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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2012

OR

 

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

For the transition period from              to             

Commission file number 001-33559

 

 

THL CREDIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   27-0344947

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

100 Federal St., 31st Floor, Boston, MA   02110
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: 800-454-4424

 

 

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, as amended, 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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

 

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

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at July 30, 2012 was 20,220,202.

 

 

 


Table of Contents

THL CREDIT, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2012

Table of Contents

 

   

INDEX

   PAGE NO.  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Assets and Liabilities as of June 30, 2012 (unaudited) and December  31, 2011

     2   
 

Consolidated Statements of Operations for the three and six months ended June  30, 2012 and 2011 (unaudited)

     3   
 

Consolidated Statements of Changes in Net Assets for the six months ended June  30, 2012 and 2011 (unaudited)

     4   
 

Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)

     5   
 

Consolidated Schedules of Investments as of June 30, 2012 (unaudited) and December 31, 2011

     6   
 

Notes to Consolidated Financial Statements (unaudited)

     15   

Item 2.

 

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

     32   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     48   

Item 4.

 

Controls and Procedures

     48   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     49   

Item 1A.

 

Risk Factors

     49   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     51   

Item 3.

 

Defaults Upon Senior Securities

     51   

Item 4.

 

Mine Safety Disclosures

     51   

Item 5.

 

Other Information

     51   

Item 6.

 

Exhibits

     51   

SIGNATURES

       52   


Table of Contents

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to THL Credit, Inc. and its wholly owned subsidiaries unless the context states otherwise.

 

Item 1. Financial Statements

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Assets and Liabilities

 

     June 30,
2012
(unaudited)
    December 31,
2011
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $326,881,792 and $263,100,758, respectively)

   $ 330,324,550      $ 266,981,836   

Non-controlled, affiliated investments (cost of $14,060 and $10,864, respectively)

     14,060        11,496   
  

 

 

   

 

 

 

Total investments at fair value (cost of $326,895,852 and $263,111,622, respectively)

     330,338,610        266,993,332   

Cash

     2,222,164        5,572,753   

Deferred financing costs

     4,335,736        1,860,484   

Interest receivable

     3,379,046        1,440,057   

Due from affiliate

     685,250        511,842   

Deferred offering costs

     425,187        327,267   

Receivable for paydown of investment

     258,621        258,621   

Prepaid expenses and other assets

     235,145        185,075   
  

 

 

   

 

 

 

Total assets

   $ 341,879,759      $ 277,149,431   
  

 

 

   

 

 

 

Liabilities:

    

Loans payable

   $ 70,200,000      $ 5,000,000   

Accrued incentive fees

     2,668,113        2,689,030   

Base management fees payable

     1,107,244        1,013,048   

Accrued expenses

     502,357        466,030   

Accrued credit facility fees and interest

     478,586        5,451   

Interest rate derivative

     574,427        —     

Accrued administrator expenses

     —          338,569   

Due to affiliate

     —          20,597   
  

 

 

   

 

 

 

Total liabilities

     75,530,727        9,532,725   

Net Assets:

    

Preferred stock, par value $0.001 per share, 100,000,000 preferred shares authorized, no preferred shares issued and outstanding

     —          —     

Common stock, par value $0.001 per share, 100,000,000 common shares authorized, 20,220,202 and 20,220,200 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     20,220        20,220   

Paid-in capital in excess of par

     262,289,377        262,289,351   

Net unrealized appreciation on investments

     3,442,758        3,881,710   

Net unrealized depreciation on interest rate derivative

     (574,427     —     

Accumulated undistributed net realized gain

     —          917,830   

Accumulated undistributed net investment income

     1,171,104        507,595   
  

 

 

   

 

 

 

Total net assets

     266,349,032        267,616,706   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 341,879,759      $ 277,149,431   
  

 

 

   

 

 

 

Net asset value per share

   $ 13.17      $ 13.24   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

2


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

 

     Three months ended June 30,      Six months ended June 30,  
     2012     2011      2012     2011  

Investment Income:

         

From non-controlled, non-affiliated investments:

         

Interest income

   $ 11,002,847      $ 8,125,991       $ 21,153,170      $ 15,005,664   

Other income

     62,366        157,220         131,300        255,827   

Dividend income

     —          279,676         —          279,676   

From non-controlled, affiliated investment:

         

Other income

     693,338        554,148         1,223,672        634,330   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investment income

     11,758,551        9,117,035         22,508,142        16,175,497   

Expenses:

         

Incentive fees

     1,635,336        1,113,150         3,061,584        1,614,903   

Base management fees

     1,107,244        998,805         2,146,554        1,990,265   

Credit facility interest and fees

     759,860        315,973         1,212,693        385,556   

Administrator expenses

     676,996        715,971         1,500,888        1,284,036   

Professional fees

     356,727        312,474         562,405        533,942   

Amortization of deferred financing costs

     237,285        210,045         448,915        256,978   

Other general and administrative expenses

     224,544        221,166         401,871        418,172   

Directors’ fees

     134,875        134,875         269,750        269,750   

Insurance expenses

     111,065        123,700         216,875        315,308   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total expenses

     5,243,932        4,146,159         9,821,535        7,068,910   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment income

     6,514,619        4,970,876         12,686,607        9,106,587   

Net change in unrealized appreciation on investments:

         

Non-controlled, non-affiliated investments

     26,690        1,579,444         (438,320     2,327,819   

Non-controlled, affiliated investments

     —          100         (632     100   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net change in unrealized appreciation on investments

     26,690        1,579,544         (438,952     2,327,919   

Unrealized depreciation on interest rate derivative

     (574,427     —           (574,427     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 5,966,882      $ 6,550,420       $ 11,673,228      $ 11,434,506   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net investment income per common share:

         

Basic and diluted

   $ 0.32      $ 0.25       $ 0.63      $ 0.45   

Net increase in net assets resulting from operations per common share:

         

Basic and diluted

   $ 0.30      $ 0.32       $ 0.58      $ 0.57   

Weighted average shares of common stock outstanding:

         

Basic and diluted

     20,220,201        20,220,197         20,220,201        20,113,105   

See accompanying notes to these consolidated financial statements.

 

3


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Changes in Net Assets (unaudited)

 

     For the six months ended June 30,  
     2012     2011  

Increase in net assets resulting from operations:

    

Net investment income

   $ 12,686,607      $ 9,106,587   

Net change in unrealized appreciation on investments

     (438,952     2,327,919   

Unrealized depreciation on interest rate derivative

     (574,427     —     
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     11,673,228        11,434,506   

Distributions to stockholders

     (12,940,928     (9,664,244

Capital share transactions:

    

Reinvestment of dividends

     26        4,048,586   
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     26        4,048,586   
  

 

 

   

 

 

 

Total (decrease) increase in net assets

     (1,267,674     5,818,848   

Net assets at beginning of period

     267,616,706        260,015,769   
  

 

 

   

 

 

 

Net assets at end of period

   $ 266,349,032      $ 265,834,617   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     20,220,202        20,220,198   
  

 

 

   

 

 

 

Capital share activity:

    

Shares issued from reinvestment of dividends

     2        304,091   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

4


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

 

     For the six months ended June 30,  
     2012     2011  

Cash flows from operating activities

    

Net increase in net assets resulting from operations

   $ 11,673,228      $ 11,434,506   

Adjustments to reconcile net increase in net assets resulting from operations to net cash used for operating activities:

    

Net change in unrealized appreciation on investments

     438,952        (2,327,919

Unrealized depreciation on interest rate derivative

     574,427        —     

Purchases of investments

     (101,811,438     (96,740,864

Proceeds from sale and paydown of investments

     41,025,267        11,659,543   

Increase in investments due to PIK

     (1,816,327     (1,152,865

Amortization of deferred financing costs

     448,915        256,978   

Accretion of discounts on investments and other fees

     (1,181,732     (1,048,753

Income from investment in member interest

     —          (330,913

Increase in interest receivable

     (1,938,989     (1,293,655

Increase in receivable for paydown of investment

     —          (258,621

Increase in receivable due from affiliate

     (173,408     (118,635

Increase in prepaid expenses and other assets

     (50,070     (25,911

Increase in accrued expenses

     27,998        185,886   

Increase in accrued credit facility fees and interest

    
473,135
  
    5,451   

Increase in base management fees payable

     94,196        19,489   

Decrease in accrued administrator expenses

     (338,569     (166,250

(Decrease) increase in accrued incentive fee

     (20,917     1,614,903   

(Decrease) increase in due to affiliate

     (20,597     10,884   
  

 

 

   

 

 

 

Net cash used for operating activities

     (52,595,929     (78,276,746

Cash flows from financing activities

    

Borrowings under credit facility

     117,800,000        —     

Repayments under credit facility

     (52,600,000     —     

Deferred offering costs paid

     (89,591     (38,707

Distributions paid

     (12,940,902     (8,603,074

Financing costs paid

     (2,924,167     (2,526,127
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     49,245,340        (11,167,908
  

 

 

   

 

 

 

Net decrease in cash

     (3,350,589     (89,444,654

Cash, beginning of period

     5,572,753        110,140,711   
  

 

 

   

 

 

 

Cash, end of period

   $ 2,222,164      $ 20,696,057   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash interest paid

   $ 366,023      $ —     

Non-cash financing activities:

For the six months ended June 30, 2012 and 2011, 2 shares and 304,091 shares, respectively, of common stock were issued in connection with dividend reinvestments of $26 and $4,048,586, respectively.

See accompanying notes to these consolidated financial statements.

 

5


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited)

June 30, 2012

 

Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost      Fair Value  

Non-controlled/non-affiliated investments—124.02% of net asset value

              

AIM Media Texas Operating, LLC

              

Second Lien Loan, 13.0% cash, 3.0% PIK, due 6/21/17(25)

   Media      6/21/12         $10,500,000       $ 10,238,473       $ 10,238,473   

Member interest(6)(12)

           0.763636         763,636         763,636   
           

 

 

    

 

 

 
              11,002,109         11,002,109   

Airborne Tactical Advantage Company, LLC

              

Senior Secured Note, 11.0% cash, due 3/7/16

   Aerospace &      9/7/11         $4,000,000         3,835,137         3,835,137   

Class A Warrants(3)

   defense         511,812         112,599         112,599   

Senior Secured Delayed Draw Term Loans, 11.0%, expiration dates of 9/7/12 and 3/7/13(4)

              —           —     
           

 

 

    

 

 

 
              3,947,736         3,947,736   

C&K Market, Inc.

              

Senior Subordinated Note, 14.0% cash, 2.0% PIK, due 11/3/15

  

Retail

& grocery

     11/3/10         $13,444,014         12,984,554         13,175,134   

Warrant for Class B

           156,552         349,000         300,000   
           

 

 

    

 

 

 
              13,333,554         13,475,134   

Chuy’s Opco, Inc.

              

Senior Secured Term Loan, LIBOR + 700 cash, due 5/24/16(5)

   Restaurants      5/24/11         $7,452,051         7,390,954         7,452,051   

Senior Secured Revolving Loan, LIBOR + 700 cash, expiration date 5/24/16(4)(5)

           $499,500         492,295         499,500   

Senior Secured Term Loan, LIBOR + 700 cash, expiration date 5/24/16(4)(5)

           $832,500         822,893         832,500   
           

 

 

    

 

 

 
              8,706,142         8,784,051   

Country Pure Foods, LLC

              

Subordinated Term Loan, 12.5% cash, 2.5% PIK, due 2/13/16

  

Food &

beverage

     8/13/10         $15,878,129         15,644,571         15,560,567   
           

 

 

    

 

 

 
              15,644,571         15,560,567   

CRS Reprocessing, LLC

              

Senior Secured Term Loan, LIBOR + 900 cash, due 6/16/15(5)

   Manufacturing      6/16/11         $9,354,686         9,209,131         9,261,139   
           

 

 

    

 

 

 
              9,209,131         9,261,139   

Dr. Fresh Inc.

              

Subordinated Term Loan, 12.0% cash, 2.0% PIK, due 11/15/17(22)

  

Consumer

products

     5/15/12         $9,357,703         9,174,014         9,174,014   
           

 

 

    

 

 

 
              9,174,014         9,174,014   

Duff & Phelps Corporation

              

Tax Receivable Agreement Payment Rights, expires 12/31/29(18)(24)

  

Financial

services

     6/1/12         —           12,500,000         12,500,000   
           

 

 

    

 

 

 
              12,500,000         12,500,000   

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

6


Table of Contents
Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost     Fair Value  

Express Courier International, Inc.

             

Secured Subordinated Term Loan, 11.0% cash, 2.0% PIK, due 7/17/16(6)(7)

  

Business

services

     1/17/12         $7,153,408         7,022,014        7,022,014   
           

 

 

   

 

 

 
              7,022,014        7,022,014   

Firebirds International, LLC

             

Senior Secured Term Loan, LIBOR + 900 cash, due 5/17/16(5)

   Restaurants      5/17/11         $8,200,000         8,065,624        8,200,000   

Senior Secured Revolving Loan, LIBOR + 900 cash, expiration date 5/17/16(5)(8)(9)

           —           (77,504     —     

Common stock(3)

           1,906         190,600        215,000   
           

 

 

   

 

 

 
              8,178,720        8,415,000   

Food Processing Holdings, LLC

             

Senior Subordinated Note, 12.0% cash, 3.0% PIK, due 8/28/17(10)(11)

   Food &      2/28/12         $13,639,782         13,510,458        13,510,458   

Class A Units(21)

   beverage         162.44         163,268        181,000   

Class B Units(21)

           406.09         408,161        400,000   
           

 

 

   

 

 

 
              14,081,887        14,091,458   

Hart InterCivic, Inc.

             

Senior Secured Term Loan, LIBOR + 900 cash, due 7/1/16(5)

  

Election

services

     7/1/11         $9,713,870         9,550,580        9,568,162   

Senior Secured Revolving Loan, LIBOR + 900 cash, expiration date 7/1/16(4)(5)(9)

           —           (47,980     —     
           

 

 

   

 

 

 
              9,502,600        9,568,162   

HEALTHCAREfirst, Inc.

             

Senior Subordinated Note, 13.5% cash, 3.0% PIK, due 12/4/15(13)

  

Business

services

     6/4/10         $13,727,491         13,432,551        13,864,766   
           

 

 

   

 

 

 
              13,432,551        13,864,766   

IMDS Corporation

             

Subordinated Term Loan, 12.5% cash, 3.0% PIK, due 11/2/17(23)

  

Healthcare,

device

manufacturing

     5/2/12         $13,065,000         12,746,332        12,746,332   
           

 

 

   

 

 

 
              12,746,332        12,746,332   

JDC Healthcare Management, LLC

             

Senior Subordinated Note, 12.0% cash, 3.5% PIK, due 6/16/14

  

Healthcare,

dental services

     4/20/10         $11,133,094         10,788,697        11,133,094   

Member interest(6)(12)

           1,393         1,393,309        1,466,500   
           

 

 

   

 

 

 
              12,182,006        12,599,594   

LCP Capital Fund LLC

             

Member interest(12)(14)(15)(16)

  

Financial

services

     4/20/10         $8,354,033         8,354,033        8,354,033   
           

 

 

   

 

 

 
              8,354,033        8,354,033   

Martex Fiber Southern Corp.

