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EX-31.2 - SECTION 302 CFO CERTIFICATION - THL Credit, Inc.d431893dex312.htm
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 September 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 November 6, 2012 was 26,315,202.

 

 

 


Table of Contents

THL CREDIT, INC.

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

Table of Contents

 

       

INDEX

   PAGE NO.  
PART I.  

FINANCIAL INFORMATION

  
  Item 1.  

Financial Statements

  
   

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

     2   
   

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

     3   
   

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

     4   
   

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

     5   
   

Consolidated Schedules of Investments as of September 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

     33   
  Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     53   
  Item 4.  

Controls and Procedures

     54   
PART II.  

OTHER INFORMATION

  
  Item 1.  

Legal Proceedings

     54   
  Item 1A.  

Risk Factors

     54   
  Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     54   
  Item 3.  

Defaults Upon Senior Securities

     54   
  Item 4.  

Mine Safety Disclosures

     54   
  Item 5.  

Other Information

     54   
  Item 6.  

Exhibits

     55   
SIGNATURES        56   


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

 

     September 30,
2012
(unaudited)
    December 31,
2011
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $366,770,897 and $263,100,758, respectively)

   $ 368,526,482      $ 266,981,836   

Non-controlled, affiliated investments (cost of $13,788 and $10,864, respectively)

     13,788        11,496   
  

 

 

   

 

 

 

Total investments at fair value (cost of $366,784,685 and $263,111,622, respectively)

     368,540,270        266,993,332   

Cash

     25,948,838        5,572,753   

Deferred financing costs

     4,076,390        1,860,484   

Interest receivable

     3,939,674        1,440,057   

Due from affiliate

     618,249        511,842   

Deferred offering costs

     —          327,267   

Receivable for paydown of investment

     521,121        258,621   

Prepaid expenses and other assets

     201,307        185,075   
  

 

 

   

 

 

 

Total assets

   $ 403,845,849      $ 277,149,431   
  

 

 

   

 

 

 

Liabilities:

    

Loans payable

   $ 50,000,000      $ 5,000,000   

Accrued incentive fees

     2,903,253        2,689,030   

Base management fees payable

     1,282,049        1,013,048   

Interest rate derivative

     1,108,710        —     

Accrued expenses

     652,607        466,030   

Accrued credit facility fees and interest

     127,191        5,451   

Accrued administrator expenses

     22,500       338,569   

Due to affiliate

     —          20,597   
  

 

 

   

 

 

 

Total liabilities

     56,096,310        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, 26,315,202 and 20,220,200 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

     26,315        20,220   

Paid-in capital in excess of par

     343,985,551        262,289,351   

Net unrealized appreciation on investments

     1,755,585        3,881,710   

Net unrealized depreciation on interest rate derivative

     (1,108,710     —     

Interest rate derivative periodic interest payments, net

     (86,461     —     

Accumulated undistributed net realized gain

     —          917,830   

Accumulated undistributed net investment income

     3,177,259        507,595   
  

 

 

   

 

 

 

Total net assets

     347,749,539        267,616,706   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 403,845,849      $ 277,149,431   
  

 

 

   

 

 

 

Net asset value per share

   $ 13.21      $ 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 September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Investment Income:

        

From non-controlled, non-affiliated investments:

        

Interest income

   $ 13,570,422      $ 9,614,357      $ 34,723,592      $ 24,620,021   

Other income

     108,884        103,087        240,184        358,914   

Dividend income

     —          —          —          279,676   

From non-controlled, affiliated investment:

        

Other income

     558,162        601,396        1,781,834        1,235,726   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     14,237,468        10,318,840        36,745,610        26,494,337   

Expenses:

        

Incentive fees

     1,697,362        1,406,204        4,758,946        3,021,107   

Base management fees

     1,282,049        1,008,584        3,428,603        2,998,849   

Credit facility interest and fees

     1,026,497        321,681        2,239,190        707,237   

Administrator expenses

     725,783        756,866        2,226,671        2,040,902   

Professional fees

     278,258        258,978        840,663        788,420   

Amortization of deferred financing costs

     259,346        213,795        708,261        470,773   

Other general and administrative expenses

     251,866        205,911        653,737        628,582   

Directors’ fees

     128,875        130,375        398,625        400,125   

Insurance expenses

     110,812        105,810        327,687        421,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     5,760,848        4,408,204        15,582,383        11,477,113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     8,476,620        5,910,636        21,163,227        15,017,224   

Interest rate derivative periodic interest payments, net

     (86,461     —          (86,461     —     

Net change in unrealized appreciation on investments:

        

Non-controlled, non-affiliated investments

     (1,687,173     (286,058     (2,125,493     2,041,761   

Non-controlled, affiliated investments

     —          240        (632     340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation on investments

     (1,687,173     (285,818     (2,126,125     2,042,101   

Unrealized depreciation on interest rate derivative

     (534,283     —          (1,108,710     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 6,168,703      $ 5,624,818      $ 17,841,931      $ 17,059,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share:

        

Basic and diluted

   $ 0.41      $ 0.29      $ 1.04      $ 0.75   

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

        

Basic and diluted

   $ 0.30      $ 0.28      $ 0.88      $ 0.85   

Weighted average shares of common stock outstanding:

        

Basic and diluted

     20,617,702        20,220,198        20,353,668        20,148,081   

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 nine months ended September 30,  
     2012     2011  

Increase in net assets resulting from operations:

    

