Investcorp Credit Management BDC, Inc. - Quarter Report: 2023 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 814-01054
INVESTCORP CREDIT MANAGEMENT BDC, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland |
46-2883380 |
(State or other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
280 Park Avenue
39th Floor
New York, NY 10017
(Address of Principal Executive Offices) (Zip Code)
(212) 599-4700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
Non-accelerated filer |
☒ |
Smaller reporting company |
☐ |
|
|
Emerging growth company |
☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
Common Stock, par value $0.001 per share |
|
ICMB |
|
The NASDAQ Global Select Market |
The number of shares of the issuer’s Common Stock, $0.001 par value per share, outstanding as of November 13, 2023 was 14,394,916.
|
|
Page |
PART I. FINANCIAL INFORMATION |
|
|
|
|
|
Item 1. |
Financial Statements |
|
|
1 |
|
|
2 |
|
|
3 |
|
|
4 |
|
|
Consolidated Schedule of Investments as of September 30, 2023 (unaudited) |
5 |
|
9 |
|
|
13 |
|
|
|
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 |
|
|
|
Item 3. |
43 |
|
|
|
|
Item 4. |
44 |
|
|
|
|
PART II. OTHER INFORMATION |
|
|
|
|
|
Item 1. |
45 |
|
|
|
|
Item 1A. |
45 |
|
|
|
|
Item 2. |
45 |
|
|
|
|
Item 3. |
45 |
|
|
|
|
Item 4. |
45 |
|
|
|
|
Item 5. |
45 |
|
|
|
|
Item 6. |
46 |
|
|
|
|
47 |
||
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Assets and Liabilities
|
|
September 30, 2023 |
|
|
|
|
|
|
(Unaudited) |
|
June 30, 2023 |
||
Assets |
|
|
|
|
|
|
Non-controlled, non-affiliated investments, at fair value (amortized cost of |
|
$ |
214,626,088 |
|
$ |
210,150,018 |
Affiliated investments, at fair value (amortized cost of $23,940,980 and |
|
|
8,778,195 |
|
|
9,961,311 |
Total investments, at fair value (amortized cost of $249,903,799 and $243,298,816, |
|
|
223,404,283 |
|
|
220,111,329 |
Cash |
|
|
90,773 |
|
|
1,093,758 |
Cash, restricted |
|
|
14,204,127 |
|
|
8,057,458 |
Principal receivable |
|
|
191,298 |
|
|
93,581 |
Interest receivable |
|
|
1,615,135 |
|
|
2,041,877 |
Payment-in-kind interest receivable |
|
|
25,738 |
|
|
46,088 |
Other receivables |
|
|
1,050 |
|
|
1,050 |
Prepaid expenses and other assets |
|
|
225,456 |
|
|
361,719 |
Total Assets |
|
$ |
239,757,860 |
|
$ |
231,806,860 |
Liabilities |
|
|
|
|
|
|
Notes payable: |
|
|
|
|
|
|
Revolving credit facility |
|
$ |
69,000,000 |
|
$ |
71,900,000 |
2026 Notes payable |
|
|
65,000,000 |
|
|
65,000,000 |
Deferred debt issuance costs |
|
|
(1,047,222) |
|
|
(1,220,556) |
Unamortized discount |
|
|
(177,775) |
|
|
(195,553) |
Notes payable, net |
|
|
132,775,003 |
|
|
135,483,891 |
Payable for investments purchased |
|
|
14,841,875 |
|
|
1,795,297 |
Dividend payable |
|
|
2,158,926 |
|
|
2,590,520 |
Income-based incentive fees payable |
|
|
576,023 |
|
|
576,023 |
Base management fees payable |
|
|
1,798,508 |
|
|
906,218 |
Interest payable |
|
|
3,007,074 |
|
|
2,293,766 |
Directors' fees payable |
|
|
5,130 |
|
|
15,755 |
Accrued expenses and other liabilities |
|
|
734,504 |
|
|
445,082 |
Total Liabilities |
|
|
155,897,043 |
|
|
144,106,552 |
Net Assets |
|
|
|
|
|
|
Common stock, par value $0.001 per share (100,000,000 shares authorized 14,392,841 |
|
|
14,393 |
|
|
14,392 |
Additional paid-in capital |
|
|
203,331,510 |
|
|
203,327,714 |
Distributable earnings (loss) |
|
|
(119,485,086) |
|
|
(115,641,798) |
Total Net Assets |
|
|
83,860,817 |
|
|
87,700,308 |
Total Liabilities and Net Assets |
|
$ |
239,757,860 |
|
$ |
231,806,860 |
Net Asset Value Per Share |
|
$ |
5.83 |
|
$ |
6.09 |
See notes to unaudited consolidated financial statements.
1
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
|
|
For the three months ended September 30, |
||||
|
|
2023 |
|
2022 |
||
Investment Income: |
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
$ |
5,465,288 |
|
$ |
5,609,112 |
Affiliated investments |
|
|
— |
|
|
(20,611) |
Total interest income |
|
|
5,465,288 |
|
|
5,588,501 |
Payment in-kind interest income |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
|
81,381 |
|
|
164,734 |
Affiliated investments |
|
|
18,800 |
|
|
17,004 |
Total payment-in-kind interest income |
|
|
100,181 |
|
|
181,738 |
Dividend income |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
|
— |
|
|
— |
Affiliated investments |
|
|
— |
|
|
— |
Total dividend income |
|
|
— |
|
|
— |
Payment in-kind dividend income |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
|
188,251 |
|
|
166,449 |
Affiliated investments |
|
|
— |
|
|
— |
Total payment-in-kind dividend income |
|
|
188,251 |
|
|
166,449 |
Other fee income |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
|
143,986 |
|
|
361,850 |
Affiliated investments |
|
|
— |
|
|
— |
Total other fee income |
|
|
143,986 |
|
|
361,850 |
Total investment income |
|
|
5,897,706 |
|
|
6,298,538 |
Expenses: |
|
|
|
|
|
|
Interest expense |
|
|
2,215,183 |
|
|
1,792,008 |
Base management fees |
|
|
978,919 |
|
|
1,103,981 |
Income-based incentive fees |
|
|
— |
|
|
(147,145) |
Provision for tax expense |
|
|
100,747 |
|
|
44,330 |
Professional fees |
|
|
227,407 |
|
|
271,781 |
Allocation of administrative costs from Adviser |
|
|
263,375 |
|
|
375,900 |
Amortization of deferred debt issuance costs |
|
|
173,333 |
|
|
173,333 |
Amortization of original issue discount - 2026 Notes |
|
|
17,777 |
|
|
17,777 |
Insurance expense |
|
|
112,984 |
|
|
137,821 |
Directors' fees |
|
|
73,375 |
|
|
75,625 |
Custodian and administrator fees |
|
|
69,292 |
|
|
71,688 |
Other expenses |
|
|
124,277 |
|
|
139,481 |
Total expenses |
|
|
4,356,669 |
|
|
4,056,580 |
Waiver of base management fees |
|
|
(86,630) |
|
|
(94,146) |
Waiver of income-based incentive fees |
|
|
— |
|
|
— |
Net expenses |
|
|
4,270,039 |
|
|
3,962,434 |
Net investment income |
|
|
1,627,667 |
|
|
2,336,104 |
Net realized and unrealized gain/(loss) on investments: |
|
|
|
|
|
|
Net realized gain (loss) from investments |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
|
— |
|
|
— |
Affiliated investments |
|
|
— |
|
|
— |
Net realized gain (loss) from investments |
|
|
— |
|
|
— |
Net change in unrealized appreciation (depreciation) in value of investments |
|
|
|
|
|
|
Non-controlled, non-affiliated investments |
|
|
(2,167,498) |
|
|
(464,275) |
Affiliated investments |
|
|
(1,144,531) |
|
|
(214,322) |
Net change in unrealized appreciation (depreciation) on investments |
|
|
(3,312,029) |
|
|
(678,597) |
Total realized gain (loss) and change in unrealized appreciation (depreciation) on investments |
|
|
(3,312,029) |
|
|
(678,597) |
Net increase (decrease) in net assets resulting from operations |
|
$ |
(1,684,362) |
|
$ |
1,657,507 |
Basic and diluted: |
|
|
|
|
|
|
Net investment income per share |
|
$ |
0.11 |
|
$ |
0.16 |
Earnings per share |
|
$ |
(0.12) |
|
$ |
0.12 |
Weighted average shares of common stock outstanding |
|
|
14,392,714 |
|
|
14,386,809 |
Distributions paid per common share |
|
$ |
0.15 |
|
$ |
0.15 |
See notes to unaudited consolidated financial statements.
2
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Changes in Net Assets (Unaudited)
|
|
For the three months ended September 30, |
||||
|
|
2023 |
|
2022 |
||
Net assets at beginning of period |
|
$ |
87,700,308 |
|
$ |
93,509,392 |
Net increase (decrease) in net assets resulting from operations: |
|
|
|
|
|
|
Net investment income |
|
|
1,627,667 |
|
|
2,336,104 |
Net realized gain (loss) from investments |
|
|
— |
|
|
— |
Net change in unrealized appreciation (depreciation) on investments |
|
|
(3,312,029) |
|
|
(678,597) |
Net increase (decrease) in net assets resulting from operations |
|
|
(1,684,362) |
|
|
1,657,507 |
|
|
|
|
|
|
|
Stockholder distributions: |
|
|
|
|
|
|
Distributions from net investment income |
|
|
(2,158,926) |
|
|
(2,158,042) |
Distributions from capital gains |
|
|
— |
|
|
— |
Net decrease in net assets resulting from stockholder distributions |
|
|
(2,158,926) |
|
|
(2,158,042) |
|
|
|
|
|
|
|
Capital transactions: |
|
|
|
|
|
|
Issuance of common shares ($0 and $0, respectively) |
|
|
— |
|
|
— |
Reinvestments of stockholder distributions |
|
|
3,797 |
|
|
4,763 |
Net increase (decrease) in net assets resulting from capital transactions |
|
|
3,797 |
|
|
4,763 |
Net increase (decrease) in net assets |
|
|
(3,839,491) |
|
|
(495,772) |
Net assets at end of period |
|
$ |
83,860,817 |
|
$ |
93,013,620 |
See notes to unaudited consolidated financial statements.
3
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
|
|
For the three months ended September 30, |
||||
|
|
2023 |
|
2022 |
||
Cash Flows from Operating Activities |
|
|
|
|
|
|
Net increase (decrease) in net assets resulting from operations |
|
$ |
(1,684,362) |
|
$ |
1,657,507 |
Adjustments to reconcile net increase (decrease) in net assets resulting from |
|
|
|
|
|
|
Origination and purchase of investments |
|
|
(16,226,507) |
|
|
(21,814,275) |
Payment in-kind interest and dividends |
|
|
(308,782) |
|
|
(333,580) |
Sales and repayments of investments |
|
|
10,317,357 |
|
|
16,476,699 |
Net realized (gain) loss on investments |
|
|
— |
|
|
— |
Net change in unrealized appreciation/depreciation on investments |
|
|
3,312,029 |
|
|
678,597 |
Amortization of discount/premium on investments |
|
|
(387,051) |
|
|
(501,016) |
Amortization of deferred debt issuance costs |
|
|
173,334 |
|
|
173,333 |
Amortization of original issue discount |
|
|
17,778 |
|
|
17,778 |
Net (increase) decrease in operating assets: |
|
|
|
|
|
|
Interest receivable |
|
|
426,742 |
|
|
366,854 |
Payment-in-kind interest receivable |
|
|
20,350 |
|
|
(14,607) |
Receivable for investments sold |
|
|
— |
|
|
(3,790,703) |
Principal receivable |
|
|
(97,717) |
|
|
— |
Prepaid expenses and other assets |
|
|
136,263 |
|
|
144,719 |
Net increase (decrease) in operating liabilities: |
|
|
|
|
|
|
Payable for investments purchased |
|
|
13,046,578 |
|
|
(221,531) |
Interest payable |
|
|
713,308 |
|
|
1,009,235 |
Directors fees payable |
|
|
(10,625) |
|
|
(875) |
Accrued expenses and other liabilities |
|
|
289,422 |
|
|
222,344 |
Base management fees payable |
|
|
892,290 |
|
|
1,009,835 |
Income-based incentive fees payable |
|
|
— |
|
|
(147,145) |
Net cash (used in) provided by operating activities |
|
|
10,630,407 |
|
|
(5,066,831) |
Cash Flows from Financing Activities: |
|
|
|
|
|
|
Distributions to stockholders |
|
|
(2,586,723) |
|
|
(2,153,109) |
Proceeds from borrowing on revolving financing facility |
|
|
3,600,000 |
|
|
19,500,000 |
Repayments of borrowing on revolving financing facility |
|
|
(6,500,000) |
|
|
(14,000,000) |
Net cash (used in) provided by financing activities |
|
|
(5,486,723) |
|
|
3,346,891 |
Net change in cash |
|
|
5,143,684 |
|
|
(1,719,940) |
Cash: |
|
|
|
|
|
|
Cash and restricted cash at beginning of period(1) |
|
|
9,151,216 |
|
|
9,155,077 |
Cash and restricted cash at end of period(2) |
|
$ |
14,294,900 |
|
$ |
7,435,137 |
Supplemental and non-cash financing cash flow information: |
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,501,875 |
|
$ |
782,733 |
Cash paid for taxes |
|
$ |
2,150 |
|
$ |
4,330 |
Issuance of shares pursuant to Dividend Reinvestment Plan |
|
$ |
3,797 |
|
$ |
4,763 |
Non-cash purchase of investments |
|
$ |
(890,312) |
|
$ |
65,281 |
Non-cash sale of investments |
|
$ |
890,312 |
|
$ |
(65,281) |
See notes to unaudited consolidated financial statements.
4
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments
(Unaudited)
September 30, 2023
Investments*(1)(2) |
|
|
Industry |
|
Interest Rate |
|
Initial Acquisition Date |
|
Maturity Date |
|
Principal Amount/ Shares(3) |
|
Amortized Cost |
|
Fair Value |
|
% of |
||||
Non-Controlled/Non-Affiliated Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
4L Technologies, Inc. |
|
|
Electronic Equipment, Instruments & Components |
|
3M S + 7.50% + 1.50% PIK (1.00% Floor) |
|
2/4/2020 |
|
6/30/2025 |
|
$ |
1,138,303 |
|
$ |
1,138,303 |
|
$ |
1,175,298 |
|
1.40 |
% |
Advanced Solutions International |
(10) |
|
Software |
|
3M S + 6.00% (1.00% Floor) |
|
9/1/2020 |
|
9/16/2025 |
|
|
6,656,250 |
|
|
6,590,499 |
|
|
6,656,250 |
|
7.94 |
% |
AHF Parent Holding, Inc. |
(10) |
|
Building Products |
|
3M S + 6.25% (0.75% Floor) |
|
2/9/2022 |
|
2/1/2028 |
|
|
4,625,000 |
|
|
4,595,898 |
|
|
4,474,688 |
|
5.34 |
% |
ALCV Purchaser, Inc. |
(10) |
|
Specialty Retail |
|
1M S + 6.75% (1.00% Floor) |
|
3/1/2021 |
|
4/15/2026 |
|
|
5,150,000 |
|
|
5,106,141 |
|
|
5,059,875 |
|
6.03 |
% |
AMCP Clean Acquisition Company, LLC |
(10) |
|
Hotels, Restaurants, and Leisure |
|
3M S + 4.25% |
|
4/6/2023 |
|
7/10/2025 |
|
|
7,711,459 |
|
|
7,023,148 |
|
|
7,171,658 |
|
8.55 |
% |
Amerequip, LLC |
(10) |
|
Machinery |
|
6M S + 7.40% (1.00% Floor) |
|
9/1/2022 |
|
8/31/2027 |
|
|
4,304,516 |
|
|
4,268,664 |
|
|
4,347,561 |
|
5.18 |
% |
American Auto Auction Group, LLC |
(10) |
|
Automotive Retail |
|
3M S + 5.00% (1.00% Floor) |
|
4/12/2023 |
|
12/30/2027 |
|
|
4,228,481 |
|
|
3,892,953 |
|
|
4,017,057 |
|
4.79 |
% |
American Nuts Holdings, LLC - Term Loan A |
(3)(9)(10) |
|
Consumer Staples Distribution & Retail |
|
3M S + 6.75% + 3.00% PIK (1.00% Floor) |
|
4/4/2022 |
|
4/10/2026 |
|
|
3,788,372 |
|
|
3,760,262 |
|
|
2,803,395 |
|
3.34 |
% |
American Nuts Holdings, LLC - Term Loan B |
(3)(9)(10) |
|
Consumer Staples Distribution & Retail |
|
3M S + 8.75% + 3.00% PIK (1.00% Floor) |
|
4/4/2022 |
|
4/10/2026 |
|
|
3,788,372 |
|
|
3,759,975 |
|
|
2,803,395 |
|
3.34 |
% |
American Teleconferencing Services, Ltd. (d/b/a Premiere Global Services, Inc.) - Revolver |
(6)(9) |
|
Software |
|
P + 5.50% (1.00% Floor) |
|
5/6/2016 |
|
4/7/2023 |
|
|
1,736,618 |
|
|
1,718,794 |
|
|
247,468 |
|
0.30 |
% |
Arborworks Acquisition LLC |
(6)(9)(10) |
|
Commercial Services & Supplies |
|
1M S + 7.00% + 3.00% PIK (1.00% Floor) |
|
11/24/2021 |
|
11/9/2026 |
|
|
8,026,560 |
|
|
7,971,487 |
|
|
5,056,733 |
|
6.03 |
% |
Arborworks Acquisition LLC - Revolver |
(4)(6)(9) |
|
Commercial Services & Supplies |
|
3M L + 7.00% (1.00% Floor) |
|
11/24/2021 |
|
11/9/2026 |
|
|
1,854,991 |
|
|
1,854,991 |
|
|
1,168,644 |
|
1.39 |
% |
Archer Systems, LLC |
(10) |
|
Professional Services |
|
3M S + 6.00% (1.00% Floor) |
|
8/11/2022 |
|
8/11/2027 |
|
|
4,615,040 |
|
|
4,577,192 |
|
|
4,661,190 |
|
5.56 |
% |
Axiom Global Inc. |
(10) |
|
Consumer Services |
|
1M S + 4.75% (0.75% Floor) |
|
9/12/2023 |
|
10/1/2026 |
|
|
4,987,047 |
|
|
4,915,981 |
|
|
4,915,732 |
|
5.86 |
% |
Bioplan USA, Inc. - Take-Back Term Loan |
(3) |
|
Containers & Packaging |
|
3M S + 3.25% + 5.00% PIK (4.00% Floor) |
|
3/8/2023 |
|
3/8/2028 |
|
|
5,678,667 |
|
|
5,389,020 |
|
|
5,380,537 |
|
6.42 |
% |
Bioplan USA, Inc. - Priority Term Loan |
|
|
Containers & Packaging |
|
3M S + 10.00% (4.00% Floor) |
|
2/28/2023 |
|
3/8/2027 |
|
|
3,367,275 |
|
|
3,431,785 |
|
|
3,602,984 |
|
4.30 |
% |
CareerBuilder, LLC |
(9)(10) |
|
Professional Services |
|
6M S + 6.75% (1.00% Floor) |
|
7/27/2017 |
|
7/31/2026 |
|
|
5,826,767 |
|
|
5,818,693 |
|
|
2,418,108 |
|
2.88 |
% |
Congruex Group LLC |
(10) |
|
Construction & Engineering |
|
3M S + 5.75% (0.75% Floor) |
|
9/27/2023 |
|
5/3/2029 |
|
|
3,989,899 |
|
|
3,935,038 |
|
|
3,937,532 |
|
4.69 |
% |
Cook & Boardman Group, LLC |
(10) |
|
Trading Companies & Distributors |
|
1M S + 5.75% (1.00% Floor) |
|
10/12/2018 |
|
10/17/2025 |
|
|
9,522,126 |
|
|
9,486,949 |
|
|
9,474,516 |
|
11.30 |
% |
Crafty Apes, LLC |
(10)(13) |
|
Entertainment |
|
6M S + 7.06% (1.00% Floor) |
|
12/23/2021 |
|
11/1/2024 |
|
|
8,000,000 |
|
|
7,966,479 |
|
|
7,600,000 |
|
9.06 |
% |
Easy Way Leisure Corporation |
(10) |
|
Household Durables |
|
3M S + 7.00% (1.00% Floor) |
|
8/2/2021 |
|
1/15/2026 |
|
|
7,785,555 |
|
|
7,721,873 |
|
|
7,766,091 |
|
9.26 |
% |
Empire Office Inc. |
(10) |
|
Trading Companies & Distributors |
|
1M S + 6.75% (1.50% Floor) |
|
3/28/2019 |
|
4/12/2024 |
|
|
11,770,853 |
|
|
11,734,027 |
|
|
11,770,853 |
|
14.04 |
% |
Evergreen North America Acquisitions, LLC |
(10) |
|
Machinery |
|
1M S + 6.75% (1.00% Floor) |
|
7/26/2022 |
|
8/13/2026 |
|
|
4,455,992 |
|
|
4,388,427 |
|
|
4,411,432 |
|
5.26 |
% |
Evergreen North America Acquisitions, LLC - Revolver |
(4) |
|
Machinery |
|
3M S + 6.75% (1.00% Floor) |
|
7/26/2022 |
|
8/13/2026 |
|
|
211,107 |
|
|
211,107 |
|
|
208,996 |
|
0.25 |
% |
Flatworld Intermediate Corporation |
(10) |
|
IT Services |
|
3M S + 6.50% (1.00% Floor) |
|
10/3/2022 |
|
10/1/2027 |
|
|
2,252,027 |
|
|
2,213,570 |
|
|
2,139,426 |
|
2.55 |
% |
Fleetpride, Inc. |
(10) |
|
Trading Companies & Distributors |
|
3M S + 4.50% (5.00% Floor) |
|
9/27/2023 |
|
9/1/2028 |
|
|
3,000,000 |
|
|
2,968,125 |
|
|
3,000,000 |
|
3.58 |
% |
See notes to unaudited consolidated financial statements.
