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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2013

OR

 

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

For the transition period from                      to                     

Commission file number 814-00789

 

 

THL CREDIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   27-0344947

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at November 4, 2013 was 33,905,202.

 

 

 


Table of Contents

THL CREDIT, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013

Table of Contents

 

   

INDEX

   PAGE
NO.
 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Consolidated Statements of Assets and Liabilities as of September 30, 2013 (unaudited) and December 31, 2012      2   
  Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)      3   
  Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2013 and 2012 (unaudited)      4   
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)      5   
  Consolidated Schedules of Investments as of September 30, 2013 (unaudited) and December 31, 2012      6   
  Notes to Consolidated Financial Statements (unaudited)      19   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      40   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      63   

Item 4.

  Controls and Procedures      64   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      64   

Item 1A.

  Risk Factors      64   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      67   

Item 3.

  Defaults Upon Senior Securities      67   

Item 4.

  Mine Safety Disclosures      68   

Item 5.

  Other Information      68   

Item 6.

  Exhibits      68   

SIGNATURES 

       69   


Table of Contents

PART 1. FINANCIAL INFORMATION

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

 

Item 1. Financial Statements

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Assets and Liabilities

(in thousands, except per share data)

 

     September 30,
2013
(unaudited)
    December 31,
2012
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $571,168 and $391,699, respectively)

   $ 571,686      $ 394,339   

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

     10        10   
  

 

 

   

 

 

 

Total investments at fair value (cost of $571,178 and $391,709, respectively)

     571,696        394,349   

Cash

     10,008        4,819   

Deferred financing costs

     4,295        3,817   

Interest receivable

     8,286        2,594   

Escrow receivable

     2,000        —     

Due from affiliate

     904        420   

Receivable for paydown of investments

     608        125   

Prepaid expenses and other assets

     450        134   
  

 

 

   

 

 

 

Total assets

   $ 598,247      $ 406,258   
  

 

 

   

 

 

 

Liabilities:

    

Loans payable

   $ 125,900      $ 50,000   

Payable for investment purchased

     9,100        —     

Accrued incentive fees

     3,543        3,279   

Base management fees payable

     2,081        1,514   

Deferred tax liability

     1,436        454   

Accrued expenses

     843        739   

Due to affiliate

     580        —     

Accrued credit facility fees and interest

     513        115   

Interest rate derivative

     314        1,053   

Income taxes payable

     109        —     

Accrued administrator expenses

     50        304   

Dividends payable

     —          1,316   
  

 

 

   

 

 

 

Total liabilities

     144,469        58,774   

Commitments and contingencies (Note 8)

    

Net Assets:

    

Preferred stock, par value $.001 per share, 100,000 preferred shares authorized, no preferred shares issued and outstanding

     —          —     

Common stock, par value $.001 per share, 100,000 common shares authorized, 33,905 and 26,315 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively.

     34        26   

Paid-in capital in excess of par

     449,893        343,723   

Net unrealized (depreciation) appreciation on investments, net of provision for taxes of $1,436 and $454, respectively

     (918     2,187   

Net unrealized depreciation on interest rate derivative

     (314     (1,053

Interest rate derivative periodic interest payments, net

     (500     (180

Accumulated undistributed net realized gains

     —          348   

Accumulated undistributed net investment income

     5,583        2,433   
  

 

 

   

 

 

 

Total net assets

     453,778        347,484   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 598,247      $ 406,258   
  

 

 

   

 

 

 

Net asset value per share

   $ 13.38      $ 13.20   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

2


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

 

     Three months  ended
September 30,
    Nine months  ended
September 30,
 
     2013     2012     2013     2012  

Investment Income:

        

From non-controlled, non-affiliated investments:

        

Interest income

   $ 17,694      $ 13,570      $ 48,472      $ 34,724   

Dividend income

     356        —          4,884        —     

Other income

     142        109        687        240   

From non-controlled, affiliated investment:

        

Other income

     872        558        2,116        1,782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     19,064        14,237        56,159        36,746   

Expenses:

        

Base management fees

     2,081        1,282        5,278        3,429   

Incentive fee

     2,053        1,697        8,093        4,759   

Credit facility interest and fees

     1,403        1,026        3,898        2,239   

Administrator expenses

     800        726        2,450        2,227   

Other general and administrative expenses

     508        363        1,354        981   

Professional fees

     311        278        953        841   

Amortization of debt issuance costs

     274        259        1,039        708   

Directors’ fees

     152        129        438        399   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     7,582        5,760        23,503        15,583   

Income tax (benefit) provision

     (120     —          376        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     11,602        8,477        32,280        21,163   

Realized and Unrealized Gain on Investments:

        

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

     (390     —          2,393        —     

Income tax benefit, realized gain

     1,097        —          —          —     

Net change in unrealized appreciation on investments:

        

Non-controlled, non-affiliated investments

     (3,141     (1,687     (2,123     (2,125

Non-controlled, affiliated investments

     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation on investments

     (3,141     (1,687     (2,123     (2,126
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for taxes on unrealized gain on investments

     (1,050     —          (981     —     

Interest rate derivative periodic interest payments, net

     (113     (87     (321     (86

Unrealized depreciation on interest rate derivative

     (248     (534     739        (1,109
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 7,757      $ 6,169      $ 31,987      $ 17,842   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share:

        

Basic and diluted

   $ 0.34      $ 0.41      $ 1.11      $ 1.04   

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

        

Basic and diluted

   $ 0.23      $ 0.30      $ 1.10      $ 0.88   

Weighted average shares of common stock outstanding:

        

Basic and diluted

     33,905        20,618        29,068        20,354   

See accompanying notes to these consolidated financial statements.

 

3


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except per share data)

 

     For the nine months ended September 30,  
     2013     2012  

Increase in net assets from operations:

    

Net investment income

   $ 32,280      $ 21,163   

Interest rate derivative periodic interest payments, net

     (321     (86

Realized gain on investments

     2,393        —     

Net change in unrealized appreciation on investments

     (2,123     (2,126

Provision for taxes on unrealized gain on investments

     (981     —     

Net change in unrealized depreciation on interest rate derivative

     739        (1,109
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     31,987        17,842   

Distributions to stockholders

     (31,871     (19,412

Capital share transactions:

    

Issuance of common stock

     110,966        85,879   

Less offering costs

     (4,788     (4,176
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     106,178        81,703   
  

 

 

   

 

 

 

Total increase in net assets

     106,294        80,133   

Net assets at beginning of period

     347,484        267,617   
  

 

 

   

 

 

 

Net assets at end of period

   $ 453,778      $ 347,750   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     33,905        26,315   
  

 

 

   

 

 

 

Capital share activity:

    

Shares sold

     7,590        6,095   
  

 

 

   

 

 

 
     7,590        6,095   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

4


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     For the nine months ended September 30,  
     2013     2012  

Cash flows from operating activities

    

Net increase in net assets resulting from operations

   $ 31,987      $ 17,842   

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

    

Increase in payable for investment purchased

     9,100        —     

Net change in unrealized appreciation on investments

     2,123        2,126   

Unrealized depreciation on interest rate derivative

     (739     1,109   

Purchases of investments

     (297,159     (172,105

Proceeds from sale and paydown of investments

     123,142        73,107   

Increase in investments due to PIK

     (2,590     (2,928

Amortization of deferred financing costs

     1,039        708   

Accretion of discounts on investments and other fees

     (3,346     (2,009

Increase in interest receivable

     (5,692     (2,500

Increase in escrow receivable

     (2,000     —     

Increase in due from affiliate

     (484     (106

Increase in prepaid expenses and other assets

     (316     (18

Increase in accrued expenses

     78        188   

Increase in accrued credit facility fees and interest

     398        122   

Increase in income taxes payable

     109        —     

Increase in deferred tax liability

     982        —     

Increase in base management fees payable

     567        269   

Decrease in accrued administrator expenses

     (255     (316

Increase in incentive fees payable

     265        214   

Decrease in dividends payable

     (1,316     —     

Increase (decrease) in due to affiliate

     580        (21
  

 

 

   

 

 

 

Net cash used in operating activities

     (143,527     (84,318

Cash flows from financing activities

    

Borrowings under credit facility

     311,600        184,900   

Repayments under credit facility

     (235,700     (139,900

Issuance of shares of common stock

     110,966        85,878   

Offering costs paid

     (4,788     (3,849

Distributions paid to stockholders

     (31,871     (19,411

Increase in deferred financing costs

     (1,491     (2,924
  

 

 

   

 

 

 

Net cash provided by financing activities

     148,716        104,694   
  

 

 

   

 

 

 

Net increase in cash

     5,189        20,376   

Cash, beginning of period

     4,819        5,573   
  

 

 

   

 

 

 

Cash, end of period

   $ 10,008      $ 25,949   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash interest paid

   $ 2,536      $ 948   

Income taxes paid

   $ 621      $ —     

See accompanying notes to these consolidated financial statements.

 

5


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited)

September 30, 2013

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No. of  Shares /
No. of Units
     Cost      Fair Value  

Non-controlled/non-affiliated
investments —125.99% of net
asset value

                    

20-20 Technologies Inc.

                    

Senior Secured Term Loan(4)

   IT Services    13.3%(5)      09/12/12         09/12/17       $ 13,738       $ 13,450       $ 13,634   
                 

 

 

    

 

 

 
                    13,450         13,634   

Adirondack Park CLO Ltd.

                    

Subordinated Notes,
Residual Interest
(4)

   Financial services    13.7%(12)      03/27/13         04/15/24       $ 10,000         9,336         9,300   
                 

 

 

    

 

 

 
                    9,336         9,300   

AIM Media Texas Operating,
LLC

                    

Second Lien Loan

   Media, entertainment and leisure   

16.0%(6)

(13.0%

Cash and 3.0% PIK)

     06/21/12         06/21/17       $ 5,830         5,711         6,005   

Member interest(7)(8)

           06/21/12         —           0.763636         764         1,000   
                 

 

 

    

 

 

 
                    6,475         7,005   

Airborne Tactical Advantage
Company, LLC

                    

Senior Secured Note

   Aerospace & defense    11.0%      09/07/11         03/07/16       $ 4,000         3,883         3,960   

Class A Warrants(9)

           09/07/11         —           511,812         113         135   

Series A Preferred Stock(9)

           09/17/13         —           225,000         169         255   
                 

 

 

    

 

 

 
                    4,165         4,350   

Blue Coat Systems, Inc.

                    

Second Lien Term Loan

   IT Services   

9.5% (LIBOR

+ 8.5%)

     06/27/13         06/27/20       $ 15,000         14,855         15,000   
                 

 

 

    

 

 

 
                    14,855         15,000   

C&K Market, Inc.

                    

Senior Subordinated Note

   Retail & grocery    18.0%(19)      11/03/10         11/03/15       $ 13,650         13,302         10,237   

Warrant for Class B

           11/03/10         —           156,552         349         —     
                 

 

 

    

 

 

 
                    13,651         10,237   

Connecture, Inc.

                    

Second Lien Term Loan

   Healthcare   

12.5% (LIBOR

+ 11.0%)

     03/18/13         07/15/18       $ 7,000         6,870         7,000   
                 

 

 

    

 

 

 
                    6,870         7,000   

Country Pure Foods, LLC

                    

Subordinated Term Loan

   Food & beverage    13.0%      08/13/10         02/13/17       $ 16,181         16,181         16,060   
                 

 

 

    

 

 

 
                    16,181         16,060   

CRS Reprocessing, LLC

                    

Senior Secured Term Loan

   Manufacturing   

10.5% (LIBOR

+ 9.5%)

     06/16/11         06/16/15       $ 18,302         18,227         18,302   
                 

 

 

    

 

 

 
                    18,227         18,302   

Cydcor LLC

                    

Senior Secured Term Loan

   Business services   

9.8% (LIBOR

+7.3%)

     06/17/13         06/12/17       $ 13,727         13,727         13,727   
                 

 

 

    

 

 

 
                    13,727         13,727   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

6


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

September 30, 2013

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost      Fair Value  

Dr. Fresh, LLC

                    

Subordinated Term Loan

   Consumer products   

14.0%(6)

(12.0% Cash and 2.0% PIK)

     05/15/12         11/15/17       $ 14,374         14,139         14,302   
                 

 

 

    

 

 

 
                    14,139         14,302   

Dryden CLO, Ltd.

                    

Subordinated Notes, Residual Interest(4)

   Financial services    13.5%(12)      09/12/13         11/15/25       $ 10,000         9,100         9,200   
                 

 

 

    

 

 

 
                    9,100         9,200   

Duff & Phelps Corporation

                    

Tax Receivable Agreement Payment Rights(11)

   Financial services    17.2%(12)      06/01/12         12/31/29         —           12,262         14,381   

Senior Secured Term Loan(11)

     

4.5% (LIBOR

+ 3.5%)

     05/15/13         04/23/20       $ 249         253         251   
                 

 

 

    

 

 

 
                    12,515         14,632   

Embarcadero Technologies, Inc.