Net investment income

   $ 21,163,227      $ 15,017,224   

Interest rate derivative periodic interest payments, net

     (86,461     —     

Net change in unrealized appreciation on investments

    
(2,126,125

    2,042,101   

Unrealized depreciation on interest rate derivative

     (1,108,710     —     
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     17,841,931        17,059,325   

Distributions to stockholders

     (19,411,393     (14,921,493

Capital share transactions:

    

Issuance of common stock

     85,878,550        —     

Less offering costs

     (4,176,281     —     

Reinvestment of dividends

     26        4,048,597   
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     81,702,295        4,048,597   
  

 

 

   

 

 

 

Total increase in net assets

     80,132,833        6,186,429   

Net assets at beginning of period

     267,616,706        260,015,769   
  

 

 

   

 

 

 

Net assets at end of period

   $ 347,749,539      $ 266,202,198   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     26,315,202        20,220,199   
  

 

 

   

 

 

 

Capital share activity:

    

Shares issued from public equity offering

     6,095,000        —     

Shares issued from reinvestment of dividends

     2        304,092   
  

 

 

   

 

 

 

Total capital share activity

     6,095,002        304,092   
  

 

 

   

 

 

 

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 nine months ended September 30,  
     2012     2011  

Cash flows from operating activities

    

Net increase in net assets resulting from operations

   $ 17,841,931      $ 17,059,325   

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

     2,126,125        (2,042,101

Unrealized depreciation on interest rate derivative

     1,108,710        —     

Purchases of investments

     (172,105,203     (123,419,376

Proceeds from sale and paydown of investments

     73,106,581        19,828,295   

Increase in investments due to PIK

     (2,928,434     (1,794,215

Amortization of deferred financing costs

     708,261        470,773   

Accretion of discounts on investments and other fees

     (2,008,507     (1,431,903

Increase in interest receivable

     (2,499,617     (509,700

Increase in receivable due from affiliate

     (106,407     (530,542

Increase in prepaid expenses and other assets

     (17,561     (54,798

Increase in accrued expenses

     187,906        206,867   

Increase in accrued credit facility fees and interest

     121,740        —     

Increase in base management fees payable

     269,001        29,268   

Decrease in accrued administrator expenses

     (316,069     (66,755

Increase in accrued incentive fee

     214,223        2,284,902   

(Decrease) increase in due to affiliate

     (20,597     10,884   
  

 

 

   

 

 

 

Net cash used for operating activities

     (84,317,917     (89,959,076

Cash flows from financing activities

    

Borrowings under credit facility

     184,900,000        11,000,000   

Repayments under credit facility

     (139,900,000     (11,000,000

Issuance of shares of common stock

     85,878,550        —     

Deferred offering costs paid

     (4,176,281     —     

Decrease (increase) in deferred offering costs

     327,267        (188,453

Distributions paid

     (19,411,367     (13,860,312

Financing costs paid

     (2,924,167     (2,534,950
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     104,694,002        (16,583,715
  

 

 

   

 

 

 

Net increase (decrease) in cash

     20,376,085        (106,542,791

Cash, beginning of period

     5,572,753        110,140,711   
  

 

 

   

 

 

 

Cash, end of period

   $ 25,948,838      $ 3,597,920   
  

 

 

   

 

 

 
Supplemental Disclosure of Cash Flow Information:     

Cash interest paid

   $ 947,591      $ 6,932   

Non-cash financing activities:

For the nine months ended September 30, 2012 and 2011, 2 shares and 304,092 shares, respectively, of common stock were issued in connection with dividend reinvestments of $26 and $4,048,597, respectively.

See accompanying notes to these consolidated financial statements.

 

5


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited)

September 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—105.98% of net asset value

                

20-20 Technologies Inc.

                

Senior Secured Term Loan, LIBOR + 1100 cash, due 9/12/17(3)(4)(26)

     Business
services
     9/12/12       $ 14,000,000       $ 13,652,710       $ 13,652,710   
             

 

 

    

 

 

 
                13,652,710         13,652,710   

AIM Media Texas Operating, LLC

                

Second Lien Loan, 13.0% cash, 3.0% PIK, due 6/21/17(5)

     Media      6/21/12       $ 10,237,500         9,990,352         9,990,352   

Member interest(6)(7)

             0.763636         763,636         763,636   
             

 

 

    

 

 

 
                10,753,988         10,753,988   

Airborne Tactical Advantage Company, LLC

                

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

     Aerospace &

defense

     9/7/11       $ 4,000,000         3,844,143         3,900,000   

Class A Warrants(8)

             511,812         112,599         120,000   

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

                —           —     
             

 

 

    

 

 

 
                3,956,742         4,020,000   

C&K Market, Inc.

                

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

     Retail & grocery      11/3/10       $ 13,512,728         13,079,369         13,377,601   

Warrant for Class B

             156,552         349,000         300,000   
             

 

 

    

 

 

 
                13,428,369         13,677,601   

Chuy’s Opco, Inc.

                

Senior Secured Term Loan, LIBOR + 700 cash, due 5/24/16(3)

     Restaurants      5/24/11       $ 464,657         461,050         464,657   
             

 

 

    

 

 

 
                461,050         464,657   

Country Pure Foods, LLC

                

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

     Food &

beverage

     8/13/10       $ 15,978,470         15,757,411         15,658,901   
             

 

 

    

 

 

 
                15,757,411         15,658,901   

CRS Reprocessing, LLC

                

Senior Secured Term Loan, LIBOR + 900 cash, due 6/16/15(3)

     Manufacturing      6/16/11       $ 8,874,130         8,746,300         8,785,389   
             

 

 

    

 

 

 
                8,746,300         8,785,389   

Cydcor LLC

                

Senior Secured Term Loan, LIBOR + 975 cash, due 9/17/16(3)

     Business
services
     9/18/12       $ 15,000,000         14,590,432         14,590,432   
             

 

 

    

 

 

 
                14,590,432         14,590,432   

Dr. Fresh Inc.