5
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments - (continued)
(Unaudited)
September 30, 2023
Investments*(1)(2) |
|
|
Industry |
|
Interest Rate |
|
Initial Acquisition Date |
|
Maturity Date |
|
Principal Amount/ Shares(3) |
|
Amortized Cost |
|
Fair Value |
|
% of |
||||
Senior Secured First Lien Debt Investments, continued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
INW Manufacturing, LLC |
(10) |
|
Food Products |
|
3M S + 5.75% (0.75% Floor) |
|
5/5/2021 |
|
3/25/2027 |
|
$ |
4,500,000 |
|
$ |
4,411,663 |
|
$ |
4,005,000 |
|
4.78 |
% |
Klein Hersh, LLC |
(3)(9)(10)(11) |
|
Professional Services |
|
3M S + 4.63% + 6.77% PIK (0.50% Floor) |
|
4/21/2022 |
|
4/27/2027 |
|
|
10,180,038 |
|
|
10,067,405 |
|
|
6,617,024 |
|
7.89 |
% |
LABL, INC. |
(10) |
|
Paper Packaging |
|
1M S + 5.00% (0.50% Floor) |
|
9/27/2023 |
|
10/29/2028 |
|
|
3,000,000 |
|
|
3,000,000 |
|
|
3,000,000 |
|
3.58 |
% |
LaserAway Intermediate Holdings II, LLC |
(10) |
|
Diversified Consumer Services |
|
3M S + 5.75% (0.75% Floor) |
|
10/12/2021 |
|
10/14/2027 |
|
|
7,250,052 |
|
|
7,173,152 |
|
|
7,250,052 |
|
8.65 |
% |
NWN Parent Holdings LLC |
(10) |
|
IT Services |
|
3M S + 8.00% (1.00% Floor) |
|
5/5/2021 |
|
5/7/2026 |
|
|
8,402,893 |
|
|
8,354,088 |
|
|
8,486,922 |
|
10.12 |
% |
Potpourri Group, Inc. |
(10) |
|
Internet & Direct Marketing Retail |
|
1M S + 8.25% (1.50% Floor) |
|
6/27/2019 |
|
7/3/2024 |
|
|
8,907,439 |
|
|
8,886,521 |
|
|
8,907,439 |
|
10.62 |
% |
PVI Holdings, Inc. |
(10)(12) |
|
Trading Companies & Distributors |
|
3M S + 6.67% (1.00% Floor) |
|
7/29/2022 |
|
1/18/2028 |
|
|
3,960,000 |
|
|
3,927,667 |
|
|
3,960,000 |
|
4.72 |
% |
Retail Services WIS Corporation |
(10) |
|
Commercial Services & Supplies |
|
3M S + 7.75% (1.00% Floor) |
|
5/20/2021 |
|
5/20/2025 |
|
|
6,420,279 |
|
|
6,361,192 |
|
|
6,388,178 |
|
7.62 |
% |
Sandvine Corporation |
(5)(7)(10) |
|
Software |
|
1M S + 4.50% |
|
2/3/2023 |
|
10/31/2025 |
|
|
5,284,642 |
|
|
5,093,971 |
|
|
4,967,563 |
|
5.92 |
% |
South Coast Terminals, LLC |
(10) |
|
Chemicals |
|
3M S + 5.75% (1.00% Floor) |
|
12/21/2021 |
|
12/10/2026 |
|
|
7,584,070 |
|
|
7,531,101 |
|
|
7,527,189 |
|
8.98 |
% |
Work Genius Holdings, Inc |
(10) |
|
Professional Services |
|
3M S + 7.50% (1.00% Floor) |
|
6/6/2022 |
|
6/7/2027 |
|
|
9,876,923 |
|
|
9,799,003 |
|
|
9,704,077 |
|
11.57 |
% |
Work Genius Holdings, Inc - Revolver |
(4) |
|
Professional Services |
|
3M S + 7.50% (1.00% Floor) |
|
12/28/2022 |
|
6/7/2027 |
|
|
750,000 |
|
|
750,000 |
|
|
736,875 |
|
0.88 |
% |
Xenon Arc, Inc. |
(10) |
|
Trading Companies & Distributors |
|
3M S + 5.25% (0.75% Floor) |
|
12/27/2021 |
|
12/17/2027 |
|
|
8,872,500 |
|
|
8,798,256 |
|
|
8,872,500 |
|
10.58 |
% |
Xenon Arc, Inc. - Revolver |
(4) |
|
Trading Companies & Distributors |
|
1M S + 5.25% (0.75% Floor) |
|
12/27/2021 |
|
12/17/2026 |
|
|
320,000 |
|
|
320,000 |
|
|
320,000 |
|
0.38 |
% |
Total Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
210,913,400 |
|
|
197,012,238 |
|
234.93 |
% |
|||
Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
4L Technologies, Inc. Common Stock |
(8) |
|
Electronic Equipment, Instruments & Components |
|
|
|
|
|
|
|
|
149,918 |
|
$ |
2,171,581 |
|
$ |
74,959 |
|
0.09 |
% |
4L Technologies, Inc. Preferred Stock |
(8) |
|
Electronic Equipment, Instruments & Components |
|
|
|
|
|
|
|
|
2,289 |
|
|
209,004 |
|
|
1,602,370 |
|
1.92 |
% |
Advanced Solutions International Preferred Equity |
|
|
Software |
|
|
|
|
|
|
|
|
888,170 |
|
|
1,000,000 |
|
|
1,865,157 |
|
2.22 |
% |
Arborworks Acquisition LLC (Equity Interest) |
(8) |
|
Commercial Services & Supplies |
|
|
|
|
|
|
|
|
62 |
|
|
62,112 |
|
|
— |
|
— |
% |
Bioplan USA, Inc. - Common Stock |
(8) |
|
Containers & Packaging |
|
|
|
|
|
|
|
|
292,150 |
|
|
1,708,941 |
|
|
4,575,069 |
|
5.46 |
% |
CF Arch Holdings LLC (Equity Interest) |
(8) |
|
Professional Services |
|
|
|
|
|
|
|
|
200,000 |
|
|
200,000 |
|
|
320,000 |
|
0.38 |
% |
Flatworld Intermediate Corporation - Equity Interest |
(8) |
|
IT Services |
|
|
|
|
|
|
|
|
4,405 |
|
|
100,000 |
|
|
17,048 |
|
0.02 |
% |
Fusion Connect, Inc. - Backstop Warrants |
(8) |
|
IT Services |
|
|
|
|
|
|
|
|
89,046 |
|
|
— |
|
|
79,251 |
|
0.09 |
% |
Fusion Connect, Inc. - Common Stock |
(8) |
|
IT Services |
|
|
|
|
|
|
|
|
230,209 |
|
|
1,184,606 |
|
|
435,095 |
|
0.52 |
% |
Fusion Connect, Inc - Equity Investor Warrants |
(8) |
|
IT Services |
|
|
|
|
|
|
|
|
13,457 |
|
|
— |
|
|
— |
|
— |
% |
Fusion Connect, Inc. - Investor Warrants |
(8) |
|
IT Services |
|
|
|
|
|
|
|
|
89,046 |
|
|
— |
|
|
79,251 |
|
0.09 |
% |
Fusion Connect, Inc. - Series A Preferred |
(3) |
|
IT Services |
|
12.50% PIK |
|
|
|
|
|
|
61,632 |
|
|
6,163,175 |
|
|
5,593,082 |
|
6.67 |
% |
Investcorp Transformer Aggregator LP |
(8) |
|
Commercial Services & Supplies |
|
|
|
|
|
|
|
|
500,000 |
|
|
500,000 |
|
|
880,000 |
|
1.05 |
% |
Pegasus Aggregator Holdings LP |
(8) |
|
Trading Companies & Distributors |
|
|
|
|
|
|
|
|
9 |
|
|
750,000 |
|
|
821,813 |
|
0.98 |
% |
Victors CCC Aggregator LP |
(8) |
|
Professional Services |
|
|
|
|
|
|
|
|
500,000 |
|
|
500,000 |
|
|
630,000 |
|
0.75 |
% |
Work Genius Holdings, Inc (Equity Interest) |
(8) |
|
Professional Services |
|
|
|
|
|
|
|
|
500 |
|
|
500,000 |
|
|
640,755 |
|
0.76 |
% |
Total Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
|
15,049,419 |
|
|
17,613,850 |
|
21.00 |
% |
|||
Total Non-Controlled/Non-Affiliated Investments |
|
|
|
|
|
|
|
|
|
|
$ |
225,962,819 |
|
$ |
214,626,088 |
|
255.93 |
% |
|||
See notes to unaudited consolidated financial statements.
6
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments - (continued)
(Unaudited)
September 30, 2023
Investments*(1)(2) |
|
|
Industry |
|
Interest Rate |
|
Initial Acquisition Date |
|
Maturity Date |
|
Principal Amount/ Shares(3) |
|
Amortized Cost |
|
Fair Value |
|
% of |
||||
Affiliated Investments (14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
1888 Industrial Services, LLC - Term A |
(3)(9) |
|
Energy Equipment & Services |
|
3M S + 5.00% PIK (1.00% Floor) |
|
9/30/2016 |
|
8/31/2024 |
|
$ |
5,911,230 |
|
|
5,911,230 |
|
|
1,403,326 |
|
1.68 |
% |
1888 Industrial Services, LLC - Term C |
(9) |
|
Energy Equipment & Services |
|
3M S + 5.00% (1.00% Floor) |
|
6/25/2019 |
|
8/31/2024 |
|
$ |
596,742 |
|
|
596,742 |
|
|
678,795 |
|
0.81 |
% |
1888 Industrial Services, LLC - Revolver |
(4)(9) |
|
Energy Equipment & Services |
|
3M S + 5.00% (1.00% Floor) |
|
10/11/2016 |
|
8/31/2024 |
|
$ |
2,342,391 |
|
|
2,342,392 |
|
|
537,579 |
|
0.64 |
% |
Techniplas Foreign Holdco LP |
(3) |
|
Automobile Components |
|
10.00% PIK |
|
6/19/2020 |
|
6/18/2027 |
|
$ |
753,825 |
|
|
753,825 |
|
|
687,638 |
|
0.82 |
% |
Total Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
9,604,189 |
|
|
3,307,338 |
|
3.95 |
% |
|||
Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
1888 Industrial Services, LLC (Equity Interest) |
(8) |
|
Energy Equipment & Services |
|
|
|
|
|
|
|
|
11,881 |
|
|
— |
|
|
— |
|
— |
% |
Techniplas Foreign Holdco LP Common Stock |
|
|
Automobile Components |
|
|
|
|
|
|
|
|
879,559 |
|
|
14,336,791 |
|
|
5,470,857 |
|
6.52 |
% |
Total Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
|
14,336,791 |
|
|
5,470,857 |
|
6.52 |
% |
|||
Total Affiliated Investments |
|
|
|
|
|
|
|
|
|
|
$ |
23,940,980 |
|
$ |
8,778,195 |
|
10.47 |
% |
|||
Total Investments |
|
|
|
|
|
|
|
|
|
|
$ |
249,903,799 |
|
$ |
223,404,283 |
|
266.40 |
% |
|||
Liabilities in excess of other assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(139,543,466) |
|
(166.40) |
% |
|||
Net Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
83,860,817 |
|
100.00 |
% |
* All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States, unless otherwise noted.
See notes to unaudited consolidated financial statements.
7
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments - (continued)
(Unaudited)
September 30, 2023
Transactions related to investments in non-controlled “Affiliate Investments” for the nine months ended September 30, 2023 were as follows:
Portfolio Company |
|
Type of Investment(a) |
|
June 30, 2023 Value |
|
Gross Additions (b) |
|
Gross Reductions (c) |
|
Net Realized Gains (Losses) |
|
Net Unrealized Gains (Losses) |
|
September 30, 2023 Value |
|
Amount of Interest or Dividends Credited to Income(d) |
|||||||
1888 Industrial Services, LLC |
|
Senior Secured First Lien Term Loan A (3M LIBOR + 5.00% PIK) |
|
$ |
1,477,807 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
(74,481) |
|
$ |
1,403,326 |
|
$ |
— |
|
|
Senior Secured First Lien Term Loan C (3M LIBOR + 5.00%) |
|
|
630,870 |
|
|
— |
|
|
(34,127) |
|
|
— |
|
|
82,052 |
|
|
678,795 |
|
|
— |
|
|
Revolver (3M LIBOR + 5.00%) |
|
|
591,359 |
|
|
— |
|
|
(23,042) |
|
|
— |
|
|
(30,738) |
|
|
537,579 |
|
|
— |
|
|
Common Equity Interest(e) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Techniplas Foreign Holdco LP |
|
Senior Secured First Lien Term Loan (10.00% PIK) |
|
|
827,410 |
|
|
18,584 |
|
|
— |
|
|
— |
|
|
(158,356) |
|
|
687,638 |
|
|
18,800 |
|
|
Common Stock(e) |
|
|
6,433,865 |
|
|
— |
|
|
— |
|
|
— |
|
|
(963,008) |
|
|
5,470,857 |
|
|
— |
|
|
|
|
$ |
9,961,311 |
|
$ |
18,584 |
|
$ |
(57,169) |
|
$ |
— |
|
$ |
(1,144,531) |
|
$ |
8,778,195 |
|
$ |
18,800 |
1M L — 1-month LIBOR (5.43% as of September 30, 2023)
3M L — 3-month LIBOR (5.66% as of September 30, 2023)
6M L — 6-month LIBOR (5.90% as of September 30, 2023)
PRIME — 8.50% as of September 30, 2023
PIK — Payment-In-Kind
1M S — 1-month SOFR (5.32% as of September 30, 2023)
3M S — 3-month SOFR (5.40% as of September 30, 2023)
6M S — 6-month SOFR (5.47% as of September 30, 2023)
See notes to unaudited consolidated financial statements.
