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EX-31.2 - EXHIBIT 31.2 - Special Value Continuation Partners, LPv344256_ex31-2.htm
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EX-32.1 - EXHIBIT 32.1 - Special Value Continuation Partners, LPv344256_ex32-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

 

FORM 10-Q

 

 

 

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarter Ended March 31, 2013

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 814-00897

 

SPECIAL VALUE CONTINUATION PARTNERS, LP

(Exact Name of Registrant as Specified in Charter)

 

Delaware       68-0631675

(State or Other Jurisdiction

of Incorporation)

     

(IRS Employer

Identification No.)

 

2951 28th Street, Suite 1000

Santa Monica, California

  90405
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code (310) 566-1000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months 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 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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨   Accelerated filer                ¨
     
Non-accelerated filer   x   Smaller Reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨   No x

 

The number of the Registrant’s common limited partner interests, outstanding as of March 31, 2013 was 320,794,305.

 

 

 
 

 

Table of Contents

Special Value Continuation Partners, LP

 

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2013

 

TABLE OF CONTENTS

 

    Page
Part I. Financial Information  
     
Item 1. Financial Statements  
  Statements of Assets and Liabilities as of March 31, 2013 (unaudited) and December 31, 2012 2
  Statements of Investments as of March 31, 2013 (unaudited) and December 31, 2012 3
  Statements of Operations for the three months ended March 31, 2013 (unaudited) and March 31, 2012 (unaudited) 14
  Statements of Changes in Net Assets for the three months ended March 31, 2013 (unaudited) and year ended December 31, 2012 15
  Statements of Cash Flows for the three months ended March 31, 2013 (unaudited) and March 31, 2012 (unaudited) 16
  Notes to Financial Statements (unaudited) 17
  Schedule of Changes in Investments in Affiliates for the three months ended March 31, 2013 (unaudited) and year ended December 31, 2012 32
  Schedule of Restricted Securities of Unaffiliated Issuers as of March 31, 2013 (unaudited) and December 31, 2012 34
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 45
     
Item 4. Controls and Procedures 45
     
Part II. Other Information  
     
Item 1. Legal Proceedings 46
     
Item 1A. Risk Factors 46
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
     
Item 3. Defaults upon Senior Securities 46
     
Item 4. Mine Safety Disclosures 46
     
Item 5. Other Information 46
     
Item 6. Exhibits 46

 

1
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership

 

Statements of Assets and Liabilities

 

   March 31, 2013   December 31, 2012 
   (unaudited)     
Assets          
Investments, at fair value:          
Unaffiliated issuers (cost of $514,388,646 and $508,302,758, respectively)  $449,148,562   $440,772,190 
Controlled companies (cost of $44,370,322 and $44,964,189 respectively)   21,612,031    22,489,208 
Other affiliates (cost of $40,912,250 and $55,803,421, respectively)   39,234,352    54,421,689 
Total investments (cost of $599,671,218 and $609,070,368, respectively)   509,994,945    517,683,087 
           
Cash and cash equivalents   11,177,328    18,035,189 
Accrued interest income:          
Unaffiliated issuers   6,585,365    4,039,149 
Controlled companies   50,689    53,524 
Other affiliates   486,707    482,634 
Receivable for investments sold   -    7,727,415 
Deferred debt issuance costs   587,454    696,018 
Unrealized appreciation on swaps   349,347    179,364 
Prepaid expenses and other assets   760,205    325,116 
Total assets  $529,992,040   $549,221,496 
           
Liabilities          
Credit facility payable   70,000,000    74,000,000 
Incentive allocation payable   2,723,742    - 
Payable for investments purchased   157,292    21,814,819 
Interest payable   151,170    119,233 
Payable to the Investment Manager   68,220    48,149 
Accrued expenses and other liabilities   1,587,037    1,503,436 
Total liabilities   74,687,461    97,485,637 
           
Preferred equity facility          
Series A preferred limited partner interests; $20,000/interest liquidation preference; 6,700 interests authorized, issued and outstanding   134,000,000    134,000,000 
Accumulated dividends on Series A preferred equity interests   510,274    526,285 
Total preferred limited partner interests   134,510,274    134,526,285 
           
Net assets applicable to common limited and general partners  $320,794,305   $317,209,574 
           
Composition of net assets applicable to common limited and general partners          
Paid-in capital  $441,328,968   $441,328,968 
Accumulated net investment income   27,906,480    26,677,138 
Accumulated net realized losses   (58,508,569)   (59,026,227)
Accumulated net unrealized depreciation   (89,932,574)   (91,770,305)
Net assets applicable to common limited and general partners  $320,794,305   $317,209,574 

 

See accompanying notes.

 

2
 

  

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Unaudited)

 

March 31, 2013

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
                     
Debt Investments (90.88%)                    
Bank Debt (74.19%) (1)                    
Accounting, Tax Preparation, Bookkeeping, and Payroll Services (3.04%)                    
Expert Global Solutions, LLC, Senior Secured 1st Lien Term Loan B, LIBOR + 6.75%, 1.25% LIBOR Floor, due 4/3/18  $714,687   $705,388   $724,071    0.14%
Expert Global Solutions, LLC, Senior Secured 2nd Lien Term Loan, LIBOR + 9.5%, 1.5% LIBOR Floor, due 10/3/18  $14,952,425    14,485,234    15,101,949    2.90%
Total Accounting, Tax Preparation, Bookkeeping, and Payroll Services        15,190,622    15,826,020      
                     
Business Support Services (2.78%)                    
STG-Fairway Acquisitions, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 9.25%, 1.25% LIBOR Floor, due 8/28/19  $14,643,455    13,874,674    14,497,021    2.78%
                     
Computer Equipment Manufacturing (2.21%)                    
ELO Touch Solutions, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 10.5%, 1.5% LIBOR Floor, due 12/1/18  $10,000,000    9,632,140    8,400,000    1.61%
Mitel US Holdings, Inc., 1st Lien Term Loan, LIBOR + 5.75%, 1.25% LIBOR Floor, due 2/27/19  $3,125,000    3,093,750    3,135,422    0.60%
Total Computer Equipment Manufacturing        12,725,890    11,535,422      
                     
Electric Power Generation, Transmission and Distribution (3.57%)                    
Panda Sherman Power, LLC, Senior Secured 1st Lien Term Loan, LIBOR + 7.5%, 1.5% LIBOR Floor, due 9/14/18  $11,070,172    10,915,565    11,319,251    2.17%
Astoria Generating Company Acquisitions, LLC, Senior Secured 1st Lien Term Loan, LIBOR + 7%, 1.5% LIBOR Floor, due 10/26/17  $7,000,000    6,739,003    7,271,250    1.40%
Total Electric Power Generation, Transmission and Distribution        17,654,568    18,590,501      
                     
Electronic Shopping (2.00%)                    
Shopzilla, Inc., Senior Secured 2nd Lien Term Loan, 13%, due 6/1/14  $10,386,390    9,955,946    10,443,516    2.00%
                     
Financial Investment Activities (0.76%)                    
Marsico Capital Management, Senior Secured 1st Lien Term Loan, LIBOR + 5%, due 12/31/22  $11,025,653    13,882,765    3,941,671    0.76%
                     
Full-Service Restaurants (3.28%)                    
RM Holdco, LLC, Subordinated Convertible Term Loan, 1.12% PIK, due 3/21/18 (2)  $5,106,805    5,106,805    4,940,834    0.95%
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche A, 11%, due 3/21/16 (2)  $3,764,387    3,764,387    3,764,387    0.72%
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B, 12% Cash + 7% PIK, due 3/21/16 (2)  $6,375,494    6,375,494    6,375,494    1.22%
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B-1, 12% Cash + 7% PIK, due 3/21/16 (2)  $2,012,224    1,960,903    2,012,224    0.39%
Total Full-Service Restaurants        17,207,589    17,092,939      
                     
Gaming Industries (5.96%)                    
Golden Gaming, Inc., Senior Secured 1st Lien Term Loan, LIBOR + 7% Cash + 1% PIK, 2% LIBOR Floor, due 3/1/16  $15,976,999    15,603,254    15,737,344    3.02%
AGS LLC, 1st Lien Term Loan, LIBOR + 10%, 1.5% LIBOR Floor, due 8/15/16  $13,269,231    12,807,565    13,561,154    2.60%
AGS LLC, DDTL 1st Lien Term Loan, LIBOR + 10%, 1.5% LIBOR Floor, due 8/15/16  $1,730,769    1,661,538    1,768,846    0.34%
Total Gaming Industries        30,072,357    31,067,344      
                     
Grocery Stores (2.61%)                    
Bashas, Inc., Senior Secured 1st Lien FILO Term Loan, LIBOR + 9.35%, 1.5% LIBOR Floor, due 12/28/15  $13,296,217    13,296,217    13,628,623    2.61%
                     
Insurance Related Activities (1.10%)                    
Confie Seguros Holding II Co., 2nd Lien Term Loan, LIBOR + 9%, 1.25% LIBOR Floor, due 5/8/19  $5,600,000    5,493,114    5,740,000    1.10%
                     
Iron and Steel Mills and Ferroalloy Manufacturing (1.29%)                    
Essar Steel Algoma, Inc., Senior Secured Term Loan, LIBOR + 7.5%, 1.25% LIBOR Floor, due 9/20/14  $6,564,737    6,464,255    6,704,237    1.29%
                     
Motion Picture and Video Industries (2.94%)                    
CORE Entertainment, Inc., Senior Secured 1st Lien Term Loan, 9%, due 6/21/17  $9,462,231    9,366,615    8,320,897    1.60%
CORE Entertainment, Inc., Senior Secured 2nd Lien Term Loan, 13.5%, due 6/21/18  $7,569,785    7,491,315    6,964,202    1.34%
Total Motion Picture and Video Industries        16,857,930    15,285,099      

 

3
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Unaudited) (Continued)

 

March 31, 2013

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
                 
Debt Investments (continued)                    
Motor Vehicle Parts Manufacturing (2.51%)                    
DMI SMW Holding Corporation, 1st Lien Senior Secured Term Loan, LIBOR + 7.75%, 1.5% LIBOR Floor, due 12/21/17  $12,935,000   $12,947,983   $13,064,350    2.51%
                     
Other Amusement and Recreation Industries (2.27%)                    
Intrawest Cayman L.P., 1st Lien Term Loan, LIBOR + 5.75%, 1.25% LIBOR Floor, due 12/4/17 - (Cayman Islands)  $1,246,875    1,228,172    1,274,936    0.24%
Intrawest Cayman L.P., 2nd Lien Term Loan, LIBOR + 9.5%, 1.25% LIBOR Floor, due 12/4/18 - (Cayman Islands)  $10,250,000    9,993,750    10,570,313    2.03%
Total Other Amusement and Recreation Industries        11,221,922    11,845,249      
                     
Other Electrical Equipment and Component Manufacturing (3.19%)                    
Palladium Energy, Inc., 1st Lien Senior Secured Term Loan, LIBOR + 9%, 1% LIBOR Floor, due 12/26/17  $16,500,317    16,186,387    16,632,320    3.19%
                     
Other Professional, Scientific, and Technical Services (2.36%)                    
Connolly, LLC, Senior Secured 2nd Lien Term Loan, LIBOR + 9.25%, 1.25% LIBOR Floor, due 7/15/19  $12,000,000    11,813,421    12,315,000    2.36%
                     
Petroleum and Coal Products Manufacturing (1.63%)                    
Boomerang Tube, LLC, 2nd Lien Term Loan, LIBOR + 9.5%, 1.5% LIBOR Floor, due 10/11/17  $8,414,858    8,182,038    8,520,043    1.63%
                     
Pharmaceutical and Medicine Manufacturing (1.56%)                    
Pharmaceutical Research Associates, Inc., 2nd Lien Term Loan, LIBOR + 9.25%, 1.25% LIBOR Floor, due 6/10/19  $8,000,000    7,840,000    8,110,000    1.56%
                     
Promoters of Performing Arts, Sports, and Similar Events (2.12%)                    
Stadium Management Group, Senior Secured 2nd Lien Term Loan, LIBOR + 9.50%, 1.25% LIBOR Floor, due 12/7/18  $11,000,000    10,798,044    11,055,000    2.12%
                     
Radio and Television Broadcasting (4.72%)                    
Encompass Digital Media, Inc., 1st Lien Term Loan, LIBOR + 5.5%, 1.25% LIBOR Floor, due 8/10/17  $7,920,150    7,920,150    8,009,252    1.54%
Granite Broadcasting Corporation, Senior Secured 1st Lien Term Loan B, LIBOR + 7.25%, 1.25% LIBOR Floor, due 5/23/18  $9,925,000    9,703,565    9,949,813    1.91%
SiTV, Inc., Senior Secured 1st Lien Term Loan, LIBOR + 6% Cash + 4% PIK, 2% LIBOR Floor, due 8/3/16  $6,859,770    6,484,806    6,616,248    1.27%
Total Radio and Television Broadcasting        24,108,521    24,575,313      
                     
Retail (1.90%)                    
Kenneth Cole Productions, Inc., Senior Secured 1st Lien FILO Term Loan, LIBOR + 10.60%, 1% LIBOR Floor, due 9/25/17  $9,727,273    9,463,661    9,921,818    1.90%
                     
Scheduled Air Transportation (3.00%)                    
Aircraft Secured Mortgages - Aircraft Leased to Delta Air Lines, Inc.                    
N913DL, 8%, due 3/15/17 (6)  $347,755    347,755    349,350    0.07%
N918DL, 8%, due 8/15/18 (6)  $439,969    439,969    439,280    0.08%
N954DL, 8%, due 3/20/19 (6)  $574,079    574,079    570,350    0.11%
N955DL, 8%, due 6/20/19 (6)  $590,714    590,714    585,650    0.11%
N956DL, 8%, due 5/20/19 (6)  $590,661    590,661    585,990    0.11%
N957DL, 8%, due 6/20/19 (6)  $595,881    595,881    590,750    0.11%
N959DL, 8%, due 7/20/19 (6)  $601,058    601,058    595,510    0.11%
N960DL, 8%, due 10/20/19 (6)  $621,492    621,492    614,380    0.12%
N961DL, 8%, due 8/20/19 (6)  $616,432    616,432    610,300    0.12%
N976DL, 8%, due 2/15/18 (6)  $454,687    454,687    455,260    0.09%
Aircraft Secured Mortgages - Aircraft Leased to United Air Lines, Inc.                    
N510UA, 20%, due 10/26/16 (2)  $391,510    391,510    503,500    0.10%
N512UA, 20%, due 10/26/16 (2)  $395,850    395,850    511,860    0.10%
N536UA, 16%, due 9/29/14 (2)  $218,270    218,270    237,690    0.05%
N545UA, 16%, due 8/29/15 (2)  $347,752    347,752    397,385    0.08%
N585UA, 20%, due 10/25/16 (2)  $464,787    464,787    601,065    0.12%
N659UA, 12%, due 2/28/16 (6)  $3,468,682    3,468,682    3,881,939    0.74%
N661UA, 12%, due 5/4/16 (6)  $3,617,747    3,617,747    4,063,848    0.78%
Total Scheduled Air Transportation        14,337,326    15,594,107      

 

4
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Unaudited) (Continued)

 

March 31, 2013

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
                 
Debt Investments (continued)                    
Semiconductor and Other Electronic Component Manufacturing (2.69%)                    
Isola USA Corporation, 1st Lien Term Loan, LIBOR + 8%, 2% LIBOR Floor, due 9/30/15  $14,000,000   $13,975,000   $14,000,000    2.69%
                     
Software Publishers (8.24%)                    
Deltek, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 8.75%, 1.25% LIBOR Floor, due 10/10/19  $15,000,000    14,787,278    15,342,225    2.94%
Edmentum, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 9.75%, 1.5% LIBOR Floor, due 5/17/19  $15,000,000    14,724,552    15,000,000    2.88%
SumTotal Systems, LLC, Senior Secured 2nd Lien Term Loan, LIBOR + 9%, 1.25% LIBOR Floor, due 5/16/19  $7,600,000    7,454,681    7,552,500    1.45%
The TriZetto Group, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 7.25%, 1.25% LIBOR Floor, due 3/28/19  $5,000,000    4,929,689    5,075,000    0.97%
Total Software Publishers        41,896,200    42,969,725      
                     
