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Carlyle Secured Lending, Inc. - Quarter Report: 2017 March (Form 10-Q)

10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2017

OR

 

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

For the transition period                      to                     

Commission File No. 000-54899

 

 

TCG BDC, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Maryland   80-0789789

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

520 Madison Avenue, 38th Floor, New York, NY 10022

(Address of principal executive office) (Zip Code)

(212) 813-4900

(Registrant’s telephone number, including area code)

 

 

N/A

(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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  

Emerging Growth Company

 

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at May 10, 2017

 

Common stock, $0.01 par value

     41,713,287  

 

 

 


Table of Contents

TCG BDC, INC.

INDEX

 

Part I.    Financial Information   
Item 1.    Financial Statements   
   Consolidated Statements of Assets and Liabilities as of March 31, 2017 (unaudited) and December 31, 2016      3  
   Consolidated Statements of Operations for the three month periods ended March 31, 2017 (unaudited) and March 31, 2016 (unaudited)      4  
   Consolidated Statements of Changes in Net Assets for the three month periods ended March 31, 2017 (unaudited) and March 31, 2016 (unaudited)      5  
   Consolidated Statements of Cash Flows for the three month periods ended March 31, 2017 (unaudited) and March 31, 2016 (unaudited)      6  
   Consolidated Schedules of Investments as of March 31, 2017 (unaudited) and December 31, 2016      7  
   Notes to Consolidated Financial Statements (unaudited)      21  
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      57  
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      86  
Item 4.    Controls and Procedures      87  
Part II.    Other Information   
Item 1.    Legal Proceedings      89  
Item 1A.    Risk Factors      89  
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      89  
Item 3.    Defaults Upon Senior Securities      89  
Item 4.    Mine Safety Disclosures      89  
Item 5.    Other Information      89  
Item 6.    Exhibits      89  
   Signatures      90  

 

2


Table of Contents

TCG BDC, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(dollar amounts in thousands, except per share data)

 

     March 31,
2017
    December 31,
2016
 
     (unaudited)        

ASSETS

    

Investments, at fair value

    

Investments—non-controlled/non-affiliated, at fair value (amortized cost of $1,263,462 and $1,332,596, respectively)

   $ 1,258,424     $ 1,323,102  

Investments—controlled/affiliated, at fair value (amortized cost of $131,545 and $97,385, respectively)

     134,121       99,657  
  

 

 

   

 

 

 

Total investments, at fair value (amortized cost of $1,395,007 and $1,429,981, respectively)

     1,392,545       1,422,759  

Cash and cash equivalents

     44,874       38,489  

Receivable for investment sold

     11,874       19,750  

Deferred financing costs

     3,221       3,308  

Interest receivable from non-controlled/non-affiliated investments

     3,272       3,407  

Interest and dividend receivable from controlled/affiliated investments

     3,048       2,400  

Prepaid expenses and other assets

     159       42  
  

 

 

   

 

 

 

Total assets

   $ 1,458,993     $ 1,490,155  
  

 

 

   

 

 

 

LIABILITIES

    

Secured borrowings (Note 6)

   $ 390,608     $ 421,885  

2015-1 Notes payable, net of unamortized debt issuance costs of $2,100 and $2,151, respectively (Note 7)

     270,900       270,849  

Due to Investment Adviser

     86       215  

Interest and credit facility fees payable (Notes 6 and 7)

     3,703       3,599  

Dividend payable (Note 9)

     17,100       20,018  

Base management and incentive fees payable (Note 4)

     11,764       8,157  

Administrative service fees payable (Note 4)

     115       137  

Other accrued expenses and liabilities

     1,399       1,158  
  

 

 

   

 

 

 

Total liabilities

     695,675       726,018  
  

 

 

   

 

 

 

Commitments and contingencies (Notes 8 and 11)

    

NET ASSETS

    

Common stock, $0.01 par value; 200,000,000 shares authorized; 41,708,155 shares and 41,702,318 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

     417       417  

Paid-in capital in excess of par value

     799,688       799,580  

Offering costs

     (74     (74

Accumulated net investment income (loss), net of cumulative dividends of $146,165 and $129,065 at March 31, 2017 and December 31, 2016, respectively

     (1,200     (3,207

Accumulated net realized gain (loss)

     (33,051     (25,357

Accumulated net unrealized appreciation (depreciation)

     (2,462     (7,222
  

 

 

   

 

 

 

Total net assets

   $ 763,318     $ 764,137  
  

 

 

   

 

 

 

NET ASSETS PER SHARE

   $ 18.30     $ 18.32  
  

 

 

   

 

 

 

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

 

3


Table of Contents

TCG BDC, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollar amounts in thousands, except per share data)

(unaudited)

 

     For the three month periods
ended
 
     March 31,
2017
    March 31,
2016
 

Investment income:

    

Interest income from non-controlled/non-affiliated investments

   $ 28,354     $ 22,111  

Other income from non-controlled/non-affiliated investments

     2,536       999  

Interest income from controlled/affiliated investments

     1,949       —    

Dividend income from controlled/affiliated investments

     1,260       —    
  

 

 

   

 

 

 

Total investment income

     34,099       23,110  
  

 

 

   

 

 

 

Expenses:

    

Base management fees (Note 4)

     5,125       4,140  

Incentive fees (Note 4)

     4,777       2,990  

Professional fees

     443       431  

Administrative service fees (Note 4)

     173       148  

Interest expense (Notes 6 and 7)

     5,034       3,599  

Credit facility fees (Note 6)

     503       599  

Directors’ fees and expenses

     103       120  

Other general and administrative

     542       503  
  

 

 

   

 

 

 

Total expenses

     16,700       12,530  

Waiver of base management fees (Note 4)

     1,708       1,380  
  

 

 

   

 

 

 

Net expenses

     14,992       11,150  
  

 

 

   

 

 

 

Net investment income (loss)

     19,107       11,960  

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments:

    

Net realized gain (loss) on investments—non-controlled/non-affiliated

     (7,694     (3,577

Net change in unrealized appreciation (depreciation) on investments—non-controlled/non-affiliated

     4,456       (11,091

Net change in unrealized appreciation (depreciation) on investments—controlled/affiliated

     304       —    
  

 

 

   

 

 

 

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments

     (2,934     (14,668
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ 16,173     $ (2,708
  

 

 

   

 

 

 

Basic and diluted earnings per common share (Note 9)

   $ 0.39     $ (0.08
  

 

 

   

 

 

 

Weighted-average shares of common stock outstanding—Basic and Diluted (Note 9)

     41,706,598       31,945,959  
  

 

 

   

 

 

 

Dividends declared per common share (Note 9)

   $ 0.41     $ 0.40  

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

 

4


Table of Contents

TCG BDC, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(dollar amounts in thousands)

(unaudited)

 

     For the three month periods ended  
         March 31, 2017             March 31, 2016      

Increase (decrease) in net assets resulting from operations:

    

Net investment income (loss)

   $ 19,107     $ 11,960  

Net realized gain (loss) on investments

     (7,694     (3,577

Net change in unrealized appreciation (depreciation) on investments

     4,760       (11,091
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     16,173       (2,708
  

 

 

   

 

 

 

Capital transactions:

    

Common stock issued

     —         33,000  

Reinvestment of dividends

     108       74  

Dividends declared (Note 12)

     (17,100     (13,337
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     (16,992     19,737  
  

 

 

   

 

 

 

Net increase (decrease) in net assets

     (819     17,029  
  

 

 

   

 

 

 

Net assets at beginning of period

     764,137       571,726  
  

 

 

   

 

 

 

Net assets at end of period

   $ 763,318     $ 588,755  
  

 

 

   

 

 

 

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

 

5


Table of Contents

TCG BDC, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

 

     For the three month periods ended  
         March 31, 2017             March 31, 2016      

Cash flows from operating activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 16,173     $ (2,708

Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:

    

Amortization of deferred financing costs

     231       264  

Net accretion of discount on investments

     (3,576     (611

Net realized (gain) loss on investments

     7,694       3,577  

Net change in unrealized (appreciation) depreciation on investments

     (4,760     11,091  

Cost of investments purchased and change in payable for investments purchased

     (152,235     (114,034

Proceeds from sales and repayments of investments and change in receivable for investments sold

     190,967       28,146  

Changes in operating assets:

    

Interest receivable

     (578     81  

Dividend receivable

     65       —    

Prepaid expenses and other assets

     (117     370  

Changes in operating liabilities:

    

Due to Investment Adviser

     (129     (121

Interest and credit facility fees payable

     104       438  

Base management and incentive fees payable

     3,607       3,163  

Administrative service fees payable

     (22     50  

Other accrued expenses and liabilities

     241       238  
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     57,665       (70,056
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     —         33,000  

Borrowings on SPV Credit Facility and Credit Facility

     93,000       111,000  

Repayments of SPV Credit Facility and Credit Facility

     (124,277     (66,000

Debt issuance costs paid

     (93     —    

Dividends paid in cash

     (19,910     (18,210
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (51,280     59,790  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     6,385       (10,266

Cash and cash equivalents, beginning of period

     38,489       41,837  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 44,874     $ 31,571  
  

 

 

   

 

 

 

Supplemental disclosures:

    

Interest paid during the period

   $ 4,952     $ 3,227  

Dividends declared during the period

   $ 17,100     $ 13,337  

Reinvestment of dividends

   $ 108     $ 74  

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

 

6


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Investments—
non-controlled/non-affiliated (1)

 

Industry

 

Interest
Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 

First Lien Debt (77.95%)

             

Access CIG, LLC (2) (3) (4) (13)

  Business Services   L + 5.00% (1.00% Floor)     10/17/2021     $ 18,289     $ 18,180     $ 18,313       2.40

Advanced Instruments,
LLC (2) (3) (4) (13) (15)

  Healthcare & Pharmaceuticals   L + 5.25% (1.00% Floor)     10/31/2022       10,500       10,287       10,476       1.37  

Alpha Packaging Holdings,
Inc. (2) (3) (4) (13)

  Containers, Packaging & Glass   L + 4.25% (1.00% Floor)     5/12/2020       11,293       11,285       11,293       1.48  

Anaren, Inc. (2) (3) (4) (13)

  Telecommunications   L + 4.50% (1.00% Floor)     2/18/2021       3,849       3,826       3,849       0.50  

Audax AAMP Holdings,
Inc. (2) (3) (4) (13)

  Durable Consumer Goods   L + 6.50% (1.00% Floor)     6/24/2017       10,274       10,260       9,789       1.28  

BAART Programs,
Inc. (2) (4) (13) (16)

  Healthcare & Pharmaceuticals   L + 7.75% (0.00% Floor)     10/9/2021       7,388       7,339       7,535       0.99  

Brooks Equipment Company,
LLC (2) (3) (4) (13)

  Construction & Building   L + 5.00% (1.00% Floor)     8/29/2020       6,694       6,659       6,682       0.89  

Capstone Logistics Acquisition,
Inc. (2) (3) (4) (13)

  Transportation: Cargo   L + 4.50% (1.00% Floor)     10/7/2021       19,478       19,343       19,445       2.55  

Captive Resources Midco,
LLC (2) (3) (4) (13) (15) (16)

  Banking, Finance, Insurance & Real Estate   L + 5.75% (1.00% Floor)     6/30/2020       28,975       28,630       28,975       3.80  

Central Security Group,
Inc. (2) (3) (4) (13) (16)

  Consumer Services   L + 5.63% (1.00% Floor)     10/6/2020       28,584       28,247       28,499       3.73  

CIP Revolution Holdings,
LLC (2) (3) (5) (15)

  Media: Advertising, Printing & Publishing   L + 6.00% (1.00% Floor)     8/19/2021       16,500       16,332       16,783       2.20  

Colony Hardware
Corporation (2) (3) (4) (13)

  Construction & Building   L + 6.00% (1.00% Floor)     10/23/2021       16,995       16,773       16,995       2.23  

Datapipe, Inc. (2) (3) (13) (16)

  Telecommunications   L + 4.75% (1.00% Floor)     3/15/2019       9,725       9,650       9,753       1.28  

Dent Wizard International
Corporation (2) (3) (4) (13) (16)

  Automotive   L + 4.75% (1.00% Floor)     4/7/2020       7,216       7,192       7,208       0.94  

Derm Growth Partners III,
LLC (Dermatology
Associates) (2) (3) (4) (5) (13) (15)

  Healthcare & Pharmaceuticals   L + 6.50% (1.00% Floor)     5/31/2022       41,005       40,468       40,842       5.35  

DermaRite Industries,
LLC (2) (3) (5) (15)

  Healthcare & Pharmaceuticals   L + 7.00% (1.00% Floor)     3/3/2022       16,724       16,381       16,507       2.16  

Dimensional Dental
Management,
LLC (2) (3) (5) (12) (15)

  Healthcare & Pharmaceuticals   L + 7.00% (1.00% Floor)     2/12/2021       19,066       18,684       19,129       2.51  

Dimora Brands, Inc. (fka TK
USA Enterprises,
Inc.) (2) (3) (5) (15)

  Construction & Building   L + 4.50% (1.00% Floor)     4/4/2022       —         (57     (14     0.00  

Direct Travel,
Inc. (2) (3) (4) (5) (13) (15)

  Hotel, Gaming & Leisure   L + 6.50% (1.00% Floor)     12/1/2021       12,782       12,382       12,708       1.66  

EIP Merger Sub, LLC (Evolve
IP) (2) (3) (5) (12) (13) (16)

  Telecommunications   L + 6.25% (1.00% Floor)     6/7/2021       23,750       23,119       23,356       3.06  

EP Minerals, LLC (2) (3) (4) (13)

  Metals & Mining   L + 4.50% (1.00% Floor)     8/20/2020       10,238       10,207       10,237       1.34  

FCX Holdings
Corp. (2) (3) (4) (13) (16)

  Capital Equipment   L + 4.50% (1.00% Floor)     8/4/2020       9,849       9,845       9,849       1.29  

Genex Holdings, Inc. (2) (3) (13) (16)

  Banking, Finance, Insurance & Real Estate   L + 4.25% (1.00% Floor)     5/30/2021       4,189       4,177       4,181       0.55  

Global Software,
LLC (2) (3) (4) (5) (13)

  High Tech Industries   L + 5.50% (1.00% Floor)     5/2/2022       20,963       20,595       20,734       2.72  

Green Energy Partners/Stonewall
LLC (2) (3) (5) (13)

  Energy: Electricity   L + 5.50% (1.00% Floor)     11/13/2021       16,600       16,479       16,612       2.18  

Green Plains II
LLC (2) (3) (4) (5) (13) (15) (16)

  Beverage, Food & Tobacco   L + 7.00% (1.00% Floor)     10/3/2022       15,229       15,089       15,465       2.03  

Hummel Station
LLC (2) (3) (5) (13) (16)

  Energy: Electricity   L + 6.00% (1.00% Floor)     10/27/2022       21,000       20,331       20,292       2.66  

Imagine! Print Solutions,
LLC (2) (3) (4) (13)

  Media: Advertising, Printing & Publishing   L + 6.00% (1.00% Floor)     3/30/2022       18,414       18,177       18,414       2.41  

Imperial Bag & Paper Co.
LLC (2) (3) (4) (13) (16)

  Forest Products & Paper   L + 6.00% (1.00% Floor)     1/7/2022       24,013       23,705       23,983       3.14  

 

7


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Investments—
non-controlled/non-affiliated (1)

 

Industry

 

Interest
Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 

First Lien Debt (77.95%) (continued)

             

Indra Holdings Corp. (Totes
Isotoner) (2) (3) (5) (13)

  Non-durable Consumer Goods   L + 4.25% (1.00% Floor)     5/1/2021     $ 14,224     $ 14,135     $ 9,264       1.21

International Medical Group,
Inc. (2) (3) (5) (12) (16)

  Banking, Finance, Insurance & Real Estate   L + 6.50% (1.00% Floor)     10/30/2020       30,000       29,526       30,371       3.98  

Jackson Hewitt Inc. (2) (3) (4) (13)

  Retail   L + 7.00% (1.00% Floor)     7/30/2020       8,758       8,632       8,276       1.08  

Legacy.com Inc. (2) (3) (5) (12)

  High Tech Industries   L + 6.00% (1.00% Floor)     3/20/2023       17,000       16,619       16,708       2.19  

Metrogistics LLC (2) (3) (4) (13)

  Transportation: Cargo   L + 6.50% (1.00% Floor)     9/30/2022       15,105       14,900       15,105       1.98  

National Technical Systems,
Inc. (2) (3) (4) (13) (15)

  Aerospace & Defense   L + 6.25% (1.00% Floor)     6/12/2021       25,123       24,867       24,234       3.17  

NES Global Talent Finance
US LLC (United
Kingdom) (2) (3) (4) (8) (13)

  Energy: Oil & Gas   L + 5.50% (1.00% Floor)     10/3/2019       11,094       10,985       10,751       1.41  

OnCourse Learning
Corporation (2) (3) (4) (5) (13) (15)

  Consumer Services   L + 6.50% (1.00% Floor)     9/12/2021       26,077       25,724       26,288       3.44  

Paradigm Acquisition
Corp. (2) (3) (4) (13)

  Business Services   L + 5.00% (1.00% Floor)     6/2/2022       11,217       11,086       11,217       1.47  

Pelican Products, Inc. (2) (3) (4) (13)

  Containers, Packaging & Glass   L + 4.25% (1.00% Floor)     4/11/2020       7,623       7,634       7,604       1.00  

Plano Molding Company,
LLC (2) (3) (4) (5) (13)

  Hotel, Gaming & Leisure   L + 7.50% (1.00% Floor)     5/12/2021       18,117       17,990       17,262       2.26  

PPT Management Holdings,
LLC (2) (3) (5) (13)

  Healthcare & Pharmaceuticals   L + 6.00% (1.00% Floor)     12/16/2022       22,444       22,240       22,457       2.94  

Premier Senior Marketing,
LLC (2) (3) (5) (16)

  Banking, Finance, Insurance & Real Estate   L + 5.00% (1.00% Floor)     7/1/2022       3,731       3,683       3,731       0.49  

Product Quest Manufacturing,
LLC (2) (3) (4) (5) (12) (16)

  Containers, Packaging & Glass   L + 5.75% (1.00% Floor)     9/9/2020       28,000       27,588       25,864       3.39  

Prowler Acquisition Corp.
(Pipeline Supply and Service,
LLC) (2) (3) (4)

  Wholesale   L + 4.50% (1.00% Floor)     1/28/2020       10,769       10,714       8,773       1.15  

PSC Industrial Holdings
Corp (2) (3) (4) (13)

  Environmental Industries   L + 4.75% (1.00% Floor)     12/5/2020       11,730       11,653       11,482       1.50  

PT Intermediate Holdings III,
LLC (Parts
Town) (2) (3) (4) (5) (13) (15) (16)

  Wholesale   L + 6.50% (1.00% Floor)     6/23/2022       19,545       19,336       19,447       2.55  

QW Holding Corporation
(Quala) (2) (3) (4) (5) (13)

  Environmental Industries   L + 6.75% (1.00% Floor)     8/31/2022       29,925       29,122       30,131       3.95  

Reliant Pro Rehab,
LLC (2) (3) (5) (12)

  Healthcare & Pharmaceuticals   L + 10.00% (1.00% Floor)     12/29/2017       22,275       22,101       22,264       2.92  

SolAreo Technologies
Corp. (2) (3) (4) (5)

  Telecommunications   L + 5.25% (1.00% Floor)     12/10/2020       19,418       19,292       18,049       2.36  

Superior Health Linens,
LLC (2) (3) (4) (5) (13) (15)

  Business Services   L + 6.50% (1.00% Floor)     9/30/2021       19,208       18,908       19,012       2.49  

T2 Systems Canada, Inc. (2) (3) (5)

  Transportation: Consumer   L + 6.75% (1.00% Floor)     9/28/2022       4,040       3,946       4,045       0.53  

T2 Systems, Inc. (2) (3) (4) (5) (13) (15)

  Transportation: Consumer   L + 6.75% (1.00% Floor)     9/28/2022       22,892       22,298       22,924       3.00  

The Hilb Group,
LLC (2) (3) (5) (12) (15)

  Banking, Finance, Insurance & Real Estate   L + 6.00% (1.00% Floor)     6/24/2021       31,313       30,744       30,849       4.04  

The SI Organization,
Inc. (2) (3) (4) (13)

  Aerospace & Defense   L + 4.75% (1.00% Floor)     11/23/2019       8,552       8,507       8,637       1.13  

The Topps Company,
Inc. (2) (3) (4) (13)

  Non-durable Consumer Goods   L + 6.00% (1.00% Floor)     10/2/2020       18,657       18,588       18,654       2.44  

Truckpro, LLC .(2) (3) (4) (13) (16)

  Automotive   L + 5.00% (1.00% Floor)     8/6/2018       9,194       9,173       9,170       1.20  

Tweddle Group, Inc. (2) (3) (4) (13)

  Media: Advertising, Printing & Publishing   L + 6.00% (1.00% Floor)     10/24/2022       15,998       15,697       16,063       2.10  

 

8


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Investments—
non-controlled/non-affiliated (1)

 

Industry

 

Interest
Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 

First Lien Debt (77.95%) (continued)

             

TwentyEighty, Inc.—Revolver
(fka Miller Heiman,
Inc.) (2) (3) (5) (10) (15)

  Business Services   L + 8.00% (1.00% Floor)     3/21/2020     $ —       $ (7   $ (3     0.00

TwentyEighty, Inc.—(Term A
Loans) (2) (3) (5) (10)

  Business Services   L + 3.50% (1.00% Floor), 4.50% PIK     3/31/2020       2,860       2,844       2,843       0.37  

TwentyEighty, Inc.—(Term B
Loans) (5) (10)

  Business Services   1.00%, 7.00% PIK     3/31/2020       4,698       4,698       3,773       0.50  

TwentyEighty, Inc.—(Term C
Loans) (5) (10)

  Business Services   0.25%, 8.75% PIK     3/31/2020       4,485       4,485       2,245       0.29  

U.S. TelePacific Holdings
Corp. (2) (3) (5)

  Telecommunications   L + 8.50% (1.00% Floor)     2/24/2021       30,000       29,189       30,027       3.93  

Vetcor Professional Practices,
LLC (2) (3) (4) (5) (13) (15)

  Consumer Services   L + 6.00% (1.00% Floor)     4/20/2021       28,488       28,028       28,737       3.76  

Violin Finco S.A.R.L. (Alexander
Mann Solutions) (United
Kingdom) (2) (3) (4) (8) (13)

  Business Services   L + 4.75% (1.00% Floor)     12/20/2019       10,034       9,985       10,034       1.31  

Vistage Worldwide
Inc. (2) (3) (4) (13) (16)

  Business Services   L + 5.50% (1.00% Floor)     8/19/2021       28,757       28,534       28,964       3.79  

VRC Companies,
LLC (2) (3) (5) (13) (15) (17)

  Business Services   L + 6.50% (1.00% Floor)     3/31/2023       25,632       24,923       25,140       3.29  

Winchester Electronics
Corporation (2) (3) (4) (5) (13) (15)

  Capital Equipment   L + 6.50% (1.00% Floor)     6/30/2022       27,298       26,914       27,749       3.64  

Zest Holdings, LLC (2) (3) (4) (13)

  Durable Consumer Goods   L + 4.75% (1.00% Floor)     8/16/2020       9,530       9,530       9,523       1.25  
         

 

 

   

 

 

   

 

 

 

First Lien Debt Total

          $ 1,088,396     $ 1,085,554       142.20
         

 

 

   

 

 

   

 

 

 
Second Lien Debt (11.61%)                                      

AIM Group USA Inc. (2) (3) (5) (13)

  Aerospace & Defense   L + 9.00% (1.00% Floor)     8/2/2022     $ 23,000     $ 22,710     $ 23,025       3.02

AmeriLife Group,
LLC (2) (3) (5) (13) (16)

  Banking, Finance, Insurance & Real Estate   L + 8.75% (1.00% Floor)     1/10/2023       20,000       19,665       19,318       2.53  

Argon Medical Devices,
Inc. (2) (3) (4) (5)

  Healthcare & Pharmaceuticals   L + 9.50% (1.00% Floor)     6/23/2022       24,000       23,381       24,437       3.20  

Berlin Packaging L.L.C. (2) (3) (5) (13)

  Containers, Packaging & Glass   L + 6.75% (1.00% Floor)     10/1/2022       2,927       2,910       2,949       0.39  

Charter NEX US Holdings,
Inc. (2) (3) (5) (13)

  Chemicals, Plastics & Rubber   L + 8.25% (1.00% Floor)     2/5/2023       7,394       7,305       7,394       0.97  

Confie Seguros Holding II
Co. (2) (3) (5) (13)

  Banking, Finance, Insurance & Real Estate   L + 9.00% (1.25% Floor)     5/8/2019       9,000       8,945       8,947       1.17  

Drew Marine Group
Inc. (2) (3) (4) (5) (13)

  Chemicals, Plastics & Rubber   L + 7.00% (1.00% Floor)     5/19/2021       12,500       12,482       12,373       1.62  

Genex Holdings, Inc. (2) (3) (5) (16)

  Banking, Finance, Insurance & Real Estate   L + 7.75% (1.00% Floor)     5/30/2022       7,990       7,917       7,990       1.05  

Institutional Shareholder Services
Inc. (2) (3) (5) (13)

  Banking, Finance, Insurance & Real Estate   L + 8.50% (1.00% Floor)     4/29/2022       12,500       12,409       12,448       1.63  

Jazz Acquisition, Inc.
(Wencor) (2) (3) (5) (13)

  Aerospace & Defense   L + 6.75% (1.00% Floor)     6/19/2022       6,700       6,677       5,901       0.77  

MRI Software, LLC (2) (3) (5)

  Software   L + 8.00% (1.00% Floor)     6/23/2022       11,250       11,115       11,305       1.48  

Power Stop, LLC (5) (9)

  Automotive   11.00%     5/29/2022       10,000       9,836       9,957       1.30  

Prowler Acquisition Corp.
(Pipeline Supply and Service,
LLC) (2) (3) (5)

  Wholesale   L + 8.50% (1.00% Floor)     7/28/2020       3,000       2,962       1,856       0.24  

Ramundsen Public Sector,
LLC (2) (3) (5)

  Sovereign & Public Finance   L + 8.50% (1.00% Floor)     1/31/2025       1,800       1,783       1,800       0.24  

 

9


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Investments—
non-controlled/non-affiliated (1)

 

Industry

 

Interest
Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 
Second Lien Debt (11.61%)
(continued)
                                     

Watchfire Enterprises,
Inc. (2) (3) (5) (13)

  Media: Advertising, Printing & Publishing   L + 8.00% (1.00% Floor)     10/2/2021       7,000     $ 6,934     $ 6,994       0.92

Zywave, Inc. (2) (3) (5)

  High Tech Industries   L + 9.00% (1.00% Floor)     11/17/2023       4,950       4,881       4,949       0.65  
         

 

 

   

 

 

   

 

 

 

Second Lien Debt Total

          $ 161,912     $ 161,643       21.18
         

 

 

   

 

 

   

 

 

 

 

Investments—non-controlled/non-affiliated (1)

 

Industry

  Maturity
Date
    Par
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage of
Net Assets
 

Structured Finance Obligations (0.20%) (5) (8) (11)

           

1776 CLO I, Ltd., Subordinated Notes

  Structured Finance     5/8/2020     $ 11,750     $ 6,519     $ 2,761       0.36

Clydesdale CLO 2005, Ltd., Subordinated Notes

  Structured Finance     12/6/2017       5,750       —         10       0.00  

MSIM Peconic Bay, Ltd., Subordinated Notes

  Structured Finance     7/20/2019       4,500       63       5       0.00  
       

 

 

   

 

 

   

 

 

 

Structured Finance Obligations Total

        $ 6,582     $ 2,776       0.36
       

 

 

   

 

 

   

 

 

 

 

Investments—non-controlled/non-affiliated (1)

  

Industry

   Shares/
Units
     Cost      Fair
Value (7)
     Percentage of
Net Assets
 

Equity Investments (0.61%) (5)

              

CIP Revolution Investments, LLC

   Media: Advertising, Printing & Publishing      300,000      $ 300      $ 411        0.05

Derm Growth Partners III, LLC (Dermatology Associates)

   Healthcare & Pharmaceuticals      1,000,000        1,000        1,230        0.16  

GS Holdco LLC (Global Software, LLC)

   High Tech Industries      1,000,000        1,001        1,207        0.16  

Legacy.com Inc.

   High Tech Industries      1,500,000        1,500        1,500        0.20  

Power Stop Intermediate Holdings, LLC

   Automotive      7,150        715        1,314        0.17  

T2 Systems Parent Corporation

   Transportation: Consumer      555,556        556        533        0.07  

THG Acquisition, LLC (The Hilb Group, LLC)

   Banking, Finance, Insurance & Real Estate      1,500,000        1,500        2,256        0.30  

TwentyEighty Investors LLC

   Business Services      51,936        —          —          0.00  
        

 

 

    

 

 

    

 

 

 

Equity Investments Total

         $ 6,572      $ 8,451        1.11
        

 

 

    

 

 

    

 

 

 

Total investments—non-controlled/non-affiliated

         $ 1,263,462      $ 1,258,424        164.86
        

 

 

    

 

 

    

 

 

 

 

Investments—controlled/affiliated

 

Industry

 

Interest
Rate (2)

  Maturity
Date
    Par
Amount/
LLC
Interest
    Cost     Fair
Value (7)
    Percentage of
Net Assets
 

Investment Fund (9.63%) (8)

             

Middle Market Credit Fund, LLC, Mezzanine Loan (2) (5) (9) (14)

  Investment Fund   L+9.50%     6/24/2017     $ 86,044     $ 86,044     $ 86,044       11.27

Middle Market Credit Fund, LLC, Subordinated Loan and Member’s Interest (5) (14)

  Investment Fund   0.001     3/1/2021       45,501       45,501       48,077       6.30  
         

 

 

   

 

 

   

 

 

 

Investment Fund Total

          $ 131,545     $ 134,121       17.57
         

 

 

   

 

 

   

 

 

 

Total investments—controlled/affiliated

          $ 131,545     $ 134,121       17.57
         

 

 

   

 

 

   

 

 

 

Total investments

          $ 1,395,007     $ 1,392,545       182.42
         

 

 

   

 

 

   

 

 

 

 

(1) Unless otherwise indicated, issuers of debt and equity investments held by TCG BDC, Inc. (together with its consolidated subsidiaries, “we,” “us,” “our,” “TCG BDC” or the “Company”) are domiciled in the United States and issuers of structured finance obligations are domiciled in the Cayman Islands. Under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the “Investment Company Act”), the Company would be deemed to “control” a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. As of March 31, 2017, the Company does not “control” any of these portfolio companies. Under the Investment Company Act, the Company would be deemed an “affiliated person” of a portfolio company if the Company owns 5% or more of the portfolio company’s outstanding voting securities. As of March 31, 2017, the Company is not an “affiliated person” of any of these portfolio companies.