                    

First Lien Term Loan

   IT Services    10.2%(5)      02/15/13         12/28/17       $ 9,946         9,812         9,846   
                 

 

 

    

 

 

 
                    9,812         9,846   

Expert Global Solutions, Inc.

                    

Second Lien Term Loan

   Business services   

12.5% (LIBOR

+ 10.2% and 0.8% PIK)

     06/21/13         10/03/18       $ 18,727         18,997         18,997   
                 

 

 

    

 

 

 
                    18,997         18,997   

Express Courier International, Inc.

                    

Secured Subordinated Term Loan

   Business services   

15.0%(13)

(PIK)

     01/17/12         07/17/16       $ 7,766         7,652         6,368   
                 

 

 

    

 

 

 
                    7,652         6,368   

Firebirds International, LLC

                    

Common stock(9)

   Restaurants         05/17/11            1,906         191         234   
                 

 

 

    

 

 

 
                    191         234   

Food Processing Holdings, LLC

                    

Senior Subordinated Note (15)

   Food & beverage   

15.0%(6)

(12.0% Cash

and 3.0% PIK)

     02/28/12         08/28/17       $ 14,165         14,059         14,165   

Class A Units(9)

           04/20/10            162.44         163         202   

Class B Units(9)

           04/20/10            406.09         408         150   
                 

 

 

    

 

 

 
                    14,630         14,517   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

7


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

September 30, 2013

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest
Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost      Fair Value  

Freeport Financial SBIC Fund LP

                    

Member interest(17)

   Financial services         06/14/13            —           147         147   
                 

 

 

    

 

 

 
                    147         147   

Gold, Inc.

                    

Subordinated Term Loan

   Consumer products   

15.0%(6)

(13.0% Cash and 2.0% PIK)

     12/31/12         12/31/17       $ 16,647         16,352         16,647   
                 

 

 

    

 

 

 
                    16,352         16,647   

Gryphon Partners 3.5, L.P.

                    

Partnership interest (17)

   Financial services         11/20/12         12/21/18         —           143         384   
                 

 

 

    

 

 

 
                    143         384   

Harrison Gypsum, LLC

                    

Senior Secured Term Loan

   Industrials   

10.5%(6)

(LIBOR +

8.5% and 0.5% PIK)

     12/21/12         12/21/17       $ 24,623         24,300         24,500   
                 

 

 

    

 

 

 
                    24,300         24,500   

Hart InterCivic, Inc.

                    

Senior Secured Term Loan

   IT Services    10.5% (LIBOR + 9.0%)      07/01/11         07/01/16       $ 8,775         8,667         8,643   

Senior Secured Revolving Loan(10)

      10.5% (LIBOR + 9.0%)      07/01/11         07/01/16       $ 800         767         800   
                 

 

 

    

 

 

 
                    9,434         9,443   

HEALTHCAREfirst, Inc.

                    

Senior Secured Term Loan

   Healthcare    11.5%(5)      08/31/12         08/30/17       $ 9,300         9,068         8,881   
                 

 

 

    

 

 

 
                    9,068         8,881   

Holland Intermediate Acquisition Corp.

                    

Senior Secured Term Loan

   Energy / Utilities    10.0% (LIBOR + 9.0%)      05/29/13         05/29/18       $ 24,227         23,730         23,730   
                 

 

 

    

 

 

 
                    23,730         23,730   

Ingenio Acquisition, LLC

                    

Senior Secured Term Loan

   Media, entertainment and leisure   

12.8% (6)

(11.3% Cash and 1.5% PIK)

     05/10/13         05/10/18       $ 9,636         9,455         9,492   
                 

 

 

    

 

 

 
                    9,455         9,492   

Jefferson Management Holdings, LLC

                    

Member interest(7)(8)

   Healthcare         04/20/10            1,393         1,393         937   
                 

 

 

    

 

 

 
                    1,393         937   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

8


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

September 30, 2013

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost     Fair Value  

Key Brand Entertainment, Inc.

                   

Senior Secured Term Loan

   Media, entertainment and leisure    9.8% (LIBOR + 8.50%)      08/08/13         08/08/18       $ 13,178         12,921        12,921   

Senior Secured Revolving
Loan
(10)(14)

      9.8% (LIBOR + 8.50%)      08/08/13         08/08/18       $ —           (29     —     
                 

 

 

   

 

 

 
                    12,892        12,921   

LCP Capital Fund LLC

                   

Member interest(8)(16)(17)

   Financial services    12.6%(12)      04/20/10         02/15/15       $ 8,354         8,354        8,354   
                 

 

 

   

 

 

 
                    8,354        8,354   

Loadmaster Derrick & Equipment,
Inc.

                   

Senior Secured Term Loan

   Energy / Utilities    9.3% (LIBOR + 8.3%)      09/28/12         09/28/17       $ 9,709         9,493        9,370   
                 

 

 

   

 

 

 
                    9,493        9,370   

Martex Fiber Southern Corp.

                   

Subordinated Term Loan

   Industrials   

13.5%(6)

(12.0% Cash and 1.5% PIK)

     04/30/12         10/31/19       $ 8,856         8,741        8,502   
                 

 

 

   

 

 

 
                    8,741        8,502   

NCM Group Holdings, LLC

                   

Senior Secured Term Loan

   Industrials    12.5% (LIBOR + 11.5%)      08/29/13         08/29/18       $ 26,727         25,672        25,672   
                 

 

 

   

 

 

 
                    25,672        25,672   

Oasis Legal Finance Holding
Company LLC

                   

Second Lien Term Loan

   Financial services    10.5%      09/30/13         09/30/18       $ 23,943         23,465        23,465   
                 

 

 

   

 

 

 
                    23,465        23,465   

Octagon Income Note XIV, Ltd.

                   

Income Notes, Residual
Interest
(4)

   Financial services    15.5%(12)      12/19/12         01/15/24       $ 9,304         8,805        8,711   
                 

 

 

   

 

 

 
                    8,805        8,711   

OEM Group, Inc.

                   

Senior Secured Note

   Manufacturing   

15.0%(6)

(12.5% Cash

and 2.5%

PIK)

     10/07/10         10/07/15       $ 15,066         14,855        14,312   

Warrant for Common

           10/07/10         —           —           —          —     
                 

 

 

   

 

 

 
                    14,855        14,312   

SeaStar Solutions (f.k.a. Marine
Acquisition Corp)

                   

Senior Subordinated Note

   Manufacturing   

13.5%(6)

(11.5% Cash

and 2.0%

PIK)

     09/18/12         05/18/17       $ 16,500         16,192        16,500   
                 

 

 

   

 

 

 
                    16,192        16,500   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

9


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

September 30, 2013

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost      Fair Value  

Sheplers, Inc.

                    

Senior Secured (2nd lien)
Term Loan

   Retail & grocery   

13.2%

(LIBOR + 11.7%)

     12/20/11         12/20/16       $ 11,426         11,219         11,255   

Mezzanine Loan

     

17.0%(18)

(10.0% Cash and 7.0% PIK)

     12/20/11         12/20/17       $ 1,871         1,845         1,848   
                 

 

 

    

 

 

 
                    13,064         13,103   

Sheridan Square CLO, Ltd

                    

Income Notes, Residual
Interest
(4)

   Financial services    13.2%(12)      03/12/13         04/15/25       $ 6,338         6,225         6,213   
                 

 

 

    

 

 

 
                    6,225         6,213   

Specialty Brands Holdings, LLC

                    

Second Lien Term Loan

   Restaurants   

11.3% (LIBOR

+ 9.8%)

     07/16/13         07/16/18       $ 20,977         20,571         20,571   
                 

 

 

    

 

 

 
                    20,571         20,571   

The Studer Group, L.L.C.

                    

Senior Subordinated Note

   Healthcare    12.0%      09/29/11         1/31/19       $ 16,910         16,910         16,910   
                 

 

 

    

 

 

 
                    16,910         16,910   

Surgery Center Holdings, Inc.

                    

Second Lien Term Loan

   Healthcare   

9.8% (LIBOR

+ 8.5%)

     04/19/13         04/11/20       $ 15,000         14,642         15,000   

Member interest(8)(9)

           04/20/10            469,673         470         2,000   
                 

 

 

    

 

 

 
                    15,112         17,000   

Tri Starr Management Services,
Inc.

                    

Senior Subordinated Note

   IT Services    15.0%(6) (12.5% Cash and 2.5% PIK)      03/04/13         03/04/19       $ 18,183         17,847         17,865   
                 

 

 

    

 

 

 
                    17,847         17,865   

Trinity Services Group, Inc.

                    

Senior Subordinated Note

   Food & beverage    14.5%(6) (12.0% Cash and 2.5% PIK)      03/29/12         09/29/17       $ 14,305         14,138         13,876   
                 

 

 

    

 

 

 
                    14,138         13,876   

Vision Solutions, Inc.

                    

Second Lien Term Loan

   IT Services    9.5% (LIBOR + 8.0%)      03/31/11         07/23/17       $ 11,625         11,558         11,625   
                 

 

 

    

 

 

 
                    11,558         11,625   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

10


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

September 30, 2013

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No. of  Shares /
No. of Units
     Cost      Fair Value  

Washington Inventory Service

                    

Senior Secured Term Loan

   Business services   

10.3% (LIBOR

+ 9.0%)

     12/27/12         06/20/19       $ 11,000         10,854         11,165   
                 

 

 

    

 

 

 
                    10,854         11,165   

Wingspan Portfolio Holdings, Inc.

                    

Subordinated Term Loan

   Financial services   

13.5% (6)

(12.0% Cash

and 1.5%

PIK)

     05/21/13         11/21/16       $ 18,768         18,425         17,079   
                 

 

 

    

 

 

 
                    18,425         17,079   

YP Equity Investors, LLC

                    

Member interest(7)(8)

   Media, entertainment and leisure         05/08/12         —           —           —           1,600   
                 

 

 

    

 

 

 
                    —           1,600   
                 

 

 

    

 

 

 

Non-controlled/non-affiliated investments—125.99% of net asset value

                  $ 571,168       $ 571,686   
                 

 

 

    

 

 

 
                    
                    

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

                    

THL Credit Greenway Fund LLC

                    

Member interest(8)(17)

   Financial services         01/27/11         1/14/2021         —           6         6   
                 

 

 

    

 

 

 
                    6         6   

THL Credit Greenway Fund II LLC

                    

Member interest(8)(17)

   Financial services         03/01/13            —           4         4   
                 

 

 

    

 

 

 
                    4         4   
                 

 

 

    

 

 

 

Total investments—125.99% of net asset value

                  $ 571,178       $ 571,696   
                 

 

 

    

 

 

 
                    

 

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

ING Capital Markets, LLC

  

Interest Rate Swap –

Pay Fixed/Receive

Floating

   1.1425%/LIBOR      5/10/2017       1    $ 50,000       $ —         $ (314
                 

 

 

    

 

 

 

Total derivative instruments—(0.07%) of net asset value

            $ —         $ (314
                 

 

 

    

 

 

 

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

11


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited)

September 30, 2013

(dollar amounts in thousands)

 

(1) All debt investments are income-producing. Equity and member interests are non-income-producing unless otherwise noted.
(2) Variable interest rate investments bear interest in reference to LIBOR or ABR, which are effective as of September 30, 2013. These variable rates reset monthly or quarterly, subject to interest rate floors.
(3) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(4) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(5) Unitranche investment; interest rate reflected represents the effective yield earned on the investment for the most recent quarter.
(6) At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the company.
(7) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(8) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(9) Equity ownership may be held in shares or units of companies related to the portfolio company.
(10) Issuer pays 0.50% unfunded commitment fee on revolving loan facility.
(11) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(12) Income-producing security with no stated coupon; interest rate reflects an estimation of an effective yield to expected maturity as of September 30, 2013.
(13) Loan was on non-accrual status as of September 30, 2013. Issuer’s contractual rate is 15.0% PIK until December 31, 2013 and then 13.0% cash thereafter.
(14) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(15) Interest held in companies related to the portfolio company.
(16) The Company’s investment in LCP Capital Fund LLC is in the form of membership interests and its contributed capital is for the most recent quarter maintained in a collateral account held by a custodian and acts as collateral for certain credit default swaps for the Series 2005-1 equity interest. See Note 2 in the Notes to the Consolidated Financial Statements.
(17) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
 
(18) Issuer has the option to increase its aggregate interest rate to 18.5% all PIK for a period of time under certain conditions in the credit agreement.
(19) Loan was on non-accrual status as of September 30, 2013. Contractual default rate of interest is 18.0%.

See accompanying notes to these consolidated financial statements.

 

12


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments

December 31, 2012

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost      Fair Value  

Non-controlled/non-affiliated
investments—113.49% of
net asset value

                    

20-20 Technologies Inc.