             

Subordinated Term Loan, 12.0% cash, 1.5% PIK, due 10/31/19(20)

  

Manufacturing,

textiles

     4/30/12         $8,689,056         8,560,824        8,560,824   
           

 

 

   

 

 

 
              8,560,824        8,560,824   

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

7


Table of Contents
Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost      Fair Value  

MModal MQ Inc. (formerly known as MedQuist, Inc.)

              

Senior Subordinated Note, 13.0% cash, due 10/14/16(17)(18)

  

Business

services

     9/30/10         $6,000,000         5,857,822         6,420,000   
           

 

 

    

 

 

 
              5,857,822         6,420,000   

OEM Group, Inc.

              

Senior Secured Note, 12.5% cash, 2.5% PIK, due 10/7/15(19)

   Manufacturing      10/7/10         $14,596,401         14,283,909         13,282,725   

Warrant for Common

              —           —     
           

 

 

    

 

 

 
              14,283,909         13,282,725   

Pomeroy IT Solutions, Inc.

              

Senior Subordinated Note, 13.0% cash, 2.0% PIK, due 2/11/16

  

Business

services

     2/11/11         $13,369,721         13,163,694         13,503,418   
           

 

 

    

 

 

 
              13,163,694         13,503,418   

Purple Communications, Inc.

              

Senior Secured Term Loan, LIBOR + 775 cash, due 12/3/14(5)

   Communications      12/3/10         $10,948,276         10,695,603         10,948,276   
           

 

 

    

 

 

 
              10,695,603         10,948,276   

Sheplers, Inc.

              

Senior Secured (2nd lien) Term Loan, LIBOR + 1165 cash, due 12/20/16(5)(6)

   Retail & grocery      12/20/11         $11,426,463         11,162,682         11,312,199   

Mezzanine Loan, 10.0% cash, 7.0% PIK, due 12/20/17(6)

           $1,716,056         1,684,870         1,698,895   
           

 

 

    

 

 

 
              12,847,552         13,011,094   

Surgery Center Holdings, Inc.

              

Senior Subordinated Note, 12.0% cash, 3.0% PIK, due 8/4/17

   Healthcare,      4/20/10         $18,633,761         18,239,019         18,726,930   

Member interest(3)(12)

  

ambulatory

surgery centers

        469,673         469,673         1,025,000   
           

 

 

    

 

 

 
              18,708,692         19,751,930   

T&D Solutions, LLC

              

Senior Secured Term Loan, 13.0% cash, due 1/29/15

  

Energy /

Utilities

     10/14/10         $14,902,664         14,781,284         14,977,178   
           

 

 

    

 

 

 
              14,781,284         14,977,178   

Texas Honing, Inc.

              

Senior Secured Term Loan, LIBOR + 850 cash, 2.0% PIK, due 6/22/16(5)

  

Energy /

Utilities

     6/22/11         $12,183,595         11,982,075         12,305,431   

Senior Secured Revolving Loan, LIBOR + 1000 cash, expiration date 6/22/16(4)(5)

           $1,800,000         1,768,210         1,800,000   
           

 

 

    

 

 

 
              13,750,285         14,105,431   

The Studer Group, L.L.C.

              

Senior Subordinated Notes, 12.0% cash, 2.0% PIK, due 3/29/17

  

Healthcare,

consulting

     9/29/11         $12,328,827         12,108,417         12,143,894   
           

 

 

    

 

 

 
              12,108,417         12,143,894   

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

8


Table of Contents
Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost      Fair Value  

Trinity Services Group, Inc.

              

Senior Subordinated Note, 12.0% cash, 1.5% PIK due 9/29/17(20)

  

Food &

beverage

     3/29/12       $ 14,035,587         13,832,423         13,895,231   
           

 

 

    

 

 

 
              13,832,423         13,895,231   

Vision Solutions, Inc.

              

Second Lien Term Loan, LIBOR + 800 cash, due 7/23/17(5)

   Business services      3/31/11       $ 10,000,000         9,915,447         10,000,000   
           

 

 

    

 

 

 
              9,915,447         10,000,000   

YP Intermediate Holdings Corp.

              

Senior Secured Term Loan, 12.0% cash, 3.0% PIK, due 5/8/17

   Media, advertising      5/8/12         $9,641,237         9,358,347         9,358,347   

Warrant for Member interest(6)(12)

              93         93   
           

 

 

    

 

 

 
              9,358,440         9,358,440   
           

 

 

    

 

 

 

Non-controlled/non-affiliated investments—124.02% of net asset value

            $ 326,881,792       $ 330,324,550   

Non-controlled/affiliated investment—0.00% of net asset value

              

THL Credit Greenway Fund LLC

              

Member interest(12)(16)

   Financial services      1/27/11            14,060         14,060   
           

 

 

    

 

 

 
              14,060         14,060   
           

 

 

    

 

 

 

Total investments—124.02% of net asset value

            $ 326,895,852       $ 330,338,610   
           

 

 

    

 

 

 

 

Derivative Instruments  
Counterparty    Instrument    Interest Rate    Expiration
Date
     # of
Contracts
   Notional      Cost      Fair Value  

ING Capital Markets, LLC

  

Interest Rate Swap – Pay Fixed/Receive Floating

   1.1425%/LIBOR      5/10/17       1    $ 50,000,000       $ —         $ (574,427
                 

 

 

    

 

 

 

Total derivative instruments—(0.22)% of net asset value

               $ —         $ (574,427
                 

 

 

    

 

 

 

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

9


Table of Contents
(1) All debt investments are income-producing. Equity and member interests are non-income-producing unless otherwise noted.
(2) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(3) Equity ownership may be held in shares or units of companies related to the portfolio company.
(4) Issuer pays 0.5% unfunded commitment fee on facility.
(5) Coupon is subject to LIBOR floors ranging from 1.00%—4.25%.
(6) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(7) At the option of the issuer on a quarterly basis—13.0% cash, or 2.0% PIK and 11.0% cash.
(8) Issuer pays 0.25% unfunded commitment fee on revolving loan quarterly.
(9) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(10) Interest held in companies related to the portfolio company.
(11) At the option of the issuer on a quarterly basis—15.0% cash, or 3.0% PIK and 12.0% cash.
(12) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(13) At the option of the issuer on a quarterly basis—16.5% cash, or 3.0% PIK and 13.5% cash.
(14) The Company’s investment in LCP Capital Fund LLC is in the form of membership interests and its contributed capital is maintained in a collateral account held by a custodian and acts as collateral for certain credit default swaps for the Series 2005-1 equity interest. See Note 2 in the Notes to the Consolidated Financial Statements.
(15) Income producing security with no stated coupon; cash yield for the three months ended June 30, 2012 was approximately 17.7%.
(16) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(17) At the option of the issuer on a quarterly basis—13.0% cash, or 2.0% PIK and 12.0% cash.
(18) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(19) At the option of the issuer on a quarterly basis—15.0% cash, or 2.5% PIK and 12.5% cash.
(20) At the option of the issuer on a quarterly basis—13.5% cash, or 1.5% PIK and 12.0% cash.
(21) Initial investment made on 4/20/10.
(22) At the option of the issuer on a quarterly basis—14.0% cash, or 2.0% PIK and 12.0% cash.
(23) At the option of the issuer on a quarterly basis—15.5% cash, or 3.0% PIK and 12.5% cash.
(24) Income-producing security with no stated coupon; yield for the three months ended June 30, 2012 was approximately 16.4%.
(25) At the option of the issuer on a quarterly basis—16.0% cash, or 3.0% PIK and 13.0% cash.

See accompanying notes to these consolidated financial statements.

 

10


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments

December 31, 2011

 

Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost     Fair Value  

Non-controlled/non-affiliated investments—99.77% of net asset value

             

Airborne Tactical Advantage Company, LLC

             

Senior Secured Note, 11.0% cash, due 3/7/16

   Aerospace &      9/7/11         $4,000,000       $ 3,813,884      $ 3,813,884   

Class A Warrants

   defense         511,812         112,599        112,599   

Senior Secured Delayed Draw Term Loans, 11.0%, expiration dates of 9/7/12 and 3/7/13(15)

              —          —     
           

 

 

   

 

 

 
              3,926,483        3,926,483   

C&K Market, Inc.

             

Senior Subordinated Note, 14.0% cash, 2.0% PIK, due 11/3/15

   Retail & grocery      11/3/10         $13,309,104         12,800,455        12,909,831   

Warrant for Class B

           156,552         349,000        87,250   
           

 

 

   

 

 

 
              13,149,455        12,997,081   

Charming Charlie, Inc.

             

Subordinated Term Loan, 14.0% cash, due 7/27/15

   Retail & grocery      1/27/11         $11,333,333         11,190,332        11,333,333   
           

 

 

   

 

 

 
              11,190,332        11,333,333   

Chuy’s Opco, Inc.

             

Senior Secured Term Loan, LIBOR + 700 cash, due 5/24/16(8)

   Restaurants      5/24/11         $7,489,562         7,421,884        7,452,114   

Senior Secured Revolving Loan, LIBOR + 700 cash, expiration date 5/24/16(8)(15)(17)

           $499,500         491,374        499,500   

Senior Secured Term Loan, LIBOR + 700 cash, expiration date 5/24/16(8)(15)(17)(18)

           —           (10,835     —     
           

 

 

   

 

 

 
              7,902,423        7,951,614   

Country Pure Foods, LLC

             

Subordinated Term Loan, 12.5% cash, 2.5% PIK, due 2/13/16(4)

   Food & beverage      8/13/10         $14,189,988         13,964,606        13,906,188   
           

 

 

   

 

 

 
              13,964,606        13,906,188   

CRS Reprocessing, LLC

             

Senior Secured Term Loan, LIBOR + 900 cash, due 6/16/15(8)

   Manufacturing      6/16/11         $11,533,333         11,328,752        11,328,752   
           

 

 

   

 

 

 
              11,328,752        11,328,752   

Firebirds International, LLC

             

Senior Secured Term Loan, LIBOR + 900 cash, due 5/17/16(8)

   Restaurants      5/17/11         $8,200,000         8,052,049        8,118,000   

Senior Secured Revolving Loan, LIBOR + 900 cash, expiration date 5/17/16(8)(17)(18)

           —           (87,466     —     

Common stock

           1,906         190,600        190,600   
           

 

 

   

 

 

 
              8,155,183        8,308,600   

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

11


Table of Contents
Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost     Fair Value  

Food Processing Holdings, LLC

             

Senior Subordinated Note, 13.5% cash, 3.0% PIK, due 8/10/15(4)

   Food &      4/20/10         $12,569,273         12,131,303        12,569,273   

Class A Units(5)

   beverage         162.44         163,268        190,000   

Class B Units(5)

           406.09         408,161        408,161   
           

 

 

   

 

 

 
              12,702,732        13,167,434   

Hart InterCivic, Inc.

             

Senior Secured Term Loan, LIBOR + 900 cash, due 7/1/16(8)

   Election services      7/1/11         $10,500,000         10,306,298        10,306,298   

Senior Secured Revolving Loan, LIBOR + 900 cash, expiration date 7/1/16(8)(15)(17)

           —           (53,957     —     
           

 

 

   

 

 

 
              10,252,341        10,306,298   

HEALTHCAREfirst, Inc.

             

Senior Subordinated Note, 13.5% cash, 3.0% PIK, due 12/4/15(18)

  

Business

services

     6/4/10         $13,624,174         13,298,742        13,624,174   
           

 

 

   

 

 

 
              13,298,742        13,624,174   

Hickory Farms, Inc.

             

Senior Secured Term Loan, LIBOR + 775 cash, due 9/28/12(8)

  

Food &

beverage

     6/2/11         $9,463,885         9,463,885        9,463,885   
           

 

 

   

 

 

 
              9,463,885        9,463,885   

JDC Healthcare Management, LLC

             

Senior Subordinated Note, 12.0% cash, 3.5% PIK, due 6/16/14

  

Healthcare,

dental services

     4/20/10         $10,938,684         10,523,464        10,938,684   

Member interest(5)(9)

           1,393         1,393,309        1,393,309   
           

 

 

   

 

 

 
              11,916,773        12,331,993   

LCP Capital Fund LLC

             

Member interest(3)(5)(7)(10)

  

Financial

services

     4/20/10         $12,000,000         12,000,000        12,000,000   
           

 

 

   

 

 

 
              12,000,000        12,000,000   

MModal MQ Inc. (formerly known as MedQuist, Inc.)

             

Senior Subordinated Note, 13.0% cash, due 10/14/16(11)(12)

  

Business

services

     9/30/10         $6,000,000         5,845,968        6,120,000   
           

 

 

   

 

 

 
              5,845,968        6,120,000   

OEM Group, Inc.

             

Senior Secured Note, 12.5% cash, 2.5% PIK, due 10/7/15(14)

   Manufacturing      10/7/10         $14,413,653         14,065,806        14,125,380   

Warrant for Common

              —          120,000   
           

 

 

   

 

 

 
              14,065,806        14,245,380   

Pomeroy IT Solutions, Inc.

             

Senior Subordinated Note, 13.0% cash, 2.0% PIK, due 2/11/16

  

Business

services

     2/11/11         $13,235,557         13,008,862        13,367,912   
           

 

 

   

 

 

 
              13,008,862        13,367,912   

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

12


Table of Contents
Portfolio company/Type of Investment(1)    Industry   

Initial

Acquisition

Date

    

Principal(2)

No. of Shares /

No. of Units

     Cost     Fair Value  

Purple Communications, Inc.

             

Senior Secured Term Loan, LIBOR + 775 cash, due 12/3/14(8)

   Communications      12/3/10         $11,465,517         11,155,137        11,465,517   
           

 

 

   

 

 

 
              11,155,137        11,465,517   

Sheplers, Inc.

             

Senior Secured (2nd lien) Term Loan, LIBOR + 1165 cash, due 12/20/16(8 )(9)

   Retail & grocery      12/20/11         $11,426,463         11,142,051        11,142,051   

Mezzanine Loan, 10.0% cash, 7.0% PIK, due 12/20/17(9)

           $1,677,067         1,643,697        1,643,697   
           

 

 

   

 

 

 
              12,785,748        12,785,748   

Surgery Center Holdings, Inc.

             

Senior Subordinated Note, 12.0% cash, 3.0% PIK, due 8/4/17

   Healthcare,      4/20/10         $18,358,861         17,939,323        18,358,861   

Member interest(5)(6)

  

ambulatory

surgery centers

        469,673         469,673        1,025,000   
           

 

 

   

 

 

 
              18,408,996        19,383,861   

T&D Solutions, LLC

             

Senior Secured Term Loan, 13.0% cash, due 1/29/15(13)

  

Energy /

Utilities

     10/14/10         $14,978,952         14,837,337        14,978,952   
           

 

 

   

 

 

 
              14,837,337        14,978,952   

Texas Honing, Inc.