 

10


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

(2) Variable rate loans to the portfolio companies and variable rate notes of structured finance obligations bear interest at a rate that may be determined by reference to either LIBOR (“L”) or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate), which generally resets quarterly. For each such loan and note, the Company has provided the interest rate in effect as of March 31, 2017. As of March 31, 2017, all of our LIBOR loans were indexed to the 90-day LIBOR rate at 1.15%, except for those loans as indicated in Notes 16 and 17 below.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by the Company’s wholly owned subsidiary, TCG BDC SPV LLC (the “SPV”). The SPV has entered into a senior secured revolving credit facility (as amended, the “SPV Credit Facility”). The lenders of the SPV Credit Facility have a first lien security interest in substantially all of the assets of the SPV (see Note 6, Borrowings). Accordingly, such assets are not available to creditors of the Company or the 2015-1 Issuer.
(5) Denotes that all or a portion of the assets are owned by the Company. The Company has entered into a senior secured revolving credit facility (as amended, the “Credit Facility” and, together with the SPV Credit Facility, the “Facilities”). The lenders of the Credit Facility have a first lien security interest in substantially all of the portfolio investments held by the Company (see Note 6, Borrowings). Accordingly, such assets are not available to creditors of the SPV or Carlyle GMS Finance MM CLO 2015-1 LLC (the “2015-1 Issuer”).
(6) Amortized cost represents original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method. Equity tranche collateralized loan obligation (“CLO”) fund investments, which are referred to as “structured finance obligations”, are recorded at amortized cost using the effective interest method.
(7) Fair value is determined in good faith by or under the direction of the Board of Directors of the Company (see Note 2, Significant Accounting Policies, and Note 3, Fair Value Measurements), pursuant to the Company’s valuation policy.
(8) The Company has determined the indicated investments are non-qualifying assets under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
(9) Represents a corporate mezzanine loan, which is subordinated to senior secured term loans of the portfolio company/investment fund.
(10) Loan was on non-accrual status as of March 31, 2017.
(11) As of March 31, 2017, the Company has a greater than 25% but less than 50% equity or subordinated notes ownership interest in certain structured finance obligations. These investments have governing documents that preclude the Company from controlling management of the entity and therefore the Company has determined that the issuer of the investment is not a controlled affiliate or a non-controlled affiliate because the investments are not “voting securities”.
(12) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders as follows: Dimensional Dental Management, LLC (4.70%), EIP Merger Sub, LLC (Evolve IP) (3.91%), International Medical Group, Inc. (4.79%), Legacy.com Inc. (3.79%), Product Quest Manufacturing, LLC (3.66%), Reliant Pro Rehab, LLC (nil) and The Hilb Group, LLC (3.33%). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/last out loan, which has a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.
(13) Denotes that all or a portion of the assets are owned by the 2015-1 Issuer and secure the notes issued in connection with a $400 million term debt securitization completed by the Company on June 26, 2015 (see Note 7, 2015-1 Notes). Accordingly, such assets are not available to the creditors of the SPV or the Company.
(14) Under the Investment Company Act, the Company is deemed to be an “affiliated person” of and “control” this investment fund because the Company owns more than 25% of the investment fund’s outstanding voting securities and/or has the power to exercise control over management or policies of such investment fund. See Note 5, Middle Market Credit Fund, LLC, for more details.

 

11


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

(15) As of March 31, 2017, the Company had the following unfunded commitments to fund delayed draw and revolving senior secured loans:

 

Investments—non-controlled/non-affiliated

  

Type

   Unused
Fee
    Par/
Principal
Amount
     Fair
Value
 

First Lien Debt—unfunded delayed draw and revolving term loans commitments

          

Advanced Instruments, LLC

  

Revolver

     0.50   $ 1,167      $ (2

Captive Resources Midco, LLC

  

Delayed Draw

     1.25     3,125        —    

Captive Resources Midco, LLC

  

Revolver

     0.50     1,875        —    

CIP Revolution Holdings, LLC

  

Delayed Draw

     0.75     1,331        20  

CIP Revolution Holdings, LLC

  

Revolver

     0.50     1,331        20  

DermaRite Industries, LLC

  

Revolver

     0.50     3,276        (35

Derm Growth Partners III, LLC (Dermatology Associates)

  

Delayed Draw

     1.00     2,217        (8

Derm Growth Partners III, LLC (Dermatology Associates)

  

Revolver

     0.50     704        (3

Dimensional Dental Management, LLC

  

Delayed Draw

     1.00     1,442        4  

Dimora Brands, Inc. (fka TK USA Enterprises, Inc.)

  

Revolver

     0.50     4,750        (14

Direct Travel, Inc.

  

Delayed Draw

     1.00     9,658        (32

Green Plains II LLC

  

Revolver

     0.50     1,291        18  

National Technical Systems, Inc.

  

Delayed Draw

     1.00     4,469        (123

National Technical Systems, Inc.

  

Revolver

     0.50     2,031        (73

OnCourse Learning Corporation

  

Revolver

     0.50     859        7  

PT Intermediate Holdings III, LLC (Parts Town)

  

Revolver

     0.50     1,429        (7

Superior Health Linens, LLC

  

Revolver

     0.50     2,614        (24

T2 Systems, Inc.

  

Revolver

     0.50     2,933        4  

The Hilb Group, LLC

  

Delayed Draw

     1.00     10,902        (120

TwentyEighty, Inc. (f/k/a Miller Heiman, Inc.)

  

Revolver

     0.50     452        (3

Vetcor Professional Practices, LLC

  

Delayed Draw

     1.00     4,384        33  

VRC Companies, LLC

  

Delayed Draw

     1.00     4,513        (69

VRC Companies, LLC

  

Revolver

     0.50     1,805        (28

Winchester Electronics Corporation

  

Delayed Draw

     1.00     2,500        38  
       

 

 

    

 

 

 

Total unfunded commitments

        $ 71,058      $ (397
       

 

 

    

 

 

 

 

(16) As of March 31, 2017, this LIBOR loan was indexed to the 30-day LIBOR rate at 0.98%.
(17) As of March 31, 2017, this LIBOR loan was indexed to the 180-day LIBOR rate at 1.42%.

As of March 31, 2017, investments at fair value consisted of the following:

 

Type—% of Fair Value

   Amortized Cost      Fair Value      % of Fair Value  

First Lien Debt

   $ 1,088,396      $ 1,085,554        77.95

Second Lien Debt

     161,912        161,643        11.61  

Structured Finance Obligations

     6,582        2,776        0.20  

Equity Investments

     6,572        8,451        0.61  

Investment Fund

     131,545        134,121        9.63  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,395,007      $ 1,392,545        100.00
  

 

 

    

 

 

    

 

 

 

 

Type—% of Fair Value of First and Second Lien Debt

  Amortized Cost     Fair Value     % of Fair Value  

Floating Rate

  $ 1,231,289     $ 1,231,222       98.72

Fixed Rate

    19,019       15,975       1.28  
 

 

 

   

 

 

   

 

 

 

Total

  $ 1,250,308     $ 1,247,197       100.00
 

 

 

   

 

 

   

 

 

 

 

12


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

The industry composition of investments at fair value as of March 31, 2017 was as follows:

 

Industry

   Amortized Cost      Fair Value      % of Fair Value  

Aerospace & Defense

   $ 62,761      $ 61,797        4.44

Automotive

     26,916        27,649        1.99  

Banking, Finance, Insurance & Real Estate

     147,196        149,066        10.70  

Beverage, Food & Tobacco

     15,089        15,465        1.11  

Business Services

     123,636        121,538        8.73  

Capital Equipment

     36,759        37,598        2.70  

Chemicals, Plastics & Rubber

     19,787        19,767        1.42  

Construction & Building

     23,375        23,663        1.70  

Consumer Services

     81,999        83,524        6.00  

Containers, Packaging & Glass

     49,417        47,710        3.43  

Durable Consumer Goods

     19,790        19,312        1.39  

Energy: Electricity

     36,810        36,904        2.65  

Energy: Oil & Gas

     10,985        10,751        0.77  

Environmental Industries

     40,775        41,613        2.99  

Forest Products & Paper

     23,705        23,983        1.72  

Healthcare & Pharmaceuticals

     161,881        164,877        11.84  

High Tech Industries

     44,596        45,098        3.24  

Hotel, Gaming & Leisure

     30,372        29,970        2.15  

Investment Fund

     131,545        134,121        9.63  

Media: Advertising, Printing & Publishing

     57,440        58,665        4.21  

Metals & Mining

     10,207        10,237        0.74  

Non-durable Consumer Goods

     32,723        27,918        2.00  

Retail

     8,632        8,276        0.59  

Software

     11,115        11,305        0.81  

Sovereign & Public Finance

     1,783        1,800        0.13  

Structured Finance

     6,582        2,776        0.20  

Telecommunications

     85,076        85,034        6.11  

Transportation: Cargo

     34,243        34,550        2.48  

Transportation: Consumer

     26,800        27,502        1.97  

Wholesale

     33,012        30,076        2.16  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,395,007      $ 1,392,545        100.00
  

 

 

    

 

 

    

 

 

 

The geographical composition of investments at fair value as of March 31, 2017 was as follows:

 

Geography

   Amortized Cost      Fair Value      % of Fair Value  

Cayman Islands

   $ 6,582      $ 2,776        0.20

United Kingdom

     20,970        20,785        1.49  

United States

     1,367,455        1,368,984        98.31  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,395,007      $ 1,392,545        100.00
  

 

 

    

 

 

    

 

 

 

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

 

13


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2016

(dollar amounts in thousands)

 

Investments—non-controlled/
non-affiliated (1)

 

Industry

  Interest
Rate (2)
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage of
Net Assets
 

First Lien Debt (80.09%)

             

Access CIG, LLC (2) (3) (4) (13)

  Business Services    
L + 5.00%
(1.00% Floor)
 
 
    10/17/2021     $ 18,335     $ 18,222     $ 18,335       2.40

Advanced Instruments,
LLC (2) (3) (4) (5) (13) (15)

  Healthcare & Pharmaceuticals    
L + 5.25%
(1.00% Floor)
 
 
    10/31/2022       22,500       22,019       22,252       2.91  

AF Borrower LLC
(Accuvant) (2) (3) (4)

  High Tech Industries    
L + 5.25%
(1.00% Floor)
 
 
    1/28/2022       16,113       15,923       16,113       2.11  

Alpha Packaging Holdings,
Inc. (2) (3) (4) (13)

  Containers, Packaging & Glass    
L + 4.25%
(1.00% Floor)
 
 
    5/12/2020       11,322       11,313       11,322       1.48  

Anaren, Inc. (2) (3) (4) (13)

  Telecommunications    
L + 4.50%
(1.00% Floor)
 
 
    2/18/2021       10,869       10,800       10,869       1.42  

Audax AAMP Holdings,
Inc. (2) (3) (4) (13)

  Durable Consumer Goods    
L + 6.00%
(1.00% Floor)
 
 
    6/24/2017       10,424       10,400       10,348       1.35  

BAART Programs, Inc. (2) (4) (16)

  Healthcare & Pharmaceuticals    
L + 7.75%
(0.00% Floor)
 
 
    10/9/2021       7,406       7,355       7,534       0.99  

Brooks Equipment Company,
LLC (2) (3) (4) (13)

  Construction & Building    
L + 5.00%
(1.00% Floor)
 
 
    8/29/2020       6,694       6,657       6,683       0.87  

Capstone Logistics Acquisition,
Inc. (2) (3) (4) (13)

  Transportation: Cargo    
L + 4.50%
(1.00% Floor)
 
 
    10/7/2021       19,478       19,337       19,212       2.51  

Captive Resources Midco,
LLC (2) (3) (4) (13) (15)

  Banking, Finance, Insurance & Real Estate    
L + 5.75%
(1.00% Floor)
 
 
    6/30/2020       29,050       28,683       29,009       3.80  

Central Security Group,
Inc. (2) (3) (4) (13) (16)

  Consumer Services    
L + 5.63%
(1.00% Floor)
 
 
    10/6/2020       28,658       28,300       28,557       3.74  

CIP Revolution Holdings,
LLC (2) (3) (5) (15)

  Media: Advertising, Printing & Publishing    
L + 6.00%
(1.00% Floor)
 
 
    8/19/2021       16,500       16,325       16,585       2.17  

Colony Hardware
Corporation (2) (3) (4) (13)

  Construction & Building    
L + 6.00%
(1.00% Floor)
 
 
    10/23/2021       17,038       16,806       17,038       2.23  

Datapipe, Inc. (2) (3) (13) (16)

  Telecommunications    
L + 4.75%
(1.00% Floor)
 
 
    3/15/2019       9,750       9,666       9,764       1.28  

Dent Wizard International
Corporation (2) (3) (4) (13) (16)

  Automotive    
L + 4.75%
(1.00% Floor)
 
 
    4/7/2020       7,216       7,190       7,216       0.94  

Derm Growth Partners III, LLC (Dermatology
Associates) (2) (3) (4) (5) (13) (15)

  Healthcare & Pharmaceuticals    
L + 6.50%
(1.00% Floor)
 
 
    5/31/2022       32,929       32,393       32,958       4.31  

Dimensional Dental Management,
LLC (2) (3) (5) (12) (15)

  Healthcare & Pharmaceuticals    
L + 7.00%
(1.00% Floor)
 
 
    2/12/2021       18,000       17,601       17,811       2.33  

Dimora Brands, Inc. (fka TK USA Enterprises, Inc.) (2) (3) (5) (15)

  Construction & Building    
L + 4.50%
(1.00% Floor)
 
 
    4/4/2022       —         (60     (30     0.00  

Direct Travel, Inc. (2) (3) (4) (5) (13) (15)

  Hotel, Gaming & Leisure    
L + 6.50%
(1.00% Floor)
 
 
    12/1/2021       12,842       12,420       12,712       1.66  

EIP Merger Sub, LLC (Evolve
IP) (2) (3) (5) (12)

  Telecommunications    
L + 6.25%
(1.00% Floor)
 
 
    6/7/2021       23,750       23,098       23,242       3.04  

Emerging Markets Communications,
LLC (2) (3) (4) (8) (13)

  Telecommunications    
L + 5.75%
(1.00% Floor)
 
 
    7/1/2021       17,730       16,299       17,730       2.32  

EP Minerals, LLC (2) (3) (4) (13)

  Metals & Mining    
L + 4.50%
(1.00% Floor)
 
 
    8/20/2020       10,264       10,232       10,259       1.34  

FCX Holdings Corp. (2) (3) (4) (13) (16)

  Capital Equipment    
L + 4.50%
(1.00% Floor)
 
 
    8/4/2020       9,856       9,852       9,856       1.29  

Genex Holdings, Inc. (2) (3) (13) (16)

  Banking, Finance, Insurance & Real Estate    
L + 4.25%
(1.00% Floor)
 
 
    5/30/2021       4,200       4,187       4,196       0.55  

Global Software,
LLC (2) (3) (4) (13) (16)

  High Tech Industries    
L + 5.50%
(1.00% Floor)
 
 
    5/2/2022       16,163       15,880       16,163       2.12  

Green Energy Partners/Stonewall
LLC (2) (3) (5) (13)

  Energy: Electricity    
L + 5.50%
(1.00% Floor)
 
 
    11/13/2021       16,600       16,475       16,598       2.17  

Green Plains II
LLC (2) (3) (4) (5) (13) (15)

  Beverage, Food & Tobacco    
L + 7.00%
(1.00% Floor)
 
 
    10/03/2022       15,205       15,059       15,379       2.01  

 

14


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of December 31, 2016

(dollar amounts in thousands)

 

Investments—non-controlled/
non-affiliated (1)

 

Industry

  Interest
Rate (2)
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage of
Net Assets
 

First Lien Debt (80.09%) (continued)

             

Hummel Station LLC (2) (3) (5) (13) (16)

  Energy: Electricity    
L + 6.00%
(1.00% Floor)
 
 
    10/27/2022     $ 21,000     $ 20,308     $ 20,160       2.64

Imagine! Print Solutions,
LLC (2) (3) (4) (13)

  Media: Advertising, Printing & Publishing    
L + 6.00%
(1.00% Floor)
 
 
    3/30/2022       18,461       18,213       18,603       2.43  

Imperial Bag & Paper Co.
LLC (2) (3) (4) (13) (16)

  Forest Products & Paper    
L + 6.00%
(1.00% Floor)
 
 
    1/7/2022       24,074       23,752       23,924       3.13  

Indra Holdings Corp. (Totes
Isotoner) (2) (3) (5) (13)

  Non-durable Consumer Goods    
L + 4.25%
(1.00% Floor)
 
 
    5/1/2021       14,224       14,130       10,553       1.38  

International Medical Group,
Inc.(2) (3) (5) (12)

  Banking, Finance, Insurance & Real Estate    
L + 6.50%
(1.00% Floor)
 
 
    10/30/2020       30,000       29,505       30,237       3.96  

Jackson Hewitt Inc. (2) (3) (4) (13)

  Retail    
L + 7.00%
(1.00% Floor)
 
 
    7/30/2020       8,758       8,625       8,320       1.09  

Metrogistics LLC (2) (3) (4) (5) (13)

  Transportation: Cargo    
L + 6.50%
(1.00% Floor)
 
 
    9/30/2022       15,200       14,986       15,094       1.98  

MSX International, Inc. (2) (3) (4) (13)

  Automotive    
L + 5.00%
(1.00% Floor)
 
 
    8/21/2020       8,940       8,882       8,940       1.17  

National Technical Systems,
Inc. (2) (3) (4) (13) (15)

  Aerospace & Defense    
L + 6.25%
(1.00% Floor)
 
 
    6/12/2021       25,123       24,854       23,927       3.13  

NES Global Talent Finance US LLC (United
Kingdom) (2) (3) (4) (8) (13)

  Energy: Oil & Gas    
L + 5.50%
(1.00% Floor)
 
 
    10/3/2019       11,250       11,132       10,911       1.43  

OnCourse Learning
Corporation (2) (3) (4) (5) (13) (15) (16)

  Consumer Services    
L + 6.50%
(1.00% Floor)
 
 
    9/12/2021       26,141       25,770       26,220       3.43  

Paradigm Acquisition
Corp. (2) (3) (4) (13)

  Business Services    
L + 5.00%
(1.00% Floor)
 
 
    6/2/2022       23,246       22,963       23,223       3.04  

Pelican Products, Inc. (2) (3) (4) (13)

  Containers, Packaging & Glass    
L + 4.25%
(1.00% Floor)
 
 
    4/11/2020       7,643       7,654       7,593       0.99  

Plano Molding Company,
LLC (2) (3) (4) (5) (13)

  Hotel, Gaming & Leisure    
L + 7.00%
(1.00% Floor)
 
 
    5/12/2021       18,163       18,030       17,302       2.26  

PPT Management Holdings,
LLC (2) (3) (5)

  Healthcare & Pharmaceuticals    
L + 6.00%
(1.00% Floor)
 
 
    12/16/2022       22,500       22,288       22,426       2.93  

Premier Senior Marketing,
LLC (2) (3) (5) (16)

  Banking, Finance, Insurance & Real Estate    
L + 5.00%
(1.00% Floor)
 
 
    7/1/2022       3,741       3,690       3,741       0.49  

Product Quest Manufacturing,
LLC (2) (3) (4) (5) (12)

  Containers, Packaging & Glass    
L + 5.75%
(1.00% Floor)
 
 
    9/9/2020       28,000       27,565       25,838       3.38  

Prowler Acquisition Corp. (Pipeline Supply and Service, LLC) (2) (3) (4)

  Wholesale    
L + 4.50%
(1.00% Floor)
 
 
    1/28/2020       10,798       10,739       8,101       1.06  

PSC Industrial Holdings
Corp (2) (3) (4) (13)

  Environmental Industries    
L + 4.75%
(1.00% Floor)
 
 
    12/5/2020       11,760       11,679       11,290       1.48  

PSI Services LLC (2) (3) (4) (5) (12) (16)

  Business Services    
L + 6.75%
(1.00% Floor)
 
 
    2/27/2021       32,705       32,022       34,784       4.56  

PT Intermediate Holdings III, LLC (Parts Town) (2) (3) (4) (5) (13) (15)

  Wholesale    
L + 6.50%
(1.00% Floor)
 
 
    6/23/2022       17,417       17,215       17,563       2.30  

QW Holding Corporation
(Quala) (2) (3) (4) (5) (13)

  Environmental Industries    
L + 6.75%
(1.00% Floor)
 
 
    8/31/2022       29,925       29,084       30,009       3.93  

Reliant Pro Rehab, LLC (2) (3) (5) (12)

  Healthcare & Pharmaceuticals    
L + 10.00%
(1.00% Floor)
 
 
    12/29/2017       22,331       22,024       22,331       2.92  

SolAero Technologies
Corp. (2) (3) (4) (5)

  Telecommunications    
L + 5.25%
(1.00% Floor)
 
 
    12/10/2020       19,677       19,541       18,901       2.47  

Superior Health Linens,
LLC (2) (3) (4) (5) (13) (15)

  Business Services    
L + 6.50%
(1.00% Floor)
 
 
    9/30/2021       19,206       18,891       19,068       2.50  

T2 Systems,
Inc. (2) (3) (4) (5) (13) (15) (16)

  Transportation: Consumer    
L + 6.75%
(1.00% Floor)
 
 
    9/28/2022       22,950       22,333       23,208       3.04  

T2 Systems Canada, Inc. (2) (3) (5) (16)

  Transportation: Consumer    
L + 6.75%
(1.00% Floor)
 
 
    9/28/2022       4,050       3,952       4,090       0.54  

 

15


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of December 31, 2016

(dollar amounts in thousands)

 

Investments—non-controlled/
non-affiliated (1)

 

Industry

  Interest
Rate (2)
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 

First Lien Debt (80.09%) (continued)

             

Teaching Strategies, LLC (2) (3) (4) (13)

  Media: Advertising, Printing & Publishing    
L + 5.50%
(0.50% Floor)
 
 
    10/1/2019     $ 13,369     $ 13,333     $ 13,369       1.75

The Hilb Group, LLC (2) (3) (5) (12) (15)

  Banking, Finance, Insurance & Real Estate    
L + 6.50%
(1.00% Floor)
 
 
    6/24/2021       29,682       29,113       29,826       3.90  

The SI Organization, Inc. (2) (3) (4) (13)

  Aerospace & Defense    
L + 4.75%
(1.00% Floor)
 
 
    11/23/2019       8,574       8,527       8,676       1.15  

The Topps Company, Inc. (2) (3) (4) (13)

  Non-durable Consumer Goods    
L + 6.00%
(1.25% Floor)
 
 
    10/2/2020       18,707       18,629       18,795       2.46  

TruckPro, LLC (2) (3) (4) (13) (16)

  Automotive    
L + 5.00%
(1.00% Floor)
 
 
    8/6/2018       9,292       9,267       9,262       1.21  

Tweddle Group, Inc. (2) (3) (4) (13)

  Media: Advertising, Printing & Publishing    
L + 6.00%
(1.00% Floor)
 
 
    10/24/2022       16,200       15,885       16,114       2.11  

TwentyEighty, Inc. (fka Miller
Heiman, Inc.) (2) (3) (5) (10) (13)

  Business Services    
L + 6.00%
(1.00% Floor)
 
 
    9/30/2019       18,719       18,571       7,628       1.00  

U.S. Farathane, LLC (2) (3) (4) (13)

  Automotive    
L + 4.75%
(1.00% Floor)
 
 
    12/23/2021       1,925       1,895       1,925       0.25  

U.S. TelePacific Holdings
Corp. (2) (3) (5)

  Telecommunications    
L + 8.50%
(1.00% Floor)
 
 
    2/24/2021       30,000       29,149       29,853       3.91  

Vetcor Professional Practices,
LLC (2) (3) (4) (5) (13) (15)

  Consumer Services    
L + 6.25%
(1.00% Floor)
 
 
    4/20/2021       25,001       24,623       25,164       3.29  

Violin Finco S.A.R.L. (Alexander
Mann Solutions) (United
Kingdom) (2) (3) (4) (8) (13)

  Business Services    
L + 4.75%
(1.00% Floor)
 
 
    12/20/2019       10,065       10,012       10,058       1.32  

Vistage Worldwide, Inc. (2) (3) (4) (13) (16)

  Business Services    
L + 5.50%
(1.00% Floor)
 
 
    8/19/2021       28,757       28,524       28,688       3.75  

Vitera Healthcare Solutions,
LLC (2) (3) (4) (13)

  Healthcare & Pharmaceuticals    
L + 5.00%
(1.00% Floor)
 
 
    11/4/2020       9,104       9,050       9,078       1.19  

Winchester Electronics
Corporation (2) (3) (4) (5) (13) (15)

  Capital Equipment    
L + 6.50%
(1.00% Floor)
 
 
    6/30/2022       27,367       26,959       27,460       3.59  

Zest Holdings, LLC (2) (3) (4) (13)

  Durable Consumer Goods    
L + 4.75%
(1.00% Floor)
 
 
    8/16/2020       9,530       9,530       9,584       1.25  
         

 

 

   

 

 

   

 

 

 

First Lien Debt Total

          $ 1,145,326     $ 1,139,548       149.13
         

 

 

   

 

 

   

 

 

 

Second Lien Debt (12.08%)

             

AF Borrower LLC (Accuvant) (2) (3) (5)

  High Tech Industries    
L + 9.00%
(1.00% Floor)
 
 
    1/30/2023     $ 8,000     $ 7,934     $ 8,000       1.05

AIM Group USA Inc. (2) (3) (5) (13)

  Aerospace & Defense    
L + 9.00%
(1.00% Floor)
 
 
    8/2/2022       23,000       22,701       23,196       3.04  

AmeriLife Group, LLC (2) (3) (5)

  Banking, Finance, Insurance & Real Estate    
L + 8.75%
(1.00% Floor)
 
 
    1/10/2023       20,000       19,656       19,208       2.51  

Argon Medical Devices,
Inc. (2) (3) (4) (5)

  Healthcare & Pharmaceuticals    
L + 9.50%
(1.00% Floor)
 
 
    6/23/2022       24,000       23,363       24,233       3.17  

Berlin Packaging L.L.C. (2) (3) (5) (13)

  Containers, Packaging & Glass    
L + 6.75%
(1.00% Floor)
 
 
    10/1/2022       2,927       2,910       2,953       0.39  

Charter NEX US Holdings,
Inc. (2) (3) (5) (13)

  Chemicals, Plastics & Rubber    
L + 8.25%
(1.00% Floor)
 
 
    2/5/2023       7,394       7,303       7,468       0.98  

Confie Seguros Holding II
Co. (2) (3) (5) (16)

  Banking, Finance, Insurance & Real Estate    
L + 9.00%
(1.25% Floor)
 
 
    5/8/2019       12,000       11,921       11,918       1.56  

Drew Marine Group Inc. (2) (3) (4) (5) (13)

  Chemicals, Plastics & Rubber    
L + 7.00%
(1.00% Floor)
 
 
    5/19/2021       12,500       12,481       12,333       1.61  

Genex Holdings, Inc. (2) (3) (5)

  Banking, Finance, Insurance & Real Estate    
L + 7.75%
(1.00% Floor)
 
 
    5/30/2022       7,990       7,915       7,978       1.04  

 

16


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of December 31, 2016

(dollar amounts in thousands)

 

Investments—non-controlled/
non-affiliated (1)

 

Industry

  Interest
Rate (2)
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 

Second Lien Debt (12.08%) (continued)

             

Institutional Shareholder
Services Inc. (2) (3) (5) (13)

  Banking, Finance, Insurance & Real Estate    
L + 8.50%
(1.00% Floor)
 
 
    4/29/2022     $ 12,500     $ 12,408     $ 12,359       1.62

Jazz Acquisition, Inc.
(Wencor) (2) (3) (5) (13)

  Aerospace & Defense    
L + 6.75%
(1.00% Floor)
 
 
    6/19/2022       6,700       6,677       5,572       0.73  

MRI Software, LLC (2) (3) (5)

  Software    
L + 8.00%
(1.00% Floor)
 
 
    6/23/2022       11,250       11,110       11,265       1.47  

Power Stop, LLC (5) (9)

  Automotive     11.00%       5/29/2022       10,000       9,831       9,863       1.29  

Prowler Acquisition Corp. (Pipeline
Supply and Service, LLC) (2) (3) (5)

  Wholesale    
L + 8.50%
(1.00% Floor)
 
 
    7/28/2020       3,000       2,960       1,682       0.22  

Vitera Healthcare Solutions,
LLC (2) (3) (4)

  Healthcare & Pharmaceuticals    
L + 8.25%
(1.00% Floor)
 
 
    11/4/2021       2,000       1,979       1,945       0.26  

Watchfire Enterprises, Inc. (2) (3) (5) (13)

  Media: Advertising, Printing & Publishing    
L + 8.00%
(1.00% Floor)
 
 
    10/2/2021       7,000       6,932       6,976       0.91  

Zywave, Inc. (2) (3) (5)

  High Tech Industries    
L + 9.00%
(1.00% Floor)
 
 
    11/17/2023       4,950       4,879       4,915       0.64  
         

 

 

   

 

 

   

 

 

 

Second Lien Debt Total

          $ 172,960     $ 171,864       22.49
         

 

 

   

 

 

   

 

 

 

 

Investments—non-controlled/non-affiliated (1)

  Industry     Maturity
Date
    Par
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of Net
Assets
 

Structured Finance Obligations (0.37%) (5) (8) (11)

           

1776 CLO I, Ltd., Subordinated Notes

    Structured Finance       5/8/2020     $ 11,750     $ 6,739     $ 2,761       0.36

Clydesdale CLO 2005, Ltd., Subordinated Notes

    Structured Finance       12/6/2017       5,750       —         10       0.00  

MSIM Peconic Bay, Ltd., Subordinated Notes

    Structured Finance       7/20/2019       4,500       63       5       0.00  

Nautique Funding Ltd., Income Notes

    Structured Finance       4/15/2020       5,000       2,437       2,440       0.32  
       

 

 

   

 

 

   

 

 

 

Structured Finance Obligations Total

        $ 9,239     $ 5,216       0.68
       

 

 

   

 

 

   

 

 

 

 

Investments—non-controlled/non-affiliated (1)

   Industry      Shares/
Units
     Cost      Fair
Value (7)
     Percentage
of Net
Assets
 

Equity Investments (0.46%) (5)

              

CIP Revolution Investments, LLC

    
Media: Advertising,
Printing & Publishing
 
 
     30,000      $ 300      $ 352        0.05

Derm Growth Partners III, LLC (Dermatology Associates)

    
Healthcare &
Pharmaceuticals
 
 
     1,000,000        1,000        976        0.13  

GS Holdco LLC (Global Software, LLC)

     High Tech Industries        1,000,000        1,001        1,126        0.15  

Power Stop Intermediate Holdings, LLC

     Automotive        7,150        715        1,208        0.16  

T2 Systems Parent Corporation

     Transportation: Consumer        555,556        556        584        0.07  

THG Acquisition, LLC (The Hilb Group, LLC)

    
Banking, Finance,
Insurance & Real Estate
 
 
     1,500,000        1,499        2,228        0.29  
        

 

 

    

 

 

    

 

 

 

Equity Investments Total

         $ 5,071      $ 6,474        0.85
        

 

 

    

 

 

    

 

 

 

Total investments—non-controlled/non-affiliated

         $ 1,332,596      $ 1,323,102        173.15
        

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of December 31, 2016

(dollar amounts in thousands)

 

Investments—controlled/affiliated

  Industry     Interest
Rate (2)
    Maturity
Date
    Par
Amount/

LLC
Interest
    Cost     Fair
Value (7)
    Percentage
of Net
Assets
 

Investment Fund (7.00%) (8)

             

Middle Market Credit Fund, LLC, Mezzanine Loan (2) (5) (9) (14)

    Investment Fund       L + 9.50%       6/24/2017     $ 62,384     $ 62,384     $ 62,384       8.16

Middle Market Credit Fund, LLC, Subordinated Loan and Member’s Interest (5) (14)

    Investment Fund       0.001       3/1/2021       35,001       35,001       37,273       4.88  
         

 

 

   

 

 

   

 

 

 

Investment Fund Total

          $ 97,385     $ 99,657       13.04
         

 

 

   

 

 

   

 

 

 

Total investments—controlled/affiliated

          $ 97,385     $ 99,657       13.04
         

 

 

   

 

 

   

 

 

 

Total investments

          $ 1,429,981     $ 1,422,759       186.19
         

 

 

   

 

 

   

 

 

 

 

(1) Unless otherwise indicated, issuers of debt and equity investments held by the Company are domiciled in the United States and issuers of structured finance obligations are domiciled in the Cayman Islands. Under the Investment Company Act, the Company would be deemed to “control” a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. As of December 31, 2016, the Company does not “control” any of these portfolio companies. Under the Investment Company Act, the Company would be deemed an “affiliated person” of a portfolio company if the Company owns 5% or more of the portfolio company’s outstanding voting securities. As of December 31, 2016, the Company is not an “affiliated person” of any of these portfolio companies.
(2) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate), which generally resets quarterly. For each such loan, the Company has provided the interest rate in effect as of December 31, 2016. As of December 31, 2016, all of our LIBOR loans were indexed to the 90-day LIBOR rate at 1.00%, except for those loans as indicated in Note 16 below.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by the SPV. The SPV has entered into the SPV Credit Facility. The lenders of the SPV Credit Facility have a first lien security interest in substantially all of the assets of the SPV (see Note 6, Borrowings). Accordingly, such assets are not available to creditors of the Company or the 2015-1 Issuer, a wholly owned and consolidated subsidiary of the Company.
(5) Denotes that all or a portion of the assets are owned by the Company. The Company has entered into the Credit Facility. The lenders of the Credit Facility have a first lien security interest in substantially all of the portfolio investments held by the Company (see Note 6, Borrowings). Accordingly, such assets are not available to creditors of the SPV or the 2015-1 Issuer.
(6) Amortized cost represents original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method. Equity tranche CLO fund investments, which are referred to as “structured finance obligations”, are recorded at amortized cost using the effective interest method.
(7) Fair value is determined in good faith by or under the direction of the Board of Directors of the Company (see Note 2, Significant Accounting Policies, and Note 3, Fair Value Measurements), pursuant to the Company’s valuation policy.
(8) The Company has determined the indicated investments are non-qualifying assets under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
(9) Represents a corporate mezzanine loan, which is subordinated to senior secured term loans of the portfolio company/investment fund.
(10) Loan was on non-accrual status as of December 31, 2016.
(11) As of December 31, 2016, the Company has a greater than 25% but less than 50% equity or subordinated notes ownership interest in certain structured finance obligations. These investments have governing documents that preclude the Company from controlling management of the entity and therefore the Company has determined that the issuer of the investment is not a controlled affiliate or a non-controlled affiliate because the investments are not “voting securities”.
(12) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders as follows: Dimensional Dental Management, LLC (4.54%), EIP Merger Sub, LLC (Evolve IP) (3.84%), International Medical Group, Inc. (4.64%), Product Quest Manufacturing, LLC (3.54%), PSI Services LLC (4.40%), Reliant Pro Rehab, LLC (nil) and The Hilb Group, LLC (3.96%). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/last out loan, which has a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.