                    

Senior Secured Term
Loan
(4)

   IT Services   

13.2%(5)

(LIBOR + 11.0%)

     09/12/12         09/12/17       $ 14,000       $ 13,666       $ 13,666   
                 

 

 

    

 

 

 
                    13,666         13,666   

AIM Media Texas Operating, LLC

                    

Second Lien Loan

   Media, entertainment and leisure    16.0%      06/21/12         06/21/17       $ 9,976         9,743         9,775   

Member interest(7)(8)

           06/21/12         —           0.763636         764         764   
                 

 

 

    

 

 

 
                    10,507         10,539   

Airborne Tactical Advantage
Company, LLC

                    

Senior Secured Note

   Aerospace & defense    11.0%      09/07/11         03/07/16       $ 4,000         3,854         3,900   

Class A Warrants(9)

           09/07/11         —           511,812         113         120   

Senior Secured Delayed Draw Term
Loans
(10)

      11.0%      09/07/11         03/07/16         —           —           —     
                 

 

 

    

 

 

 
                    3,967         4,020   

C&K Market, Inc.

                    

Senior Subordinated Note

   Retail & grocery   

16.0%

(14.0% Cash

and 2.0%

PIK)

     11/03/10         11/03/15       $ 13,582         13,176         13,480   

Warrant for Class B

           11/03/10         —           157,552         349         350   
                 

 

 

    

 

 

 
                    13,525         13,830   

Country Pure Foods, LLC

                    

Subordinated Term Loan

   Food & beverage   

15%

(12.5% Cash

and 2.5% PIK)

     08/13/10         02/13/16       $ 16,079         15,871         15,758   
                 

 

 

    

 

 

 
                    15,871         15,758   

CRS Reprocessing, LLC

                    

Senior Secured Term Loan

   Manufacturing   

10.3%

(LIBOR +

9.3%)

     06/16/11         06/16/15       $ 8,438         8,327         8,375   
                 

 

 

    

 

 

 
                    8,327         8,375   

Cydcor LLC

                    

Senior Secured Term Loan

   Business services   

12.3%

(LIBOR

+9.8%)

     09/18/12         09/17/16       $ 14,649         14,270         14,270   
                 

 

 

    

 

 

 
                    14,270         14,270   

Dr. Fresh, LLC

                    

Subordinated Term Loan

   Consumer products   

14.0%(6)

(12.0% Cash

and 2.0%

PIK)

     05/15/12         11/15/17       $ 14,158         13,893         13,946   
                 

 

 

    

 

 

 
                    13,893         13,946   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

13


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)

  

Industry

 

Interest Rate(2)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(3)
No. of  Shares /
No. of Units
    Cost     Fair Value  

Duff & Phelps Corporation

              

Tax Receivable Agreement
Payment Rights
(11)

   Financial services   16.4%(12)     06/01/12        12/31/29        —          12,262        12,262   
            

 

 

   

 

 

 
               12,262        12,262   

Express Courier International, Inc.

              

Secured Subordinated
Term Loan

   Business services  

15.0% (13)

(PIK)

    01/17/12        07/17/16      $ 7,479        7,358        6,357   
            

 

 

   

 

 

 
               7,358        6,357   

Firebirds International, LLC

              

Senior Secured Term Loan

   Restaurants  

10.5%

(LIBOR +

9.0)

    05/17/11        05/17/16      $ 8,200        8,080        8,200   

Senior Secured Revolving
Loan
(14)(15)

    

10.5%

(LIBOR +

9.0)

    05/17/11        05/17/16        —          (67     —     

Common stock(9)

         05/17/11        —          1,906        191        215   
            

 

 

   

 

 

 
               8,204        8,415   

Food Processing Holdings, LLC

              

Senior Subordinated Note (16)

   Food & beverage  

15.0%(6)

(12.0%  Cash

and 3.0%

PIK)

    02/28/12        08/28/17      $ 13,847        13,727        13,397   

Class A Units(9)

         04/20/10        —          162.44        163        181   

Class B Units(9)

         04/20/10        —          406.09        408        150   
            

 

 

   

 

 

 
               14,298        13,728   

Gold, Inc.

              

Subordinated Term Loan

   Consumer products  

15.0%(6)

(13.0% Cash

and 2.0%

PIK)

    12/31/12        12/31/17      $ 36,800        36,064        36,064   
            

 

 

   

 

 

 
               36,064        36,064   

Gryphon Partners 3.5, L.P.

              

Partnership interest

   Financial services       11/20/12        12/21/18        —          1,195        1,895   
            

 

 

   

 

 

 
               1,195        1,895   

Harrison Gypsum, LLC

              

Senior Secured Term Loan

   Industrials  

10.5%(6)

(LIBOR +

8.5% and

0.5% PIK)

    12/21/12        12/21/17      $ 25,380        25,001        25,001   
            

 

 

   

 

 

 
               25,001        25,001   

Hart InterCivic, Inc.

              

Senior Secured Term Loan

   IT Services  

10.5%

(LIBOR +

9.0%)

    07/01/11        07/01/16      $ 9,594        9,450        9,499   

Senior Secured Revolving
Loan
(10)(15)

    

10.5%

(LIBOR +

9.0%)

    07/01/11        07/01/16      $ —          (42     —     
            

 

 

   

 

 

 
               9,408        9,499   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

14


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost      Fair Value  

HEALTHCAREfirst, Inc.

                    

Senior Secured Term Loan

   Healthcare   

11.5%(5) (LIBOR

+ 10.0%)

     08/31/12         08/30/17       $ 9,875         9,594         9,594   
                 

 

 

    

 

 

 
                    9,594         9,594   

IMDS Corporation

                    

Subordinated Term Loan

   Healthcare   

15.5%(6)

(12.5% Cash

and 3.0%

PIK)

     05/02/12         11/02/17       $ 13,266         12,967         12,404   
                 

 

 

    

 

 

 
                    12,967         12,404   

Jefferson Management Holdings,
LLC

                    

Member interest(7)(8)

   Healthcare    N/A      04/20/10         —           1,393         1,393         1,388   
                 

 

 

    

 

 

 
                    1,393         1,388   

LCP Capital Fund LLC

                    

Member interest(8)(17)(18)

   Financial services    16.2%(19)      04/20/10         02/15/15       $ 8,354         8,354         8,354   
                 

 

 

    

 

 

 
                    8,354         8,354   

Loadmaster Derrick & Equipment, Inc.

                    

Senior Secured Term Loan

   Energy / Utilities   

9.3% (LIBOR

+ 8.3%)

     09/28/12         09/28/17       $ 9,709         9,462         9,462   

Senior Secured Revolving
Loan
(10)

     

9.3% (LIBOR

+ 8.3%)

     09/28/12         09/28/17       $ 290         290         290   

Senior Secured Delayed Draw
Term Loans

     

9.3% (LIBOR

+ 8.3%)

     09/28/12         09/28/17       $ —           —           —     
                 

 

 

    

 

 

 
                    9,752         9,752   

Marine Acquisition Corp.
(Teleflex Marine)

                    

Senior Subordinated Note

   Manufacturing    13.5%(6)      09/18/12         05/18/17       $ 16,500         16,146         16,170   
                 

 

 

    

 

 

 
                    16,146         16,170   

Martex Fiber Southern Corp.

                    

Subordinated Term Loan

   Industrials   

13.5%(6)

(12.0% Cash

and 1.5%

PIK)

     04/30/12         10/31/19       $ 8,756         8,632         8,580   
                 

 

 

    

 

 

 
                    8,632         8,580   

Octagon Income Note XIV, Ltd.

                    

Income Notes, Residual
Interest
(4)

   Financial services    15.5%(20)      12/19/12         01/15/24       $ 10,000         9,400         9,400   
                 

 

 

    

 

 

 
                    9,400         9,400   

OEM Group, Inc.

                    

Senior Secured Note

   Manufacturing   

15.0%(6)

(12.5% Cash

and 2.5%

PIK)

     10/07/10         10/07/15       $ 14,784         14,510         13,601   

Warrant for Common

           —           —           —           —           —     
                 

 

 

    

 

 

 
                    14,510         13,601   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

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THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)

  

Industry

  

Interest Rate(2)

   Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No.  of Shares /
No. of Units
     Cost      Fair Value  

Pinnacle Operating Corporation

                    

Senior Secured Term Loan

   Industrials   

11.5% (LIBOR

+ 10.3%)

     11/26/12         05/15/19       $ 10,000         9,508         9,508   
                 

 

 

    

 

 

 
                    9,508         9,508   

Sheplers, Inc.

                    

Senior Secured (2nd lien) Term Loan(7)

   Retail & grocery   

13.2% (LIBOR

+ 11.7%)

     12/20/11         12/20/16       $ 11,426         11,182         11,369   

Mezzanine Loan(7)

     

17.0%(21)

(10.0% Cash

and 7.0%

PIK)

     12/20/11         12/20/17       $ 1,776         1,747         1,768   
                 

 

 

    

 

 

 
                    12,929         13,137   

The Studer Group, L.L.C.

                    

Senior Subordinated Note

   Healthcare   

14.0%

(12.0% Cash

and 2.0% PIK)

     09/29/11         03/29/17       $ 12,454         12,251         12,361   
                 

 

 

    

 

 

 
                    12,251         12,361   

Surgery Center Holdings, Inc.

                    

Senior Subordinated Note

   Healthcare    15.0%      04/20/10         08/04/17       $ 18,773         18,405         18,960   

Member interest(8)(9)

           —           —           469,673         470         1,850   
                 

 

 

    

 

 

 
                    18,875         20,810   

Trinity Services Group, Inc.

                    

Senior Subordinated Note

   Food & beverage   

13.5%(6)

(12.0% Cash

and 1.5%

PIK)

     03/29/12         09/29/17       $ 14,143         13,954         14,073   
                 

 

 

    

 

 

 
                    13,954         14,073   

Vision Solutions, Inc.

                    

Second Lien Term Loan

   IT Services   

9.5% (LIBOR

+ 8.0%)

     03/31/11         07/23/17       $ 11,625         11,547         11,625   
                 

 

 

    

 

 

 
                    11,547         11,625   

Washington Inventory Service

                    

Senior Secured Term Loan

   Business services   

10.3% (LIBOR

+ 9.0%)

     12/27/12         06/20/19       $ 11,000         10,835         10,835   
                 

 

 

    

 

 

 
                    10,835         10,835   

YP Equity Investors, LLC

                    

Senior Secured Term Loan

   Media, entertainment and leisure   

15.0% (12.0%

Cash and 3.0%

PIK)

     05/08/12         05/08/17       $ 3,322         3,236         3,322   

Member interest(7)(8)

           05/08/12         05/08/17         —           —           1,800   
                 

 

 

    

 

 

 
                    3,236         5,122   
                 

 

 

    

 

 

 

Non-controlled/non-affiliated investments—113.49% of net asset value

                  $ 391,699       $ 394,339   
                 

 

 

    

 

 

 
                    
                    

 

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)

 

Industry

 

Interest Rate(2)

  

Initial
Acquisition
Date

  

Maturity/
Dissolution
Date

  Principal(3)
No.  of Shares /
No. of Units
    Cost     Fair Value  

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

               

THL Credit Greenway Fund LLC

               

Member interest

  Financial services      01/27/11    1/14/2021     —          10        10   
             

 

 

   

 

 

 
                10        10   
             

 

 

   

 

 

 

Total investments—113.49% of net asset value

          $ 391,709      $ 394,349   
             

 

 

   

 

 

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

ING Capital Markets, LLC

 

Interest Rate Swap

– Pay

Fixed/Receive

Floating

 

1.1425%/

LIBOR

   5/10/2017    1   $ 50,000      $ —        $ (1,053
             

 

 

   

 

 

 

Total derivative instruments—(0.30)% of net asset value

          $ —        $ (1,053
             

 

 

   

 

 

 

 

(1) All debt investments are income-producing. Equity and member interests are non-income-producing unless otherwise noted.
(2) Variable interest rate investments bear interest in reference to LIBOR or ABR, which reset monthly or quarterly, subject to interest rate floors. Unless otherwise noted, for each debt investment we have provided the interest rate in effect as of December 31, 2012.
(3) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(4) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(5) Unitranche investment; yield reflected represents the effective yield earned on the investment.
(6) At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the company.
(7) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(8) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(9) Equity ownership may be held in shares or units of companies related to the portfolio company.
(10) Issuer pays 0.5% unfunded commitment fee on facility.
(11) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(12) Income-producing security with no stated coupon; yield from initial investment through December 31, 2012 was approximately 16.4%.
(13) Issuer will pay 15% PIK until April 1, 2013, 13.0% cash interest thereafter.
(14) Issuer pays 0.25% unfunded commitment fee on revolving loan quarterly.
(15) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(16) Interest held in companies related to the portfolio company.
(17) The Company’s investment in LCP Capital Fund LLC is in the form of membership interests and its contributed capital is maintained in a collateral account held by a custodian and acts as collateral for certain credit default swaps for the Series 2005-1 equity interest. See Note 2 in the Notes to the Consolidated Financial Statements.
(18) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments

December 31, 2012

(dollar amounts in thousands)

 

(19) Income producing security with no stated coupon; cash yield for the three months ended December 31, 2012 was approximately 16.2%.
(20) Income producing security with no stated coupon; cash yield for the three months ended December 31, 2012 was approximately 15.5%.
(21) Issuer has the option to increase its aggregate interest rate to 18.5% all PIK for a period of time under certain conditions in the credit agreement.