8
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments
June 30, 2023
Investments*(1)(2) |
|
|
Industry |
|
Interest Rate |
|
Initial |
|
Maturity |
|
Principal |
|
Amortized |
|
Fair Value |
|
% of Net Assets |
Non-Controlled/Non-Affiliated Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
4L Technologies, Inc. |
|
|
Electronic Equipment, Instruments & Components |
|
3M S + 7.50% (1.00% Floor) |
|
2/4/2020 |
|
6/30/2025 |
|
$1,132,352 |
|
$1,132,352 |
|
$1,132,352 |
|
1.29% |
Advanced Solutions International |
(10) |
|
Software |
|
3M S + 6.00% (1.00% Floor) |
|
9/1/2020 |
|
9/16/2025 |
|
6,750,000 |
|
6,675,818 |
|
6,750,000 |
|
7.70% |
AHF Parent Holding, Inc. |
(10) |
|
Building Products |
|
3M S + 6.25% (0.75% Floor) |
|
2/9/2022 |
|
2/1/2028 |
|
4,687,500 |
|
4,656,726 |
|
4,511,719 |
|
5.14% |
ALCV Purchaser, Inc. |
(10) |
|
Specialty Retail |
|
3M S + 6.75% (1.00% Floor) |
|
3/1/2021 |
|
4/15/2026 |
|
5,200,000 |
|
5,152,059 |
|
5,148,000 |
|
5.87% |
AMCP Clean Acquisition Company, LLC |
(10) |
|
Hotels, Restaurants, and Leisure |
|
3M S + 4.25% |
|
4/6/2023 |
|
7/10/2025 |
|
6,981,712 |
|
6,304,958 |
|
6,283,541 |
|
7.16% |
Amerequip, LLC |
(10) |
|
Machinery |
|
6M S + 7.40% (1.00% Floor) |
|
9/1/2022 |
|
8/31/2027 |
|
4,994,516 |
|
4,950,906 |
|
4,994,516 |
|
5.69% |
American Auto Auction Group, LLC |
(10) |
|
Automotive Retail |
|
3M S + 5.00% (1.00% Floor) |
|
4/12/2023 |
|
12/30/2027 |
|
4,239,241 |
|
3,888,170 |
|
3,878,905 |
|
4.42% |
American Nuts Holdings, LLC - Term Loan A |
(3)(9)(10) |
|
Consumer Staples Distribution & Retail |
|
3M S + 6.75% + 3.00% PIK (1.00% Floor) |
|
4/4/2022 |
|
4/10/2026 |
|
3,788,372 |
|
3,760,262 |
|
3,030,698 |
|
3.46% |
American Nuts Holdings, LLC - Term Loan B |
(3)(9)(10) |
|
Consumer Staples Distribution & Retail |
|
3M S + 8.75% + 3.00% PIK (1.00% Floor) |
|
4/4/2022 |
|
4/10/2026 |
|
3,788,372 |
|
3,759,975 |
|
3,030,698 |
|
3.46% |
American Teleconferencing Services, Ltd. (d/b/a Premiere Global Services, Inc.) - Revolver |
(6)(9) |
|
Software |
|
P + 5.50% (1.00% Floor) |
|
5/6/2016 |
|
4/7/2023 |
|
1,736,618 |
|
1,718,794 |
|
217,077 |
|
0.25% |
Arborworks Acquisition LLC |
(6)(10) |
|
Commercial Services & Supplies |
|
3M L + 7.00% + 3.00% PIK (1.00% Floor) |
|
11/24/2021 |
|
11/9/2026 |
|
8,033,532 |
|
7,976,037 |
|
6,025,149 |
|
6.87% |
Arborworks Acquisition LLC - Revolver |
(4)(6) |
|
Commercial Services & Supplies |
|
3M L + 7.00% (1.00% Floor) |
|
11/24/2021 |
|
11/9/2026 |
|
1,308,407 |
|
1,308,407 |
|
981,305 |
|
1.12% |
Archer Systems, LLC |
(10) |
|
Professional Services |
|
3M S + 6.00% (1.00% Floor) |
|
8/11/2022 |
|
8/11/2027 |
|
5,414,246 |
|
5,367,591 |
|
5,441,317 |
|
6.20% |
Bioplan USA, Inc. - Take-Back Term Loan |
(3) |
|
Containers & Packaging |
|
3M S + 3.25% + 5.00% PIK (4.00% Floor) |
|
3/8/2023 |
|
3/8/2028 |
|
5,605,485 |
|
5,303,003 |
|
5,213,101 |
|
5.94% |
Bioplan USA, Inc. - Priority Term Loan |
(10) |
|
Containers & Packaging |
|
3M S + 10.00% (4.00% Floor) |
|
2/28/2023 |
|
3/8/2027 |
|
3,367,275 |
|
3,435,421 |
|
3,602,984 |
|
4.11% |
CareerBuilder, LLC |
(10) |
|
Professional Services |
|
3M L + 6.75% (1.00% Floor) |
|
7/27/2017 |
|
7/31/2026 |
|
6,017,119 |
|
6,008,781 |
|
2,572,318 |
|
2.93% |
Cook & Boardman Group, LLC |
(10) |
|
Trading Companies & Distributors |
|
3M S + 5.75% (1.00% Floor) |
|
10/12/2018 |
|
10/17/2025 |
|
9,547,181 |
|
9,508,116 |
|
9,213,030 |
|
10.51% |
Crafty Apes, LLC |
(10)(13) |
|
Entertainment |
|
1M S + 7.06% (1.00% Floor) |
|
12/23/2021 |
|
11/1/2024 |
|
8,000,000 |
|
7,959,319 |
|
7,640,000 |
|
8.71% |
Easy Way Leisure Corporation |
(10) |
|
Household Durables |
|
3M S + 7.00% (1.00% Floor) |
|
8/2/2021 |
|
1/15/2026 |
|
7,805,376 |
|
7,735,660 |
|
7,610,242 |
|
8.68% |
Empire Office Inc. |
(10) |
|
Trading Companies & Distributors |
|
1M L + 6.75% (1.50% Floor) |
|
3/28/2019 |
|
4/12/2024 |
|
11,976,967 |
|
11,923,473 |
|
11,947,025 |
|
13.62% |
Evergreen North America Acquisitions, LLC |
(10) |
|
Machinery |
|
3M S + 6.75% (1.00% Floor) |
|
7/26/2022 |
|
8/13/2026 |
|
4,467,360 |
|
4,394,797 |
|
4,400,349 |
|
5.02% |
Evergreen North America Acquisitions, LLC - Revolver |
(4) |
|
Machinery |
|
3M S + 6.75% (1.00% Floor) |
|
7/26/2022 |
|
8/13/2026 |
|
211,107 |
|
211,107 |
|
207,941 |
|
0.24% |
Flatworld Intermediate Corporation |
(10) |
|
IT Services |
|
3M S + 6.50% (1.00% Floor) |
|
10/3/2022 |
|
10/1/2027 |
|
2,420,270 |
|
2,376,950 |
|
2,359,764 |
|
2.69% |
See notes to unaudited consolidated financial statements.
9
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments - (continued)
June 30, 2023
Investments*(1)(2) |
|
|
Industry |
|
Interest Rate |
|
Initial |
|
Maturity |
|
Principal |
|
Amortized |
|
Fair Value |
|
% of Net Assets |
Senior Secured First Lien Debt Investments, continued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Fusion Connect, Inc. - 2022 Term Loan |
(3)(10) |
|
IT Services |
|
3M S + 7.50% + 1.00% PIK (1.00% Floor) |
|
1/12/2022 |
|
1/18/2027 |
|
$6,838,831 |
|
$6,684,667 |
|
$6,684,957 |
|
7.62% |
INW Manufacturing, LLC |
(10) |
|
Food Products |
|
3M S + 5.75% (0.75% Floor) |
|
5/5/2021 |
|
3/25/2027 |
|
4,562,500 |
|
4,467,824 |
|
4,288,750 |
|
4.89% |
Klein Hersh, LLC |
(3)(10)(11) |
|
Professional Services |
|
3M S + 4.63% + 6.77% PIK (0.50% Floor) |
|
4/21/2022 |
|
4/27/2027 |
|
10,390,813 |
|
10,275,044 |
|
8,078,857 |
|
9.21% |
LaserAway Intermediate Holdings II, LLC |
(10) |
|
Diversified Consumer Services |
|
3M S + 5.75% (0.75% Floor) |
|
10/12/2021 |
|
10/14/2027 |
|
7,268,500 |
|
7,187,704 |
|
7,268,500 |
|
8.29% |
NWN Parent Holdings LLC |
(10) |
|
IT Services |
|
3M S + 8.00% (1.00% Floor) |
|
5/5/2021 |
|
5/7/2026 |
|
8,402,893 |
|
8,350,223 |
|
8,423,901 |
|
9.61% |
NWN Parent Holdings LLC - Revolver |
(4) |
|
IT Services |
|
3M S + 8.00% (1.00% Floor) |
|
5/5/2021 |
|
5/7/2026 |
|
400,000 |
|
400,000 |
|
401,000 |
|
0.46% |
Potpourri Group, Inc. |
(10) |
|
Internet & Direct Marketing Retail |
|
1M S + 8.25% (1.50% Floor) |
|
6/27/2019 |
|
7/3/2024 |
|
8,969,729 |
|
8,942,153 |
|
8,969,729 |
|
10.23% |
PVI Holdings, Inc. |
(10)(12) |
|
Trading Companies & Distributors |
|
3M S + 5.94% (1.00% Floor) |
|
7/29/2022 |
|
7/16/2027 |
|
3,970,000 |
|
3,935,901 |
|
3,970,000 |
|
4.53% |
Retail Services WIS Corporation |
(10) |
|
Commercial Services & Supplies |
|
3M S + 7.75% (1.00% Floor) |
|
5/20/2021 |
|
5/20/2025 |
|
6,508,087 |
|
6,440,129 |
|
6,443,006 |
|
7.35% |
Sandvine Corporation |
(5)(7)(10) |
|
Software |
|
3M S + 4.50% |
|
2/3/2023 |
|
10/31/2025 |
|
5,284,642 |
|
5,074,088 |
|
5,046,833 |
|
5.75% |
South Coast Terminals, LLC |
(10) |
|
Chemicals |
|
1M L + 5.75% (1.00% Floor) |
|
12/21/2021 |
|
12/10/2026 |
|
7,606,650 |
|
7,550,110 |
|
7,568,617 |
|
8.63% |
Work Genius Holdings, Inc |
(10) |
|
Professional Services |
|
3M S + 7.50% (1.00% Floor) |
|
6/6/2022 |
|
6/7/2027 |
|
9,901,923 |
|
9,819,740 |
|
9,629,620 |
|
10.98% |
Work Genius Holdings, Inc - Revolver |
(4) |
|
Professional Services |
|
3M S + 7.50% (1.00% Floor) |
|
12/28/2022 |
|
6/7/2027 |
|
750,000 |
|
750,000 |
|
729,375 |
|
0.83% |
Xenon Arc, Inc. |
(10) |
|
Trading Companies & Distributors |
|
6M L + 5.25% (0.75% Floor) |
|
12/27/2021 |
|
12/17/2027 |
|
8,895,000 |
|
8,818,485 |
|
8,895,000 |
|
10.14% |
Xenon Arc, Inc. - Revolver |
(4) |
|
Trading Companies & Distributors |
|
6M L + 5.25% (0.75% Floor) |
|
12/27/2021 |
|
12/17/2026 |
|
253,333 |
|
253,333 |
|
253,333 |
|
0.29% |
Total Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
204,458,083 |
|
192,843,509 |
|
219.89% |
|||
Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
4L Technologies, Inc. Common Stock |
(8) |
|
Electronic Equipment, Instruments & Components |
|
|
|
|
|
|
|
$149,918 |
|
$2,171,581 |
|
$95,947 |
|
0.11% |
4L Technologies, Inc. Preferred Stock |
(8) |
|
Electronic Equipment, Instruments & Components |
|
|
|
|
|
|
|
2,289 |
|
209,004 |
|
2,037,299 |
|
2.33% |
Advanced Solutions International Preferred Equity |
|
|
Software |
|
|
|
|
|
|
|
888,170 |
|
1,000,000 |
|
1,758,577 |
|
2.01% |
Arborworks Acquisition LLC (Equity Interest) |
(8) |
|
Commercial Services & Supplies |
|
|
|
|
|
|
|
62 |
|
62,112 |
|
— |
|
— |
Bioplan USA, Inc. - Common Stock |
(8) |
|
Containers & Packaging |
|
|
|
|
|
|
|
292,150 |
|
1,708,941 |
|
4,142,687 |
|
4.72% |
CF Arch Holdings LLC (Equity Interest) |
(8) |
|
Professional Services |
|
|
|
|
|
|
|
200,000 |
|
200,000 |
|
318,000 |
|
0.36% |
Flatworld Intermediate Corporation - Equity Interest |
(8) |
|
IT Services |
|
|
|
|
|
|
|
4,405 |
|
100,000 |
|
38,722 |
|
0.04% |
Fusion Connect, Inc. - Backstop Warrants |
(8) |
|
IT Services |
|
|
|
|
|
|
|
89,046 |
|
0 |
|
133,720 |
|
0.15% |
Fusion Connect, Inc. - Common Stock |
(8) |
|
IT Services |
|
|
|
|
|
|
|
230,209 |
|
1,184,606 |
|
575,914 |
|
0.66% |
Fusion Connect, Inc - Equity Investor Warrants |
(8) |
|
IT Services |
|
|
|
|
|
|
|
13,457 |
|
— |
|
— |
|
— |
Fusion Connect, Inc. - Investor Warrants |
(8) |
|
IT Services |
|
|
|
|
|
|
|
89,046 |
|
— |
|
133,720 |
|
0.15% |
Fusion Connect, Inc. - Series A Preferred |
(3) |
|
IT Services |
|
12.50% PIK |
|
|
|
|
|
59,749 |
|
5,974,924 |
|
4,824,752 |
|
5.50% |
Investcorp Transformer Aggregator LP |
(8) |
|
Commercial Services & Supplies |
|
|
|
|
|
|
|
500,000 |
|
500,000 |
|
880,000 |
|
1.01% |
Pegasus Aggregator Holdings LP |
(8) |
|
Trading Companies & Distributors |
|
|
|
|
|
|
|
9 |
|
750,000 |
|
898,491 |
|
1.02% |
Victors CCC Aggregator LP |
(8) |
|
Professional Services |
|
|
|
|
|
|
|
500,000 |
|
500,000 |
|
635,000 |
|
0.72% |
Work Genius Holdings, Inc (Equity Interest) |
(8) |
|
Professional Services |
|
|
|
|
|
|
|
500 |
|
500,000 |
|
833,680 |
|
0.95% |
Total Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
14,861,168 |
|
17,306,509 |
|
19.73% |
|||
Total Non-Controlled/Non-Affiliates Investments |
|
|
|
|
|
|
|
|
|
$219,319,251 |
|
$210,150,018 |
|
239.62% |
|||
See notes to unaudited consolidated financial statements.
10
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments - (continued)
June 30, 2023
Investments*(1)(2) |
|
|
Industry |
|
Interest Rate |
|
Initial |
|
Maturity |
|
Principal |
|
Amortized |
|
Fair Value |
|
% of Net Assets |
Affiliated Investments(14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
1888 Industrial Services, LLC - Term A |
(3)(9) |
|
Energy Equipment & Services |
|
3M L + 5.00% PIK (1.00% Floor) |
|
9/30/2016 |
|
8/31/2024 |
|
$5,911,230 |
|
$5,911,230 |
|
$1,477,807 |
|
1.69% |
1888 Industrial Services, LLC - Term C |
(9) |
|
Energy Equipment & Services |
|
3M L + 5.00% (1.00% Floor) |
|
6/25/2019 |
|
8/31/2024 |
|
$630,870 |
|
630,870 |
|
630,870 |
|
0.72% |
1888 Industrial Services, LLC - Revolver |
(4)(9) |
|
Energy Equipment & Services |
|
3M L + 5.00% (1.00% Floor) |
|
10/11/2016 |
|
8/31/2024 |
|
$2,365,434 |
|
2,365,434 |
|
591,359 |
|
0.67% |
Techniplas Foreign Holdco LP |
(3) |
|
Automobile Components |
|
10.00% PIK |
|
6/19/2020 |
|
6/18/2027 |
|
$735,240 |
|
735,240 |
|
827,410 |
|
0.94% |
Total Senior Secured First Lien Debt Investments |
|
|
|
|
|
|
|
|
|
9,642,774 |
|
3,527,446 |
|
4.02% |
|||
Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
1888 Industrial Services, LLC (Equity Interest) |
(8) |
|
Energy Equipment & Services |
|
|
|
|
|
|
|
11,881 |
|
— |
|
— |
|
0.00% |
Techniplas Foreign Holdco LP Common Stock |
|
|
Auto Components |
|
|
|
|
|
|
|
879,559 |
|
14,336,791 |
|
6,433,865 |
|
7.34% |
Total Equity, Warrants and Other Investments |
|
|
|
|
|
|
|
|
|
14,336,791 |
|
6,433,865 |
|
7.34% |
|||
Total Affiliated Investments |
|
|
|
|
|
|
|
|
|
$23,979,565 |
|
$9,961,311 |
|
11.36% |
|||
Total Investments |
|
|
|
|
|
|
|
|
|
$243,298,816 |
|
$220,111,329 |
|
250.98% |
|||
Liabilities in excess of other assets |
|
|
|
|
|
|
|
|
|
|
|
(132,411,021) |
|
(150.98)% |
|||
Net Assets |
|
|
|
|
|
|
|
|
|
|
|
$87,700,308 |
|
100.00% |
|||
* All investments of the Company are in entities which are organized under the laws of the United States and have a principal place of business in the United States, unless otherwise noted.
See notes to unaudited consolidated financial statements.
11
Investcorp Credit Management BDC, Inc. and Subsidiaries
Consolidated Schedule of Investments - (continued)
June 30, 2023
Transactions related to investment in non-controlled “Affiliated Investments” for the year ended June 30, 2023 were as follows:
Portfolio Company |
|
Type of Investment(a) |
|
June 30, 2022 |
|
Gross Additions(b) |
|
Gross Reductions(c) |
|
Net Realized Gains (Losses) |
|
Net Unrealized Gains (Losses) |
|
June 30, 2023 Value |
|
Amount of Interest or Dividends Credited to Income(d) |
|||||||
1888 Industrial Services, LLC |
|
Senior Secured First Lien Term Loan A (3M LIBOR + 5.00% PIK) |
|
$ |
1,477,807 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
1,477,807 |
|
$ |
— |
|
|
Senior Secured First Lien Term Loan C (3M LIBOR + 5.00%) |
|
|
678,820 |
|
|
— |
|
|
(47,950) |
|
|
— |
|
|
— |
|
|
630,870 |
|
|
(20,611) |
|
|
Revolver (3M LIBOR + 5.00%) |
|
|
556,152 |
|
|
140,826 |
|
|
— |
|
|
— |
|
|
(105,619) |
|
|
591,359 |
|
|
— |
|
|
Common Equity Interest(e) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Techniplas Foreign Holdco LP |
|
Senior Secured First Lien Term Loan (10.00% PIK) |
|
|
931,265 |
|
|
70,051 |
|
|
— |
|
|
— |
|
|
(173,906) |
|
|
827,410 |
|
|
70,070 |
|
|
Common Stock(e) |
|
|
7,002,759 |
|
|
421,396 |
|
|
— |
|
|
— |
|
|
(990,290) |
|
|
6,433,865 |
|
|
— |
|
|
|
|
$ |
10,646,803 |
|
$ |
632,273 |
|
$ |
(47,950) |
|
$ |
— |
|
$ |
(1,269,815) |
|
$ |
9,961,311 |
|
$ |
49,459 |
1M L — 1-month LIBOR (5.22% as of June 30, 2023)
3M L — 3-month LIBOR (5.55% as of June 30, 2023)
6M L — 6-month LIBOR (5.76% as of June 30, 2023)
PRIME — 8.25% as of June 30, 2023
PIK — Payment-In-Kind
1M S — 1-month SOFR (5.14% as of June 30, 2023)
3M S — 3-month SOFR (5.27% as of June 30, 2023)
6M S — 6-month SOFR (5.39% as of June 30, 2023)
See notes to unaudited consolidated financial statements.
12
Investcorp Credit Management BDC, Inc. and subsidiaries
Notes to Consolidated Financial Statements (unaudited)
September 30, 2023
Note 1. Organization
Investcorp Credit Management BDC, Inc. (“ICMB” or the “Company”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”) for U.S. federal income tax purposes. The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 946 Financial Services – Investment Companies.
On February 11, 2014, the Company completed its initial public offering (the “Offering”), selling 7,666,666 shares of its common stock, par value $0.001, including the underwriters’ over-allotment, at a price of $15.00 per share with net proceeds of approximately $111.5 million.
CM Finance LLC, a Maryland limited liability company, commenced operations in March 2012. Immediately prior to the Offering, CM Finance LLC was merged with and into the Company (the “Merger”). In connection with the Merger, the Company issued 6,000,000 shares of common stock and $39.8 million in debt to the pre-existing CM Finance LLC investors, consisting of funds managed by Cyrus Capital Partners, L.P. (the “Original Investors” or the “Cyrus Funds”). The Company had no assets or operations prior to completion of the Merger and, as a result, the books and records of CM Finance LLC became the books and records of the Company, as the surviving entity. Immediately after the Merger, the Company issued 2,181,818 shares of its common stock to Stifel Venture Corp. (“Stifel”) in exchange for $32.7 million in cash. The Company used all of the proceeds of the sale of shares to Stifel to repurchase 2,181,818 shares of common stock from the Original Investors. Immediately after the completion of the Offering, the Company had 13,666,666 shares outstanding. The Company used a portion of the net proceeds of the Offering to repay 100% of the debt issued to the Original Investors in connection with the Merger.
CM Investment Partners LLC (the “Adviser”) serves as the Company’s investment adviser. On August 30, 2019, Investcorp Credit Management US LLC (“Investcorp”), a subsidiary of Investcorp Bank Holdings B.S.C., acquired the interests in the Adviser, which were previously held by the Cyrus Funds and Stifel and paid off certain debt owed by the Adviser, resulting in Investcorp having a majority ownership interest in the Adviser (the “Investcorp Transaction”). On August 30, 2019, CM Finance, Inc. changed its name to Investcorp Credit Management BDC, Inc.