Wired Telecommunications Carriers (3.92%)                    
Bulgaria Telecom Company AD, 1st Lien Facility 1A Term Loan, EURIBOR + 5.5%, due 11/9/17 - (Bulgaria) (4)  3,262,515    3,525,355    3,846,740    0.74%
Integra Telecom Holdings, Inc., 2nd Lien Term Loan, LIBOR + 8.5%, 1.25% LIBOR Floor, due 2/22/20  $15,000,000    14,674,950    15,446,925    2.96%
Viva Telecom Bulgaria EAD, 1st Lien Facility 1B Term Loan, EURIBOR + 5.5%, due 11/9/17 - (Luxembourg) (4)  980,713    1,059,723    1,156,331    0.22%
Total Wired Telecommunications Carriers        19,260,028    20,449,996      
                     
Wireless Telecommunications Carriers (2.54%)                    
Globalive Wireless Management Corp., Senior Secured 1st Lien Term Loan, LIBOR + 10.9%, due 4/30/14 - (Canada)  $3,037,292    2,933,872    3,023,624    0.58%
Gogo, LLC, Senior Secured 1st Lien Term Loan, LIBOR + 9.75%, 1.5% LIBOR Floor, due 6/21/17  $10,104,406    9,700,229    10,205,450    1.96%
Total Wireless Telecommunications        12,634,101    13,229,074      
                     
Total Bank Debt        387,340,559    386,634,388      
                     
Other Corporate Debt Securities (16.69%)                    
Architectural, Engineering, and Related Services (1.38%)                    
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes, 6% Cash + 10% PIK, due 12/31/19 (2), (5)  $7,209,840    7,209,840    7,209,840    1.38%
                     
Artificial Synthetic Fibers and Filaments Manufacturing (1.83%)                    
AGY Holding Corporation, Senior Secured 2nd Lien Notes, 11%, due 11/15/14  $18,536,000    15,172,634    9,546,040    1.83%
                     
Data Processing, Hosting, and Related Services (1.45%)                    
The Telx Group, Inc., Senior Unsecured Notes, 10% Cash + 2% PIK, due 9/26/19 (5)  $6,993,490    6,855,009    7,552,970    1.45%
                     
Metal and Mineral (except Petroleum) Merchant Wholesalers (2.54%)                    
Constellation Enterprises, LLC, Senior Secured 1st Lien Notes, 10.625%, due 2/1/16 (5)  $12,500,000    12,322,875    13,248,048    2.54%
                     
Metal Ore Mining (1.44%)                    
St Barbara Ltd., 1st Priority Senior Secured Notes, 8.875%, due 4/15/18 (5)  $7,359,000    7,321,771    7,515,379    1.44%
                     
Nondepository Credit Intermediation (1.98%)                    
Caribbean Financial Group, Senior Secured Notes, 11.5%, due 11/15/19 (5)  $10,000,000    9,808,736    10,300,000    1.98%
                     
Nonferrous Metal Production and Processing (2.98%)                    
International Wire Group Holdings, Inc., Senior Secured Notes, 8.5%,                     
    due 10/15/17 (5)  $15,000,000    15,000,000    15,508,499    2.98%
                     
Scientific Research and Development Services (3.09%)                    
BPA Laboratories, Inc., Senior Secured Notes, 12.25%, due 4/1/17 (5)  $17,110,000    16,446,295    16,083,400    3.09%
                     
Total Other Corporate Debt Securities        90,137,160    86,964,176      
                     
Total Debt Investments        477,477,719    473,598,564      

 

5
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Unaudited) (Continued)

 

March 31, 2013

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
           Fair   Cash and 
Investment  Shares   Cost   Value   Investments 
                 
Equity Securities (6.98%)                    
Architectural, Engineering, and Related Services (1.21%)                    
ESP Holdings, Inc., Cumulative Preferred 15% (2), (5)   20,297   $2,249,930   $3,643,088    0.70%
ESP Holdings, Inc., Common Stock (2), (3), (5)   88,670    9,311,782    2,674,472    0.51%
Total Architectural, Engineering, and Related Services        11,561,712    6,317,560      
                     
Business Support Services (0.23%)                    
STG-Fairway Holdings, LLC, Class A Units (3), (5)   80,396    1,100,348    1,209,960    0.23%
                     
Data Processing, Hosting, and Related Services (0.24%)                    
Anacomp, Inc., Class A Common Stock (3), (5), (6)   1,255,527    26,711,048    1,255,527    0.24%
                     
Depository Credit Intermediation (0.15%)                    
Doral Financial Corporation, Common Stock (3)   1,077,795    11,699,417    759,522    0.15%
                     
Electric Power Generation, Transmission and Distribution (0.01%)                    
La Paloma Residual Bank Debt Claim (3), (5)   1,830,453    1,574,284    51,253    0.01%
                     
Electronic Shopping (0.26%)                    
Shop Holding, LLC, Class A Units (3), (5)   490,037    462,576    1,020,008    0.19%
Shop Holding, LLC, Warrants to Purchase Class A Units (3), (5)   326,691    -    353,286    0.07%
Total Electronic Shopping        462,576    1,373,294      
                     
Financial Investment Activities (0.00%)                    
Marsico Holdings, LLC, Common Interest Units (3), (5)   168,698    172,694    9,278    - 
                     
Full-Service Restaurants (0.15%)                    
RM Holdco, LLC, Membership Units (2), (3), (5)   13,161,000    2,010,777    751,443    0.15%
                     
Machine Shops; Turned Product; and Screw, Nut, and Bolt                    
    Manufacturing (0.00%)                    
Precision Holdings, LLC, Class C Membership Interests (3), (5)   33    1,396    17,982    - 
                     
Nonmetallic Mineral Mining and Quarrying (0.53%)                    
EPMC HoldCo, LLC, Membership Units (2), (5)   1,312,720    -    2,782,966    0.53%
                     
Other Amusement and Recreation Industries (0.00%)                    
Bally Total Fitness Holding Corporation, Common Stock (3), (5)   6,058    45,186,963    18,174    - 
Bally Total Fitness Holding Corporation, Warrants (3), (5)   10,924    -    1    - 
Total Other Amusement and Recreation Industries        45,186,963    18,175      
                     
Radio and Television Broadcasting (0.07%)                    
SiTV, Inc., Warrants to Purchase Common Stock (3), (5)   233,470    300,322    345,536    0.07%
                     
Scheduled Air Transportation (1.89%)                    
Equipment Trusts - Aircraft Leased to Delta Air Lines, Inc.                    
N913DL Trust Beneficial Interests (5), (6)   529    109,193    111,180    0.02%
N918DL Trust Beneficial Interests (5), (6)   479    124,973    120,530    0.02%
N954DL Trust Beneficial Interests (5), (6)   463    154,136    85,680    0.02%
N955DL Trust Beneficial Interests (5), (6)   455    156,265    129,880    0.02%
N956DL Trust Beneficial Interests (5), (6)   457    156,449    133,110    0.03%
N957DL Trust Beneficial Interests (5), (6)   455    157,444    133,790    0.03%
N959DL Trust Beneficial Interests (5), (6)   454    158,434    134,300    0.03%
N960DL Trust Beneficial Interests (5), (6)   449    162,544    139,740    0.03%
N961DL Trust Beneficial Interests (5), (6)   452    161,755    142,290    0.03%
N967DL Trust Beneficial Interests (5), (6)   494    130,007    83,980    0.02%
Equipment Trusts - Aircraft Leased to United Air Lines, Inc.                    
N510UA Trust Beneficial Interests (2), (5)   46    161,681    485,106    0.09%
N512UA Trust Beneficial Interests (2), (5)   45    158,224    478,704    0.09%
N536UA Trust Beneficial Interests (2), (5)   66    320,764    642,039    0.12%
N545UA Trust Beneficial Interests (2), (5)   56    285,666    632,306    0.12%
N585UA Trust Beneficial Interests (2), (5)   45    177,826    589,948    0.11%
United N659UA-767, LLC (N659UA) (5), (6)   336    1,843,142    2,926,343    0.56%
United N661UA-767, LLC (N661UA) (5), (6)   326    1,825,775    2,873,073    0.55%
Total Scheduled Air Transportation        6,244,278    9,841,999      

 

6
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Unaudited) (Continued)

 

March 31, 2013

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
           Fair   Cash and 
Investment  Shares   Cost   Value   Investments 
                 
Equity Securities (continued)                    
Semiconductor and Other Electronic Component Manufacturing (0.01%)                    
AIP/IS Holdings, LLC, Membership Units (3), (5)   352   $-   $68,922    0.01%
                     
Support Activities for Mining (0.64%)                    
DeepOcean Group Holding BV, Common Stock - (Norway) (3), (5)   145,824    3,477,624    3,323,768    0.64%
                     
Wired Telecommunications Carriers (1.59%)                    
Integra Telecom, Inc., Common Stock (3), (5)   1,274,522    8,433,884    5,048,571    0.97%
Integra Telecom, Inc., Warrants (3), (5)   346,939    19,920    -      
V Telecom Investment S.C.A, Common Shares - (Luxembourg) (3), (4), (5)   1,393    3,236,256    3,220,625    0.62%
Total Wired Telecommunications Carriers        11,690,060    8,269,196      
                     
Total Equity Securities        122,193,499    36,396,381      
                     
Total Investments        599,671,218    509,994,945      
Cash and Cash Equivalents (2.14%)                    
Cash and Cash Equivalents             11,177,328    2.14%
                     
Total Cash and Investments            $521,172,273    100.00%

 

Notes to Statement of Investments:

 

(1) Investments in bank debt generally are bought and sold among institutional investors in transactions not subject to registration under the Securities Act of 1933.  Such transactions are generally subject to contractual restrictions, such as approval of the agent or borrower.
(2) Non-controlled affiliate – as defined under the Investment Company Act of 1940 (ownership of between 5% and 25% of the outstanding voting securities   of this issuer).
(3) Non-income producing security.
(4) Principal amount denominated in foreign currency.  Amortized cost and fair value converted from foreign currency to US dollars. (See Note 2)
(5) Restricted security. (See Note 2)
(6) Controlled issuer – as defined under the Investment Company Act of 1940 (ownership of 25% or more of the outstanding voting securities of this issuer).

 

Aggregate acquisitions and aggregate dispositions of investments, other than government securities, totaled $40,263,751 and $51,006,153, respectively for the three months ended March 31, 2013. Aggregate acquisitions includes investment assets received as payment in kind. Aggregate dispositions includes principal paydowns on and maturities of debt investments. The total value of restricted securities and bank debt as of March 31, 2013 was $499,689,383, or 95.9% of total cash and investments of the Partnership.

 

Swaps at March 31, 2013 were as follows:

 

Investment  Notional
Amount
   Fair Value 
         
Euro/US Dollar Cross-Currency Basis Swap, Pay Euros/Receive USD, Expires 5/16/14  $6,040,944   $349,347 

 

See accompanying notes.

 

7
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments

 

December 31, 2012

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
Debt Investments (90.12%)                    
Bank Debt (75.60%) (1)                    
Accounting, Tax Preparation, Bookkeeping, and Payroll Services (3.16%)                    
Expert Global Solutions, LLC, Senior Secured 1st Lien Term Loan B, LIBOR + 6.75%, 1.25% LIBOR Floor, due 4/2/18  $1,916,252   $1,882,302   $1,925,239    0.36%
Expert Global Solutions, LLC, Senior Secured 2nd Lien Term Loan, LIBOR + 9.5%, 1.5% LIBOR Floor, due 10/2/18  $14,976,011    14,493,414    14,953,547    2.80%
Total Accounting, Tax Preparation, Bookkeeping, and Payroll Services        16,375,716    16,878,786      
                     
Business Support Services (3.58%)                    
STG-Fairway Acquisitions, Inc., Senior Secured 2nd Lien Term Loan, 12.5%, due 12/29/15  $19,878,935    18,821,586    19,193,112    3.58%
                     
Computer Equipment Manufacturing (1.78%)                    
ELO Touch Solutions, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 10.5%, 1.5% LIBOR Floor, due 12/4/18  $10,000,000    9,621,530    9,550,000    1.78%
                     
Electric Power Generation, Transmission and Distribution (3.41%)                    
Panda Sherman Power, LLC, Senior Secured 1st Lien Term Loan, LIBOR + 7.5%, 1.5% LIBOR Floor, due 9/14/18  $11,070,172    10,910,286    11,263,900    2.10%
Astoria Generating Company Acquisitions, LLC, Senior Secured 1st Lien Term Loan, LIBOR + 9.35%, 1.5% LIBOR Floor, due 12/28/15  $7,000,000    6,727,929    7,040,845    1.31%
Total Electric Power Generation, Transmission and Distribution        17,638,215    18,304,745      
                     
Electronic Shopping (2.13%)                    
Shopzilla, Inc., Senior Secured 2nd Lien Term Loan, 13%, due 6/1/14  $11,382,687    10,869,637    11,422,526    2.13%
                     
Equipment Rental and Leasing (3.28%)                    
Sky Funding AMR Lease Portfolio, Senior Subordinated 1st Lien Term Loan, 10%, due 9/6/16 - (Ireland)  $17,000,000    16,412,490    17,595,000    3.28%
                     
Financial Investment Activities (0.02%)                    
Marsico Capital Management, Senior Secured 1st Lien Term Loan, LIBOR + 5%, due 12/31/22  $11,281,905    14,205,420    5,753,772    1.07%
                     
Full-Service Restaurants (3.20%)                    
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche A, 11%,
due 3/19/16 (2)
  $3,759,156    3,759,156    3,759,156    0.70%
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B, 12% Cash + 7% PIK, due 3/19/16 (2)  $6,258,122    6,258,122    6,258,122    1.17%
RM Holdco, LLC, Subordinated Convertible Term Loan, 1.12% PIK,
due 3/21/18 (2)
  $5,106,805    5,106,805    5,106,805    0.96%
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B-1, 12% Cash + 7% PIK, due 3/19/16 (2)  $1,976,470    1,922,118    1,976,470    0.37%
Total Full-Service Restaurants        17,046,201    17,100,553      
                     
Gaming Industries (5.61%)                    
Golden Gaming, Inc., Senior Secured 1st Lien Term Loan, LIBOR + 7% Cash + 1% PIK, 2% LIBOR Floor, due 4/15/16  $15,975,628    15,600,947    15,735,993    2.94%
AGS LLC, 1st Lien Term Loan, LIBOR + 10%, 1.5% LIBOR Floor, due 8/15/16  $13,269,231    12,781,083    13,395,288    2.50%
AGS LLC, DDTL 1st Lien Term Loan, LIBOR + 10%, 1.5% LIBOR Floor, due 8/15/16  $865,385    796,154    881,827    0.17%
Total Gaming Industries        29,178,184    30,013,108      
                     
Grocery Stores (2.58%)                    
Bashas, Inc., Senior Secured 1st Lien FILO Term Loan, LIBOR + 9.35%, 1.5% LIBOR Floor, due 12/28/15  $13,461,182    13,461,182    13,797,711    2.58%

 

8
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Continued)

 

December 31, 2012

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
Debt Investments (continued)                    
Insurance Related Activities (1.04%)                    
Confie Seguros Holding II Co., 2nd Lien Term Loan, LIBOR + 9%, 1.25% LIBOR Floor, due 7/26/19  $5,600,000   $5,490,103   $5,590,676    1.04%
                     
Iron and Steel Mills and Ferroalloy Manufacturing (1.22%)                    
Essar Steel Algoma, Inc., Senior Secured Term Loan, LIBOR + 7.5%, 1.25% LIBOR Floor, due 9/20/14  $6,581,231    6,464,979    6,537,367    1.22%
                     
Motion Picture and Video Industries (2.83%)                    
CORE Entertainment, Inc., Senior Secured 1st Lien Term Loan, 9%, due 6/21/17  $9,462,231    9,362,125    8,220,313    1.53%
CORE Entertainment, Inc., Senior Secured 2nd Lien Term Loan, 13.5%, due 6/21/18  $7,569,785    7,488,038    6,964,202    1.30%
Total Motion Picture and Video Industries        16,850,163    15,184,515      
                     