                

Subordinated Term Loan, 12.0% cash, 2.0% PIK, due 11/15/17(10)

     Consumer
products
     5/15/12       $ 9,405,532         9,227,672         9,264,449   
             

 

 

    

 

 

 
                9,227,672         9,264,449   

 

(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  

Duff & Phelps Corporation

               

Tax Receivable Agreement Payment Rights, expires 12/31/29(11)(12)

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

 

 

   

 

 

 
                12,500,000        12,500,000   

Express Courier International, Inc.

               

Secured Subordinated Term Loan, 11.0% cash, 2.0% PIK, due 7/17/16(6)(13)

     Business
services
     1/17/12       $ 7,190,032         7,064,210        6,111,527   
             

 

 

   

 

 

 
                7,064,210        6,111,527   

Firebirds International, LLC

               

Senior Secured Term Loan, LIBOR + 900 cash, due 5/17/16(3)

     Restaurants      5/17/11       $ 8,200,000         8,072,710        8,200,000   

Senior Secured Revolving Loan, LIBOR + 900 cash, expiration date 5/17/16(3)(14)(15)

             —           (72,469     —     

Common stock(8)

             1,906         190,600        215,000   
             

 

 

   

 

 

 
                8,190,841        8,415,000   

Food Processing Holdings, LLC

               

Senior Subordinated Note, 12.0% cash, 3.0% PIK, due 8/28/17(16)(17)

     Food &

beverage

     2/28/12       $ 13,743,217         13,618,171        13,468,352   

Class A Units(18)

             162.44         163,268        181,000   

Class B Units(18)

             406.09         408,161        350,000   
             

 

 

   

 

 

 
                14,189,600        13,999,352   

Hart InterCivic, Inc.

               

Senior Secured Term Loan, LIBOR + 900 cash, due 7/1/16(3)

     Election

services

     7/1/11       $ 9,713,870         9,558,974        9,616,731   

Senior Secured Revolving Loan, LIBOR + 900 cash, expiration date 7/1/16(3)(9)(15)

             —           (44,959     —     
             

 

 

   

 

 

 
                9,514,015        9,616,731   

HEALTHCAREfirst, Inc.

               

Senior Secured Term Loan, LIBOR + 1000 cash, due 8/30/17(3)(4)

     Business

services

     8/31/12       $ 10,000,000         9,703,869        9,703,869   
             

 

 

   

 

 

 
                9,703,869        9,703,869   

IMDS Corporation

               

Subordinated Term Loan, 12.5% cash, 3.0% PIK, due 11/2/17(19)

     Healthcare,
device
manufacturing
     5/2/12       $ 13,165,165         12,856,207        12,309,429   
             

 

 

   

 

 

 
                12,856,207        12,309,429   

JDC Healthcare Management, LLC

               

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

     Healthcare,

dental
services

     4/20/10       $ 11,231,591         10,925,864        11,231,591   

Member interest(6)(7)

             1,393         1,393,309        1,513,500   
             

 

 

   

 

 

 
                12,319,173        12,745,091   

LCP Capital Fund LLC

               

Member interest(7)(20)(21)(22)

     Financial

services

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

 

 

   

 

 

 
                8,354,033        8,354,033   

 

(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  

Loadmaster Derrick & Equipment, Inc.

                

Senior Secured Term Loan, LIBOR + 825 cash, due 9/28/17(3)

     Energy /

Utilities

     9/28/12       $ 12,000,000         11,680,422         11,680,422   

Senior Secured Revolving Loan, LIBOR + 825 cash, expiration date 9/28/17(3)(9)

           $ 1,290,485        1,290,485        1,290,485  
             

 

 

    

 

 

 
                12,970,907         12,970,907   

Marine Acquisition Corp. (Teleflex Marine)

                

Senior Subordinated Note, 11.5% cash, 2.0% PIK due 5/18/17(23)

     Manufacturing      9/18/12       $ 16,500,000         16,130,826         16,130,826   
             

 

 

    

 

 

 
                16,130,826         16,130,826   

Martex Fiber Southern Corp.

                

Subordinated Term Loan, 12.0% cash, 1.5% PIK, due 10/31/19(24)

     Textiles      4/30/12       $ 8,722,364         8,596,724         8,596,724   
             

 

 

    

 

 

 
                8,596,724         8,596,724   

OEM Group, Inc.

                

Senior Secured Note, 12.5% cash, 2.5% PIK, due 10/7/15(25)

     Manufacturing      10/7/10       $ 14,689,656         14,395,766         13,514,483   

Warrant for Common

                —           —     
             

 

 

    

 

 

 
                14,395,766         13,514,483   

Pomeroy IT Solutions, Inc.

                

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

     Business

services

     2/11/11       $ 13,438,055         13,243,064         13,572,436   
             

 

 

    

 

 

 
                13,243,064         13,572,436   

Purple Communications, Inc.