In connection with the Investcorp Transaction, on June 26, 2019, the Company entered into a definitive stock purchase and transaction agreement with Investcorp BDC Holdings Limited (“Investcorp BDC”), an affiliate of Investcorp (the “Stock Purchase Agreement”). Under the Stock Purchase Agreement, Investcorp BDC was required by August 30, 2021 to purchase (i) 680,985 newly issued shares of the Company’s common stock, par value $0.001 per share, at the most recently determined net asset value per share of the Company’s common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and (ii) 680,985 shares of the Company’s common stock in open-market or secondary transactions. Investcorp BDC has completed all required purchases under the Stock Purchase Agreement.
In connection with the Investcorp Transaction, on June 26, 2019, the Company’s board of directors, including all of the directors who are not “interested persons” of the Company, as defined in Section 2(a)(19) of the 1940 Act (each, an “Independent Director”), unanimously approved a new investment advisory agreement (the “Advisory Agreement”) which was subsequently approved by the Company’s stockholders at a special meeting of stockholders held on August 28, 2019. In connection with the closing of the Investcorp Transaction, on August 30, 2019, the Company entered into the Advisory Agreement and a new administration agreement (the “Administration Agreement”) with the Adviser as its investment adviser and administrator, respectively. The Advisory Agreement and the Administration Agreement are substantially similar to the Company’s prior investment advisory agreement between the Company and the Adviser and the Company’s prior administration agreement, respectively.
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. The Company invests primarily in middle-market companies in the form of standalone first and second lien loans, unitranche loans and mezzanine loans. The Company may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
13
As a BDC, the Company is required to comply with certain regulatory requirements. For instance, as a BDC, the Company must not acquire any assets other than “qualifying assets,” as defined in Section 55(a) of the 1940 Act unless, at the time the acquisition is made, at least 70% of total assets are qualifying assets. Qualifying assets generally include investments in “eligible portfolio companies,” which, under the 1940 Act, are generally defined as any issuer that (1) is organized under the laws of, and has its principal place of business, in the United States; (2) is not an investment company (other than a small business investment company wholly-owned by the BDC) or a company that would be an investment company but for certain exclusions under the 1940 Act; and (3) either does not have any class of securities listed on a national securities exchange or has any class of securities listed on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.
From time-to-time, the Company may form taxable subsidiaries that are taxed as corporations for U.S. federal income tax purposes (the “Taxable Subsidiaries”). At September 30, 2023 and June 30, 2023, the Company had no Taxable Subsidiaries. The Taxable Subsidiaries, if any, allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
Note 2. Significant Accounting Policies
The following is a summary of significant accounting policies followed by the Company.
a. Basis of Presentation
The accompanying consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6, 10 and 12 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with U.S. GAAP are omitted. The unaudited financial statements and notes should be read in conjunction with the audited financial statements and notes thereto for the year ended June 30, 2023. All values are stated in U.S. dollars, unless noted otherwise. The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the periods included herein as required by U.S. GAAP. These adjustments are normal and recurring in nature.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments and other amounts reported in the consolidated financial statements and accompanying notes. Management believes that the estimates utilized in preparing the Company’s consolidated financial statements are reasonable and prudent. Actual results could differ materially from these estimates. All material inter-company balances and transactions have been eliminated.
As permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing all or substantially all of its services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries, CM Finance SPV Ltd. (“SPV”), CM Finance SPV LLC (“LLC”) and Investcorp Credit Management BDC SPV, LLC (“SPV LLC”), which are special purpose vehicles used to finance certain investments in its consolidated financial statements. The effects of all material intercompany balances and transactions have been eliminated in consolidation.
The Company reclassified prior period affiliate and other information in the accompanying consolidated balance sheet and income statements to conform to its current period presentation. These reclassifications had no effect on the Company’s consolidated financial position or the consolidated results of operations as previously reported.
b. Revenue Recognition, Security Transactions, and Realized/Unrealized Gains or Losses
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing, commitment, and amendment fees, and purchase and original issue discounts (“OID”) associated with loans to portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of discounts or premiums is calculated by the effective interest or straight-line method, as applicable, as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties are included in other fee income and unamortized fees and discounts are recorded as interest income and are non-recurring in nature. During the three months ended September 30, 2023, $174,454 of prepayment penalties and unamortized discounts upon prepayment were recorded as investment income. During the three months ended September 30, 2022, $155,038 of prepayment penalties and unamortized discounts upon prepayment were recorded as interest income.
14
Structuring fees and similar fees are recognized as income as earned, usually when received. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other fee income.
Management reviews all loans that become 90 days or more past due on principal or interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. However, capitalized PIK interest will not be reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although management may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. As of September 30, 2023, the Company had ten loans on non-accrual status, 1888 Industrial Services, LLC – Term A, Term C and Revolver, American Nuts Holdings, LLC - Term A and Term B, American Teleconferencing Services, Ltd. (d/b/a Premiere Global Services, Inc.) Revolver, Arborworks Acquisition LLC - Term Loan and Revolver, CareerBuilder, LLC and Klein Hersh, LLC, which collectively represented 10.62% of the Company’s portfolio at fair value. As of June 30, 2023, the Company had six loans on non-accrual status, 1888 Industrial Services, LLC – Term A, Term C and Revolver, American Nuts Holdings, LLC - Term A and Term B, and American Teleconferencing Services, Ltd. (d/b/a Premiere Global Services, Inc.) Revolver, which collectively represented 4.08% of the Company’s portfolio at fair value.
Dividend income is recorded on the ex-dividend date.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are determined by calculating the difference between the net proceeds from the disposition and the amortized cost basis of the investments, without regard to unrealized gains or losses previously recognized. Realized gains or losses on the sale of investments are calculated using the specific identification method. The Company reports changes in fair value of investments as a component of the net change in unrealized appreciation (depreciation) on investments in the Unaudited Consolidated Statements of Operations.
The Company holds debt investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an accrual basis to the extent that such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. The Company earned PIK interest of $100,181 during the three months ended September 30, 2023. The Company earned PIK interest of $181,738 during the three months ended September 30, 2022.
The Company may hold equity investments in its portfolio that contain a PIK dividend provision. PIK dividends, which represent contractual dividend payments added to the investment balance, are recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company earned PIK dividends of $188,251 during the three months ended September 30, 2023. The Company earned PIK dividends of $166,449 during the three months ended September 30, 2022.
c. Paid In Capital
The Company records the proceeds from the sale of its common stock to common stock and additional paid-in capital, net of commissions and marketing support fees.
d. Net Increase (Decrease) in Net Assets Resulting from Operations per Share
The net increase (decrease) in net assets resulting from operations per share is calculated based upon the weighted average number of shares of common stock outstanding during the reporting period.
e. Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend or distribution is determined by the Company’s board of directors each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed annually, although the Company may decide to retain such capital gains for investment.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions the Company declares in cash on behalf of the Company’s stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s board of directors authorizes, and the Company declares, a cash distribution, then the Company’s stockholders who have not “opted out” of the Company’s dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution.
15
f. Cash and Restricted Cash
Cash and restricted cash consist of bank demand deposits. The Company deposits its cash in financial institutions and, at times, such balance may be in excess of the Federal Deposit Insurance Corporation insurance limits. All of the Company’s cash deposits are held at what management believes to be large established high credit quality financial institutions and management believes that the risk of loss associated with any uninsured balances is remote. The Company has restrictions on the uses of the cash held by SPV, LLC and SPV LLC based on the terms of the relevant financing arrangement. For more information on the Company’s financing arrangements and borrowings, see Note 5.
g. Deferred Offering Costs
Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock and bonds, including legal, accounting, printing fees, and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering is completed.
h. Investment Transactions and Expenses
Purchases of loans, including revolving credit agreements, are recorded on a fully committed basis until the funded and unfunded portions are known or estimable, which in many cases may not be until settlement.
Expenses are accrued as incurred.
Deferred debt issuance costs and deferred financing costs, incurred in connection with the Company’s financing arrangements and borrowings, are amortized using the straight-line method which approximates the effective interest method over the life of the debt.
i. Investment Valuation
The Company applies fair value accounting to all of its financial instruments in accordance with ASC Topic 820 – Fair Value Measurements and Disclosures (“ASC 820”) and Rule 2a-5 under the 1940 Act. ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its investments and financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Fair value is defined as the price that would be received upon a sale of an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Securities that are traded on securities exchanges (including such securities traded in the afterhours market) are valued on the basis of the closing price on the valuation date (if such prices are available). Securities that are traded on more than one securities exchange are valued at the closing price on the primary securities exchange on which such securities are traded on the valuation date (or if reported on the consolidated tape, then their last sales price on the consolidated tape). Listed options for which the last sales price falls between the last “bid” and “ask” prices for such options are valued at their last sales price on the date of the valuation on the primary securities exchange on which such options are traded. Options for which the last sales price on the valuation date does not fall between the last “bid” and “ask” prices are valued at the average of the last “bid” and “ask” prices for such options on that date. To the extent these securities are actively traded, and valuation adjustments are not applied, they are categorized in Level 1 of the fair value hierarchy. The Company held no Level 1 investments as of September 30, 2023 or June 30, 2023.
Investments that are not traded on securities exchanges but are traded on the over-the-counter (“OTC”) markets (such as term loans, notes and warrants) are valued using various techniques, which may consider recently executed transactions in securities of the issuer or comparable issuers, market price quotations (when observable) and fundamental data relating to the issuer. These
16
investments are categorized in Level 2 of the fair value hierarchy, or in instances when lower relative weight is placed on transaction prices, quotations, or similar observable inputs, they are categorized in Level 3.
Investments for which market quotations are not readily available or may be considered unreliable are fair valued, in good faith, using a method determined to be appropriate in the given circumstances. The valuation methods used include the Cost Approach, the Market Approach and the Income Approach. Inputs used in these approaches may include, but are not limited to, interest rate yield curves, credit spreads, recovery rates, comparable company transactions, trading multiples, and volatilities. The valuation method the Company uses may change as changes in the underlying portfolio company dictates, such as moving from the Cost Approach to Market Approach when underlying conditions change at the company. Because of the inherent uncertainty of valuation in these circumstances, the fair values for the aforementioned investments may differ significantly from values that would have been used had a ready and liquid market for such investments existed or from the amounts that might ultimately be realized, and such differences could be material.
The Adviser seeks to ensure that the Company’s valuation policies and procedures, as approved by the Company’s board of directors, are consistently applied across all investments of the Company. The valuations are continuously monitored and the valuation process for Level 3 investments is completed on a quarterly basis and is designed to subject the valuation of Level 3 investments to an appropriate level of consistency, oversight and review. The valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment. These investment professionals prepare the preliminary valuations based on their evaluation of financial and operating data, company specific developments, market valuations of comparable securities from the same company or that of comparable companies as well as any other relevant factors including recent purchases and sales that may have occurred preceding month-end.
Valuation models are typically calibrated upon initial funding and are re-calibrated as necessary upon subsequent material events (including, but not limited to additional financing activity, changes in comparable companies, and recent trades). The preliminary valuation conclusions are then documented and discussed with senior management of the Adviser. On a periodic basis and at least once annually, one or more third-party independent valuation firm(s) engaged by the Company conduct independent appraisals and review the Adviser’s preliminary valuations and make their own independent assessment. The Valuation Committee of the Company’s board of directors then reviews the preliminary valuations of the Adviser and, as applicable, that of any independent valuation firms. The Valuation Committee discusses the valuations and makes a recommendation to the Company’s board of directors regarding the fair value of each investment in good faith based on the input of the Adviser and the independent valuation firm(s). Upon recommendation by the Valuation Committee and a review of the valuation materials of the Adviser and the third-party independent valuation firm(s), the board of directors of the Company determines, in good faith, the fair value of each investment.
For more information on the classification of the Company’s investments by major categories, see Note 4.
The fair value of the Company’s assets and liabilities that qualify as financial instruments under U.S. GAAP approximates the carrying amounts presented in the Unaudited Consolidated Statements of Assets and Liabilities.
j. Income Taxes
The Company has elected to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To maintain qualification as a RIC, the Company must, among other things, meet certain source of income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company continues to qualify as a RIC and continues to satisfy the annual distribution requirement, the Company will not have to pay corporate level U.S. federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible U.S. federal excise taxes if the Company does not distribute to its stockholders at least 98% of net ordinary income, 98.2% of capital gains, if any, and any recognized and undistributed income from prior years for which it paid no U.S. federal income taxes. Additionally, certain of the Company’s consolidated subsidiaries are subject to U.S. federal and state income taxes. At September 30, 2023 and September 30, 2022, the Company had no Taxable Subsidiaries. The Company incurred excise tax expenses, which are included in the provision for tax expense of $100,747 for the three months ended September 30, 2023, and $44,330 for the three months ended September 30, 2022.
Book and tax basis differences that are permanent differences are reclassified among the Company’s capital accounts, as appropriate at year-end. Additionally, the tax character of distributions is determined in accordance with the Code, which differs from U.S. GAAP. During the three months ended September 30, 2023, the Company recorded distributions of $2.2 million. During the three months ended September 30, 2022, the Company recorded distributions of $2.2 million. For certain periods, the tax character of a portion of distributions may be return of capital.
17
U.S. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a more-likely-than-not threshold would be recorded as a tax expense in the current year. The Company’s policy is to recognize accrued interest and penalties associated with uncertain tax positions as part of the tax provision.
The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for any tax year since inception. The tax years ended June 30, 2020 through present remain subject to examinations by taxing authorities. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
Permanent differences between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for U.S. federal income tax purposes. During the year ended June 30, 2023, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of paydown gains and losses, Taxable Subsidiary partnership investments, nondeductible taxes paid and income/(loss) from wholly owned subsidiaries as follows:
|
|
As of June 30, 2023 |
|
Additional paid-in capital |
|
$ |
(284,155) |
Distributable earnings |
|
|
284,155 |
The tax character of all distributions paid by the Company during the year ended June 30, 2023 was ordinary income.
At June 30, 2023, the components of distributable earnings on a tax basis were as follows:
|
|
As of June 30, 2023 |
|
Undistributed net investment income |
|
$ |
11,648,379 |
Accumulated capital gains (losses) and other |
|
|
(27,970,779) |
Capital loss carryover |
|
|
(73,713,555) |
Unrealized appreciation (depreciation) |
|
|
(23,015,323) |
Distributions payable |
|
|
(2,590,520) |
Distributable earnings (loss) |
|
$ |
(115,641,798) |
For U.S. federal income tax purposes, net realized capital losses may be carried over to offset future capital gains, if any. These capital losses can be carried forward for an indefinite period and will retain their character as either short-term or long-term capital losses. As of June 30, 2023, the Company had a net short-term capital loss carryforward of $1,971,187 and a net long-term capital loss carryforward of $71,742,368 available to be carried forward for an indefinite period.
A RIC may elect to defer any capital losses incurred after October 31 of a taxable year (“post-October”) to the beginning of the following fiscal year. As of June 30, 2023, the Company had a post-October short-term capital loss deferral of $41,242 and a post-October long-term capital loss deferral of $27,178,811. These losses were deemed to arise on July 1, 2023.
k. Capital Gains Incentive Fee
Under the Advisory Agreement, the Company has agreed to pay the Adviser a fee for investment advisory and management services consisting of two components: a base management fee (the “Base Management Fee”) and an incentive fee (the “Incentive Fee”). The Incentive Fee has two components: one based on the Company’s pre-Incentive Fee net investment income (the “Income-Based Fee”) and one based on capital gains (the “Capital Gains Fee”). Under U.S. GAAP, the Company calculates the Capital Gains Fee payable to the Adviser as if the Company had realized all investments at their fair values as of the reporting date. Accordingly, the Company accrues a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of provisional Capital Gains Fee accrued at a reporting date may vary from the incentive fee that is ultimately realized and the differences could be material.
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date) commencing with the Company’s fiscal year ending on June 30, 2021, and is calculated at the end of each applicable year by subtracting (1) the sum of the Company’s cumulative aggregate realized capital losses and aggregate unrealized capital depreciation from (2) the Company’s cumulative aggregate realized capital gains, in each case calculated from June 30, 2020. If the amount so calculated is positive, then the Capital Gains Fee for such year is equal to 20% of such amount, less the aggregate amount of Capital Gains Fees paid in all prior years under the Advisory Agreement. If such amount is negative, then no Capital Gains Fee will be payable for such year. Under the Advisory Agreement, the Capital Gains
18
Fee was not charged until the fiscal year ended June 30, 2023. As of September 30, 2023 and June 30, 2023, there was no Capital Gains Fee payable to the Adviser under the Advisory Agreement.
Note 3. Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. The Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial statements upon adoption.
In June 2022, the FASB issued ASU 2022-03, "Fair Value Measurement (Topic 820) - Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions", which was issued to (1) clarify the guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security, (2) to amend a related illustrative example, and (3) to introduce new disclosure requirements for equity securities subject to contractual sale restrictions that are measured at fair value in accordance with Topic 820. The new guidance is effective for interim and annual periods beginning after December 15, 2023. The Company does not anticipate the new standard will have a material impact to the consolidated financial statements and related disclosures.
Note 4. Investments
The Company’s investments, at any time, may include securities and other financial instruments, including, without limitation, corporate and government bonds, convertible securities, collateralized loan obligations, term loans, revolvers and delayed draw facilities, trade claims, equity securities, privately negotiated securities, direct placements, working interests, warrants and investment derivatives (such as credit default swaps, recovery swaps, total return swaps, options, forward contracts, and futures) (all of the foregoing collectively referred to in these financial statements as “investments”).
a. Certain Risk Factors
In the ordinary course of business, the Company manages a variety of risks including market risk, liquidity risk and credit risk. The Company identifies, measures and monitors risk through various control mechanisms, including trading limits and diversifying exposures and activities across a variety of instruments, markets and counterparties.
Market risk is the risk of potential adverse changes to the value of financial instruments because of changes in market conditions, including as a result of changes in the credit quality of a particular issuer, credit spreads, interest rates, and other movements and volatility in security prices or commodities. In particular, the Company may invest in issuers that are experiencing or have experienced financial or business difficulties (including difficulties resulting from the initiation or prospect of significant litigation or bankruptcy proceedings), which involves significant risks. The Company manages its exposure to market risk through the use of risk management strategies and various analytical monitoring techniques.