Motor Vehicle Parts Manufacturing (2.41%)                    
DMI SMW Holding Corporation, Term Loan, LIBOR + 7.75%, 1.5% LIBOR Floor, due 12/21/17  $12,935,000    12,938,292    12,902,663    2.41%
                     
Other Amusement and Recreation Industries (2.14%)                    
Intrawest Cayman L.P., 1st Lien Term Loan, LIBOR + 5.75%, 1.25% LIBOR Floor, due 12/4/17 - (Cayman Islands)  $1,250,000    1,231,250    1,257,813    0.23%
Intrawest Cayman L.P., 2nd Lien Term Loan, LIBOR + 9.5%, 1.25% LIBOR Floor, due 12/4/18 - (Cayman Islands)  $10,250,000    9,993,750    10,250,000    1.91%
Total Other Amusement and Recreation Industries        11,225,000    11,507,813      
                     
Other Electrical Equipment and Component Manufacturing (3.03%)                    
Palladium Energy, Inc., Term Loan, LIBOR + 9%, 1% LIBOR Floor, due 12/21/17  $16,500,317    16,170,991    16,219,812    3.03%
                     
Other Professional, Scientific, and Technical Services (2.27%)                    
Connolly, LLC, Senior Secured 2nd Lien Term Loan, LIBOR + 9.25%, 1.25% LIBOR Floor, due 7/26/19  $12,000,000    11,808,454    12,157,500    2.27%
                     
Petroleum and Coal Products Manufacturing (1.57%)                    
Boomerang Tube, LLC, 2nd Lien Term Loan, LIBOR + 9.5%, 1.5% LIBOR Floor, due 10/2/17  $8,522,741    8,277,159    8,416,206    1.57%
                     
Pharmaceutical and Medicine Manufacturing (1.51%)                    
Pharmaceutical Research Associates, Inc., 2nd Lien Term Loan, LIBOR + 9.25%, 1.25% LIBOR Floor, due 6/10/19  $8,000,000    7,840,000    8,085,000    1.51%
                     
Promoters of Perfoming Arts, Sports, and Similar Events (2.06%)                    
Stadium Management Group, Senior Secured 2nd Lien Term Loan, LIBOR + 9.50%, 1.25% LIBOR Floor, due 12/7/18  $11,000,000    10,792,091    11,055,000    2.06%
                     
Radio and Television Broadcasting (4.58%)                    
Encompass Digital Media, Inc., 1st Lien Term Loan, LIBOR + 6.5%, 1.5% LIBOR Floor, due 8/10/17  $7,940,000    7,802,595    8,039,250    1.50%
Granite Broadcasting Corporation, Senior Secured 1st Lien Term Loan B, LIBOR + 7.25%, 1.25% LIBOR Floor, due 5/23/18  $9,950,000    9,719,719    9,974,875    1.86%
SiTV, Inc., Senior Secured 1st Lien Term Loan, LIBOR + 6% Cash + 4% PIK, 2% LIBOR Floor, due 8/3/16  $6,806,343    6,421,282    6,523,880    1.22%
Total Radio and Television Broadcasting        23,943,596    24,538,005      
                     
Retail (1.90%)                    
Kenneth Cole Productions, Inc., Senior Secured 1st Lien FILO Term Loan, LIBOR + 10.60%, 1% LIBOR Floor, due 9/25/17  $10,000,000    9,717,763    10,200,000    1.90%

 

9
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Continued)

 

December 31, 2012

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
                 
Debt Investments (continued)                    
Scheduled Air Transportation (3.11%)                    
Delta Air Lines, Inc., Aircraft Secured Mortgage (N913DL), 8%, due 7/15/18 (6)  $366,557   $366,557   $367,370    0.07%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N918DL), 8%, due 7/15/18 (6)  $456,613    456,613    454,580    0.08%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N954DL), 8%, due 9/20/19 (6)  $593,200    593,200    597,720    0.11%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N955DL), 8%, due 9/20/19 (6)  $609,107    609,107    612,000    0.11%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N956DL), 8%, due 9/20/19 (6)  $609,360    609,360    612,850    0.11%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N957DL), 8%, due 9/20/19 (6)  $614,434    614,434    617,440    0.12%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N959DL), 8%, due 9/20/19 (6)  $619,468    619,468    622,030    0.12%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N960DL), 8%, due 9/20/19 (6)  $639,631    639,631    640,730    0.12%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N961DL), 8%, due 9/20/19 (6)  $635,009    635,009    636,990    0.12%
Delta Air Lines, Inc., Aircraft Secured Mortgage (N976DL), 8%, due 7/15/18 (6)  $474,007    474,007    473,280    0.09%
United Air Lines, Inc., Aircraft Secured Mortgage (N510UA), 20%, due 9/26/16 (2)  $410,410    410,410    548,340    0.10%
United Air Lines, Inc., Aircraft Secured Mortgage (N512UA), 20%,
due 10/26/16 (2)
  $414,343    414,343    556,225    0.10%
United Air Lines, Inc., Aircraft Secured Mortgage (N536UA), 16%, due 8/21/14 (2)  $251,941    251,941    277,780    0.05%
United Air Lines, Inc., Aircraft Secured Mortgage (N545UA), 16%, due 7/17/15 (2)  $377,925    377,925    436,810    0.08%
United Air Lines, Inc., Aircraft Secured Mortgage (N585UA), 20%,
due 10/25/16 (2)
  $486,501    486,501    653,220    0.12%
United Air Lines, Inc., Aircraft Secured Mortgage (N659UA), 12%, due 3/28/16 (6)  $3,707,430    3,707,430    4,264,148    0.80%
United Air Lines, Inc., Aircraft Secured Mortgage (N661UA), 12%, due 5/4/16 (6)  $3,849,284    3,849,284    4,351,424    0.81%
         15,115,220    16,722,937      
Semiconductor and Other Electronic Component Manufacturing (2.61%)                    
Isola USA Corporation, 1st Lien Term Loan, LIBOR + 8%, 2% LIBOR Floor, due 9/29/15  $14,000,000    13,975,000    14,000,000    2.61%
                     
Software Publishers (8.47%)                    
Blackboard, Inc., Senior Secured 1st Lien Term Loan, LIBOR + 6%, 1.5% LIBOR Floor, due 10/4/18  $2,671,613    2,457,884    2,705,008    0.51%
Deltek, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 8.75%, 1.25% LIBOR Floor, due 10/10/19  $15,000,000    14,781,719    15,275,025    2.85%
Edmentum, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 9.75%, 1.5% LIBOR Floor due 5/8/19  $15,000,000    14,717,168    14,831,250    2.77%
SumTotal Systems, LLC, Senior Secured 2nd Lien Term Loan, LIBOR + 9%, 1.25% LIBOR Floor, due 5/13/19  $7,600,000    7,449,234    7,524,000    1.41%
The TriZetto Group, Inc., Senior Secured 2nd Lien Term Loan, LIBOR + 7.25%, 1.25% LIBOR Floor, due 3/28/19  $5,000,000    4,927,523    4,979,175    0.93%
Total Software Publishers        44,333,528    45,314,458      
                     
Support Activities for Mining (0.06%)                    
Trico Shipping AS, 1st Lien Term Loan A, LIBOR + 8.5%, 1.5% LIBOR Floor, due 5/13/14 - (Norway)  $228,803    228,803    228,803    0.04%
Trico Shipping AS, 1st Lien Term Loan B, LIBOR + 8.5%, 1.5% LIBOR Floor, due 5/13/14 - (Norway)  $80,543    80,543    80,543    0.02%
Total Support Activities for Mining        309,346    309,346      
                     
Wired Telecommunications Carriers (2.52%)                    
Bulgaria Telecom Company AD, 1st Lien Facility 1A Term Loan, EURIBOR + 5.5%, due 11/9/17 - (Bulgaria) (4)  3,262,515    3,525,355    3,744,685    0.70%
Integra Telecom Holdings, Inc., 1st Lien Term Loan, LIBOR + 7.25%, 2% LIBOR Floor, due 4/15/15  $8,477,489    8,070,172    8,518,096    1.60%
Viva Telecom Bulgaria EAD, 1st Lien Facility 1B Term Loan, EURIBOR + 5.5%, due 11/9/17 - (Luxembourg)(4)  980,713    1,059,723    1,125,653    0.22%
                     
Total Wired Telecommunications Carriers        12,655,250    13,388,434      

 

10
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Continued)

 

December 31, 2012

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
   Principal       Fair   Cash and 
Investment  Amount   Cost   Value   Investments 
                 
Debt Investments (continued)                    
Wireless Telecommunications Carriers (0.56%)                    
Globalive Wireless Management Corp., Senior Secured 1st Lien Term Loan, LIBOR + 8.9%, due 10/9/12 - (Canada)  $3,037,292   $2,933,872   $3,000,845    0.56%
Gogo, LLC, Senior Secured 1st Lien Term Loan, LIBOR + 9.75%, 1.5% LIBOR Floor, due 6/21/17  $10,168,765    9,762,014    10,270,452    1.92%
Total Wireless Telecommunications        12,695,886    13,271,297      
                     
Total Bank Debt        404,232,982    405,010,342      
                     
Other Corporate Debt Securities (14.51%)                    
Architectural, Engineering, and Related Services (1.33%)                    
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes, 6% Cash + 10% PIK, due 12/31/19 (2), (5)  $7,209,840    7,209,840    7,134,137    1.33%
                     
Artificial Synthetic Fibers and Filaments Manufacturing (1.72%)                    
AGY Holding Corporation, Senior Secured 2nd Lien Notes, 11%, due 11/15/14  $18,536,000    15,172,634    9,221,660    1.72%
                     
Data Processing, Hosting, and Related Services (1.34%)                    
The Telx Group, Inc., Senior Unsecured Notes, 10% Cash + 2% PIK, due 9/26/19 (5)  $6,958,697    6,820,215    7,167,458    1.34%
                     
Metal and Mineral (except Petroleum) Merchant Wholesalers (2.48%)                    
Constellation Enterprises, LLC, Senior Secured 1st Lien Notes, 10.625%, due 2/1/16 (5)  $12,500,000    12,322,875    13,296,875    2.48%
                     
Nondepository Credit Intermediation (1.87%)                    
Caribbean Financial Group, Senior Secured Notes, 11.5%, due 11/15/19 (5)  $10,000,000    9,803,494    10,037,500    1.87%
                     
Nonferrous Metal Production and Processing (2.88%)                    

International Wire Group Holdings, Inc., Senior Secured Notes, 8.5%,

due 10/15/17 (2), (5)

  $15,000,000    15,000,000    15,450,000    2.88%
                     
Scientific Research and Development Services (2.89%)                    
BPA Laboratories, Inc., Senior Secured Notes, 12.25%, due 4/1/17 (5)  $17,110,000    16,446,295    15,484,550    2.89%
                     
Total Other Corporate Debt Securities        82,775,353    77,792,180      
                     
Total Debt Investments        487,008,335    482,802,522      
                     
Equity Securities (6.51%)                    
Other Amusement and Recreation Industries (0.01%)                    
Bally Total Fitness Holding Corporation, Common Stock (3), (5)   6,058    45,186,963    27,746    0.01%
Bally Total Fitness Holding Corporation, Warrants (3), (5)   10,924    -    1    - 
Total Other Amusement and Recreation Industries        45,186,963    27,747      
                     
Architectural, Engineering, and Related Services (1.10%)                    
ESP Holdings, Inc., Cumulative Preferred 15% (2), (3), (5)   20,297    2,249,930    3,643,088    0.68%
ESP Holdings, Inc., Common Stock (2), (3), (5)   88,670    9,311,782    2,263,124    0.42%
Total Architectural, Engineering, and Related Services        11,561,712    5,906,212      
                     
Business Support Services (0.05%)                    
STG-Fairway Holdings, LLC, Class A Units (3), (5)   80,396    1,100,348    241,188    0.05%
                     
Data Processing, Hosting, and Related Services (0.23%)                    
Anacomp, Inc., Class A Common Stock (3), (5), (6)   1,255,527    26,711,048    1,255,527    0.23%

 

11
 

 

 Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Continued)

 

December 31, 2012

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
           Fair   Cash and 
Investment  Shares   Cost   Value   Investments 
                 
Equity Securities (continued)                    
                     
Depository Credit Intermediation (0.15%)                    
Doral Financial Corporation, Common Stock (3)   1,077,795   $11,699,417   $780,431    0.15%
                     
Electric Power Generation, Transmission and Distribution (0.01%)                    
La Paloma Residual Bank Debt Claim (3), (5)   1,830,453    1,574,284    51,253    0.01%
                     
Electronic Shopping (0.21%)                    
Shop Holding, LLC, Class A Units (3), (5)   490,037    462,576    915,198    0.16%
Shop Holding, LLC, Warrants to Purchase Class A Units (3), (5)   326,691    -    283,346    0.05%
Total Electronic Shopping        462,576    1,198,544      
                     
Financial Investment Activities (0.02%)                    
Marsico Holdings, LLC, Common Interest Units (3), (5)   168,698    172,694    84,349    0.02%
                     
Full-Service Restaurants (0.16%)                    
RM Holdco, LLC, Membership Units (2), (3), (5)   13,161,000    2,010,777    849,478    0.16%
                     
Machine Shops; Turned Product; and Screw, Nut, and Bolt
    Manufacturing (0.00%)
                    
Precision Holdings, LLC, Class C Membership Interests (3), (5)   33    1,396    21,317    - 
                     
Nonmetallic Mineral Mining and Quarrying (0.51%)                    
EPMC HoldCo, LLC, Membership Units (2), (5)   1,312,720    -    2,730,458    0.51%
                     
Radio and Television Broadcasting (0.06%)                    
SiTV, Inc., Warrants to Purchase Common Stock (3), (5)   233,470    300,322    336,197    0.06%
                     
Scheduled Air Transportation (1.83%)                    
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N913DL) (5), (6)   466    113,899    111,520    0.02%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N918DL) (5), (6)   433    130,664    120,530    0.02%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N954DL) (5), (6)   421    161,952    113,390    0.02%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N955DL) (5), (6)   417    164,481    160,650    0.03%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N956DL) (5), (6)   418    164,726    163,200    0.03%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N957DL) (5), (6)   417    165,755    163,880    0.03%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N959DL) (5), (6)   416    166,778    164,390    0.03%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N960DL) (5), (6)   412    171,075    169,660    0.03%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N961DL) (5), (6)   415    170,315    171,360    0.03%
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N976DL) (5), (6)   442    136,326    83,300    0.02%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N510UA) (2), (5)   43    151,759    479,682    0.09%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N512UA) (2), (5)   43    148,561    473,761    0.09%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N536UA) (2), (5)   62    298,394    624,746    0.12%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N545UA) (2), (5)   52    267,249    616,897    0.12%
United Air Lines, Inc., Equipment Trust Beneficial Interests (N585UA) (2), (5)   43    167,806    583,391    0.11%
United N659UA-767, LLC (N659UA) (5), (6)   312    1,773,072    2,771,428    0.52%
United N661UA-767, LLC (N661UA) (5), (6)   303    1,759,997    2,789,809    0.52%
Total Scheduled Air Transportation        6,112,809    9,761,594      
                     
Semiconductor and Other Electronic Component Manufacturing (0.01%)                    
AIP/IS Holdings, LLC, Membership Units (3), (5)   352    -    68,922    0.01%
                     
Support Activities for Mining (0.61%)                    
DeepOcean Group Holding AS, Common Stock - (Norway) (3), (5)   145,824    3,477,627    3,255,535    0.61%

 

12
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statement of Investments (Continued)

 

December 31, 2012

 

Showing Percentage of Total Cash and Investments of the Partnership

 

               Percent of 
           Fair   Cash and 
Investment  Shares   Cost   Value   Investments 
                 
Equity Securities (continued)                    
                     
Wired Telecommunications Carriers (1.55%)                    
Integra Telecom, Inc., Common Stock (3), (5)   1,274,522   $8,433,884   $5,038,718    0.94%
Integra Telecom, Inc., Warrants (3), (5)   346,939    19,920    -    - 
V Telecom Investment S.C.A, Common Shares - (Luxembourg) (3), (4), (5)   1,393    3,236,256    3,273,095    0.61%
Total Wired Telecommunications Carriers        11,690,060    8,311,813      
                     
Total Equity Securities        122,062,033    34,880,565      
                     
Total Investments (7)        609,070,368    517,683,087      
                     
Cash and Cash Equivalents             18,035,189    3.37%
                     
Total Cash and Investments            $535,718,276    100.00%

 

Notes to Statement of Investments:

 

(1)Investments in bank debt generally are bought and sold among institutional investors in transactions not subject to registration under the Securities Act of 1933. Such transactions are generally subject to contractual restrictions, such as approval of the agent or borrower.
(2)Non-controlled affiliate – as defined under the Investment Company Act of 1940 (ownership of between 5% and 25% of the outstanding voting securities of this issuer).
(3)Non-income producing security.
(4)Principal amount denominated in foreign currency. Amortized cost and fair value converted from foreign currency to US dollars. (See Note 2)
(5)Restricted security. (See Note 2)
(6)Controlled issuer – as defined under the Investment Company Act of 1940 (ownership of 25% or more of the outstanding voting securities of this issuer).
(7)Includes investments with an aggregate market value of $1,382,875 that have been segregated to collateralize certain unfunded commitments.