             

Senior Secured Term Loan, LIBOR + 850 cash, 2.0% PIK, due 6/22/16(8)

  

Energy /

Utilities

     6/22/11         $12,061,333         11,840,577        12,061,333   

Senior Secured Revolving Loan, LIBOR + 1000 cash, expiration date 6/22/16(8)(16)(17)

           —           (35,774     —     
           

 

 

   

 

 

 
              11,804,803        12,061,333   

The Studer Group, LLC

             

Senior Subordinated Notes, 12.0% cash, 2.0% PIK due 3/29/17

  

Healthcare,

consulting

     9/29/11         $12,263,422         12,027,298        12,027,298   
           

 

 

   

 

 

 
              12,027,298        12,027,298   

Vision Solutions, Inc.

             

Second Lien Term Loan, LIBOR + 800 cash, due 7/23/17(8)

  

Business

services

     3/31/11         $10,000,000         9,909,096        9,900,000   
           

 

 

   

 

 

 
              9,909,096        9,900,000   
           

 

 

   

 

 

 

Non-controlled/ non-affiliated investments—99.77% of net asset value

            $ 263,100,758      $ 266,981,836   

Non-controlled/ affiliated investment—0.00% of net asset value

             

THL Credit Greenway Fund LLC

             

Member interest(5)(10)

  

Financial

services

     1/27/11            10,864        11,496   
           

 

 

   

 

 

 
              10,864        11,496   
           

 

 

   

 

 

 

Total investments—99.77% of net asset value

            $ 263,111,622      $ 266,993,332   
           

 

 

   

 

 

 

 

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

13


Table of Contents
(1) All debt investments are income producing. Equity and member interests are non-income producing unless otherwise noted.
(2) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(3) The Company’s investment in LCP Capital Fund LLC is in the form of membership interests and its contributed capital is maintained in a collateral account held by a custodian and acts as collateral for certain credit default swaps for the Series 2005-1 equity interest. See Note 2 in the Notes to the Consolidated Financial Statements.
(4) Interest held in companies related to the portfolio company.
(5) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(6) Equity ownership may be held in shares or units of companies related to the portfolio company.
(7) Income producing security.
(8) Coupon is subject to LIBOR floors ranging from 1.00%—4.25%.
(9) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(10) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(11) 13.0% cash, or 2.0% PIK and 12.0% cash, at the option of the issuer on a quarterly basis.
(12) Publicly traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(13) Stated coupon adjusted to achieve a combined yield of 13% for Revolving Loan and Term Loan.
(14) At the option of the issuer on a quarterly basis—15.0% cash, or 2.5% PIK and 12.5% cash.
(15) Issuer pays 0.5% unfunded commitment fee on facility quarterly.
(16) Issuer pays 0.25% unfunded commitment fee on revolving loan quarterly.
(17) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(18) 16.5% cash, or 3.0% PIK and 13.5% cash, at the option of the issuer on a quarterly basis.

See accompanying notes to these consolidated financial statements.

 

14


Table of Contents

THL Credit, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012

1. Organization

THL Credit, Inc., or the Company, was organized as a Delaware corporation on May 26, 2009. The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, or 1940 Act. The Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, or the Code, as amended. In 2009, the Company was treated for tax purposes as a corporation. The Company’s investment objective is to generate both current income and capital appreciation, primarily through privately negotiated investments in debt and equity securities of middle-market companies.

The Company was initially funded on July 23, 2009, issuing 6,700 shares of common stock at an aggregate purchase price of $100,500 to THL Credit Opportunities, L.P., an affiliate of THL Credit Advisors LLC, or the Advisor. While the Company incurred certain costs in connection with an anticipated initial public offering, which ultimately would have been borne by the Advisor had the offering not closed; the Company did not formally commence principal operations until the completion of the offering on April 21, 2010, as described below.

On April 20, 2010, in anticipation of completing an initial public offering and formally commencing principal operations, the Company entered into a purchase and sale agreement with THL Credit Opportunities, L.P. and THL Credit Partners BDC Holdings, L.P., or BDC Holdings, an affiliate of the Company, to effectuate the sale by THL Credit Opportunities, L.P. to the Company of certain securities valued at $62,107,449, as determined by the Company’s board of directors, and on the same day issued 4,140,496 shares of common stock to BDC Holdings valued at $15.00 per share, pursuant to such agreement, in exchange for the aforementioned securities. Subsequently, the Company filed an election to be regulated as a BDC.

On April 21, 2010, the Company completed its initial public offering, formally commencing principal operations, and sold 9,000,000 shares of its common stock through a group of underwriters at a price of $13.00 per share, less an underwriting discount and commissions totaling $0.8125 per share. Concurrently, the Company sold 6,307,692 shares of its common stock to BDC Holdings at $13.00 per share, the sale of which was not subject to an underwriting discount and commission. On April 27, 2010, the Company closed the sale of the aforementioned 15,307,692 shares and received $191.7 million of net proceeds.

On May 26, 2010, the underwriters exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 337,000 shares of common stock at $13.00 per share resulting in additional net proceeds of $4.1 million.

The Company has established wholly owned subsidiaries, THL Credit AIM Media Holdings Inc., THL Credit Holdings, Inc. and THL Credit YP Holdings Inc, which are structured as Delaware entities, or tax blockers, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). Tax blockers are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

The Company has a wholly owned subsidiary, THL Corporate Finance, Inc., which serves as the administrative agent on certain investment transactions.

On April 8, 2011, the Company received a “Greenlight” letter allowing it to file an application to license a small business investment company, or SBIC, with the Investment Division of the Small Business Administration, or the SBA. The application was submitted and formally accepted on September 21, 2011. As of June 30, 2012, the SBIC had not received its license to operate as an SBIC. There can be no assurance when or if the SBIC will be able to obtain such license or that the Company will be able to capitalize such SBIC with sufficient regulatory capital to borrow the maximum amount available.

THL Credit SBIC, LP, or SBIC LP, and its general partner, THL Credit SBIC GP, LLC, or SBIC GP, were organized in Delaware on August 25, 2011 as a limited partnership and limited liability company, respectively. Both the SBIC LP and SBIC GP are consolidated wholly owned subsidiaries of the Company. The SBIC will be subject to regulation and oversight by the SBA. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. The SBIC LP’s objective is to generate both current income and capital appreciation through debt and equity investments. SBIC LP generally invests with the Company in SBA eligible businesses that meet the investment criteria used by the Company. As of June 30, 2012, the SBIC LP had made three pre-licensing investments with an aggregate amortized cost basis of $28,430,390 and fair market value of $28,593,932 that were pre-approved by the SBA. As of December 31, 2011, the SBIC LP had made one pre-licensing investment with an aggregate amortized cost basis and fair market value of $12,785,748 that was pre-approved by the SBA.

The Company manages the day-to-day operations of and provides investment advisory and administrative services to SBIC LP.

 

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2. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended, and the Securities and Exchange Act of 1934, as amended, the Company generally will not consolidate its interest in any company other than in investment company subsidiaries and controlled operating companies substantially all of whose business consists of providing services to the Company.

The accompanying consolidated financial statements of the Company have been presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal accruals, considered necessary for the fair presentation of financial statements for interim period included herein. The current period’s results of operations are not necessarily indicative of the operating results to be expected for the period ended December 31, 2012. The financial results of our portfolio companies are not consolidated in the financial statements. The accounting records of the Company are maintained in U.S. dollars.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Changes in the economic environment, financial markets, credit worthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ and these differences could be material.

Cash

Cash consists of funds held in demand deposit accounts at several financial institutions and, at certain times, balances may exceed the Federal Deposit Insurance Corporation insured limit and is therefore subject to credit risk. There were no cash equivalents as of June 30, 2012 and December 31, 2011.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the term of the credit facility.

Deferred Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the public offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement.

Interest Rate Derivative

The Company does not use hedge accounting as it considers its derivative an economic hedge. The Company recognizes derivatives as either interest rate derivative assets or liabilities at fair value on its Consolidated Statements of Assets and Liabilities with valuation changes and interest rate payments recorded as net change in unrealized appreciation (depreciation) on interest rate derivative and interest rate derivative periodic interest payments, net, respectively, on the Consolidated Statements of Operations. See also the disclosure in Note 7, Interest Rate Derivative.

Valuation of Investments

Investments, for which market quotations are readily available, are valued using market quotations, which are generally obtained from an independent pricing service or one or more broker-dealers or market makers. Debt and equity securities, for which market quotations are not readily available, are valued at fair value as determined in good faith by the Company’s board of directors. Because we expect that there will not be a readily available market value for many of the investments in the Company’s portfolio, it is expected that many of the Company’s portfolio investments’ values will be determined in good faith by the Company’s board of directors in accordance with a documented valuation policy that has been reviewed and approved by our board of directors in accordance with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

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With respect to investments for which market quotations are not readily available, the Company’s board of directors undertakes a multi-step valuation process each quarter, as described below:

 

   

the Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

 

   

preliminary valuation conclusions are then documented and discussed with senior management of the Advisor;

 

   

to the extent determined by the audit committee of the Company’s board of directors, independent valuation firms engaged by the Company conduct independent appraisals and review the Advisor’s preliminary valuations in light of their own independent assessment;

 

   

the audit committee of our board of directors reviews the preliminary valuations of the Advisor and independent valuation firms and, if necessary, responds and supplements the valuation recommendation of the independent valuation firm to reflect any comments; and

 

   

our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

The types of factors that the Company may take into account in fair value pricing our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. The Company utilizes an income approach to value its debt investments and a combination of income and market approaches to value its equity investments. With respect to unquoted securities, the Company’s board of directors, in consultation with the Company’s independent third party valuation firm, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors. For debt investments, the Company determines the fair value primarily using an income, or yield, approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each portfolio investments. The Company’s estimate of the expected repayment date is generally the legal maturity date of the instrument. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors.

The Company values its interest rate derivative agreement using an income approach that analyzes the discounted cash flows associated with the interest rate derivative agreement. Significant inputs to the discounted cash flows methodology include the forward interest rate yield curves in effect as of the end of the measurement period and an evaluation of the counterparty’s credit risk.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future 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 the Company may take into account in fair value pricing the Company’s investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, the current investment performance rating, 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, transaction comparables, our principal market as the reporting entity and enterprise values, among other factors.

In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2—Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management.

 

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The Company considers whether the volume and level of activity for the asset or liability have significantly decreased and identifies transactions that are not orderly in determining fair value. Accordingly, if the Company determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances.

The Company has adopted the authoritative guidance under GAAP for estimating the fair value of investments in investment companies that have calculated net asset value per share in accordance with the specialized accounting guidance for Investment Companies. Accordingly, in circumstances in which net asset value per share of an investment is determinative of fair value, the Company estimates the fair value of an investment in an investment company using the net asset value per share of the investment (or its equivalent) without further adjustment, if the net asset value per share of the investment is determined in accordance with the specialized accounting guidance for investment companies as of the reporting entity’s measurement date.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends the existing fair value guidance within ASC 820-10. The amendments include: (1) application of the concepts of the highest and best use valuation premise only to measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities), (2) an exception to fair value measurement principles for financial assets and financial liabilities (and derivatives) with offsetting positions in market risks or counterparty credit risk, which allows an entity to measure the fair value of the net risk position when several criteria are met, (3) extension of the prohibition of a blockage factor application to all fair value measurements, (4) a model for the fair value measurement of instruments classified within an entity’s stockholders’ equity which is consistent with the guidance of measuring the fair value for liabilities, (5) additional disclosures for fair value measurements categorized in Level 3 of the fair value hierarchy: (i) quantitative information about unobservable inputs used, (ii) a description of the valuation processes used by the entity and (iii) a qualitative discussion about the sensitivity of the measurements, (6) disclosure of the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed and (7) disclosure of any transfers between Levels 1 and 2 of the fair value hierarchy, not just significant transfers. The provisions of ASU 2011-04 are effective for the Company on January 1, 2012. The adoption of this standard has been reflected in the Company’s financial statement disclosures.

Investment Risk

The value of investments will generally fluctuate with, among other things, changes in prevailing interest rates, federal tax rates, counterparty risk, general economic conditions, the condition of certain financial markets, developments or trends in any particular industry and the financial condition of the issuer. During periods of limited liquidity and higher price volatility, the Company’s ability to dispose of investments at a price and time that the Company deems advantageous may be impaired. The extent of this exposure is reflected in the carrying value of these financial assets and recorded in the Consolidated Statements of Assets and Liabilities.

Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. The value of lower-quality debt securities often fluctuates in response to company, political, or economic developments and can decline significantly over short periods of time or during periods of general or regional economic difficulty. Lower-quality debt securities can be thinly traded or have restrictions on resale, making them difficult to sell at an acceptable price. The default rate for lower-quality debt securities is likely to be higher during economic recessions or periods of high interest rates.