                

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

     Communications      12/3/10       $ 10,689,655         10,465,596         10,689,655   
             

 

 

    

 

 

 
                10,465,596         10,689,655   

Sheplers, Inc.

                

Senior Secured (2nd lien) Term Loan, LIBOR + 1165 cash, due 12/20/16(3)(6)

     Retail & grocery      12/20/11       $ 11,426,463         11,172,486         11,369,331   

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

           $ 1,746,004         1,715,864         1,737,274   
             

 

 

    

 

 

 
                12,888,350         13,106,605   

Surgery Center Holdings, Inc.

                

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

     Healthcare,

ambulatory

surgery centers

     4/20/10       $ 18,772,751         18,391,273         18,960,478   

Member interest(7)(8)

             469,673         469,673         1,400,000   
             

 

 

    

 

 

 
                18,860,946         20,360,478   

T&D Solutions, LLC

                

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

     Energy /

Utilities

     10/14/10       $ 14,864,714         14,753,934         15,013,361   
             

 

 

    

 

 

 
                14,753,934         15,013,361   

 

(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  

Texas Honing, Inc.

                

Senior Secured Term Loan, LIBOR + 850 cash, 2.0% PIK, due 6/22/16(3)

     Energy /

Utilities

     6/22/11       $ 12,183,595         11,992,354         12,549,103   

Senior Secured Revolving Loan, LIBOR + 1000 cash, expiration date 6/22/16(3)(9)

           $ 1,800,000         1,770,224         1,800,000   
             

 

 

    

 

 

 
                13,762,578         14,349,103   

The Studer Group, L.L.C.

                

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

     Healthcare,

consulting

     9/29/11       $ 12,391,156         12,178,936         12,205,288   
             

 

 

    

 

 

 
                12,178,936         12,205,288   

Trinity Services Group, Inc.

                

Senior Subordinated Note, 12.0% cash, 1.5% PIK due 9/29/17(24)

     Food &

beverage

     3/29/12       $ 14,089,390         13,892,916         13,948,496   
             

 

 

    

 

 

 
                13,892,916         13,948,496   

Vision Solutions, Inc.

                

Second Lien Term Loan, LIBOR + 800 cash, due 7/23/17(3)

     Business
services
     3/31/11       $ 10,000,000         9,918,771         10,000,000   
             

 

 

    

 

 

 
                9,918,771         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       $ 9,717,765         9,444,868         9,444,868   

Warrant for Member interest(6)(7)

                93         93   
             

 

 

    

 

 

 
                9,444,961         9,444,961   
             

 

 

    

 

 

 

Non-controlled/non-affiliated investments—105.98% of net asset value

              $ 366,770,897       $ 368,526,482   

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

                

THL Credit Greenway Fund LLC

                

Member interest(7)(22)

     Financial
services
     1/27/11            13,788         13,788   
             

 

 

    

 

 

 
                13,788         13,788   
             

 

 

    

 

 

 

Total investments—105.98% of net asset value

              $ 366,784,685       $ 368,540,270   
             

 

 

    

 

 

 

 

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       $ —         $ (1,108,710
                 

 

 

    

 

 

 

Total derivative instruments—(0.32)% of net asset value

               $ —         $ (1,108,710
                 

 

 

    

 

 

 

 

(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) Coupon is subject to LIBOR floors ranging from 1.00%—4.25%.
(4) Interest rate reflected represents the effective return earned on the investment.
(5) At the option of the issuer on a quarterly basis—16.0% cash, or 3.0% PIK and 13.0% cash.
(6) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(7) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(8) Equity ownership may be held in shares or units of companies related to the portfolio company.
(9) Issuer pays 0.5% unfunded commitment fee on facility.
(10) At the option of the issuer on a quarterly basis—14.0% cash, or 2.0% PIK and 12.0% cash.
(11) Income-producing security with no stated coupon; yield for the three months ended September 30, 2012 was approximately 16.5%.
(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) At the option of the issuer on a quarterly basis—13.0% cash, or 2.0% PIK and 11.0% cash.
(14) Issuer pays 0.25% unfunded commitment fee on revolving loan quarterly.
(15) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(16) Interest held in companies related to the portfolio company.
(17) At the option of the issuer on a quarterly basis—15.0% cash, or 3.0% PIK and 12.0% cash.
(18) Initial investment made on 4/20/10.
(19) At the option of the issuer on a quarterly basis—15.5% cash, or 3.0% PIK and 12.5% cash.
(20) 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.
(21) Income producing security with no stated coupon; cash yield for the three months ended September 30, 2012 was approximately 16.2%.
(22) 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.
(23) At the option of the issuer on a quarterly basis—13.5% cash, or 2.0% PIK and 11.5% cash.
(24) At the option of the issuer on a quarterly basis—13.5% cash, or 1.5% PIK and 12.0% cash.
(25) At the option of the issuer on a quarterly basis—15.0% cash, or 2.5% PIK and 12.5% cash.
(26) Foreign 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.

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 &

defense

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

Class A Warrants

             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 &

beverage

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

Class A Units(5)

           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,

ambulatory

surgery centers

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

Member interest(5)(6)

             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)

September 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.

On September 25, 2012, the Company closed a public equity offering selling 6,095,000 shares of its common stock through a group of underwriters at a price of $14.09 per share, less an underwriting discount and offering expenses, and received $81.7 million in proceeds.

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. 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. As of September 30, 2012, the SBIC LP had not received its license to operate as an SBIC. There can be no assurance when or if the SBIC LP will be able to obtain such license or that the Company will be able to capitalize the SBIC LP with sufficient regulatory capital to borrow the maximum amount available.