 

Aggregate acquisitions and aggregate dispositions of investments, other than government securities, totaled $359,020,926 and $211,216,033, respectively for the year ended December 31, 2012. Aggregate acquisitions includes investment assets received as payment in kind. Aggregate dispositions includes principal paydowns on and maturities of debt investments. The total value of restricted securities and bank debt as of December 31, 2012 was $507,680,996, or 94.8% of total cash and investments of the Partnership.

 

Swaps at December 31, 2012 were as follows:

 

Investment  Notional 
Amount
   Fair Value 
           
Euro/US Dollar Cross-Currency Basis Swap, Pay Euros/Receive USD, Expires 5/16/14  $6,040,944   $179,364 

 

See accompanying notes.

 

13
 

 

 Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statements of Operations

 

   Three Months Ended March 31, 
   2013   2012 (1) 
         
Investment income          
Interest income:          
Unaffiliated issuers  $15,240,367   $8,152,548 
Controlled companies   330,317    - 
Other affiliates   893,512    1,682,714 
Dividend income:          
Other affiliates   -    1,811,189 
Other income:          
Unaffiliated issuers   157,533    - 
Controlled companies   142,911    - 
Other affiliates   101,103    167,874 
Total investment income   16,865,743    11,814,325 
           
Operating expenses          
Management and advisory fees   1,964,738    1,696,797 
Administrative expenses   167,808    - 
Interest expense   136,407    46,519 
Amortization of deferred debt issuance costs   108,564    109,771 
Legal fees, professional fees and due diligence expenses   74,462    100,230 
Director fees   48,059    35,667 
Custody fees   28,544    22,159 
Insurance expense   24,201    19,261 
Commitment fees   22,589    62,208 
Professional fees relating to the Conversion   -    278,190 
Other operating expenses   136,409    50,743 
Total operating expenses   2,711,781    2,421,545 
           
Net investment income   14,153,962    9,392,780 
           
Net realized and unrealized gain (loss) on investments and foreign currency          
Net realized gain (loss):          
Investments in unaffiliated issuers   517,658    (5,981,289)
Investments in non-controlled affiliates   -    718,845 
Net realized gain (loss)   517,658    (5,262,444)
           
Net change in net unrealized appreciation/depreciation   1,837,731    374,743 
Net realized and unrealized gain (loss)   2,355,389    (4,887,701)
           
Dividends paid on Series A preferred equity facility   (393,413)   (371,492)
Net change in accumulated dividends on  preferred equity facility   16,011    (43,307)
Net increase in net assets applicable to common limited and general partners resulting from operations  $16,131,949   $4,090,280 

 

See accompanying notes.

 

(1) The Statement of Operations for the three months ended March 31, 2012 reflects a portfolio prior to the Conversion which had different objectives.

 

14
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statements of Changes in Net Assets

 

   Three Months Ended March 31, 2013 (Unaudited) 
       Common     
       Limited   General 
   Total   Partner   Partner 
Net assets applicable to common limited and general partners,  beginning of year  $317,209,574   $317,209,574   $- 
                
Net investment income   14,153,962    11,354,740    2,799,222 
Net realized gain   517,658    414,126    103,532 
Net change in unrealized appreciation/depreciation   1,837,731    1,470,185    367,546 
Dividends paid on preferred equity facility   (393,413)   (314,730)   (78,683)
Net change in accumulated dividends on preferred equity facility   16,011    12,809    3,202 
Net increase in net assets applicable to common limited and  general partners resulting from operations   16,131,949    12,937,129    3,194,820 
                
Distributions to common limited and general partners from:               
Net investment income   (12,547,218)   (9,823,476)   (2,723,742)
                
Net assets applicable to common limited and general partners,  end of period (including accumulated net investment income of  $27,906,480, $27,555,965 and $350,515, respectively)  $320,794,305   $320,323,227   $471,078 

 

 

   Year Ended December 31, 2012 
       Common     
       Limited   General 
   Total   Partner   Partner 
Net assets applicable to common limited and general partners,  beginning of year  $237,606,302   $237,606,302   $- 
                
Contributions from common limited partner   82,692,187    82,692,187    - 
                
Net investment income   42,473,133    42,473,133    - 
Net realized gain   (15,990,188)   (15,990,188)   - 
Net change in unrealized appreciation/depreciation   3,205,937    3,205,937    - 
Dividends paid on preferred equity facility   (1,542,932)   (1,542,932)   - 
Net change in accumulated dividends on preferred equity facility   (59,867)   (59,867)   - 
Net increase in net assets applicable to common limited and  general partners resulting from operations   28,086,083    28,086,083    - 
                
Distributions to common limited and general partners from:               
Net investment income   (31,174,998)   (31,174,998)   - 
                
Net assets applicable to common limited and general partners,  end of year (including accumulated net investment income of  $26,677,138, $26,326,623 and $350,515, respectively)  $317,209,574   $317,209,574   $- 

 

See accompanying notes.

 

15
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Statements of Cash Flows

 

   Three Months Ended March 31, 
   2013   2012 
         
Operating activities          
Net increase in net assets applicable to limited and general partners resulting  from operations  $16,131,949   $3,432,624 
Adjustments to reconcile net increase in net assets applicable to limited and general partners resulting from operations to net cash provided by operating  activities:          
Net realized loss (gain)   (517,658)   5,262,444 
Net change in unrealized appreciation/depreciation of investments   (1,880,949)   (515,367)
Dividends paid on Series A preferred equity facility   393,413    371,492 
Net change in accumulated dividends on Series A preferred equity facility   (16,011)   43,307 
Accretion of original issue discount   (825,555)   (143,604)
Net accretion of market discount/premium   (81)   (556,441)
Interest and dividend income paid in kind   (253,156)   (754,214)
Amortization of deferred debt issuance costs   108,564    109,771 
Changes in assets and liabilities:          
Purchases of investment securities   (40,010,595)   (74,402,541)
Proceeds from sales, maturities and paydowns of investments   51,006,153    46,076,803 
Decrease (increase) in accrued interest income - unaffiliated issuers   (2,546,216)   637,460 
Decrease in accrued interest income - controlled companies   2,835    - 
Increase in accrued interest income - other affiliates   (4,073)   (474,898)
Decrease in receivable for investments sold   7,727,415    966,560 
Decrease (increase) in prepaid expenses and other assets   (435,089)   42,618 
Increase (decrease) in payable for investments purchased   (21,657,527)   25,696,767 
Increase in payable to the Investment Manager   20,071    443,261 
Increase (decrease) in interest payable   31,937    (11,407)
Increase (decrease) in accrued expenses and other liabilities   83,601    (138,409)
Net cash provided by operating activities   7,359,028    6,086,226 
           
Financing activities          
Proceeds from draws on credit facility   6,000,000    57,000,000 
Principal repayments on credit facility   (10,000,000)   (44,000,000)
Dividends paid on preferred equity facility   (393,413)   (371,492)
Distributions paid to common limited partner   (9,823,476)   - 
Net cash provided by (used in) financing activities   (14,216,889)   12,628,508 
           
Net increase in cash and cash equivalents   (6,857,861)   18,714,734 
Cash and cash equivalents at beginning of period   18,035,189    10,831,678 
Cash and cash equivalents at end of period  $11,177,328   $29,546,412 
           
Supplemental cash flow information          
Interest payments  $104,470   $57,926 

 

See accompanying notes.

 

16
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited)

 

March 31, 2013

 

1. Organization and Nature of Operations

 

Special Value Continuation Partners, LP (the “Partnership”) a Delaware limited partnership, commenced operations on July 31, 2006 as an externally managed, closed-end, non-diversified management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). On April 2, 2012, the Partnership elected to be treated as a business development company (“BDC”) under the 1940 Act (the “Conversion”). The Partnership’s investment objective is to achieve high total returns through current income and capital appreciation, with an emphasis on principal protection. The Partnership invests primarily in the debt of middle-market companies, including senior secured loans, junior loans, mezzanine debt and bonds. Such investments may include an equity component, and, to a lesser extent, the Partnership may make equity investments directly. The Partnership has elected to be treated as a partnership for U.S. federal income tax purposes. TCP Capital Corp. (“TCPC” or the “Common Limited Partner”) owns the entire common limited partner interest in the Partnership. TCPC was formed on April 2, 2012 through the conversion of its predecessor, Special Value Continuation Fund, LLC (“SVCF”), from a limited liability company to a corporation, leaving TCPC as the surviving entity. Prior to its conversion to TCPC, SVCF owned the entire common limited partner interest in the Partnership. On April 3, 2012, TCPC completed an initial public offering of its new common stock. TCPC has also elected to be treated as a business development company under the 1940 Act.

 

The general partner of the Partnership is SVOF/MM, LLC, which also serves as the administrator of TCPC and the Partnership (the “Administrator” or the “General Partner”). The managing member of the Administrator is Tennenbaum Capital Partners, LLC, which serves as the Investment Manager to both TCPC and the Partnership. Most of the equity interests in the General Partner are owned directly or indirectly by the Investment Manager and its employees.

 

Partnership management consists of the General Partner and the Board of Directors. The General Partner directs and executes the day-to-day operations of the Partnership subject to oversight from the Board of Directors, which performs certain functions required by the 1940 Act. The Board of Directors has delegated investment management of the Partnership’s assets to the Investment Manager. At March 31, 2013, the Board of Directors consisted of four persons, three of whom are independent. If the Partnership has preferred limited partner interests outstanding, as it currently does, the holders of the preferred limited partner interests voting separately as a class are entitled to elect two of the Directors. The remaining directors will be subject to election by holders of the common limited partner interests and preferred limited partner interests voting together as a single class.

 

Preferred Equity

 

At March 31, 2013, the Partnership had 6,700 Series A preferred limited partner interests (the “Preferred Interests”) issued and outstanding with a liquidation preference of $20,000 per preferred limited interest. The Preferred Interests are redeemable at the option of the Partnership, subject to certain conditions. Additionally, under certain conditions, the Partnership may be required to either redeem certain of the Preferred Interests or repay indebtedness, at the Partnership’s option. Such conditions would include a failure by the Partnership to maintain adequate collateral as required by its credit facility agreement or by the Statement of Preferences of the Preferred Interests or a failure by the Partnership to maintain sufficient asset coverage as required by the 1940 Act. As of March 31, 2013, the Partnership was in full compliance with such requirements.

 

17
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

1. Organization and Nature of Operations (continued)

 

The Preferred Interests accrue dividends at an annual rate equal to LIBOR plus 0.85% or, in the case of any holders of Preferred Interests that are CP Conduits (as defined in the leveraging documents), the higher of (i) LIBOR plus 0.85% or (ii) the CP Conduit’s cost of funds rate plus 0.85%, subject to certain limitations and adjustments.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The financial statements of the Partnership have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The following is a summary of the significant accounting policies of the Partnership.

 

Use of Estimates

 

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates and assumptions to be reasonable, actual results could differ from those estimates.

 

Investment Valuation

 

Management values investments held by the Partnership at fair value based upon the principles and methods of valuation set forth in policies adopted by the Partnership’s Board of Directors and in conformity with procedures set forth in the Senior Facility, as defined in Note 4, below, and the Statement of Preferences for the Preferred Interests. Fair value is generally defined as the amount for which an investment would be sold in an orderly transaction between market participants at the measurement date.

 

All investments are valued at least quarterly based on affirmative pricing or quotations from independent third-party sources, with the exception of investments priced directly by the Investment Manager which together comprise, in total, less than 5% of the capitalization of the Partnership.

 

18
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited)

 

March 31, 2013

 

2. Summary of Significant Accounting Policies (continued)

 

Investments listed on a recognized exchange or market quotation system, whether U.S. or foreign, are valued for financial reporting purposes as of the last business day of the reporting period using the closing price on the date of valuation. Liquid investments not listed on a recognized exchange or market quotation system are valued using prices provided by a nationally recognized pricing service or by using quotations from broker-dealers. Investments not priced by a pricing service or for which market quotations are either not readily available or are determined to be unreliable are valued using affirmative valuations performed by independent valuation services or, for investments aggregating less than 5% of the total capitalization of the Partnership, directly by the Investment Manager.

 

Fair valuations of investments are determined under guidelines adopted by the Partnership’s Board of Directors, and are subject to their approval. Generally, to increase objectivity in valuing the Partnership’s investments, the Investment Manager will utilize external measures of value, such as public markets or third-party transactions, whenever possible. The Investment Manager’s valuation is not based on long-term work-out value, immediate liquidation value, nor incremental value for potential changes that may take place in the future. The values assigned to investments that are valued by the Investment Manager are based on available information and do not necessarily represent amounts that might ultimately be realized, as these amounts depend on future circumstances and cannot reasonably be determined until the individual investments are actually liquidated. The foregoing policies apply to all investments, including those in companies and groups of affiliated companies aggregating more than 5% of the Partnership’s assets.

 

Fair valuations of investments in each asset class are determined using one or more methodologies including the market approach, income approach, or, in the case of recent investments, the cost approach, as appropriate.  The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets.  The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value 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 may be taken into account include, as relevant:  available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market and enterprise values, among other factors.

 

19
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

2. Summary of Significant Accounting Policies (continued)

 

Unobservable inputs used in the fair value measurement of the Partnership’s Level 3 investments as of March 31, 2013 included the following:

 

Asset Type  Fair Value   Valuation Technique  Unobservable Input  Range (Weighted Average) 
Bank Debt  $275,074,150   Market rate approach  Market yields   5.3% - 15.9% (11.1%) 
        Market quotations  Indicative bid/ask quotes   1 - 2 (1) 
        Market comparable companies  Revenue multiples   0.4x - 0.4x (0.4x) 
        Market comparable companies  EBITDA multiples   7.7x - 7.7x (7.7x) 
Other Corporate Debt  $25,062,810   Market rate approach  Market yields   14.2% - 14.2% (14.2%) 
        Market quotations  Indicative bid/ask quotes   1 - 1 (1) 
        Market comparable companies  EBITDA multiples   10.0x - 10.0x (10.0x) 
Equity  $35,636,859   Market rate approach  Market yields   7.0% - 26.0% (12.3%) 
        Market quotations  Indicative bid/ask quotes   1 - 2 (1) 
        Market comparable companies  Revenue multiples   0.4x - 1.1x (0.8x) 
        Market comparable companies  EBITDA multiples   3.5x - 9.1x (5.7x) 

 

Generally, a change in an unobservable input may result in a change to the value of an investment as follows:

 

Input   Impact to Value if
Input Increases
  Impact to Value if
Input Decreases
Market yields   Decrease   Increase
Revenue multiples   Increase   Decrease
EBITDA multiples   Increase   Decrease

 

Investments of the Partnership may be categorized based on the types of inputs used in valuing such investments. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Transfers between levels are recognized as of the beginning of the reporting period.