 

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The following is a summary of the industry classification in which the Company invests as of June 30, 2012:

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Aerospace & defense

   $ 3,947,736       $ 3,947,736         1.48

Business services

     49,391,528         50,810,198         19.09

Communications

     10,695,603         10,948,276         4.11

Consumer products

     9,174,014         9,174,014         3.44

Election services

     9,502,600         9,568,162         3.59

Energy / Utilities

     28,531,569         29,082,609         10.92

Financial services

     20,868,093         20,868,093         7.83

Food & beverage

     43,558,881         43,547,256         16.35

Healthcare, ambulatory surgery centers

     18,708,692         19,751,930         7.42

Healthcare, consulting

     12,108,417         12,143,894         4.56

Healthcare, dental services

     12,182,006         12,599,594         4.73

Healthcare, device manufacturing

     12,746,332         12,746,332         4.79

Manufacturing

     23,493,040         22,543,864         8.46

Manufacturing, textiles

     8,560,824         8,560,824         3.21

Media

     11,002,109         11,002,109         4.13

Media, advertising

     9,358,440         9,358,440         3.51

Restaurants

     16,884,862         17,199,051         6.46

Retail & grocery

     26,181,106         26,486,228         9.94
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 326,895,852       $ 330,338,610         124.02
  

 

 

    

 

 

    

 

 

 

The following is a summary of the geographical concentration of our investment portfolio as of June 30, 2012:

 

Region:    Cost      Fair Value      % of
Net Assets
 

Midwest

   $ 64,297,499       $ 65,200,984         24.48

Northeast

     35,286,739         35,848,917         13.46

Northwest

     13,333,554         13,475,134         5.06

Southeast

     102,019,613         103,602,881         38.90

Southwest

     82,173,383         82,088,404         30.81

West

     29,785,064         30,122,290         11.31
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 326,895,852       $ 330,338,610         124.02
  

 

 

    

 

 

    

 

 

 

 

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The following is a summary of the industry classification in which the Company invests as of December 31, 2011:

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Aerospace & defense

   $ 3,926,483       $ 3,926,483         1.47

Business services

     42,062,668         43,012,086         16.08

Communications

     11,155,137         11,465,517         4.28

Election services

     10,252,341         10,306,298         3.85

Energy / Utilities

     26,642,140         27,040,285         10.10

Financial services

     12,010,864         12,011,496         4.49

Food & beverage

     36,131,223         36,537,507         13.65

Healthcare, ambulatory surgery centers

     18,408,996         19,383,861         7.24

Healthcare, consulting

     12,027,298         12,027,298         4.49

Healthcare, dental services

     11,916,773         12,331,993         4.61

Manufacturing

     25,394,558         25,574,132         9.56

Restaurants

     16,057,606         16,260,214         6.08

Retail & grocery

     37,125,535         37,116,162         13.87
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 263,111,622       $ 266,993,332         99.77
  

 

 

    

 

 

    

 

 

 

The following is a summary of the geographical concentration of our investment portfolio as of December 31, 2011:

 

Region:    Cost      Fair Value      % of
Net Assets
 

Midwest

   $ 73,850,595       $ 74,476,659         27.82

Northeast

     17,856,832         18,131,496         6.78

Northwest

     13,149,455         12,997,081         4.86

Southeast

     70,058,029         71,792,628         26.83

Southwest

     67,132,478         68,229,951         25.50

West

     21,064,233         21,365,517         7.98
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 263,111,622       $ 266,993,332         99.77
  

 

 

    

 

 

    

 

 

 

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of June 30, 2012:

 

Description:

   Fair Value     Level 1      Level 2     Level 3  

First lien debt

   $ 79,679,374      $ —         $ —        $ 79,679,374   

Second lien debt

     68,056,510        —           —          68,056,510   

Subordinated debt

     157,270,805        —           —          157,270,805   

Investments in funds

     8,368,093        —           —          8,368,093   

Equity investments

     4,463,828        —           —          4,463,828   

Investment in payment rights

     12,500,000        —           —          12,500,000   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investments

   $ 330,338,610      $ —         $ —        $ 330,338,610   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate derivative

     (574,427     —           (574,427     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liability at fair value

   $ (574,427   $ —         $ (574,427   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of December 31, 2011:

 

Description:

   Fair Value      Level 1      Level 2      Level 3  

First lien debt

   $ 89,488,235       $ —           —         $ 89,488,235   

Second lien debt

     60,124,938         —           —           60,124,938   

Subordinated debt

     101,841,744         —           —           101,841,744   

Investments in funds

     12,011,496         —           —           12,011,496   

Equity investments

     3,526,919         —           —           3,526,919   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 266,993,332       $ —         $ —         $ 266,993,332   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table rolls forward the changes in fair value during the six months ended June 30, 2012 for investments classified within Level 3:

 

    First lien
debt
    Second lien
debt
    Subordinated
debt
    Investments
in funds
    Equity
investments
    Investment in
Payment Rights
    Totals  

Beginning balance, January 1, 2012

  $ 89,488,235      $ 60,124,938      $ 101,841,744      $ 12,011,496      $ 3,526,919      $ —        $ 266,993,332   

Purchases

    3,048,750        19,570,740        65,924,284        3,935        763,729        12,500,000        101,811,438   

Sales and repayments

    (13,475,955     (11,333,333     (12,569,273     (3,646,706     —          —          (41,025,267

Unrealized appreciation (depreciation)(1)

    245,984        (853,811     (3,673     (632     173,180        —          (438,952

Net amortization of premiums, discounts and fees

    250,104        242,667        688,961        —          —          —          1,181,732   

PIK

    122,256        305,309        1,388,762        —          —          —          1,816,327   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2012

  $ 79,679,374      $ 68,056,510      $ 157,270,805      $ 8,368,093      $ 4,463,828      $ 12,500,000      $ 330,338,610   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation from investments still held as of the reporting date(1)

  $ 245,984      $ (710,810   $ 434,297      $ (632   $ 173,180      $ —        $ 142,019   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table rolls forward the changes in fair value during the six months ended June 30, 2011 for investments classified within Level 3(2):

 

    First lien
debt
    Second lien
debt
    Subordinated
debt
    Investments
in funds
    Equity
investments
    Totals  

Beginning balance, January 1, 2011

  $ 35,184,846      $ 33,968,221      $ 66,576,890      $ 12,790,984      $ 5,008,238      $ 153,529,179   

Purchases

    48,374,097        30,883,333        17,203,917        9,065        270,452        96,740,864   

Sales and repayments

    (567,535     (8,738,889     (335,541     (1,122,033     (895,545     (11,659,543

Unrealized appreciation (depreciation)(1)

    823,307        416,696        1,287,623        100        (199,807     2,327,919   

Net amortization of premiums, discounts and fees

    135,505        385,645        527,603        —          —          1,048,753   

PIK and non cash earnings

    6,000        219,601        927,264        330,913        —          1,483,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2011

  $ 83,956,220      $ 57,134,607      $ 86,187,756      $ 12,009,029      $ 4,183,338      $ 243,470,950   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation from investments still held as of the reporting date(1)

  $ 823,306      $ 990,737      $ 1,287,623      $ 100      $ 7,648      $ 3,109,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) All unrealized appreciation (depreciation) in the table above is reflected in the accompanying Consolidated Statements of Operations.
(2) For the six months ended June 30, 2011, the Company has reclassified certain of the above investment categories to expand the classification of investments to reflect the security interest of the Company’s debt holdings. The opening balance as of January 1, 2011 has been adjusted to conform to the revised classifications.

 

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The following provides quantitative information about Level 3 fair value measurements:

 

Description:

   Fair Value     

Valuation Technique

  

Unobservable Inputs

   Range (Average) (1)

First lien debt

   $ 79,679,374       Discounted cash flows (income approach)    Weighted average cost of capital    10% - 12% (11%)

Second lien debt

     68,056,510       Discounted cash flows (income approach)    Weighted average cost of capital    16% - 18% (17%)

Subordinated debt

     157,270,805       Discounted cash flows (income approach)    Weighted average cost of capital    14% - 16% (15%)

Investments in funds

     8,368,093       Discounted cash flows (income approach)    Weighted average cost of capital    14% - 22% (18%)
      Net asset value, as a practical expedient    Net asset value    N/A

Equity investments

     4,463,828       Market comparable companies (market approach)    EBITDA multiple    5.8 - 6.7 (6.2)

Investment in payment rights(2)

     12,500,000       Discounted cash flows (income approach)    Weighted average cost of capital and federal tax rates    14% - 18% (16%)
  

 

 

          

Total investments

   $ 330,338,610            
  

 

 

          

 

(1) The minimum and maximum values were determined using the weighted average of the fair value of the investments in each investment category.
(2) Investment in a tax receivable agreement, or TRA, payment rights

The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien debt, second lien debt and subordinated debt), including income-producing investments in funds and payment rights, is the weighted average cost of capital, or WACC. Significant increases (decreases) in the WACC in isolation would result in a significantly lower (higher) fair value measurement. In determining the WACC, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels, credit quality, among other factors, including federal tax rates, in its analysis. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate WACC to use in the income approach.

The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple, or the Multiple. Significant increases (decreases) in the Multiple in isolation would result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach.

Investment in Tax Receivable Agreement Payment Rights

In June 2012, the Company invested in a TRA that entitles it to certain payment rights, or TRA Payment Rights, from Duff & Phelps Corporation, or Duff & Phelps. The TRA transfers the economic value of certain tax deductions, or tax benefits, taken by Duff & Phelps to the Company. Through the TRA, the Company is entitled to receive an annual tax benefit payment based upon 85% of the savings from certain deductions along with interest, which is calculated from the due date of the Duff & Phelps’ federal tax return until the date the payment is made to the Company. These tax benefit payments will continue until the relevant deductions are fully utilized, which is projected to be 17 years. The projected annual tax benefit payment will be accrued on a quarterly basis and paid annually and will be allocated between a reduction in the cost basis of the investment and interest income based upon an amortization schedule. The TRA payment right is, in effect, a subordinated claim on the issuing company which can be valued based on the credit risk of the issuer, the liquidity of the underlying payment right, risk of tax law changes and any other factors which might impact the value of the payment right. Based upon the characteristics of the investment, the Company has chosen to categorize the investment in the TRA payment rights as investment in payment rights in the fair value hierarchy. During the three and six months ended June 30, 2012, the Company recognized $162,933 of income in connection with the TRA payment rights. As of June 30, 2012, the value of the Company’s interest in the TRA was $12,500,000 and is reflected in the Consolidated Schedule of Investments.

 

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Investment in Funds

Greenway

On January 14, 2011, THL Credit Greenway Fund LLC, or Greenway, was formed as a Delaware limited liability company. Greenway is a portfolio company of the Company. Greenway is a closed-end investment fund which provides for no liquidity or redemption options and is not readily marketable. Greenway operates under a limited liability agreement dated January 19, 2011, or the Agreement. Greenway will continue in existence until January 14, 2021, subject to earlier termination pursuant to certain terms of the Agreement. The term may also be extended for up to three additional one-year periods pursuant to certain terms of the Agreement. Greenway has a two year investment period.

Greenway has $150,000,000 of capital committed by affiliates of a single institutional investor, and is managed by the Company through the investment professionals that serve on the Company’s investment committee. The Company’s capital commitment to Greenway is $15,000. As of June 30, 2012, all of the capital had been called by Greenway. As of June 30, 2012 and December 31, 2011, the value of the Company’s interest in Greenway was $14,060 and $11,496, respectively, and is reflected in the Consolidated Schedules of Investments.

As manager of Greenway, the Company acts as the investment adviser to Greenway and is entitled to receive certain fees. As a result, Greenway is classified as an affiliate of the Company. For the three and six months ended June 30, 2012, the Company earned $693,338 and $1,223,672 in fees related to Greenway, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. For the three and six months ended June 30, 2011, the Company earned $554,148 and $634,330 in fees related to Greenway, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of June 30, 2012 and December 31, 2011, $668,985 and $410,479 of fees related to Greenway were included in Due from affiliate on the Consolidated Statements of Assets and Liabilities.

Greenway invests in securities similar to those of the Company pursuant to investment and allocation guidelines which address, among other things, the size of the borrowers, the types of transactions and the concentration and investment ratio amongst Greenway and the Company. However, the Company has the discretion to invest in other securities.

LCP Capital Fund LLC

The Company has invested in membership interests in LCP Capital Fund LLC, or LCP, a private investment company that was organized to participate in investment opportunities that arise when a special purpose entity, or SPE, or sponsor thereof, needs to raise capital to achieve ratings, regulatory, accounting, tax, or other objectives. LCP is a closed investment vehicle which provides for no liquidity or redemption options and is not readily marketable. LCP is managed by an unaffiliated third party. As of June 30, 2012 and December 31, 2011, the Company has contributed $12,000,000 of capital in the form of membership interests in LCP, which is invested in an underlying SPE referred to as Series 2005-01. On May 1, 2012, the Company received $3,645,967 in connection with a reduction in its commitment pursuant to the governing documents, which is related to the notional amount of the underlying credit default swaps. The Company’s exposure is limited to the amount of its remaining contributed capital. As of June 30, 2012 and December 31, 2011, the value of the Company’s interest in LCP was $8,354,033 and $12,000,000, respectively, and is reflected in the Consolidated Schedules of Investments.

The Company’s contributed capital in LCP is maintained in a collateral account held by a third-party custodian, who is neither affiliated with the Company nor with LCP, and acts as collateral on certain credit default swaps for the Series 2005-01 for which LCP receives fixed premium payments throughout the year, adjusted for expenses incurred by LCP. The SPE purchases assets on a non-recourse basis and LCP agrees to reimburse the SPE up to a specified amount for potential losses. LCP holds the contributed cash invested for an SPE transaction in a segregated account that secures the payment obligation of LCP. The Company expects to receive distributions from LCP on a quarterly basis. Such distributions are reflected in the Company’s Consolidated Statements of Operations as interest income in the period earned. LCP has a remaining life of 18 years; however, it is currently expected that Series 2005-01 will terminate on February 15, 2013, if not extended prior to this date pursuant to the terms of Series 2005-1 SPE. Regardless of the date of dissolution, LCP has the right to receive amounts held in the collateral account if there is an event of default under LCP’s operative agreements. LCP may have other series which will have investments in other SPEs to which the Company will not be exposed.

Security Transactions, Income Recognition, Realized/Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method. The Company reports changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation on investments in the Consolidated Statements of Operations. The Company reports changes in fair value of the interest rate derivative that is measured at fair value as a component of net change in unrealized appreciation or depreciation on interest rate derivative in the Consolidated Statements of Operations.

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that the Company expects to collect such amounts. Dividend income is recognized on the ex-dividend date. Original issue discount, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with the acquisition of debt securities, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees.

 

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The Company has investments in its portfolio which contain a contractual paid-in-kind, or PIK, interest provision. PIK interest is computed at the contractual rate specified in each investment agreement, is added to the principal balance of the investment, and is recorded as income. The Company will cease accruing PIK interest if there is insufficient value to support the accrual or if it does not expect amounts to be collectible. To maintain the Company’s status as a RIC, PIK interest income, which is considered investment company taxable income, must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash.

The Company recorded $1,170,190 and $1,939,202 in PIK income for the three and six months ended June 30, 2012, respectively. The Company recorded $623,727 and $1,152,864 in PIK income for the three and six months ended June 30, 2011, respectively. The Company received cash proceeds related to PIK income previously recognized of $523,868 and $0, for the three and six months ended June 30, 2012 and 2011, respectively.

The Company capitalizes and amortizes upfront loan origination fees received in connection with the closing of investments. The unearned income from such fees is accreted into interest income over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees, and unamortized discounts are recorded as interest income.

In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned. The Company had no income from advisory services for the three and six months ended June 30, 2012 and 2011, respectively.

Other income includes commitment fees, fees related to the management of Greenway, amendment fees and unused commitment fees associated with investments in portfolio companies.

Expenses are recorded on an accrual basis.

Revolving and Unfunded Delayed Draw Loans

For the Company’s investments in revolving and delayed draw loans, the cost basis of the investments purchased is adjusted for the cash received for the discount on the total balance committed. The fair value is also adjusted for price appreciation or depreciation on the unfunded portion. As a result, the purchase of commitments not completely funded may result in a negative value until it is offset by the future amounts called and funded.

Income Taxes

The Company has elected to be taxed as a RIC under Subchapter M of the Code and currently qualifies, and intends to continue to qualify each year, as a RIC under the Code.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its ordinary income for each calendar year and 98.2% of its net capital gains for the one-year period ending October 31 of that calendar year. The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on undistributed taxable income as required.