The SBIC LP 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 September 30, 2012, the SBIC LP had made three pre-licensing investments with an aggregate amortized cost basis of $28,549,284 and fair market value of $27,814,856 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 September 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 Advisor and 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, which valuation is then approved by the board of directors. 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 September 30, 2012:

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Aerospace & defense

   $ 3,956,742       $ 4,020,000         1.16

Business services

     68,173,056         67,630,974         19.46

Communications

     10,465,596         10,689,655         3.07

Consumer products

     9,227,672         9,264,449         2.66

Election services

     9,514,015         9,616,731         2.77

Energy / Utilities

     41,487,419         42,333,371         12.17

Financial services

     20,867,821         20,867,821         6.00

Food & beverage

     43,839,927         43,606,749         12.54

Healthcare, ambulatory surgery centers

     18,860,946         20,360,478         5.85

Healthcare, consulting

     12,178,936         12,205,288         3.51

Healthcare, dental services

     12,319,173         12,745,091         3.67

Healthcare, device manufacturing

     12,856,207         12,309,429         3.54

Manufacturing

     39,272,892         38,430,698         11.05

Media

     10,753,988         10,753,988         3.09

Media, advertising

     9,444,961         9,444,961         2.72

Restaurants

     8,651,891         8,879,657         2.55

Retail & grocery

     26,316,719         26,784,206         7.70

Textiles

     8,596,724         8,596,724         2.47
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 366,784,685       $ 368,540,270         105.98
  

 

 

    

 

 

    

 

 

 

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

 

Region:    Cost      Fair Value      % of
Net Assets
 

International

   $ 13,652,710       $ 13,652,710         3.93

Midwest

     76,469,820         76,958,026         22.13

Northeast

     29,464,545         29,464,545         8.47

Northwest

     13,428,369         13,677,601         3.93

Southeast

     115,503,993         116,489,370         33.50

Southwest

     74,062,777         73,753,482         21.21

West

     44,202,471         44,544,536         12.81
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 366,784,685       $ 368,540,270         105.98
  

 

 

    

 

 

    

 

 

 

 

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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 September 30, 2012:

 

Description:

   Fair Value     Level 1      Level 2     Level 3  

First lien secured debt

   $ 121,936,814      $ —         $ —        $ 121,936,814   

Second lien debt

     54,319,034        —           —          54,319,034   

Subordinated debt

     166,573,372        —           —          166,573,372   

Investments in funds

     8,367,821        —           —          8,367,821   

Equity investments

     4,843,229        —           —          4,843,229   

Investment in payment rights

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

 

 

   

 

 

    

 

 

   

 

 

 

Total investments

   $ 368,540,270      $ —         $ —        $ 368,540,270   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate derivative

     (1,108,710     —           (1,108,710     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liability at fair value

   $ (1,108,710   $ —         $ (1,108,710   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

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 secured 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 nine months ended September 30, 2012 for investments classified within Level 3:

 

     First lien
secured 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

     53,956,735        19,570,740        85,310,064        3,935        763,729         12,500,000         172,105,203   

Sales and repayments

     (22,572,476     (25,323,324     (21,826,303     (3,646,978     —           —           (73,369,081

Unrealized appreciation (depreciation)(1)

     505,951        (1,122,121     (2,061,904     (632     552,581         —           (2,126,125

Net amortization of premiums, discounts and fees

     436,113        593,709        978,685        —          —           —           2,008,507   

PIK

     122,256        475,092        2,331,086        —          —           —           2,928,434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance, September 30, 2012

   $ 121,936,814      $ 54,319,034      $ 166,573,372      $ 8,367,821      $ 4,843,229       $ 12,500,000       $ 368,540,270   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 505,951      $ (373,173   $ (1,061,756   $ (632   $ 552,581       $ —         $ (377,029
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

 

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

Beginning balance, January 1, 2011

   $ 44,185,902      $ 24,967,165      $ 66,576,890      $ 12,790,984      $ 5,008,238      $ 153,529,179   

Purchases

     62,493,298        30,883,333        29,649,917        9,777        383,051        123,419,376   

Sales and repayments

     (10,005,358     (8,059,205     (335,540     (791,268     (895,545     (20,086,916

Unrealized appreciation (depreciation)(1)

     465,420        635,958        1,227,441        340        (287,058     2,042,101   

Net amortization of premiums, discounts and fees

     563,574        228,551        639,778        —          —          1,431,903   

PIK and non cash earnings

     6,000        310,522        1,477,693        —          —          1,794,215   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, September 30, 2011

   $ 97,708,836      $ 48,966,324      $ 99,236,179      $ 12,009,833      $ 4,208,686      $ 262,129,858   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,039,460      $ 635,958      $ 1,227,441      $ 340      $ (79,603   $ 2,823,596   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) All unrealized appreciation (depreciation) in the table above is reflected in the accompanying Consolidated Statements of Operations.
(2) For the nine months ended September 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 secured debt

   $ 121,936,814       Discounted cash flows (income approach)    Weighted average
cost of capital
   11% - 13% (12%)

Second lien debt

     54,319,034       Discounted cash flows (income approach)    Weighted average
cost of capital
   15% -17% (16%)

Subordinated debt

     166,573,372       Discounted cash flows (income approach)    Weighted average
cost of capital
   15% - 16% (15%)

Investments in funds

     8,367,821      

Discounted cash flows (income approach)

Net asset value, as a practical expedient

   Weighted average
cost of capital

Net asset value

   14% - 18% (16%)

 

 

N/A

Equity investments

     4,843,229       Market comparable companies (market approach)    EBITDA multiple    6.0 - 6.9 (6.5)

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

   $ 368,540,270            
  

 

 

          

 

(1) Ranges were determined using a weighted average based upon 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 secured 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 and entitles the Company to a stream of payments to be received. 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.