 

At March 31, 2013, the investments of the Partnership were categorized as follows:

 

Level   Basis for Determining Fair Value  Bank Debt   Other
Corporate Debt
   Equity
Securities
 
 1   Quoted prices in active markets for  $-   $-   $759,522 
     identical assets               
 2   Other observable market inputs*   111,560,238    61,901,366    - 
 3   Independent third-party pricing               
     sources that employ significant unobservable inputs   275,074,150    17,509,840    34,225,001 
 3   Investment Manager valuations with               
     significant unobservable inputs   -    7,552,970    1,411,858 
 Total      $386,634,388   $86,964,176   $36,396,381 

 

* For example, quoted prices in inactive markets or quotes for comparable investments.

 

20
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013 


2. Summary of Significant Accounting Policies (continued)

 

Changes in investments categorized as Level 3 during the three months ended March 31, 2013 were as follows:

 

   Independent Third-Party Valuation 
   Bank Debt   Other 
Corporate Debt
   Equity
Securities
 
Beginning balance  $359,343,326   $17,171,637   $32,675,370 
Net realized and unrealized gains (losses)   (2,705,665)   332,962    1,418,164 
Acquisitions   15,489,607    5,241    778,020 
Dispositions   (38,401,835)   -    (646,553)
Transfers out of Level 3   (58,651,283)   -    - 
Ending balance  $275,074,150   $17,509,840   $34,225,001 
                
Net change in unrealized appreciation/depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $(1,074,858)  $332,962   $1,418,164 

 

Comprised of eight investments that transferred to Level 2 due to increased observable market activity.

 

   Investment Manager Valuation 
   Bank Debt   Other 
Corporate Debt
   Equity 
Securities
 
Beginning balance  $-   $7,167,458   $1,424,764 
Net realized and unrealized gains (losses)   -    350,718    (12,906)
Acquisitions   -    34,794    - 
Ending balance  $-   $7,552,970   $1,411,858 
                
Net change in unrealized appreciation/depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $-   $350,718   $(12,906)

 

There were no transfers between Level 1 and 2 during the three months ended March 31, 2013.

 

21
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

2. Summary of Significant Accounting Policies (continued)

 

At December 31, 2012, the investments of the Partnership were categorized as follows:

 

Level   Basis for Determining Fair Value  Bank Debt   Other 
Corporate Debt
   Equity 
Securities
 
 1   Quoted prices in active markets for identical assets  $-   $-   $780,431 
 2   Other observable market inputs*   45,667,016    53,453,085    - 
 3   Independent third-party pricing sources that employ significant               
     unobservable inputs   359,343,326    17,171,637    32,675,370 
 3   Investment Manager valuations with significant unobservable               
     inputs   -    7,167,458    1,424,764 
 Total      $405,010,342   $77,792,180   $34,880,565 

 

* For example, quoted prices in inactive markets or quotes for comparable investments.

 

Changes in investments categorized as Level 3 during the year ended December 31, 2012 were as follows:

 

   Independent Third-Party Valuation 
   Bank Debt   Other 
Corporate Debt
   Equity
Securities
 
Beginning balance  $159,949,811   $24,061,229   $68,114,764 
Net realized and unrealized losses   (8,709,385)   (6,540,882)   (7,100,618)
Acquisitions   288,929,785    3,731,290    9,584,408 
Dispositions   (84,994,292)   -    (37,923,184)
Transfers out of Level 3   -    (4,080,000)   - 
Transfers into Level 3††   4,167,407    -    - 
Ending balance  $359,343,326   $17,171,637   $32,675,370 
                
Net change in unrealized appreciation/depreciation during the period on investments still held at period end (included in net realized and unrealized losses, above)  $(5,856,277)  $127,255   $(9,797,319)

 

Comprised of one investment that transferred to Level 2 due to increased trading volumes.

†† Comprised of one investment that transferred from Level 2 due to reduced trading volumes.

 

22
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

2. Summary of Significant Accounting Policies (continued)

 

   Investment Manager Valuation 
   Bank Debt   Other
Corporate Debt
   Equity
Securities
 
Beginning balance  $51,436   $7,464,188   $1,252,190 
Net realized and unrealized gains (losses)   -    284,156    274,554 
Acquisitions   -    148,281    - 
Dispositions   -    (729,167)   (5,842)
Transfers out of Level 3#   -    -    (147,574)
Reclassifications within Level 3##   (51,436)   -    51,436 
Ending balance  $-   $7,167,458   $1,424,764 
                
Net change in unrealized appreciation/depreciation during the period on investments still held at period end (included in net realized and unrealized gains/losses, above)  $-   $272,637   $274,555 

 

# Comprised of one investment that transferred to Level 2 due to increased trading volumes.

## Comprised of claims in the liquidation of a portfolio company that were reclassified as equity.

 

There were no transfers between Level 1 and 2 during the year ended December 31, 2012.

 

Investment Transactions

 

The Partnership records investment transactions on the trade date, except for private transactions that have conditions to closing, which are recorded on the closing date. The cost of investments purchased is based upon the purchase price plus those professional fees which are specifically identifiable to the investment transaction. Realized gains and losses on investments are recorded based on the identification method, which typically allocates the highest cost inventory to the basis of investments sold.

 

Cash and Cash Equivalents

 

Cash consists of amounts held in accounts with brokerage firms and the custodian bank. Cash equivalents consist of highly liquid investments with an original maturity of three months or less.

 

Repurchase Agreements

 

 In connection with transactions in repurchase agreements, it is the Partnership’s policy that its custodian take possession of the underlying collateral, the fair value of which is required to exceed the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Partnership may be delayed or limited.

 

23
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

2. Summary of Significant Accounting Policies (continued)

 

Restricted Investments

 

The Partnership may invest without limitation in instruments that are subject to legal or contractual restrictions on resale. These instruments generally may be resold to institutional investors in transactions exempt from registration or to the public if the securities are registered. Disposal of these investments may involve time-consuming negotiations and additional expense, and prompt sale at an acceptable price may be difficult. Information regarding restricted investments is included at the end of the Consolidated Statement of Investments. Restricted investments, including any restricted investments in affiliates, are valued in accordance with the investment valuation policies discussed above.

  

Foreign Investments

 

The Partnership may invest in instruments traded in foreign countries and denominated in foreign currencies. The Partnership held foreign currency denominated investments comprising approximately 1.6% of the Partnership’s total investments at both March 31, 2013 and December 31, 2012. Such positions were converted at the respective closing rate in effect at March 31, 2013 and December 31, 2012 and reported in U.S. dollars. Purchases and sales of investments and income and expense items denominated in foreign currencies, when they occur, are translated into U.S. dollars on the respective dates of such transactions.  The portion of gains and losses on foreign investments resulting from fluctuations in foreign currencies is included in net realized and unrealized gain or loss from investments.

 

Investments in foreign companies and securities of foreign governments may involve special risks and considerations not typically associated with investing in U.S. companies and securities of the U.S. government. These risks include, among other things, revaluation of currencies, less reliable information about issuers, different transactions clearance and settlement practices, and potential future adverse political and economic developments. Moreover, investments in foreign companies and securities of foreign governments and their markets may be less liquid and their prices more volatile than those of comparable U.S. companies and the U.S. government.

 

Derivatives

 

In order to mitigate certain currency exchange and interest rate risks, the Partnership has entered into several swap, forward currency and option transactions. All derivatives are recognized as either assets or liabilities in the Statement of Assets and Liabilities. The transactions entered into are accounted for using the mark-to-market method with the resulting change in fair value recognized in earnings for the current period. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in interest rates and the value of foreign currency relative to the U.S. dollar.

 

24
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

 2. Summary of Significant Accounting Policies (continued)

 

The Partnership did not enter into any new derivative transactions during the three months ended March 31, 2013 and March 31, 2012. At March 31, 2013 and March 31, 2012, the Partnership held a cross currency basis swap with a notional amount of $6,040,944. Gains and losses from derivatives during the three months ended March 31, 2013 were included in net realized and unrealized loss on investments in the Statement of Operations as follows:

 

Instrument  Realized   Unrealized 
Cross currency basis swaps  $-   $169,983 

 

Gains and losses from derivatives during the three months ended March 31, 2012 were included in net realized and unrealized loss on investments in the Statement of Operations as follows:

 

Instrument  Realized   Unrealized 
Cross currency basis swaps  $-   $(123,904)

 

The valuations of the swap held at March 31, 2013 and March 31, 2012 were determined using observable market inputs other than quoted prices in active markets for identical assets and, accordingly, are classified as Level 2 in the GAAP valuation hierarchy.

 

Debt Issuance Costs

 

Costs of approximately $3.5 million were incurred during 2006 in connection with placing the Senior Facility. These costs were deferred and are being amortized on a straight-line basis over eight years, the estimated life of the Senior Facility. The impact of utilizing the straight-line amortization method versus the effective-interest method is not material to the operations of the Partnership.

 

Revenue Recognition

 

Interest and dividend income, including income paid in kind, is recorded on an accrual basis. Origination, structuring, closing, commitment and other upfront fees earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, are recognized as earned. Prepayment fees and similar income received upon the early repayment of a loan or debt security are included in interest income.

 

Certain of the Partnership’s debt investments are purchased at a considerable discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. GAAP generally requires that discounts on the acquisition of corporate bonds, municipal bonds and treasury bonds be amortized using the effective-interest or constant-yield method. GAAP also requires the Partnership to consider the collectability of interest when making accruals. Accordingly, when accounting for purchase discounts, the Partnership recognizes discount accretion income when it is probable that such amounts will be collected, generally at disposition. When the Partnership receives principal payments on a loan in an amount in excess of the loan’s amortized cost, it records the excess principal payments as interest income.

 

25
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited)

 

March 31, 2013

 

2. Summary of Significant Accounting Policies (continued)

 

Income Taxes

 

The Partnership’s income or loss is reported in the partners’ income tax returns. Consequently, no income taxes are paid at the partnership level or reflected in the Partnership’s financial statements. In accordance with ASC Topic 740 – Income Taxes, the Partnership recognizes in its financial statements the effect of a tax position when it is determined that such position is more likely than not, based on the technical merits, to be sustained upon examination. As of December 31, 2012, the tax returns, the qualification of the Partnership, and the amount of allocable Partnership income or loss are subject to examination by federal and California taxing authorities for all tax years since January 1, 2009. No such examinations are currently pending.

 

Cost and unrealized appreciation and depreciation of the Partnership’s investments (including derivatives) for U.S. federal income tax purposes at March 31, 2013 were as follows:

 

 

Unrealized appreciation  $24,593,396 
Unrealized depreciation   (113,920,322)
Net unrealized depreciation   (89,326,926)
      
Cost  $599,671,218 

 

3. Management Fees, Incentive Compensation and Other Expenses

 

Following the Conversion, the Partnership’s management fee is calculated at an annual rate of 1.5% of total assets (excluding cash and cash equivalents) as of the beginning of each quarter and is payable to the Investment Manager quarterly in arrears.

 

Incentive compensation is only paid to the extent that TCPC’s total performance exceeds a cumulative 8% annual return since January 1, 2013 (the “Total Return Hurdle”). No incentive compensation was incurred prior to January 1, 2013. Beginning January 1, 2013, the incentive compensation equals 20% of net investment income (reduced by preferred dividends) and 20% of net realized gains (reduced by any net unrealized losses), subject to the Total Return Hurdle. The incentive compensation is payable quarterly in arrears as an allocation and distribution to the General Partner and is calculated as the difference between cumulative incentive compensation earned since January 1, 2013 and cumulative incentive compensation paid since January 1, 2013. A reserve for incentive compensation is allocated to the account of the General Partner based on incentive compensation that would have been distributable to the General Partner assuming a hypothetical liquidation of TCPC and the Partnership at net asset value on the balance sheet date. At March 31, 2013, the General Partner’s equity interest in the Partnership was comprised entirely of a reserve amount of $471,078 as reflected in the Statement of Changes in Net Assets.

 

26
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited)

 

March 31, 2013

 

3. Management Fees, Incentive Compensation and Other Expenses (continued)

 

Prior to the Conversion, the Investment Manager received an annual management and advisory fee, payable monthly in arrears, equal to 1.0% of committed capital, defined as the sum of the maximum amount of the Preferred Interests, the maximum amount available under the Senior Facility, the initial value of the contributed general partnership equity and the initial value of the contributed common equity, subject to reduction by the amount of the Senior Facility commitment when the Senior Facility is no longer outstanding, and by the amount of the Preferred Interests when less than $1 million in liquidation preference of preferred securities remains outstanding. In addition to the management fee, the General Partner was entitled to a performance allocation equal to 20% of all cumulative income and gain distributions, subject to an 8% hurdle on undistributed contributed equity with a catch up for the General Partner.

 

The Partnership bears all respective expenses incurred in connection with the business of the Partnership, including fees and expenses of outside contracted services, such as custodian, administrative, legal, audit and tax preparation fees, costs of valuing investments, insurance costs, brokers’ and finders’ fees relating to investments, and any other transaction costs associated with the purchase and sale of investments of the Partnership.

 

4. Senior Secured Revolving Credit Facility

 

The Partnership has entered into a credit agreement with certain lenders, which provides for a senior secured revolving credit facility (the “Senior Facility”), pursuant to which amounts may be drawn up to $116 million subject to certain collateral and other restrictions. The Senior Facility matures July 31, 2014, subject to extension by the lenders at the request of the Partnership for one 12-month period. Most of the cash and cash investments of the Partnership are included in the collateral for the Senior Facility.

 

Advances under the Senior Facility bear interest at LIBOR plus 0.44% per annum, except in the case of loans from CP Conduits, which bear interest at the higher of LIBOR plus 0.44% or the CP Conduit’s cost of funds plus 0.44%, subject to certain limitations. The weighted-average interest rate on outstanding borrowings at March 31, 2013 and December 31, 2012 was 0.64% and 0.65%, respectively.

 

27
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

4. Senior Secured Revolving Credit Facility (continued)

 

In addition to amounts due on outstanding debt, the Senior Facility accrues commitment fees of 0.20% per annum on the unused portion of the Senior Facility, or 0.25% per annum when less than $46.4 million in borrowings are outstanding. The Senior Facility may be terminated, and any outstanding amounts thereunder may become due and payable, should the Partnership fail to satisfy certain financial or other covenants.  As of March 31, 2013, the Partnership was in full compliance with such covenants.

 

 5. Commitments, Concentration of Credit Risk and Off-Balance Sheet Risk

 

The Partnership conducts business with brokers and dealers that are primarily headquartered in New York and Los Angeles and are members of the major securities exchanges. Banking activities are conducted with a firm headquartered in the New York area.

 

In the normal course of business, the Partnership’s investment activities involve executions, settlement and financing of various transactions resulting in receivables from, and payables to, brokers, dealers and the Partnership’s custodian. These activities may expose the Partnership to risk in the event that such parties are unable to fulfill contractual obligations. Management does not anticipate any material losses from counterparties with whom it conducts business. Consistent with standard business practice, the Partnership enters into contracts that contain a variety of indemnifications, and are engaged from time to time in various legal actions. The maximum exposure of the Partnership under these arrangements and activities is unknown. However, the Partnership expects the risk of material loss to be remote.

 

6. Related Parties

 

The Common Limited Partner, the Partnership, the Investment Manager, the General Partner and their members and affiliates may be considered related parties.  From time to time, the Partnership advances payments to third parties on behalf of the Common Limited Partner which are reimbursable through deductions from distributions to the Common Limited Partner.  At March 31, 2013, no such amounts were outstanding. From time to time, the Investment Manager advances payments to third parties on behalf of the Partnership and receives reimbursement from the Partnership.  At March 31, 2013, such amounts totaled $68,220, as reflected in the Statement of Assets and Liabilities.