If the Company does not distribute at least 98% of its ordinary income in the year earned and 98.2% of its net capital gains for the one-year period ending October 31 in that calendar year, the Company will generally be required to pay an excise tax equal to 4% of the undistributed amount. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.

The Company follows the provisions under the authoritative guidance on accounting for and disclosure of uncertainty in tax positions. The provisions require management to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions not meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. There are no unrecognized tax benefits in the accompanying consolidated financial statements. Although the Company files federal and state tax returns, the Company’s major tax jurisdiction is federal. The Company’s inception-to-date federal tax years remain subject to examination by taxing authorities.

 

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Dividends

Dividends and distributions to stockholders are recorded on the applicable record date. The amount, if any to be paid out as a dividend is determined by the Company’s board of directors on a quarterly basis. Net realized capital gains, if any, are generally distributed at least annually out of assets legally available for such distributions, although the Company may decide to retain such capital gains for investment.

Capital transactions in connection with the Company’s dividend reinvestment plan are recorded when shares are issued.

3. Related Party Transactions

On March 6, 2012, the Company’s investment management agreement was re-approved by its board of directors, including a majority of our directors who are not interested persons of the Company. Under the investment management agreement, the Advisor, subject to the overall supervision of the Company’s board of directors, manages the day-to-day operations of, and provides investment advisory services to the Company.

The Advisor receives a fee for investment advisory and management services consisting of a base management fee and a two-part incentive fee.

The base management fee is calculated at an annual rate of 1.5% of the Company’s gross assets payable quarterly in arrears on a calendar quarter basis. For purposes of calculating the base management fee, “gross assets” is determined as the value of the Company’s assets without deduction for any liabilities. The base management fee is calculated based on the value of the Company’s gross assets at the end of the most recently completed calendar quarter, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter.

For the three and six months ended June 30, 2012, the Company incurred base management fees payable to the Advisor of $1,107,244 and $2,146,554, respectively. For the three and six months ended June 30, 2011, the Company incurred base management fees payable to the Advisor of $998,805 and $1,990,265, respectively. As of June 30, 2012 and December 31, 2011, $1,107,244 and $1,013,048, respectively, was payable to the Advisor.

The incentive fee has two components, ordinary income and capital gains, as follows:

The ordinary income component is calculated, and payable, quarterly in arrears based on the Company’s preincentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The preincentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as “minimum income level”). Preincentive 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 the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the Company’s administration agreement (discussed below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest. Preincentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that the Company has not yet received in cash. The Advisor receives no incentive fee for any calendar quarter in which the Company’s preincentive fee net investment income does not exceed the minimum income level. Subject to the cumulative total return requirement described below, the Advisor receives 100% of the Company’s preincentive fee net investment income for any calendar quarter with respect to that portion of the preincentive net investment income for such quarter, if any, that exceeds the minimum income level but is less than 2.5% (which is 10.0% annualized) of net assets (also referred to as the “catch-up” provision) and 20.0% of the Company’s preincentive fee net investment income for such calendar quarter, if any, greater than 2.5% (10.0% annualized) of net assets. The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s preincentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which the Company’s preincentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of preincentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such incentive fee that is attributable to deferred interest until the Company actually receives such interest in cash.

 

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For the three and six months ended June 30, 2012, the Company incurred $1,629,999 and $3,149,646, respectively, of incentive fees related to ordinary income. For the three and six months ended June 30, 2011, the Company incurred $797,241 of incentive fees related to ordinary income. As of June 30, 2012, $1,462,221 of such incentive fees are currently payable to the Advisor, as $167,778 of incentive 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.

The second component of the incentive fee (capital gains incentive fee) is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). This component is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid capital gains incentive fees is subtracted from such capital gains incentive fee calculated.

The capital gains incentive fee payable to the Company’s Advisor under the investment management agreement (as described above) as of June 30, 2012 and December 31, 2011 was $0 and $195,929, respectively. GAAP requires that the capital gains incentive fee accrual considers the cumulative aggregate unrealized capital appreciation in the calculation, as a capital gains incentive fee would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the investment management agreement. For accounting purposes in accordance with GAAP only, in order to reflect the potential capital gains incentive fee that would be payable for a given period as if all unrealized gains were realized, the Company has accrued total capital gains incentive fees including $0 and $195,929 currently payable as of June 30, 2012 and December 31, 2011, respectively of $688,280 and $972,271 as of June 30, 2012 and December 31, 2011, respectively, based upon net realized capital gains and unrealized capital depreciation for that period (in accordance with the terms of the investment management agreement), plus unrealized capital appreciation on investments held at the end of the year. There can be no assurance that such unrealized capital appreciation will be realized in the future. Accordingly, such fee, as calculated and accrued would not necessarily be payable under the investment management agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. Approximately $350,000 of the accrued potential capital gains incentive fee for the six months ended June 30, 2011 was related to unrealized appreciation on investments in periods prior to 2011. Such amounts were not material to current or to prior periods’ consolidated financial statements.

The Company has also entered into an administration agreement with the Advisor under which the Advisor will provide administrative services to the Company. Under the administration agreement, the Advisor performs, or oversees the performance of administrative services necessary for the operation of the Company, which include, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to the Company’s stockholders and reports filed with the SEC. In addition, the Advisor assists in determining and publishing the Company’s net asset value, oversees the preparation and filing of the Company’s tax returns and the printing and dissemination of reports to the Company’s stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. The Company will reimburse the Advisor for its allocable portion of the costs and expenses incurred by the Advisor for overhead in performance by the Advisor of its duties under the administration agreement and the investment management agreement, including facilities, office equipment and our allocable portion of cost of compensation and related expenses of our chief financial officer and chief compliance officer and their respective staffs, as well as any costs and expenses incurred by the Advisor relating to any administrative or operating services provided by the Advisor to the Company. Such costs are reflected as administrator expenses in the accompanying Consolidated Statements of Operations. Under the administration agreement, the Advisor provides, on behalf of the Company, managerial assistance to those portfolio companies to which the Company is required to provide such assistance. To the extent that our Advisor outsources any of its functions, the Company pays the fees associated with such functions on a direct basis without profit to the Advisor.

For the three and six months ended June 30, 2012, the Company incurred administrator expenses payable to the Advisor of $676,996 and $1,500,888, respectively. For the three and six months ended June 30, 2011, the Company incurred administrator expenses payable to the Advisor of $715,971 and $1,284,036, respectively. As of June 30, 2012 and December 31, 2011, $0 and $338,569, respectively, was payable to the Advisor.

The Company and the Advisor have entered into a license agreement with THL Partners, L.P., or THL Partners, under which THL Partners has granted to the Company and the Advisor a non-exclusive, personal, revocable, worldwide, non-transferable license to use the trade name and service mark THL, which is a proprietary mark of THL Partners, for specified purposes in connection with the Company’s and the Advisor’s respective businesses. This license agreement is royalty-free, which means the Company is not charged a fee for its use of the trade name and service mark THL. The license agreement is terminable either in its entirety or with respect to the Company or the Advisor by THL Partners at any time in its sole discretion upon 60 days prior written notice, and is also terminable with respect to either the Company or the Advisor by THL Partners in the case of

 

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certain events of non-compliance. After the expiration of its first one year term, the entire license agreement is terminable by either the Company or the Advisor at the Company or its sole discretion upon 60 days prior written notice. Upon termination of the license agreement, the Company and the Advisor must cease to use the name and mark THL, including any use in the Company’s respective legal names, filings, listings and other uses that may require the Company to withdraw or replace the Company’s names and marks. Other than with respect to the limited rights contained in the license agreement, the Company and the Advisor have no right to use, or other rights in respect of, the THL name and mark. The Company is an entity operated independently from THL Partners, and third parties who deal with the Company have no recourse against THL Partners.

Due to Affiliates

The Advisor paid certain other general and administrative expenses on behalf of the Company. Such amounts, if any, have been recorded in the Consolidated Statements of Assets and Liabilities as due to affiliate as of June 30, 2012 and December 31, 2011.

Affiliated Stockholders

THL Credit Opportunities, L.P. and BDC Holdings own 6,974 and 8,047,720 shares, respectively, or 0.03% and 39.80%, respectively, of the Company’s common stock as of June 30, 2012, compared with 6,974 and 8,972,720 shares, respectively, or 0.03% and 44.38%, respectively, as of December 31, 2011.

4. Realized Gains

The Company did not recognize any realized gains for the three and six months ended June 30, 2012 and 2011.

5. Net Increase in Net Assets Per Share Resulting from Operations

The following information sets forth the computation of basic and diluted net increase in net assets per share resulting from operations:

 

     For the three months ended June 30,      For the six months ended June 30,  
     2012      2011      2012      2011  

Numerator—net increase in net assets resulting from operations:

   $ 5,966,882       $ 6,550,420       $ 11,673,228       $ 11,434,506   

Denominator—basic and diluted weighted average common shares:

     20,220,201         20,220,197         20,220,201         20,113,105   

Basic and diluted net increase in net assets per common share resulting from operations:

   $ 0.30       $ 0.32       $ 0.58       $ 0.57   

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

6. Credit Facility

On May 10, 2012, the Company entered into an amendment, or Amendment, to its existing revolving credit agreement, or Revolving Facility, and entered into a new senior secured term loan credit facility, or Term Loan Facility, and together with the Revolving Facility, the Facilities, with ING Capital LLC.

The Amendment revised the Revolving Facility, dated March 11, 2011, to (among other things): increase the amount available for borrowing from $125,000,000 to $140,000,000; permit the Term Loan Facility; extend the maturity date from May 2014 to May 2016 (with a one year term out period beginning in May 2015); and change the non-use fee from 1.00% annually if the Company uses 50% or less of the Revolving Facility and 0.50% annually if the Company uses more than 50% of the Revolving Facility to 1.00% annually if the Company uses 35% or less of the Revolving Facility and 0.50% annually if the Company uses more than 35% of the Revolving Facility. The Amendment also changes the interest rate of the Revolving Facility from (a) Eurocurrency loans from LIBOR plus 3.50% to (i) when the facility is more than 35% drawn and the step-down condition is satisfied, LIBOR plus 3.00%, (ii) when the facility is more than 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.25%, (iii) when the facility is less than or equal to 35% drawn and the step-down condition is satisfied, LIBOR plus 3.25%, and (iv) when the facility is less than or equal to 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.50% and (b) alternative base rate loans based, or ABR, on the highest rate of the Prime Rate, Federal Funds Rate plus 0.5% or

 

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three month LIBOR plus 1.0% per annum to (i) when the facility is more than 35% drawn and the step-down condition is satisfied, ABR plus 2.00%, (ii) when the facility is more than 35% drawn and the step-down condition is not satisfied, ABR plus 2.25%, (iii) when the facility is less than or equal to 35% drawn and the step-down condition is satisfied, ABR plus 2.25%, and (iv) when the facility is less than or equal to 35% drawn and the step-down condition is not satisfied, ABR plus 2.50%.

The Term Loan Facility provides the Company with a $50,000,000 senior secured term loan , or Term Loan. The Term Loan expires in May 2017, bears interest at LIBOR plus 4.00% (with no LIBOR Floor) and has substantially similar terms to the Company’s existing Revolving Facility (as amended by the Amendment).

Each of the Facilities includes an accordion feature permitting the Company to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $225,000,000.

The Facilities generally require payment of interest on a quarterly basis for ABR loans, and at the end of the applicable interest period for Eurocurrency loans bearing interest at LIBOR. All outstanding principal is due upon each maturity date. The Facilities also require a mandatory prepayment of interest and principal upon certain customary triggering events (including, without limitation, the disposition of assets or the issuance of certain securities).

Borrowings under the Facilities are subject to, among other things, a minimum borrowing/collateral base. The Facilities have certain collateral requirements and/or financial covenants, including covenants related to: (a) limitations on the incurrence of additional indebtedness and liens, (b) limitations on certain investments, (c) limitations on certain restricted payments, (d) limitations on the creation or existence of agreements that prohibit liens on certain properties of the Company and its subsidiaries, and (e) compliance with certain financial maintenance standards including (i) minimum stockholders’ equity, (ii) a ratio of total assets (less total liabilities not represented by senior securities) to the aggregate amount of senior securities representing indebtedness of the Company and its subsidiaries, of not less than 2.25:1.0, (iii) minimum liquidity, (iv) minimum net worth, and (v) a consolidated interest coverage ratio. In addition to the financial maintenance standards, described in the preceding sentence, borrowings under the Facilities (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in the Company’s portfolio.

The Facilities’ documents also include default provisions such as the failure to make timely payments under the Facilities, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Facilities, which, if not complied with, could, at the option of the lenders under the Facilities, accelerate repayment under the Facilities, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations. Each loan originated under the Revolving Facility is subject to the satisfaction of certain conditions. The Company cannot be assured that it will be able to borrow funds under the Revolving Facility at any particular time or at all. The Company is currently in compliance with all financial covenants under the Facilities.

For the six months ended June 30, 2012, the Company borrowed $117,800,000 and made $52,600,000 of repayments under the Facilities. There were no borrowings or repayments for the six months ended June 30, 2011. As of June 30, 2012 and December 31, 2011, there were $70,200,000 and $5,000,000 of borrowings outstanding at a weighted average interest rate of 4.1000% and 3.8125%, respectively. Interest expense and related fees of $759,860 and $315,973 were incurred in connection with the Facilities during the three months ended June 30, 2012 and 2011, respectively. Interest expense and related fees of $1,212,693 and $385,556 were incurred in connection with the Facilities during the six months ended June 30, 2012 and 2011, respectively.

In accordance with the 1940 Act, with certain exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. The asset coverage as of June 30, 2012 is in excess of 200%.

7. Interest Rate Derivative

On May 10, 2012, the Company entered into a five-year interest rate swap agreement, or swap agreement, with ING Capital Markets, LLC on its Term Loan Borrowing. Under the swap agreement, with a notional value of $50,000,000, the Company pays a fixed rate of 1.1425% and receives a floating rate based upon the current three-month LIBOR rate. The Company entered into the swap agreement to manage interest rate risk and not for speculative purposes.

The Company uses an income approach using a discounted cash flow methodology. Significant inputs to the discounted cash flows methodology include the forward interest rate yield curves in effect as of the end of the measurement period and an evaluation of the counterparty’s credit risk.

The Company records the change in valuation of the swap agreement in unrealized appreciation (depreciation) as of each measurement period. When the quarterly swap amounts are paid or received under the swap agreement, the amounts are recorded as a realized gain (loss).

For the three and six months ended June 30, 2012, the Company recognized $574,427 of net unrealized depreciation from the swap agreement, which is listed under unrealized depreciation on interest rate derivative in the Consolidated Statements of Operations. As of June 30 2012, the Company’s fair value of its swap agreement is $574,427, which is listed as an interest rate derivative liability on the Consolidated Statements of Assets and Liabilities.