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. The payments that the Company is entitled to receive result from cash savings, if any, in U.S. federal, state or local income tax that Duff & Phelps realizes (i) from the tax savings derived from the goodwill and other intangibles created in connection with the transaction (ii) from other income tax deductions. These tax benefit payments will continue until the relevant deductions are fully utilized, which is projected to be 17 years. Pursuant to the TRA, the Company maintains the right to enforce Duff & Phelps payment obligations as a transferee of the TRA contract. If Duff & Phelps chooses to pre-pay and terminate the TRA, the Company will be entitled to the present value of the expected future TRA payments. If Duff & Phelps breaches any material obligation than all obligations are accelerated and calculated as if an early termination occurred. Failure to make a payment is a breach of a material obligation if the failure occurs for more than three months.

 

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The projected annual tax benefit payment will be accrued on a quarterly basis and paid annually. The payment will be allocated between a reduction in the cost basis of the investment and interest income based upon an amortization schedule. 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. The valuation will be based principally on a discounted cash flow analysis of projected future cash flow streams assuming an appropriate discount rate, which will among other things consider other transactions in the market, the current credit environment, performance of Duff & Phelps and the length of the remaining payment stream. During the three and nine months ended September 30, 2012, the Company recognized $516,892 and $679,825 of income in connection with the TRA payment rights, respectively. As of September 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.

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 September 30, 2012, all of the capital had been called by Greenway. As of September 30, 2012 and December 31, 2011, the value of the Company’s interest in Greenway was $13,788 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 nine months ended September 30, 2012, the Company earned $558,162 and $1,781,834 in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. For the three and nine months ended September 30, 2011, the Company earned $601,396 and $1,235,726 in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2012 and December 31, 2011, $614,020 and $410,479 of fees related to Greenway, respectively, 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 September 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 September 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.

 

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Security Transactions, Payment-in-Kind, 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.

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 $1,116,494 and $3,047,065 in PIK income for the three and nine months ended September 30, 2012, respectively. The Company recorded $641,351 and $1,794,215 in PIK income for the three and nine months ended September 30, 2011, respectively. The Company received cash proceeds related to PIK income previously recognized of $227,491 and $751,359 for the three and nine months ended September 30, 2012, respectively. The Company received cash proceeds related to PIK income previously recognized of $59,205, for the three and nine months ended September 30, 2011.

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 nine months ended September 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

 

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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.

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 nine months ended September 30, 2012, the Company incurred base management fees payable to the Advisor of $1,282,049 and $3,428,603, respectively. For the three and nine months ended September 30, 2011, the Company incurred base management fees payable to the Advisor of $1,008,584 and $2,998,849, respectively. As of September 30, 2012 and December 31, 2011, $1,282,049 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

 

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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.

For the three and nine months ended September 30, 2012, the Company incurred $2,034,796 and $5,184,442, respectively, of incentive fees related to ordinary income. For the three and nine months ended September 30, 2011, the Company incurred $1,463,368 and $2,260,610 of incentive fees related to ordinary income, respectively. As of September 30, 2012, $1,883,621 of such incentive fees are currently payable to the Advisor, as $151,175 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 September 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 September 30, 2012 and December 31, 2011, respectively of $350,845 and $972,271 as of September 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 period. 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 nine months ended September 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.

 

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For the three and nine months ended September 30, 2012, the Company incurred administrator expenses payable to the Advisor of $725,783 and $2,226,671, respectively. For the three and nine months ended September 30, 2011, the Company incurred administrator expenses payable to the Advisor of $756,866 and $2,040,902, respectively. As of September 30, 2012 and December 31, 2011, $22,500 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 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 and from Affiliates

The Advisor paid certain other general and administrative expenses on behalf of the Company. As of September 30, 2012 and December 31, 2011, $0 and $20,597, respectively, of expenses were included in Due to affiliate on the Consolidated Statements of Assets and Liabilities.

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. As of September 30, 2012 and December 31, 2011, $614,020 and $410,479 of fees related to Greenway, respectively, were included in Due from affiliate on the Consolidated Statements of Assets and Liabilities.

Affiliated Stockholders

THL Credit Opportunities, L.P. and BDC Holdings own 6,974 and 5,047,720 shares, respectively, or 0.03% and 19.18%, respectively, of the Company’s common stock as of September 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 on Investments

The Company did not recognize any realized gains for the three and nine months ended September 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 September 30,      For the nine months ended September 30,  
     2012      2011      2012      2011  

Numerator—net increase in net assets resulting from operations:

   $ 6,168,703       $ 5,624,818       $ 17,841,931       $ 17,059,325   

Denominator—basic and diluted weighted average common shares:

     20,617,702         20,220,198         20,353,668         20,148,081   

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

   $ 0.30       $ 0.28       $ 0.88       $ 0.85   

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.