See accompanying notes to these consolidated financial statements.

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2013

(in thousands, except per share data)

1. Organization

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

The Company was initially funded on July 23, 2009, issuing 7 shares of common stock at an aggregate purchase price of $101 to THL Credit Opportunities, L.P., an affiliate of THL Credit Advisors LLC, or the Advisor. While the Company incurred certain costs in connection with an anticipated initial public offering, which ultimately would have been borne by the Advisor had the offering not closed; the Company did not formally commence principal operations until the completion of the offering on April 21, 2010, as described below.

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

On April 21, 2010, the Company completed its initial public offering, formally commencing principal operations, and sold 9,000 shares of its common stock through a group of underwriters at a price of $13.00 per share, less an underwriting discount and commissions totaling $0.8125 per share. Concurrently, the Company sold 6,308 shares of its common stock to BDC Holdings at $13.00 per share, the sale of which was not subject to an underwriting discount and commission. On April 27, 2010, the Company closed the sale of the aforementioned 15,308 shares and received $190,684 of net proceeds, which includes an underwriting discount and offering expenses.

On May 26, 2010, the underwriters exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 337 shares of common stock at $13.00 per share resulting in additional net proceeds of $3,892, which includes an underwriting discount and offering expenses.

On September 25, 2012, the Company closed a public equity offering selling 6,095 shares of its common stock through a group of underwriters at a price of $14.09 per share, less an underwriting discount and offering expenses, and received $81,657 in net proceeds.

On June 24, 2013, the Company closed a public equity offering selling 7,590 shares of its common stock through a group of underwriters at a price of $14.62 per share, less an underwriting discount and offering expenses, and received $106,178 in net proceeds.

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

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

THL Credit SBIC, LP, or SBIC LP, and its general partner, THL Credit SBIC GP, LLC, or SBIC GP, were organized in Delaware on August 25, 2011 as a limited partnership and limited liability company, respectively. On January 16, 2013, the Company withdrew its application with the Investment Division of the U.S. Small Business Administration, or SBA, to license a small business investment company, or SBIC. Both the SBIC LP and SBIC GP remain consolidated wholly owned subsidiaries of the Company.

 

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Table of Contents

2. Significant Accounting Policies

Basis of Presentation

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

The accompanying consolidated financial statements of the Company have been presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal accruals, considered necessary for the fair statement of financial statements for the interim period included herein. The current period’s results of operations are not necessarily indicative of the operating results to be expected for the period ended December 31, 2013. The financial results of our portfolio companies are not consolidated in the financial statements. The accounting records of the Company are maintained in U.S. dollars.

Use of Estimates

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

Cash

Cash consists of funds held in demand deposit accounts at several financial institutions and, at certain times, balances may exceed the Federal Deposit Insurance Corporation insured limit and is therefore subject to credit risk. There were no cash equivalents as of September 30, 2013 and December 31, 2012.

Deferred Financing Costs

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

Deferred Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering becomes effective.

Escrow Receivable

Escrow receivable represents the Company’s claims to amounts set aside for indemnification claims or purchase price adjustments from the sale of certain investments. Escrow receivable is presented at net realizable value on the Consolidated Statements of Assets and Liabilities. There is a risk that some or all of the escrow amounts might not be ultimately collected by the Company.

Interest Rate Derivative

The Company recognizes derivatives as either interest rate derivative assets or liabilities at fair value on its Consolidated Statements of Assets and Liabilities with valuation changes and interest rate payments recorded as net change in unrealized appreciation (depreciation) on interest rate derivative and interest rate derivative periodic interest payments, net, respectively, on the Consolidated Statements of Operations. See also the disclosure in Note 7, Interest Rate Derivative.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of the Company’s long-term obligations are disclosed in Note 6, Credit Facility.

 

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Table of Contents

Valuation of Investments

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

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

The Company values its residual interest investments in collateralized loan obligations using an income approach that analyzes the discounted cash flows of our residual interest. The discounted cash flows model utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available. Specifically, the Company uses Intex cash flow models, or an appropriate substitute to form the basis for the valuation of the Company’s residual interest. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market data and projections provided by third parties as well as management estimates.

The Company values its investment in payment rights using an income approach that analyzes the discounted projected future cash flow streams assuming an appropriate discount rate, which will among other things consider other transactions in the market, the current credit environment, performance of the underlying portfolio company and the length of the remaining payment stream.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future cash flows or earnings to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in fair value pricing the Company’s investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, the current investment

 

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Table of Contents

performance rating, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, transaction comparables, our principal market as the reporting entity and enterprise values, among other factors.

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

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

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

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

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

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

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

Investment Risk

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

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

As of September 30, 2013, we had two loans on non-accrual with an amortized cost basis of $20,954 and fair value of $16,605. As of December 31, 2012, we had no loans on non-accrual.

Security Transactions, Payment-in-Kind, Income Recognition, Realized/Unrealized Gains or Losses

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

 

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

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when it is no longer probable that principal or interest will be collected. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection.

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

The following shows a rollforward of PIK income activity for the nine months ended September 30, 2013 and for the year ended December 31, 2012:

 

Accumulated PIK balance at December 31, 2011

   $ 3,488   

PIK income capitalized/receivable

     4,124   

PIK received in cash from full repayments

     (1,805
  

 

 

 

Accumulated PIK balance at December 31, 2012

     5,807   

PIK income capitalized/receivable

     2,588   

PIK received in cash from full repayments

     (2,255
  

 

 

 

Accumulated PIK balance at September 30, 2013

   $ 6,140   
  

 

 

 

Interest income from the Company’s TRA and CLO residual interests is recorded based upon an estimation of an effective yield to expected maturity using anticipated cash flows. Amounts in excess of income recognized are recorded as a reduction to the cost basis of the investment. The Company monitors the anticipated cash flows from its TRA and CLO residual interests and will adjust its effective yield periodically as needed.

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

In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned. The Company had no income from advisory services related to portfolio companies for the three and nine months ended September 30, 2013 and 2012, respectively.

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

 

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The following is a summary of the levels within the fair value hierarchy in which the Company invests as of September 30, 2013:

 

Description

   Fair Value         Level 1          Level 2     Level 3  

First lien secured debt

   $ 183,729      $ —         $ —        $ 183,729   

Subordinated debt

     170,359        —           —          170,359   

Second lien debt

     154,395        —           —          154,395   

CLO residual interests

     33,424        —           —          33,424   

Investment in payment rights

     14,381        —           —          14,381   

Investments in funds

     8,895        —           —          8,895   

Equity investments

     6,513        —           —          6,513   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investments

   $ 571,696      $ —         $ —        $ 571,696   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate derivative

     (314     —           (314     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liability at fair value

   $ (314   $ —         $ (314   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of December 31, 2012:

 

Description

   Fair Value         Level 1          Level 2     Level 3  

Subordinated debt

   $ 183,319      $ —         $ —        $ 183,319   

First lien secured debt

     102,256        —           —          102,256   

Second lien debt

     70,035        —           —          70,035   

Investment in payment rights

     12,262        —           —          12,262   

Investments in funds

     10,259        —           —          10,259   

CLO residual interests

     9,400        —           —          9,400   

Equity investments

     6,818        —           —          6,818   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investments

   $ 394,349      $ —         $ —        $ 394,349   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate derivative

     (1,053     —           (1,053     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liability at fair value

   $ (1,053   $ —         $ (1,053   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The following is a summary of the industry classification in which the Company invests as of September 30, 2013:

 

Industry

   Cost      Fair Value      % of
Net Assets
 

Financial services

   $ 96,525       $ 97,494         21.49

IT Services

     76,956         77,414         17.06

Industrials

     58,714         58,673         12.93

Healthcare

     49,354         50,729         11.18

Business services

     51,230         50,258         11.08

Manufacturing

     49,274         49,115         10.82

Food & beverage

     44,949         44,452         9.80

Energy / Utilities

     33,223         33,099         7.29

Media, entertainment and leisure

     28,821         31,018         6.84

Consumer Products

     30,491         30,949         6.82

Retail & grocery

     26,715         23,340         5.14

Restaurants

     20,762         20,805         4.58

Aerospace & defense

     4,164         4,350         0.96
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 571,178       $ 571,696         125.99
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is a summary of the geographical concentration of our investment portfolio as of September 30, 2013:

 

Region

   Cost      Fair Value      % of
Net Assets
 

Northeast

   $ 133,394       $ 135,274         29.81

West

     126,567         127,861         28.18

Midwest

     103,215         103,458         22.80

Southwest

     98,611         97,006         21.38

Southeast

     82,290         84,225         18.56

International

     13,450         13,635         3.00

Northwest

     13,651         10,237         2.26
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 571,178       $ 571,696         125.99
  

 

 

    

 

 

    

 

 

 

The following is a summary of the industry classification in which the Company invests as of December 31, 2012(1):

 

Industry

   Cost      Fair Value      % of
Net Assets
 

Healthcare

   $ 55,080       $ 56,558         16.27

Consumer Products

     49,957         50,010         14.39

Food & beverage

     44,124         43,559         12.54

Industrials

     43,142         43,089         12.40

Manufacturing

     38,982         38,145         10.98

IT services

     34,621         34,790         10.01

Financial services

     31,221         31,921         9.19

Business services

     32,464         31,462         9.05

Retail & grocery

     26,455         26,967         7.76

Media, entertainment and leisure

     13,742         15,661         4.51

Energy / Utilities

     9,752         9,752         2.81

Restaurants

     8,203         8,415         2.42

Aerospace & defense

     3,966         4,020         1.16
  

 

 

    

 

 

    

 

 

 
   $ 391,709       $ 394,349         113.49
  

 

 

    

 

 

    

 

 

 

 

(1) The Company has changed the industry classification of certain investments to conform to new industry classifications adopted as of September 30, 2013.

The following is a summary of the geographical concentration of our investment portfolio as of December 31, 2012:

 

Region

   Cost      Fair Value      % of
Net Assets
 

Southeast

   $ 101,401       $ 104,146         29.98

West

     87,804         88,635         25.51

Southwest

     73,786         72,432         20.84

Midwest

     62,867         63,033         18.14

Northeast

     38,659         38,607         11.11

Northwest

     13,526         13,830         3.98

International

     13,666         13,666         3.93
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 391,709       $ 394,349         113.49
  

 

 

    

 

 

    

 

 

 

 

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The following table rolls forward the changes in fair value during the nine months ended September 30, 2013 for investments classified within Level 3:

 

    First lien
debt
    Second
lien debt
    Subordinated
debt
    Investments
in Funds
    Equity
investments
    Investment in
payment
rights
    CLO residual
interests
    Totals  

Beginning balance, January 1 2013

  $ 102,256      $ 70,035      $ 183,319      $ 10,259      $ 6,819      $ 12,261      $ 9,400      $ 394,349   

Purchases

    121,468        100,397        49,645        366        169        —          25,114        297,159   

Sales and repayments

    (41,021     (18,537     (61,589     (1,270     —          —          (1,208     (123,625

Unrealized appreciation (depreciation)(1)

    (39     1,323        (4,549     (460     (475     2,120        (43     (2,123

Net amortization of premiums, discounts and fees

    966        857        1,362        —          —          —          161        3,346   

PIK

    99        320        2,171        —          —          —          —          2,590   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, September 30, 2013

  $ 183,729      $ 154,395      $ 170,359      $ 8,895      $ 6,513      $ 14,381      $ 33,424      $ 571,696   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 242      $ 1,865      $ (930   $ (99   $ 2,638      $ (1,014   $ (43   $ 2,659   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) All unrealized appreciation (depreciation) in the table above is reflected in the accompanying Consolidated Statements of Operations.

 

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

 

     First lien
debt
    Second
lien debt
    Subordinated
debt
    Investments
in Funds
    Equity
investments
     Investment in
payment rights
     Totals  

Beginning balance, January 1, 2012

   $ 89,488      $ 60,125      $ 101,842      $ 12,011      $ 3,527       $ —         $ 266,993   

Purchases

     53,957        19,571        85,310        4        763         12,500         172,105   

Sales and repayments

     (22,572     (25,324     (21,826     (3,647     —           —           (73,369

Unrealized appreciation (depreciation)(1)

     506        (1,122     (2,062     (1     553         —           (2,126

Net amortization of premiums, discounts and fees

     436        594        979        —          —           —           2,009   

PIK

     122        475        2,331        —          —           —           2,928   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance, September 30, 2012

   $ 121,937      $ 54,319      $ 166,574      $ 8,367      $ 4,843       $ 12,500       $ 368,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

   $ 506      $ (373   $ (1,062   $ (1   $ 553       $ —         $ (377
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) All unrealized appreciation (depreciation) in the table above is reflected in the accompanying Consolidated Statements of Operations.