 

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8. Offering Expenses

As of June 30, 2012 and December 31, 2011, $425,187 and $327,267, respectively, of offering costs related to the Company’s shelf registration statement were incurred and are reflected in the Consolidated Statements of Assets and Liabilities as deferred offering costs. Such amounts are expected to be charged against paid in capital in excess of par upon closing of an offering under the Company’s shelf registration.

9. Commitments and Contingencies

From time to time, the Company, or the Advisor, may become party to legal proceedings in the ordinary course of business, including proceedings related to the enforcement of our rights under contracts with our portfolio companies. Neither the Company, nor the Advisor, is currently subject to any material legal proceedings.

The Company has the following revolving commitments to portfolio companies:

 

     As of  
     June 30, 2012     December 31, 2011  

Total commitments

   $ 10,925,000        $10,925,000   

Less: funded commitments

     (2,299,500     (499,500)   
  

 

 

   

 

 

 

Total unfunded commitments

   $ 8,625,500        $10,425,500   
  

 

 

   

 

 

 

As of June 30, 2012 and December 31, 2011, the Company has also agreed to provide $7,017,500 and $7,850,000, respectively, of capital in delayed draw and capital expenditure facilities. The Company has also agreed to provide certain additional funding amounts of up to $4,666,667 to a portfolio company to fund future acquisitions provided certain performance requirements and other conditions are met. As of June 30, 2012 and December 31, 2011, such requirements and conditions had not been met

10. Dividends

The Company has elected to be taxed as a regulated investment company under Subchapter M of the Code. In order to maintain its status as a regulated investment company, it is required to distribute at least 90% of its investment company taxable income. The Company intends to make distributions to stockholders on a quarterly basis of substantially all of its net investment income. In addition, although the Company intends to make distributions of net realized capital gains, if any, at least annually, out of assets legally available for such distributions, it may in the future decide to retain such capital gains for investment.

In addition, the Company may be limited in its ability to make distributions due to the BDC asset coverage test for borrowings applicable to the Company as a BDC under the 1940 Act.

The following table summarizes the Company’s dividends declared and paid or to be paid on all shares:

 

Date Declared    Record Date    Payment Date    Amount Per Share  

August 5, 2010

   September 2, 2010    September 30, 2010    $ 0.05   

November 4, 2010

   November 30, 2010    December 28, 2010    $ 0.10   

December 14, 2010

   December 31, 2010    January 28, 2011    $ 0.15   

March 10, 2011

   March 25, 2011    March 31, 2011    $ 0.23   

May 5, 2011

   June 15, 2011    June 30, 2011    $ 0.25   

July 28, 2011

   September 15, 2011    September 30, 2011    $ 0.26   

October 27, 2011

   December 15, 2011    December 30, 2011    $ 0.28   

March 6, 2012

   March 20, 2012    March 30, 2012    $ 0.29   

March 6, 2012

   March 20, 2012    March 30, 2012    $ 0.05   

May 2, 2012

   June 15, 2012    June 29, 2012    $ 0.30   

July 26, 2012

   September 14, 2012    September 28, 2012    $ 0.32   

On July 26, 2012, the Company’s board of directors declared a dividend of $0.32 per share, payable on September 28, 2012 to stockholders of record at the close of business on September 14, 2012. The dividend will be paid out of net investment income earned in the period from July 1, 2012 through September 30, 2012.

The Company may not be able to achieve operating results that will allow it to make distributions at a specific level or to increase the amount of these distributions from time to time. If the Company does not distribute a certain percentage of its income annually, it will suffer adverse tax consequences, including possible loss of its status as a regulated investment company. The Company cannot assure stockholders that they will receive any distributions at a particular level.

 

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We maintain an “opt in” dividend reinvestment plan for our common stockholders. As a result, unless stockholders specifically elect to have their dividends automatically reinvested in additional shares of common stock, stockholders will receive all such dividends in cash. With respect to our dividends and distributions paid to stockholders during the six months ended June 30, 2012 and 2011, dividends reinvested pursuant to our dividend reinvestment plan totaled $26 and $4,048,586, respectively.

Under the terms of our dividend reinvestment plan, dividends will primarily be paid in newly issued shares of common stock. However, the Company reserves the right to purchase shares in the open market in connection with the implementation of the plan. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Distributions in excess of our current and accumulated profits and earnings would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions will be made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. If we had determined the tax attributes of our 2012 distributions as of June 30, 2012, approximately 92.9% would be from ordinary income and 7.1% would be from capital gains, which were recognized in 2011 for tax purposes. However, except for capital gain distributions attributable to long-term capital gains recognized in 2011, there can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2012 distributions to stockholders will actually be. Each year, a statement on Form 1099-DIV identifying the source of the distribution will be mailed to our stockholders.

11. Financial Highlights

 

     For the three months ended June 30,     For the six months ended June 30,  
     2012     2011     2012     2011  

Per Share Data:

        

Net asset value, beginning of period

   $ 13.18      $ 13.07      $ 13.24      $ 13.06   

Net investment income(1)

     0.32        0.25        0.63        0.45   

Net change in unrealized appreciation of investments(1)(2)

     0.00        0.08        (0.03     0.12   

Unrealized depreciation of interest rate derivative(1)

     (0.03     —          (0.03     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations(3)

     0.29        0.33        0.57        0.57   

Distributions to stockholders

     (0.30     (0.25     (0.64     (0.48
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 13.17      $ 13.15      $ 13.17      $ 13.15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at end of period

   $ 13.47      $ 13.00      $ 13.47      $ 13.00   

Total return(4)(5)

     7.08     1.84     15.76     3.61

Shares outstanding at end of period

     22,220,202        20,220,198        20,220,202        20,220,198   

Ratio/Supplemental Data:

        

Net assets at end of period

   $ 266,349,032      $ 265,834,617      $ 266,349,032      $ 265,834,617   

Ratio of operating expenses to average net assets(6)

     7.90     6.27     7.39     5.41

Ratio of net investment income to average net assets(6)

     9.81     7.52     9.54     6.97

Portfolio turnover(5)

     7.89     0.69     14.00     4.06

 

(1) Calculated based on weighted average common shares outstanding.
(2) Net change in unrealized appreciation of investments includes the effect of rounding on a per share basis.
(3) Includes the cumulative effect of rounding.
(4) Total return is based on the change in market price per share during the period. Total return takes into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan.
(5) Not annualized.
(6) Annualized.

 

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12. Subsequent Events

On July 26, 2012, the Company’s board of directors declared a dividend of $0.32 per share, payable on September 28, 2012 to stockholders of record at the close of business on September 14, 2012. The dividend will be paid out of net income earned in the period from July 1, 2012 through September 30, 2012.

On July 27, 2012, the Company was prepaid on $8,130,628 of its senior secured loans in Chuy’s Opco, Inc.

 

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

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

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

In addition to factors previously identified elsewhere in this filing, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

   

the introduction, withdrawal, success and timing of business initiatives and strategies;

 

   

changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

   

the relative and absolute investment performance and operations of our investment adviser;

 

   

the impact of increased competition;

 

   

the impact of future acquisitions and divestitures;

 

   

the unfavorable resolution of legal proceedings;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

 

   

the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or the Advisor;

 

   

the ability of the Advisor to identify suitable investments for us and to monitor and administer our investments;

 

   

our contractual arrangements and relationships with third parties;

 

   

any future financings by us;

 

   

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

 

   

fluctuations in foreign currency exchange rates; and

 

   

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

Overview

THL Credit, Inc. was organized as a Delaware corporation on May 26, 2009 and initially funded on July 23, 2009. We commenced principal operations on April 21, 2010. Our investment objective is to generate both current income and capital appreciation, primarily through the origination of privately negotiated investments in debt and equity securities in middle market companies.

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

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.

 

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On April 21, 2010, we completed our initial public offering, formally commencing principal operations, and sold 9,000,000 shares of our common stock through a group of underwriters at a price of $13.00 per share, less an underwriting discount and commissions totaling $0.8125 per share. Concurrently, we sold 6,307,692 shares of our common stock to THL Credit Partners BDC Holdings, L.P., or BDC Holdings, at $13.00 per share that was not subject to an underwriting discount and commission. We received $191.7 million of total net proceeds for the aforementioned offerings. Since May 2011, BDC Holdings distributed an aggregate of 2.8 million shares of our common stock held by BDC Holdings to its partners. As of June 30, 2012, BDC Holdings owns 39.8% of our common stock.

We have elected to be treated for tax purposes as a RIC under Subchapter M of the Code. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.

Portfolio Composition and Investment Activity

Portfolio Composition

We completed the quarter ended June 30, 2012 with $330.3 million (at fair value), which represents a $63.3 million, or 23.7%, increase from the $267.0 million (at fair value) as of December 31, 2011. We also increased our portfolio to thirty companies, including THL Credit Greenway Fund LLC, or Greenway, as of June 30, 2012, from twenty-four companies, including Greenway, as of December 31, 2011.

At June 30, 2012, our average portfolio company investment, exclusive of Greenway, at amortized cost and fair value was approximately $11.3 million and $11.4 million, respectively and our largest portfolio company investment by amortized cost and fair value was approximately $18.7 million and $19.8 million, respectively. At December 31, 2011, our average portfolio company investment at amortized cost and fair value was approximately $11.4 million and $11.6 million, respectively and our largest portfolio company investment by amortized cost and fair value was approximately $18.4 million and $19.4 million, respectively.

At June 30, 2012, 33.3% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 66.7% bore interest at fixed rates. At December 31, 2011, 40.0% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 60.0% bore interest at fixed rates. In the future, we expect that additional loans in our portfolio will have floating rates.

The weighted average yield of the debt and income-producing investments in our portfolio at their current cost was 14.2% at June 30, 2012 as compared to 14.0% at December 31, 2011. The weighted average yield on our debt securities at their current cost was 14.0% at June 30, 2012 as compared to 13.8% at December 31, 2011. Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of upfront loan origination fees, original issue discount and market premium or discount. Yields exclude common equity investments, preferred equity investments, and cash and cash equivalents.

Our portfolio companies, in which we have debt investments, currently have an average EBITDA of approximately $24 million, excluding one portfolio company with EBITDA levels not representative of a typical portfolio company, based on the latest available financial information and our weighted average attachment point in the capital structure of our portfolio companies, in which we have debt investments, is approximately 3.3 times EBITDA based on the latest available financial information.

 

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The following table summarizes the amortized cost and fair value of investments as of June 30, 2012 (in millions).

 

Description:

   Amortized Cost      Percentage of
Total
    Fair Value      Percentage of
Total
 

First lien debt

   $ 78.5         24.0   $ 79.7         24.1

Second lien debt

     68.3         20.9     68.0         20.6

Subordinated debt

     155.3         47.5     157.3         47.6

Investments in funds

     8.4         2.6     8.4         2.5

Equity investments

     3.9         1.2     4.4         1.4

Investment in payment rights

     12.5         3.8     12.5         3.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 326.9         100.0   $ 330.3         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the amortized cost and fair value of investments as of December 31, 2011 (in millions).

 

Description:

   Amortized Cost      Percentage of
Total
    Fair Value      Percentage of
Total
 

First lien debt

   $ 88.5         33.6   $ 89.5         33.5

Second lien debt

     59.6         22.6     60.2         22.6

Subordinated debt

     99.9         38.0     101.8         38.1

Investments in funds

     12.0         4.6     12.0         4.5

Equity investments

     3.1         1.2     3.5         1.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 263.1         100.0   $ 267.0         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Investment Activity

During the six months ended June 30, 2012, we made $101.8 million ($103.5 million at par) of investments including $83.9 million ($85.5 million at par) in eight new portfolio companies and $17.9 million ($18.0 million at par) in four existing portfolio companies and funding of $3.0 million of delayed draw and revolver commitments. These investments include a $12.5 million income-producing investment in TRA payment rights and $0.8 million of equity investments. Debt investments funded in the six months ended June 30, 2012, included $3.0 million of first lien, $19.6 million of second lien and $65.9 million of subordinated loans and had a weighted average yield of 14.6%. The weighted average yield, including all income-producing investments, was 14.8%.

During the three months ended June 30, 2012, we made $65.7 million ($66.8 million at par) of investments including $63.2 million ($64.4 million at par) in six new portfolio companies and $2.4 million ($2.4 million at par) in three existing portfolio companies. These investments include a $12.5 million income-producing investment in TRA payment rights and $0.8 million of equity investments. Debt investments funded in the three months ended June 30, 2012, included $0.5 million of first lien, $19.6 of second lien and $32.3 million of subordinated loans and had a weighted average yield of 15.1%. The weighted average yield, including all income-producing investments, was 15.3%.

During the six months ended June 30, 2011, we made $96.7 million ($98.2 million at par) of investments including $89.7 million ($91.0 million at par) in nine new portfolio companies and $7.0 million ($7.2 million at par) in three existing portfolio companies, including funding of $0.4 million of revolver commitments. Debt investments funded in the six months ended June 30, 2011, included $48.6 million of first lien, $30.9 million of second lien and $17.3 million of subordinated loans and had a weighted average yield of 12.4%.

During the three months ended June 30, 2011, we made $54.9 million ($56.0 million at par) of investments including $48.0 million ($48.9 million at par) in five new portfolio companies and $6.9 million ($7.1 million at par) in two existing portfolio companies, including funding of $0.4 million of revolver commitments. Debt investments funded in the three months ended June 30, 2011, included $48.2 million of first lien, $1.9 million of second lien and $4.5 million of subordinated loans and had a weighted average yield of 11.4%.

During the three and six months ended June 30, 2012, we received $24.6 million and $41.3 million, respectively, in proceeds principally from prepayments of our initial debt investment in Food Holdings and our debt investment in Charming Charlie, Inc., the sale of our investment in Hickory Farms, Inc. and partial prepayments from our investments in Hart InterCivic, Inc., CRS Reprocessing, LLC, LCP Capital Fund LLC, as well as amortization of certain other investments. During the three and six months ended June 30, 2012, these proceeds included $0.2 million and $0.3 million of prepayment premiums, respectively, which are related to Charming Charlie, Inc.

 

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During the three and six months ended June 30, 2011, we received $1.8 million and $12.0 million, respectively, in proceeds principally from the prepayment from Intelligrated, Inc., as well as amortization of certain other investments. During the three and six months ended June 30, 2011, these proceeds included $0 and $0.3 million of prepayment premiums, respectively, which are related to Intelligrated.

The frequency or volume of any prepayments may fluctuate significantly from period to period.

Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.

Investment Risk

The value of our investments will generally fluctuate with, among other things, changes in prevailing interest rates, federal tax rates, counterparty risk, general economic conditions, the condition of certain financial markets, developments or trends in any particular industry and the financial condition of the issuer. During periods of limited liquidity and higher price volatility, our ability to dispose of investments at a price and time that we deem advantageous may be impaired.

Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. The value of lower-quality debt securities often fluctuates in response to company, political, or economic developments and can decline significantly over short periods of time or during periods of general or regional economic difficulty. Lower-quality debt securities can be thinly traded or have restrictions on resale, making them difficult to sell at an acceptable price. The default rate for lower-quality debt securities is likely to be higher during economic recessions or periods of high interest rates.