 

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Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of December 31, 2016

(dollar amounts in thousands)

 

(13) Denotes that all or a portion of the assets are owned by the 2015-1 Issuer and secure the notes issued in connection with a $400 million term debt securitization completed by the Company on June 26, 2015 (see Note 7, 2015-1 Notes). Accordingly, such assets are not available to the creditors of the SPV or the Company.
(14) Under the Investment Company Act, the Company is deemed to be an “affiliated person” of and “control” this investment fund because the Company owns more than 25% of the investment fund’s outstanding voting securities and/or has the power to exercise control over management or policies of such investment fund. See Note 5, Middle Market Credit Fund, LLC, for more details.
(15) As of December 31, 2016, the Company had the following unfunded commitments to fund delayed draw and revolving senior secured loans:

 

Investments—non-controlled/non-affiliated

   Type      Unused
Fee
    Par/
Principal
Amount
     Fair Value  

First Lien Debt—unfunded delayed draw and revolving term loans commitments

          

Advanced Instruments, LLC

     Revolver        0.50   $ 2,500      $ (25

Captive Resources Midco, LLC

     Revolver        0.50     1,875        (2

Captive Resources Midco, LLC

     Delayed Draw        1.25     3,125        (4

CIP Revolution Holdings, LLC

     Revolver        0.50     1,331        6  

CIP Revolution Holdings, LLC

     Delayed Draw        0.75     1,331        6  

Derm Growth Partners III, LLC (Dermatology Associates)

     Revolver        0.50     1,672        1  

Derm Growth Partners III, LLC (Dermatology Associates)

     Delayed Draw        1.00     5,247        4  

Dimensional Dental Management, LLC

     Delayed Draw        1.00     2,507        (23

Dimora Brands, Inc. (fka TK USA Enterprises, Inc.)

     Revolver        0.50     4,750        (30

Direct Travel, Inc.

     Delayed Draw        1.00     9,658        (56

Green Plains II LLC

     Revolver        0.50     1,352        14  

National Technical Systems, Inc.

     Revolver        0.50     2,031        (102

National Technical Systems, Inc.

     Delayed Draw        1.00     4,469        (165

OnCourse Learning Corporation

     Revolver        0.50     859        2  

PT Intermediate Holdings III, LLC (Parts Town)

     Revolver        0.50     2,025        15  

Superior Health Linens, LLC

     Revolver        0.50     2,735        (17

T2 Systems, Inc.

     Revolver        0.50     2,933        29  

The Hilb Group, LLC

     Delayed Draw        1.00     3,810        16  

Vetcor Professional Practices, LLC

     Delayed Draw        1.00     3,057        18  

Winchester Electronics Corporation

     Delayed Draw        1.00     2,500        8  
       

 

 

    

 

 

 

Total unfunded commitments

        $ 59,767      $ (305
       

 

 

    

 

 

 

 

(16) As of December 31, 2016, this LIBOR loan was indexed to the 30-day LIBOR rate at 0.77%.

As of December 31, 2016, investments at fair value consisted of the following:

 

Type—% of Fair Value

   Amortized Cost      Fair Value      % of Fair Value  

First Lien Debt

   $ 1,145,326      $ 1,139,548        80.09

Second Lien Debt

     172,960        171,864        12.08  

Structured Finance Obligations

     9,239        5,216        0.37  

Equity Investments

     5,071        6,474        0.46  

Investment Fund

     97,385        99,657        7.00  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,429,981      $ 1,422,759        100.00
  

 

 

    

 

 

    

 

 

 

Type—% of Fair Value of First and Second Lien Debt

   Amortized Cost      Fair Value      % of Fair Value  

Floating Rate

   $ 1,308,455      $ 1,301,549        99.25

Fixed Rate

     9,831        9,863        0.75  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,318,286      $ 1,311,412        100.00
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

TCG BDC, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

As of December 31, 2016

(dollar amounts in thousands)

 

The industry composition of investments at fair value as of December 31, 2016 was as follows:

 

Industry

   Amortized Cost      Fair Value      % of Fair Value  

Aerospace & Defense

   $ 62,759      $ 61,371        4.31

Automotive

     37,780        38,414        2.70  

Banking, Finance, Insurance & Real Estate

     148,577        150,700        10.59  

Beverage, Food & Tobacco

     15,059        15,379        1.08  

Business Services

     149,205        141,784        9.97  

Capital Equipment

     36,811        37,316        2.62  

Chemicals, Plastics & Rubber

     19,784        19,801        1.39  

Construction & Building

     23,403        23,691        1.67  

Consumer Services

     78,693        79,941        5.62  

Containers, Packaging & Glass

     49,442        47,706        3.35  

Durable Consumer Goods

     19,930        19,932        1.04  

Energy: Electricity

     36,783        36,758        2.59  

Energy: Oil & Gas

     11,132        10,911        0.77  

Environmental Industries

     40,763        41,299        2.90  

Forest Products & Paper

     23,752        23,924        1.68  

Healthcare & Pharmaceuticals

     159,072        161,544        11.36  

High Tech Industries

     45,617        46,317        3.26  

Hotel, Gaming & Leisure

     30,450        30,014        2.11  

Investment Fund

     97,385        99,657        7.00  

Media: Advertising, Printing & Publishing

     70,988        71,999        5.06  

Metals & Mining

     10,232        10,259        0.72  

Non-durable Consumer Goods

     32,759        29,348        2.06  

Retail

     8,625        8,320        0.58  

ware

     11,110        11,265        0.79  

Structured Finance

     9,239        5,216        0.37  

Telecommunications

     108,553        110,359        7.76  

Transportation: Cargo

     34,323        34,306        2.41  

Transportation: Consumer

     26,841        27,882        1.96  

Wholesale

     30,914        27,346        1.92  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,429,981      $ 1,422,759        100.00
  

 

 

    

 

 

    

 

 

 

The geographical composition of investments at fair value as of December 31, 2016 was as follows:

 

Geography

   Amortized Cost      Fair Value      % of Fair Value  

Cayman Islands

   $ 9,239      $ 5,216        0.37

United Kingdom

     21,144        20,969        1.47  

United States

     1,399,598        1,396,574        98.16  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,429,981      $ 1,422,759        100.00
  

 

 

    

 

 

    

 

 

 

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

 

20


Table of Contents

TCG BDC, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

As of March 31, 2017

(dollar amounts in thousands, except per share data)

1. ORGANIZATION

TCG BDC, Inc. (together with its consolidated subsidiaries, “we,” “us,” “our,” “TCG BDC” or the “Company”) is a Maryland corporation formed on February 8, 2012, and structured as an externally managed, non-diversified closed-end investment company. The Company is managed by its investment adviser, Carlyle GMS Investment Management L.L.C. (“CGMSIM” or “Investment Adviser”), a wholly owned subsidiary of The Carlyle Group L.P. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the “Investment Company Act”). In addition, the Company has elected to be treated, and intends to continue to comply with the requirements to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (together with the rules and regulations promulgated thereunder, the “Code”).

The Company’s investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle market companies, which the Company defines as companies with approximately $10 million to $100 million of earnings before interest, taxes, depreciation and amortization (“EBITDA”), which the Company believes is a useful proxy for cash flow. The Company seeks to achieve its investment objective primarily through direct originations of secured debt, including first lien senior secured loans (which may include stand-alone first lien loans, first lien/last out loans and “unitranche” loans) and second lien senior secured loans (collectively, “Middle Market Senior Loans”), with the balance of our assets invested in higher yielding investments (which may include unsecured debt, mezzanine debt and investments in equities). The Middle Market Senior Loans are generally made to private U.S. middle market companies that are, in many cases, controlled by private equity firms. Depending on market conditions, the Company expects that between 70% and 80% of the value of its assets will be invested in Middle Market Senior Loans. The Company expects that the composition of its portfolio will change over time given the Investment Adviser’s view on, among other things, the economic and credit environment (including with respect to interest rates) in which the Company is operating.

On May 2, 2013, the Company completed its initial closing of capital commitments (the “Initial Closing”) and subsequently commenced substantial investment operations. If the Company has not consummated an initial public offering of its common stock that results in an unaffiliated public float of at least 15% of the aggregate capital commitments received prior to the date of such initial public offering (a “Qualified IPO”) by May 2, 2018, then the Board of Directors of the Company (subject to any necessary stockholder approvals and applicable requirements of the Investment Company Act) will use its best efforts to wind down and/or liquidate and dissolve.

The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. The Company will remain an emerging growth company for up to five years following an initial public offering, although if the market value of the common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, the Company would cease to be an emerging growth company as of the following December 31.

The Company is externally managed by the Investment Adviser, an investment adviser registered under the Investment Advisers Act of 1940, as amended. Carlyle GMS Finance Administration L.L.C. (the “Administrator”) provides the administrative services necessary for the Company to operate. Both the Investment Adviser and the Administrator are wholly owned subsidiaries of Carlyle Investment Management L.L.C., a subsidiary of The Carlyle Group L.P. “Carlyle” refers to The Carlyle Group L.P. and its affiliates and its consolidated subsidiaries (other than portfolio companies of its affiliated funds), a global alternative asset manager publicly traded on NASDAQ Global Select Market under the symbol “CG”. Refer to the sec.gov website for further information on Carlyle.

 

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Effective March 15, 2017, the Company changed its name from “Carlyle GMS Finance, Inc.” to “TCG BDC, Inc.”

TCG BDC SPV LLC (the “SPV”) is a Delaware limited liability company that was formed on January 3, 2013. The SPV invests in first and second lien senior secured loans. The SPV is a wholly owned subsidiary of the Company and is consolidated in these consolidated financial statements commencing from the date of its formation, January 3, 2013. Effective March 15, 2017, the SPV changed its name from “Carlyle GMS Finance SPV LLC” to “TCG BDC SPV LLC”.

On June 26, 2015, the Company completed a $400 million term debt securitization (the “2015-1 Debt Securitization”). The notes offered in the 2015-1 Debt Securitization (the “2015-1 Notes”) were issued by Carlyle GMS Finance MM CLO 2015-1 LLC (the “2015-1 Issuer”), a wholly owned and consolidated subsidiary of the Company, and are secured by a diversified portfolio of the 2015-1 Issuer consisting primarily of first and second lien senior secured loans. Refer to Note 7 for details. The 2015-1 Issuer is consolidated in these consolidated financial statements commencing from the date of its formation, May 8, 2015.

On February 29, 2016, the Company and Credit Partners USA LLC (“Credit Partners”) entered into an amended and restated limited liability company agreement, which was subsequently amended on June 24, 2016 (as amended, the “Limited Liability Company Agreement”) to co-manage Middle Market Credit Fund, LLC (“Credit Fund”). Credit Fund primarily invests in first lien loans of middle market companies. Credit Fund is managed by a six-member board of managers, on which the Company and Credit Partners each have equal representation. The Company and Credit Partners each have 50% economic ownership of Credit Fund and have commitments to fund, from time to time, capital of up to $400,000 each. Refer to Note 5, Middle Market Credit Fund, LLC, for details.

As a BDC, the Company is required to comply with certain regulatory requirements. As part of these requirements, the Company must not acquire any assets other than “qualifying assets” specified in the Investment Company Act unless, at the time the acquisition is made, at least 70% of its total assets are qualifying assets (with certain limited exceptions).

To qualify as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to its stockholders generally at least 90% of its investment company taxable income, as defined by the Code, for each year. Pursuant to this election, the Company generally does not have to pay corporate level taxes on any income that it distributes to stockholders, provided that the Company satisfies those requirements.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“US GAAP”). The Company is an investment company for the purposes of accounting and financial reporting in accordance with Accounting Standards Update (“ASU”) 2013-08, Financial Services—Investment Companies (“ASU 2013-08”): Amendments to the Scope, Measurement and Disclosure Requirements. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, the SPV and the 2015-1 Issuer. All significant intercompany balances and transactions have been eliminated. US GAAP for an investment company requires investments to be recorded at fair value. The carrying value for all other assets and liabilities approximates their fair value.

The interim financial statements have been prepared in accordance with US GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X.

 

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Accordingly, certain disclosures accompanying the annual consolidated financial statements prepared in accordance with US GAAP are omitted. In the opinion of management, all adjustments considered necessary for the fair presentation of consolidated financial statements for the interim period presented have been included. These adjustments are of a normal, recurring nature. This Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2016. The results of operations for the three month period ended March 31, 2017 are not necessarily indicative of the operating results to be expected for the full year.

Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on base management and incentive fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the consolidated financial statements. Actual results could differ from these estimates and such differences could be material.

Investments

Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation on investments as presented in the accompanying Consolidated Statements of Operations reflects the net change in the fair value of investments, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. See Note 3 for further information about fair value measurements.

Cash and Cash Equivalents

Cash and cash equivalents consist of demand deposits and highly liquid investments (e.g., money market funds, U.S. treasury notes) with original maturities of three months or less. Cash equivalents are carried at amortized cost, which approximates fair value. The Company’s cash and cash equivalents are held with two large financial institutions and cash held in such financial institutions may, at times, exceed the Federal Deposit Insurance Corporation insured limit.

Revenue Recognition

Interest from Investments and Realized Gain/Loss on Investments

Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on debt investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion of discounts and amortization of premiums, if any. At time of exit, the realized gain or loss on an investment is the difference between the amortized cost at time of exit and the cash received at exit using the specific identification method.

The Company may have loans in its portfolio that contain payment-in-kind (“PIK”) provisions. PIK represents interest that is accrued and recorded as interest income at the contractual rates, increases the loan

 

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principal on the respective capitalization dates, and is generally due at maturity. As of March 31, 2017, the fair value of the loan in the portfolio with PIK provisions was $8,861, which represents approximately 0.6% of total investments at fair value. For the three month period ended March 31, 2017, there was no PIK interest accrued. As of December 31, 2016, no loans in the portfolio contained PIK provisions.

Interest income from investments in the “equity” class of collateralized loan obligation (“CLO”) funds, which are included in “structured finance obligations”, is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with Accounting Standards Codification (“ASC”) 325-40, Beneficial Interests in Securitized Financials Assets. The Company monitors the expected cash inflows from its CLO equity investments, including the expected residual payments and the effective yield is determined and updated at least quarterly. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties, including the amount and timing of principal payments which are impacted by prepayments, repurchases, defaults, delinquencies and liquidations of or within the CLO funds. These uncertainties are difficult to predict and are subject to future events that could have impacted the Company’s estimates if the information was known at the time. As a result, actual results may differ significantly from these estimates.

Dividend Income

Dividend income from the investment fund is recorded on the record date for the investment fund to the extent that such amounts are payable by the investment fund and are expected to be collected.

Other Income

Other income may include income such as consent, waiver, amendment, syndication and prepayment fees associated with the Company’s investment activities as well as any fees for managerial assistance services rendered by the Company to the portfolio companies. Such fees are recognized as income when earned or the services are rendered. The Company may receive fees for guaranteeing the outstanding debt of a portfolio company. Such fees are amortized into other income over the life of the guarantee. The unamortized amount, if any, is included in other assets in the accompanying Consolidated Statements of Assets and Liabilities. For the three month periods ended March 31, 2017 and 2016, the Company earned $2,536 and $999, respectively, in other income, primarily from syndication and prepayment fees.

Non-Accrual Income

Loans are generally placed on non-accrual status 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 in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid current and, in management’s judgment, are likely to remain current. Management may not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. As of March 31, 2017, the fair value of the loan in the portfolio on non-accrual status was $8,858, which represents approximately 0.6% of total investments at fair value. The remaining first and second lien debt investments were performing and current on their interest payments as of March 31, 2017. All first and second lien debt investments were performing and current on their interest payments as of March 31, 2016.

SPV Credit Facility, Credit Facility and 2015-1 Notes Related Costs, Expenses and Deferred Financing Costs (See Note 6, Borrowings, and Note 7, 2015-1 Notes)

Interest expense and unused commitment fees on the SPV Credit Facility and Credit Facility are recorded on an accrual basis. Unused commitment fees are included in credit facility fees in the accompanying Consolidated Statements of Operations.

 

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The SPV Credit Facility and Credit Facility are recorded at carrying value, which approximates fair value.

Deferred financing costs include capitalized expenses related to the closing or amendments of the SPV Credit Facility and Credit Facility. Amortization of deferred financing costs for each credit facility is computed on the straight-line basis over the respective term of each credit facility, except for a portion that was accelerated in connection with the amendment of the SPV Credit Facility as described in Note 6. The unamortized balance of such costs is included in deferred financing costs in the accompanying Consolidated Statements of Assets and Liabilities. The amortization of such costs is included in credit facility fees in the accompanying Consolidated Statements of Operations.

Debt issuance costs include capitalized expenses including structuring and arrangement fees related to the offering of the 2015-1 Notes. Amortization of debt issuance costs for the 2015-1 Notes is computed on the effective yield method over the term of the 2015-1 Notes. The unamortized balance of such costs is presented as a direct deduction to the carrying amount of the 2015-1 Notes in the accompanying Consolidated Statements of Assets and Liabilities. The amortization of such costs is included in interest expense in the accompanying Consolidated Statements of Operations.

The 2015-1 Notes are recorded at carrying value, which approximates fair value.

Organization and Offering Costs

The Company agreed to reimburse the Investment Adviser for initial organization and offering costs incurred on behalf of the Company up to $1,500. As of March 31, 2017 and December 31, 2016, $1,500 of organization and offering costs had been incurred by the Company and $57 of excess organization and offering costs had been incurred by the Investment Adviser since inception. The $1,500 of incurred organization and offering costs are allocated to all stockholders based on their respective capital commitment and are re-allocated amongst all stockholders at the time of each capital drawdown subsequent to the Initial Closing. The Company’s organization costs incurred are expensed and the offering costs are charged against equity when incurred.

Income Taxes

For federal income tax purposes, the Company has elected to be treated as a RIC under the Code, and intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, the Company must meet certain minimum distribution, source-of-income and asset diversification requirements. If such requirements are met, then the Company is generally required to pay income taxes only on the portion of its taxable income and gains it does not distribute.

The minimum distribution requirements applicable to RICs require the Company to distribute to its stockholders at least 90% of its investment company taxable income (“ICTI”), as defined by the Code, each year. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

In addition, based on the excise distribution requirements, the Company is subject to a 4% nondeductible federal excise tax on undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year. For this purpose, however, any ordinary income or capital gain net income retained by the Company that is subject to corporate income tax is considered to have been distributed. The Company intends to make sufficient distributions each taxable year to satisfy the excise distribution requirements.

 

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The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are “more-likely than not” to be sustained by the applicable tax authority. All penalties and interest associated with income taxes, if any, are included in income tax expense. The SPV and the 2015-1 Issuer are disregarded entities for tax purposes and are consolidated with the tax return of the Company.

Capital Calls and Dividends and Distributions to Common Stockholders

The Company records the shares issued in connection with capital calls as of the effective date of the capital call. To the extent that the Company has taxable income available, the Company intends to make quarterly distributions to its common stockholders. Dividends and distributions to common stockholders are recorded on the record date. The amount to be distributed is determined by the Board of Directors each quarter and is generally based upon the taxable earnings estimated by management and available cash. Net realized capital gains, if any, are generally distributed at least annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions on behalf of its stockholders, for those who have elected to participate in the plan. As a result of adopting such a plan, if the Board of Directors authorizes, and The Company declares, a cash dividend or distribution, the stockholders who have elected to participate in the dividend reinvestment plan would have their cash dividends or distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving cash. Prior to a Qualified IPO, the Company intends to use primarily newly issued shares of its common stock to implement the plan issued at the net asset value per share most recently determined by the Board of Directors. After a Qualified IPO, the Company intends to use primarily newly issued shares to implement the plan so long as the market value per share is equal to or greater than the net asset value per share as of the close of business on the relevant payment date for such dividend or distribution. If the market value per share is less than the net asset value per share as of the close of business on the relevant payment date, the plan administrator would purchase the common stock on behalf of participants in the open market, unless the Company instructs the plan administrator otherwise.

Functional Currency

The functional currency of the Company is the U.S. Dollar and all transactions were in U.S. Dollars.

3. FAIR VALUE MEASUREMENTS

The Company applies fair value accounting in accordance with the terms of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value as the amount that would be exchanged to sell an asset or transfer a liability in an orderly transfer between market participants at the measurement date. The Company values securities/instruments traded in active markets on the measurement date by multiplying the closing price of such traded securities/instruments by the quantity of shares or amount of the instrument held. The Company may also obtain quotes with respect to certain of its investments, such as its securities/instruments traded in active markets and its liquid securities/instruments that are not traded in active markets, from pricing services, brokers, or counterparties (i.e., “consensus pricing”). When doing so, the Company determines whether the quote obtained is sufficient according to US GAAP to determine the fair value of the security. The Company may use the quote obtained or alternative pricing sources may be utilized including valuation techniques typically utilized for illiquid securities/instruments.

Securities/instruments that are illiquid or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Investment Adviser or the Company’s Board of Directors, does not represent fair value shall each be valued as of the measurement date

 

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using all techniques appropriate under the circumstances and for which sufficient data is available. These valuation techniques may vary by investment and include comparable public market valuations, comparable precedent transaction valuations and/or discounted cash flow analyses. The process generally used to determine the applicable value is as follows: (i) the value of each portfolio company or investment is initially reviewed by the investment professionals responsible for such portfolio company or investment and, for non-traded investments, a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs is used to determine a preliminary value, which is also reviewed alongside consensus pricing, where available; (ii) preliminary valuation conclusions are documented and reviewed by a valuation committee comprised of members of senior management; (iii) the Board of Directors engages a third-party valuation firm to provide positive assurance on portions of the Middle Market Senior Loans and equity investments portfolio each quarter (such that each non-traded investment other than Credit Fund is reviewed by a third-party valuation firm at least once on a rolling twelve month basis) including a review of management’s preliminary valuation and conclusion on fair value; (iv) the Audit Committee of the Board of Directors (the “Audit Committee”) reviews the assessments of the Investment Adviser and the third-party valuation firm and provides the Board of Directors with any recommendations with respect to changes to the fair value of each investment in the portfolio; and (v) the Board of Directors discusses the valuation recommendations of the Audit Committee and determines the fair value of each investment in the portfolio in good faith based on the input of the Investment Adviser and, where applicable, the third-party valuation firm.

All factors that might materially impact the value of an investment are considered, including, but not limited to the assessment of the following factors, as relevant:

 

    the nature and realizable value of any collateral;

 

    call features, put features and other relevant terms of debt;

 

    the portfolio company’s leverage and ability to make payments;

 

    the portfolio company’s public or private credit rating;

 

    the portfolio company’s actual and expected earnings and discounted cash flow;

 

    prevailing interest rates and spreads for similar securities and expected volatility in future interest rates;

 

    the markets in which the portfolio company does business and recent economic and/or market events; and

 

    comparisons to comparable transactions and publicly traded securities.

Investment performance data utilized are the most recently available financial statements and compliance certificate received from the portfolio companies as of the measurement date which in many cases may reflect a lag in information.

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 fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been reported had a ready market for the investments existed, and it is reasonably possible that the difference could be material.

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the realized gains or losses on investments to be different from the net change in unrealized appreciation or depreciation currently reflected in the consolidated financial statements as of March 31, 2017 and December 31, 2016.

US GAAP establishes a hierarchical disclosure framework which ranks the level of observability of market price inputs used in measuring investments at fair value. The observability of inputs is impacted by a number of

 

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factors, including the type of investment and the characteristics specific to the investment and state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available quoted prices or for which fair value can be measured from quoted prices in active markets generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

Investments measured and reported at fair value are classified and disclosed based on the observability of inputs used in determination of fair values, as follows:

 

    Level 1—inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date. The types of financial instruments in Level 1 generally include unrestricted securities, including equities and derivatives, listed in active markets. The Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

 

    Level 2—inputs to the valuation methodology are either directly or indirectly observable as of the reporting date and are those other than quoted prices in active markets. The type of financial instruments in this category generally includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs.

 

    Level 3—inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are in this category generally include investments in privately-held entities, CLOs, and certain over-the-counter derivatives where the fair value is based on unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the overall fair value measurement. The Investment Adviser’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. For the three month periods ended March 31, 2017 and 2016, there were no transfers between levels.

 

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The following tables summarize the Company’s investments measured at fair value on a recurring basis by the above fair value hierarchy levels as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017  
     Level 1      Level 2      Level 3      Total  

Assets

 

     

First Lien Debt

   $ —        $ —        $ 1,085,554      $ 1,085,554  

Second Lien Debt

     —          —          161,643        161,643  

Structured Finance Obligations

     —          —          2,776        2,776  

Equity Investments

     —          —          8,451        8,451  

Investment Fund

           

Mezzanine Loan

     —          —          86,044        86,044  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ —        $ —        $ 1,344,468      $ 1,344,468  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments measured at net asset value (1)

            $ 48,077  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

            $ 1,392,545  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     Level 1      Level 2      Level 3      Total  

Assets

        

First Lien Debt

   $ —        $ —        $ 1,139,548      $ 1,139,548  

Second Lien Debt

     —          —          171,864        171,864  

Structured Finance Obligations

     —          —          5,216        5,216  

Equity Investments

     —          —          6,474        6,474  

Investment Fund

           

Mezzanine Loan

     —          —          62,384        62,384  
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

   $ —        $ —        $ 1,385,486      $ 1,385,486  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investments measured at net asset value (1)

            $ 37,273  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

            $ 1,422,759  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amount represents the Company’s subordinated loan and member’s interest investments in Credit Fund. The fair value of these investments has been estimated using the net asset value of the Company’s ownership interests in Credit Fund.

 

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The changes in the Company’s investments at fair value for which the Company has used Level 3 inputs to determine fair value and net change in unrealized appreciation (depreciation) included in earnings for Level 3 investments still held are as follows:

 

     Financial Assets
For the three month period ended March 31, 2017
 
     First Lien
Debt
    Second
Lien Debt
    Structured
Finance
Obligations
    Equity
Investments
     Investment
Fund -

Mezzanine
Loan
    Total  

Balance, beginning of period

   $ 1,139,548     $ 171,864     $ 5,216     $ 6,474      $ 62,384     $ 1,385,486  

Purchases

     92,793       1,782       —         1,500        45,660       141,735  

Sales

     (24,723     (2,978     —         —          —         (27,701

Paydowns

     (120,872     (10,000     (2,518     —          (22,000     (155,390

Accretion of discount

     3,425       151       —         —          —         3,576  

Net realized gains (losses)

     (7,552     (3     (139     —          —         (7,694

Net change in unrealized appreciation (depreciation)

     2,935       827       217       477        —         4,456  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 1,085,554     $ 161,643     $ 2,776     $ 8,451      $ 86,044     $ 1,344,468  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) included in earnings related to investments still held as of March 31, 2017 included in net change in unrealized appreciation (depreciation) on investments non-controlled/non-affiliated on the Consolidated Statements of Operations

   $ (3,472   $ 859     $ 220     $ 477      $ —       $ (1,916
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

     Financial Assets
For the three month period ended March 31, 2016
 
     First Lien
Debt
    Second
Lien Debt
    Structured
Finance
Obligations
    Equity
Investments
     Total  

Balance, beginning of period

   $ 785,459     $ 210,396     $ 44,812     $ 2,424      $ 1,043,091  

Purchases

     98,802       33,488       —         —          132,290  

Sales

     (2,193     (10,835     (9,805     —          (22,833

Paydowns

     (3,326     —         —         —          (3,326

Accretion of discount

     532       97       (31     —          598  

Net realized gains (losses)

     4       —         (3,581     —          (3,577

Net change in unrealized appreciation (depreciation)

     (5,608     (5,256     (1,040     371        (11,533
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 873,670     $ 227,890     $ 30,355     $ 2,795      $ 1,134,710  
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) included in earnings related to investments still held as of March 31, 2016 included in net change in unrealized appreciation (depreciation) on investments non-controlled/non-affiliated on the Consolidated Statements of Operations

   $ (5,602   $ (5,256   $ (4,298   $ 371      $ (14,785
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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The Company generally uses the following framework when determining the fair value of investments that are categorized as Level 3:

Investments in debt securities are initially evaluated to determine whether the enterprise value of the portfolio company is greater than the applicable debt. The enterprise value of the portfolio company is estimated using a market approach and an income approach. The market approach utilizes market value (EBITDA) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The income approach typically uses a discounted cash flow analysis of the portfolio company.

Investments in debt securities that do not have sufficient coverage through the enterprise value analysis are valued based on an expected probability of default and discount recovery analysis.

Investments in debt securities with sufficient coverage through the enterprise value analysis are generally valued using a discounted cash flow analysis of the underlying security. Projected cash flows in the discounted cash flow typically represent the relevant security’s contractual interest, fees and principal payments plus the assumption of full principal recovery at the security’s expected maturity date. The discount rate to be used is determined using an average of two market-based methodologies. Investments in debt securities may also be valued using consensus pricing.

Investments in structured finance obligations are generally valued using a discounted cash flow and/or consensus pricing.

Investments in equities are generally valued using a market approach and/or an income approach. The market approach utilizes EBITDA multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The income approach typically uses a discounted cash flow analysis of the portfolio company.

Investments in the subordinated loan and member’s interest of the investment fund are valued using the net asset value of the Company’s ownership interest in the investment fund and investments in the mezzanine loan of the investment fund are valued using discounted cash flow analysis with expected repayment rate of principal and interest.