The following provides quantitative information about Level 3 fair value measurements as of September 30, 2013:

 

Description:

   Fair Value     

Valuation Technique

  

Unobservable Inputs

  

Range (Average) (1)

First lien secured debt

   $ 183,729       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    12% - 13% (12%)

Second lien debt

     154,395       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    12% -14% (13%)

Subordinated debt

     170,359       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    15% - 17% (16%)

Investments in funds

     8,895       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    13%

Equity investments

     6,513       Net asset value, as a practical expedient    Net asset value    N/A
      Market comparable companies (market approach)    EBITDA multiple    5.7% - 6.5% (6.1%)

Investment in payment rights(2)

     14,381       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    17.2%
         Federal tax rates    35% - 40% (38%)

CLO residual interests

     33,424       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    14%
         Default rate    2%
         Prepayment rate    20%
  

 

 

          

Total investments

   $ 571,696            
  

 

 

          

 

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Table of Contents
(1) Ranges were determined using a weighted average based upon the fair value of the investments in each investment category.
(2) Investment in a tax receivable agreement, or TRA, payment rights

The following provides quantitative information about Level 3 fair value measurements as of December 31, 2012:

 

Description:

   Fair Value     

Valuation Technique

  

Unobservable Inputs

  

Range (Average) (1)

First lien secured debt

   $ 102,256       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    12% - 13% (12%)

Second lien debt

     70,035       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    14% - 16% (15%)

Subordinated debt

     183,319       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    15% - 17% (16%)

Investments in funds

     10,259       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    14% - 18% (16%)
      Net asset value, as a practical expedient    Net asset value    N/A

Equity investments

     6,818       Market comparable companies (market approach)    EBITDA multiple    5.0 - 5.7 (5.3)

Investment in payment rights(2)

     12,262       Discounted cash flows (income approach)    Weighted average cost of capital (WACC) and federal tax rates    14% - 18% (16%)

CLO residual interest

     9,400       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    15% - 16% (16%)
  

 

 

          

Total investments

   $ 394,349            
  

 

 

          

 

(1) Ranges were determined using a weighted average based upon the fair value of the investments in each investment category.
(2) Investment in a tax receivable agreement, or TRA, payment rights

The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien secured debt, second lien debt and subordinated debt), including income-producing investments in funds, payment rights and CLO residual interests is the weighted average cost of capital, or WACC. Significant increases (decreases) in the WACC in isolation would result in a significantly lower (higher) fair value measurement. In determining the WACC, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels, credit quality, among other factors, including federal tax rates, in its analysis. In the case of CLO residual interests, the Company considers prepayment, re-investment and loss assumptions based upon historical and projected performance as well as comparable yields for other similar CLOs. In the case of the TRA, the Company considers the risks associated with changes in tax rates, the performance of the portfolio company and the expected term of the investment. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate WACC to use in the income approach.

 

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Table of Contents

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

Investment in Tax Receivable Agreement Payment Rights

In June 2012, the Company invested in a TRA that entitles it to certain payment rights, or TRA Payment Rights, from Duff & Phelps Corporation, or Duff & Phelps. The TRA transfers the economic value of certain tax deductions, or tax benefits, taken by Duff & Phelps to the Company and entitles the Company to a stream of payments to be received. The TRA payment right is, in effect, a subordinated claim on the issuing company which can be valued based on the credit risk of the issuer, which includes projected future earnings, the liquidity of the underlying payment right, risk of tax law changes, the effective tax rate and any other factors which might impact the value of the payment right.

Through the TRA, the Company is entitled to receive an annual tax benefit payment based upon 85% of the savings from certain deductions along with interest. The payments that the Company is entitled to receive result from cash savings, if any, in U.S. federal, state or local income tax that Duff & Phelps realizes (i) from the tax savings derived from the goodwill and other intangibles created in connection with the Duff & Phelps initial public offering and (ii) from other income tax deductions. These tax benefit payments will continue until the relevant deductions are fully utilized, which is projected to be 17 years. Pursuant to the TRA, the Company maintains the right to enforce Duff & Phelps payment obligations as a transferee of the TRA contract. If Duff & Phelps chooses to pre-pay and terminate the TRA, the Company will be entitled to the present value of the expected future TRA payments. If Duff & Phelps breaches any material obligation than all obligations are accelerated and calculated as if an early termination occurred. Failure to make a payment is a breach of a material obligation if the failure occurs for more than three months.

The projected annual tax benefit payment will be accrued on a quarterly basis and paid annually. The payment will be allocated between a reduction in the cost basis of the investment and interest income based upon an amortization schedule. Based upon the characteristics of the investment, the Company has chosen to categorize the investment in the TRA payment rights as investment in payment rights in the fair value hierarchy.

Managed Funds

The Advisor and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Advisor may serve as investment adviser to one or more registered closed-end funds. In addition, our officers may serve in similar capacities for one or more registered closed-end funds. The Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Advisor’s allocation procedures.

The Company does not have the ability to redeem its investment in funds but distributions are expected to be received until the dissolution of the funds, which is anticipated to be between 2013 and 2021, as the underlying investments are expected to be liquidated.

Greenway

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

Greenway has $150,000 of capital committed by affiliates of a single institutional investor. The Company’s capital commitment to Greenway is $15. As of September 30, 2013, and December 31, 2012, all of the capital had been called by Greenway. The Company’s nominal investment in Greenway is reflected in the September 30, 2013 and December 31, 2012 Consolidated Schedule of Investments.

The Company acts as the investment adviser to Greenway and is entitled to receive certain fees relating to its investment management services provided, including a base management fee, a performance fee and a portion of the closing fees on each investment transaction. As a result, Greenway is classified as an affiliate of the Company. For the three and nine months ended September 30, 2013, the Company earned $393 and $1,396, respectively, in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. For the three and nine months ended September 30, 2012, the Company earned $558 and $1,782 in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2013 and December 31, 2012, $393 and $402 of fees related to Greenway, respectively, were included in due from affiliate on the Consolidated Statements of Assets and Liabilities.

 

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Table of Contents

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

Greenway II

On January 31, 2013, THL Credit Greenway Fund II, LLC, or Greenway II LLC, was formed as a Delaware limited liability company and is a portfolio company of the Company. Greenway II LLC is a closed-end investment fund which provides for no liquidity or redemption options and is not readily marketable. Greenway II operates under a limited liability agreement dated February 11, 2013, as amended, or the Greenway II Agreement. Greenway II LLC will continue in existence for eight years from the final closing date, subject to earlier termination pursuant to certain terms of the Greenway II LLC Agreement. The term may also be extended for up to three additional one-year periods pursuant to certain terms of the Greenway II LLC Agreement. Greenway II LLC has a two year investment period.

Greenway II LLC has $186,505 of commitments primarily from institutional investors. The Company’s capital commitment to Greenway II is $4. The Company’s nominal investment in Greenway II LLC is reflected in the September 30, 2013 Consolidated Schedule of Investments. Greenway II LLC is managed by the Company through the investment professionals that serve on its investment committee. As contemplated in the Greenway II LLC Agreement, the Company has established a related investment vehicle and entered into an investment management agreement with an account set up by an unaffiliated third party investor to invest alongside Greenway II LLC pursuant to similar economic terms. The account is also managed by the Company. References to “Greenway II” herein include Greenway II LLC and the accounts of related investment vehicles.

The Company acts as the investment adviser to Greenway II and is entitled to receive certain fees relating to its investment management services provided, including a base management fee, a performance fee and a portion of the closing fees on each investment transaction. As a result, Greenway II is classified as an affiliate of the Company. For the three and nine months ended September 30, 2013, the Company earned $479 and $720, respectively, in fees related to Greenway II, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2013, $441 of fees related to Greenway II were included in due from affiliate on the Consolidated Statements of Assets and Liabilities. During the nine months ended September 30, 2013, the Company sold a portion of its investments in seven portfolio companies at fair value, for total proceeds of $19,533, to Greenway II determined in accordance with the normal valuation policies with no significant realized gains on the transactions.

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

Investment in Funds

LCP Capital Fund LLC

The Company has invested in a membership interest of LCP Capital Fund LLC, or LCP, a private investment company that was organized to participate in investment opportunities that arise when a special purpose entity, or SPE, or sponsor thereof, needs to raise capital to achieve ratings, regulatory, accounting, tax, or other objectives. LCP is a closed investment vehicle which provides for no liquidity or redemption options and is not readily marketable. LCP is managed by an unaffiliated third party. As of September 30, 2013 and December 31, 2012, the Company has contributed $12,000 of capital in the form of membership interests in LCP, which is invested in an underlying SPE referred to as Series 2005-01. On May 1, 2012, the Company received $3,646 in connection with a reduction in its commitment pursuant to the governing documents, which is related to the notional amount of the underlying credit default swaps. The Company’s exposure is limited to the amount of its remaining contributed capital. As of September 30, 2013, the value of the Company’s interest in LCP was $8,354, and is reflected in the Consolidated Schedules of Investments.

The Company’s contributed capital in LCP is maintained in a collateral account held by a third-party custodian, who is neither affiliated with the Company nor with LCP, and acts as collateral on certain credit default swaps for the Series 2005-01 for which LCP receives fixed premium payments throughout the year, adjusted for expenses incurred by LCP. The SPE purchases assets on a non-recourse basis and LCP agrees to reimburse the SPE up to a specified amount for potential losses. LCP holds the contributed cash invested for an SPE transaction in a segregated account that secures the payment obligation of LCP. The Company expects to receive distributions from LCP on a quarterly basis. Such distributions are reflected in the Company’s Consolidated Statements of Operations as interest income in the period earned. LCP has a remaining life of 18 years; however, it is currently expected that Series 2005-01 will terminate on February 15, 2015, if not extended prior to this date pursuant to the terms of Series 2005-1 SPE. Regardless of the date of dissolution, LCP has the right to receive amounts held in the collateral account if there is an event of default under LCP’s operative agreements. LCP may have other series which will have investments in other SPEs to which the Company will not be exposed.

 

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Table of Contents

CLO Residual Interests

The Company invested $33,500 in the residual interest in the subordinated notes, which can also be structured as income notes, of four CLOs. The Company owns between 10.4% and 23.1% of the subordinated notes of these CLOs. The subordinated notes are subordinated to the secured notes issued in connection with each CLO. The secured notes in each structure are collateralized by portfolios consisting primarily of broadly syndicated senior secured bank loans. The first investment was in the income notes of a $625,900 CLO of Octagon Investment Partners XIV, Ltd. The income notes are part of a class of subordinated notes, which are paid equal with other subordinated notes within this class. The subordinated notes are subordinated to the claims of $569,250 in secured notes issued by the structure. The second investment was in the income notes of a $724,534 CLO of Sheridan Square CLO Ltd. The income notes are part of a class of subordinated notes, which are paid equal with other subordinated notes within this class. The subordinated notes are subordinated to the claims of $658,700 in secured notes issued by the structure. The third investment was in the subordinated notes of the $517,000 CLO of Adirondack Park CLO Ltd. There is only one class of subordinated notes that are subordinated to the claims of $463,500 in secured notes issued by the structure. The fourth investment was in the subordinated notes of a $516,400 CLO of Dryden 30 Senior Loan Fund. The subordinated notes are subordinated to the claims of $473,150 in secured notes issued by the structure.

In each case, the subordinated notes do not have a stated rate of interest, but are entitled to receive distributions on quarterly payment dates subject to the priority of payments to secured note holders in the structures if and to the extent funds are available for such purpose. The payments on the subordinated notes are subordinated not only to the interest and principal claims of all secured notes issued, but to certain administrative expenses, taxes, and the base and subordinated fees paid to the collateral manager. Payments to the subordinated notes may vary significantly quarter to quarter for a variety of reasons and may be subject to 100% loss. Investments in subordinated notes, due to the structure of the CLO, can be significantly impacted by change in the market value of the assets, the distributions on the assets, defaults and recoveries on the assets, capital gains and losses on the assets along with prices, interest rates and other risks associated with the assets.

Revolving and Unfunded Delayed Draw Loans

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

Income Taxes, Including Excise Tax

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

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid a 4% excise tax on undistributed earnings, we are required to distribute each calendar year the sum of (i) 98% of our ordinary income for such calendar year (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income. See also the disclosure in Note 9, Dividends, for a summary of the dividends paid. For the three and nine months ended September 30, 2013 and 2012, the Company did not incur any excise tax expense.