Managed Fund

On January 14, 2011, THL Credit Greenway Fund LLC was formed as a Delaware limited liability company. Greenway is a portfolio company of ours. Greenway is a closed-end investment fund which provides for no liquidity or redemption options and is not readily marketable. Greenway operates under a limited liability agreement dated January 19, 2011 (the “Agreement”). Greenway will continue in existence until January 14, 2021, subject to earlier termination pursuant to certain terms of the Agreement. The term may also be extended for up to three additional one-year periods pursuant to certain terms of the Agreement. Greenway has a two year investment period.

Greenway has $150.0 million of capital committed by affiliates of a single institutional investor, and is managed by us through the investment professionals that serve on our investment committee. Our capital commitment to Greenway is $0.02 million. As of June 30, 2012, all of the capital had been called by Greenway. As of June 30, 2012 and December 31, 2011, the value of our interest in Greenway was $0.01 million and $0.01 million, respectively, and is reflected in the Consolidated Schedule of Investments.

As manager of Greenway, we act as the investment adviser to Greenway and are entitled to receive certain fees. As a result, Greenway is classified as an affiliate of ours. For the three and six months ended June 30, 2012, we earned $0.7 million and $1.2 million in fees related to Greenway, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. For the three and six months ended June 30, 2011, we earned $0.6 million and $0.6 million in fees related to Greenway, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of June 30, 2012 and December 31, 2011, $0.7 million and $0.4 million of fees related to Greenway were included in Due from affiliate on the Consolidated Statements of Assets and Liabilities.

Greenway invests in securities similar to those of ours pursuant to investment and allocation guidelines which address, among other things, the size of the borrowers, the types of transactions and the concentration and investment ratio amongst Greenway and us. However, we have the discretion to invest in other securities.

Investment in Fund

We have invested in membership interests in LCP Capital Fund LLC, or LCP, a private investment company that was organized to participate in investment opportunities that arise when a special purpose entity, or SPE, or sponsor thereof, needs to raise capital to achieve ratings, regulatory, accounting, tax, or other objectives. LCP is a closed investment vehicle which provides for no liquidity or redemption options and is not readily marketable. LCP is managed by an unaffiliated third party. As of June 30, 2012 and December 31, 2011, we had contributed $12.0 million of capital in the form of membership interests in LCP, which is invested in an underlying SPE referred to as Series 2005-01. On May 1, 2012, we received $3.6 million in connection with a reduction in its commitment pursuant to the governing documents, which is related to the notional amount of the underlying credit default swaps. Our exposure is limited to the amount of its remaining contributed capital. As of June 30, 2012 and December 31, 2011, the value of our interest in LCP was $8.4 million and $12.0 million, respectively, and is reflected in the Consolidated Schedules of Investments.

 

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Our contributed capital in LCP is maintained in a collateral account held by a third-party custodian, who is neither affiliated with us nor with LCP, and acts as collateral on certain credit default swaps for the Series 2005-01 for which LCP receives fixed premium payments throughout the year, adjusted for expenses incurred by LCP. The SPE purchases assets on a non-recourse basis and LCP agrees to reimburse the SPE up to a specified amount for potential losses. LCP holds the contributed cash invested for an SPE transaction in a segregated account that secures the payment obligation of LCP. We expect to receive distributions from LCP on a quarterly basis. Such distributions are reflected in our Consolidated Statements of Operations as interest income in the period earned. LCP has a remaining life of 18 years; however, it is currently expected that Series 2005-01 will terminate on February 15, 2013, if not extended prior to this date pursuant to the terms of Series 2005-1 SPE. Regardless of the date of dissolution, LCP has the right to receive amounts held in the collateral account if there is an event of default under LCP’s operative agreements. LCP may have other series which will have investments in other SPEs to which we will not be exposed.

Investment in Tax Receivable Agreement Payment Rights

In June 2012, we invested in a tax receivable agreement, or TRA, that entitles us to certain payment rights, or TRA Payment Rights, from Duff & Phelps Corporation, or Duff & Phelps. The TRA transfers the economic value of certain tax deductions, or tax benefits, taken by Duff & Phelps to us. Through the TRA, we are entitled to receive an annual tax benefit payment based upon 85% of the savings from certain deductions along with interest, which is calculated from the due date of the Duff & Phelps’ federal tax return until the date the payment is made to us. These tax benefit payments will continue until the relevant deductions are fully utilized, which is projected to be 17 years. The projected annual tax benefit payment will be accrued on a quarterly basis and paid annually and will be allocated between a reduction in the cost basis of the investment and interest income based upon an amortization schedule. The TRA payment right is, in effect, a subordinated claim on the issuing company which can be valued based on the credit risk of the issuer, the liquidity of the underlying payment right, risk of tax law changes and any other factors which might impact the value of the payment right. Based upon the characteristics of the investment, we have chosen to categorize the investment in the TRA payment rights as investment in payment rights in the fair value hierarchy. During the three and six months ended June 30, 2012, we have recognized $0.2 million of income in connection with the TRA payment rights. As of June 30, 2012, the value of our interest in the TRA was $12.5 million and is reflected in the Consolidated Schedule of Investments.

Asset Quality

We view active portfolio monitoring as a vital part of our investment process. We consider board observation rights, regular dialogue with company management and sponsors, and detailed internally generated monitoring reports to be critical to our performance. We have developed a monitoring template that promotes compliance with these standards and that is used as a tool by the Advisor’s investment committee to assess investment performance relative to plan. In addition, our portfolio companies may rely on us to provide financial and capital market expertise and may view us as a value-added resource.

As part of the monitoring process, the Advisor assesses the risk profile of each of our investments and assigns each investment a score of a 1, 2, 3, 4 or 5. Effective March 31, 2012, the Advisor revised its scoring system in order to categorize, on a more granular level, each investment based upon its performance and may revise the scoring system in the future depending upon the nature of the portfolio. The changes from December 31, 2011, included moving investments with a previous score of a 2 to a new investment performance score of 3 and bifurcating a previous score of 1 between new investment performance scores of 1 and 2 based upon its performance. Overall, there was no significant change in the risk profile of the portfolio companies between December 31, 2011 and June 30, 2012 or between March 31, 2012 and June 30, 2012.

The revised investment performance scores, or IPS, are as follows:

1 – The portfolio company is performing above our underwriting expectations.

2 – The portfolio company is performing as expected at the time of underwriting. All new investments are initially scored a 2.

3 – The portfolio company is operating below our underwriting expectations, and requires closer monitoring. The company may be out of compliance with financial covenants, however, principal or interest payments are generally not past due.

4 – The portfolio company is performing materially below our underwriting expectations and returns on our investment are likely to be impaired. Principal or interest payments may be past due, however, full recovery of principal is expected.

5 – The portfolio company is performing substantially below expectations and the risk of the investment has increased substantially. The company is in payment default and the principal amount is not expected to be repaid in full.

 

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For any investment receiving a score of a 3 or lower, our manager increases its level of focus and prepares regular updates for the investment committee summarizing current operating results, material impending events and recommended actions.

The Advisor monitors and, when appropriate, changes the investment scores assigned to each investment in our portfolio. In connection with our investment valuation process, the Advisor and board of directors review these investment scores on a quarterly basis. Our average investment score was 1.93 at June 30, 2012. The following is a distribution of the investment scores of our portfolio companies at June 30, 2012:

 

     June 30, 2012  

Investment Score

   Investments at
Fair  Value
     % of  Total
Portfolio
 

1(a)

   $ 67.4         20.4

2(b)

     204.7         62.0

3(c)

     58.2         17.6

4

     —           —     

5

     —           —     
  

 

 

    

 

 

 

Total

   $ 330.3         100.0
  

 

 

    

 

 

 

 

(a) As of June 30, 2012, Investment Score “1” included $8.2 million of loans to companies in which we also hold equity securities.
(b) As of June 30, 2012, Investment Score “2” included $61.3 million of loans to companies in which we also hold equity securities.
(c) As of June 30, 2012, Investment Score “3” included $32.0 million of loans to companies in which we also hold equity securities.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when there is reasonable doubt that principal or interest will be collected. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. If the fair value of a loan is below cost, we may cease recognizing paid-in-kind, or PIK, interest and/or the accretion of a discount on the debt investment until such time that the fair value equals or exceeds cost. As of June 30, 2012 and December 31, 2011, we had no loans on non-accrual.

Results of Operations

The principal measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio. Net unrealized appreciation (depreciation) on interest rate derivative is the net change in the fair value of the interest rate derivative agreement.

Comparison of the Three and Six Months Ended June 30, 2012 and 2011

Investment Income

We generate revenues primarily in the form of interest on the debt and other income-producing securities we hold. Our investments in fixed income instruments generally have an expected maturity of five to seven years, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt instruments and preferred stock investments may defer payments of dividends or pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of fees from the management of Greenway, prepayment premiums, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Investment income for the three months ended June 30, 2012 and 2011 totaled $11.8 million and $9.1 million, respectively, and was primarily attributable to $10.4 million and $7.4 million of interest income on debt securities and cash (including $1.2 million and $0.6 million of PIK interest, $0.2 million and $0 of prepayment premiums and $0.4 million and $0.5 million of accretion of discounts and other fees), $0.6 million and $0.6 million of interest income on income-producing securities (LCP Capital Fund LLC and Duff & Phelps Corporation, at June 30, 2012, and LCP Capital Fund LLC, at June 30, 2011), $0.7 million and $0.6 million of fees related to Greenway, $0 and $0.3 million related to dividend income and $0.1 million and $0.2 million of other income, respectively. For the three months ended June 30, 2012 and 2011, we received no cash proceeds related to PIK income previously recognized.

 

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Investment income for the six months ended June 30, 2012 and 2011 totaled $22.5 million and $16.2 million, respectively, and was primarily attributable to $20.1 million and $14.0 million of interest income on debt securities and cash (including $1.9 million and $1.2 million of PIK interest, $0.3 million and $0.3 million of prepayment premiums and $1.2 million and $1.0 million of accretion of discounts and other fees), $1.1 million and $1.0 million of interest income on income-producing securities (LCP Capital Fund LLC and Duff & Phelps Corporation, at June 30, 2012, and LCP Capital Fund LLC, at June 30, 2011), $1.2 million and $0.6 million of fees related to Greenway, $0 and $0.3 million related to dividend income and $0.1 million and $0.3 million of other income. For the six months ended June 30, 2012 and 2011, we also received cash proceeds related to PIK income previously recognized of $0.5 million and $0.

The increases in investment income from the respective periods were due to the growth in the overall investment portfolio and the closing of Greenway in January 2011.

In certain investment transactions, we may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned. We had no income from advisory services for the three or six months ended June 30, 2012 and 2011.

Expenses

Our primary operating expenses include the payment of base management fees, an incentive fee, and expenses reimbursable under the investment management agreement and the allocable portion of overhead under the administration agreement (“administrator expenses”). The base management fee compensates the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our investment management agreement and administration agreement provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for facilities, office equipment and utilities allocable to the performance by the Advisor of its duties under the agreements, as well as any costs and expenses incurred by the Advisor relating to any administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

Operating expenses totaled $5.2 million and $4.1 million for the three months ended June 30, 2012 and 2011, and consisted of incentive fees, base management fees, administrator expenses, fees related to our credit facility, professional fees, insurance expenses, directors’ fees, and other general and administrative expenses.

The base management fees for the three months ended June 30, 2012 and 2011 were $1.1 million and $1.0 million, respectively, as provided for in the investment management agreement. The incentive fees incurred for the three months ended June 30, 2012 and 2011 were $1.6 million and $1.1 million and such amounts include the effect of unrealized appreciation of $0.0 million and $0.8 million, respectively. There can be no assurance that such unrealized capital (depreciation) appreciation will be realized in the future. Accordingly, such fee, as calculated and accrued is currently not, and would not necessarily be, payable under the investment management agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. The accrued incentive fee related to capital gains may differ from the actual incentive fee that may be paid to the Advisor depending on whether we are ultimately able to generate a net realized capital gain. The increase in base management fees and incentive fee expenses for the respective periods is due to the growth in both the portfolio and net investment income. As of June 30, 2012, $1.5 million of incentive fees are currently payable to the Advisor pursuant to the terms of the investment management agreement as $0.2 million of incentive fees incurred were generated from deferred interest (i.e. PIK and certain discount accretion) and is not payable until such amounts are received in cash.

Administrator expenses for the three months ended June 30, 2012 and 2011 totaled $0.7 million and $0.7 million, respectively. Expenses for professional fees, insurance expenses, directors’ fees, and other general and administrative expense (“other expenses”) for the three months ended June 30, 2012 and 2011 totaled $0.8 million and $0.8 million, respectively.

For the three months ended June 30, 2012 and 2011, fees and expenses related to our credit facility, including amortization of deferred financing costs, were $1.0 million and $0.5 million. Borrowings under the credit facility were $92.5 million and $0, respectively, for the three months ended June 30, 2012 and 2011. Repayments under the credit facility were $46.8 million and $0, respectively, for the three months ended June 30, 2012 and 2011. The increase in expenses related to the credit facility is due principally to the level of borrowings and amortization of deferred financing costs.

Operating expenses totaled $9.8 million and $7.1 million for the six months ended June 30, 2012 and 2011, and consisted of incentive fees, base management fees, administrator expenses, fees related to our credit facility, professional fees, insurance expenses, directors’ fees, and other general and administrative expenses. The increase in operating expenses was due primarily to the increase in base management fees and incentive fee expenses for the respective periods.

The base management fees for the six months ended June 30, 2012 and 2011 were $2.1 million and $2.0 million, respectively, as provided for in the investment management agreement. The incentive fees incurred for the six months ended June 30, 2012 and

 

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2011 were $3.1 million and $1.6 million and such amounts include the effect of unrealized appreciation of ($0.1) million and $0.8 million, respectively. Approximately $0.4 million, for the six months ended June 30, 2011, was related to unrealized appreciation on investments in periods prior to 2011. Such amounts were not material to current or prior periods’ financial statements. There can be no assurance that such unrealized capital (depreciation) appreciation will be realized in the future. Accordingly, such fee, as calculated and accrued is currently not, and would not necessarily be, payable under the investment management agreement, and may never be paid based upon the computation of capital gains incentive fees in subsequent periods. The accrued incentive fee related to capital gains may differ from the actual incentive fee that may be paid to the Advisor depending on whether we are ultimately able to generate a net realized capital gain. The increase in base management fees and incentive fee expenses for the respective periods is due to the growth in both the portfolio and net investment income.

Administrator expenses for the six months ended June 30, 2012 and 2011 totaled $1.5 million and $1.2 million, respectively. Expenses for professional fees, insurance expenses, directors’ fees, and other general and administrative expense (“other expenses”) for the six months ended June 30, 2012 and 2011 totaled $1.4 million and $1.5 million, respectively. The increase in administrator expenses is due principally to additional resources and related costs to support our growth.