 

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The following tables summarize the quantitative information related to the significant unobservable inputs for Level 3 instruments which are carried at fair value as of March 31, 2017 and December 31, 2016:

 

    Fair Value as of
March 31,

2017
   

Valuation Techniques

 

Significant

Unobservable Inputs

  Range        
          Low     High     Weighted
Average
 

Investments in First Lien Debt

  $ 1,010,923     Discounted Cash Flow   Discount Rate     4.13     16.25     8.01
    72,386     Consensus Pricing   Indicative Quotes     65.13       101.00       94.09  
    2,245     Income Approach   Discount Rate     19.53     19.53     19.53
    Market Approach   Comparable Multiple     4.06     4.51     4.28
 

 

 

           

Total First Lien Debt

    1,085,554            
 

 

 

           

Investments in Second Lien Debt

    156,836     Discounted Cash Flow   Discount Rate     7.93     11.01     9.65
    2,949     Consensus Pricing   Indicative Quotes     100.75       100.75       100.75  
    1,858     Income Approach   Discount Rate     10.68     10.68     10.68
    Market Approach   Comparable Multiple     8.87     9.60x       9.24x  
 

 

 

           

Total Second Lien Debt

    161,643            
 

 

 

           

Investments in Structured Finance Obligations

    2,776     Discounted Cash Flow   Discount Rate     22.00     22.00     22.00
      Default Rate     0.78       0.78       0.78  
      Prepayment Rate     35.00       35.00       35.00  
      Recovery Rate     65.00       65.00       65.00  
 

 

 

           

Total Structured Finance Obligations

    2,776            
 

 

 

           

Investments in Equity

    8,451     Income Approach   Discount Rate     8.37     10.30     9.13
    Market Approach   Comparable Multiple     7.55     14.52     10.92
 

 

 

           

Total Equity Investments

    8,451            
 

 

 

           

Investments in Investment Fund—Mezzanine Loan

    86,044     Income Approach   Repayment Rate     100.00     100.00     100.00
 

 

 

           

Total Investment Fund—Mezzanine Loan

    86,044            
 

 

 

           

Total Level 3 Investments

  $ 1,344,468            
 

 

 

           

 

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    Fair Value as of
December 31,
2016
   

Valuation Techniques

 

Significant

Unobservable Inputs

  Range        
          Low     High     Weighted
Average
 

Investments in First Lien Debt

  $ 986,695     Discounted Cash Flow   Discount Rate     4.50     16.33     7.94
    152,853     Consensus Pricing   Indicative Quotes     40.75       106.36       97.29  
 

 

 

           

Total First Lien Debt

    1,139,548            
 

 

 

           

Investments in Second Lien Debt

    153,657     Discounted Cash Flow   Discount Rate     7.93     11.05     9.75
    16,525     Consensus Pricing   Indicative Quotes     83.17       100.88       94.48  
    1,682     Income Approach   Discount Rate     15.32     15.32     15.32
    Market Approach   Comparable Multiple     8.01     8.68     8.34
 

 

 

           

Total Second Lien Debt

    171,864            
 

 

 

           

Investments in Structured Finance Obligations

    2,761     Discounted Cash Flow   Discount Rate     22.00     22.00     22.00
      Default Rate     1.13       1.13       1.13  
      Prepayment Rate     35.00       35.00       35.00  
      Recovery Rate     65.00       65.00       65.00  
    2,455     Consensus Pricing   Indicative Quotes     0.10       48.79       48.50  
 

 

 

           

Total Structured Finance Obligations

    5,216            
 

 

 

           

Investments in Equity

    6,474     Income Approach   Discount Rate     8.68     10.40     9.41
    Market Approach   Comparable Multiple     7.22     13.71     11.00
 

 

 

           

Total Equity Investments

    6,474            
 

 

 

           

Investments in Investment Fund—Mezzanine Loan

    62,384     Income Approach   Repayment Rate     100.00     100.00     100.00

Total Investment Fund—Mezzanine Loan

    62,384            
 

 

 

           

Total Level 3 Investments

  $ 1,385,486            
 

 

 

           

The significant unobservable inputs used in the fair value measurement of the Company’s investments in first and second lien debt securities are discount rates, indicative quotes and comparable EBITDA multiples. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in indicative quotes or comparable EBITDA multiples in isolation may result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s investments in structured finance obligations are discount rates, default rates, prepayment rates, recovery rates and indicative quotes. Significant increases in discount rates, default rates or prepayment rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value. Significant decreases in indicative quotes in isolation may result in a significantly lower fair value measurement.

 

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The significant unobservable inputs used in the fair value measurement of the Company’s investments in equities are discount rates and comparable EBITDA multiples. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in comparable EBITDA multiples would result in a significantly lower fair value measurement.

Financial instruments disclosed but not carried at fair value

The following table presents the carrying value and fair value of the Company’s secured borrowings disclosed but not carried at fair value as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017      December 31, 2016  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Secured borrowings

   $ 390,608      $ 390,608      $ 421,885      $ 421,885  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 390,608      $ 390,608      $ 421,885      $ 421,885  
  

 

 

    

 

 

    

 

 

    

 

 

 

The carrying values of the secured borrowings approximate their respective fair values and are categorized as Level 3 within the hierarchy. Secured borrowings are valued generally using discounted cash flow analysis. The significant unobservable inputs used in the fair value measurement of the Company’s secured borrowings are discount rates. Significant increases in discount rates would result in a significantly lower fair value measurement.

The following table represents the carrying values (before debt issuance costs) and fair values of the Company’s 2015-1 Notes disclosed but not carried at fair value as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017      December 31, 2016  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Aaa/AAA Class A-1A Notes

   $ 160,000      $ 160,110      $ 160,000      $ 160,072  

Aaa/AAA Class A-1B Notes

     40,000        40,001        40,000        39,960  

Aaa/AAA Class A-1C Notes

     27,000        27,030        27,000        26,951  

Aa2 Class A-2 Notes

     46,000        46,027        46,000        45,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 273,000      $ 273,168      $ 273,000      $ 272,767  
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value determination of the Company’s 2015-1 Notes was based on the market quotation(s) received from broker/dealer(s). These fair value measurements were based on significant inputs not observable and thus represent Level 3 measurements as defined in the accounting guidance for fair value measurement.

The carrying value of other financial assets and liabilities approximates their fair value based on the short term nature of these items.

4. RELATED PARTY TRANSACTIONS

Investment Advisory Agreement

On April 3, 2013, the Company’s Board of Directors, including a majority of the directors who are not “interested persons” as defined in Section 2(a)(19) of the Investment Company Act (the “Independent Directors”), approved an investment advisory agreement (the “Investment Advisory Agreement”) between the Company and the Investment Adviser in accordance with, and on the basis of an evaluation satisfactory to such directors as required by, Section 15(c) of the Investment Company Act. The initial term of the Investment Advisory Agreement is two years from April 3, 2013 and, unless terminated earlier, the Investment Advisory Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by the vote of the Board of Directors and by the vote of a majority of the Independent

 

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Directors. On March 20, 2017, the Company’s Board of Directors, including a majority of the Independent Directors, approved the continuance of the Investment Advisory Agreement for a one year period. The Investment Advisory Agreement will automatically terminate in the event of an assignment and may be terminated by either party without penalty upon at least 60 days’ written notice to the other party. Subject to the overall supervision of the Board of Directors, the Investment Adviser provides investment advisory services to the Company. For providing these services, the Investment Adviser receives fees from the Company consisting of two components—a base management fee and an incentive fee.

Prior to a Qualified IPO, the base management fee is calculated and payable quarterly in arrears at an annual rate of 1.50% of the average daily gross assets of the Company for the period adjusted for share issuances or repurchases, excluding any cash and cash equivalents and including assets acquired through the incurrence of debt from use of the SPV Credit Facility, Credit Facility and 2015-1 Notes (see Note 6, Borrowings, and Note 7, 2015-1 Notes). For purposes of this calculation, cash and cash equivalents include any temporary investments in cash-equivalents, U.S. government securities and other high quality investment grade debt investments that mature in 12 months or less from the date of investment. Base management fees for any partial quarter are prorated. The Investment Adviser waived its right to receive one-third (0.50%) of the 1.50% base management fee prior to a Qualified IPO. The fee waiver will terminate if and when a Qualified IPO has been consummated. Any waived base management fees are not subject to recoupment by the Investment Adviser.

The incentive fee has two parts. The first part is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter. The second part is determined and payable in arrears based on capital gains as of the end of each calendar year.

Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the operating expenses accrued for the quarter (including the base management fee, expenses payable under the administration agreement, and any interest expense or fees on any credit facilities or outstanding debt and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income does not include, in the case of investments with a deferred interest feature (such as original issue discount (“OID”), debt instruments with pay-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

Prior to any Qualified IPO of the Company’s common stock, pre-incentive fee net investment income, expressed as a rate of return on the average daily Hurdle Calculation Value (as defined below) throughout the immediately preceding calendar quarter, is compared to a “hurdle rate” of 1.50% per quarter (6% annualized) or a “catch-up” of 1.875% per quarter (7.50% annualized), as applicable. “Hurdle Calculation Value” means, on any given day, the sum of (x) the value of net assets as of the end of the calendar quarter immediately preceding such day plus (y) the aggregate amount of capital drawn from investors (or reinvested in the Company pursuant to a dividend reinvestment plan) from the beginning of the current quarter to such day minus (z) the aggregate amount of distributions (including share repurchases) made by the Company from the beginning of the current quarter to such day, but only to the extent such distributions were not declared and accounted for on the books and records in a previous quarter.

The Company pays its Investment Adviser an incentive fee with respect to its pre-incentive fee net investment income in each calendar quarter as follows:

 

    no incentive fee based on pre-incentive fee net investment income in any calendar quarter in which its pre-incentive fee net investment income does not exceed the hurdle rate of 1.50%;

 

   

100% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 1.875% in any calendar

 

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quarter (7.50% annualized). The Company refers to this portion of the pre-incentive fee net investment income (which exceeds the hurdle rate but is less than 1.875%) as the “catch-up.” The “catch-up” is meant to provide the Investment Adviser with approximately 20% of the Company’s pre-incentive fee net investment income as if a hurdle rate did not apply if this net investment income exceeds 1.875% in any calendar quarter; and

 

    20% of the amount of pre-incentive fee net investment income, if any, that exceeds 1.875% in any calendar quarter (7.50% annualized) will be payable to the Investment Adviser. This reflects that once the hurdle rate is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to the Investment Adviser.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20% of realized capital gains, if any, on a cumulative basis from inception through the date of determination, computed net of all realized capital losses on a cumulative basis and unrealized capital depreciation, less the aggregate amount of any previously paid capital gain incentive fees, provided that, the incentive fee determined at the end of the first calendar year of operations may be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses on a cumulative basis and unrealized capital depreciation.

The Company will defer payment of any incentive fee otherwise earned by the Investment Adviser if, during the most recent four full calendar quarter periods (or, if less, the number of full calendar quarters completed since the initial drawdown of capital from the stockholders, “Initial Drawdown”) ending on or prior to the date such payment is to be made, the sum of (a) the aggregate distributions to stockholders and (b) the change in net assets (defined as gross assets less indebtedness and before taking into account any incentive fees payable during the period) is less than 6.0% of net assets (defined as gross assets less indebtedness) at the beginning of such period, provided, that such percentage will be appropriately prorated during the four full calendar quarters immediately following the Initial Drawdown. These calculations are adjusted for any share issuances or repurchases. Any deferred incentive fees are carried over for payment in subsequent calculation periods. The Investment Adviser may earn an incentive fee under the Investment Advisory Agreement on the Company’s repurchase of debt issued by the Company at a gain.

For the three month periods ended March 31, 2017 and 2016, base management fees were $3,417 and $2,760, respectively (net of waiver of $1,708 and $1,380, respectively), incentive fees related to pre-incentive fee net investment income were $4,777 and $2,990, respectively, and there were no incentive fees related to realized capital gains. For the three month periods ended March 31, 2017 and 2016, there were no accrued capital gains incentive fees based upon the cumulative net realized and unrealized appreciation (depreciation) as of March 31, 2017 and 2016, respectively. The accrual for any capital gains incentive fee under US GAAP in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual.

As of March 31, 2017 and December 31, 2016, $11,764 and $8,157, respectively, was included in base management and incentive fees payable in the accompanying Consolidated Statements of Assets and Liabilities.

On April 3, 2013, the Investment Adviser entered into a personnel agreement with The Carlyle Group Employee Co., L.L.C. (“Carlyle Employee Co.”), an affiliate of the Investment Adviser, pursuant to which Carlyle Employee Co. provides the Investment Adviser with access to investment professionals.

Administration Agreement

On April 3, 2013, the Company’s Board of Directors approved an administration agreement (the “Administration Agreement”) between the Company and the Administrator. Pursuant to the Administration

 

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Agreement, the Administrator provides services and receives reimbursements equal to an amount that reimburses the Administrator for its costs and expenses and the Company’s allocable portion of overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including the Company’s allocable portion of the compensation paid to or compensatory distributions received by the Company’s officers (including the Chief Compliance Officer and Chief Financial Officer) and respective staff who provide services to the Company, operations staff who provide services to the Company, and any internal audit staff, to the extent internal audit performs a role in the Company’s Sarbanes-Oxley Act internal control assessment. Reimbursement under the Administration Agreement occurs quarterly in arrears.

The initial term of the Administration Agreement is two years from April 3, 2013 and, unless terminated earlier, the Administration Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board of Directors or by a majority vote of the outstanding voting securities of the Company and (ii) the vote of a majority of the Company’s Independent Directors. On March 20, 2017, the Company’s Board of Directors, including a majority of the Independent Directors, approved the continuance of the Administration Agreement for a one year period. The Administration Agreement may not be assigned by a party without the consent of the other party and may be terminated by either party without penalty upon at least 60 days’ written notice to the other party.

For the three month periods ended March 31, 2017 and 2016, the Company incurred $173 and $148, respectively, in fees under the Administrative Agreement, which were included in administrative service fees in the accompanying Consolidated Statements of Operations. As of March 31, 2017 and December 31, 2016, $115 and $137, respectively, was unpaid and included in administrative service fees payable in the accompanying Consolidated Statements of Assets and Liabilities.

Sub-Administration Agreements

On April 3, 2013, the Administrator entered into sub-administration agreements with Carlyle Employee Co. and CELF Advisors LLP (“CELF”) (the “Carlyle Sub-Administration Agreements”). Pursuant to the Carlyle Sub-Administration Agreements, Carlyle Employee Co. and CELF provide the Administrator with access to personnel.

On April 3, 2013, the Administrator entered into a sub-administration agreement with State Street Bank and Trust Company (“State Street” and, such agreement, the “State Street Sub-Administration Agreement” and, together with the Carlyle Sub-Administration Agreements, the “Sub-Administration Agreements”). On March 11, 2015, the Company’s Board of Directors, including a majority of the Independent Directors, approved an amendment to the State Street Sub-Administration Agreement. The initial term of the State Street Sub-Administration Agreement ends on April 1, 2017 and, unless terminated earlier, the State Street Sub-Administration Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board of Directors or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Company’s Independent Directors. The State Street Sub-Administration Agreement may be terminated upon at least 60 days’ written notice and without penalty by the vote of a majority of the outstanding securities of the Company, or by the vote of the Board of Directors or by either party to the State Street Sub-Administration Agreement.

For the three month periods ended March 31, 2017 and 2016, fees incurred in connection with the State Street Sub-Administration Agreement, which amounted to $160 and $140, respectively, were included in other general and administrative in the accompanying Consolidated Statements of Operations. As of March 31, 2017 and December 31, 2016, $160 and $159, respectively, was unpaid and included in other accrued expenses and liabilities in the accompanying Consolidated Statements of Assets and Liabilities.

 

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Placement Fees

On April 3, 2013, the Company entered into a placement fee arrangement with TCG Securities, L.L.C. (“TCG”), a licensed broker-dealer and an affiliate of the Investment Adviser, which may require stockholders to pay a placement fee to TCG for TCG’s services.

For the three month periods ended March 31, 2017 and 2016, TCG earned placement fees of $0 and $3, respectively, from the Company’s stockholders in connection with the issuance or sale of the Company’s common stock.

Board of Directors

The Company’s Board of Directors currently consists of five members, three of whom are Independent Directors. On April 3, 2013, the Board of Directors established an Audit Committee consisting of its Independent Directors. The Board of Directors also established a Pricing Committee of the Board of Directors (the “Pricing Committee”) and may establish additional committees in the future. For the three month periods ended March 31, 2017 and 2016, the Company incurred $103 and $120, respectively, in fees and expenses associated with its Independent Directors and the Audit Committee. As of March 31, 2017 and December 31, 2016, $0 was unpaid and included in other accrued expenses and liabilities in the accompanying Consolidated Statements of Assets and Liabilities. As of March 31, 2017 and December 31, 2016, current directors had committed $821 in capital commitments to the Company.

Transactions

For the three month period ended March 31, 2017, the Company sold three investments to Credit Fund for proceeds of $30,743 and realized gains of $177. See Note 5, Middle Market Credit Fund, LLC, for further information about Credit Fund.

5. MIDDLE MARKET CREDIT FUND, LLC

Overview

On February 29, 2016, the Company and Credit Partners entered into the Limited Liability Company Agreement to co-manage Credit Fund, an unconsolidated Delaware limited liability company. Credit Fund primarily invests in first lien loans of middle market companies. Credit Fund is managed by a six-member board of managers, on which the Company and Credit Partners each have equal representation. Establishing a quorum for Credit Fund’s board of managers requires at least four members to be present at a meeting, including at least two of the Company’s representatives and two of Credit Partners’ representatives. The Company and Credit Partners each have 50% economic ownership of Credit Fund and have commitments to fund, from time to time, capital of up to $400,000 each. Funding of such commitments generally requires the approval of the board of Credit Fund, including the board members appointed by the Company. By virtue of its membership interest, the Company and Credit Partners each indirectly bear an allocable share of all expenses and other obligations of Credit Fund.

Together with Credit Partners, the Company co-invests through Credit Fund. Investment opportunities for Credit Fund are sourced primarily by the Company and its affiliates. Portfolio and investment decisions with respect to Credit Fund must be unanimously approved by a quorum of Credit Fund’s investment committee consisting of an equal number of representatives of the Company and Credit Partners. Therefore, although the Company owns more than 25% of the voting securities of Credit Fund, the Company does not believe that it has control over Credit Fund (other than for purposes of the Investment Company Act). Middle Market Credit Fund SPV, LLC (the “Credit Fund Sub”), a Delaware limited liability company, was formed on April 5, 2016. Credit Fund Sub primarily invests in first lien loans of middle market companies. Credit Fund Sub is a wholly owned subsidiary of Credit Fund and is consolidated in Credit Fund’s consolidated financial statements commencing from the date of its formation. Credit Fund follows the same Internal Risk Rating System as the Company.

 

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Credit Fund, the Company and Credit Partners entered into an administration agreement with Carlyle GMS Finance Administration L.L.C., the administrative agent of Credit Fund (in such capacity, the “Administrative Agent”), pursuant to which the Administrative Agent is delegated certain administrative and non-discretionary functions, is authorized to enter into sub-administration agreements at our expense with the approval of the board of managers of Credit Fund, and is reimbursed by Credit Fund for its costs and expenses and Credit Fund’s allocable portion of overhead incurred by the Administrative Agent in performing its obligations thereunder

Selected Financial Data

Since inception of Credit Fund and through March 31, 2017 and December 31, 2016, the Company and Credit Partners each made capital contributions of $1 in members’ equity and $45,500 and $35,000, respectively, in subordinated loans to Credit Fund. As of March 31, 2017 and December 31, 2016, Credit Fund had net borrowings of $86,044 and $62,384, respectively, in mezzanine loans under a revolving credit facility with the Company (the “Credit Fund Facility”). As of March 31, 2017 and December 31, 2016, Credit Fund had subordinated loans and members’ capital of $96,155 and $74,547, respectively. As of March 31, 2017 and December 31, 2016, the Company’s ownership interest in such subordinated loans and members’ capital was $48,077 and $37,273 respectively, and in such mezzanine loans was $86,044 and $62,384, respectively.

As of March 31, 2017 and December 31, 2016, Credit Fund held cash and cash equivalents totaling $10,533 and $6,103, respectively.

As of March 31, 2017 and December 31, 2016, Credit Fund had total investments at fair value of $558,694 and $437,829, respectively, which was comprised of first lien senior secured loans and second lien senior secured loans to 35 and 28 portfolio companies, respectively. As of March 31, 2017 and December 31, 2016, no loans in Credit Fund’s portfolio were on non-accrual status or contained PIK provisions. All investments in the portfolio were floating rate debt investments. The portfolio companies in Credit Fund are U.S. middle market companies in industries similar to those in which the Company may invest directly. Additionally, as of March 31, 2017 and December 31, 2016, Credit Fund had commitments to fund various undrawn revolvers and delayed draw investments to its portfolio companies totaling $32,012 and $30,361, respectively.

Below is a summary of Credit Fund’s portfolio, followed by a listing of the loans in Credit Fund’s portfolio as of March 31, 2017 and December 31, 2016:

 

     As of
March 31,

2017
    As of
December 31,
2016
 

Senior secured loans (1)

   $ 560,196     $ 439,086  

Weighted average yields of senior secured loans based on amortized cost (2)

     6.53     6.47

Weighted average yields of senior secured loans based on fair value (2)

     6.46     6.41

Number of portfolio companies in Credit Fund

     35       28  

Average amount per portfolio company (1)

   $ 16,006     $ 15,682  

 

(1) At par/principal amount.
(2) Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of March 31, 2017 and December 31, 2016. Weighted average yield on debt and income producing securities at fair value is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at fair value included in such securities. Weighted average yield on debt and income producing securities at amortized cost is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at amortized cost included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented above.

 

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Consolidated Schedule of Investments as of March 31, 2017 (unaudited)

 

Investments (1)

  Industry     Interest
Rate
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (5)
    Fair
Value (6)
 

First Lien Debt (99.42% of fair value)

           

Advanced Instruments,
LLC (2) (3) (4) (10) (11)

   
Healthcare &
Pharmaceuticals
 
 
   
L + 5.25%
(1.00% Floor)
 
 
    10/31/2022     $ 12,000     $ 11,867     $ 11,972  

AM Conservation Holding
Corporation (2) (3) (4)

    Energy: Electricity      
L + 4.75%
(1.00% Floor)
 
 
    10/31/2022       29,925       29,657       30,185  

Anaren, Inc. (2) (3) (4)

    Telecommunications      
L + 4.50%
(1.00% Floor)
 
 
    2/18/2021       6,963       6,935       6,963  

Borchers, Inc. (2) (3) (4) (7) (10) (11)

   
Chemicals,
Plastics & Rubber
 
 
   
L + 4.75%
(1.00% Floor)
 
 
    1/13/2024       8,142       8,096       8,170  

Datapipe, Inc. (2) (3) (4) (11)

    Telecommunications      
L + 4.75%
(1.00% Floor)
 
 
    3/15/2019       9,725       9,650       9,753  

DBI Holding LLC (2) (3) (4)

    Business Services      
L + 5.25%
(1.00% Floor)
 
 
    8/1/2021       19,950       19,774       19,754  

Dent Wizard International
Corporation (2) (3) (4) (11)

    Automotive      
L + 4.75%
(1.00% Floor)
 
 
    4/7/2020       15,000       14,861       14,984  

Dimora Brands, Inc. (fka TK USA
Enterprises, Inc.) (2) (3) (4) (11)

   
Construction &
Building
 
 
   
L + 4.50%
(1.00% Floor)
 
 
    4/4/2023       19,800       19,539       19,743  

Diversitech Corporation (2) (4) (10)

    Capital Equipment       P + 3.50%       11/19/2021       14,766       14,589       14,766  

DTI Holdco, Inc. (2) (3) (4) (7)

   
High Tech
Industries
 
 
   
L + 5.25%
(1.00% Floor)
 
 
    9/30/2023       19,900       19,704       19,639  

EAG, Inc. (2) (3) (4) (11)

    Business Services      
L + 4.25%
(1.00% Floor)
 
 
    7/28/2018       8,440       8,430       8,469  

EIP Merger Sub, LLC
(Evolve IP) (2) (3) (4) (8) (11)

    Telecommunications      
L + 6.25%
(1.00% Floor)
 
 
    6/7/2021       22,894       22,280       22,539  

EIP Merger Sub, LLC
(Evolve IP) (2) (3) (4) (9) (11)

    Telecommunications      
L + 6.25%
(1.00% Floor)
 
 
    6/7/2021       1,500       1,458       1,475  

Empower Payments Acquisitions,
Inc. (2) (3) (7)

   

Media: Advertising,
Printing &
Publishing
 
 
 
   
L + 5.50%
(1.00% Floor)
 
 
    11/30/2023       17,456       17,115       17,411  

Jensen Hughes, Inc. (2) (3) (4) (10) (11)

    Utilities: Electric      
L + 5.00%
(1.00% Floor)
 
 
    12/4/2021       20,408       20,197       20,275  

Kestra Financial, Inc. (2) (3) (4)

   

Banking, Finance,
Insurance & Real
Estate
 
 
 
   
L + 5.25%
(1.00% Floor)
 
 
    6/24/2022       19,850       19,593       19,725  

MSHC, Inc. (2) (3) (4) (10)

   
Construction &
Building
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    7/19/2021       13,543       13,440       13,423  

PAI Holdco, Inc.
(Parts Authority) (2) (3) (4)

    Automotive      
L + 4.75%
(1.00% Floor)
 
 
    12/30/2022       9,925       9,864       9,925  

Paradigm Acquisition Corp. (2) (3) (4)

    Business Services      
L + 5.00%
(1.00% Floor)
 
 
    6/2/2022       11,970       11,874       11,970  

Pasternack Enterprises, Inc.
(Infinite RF) (2) (3) (4)

    Capital Equipment      
L + 5.00%
(1.00% Floor)
 
 
    5/27/2022       11,910       11,817       11,885  

PSI Services LLC (2) (3) (4) (7) (10)

    Business Services      
L + 5.00%
(1.00% Floor)
 
 
    1/19/2023       29,623       29,052       29,333  

Q Holding Company (2) (3) (4)

    Automotive      
L + 5.00%
(1.00% Floor)
 
 
    12/18/2021       13,929       13,798       13,958  

QW Holding Corporation
(Quala) (2) (3) (4) (7) (10)

   
Environmental
Industries
 
 
   
L + 6.75%
(1.00% Floor)
 
 
    8/31/2022       10,983       10,447       11,121  

Ramundsen Public Sector,
LLC (2) (3) (4)

   
Sovereign & Public
Finance
 
 
   
L + 4.25%
(1.00% Floor)
 
 
    2/1/2024       4,000       3,983       4,008  

RelaDyne Inc. (2) (3) (4) (10)

    Wholesale      
L + 5.25%
(1.00% Floor)
 
 
    7/22/2022       26,228       25,834       25,978  

Restaurant Technologies,
Inc. (2) (3) (4)

    Retail      
L + 4.75%
(1.00% Floor)
 
 
    11/23/2022       14,000       13,876       14,021  

Systems Maintenance Services
Holding, Inc. (2) (3) (4) (11)

   
High Tech
Industries
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    10/30/2023       24,439       24,266       24,561  

T2 Systems Canada, Inc. (2) (3) (4)

   
Transportation:
Consumer
 
 
   
L + 6.75%
(1.00% Floor)
 
 
    9/28/2022       2,693       2,630       2,696  

 

40


Table of Contents

Consolidated Schedule of Investments as of March 31, 2017 (unaudited)

 

Investments (1)

  Industry     Interest
Rate
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (5)
    Fair
Value (6)
 

First Lien Debt (99.42% of fair value) (continued)

           

T2 Systems, Inc. (2) (3) (4) (10)

   
Transportation:
Consumer
 
 
   
L + 6.75%
(1.00% Floor)
 
 
    9/28/2022     $ 15,262     $ 14,865     $ 15,282  

Teaching Strategies,
LLC (2) (3) (4) (10)

   

Media: Advertising,
Printing &
Publishing
 
 
 
   
L + 4.75%
(1.00% Floor)
 
 
    2/27/2023       18,100       17,915       17,980  

The Original Cakerie, Ltd.
(Canada) (2) (3) (4) (10) (11)

   
Beverage, Food &
Tobacco
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    7/20/2021       6,992       6,932       6,992  

The Original Cakerie, Co.
(Canada) (2) (3) (4) (11)

   
Beverage, Food &
Tobacco
 
 
   
L + 5.50%
(1.00% Floor)
 
 
    7/20/2021       3,612       3,585       3,612  

U.S. Acute Care Solutions,
LLC (2) (3) (4)

   
Healthcare &
Pharmaceuticals
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    5/15/2021       26,334       26,099       26,275  

U.S. Anesthesia Partners,
Inc. (2) (3) (4) (11)

   
Healthcare &
Pharmaceuticals
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    12/31/2019       10,348       10,257       10,366  

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

   
Chemicals, Plastics
& Rubber
 
 
   
L + 4.50%
(1.00% Floor)
 
 
    2/5/2021       17,865       17,748       17,775  

WIRB—Copernicus Group,
Inc. (2) (3) (4)

   
Healthcare &
Pharmaceuticals
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    8/12/2022       12,315       12,232       12,281  

Zest Holdings, LLC (2) (3) (4)

   
Durable Consumer
Goods
 
 
   
L + 4.75%
(1.00% Floor)
 
 
    8/16/2020       8,700       8,661       8,693  

Zywave, Inc. (2) (3) (4) (7) (10)

   
High Tech
Industries
 
 
   
L + 5.00%
(1.00% Floor)
 
 
    11/17/2022       17,456       17,279       17,494  
         

 

 

   

 

 

 

First Lien Debt Total

          $ 550,199     $ 555,452  
         

 

 

   

 

 

 

Second Lien Debt (0.58% of fair value)

           

Ramundsen Public Sector,
LLC (2) (3) (4) (7)

   
Sovereign & Public
Finance
 
 
   
L + 8.50%
(1.00% Floor)
 
 
    1/31/2025     $ 200     $ 198     $ 200  

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

   
Chemicals, Plastics
& Rubber
 
 
   
L + 8.75%
(1.00% Floor)
 
 
    2/5/2022       2,000       1,969       1,992  

Zywave, Inc. (2) (3) (4)

   
High Tech
Industries
 
 
   
L + 9.00%
(1.00% Floor)
 
 
    11/17/2023       1,050       1,035       1,050  
         

 

 

   

 

 

 

Second Lien Debt Total

          $ 3,202     $ 3,242  
         

 

 

   

 

 

 

Total Investments

          $ 553,401     $ 558,694  
         

 

 

   

 

 

 

 

(1) Unless otherwise indicated, issuers of investments held by Credit Fund are domiciled in the United States. As of March 31, 2017, the geographical composition of investments as a percentage of fair value was 1.90% in Canada and 98.10% in the United States.
(2) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to either LIBOR or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate (“P”)), which generally resets quarterly. For each such loan, Credit Fund has provided the interest rate in effect as of March 31, 2017. As of March 31, 2017, all of Credit Fund’s LIBOR loans were indexed to the 90-day LIBOR rate at 1.15%, except for those loans as indicated in Note 11 below, and the U.S. Prime Rate loan was indexed at 4.00%.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by Credit Fund Sub. Credit Fund Sub has entered into a revolving credit facility (the “Credit Fund Sub Facility”). The lenders of the Credit Fund Sub Facility have a first lien security interest in substantially all of the assets of Credit Fund Sub. Accordingly, such assets are not available to creditors of Credit Fund.
(5) Amortized cost represents original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method.
(6) Fair value is determined in good faith by or under the direction of the board of managers of Credit Fund, pursuant to Credit Fund’s valuation policy, which is substantially similar to the valuation policy of the Company provided in Note 3, Fair Value Measurements.
(7) Denotes that all or a portion of the assets are owned by Credit Fund. Credit Fund has entered into the Credit Fund Facility. The lenders of the Credit Fund Facility have a first lien security interest in substantially all of the assets of Credit Fund. Accordingly, such assets are not available to creditors of Credit Fund Sub.
(8)

Credit Fund receives less than the stated interest rate of this loan as a result of an agreement among lenders. The interest rate reduction is 1.25% on EIP Merger Sub, LLC (Evolve IP). Pursuant to the agreement among lenders in respect of this

 

41


Table of Contents
  loan, this investment represents a first lien/first out loan, which has first priority ahead of the first lien/last out loan with respect to principal, interest and other payments.
(9) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders as follows: EIP Merger Sub, LLC (Evolve IP) (3.91%). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/last out loan, which has a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.
(10) As of March 31, 2017, Credit Fund had the following unfunded commitments to fund delayed draw and revolving senior secured loans:

 

First Lien Debt—unfunded delayed draw and revolving term
loans commitments

   Type      Unused
Fee
    Par/
Principal
Amount
     Fair Value  

Advanced Instruments, LLC

     Revolver        0.50   $ 1,333      $ (3

Borchers, Inc.