Certain consolidated subsidiaries of the Company are subject to U.S. federal and state income taxes. These taxable entities are not consolidated for income tax purposes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries.

For the three months ended September 30, 2013, the Company recognized a current income tax benefit of ($1,217), which is shown as income tax (benefit) provision of ($120) and income tax (benefit) provision, realized gain of ($1,097) in the Consolidated Statements of Operations. For the nine months ended September 30, 2013, the Company recognized current income tax provision of $376, which is shown as income tax (benefit) provision in the Consolidated Statements of Operations. These income taxes relate primarily related to the proceeds

 

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received in June 2013 from its equity investment in YP Equity Investors, LLC into one of the Company’s wholly owned tax blocker corporations. The expense reflects the tax impact of a revision to previously recognized estimated realized gains and dividend income as a result of adjusted tax estimates provided by YP Equity Investors, LLC during the quarter and may be subject to further change once tax information is finalized for the year. The Company did not recognize current tax expense for the three or nine months ended September 30, 2012. As of September 30, 2013, $359 of income tax receivable was included in prepaid expenses and other assets and $109 was included as income taxes payable on the Consolidated Statements of Assets and Liabilities relating to dividend income and other projected earnings of tax blocker corporations. As of December 31, 2012, there were no income taxes receivable or payable.

For the three and nine months ended September 30, 2013, the Company recognized a provision for tax on unrealized gain on investments of $1,050 and $981 for consolidated subsidiaries in the Consolidated Statements of Operations. The Company did not recognize a benefit or provision for tax on unrealized gain on investments during the three and nine months ended September 30, 2012. As of September 30, 2013 and December 31, 2012, $1,436 and $454, respectively, were included in deferred tax liability on the Consolidated Statements of Assets and Liabilities relating to deferred tax on unrealized gain on investments held in tax blocker corporations.

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

Dividends

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

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

3. Related Party Transactions

Investment Management Agreement

On February 27, 2013, the Company’s investment management agreement was re-approved by its board of directors, including a majority of our directors who are not interested persons of the Company. Under the investment management agreement, the Advisor, subject to the overall supervision of the Company’s board of directors, manages the day-to-day operations of, and provides investment advisory services to the Company.

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

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

For the three and nine months ended September 30, 2013, the Company incurred base management fees payable to the Advisor of $2,081, and $5,278, respectively. For the three and nine months ended September 30, 2012, the Company incurred base management fees payable to the Advisor of $1,282, and $3,429, respectively. As of September 30, 2013 and December 31, 2012, $2,081 and $1,514, respectively, was payable to the Advisor.

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

The ordinary income component is calculated, and payable, quarterly in arrears based on the Company’s preincentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The preincentive fee net investment income, which is expressed as a rate of return on the value of the Company’s net assets attributable to the Company’s common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as “minimum income level”). Preincentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as

 

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

For the three and nine months ended September 30, 2013, the Company incurred $2,731 and $7,855, respectively, of incentive fees related to ordinary income. For the three and nine months September 30, 2012, the Company incurred $2,035 and $5,184, respectively, of incentive fees related to ordinary income.

The second component of the incentive fee (capital gains incentive fee) is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). This component is equal to 20.0% of the Company’s cumulative aggregate realized capital gains from inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid capital gains incentive fees is subtracted from such capital gains incentive fee calculated. The capital gains incentive fee payable to the Company’s Advisor under the investment management agreement as of September 30, 2013 and December 31, 2012 was $0 and $35, respectively.

As of September 30, 2013 and December 31, 2012, $2,710 and $2,331, respectively, of such incentive fees are currently payable to the Advisor. For the three months ended September 30, 2013, $87 of incentive fees incurred by the Company were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.

GAAP requires that the incentive fee accrual considers the cumulative aggregate unrealized capital appreciation or depreciation of investments or other financial instruments, such as an interest rate derivative, in the calculation, as an incentive fee would be payable if such unrealized capital appreciation or depreciation were realized, even though such unrealized capital appreciation or depreciation is not permitted to be considered in calculating the fee actually payable under the investment management agreement. For accounting purposes in accordance with GAAP only, in order to reflect the potential incentive fee that would be payable for a given period as if all unrealized gains or losses were realized, the Company has accrued incentive fees of $40 and $317 as of September 30, 2013 and December 31, 2012, respectively, based upon unrealized appreciation or depreciation of investments and the interest rate derivative for that period (in accordance with the terms of the investment management agreement). There can be no assurance that such unrealized appreciation or depreciation will be realized in the future. Accordingly, such fee, as calculated and accrued would not necessarily be payable under the investment management agreement, and may never be paid based upon the computation of incentive fees in subsequent periods.

Administration Agreement

The Company has also entered into an administration agreement with the Advisor under which the Advisor will provide administrative services to the Company. Under the administration agreement, the Advisor performs, or oversees the performance of administrative services necessary for the operation of the Company, which include, among other things, being responsible for the financial records which the Company is required to maintain and preparing reports to the Company’s

 

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

For the three and nine months ended September 30, 2013, the Company incurred administrator expenses of $800, and $2,450, respectively. For the three and nine months ended September 30, 2012, the Company incurred administrator expenses of $726, and $2,227, respectively. As of September 30, 2013 and December 31, 2012, $50 and $304, respectively, was payable to the Advisor.

The Company and the Advisor have entered into a license agreement with THL Partners, L.P., or THL Partners, under which THL Partners has granted to the Company and the Advisor a non-exclusive, personal, revocable, worldwide, non-transferable license to use the trade name and service mark THL, which is a proprietary mark of THL Partners, for specified purposes in connection with the Company’s and the Advisor’s respective businesses. This license agreement is royalty-free, which means the Company is not charged a fee for its use of the trade name and service mark THL. The license agreement is terminable either in its entirety or with respect to the Company or the Advisor by THL Partners at any time in its sole discretion upon 60 days prior written notice, and is also terminable with respect to either the Company or the Advisor by THL Partners in the case of certain events of non-compliance. After the expiration of its first one year term, the entire license agreement is terminable by either the Company or the Advisor at the Company or its sole discretion upon 60 days prior written notice. Upon termination of the license agreement, the Company and the Advisor must cease to use the name and mark THL, including any use in the Company’s respective legal names, filings, listings and other uses that may require the Company to withdraw or replace the Company’s names and marks. Other than with respect to the limited rights contained in the license agreement, the Company and the Advisor have no right to use, or other rights in respect of, the THL name and mark. The Company is an entity operated independently from THL Partners, and third parties who deal with the Company have no recourse against THL Partners.

Due To and From Affiliates

The Advisor paid certain other general and administrative expenses on behalf of the Company. As of September 30, 2013 and December 31, 2012, $64 and $0, respectively, of expenses were included in due to affiliate on the Consolidated Statements of Assets and Liabilities.

The Company acts as the investment adviser to Greenway and Greenway II and is entitled to receive certain fees. As a result, Greenway and Greenway II are classified as affiliates of the Company. As of September 30, 2013 and December 31, 2012, $893 and $411 of total fees related to Greenway and Greenway II, respectively, were included in due from affiliate on the Consolidated Statements of Assets and Liabilities.

4. Realized Gains and Losses on Investments

The Company recognized realized (losses) gains on its portfolio investments of ($390) and $2,393 during the three and nine months ended September 30, 2013, respectively, related primarily to the proceeds received from YP Equity Investors, LLC in June 2013. Realized losses of ($390) for the three months ended September 30, 2013, reflecting a revision to previously recognized estimated realized gains and dividend income as a result of adjusted tax estimates from YP Equity Investors, LLC. The Company did not recognize any realized gains and losses for the three and nine months ended September 30, 2012.

 

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

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

 

     For the three months ended
September 30,
     For the nine months ended
September 30,
 
     2013      2012      2013      2012  

Numerator—net increase in net assets resulting from operations:

   $ 7,757       $ 6,169       $ 31,987       $ 17,842   

Denominator—basic and diluted weighted average common shares:

     33,905         20,618         29,068         20,354   

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

   $ 0.23       $ 0.30       $ 1.10       $ 0.88   

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

6. Credit Facility

On March 15, 2013, the Company entered into an amendment, or the Revolver Amendment, to our existing revolving credit agreement, or Revolving Facility, and entered into an amendment, or the Term Loan Amendment, to our term loan agreement credit facility, or Term Loan Facility, and together with the Revolving Facility, the Facilities, with ING Capital LLC.

The Revolver Loan Amendment revised the Revolving Facility dated May 10, 2012 to among other things, increase the amount available for borrowing under the Revolving Facility from $140,000 to $170,000 and extend the maturity date from May 2016 to May 2017 (with a one year term out period beginning in May 2016). The one year term out period is the one year anniversary between the revolver termination date, or the end of the availability period, and the maturity date. During this time, the Company is required to make mandatory prepayments on its loans from the proceeds we receive from the sale of assets, extraordinary receipts, returns of capital or the issuances of equity or debt. The Revolver Amendment also changes the interest rate of the Revolving Facility to (i) when the facility is more than or equal to 35% drawn and the step-down condition is satisfied, LIBOR plus 2.75%, (ii) when the facility is more than or equal to 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.00%, (iii) when the facility is less than 35% drawn and the step-down condition is satisfied, LIBOR plus 2.75%, and (iv) when the facility is less than 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.25%. The non-use fee is 1.00% annually if the Company uses 35% or less of the Revolving Facility and 0.50% annually if the Company uses more than 35% of the Revolving Facility. The Company elects the LIBOR rate on the loans outstanding on our Revolving Facility, which can have a maturity date that is one, two, three or six months. The LIBOR rate on the borrowings outstanding on its Revolving Facility currently has a one month maturity.

The Term Loan Amendment revised the Term Loan Facility dated May 10, 2012 to increase the $50,000 senior secured term loan, or Term Loan, to $70,000 and extend the maturity date from May 2017 to May 2018. The Term Loan bears interest at LIBOR plus 4.00% (with no LIBOR Floor) and has substantially similar terms to our existing Revolving Facility (as amended by the Amendment). The Company elects the LIBOR rate on our Term Loan, which can have a maturity date that is one, two, three or six months. The LIBOR rate on its Term Loan currently has a one month maturity.

Each of the Facilities includes an accordion feature permitting the Company to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $400,000.

The Facilities generally require payment of interest on a quarterly basis for ABR loans, and at the end of the applicable interest period for Eurocurrency loans bearing interest at LIBOR, the interest rate benchmark used to determine the variable rates paid on the Facilities. LIBOR maturities can range between one and six months at the election of the Company. All outstanding principal is due upon each maturity date. The Facilities also require a mandatory prepayment of interest and principal upon certain customary triggering events (including, without limitation, the disposition of assets or the issuance of certain securities).

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

 

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

For the nine months ended September 30, 2013, the Company borrowed $311,600 and repaid $235,700 under the Facilities. For the nine months ended September 30, 2012, the Company borrowed $184,900 and repaid $139,900 under the Facilities.

As of September 30, 2013 and December 31, 2012, there were $125,900 and $50,000 of borrowings outstanding under the Facilities at a weighted average interest rate of 4.41% and 4.21%, respectively. As of September 30, 2013 and December 31, 2012, the carrying amount of the Company’s outstanding Facilities approximated fair value. The fair values of the Company’s Facilities are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s Facilities are estimated based upon market interest rates and entities with similar credit risk. As of September 30, 2013 and December 31, 2012, the Facilities would be deemed to be level 3 of the fair value hierarchy.

Interest expense and related fees of $1,403 and $3,898 were incurred in connection with the Facilities during the three and nine months ended September 30, 2013, respectively. Interest expense and related fees of $1,026 and $2,239 were incurred in connection with the Facilities during the three and nine months ended September 30, 2012, respectively.

In accordance with the 1940 Act, with certain exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. The asset coverage as of September 30, 2013 is in excess of 200%.

See also the disclosure in Note 11, Subsequent Events, for a recent amendment to the Facilities.

7. Interest Rate Derivative

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

The Company records the change in valuation of the swap agreement in unrealized appreciation (depreciation) as of each measurement period. When the quarterly interest rate swap amounts are paid or received under the swap agreement, the amounts are recorded as a realized gain (loss) through interest rate derivative periodic interest payments, net on the Consolidated Statement of Operations.

The Company recognized a realized loss for the three and nine months ended September 30, 2013 of $113 and $321, respectively, which is reflected as interest rate derivative periodic interest payments, net on the Consolidated Statements of Operations. The Company recognized a realized loss for the three and nine months ended September 30, 2012 of $86, which is reflected as interest rate derivative periodic interest payments, net on the Consolidated Statements of Operations.

For the three and nine months ended September 30, 2013, the Company recognized ($248) and $739, respectively, of net change in unrealized depreciation from the swap agreement, which is listed under net change in unrealized depreciation on interest rate derivative in the Consolidated Statements of Operations. For the three and nine months ended September 30, 2012, the Company recognized ($534) and ($1,109), respectively, of net change in unrealized depreciation from the swap agreement. As of September 30, 2013 and December 31, 2012, the Company’s fair value of its swap agreement is ($314) and ($1,053), respectively, which is listed as an interest rate derivative liability on the Consolidated Statements of Assets and Liabilities.