With respect to liquidity risk, the Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making the purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Credit risk is the potential loss the Company may incur from a failure of an issuer to make payments according to the terms of a contract. The Company is subject to credit risk because of its strategy of investing in the debt of leveraged companies and its involvement in derivative instruments. The Company’s exposure to credit risk on its investments is limited to the fair value of the investments. With regard to derivatives, the Company attempts to limit its credit risk by considering its counterparty’s (or its guarantor’s) credit rating.
b. Investments
Investment purchases, sales and principal payments/paydowns are summarized below for the three months ended September 30, 2023 and September 30, 2022, respectively. These purchase and sale amounts exclude derivative instruments as well as non-cash restructurings.
|
|
For the three months ended September 30, |
||||
|
|
2023 |
|
2022 |
||
Investment purchases, at cost (including PIK interest) |
|
$ |
16,535,289 |
|
$ |
22,147,855 |
Investment sales and repayments |
|
|
10,317,357 |
|
|
16,476,699 |
19
The composition of the Company’s investments as of September 30, 2023, by investment type, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:
Investment Type |
|
Investments at |
|
|
Percentage of |
|
Investments at |
|
|
Percentage of |
||||
Senior Secured First Lien Debt Investments |
|
$ |
220,517,589 |
|
|
88.24 |
% |
|
$ |
200,319,576 |
|
|
89.67 |
% |
Equity, Warrants and Other Investments |
|
|
29,386,210 |
|
|
11.76 |
|
|
|
23,084,707 |
|
|
10.33 |
|
Total |
|
$ |
249,903,799 |
|
|
100.00 |
% |
|
$ |
223,404,283 |
|
|
100.00 |
% |
The composition of the Company’s investments as of June 30, 2023, by investment type, as a percentage of the total portfolio, at amortized cost and fair value, are as follows:
Investment Type |
|
Investments at |
|
|
Percentage of |
|
Investments at |
|
|
Percentage of |
||||
Senior Secured First Lien Debt Investments |
|
$ |
214,100,857 |
|
|
88.00 |
% |
|
$ |
196,370,955 |
|
|
89.21 |
% |
Equity, Warrants and Other Investments |
|
|
29,197,959 |
|
|
12.00 |
|
|
|
23,740,374 |
|
|
10.79 |
|
Total |
|
$ |
243,298,816 |
|
|
100.00 |
% |
|
$ |
220,111,329 |
|
|
100.00 |
% |
The Company uses Global Industry Classification Standard (“GICS”) codes to identify the industry groupings in its portfolio. The following table shows the portfolio composition by industry grouping at fair value at September 30, 2023:
Industry Classification |
|
Investments at |
|
Percentage of |
||
Trading Companies & Distributors |
|
$ |
38,219,681 |
|
17.11 |
% |
Professional Services |
|
|
25,728,030 |
|
11.52 |
|
IT Services |
|
|
16,830,075 |
|
7.53 |
|
Software |
|
|
13,736,438 |
|
6.15 |
|
Containers & Packaging |
|
|
13,558,591 |
|
6.07 |
|
Commercial Services & Supplies |
|
|
13,493,554 |
|
6.04 |
|
Machinery |
|
|
8,967,989 |
|
4.01 |
|
Internet & Direct Marketing Retail |
|
|
8,907,439 |
|
3.99 |
|
Household Durables |
|
|
7,766,091 |
|
3.48 |
|
Entertainment |
|
|
7,600,000 |
|
3.40 |
|
Chemicals |
|
|
7,527,189 |
|
3.37 |
|
Diversified Consumer Services |
|
|
7,250,052 |
|
3.25 |
|
Hotels, Restaurants, and Leisure |
|
|
7,171,656 |
|
3.21 |
|
Automobile Components |
|
|
6,158,497 |
|
2.76 |
|
Consumer Staples Distribution & Retail |
|
|
5,606,790 |
|
2.51 |
|
Specialty Retail |
|
|
5,059,875 |
|
2.26 |
|
Consumer Services |
|
|
4,915,732 |
|
2.20 |
|
Building Products |
|
|
4,474,688 |
|
2.00 |
|
Automotive Retail |
|
|
4,017,057 |
|
1.80 |
|
Food Products |
|
|
4,005,000 |
|
1.79 |
|
Construction & Engineering |
|
|
3,937,532 |
|
1.76 |
|
Paper Packaging |
|
|
3,000,000 |
|
1.34 |
|
Electronic Equipment, Instruments & Components |
|
|
2,852,627 |
|
1.28 |
|
Energy Equipment & Services |
|
|
2,619,700 |
|
1.17 |
|
Total |
|
$ |
223,404,283 |
|
100.00 |
% |
20
The following table shows the portfolio composition by industry grouping at fair value at June 30, 2023:
Industry Classification |
|
Investments at |
|
Percentage of |
||
Trading Companies & Distributors |
|
$ |
35,176,879 |
|
15.98 |
% |
Professional Services |
|
|
28,238,167 |
|
12.83 |
|
IT Services |
|
|
23,576,450 |
|
10.71 |
|
Commercial Services & Supplies |
|
|
14,329,460 |
|
6.51 |
|
Software |
|
|
13,772,487 |
|
6.26 |
|
Containers & Packaging |
|
|
12,958,772 |
|
5.89 |
|
Machinery |
|
|
9,602,806 |
|
4.36 |
|
Internet & Direct Marketing Retail |
|
|
8,969,729 |
|
4.08 |
|
Entertainment |
|
|
7,640,000 |
|
3.47 |
|
Household Durables |
|
|
7,610,242 |
|
3.46 |
|
Chemicals |
|
|
7,568,617 |
|
3.44 |
|
Diversified Consumer Services |
|
|
7,268,500 |
|
3.30 |
|
Automobile Components |
|
|
7,261,275 |
|
3.30 |
|
Hotels, Restaurants, and Leisure |
|
|
6,283,541 |
|
2.85 |
|
Consumer Staples Distribution & Retail |
|
|
6,061,396 |
|
2.75 |
|
Specialty Retail |
|
|
5,148,000 |
|
2.34 |
|
Building Products |
|
|
4,511,719 |
|
2.05 |
|
Food Products |
|
|
4,288,750 |
|
1.95 |
|
Automotive Retail |
|
|
3,878,905 |
|
1.76 |
|
Electronic Equipment, Instruments & Components |
|
|
3,265,598 |
|
1.48 |
|
Energy Equipment & Services |
|
|
2,700,036 |
|
1.23 |
|
Total |
|
$ |
220,111,329 |
|
100.00 |
% |
The following table shows the portfolio composition by geographic grouping at fair value at September 30, 2023:
Geographic Region |
|
Investments at |
|
Percentage of |
||
U.S. Northeast |
|
$ |
86,530,253 |
|
38.73 |
% |
U.S. West |
|
|
48,391,784 |
|
21.66 |
|
U.S. Midwest |
|
|
27,364,696 |
|
12.25 |
|
U.S. Mid-Atlantic |
|
|
22,911,655 |
|
10.26 |
|
U.S. Southeast |
|
|
20,636,714 |
|
9.24 |
|
U.S. Southwest |
|
|
12,601,618 |
|
5.64 |
|
International |
|
|
4,967,563 |
|
2.22 |
|
Total |
|
$ |
223,404,283 |
|
100.00 |
% |
The following table shows the portfolio composition by geographic grouping at fair value at June 30, 2023:
Geographic Region |
|
Investments at |
|
Percentage of |
||
U.S. Northeast |
|
$ |
94,658,227 |
|
43.00 |
% |
U.S. West |
|
|
44,911,266 |
|
20.40 |
|
U.S. Midwest |
|
|
26,602,440 |
|
12.09 |
|
U.S. Southeast |
|
|
20,803,349 |
|
9.45 |
|
U.S. Mid-Atlantic |
|
|
17,721,607 |
|
8.05 |
|
U.S. Southwest |
|
|
10,367,607 |
|
4.71 |
|
International |
|
|
5,046,833 |
|
2.30 |
|
Total |
|
$ |
220,111,329 |
|
100.00 |
% |
The Company’s primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle-market companies to help these companies fund acquisitions, growth or refinancing. During the three months ended September 30, 2023, the Company made investments in new and existing portfolio companies of approximately $15.5 million, to which it was not previously contractually committed to provide financial support. During the three months ended September 30, 2023, the Company made investments of approximately $0.7 million in companies to which it was previously committed to provide financial support through the terms of the revolvers and delayed draw term loans. The details of the Company’s investments have been disclosed on the Unaudited Consolidated Schedule of Investments.
c. Derivatives
Derivative contracts include total return swaps and embedded derivatives in the Company’s borrowings. The Company may enter into derivative contracts as part of its investment strategies. On October 28, 2020, the SEC adopted a rule that modifies the conditions by which BDCs can enter into, or “cover” open positions pursuant to, certain derivatives contracts that involve potential
21
future payment obligations (the “Derivatives Rule”). The Derivatives Rule requires a BDC entering into a derivatives contract to develop and implement a derivatives risk management program, to comply with an outer limit on asset coverage ratio based on the VaR (“value-at-risk”) test, and to report its derivative activity to its board of directors on a regular basis. The Derivatives Rule also contains exceptions to these conditions for any fund that limits its exposure to derivatives positions to 10 percent of its net assets. At September 30, 2023 and June 30, 2023, the Company held no derivative contracts.
d. Fair Value Measurements
ASC 820 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a valuation hierarchy that prioritizes the inputs used in the valuation of an asset or liability based upon their transparency. The valuation hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). Classification within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assets and liabilities measured at fair value have been classified in the following three categories:
Level 1 – valuation is based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 – valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, such as (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly; (c) inputs other than quoted prices that are observable for the asset or liability; or (d) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – valuation is based on unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. Unobservable inputs are developed based on the best information available under the circumstances, which might include the Company’s own data. The Company’s own data used to develop unobservable inputs is adjusted if information is reasonably available without undue cost and effort that indicates that market participants would use different assumptions.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of the market and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
Estimates of fair value for cash and restricted cash are measured using observable, quoted market prices, or Level 1 inputs. All other fair value significant estimates are measured using unobservable inputs, or Level 3 inputs.
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets measured at fair value as of September 30, 2023:
|
|
Level 1 |
|
Level 2 |
|
|
Level 3 |
|
Total |
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments |
|
$ |
— |
|
$ |
— |
|
|
$ |
200,319,576 |
|
$ |
200,319,576 |
Equity, Warrants and Other Investments |
|
|
— |
|
|
— |
|
|
|
23,084,707 |
|
|
23,084,707 |
Total Investments |
|
$ |
— |
|
$ |
— |
|
|
$ |
223,404,283 |
|
$ |
223,404,283 |
22
The following table summarizes the classifications within the fair value hierarchy of the Company’s assets measured at fair value as of June 30, 2023:
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured First Lien Debt Investments |
|
$ |
— |
|
$ |
— |
|
$ |
196,370,955 |
|
$ |
196,370,955 |
Equity, Warrants and Other Investments |
|
|
— |
|
|
— |
|
|
23,740,374 |
|
|
23,740,374 |
Total Investments |
|
$ |
— |
|
$ |
— |
|
$ |
220,111,329 |
|
$ |
220,111,329 |
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended September 30, 2023:
|
|
Senior Secured |
|
Senior Secured |
|
Unsecured |
|
Equity, Warrants |
|
Total |
|||||
Fair value at September 30, 2022 |
|
$ |
196,370,955 |
|
$ |
— |
|
$ |
— |
|
$ |
23,740,374 |
|
$ |
220,111,329 |
Purchases (including PIK interest) |
|
|
16,347,037 |
|
|
— |
|
|
— |
|
|
188,252 |
|
|
16,535,289 |
Sales and repayments |
|
|
(10,317,357) |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,317,357) |
Amortization |
|
|
387,051 |
|
|
— |
|
|
— |
|
|
— |
|
|
387,051 |
Net realized gains (losses) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Transfers in |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Transfers out |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Net change in unrealized appreciation (depreciation) |
|
|
(2,468,110) |
|
|
— |
|
|
— |
|
|
(843,919) |
|
|
(3,312,029) |
Fair value at September 30, 2023 |
|
$ |
200,319,576 |
|
$ |
— |
|
$ |
— |
|
$ |
23,084,707 |
|
$ |
223,404,283 |
Change in unrealized appreciation (depreciation) relating to assets still held as of September 30, 2023 |
|
$ |
(2,468,109) |
|
$ |
— |
|
$ |
— |
|
$ |
(843,919) |
|
$ |
(3,312,028) |
The following table provides a reconciliation of the beginning and ending balances for investments that use Level 3 inputs for the three months ended September 30, 2022:
|
|
Senior Secured |
|
Senior Secured |
|
Unsecured |
|
Equity, Warrants |
|
Total |
|||||
Fair value at June 30, 2022 |
|
$ |
214,858,036 |
|
$ |
— |
|
$ |
— |
|
$ |
18,825,950 |
|
$ |
233,683,986 |
Purchases (including PIK interest) |
|
|
21,781,406 |
|
|
— |
|
|
— |
|
|
366,449 |
|
|
22,147,855 |
Sales and repayments |
|
|
(16,476,699) |
|
|
— |
|
|
— |
|
|
— |
|
|
(16,476,699) |
Amortization |
|
|
501,016 |
|
|
— |
|
|
— |
|
|
— |
|
|
501,016 |
Net realized gains (losses) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Transfers in |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Transfers out |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
Net change in unrealized (depreciation) appreciation |
|
|
(1,130,564) |
|
|
— |
|
|
— |
|
|
451,967 |
|
|
(678,597) |
Fair value at September 30, 2022 |
|
$ |
219,533,195 |
|
$ |
— |
|
$ |
— |
|
$ |
19,644,366 |
|
$ |
239,177,561 |
Change in unrealized appreciation (depreciation) relating to assets still held as of September 30, 2022 |
|
$ |
(1,022,903) |
|
$ |
— |
|
$ |
— |
|
$ |
451,968 |
|
$ |
(570,935) |
Transfers into Level 3 during or at the end of the reporting period are reported under Level 1 or Level 2 as of the beginning of the period. Transfers out of Level 3 during or at the end of the reporting period are reported under Level 3 as of the beginning of the period. Changes in unrealized gains (losses) relating to Level 3 instruments are included in net change in unrealized (depreciation) appreciation on investments and derivatives on the Unaudited Consolidated Statements of Operations.
During the three months ended September 30, 2023 and three months ended September 30, 2022, the Company did not transfer any investments among Levels 1, 2 and 3.
The following tables provide quantitative information regarding the Company’s Level 3 fair value measurements as of September 30, 2023 and June 30, 2023. This information presents the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one investment. For example, the highest market yield presented in the table for senior secured notes is appropriate for valuing a specific investment but may not be appropriate for valuing any other investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Company’s Level 3 investments. In addition to the techniques and inputs noted in the tables below, according to our valuation policy we may also use other valuation techniques and methodologies when determining our fair value measurements. The below tables are not intended to be all-inclusive, but rather provide information on the significant unobservable inputs as they relate to the Company’s determination of fair values.
23
|
|
Fair Value |
|
Valuation |
|
Unobservable |
|
Weighted |
|
Range |
||
Senior Secured First Lien Debt Investments |
|
$ |
167,661,231 |
|
Income Approach |
|
Market Yields |
|
13.4% |
|
|
9.9%-18.1% |
Senior Secured First Lien Debt Investments |
|
|
6,294,430 |
|
Market Comparable Approach |
|
EBITDA Multiple |
|
5.3x |
|
|
5.2x-5.8x |
Senior Secured First Lien Debt Investments |
|
|
2,418,108 |
|
Market Comparable Approach |
|
Revenue Multiple |
|
0.27x |
|
|
0.27x |
Senior Secured First Lien Debt Investments |
|
|
14,853,263 |
|
Recent Transaction |
|
Recent Transaction |
|
N/A |
|
|
N/A |
Senior Secured First Lien Debt Investments |
|
|
9,092,544 |
|
Recovery Analysis |
|
Recovery Amount |
|
N/A |
|
|
N/A |
Equity, Warrants, and Other Investments |
|
|
5,593,082 |
|
Income Approach |
|
Market Yields |
|
17.1% |
|
|
17.1% |
Equity, Warrants, and Other Investments |
|
|
17,491,625 |
|
Market Comparable Approach |
|
EBITDA multiple |
|
8.9x |
|
|
4.7x-21.9x |
|
|
Fair Value as of |
|
Valuation |
|
Unobservable |
|
Weighted |
|
|
Range |
|
Senior Secured First Lien Debt Investments |
|
$ |
161,776,983 |
|
Income Approach |
|
Market Yields |
|
13.3% |
|
|
10.1% - 18.0% |
Senior Secured First Lien Debt Investments |
|
|
13,895,260 |
|
Market Comparable Approach |
|
EBITDA Multiple |
|
17.3x |
|
|
5.7x – 21.2x |
Senior Secured First Lien Debt Investments |
|
|
5,272,355 |
|
Market Comparable Approach |
|
Revenue Multiple |
|
0.3x |
|
|
0.30x – 0.38x |
Senior Secured First Lien Debt Investments |
|
|
15,209,280 |
|
Recent Transaction |
|
Recent Transaction |
|
N/A |
|
|
N/A |
Senior Secured First Lien Debt Investments |
|
|
217,077 |
|
Recovery Analysis |
|
Recovery Amount |
|
N/A |
|
|
N/A |
Equity, Warrants and Other Investments |
|
|
4,824,752 |
|
Income Approach |
|
Market Yields |
|
18.0% |
|
|
18.0% |
Equity, Warrants and Other Investments |
|
|
18,915,622 |
|
Market Comparable Approach |
|
EBITDA multiple |
|
8.7x |
|
|
5.7x – 24.2x |
Equity, Warrants and Other Investments |
|
|
— |
|
Market Comparable Approach |
|
Revenue Multiple |
|
0.3x |
|
|
0.3x |
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. Significant increases in illiquidity discounts, PIK discounts and market yields would result in significantly lower fair value measurements.
Note 5. Borrowings
On August 23, 2021, the Company, through SPV LLC entered into a five-year, $115 million senior secured revolving credit facility (the “Capital One Revolving Financing”) with Capital One, N.A. (“Capital One”), which is secured by collateral consisting primarily of loans in the Company’s investment portfolio. On June 14, 2023, we amended the Capital One Revolving Financing to decrease the facility size from $115 million to $100 million. The Capital One Revolving Financing, which will expire on August 22, 2026 (the “Maturity Date”), features a three-year reinvestment period and a two-year amortization period.
Effective November 18, 2022, borrowings under the Capital One Revolving Financing generally bear interest at a rate per annum equal to the Secured Overnight Financing Rate (”SOFR”) plus 2.50%. The default interest rate will be equal to the interest rate then in effect plus 2.00%. The Capital One Revolving Financing required the payment of an upfront fee of 1.125% ($1.3 million) of the available borrowings under the Capital One Revolving Financing at the closing, and requires the payment of an unused fee of (i) 0.75% annually for any undrawn amounts below 50% of the Capital One Revolving Financing, (ii) 0.50% annually for any undrawn amounts between 50% and 75% of the Capital One Revolving Financing, and (iii) 0.25% annually for any undrawn amounts above 75% of the Capital One Revolving Financing. Borrowings under the Capital One Revolving Financing are based on a borrowing base. The Capital One Revolving Financing generally requires payment of interest and fees on a quarterly basis. All outstanding principal is due on the Maturity Date. The Capital One Revolving Financing also requires mandatory prepayment of interest and principal upon certain events.
As of September 30, 2023 and June 30, 2023, there were $69.0 million and $71.9 million in borrowings outstanding under the Capital One Revolving Financing, respectively.
Restricted cash (as shown on the Unaudited Consolidated Statements of Assets and Liabilities) is held by the trustee of the Capital One Revolving Financing and is restricted to purchases of investments by SPV LLC that must meet certain eligibility criteria identified by the loan, security and investment management agreement governing the Capital One Revolving Financing. As of September 30, 2023, SPV LLC had a notional amount of $200.0 million, which included $185.5 million of the Company’s portfolio investments at fair value, no accrued interest receivable and $14.2 million in cash held by the trustees of the Capital One Revolving Financing. As of June 30, 2023, SPV and LLC had a notional amount of $194.0 million in assets with a fair value of $181.5 million, no accrued interest receivable and $8.1 million in cash held by the trustee of the Capital One Revolving Financing. For the three months ended September 30, 2023, the weighted average outstanding debt balance and the weighted average stated interest rate under the Capital One Revolving Financing was $70.0 million and 7.75%, respectively. For the three months ended September 30, 2022, the
24
weighted average outstanding debt balance and the weighted average stated interest rate under the Capital One Revolving Financing was $81.9 million and 4.56%, respectively.