     Revolver        0.50     1,858        5  

Diversitech Corporation

     Delayed Draw        1.00     5,000        —    

Jensen Hughes, Inc.

     Delayed Draw        0.50     1,461        (8

Jensen Hughes, Inc.

     Revolver        0.50     2,000        (11

MSHC, Inc.

     Delayed Draw        1.50     1,399        (11

PSI Services LLC

     Revolver        0.50     377        (4

QW Holding Corporation (Quala)

     Delayed Draw        1.00     4,762        33  

QW Holding Corporation (Quala)

     Revolver        1.00     4,234        29  

RelaDyne Inc.

     Delayed Draw        0.50     135        (1

RelaDyne Inc.

     Revolver        0.50     2,433        (21

T2 Systems, Inc.

     Revolver        1.00     1,955        2  

Teaching Strategies, LLC

     Revolver        0.50     1,900        (11

The Original Cakerie, Ltd. (Canada)

     Revolver        0.50     1,665        —    

Zywave, Inc.

     Revolver        0.50     1,500        3  
       

 

 

    

 

 

 

Total unfunded commitments

        $ 32,012      $ 2  
       

 

 

    

 

 

 

 

(11) As of March 31, 2017, this LIBOR loan was indexed to the 30-day LIBOR rate at 0.98%.

 

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Table of Contents

Consolidated Schedule of Investments as of December 31, 2016

 

Investments (1)

 

Industry

  Interest
Rate (2)
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (5)
    Fair
Value (6)
 

First Lien Debt (99.31% of fair value)

           

AM Conservation Holding
Corporation (2) (3) (4)

  Energy: Electricity    
L + 4.75%
(1.00% Floor)
 
 
    10/31/2022     $ 30,000     $ 29,721     $ 29,925  

Datapipe, Inc. (2) (3) (4) (11)

  Telecommunications    
L + 4.75%
(1.00% Floor)
 
 
    3/15/2019       9,750       9,654       9,764  

Dimora Brands, Inc. (fka TK USA
Enterprises, Inc.) (2) (3) (4) (11)

  Construction & Building    
L + 4.50%
(1.00% Floor)
 
 
    4/4/2023       19,850       19,580       19,723  

Diversitech Corporation (2) (4) (10) (11)

  Capital Equipment     P + 3.50%       11/19/2021       14,803       14,617       14,803  

DTI Holdco, Inc. (2) (3) (4) (7)

  High Tech Industries    
L + 5.25%
(1.00% Floor)
 
 
    9/30/2023       19,950       19,751       19,651  

DYK Prime Acquisition LLC (2) (3) (4)

  Chemicals, Plastics & Rubber    
L + 4.75%
(1.00% Floor)
 
 
    4/1/2022       5,775       5,735       5,775  

EAG, Inc. (2) (3) (4) (11)

  Business Services    
L + 4.25%
(1.00% Floor)
 
 
    7/28/2018       8,713       8,686       8,720  

EIP Merger Sub, LLC (Evolve
IP) (2) (3) (4) (8)

  Telecommunications    
L + 6.25%
(1.00% Floor)
 
 
    6/7/2021       22,971       22,323       22,509  

EIP Merger Sub, LLC (Evolve
IP) (2) (3) (4) (9)

  Telecommunications    
L + 6.25%
(1.00% Floor)
 
 
    6/7/2021       1,500       1,455       1,468  

Empower Payments Acquisitions,
Inc. (2) (3) (7)

  Media: Advertising, Printing & Publishing    
L + 5.50%
(1.00% Floor)
 
 
    11/30/2023       17,500       17,154       17,279  

Generation Brands Holdings,
Inc. (2) (3) (4)

  Durable Consumer Goods    
L + 5.00%
(1.00% Floor)
 
 
    6/10/2022       19,900       19,712       20,099  

Jensen Hughes, Inc. (2) (3) (4) (10)

  Utilities: Electric    
L + 5.00%
(1.00% Floor)
 
 
    12/4/2021       20,409       20,188       20,327  

Kestra Financial, Inc. (2) (3) (4)

  Banking, Finance, Insurance & Real Estate    
L + 5.25%
(1.00% Floor)
 
 
    6/24/2022       19,900       19,632       19,814  

MSHC, Inc. (2) (3) (4) (10)

  Construction & Building    
L + 5.00%
(1.00% Floor)
 
 
    7/19/2021       13,177       13,062       13,003  

PAI Holdco, Inc. (Parts
Authority) (2) (3) (4)

  Automotive    
L + 4.75%
(1.00% Floor)
 
 
    12/30/2022       9,950       9,886       9,950  

Pasternack Enterprises, Inc. (Infinite
RF) (2) (3) (4)

  Capital Equipment    
L + 5.00%
(1.00% Floor)
 
 
    5/27/2022       11,941       11,844       11,941  

Q Holding Company (2) (3) (4)

  Automotive    
L + 5.00%
(1.00% Floor)
 
 
    12/18/2021       13,964       13,828       13,941  

QW Holding Corporation
(Quala) (2) (3) (4) (7) (10)

  Environmental Industries    
L + 6.75%
(1.00% Floor)
 
 
    8/31/2022       8,975       8,413       9,030  

Restaurant Technologies, Inc. (2) (3) (4)

  Retail    
L + 4.75%
(1.00% Floor)
 
 
    11/23/2022       23,514       23,117       23,443  

RelaDyne Inc. (2) (3) (4) (10)

  Wholesale    
L + 5.25%
(1.00% Floor)
 
 
    7/22/2022       14,000       13,871       13,969  

Systems Maintenance Services
Holding, Inc. (2) (3) (4)

  High Tech Industries    
L + 5.00%
(1.00% Floor)
 
 
    10/30/2023       12,000       11,885       12,001  

T2 Systems Canada, Inc. (2) (3) (4) (11)

  Transportation: Consumer    
L + 6.75%
(1.00% Floor)
 
 
    9/28/2022       2,700       2,635       2,727  

T2 Systems, Inc. (2) (3) (4) (10) (11)

  Transportation: Consumer    
L + 6.75%
(1.00% Floor)
 
 
    9/28/2022       15,300       14,888       15,473  

The Original Cakerie, Ltd.
(Canada) (2) (3) (4) (10)

  Beverage, Food & Tobacco    
L + 5.00%
(1.00% Floor)
 
 
    7/20/2021       7,009       6,946       7,009  

The Original Cakerie, Co.
(Canada) (2) (3) (4)

  Beverage, Food & Tobacco    
L + 5.50%
(1.00% Floor)
 
 
    7/20/2021       3,621       3,591       3,621  

U.S. Acute Care Solutions, LLC (2) (3) (4)

  Health & Pharmaceuticals    
L + 5.00%
(1.00% Floor)
 
 
    5/15/2021       26,400       26,154       26,336  

U.S. Anesthesia Partners, Inc. (2) (3) (4)

  Health & Pharmaceuticals    
L + 5.00%
(1.00% Floor)
 
 
    12/31/2019       10,374       10,275       10,362  

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

  Chemicals, Plastics & Rubber    
L + 4.50%
(1.00% Floor)
 
 
    2/5/2021       17,910       17,786       17,903  

 

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Table of Contents

Consolidated Schedule of Investments as of December 31, 2016

 

Investments (1)

 

Industry

  Interest
Rate (2)
    Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost (5)
    Fair
Value (6)
 

First Lien Debt (99.31% of fair value) (continued)

           

WIRB—Copernicus Group, Inc. (2) (3) (4)

  Health & Pharmaceuticals    
L + 5.00%
(1.00% Floor)
 
 
    8/12/2022     $ 7,980     $ 7,916     $ 8,050  

Zest Holdings, LLC (2) (3) (4)

  Durable Consumer Goods    
L + 4.75%
(1.00% Floor)
 
 
    8/16/2020       8,700       8,658       8,749  

Zywave, Inc. (2) (3) (4) (7) (10)

  High Tech Industries    
L + 5.00%
(1.00% Floor)
 
 
    11/17/2022       17,500       17,315       17,434  
         

 

 

   

 

 

 

First Lien Debt Total

          $ 430,278     $ 434,799  
         

 

 

   

 

 

 

Second Lien Debt (0.69% of fair value)

           

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

  Chemicals, Plastics & Rubber    
L + 8.75%
(1.00% Floor)
 
 
    2/5/2022     $ 2,000     $ 1,960     $ 1,987  

Zywave, Inc. (2) (3) (4)

  High Tech Industries    
L + 9.00%
(1.00% Floor)
 
 
    11/17/2023       1,050       1,034       1,043  
         

 

 

   

 

 

 

Second Lien Debt Total

          $ 2,994     $ 3,030  
         

 

 

   

 

 

 

Total Investments

          $ 433,272     $ 437,829  
         

 

 

   

 

 

 

 

(1) Unless otherwise indicated, issuers of investments held by Credit Fund are domiciled in the United States. As of December 31, 2016, the geographical composition of investments as a percentage of fair value was 2.43% in Canada and 97.57% in the United States.
(2) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to either LIBOR (“L”) or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate (“P”)), which generally resets quarterly. For each such loan, Credit Fund has provided the interest rate in effect as of December 31, 2016. As of December 31, 2016, all of Credit Fund’s LIBOR loans were indexed to the 90-day LIBOR rate at 1.00%, except for those loans as indicated in Note 11 below, and the U.S. Prime Rate loan was indexed at 3.75%.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by Credit Fund Sub. Credit Fund Sub has entered into a revolving credit facility (the “Credit Fund Sub Facility”). The lenders of the Credit Fund Sub Facility have a first lien security interest in substantially all of the assets of Credit Fund Sub. Accordingly, such assets are not available to creditors of Credit Fund.
(5) Amortized cost represents original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method.
(6) Fair value is determined in good faith by or under the direction of the board of managers of Credit Fund, pursuant to Credit Fund’s valuation policy, which is substantially similar to the valuation policy of the Company provided in “—Critical Accounting Policies—Fair Value Measurements.”
(7) Denotes that all or a portion of the assets are owned by Credit Fund. Credit Fund has entered into the Credit Fund Facility. The lenders of the Credit Fund Facility have a first lien security interest in substantially all of the assets of Credit Fund. Accordingly, such assets are not available to creditors of Credit Fund Sub.
(8) Credit Fund receives less than the stated interest rate of this loan as a result of an agreement among lenders. The interest rate reduction is 1.25% on EIP Merger Sub, LLC (Evolve IP). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/first out loan, which has first priority ahead of the first lien/last out loan with respect to principal, interest and other payments.
(9) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders as follows: EIP Merger Sub, LLC (Evolve IP) (3.84%). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/last out loan, which has a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.

 

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(10) As of December 31, 2016, Credit Fund had the following unfunded commitments to fund delayed draw and revolving senior secured loans:

 

First Lien Debt—unfunded delayed draw and revolving term
loans commitments

   Type      Unused Fee     Par/
Principal
Amount
     Fair
Value
 

Diversitech Corporation

     Delayed Draw        1.00   $ 5,000      $ —    

Jensen Hughes, Inc.

     Revolver        0.50     2,000        (7

Jensen Hughes, Inc.

     Delayed Draw        0.50     1,461        (5

MSHC, Inc.

     Delayed Draw        1.50     1,790        (21

QW Holding Corporation (Quala)

     Revolver        1.00     5,086        14  

QW Holding Corporation (Quala)

     Delayed Draw        1.00     5,918        17  

RelaDyne Inc.

     Revolver        0.50     2,162        (6

RelaDyne Inc.

     Delayed Draw        0.50     1,824        (5

T2 Systems, Inc.

     Revolver        1.00     1,955        20  

The Original Cakerie, Ltd. (Canada)

     Revolver        0.50     1,665        —    

Zywave, Inc.

     Revolver        0.50     1,500        (5
       

 

 

    

 

 

 

Total unfunded commitments

        $ 30,361      $ 2  
       

 

 

    

 

 

 

 

(11) As of December 31, 2016, this LIBOR loan was indexed to the 30-day LIBOR rate at 0.77%.

Below is certain summarized consolidated financial information for Credit Fund as of March 31, 2017 and December 31, 2016, respectively. Credit Fund commenced operations in May 2016.

 

     March 31, 2017      December 31, 2016  
     (unaudited)         

Selected Consolidated Balance Sheet Information

     

ASSETS

     

Investments, at fair value (amortized cost of $553,401 and $433,272, respectively)

   $ 558,694      $ 437,829  

Cash and other assets

     15,088        11,326  
  

 

 

    

 

 

 

Total assets

   $ 573,782      $ 449,155  
  

 

 

    

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

     

Secured borrowings

   $ 367,375      $ 248,540  

Mezzanine loans

     86,044        62,384  

Other liabilities

     24,208        63,684  

Subordinated loans and members’ equity

     96,155        74,547  
  

 

 

    

 

 

 

Liabilities and members’ equity

   $ 573,782      $ 449,155  
  

 

 

    

 

 

 

 

     For the three
month period ended
March 31, 2017
 
     (unaudited)  

Selected Consolidated Statement of Operations Information:

  

Total investment income

   $ 8,182  
  

 

 

 

Expenses

  

Interest and credit facility expenses

     5,473  

Other expenses

     318  
  

 

 

 

Total expenses

     5,791  
  

 

 

 

Net investment income (loss)

     2,391  
  

 

 

 

Net realized gain (loss) on investments

     —    

Net change in unrealized appreciation (depreciation) on investments

     737  
  

 

 

 

Net increase (decrease) resulting from operations

   $ 3,128  
  

 

 

 

 

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Debt

Credit Fund Facility

On June 24, 2016, Credit Fund entered into the Credit Fund Facility with the Company pursuant to which Credit Fund may from time to time request mezzanine loans from the Company. The maximum principal amount of the Credit Fund Facility is $100,000. The maturity date of the Credit Fund Facility is June 24, 2017. Amounts borrowed under the Credit Fund Facility bear interest at a rate of LIBOR plus 9.50%.

During the three month period ended March 31, 2017, there were mezzanine loan borrowings of $45,660 and repayments of $22,000 under the Credit Fund Facility. As of March 31, 2017 and December 31, 2016, there were $86,044 and $62,384 in mezzanine loans outstanding, respectively.

As of March 31, 2017, Credit Fund was in compliance with all covenants and other requirements of the Credit Fund Facility.

Credit Fund Sub Facility

On June 24, 2016, Credit Fund Sub closed on the Credit Fund Sub Facility with lenders. The Credit Fund Sub Facility provides for secured borrowings during the applicable revolving period up to an amount equal to $450,000, with an accordion feature that can, subject to certain conditions, increase the aggregate maximum credit commitment up to an amount not to exceed $1,400,000. The facility is secured by a first lien security interest in substantially all of the portfolio investments held by Credit Fund Sub and the Company’s and Credit Partners’ unfunded capital commitments. The maturity date of the Credit Fund Sub Facility is June 24, 2022. Amounts borrowed under the Credit Fund Sub Facility bear interest at a rate of LIBOR plus 2.50%.

During the three month period ended March 31, 2017, there were secured borrowings of $118,835 under the Credit Fund Sub Facility. As of March 31, 2017 and December 31, 2016, there was $367,375 and $248,540 in secured borrowings outstanding, respectively.

As of March 31, 2017, Credit Fund Sub was in compliance with all covenants and other requirements of the Credit Fund Sub Facility.

6. BORROWINGS

In accordance with the Investment Company Act, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the Investment Company Act, is at least 200% after such borrowing. As of March 31, 2017 and December 31, 2016, asset coverage was 215.03%, and 209.97%, respectively. During the three month periods ended March 31, 2017 and 2016, there were secured borrowings of $93,000 and $111,000, respectively, under the SPV Credit Facility and Credit Facility and repayments of $124,277 and $66,000, respectively, under the SPV Credit Facility and Credit Facility. As of March 31, 2017 and December 31, 2016, there was $390,608 and $421,885, respectively, in secured borrowings outstanding.

SPV Credit Facility

The SPV closed on May 24, 2013 on the SPV Credit Facility, which was subsequently amended on June 30, 2014, June 19, 2015 and June 9, 2016. The SPV Credit Facility provides for secured borrowings during the applicable revolving period up to an amount equal to the lesser of $400,000 (the borrowing base as calculated pursuant to the terms of the SPV Credit Facility) and the amount of net cash proceeds and unpledged capital commitments the Company has received, with an accordion feature that can, subject to certain conditions, increase the aggregate maximum credit commitment up to an amount not to exceed $750,000, subject to restrictions imposed on borrowings under the Investment Company Act and certain restrictions and conditions set forth in the SPV Credit Facility, including adequate collateral to support such borrowings. The SPV Credit

 

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Facility has a revolving period through May 23, 2019 and a maturity date of May 24, 2021. Borrowings under the SPV Credit Facility bear interest initially at the applicable commercial paper rate (if the lender is a conduit lender) or LIBOR (or, if applicable, a rate based on the prime rate or federal funds rate) plus 2.00% per year through May 23, 2018, with a pre-determined future interest rate increase of 0.50% during the final year of the revolving period and pre-determined future interest rate increases of 0.875%-1.75% over the two years following the end of the revolving period. The SPV is also required to pay an undrawn commitment fee of between 0.25% and 0.75% per year depending on the drawings under the SPV Credit Facility. Payments under the SPV Credit Facility are made quarterly. The lenders have a first lien security interest on substantially all of the assets of the SPV.

As part of the SPV Credit Facility, the SPV is subject to limitations as to how borrowed funds may be used and the types of loans that are eligible to be acquired by the SPV including, but not limited to, restrictions on sector and geographic concentrations, loan size, payment frequency, tenor and minimum investment ratings (or estimated ratings). In addition, borrowed funds are intended to be used primarily to purchase first lien loan assets, and the SPV is limited in its ability to purchase certain other assets (including, but not limited to, second lien loans, covenant-lite loans, revolving and delayed draw loans and discount loans) and other assets are not permitted to be purchased (including, but not limited to paid-in-kind loans and structured finance obligations). The SPV Credit Facility has certain requirements relating to interest coverage, collateral quality and portfolio performance, including limitations on delinquencies and charge offs, certain violations of which could result in the immediate acceleration of the amounts due under the SPV Credit Facility. The SPV Credit Facility is also subject to a borrowing base that applies different advance rates to assets held by the SPV based generally on the fair market value of such assets. Under certain circumstances as set forth in the SPV Credit Facility, the Company could be obliged to repurchase loans from the SPV.

As of March 31, 2017 and 2016, the SPV was in compliance with all covenants and other requirements of the SPV Credit Facility.

Credit Facility

The Company closed on March 21, 2014 on the Credit Facility, which was subsequently amended on January 8, 2015, May 25, 2016 and March 22, 2017. The maximum principal amount of the Credit Facility is $283,000, subject to availability under the Credit Facility, which is based on certain advance rates multiplied by the value of the Company’s portfolio investments (subject to certain concentration limitations) net of certain other indebtedness that the Company may incur in accordance with the terms of the Credit Facility. Proceeds of the Credit Facility may be used for general corporate purposes, including the funding of portfolio investments. Maximum capacity under the Credit Facility may be increased to $550,000 through the exercise by the Company of an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing. The Credit Facility includes a $20,000 limit for swingline loans and a $5,000 limit for letters of credit. The Company may borrow amounts in U.S. dollars or certain other permitted currencies. Amounts drawn under the Credit Facility, including amounts drawn in respect of letters of credit, bear interest at either LIBOR plus an applicable spread of 2.25%, or an “alternative base rate” (which is the highest of a prime rate, the federal funds effective rate plus 0.50%, or one month LIBOR plus 1.00%) plus an applicable spread of 1.25%. The Company may elect either the LIBOR or the “alternative base rate” at the time of drawdown, and loans may be converted from one rate to another at any time, subject to certain conditions. The Company also pays a fee of 0.375% on undrawn amounts under the Credit Facility and, in respect of each undrawn letter of credit, a fee and interest rate equal to the then-applicable margin under the Credit Facility while the letter of credit is outstanding. The availability period under the Credit Facility will terminate on March 21, 2021 and the Credit Facility will mature on March 21, 2022. During the period from March 21, 2021 to March 21, 2022, the Company will be obligated to make mandatory prepayments under the Credit Facility out of the proceeds of certain asset sales, other recovery events and equity and debt issuances.

 

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Subject to certain exceptions, the Credit Facility is secured by a first lien security interest in substantially all of the portfolio investments held by the Company and the Company’s unfunded investor equity capital commitments (provided that the amount of unfunded capital commitments ultimately available to the lenders is limited to $100,000). The pledge of unfunded investor equity capital commitments was subject to release once $100,000 of incremental capital had been called and received by the Company subsequent to January 8, 2015. The pledge of unfunded investor equity capital commitments had been released as of March 31, 2017. The Credit Facility includes customary covenants, including certain financial covenants related to asset coverage, shareholders’ equity and liquidity, certain limitations on the incurrence of additional indebtedness and liens, and other maintenance covenants, as well as usual and customary events of default for senior secured revolving credit facilities of this nature.

As of March 31, 2017 and December 31, 2016, the Company was in compliance with all covenants and other requirements of the Credit Facility.

Summary of Facilities

The Facilities consisted of the following as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017  
     Total Facility      Borrowings
Outstanding
     Unused Portion (1)      Amount
Available (2)
 

SPV Credit Facility

   $ 400,000      $ 201,108      $ 198,892      $ 10,476  

Credit Facility

     283,000        189,500        93,500        93,500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 683,000      $ 390,608      $ 292,392      $ 103,976  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2016  
     Total Facility      Borrowings
Outstanding
     Unused Portion (1)      Amount
Available (2)
 

SPV Credit Facility

   $ 400,000      $ 252,885      $ 147,115      $ 5,988  

Credit Facility

     220,000        169,000        51,000        51,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 620,000      $ 421,885      $ 198,115      $ 56,988  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The unused portion is the amount upon which commitment fees are based.
(2) Available for borrowing based on the computation of collateral to support the borrowings and subject to compliance with applicable covenants and financial ratios.

As of March 31, 2017 and December 31, 2016, $1,666 and $1,667, respectively, of interest expense, $274 and $203, respectively, of unused commitment fees and $23 and $23, respectively, of other fees were included in interest and credit facility fees payable. For the three month periods ended March 31, 2017 and 2016, the weighted average interest rate was 3.07% and 2.60%, respectively, and average principal debt outstanding was $376,532 and $257,170, respectively. As of March 31, 2017 and December 31, 2016, the weighted average interest rate was 3.22% and 2.92%, respectively, based on floating LIBOR rates.

 

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For the three month periods ended March 31, 2017 and 2016, the components of interest expense and credit facility fees on the Facilities were as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Interest expense

   $ 2,892      $ 1,698  

Facility unused commitment fee

     292        361  

Amortization of deferred financing costs

     181        213  

Other fees

     30        25  
  

 

 

    

 

 

 

Total interest expense and credit facility fees

   $ 3,395      $ 2,297  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 2,893      $ 1,520  

7. 2015-1 Notes

On June 26, 2015, the Company completed the 2015-1 Debt Securitization. The 2015-1 Notes were issued by the 2015-1 Issuer, a wholly-owned and consolidated subsidiary of the Company, and are secured by a diversified portfolio of the 2015-1 Issuer consisting primarily of first and second lien senior secured loans. The 2015-1 Debt Securitization was executed through a private placement of the 2015-1 Notes, consisting of $160 million of Aaa/AAA Class A-1A Notes which bear interest at the three-month London Interbank Offered Rate (“LIBOR”) plus 1.85%; $40 million of Aaa/AAA Class A-1B Notes which bear interest at the three-month LIBOR plus 1.75% for the first 24 months and the three-month LIBOR plus 2.05% thereafter; $27 million of Aaa/AAA Class A-1C Notes which bear interest at 3.75%; and $46 million of Aa2 Class A-2 Notes which bear interest at the three month LIBOR plus 2.70%. The 2015-1 Notes were issued at par and are scheduled to mature on July 15, 2027. The Company received 100% of the preferred interests (the “Preferred Interests”) issued by the 2015-1 Issuer on the closing date of the 2015-1 Debt Securitization in exchange for the Company’s contribution to the Issuer of the initial closing date loan portfolio. The Preferred Interests do not bear interest and had a nominal value of $125.9 million at closing. In connection with the contribution, the Company made customary representations, warranties and covenants to the 2015-1 Issuer in the purchase agreement. The Class A-1A, Class A-1B and Class A-1C and Class A-2 Notes are included in the March 31, 2017 consolidated financial statements. The Preferred Interests were eliminated in consolidation.

On the closing date of the 2015-1 Debt Securitization, the 2015-1 Issuer effected a one-time distribution to the Company of a substantial portion of the proceeds of the private placement of the 2015-1 Notes, net of expenses, which distribution was used to repay a portion of certain amounts outstanding under the SPV Credit Facility and the Credit Facility. As part of the 2015-1 Debt Securitization, certain first and second lien senior secured loans were distributed by the SPV to the Company pursuant to a distribution and contribution agreement. The Company contributed the loans that comprised the initial closing date loan portfolio (including the loans distributed to the Company from the SPV) to the 2015-1 Issuer pursuant to a contribution agreement. Future loan transfers from the Company to the 2015-1 Issuer will be made pursuant to a sale agreement and are subject to the approval of the Company’s Board of Directors. Assets of the 2015-1 Issuer are not available to the creditors of the SPV or the Company. In connection with the issuance and sale of the 2015-1 Notes, the Company made customary representations, warranties and covenants in the purchase agreement.

During the reinvestment period, pursuant to the indenture governing the 2015-1 Notes, all principal collections received on the underlying collateral may be used by the 2015-1 Issuer to purchase new collateral under the direction of Investment Adviser in its capacity as collateral manager of the 2015-1 Issuer and in accordance with the Company’s investment strategy.

The Investment Adviser serves as collateral manager to the 2015-1 Issuer under a collateral management agreement (the “Collateral Management Agreement”). Pursuant to the Collateral Management Agreement, the 2015-1 Issuer pays management fees (comprised of base management fees, subordinated management fees and

 

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incentive management fees) to the Investment Adviser for rendering collateral management services. As per the Collateral Management Agreement, for the period the Company retains all of the Preferred Interests, the Investment Adviser does not earn management fees for providing such collateral management services. The Company currently retains all of the Preferred Interests, thus the Investment Adviser did not earn any management fees from the 2015-1 Issuer for the three month periods ended March 31, 2017 and 2016. Any such waived fees may not be recaptured by the Investment Adviser.

Pursuant to an undertaking by the Company in connection with the 2015-1 Debt Securitization, the Company has agreed to hold on an ongoing basis Preferred Interests with an aggregate dollar purchase price at least equal to 5% of the aggregate outstanding amount of all collateral obligations by the 2015-1 Issuer for so long as any securities of the 2015-1 Issuer remain outstanding. As of March 31, 2017, the Company was in compliance with its undertaking.

The 2015-1 Issuer pays ongoing administrative expenses to the trustee, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports, and providing required services in connection with the administration of the 2015-1 Issuer.

As of March 31, 2017, there were 59 first lien and second lien senior secured loans with a total fair value of approximately $389,003 securing the 2015-1 Notes. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, term, agency rating, collateral coverage, minimum coupon, minimum spread and sector diversity requirements in the indenture governing the 2015-1 Notes.

For the three month periods ended March 31, 2017 and 2016, the effective annualized weighted average interest rate, which includes amortization of debt issuance costs on the 2015-1 Notes, was 3.18% and 2.79%, respectively, based on floating LIBOR rates.

For the three month periods ended March 31, 2017 and 2016, the components of interest expense on the 2015-1 Notes were as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Interest expense

   $ 2,092      $ 1,850  

Amortization of deferred financing costs

     50        51  
  

 

 

    

 

 

 

Total interest expense and credit facility fees

   $ 2,142      $ 1,901  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 2,059      $ 1,707  

8. COMMITMENTS AND CONTINGENCIES

A summary of significant contractual payment obligations was as follows as of March 31, 2017 and December 31, 2016:

 

     SPV Credit Facility and Credit Facility      2015-1 Notes  

Payment Due by Period

   March 31, 2017      December 31, 2016      March 31, 2017      December 31, 2016  

Less than 1 Year

   $ —        $ —        $ —        $ —    

1-3 Years

     —          —          —          —    

3-5 Years

     390,608        421,885        —          —    

More than 5 Years

     —          —          273,000        273,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 390,608      $ 421,885      $ 273,000      $ 273,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

In the ordinary course of its business, the Company enters into contracts or agreements that contain indemnification or warranties. Future events could occur that lead to the execution of these provisions against the

 

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Company. The Company believes that the likelihood of such an event is remote; however, the maximum potential exposure is unknown. No accrual has been made in the consolidated financial statements as of March 31, 2017 and December 31, 2016 for any such exposure.

As of March 31, 2017 and December 31, 2016, the Company had $1,274,174 and $1,222,358, respectively, in total capital commitments from stockholders, of which $473,514 and $421,698, respectively, was unfunded. As of March 31, 2017 and December 31, 2016, current directors had committed $821 in capital commitments to the Company.

The Company had the following unfunded commitments to fund delayed draw and revolving senior secured loans as of the indicated dates:

 

     Par Value as of  
     March 31, 2017      December 31, 2016  

Unfunded delayed draw commitments

   $ 44,541      $ 35,704  

Unfunded revolving term loan commitments

     26,517        24,063  
  

 

 

    

 

 

 

Total unfunded commitments

   $ 71,058      $ 59,767  
  

 

 

    

 

 

 

As of March 31, 2017, the Company had remaining commitments to fund, from time to time, capital to Credit Fund of up to $354,499. Funding of such commitments generally requires the approval of the board of Credit Fund, including the board members appointed by the Company. As of March 31, 2017, the Company had remaining commitments to fund, from time to time, mezzanine loans to Credit Fund of up to $13,956, of which $10,438 was available for borrowing based on the computation of collateral to support the borrowings.

9. NET ASSETS

The Company has the authority to issue 200,000,000 shares of common stock, $0.01 per share par value.