 

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6. Credit Facility

On May 10, 2012, the Company entered into an amendment, or the 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 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 nine months ended September 30, 2012, the Company borrowed $184,900,000 and made $139,900,000 of repayments under the Facilities. For the nine months ended September 30, 2011, the Company borrowed $11,000,000 and made $11,000,000 of repayments under the Facilities. As of September 30, 2012 and December 31, 2011, there were $50,000,000 and $5,000,000 of borrowings outstanding at a weighted average interest rate of 4.2275% and 3.8125%, respectively. Interest expense and related fees of $1,026,497 and $321,681 were incurred in connection with the Facilities during the three months ended September 30, 2012 and 2011, respectively. Interest expense and related fees of $2,239,190, and $707,237 were incurred in connection with the Facilities during the nine months ended September 30, 2012 and 2011, respectively.

 

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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 September 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 to value the interest rate derivative. 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 interest rate swap amounts are paid or received under the swap agreement, the amounts are recorded as a realized gain (loss).

The Company recognized a realized loss for the three and nine months ended September 30, 2012 of $86,461, which is reflected as interest rate derivative periodic interest payments, net on the Consolidated Statements of Operations.

For the three and nine months ended September 30, 2012, the Company recognized $534,283 and $1,108,710 of net unrealized depreciation from the swap agreement, respectively, which is listed under unrealized depreciation on interest rate derivative in the Consolidated Statements of Operations. As of September 30 2012, the Company’s fair value of its swap agreement is $1,108,710, which is listed as an interest rate derivative liability on the Consolidated Statements of Assets and Liabilities.

8. Offering Expenses

A portion of the net proceeds of the Company’s public equity offering of 6,095,000 shares of common stock on September 25, 2012 was used to pay offering expenses of $4,176,281. Offering costs, which include $3,435,142 of underwriter’s fees, have been charged against paid in capital in excess of par. For the year ended December 31, 2011, $327,267 of offering costs related to the Company’s shelf registration statement were incurred and are reflected in the Consolidated Statements of Assets and Liabilities. All offering costs were borne by the Company.

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.

Unfunded commitments to provide funds to portfolio companies are not reflected on the Company’s balance sheet. The Company’s unfunded commitments may be significant from time to time. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that the Company holds. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company intends to use cash flow from normal and early principal repayments and proceeds from borrowings and offerings to fund these commitments.

 

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As of September 30, 2012 and December 31, 2011, the Company has the following unfunded revolving commitments to portfolio companies (in millions):

 

     As of  
     September 30, 2012     December 31, 2011  

Total commitments

   $ 14,000,000      $ 10,925,000   

Less: funded commitments

     (3,090,485     (499,500
  

 

 

   

 

 

 

Total unfunded revolving commitments

   $ 10,909,515      $ 10,425,500   
  

 

 

   

 

 

 

As of September 30, 2012 and December 31, 2011, the Company has also agreed to provide $14,000,000 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 $6,666,667 to a portfolio company to fund future acquisitions provided certain performance requirements and other conditions are met. As of September 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   

November 2, 2012

   December 14, 2012    December 28, 2012    $ 0.33   

On November 2, 2012, the Company’s board of directors declared a dividend of $0.33 per share, payable on December 28, 2012 to stockholders of record at the close of business on December 14, 2012. The dividend will be paid out of net investment income earned in the period from October 1, 2012 through December 31, 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.

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 nine months ended September 30, 2012 and 2011, dividends reinvested pursuant to our dividend reinvestment plan totaled $26 and $4,048,597, 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.

 

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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 September 30, 2012, approximately 95.3% would be from ordinary income and 4.7% 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 September 30,     For the nine months ended September 30,  
     2012     2011     2012     2011  

Per Share Data:

        

Net asset value, beginning of period

   $ 13.17      $ 13.15      $ 13.24      $ 13.06   

Net investment income(1)

     0.41        0.29        1.04        0.75   

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

     (0.07     (0.01     (0.10     0.10   

Unrealized depreciation of interest rate derivative(1)

     (0.03     —          (0.06     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations(3)

     0.31        0.28        0.88        0.85   

Accretive effect of share issuance

     0.05        —          0.05        —     

Distributions to stockholders

     (0.32     (0.26     (0.96     (0.74
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 13.21      $ 13.17      $ 13.21      $ 13.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at end of period

   $ 14.03      $ 10.92      $ 14.03      $ 10.92   

Total return(4)(5)

     4.16     (14.00 %)      20.57     (10.94 %) 

Shares outstanding at end of period

     26,315,202        20,220,199        26,315,202        20,220,199   

Ratio/Supplemental Data:

        

Net assets at end of period

   $ 347,749,539      $ 266,202,198      $ 347,749,539      $ 266,202,198   

Ratio of operating expenses to average net assets(6)

     8.49     6.57     7.76     5.80

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

     12.49     8.82     10.54     7.59

Portfolio turnover(5)

     9.33     3.57     23.50     7.30

 

(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.

12. Subsequent Events

In October 2012, the Company invested in an aggregate of $24,000,000 of broadly syndicated first lien secured term loans in five companies for short term investment purposes.

On October 24, 2012, the Company made an additional $1,625,000 investment in the second lien term loan of Vision Solutions, Inc.

 

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On October 24, 2012, the Company was prepaid on its secured term loan and revolving loan of Texas Honing, Inc. at par plus a prepayment premium resulting in total proceeds of $12,550,939.

On October 29, 2012, the Company was prepaid on its subordinated term loan of JDC Healthcare Management, LLC at par of $11,231,591.