The fair value of the Company’s borrowings is estimated based on the rate at which similar credit facilities or debentures would be priced. At September 30, 2023 and June 30, 2023, the fair value of the Company’s total borrowings under the Capital One Revolving Financing, was estimated at $69.0 million and $71.9 million respectively, which the Company concluded was a Level 3 fair value.
On March 31, 2021, the Company closed the public offering of $65 million in aggregate principal amount of 4.875% notes due 2026 (the “2026 Notes”). The total net proceeds to the Company from the sale of the 2026 Notes, after deducting the underwriting discounts and commissions of approximately $1.3 million and estimated offering expenses of approximately $215,000, were approximately $63.1 million.
The 2026 Notes will mature on April 1, 2026, unless previously redeemed or repurchased in accordance with their terms, and bear interest at a rate of 4.875%. The 2026 Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured, unsubordinated indebtedness issued by the Company. Because the 2026 Notes are not secured by any of the Company’s assets, they are effectively subordinated to all of the Company’s existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which the Company subsequently grants a security interest), to the extent of the value of the assets securing such indebtedness. The 2026 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of the Company’s subsidiaries and financing vehicles, including, without limitation, borrowings under the Capital One Revolving Financing. The 2026 Notes are obligations exclusively of the Company and not of any of the Company’s subsidiaries. None of the Company’s subsidiaries is a guarantor of the 2026 Notes and the 2026 Notes will not be required to be guaranteed by any subsidiary the Company may acquire or create in the future.
The 2026 Notes may be redeemed in whole or in part at any time or from time to time at the Company’s option, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price (as determined by the Company) equal to the greater of the following amounts, plus, in each case, accrued and unpaid interest to, but excluding, the redemption date: (1) 100% of the principal amount of the 2026 Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of accrued and unpaid interest to the date of redemption) on the 2026 Notes to be redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) using the applicable Treasury Rate plus 50 basis points; provided, however, that if the Company redeems any 2026 Notes on or after January 1, 2026 (the date falling three months prior to the maturity date of the 2026 Notes), the redemption price for the 2026 Notes will be equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption; provided, further, that no such partial redemption shall reduce the portion of the principal amount of a 2026 Note not redeemed to less than $2,000. Interest on the 2026 Notes is payable semi-annually on April 1 and October 1 of each year, commencing October 1, 2021. The Company may from time to time repurchase 2026 Notes in accordance with the 1940 Act and the rules promulgated thereunder.
As of September 30, 2023, the carrying amount of the 2026 Notes was $64.8 million on an aggregate principal balance of $65.0 million at an effective yield of 5.33%. As of September 30, 2023, the fair value of the 2026 Notes was $58.2 million. The Company concluded that this was Level 3 fair value under ASC 820.
Long-Term Debt Maturities
Set forth below is the aggregate principal amount of our long-term debt as of September 30, 2023 (excluding unamortized premiums, net, unamortized debt issuance costs and note payable) maturing during the following years:
2024 |
|
$ |
— |
2025 |
|
|
— |
2026 |
|
|
134,000,000 |
Total long-term debt |
|
$ |
134,000,000 |
Note 6. Indemnification, Guarantees, Commitments and Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of representations and warranties and general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements is unknown as it would involve future claims that may be made against the Company; however, based on the Company’s experience, the risk of loss is remote and no such claims are expected to occur. As such, the Company has not accrued any liability in connection with such indemnifications.
25
The Company’s board of directors declared the following quarterly distributions during the three months ended September 30, 2023:
Declared |
|
Ex-Date |
|
Record Date |
|
Pay Date |
|
Amount |
|
Fiscal Quarter |
September 14, 2023 |
|
October 11, 2023 |
|
October 12, 2023 |
|
November 2, 2023 |
|
$0.1500 |
|
1st 2024 |
Loans purchased by the Company may include revolving credit agreements or other financing commitments obligating the Company to advance additional amounts on demand. The Company generally sets aside sufficient liquid assets to cover its unfunded commitments, if any.
The following table details the Company’s unfunded commitments to portfolio companies as of September 30, 2023:
Investments |
|
Unfunded |
|
Fair |
|
Annual |
|
Expiration |
||
1888 Industrial Services, LLC – Revolver |
|
$ |
210,033 |
|
$ |
— |
|
0.50% |
|
8/31/24 |
Amerequip, LLC – Revolver |
|
|
967,742 |
|
|
— |
|
0.50% |
|
8/31/27 |
Arborworks Acquisition LLC – Revolver |
|
|
8,363 |
|
|
— |
|
0.50% |
|
11/9/26 |
Archer Systems, LLC – Revolver |
|
|
603,175 |
|
|
— |
|
0.50% |
|
8/11/27 |
Evergreen North America Acquisitions, LLC – Revolver |
|
|
276,064 |
|
|
— |
|
0.50% |
|
8/13/26 |
Flatworld Intermediate Corporation – Revolver |
|
|
567,568 |
|
|
— |
|
0.50% |
|
10/1/27 |
NWN Parent Holdings LLC – Revolver |
|
|
1,200,000 |
|
|
— |
|
0.50% |
|
5/7/26 |
South Coast Terminals LLC – Revolver |
|
|
967,742 |
|
|
— |
|
0.50% |
|
12/10/26 |
Xenon Arc, Inc. – Revolver |
|
|
680,000 |
|
|
— |
|
0.50% |
|
12/17/26 |
Total Unfunded Commitments |
|
$ |
5,480,687 |
|
$ |
— |
|
|
|
|
The following table details the Company’s unfunded commitments to portfolio companies as of June 30, 2023:
Investments |
|
Unfunded |
|
Fair |
|
Annual |
|
Expiration |
||
1888 Industrial Services, LLC – Revolver |
|
$ |
186,990 |
|
$ |
— |
|
0.50% |
|
8/31/24 |
Amerequip, LLC – Revolver |
|
|
967,742 |
|
|
— |
|
0.50% |
|
8/31/27 |
Arborworks Acquisition LLC – Revolver |
|
|
554,947 |
|
|
— |
|
0.50% |
|
11/9/26 |
Archer Systems, LLC – Revolver |
|
|
603,175 |
|
|
— |
|
0.50% |
|
8/11/27 |
Evergreen North America Acquisitions, LLC – Revolver |
|
|
276,064 |
|
|
— |
|
0.50% |
|
8/13/26 |
Flatworld Intermediate Corporation – Revolver |
|
|
567,567 |
|
|
— |
|
0.50% |
|
10/1/27 |
NWN Parent Holdings LLC – Revolver |
|
|
800,000 |
|
|
— |
|
0.50% |
|
5/7/26 |
South Coast Terminals LLC – Revolver |
|
|
967,742 |
|
|
— |
|
0.50% |
|
12/10/26 |
Xenon Arc, Inc. – Revolver |
|
|
746,667 |
|
|
— |
|
0.50% |
|
12/17/26 |
Total Unfunded Commitments |
|
$ |
5,670,894 |
|
$ |
— |
|
|
|
|
Note 7. Agreements and Related Party Transactions
Advisory Agreement
The Company is party to the Advisory Agreement with the Adviser. Under the Advisory Agreement, the Base Management Fee is calculated at an annual rate of 1.75% of the Company’s gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such amount, “Gross Assets”).
For the three months ended September 30, 2023, $978,919 in Base Management Fees were earned by the Adviser, of which $86,630 was voluntarily waived. As of September 30, 2023, $1,798,508 of such fees were payable. For the three months ended September 30, 2022, $1,103,981 in Base Management Fees were earned by the Adviser, of which $94,146 was voluntarily waived. As of June 30, 2023, $906,218 of such fees were payable. There is no guarantee that the Adviser will waive Base Management Fees in the future. Any portion of the Base Management Fee waived is not subject to recapture.
The Base Management Fee is calculated based on the average value of the Company’s Gross Assets at the end of the two most recently completed fiscal quarters prior to the quarter for which such fees are being calculated. The Base Management Fee is payable quarterly in arrears and the Base Management Fees for any partial month or quarter will be appropriately pro-rated.
Under the Advisory Agreement, the Income-Based Fee is calculated and payable quarterly in arrears based on the Company’s Pre-Incentive Fee Net Investment Income (as defined below) for the immediately preceding fiscal quarter, subject to a total return requirement (the “Total Return Requirement”) and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which the Company’s Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets attributable to its
26
common stock, for the immediately preceding fiscal quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a “catch-up” provision measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, the Adviser receives no Income-Based Fee until the Company’s Pre-Incentive Fee Net Investment Income exceeds the hurdle rate of 2.0%, but then receives, as a “catch-up,” 100% of the Company’s Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.5% (which is 10.0% annualized). The effect of the “catch-up” provision is that, subject to the Total Return Requirement and deferral provisions discussed below, if Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter, the Adviser receives 20.0% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply.
“Pre-Incentive Fee Net Investment Income” means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the Base Management Fee, expenses payable under the Administration Agreement and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the Incentive Fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash.
Pre-Incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
No Income-Based Fee is payable under the Advisory Agreement except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the fiscal quarter for which fees are being calculated and the Lookback Period (as defined below) exceeds the cumulative Incentive Fees accrued and/or paid for the Lookback Period. The “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of Pre-Incentive Fee Net Investment Income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current fiscal quarter and the Lookback Period. The “Lookback Period” means (1) through June 30, 2022, the period that commences on the last day of the fiscal quarter in which the Advisory Agreement became effective and ends on the last day of the fiscal quarter immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated, and (2) after June 30, 2022, the eleven fiscal quarters immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated.
For the three months ended September 30, 2023, the Company incurred no Income-Based Fees. As of September 30, 2023, $576,023 in incentive fees related to Income-Based Fees incurred by the Company are currently payable to the Adviser and $201,817 in incentive fees related to Income-Based Fees incurred by the Company were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three months ended September 30, 2022, the Company wrote off $147,145 in previously deferred Income-Based Fees and incurred no additional Income-Based Fees. As of June 30, 2023, $201,817 of Income-Based Fees incurred by the Company were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash. Any voluntary waivers of the incentive fee in no way implies that the Adviser will agree to waive any incentive fee in any future period. Any portion of the incentive fees waived are not subject to recapture.
Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year ended June 30, 2021, and is equal to 20.0% of our cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of the Company’s aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. If such amount is negative, then no Capital Gains Fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a fiscal year end for purposes of calculating and paying the Capital Gains Fee. Under the Advisory Agreement, the Capital Gains Fee was not charged until the fiscal year ending June 30, 2023.
Under U.S. GAAP, the Company calculates the Capital Gains Fee as if it had realized all assets at their fair values as of the reporting date. Accordingly, the Company accrues a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of the provisional Capital Gains Fee accrued at a reporting date may vary from the Capital Gains Fee that is ultimately realized and the differences could be material.
As of September 30, 2023, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Advisory Agreement. As of June 30, 2023, there was no Capital Gains Fee accrued, earned or payable to the Adviser under the Advisory Agreement.
27
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of the Adviser’s duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser’s services under the Advisory Agreement or otherwise as the Adviser.
Mr. Mauer holds an approximate 17% interest in the Adviser. Investcorp holds an approximate 83% ownership interest in the Adviser. Pursuant to the Advisory Agreement, the Company has agreed to pay to the Adviser a Base Management Fee and an Incentive Fee. Mr. Mauer, an interested member of the Board, has a direct or indirect pecuniary interest in the Adviser. The Incentive Fee will be computed and paid on income that we may not have yet received in cash at the time of payment. This fee structure may create an incentive for the Adviser to invest in certain types of speculative securities. Additionally, the Company will rely on investment professionals from the Adviser to assist the Board with the valuation of the Company’s portfolio investments. The Adviser’s Base Management Fee and Incentive Fee is based on the value of our investments and, therefore, there may be a conflict of interest when personnel of the Adviser are involved in the valuation process for the Company’s portfolio investments.
Administration Agreement
Pursuant to the Administration Agreement, the Adviser furnishes the Company with office facilities and equipment and provides it with the clerical, bookkeeping, recordkeeping and other administrative services necessary to conduct day-to-day operations. Under the Administration Agreement, the Adviser performs, or oversees the performance of the Company’s required administrative services, which includes, among other things, being responsible for the financial records which it is required to maintain and preparing reports to its stockholders and reports filed with the SEC. In addition, the Adviser assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports and other materials to its stockholders, and generally oversees the payment of its expenses and the performance of administrative and professional services rendered to it by others. Under the Administration Agreement, the Adviser also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted its offer to provide such assistance. In addition, the Adviser may satisfy certain of its obligations to the Company under the Administration Agreement through the services agreement with Investcorp International Inc., an affiliate of Investcorp, including supplying the Company with accounting and back-office professionals upon the request of the Adviser. The Company incurred costs of $263,375 under the Administration Agreement for the three months ended September 30, 2023. The Company incurred costs of $375,900 under the Administration Agreement for the three months ended September 30, 2022.
As of September 30, 2023 and June 30, 2023, the Company recorded no accrued expenses or other liabilities for reimbursement of expenses owed to the Adviser under the Administration Agreement.
Stock Purchase Agreement
In connection with the Investcorp Transaction, on June 26, 2019, the Company entered into a definitive stock purchase and transaction agreement with Investcorp BDC Holdings Limited (“Investcorp BDC”), an affiliate of Investcorp (the “Stock Purchase Agreement”), pursuant to which Investcorp BDC was required by August 30, 2021, to purchase (i) 680,985 newly issued shares of the Company’s common stock, at the most recently determined net asset value per share of the Company’s common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and (ii) 680,985 shares of the Company’s common stock in open-market or secondary transactions. Investcorp BDC completed all remaining required purchases under the Stock Purchase Agreement during the quarter ended September 30, 2021.
Co-investment Exemptive Relief
On July 20, 2021, the SEC issued an order, which superseded a prior order issued on March 19, 2019, granting the Company’s application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions with other funds managed by the Adviser or its affiliates and any future funds that are advised by the Adviser or its affiliated investment advisers (the “Exemptive Relief”). Under the terms of the Exemptive Relief, in order for the Company to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of the directors who are not “interested persons” of the Company, as defined in Section 2(a)(19) of the 1940 Act (each, an “Independent Director”) must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to the Company and its stockholders and do not involve overreaching in respect of the Company or its stockholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of the Company’s stockholders and is consistent with the Company’s investment objectives and strategies.
28
License Agreement
The Company has entered into a license agreement with the Adviser under which the Adviser has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Investcorp.” Under this agreement, the Company has a right to use the “Investcorp” name for so long as the Adviser or one of its affiliates remains the Company’s investment adviser. Other than with respect to this limited license, the Company has no legal right to the “Investcorp” name. This license agreement will remain in effect for so long as the Advisory Agreement with the Adviser is in effect and Investcorp is the majority owner of the Adviser.
Note 8. Directors’ Fees
Each Independent Director receives (i) an annual fee of $75,000, and (ii) $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person or telephonically each regular board of directors meeting and each special telephonic meeting. Each Independent Director also receives $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairperson of the audit committee receives an additional annual fee of $7,500. The chairperson(s) of the valuation committee, the nominating and corporate governance committee and the compensation committee receives an additional annual fee of $2,500, $2,500 and $2,500, respectively. The Company has obtained directors’ and officers’ liability insurance on behalf of the Company’s directors and officers. For the three months ended September 30, 2023, the Company recorded directors’ fees of $73,375, of which $5,130 were payable at September 30, 2023. For the three months ended September 30, 2022, the Company recorded directors’ fees of $75,625, of which $15,755 were payable at June 30, 2023.
Note 9. Net Change in Net Assets Resulting from Operations Per Share
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.
The following table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations:
Basic and Diluted Net Increase (Decrease) in Net Assets Per Share |
|
Three months ended September 30, |
||||
|
|
2023 |
|
2022 |
||
Net increase (decrease) in net assets resulting from operations |
|
$ |
(1,684,362) |
|
$ |
1,657,507 |
Weighted average shares of common stock outstanding |
|
|
14,392,714 |
|
|
14,386,809 |
Basic/diluted net increase (decrease) in net assets from operations per share |
|
$ |
(0.12) |
|
$ |
0.12 |
On September 3, 2021, the Company issued 453,985 shares of common stock, par value $0.001 per share to Investcorp BDC at a price of $6.92 per share for an aggregate offering price of $3,141,576. The sale of the Company’s common stock to Investcorp BDC was made pursuant to the Stock Purchase Agreement and the issuance of the Company’s common stock was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(a)(2) thereof and Regulation D thereunder. Investcorp BDC is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D under the Securities Act.