During the three month period ended March 31, 2017, the Company issued 5,837 shares for $108 from the reinvestment of dividends. The following table summarizes capital activity during the three month period ended March 31, 2017:

 

   

 

Common Stock

    Capital
in

Excess
of Par
Value
    Offering
Costs
    Accumulated Net
Investment
Income (Loss)
    Accumulated
Net Realized
Gain (Loss)

on
Investments
    Accumulated Net
Unrealized
Appreciation

(Depreciation) on
Investments
    Total
Net
Assets
 
    Shares     Amount              

Balance, beginning of period

    41,702,318     $ 417     $ 799,580     $ (74   $ (3,207   $ (25,357   $ (7,222   $ 764,137  

Reinvestment of dividends

    5,837       —         108       —         —         —         —         108  

Net investment income (loss)

    —         —         —         —         19,107       —         —         19,107  

Net realized gain (loss) on investments

    —         —         —         —         —         (7,694     —         (7,694

Net change in unrealized appreciation (depreciation) on investments

    —         —         —         —         —         —         4,760       4,760  

Dividends declared

    —         —         —         —         (17,100     —         —         (17,100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    41,708,155     $ 417     $ 799,688     $ (74   $ (1,200   $ (33,051   $ (2,462   $ 763,318  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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During the three month period ended March 31, 2016, the Company issued 1,819,066 shares for $33,074 including reinvestment of dividends. The following table summarizes capital activity during the three month period ended March 31, 2016:

 

   

 

Common Stock

    Capital
in Excess

of Par
Value
    Offering
Costs
    Accumulated
Net Investment
Income (Loss)
    Accumulated
Net Realized
Gain (Loss)

on
Investments
    Accumulated Net
Unrealized
Appreciation

(Depreciation) on
Investments
    Total
Net
Assets
 
    Shares     Amount              

Balance, beginning of period

    31,524,083     $ 315     $ 613,944     $ (74   $ (12,994   $ (2,411   $ (27,054   $ 571,726  

Common stock issued

    1,815,181       18       32,982       —         —         —         —         33,000  

Reinvestment of dividends

    3,885       —         74       —         —         —         —         74  

Net investment income (loss)

    —         —         —         —         11,960       —         —         11,960  

Net realized gain (loss) on investments

    —         —         —         —         —         (3,577     —         (3,577

Net change in unrealized appreciation (depreciation) on investments

    —         —         —         —         —         —         (11,091     (11,091

Dividends declared

    —         —         —         —         (13,337     —         —         (13,337
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    33,343,149     $ 333     $ 647,000     $ (74   $ (14,371   $ (5,988   $ (38,145   $ 588,755  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes total shares issued and proceeds received related to capital subscriptions for the Company’s common stock and reinvestment of dividends during the three month period ended March 31, 2017:

 

     Shares Issued      Proceeds Received  

January 24, 2017*

     5,837      $ 108  
  

 

 

    

 

 

 

Total

     5,837      $ 108  
  

 

 

    

 

 

 

 

*  Represents shares issued upon the reinvestment of dividends

The following table summarizes total shares issued and proceeds received related to capital subscriptions for the Company’s common stock and reinvestment of dividends during the three month period ended March 31, 2016:

 

     Shares Issued      Proceeds Received  

January 22, 2016*

     3,885      $ 74  

March 11, 2016

     1,815,181        33,000  
  

 

 

    

 

 

 

Total

     1,819,066      $ 33,074  
  

 

 

    

 

 

 

 

* Represents shares issued upon the reinvestment of dividends

Subscribed but unissued shares are presented in equity with a deduction of subscriptions receivable until cash is received for a subscription. There were no subscribed but unissued shares as of March 31, 2017 and December 31, 2016.

Subscription transactions during the three month periods ended March 31, 2017 and 2016 were executed at an offering price at a premium to net asset value due to the requirement to use prior quarter net asset value as offering price unless it would result in the Company selling shares of its common stock at a price below the current net asset value and also in order to effect a reallocation of organizational costs to subsequent investors. Such subscription transactions increased net asset value by $0.00 per share and $0.01 per share, respectively, for the three month periods ended March 31, 2017 and 2016, respectively.

 

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The Company computes earnings per common share in accordance with ASC 260, Earnings Per Share. Basic earnings per common share were calculated by dividing net increase (decrease) in net assets resulting from operations attributable to the Company by the weighted-average number of common shares outstanding for the period.

Basic and diluted earnings per common share were as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Net increase (decrease) in net assets resulting from operations

   $ 16,173      $ (2,708

Weighted-average common shares outstanding

     41,706,598        31,945,959  
  

 

 

    

 

 

 

Basic and diluted earnings per common share

   $ 0.39      $ (0.08
  

 

 

    

 

 

 

The following table summarizes the Company’s dividends declared and payable since inception through March 31, 2017:

 

Date Declared

   Record Date    Payment Date    Per Share
Amount
    Total
Amount
 

March 13, 2014

   March 31, 2014    April 14, 2014    $ 0.19     $ 2,449  

June 26, 2014

   June 30, 2014    July 14, 2014    $ 0.27     $ 3,481  

September 12, 2014

   September 18, 2014    October 9, 2014    $ 0.44     $ 5,956  

December 19, 2014

   December 29, 2014    January 26, 2015    $ 0.35     $ 6,276  

March 11, 2015

   March 13, 2015    April 17, 2015    $ 0.37     $ 7,833  

June 24, 2015

   June 30, 2015    July 22, 2015    $ 0.37     $ 9,902  

September 24, 2015

   September 24, 2015    October 22, 2015    $ 0.42     $ 11,670  

December 29, 2015

   December 29, 2015    January 22, 2016    $ 0.40     $ 12,610  

December 29, 2015

   December 29, 2015    January 22, 2016    $ 0.18  (1)    $ 5,674  

March 10, 2016

   March 14, 2016    April 22, 2016    $ 0.40     $ 13,337  

June 8, 2016

   June 8, 2016    July 22, 2016    $ 0.40     $ 13,943  

September 28, 2016

   September 28, 2016    October 24, 2016    $ 0.40     $ 15,917  

December 29, 2016

   December 29, 2016    January 24, 2017    $ 0.41     $ 17,098  

December 29, 2016

   December 29, 2016    January 24, 2017    $ 0.07  (1)    $ 2,919  

March 20, 2017

   March 20, 2017    April 24, 2017    $ 0.41     $ 17,100  

 

(1) Represents a special dividend.

 

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10. CONSOLIDATED FINANCIAL HIGHLIGHTS

The following is a schedule of consolidated financial highlights for the three month periods ended March 31, 2017 and 2016:

 

     For the three month periods ended  
     March 31, 2017     March 31, 2016  

Per Share Data:

    

Net asset value per share, beginning of period

   $ 18.32     $ 18.14  

Net investment income (loss) (1)

     0.46       0.37  

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments

     (0.07     (0.46
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.39       (0.09
  

 

 

   

 

 

 

Dividends declared (2)

     (0.41     (0.40

Effect of subscription offering price (3)

     0.00       0.01  
  

 

 

   

 

 

 

Net asset value per share, end of period

   $ 18.30     $ 17.66  
  

 

 

   

 

 

 

Number of shares outstanding, end of period

     41,708,155       33,343,149  

Total return (4)

     2.14     (0.44 )% 

Net assets, end of period

   $ 763,318     $ 588,755  

Ratio to average net assets (5):

    

Expenses net of waiver, before incentive fees

     1.32     1.42

Expenses net of waiver, after incentive fees

     1.94     1.94

Expenses gross of waiver, after incentive fees

     2.16     2.18

Net investment income (loss) (6)

     2.48     2.08

Interest expense and credit facility fees

     0.72     0.73

Ratios/Supplemental Data:

    

Asset coverage, end of period

     215.03     206.60

Portfolio turnover

     10.20     2.57

Total committed capital, end of period

   $ 1,274,174     $ 1,188,640  

Ratio of total contributed capital to total committed capital, end of period

     62.84     54.53

Weighted-average shares outstanding

     41,706,598       31,945,959  

 

(1) Net investment income (loss) per share was calculated as net investment income (loss) for the period divided by the weighted average number of shares outstanding for the period.
(2) Dividends declared per share was calculated as the sum of dividends declared during the period divided by the number of shares outstanding at each respective quarter-end date (refer to Note 9).
(3) Increase is due to offering price of subscriptions during the period (refer to Note 9).
(4) Total return (not annualized) is based on the change in net asset value per share during the period plus the declared dividends, assuming reinvestment of dividends in accordance with the dividend reinvestment plan, divided by the beginning net asset value for the period. Total return for the three month periods ended March 31, 2017 and 2016 is inclusive of $0.00 and $0.01, respectively, per share increase in net asset value for the periods related to the offering price of subscriptions. Excluding the effects of the higher offering price of subscriptions, total return (not annualized) would have been 2.14% and (0.50%), respectively (refer to Note 9).
(5) These ratios to average net assets have not been annualized.
(6) The net investment income ratio is net of the waiver of base management fees.

11. LITIGATION

The Company may become party to certain lawsuits in the ordinary course of business. The Company does not believe that the outcome of current matters, if any, will materially impact the Company or its consolidated

 

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financial statements. As of March 31, 2017 and December 31, 2016, the Company was not subject to any material legal proceedings, nor, to the Company’s knowledge, is any material legal proceeding threatened against the Company.

In addition, portfolio investments of the Company could be the subject of litigation or regulatory investigations in the ordinary course of business. The Company does not believe that the outcome of any current contingent liabilities of its portfolio investments, if any, will materially affect the Company or these consolidated financial statements.

12. TAX

The Company has not recorded a liability for any uncertain tax positions pursuant to the provisions of ASC 740, Income Taxes, as of March 31, 2017 and December 31, 2016.

In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax regulators. As of March 31, 2017 and December 31, 2016, the Company had filed tax returns and therefore is subject to examination.

The Company’s taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate. The estimated tax character of dividends declared for the three month periods ended March 31, 2017 and 2016 was as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Ordinary income

   $ 17,100      $ 13,337  

Tax return of capital

   $ —        $ —    

13. SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date the consolidated financial statements were issued. There have been no subsequent events that require recognition or disclosure through the date the consolidated financial statements were issued, except as disclosed below.

Subsequent to March 31, 2017, the Company borrowed $45,000 under the Credit Facility and SPV Credit Facility to fund investment acquisitions. The Company also voluntarily repaid $23,504 under the Credit Facility and SPV Credit Facility.

On April 6, 2017, Credit Fund issued a capital call and delivered capital drawdown notices of $4,000 to each of the Company and Credit Partners. Proceeds from the capital call were due, and the related issuance of $8,000 of subordinated loans occurred, on April 13, 2017.

On May 5, 2017, the Company issued a capital call and delivered capital drawdown notices totaling $39,488. Proceeds from the capital call and the related issuance of 2,141,417 shares is expected on or about May 19, 2017.

On May 3, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with NF Investment Corp. (“NFIC”), a Maryland corporation and an externally managed, non-diversified closed-end investment company that has elected to be regulated as a BDC under the Investment Company Act. Both the Company and NFIC are managed by the Investment Adviser. Pursuant to the Merger Agreement, NFIC will merge with and into the Company (the “Merger”) with the Company as the surviving entity. The completion of

 

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the Merger is subject to the approval of a majority of the outstanding shares of NFIC’s common stock and other customary closing conditions. While there can be no assurances as to the exact timing, or that the Merger will be completed at all, the Company expects to complete the Merger in June 2017. If the proposed Merger is consummated, NFIC will cease to exist as a separate corporation, and each share of common stock of NFIC will be converted into the right to receive a mixture of cash and shares of common stock of the Company, par value $0.01 per share (the “Acquisition Shares” and together with such cash, the “Merger Consideration”), in accordance with the elections of the stockholders of NFIC (under which at least 5% of the Merger Consideration received by each stockholder of NFIC must be in the form of Acquisition Shares).

 

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

(dollar amounts in thousands, except per share data, unless otherwise indicated)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

We have included or incorporated by reference in this Form 10-Q, and from time to time our management may make, “forward-looking statements”. These forward-looking statements are not historical facts, but instead relate to future events or the future performance or financial condition of TCG BDC, Inc. (together with its consolidated subsidiaries, “we,” “us,” “our,” “TCG BDC” or the “Company”). These statements are based on current expectations, estimates and projections about us, our current or prospective portfolio investments, our industry, our beliefs, and our assumptions. The forward-looking statements contained in this Form 10-Q and the documents incorporated by reference herein involve a number of risks and uncertainties, including statements concerning:

 

    our, or our portfolio companies’, future business, operations, operating results or prospects;

 

    the return or impact of current and future investments;

 

    the impact of any protracted decline in the liquidity of credit markets on our business;

 

    the impact of fluctuations in interest rates on our business;

 

    currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars;

 

    our future operating results;

 

    the impact of changes in laws, policies or regulations (including the interpretation thereof) affecting our operations or the operations of our portfolio companies;

 

    the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

    our ability to recover unrealized losses;

 

    market conditions and our ability to access alternative debt markets and additional debt and equity capital;

 

    our contractual arrangements and relationships with third parties;

 

    the general economy and its impact on the industries in which we invest;

 

    the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;

 

    competition with other entities and our affiliates for investment opportunities;

 

    the speculative and illiquid nature of our investments;

 

    the use of borrowed money to finance a portion of our investments;

 

    our expected financings and investments;

 

    the adequacy of our cash resources and working capital;

 

    the loss of key personnel;

 

    the costs associated with being a public entity;

 

    the timing, form and amount of any dividend distributions;

 

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

 

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    the ability to consummate acquisitions;

 

    the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;

 

    the ability of The Carlyle Group Employee Co., L.L.C. and CELF Advisors LLP to attract and retain highly talented professionals that can provide services to our investment adviser and administrator;

 

    our ability to maintain our status as a business development company; and

 

    our intent to satisfy the requirements of a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may,” “plans,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2016 and Part II, Item 1A of and elsewhere in this Form 10-Q.

We have based the forward-looking statements included in this Form 10-Q on information available to us on the date of this Form 10-Q, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the Securities and Exchange Commission (the “SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

OVERVIEW

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Part I, Item 1 of this Form 10-Q “Financial Statements.” This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2016 and Part II, Item 1A of this Form 10-Q “Risk Factors.” Our actual results could differ materially from those anticipated by such forward-looking statements due to factors discussed under “Risk Factors” and “Cautionary Statements Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-Q.

We are a Maryland corporation formed on February 8, 2012, and structured as an externally managed, non-diversified closed-end investment company. We have elected to be regulated as a BDC under the Investment Company Act. We have elected to be treated, and intend to continue to comply with the requirements to qualify annually, as a RIC under Subchapter M of the Code.

Our investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle market companies, which we define as companies with approximately $10 million to $100 million of EBITDA. We seek to achieve our investment objective primarily through direct originations of Middle Market Senior Loans, with the balance of our assets invested in higher yielding investments (which may include unsecured debt, mezzanine debt and investments in equities). We generally make Middle Market Senior Loans to private U.S. middle market companies that are, in many cases, controlled by private equity firms. Depending on market conditions, we expect that between 70% and 80% of the value of our assets will be invested in Middle Market Senior Loans. We expect that the composition of our portfolio will change over time given our Investment Adviser’s view on, among other things, the economic and credit environment (including with respect to interest rates) in which we are operating.

 

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We are externally managed by our Investment Adviser, an investment adviser registered under the Advisers Act. Our Administrator provides the administrative services necessary for us to operate. Both our Investment Adviser and our Administrator are wholly owned subsidiaries of Carlyle Investment Management L.L.C., a subsidiary of Carlyle.

In conducting our investment activities, we believe that we benefit from the significant scale and resources of Carlyle, including our Investment Adviser and its affiliates. We have operated our business as a BDC since we began our investment activities in May 2013.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt available to middle market companies, the general economic environment and the competitive environment for the type of investments we make.

Revenue

We generate revenue primarily in the form of interest income on debt investments we hold. In addition, we generate income from dividends on direct equity investments, capital gains on the sales of loans and debt and equity securities and various loan origination and other fees. Our debt investments generally have a stated term of five to eight years and generally bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR. Interest on these debt investments is generally paid quarterly. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of: (i) investment advisory fees, including base management fees and incentive fees, to our Investment Adviser pursuant to an investment advisory agreement (the “Investment Advisory Agreement”) between us and our Investment Adviser; (ii) costs and other expenses and our allocable portion of overhead incurred by our Administrator in performing its administrative obligations under an administration agreement (the “Administration Agreement”) between us and our Administrator; and (iii) other operating expenses as detailed below:

 

    the costs associated with the Private Offering;

 

    the costs of any other offerings of our common stock and other securities, if any;

 

    calculating individual asset values and our net asset value (including the cost and expenses of any independent valuation firms);

 

    expenses, including travel expenses, incurred by our Investment Adviser, or members of our Investment Adviser team managing our investments, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, expenses of enforcing our rights;

 

    the base management fee and any incentive fee payable under our Investment Advisory Agreement;

 

    certain costs and expenses relating to distributions paid on our shares;

 

    administration fees payable under our Administration Agreement and sub-administration agreements, including related expenses;

 

    debt service and other costs of borrowings or other financing arrangements;

 

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    the allocated costs incurred by our Investment Adviser in providing managerial assistance to those portfolio companies that request it;

 

    amounts payable to third parties relating to, or associated with, making or holding investments;

 

    the costs associated with subscriptions to data service, research-related subscriptions and expenses and quotation equipment and services used in making or holding investments;

 

    transfer agent and custodial fees;

 

    costs of hedging;

 

    commissions and other compensation payable to brokers or dealers;

 

    federal and state registration fees;

 

    any U.S. federal, state and local taxes, including any excise taxes;

 

    independent director fees and expenses;

 

    costs of preparing financial statements and maintaining books and records, costs of preparing tax returns, costs of Sarbanes-Oxley Act compliance and attestation and costs of filing reports or other documents with the SEC (or other regulatory bodies), and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing;

 

    the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders’ meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters;

 

    the costs of specialty and custom software for monitoring risk, compliance and overall portfolio, including any development costs incurred prior to the filing of our election to be regulated as a BDC;

 

    our fidelity bond;

 

    directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

    indemnification payments;

 

    direct fees and expenses associated with independent audits, agency, consulting and legal costs; and

 

    all other expenses incurred by us or our Administrator in connection with administering our business, including our allocable share of certain officers and their staff compensation.

We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.

PORTFOLIO AND INVESTMENT ACTIVITY

As of March 31, 2017, the fair value of our investments was approximately $1,392,545, comprised of 94 investments in 82 portfolio companies/structured finance obligations/investment fund across 30 industries with 54 sponsors. As of December 31, 2016, the fair value of our investments was approximately $1,422,759, comprised of 98 investments in 86 portfolio companies/structured finance obligations/investment fund across 29 industries with 57 sponsors.

Based on fair value as of March 31, 2017, our portfolio consisted of approximately 89.6% in secured debt (78.0% in first lien debt (including 12.1% in first lien/last out loans) and 11.6% in second lien debt), 9.6% in Credit Fund, 0.2% in structured finance obligations and 0.6% in equity investments. Based on fair value as of March 31, 2017, approximately 1% of our debt portfolio was invested in debt bearing a fixed interest rate and approximately 99% of our debt portfolio was invested in debt bearing a floating interest rate with an interest rate floor.

 

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Based on fair value as of December 31, 2016, our portfolio consisted of approximately 92.2% in secured debt (80.1% in first lien debt (including 12.9% in first lien/last out loans) and 12.1% in second lien debt), 7.0% in Credit Fund, 0.37% in structured finance obligations and 0.46% in equity investments. Based on fair value as of December 31, 2016, approximately 1% of our debt portfolio was invested in debt bearing a fixed interest rate and approximately 99% of our debt portfolio was invested in debt bearing a floating interest rate with an interest rate floor.

Our investment activity for the three month periods ended March 31, 2017 and 2016 is presented below (information presented herein is at amortized cost unless otherwise indicated):

 

     For the three month periods ended  
     March 31, 2017     March 31, 2016  

Investments:

    

Total investments, beginning of period

   $ 1,429,981     $ 1,079,720  

New investments purchased

     152,235       132,291  

Net accretion of discount on investments

     3,576       611  

Net realized gain (loss) on investments

     (7,694     (3,577

Investments sold or repaid

     (183,091     (26,159
  

 

 

   

 

 

 

Total Investments, end of period

   $ 1,395,007     $ 1,182,886  
  

 

 

   

 

 

 

Principal amount of investments funded:

    

First Lien Debt

   $ 94,929     $ 100,556  

Second Lien Debt

     1,800       34,000  

Structured Finance Obligations

     —         —    

Equity Investments

     1,552       —    

Investment Fund

     56,160       1  
  

 

 

   

 

 

 

Total

   $ 154,441     $ 134,557  
  

 

 

   

 

 

 

Principal amount of investments sold or repaid:

    

First Lien Debt

   $ (154,003   $ (5,629

Second Lien Debt

     (13,000     (11,000

Structured Finance Obligations

     (5,000     (14,200

Investment Fund

     (22,000     —    
  

 

 

   

 

 

 

Total

   $ (194,003   $ (30,829
  

 

 

   

 

 

 

Number of new funded investments

     17       11  

Average amount of new funded investments

   $ 9,085     $ 12,032  

Percentage of new funded debt investments at floating interest rates

     91     100

Percentage of new funded debt investments at fixed interest rates

     9     0

As of March 31, 2017 and December 31, 2016, investments consisted of the following:

 

     March 31, 2017      December 31, 2016  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

First Lien Debt

   $ 1,088,396      $ 1,085,554      $ 1,145,326      $ 1,139,548  

Second Lien Debt

     161,912        161,643        172,960        171,864  

Structured Finance Obligations

     6,582        2,776        9,239        5,216  

Equity Investments

     6,572        8,451        5,071        6,474  

Investment Fund

     131,545        134,121        97,385        99,657  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,395,007      $ 1,392,545      $ 1,429,981      $ 1,422,759  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The weighted average yields (1) for our first and second lien debt, based on the amortized cost and fair value as of March 31, 2017 and December 31, 2016, were as follows:

 

     March 31, 2017     December 31, 2016  
     Amortized
Cost
    Fair Value     Amortized
Cost
    Fair Value  

First Lien Debt (excluding First Lien/Last Out)

     7.35     7.37     7.09     7.15

First Lien/Last Out Unitranche

     12.00     11.99     12.33     12.12
  

 

 

   

 

 

   

 

 

   

 

 

 

First Lien Debt Total

     8.07     8.09     7.92     7.96

Second Lien Debt

     10.07     10.09     9.97     10.04
  

 

 

   

 

 

   

 

 

   

 

 

 

First and Second Lien Debt Total

     8.33     8.35     8.19     8.23
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of March 31, 2017 and December 31, 2016. Weighted average yield on debt and income producing securities at fair value is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at fair value included in such securities. Weighted average yield on debt and income producing securities at amortized cost is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at amortized cost included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented above.

Total weighted average yields (which includes the effect of accretion of discount and amortization of premiums) of our first and second lien debt investments as measured on an amortized cost basis, increased from 8.19% to 8.33% from December 31, 2016 to March 31, 2017. The increase in weighted average yields was mainly due to the increase in 90-day LIBOR from 1.00% to 1.15% and from originations of new investments with higher weighted average yields of 9.22% and sales/repayments of existing investments with lower weighted average yields of 8.45%.

The following table summarizes the fair value of our performing and non-performing investments as of

March 31, 2017 and December 31, 2016:

 

     March 31, 2017     December 31, 2016  
     Fair Value      Percentage     Fair Value      Percentage  

Performing

   $ 1,383,687        99.36   $ 1,415,131        99.46

Non-accrual(1)

     8,858        0.64       7,628        0.54  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,392,545        100.00   $ 1,422,759        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Loans are generally placed on non-accrual status 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 in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest has been paid current and, in management’s judgment, likely to remain current. Management may not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. See Note 2 to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information on the accounting policies.

See the Consolidated Schedules of Investments as of March 31, 2017 and December 31, 2016 in our consolidated financial statements in Part I, Item 1 of this Form 10-Q for more information on these investments, including a list of companies and type and amount of investments.

 

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As part of the monitoring process, our Investment Adviser has developed risk policies pursuant to which it regularly assesses the risk profile of each of our debt investments and rates each of them based on the following categories, which we refer to as “Internal Risk Ratings”:

Internal Risk Ratings Definitions

 

Rating

  

Definition

1    Performing—Low Risk: Borrower is operating more than 10% ahead of the base case.
2    Performing—Stable Risk: Borrower is operating within 10% of the base case (above or below). This is the initial rating assigned to all new borrowers.
3    Performing—Management Notice: Borrower is operating more than 10% below the base case. A financial covenant default may have occurred, but there is a low risk of payment default.
4    Watch List: Borrower is operating more than 20% below the base case and there is a high risk of covenant default, or it may have already occurred. Payments are current although subject to greater uncertainty, and there is moderate to high risk of payment default.
5    Watch List—Possible Loss: Borrower is operating more than 30% below the base case. At the current level of operations and financial condition, the borrower does not have the ability to service and ultimately repay or refinance all outstanding debt on current terms. Payment default is very likely or may have occurred. Loss of principal is possible.
6    Watch List—Probable Loss: Borrower is operating more than 40% below the base case, and at the current level of operations and financial condition, the borrower does not have the ability to service and ultimately repay or refinance all outstanding debt on current terms. Payment default is very likely or may have already occurred. Additionally, the prospects for improvement in the borrower’s situation are sufficiently negative that impairment of some or all principal is probable.

Our Investment Adviser’s risk rating model is based on evaluating portfolio company performance in comparison to the base case when considering certain credit metrics including, but not limited to, adjusted EBITDA and net senior leverage as well as specific events including, but not limited to, default and impairment.

Our Investment Adviser monitors and, when appropriate, changes the investment ratings assigned to each debt investment in our portfolio. In connection with our quarterly valuation process, our Investment Adviser reviews our investment ratings on a regular basis. The following table summarizes the Internal Risk Ratings as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017     December 31, 2016  
     Fair Value      % of
Fair
Value
    Fair Value      % of
Fair
Value
 
(dollar amounts in millions)                           

Internal Risk Rating 1

   $ 27.5        2.20   $ 59.3        4.52

Internal Risk Rating 2

     1,023.2        82.05       1,055.7        80.50  

Internal Risk Rating 3

     93.7        7.51       100.9        7.70  

Internal Risk Rating 4

     89.4        7.17       75.7        5.77  

Internal Risk Rating 5

     13.4        1.07       12.2        0.93  

Internal Risk Rating 6

     —          —         7.6        0.58  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,247.2        100.00   $ 1,311.4        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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As of March 31, 2017 and December 31, 2016, the weighted average Internal Risk Rating of our debt investment portfolio was 2.2. As of March 31, 2017, 9 of our debt investments, with an aggregate fair value of $102.8 million, were assigned an Internal Risk Rating of 4-6. As of December 31, 2016, 8 of our debt investments, with an aggregate fair value of $95.5 million, were assigned an Internal Risk Rating of 4-6. As of March 31, 2017 and December 31, 2016, one first lien debt investment in the portfolio with a fair value of $8.9 million and $7.6 million, respectively, was on non-accrual status, which represented approximately 0.71% and 0.58%, respectively, of total first and second lien investments at fair value. The remaining first and second lien debt investments were performing and current on their interest payments as of March 31, 2017 and December 31, 2016. During the period ended March 31, 2017, one investment with fair value of $9.8 million was downgraded to an Internal Risk Rating of 4 due to changes in financial condition and performance of the respective portfolio company. Effective January 31, 2017, TwentyEighty, Inc. (fka Miller Heiman, Inc.) completed a restructuring whereby the first lien debt held by us, which carried an Internal Risk Rating of 6 as of December 31, 2016, was converted into new term loans and equity. As of March 31, 2017, the fair value of such new term loans with an Internal Risk Rating of 3 was $2.8 million, an Internal Risk Rating of 4 was $3.8 million, and an Internal Risk Rating of 5 was $2.3 million.

CONSOLIDATED RESULTS OF OPERATIONS

For the three month periods ended March 31, 2017 and 2016

The net increase or decrease in net assets from operations may vary substantially from period to period as a result of various factors, including the recognition of realized gains and losses and net change in unrealized appreciation and depreciation. As a result, quarterly comparisons may not be meaningful.

Investment Income

Investment income for the three month periods ended March 31, 2017 and 2016 were as follows:

 

     For the three month periods ended  
         March 31, 2017          March 31, 2016  

First Lien Debt

   $ 26,701      $ 16,198  

Second Lien Debt

     4,169        6,424  

Structured Finance Obligations

     —          485  

Equity Investments

     1        —    

Investment Fund

     3,209        —    

Cash

     19        3  
  

 

 

    

 

 

 

Total investment income

   $ 34,099      $ 23,110  
  

 

 

    

 

 

 

The increase in investment income for the three month period ended March 31, 2017 from the comparable period in 2016 was primarily driven by our increasing invested balance, increased fees and other income from amendments and prepayments, and interest and dividend income from Credit Fund. As of March 31, 2017, the size of our portfolio increased to $1,395,007 from $1,182,886 as of March 31, 2016, at amortized cost, and total principal amount of investments outstanding increased to $1,427,572 from $1,246,092 as of March 31, 2016. As of March 31, 2017, the weighted average yield of our first and second lien debt increased to 8.33% from 8.14% as of March 31, 2016, on amortized cost.

Interest income on our first and second lien debt investments is dependent on the composition and credit quality of the portfolio. Generally, we expect the portfolio to generate predictable quarterly interest income based on the terms stated in each loan’s credit agreement. As of March 31, 2017, one first lien debt investment in the portfolio was non-performing. The fair value of the loan in the portfolio on non-accrual status was $8,858, which represents approximately 0.71% of total first and second lien investments at fair value. The remaining first and

 

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second lien debt investments were performing and current on their interest payments as of March 31, 2017. All first and second lien debt investments were performing and current on their interest payments as of March 31, 2016. Interest income from structured finance obligations is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows. The effective yield is updated at least quarterly based on payments received and expected future payments. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties, including the amount and timing of principal payments which are impacted by prepayments, repurchases, defaults, delinquencies and liquidations of or within the CLO funds that issued the structured finance obligations. These uncertainties are difficult to predict and are subject to future events that could have impacted the Company’s estimates if the information was known at the time of such estimates. As a result, actual results may differ significantly from these estimates.

For the three month periods ended March 31, 2017 and 2016, the Company earned $2,536 and $999, respectively, in other income. The increase in other income for the three month period ended March 31, 2017 from March 31, 2016 was primarily due to higher syndication fees and prepayment fees resulting from full paydowns on select investments.

Our total dividend and interest income from investments in Credit Fund totaled $3,209 for the three month period ended March 31, 2017. We did not receive any dividend or interest income from investments in Credit Fund for the three month period ended March 31, 2016. We made our first investment in Credit Fund in February 2016.

Net investment income for the three month periods ended March 31, 2017 and 2016 was as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Total investment income

   $ 34,099      $ 23,110  

Net expenses

     (14,992      (11,150
  

 

 

    

 

 

 

Net investment income (loss)

   $ 19,107      $ 11,960  
  

 

 

    

 

 

 

Expenses

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Base management fees

   $ 5,125      $ 4,140  

Incentive fees

     4,777        2,990  

Professional fees

     443        431  

Administrative service fees

     173        148  

Interest expense

     5,034        3,599  

Credit facility fees

     503        599  

Directors’ fees and expenses

     103        120  

Other general and administrative

     542        503  
  

 

 

    

 

 

 

Total expenses

     16,700        12,530  

Waiver of base management fees

     (1,708      (1,380
  

 

 

    

 

 

 

Net expenses

   $ 14,992      $ 11,150  
  

 

 

    

 

 

 

 

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Interest expense and credit facility fees for the three month periods ended March 31, 2017 and 2016 were comprised of the following:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Interest expense

   $ 5,034      $ 3,599  

Facility unused commitment fee

     292        361  

Amortization of deferred financing costs

     181        213  

Other fees

     30        25  
  

 

 

    

 

 

 

Total interest expense and credit facility fees

   $ 5,537      $ 4,198  
  

 

 

    

 

 

 

Cash paid for interest expense

   $ 4,952      $ 3,227  

The increase in interest expense for the three month period ended March 31, 2017 compared to the comparable period in 2016 was driven by increased drawings under the Facilities related to increased deployment of capital for investments. For the three month period ended March 31, 2017, the average interest rate increased to 3.12% from 2.70% for the comparable period in 2016, and average principal debt outstanding increased to $649,532 from $530,170 for the comparable period in 2016.