8. Commitments and Contingencies

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

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

 

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As of September 30, 2013 and December 31, 2012, the Company has the following unfunded commitments to portfolio companies (in millions):

 

     As of  
     September 30,
2013
     December 31,
2012
 

Unfunded revolving commitments

   $ 10,678       $ 10,910   

Unfunded delayed draw and capital expenditure facilities

     8,000         12,000   

Unfunded commitments to investments in funds

     4,680        3,980  
  

 

 

    

 

 

 

Total unfunded commitments

   $ 23,358       $ 26,890   
  

 

 

    

 

 

 

9. Dividends

The Company has elected to be taxed as a regulated investment company under Subchapter M of the Code. In order to maintain its status as a regulated investment company, it is required to distribute at least 90% of its investment company taxable income. To avoid a 4% excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending October 31 of that calendar year (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no federal income tax. The Company intends to make distributions to stockholders on a quarterly basis of substantially all of its net investment income. In addition, although the Company intends to make distributions of net realized capital gains, if any, at least annually, out of assets legally available for such distributions, it may in the future decide to retain such capital gains for investment.

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

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

 

Date Declared    Record Date    Payment Date    Amount Per Share  

August 5, 2010

   September 2, 2010    September 30, 2010    $ 0.05   

November 4, 2010

   November 30, 2010    December 28, 2010    $ 0.10   

December 14, 2010

   December 31, 2010    January 28, 2011    $ 0.15   

March 10, 2011

   March 25, 2011    March 31, 2011    $ 0.23   

May 5, 2011

   June 15, 2011    June 30, 2011    $ 0.25   

July 28, 2011

   September 15, 2011    September 30, 2011    $ 0.26   

October 27, 2011

   December 15, 2011    December 30, 2011    $ 0.28   

March 6, 2012

   March 20, 2012    March 30, 2012    $ 0.29   

March 6, 2012

   March 20, 2012    March 30, 2012    $ 0.05   

May 2, 2012

   June 15, 2012    June 29, 2012    $ 0.30   

July 26, 2012

   September 14, 2012    September 28, 2012    $ 0.32   

November 2, 2012

   December 14, 2012    December 28, 2012    $ 0.33   

December 20, 2012

   December 31, 2012    January 28, 2013    $ 0.05   

February 27, 2013

   March 15, 2013    March 29, 2013    $ 0.33   

May 2, 2013

   June 14, 2013    June 28, 2013    $ 0.34   

August 2, 2013

   September 16, 2013    September 30, 2013    $ 0.34   

August 2, 2013

   September 16, 2013    September 30, 2013    $ 0.08   

October 30, 2013

   December 16, 2013    December 31, 2013    $ 0.34   

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

We maintain an “opt in” dividend reinvestment plan for our common stockholders. As a result, unless stockholders specifically elect to have their dividends automatically reinvested in additional shares of common stock, stockholders will receive all such dividends in cash. With respect to our dividends and distributions paid to stockholders during the three and nine months ended September 30, 2012, dividends reinvested pursuant to our dividend reinvestment plan totaled $0 and $26, respectively. There were no dividends reinvested for the three or nine months ended September 30, 2013 under the dividend reinvestment plan.

 

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

Distributions in excess of our current and accumulated profits and earnings would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions will be made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. If the Company had determined the tax attributes of its 2013 distributions as of September 30, 2013, 93.7% would be from ordinary income, 6.3% would be from capital gains and 0% would be a return of capital. There can be no certainty to stockholders that this determination is representative of what the tax attributes of the Company’s 2013 distributions to stockholders will actually be. Each year, a statement on Form 1099-DIV identifying the source of the distribution will be mailed to our stockholders.

10. Financial Highlights

 

     For the three months ended September 30,     For the nine months ended September 30,  
     2013     2012     2013     2012  

Per Share Data:

        

Net asset value, beginning of period

   $ 13.58      $ 13.17      $ 13.20      $ 13.24   

Net investment income, after taxes(1)

     0.34        0.41        1.11        1.04   

Net realized (loss) gains on investments(1)

     (0.01     —          0.09        —     

Income tax provision, realized gain(1)

     0.03        —          (0.01     —     

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

     (0.10     (0.07     (0.06     (0.10

Provision for taxes on unrealized gain on investments(1)

     (0.03     —          (0.03     —     

Net change in unrealized (depreciation) appreciation of interest rate derivative(1)

     (0.01     (0.03     0.03        (0.06
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations(3)

     0.22        0.31        1.13        0.88   

Accretive effect of share issuance

     —          0.05        0.14        0.05   

Distributions to stockholders

     (0.42     (0.32     (1.09     (0.96
  

 

 

   

 

 

   

 

 

   

 

 

 

Net asset value, end of period

   $ 13.38      $ 13.21      $ 13.38      $ 13.21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Per share market value at end of period

   $ 15.61      $ 14.03      $ 15.61      $ 14.03   

Total return(4)(5)

     2.76     4.16     5.54     20.57

Shares outstanding at end of period

     33,905        26,315        33,905        26,315   

Ratio/Supplemental Data:

        

Net assets at end of period

   $ 453,778      $ 347,750      $ 453,778      $ 347,750   

Ratio of operating expenses to average net assets(6)

     6.57     8.49     4.57     7.76

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

     9.78     12.49     10.87     10.54

Portfolio turnover(5)

     5.83     9.33     25.96     23.50

 

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

 

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(6) Annualized, except for dividend income, income tax provision on the YP Equity Investors, LLC dividend and the net impact on incentive fees.

11. Subsequent Events

From October 1, 2013 through November 4, 2013, the Company made new investments of $25,833 of in the financial services, food and beverage and media, entertainment and leisure industries. Of the $25,833 of new investments, 97.5% were first lien senior secured debt and 2.5% was an investment in funds. All of the new debt investments were floating rate and had a weighted average yield based upon cost at the time of investment of 10.8%.

From October 1, 2013 through November 4, 2013, the Company received proceeds of $21,647 from prepayments, sales or refinancings of investments in energy/utilities, financial services, food and beverage and media, entertainment and leisure industries, including prepayment premiums of $175. Of the aggregate principal amount of investments repaid, sold or refinanced, 4.1% were in first lien senior secured debt, 27.2% were second lien debt, 66.0% were subordinated debt and 2.8% were CLO residual interests. Of the debt investments prepaid, based upon par value, 4.2% were floating rate and 95.8% were fixed rate investments and 95.8% had a PIK election and 4.2% did not have a PIK election.

On October 9, 2013, the Company closed on an additional $85,000 of commitments to its Facilities, which increased the commitments on the Revolving Facility from $170,000 to $232,000 and commitments on the Term Loan Facility from $70,000 to $93,000.

On October 30, 2013, the Company’s board of directors declared a dividend of $0.34 per share payable on December 31, 2013 to stockholders of record at the close of business on December 16, 2013.

 

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

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this report. In addition to historical information, the following discussion and other parts of this report contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under Item 1A—“Risk Factors” of Part II of this quarterly report on Form 10-Q, Item 1A—“Risk Factors” of our annual report on Form 10-K, and “Cautionary Statement Regarding Forward-Looking Statements” of this Item 2. You should not place undue reliance on these forward-looking statements.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

 

   

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

 

   

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

 

   

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

 

   

the impact of increased competition;

 

   

the impact of future acquisitions and divestitures;

 

   

the unfavorable resolution of legal proceedings;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

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

 

   

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

 

   

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

 

   

our contractual arrangements and relationships with third parties;

 

   

any future financings by us;

 

   

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

 

   

fluctuations in foreign currency exchange rates; and

 

   

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

Overview

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

We are a direct lender to middle-market companies and invest in subordinated, or mezzanine, debt and second lien secured debt, which may include an associated equity component such as warrants, preferred stock or other similar securities. We may also selectively invest in first lien secured loans that generally have structures with higher interest rates, which include unitranche investments, or loan structures that combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans. In certain instances we will also make direct equity investments, including equity investments into or through funds, and we may also selectively invest in more broadly syndicated first lien secured loans from time to time. We may also provide advisory services to managed funds.

 

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

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

Since April 2010, after we completed our initial public offering and commenced principal operations, we have been responsible for making, on behalf of ourselves and managed funds, $985 million in commitments into 57 separate portfolio companies through a combination of both initial and follow-on investments.

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

Portfolio Composition and Investment Activity

Portfolio Composition

As of September 30, 2013, we have $571.7 million of investments (at fair value), which represents a $177.4 million, or 45.0% increase from the $394.3 million (at fair value) as of December 31, 2012. We also increased our portfolio to forty-nine investments, including THL Credit Greenway Fund LLC, or Greenway, and THL Credit Greenway Fund II LLC, or Greenway II, as of September 30, 2013, from thirty-four portfolio investments, including Greenway, as of December 31, 2012.

At September 30, 2013, our average portfolio investment, exclusive of Greenway, Greenway II and portfolio investments where we only have an equity investment, at amortized cost and fair value was approximately $13.6 million and $13.5 million, respectively and our largest portfolio investment by both amortized cost and fair value was approximately $25.6 million. At December 31, 2012, our average portfolio investment at both amortized cost and fair value was approximately $11.9 million and our largest portfolio company investment by both amortized cost and fair value was approximately $36.1 million.

At September 30, 2013, 53.9% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 46.1% bore interest at fixed rates. At December 31, 2012, 43.3% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 56.7% bore interest at fixed rates.

The weighted average yield of the debt and income-producing investments in our portfolio at their current cost was 12.1% at September 30, 2013 as compared to 13.9% at December 31, 2012. The weighted average yield on our debt securities at their current cost was 11.8% at September 30, 2013 as compared to 13.7% at December 31, 2012.

 

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The following table shows the weighted average yield by investment category at their current cost basis (in millions).

 

     As of  

Description:

   September 30,
2013
    December 31,
2012
 

First lien secured debt

     11.3     11.5

Second lien debt

     11.8     13.3

Subordinated debt

     12.5     15.0

Investments in funds (1)

     12.6     16.3

Investment in payment rights

     17.2     16.4

CLO residual interests

     14.6     15.5
  

 

 

   

 

 

 

Debt and income-producing investments

     12.1     13.9

Debt investments

     11.8     13.7

 

(1) Includes only our investment in LCP Capital Fund LLC, which is the only investment in funds where we receive regular payments.
(2) Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of upfront loan origination fees, original issue discount and market premium or discount. Yields exclude common equity investments, preferred equity investments and cash.

Our portfolio companies, in which we have debt investments, currently have an average EBITDA of approximately $30 million, based on the latest available financial information provided by the portfolio companies. Our weighted average attachment point in the capital structure of our portfolio companies is approximately 4.1 times EBITDA based on the latest available financial information.

As of September 30, 2013, 77% of our portfolio investments are in sponsored investments and 23% of our portfolio investments are in unsponsored investments. Our portfolio investments as of September 30, 2013 have used our capital for change of control transactions (38%), acquisitions/growth capital (13%), refinancings (11%), recapitalizations (21%) and other (17%).

The following table summarizes the amortized cost and fair value of investments as of September 30, 2013 (in millions).

 

Description

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

First lien debt

   $ 183.4         32.1   $ 183.7         32.1

Subordinated debt

     175.8         30.8     170.4         29.8

Second lien debt

     153.6         26.9     154.4         27.0

CLO residual interest

     33.5         5.9     33.4         5.9

Investment in payment rights

     12.3         2.1     14.4         2.5

Investments in funds

     8.6         1.5     8.9         1.6

Equity investments

     4.0         0.7     6.5         1.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 571.2         100.0   $ 571.7         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table summarizes the amortized cost and fair value of investments as of December 31, 2012 (in millions).

 

Description

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

Subordinated debt

   $ 184.1         47.1   $ 183.3         46.4

First lien secured debt

     101.8         26.0     102.2         26.0

Second lien debt

     70.6         18.0     70.0         17.8

Investment in payment rights

     12.3         3.1     12.3         3.1

Investments in funds

     9.6         2.4     10.3         2.6

CLO residual interests

     9.4         2.4     9.4         2.4

Equity investments

     3.9         1.0     6.8         1.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 391.7         100.0   $ 394.3         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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

 

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The following is a summary of the industry classification in which the Company invests as of September 30, 2013 (in millions).

 

Industry

   Cost      Fair Value      % of
Net Assets
 

Financial services

   $ 96.5       $ 97.5         21.49

IT services

     77.0         77.4         17.06

Industrials

     58.7         58.7         12.93

Healthcare

     49.4         50.7         11.18

Business services

     51.2         50.3         11.08

Manufacturing

     49.3         49.1         10.82

Food & beverage

     44.9         44.5         9.80

Energy / utilities

     33.2         33.1         7.29

Media, entertainment and leisure

     28.8         31.0         6.84

Consumer products

     30.5         30.9         6.82

Retail & grocery

     26.7         23.3         5.14

Restaurants

     20.8         20.8         4.58

Aerospace & defense

     4.2         4.4         0.96
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 571.2       $ 571.7         125.99
  

 

 

    

 

 

    

 

 

 

The following is a summary of the industry classification in which the Company invests as of December 31, 2012 (in millions)(1).