29
Note 10. Distributions
The following table reflects the distributions declared on shares of the Company’s common stock since the Offering in February 2014. Stockholders of record as of each respective record date were entitled to receive the distribution:
Declaration Date |
|
Record Date |
|
Payment Date |
|
Amount Per Share |
|
|
March 14, 2014 |
|
March 24, 2014 |
|
March 31, 2014 |
|
$ |
0.1812 |
|
May 14, 2014 |
|
June 16, 2014 |
|
July 1, 2014 |
|
$ |
0.3375 |
|
September 4, 2014 |
|
September 18, 2014 |
|
October 1, 2014 |
|
$ |
0.3375 |
|
November 6, 2014 |
|
December 18, 2014 |
|
January 5, 2015 |
|
$ |
0.3375 |
|
January 28, 2015 |
|
March 18, 2015 |
|
April 2, 2015 |
|
$ |
0.3469 |
|
May 6, 2015 |
|
June 8, 2015 |
|
July 5, 2015 |
|
$ |
0.3469 |
|
June 10, 2015# |
|
September 1, 2015 |
|
September 15, 2015 |
|
$ |
0.4300 |
|
June 10, 2015 |
|
September 18, 2015 |
|
October 2, 2015 |
|
$ |
0.3469 |
|
November 3, 2015 |
|
December 18, 2015 |
|
January 5, 2016 |
|
$ |
0.3469 |
|
February 2, 2016 |
|
March 18, 2016 |
|
April 7, 2016 |
|
$ |
0.3516 |
|
April 28, 2016 |
|
June 17, 2016 |
|
July 7, 2016 |
|
$ |
0.3516 |
|
August 25, 2016 |
|
September 16, 2016 |
|
October 6, 2016 |
|
$ |
0.3516 |
|
November 3, 2016 |
|
December 16, 2016 |
|
January 5, 2017 |
|
$ |
0.3516 |
|
November 3, 2016 |
|
March 17, 2017 |
|
April 6, 2017 |
|
$ |
0.2500 |
|
May 2, 2017 |
|
June 16, 2017 |
|
July 6, 2017 |
|
$ |
0.2500 |
|
August 24, 2017 |
|
September 8, 2017 |
|
October 5, 2017 |
|
$ |
0.2500 |
|
November 7, 2017 |
|
March 16, 2018 |
|
April 5, 2018 |
|
$ |
0.2500 |
|
May 2, 2018 |
|
June 15, 2018 |
|
July 5, 2018 |
|
$ |
0.2500 |
|
August 23, 2018 |
|
September 18, 2018 |
|
October 5, 2018 |
|
$ |
0.2500 |
|
November 6, 2018 |
|
December 14, 2018 |
|
January 3, 2019 |
|
$ |
0.2500 |
|
February 5, 2019 |
|
March 15, 2019 |
|
April 4, 2019 |
|
$ |
0.2500 |
|
May 1, 2019 |
|
June 14, 2019 |
|
July 5, 2019 |
|
$ |
0.2500 |
|
August 28, 2019 |
|
September 26, 2019 |
|
October 16, 2019 |
|
$ |
0.2500 |
|
November 6, 2019 |
|
December 13, 2019 |
|
January 2, 2020 |
|
$ |
0.2500 |
|
February 4, 2020 |
|
March 13, 2020 |
|
April 2, 2020 |
|
$ |
0.2500 |
|
May 7, 2020 |
|
June 19, 2020 |
|
July 10, 2020 |
|
$ |
0.1500 |
|
May 7, 2020* |
|
June 19, 2020 |
|
July 10, 2020 |
|
$ |
0.0300 |
|
August 26, 2020 |
|
September 25, 2020 |
|
October 15, 2020 |
|
$ |
0.1500 |
|
August 26, 2020* |
|
September 25, 2020 |
|
October 15, 2020 |
|
$ |
0.0300 |
|
November 3, 2020 |
|
December 10, 2020 |
|
January 4, 2021 |
|
$ |
0.1500 |
|
November 3, 2020* |
|
December 10, 2020 |
|
January 4, 2021 |
|
$ |
0.0300 |
|
February 3, 2021 |
|
March 12, 2021 |
|
April 1, 2021 |
|
$ |
0.1500 |
|
February 3, 2021* |
|
March 12, 2021 |
|
April 1, 2021 |
|
$ |
0.0300 |
|
May 6, 2021 |
|
June 18, 2021 |
|
July 9, 2021 |
|
$ |
0.1500 |
|
August 25, 2021 |
|
September 24, 2021 |
|
October 14, 2021 |
|
$ |
0.1500 |
|
November 3, 2021 |
|
December 10, 2021 |
|
January 4, 2022 |
|
$ |
0.1500 |
|
February 3, 2022 |
|
March 11, 2022 |
|
March 31, 2022 |
|
$ |
0.1500 |
|
May 5, 2022 |
|
June 17, 2022 |
|
July 8, 2022 |
|
$ |
0.1500 |
|
August 25, 2022 |
|
September 23, 2022 |
|
October 14, 2022 |
|
$ |
0.1500 |
|
November 11, 2022 |
|
December 16, 2022 |
|
January 10, 2023 |
|
$ |
0.1300 |
|
November 11, 2022* |
|
December 16, 2022 |
|
January 10, 2023 |
|
$ |
0.0200 |
|
February 2, 2023 |
|
March 10, 2023 |
|
March 30, 2023 |
|
$ |
0.1300 |
|
February 2, 2023* |
|
March 10, 2023 |
|
March 30, 2023 |
|
$ |
0.0200 |
|
May 4, 2023 |
|
June 16, 2023 |
|
July 7, 2023 |
|
$ |
0.1300 |
|
May 4, 2023* |
|
June 16, 2023 |
|
July 7, 2023 |
|
$ |
0.0500 |
|
September 14, 2023 |
|
October 12, 2023 |
|
November 2, 2023 |
|
$ |
0.1300 |
|
September 14, 2023* |
|
October 12, 2023 |
|
November 2, 2023 |
|
$ |
0.0200 |
|
# Special distribution
* Supplemental distribution
The following table reflects, for U.S. federal income tax purposes, the sources of the cash dividend distributions that the Company has paid on its common stock during the three months ended September 30, 2023 and September 30, 2022:
|
|
Three months ended September 30, |
||||||||
|
|
2023 |
|
2022 |
||||||
|
|
|
Distribution Amount |
|
Percentage |
|
|
Distribution Amount |
|
Percentage |
Ordinary income and short-term capital gains |
|
$ |
2,158,926 |
|
100% |
|
$ |
2,158,042 |
|
100% |
Long-term capital gains |
|
|
— |
|
— |
|
|
— |
|
— |
Total |
|
$ |
2,158,926 |
|
100% |
|
$ |
2,158,042 |
|
100% |
The 2023-2024 figures in the above table are estimates based on the Company’s year-to-date activity. The tax status of distributions for a tax year depends on the Company’s total amount of taxable income for the entire year, therefore, the tax status
30
cannot be confirmed until after the end of the tax year. Accordingly, the Company’s distributions for the tax year may be re-characterized later based upon subsequent events. As applicable, the Company reports the actual tax character of its distributions for U.S. federal income tax purposes annually to stockholders on Internal Revenue Service Form 1099-DIV issued after the end of the year. The Company’s Form 10-K for the year ending June 30, 2024 will also include information regarding the actual components and tax treatment of all the Company’s distributions for the fiscal year 2023-2024. Because each stockholder’s tax status is unique, stockholders should consult their tax advisor regarding this distribution notice.
Note 11. Share Transactions
The following table summarizes the total shares issued for the three months ended September 30, 2023 and September 30, 2022.
|
|
Three months ended September 30, |
||||||||
|
|
2023 |
|
2022 |
||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
||
Balance at beginning of period |
|
14,391,775 |
|
$ |
205,812,251 |
|
14,385,810 |
|
$ |
205,790,502 |
Issuance of common shares |
|
— |
|
|
— |
|
— |
|
|
— |
Reinvestments of stockholder distributions |
|
1,066 |
|
|
3,797 |
|
1,135 |
|
|
4,763 |
Balance at end of period |
|
14,392,841 |
|
$ |
205,816,048 |
|
14,386,945 |
|
$ |
205,795,265 |
Note 12. Financial Highlights
The following represents the per share data and the ratios to average net assets for the Company:
|
For the three months ended September 30, |
||||||
|
2023 |
|
2022 |
||||
Per Share Data:(1) |
|
|
|
|
|
|
|
Net asset value, beginning of period |
$ |
6.09 |
|
|
$ |
6.50 |
|
Net investment income |
|
0.11 |
|
|
|
0.16 |
|
Net realized and unrealized gains (losses) |
|
(0.22) |
|
|
|
(0.04) |
|
Net increase (decrease) in net assets resulting from operations |
|
(0.11) |
|
|
|
0.12 |
|
Capital transactions(2) |
|
|
|
|
|
|
|
Dividends from net investment income |
|
(0.15) |
|
|
|
(0.15) |
|
Distributions from net realized gains |
|
— |
|
|
|
— |
|
Net decrease in net assets resulting from capital transactions |
|
(0.15) |
|
|
|
(0.15) |
|
Offering costs |
|
— |
|
|
|
— |
|
Net asset value, end of period |
$ |
5.83 |
|
|
$ |
6.47 |
|
Market value per share, end of period |
$ |
3.99 |
|
|
$ |
3.58 |
|
Total return based on market value(3)(4) |
|
15.05 |
% |
|
|
(11.94) |
% |
Shares outstanding at end of period |
|
14,392,841 |
|
|
|
14,386,945 |
|
Ratio/Supplemental Data: |
|
|
|
|
|
|
|
Net assets, at end of period |
$ |
83,860,817 |
|
|
$ |
93,013,620 |
|
Ratio of total expenses to average net assets(5) |
|
20.67 |
% |
|
|
17.30 |
% |
Ratio of net expenses to average net assets(5) |
|
20.26 |
% |
|
|
16.90 |
% |
Ratio of interest expense and fees and amortization of deferred debt issuance costs to average net assets(5) |
|
11.33 |
% |
|
|
8.38 |
% |
Ratio of net investment income before fee waiver to average net assets(5) |
|
8.13 |
% |
|
|
10.37 |
% |
Ratio of net investment income after fee waiver to average net assets(5) |
|
7.72 |
% |
|
|
9.96 |
% |
Total Borrowings |
$ |
134,000,000 |
|
|
$ |
154,500,000 |
|
Asset Coverage Ratio(6) |
|
1.63 |
|
|
|
1.60 |
|
Portfolio Turnover Rate(4) |
|
5 |
% |
|
|
7 |
% |
Total return is calculated based on a time-weighted rate of return methodology for the stockholders and is not annualized. Total return is reflected after all investment-related and operating expenses. An individual stockholder’s return may vary from these returns based on the timing of capital transactions.
31
The ratios to average stockholders’ capital are calculated based on the monthly average stockholders’ capital during the period. Credit facility related expenses include interest expense and amortization of deferred debt issuance costs.
Note 13. Other Fee Income
The other fee income consists of structuring fee income, amendment fee income and royalty income. The following tables summarize the Company’s other fee income for the three months ended September 30, 2023 and September 30, 2022:
|
|
For the three months ended |
||||
|
|
|
2023 |
|
|
2022 |
Amendment Fee |
|
$ |
51,904 |
|
$ |
60,338 |
Prepayment Fee Income |
|
|
87,158 |
|
|
187,720 |
Other Fees |
|
|
4,924 |
|
|
113,792 |
Other Fee Income |
|
$ |
143,986 |
|
$ |
361,850 |
Note 14. Tax Information
As of September 30, 2023, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
Tax cost |
|
$ |
249,731,637 |
Gross unrealized appreciation |
|
|
7,592,020 |
Gross unrealized depreciation |
|
|
(33,919,374) |
Net unrealized investment depreciation |
|
$ |
(26,327,354) |
As of June 30, 2023, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
Tax cost |
|
$ |
243,126,654 |
Gross unrealized appreciation |
|
|
7,371,220 |
Gross unrealized depreciation |
|
|
(30,386,545) |
Net unrealized investment depreciation |
|
$ |
(23,015,325) |
Note 15. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
From October 1, 2023 through November 13, 2023, the Company invested $10.6 million in three new portfolio companies.
The Company’s dividend framework provides a quarterly base dividend and may be supplemented, at the discretion of the Company’s board of directors, by additional dividends as determined to be available by the Company’s net investment income and performance during the quarter.
On November 9, 2023, the Company’s board of directors declared a distribution for the quarter ended December 31, 2023 of $0.12 per share payable on January 8, 2024, to stockholders of record as of December 14, 2023 and a supplemental distribution of $0.03 per share, payable on January 8, 2024, to stockholders of record as of December 14, 2023.
32
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation the risks, uncertainties and other factors we identify in “Risk Factors” in this Quarterly Report on Form 10-Q, in our most recent Annual Report on Form 10-K under Part I, Item 1A, and in our other filings with the SEC that we make from time to time. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, and include statements regarding the following, without limitation:
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of filing of this report. Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, actual results and/or events could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Important assumptions include, without limitation, our ability to originate new loans and investments, borrowing costs and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or Securities and Exchange Commission (“SEC”) rule or regulation. You are
33
advised to consult any additional disclosures that we may make directly to you or through reports that we file from time to time with the SEC, including our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
Investcorp Credit Management BDC, Inc. (“ICMB,” the “Company”, “us”, “we” or “our”), a Maryland corporation formed in May 2013, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for U.S. federal income tax purposes, we have elected to be treated and intend to continue to qualify as a RIC under Subchapter M of the Code. On August 30, 2019, we changed our name from CM Finance Inc. to Investcorp Credit Management BDC, Inc.
Our primary investment objective is to maximize total return to stockholders in the form of current income and capital appreciation by investing directly in debt and related equity of privately held middle market companies to help these companies fund acquisitions, growth or refinancing. We invest primarily in middle-market companies in the form of standalone first and second lien loans, unitranche loans and mezzanine loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
CM Investment Partners LLC (the “Adviser”) serves as our investment adviser. On August 30, 2019, Investcorp Credit Management US LLC (“Investcorp”) acquired an approximate 76% ownership interest in the Adviser through the acquisition of the interests held by Stifel Venture Corp. (“Stifel”) and certain funds managed by Cyrus Capital and through a direct purchase of equity from the Adviser. Investcorp is a leading global credit investment platform with assets under management of $22.0 billion as of September 30, 2023. Investcorp manages funds which invest primarily in senior secured corporate debt issued by mid and large-cap corporations in Western Europe and the United States. The business has a strong track record of consistent performance and growth, employing approximately 45 investment professionals in London and New York. Investcorp is a subsidiary of Investcorp Holdings B.S.C. (“Investcorp Holdings”). Investcorp Holdings and its consolidated subsidiaries, including Investcorp, are referred to as “Investcorp Group”. Investcorp Group is a global provider and manager of alternative investments, offering such investments to its high-net-worth private and institutional clients on a global basis.
We have entered into an investment advisory agreement (the “Advisory Agreement”) and an administration agreement (the “Administration Agreement”) with the Adviser, pursuant to which the Adviser provides us with investment advisory and the administrative services necessary for our operations. See “Note 7. Agreements and Related Party Transactions” in the notes to our consolidated financial statements in this Quarterly Report on Form 10-Q for more information regarding the Advisory Agreement and Administration Agreement and the fees and expenses paid or reimbursed by us thereunder.
From time to time, we may form taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes, to allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code. As of each of September 30, 2023 and June 30, 2023, we had no Taxable Subsidiaries.
We are generally permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after each such issuance.
On July 20, 2021, the SEC issued an order, which superseded a prior order issued on March 19, 2019, granting our application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions with other funds managed by the Adviser or its affiliates and any future funds that are advised by the Adviser or its affiliated investment advisers (the “Exemptive Relief”). Under the terms of the Exemptive Relief, in order for us to participate in a co-investment transaction a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our shareholders and do not involve overreaching in respect of us or our shareholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of our shareholders and is consistent with our investment objectives and strategies.
Market Developments
The current inflationary environment and uncertainty as to the probability of, and length and depth of a global recession could affect our portfolio companies. Government spending, government policies, including recent increases in certain interest rates by the U.S. Federal Reserve and other global central banks, the failures of certain regional banks earlier this year and the potential for disruptions in the availability of credit in the United States and elsewhere, in conjunction with other factors, including those described elsewhere in this Quarterly Report and in other filings we have made with the SEC, could affect our portfolio companies, our financial condition and our results of operations. We will continue to monitor the evolving market environment. In these circumstances,
34
developments outside our control could require us to adjust our plan of operations and could impact our financial condition, results of operations or cash flows in the future. Despite these factors, we believe we and our portfolio are well positioned to manage the current environment. For additional information, see Part I, Item 1A. Risk Factors in our most recently filed Annual Report on Form 10-K, as well as the risk factors listed in our subsequently filed Quarterly Reports on Form 10-Q.
Critical accounting estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.
Understanding our accounting policies and the extent to which we use management’s judgment and estimates in applying these policies is integral to understanding our financial statements. We describe our most significant accounting policies in “Note 2. Significant Accounting Policies” in our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2023 and in this Quarterly Report on Form 10-Q. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. Management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming the estimates and judgments, giving due consideration to materiality. We have identified the valuation of our portfolio investments, including our investment valuation policy (which has been approved by our board of directors), as our critical accounting policy and estimates. The critical accounting policies should be read in conjunction with our risk factors in our Annual Report on Form10-K for the fiscal year ended June 30, 2023 and our subsequently filed Quarterly Reports on Form 10-Q. In addition to the discussion below, our critical accounting policies are further described in the notes to our consolidated financial statements.
Valuation of portfolio investments
We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (a) are independent of us, (b) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (c) are able to transact for the asset, and (d) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker dealers or market makers.
Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by our board of directors. Because a readily available market value for many of the investments in our portfolio is often not available, we value many of our portfolio investments at fair value as determined in good faith by our board of directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may also be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security causes current market quotations not to reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently, causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid ask spread.
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or
35
liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available under the circumstances. The availability of observable inputs can vary depending on the financial instrument and is affected by a variety of factors. To the extent the valuation is based on models or inputs that are less observable, the determination of fair value requires more judgment. As markets change, new types of investments are made, or pricing for certain investments becomes more or less observable, management, with oversight from our board of directors, may refine our valuation methodologies to best reflect the fair value of our investments appropriately.
As of September 30, 2023, our investment portfolio, valued at fair value in accordance with our Board-approved valuation policy, represented 93.2% of our total assets, as compared to 95.0% of our total assets as of June 30, 2023.
See Note 2.i “Significant Accounting Policies – Investment Valuation” and Note 4. “Investments” in the notes to the consolidated financial statements included in our most recent Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q for more information on our valuation process.
Financing Facility
On August 23, 2021, we, through Investcorp Credit Management BDC SPV, LLC, our wholly-owned subsidiary, entered into a five-year, $115 million senior secured revolving credit facility (the “Capital One Revolving Financing”) with Capital One, N.A. (“Capital One”), which is secured by collateral consisting primarily of loans in our investment portfolio. On June 14, 2023, we amended the Capital One Revolving Financing to decrease the facility size from $115 million to $100 million. The Capital One Revolving Financing, which will expire on August 22, 2026 (the “Maturity Date”), features a three-year reinvestment period and a two-year amortization period.
Effective November 18, 2022, borrowings under the Capital One Revolving Financing generally bear interest at a rate per annum equal to Secured Overnight Financing Rate ("SOFR") plus 2.50%. The default interest rate will be equal to the interest rate then in effect plus 2.00%. The Capital One Revolving Financing required the payment of an upfront fee of 1.125% ($1.3 million) of the available borrowings under the Capital One Revolving Financing at the closing, and requires the payment of an unused fee of (i) 0.75% annually for any undrawn amounts below 50% of the Capital One Revolving Financing, (ii) 0.50% annually for any undrawn amounts between 50% and 75% of the Capital One Revolving Financing, and (iii) 0.25% annually for any undrawn amounts above 75% of the Capital One Revolving Financing. Borrowings under the Capital One Revolving Financing are based on a borrowing base.
36
The Capital One Revolving Financing generally requires payment of interest and fees on a quarterly basis. All outstanding principal is due on the Maturity Date. The Capital One Revolving Financing also requires mandatory prepayment of interest and principal upon certain events.
As of September 30, 2023 and June 30, 2023, there were $69.0 million and $71.9 million in borrowings outstanding under the Capital One Revolving Financing, respectively.
Notes due 2026
On March 31, 2021, we closed the public offering of $65.0 million in aggregate principal amount of 4.875% notes due 2026 (the “2026 Notes”). The total net proceeds to us from the 2026 Notes after deducting underwriting discounts and commissions of approximately $1.3 million and offering expenses of approximately $215,000, were approximately $63.1 million.
The 2026 Notes will mature on April 1, 2026, unless previously redeemed or repurchased in accordance with their terms, and bear interest at a rate of 4.875%. The 2026 Notes are our direct unsecured obligations and rank pari passu, which means equal in right of payment, with all of our outstanding and future unsecured, unsubordinated indebtedness. Because the 2026 Notes are not secured by any of our assets, they are effectively subordinated to all of our existing and future secured indebtedness (including indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness. The 2026 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our existing or future subsidiaries and financing vehicles, including, without limitation, borrowings under the Capital One Revolving Financing. The 2026 Notes are exclusively our obligations and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the 2026 Notes and the 2026 Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future.
The 2026 Notes may be redeemed in whole or in part at any time or from time to time at our option, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price (as determined by us) equal to the greater of the following amounts, plus, in each case, accrued and unpaid interest to, but excluding, the redemption date: (1) 100% of the principal amount of the 2026 Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of accrued and unpaid interest to the date of redemption) on the 2026 Notes to be redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) using the applicable Treasury Rate (as defined in the 2026 Notes Indenture (as defined below)) plus 50 basis points; provided, however, that if we redeem any 2026 Notes on or after January 1, 2026 (the date falling three months prior to the maturity date of the 2026 Notes), the redemption price for the 2026 Notes will be equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption; provided, further, that no such partial redemption shall reduce the portion of the principal amount of a 2026 Note not redeemed to less than $2,000. Interest on the 2026 Notes is payable semi-annually on April 1 and October 1 of each year, commencing October 1, 2021. We may from time to time repurchase 2026 Notes in accordance with the 1940 Act and the rules promulgated thereunder. As of September 30, 2023, the outstanding principal balance of the 2026 Notes was approximately $65.0 million.