The increase in base management fees (and related waiver of base management fees) and incentive fees related to pre-incentive fee net investment income for the three month period ended March 31, 2017 from the comparable period in 2016 were driven by our deployment of capital and increasing invested balance. For the three month periods ended March 31, 2017 and 2016, base management fees were $3,417 and $2,760, respectively, (net the waiver of $1,708 and $1,380, respectively), incentive fees related to pre-incentive fee net investment income were $4,777 and $2,990, respectively, and there were no incentive fees related to realized capital gains. The accrual for any capital gains incentive fee under accounting principles generally accepted in the United States (“US GAAP”) in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual. See Note 4 to the consolidated financial statements included in Part I, Item 1 of this Form 10-Q for more information on the incentive and base management fees. For the three month periods ended March 31, 2017 and 2016, there were no accrued capital gains incentive fees based upon the cumulative net realized and unrealized appreciation (depreciation) as of March 31, 2017 and 2016, respectively.

Professional fees include legal, rating agencies, audit, tax, valuation, technology and other professional fees incurred related to the management of the Company. Administrative service fees represent fees paid to the Administrator for our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including our allocable portion of the cost of certain of our executive officers and their respective staff. Other general and administrative expenses include insurance, filing, research, subscriptions and other costs.

Net Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) on Investments

During the three months ended March 31, 2017 and 2016, we had realized gains on 4 and 3 investments, respectively, totaling approximately $186 and $11, respectively, which was offset by realized losses on 3 and 3 investments, respectively, totaling approximately $7,880 and $3,588, respectively. During the three month periods ended March 31, 2017 and 2016, the Company had a change in unrealized appreciation on 57 and 34 investments, respectively, totaling approximately $17,492 and $8,051, respectively, which was offset by a change in unrealized depreciation on 41 and 67 investments, respectively, totaling approximately $12,732 and $19,142, respectively. In particular, effective January 31, 2017, TwentyEighty, Inc. (fka Miller Heiman, Inc.) completed a restructuring whereby the first lien debt held by us was converted into new term loans and equity. As a result, $10,943 of unrealized depreciation was reversed and we realized a loss of $7,738 during the period.

 

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Net realized gain (loss) and net change in unrealized appreciation (depreciation) by the type of investments for the three month periods ended March 31, 2017 and 2016 were as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Net realized gain (loss) on investments

   $ (7,694    $ (3,577

Net change in unrealized appreciation (depreciation) on investments

     4,760        (11,091
  

 

 

    

 

 

 

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments

   $ (2,934    $ (14,668
  

 

 

    

 

 

 

Net realized gain (loss) and net change in unrealized appreciation (depreciation) by the type of investments for the three month periods ended March 31, 2017 and 2016 were as follows:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Type

   Net realized
gain (loss)
     Net change in
unrealized
appreciation
(depreciation)
     Net realized
gain (loss)
     Net change in
unrealized
appreciation
(depreciation)
 

First Lien Debt

   $ (7,552    $ 3,205      $ 4      $ (5,166

Second Lien Debt

     (3      859        —          (5,256

Structured Finance Obligations

     (139      220        (3,581      (1,040

Equity Investments

     —          476        —          371  

Investment Fund

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (7,694    $ 4,760      $ (3,577    $ (11,091
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in unrealized depreciation in our investments for the three months ended March 31, 2017 compared to the comparable period in 2016 was primarily due to changes in various inputs utilized under our valuation methodology, including, but not limited to, market spreads, leverage multiples and borrower ratings.

MIDDLE MARKET CREDIT FUND, LLC

Overview

On February 29, 2016, we and Credit Partners entered into an amended and restated limited liability company agreement, which was subsequently amended on June 24, 2016 (as amended, “the Limited Liability Company Agreement”) to co-manage Credit Fund, an unconsolidated Delaware limited liability company. Credit Fund primarily invests in first lien loans of middle-market companies. Credit Fund is managed by a six-member board of managers, on which we and Credit Partners each have equal representation. Establishing a quorum for Credit Fund’s board of managers requires at least four members to be present at a meeting, including at least two of our representatives and two of Credit Partners’ representatives. We and Credit Partners each have 50% economic ownership of Credit Fund and have commitments to fund, from time to time, capital of up to $400,000 each. Funding of such commitments generally requires the approval of the board of Credit Fund, including the board members appointed by us. By virtue of its membership interest, the Company and Credit Partners each indirectly bear an allocable share of all expenses and other obligations of Credit Fund.

Together with Credit Partners, we co-invest through Credit Fund. Investment opportunities for Credit Fund are sourced primarily by us and our affiliates. Portfolio and investment decisions with respect to Credit Fund must be unanimously approved by a quorum of Credit Fund’s investment committee consisting of an equal number of representatives of us and Credit Partners. Therefore, although we own more than 25% of the voting

 

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securities of Credit Fund, we do not believe that we have control over Credit Fund (other than for purposes of the Investment Company Act). Middle Market Credit Fund SPV, LLC (the “Credit Fund Sub”), a Delaware limited liability company, was formed on April 5, 2016. Credit Fund Sub primarily invests in first lien loans of middle-market companies. Credit Fund Sub is a wholly-owned subsidiary of Credit Fund and is consolidated in Credit Fund’s consolidated financial statements commencing from the date of its formation. Credit Fund follows the same Internal Risk Rating system as us.

Credit Fund, we and Credit Partners entered into an administration agreement with Carlyle GMS Finance Administration L.L.C., the administrative agent of Credit Fund (in such capacity, the “Administrative Agent”), pursuant to which the Administrative Agent is delegated certain administrative and non-discretionary functions, is authorized to enter into sub-administration agreements at our expense with the approval of the board of managers of Credit Fund, and is reimbursed by Credit Fund for its costs and expenses and Credit Fund’s allocable portion of overhead incurred by the Administrative Agent in performing its obligations thereunder.

Selected Financial Data

Since inception of Credit Fund and through March 31, 2017 and December 31, 2016, the Company and Credit Partners each made capital contributions of $1 in members’ equity and $45,500 and $35,000, respectively, in subordinated loans to Credit Fund. As of March 31, 2017 and December 31, 2016, Credit Fund had net borrowings of $86,044 and $62,384, respectively, in mezzanine loans under a revolving credit facility with the Company (the “Credit Fund Facility”). As of March 31, 2017 and December 31, 2016, Credit Fund had subordinated loans and members’ capital of $96,155 and $74,547, respectively. As of March 31, 2017 and December 31, 2016, the Company’s ownership interest in such subordinated loans and members’ capital was $48,077 and $37,273, respectively, and in such mezzanine loans was $86,044 and $62,384, respectively.

As of March 31, 2017 and December 31, 2016, Credit Fund held cash and cash equivalents totaling $10,533 and $6,103, respectively.

As of March 31, 2017 and December 31, 2016, Credit Fund had total investments at fair value of $558,694 and $437,829, respectively, which was comprised of first lien senior secured loans and second lien senior secured loans to 35 and 28 portfolio companies, respectively. As of March 31, 2017 and December 31, 2016, no loans in Credit Fund’s portfolio were on non-accrual status or contained PIK provisions. All investments in the portfolio were floating rate debt investments. The portfolio companies in Credit Fund are U.S. middle market companies in industries similar to those in which the Company may invest directly. Additionally, as of March 31, 2017 and December 31, 2016, Credit Fund had commitments to fund various undrawn revolvers and delayed draw investments to its portfolio companies totaling $32,012 and $30,361, respectively.

Below is a summary of Credit Fund’s portfolio, followed by a listing of the loans in Credit Fund’s portfolio as of March 31, 2017 and December 31, 2016:

 

     As of March 31,
2017
    As of December 31,
2016
 

Senior secured loans (1)

   $ 560,196     $ 439,086  

Weighted average yields of senior secured loans based on amortized cost (2)

     6.53     6.47

Weighted average yields of senior secured loans based on fair value (2)

     6.46     6.41

Number of portfolio companies in Credit Fund

     35       28  

Average amount per portfolio company (1)

   $ 16,006     $ 15,682  

Weighted average Internal Risk Rating

     2.0       2.0  

 

(1) At par/principal amount.

 

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(2) Weighted average yields include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of March 31, 2017 and December 31, 2016. Weighted average yield on debt and income producing securities at fair value is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at fair value included in such securities. Weighted average yield on debt and income producing securities at amortized cost is computed as (a) the annual stated interest rate or yield earned plus the net annual amortization of OID and market discount earned on accruing debt included in such securities, divided by (b) total first lien and second lien debt at amortized cost included in such securities. Actual yields earned over the life of each investment could differ materially from the yields presented above.

 

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Consolidated Schedule of Investments as of March 31, 2017 (unaudited)

 

Investments (1)

  Industry  

Interest Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost
(5)
    Fair
Value 
(6)
 

First Lien Debt (99.42% of fair value)

       

Advanced Instruments,
LLC (2) (3) (4) (10) (11)

  Health &
Pharmaceuticals
  L + 5.25% (1.00% Floor)     10/31/2022     $ 12,000     $ 11,867     $ 11,972  

AM Conservation Holding Corporation (2) (3) (4)

  Energy: Electricity   L + 4.75% (1.00% Floor)     10/31/2022       29,925       29,657       30,185  

Anaren, Inc (2) (3) (4)

  Telecommunications   L + 4.50% (1.00% Floor)     2/18/2021       6,963       6,935       6,963  

Borchers, Inc (2) (3) (4) (7) (10) (11)

  Chemicals,
Plastics & Rubber
  L + 4.75% (1.00% Floor)     1/13/2024       8,142       8,096       8,170  

Datapipe, Inc. (2) (3) (4) (11)

  Telecommunications   L + 4.75% (1.00% Floor)     3/15/2019       9,725       9,650       9,753  

DBI Holding LLC (2) (3) (4)

  Business Services   L + 5.25% (1.00% Floor)     8/1/2021       19,950       19,774       19,754  

Dent Wizard International Corporation (2) (3) (4) (11)

  Automotive   L + 4.75% (1.00% Floor)     4/7/2020       15,000       14,861       14,984  

Dimora Brands, Inc. (fka TK USA Enterprises,
Inc.) (2) (3) (4) (11)

  Construction &
Building
  L + 4.50% (1.00% Floor)     4/4/2023       19,800       19,539       19,743  

Diversitech Corporation (2) (4) (10)

  Capital Equipment   P + 3.50%     11/19/2021       14,766       14,589       14,766  

DTI Holdco, Inc. (2) (3) (4) (7)

  High Tech
Industries
  L + 5.25% (1.00% Floor)     9/30/2023       19,900       19,704       19,639  

EAG, Inc. (2) (3) (4) (11)

  Business Services   L + 4.25% (1.00% Floor)     7/28/2018       8,440       8,430       8,469  

EIP Merger Sub, LLC
(Evolve IP) (2) (3) (4) (8) (11)

  Telecommunications   L + 6.25% (1.00% Floor)     6/7/2021       22,894       22,280       22,539  

EIP Merger Sub, LLC
(Evolve IP) (2) (3) (4) (9) (11)

  Telecommunications   L + 6.25% (1.00% Floor)     6/7/2021       1,500       1,458       1,475  

Empower Payments Acquisitions,
Inc. (2) (3) (7)

  Media: Advertising,
Printing &
Publishing
  L + 5.50% (1.00% Floor)     11/30/2023       17,456       17,115       17,411  

Jensen Hughes,
Inc. (2) (3) (4) (10) (11)

  Utilities: Electric   L + 5.00% (1.00% Floor)     12/4/2021       20,408       20,197       20,275  

Kestra Financial, Inc. (2) (3) (4)

  Banking, Finance,
Insurance & Real
Estate
  L + 5.25% (1.00% Floor)     6/24/2022       19,850       19,593       19,725  

MSHC, Inc. (2) (3) (4) (10)

  Construction &
Building
  L + 5.00% (1.00% Floor)     7/19/2021       13,543       13,440       13,423  

PAI Holdco, Inc. (Parts Authority) (2) (3) (4)

  Automotive   L + 4.75% (1.00% Floor)     12/30/2022       9,925       9,864       9,925  

Paradigm Acquisition
Corp. (2) (3) (4)

  Business Services   L + 5.00% (1.00% Floor)     6/2/2022       11,970       11,874       11,970  

Pasternack Enterprises, Inc. (Infinite RF) (2) (3) (4)

  Capital Equipment   L + 5.00% (1.00% Floor)     5/27/2022       11,910       11,817       11,885  

PSI Services
LLC (2) (3) (4) (7) (10)

  Business Services   L + 5.00% (1.00% Floor)     1/19/2023       29,623       29,052       29,333  

Q Holding Company (2) (3) (4)

  Automotive   L + 5.00% (1.00% Floor)     12/18/2021       13,929       13,798       13,958  

QW Holding Corporation
(Quala) (2) (3) (4) (7) (10)

  Environmental
Industries
  L + 6.75% (1.00% Floor)     8/31/2022       10,983       10,447       11,121  

Ramundsen Public Sector,
LLC (2) (3) (4)

  Sovereign & Public
Finance
  L + 4.25% (1.00% Floor)     2/1/2024       4,000       3,983       4,008  

RelaDyne Inc. (2) (3) (4) (10)

  Wholesale   L + 5.25% (1.00% Floor)     7/22/2022       26,228       25,834       25,978  

Restaurant Technologies,
Inc. (2) (3) (4)

  Retail   L + 4.75% (1.00% Floor)     11/23/2022       14,000       13,876       14,021  

Systems Maintenance Services Holding, Inc. (2) (3) (4) (11)

  High Tech
Industries
  L + 5.00% (1.00% Floor)     10/30/2023       24,439       24,266       24,561  

T2 Systems Canada, Inc. (2) (3) (4)

  Transportation:
Consumer
  L + 6.75% (1.00% Floor)     9/28/2022       2,693       2,630       2,696  

T2 Systems, Inc. (2) (3) (4) (10)

  Transportation:
Consumer
  L + 6.75% (1.00% Floor)     9/28/2022       15,262       14,865       15,282  

Teaching Strategies,
LLC (2) (3) (4) (10)

  Media: Advertising,
Printing &
Publishing
  L + 4.75% (1.00% Floor)     2/27/2023       18,100       17,915       17,980  

The Original Cakerie, Ltd. (Canada) (2) (3) (4) (10) (11)

  Beverage, Food &
Tobacco
  L + 5.00% (1.00% Floor)     7/20/2021       6,992       6,932       6,992  

The Original Cakerie, Co. (Canada) (2) (3) (4) (11)

  Beverage, Food &
Tobacco
  L + 5.50% (1.00% Floor)     7/20/2021       3,612       3,585       3,612  

U.S. Acute Care Solutions, LLC (2) (3) (4)

  Healthcare &
Pharmaceuticals
  L + 5.00% (1.00% Floor)     5/15/2021       26,334       26,099       26,275  

 

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Table of Contents

Consolidated Schedule of Investments as of March 31, 2017 (unaudited)

 

Investments (1)

  Industry    

Interest Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost
(5)
    Fair
Value 
(6)
 

First Lien Debt (99.42% of fair value) (continued)

       

U.S. Anesthesia Partners,
Inc. (2) (3) (4) (11)

   
Healthcare &
Pharmaceuticals
 
 
  L + 5.00% (1.00% Floor)     12/31/2019     $ 10,348     $ 10,257     $ 10,366  

Vantage Specialty Chemicals, Inc. (2) (3) (4) (11)

   
Chemicals,
Plastics & Rubber
 
 
  L + 4.50% (1.00% Floor)     2/5/2021       17,865       17,748       17,775  

WIRB—Copernicus Group,
Inc. (2) (3) (4)

   
Healthcare &
Pharmaceuticals
 
 
  L + 5.00% (1.00% Floor)     8/12/2022       12,315       12,232       12,281  

Zest Holdings,
LLC (2) (3) (4)

   
Durable Consumer
Goods
 
 
  L + 4.75% (1.00% Floor)     8/16/2020       8,700       8,661       8,693  

Zywave, Inc. (2) (3) (4) (7) (10)

   
High Tech
Industries
 
 
  L + 5.00% (1.00% Floor)     11/17/2022       17,456       17,279       17,494  
         

 

 

   

 

 

 

First Lien Debt Total

          $ 550,199     $ 555,452  
         

 

 

   

 

 

 

Second Lien Debt (0.58% of fair value)

           

Ramundsen Public Sector,
LLC (2) (3) (4) (7)

   
Sovereign & Public
Finance
 
 
 

L + 8.50% (1.00% Floor)

    1/31/2025     $ 200     $ 198     $ 200  

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

   
Chemicals,
Plastics & Rubber
 
 
 

L + 8.75% (1.00% Floor)

    2/5/2022       2,000       1,969       1,992  

Zywave, Inc. (2) (3) (4)

   
High Tech
Industries
 
 
 

L + 9.00% (1.00% Floor)

    11/17/2023       1,050       1,035       1,050  
         

 

 

   

 

 

 

Second Lien Debt Total

          $ 3,202     $ 3,242  
         

 

 

   

 

 

 

Total Investments

          $ 553,401     $ 558,694  
         

 

 

   

 

 

 

 

(1) Unless otherwise indicated, issuers of investments held by Credit Fund are domiciled in the United States. As of March 31, 2017, the geographical composition of investments as a percentage of fair value was 1.90% in Canada and 98.10% in the United States.
(2) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to either LIBOR (“L”) or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate (“P”)), which generally resets quarterly. For each such loan, Credit Fund has provided the interest rate in effect as of March 31, 2017. As of March 31, 2017, all of Credit Fund’s LIBOR loans were indexed to the 90-day LIBOR rate at 1.15%, except for those loans as indicated in Note 11 below, and the U.S. Prime Rate loan was indexed at 4.00%.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by Credit Fund Sub. Credit Fund Sub has entered into a revolving credit facility (the “Credit Fund Sub Facility”). The lenders of the Credit Fund Sub Facility have a first lien security interest in substantially all of the assets of Credit Fund Sub. Accordingly, such assets are not available to creditors of Credit Fund.
(5) Amortized cost represents original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method.
(6) Fair value is determined in good faith by or under the direction of the board of managers of Credit Fund, pursuant to Credit Fund’s valuation policy, which is substantially similar to the valuation policy of the Company provided in “Critical Accounting Policies—Fair Value Measurements.”
(7) Denotes that all or a portion of the assets are owned by Credit Fund. Credit Fund has entered into the Credit Fund Facility. The lenders of the Credit Fund Facility have a first lien security interest in substantially all of the assets of Credit Fund. Accordingly, such assets are not available to creditors of Credit Fund Sub.
(8) Credit Fund receives less than the stated interest rate of this loan as a result of an agreement among lenders. The interest rate reduction is 1.25% on EIP Merger Sub, LLC (Evolve IP). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/first out loan, which has first priority ahead of the first lien/last out loan with respect to principal, interest and other payments.

 

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(9) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders as follows: EIP Merger Sub, LLC (Evolve IP) (3.91)%. Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/last out loan, which has a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.
(10) As of March 31, 2017, Credit Fund had the following unfunded commitments to fund delayed draw and revolving senior secured loans:

 

First Lien Debt—unfunded delayed draw and
revolving term loans commitments

   Type      Unused Fee     Par/
Principal
Amount
     Fair Value  

Advanced Instruments, LLC

     Revolver        1.00   $ 1,333      $ (3

Borchers, Inc.

     Revolver        1.00     1,858        5  

Diversitech Corporation

     Delayed Draw        1.00     5,000        —    

Jensen Hughes, Inc.

     Delayed Draw        0.50     1,461        (8

Jensen Hughes, Inc.

     Revolver        0.50     2,000        (11

MSHC, Inc.

     Delayed Draw        1.50     1,399        (11

PSI Services LLC

     Revolver        1.00     377        (4

QW Holding Corporation (Quala)

     Delayed Draw        1.00     4,762        33  

QW Holding Corporation (Quala)

     Revolver        1.00     4,234        29  

RelaDyne Inc.

     Delayed Draw        0.50     135        (1

RelaDyne Inc.

     Revolver        0.50     2,433        (21

T2 Systems, Inc.

     Revolver        1.00     1,955        2  

Teaching Strategies, LLC

     Revolver        1.00     1,900        (11

The Original Cakerie, Ltd. (Canada)

     Revolver        0.50     1,665        —    

Zywave, Inc.

     Revolver        0.50     1,500        3  
       

 

 

    

 

 

 

Total unfunded commitments

        $ 32,012      $ 2  
       

 

 

    

 

 

 

 

(11) As of March 31, 2017, this LIBOR loan was indexed to the 30-day LIBOR rate at 0.98%.

 

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Consolidated Schedule of Investments as of December 31, 2016

 

Investments (1)

 

Industry

 

Interest Rate (2)

  Maturity
Date
    Par/
Principal
Amount
    Amortized
Cost
(5)
    Fair
Value 
(6)
 

First Lien Debt (99.31% of fair value)

         

AM Conservation Holding Corporation (2) (3) (4)

  Energy: Electricity   L + 4.75% (1.00% Floor)     10/31/2022     $ 30,000     $ 29,721     $ 29,925  

Datapipe, Inc. (2) (3) (4) (11)

  Telecommunications   L + 4.75% (1.00% Floor)     3/15/2019       9,750       9,654       9,764  

Dimora Brands, Inc. (fka TK USA Enterprises, Inc.) (2) (3) (4) (11)

  Construction & Building   L + 4.50% (1.00% Floor)     4/4/2023       19,850       19,580       19,723  

Diversitech Corporation (2) (4) (10) (11)

  Capital Equipment   P + 3.50%     11/19/2021       14,803       14,617       14,803  

DTI Holdco, Inc. (2) (3) (4) (7)

  High Tech Industries   L + 5.25% (1.00% Floor)     9/30/2023       19,950       19,751       19,651  

DYK Prime Acquisition LLC (2) (3) (4)

  Chemicals, Plastics & Rubber   L + 4.75% (1.00% Floor)     4/1/2022       5,775       5,735       5,775  

EAG, Inc. (2) (3) (4) (11)

  Business Services   L + 4.25% (1.00% Floor)     7/28/2018       8,713       8,686       8,720  

EIP Merger Sub, LLC (Evolve IP) (2) (3) (4) (8)

  Telecommunications   L + 6.25% (1.00% Floor)     6/7/2021       22,971       22,323       22,509  

EIP Merger Sub, LLC (Evolve IP) (2) (3) (4) (9)

  Telecommunications   L + 6.25% (1.00% Floor)     6/7/2021       1,500       1,455       1,468  

Empower Payments Acquisitions,
Inc. (2) (3) (7)

  Media: Advertising, Printing & Publishing   L + 5.50% (1.00% Floor)     11/30/2023       17,500       17,154       17,279  

Generation Brands Holdings, Inc. (2) (3) (4)

  Durable Consumer Goods   L + 5.00% (1.00% Floor)     6/10/2022       19,900       19,712       20,099  

Jensen Hughes,
Inc. (2) (3) (4) (10)

  Utilities: Electric   L + 5.00% (1.00% Floor)     12/4/2021       20,409       20,188       20,327  

Kestra Financial,
Inc. (2) (3) (4)

  Banking, Finance, Insurance & Real Estate   L + 5.25% (1.00% Floor)     6/24/2022       19,900       19,632       19,814  

MSHC, Inc. (2) (3) (4) (10)

  Construction & Building   L + 5.00% (1.00% Floor)     7/19/2021       13,177       13,062       13,003  

PAI Holdco, Inc. (Parts Authority) (2) (3) (4)

  Automotive   L + 4.75% (1.00% Floor)     12/30/2022       9,950       9,886       9,950  

Pasternack Enterprises, Inc. (Infinite RF) (2) (3) (4)

  Capital Equipment   L + 5.00% (1.00% Floor)     5/27/2022       11,941       11,844       11,941  

Q Holding
Company (2) (3) (4)

  Automotive   L + 5.00% (1.00% Floor)     12/18/2021       13,964       13,828       13,941  

QW Holding Corporation (Quala) (2) (3) (4) (7) (10)

  Environmental Industries   L + 6.75% (1.00% Floor)     8/31/2022       8,975       8,413       9,030  

Restaurant Technologies, Inc. (2) (3) (4)

  Retail   L + 4.75% (1.00% Floor)     11/23/2022       23,514       23,117       23,443  

RelaDyne Inc. (2) (3) (4) (10)

  Wholesale   L + 5.25% (1.00% Floor)     7/22/2022       14,000       13,871       13,969  

Systems Maintenance Services Holding, Inc. (2) (3) (4)

  High Tech Industries   L + 5.00% (1.00% Floor)     10/30/2023       12,000       11,885       12,001  

T2 Systems Canada, Inc. (2) (3) (4) (11)

  Transportation: Consumer   L + 6.75% (1.00% Floor)     9/28/2022       2,700       2,635       2,727  

T2 Systems,
Inc. (2) (3) (4) (10) (11)

  Transportation: Consumer   L + 6.75% (1.00% Floor)     9/28/2022       15,300       14,888       15,473  

The Original Cakerie, Ltd. (Canada) (2) (3) (4) (10)

  Beverage, Food & Tobacco   L + 5.00% (1.00% Floor)     7/20/2021       7,009       6,946       7,009  

The Original Cakerie, Co. (Canada) (2) (3) (4)

  Beverage, Food & Tobacco   L + 5.50% (1.00% Floor)     7/20/2021       3,621       3,591       3,621  

U.S. Acute Care Solutions, LLC (2) (3) (4)

  Health & Pharmaceuticals   L + 5.00% (1.00% Floor)     5/15/2021       26,400       26,154       26,336  

U.S. Anesthesia Partners, Inc. (2) (3) (4)

  Health & Pharmaceuticals   L + 5.00% (1.00% Floor)     12/31/2019       10,374       10,275       10,362  

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

  Chemicals, Plastics & Rubber   L + 4.50% (1.00% Floor)     2/5/2021       17,910       17,786       17,903  

WIRB—Copernicus Group, Inc. (2) (3) (4)

  Health & Pharmaceuticals   L + 5.00% (1.00% Floor)     8/12/2022       7,980       7,916       8,050  

Zest Holdings,
LLC (2) (3) (4)

  Durable Consumer Goods   L + 4.75% (1.00% Floor)     8/16/2020       8,700       8,658       8,749  

Zywave, Inc. (2) (3) (4) (7) (10)

  High Tech Industries   L + 5.00% (1.00% Floor)     11/17/2022       17,500       17,315       17,434  
         

 

 

   

 

 

 

First Lien Debt Total

          $ 430,278     $ 434,799  
         

 

 

   

 

 

 

Second Lien Debt (0.69% of fair value)

         

Vantage Specialty Chemicals,
Inc. (2) (3) (4) (11)

  Chemicals, Plastics & Rubber   L + 8.75% (1.00% Floor)     2/5/2022     $ 2,000     $ 1,960     $ 1,987  

Zywave, Inc. (2) (3) (4)

  High Tech Industries   L + 9.00% (1.00% Floor)     11/17/2023       1,050       1,034       1,043  
         

 

 

   

 

 

 

Second Lien Debt Total

          $ 2,994     $ 3,030  
         

 

 

   

 

 

 

Total Investments

          $ 433,272     $ 437,829  
         

 

 

   

 

 

 

 

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Table of Contents
(1) Unless otherwise indicated, issuers of investments held by Credit Fund are domiciled in the United States. As of December 31, 2016, the geographical composition of investments as a percentage of fair value was 2.43% in Canada and 97.57% in the United States.
(2) Variable rate loans to the portfolio companies bear interest at a rate that may be determined by reference to either LIBOR (“L”) or an alternate base rate (commonly based on the Federal Funds Rate or the U.S. Prime Rate (“P”)), which generally resets quarterly. For each such loan, Credit Fund has provided the interest rate in effect as of December 31, 2016. As of December 31, 2016, all of Credit Fund’s LIBOR loans were indexed to the 90-day LIBOR rate at 1.00%, except for those loans as indicated in Note 11 below, and the U.S. Prime Rate loan was indexed at 3.75%.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by Credit Fund Sub. Credit Fund Sub has entered into a revolving credit facility (the “Credit Fund Sub Facility”). The lenders of the Credit Fund Sub Facility have a first lien security interest in substantially all of the assets of Credit Fund Sub. Accordingly, such assets are not available to creditors of Credit Fund.
(5) Amortized cost represents original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method.
(6) Fair value is determined in good faith by or under the direction of the board of managers of Credit Fund, pursuant to Credit Fund’s valuation policy, which is substantially similar to the valuation policy of the Company provided in “Critical Accounting Policies—Fair Value Measurements.”
(7) Denotes that all or a portion of the assets are owned by Credit Fund. Credit Fund has entered into the Credit Fund Facility. The lenders of the Credit Fund Facility have a first lien security interest in substantially all of the assets of Credit Fund. Accordingly, such assets are not available to creditors of Credit Fund Sub.
(8) Credit Fund receives less than the stated interest rate of this loan as a result of an agreement among lenders. The interest rate reduction is 1.25% on EIP Merger Sub, LLC (Evolve IP). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/first out loan, which has first priority ahead of the first lien/last out loan with respect to principal, interest and other payments.
(9) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders as follows: EIP Merger Sub, LLC (Evolve IP) (3.84%). Pursuant to the agreement among lenders in respect of this loan, this investment represents a first lien/last out loan, which has a secondary priority behind the first lien/first out loan with respect to principal, interest and other payments.
(10) As of December 31, 2016, Credit Fund had the following unfunded commitments to fund delayed draw and revolving senior secured loans:

 

First Lien Debt—unfunded delayed draw
and revolving term loans commitments

  

Type

   Unused
Fee
    Par/
Principal
Amount
     Fair
Value
 

Diversitech Corporation

  

Delayed Draw

     1.00   $ 5,000      $ —    

Jensen Hughes, Inc.

  

Revolver

     0.50     2,000        (7

Jensen Hughes, Inc.

  

Delayed Draw

     0.50     1,461        (5

MSHC, Inc.

  

Delayed Draw

     1.50     1,790        (21

QW Holding Corporation (Quala)

  

Revolver

     1.00     5,086        14  

QW Holding Corporation (Quala)

  

Delayed Draw

     1.00     5,918        17  

RelaDyne Inc.

  

Revolver

     0.50     2,162        (6

RelaDyne Inc.

  

Delayed Draw

     0.50     1,824        (5

T2 Systems, Inc.

  

Revolver

     1.00     1,955        20  

The Original Cakerie, Ltd. (Canada)

  

Revolver

     0.50     1,665        —    

Zywave, Inc.

  

Revolver

     0.50     1,500        (5
       

 

 

    

 

 

 

Total unfunded commitments

        $ 30,361      $ 2  
       

 

 

    

 

 

 

 

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(11) As of December 31, 2016, this LIBOR loan was indexed to the 30-day LIBOR rate at 0.77%.

Below is certain summarized consolidated financial information for Credit Fund as of March 31, 2017 and December 31, 2016, respectively. Credit Fund commenced operations in May 2016.

 

     March 31, 2017      December 31, 2016  
     (unaudited)         

Selected Consolidated Balance Sheet Information

     

ASSETS

     

Investments, at fair value (amortized cost of $553,401 and $433,272, respectively)

   $ 558,694      $ 437,829  

Cash and other assets

     15,088        11,326  
  

 

 

    

 

 

 

Total assets

   $ 573,782      $ 449,155  
  

 

 

    

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

     

Secured borrowings

   $ 367,375      $ 248,540  

Mezzanine loans

     86,044        62,384  

Other liabilities

     24,208        63,684  

Subordinated loans and members’ equity

     96,155        74,547  
  

 

 

    

 

 

 

Liabilities and members’ equity

   $ 573,782      $ 449,155  
  

 

 

    

 

 

 

 

     For the three month
period ended
March 31, 2017
 
     (unaudited)  

Selected Consolidated Statement of Operations Information:

  

Total investment income

   $ 8,182  
  

 

 

 

Expenses

  

Interest and credit facility expenses

     5,473  

Other expenses

     318  
  

 

 

 

Total expenses

     5,791  
  

 

 

 

Net investment income (loss)

     2,391  
  

 

 

 

Net realized gain (loss) on investments

     —    

Net change in unrealized appreciation (depreciation) on investments

     737  
  

 

 

 

Net increase (decrease) resulting from operations

   $ 3,128  
  

 

 

 

Debt

Credit Fund Facility

On June 24, 2016, Credit Fund entered into the Credit Fund Facility with us pursuant to which Credit Fund may from time to time request mezzanine loans from us. The maximum principal amount of the Credit Fund Facility is $100,000. The maturity date of the Credit Fund Facility is June 24, 2017. Amounts borrowed under the Credit Fund Facility bear interest at a rate of LIBOR plus 9.50%.