For the six months ended June 30, 2012 and 2011, fees and expenses related to our credit facility, including amortization of deferred financing costs, were $1.7 million and $0.6 million, respectively. Borrowings under the credit facility were $117.8 million and $0, respectively, for the six months ended June 30, 2012 and 2011. Repayments under the credit facility were $52.6 million and $0, respectively, for the six months ended June 30, 2012 and 2011. The increase in expenses related to the credit facility is due principally to the timing of the facility closing in March 2011, the level of borrowings and amortization of deferred financing costs.

We expect certain of our operating expenses, including administrator expenses, professional fees and other general and administrative expenses to decline as a percentage of our total assets during periods of growth and increase as a percentage of our total assets during periods of asset declines. We expect operating expenses, excluding base management, incentive fees and costs related to our credit facility, to continue to generally range between $1.4 million to $1.5 million per quarter.

Net Investment Income

Net investment income was $6.5 million, or $0.32 per common share based on a weighted average of 20,220,201 common shares outstanding for the three months ended June 30, 2012, as compared to $5.0 million, or $0.25 per common share based on a weighted average of 20,220,197 common shares outstanding for the three months ended June 30, 2011.

Net investment income was $12.7 million, or $0.63 per common share based on a weighted average of 20,220,201 common shares outstanding for the six months ended June 30, 2012, as compared to $9.1 million, or $0.45 per common share based on a weighted average of 20,113,105 common shares outstanding for the six months ended June 30, 2011.

The increase in net investment income is attributable to the growth in the portfolio.

Net Realized Gains and Losses

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.

We did not recognize any realized gains or losses on our portfolio company investments during the three or six months ended June 30, 2012 and 2011.

Net Change in Unrealized Appreciation of Investments

Net change in unrealized appreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal or previously recorded appreciation or depreciation when gains or losses are realized.

Net change in unrealized appreciation on investments totaled $0.0 million and $1.6 million for the three months ended June 30, 2012 and 2011. The change in unrealized appreciation on our investments was driven primarily by the changes in the capital market conditions and in the financial performance of certain portfolio companies.

Net change in unrealized appreciation on investments totaled ($0.4) million and $2.3 million for the six months ended June 30, 2012 and 2011. The change in unrealized appreciation on our investments was driven primarily by the realization of previously unrealized appreciation on Food Holdings in February 2012, changes in the capital market conditions, and in the financial performance of certain portfolio companies.

Unrealized Depreciation of Interest Rate Derivative

The interest rate derivative was entered into on May 10, 2012. Unrealized depreciation reflects the value of the interest rate derivative agreement during the reporting period.

 

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Unrealized depreciation on interest rate derivative totaled $0.6 million and $0 for the three and six months ended June 30, 2012 and was due to capital markets changes impacting interest rate swap spreads.

Net Increase in Net Assets Resulting from Operations

Net increase in net assets resulting from operations totaled $6.0 million, or $0.30 per common share based on a weighted average of 20,220,201 common shares for the three months ended June 30, 2012, as compared to $6.6 million, or $0.32 per common share based on a weighted average of 20,220,197 common shares outstanding, for the three months ended June 30, 2011. The lower increase in net assets resulting from operations is due to lower unrealized appreciation on the portfolio and unrealized depreciation on the interest rate derivative.

Net increase in net assets resulting from operations totaled $11.7 million, or $0.58 per common share based on a weighted average of 20,220,201 common shares for the six months ended June 30, 2012, as compared to $11.4 million, or $0.57 per common share based on a weighted average of 20,113,105 common shares outstanding, for the six months ended June 30, 2011. The increase in net assets resulting from operations is due to the continued growth in net investment income, which is a result of growing our portfolio.

Financial condition, liquidity and capital resources

Cash Flows from Operating and Financing Activities

Our operating activities used cash of $52.6 million and $78.3 million for the six months ended June 30, 2012 and 2011, respectively, primarily in connection with the purchase of investments. For the six months ended June 30, 2012, our financing activities provided cash of $65.2 million from net borrowings and used cash of $12.9 million for dividends to stockholders and $2.9 million for the payment of financing costs. For the six months ended June 30, 2011, our financing activities used cash of $8.6 million for dividends to stockholders and $2.5 million for the payment of financing costs.

As of June 30, 2012, we deployed the proceeds received from our initial public offering, and Term Loan Facility, as described below. As a result, our liquidity and capital resources now will be derived primarily from our Revolving Facility, as described below, and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as the payment of dividends to the holders of our common stock. We used, and expect to continue to use, these capital resources as well as proceeds from turnover within our portfolio and from public and private offerings of securities to finance our investment objectives. To that end, we have a shelf registration statement on file, pursuant to which we expect to raise additional capital to support our future growth through future equity offerings, issuances of senior securities and/or future borrowings, to the extent permitted by the 1940 Act. However, there can be no assurance that these capital resources will be available to us when we are assessing capital markets.

As of June 30, 2012 and December 31, 2011, we had cash of $2.2 million and $5.6 million, respectively. We had no cash equivalents as of June 30, 2012 and December 31, 2011.

We believe our revolver capacity and any proceeds generated from the sale or paydown of investments in the coming quarter provides us with ample liquidity to acquit our pipeline for the coming quarters.

Credit Facility

On May 10, 2012, we entered into an amendment, or Amendment, to our existing revolving credit agreement, or Revolving Facility, and entered into a new senior secured term loan credit facility, or Term Loan Facility, and together with the Revolving Facility, the Facilities, with ING Capital LLC.

The Amendment revised the Revolving Facility, dated March 11, 2011, to (among other things) increase the amount available for borrowing from $125.0 million to $140.0 million; permit the Term Loan Facility; extend the maturity date from May 2014 to May 2016 (with a one year term out period beginning in May 2015); and change the non-use fee from 1.00% annually if we use 50% or less of the Revolving Facility and 0.50% annually if we use more than 50% of the Revolving Facility to 1.00% annually if the we use 35% or less of the Revolving Facility and 0.50% annually if we use more than 35% of the Revolving Facility. The Amendment also changes the interest rate of the Revolving Facility from (a) Eurocurrency loans from LIBOR plus 3.50% to (i) when the facility is more than 35% drawn and the step-down condition is satisfied, LIBOR plus 3.00%, (ii) when the facility is more than 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.25%, (iii) when the facility is less than or equal to 35% drawn and the step-down condition is satisfied, LIBOR plus 3.25%, and (iv) when the facility is less than or equal to 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.50% and (b) alternative base rate loans based, or ABR, on the highest rate of the Prime Rate,

 

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Federal Funds Rate plus 0.5% or three month LIBOR plus 1.0% per annum to (i) when the facility is more than 35% drawn and the step-down condition is satisfied, ABR plus 2.00%, (ii) when the facility is more than 35% drawn and the step-down condition is not satisfied, ABR plus 2.25%, (iii) when the facility is less than or equal to 35% drawn and the step-down condition is satisfied, ABR plus 2.25%, and (iv) when the facility is less than or equal to 35% drawn and the step-down condition is not satisfied, ABR plus 2.50%.

The Term Loan Facility provides us with a $50.0 million senior secured term loan, or Term Loan. The Term Loan expires in May 2017, bears interest at LIBOR plus 4.00% (with no LIBOR Floor) and has substantially similar terms to our existing Revolving Facility (as amended by the Amendment).

Each of the Facilities includes an accordion feature permitting us to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $225.0 million.

The Facilities generally require payment of interest on a quarterly basis for ABR loans, and at the end of the applicable interest period for Eurocurrency loans bearing interest at LIBOR. All outstanding principal is due upon each maturity date. The Facilities also require a mandatory prepayment of interest and principal upon certain customary triggering events (including, without limitation, the disposition of assets or the issuance of certain securities).

Borrowings under the Facilities are subject to, among other things, a minimum borrowing/collateral base. The Facilities have certain collateral requirements and/or financial covenants, including covenants related to: (a) limitations on the incurrence of additional indebtedness and liens, (b) limitations on certain investments, (c) limitations on certain restricted payments, (d) limitations on the creation or existence of agreements that prohibit liens on certain properties of outs and our subsidiaries, and (e) compliance with certain financial maintenance standards including (i) minimum stockholders’ equity, (ii) a ratio of total assets (less total liabilities not represented by senior securities) to the aggregate amount of senior securities representing indebtedness, of us and our subsidiaries, of not less than 2.25:1.0, (iii) minimum liquidity, (iv) minimum net worth, and (v) a consolidated interest coverage ratio. In addition to the financial maintenance standards, described in the preceding sentence, borrowings under the Facilities (and the incurrence of certain other permitted debt) are subject to compliance with a borrowing base that applies different advance rates to different types of assets in our portfolio.

The Facilities’ documents also include default provisions such as the failure to make timely payments under the Facilities, the occurrence of a change in control, and the failure by us to materially perform under the operative agreements governing the Facilities, which, if not complied with, could, at the option of the lenders under the Facilities, accelerate repayment under the Facilities, thereby materially and adversely affecting our liquidity, financial condition and results of operations. Each loan originated under the Revolving Facility is subject to the satisfaction of certain conditions. We cannot be assured that we will be able to borrow funds under the Revolving Facility at any particular time or at all. We are currently in compliance with all financial covenants under the Facilities.

For the six months ended June 30, 2012, we borrowed $117.8 million and made $52.6 million of repayments under the Facilities. There were no borrowings or repayments for the six months ended June 30, 2011. As of June 30, 2012 and December 31, 2011, there were $70.2 million and $5.0 million of borrowings outstanding at a weighted average interest rate of 4.1000% and 3.8125%, respectively. Interest expense and related fees of $0.8 million and $0.3 million were incurred in connection with the Facilities during the three months ended June 30, 2012 and 2011, respectively. Interest expense and related fees of $1.2 million and $0.4 million were incurred in connection with the Facilities during the six months ended June 30, 2012 and 2011, respectively.

In accordance with the 1940 Act, with certain exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. The asset coverage as of June 30, 2012 is in excess of 200%.

Interest Rate Derivative

On May 10, 2012, we entered into a five-year interest rate swap agreement, or swap agreement, with ING Capital Markets, LLC on its Term Loan Borrowing. Under the swap agreement, with a notional value of $50 million, we pay a fixed rate of 1.1425% and receive a floating rate based upon the current three-month LIBOR rate. We entered into the swap agreement to manage interest rate risk and not for speculative purposes.

We use an income approach using a discounted cash flow methodology. Significant inputs to the discounted cash flows methodology include the forward interest rate yield curves in effect as of the end of the measurement period and an evaluation of the counterparty’s credit risk.

We record the change in valuation of the swap agreement in unrealized appreciation (depreciation) as of each measurement period. When the quarterly swap amounts are paid or received under the swap agreement, the amounts are recorded as a realized gain (loss).

For the three and six months ended June 30, 2012 we recognized $0.6 million of net unrealized depreciation from the swap agreement, which is listed under net unrealized depreciation on interest rate derivative in the Consolidated Statements of Operations. As of June 30 2012, our fair value of its swap agreement is $0.6 million, which is listed as an interest rate derivative liability on the Consolidated Statements of Assets and Liabilities.

 

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Other

We have received a “Greenlight” letter allowing us to file an application with the Investment Division of the Small Business Administration to license a Small Business Investment Company. We submitted our application, which was formally accepted for processing by the SBA on September 21, 2011. There can be no assurance when or if we will be able obtain such license and capitalize such SBIC with sufficient regulatory capital to borrow the maximum amount available.

THL Credit SBIC, LP, or SBIC LP, and its general partner, THL Credit SBIC GP, LLC, or SBIC GP, were organized in Delaware on August 25, 2011 as a limited partnership and limited liability company, respectively. Both the SBIC LP and SBIC GP are consolidated wholly owned subsidiaries of the Company. The SBIC will be subject to regulation and oversight by the SBA. Under SBA regulations, SBICs may make loans to eligible small businesses and invest in the equity securities of small businesses. The SBIC LP’s objective is to generate both current income and capital appreciation through debt and equity investments. SBIC LP generally invests with the Company in SBA eligible businesses that meet the investment criteria used by the Company. As of June 30, 2012, the SBIC LP had made three pre-licensing investments with an aggregate amortized cost basis of $28.4 million and fair market value of $28.6 million that were pre-approved by the SBA. As of December 31, 2011, the SBIC LP had made one pre-licensing investment with an aggregate amortized cost basis and fair market value of $12.8 million that was pre-approved by the SBA.

Commitments and Contingencies

From time to time, the Company, or the Advisor, may become party to legal proceedings in the ordinary course of business, including proceedings related to the enforcement of our rights under contracts with our portfolio companies. Neither the Company, nor the Advisor, is currently subject to any material legal proceedings.

We have the following revolving commitments (in millions) to portfolio companies:

 

     As of  
     June 30, 2012     December 31, 2011  

Total commitments

   $ 10.9      $ 10.9   

Less: funded commitments

     (2.3     (0.5
  

 

 

   

 

 

 

Total unfunded commitments

   $ 8.6      $ 10.4   
  

 

 

   

 

 

 

As of June 30, 2012 and December 31, 2011, we have also agreed to provide $7.0 million and $7.9 million, respectively, of capital in delayed draw and capital expenditure facilities. We have also agreed to provide additional funding amounts of up to $4.7 million to a portfolio company to fund future acquisitions provided certain performance requirements and other conditions are met. As of June 30, 2012 and December 31, 2011, such requirements and conditions had not been met.

Dividends

We have elected to be taxed as a regulated investment company under Subchapter M of the Code. In order to maintain our status as a regulated investment company, we are required to (1) distribute at least 90% of our investment company taxable income and (2) distribute at least 98% of our ordinary income for each calendar year and 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year to avoid excise tax. We intend to make distributions to stockholders on a quarterly basis of substantially all of our net investment income. Although we intend to make distributions of net realized capital gains, if any, at least annually, out of assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. In addition, the extent and timing of special dividends, if any, will be determined by our board of directors and will largely be driven by portfolio specific events and tax considerations at the time.

In addition, we may be limited in our ability to make distributions due to the BDC asset coverage test for borrowings applicable to us as a BDC under the 1940 Act.

The following table summarizes our dividends declared and paid or to be paid on all shares:

 

Date Declared

   Record Date    Payment Date    Amount Per Share  

August 5, 2010

   September 2, 2010    September 30, 2010    $ 0.05   

November 4, 2010

   November 30, 2010    December 28, 2010    $ 0.10   

December 14, 2010

   December 31, 2010    January 28, 2011    $ 0.15   

 

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Date Declared

   Record Date    Payment Date    Amount Per Share  

March 10, 2011

   March 25, 2011    March 31, 2011    $ 0.23   

May 5, 2011

   June 15, 2011    June 30, 2011    $ 0.25   

July 28, 2011

   September 15, 2011    September 30, 2011    $ 0.26   

October 27, 2011

   December 15, 2011    December 30, 2011    $ 0.28