The indenture under which the 2026 Notes are issued (the “2026 Notes Indenture”) contains certain covenants, including covenants requiring us to comply with Section 18(a)(1)(A) as modified by Section 61(a)(2) of 1940 Act, or any successor provisions, to comply with Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions but giving effect to any no-action relief granted by the SEC to another BDC and upon which we may reasonably rely (or to us if we determine to seek such similar no-action or other relief), and to provide financial information to the holders of the 2026 Notes and the trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) These covenants are subject to important limitations and exceptions that are set forth in the 2026 Notes Indenture.
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount we have available to invest as well as the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities
37
exchange and have a market capitalization of less than $250 million. In each case, the company must be organized in the United States. As of September 30, 2023, approximately 2.03% of our total assets were non-qualifying assets.
To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income we distribute to our stockholders.
Revenues
We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from royalty income, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK interest. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.
Expenses
Our primary operating expenses include the payment of the base management fee (the “Base Management Fee”) and, depending on our operating results, the incentive fees (the “Incentive Fee”) under the Advisory Agreement, as well as the payment of reimbursable expenses to the Adviser for the costs and expenses incurred by the Adviser in performing its obligations and providing personnel and facilities under the Administration Agreement, such as our allocable portion of overhead expenses, including rent and the allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs. The Base Management Fee and Incentive Fee compensation under the Advisory Agreement remunerates the Adviser for work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:
38
Portfolio and Investment Activity
Portfolio composition
We invest primarily in middle-market companies in the form of standalone first and second lien loans, unitranche loans and mezzanine loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments.
As of September 30, 2023, our investment portfolio of $223.4 million (at fair value) consisted of debt and equity investments in 40 portfolio companies, of which 89.67% were first lien investments and 10.33% were in equities, warrants and other positions. At September 30, 2023, our average and largest portfolio company investment at fair value was $5.6 million and $13.6 million, respectively.
As of June 30, 2023, our investment portfolio of $220.1 million (at fair value) consisted of debt and equity investments in 36 portfolio companies, of which 89.21% were first lien investments and 10.79% were in equities, warrants and other positions. At June 30, 2023, our average and largest portfolio company investment at fair value was $6.1 million and $13.0 million, respectively.
As of September 30, 2023 and June 30, 2023, our weighted average total yield of debt and income producing securities at amortized cost (which includes interest income and amortization of fees and discounts) was 11.14% and 12.46% respectively. As of September 30, 2023 and June 30, 2023, our weighted average total yield on investments at amortized cost (which includes interest income and amortization of fees and discounts) was 10.15% and 11.32%, respectively. The weighted average total yield was computed using an internal rate of return calculation of our debt investments based on contractual cash flows, including interest and amortization payments, and, for floating rate investments, the spot LIBOR or SOFR, as applicable, as of September 30, 2023 of all of our debt investments. The weighted average total yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio and is calculated before payment of all of our fees and expenses, including any sales load paid in connection with an offering of our securities. There can be no assurance that the weighted average total yield will remain at its current level.
39
We use Global Industry Classification Standard (“GICS”) codes to identify the industry groupings of our portfolio companies. At September 30, 2023 and June 30, 2023, respectively, the industry composition of our portfolio in accordance with the GICS codes at fair value, as a percentage of our total portfolio, was as follows:
|
|
Percentage of Total Portfolio at September 30, 2023 |
|
Percentage of Total Portfolio at June 30, 2023 |
||
Trading Companies & Distributors |
|
17.11 |
% |
|
15.98 |
% |
Professional Services |
|
11.52 |
|
|
12.83 |
|
IT Services |
|
7.53 |
|
|
10.71 |
|
Software |
|
6.15 |
|
|
6.26 |
|
Containers & Packaging |
|
6.07 |
|
|
5.89 |
|
Commercial Services & Supplies |
|
6.04 |
|
|
6.51 |
|
Machinery |
|
4.01 |
|
|
4.36 |
|
Internet & Direct Marketing Retail |
|
3.99 |
|
|
4.08 |
|
Household Durables |
|
3.48 |
|
|
3.46 |
|
Entertainment |
|
3.40 |
|
|
3.47 |
|
Chemicals |
|
3.37 |
|
|
3.44 |
|
Diversified Consumer Services |
|
3.25 |
|
|
3.30 |
|
Hotels, Restaurants, and Leisure |
|
3.21 |
|
|
2.85 |
|
Automobile Components |
|
2.76 |
|
|
3.30 |
|
Consumer Staples Distribution & Retail |
|
2.51 |
|
|
2.75 |
|
Specialty Retail |
|
2.26 |
|
|
2.34 |
|
Consumer Services |
|
2.20 |
|
|
— |
|
Building Products |
|
2.00 |
|
|
2.05 |
|
Automotive Retail |
|
1.80 |
|
|
1.76 |
|
Food Products |
|
1.79 |
|
|
1.95 |
|
Construction & Engineering |
|
1.76 |
|
|
— |
|
Paper Packaging |
|
1.34 |
|
|
— |
|
Electronic Equipment, Instruments & Components |
|
1.28 |
|
|
1.48 |
|
Energy Equipment & Services |
|
1.17 |
|
|
1.23 |
|
|
|
100.00 |
% |
|
100.00 |
% |
During the three months ended September 30, 2023, we made investments in four new portfolio companies and one existing portfolio company totaling approximately $15.5 million, at cost. Of the new investments, 100.0% consisted of first lien investments.
At September 30, 2023, 99.7% of our debt investments bore interest based on floating rates based on indices such as LIBOR, SOFR, the Euro Interbank Offered Rate, the Federal Funds Rate of the Prime Rate (in certain cases, subject to interest rate floors), and 0.3% bore interest at fixed rates. At June 30, 2023, 99.6% of our debt investments bore interest based on floating rates based on indices such as LIBOR, SOFR, the Euro Interbank Offered Rate, the Federal Funds Rate or the Prime Rate (in certain cases, subject to interest rate floors), and 0.4% bore interest at fixed rates.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2023, we had nine investments with aggregate unfunded commitments of $5.5 million, and as of June 30, 2023, we had nine investments with aggregate unfunded commitments of $5.7 million. As of September 30, 2023, we had sufficient liquidity (through cash on hand and available borrowings under our Capital One Revolving Financing) to fund such unfunded loan commitments should the need arise.
Asset Quality
In addition to various risk management and monitoring tools, we use the Adviser’s investment rating system to characterize and monitor the credit profile and expected level of returns on each investment in our portfolio. This investment rating system uses a five-level numeric rating scale. The following is a description of the conditions associated with each investment rating:
Investment Rating 1 |
Investments that are performing above expectations, and whose risks remain favorable compared to the expected risk at the time of the original investment. |
|
|
Investment Rating 2 |
Investments that are performing within expectations and whose risks remain neutral compared to the expected risk at the time of the original investment. Generally, all new loans are initially rated 2. |
|
|
Investment Rating 3 |
Investments that are performing below expectations and that require closer monitoring, but where no loss of return or principal is expected. Portfolio companies with a rating of 3 may be out of compliance with their financial covenants. |
|
|
Investment Rating 4 |
Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are often in workout. Investments with a rating of 4 will be those for which some loss of return but no loss of principal is expected. |
|
|
40
Investment Rating 5 |
Investments that are performing substantially below expectations and whose risks have increased substantially since the original investment. These investments are almost always in workout. Investments with a rating of 5 will be those for which some loss of return and principal is expected. |
If the Adviser determines that an investment is underperforming, or circumstances suggest that the risk associated with a particular investment has significantly increased, the Adviser will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions. While the investment rating system identifies the relative risk for each investment, the rating alone does not dictate the scope and/or frequency of any monitoring that will be performed. The frequency of the Adviser’s monitoring of an investment will be determined by a number of factors, including, but not limited to, the trends in the financial performance of the portfolio company, the investment structure and the type of collateral securing the investment.
The following table shows the investment rankings of the investments in our portfolio, according to the Adviser’s investment rating system:
|
|
As of September 30, 2023 |
|
As of June 30, 2023 |
||||||||||||||
Investment Rating |
|
Fair Value |
|
|
% of Portfolio |
|
Number of Investments(1) |
|
Fair Value |
|
% of Portfolio |
|
Number of Investments(1) |
|||||
1 |
|
$ |
21,955,923 |
|
|
9.8 |
% |
|
|
4 |
|
$ |
16,538,345 |
|
7.5 |
% |
|
3 |
2 |
|
|
132,759,445 |
|
|
59.4 |
|
|
|
36 |
|
|
114,979,324 |
|
52.2 |
|
|
32 |
3 |
|
|
45,633,242 |
|
|
20.4 |
|
|
|
17 |
|
|
62,588,392 |
|
28.4 |
|
|
19 |
4 |
|
|
11,832,167 |
|
|
5.4 |
|
|
|
5 |
|
|
13,067,850 |
|
6.0 |
|
|
5 |
5 |
|
|
11,223,506 |
|
|
5.0 |
|
|
|
6 |
|
|
12,937,418 |
|
5.9 |
|
|
6 |
Total |
|
$ |
223,404,283 |
|
|
100.0 |
% |
|
|
68 |
|
$ |
220,111,329 |
|
100.0 |
% |
|
65 |
Results of Operations
Comparison of the three months ended September 30, 2023 and September 30, 2022
Investment income
Investment income, attributable primarily to interest and fees on our debt investments, for the three months ended September 30, 2023 decreased to $5.9 million from $6.3 million for the three months ended September 30, 2022, primarily related to the repayment of one portfolio company and the addition of three portfolio companies on non-accrual status.
Expenses
Total expenses for the three months ended September 30, 2023 increased to $4.3 million, compared to $4.0 million for the three months ended September 30, 2022, primarily due to the increase in interest expense with the Capital One Revolving Financing associated with the increase in SOFR rates and borrowing activities.
Net investment income
Net investment income decreased to $1.6 million for the three months ended September 30, 2023 from $2.3 million for the three months ended September 30, 2022, primarily due to the decrease in total investment income primarily related to the repayment of one portfolio company and the addition of three portfolio companies on non-accrual status and the increase in interest expense with the Capital One Revolving Financing associated with the increase in SOFR rates and borrowing activities.
Net realized gain or loss
There was no net realized gain or loss on investments for the three months ended September 30, 2023. There was also no net realized gain or loss on investments for the three months ended September 30, 2022.
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized depreciation of $3.3 million for the three months ended September 30, 2023, primarily due to the write down of our investments in American Nuts Holdings, LLC and Techniplas Foreign Holdco LP.
During the three months ended September 30, 2022, we recorded a net change in unrealized depreciation of $0.7 million, primarily due to the decrease in the fair value of our investments in BioPlan USA, Inc. and Arborworks Acquisition LLC, which was offset by the increase in the fair value of our investments in the Fusion Connect, Inc. - Series B Preferred and Barri Financial Group, LLC.
41
Liquidity and Capital Resources
Our primary liquidity needs include interest and principal repayments under the Capital One Revolving Financing, interest payments on the 2026 Notes, our unfunded loan commitments (if any), investments in portfolio companies, dividend distributions to our stockholders and operating expenses. We believe that our current cash on hand and our anticipated cash flows from operations, including from contractual monthly portfolio company payments and prepayments, will be adequate to meet our cash needs for our daily operations. This “Liquidity and Capital Resources” section should be read in conjunction with “Market Developments” above and the risk factors referenced in our most recent Annual Report on Form 10-K.
Cash flows
For the three months ended September 30, 2023, our total cash balance increased by $5.1 million. During that period, cash increased by $10.6 million from operating activities, primarily due to proceeds from sales and repayments of portfolio companies of $10.3 million and payables for investments purchased of $13.0 million, partially offset by a decrease in net assets resulting from operations of $1.7 million and payments for the purchase of investments in portfolio companies of $16.2 million. During the same period, net cash used in financing activities totaled $5.5 million, consisting primarily of $2.6 million of distributions paid to our stockholders and repayments of $6.5 million to paydown the Capital One Revolving Facility, offset by proceeds of $3.6 million from borrowing under the Capital One Revolving Facility.
Capital resources
As of September 30, 2023, we had $0.1 million of cash as well as $14.2 million in restricted cash and $31.0 million of capacity under the Capital One Revolving Financing. We intend to generate additional cash primarily from future offerings of equity and/or debt securities, future borrowings or debt issuances, as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less.
As discussed below in further detail, we have elected to be treated as a RIC under the Code. To maintain our RIC status, we generally must distribute substantially all of our net taxable income to stockholders in the form of dividends. Our net taxable income does not necessarily equal our net income as calculated in accordance with U.S. GAAP.
Asset Coverage Requirements
On May 2, 2018, our board of directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the board of directors, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, effective May 2, 2019, our applicable minimum asset coverage ratio under the 1940 Act was decreased to 150% from 200%. Thus, we are permitted under the 1940 Act, under specified conditions, to issue multiple classes of debt and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after each such issuance. As of September 30, 2023, our asset coverage for borrowed amounts was 162.6%.
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. If we continue to qualify as a RIC for a taxable years, we will not be subject to corporate-level U.S. federal income tax on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To continue to qualify for RIC tax treatment, we must, among other things, distribute to our stockholders, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). We will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.
42
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). However, the covenants contained in the Capital One Revolving Financing and any other borrowing or financing arrangement we or our subsidiaries may have may prohibit us from making distributions to our stockholders, and, as a result, could hinder our ability to satisfy the distribution requirement. In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividends for that fiscal year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a BDC under the 1940 Act and due to provisions in the agreements governing our borrowing or financial arrangements. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
In accordance with certain applicable U.S. Department of Treasury (“Treasury”) regulations and a revenue procedure issued by the Internal Revenue Service, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 2023, our off-balance sheet arrangements consisted of $5.5 million in unfunded commitments to nine of our portfolio companies. As of September 30, 2023, we had sufficient liquidity (through cash on hand and available borrowings under our Capital One Revolving Financing) to fund such unfunded loan commitments should the need arise. As of June 30, 2023, our off-balance arrangements consisted of $5.7 million in unfunded commitments to nine of our portfolio companies.
Recent Developments
From October 1, 2023 through November 13, 2023, the Company invested $10.6 million in three new portfolio companies.
On November 9, 2023, the Company’s board of directors declared a distribution for the quarter ended December 31, 2023 of $0.12 per share payable on January 8, 2024 to stockholders of record as of December 14, 2023 and a supplemental distribution of $0.03 per share, payable on January 8, 2024 to stockholders of record as of December 14, 2023.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are subject to financial market risks, including changes in interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a change in market interest rates will not have a material adverse effect on our net investment income.
Generally, we believe higher yielding assets such as those in our investment portfolio do not necessarily follow a linear interest rate relationship and are less sensitive in price-to-interest rate changes than many other debt investments. Our investments in fixed-rate assets are generally exposed to changes in value due to interest rate fluctuations, and our floating-rate assets are generally exposed to cash-flow variability from fluctuation in rates. At September 30, 2023, 99.7% of our debt investments bore interest based on floating rates, such as LIBOR, SOFR, the Euro Interbank Offered Rate, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to three months.
43
Consequently, our net interest income (interest income less interest expense) is exposed to risks related to interest-rate fluctuations. Variable-rate instruments subject to a floor generally reset periodically to the applicable floor and, in the case of investments in our portfolio, quarterly to a floor based on LIBOR or SOFR, only if the index exceeds the floor. As of September 30, 2023, 100.0% of our floating-rate portfolio was subject to interest-rate floors set at or below the current applicable rate. Under these loans, we do not benefit from increases in interest rates until such rates exceed the floor and thereafter benefit from market rates above any such floor. In addition, our interest expense will be affected by changes in the published interest rates in connection with the Capital One Revolving Financing to the extent it goes above the floor; however, our 2026 Notes bear interest at a fixed rate. As of September 30, 2023, our floating rate borrowings totaled $69.0 million in principal amount, which represented 51.5% of our outstanding debt.
Based on our investment portfolio as of September 30, 2023, with certain interest rate floors and our financing arrangements at September 30, 2023, a 1.00% increase in interest rates would increase our net interest income by approximately 5.68% and a 2.00% increase in interest rates would increase our net interest income by approximately 13.93%.
Although management believes that this analysis is indicative of our existing sensitivity as of September 30, 2023, to interest rate changes, it does not adjust for changes in the credit markets, the size, credit quality or composition of the assets in our portfolio and other business developments, including borrowing, that could affect the net increase in net assets resulting from operations or net income. It also does not adjust for the effect of the time lag between a change in the relevant interest rate index and the rate adjustment under the applicable loans or borrowings. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis included herein.
Because it is our intention to hold loans to maturity, the fluctuating relative value of these loans that may occur due to changes in interest rates may have an impact on unrealized gains and losses during quarterly reporting periods. Based on our assessment of the interest rate risk, as of September 30, 2023, we had no hedging transactions in place as we deemed the risk acceptable, and we did not believe it was necessary to mitigate this risk at that time.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2023 (the end of the period covered by this report), our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. The design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
44
PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Neither we, the Adviser, nor our subsidiaries, nor any of our respective property, are currently subject to any material legal proceedings, other than ordinary routine litigation incidental to our businesses. We, the Adviser, and our subsidiaries may from time to time, however, be involved in litigation arising out of our operations in the normal course of business or otherwise, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Furthermore, third parties may seek to impose liability on us in connection with the activities of our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these matters will materially affect our financial condition or results of operations. There can be no assurance whether any current or future legal proceedings will have a material adverse effect on our financial condition or results of operations in any future reporting period.
Item 1A. Risk Factors
You should carefully consider the risks referenced below and all other information contained in this Quarterly Report on Form 10-Q, including our interim financial statements and the related notes thereto, before making a decision to purchase our securities. Any such risks and uncertainties are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and/or operating results, as well as the market price of our securities.
There have been no material changes during the three months ended September 30, 2023 to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2023 (filed with the SEC on September 21, 2023). If any of such changes or risks actually occur, our business, financial condition or results of operations could be materially adversely affected. If that happens, the value of our securities could decline, and you may lose all or part of your investment.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
During the three months ended September 30, 2023, we issued 1,066 shares of common stock under our dividend reinvestment plan. These issuances were not subject to the registration requirements under the Securities Act. The cash paid for shares of common stock issued under our dividend reinvestment plan during the three months ended September 30, 2023 was $3,797.
Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the fiscal quarter ended September 30, 2023, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) or any “non Rule 10b5-1 trading arrangement.”
45
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
3.1 |
|
|
|
3.1.1 |
|
|
|
3.2 |
|
|
|
31.1 |
|
|
|
31.2 |
|
|
|
32.1 |
|
|
|
32.2 |
|
|
|
101.INS |
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
104 |
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith
** The certifications attached as Exhibit 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are deemed furnished and not filed with the SEC and are not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 13, 2023
INVESTCORP CREDIT MANAGEMENT BDC, INC. |
|
|
|
By: |
/s/ Michael C. Mauer |
|
|
|
Michael C. Mauer |
|
Chief Executive Officer |
|
|
By: |
/s/ Rocco DelGuercio |
|
|
|
Rocco DelGuercio |
|
Chief Financial Officer |
47