 

28
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited)

 

March 31, 2013

 

6. Related Parties (continued)

 

Pursuant to an administration agreement between the Administrator and the Partnership (the “Administration Agreement”), the Administrator may be reimbursed for costs and expenses incurred by the Administrator for office space rental, office equipment and utilities allocable to the Partnership, as well as costs and expenses incurred by the Administrator or its affiliates relating to any administrative, operating, or other non-investment advisory services provided by the Administrator or its affiliates to the Partnership.  For the three months ended March 31, 2013, expenses allocated pursuant to the Administration Agreement totaled $167,808. The Administrator waived reimbursement of all administrative expenses prior to January 1, 2013.

 

7.  Common Limited Partner Equity

 

On April 3, 2012, in connection with an initial public offering of its common equity, the Common Limited Partner contributed $82,692,187 in net receipts from the offering to the Partnership, as reflected in the Statement of Changes in Net Assets.

 

8.  Distributions

 

The Partnership’s distributions are recorded on the record date. The timing of distributions is determined by the General Partner, which has provided the Investment Manager with certain criteria for such distributions.

  

9.  Subsequent Events

 

On May 1, 2013, the Common Limited Partner and the preferred limited partners voted to add an additional director, Rajneesh Vig, to the Board of Directors effective as of May 1, 2013.

 

29
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

10. Financial Highlights

  

   Three Months Ended 
   March 31, 2013 
     
Return on invested assets (1), (2)   3.4%
      
Gross return to common limited partner (1)   5.1%
Less: General Partner incentive allocation (1)   (1.0)%
Return to common limited partner (1), (3)   4.1%
      
Ratios to average common equity: (4), (5)     
Net investment income   14.3%
Expenses   3.4%
Expenses and General Partner allocation   4.4%
      
Ending net assets attributable to common limited partner  $320,323,227 
Portfolio turnover rate (1)   7.8%
Weighted-average debt outstanding  $73,355,556 
Weighted-average interest rate on debt   0.8%

 

(1)Not annualized.
(2)Return on invested assets is a time-weighted, geometrically linked rate of return and excludes cash and cash equivalents.
(3)Returns (net of dividends on the preferred equity facility, allocations to General Partner and Partnership expenses, including financing costs and management fees) are calculated on a monthly geometrically linked, time-weighted basis.
(4)Net investment income and expenses annualized. General Partner allocation not annualized.
(5)These ratios include interest expense but do not reflect the effect of dividends on the preferred equity facility.

 

30
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Notes to Financial Statements (Unaudited) (Continued)

 

March 31, 2013

 

11. Select Quarterly Data (Unaudited)

  

   Q1 2013 
     
Total investment income  $16,865,743 
Net investment income   14,153,962 
Net realized and unrealized gain   2,355,389 
Preferred dividends   (377,402)
Net increase in net assets allocable to common limited and general partners resulting from operations  $16,131,949 

 

   2012 
    Q4    Q3    Q2    Q1 (1) 
                     
Total investment income  $17,181,003   $12,110,973   $11,086,458   $11,814,325 
Net investment income   14,222,900    9,765,895    9,091,558    9,392,780 
Net realized and unrealized gain (loss)   (5,743,587)   344,397    (2,497,360)   (4,887,701)
Preferred dividends   (391,402)   (399,121)   (397,477)   (414,799)
Net increase in net assets allocable to common limited and general partners resulting from operations  $8,087,911   $9,711,171   $6,196,721   $4,090,280 

 

   2011 (1) 
   Q4   Q3   Q2   Q1 
                 
Total investment income  $9,103,299   $10,509,783   $17,257,216   $17,987,378 
Net investment income   6,395,902    8,365,091    15,288,901    15,785,441 
Net realized and unrealized loss   (2,980,033)   (20,014,551)   (9,556,909)   (6,327,388)
Preferred dividends   (389,857)   (389,747)   (392,078)   (373,148)
Net increase in net assets allocable to common limited and general partners resulting from operations  $3,026,012   $(12,039,207)  $5,339,914   $9,084,905 

  

(1) Periods prior to the Conversion reflect portfolios that had different investment objectives.

 

31
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Schedule of Changes in Investments in Affiliates (1)

 

Three Months Ended March 31, 2013

 

Security  Value,
Beginning of
Period
   Acquisitions   Dispositions (2)   Value,
End of
Period
 
Anacomp, Inc., Class A Common Stock  $1,255,527   $-   $-   $1,255,527 
EPMC HoldCo, LLC, Membership Units   2,730,458    -    -    2,782,966 
ESP Holdings, Inc., Cumulative Preferred 15%   3,643,088    -    -    3,643,088 
ESP Holdings, Inc., Common Stock   2,263,124    -    -    2,674,472 
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes, 6% Cash + 10% PIK, due 12/31/19   7,134,137    -    -    7,209,840 
N510UA Aircraft Secured Mortgage, 20%, due 10/26/16   548,340    -    (18,900)   503,500 
N512UA Aircraft Secured Mortgage, 20%, due 10/26/16   556,225    -    (18,493)   511,860 
N536UA Aircraft Secured Mortgage, 16%, due 9/29/14   277,780    -    (33,671)   237,690 
N545UA Aircraft Secured Mortgage, 16%, due 8/29/15   436,810    -    (30,173)   397,385 
N585UA Aircraft Secured Mortgage, 20%, due 10/25/16   653,220    -    (21,714)   601,065 
N659UA Aircraft Secured Mortgage, 12%, due 2/28/16   4,264,148    -    (238,748)   3,881,939 
N661UA Aircraft Secured Mortgage, 12%, due 5/4/16   4,351,424    -    (231,537)   4,063,848 
N510UA Equipment Trust Beneficial Interests   479,682    18,900    (8,978)   485,106 
N512UA Equipment Trust Beneficial Interests   473,761    18,493    (8,831)   478,704 
N536UA Equipment Trust Beneficial Interests   624,746    33,671    (11,300)   642,039 
N545UA Equipment Trust Beneficial Interests   616,897    30,302    (11,884)   632,306 
N585UA Equipment Trust Beneficial Interests   583,391    21,714    (11,694)   589,948 
N913DL Aircraft Secured Mortgage, 8%, due 3/15/17   367,370    -    (18,802)   349,350 
N918DL Aircraft Secured Mortgage, 8%, due 8/15/18   454,580    -    (16,644)   439,280 
N954DL Aircraft Secured Mortgage, 8%, due 3/20/19   597,720    -    (19,121)   570,350 
N955DL Aircraft Secured Mortgage, 8%, due 6/20/19   612,000    -    (18,393)   585,650 
N956DL Aircraft Secured Mortgage, 8%, due 5/20/19   612,850    -    (18,699)   585,990 
N957DL Aircraft Secured Mortgage, 8%, due 6/20/19   617,440    -    (18,554)   590,750 
N959DL Aircraft Secured Mortgage, 8%, due 7/20/19   622,030    -    (18,410)   595,510 
N960DL Aircraft Secured Mortgage, 8%, due 10/20/19   640,730    -    (18,139)   614,380 
N961DL Aircraft Secured Mortgage, 8%, due 8/20/19   636,990    -    (18,577)   610,300 
N976DL Aircraft Secured Mortgage, 8%, due 2/15/18   473,280    -    (19,320)   455,260 
N913DL Equipment Trust Beneficial Interests   111,520    18,802    (23,508)   111,180 
N918DL Equipment Trust Beneficial Interests   120,530    16,644    (22,334)   120,530 
N954DL Equipment Trust Beneficial Interests   113,390    19,121    (26,938)   85,680 
N955DL Equipment Trust Beneficial Interests   160,650    18,393    (26,609)   129,880 
N956DL Equipment Trust Beneficial Interests   163,200    18,699    (26,976)   133,110 
N957DL Equipment Trust Beneficial Interests   163,880    18,554    (26,864)   133,790 
N959DL Equipment Trust Beneficial Interests   164,390    18,410    (26,754)   134,300 
N960DL Equipment Trust Beneficial Interests   169,660    18,139    (26,669)   139,740 
N961DL Equipment Trust Beneficial Interests   171,360    18,577    (27,137)   142,290 
N967DL Equipment Trust Beneficial Interests   83,300    19,320    (25,640)   83,980 
RM Holdco, LLC, Membership Units   849,478    -    -    751,443 
RM Holdco, LLC, Subordinated Convertible Term Loan, 1.12% PIK, due 3/21/18   5,106,805    -    -    4,940,834 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche A, 11%, due 3/19/16   3,759,156    -    5,231    3,764,387 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B,                    
12% Cash + 7% PIK, due 3/19/16   6,258,122    -    117,372    6,375,494 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B-1,                    
12% Cash + 7% PIK, due 3/19/16   1,976,470    -    38,785    2,012,224 
United N659UA-767, LLC (N659UA)   2,771,428    238,748    (168,678)   2,926,343 
United N661UA-767, LLC (N661UA)   2,789,809    231,537    (165,758)   2,873,073 

 

 Notes to Schedule of Changes in Investments in Affiliates:

(1)The issuers of the securities listed on this schedule are considered affiliates under the Investment Company Act of 1940 due to the ownership by the Company of 5% or more of the issuers' voting securities.
(2)Dispositions include sales, paydowns, mortgage amortizations, and aircraft depreciation.

 

32
 

 

Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Schedule of Changes in Investments in Affiliates (1)

 

Year Ended December 31, 2012

 

Security  Value,
Beginning
of
Period
   Acquisitions   Dispositions (2)   Value,
End of
Period
 
Anacomp, Inc., Class A Common Stock  $740,761   $-   $-   $1,255,527 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N913DL), 8%, due 7/15/18   -    403,947    (37,389)   367,370 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N918DL), 8%, due 7/15/18   -    490,003    (33,390)   454,580 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N954DL), 8%, due 9/20/19   -    631,014    (37,814)   597,720 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N955DL), 8%, due 9/20/19   -    645,523    (36,417)   612,000 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N956DL), 8%, due 9/20/19   -    646,372    (37,011)   612,850 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N957DL), 8%, due 9/20/19   -    651,170    (36,735)   617,440 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N959DL), 8%, due 9/20/19   -    655,930    (36,462)   622,030 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N960DL), 8%, due 9/20/19   -    675,587    (35,956)   640,730 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N961DL), 8%, due 9/20/19   -    671,812    (36,803)   636,990 
Delta Air Lines, Inc., Aircraft Secured Mortgage (N976DL), 8%, due 7/15/18   -    512,643    (38,636)   473,280 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N913DL)   -    145,176    (31,277)   111,520 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N918DL)   -    162,691    (32,027)   120,530 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N954DL)   -    202,368    (40,415)   113,390 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N955DL)   -    204,598    (40,116)   160,650 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N956DL)   -    205,404    (40,679)   163,200 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N957DL)   -    206,328    (40,572)   163,880 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N959DL)   -    207,244    (40,467)   164,390 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N960DL)   -    211,653    (40,578)   169,660 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N961DL)   -    211,555    (41,241)   171,360 
Delta Air Lines, Inc., Equipment Trust Beneficial Interests (N976DL)   -    173,597    (37,271)   83,300 
EPMC HoldCo, LLC, Membership Units   5,264,007    -    (1,276,226)   2,730,458 
ESP Holdings, Inc., Cumulative Preferred 15%   3,287,872    -    -    3,643,088 
ESP Holdings, Inc., Common Stock   7,473,887    -    -    2,263,124 
ESP Holdings, Inc., Junior Unsecured Subordinated Promissory Notes,                    
6% Cash + 10% PIK, due 12/31/19   6,240,393    1,000,494    -    7,134,137 
International Wire Group Holdings, Inc., Common Stock   30,077,606    -    (31,940,733)   - 
International Wire Group Holdings, Inc., Senior Notes,                    
11.5% Cash or 12.25% PIK, due 4/15/15   18,180,000    -    (18,000,000)   - 
International Wire Group Holdings, Inc., Senior Secured Notes,                    
8.5%, due 10/15/17   -    15,000,000    -    15,450,000 
Real Mex Restaurants, Inc. Senior Secured Notes, 14%, due 1/1/13   12,410,823    -    (6,627,711)   - 
RM Holdco, LLC, Membership Units   -    2,010,777    -    849,478 
RM Holdco, LLC, Subordinated Convertible Term Loan, 1.12% PIK, due
    3/21/18
   -    5,106,805    -    5,106,805 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche A, 11%, due
    3/19/16
   -    3,759,156    -    3,759,156 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B,                    
12% Cash + 7% PIK, due 3/19/16   -    6,258,122    -    6,258,122 
RM OpCo, LLC, Senior Secured 1st Lien Term Loan Tranche B-1,                    
12% Cash + 7% PIK, due 3/19/16        1,922,118    -    1,976,470 
United Air Lines, Inc., Aircraft Secured Mortgage (N510UA), 20%, due
    9/26/16
   624,066    -    (66,886)   548,340 
United Air Lines, Inc., Aircraft Secured Mortgage (N512UA), 20%, due
    10/26/16
   630,208    -    (65,449)   556,225 
United Air Lines, Inc., Aircraft Secured Mortgage (N536UA), 16%, due
    8/21/14
   414,963    -    (122,068)   277,780 
United Air Lines, Inc., Aircraft Secured Mortgage (N545UA), 16%, due
    7/17/15
   563,575    -    (109,385)   436,810 
United Air Lines, Inc., Aircraft Secured Mortgage (N585UA), 20%, due
    10/25/16
   739,958    -    (76,848)   653,220 
United Air Lines, Inc., Aircraft Secured Mortgage (N659UA), 12%, due
    3/28/16
   5,014,613    -    (886,810)   4,264,148 
United Air Lines, Inc., Aircraft Secured Mortgage (N661UA), 12%, due
    5/4/16
   5,192,014    -    (860,025)   4,351,424 
United Air Lines, Inc., Equipment Trust Beneficial Interests (N510UA)   467,137    66,886    (35,913)   479,682 
United Air Lines, Inc., Equipment Trust Beneficial Interests (N512UA)   458,665    65,449    (35,325)   473,761 
United Air Lines, Inc., Equipment Trust Beneficial Interests (N536UA)   686,303    122,068    (45,201)   624,746 
United Air Lines, Inc., Equipment Trust Beneficial Interests (N545UA)   612,589    109,256    (47,505)   616,897 
United Air Lines, Inc., Equipment Trust Beneficial Interests (N585UA)   498,602    76,848    (46,776)   583,391 
United N659UA-767, LLC (N659UA)   2,274,815    886,810    (674,712)   2,771,428 
United N661UA-767, LLC (N661UA)   2,205,523    860,025    (663,033)   2,789,809 

 

Notes to Schedule of Changes in Investments in Affiliates:

(1)The issuers of the securities listed on this schedule are considered affiliates under the Investment Company Act of 1940 due to the ownership by the Company of 5% or more of the issuers' voting securities.
(2)Dispositions include sales, paydowns, mortgage amortizations, and aircraft depreciation.