On November 2, 2012, the Company’s board of directors declared a dividend of $0.33 per share, payable on December 28, 2012 to stockholders of record at the close of business on December 14, 2012. The dividend will be paid out of net investment income earned in the period from October 1, 2012 through December 31, 2012.

 

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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 invest primarily in junior capital securities, including subordinated, or mezzanine, debt and second lien secured debt, which junior capital may include an associated equity component such as warrants, preferred stock or other similar securities. We may also selectively invest in first lien secured loans that generally have structures with higher interest rates, which include unitranche investments. In certain instances we will also make direct equity investments and we may also selectively invest in more liquid broadly syndicated loans from time to time.

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.

 

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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.

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 September 30, 2012, BDC Holdings owns 19.2% of our common stock.

On September 25, 2012, we closed on a public equity offering selling 6,095,000 shares of our common stock through a group of underwriters at a price of $14.09 per share, less an underwriting discount and offering expenses, and received $81.7 million in proceeds.

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 September 30, 2012 with $368.5 million (at fair value), which represents a $101.5 million, or 38.0%, increase from the $267.0 million (at fair value) as of December 31, 2011. We also increased our portfolio to 33 companies, including THL Credit Greenway Fund LLC, or Greenway, as of September 30, 2012, from 24 companies, including Greenway, as of December 31, 2011.

At September 30, 2012, our average portfolio company investment, exclusive of Greenway, at amortized cost and fair value was approximately $11.5 million and $11.5 million, respectively and our largest portfolio company investment by amortized cost and fair value was approximately $18.9 million and $20.4 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 September 30, 2012, 42.4% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 57.6% 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 13.9% at September 30, 2012 as compared to 14.0% at December 31, 2011. The weighted average yield on our debt securities at their current cost was 13.7% at September 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 $20 million, excluding one portfolio company with EBITDA levels not representative of a typical portfolio company, based on the latest available financial information. Our weighted average attachment point in the capital structure of our portfolio companies is approximately 3.6 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 September 30, 2012 (in millions).

 

Description:

   Amortized Cost      Percentage of
Total
    Fair Value(1)      Percentage of
Total
 

First lien secured debt

   $ 120.5         32.8   $ 121.9         33.1

Second lien debt

     54.9         15.0     54.3         14.7

Subordinated debt

     166.6         45.5     166.6         45.2

Investments in funds

     8.4         2.3     8.4         2.3

Equity investments

     3.9         1.0     4.8         1.3

Investment in payment rights

     12.5         3.4     12.5         3.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 366.8         100.0   $ 368.5         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(1)      Percentage of
Total
 

First lien secured 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
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

All investments are categorized as Level 3 in the fair value hierarchy.

 

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The following is a summary of the industry classification in which the Company invests as of September 30, 2012 (in millions).

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Aerospace & defense

   $ 4.0       $ 4.0         1.16

Business services

     68.1         67.6         19.46

Communications

     10.5         10.7         3.07

Consumer products

     9.2         9.3         2.66

Election services

     9.5         9.6         2.77

Energy / Utilities

     41.4         42.3         12.17

Financial services

     20.9         20.9         6.00

Food & beverage

     43.8         43.6         12.54

Healthcare, ambulatory surgery centers

     18.9         20.4         5.85

Healthcare, consulting

     12.2         12.2         3.51

Healthcare, dental services

     12.3         12.7         3.67

Healthcare, device manufacturing

     12.9         12.3         3.54

Manufacturing

     39.3         38.4         11.05

Media

     10.8         10.8         3.09

Media, advertising

     9.4         9.4         2.72

Restaurants

     8.7         8.9         2.55

Retail & grocery

     26.3         26.8         7.70

Textiles

     8.6         8.6         2.47
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 366.8       $ 368.5         105.98
  

 

 

    

 

 

    

 

 

 

The following is a summary of the industry classification in which the Company invests as of December 31, 2011 (in millions).

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Aerospace & defense

   $ 3.9       $ 3.9         1.47

Business services

     42.1         43.0         16.08

Communications

     11.2         11.5         4.28

Election services

     10.3         10.3         3.85

Energy / Utilities

     26.6         27.1         10.10

Financial services

     12.0         12.0         4.49

Food & beverage

     36.1         36.5         13.65

Healthcare, ambulatory surgery centers

     18.4         19.4         7.24

Healthcare, consulting

     12.0         12.0         4.49

Healthcare, dental services

     11.9         12.3         4.61

Manufacturing

     25.4         25.6         9.56

Restaurants

     16.1         16.3         6.08

Retail & grocery

     37.1         37.1         13.87
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 263.1       $ 267.0         99.77
  

 

 

    

 

 

    

 

 

 

Investment Activity

During the nine months ended September 30, 2012, we made $168.8 million ($172.3 million at par) of investments, net of $3.3 million sold following an initial investment as a coinvestment, including $151.0 million ($154.3 million at par) in thirteen new portfolio companies and $17.9 million ($18.1 million at par) in four existing portfolio companies, including funding of $3.0 million of existing 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 nine months ended September 30, 2012, included $54.0 million of first lien secured loans, which includes $23.4 million of unitranche loans, $19.6 million of second lien loans and $82.1 million of subordinated loans and had a weighted average yield of 13.7%. The weighted average yield, including all income-producing investments, was 13.9%.

During the three months ended September 30, 2012, we made $67.0 million ($68.8 million at par) of investments, net of $3.3 million sold following an initial investment as a coinvestment, in five new portfolio companies. Debt investments funded in the three months ended September 30, 2012, included $