During the three months ended March 31, 2017, there were mezzanine loan borrowings of $45,660 and repayments of $22,000 under the Credit Fund Facility. As of March 31, 2017 and December 31, 2016, there were $86,044 and $62,384 in mezzanine loans outstanding, respectively.

 

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Credit Fund Sub Facility

On June 24, 2016, Credit Fund Sub closed on the Credit Fund Sub Facility with lenders. The Credit Fund Sub Facility provides for secured borrowings during the applicable revolving period up to an amount equal to $450,000, with an accordion feature that can, subject to certain conditions, increase the aggregate maximum credit commitment up to an amount not to exceed $1,400,000. The facility is secured by a first lien security interest in substantially all of the portfolio investments held by Credit Fund Sub and the Company’s and Credit Partners’ unfunded capital commitments. The maturity date of the Credit Fund Sub Facility is June 24, 2022. Amounts borrowed under the Credit Fund Sub Facility bear interest at a rate of LIBOR plus 2.50%.

During the three month period ended March 31, 2017, there were secured borrowings of $118,835 under the Credit Fund Sub Facility. As of March 31, 2017 and December 31, 2016, there was $367,375 and $248,540 in secured borrowings outstanding, respectively.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

We generate cash from the net proceeds of offerings of our common stock and through cash flows from operations, including investment sales and repayments as well as income earned on investments and cash equivalents. We may also fund a portion of our investments through borrowings under the Facilities, as well as through securitization of a portion of our existing investments.

The SPV closed on May 24, 2013 on the SPV Credit Facility, which was subsequently amended on June 30, 2014, June 19, 2015 and June 9, 2016. The SPV Credit Facility provides for secured borrowings during the applicable revolving period up to an amount equal to the lesser of $400,000 (the borrowing base as calculated pursuant to the terms of the SPV Credit Facility) and the amount of net cash proceeds and unpledged capital commitments the Company has received, with an accordion feature that can, subject to certain conditions, increase the aggregate maximum credit commitment up to an amount not to exceed $750,000, subject to restrictions imposed on borrowings under the Investment Company Act and certain restrictions and conditions set forth in the SPV Credit Facility, including adequate collateral to support such borrowings. The SPV Credit Facility imposes financial and operating covenants on us and the SPV that restrict our and its business activities. Continued compliance with these covenants will depend on many factors, some of which are beyond our control.

We closed on March 21, 2014 on the Credit Facility, which was subsequently amended on January 8, 2015, May 25, 2016 and March 22, 2017. The maximum principal amount of the Credit Facility is $283,000, subject to availability under the Credit Facility, which is based on certain advance rates multiplied by the value of the Company’s portfolio investments (subject to certain concentration limitations) net of certain other indebtedness that the Company may incur in accordance with the terms of the Credit Facility. Proceeds of the Credit Facility may be used for general corporate purposes, including the funding of portfolio investments. Maximum capacity under the Credit Facility may be increased, subject to certain conditions, to $550,000 through the exercise by the Company of an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing. The Credit Facility includes a $20,000 limit for swingline loans and a $5,000 limit for letters of credit. Subject to certain exceptions, the Credit Facility is secured by a first lien security interest in substantially all of the portfolio investments held by the Company. The Credit Facility includes customary covenants, including certain financial covenants related to asset coverage, shareholders’ equity and liquidity, certain limitations on the incurrence of additional indebtedness and liens, and other maintenance covenants, as well as usual and customary events of default for senior secured revolving credit facilities of this nature.

Although we believe that we and the SPV will remain in compliance, there are no assurances that we or the SPV will continue to comply with the covenants in the Credit Facility and SPV Credit Facility, as applicable. Failure to comply with these covenants could result in a default under the Credit Facility and/or the SPV Credit Facility that, if we or the SPV were unable to obtain a waiver from the applicable lenders, could result in the immediate acceleration of the amounts due under the Credit Facility and/or the SPV Credit Facility, and thereby have a material adverse impact on our business, financial condition and results of operations.

 

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For more information on the SPV Credit Facility and the Credit Facility, see Note 6 to the consolidated financial statements in Part II, Item 8 of this Form 10-Q.

The primary use of existing funds and any funds raised in the future is expected to be for investments in portfolio companies, repayment of indebtedness, cash distributions to our stockholders and for other general corporate purposes.

On June 26, 2015, we completed a $400 million term debt securitization (the “2015-1 Debt Securitization”). The notes offered in the Debt Securitization (the “2015-1 Notes”) were issued by Carlyle GMS Finance MM CLO 2015-1 LLC (the “2015-1 Issuer”), a wholly-owned and consolidated subsidiary of us, and are secured by a diversified portfolio of the 2015-1 Issuer consisting primarily of first and second lien senior secured loans. The 2015-1 Debt Securitization was executed through a private placement of the 2015-1 Notes, consisting of $160 million of Aaa/AAA Class A-1A Notes, which bear interest at the three-month London Interbank Offered Rate (“LIBOR”) plus 1.85%; $40 million of Aaa/AAA Class A-1B Notes, which bear interest at the three-month LIBOR plus 1.75% for the first 24 months and the three-month LIBOR plus 2.05% thereafter; $27 million of Aaa/AAA Class A-1C Notes, which bear interest at 3.75%; and $46 million of Aa2 Class A-2 Notes which bear interest at the three-month LIBOR plus 2.70%. The 2015-1 Notes were issued at par and are scheduled to mature on July 15, 2027. We received 100% of the preferred interests (the “Preferred Interests”) issued by the 2015-1 Issuer on the closing date of the 2015-1 Debt Securitization in exchange for our contribution to the Issuer of the initial closing date loan portfolio. The Preferred Interests do not bear interest and had a nominal value of $125.9 million at closing. In connection with the contribution, we have made customary representations, warranties and covenants to the 2015-1 Issuer. The Class A-1A, Class A-1B and Class A-1C and Class A-2 Notes are included in the consolidated financial statements included in Part I, Item 1 of this Form 10-Q. The Preferred Interests were eliminated in consolidation. For more information on the 2015-1 Notes, see Note 7 to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

As of March 31, 2017 and December 31, 2016, the Company had $44,874 and $38,489, respectively, in cash and cash equivalents. The Facilities consisted of the following as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017  
     Total
Facility
     Borrowings
Outstanding
     Unused
Portion (1)
     Amount
Available (2)
 

SPV Credit Facility

   $ 400,000      $ 201,108      $ 198,892      $ 10,476  

Credit Facility

     283,000        189,500        93,500        93,500  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 683,000      $ 390,608      $ 292,392      $ 103,976  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2016  
     Total
Facility
     Borrowings
Outstanding
     Unused
Portion (1)
     Amount
Available (2)
 

SPV Credit Facility

   $ 400,000      $ 252,885      $ 147,115      $ 5,988  

Credit Facility

     220,000        169,000        51,000        51,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 620,000      $ 421,885      $ 198,115      $ 56,988  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The unused portion is the amount upon which commitment fees are based.
(2) Available for borrowing based on the computation of collateral to support the borrowings and subject to compliance with applicable covenants and financial ratios.

 

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The following were the carrying values (before debt issuance costs) and fair values of the Company’s 2015-1 Notes as of March 31, 2017 and December 31, 2016:

 

     March 31, 2017      December 31, 2016  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Aaa/AAA Class A-1A Notes

   $ 160,000      $ 160,110      $ 160,000      $ 160,072  

Aaa/AAA Class A-1B Notes

     40,000        40,001        40,000        39,960  

Aaa/AAA Class A-1C Notes

     27,000        27,030        27,000        26,951  

Aa2 Class A-2 Notes

     46,000        46,027        46,000        45,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 273,000      $ 273,168      $ 273,000      $ 272,767  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity Activity

There were $51,816 and $14,300 of commitments made to us during the three month periods ended March 31, 2017 and 2016, respectively. As of March 31, 2017 and December 31, 2016, we had $1,274,174 and $1,222,358, respectively, in total capital commitments from stockholders, of which $473,514 and $421,698, respectively, was unfunded, and subject to call by the Company. As of March 31, 2017 and December 31, 2016, current directors had committed $821 in capital commitments to us.

Shares issued as of March 31, 2017 and December 31, 2016 were 41,708,155 and 41,702,318, respectively.

The following table summarizes activity in the number of shares of our common stock outstanding during the three month periods ended March 31, 2017 and 2016:

 

     For the three month periods ended  
     March 31, 2017      March 31, 2016  

Shares outstanding, beginning of period

     41,702,318        31,524,083  

Common stock issued

     —          1,815,181  

Reinvestment of dividends

     5,837        3,885  
  

 

 

    

 

 

 

Shares outstanding, end of period

     41,708,155        33,343,149  
  

 

 

    

 

 

 

Contractual Obligations

A summary of our significant contractual payment obligations was as follows as of March 31, 2017 and December 31, 2016:

 

     SPV Credit Facility and Credit Facility      2015-1 Notes  

Payment Due by Period

   March 31, 2017      December 31, 2016      March 31, 2017      December 31,2016  

Less than 1 Year

   $ —        $ —        $ —        $ —    

1-3 Years

     —          —          —          —    

3-5 Years

     390,608        421,885        —          —    

More than 5 Years

     —          —          273,000        273,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 390,608      $ 421,885      $ 273,000      $ 273,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2017 and December 31, 2016, $201,108 and $252,885, respectively, of secured borrowings were outstanding under the SPV Credit Facility, $189,500 and $169,000, respectively, were outstanding under the Credit Facility and $273,000 and $273,000, respectively, of 2015-1 Notes were outstanding. For the three month periods ended March 31, 2017 and 2016, we incurred $5,034 and $3,599, respectively, of interest expense and $292 and $361, respectively, of unused commitment fees.

 

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OFF BALANCE SHEET ARRANGEMENTS

In the ordinary course of our business, we enter into contracts or agreements that contain indemnifications or warranties. Future events could occur which may give rise to liabilities arising from these provisions against us. We believe that the likelihood of such an event is remote; however, the maximum potential exposure is unknown. No accrual has been made in these consolidated financial statements as of March 31, 2017 and December 31, 2016 included in Part I, Item 1 of this Form 10-Q for any such exposure.

We have in the past and may in the future become obligated to fund commitments such as revolving credit facilities, bridge financing commitments, or delayed draw commitments.

We had the following unfunded commitments to fund delayed draw and revolving senior secured loans as of the indicated dates:

 

     Principal Amount as of  
     March 31, 2017      December 31, 2016  

Unfunded delayed draw commitments

   $ 44,541      $ 35,704  

Unfunded revolving term loan commitments

     26,517        24,063  
  

 

 

    

 

 

 

Total unfunded commitments

   $ 71,058      $ 59,767  
  

 

 

    

 

 

 

Pursuant to an undertaking by us in connection with the 2015-1 Debt Securitization, we agreed to hold on an ongoing basis Preferred Interests with an aggregate dollar purchase price at least equal to 5% of the aggregate outstanding amount of all collateral obligations by the 2015-1 Issuer for so long as any securities of the 2015-1 Issuer remains outstanding. As of March 31, 2017, we were in compliance with this undertaking.

As of March 31, 2017, in addition to the amounts in the table above, we had remaining commitments to fund, from time to time, capital to Credit Fund of up to $354,499. As of March 31, 2017, we had remaining commitments to fund, from time to time, mezzanine loans to Credit Fund of up to $13,956, of which $10,438 was available for borrowing based on the computation of collateral to support the borrowings.

DIVIDENDS AND DISTRIBUTIONS TO COMMON STOCKHOLDERS

We have adopted a dividend reinvestment plan that provides for reinvestment of any distributions on behalf of our stockholders, for those who have elected to participate in the plan. As a result of adopting such a plan, if the Board of Directors authorizes, and we declare a cash dividend or distribution, the stockholders who have elected to participate in the dividend reinvestment plan would have their cash dividends or distributions automatically reinvested in additional shares of our common stock, rather than receiving cash. Prior to a Qualified IPO, we intend to use primarily newly issued shares of its common stock to implement the plan issued at the net asset value per share most recently determined by the Board of Directors. After a Qualified IPO, we intend to use primarily newly issued shares to implement the plan so long as the market value per share is equal to or greater than the net asset value per share as of the close of business on the relevant payment date for such dividend or distribution. If the market value per share is less than the net asset value per share as of the close of business on the relevant payment date, the plan administrator would purchase the common stock on behalf of participants in the open market, unless we instruct the plan administrator otherwise.

 

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The following table summarizes our dividends declared and payable since inception through March 31, 2017:

 

Date Declared

   Record Date    Payment Date    Per Share
Amount
    Total
Amount
     Annualized
Dividend Yield (1)
 

March 13, 2014

   March 31, 2014    April 14, 2014    $ 0.19     $ 2,449        4.76

June 26, 2014

   June 30, 2014    July 14, 2014    $ 0.27     $ 3,481        5.52

September 12, 2014

   September 18, 2014    October 9, 2014    $ 0.44     $ 5,956        9.23

December 19, 2014

   December 29, 2014    January 26, 2015    $ 0.35     $ 6,276        8.17

March 11, 2015

   March 13, 2015    April 17, 2015    $ 0.37     $ 7,833        8.58

June 24, 2015

   June 30, 2015    July 22, 2015    $ 0.37     $ 9,902        9.03

September 24, 2015

   September 24, 2015    October 22, 2015    $ 0.42     $ 11,670        8.91

December 29, 2015

   December 29, 2015    January 22, 2016    $ 0.40     $ 12,610        8.97

December 29, 2015

   December 29, 2015    January 22, 2016    $ 0.18 (2)    $ 5,674        4.03

March 10, 2016

   March 14, 2016    April 22, 2016    $ 0.40     $ 13,337        9.26

June 8, 2016

   June 8, 2016    July 22, 2016    $ 0.40     $ 13,943        9.23

September 28, 2016

   September 28, 2016    October 24, 2016    $ 0.40     $ 15,917        9.37

December 29, 2016

   December 29, 2016    January 24, 2017    $ 0.41     $ 17,098        9.09

December 29, 2016

   December 29, 2016    January 24, 2017    $ 0.07 (2)    $ 2,919        1.55

March 20, 2017

   March 20, 2017    April 24, 2017    $ 0.41     $ 17,100        9.07

 

(1) Annualized dividend yield is calculated by dividing the declared dividend by the weighted average of the net asset value at the beginning of the quarter and the capital called during the quarter and annualizing over 4 quarterly periods.
(2) Represents a special dividend.

CRITICAL ACCOUNTING POLICIES

The preparation of our consolidated financial statements requires us 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, including those relating to the valuation of our investment portfolio, are described below. The critical accounting policies should be read in connection with our consolidated financial statements in Part I, Item 1 of this Form 10-Q and in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2016.

Fair Value Measurements

The Company applies fair value accounting in accordance with the terms of Financial Accounting Standards Board ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value as the amount that would be exchanged to sell an asset or transfer a liability in an orderly transfer between market participants at the measurement date. The Company values securities/instruments traded in active markets on the measurement date by multiplying the closing price of such traded securities/instruments by the quantity of shares or amount of the instrument held. The Company may also obtain quotes with respect to certain of its investments, such as its securities/instruments traded in active markets and its liquid securities/instruments that are not traded in active markets, from pricing services, brokers, or counterparties (i.e., “consensus pricing”). When doing so, the Company determines whether the quote obtained is sufficient according to US GAAP to determine the fair value of the security. The Company may use the quote obtained or alternative pricing sources may be utilized including valuation techniques typically utilized for illiquid securities/instruments.

Securities/instruments that are illiquid or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Investment Adviser or the Board of Directors, does not represent fair value shall each be valued as of the measurement date using all

 

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techniques appropriate under the circumstances and for which sufficient data is available. These valuation techniques may vary by investment and include comparable public market valuations, comparable precedent transaction valuations and/or discounted cash flow analyses. The process generally used to determine the applicable value is as follows: (i) the value of each portfolio company or investment is initially reviewed by the investment professionals responsible for such portfolio company or investment and, for non-traded investments, a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs is used to determine a preliminary value, which is also reviewed alongside consensus pricing, where available; (ii) preliminary valuation conclusions are documented and reviewed by a valuation committee comprised of members of senior management; (iii) the Board of Directors engages a third-party valuation firm to provide positive assurance on portions of the Middle Market Senior Loans and equity investments portfolio each quarter (such that each non-traded investment other than Credit Fund is reviewed by a third-party valuation firm at least once on a rolling twelve month basis) including a review of management’s preliminary valuation and conclusion on fair value; (iv) the Audit Committee of the Board of Directors (the “Audit Committee”) reviews the assessments of the Investment Adviser and the third-party valuation firm and provides the Board of Directors with any recommendations with respect to changes to the fair value of each investment in the portfolio; and (v) the Board of Directors discusses the valuation recommendations of the Audit Committee and determines the fair value of each investment in the portfolio in good faith based on the input of the Investment Adviser and, where applicable, the third-party valuation firm.

All factors that might materially impact the value of an investment are considered, including, but not limited to the assessment of the following factors, as relevant:

 

    the nature and realizable value of any collateral;

 

    call features, put features and other relevant terms of debt;

 

    the portfolio company’s leverage and ability to make payments;

 

    the portfolio company’s public or private credit rating;

 

    the portfolio company’s actual and expected earnings and discounted cash flow;

 

    prevailing interest rates and spreads for similar securities and expected volatility in future interest rates;

 

    the markets in which the portfolio company does business and recent economic and/or market events; and

 

    comparisons to comparable transactions and publicly traded securities.

Investment performance data utilized are the most recently available financial statements and compliance certificate received from the portfolio companies as of the measurement date which in many cases may reflect a lag in information.

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 fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been reported had a ready market for the investments existed, and it is reasonably possible that the difference could be material.

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the realized gains or losses on investments to be different from the net change in unrealized appreciation or depreciation currently reflected in the consolidated financial statements as of March 31, 2017 and December 31, 2016.

US GAAP establishes a hierarchical disclosure framework which ranks the level of observability of market price inputs used in measuring investments at fair value. The observability of inputs is impacted by a number of

 

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factors, including the type of investment and the characteristics specific to the investment and state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available quoted prices or for which fair value can be measured from quoted prices in active markets generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

Investments measured and reported at fair value are classified and disclosed based on the observability of inputs used in determination of fair values, as follows:

 

    Level 1—inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date. The types of financial instruments included in Level 1 generally include unrestricted securities, including equities and derivatives, listed in active markets. The Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

 

    Level 2—inputs to the valuation methodology are either directly or indirectly observable as of the reporting date and are those other than quoted prices in active markets. The type of financial instruments in this category generally includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs.

 

    Level 3—inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in this category generally include investments in privately-held entities, collateralized loan obligations (“CLOs”), and certain over-the-counter derivatives where the fair value is based on unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the overall fair value measurement. The Investment Adviser’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur.

The Company generally uses the following framework when determining the fair value of investments that are categorized as Level 3:

Investments in debt securities are initially evaluated to determine whether the enterprise value of the portfolio company is greater than the applicable debt. The enterprise value of the portfolio company is estimated using a market approach and an income approach. The market approach utilizes market value (EBITDA) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The income approach typically uses a discounted cash flow analysis of the portfolio company.

Investments in debt securities that do not have sufficient coverage through the enterprise value analysis are valued based on an expected probability of default and discount recovery analysis.

Investments in debt securities with sufficient coverage through the enterprise value analysis are generally valued using a discounted cash flow analysis of the underlying security. Projected cash flows in the discounted

 

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cash flow typically represent the relevant security’s contractual interest, fees and principal payments plus the assumption of full principal recovery at the security’s expected maturity date. The discount rate to be used is determined using an average of two market-based methodologies. Investments in debt securities may also be valued using consensus pricing.

Investments in structured finance obligations are generally valued using a discounted cash flow and/or consensus pricing.

Investments in equities are generally valued using a market approach and/or an income approach. The market approach utilizes EBITDA multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The income approach typically uses a discounted cash flow analysis of the portfolio company.

Investments in Credit Fund’s subordinated loan and member’s interest are valued using the net asset value of the Company’s ownership interest in the funds and investments in Credit Fund’s mezzanine loans are valued using discounted cash flow analysis with expected repayment rate of principal and interest.

The significant unobservable inputs used in the fair value measurement of the Company’s investments in first and second lien debt securities are discount rates, indicative quotes and comparable EBITDA multiples. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in indicative quotes or comparable EBITDA multiples in isolation may result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s investments in structured finance obligations are discount rates, default rates, prepayment rates, recovery rates and indicative quotes. Significant increases in discount rates, default rates or prepayment rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value. Significant decreases in indicative quotes in isolation may result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s investments in equities are discount rates and comparable EBITDA multiples. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in comparable EBITDA multiples would result in a significantly lower fair value measurement.

The carrying values of the secured borrowings and 2015-1 Notes approximate their respective fair values and are categorized as Level 3 within the hierarchy. Secured borrowings are valued generally using discounted cash flow analysis. The significant unobservable inputs used in the fair value measurement of the Company’s secured borrowings are discount rates. Significant increases in discount rates would result in a significantly lower fair value measurement. The fair value determination of the Company’s 2015-1 Notes was based on the market quotation(s) received from broker/dealer(s). These fair value measurements were based on significant inputs not observable and thus represent Level 3 measurements as defined in the accounting guidance for fair value measurement.

The carrying value of other financial assets and liabilities approximates their fair value based on the short term nature of these items.

See Note 3 to the consolidated financial statements in Part I, Item 1 of this Form 10-Q for further information on fair value measurements.

 

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Use of Estimates

The preparation of consolidated financial statements in Part I, Item 1 of this Form 10-Q in conformity with US GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on base management and incentive fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the consolidated financial statements in Part I, Item 1 of this Form 10-Q. Actual results could differ from these estimates and such differences could be material.

Investments

Investment transactions are recorded on the trade date. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment using the specific identification method without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation on investments as presented in the Consolidated Statements of Operations in Part I, Item 1 of this Form 10-Q reflects the net change in the fair value of investments, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

Revenue Recognition

Interest from Investments and Realized Gain/Loss on Investments

Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on debt investments purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost, including origination fees and upfront fees received that are deemed to be an adjustment to yield, adjusted for the accretion of discounts and amortization of premiums, if any. At time of exit, the realized gain or loss on an investment is the difference between the amortized cost at time of exit and the cash received at exit using the specific identification method.

The Company may have loans in its portfolio that contain payment-in-kind (“PIK”) provisions. PIK represents interest that is accrued and recorded as interest income at the contractual rates, increases the loan principal on the respective capitalization dates, and is generally due at maturity.

Interest income from investments in the “equity” class of CLO funds, which we refer to as “structured finance obligations”, is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financials Assets. We monitor the expected cash inflows from our CLO equity investments, including the expected residual payments and the effective yield is determined and updated at least quarterly. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties, including the amount and timing of principal payments which are impacted by prepayments, repurchases, defaults, delinquencies and liquidations of or within the CLO funds. These uncertainties are difficult to predict and are subject to future events that could have impacted the Company’s estimates if the information was known at the time. As a result, actual results may differ significantly from these estimates.

 

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Dividend Income

Dividend income from the investment fund is recorded on the record date for the investment fund to the extent that such amounts are payable by the investment fund and are expected to be collected.

Other Income

Other income may include income such as consent, waiver, amendment, syndication and prepayment fees associated with the Company’s investment activities as well as any fees for managerial assistance services rendered by the Company to the portfolio companies. Such fees are recognized as income when earned or the services are rendered. The Company may receive fees for guaranteeing the outstanding debt of a portfolio company. Such fees are amortized into other income over the life of the guarantee. The unamortized amount, if any, is included in other assets in the Consolidated Statements of Assets and Liabilities included in Part I, Item 1 of this Form 10-Q.

Non-Accrual Income

Loans are generally placed on non-accrual status 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 in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid current and, in management’s judgment, are likely to remain current. Management may not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. As of March 31, 2017, the fair value of the loan in the portfolio on non-accrual status was $8,858, which represents approximately 0.6% of total investments at fair value. The remaining first and second lien debt investments were performing and current on their interest payments as of March 31, 2017. All first and second lien debt investments were performing and current on their interest payments as of March 31, 2016.

Income Taxes

For federal income tax purposes, the Company has elected to be treated as a RIC under the Code, and intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, the Company must meet certain minimum distribution, source-of-income and asset diversification requirements. If such requirements are met, then the Company is generally required to pay income taxes only on the portion of its taxable income and gains it does not distribute.

The minimum distribution requirements applicable to RICs require the Company to distribute to its stockholders at least 90% of its investment company taxable income (“ICTI”), as defined by the Code, each year. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

In addition, based on the excise distribution requirements, the Company is subject to a 4% nondeductible federal excise tax on undistributed income unless the Company distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year. For this purpose, however, any ordinary income or capital gain net income retained by the Company that is subject to corporate income tax is considered to have been distributed. The Company intends to make sufficient distributions each taxable year to satisfy the excise distribution requirements.

 

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The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are “more-likely than not” to be sustained by the applicable tax authority. All penalties and interest associated with income taxes, if any, are included in income tax expense.

The SPV and the 2015-1 Issuer are disregarded entities for tax purposes and are consolidated with the tax return of the Company.

Capital Calls and Dividends and Distributions to Common Stockholders

The Company records the shares issued in connection with capital calls as of the effective date of the capital call. To the extent that the Company has taxable income available, the Company intends to make quarterly distributions to its common stockholders. Dividends and distributions to common stockholders are recorded on the record date. The amount to be distributed is determined by the Board of Directors each quarter and is generally based upon the taxable earnings estimated by management and available cash. Net realized capital gains, if any, are generally distributed at least annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions on behalf of its stockholders, for those who have elected to participate in the plan. As a result of adopting such a plan, if the Board of Directors authorizes, and the Company declares, a cash dividend or distribution, the stockholders who have elected to participate in the dividend reinvestment plan would have their cash dividends or distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving cash. Prior to a Qualified IPO, the Company intends to use primarily newly issued shares of its common stock to implement the plan issued at the net asset value per share most recently determined by the Board of Directors. After a Qualified IPO, the Company intends to use primarily newly issued shares to implement the plan so long as the market value per share is equal to or greater than the net asset value per share as of the close of business on the relevant payment date for such dividend or distribution. If the market value per share is less than the net asset value per share as of the close of business on the relevant payment date, the plan administrator would purchase the common stock on behalf of participants in the open market, unless the Company instructs the plan administrator otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in the valuations of our investment portfolio and interest rates.

Valuation Risk

Our investments may not have a readily available market price, and we value these investments at fair value as determined in good faith by our Board of Directors in accordance with our valuation policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. 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 our investments may fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been used had a ready market for the investments existed, and it is possible that the difference could be material.

 

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Interest Rate Risk

As of March 31, 2017, on a fair value basis, approximately 1% of our debt investments bear interest at a fixed rate and approximately 99% of our debt investments bear interest at a floating rate, which primarily are subject to interest rate floors. Interest rates on the investments held within our portfolio of investments are typically based on floating LIBOR, with many of these investments also having a LIBOR floor. Additionally, our Facilities are also subject to floating interest rates and are currently paid based on floating LIBOR rates.

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. There can be no assurance that a significant change in market interest rates will not have a material adverse effect on our income in the future.

The following table estimates the potential changes in net cash flow generated from interest income, should interest rates increase or decrease by 100, 200 or 300 basis points. Interest income is calculated as revenue from interest generated from our settled portfolio of investments held as of March 31, 2017 and December 31, 2016, excluding structured finance obligations and Credit Fund. These hypothetical calculations are based on a model of the settled investments in our portfolio, excluding structured finance obligations and Credit Fund, held as of March 31, 2017 and December 31, 2016, and are only adjusted for assumed changes in the underlying base interest rates and the impact of that change on interest income. Interest expense is calculated based on outstanding secured borrowings and 2015-1 Notes as of March 31, 2017 and December 31, 2016 and based on the terms of our Facilities and 2015-1 Notes. Interest expense on our Facilities and 2015-1 Notes is calculated using the interest rate as of March 31, 2017 and December 31, 2016, adjusted for the hypothetical changes in rates, as shown below. We intend to continue to finance a portion of our investments with borrowings and the interest rates paid on our borrowings may impact significantly our net interest income.

We regularly measure exposure to interest rate risk. We assess interest rate risk and manage interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on that review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates.

Based on our Consolidated Statements of Assets and Liabilities as of March 31, 2017 and December 31, 2016, the following table shows the annual impact on net investment income of base rate changes in interest rates for our settled investments (considering interest rate floors for variable rate instruments), excluding structured finance obligations and Credit Fund, and outstanding secured borrowings and 2015-1 Notes assuming no changes in our investment and borrowing structure:

 

     As of March 31, 2017      As of December 31, 2016  

Basis Point Change

   Interest
Income
    Interest
Expense
    Net
Investment
Income
     Interest
Income
    Interest
Expense
    Net
Investment
Income
 

Up 300 basis points

   $ 39,057     $ (19,098   $ 19,959      $ 40,324     $ (20,037   $ 20,287  

Up 200 basis points

   $ 26,484     $ (12,732   $ 13,752      $ 26,848     $ (13,358   $ 13,490  

Up 100 basis points

   $ 13,910     $ (6,366   $ 7,544      $ 13,372     $ (6,679   $ 6,693  

Down 100 basis points

   $ (1,495   $ 6,333     $ 4,838      $ (132   $ 6,282     $ 6,150  

Down 200 basis points

   $ (1,495   $ 7,002     $ 5,507      $ (132   $ 6,282     $ 6,150  

Down 300 basis points

   $ (1,495   $ 7,002     $ 5,507      $ (132   $ 6,282     $ 6,150  

Item 4. Controls and Procedures.

Evaluation of Disclosure 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 (Principal Executive Officer) and our Chief Financial Officer and Treasurer (Principal Financial Officer), of the effectiveness of the design and

 

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operation of our disclosure controls and procedures (as defined in Rule 13a-15 of Exchange Act). Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer and Treasurer have concluded that our current disclosure controls and procedures are effective in timely alerting them of material information relating to the Company that is required to be disclosed by us in the reports we file or submit under the Exchange Act.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting during the three month period ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company may become party to certain lawsuits in the ordinary course of business. The Company is not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against the Company. See also Note 11 to the consolidated financial statements in Part I, Item 1 of this Form 10-Q.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2016. For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 21, 2017, which is accessible on the SEC’s website at sec.gov.

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

Except as previously reported by the Company on Form 8-K, we did not sell any equity securities during the period covered in this report that were not registered under the Securities Act of 1933, as amended.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not Applicable.

Item 6. Exhibits.

 

10.1    Third Amendment, dated as of March 22, 2017, to the Senior Secured Revolving Credit Agreement, dated as of March 21, 2014.*
31.1    Certification of Chief Executive Officer (Principal Executive Officer) Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2    Certification of Chief Financial Officer (Principal Financial Officer) Pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
32.1    Certification of Chief Executive Officer (Principal Executive Officer) Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2    Certification of Chief Financial Officer (Principal Financial Officer) Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

* Filed herewith

 

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SIGNATURES

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

 

 

TCG BDC, INC.

Dated: May 10, 2017

  By   

/s/ Venugopal Rathi

    

Venugopal Rathi

Chief Financial Officer

(principal financial and accounting officer)

 

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