 

33
 

 

 Special Value Continuation Partners, LP

(A Delaware Limited Partnership)

 

Schedule of Restricted Securities of Unaffiliated Issuers

 

March 31, 2013

 

Investment  Acquisition Date  Cost 
        
AIP/IS Holdings, LLC, Membership Units  Var. 2009 & 2010  $- 
Bally Total Fitness Holding Corporation, Common Stock  4/30/10   45,186,963 
Bally Total Fitness Holding Corporation, Warrants  4/30/10   - 
BPA Laboratories, Inc., Senior Secured Notes, 12.25%, due 4/1/17  3/5/12   16,446,295 
Caribbean Financial Group, Senior Secured Notes, 11.5%, due 11/15/19  10/19/12   9,808,736 
Constellation Enterprises, LLC, Senior Secured 1st Lien Notes, 10.625%, due 2/1/16  1/20/11   12,322,875 
DeepOcean Group Holding AS, Common Stock  5/13/11   3,477,627 
Integra Telecom, Inc., Common Stock  11/19/09   8,433,884 
Integra Telecom, Inc., Warrants  11/19/09   19,920 
La Paloma Generating Company, Residual Claim  2/2/05   1,574,284 
Marsico Holdings, LLC Common Interest Units  9/10/12   172,694 
Precision Holdings, LLC, Class C Membership Interests  Var. 2010 & 2011   1,396 
Shop Holding, LLC, Class A Units  6/2/11   462,576 
Shop Holding, LLC, Warrants to Purchase Class A Units  6/2/11   - 
SiTV, Inc., Warrants to Purchase Common Stock  8/3/12   300,322 
St Barbara Ltd., 1st Priority Senior Secured Notes, 8.875%, due 4/15/18  3/22/13   7,321,771 
STG-Fairway Holdings, LLC, Class A Units  12/30/10   1,100,348 
The Telx Group, Inc., Senior Unsecured Notes, 10% Cash + 2% PIK, due 9/26/19  9/26/11   6,855,009 
V Telecom Investment S.C.A, Common Shares  11/9/12   3,236,256 

  

 

December 31, 2012

 

Investment  Acquisition Date  Cost 
        
AIP/IS Holdings, LLC, Membership Units  Var. 2009 & 2010  $- 
Bally Total Fitness Holding Corporation, Common Stock  4/30/10   45,186,963 
Bally Total Fitness Holding Corporation, Warrants  4/30/10   - 
BPA Laboratories, Inc., Senior Secured Notes, 12.25%, due 4/1/17  3/5/12   16,446,295 
Caribbean Financial Group, Senior Secured Notes, 11.5%, due 11/15/19  10/19/12   9,803,494 
Constellation Enterprises, LLC, Senior Secured 1st Lien Notes, 10.625%, due 2/1/16  1/20/11   12,322,875 
DeepOcean Group Holding AS, Common Stock  5/13/11   3,477,627 
Integra Telecom, Inc., Common Stock  11/19/09   8,433,884 
Integra Telecom, Inc., Warrants  11/19/09   19,920 
La Paloma Generating Company, Residual Claim  2/2/05   1,574,284 
Marsico Holdings, LLC Common Interest Units  9/10/12   172,694 
Precision Holdings, LLC, Class C Membership Interests  Var. 2010 & 2011   1,396 
Shop Holding, LLC, Class A Units  6/2/11   462,576 
Shop Holding, LLC, Warrants to Purchase Class A Units  6/2/11   - 
SiTV, Inc., Warrants to Purchase Common Stock  8/3/12   300,322 
STG-Fairway Holdings, LLC, Class A Units  12/30/10   1,100,348 
The Telx Group, Inc., Senior Unsecured Notes, 10% Cash + 2% PIK, due 9/26/19  9/26/11   6,820,215 
V Telecom Investment S.C.A, Common Shares  11/9/12   3,236,256 

 

34
 

 

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 our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. For periods prior to April 2, 2012, the consolidated financial statements and related footnotes reflect the performance of Special Value Continuation Fund, LLC which was formed on July 17, 2006. In addition, some of the statements in this report (including in the following discussion) constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which relate to future events or the future performance or financial condition of Special Value Continuation Partners, LP. (the “Partnership,” “we,” “us,” or “our”). The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:

 

  our, or our portfolio companies’, future business, operations, operating results or prospects;

 

  the return or impact of current and future investments;

 

  the impact of a protracted decline in the liquidity of credit markets on our business;

 

  the impact of fluctuations in interest rates on our business;

 

  the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;

 

  our contractual arrangements and relationships with third parties;

 

  the general economy and its impact on the industries in which we invest;

 

  the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;

 

  our expected financings and investments;

 

  the adequacy of our financing resources and working capital;

 

  the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;

 

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

 

  the timing, form and amount of any dividend distributions; and

 

  our ability to maintain our qualification as a regulated investment company and as a business development company.

 

We use words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “could,” “may,” “plan” and similar words to identify forward-looking statements. The forward looking statements contained in this quarterly report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as “Risk Factors” in this report and included in our amended registration statement on Form N-2 filed with the Securities and Exchange Commission on December 7, 2012.

 

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

35
 

 

Overview

 

The Partnership is a Delaware limited liability company formed on July 31, 2006 and is an externally managed, closed-end, non-diversified management investment company. On April 2, 2012, we elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Conversion”). The Partnership’s investment objective is to achieve high total returns while minimizing losses. The Partnership invests primarily in the debt of middle-market companies, including senior secured loans, junior loans, mezzanine debt and bonds. Such investments may include an equity component, and, to a lesser extent, the Partnership may make equity investments directly. TCP Capital Corp. (“TCPC”) owns 100% of the common limited partner interests of the Partnership. TCPC has also elected to be treated as a BDC under the 1940 Act. The General Partner of the Partnership is SVOF/MM, LLC (“SVOF/MM”), which also serves as the administrator (“Administrator”) of TCPC and the Partnership. The managing member of SVOF/MM is Tennenbaum Capital Partners, LLC (“TCP” or the “Advisor”), which serves as the investment manager to both TCPC and the Partnership. Most of the equity interests in the General Partner are owned directly or indirectly by TCP and its employees. The Partnership has elected to be treated as a partnership for U.S. federal income tax purposes.

 

Investments

 

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

 

As a BDC, we 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 and indebtedness of private U.S. companies, public U.S. operating companies whose securities are not listed on a national securities exchange or registered under the Securities Exchange Act of 1934, as amended, public domestic operating companies having a market capitalization of less than $250 million, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. We are also permitted to make certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

 

Revenues

 

We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.

 

Expenses

 

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, incentive compensation, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive compensation remunerates the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our administration agreement with SVOF/MM, LLC (the “Administrator”) provides that the Administrator may be reimbursed for costs and expenses incurred by the Administrator for office space rental, office equipment and utilities allocable to us under the administration agreement, as well as any costs and expenses incurred by the Administrator or its affiliates relating to any non-investment advisory, administrative or operating services provided by the Administrator or its affiliates to us. We also bear all other costs and expenses of our operations and transactions which may include those relating to:

 

  our organization;

 

36
 

  

  calculating our net asset value (including the cost and expenses of any independent valuation firms);

 

  interest payable on debt, if any, incurred to finance our investments;

 

  the base management fee and any incentive compensation;

 

  dividends and distributions on our preferred shares, if any;

 

  administration fees payable under the administration agreement;

 

  fees payable to third parties relating to, or associated with, making investments;

 

  transfer agent and custodial fees;

 

  registration fees;

 

  director fees and expenses;

 

  costs of preparing and filing reports or other documents with the SEC;

 

  costs of any reports, proxy statements or other notices to our limited partners, including printing costs;

 

  our fidelity bond;

 

  directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

  indemnification payments;

 

  direct costs and expenses of administration, including audit and legal costs; and

 

  all other expenses reasonably incurred by us and the Administrator in connection with administering our business, such as the allocable portion of overhead under the administration agreement, including rent and other allocable portions of the cost of certain of our officers and their respective staffs.

 

The investment management agreement provides that the base management fee be calculated at an annual rate of 1.5% of our total assets (excluding cash and cash equivalents) payable quarterly in arrears. For purposes of calculating the base management fee, “total assets” is determined without deduction for any borrowings or other liabilities. For the first calendar quarter (or portion thereof) of our operations as a BDC, the base management fee was calculated based on the initial value of our total assets (excluding cash and cash equivalents) as of a date as close as practicable to the Conversion. Beginning with our second calendar quarter of operations as a BDC, the base management fee is calculated based on the value of our total assets (excluding cash and cash equivalents) at the end of the most recently completed calendar quarter.

 

Additionally, the investment management agreement and the Amended and Restated Limited Partnership Agreement provide that the Advisor or its affiliates may be entitled to incentive compensation under certain circumstances. No incentive compensation was incurred prior to January 1, 2013. Beginning January 1, 2013, the incentive compensation equals the sum of (1) 20% of all of the ordinary income of TCPC since that date and (2) 20% of all net realized capital gains (net of any net unrealized capital depreciation) since that date, with each component being subject to a total return requirement of 8% of TCPC’s contributed common equity annually. The incentive compensation initially is payable to the General Partner by the Partnership pursuant to the Amended and Restated Limited Partnership Agreement. If the Partnership is terminated or for any other reason incentive compensation is not paid by the Partnership, it would be paid pursuant to the investment management agreement between us and the Advisor. The determination of incentive compensation is subject to limitations under the 1940 Act and the Advisers Act.

 

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Critical accounting policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our financial statements.

 

Valuation of portfolio investments

 

We value our portfolio investments at fair value based upon the principles and methods of valuation set forth in policies adopted by our board of directors. Fair value is defined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Market participants are buyers and sellers in the principal (or most advantageous) market for the asset that (i) are independent of us, (ii) are knowledgeable, having a reasonable understanding about the asset based on all available information (including information that might be obtained through due diligence efforts that are usual and customary), (iii) are able to transact for the asset, and (iv) are willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).

 

Investments for which market quotations are readily available are valued at such market quotations unless the quotations are deemed not to represent fair value. We generally obtain market quotations from recognized exchanges, market quotation systems, independent pricing services or one or more broker-dealers or market makers. However, short term debt investments with remaining maturities within 90 days are generally valued at amortized cost, which approximates fair value. Debt and equity securities for which market quotations are not readily available, which is the case for many of our investments, or for which market quotations are deemed not to represent fair value, are valued at fair value using a consistently applied valuation process in accordance with our documented valuation policy that has been reviewed and approved by our board of directors, who also approve in good faith the valuation of such securities as of the end of each quarter. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that we may ultimately realize. In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of our investments than on the fair values of our investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where we believe that facts and circumstances applicable to an issuer, a seller or purchaser, or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

 

The valuation process adopted by our board of directors with respect to investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value is as follows:

 

  The investment professionals of the Advisor provide recent portfolio company financial statements and other reporting materials to independent valuation firms approved by our board of directors.

 

  Such firms evaluate this information along with relevant observable market data to conduct independent appraisals each quarter, and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor.

 

 

The fair value of smaller investments comprising in the aggregate less than 5% of our total capitalization may be determined by the Advisor in good faith in accordance with our valuation policy without the employment of an independent valuation firm.

 

 

 

The audit committee of the board of directors discusses the valuations, and the board of directors approves the fair value of each investment in our portfolio in good faith based on the input of the Advisor, the respective independent valuation firms (to the extent applicable) and the audit committee of the board of directors.

 

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Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values.

 

When valuing all of our investments, we strive to maximize the use of observable inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of us. Unobservable inputs are inputs that reflect our assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

 

Our investments may be categorized based on the types of inputs used in their valuation. The level in the GAAP valuation hierarchy in which an investment falls is based on the lowest level input that is significant to the valuation of the investment in its entirety. Investments are classified by GAAP into the three broad levels as follows:

 

Level 1 — Investments valued using unadjusted quoted prices in active markets for identical assets.

 

Level 2 — Investments valued using other unadjusted observable market inputs, e.g. quoted prices in markets that are not active or quotes for comparable instruments.

 

Level 3 — Investments that are valued using quotes and other observable market data to the extent available, but which also take into consideration one or more unobservable inputs that are significant to the valuation taken as a whole.

 

As of March 31, 2013, 0.1% of our investments were categorized as Level 1, 34.0% were categorized as Level 2, 64.1% were Level 3 investments valued based on valuations by independent third party sources, and 1.8% were Level 3 investments valued based on valuations by the Advisor.

 

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the financial statements.

 

Revenue recognition

 

Interest and dividend income, including income paid in kind, is recorded on an accrual basis to the extent that such amounts are determined to be collectible. Origination, structuring, closing, commitment and other upfront fees earned with respect to capital commitments are generally amortized or accreted into interest income over the life of the respective debt investment. Other fees, including certain amendment fees, prepayment fees and commitment fees on broken deals, are recognized as earned. Prepayment fees and similar income received upon the early repayment of a loan or debt security are included in interest income.

 

Certain of our debt investments are purchased at a considerable discount to par as a result of the underlying credit risks and financial results of the issuer, as well as general market factors that influence the financial markets as a whole. GAAP generally requires that discounts on the acquisition of corporate bonds, municipal bonds and treasury bonds be amortized using the effective-interest or constant-yield method. GAAP also requires that we consider the collectability of interest when making accruals. Accordingly, when accounting for purchase discounts, we recognize discount accretion income when it is probable that such amounts will be collected.

 

Net realized gains or losses and net change in unrealized appreciation or depreciation

 

We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Realized gains and losses are computed using the specific identification method. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.

 

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Portfolio and investment activity

 

During the three months ended March 31, 2013, we invested approximately $40.3 million across 1 new and 4 existing portfolio companies. All of these investments were in senior secured debt comprised of senior loans ($32.9 million, or 82% of the total) and senior secured notes ($7.4 million, or 18% of the total). Additionally, we received approximately $51.0 million in proceeds from sales or repayments of investments during the three months ended March 31, 2013.

 

At March 31, 2013, our investment portfolio of $510.0 million (at fair value) consisted of 54 portfolio companies and was invested 93% in debt investments, of which 96% was in senior secured debt and 4% in unsecured or subordinated debt. In aggregate, our investment portfolio was invested 75% in senior secured loans, 14% in senior secured notes, 4% in unsecured or subordinated debt, and 7% in equity investments. Our average portfolio company investment at fair value was approximately $9.4 million. Our largest portfolio company investment by value was approximately $20.5 million and our five largest portfolio company investments by value comprised approximately 17% of our portfolio at March 31, 2013. At December 31, 2012, our investment portfolio of $517.7 million (at fair value) consisted of 54 portfolio companies and was invested 93% in debt investments, of which 96% was in senior secured debt and 4% in unsecured or subordinated debt. In aggregate, our investment portfolio was invested 77% in senior secured loans, 12% in senior secured notes, 4% in unsecured or subordinated debt, and 7% in equity investments. Our average portfolio company investment at fair value was approximately $9.6 million. Our largest portfolio company investment by value was approximately $19.4 million and our five largest portfolio company investments by value comprised approximately 17% of our portfolio at December 31, 2012. 

 

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The industry composition of our portfolio at fair value at March 31, 2013 was as follows:

 

   Percent of Total 
Industry  Investments 
Software Publishers   8.4%
Gaming Industries   6.1%
Wired Telecommunications Carriers   5.6%
Scheduled Air Transportation   5.0%
Radio and Television Broadcasting   4.9%
Electric Power Generation, Transmission and Distribution   3.7%
Full-Service Restaurants   3.5%
Other Electrical Equipment and Component Manufacturing   3.3%
Scientific Research and Development Services   3.2%
Accounting, Tax Preparation, Bookkeeping, and Payroll Services   3.1%
Business Support Services   3.1%
Nonferrous Metal Production and Processing   3.0%
Motion Picture and Video Industries   3.0%
Semiconductor and Other Electronic Component Manufacturing   2.8%
Grocery Stores   2.7%
Architectural, Engineering, and Related Services   2.7%
Metal and Mineral (except Petroleum) Merchant Wholesalers   2.6%
Wireless Telecommunications   2.6%
Motor Vehicle Parts Manufacturing   2.6%
Other Professional, Scientific, and Technical Services   2.4%
Other Amusement and Recreation Industries   2.3%
Electronic Shopping   2.3%
Computer Equipment Manufacturing   2.3%
Promoters of Performing Arts, Sports, and Similar Events   2.2%
Nondepository Credit Intermediation   2.0%
Retail   1.9%
Artificial Synthetic Fibers and Filaments Manufacturing   1.9%
Data Processing, Hosting, and Related Services   1.7%
Petroleum and Coal Products Manufacturing   1.7%
Pharmaceutical and Medicine Manufacturing   1.6%
Metal Ore Mining   1.5%
Iron and Steel Mills and Ferroalloy Manufacturing   1.3%
Insurance Related Activities   1.0%
Other   2.0%
Total   100.0%

 

The weighted average effective yield of the debt securities in our portfolio was 11.1% at March 31, 2013 and 11.3% at December 31, 2012. The weighted effective yields on our senior debt and other debt investments were 11.1% and 10.0%, respectively, at March 31, 2013, versus 11.4% and 9.9% at December 31, 2012.

 

At March 31, 2013, 69.3% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate, and 30.7% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 96.4% at March 31, 2013. At December 31, 2012, 63.8% of our debt investments bore interest based on floating rates and 36.2% bore interest at fixed rates. The percentage of our floating rate debt investments that bore interest based on an interest rate floor was 95.6% at December 31, 2012.

 

Results of operations

 

Results of operations of the Partnership for the three months ended March 31, 2013 are not directly comparable to the three months ended March 31, 2012, since the three months ended March 31, 2012 reflect a portfolio prior to the Conversion with different investment objectives.

 

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Investment income

 

Investment income totaled $16.9 million and $11.8 million, respectively, for the three months ended March 31, 2013 and 2012, of which $16.5 million and $9.8 million were attributable to interest and fees on our debt investments, $0.0 million and $1.8 million to dividends from equity securities and $0.4 million and $0.2 million to other income, respectively. The increase in investment income in the three months ended March 31, 2013 compared to the three months ended March 31, 2012 reflects an increase in interest income due to the larger investment portfolio and the higher percentage of the portfolio in income-producing assets in the three months ended March 31, 2013 compared to the three months ended March 31, 2012.

 

Expenses

 

Net expenses for the three months ended March 31, 2013 and 2012 were $2.7 million and $2.4 million, respectively, $2.0 million and $1.7 million in base management fees, $0.1 million and $0.1 million in legal and professional fees, $0.2 million and $0.1 million in interest expense and fees related to the Revolving Facility, $0.1 million and $0.1 million in amortization of debt issuance costs, and $0.3 million and $0.4 million in other expenses, respectively. The increase in expenses in the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily reflects the increase in management fees due to the larger portfolio.

 

Net investment income

 

Net investment income was $14.2 million and $9.4 million respectively, for the three months ended March 31, 2013 and 2012. The increase in in net investment income in the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily reflects the increase in interest and other income in the three months ended March 31, 2013, partially offset by the decline in dividend income and the increase in expenses.

 

Net realized and unrealized gain or loss

 

Net realized gains (losses) for the three months ended March 31, 2013 and 2012 were $0.5 million and $(5.3) million, respectively. The net realized losses during the three months ended March 31, 2012 were primarily due to a reorganization charge on one debt investment of $(5.5) million. For the three months ended March 31, 2013 and 2012, the change in net unrealized appreciation was $1.8 million and $0.4 million, respectively.

 

Dividends to preferred limited partners

 

Dividends on the Preferred Interests for the three months ended March 31, 2013 and 2012 were $0.4 million and $0.4 million, respectively, as average LIBOR rates for the two periods were similar.

 

 Incentive compensation

 

Incentive compensation distributable to the General Partner for the three months ended March 31, 2013 and 2012 was $2.7 million and $0.0 million, respectively.  Incentive compensation for the three months ended March 31, 2013 was distributable due to net investment income, net of preferred dividends, exceeding the total return threshold.  No incentive compensation was payable prior to January 1, 2013.  The reserve for incentive compensation to the General Partner for the three months ended March 31, 2013 and 2012 was $0.5 million and $0.0 million, respectively.  The reserve for incentive compensation for the three months ended March 31, 2013 reflects amounts in excess of distributable incentive compensation which would have been earned by the General Partner had TCPC and the Partnership liquidated at net asset value at March 31, 2013. 

 

Net increase or decrease in net assets allocable to common limited and general partners resulting from operations

 

The net increase in net assets allocable to common limited and general partners resulting from operations was $16.1 million and $4.1 million for the three months ended March 31, 2013 and 2012, respectively. The increased amount in the three months ended March 31, 2013 compared to the three months ended March 31, 2012 primarily reflects the increase in net investment income and the increase in net realized and unrealized gains.

 

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Liquidity and capital resources

 

Since our inception, our liquidity and capital resources have been generated primarily through contributions from the common limited partner of the Partnership (which came from the initial private placement of common shares of SVCF (the predecessor entity) which were subsequently converted to common stock of TCPC), net proceeds from the Offering, our preferred equity facility and our revolving credit facility (together, the “Leverage Program”), and cash flows from operations, including investments sales and repayments and income earned from investments and cash equivalents. The primary uses of cash have been investments in portfolio companies, cash distributions to our equity holders, payments to service our Leverage Program and other general corporate purposes.

 

Net cash provided by operating activities during the three months ended March 31, 2013 was $7.4 million. Our primary source of cash from operating activities during this period consisted of net investment income (net of non-cash income and expenses) of approximately $11.0 million, partially offset by settlement of acquisitions of investments (net of dispositions) of $3.6 million.

 

Net cash used in financing activities was $14.2 million during the three months ended March 31, 2013, consisting primarily of $9.8 million of distributions to our common limited partner, $0.4 million of dividends on our preferred equity facility (the “Preferred Interests”), and $4.0 million of net repayments under our revolving credit facility (the “Revolving Facility”).

 

At March 31, 2013, we had $11.2 million in cash and cash equivalents.

 

The Revolving Facility is secured by substantially all of the assets in our portfolio, including cash and cash equivalents. At March 31, 2013, we had $70.0 million drawn and outstanding under the Revolving Facility, with an additional $46.0 million available to us, subject to compliance with customary affirmative and negative covenants, including the maintenance of a minimum shareholders’ equity, the maintenance of ratios of not less than 300% of total assets (less total liabilities other than indebtedness) to total indebtedness and not less than 200% of total assets (less total liabilities other than indebtedness) to the sum of total preferred equity and indebtedness, and restrictions on certain payments and issuance of debt. Economic conditions, like those that began in 2007 and which have continued, may result in a decrease in the value of our investments, which would affect both the asset coverage ratios and the value of the collateral securing the Revolving Facility, and may therefore impact our ability to borrow under the Revolving Facility. In addition to regulatory restrictions that restrict our ability to raise capital, the Leverage Program contains various covenants which, if not complied with, could accelerate repayment under the Revolving Facility or require redemption of the Preferred Interests, thereby materially and adversely affecting our liquidity, financial condition and results of operations. At March 31, 2013, we were in compliance with all financial and operational covenants required by the Revolving Facility.

 

Economic conditions, like those that began in 2007 and which have continued, while creating attractive opportunities for us, may decrease liquidity and raise the cost of capital generally, which could limit our ability to renew, extend or replace the Leverage Program on terms as favorable as are currently included therein. If we are unable to renew, extend or replace the Leverage Program upon its maturity, we expect to have sufficient funds to repay the outstanding balance in full from our net investment income and sales of, and repayments of principal from, our portfolio company investments, as well as from anticipated debt and equity capital raises, among other sources. Economic conditions, like those that began in 2007 and which have continued, may limit our ability to raise capital or the ability of the companies in which we invest to repay our loans or engage in a liquidity event, such as a sale, recapitalization or initial public offering. The Revolving Facility matures in July 2014 and the Preferred Interests will be subject to mandatory redemption in July 2016. Any inability to renew, extend or replace the Revolving Facility or replace the Preferred Interests could adversely impact our liquidity and ability to find new investments or maintain distributions to our common limited partner.

 

Contractual obligations

 

Our Revolving Facility is a senior secured revolving credit facility with certain lenders pursuant to which amounts may be drawn up to $116 million. The Revolving Facility matures on July 31, 2014, and may be extended at our option for one 12-month period. At March 31, 2013, $70 million in advances were outstanding under the Revolving Facility, all of which were short-term draws of less than one year.

 

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We have also entered into several contracts under which we have future commitments. Pursuant to an investment management agreement, the Advisor manages our day-to-day operations and provides investment advisory services to us. Payments under the investment management agreement will be equal to a percentage of the value of our gross assets (excluding cash and cash equivalents) and an incentive compensation, plus reimbursement of certain expenses incurred by the Advisor. Under our administration agreement, the Administrator provides us with administrative services, facilities and personnel. Payments under the administration agreement are equal to an allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations to us, and may include rent and our allocable portion of the cost of certain of our officers and their respective staffs. We are responsible for reimbursing the Advisor for due diligence and negotiation expenses, fees and expenses of custodians, administrators, transfer and distribution agents, counsel and directors, insurance, filings and registrations, proxy expenses, expenses of communications to investors, compliance expenses, interest, taxes, portfolio transaction expenses, costs of responding to regulatory inquiries and reporting to regulatory authorities, costs and expenses of preparing and maintaining our books and records, indemnification, litigation and other extraordinary expenses and such other expenses as are approved by the directors as being reasonably related to the organization, offering, capitalization, operation or administration of the Partnership and any portfolio investments, as applicable. The Advisor is not responsible for any of the foregoing expenses and such services are not investment advisory services under the 1940 Act. Either party may terminate each of the investment management agreement and administration agreement without penalty upon not less than 60 days’ written notice to the other.

 

Distributions to the common limited partner

 

Our quarterly distributions to our common limited partner are recorded on the ex-dividend date and are determined under guidelines established by our board of directors. Distributions are declared considering our estimate of annual taxable income available for distribution to limited partners and the amount of taxable income carried over from the prior year for distribution in the current year. We do not have a policy to pay distributions at a specific level and expect to continue to distribute substantially all of our taxable income. We cannot assure limited partners that they will receive any distributions or distributions at a particular level.

 

The following table summarizes our distributions to our common limited partner for the three months ended March 31, 2013 and 2012:

 

Payment Date  Total
Amount
 
March 17, 2013  $8,906,331 
Total for three months ended March 31, 2013  $8,906,331 
      
March 9, 2012  $5,400,000 
Total for three months ended March 31, 2012  $5,400,000 

 

Related Parties

 

We have entered into a number of business relationships with affiliated or related parties, including the following:

 

  Each of the TCPC and the Partnership has entered into an investment management agreement with the Advisor.

 

  The Administrator provides us with administrative services necessary to conduct our day-to-day operations. For providing these services, facilities and personnel, the Administrator may be reimbursed by us for expenses incurred by the Administrator in performing its obligations under the administration agreement, including our allocable portion of the cost of certain of our officers and the Administrator’s administrative staff and providing, at our request and on our behalf, significant managerial assistance to our portfolio companies to which we are required to provide such assistance.

 

  Pursuant to its limited partnership agreement, the general partner of the Partnership is SVOF/MM, LLC. SVOF/MM, LLC is an affiliate of the Advisor and the general partners or managing member of certain other funds managed by the Advisor.

 

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The Advisor and its affiliates, employees and associates currently do and in the future may manage other funds and accounts. The Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds or accounts. Accordingly, conflicts may arise regarding the allocation of investments or opportunities among us and those accounts. In general, the Advisor will allocate investment opportunities pro rata among us and the other funds and accounts (assuming the investment satisfies the objectives of each) based on the amount of committed capital each then has available. The allocation of certain investment opportunities in private placements is subject to independent director approval pursuant to the terms of the co-investment exemptive order applicable to us. In certain cases, investment opportunities may be made other than on a pro rata basis. For example, we may desire to retain an asset at the same time that one or more other funds or accounts desire to sell it or we may not have additional capital to invest at a time the other funds or accounts do. If the Advisor is unable to manage our investments effectively, we may be unable to achieve our investment objective. In addition, the Advisor may face conflicts in allocating investment opportunities between us and certain other entities that could impact our investment returns. While our ability to enter into transactions with our affiliates will be restricted under the 1940 Act, we have received an exemptive order from the SEC permitting certain affiliated investments subject to certain conditions. As a result, we may face conflict of interests and investments made pursuant to the exemptive order conditions which could in certain circumstances affect adversely the price paid or received by us or the availability or size of the position purchased or sold by us.

 

Recent Developments

 

From April 1, 2013 through May 3, 2013, the Partnership has invested approximately $62.5 million in six loans with an effective yield of approximately 9.3%.

 

On May 1, 2013, the Common Limited Partner and the preferred limited partners voted to add an additional director, Rajneesh Vig, to the Board of Directors effective as of May 1, 2013.

 

On May 8, 2013, the TCPC’s board of directors declared a second quarter cash dividend to its stockholders of $0.36 per share, payable on June 28, 2013 to its stockholders of record as of the close of business on June 7, 2013.

 

Item 3: Quantitative and qualitative disclosure about market risk

 

We are subject to financial market risks, including changes in interest rates. At March 31, 2013, 69.3% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At March 31, 2013, the percentage of our floating rate debt investments that bore interest based on an interest rate floor was 96.4%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

 

Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

 

Based on our March 31, 2013 balance sheet, the following table shows the annual impact on net income of base rate changes in interest rates (considering interest rate floors for variable rate instruments) assuming no changes in our investment and borrowing structure:

 

Basis Point Change  Interest income   Interest Expense   Net Income 
Up 300 basis points  $6,414,658   $(6,120,000)  $294,658 
Up 200 basis points  $3,087,323   $(4,080,000)  $(992,677)
Up 100 basis points  $290,343   $(2,040,000)  $(1,749,657)
Down 100 basis points  $(47,569)  $563,244   $515,675 
Down 200 basis points  $(47,569)  $563,244   $515,675 
Down 300 basis points  $(47,569)  $563,244   $515,675 

 

Item 4. Controls and Procedures

 

As of the period covered by this report, we, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on our evaluation, our management, including the chief executive officer and chief financial officer, concluded that our disclosure controls and procedures were effective in timely alerting management, including the chief executive officer and chief financial officer, of material information about us required to be included in our periodic SEC filings. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, are based upon certain assumptions about the likelihood of future events and can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. There has not been any change in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II – Other Information

 

  Item 1. Legal Proceedings

 

Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, as of March 31, 2013, we are currently not a party to any pending material legal proceedings.

 

  Item 1A. Risk Factors

 

There have been no material changes from the risk factors previously disclosed in TCPC’s most recent registration statement, as filed with the Securities and Exchange Commission on April 1, 2013.

 

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

 

None.

 

  Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4: Mine Safety Disclosures.

 

None.

 

Item 5: Other Information.

 

None.

 

Item 6: Exhibits

 

3.1 Form of Amended and Restated Limited Partnership Agreement (4)
3.2 Bylaws of TCP Capital Corp. (1)
4.1 Statement of Preferences of Preferred Interests (2)
10.1 Form of Amended and Restated Investment Management Agreement by and between Special Value Continuation Partners, LP and Tennenbaum Capital Partners, LLC (4)
10.2 Form of Administration Agreement of Special Value Continuation Partners, LP (4)
10.3 Form of Underwriting Agreement (1)
10.4 Custodial Agreement, dated as of July 31, 2006 (4)
10.5 Credit Agreement, dated July 31, 2006 (4)
10.6 First Amendment to Credit Agreement, dated February 28, 2011 (4)
11 Computation of Per Share Earnings (included in the notes to the financial statements contained in this report)
12 Computation of Ratios (included in the notes to the financial statements contained in this report)
22 Published report regarding matters submitted to vote of security holders (5)
23.1 Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Registrant (6)
23.2 Consent of independent registered public accounting firm (6)
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 *
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 *
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 *

_____________

* Filed herewith.

 

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(1) Incorporated by reference to TCP Capital Corp.’s (formerly Special Value Continuation Fund, LLC) Registration Statement under the Securities Act of 1933, as amended, on Form N-2 (File No. 333-172669), filed on May 13, 2011.
(2) Incorporated by reference to Exhibit D to TCP Capital Corp.’s (formerly Special Value Continuation Fund, LLC) Registration Statement on Form N-2 (File No. 811-21935) filed on October 31, 2006.
(3) Incorporated by reference to TCP Capital Corp.'s Registration Statement under the Securities Act of 1933, as amended, on Form N-2 (File No. 333-172669), filed on March 5, 2012.
(4) Incorporated by reference to Form 10-12G of the Registrant (File No. 000-54393), filed May 6, 2011.
(5) Incorporated by reference to Item 5.07 of TCP Capital Corp.’s  Form 8-K filed on May 6, 2013.
(6) Incorporated by reference to TCP Capital Corp.’s (formerly Special Value Continuation Fund, LLC) Registration Statement under the Securities Act of 1933 (File No. 333-185319), on Form N-2, filed on April 1, 2013.

 

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SIGNATURES

 

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

 

SPECIAL VALUE CONTINUATION PARTNERS, LP

  

Date:   May 8, 2013    
  By: /s/ Howard M. Levkowitz
  Name: Howard M. Levkowitz
  Title: Chief Executive Officer
     
Date:   May 8, 2013    
  By: /s/ Paul L. Davis
  Name: Paul L. Davis
  Title: Chief Financial Officer

 

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