 

Industry

   Cost      Fair Value      % of
Net Assets
 

Healthcare

   $ 55.0       $ 56.5         16.27

Consumer products

     50.0         50.0         14.39

Food & beverage

     44.1         43.5         12.54

Industrials

     43.1         43.1         12.40

Manufacturing

     39.0         38.1         10.98

IT services

     34.6         34.8         10.01

Financial services

     31.2         31.9         9.19

Business services

     32.5         31.5         9.05

Retail & grocery

     26.5         27.0         7.76

Media, entertainment and leisure

     13.7         15.7         4.51

Energy / utilities

     9.8         9.8         2.81

Restaurants

     8.2         8.4         2.42

Aerospace & defense

     4.0         4.0         1.16
  

 

 

    

 

 

    

 

 

 
   $ 391.7       $ 394.3         113.49
  

 

 

    

 

 

    

 

 

 

 

(1) We have changed the industry classification of certain investments to conform to new industry classifications adopted as of September 30, 2013.

 

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Investment Activity

The following is a summary of our investment activity, presented on a cost basis, for the three and nine months ended September 30, 2013 and 2012 (in millions).

 

     Three months ended September 30,     Nine months ended September 30,  
     2013     2012     2013     2012  

New portfolio transactions

   $ 91.7      $ 70.3      $ 280.5      $ 154.2   

Existing portfolio investments

        

Follow-on investments

     4.6        —          15.2        14.9   

Delayed draw and revolver investments

     0.8        —          1.5        3.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total existing portfolio investments

     5.4        —          16.7        17.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio investment activity

   $ 97.1      $ 70.3      $ 297.2      $ 172.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of new portfolio investments

     5        5        11        13   

Number of existing portfolio investments

     4        —          9        4   

First lien secured debt

   $ 39.4      $ 50.9      $ 121.2      $ 54.0   

Second lien debt

     44.0        —          100.7        19.6   

Subordinated debt

     4.2        19.4        49.6        85.3   

Investments in funds

     0.2        —          0.4        —     

Investment in payment rights

     —          —          —          12.5   

Equity investments

     0.2        —          0.2        0.7   

CLO residual interests

     9.1        —          25.1        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio investments

   $ 97.1      $ 70.3      $ 297.2      $ 172.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average yield of new debt investments

     11.6     12.4     11.7     13.7

Weighted average yield, including all new income-producing investments

     11.9     12.4     11.9     13.9

 

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The following is a summary of the proceeds received from prepayments and sales of our investments (in millions).

 

     Three months ended September 30,      Nine months ended September 30,  
Investment    2013      2012      2013      2012  

20-20 Technologies Inc.

   $ 0.1       $ —         $ 0.3       $ —     

AIM Media Texas Operating, LLC

     0.5         —           4.2         —     

Charming Charlie, Inc.

     —           —           —           11.6   

Chuy’s Opco, Inc.

     —           8.3         —           8.7   

Connecture, Inc. (c)

     —           —           1.0         —     

CRS Reprocessing, LLC

     —           0.5         0.5         2.7   

Cydcor LLC (a)

     0.3         —           15.2         —     

Duff & Phelps Corporation

     —           —           —           —     

Embarcadero Technologies, Inc. (c)

     0.1         —           5.0         —     

Firebirds International, LLC

     —           —           8.3         —     

Food Processing Holdings, LLC

     —           —           —           12.6   

Gold, Inc. (c)

     —           —           19.8         —     

Gryphon Partners 3.5, L.P.

     0.4         —           1.3         —     

Harrison Gypsum, LLC

     0.3         —           0.9         —     

Hart InterCivic, Inc.

     —           —           0.8         0.8   

HEALTHCAREfirst, Inc.

     0.3         14.0         0.6         14.0   

Hickory Farms, Inc.

     —           —           —           9.5   

Holland Intermediate Acquisition Corp.(c)

     4.9         —           7.1         —     

IMDS Corporation (e)

     13.5         —           13.5         —     

Ingenio Acquisition, LLC (c)

     —           —           1.5         —     

LCP Capital Fund LLC

     —           —           —           3.6   

Loadmaster Derrick & Equipment, Inc.

     —           —           1.0         —     

MModal MQ Inc.

     —           6.9         —           6.9   

Octagon Income Note XIV, Ltd.

     0.7         —           0.7         —     

Pinnacle Operating Corporation

     10.3         —           10.3         —     

Purple Communications, Inc.

     —           0.3         —           0.8   

Sheridan Square CLO, Ltd

     0.4         —           0.5         —     

Surgery Center Holdings, Inc. (b)

     —           —           19.3         —     

T&D Solutions, LLC

     —           —           —           0.1   

Tri Starr Management Services, Inc. (c)

     —           —           2.4         —     

Wingspan Portfolio Holdings, Inc. (c)

     —           —           7.1         —     

YP Equity Investors, LLC (f)

     —           —           3.4         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total (d)

   $ 31.8       $ 30.0       $ 124.7       $ 71.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Proceeds include $14.3 million received in connection with the prepayment of our initial first lien debt investment as part of a refinancing and subsequently closed on another $14.3 million first lien debt investment.
(b) Proceeds include $19.3 million, including a prepayment premium, received in connection with the prepayment of our subordinated debt investment as part of a refinancing. We subsequently closed on a $15.0 million second lien investment.
(c) Proceeds received in connection with the sale of investments to Greenway II and co-investors.
(d) For the three months ended September 30, 2013 and 2012, proceeds included $0.3 and $1.2 million, respectively, of prepayment premiums. For the nine months ended September 30, 2013 and 2012, proceeds included $1.1 and $1.5 million, respectively, of prepayment premiums.
(e) Proceeds include $1.5 million recorded as an escrow receivable.
(f) Excludes dividend income and realized gains, net of tax received in connection with our equity investment in June 2013. Proceeds shown reflect amounts received in connection with the repayment of our debt investment.

 

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The frequency or volume of any prepayments may fluctuate significantly from period to period. The increase between the three and nine months ended September 30, 2013 and 2012 are primarily the result of the sale of certain investments to Greenway II and a co-investor and portfolio company refinancings.

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

We had an increase in the number of unsponsored investment transactions closing in 2013, having closed 4 for the nine months ended September 30, 2013 compared to two for all of 2012.

Investment Risk

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

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

Managed Funds

The Advisor and its affiliates may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Advisor may serve as investment adviser to one or more registered closed-end funds. In addition, our officers may serve in similar capacities for one or more registered closed-end funds. The Advisor and its affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Advisor or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Advisor’s allocation procedures.

We do not have the ability to redeem our investment in funds but distributions are expected to be received until the dissolution of the funds, which is anticipated to be between 2013 and 2021, as the underlying investments are expected to be liquidated.

Greenway

On January 14, 2011, THL Credit Greenway Fund LLC, or Greenway, was formed as a Delaware limited liability company. Greenway is a portfolio company of the Company. Greenway is a closed-end investment fund which provides for no liquidity or redemption options and is not readily marketable. Greenway operates under a limited liability agreement dated January 19, 2011, or the Agreement. Greenway will continue in existence until January 14, 2021, subject to earlier termination pursuant to certain terms of the Agreement. The term may also be extended for up to three additional one-year periods pursuant to certain terms of the Agreement. Greenway had a two year investment period. Greenway has $150 million of capital committed by affiliates of a single institutional investor, and is managed by the Company. The Company’s capital commitment to Greenway is $0.02 million. As of September 30, 2013 and December 31, 2012, all of the capital had been called by Greenway. Our nominal investment in Greenway is reflected in the September 30, 2013 and December 31, 2012 Consolidated Schedule of Investments.

As manager of Greenway, the Company acts as the investment adviser to Greenway and is entitled to receive certain fees relating to investment management services, provided including a base management fee, a performance fee and a portion of the closing fees on each investment transaction. As a result, Greenway is classified as an affiliate of the Company. For the three months ended September 30, 2013 and 2012, the Company earned $0.4 million and $0.6 million in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. For the nine months ended September 30, 2013 and 2012, the Company earned $1.4 million and $1.8 million in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2013 and December 31, 2012, $0.4 million and $0.4 million of fees related to Greenway, respectively, were included in due from affiliate on the Consolidated Statements of Assets and Liabilities.

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

 

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Greenway II

On January 31, 2013, THL Credit Greenway Fund II, LLC, or Greenway II LLC, was formed as a Delaware limited liability company and is a portfolio company of the Company. Greenway II LLC is a closed-end investment fund which provides for no liquidity or redemption options and is not readily marketable. Greenway II operates under a limited liability agreement dated February 11, 2013, as amended, or the Greenway II Agreement. Greenway II LLC will continue in existence for eight years from the final closing date, subject to earlier termination pursuant to certain terms of the Greenway II LLC Agreement. The term may also be extended for up to three additional one-year periods pursuant to certain terms of the Greenway II LLC Agreement. Greenway II LLC has a two year investment period.

Greenway II LLC has $186.5 million of commitments primarily from institutional investors. The Company’s capital commitment to Greenway II is $0.004 million. Our nominal investment in Greenway II LLC is reflected in the September 30, 2013 Consolidated Schedule of Investments. Greenway II LLC is managed by the Company. As contemplated in the Greenway II LLC Agreement, we have established a related investment vehicle and entered into an investment management agreement with an account set up by an unaffiliated third party investor to invest alongside Greenway II LLC pursuant to similar economic terms. The account is also managed by the Company. References to “Greenway II” herein include Greenway II LLC and the accounts of related investment vehicles.

The Company acts as the investment adviser to Greenway II and is entitled to receive certain fees relating to investment management services provided, including a base management fee, a performance fee and a portion of the closing fees on each investment transaction. As a result, Greenway II is classified as an affiliate of the Company. For the three and nine months ended September 30, 2013, we earned $0.5 million and $0.7 million, respectively, in fees related to Greenway II, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2013, $0.4 million of fees related to Greenway II were included in due from affiliate on the Consolidated Statements of Assets and Liabilities. During the nine months ended September 30, 2013, the Company sold a portion of its investments in seven portfolio companies at fair value, for total proceeds of $19.5 million, to Greenway II determined in accordance with the normal valuation policies with no significant realized gains on the transactions.

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

Investment in Funds

LCP Capital Fund LLC

We have invested in a membership interest of LCP Capital Fund LLC, or LCP, a private investment company that was organized to participate in investment opportunities that arise when a special purpose entity, or SPE, or sponsor thereof, needs to raise capital to achieve ratings, regulatory, accounting, tax, or other objectives. LCP is a closed investment vehicle which provides for no liquidity or redemption options and is not readily marketable. LCP is managed by an unaffiliated third party. As of September 30, 2013 and December 31, 2012, we had contributed $12.0 million of capital in the form of membership interests in LCP, which is invested in an underlying SPE referred to as Series 2005-01. On May 1, 2012, we received $3.6 million in connection with a reduction in its commitment pursuant to the governing documents, which is related to the notional amount of the underlying credit default swaps. Our exposure is limited to the amount of its remaining contributed capital. As of September 30, 2013 and December 31, 2012, the value of our interest in LCP was $8.4 million, and is reflected in the Consolidated Schedules of Investments.

Our contributed capital in LCP is maintained in a collateral account held by a third-party custodian, who is neither affiliated with us nor with LCP, and acts as collateral on certain credit default swaps for the Series 2005-01 for which LCP receives fixed premium payments throughout the year, adjusted for expenses incurred by LCP. The SPE purchases assets on a non-recourse basis and LCP agrees to reimburse the SPE up to a specified amount for potential losses. LCP holds the contributed cash invested for an SPE transaction in a segregated account that secures the payment obligation of LCP. We expect to receive distributions from LCP on a quarterly basis. Such distributions are reflected in our Consolidated Statements of Operations as interest income in the period earned. LCP has a remaining life of 18 years; however, it is currently expected that Series 2005-01 will terminate on February 15, 2015, if not extended prior to this date pursuant to the terms of Series 2005-1 SPE. Regardless of the date of dissolution, LCP has the right to receive amounts held in the collateral account if there is an event of default under LCP’s operative agreements. LCP may have other series which will have investments in other SPEs to which we will not be exposed.

CLO Residual Interests

We invested $33.5 million in the residual interest in the subordinated notes, which can also be structured as income notes, of four CLOs. We own between 10.4% and 23.1% of the subordinated notes of these CLOs. The subordinated notes are subordinated to the secured notes issued in connection with each CLO. The secured notes in each structure are collateralized by portfolios consisting primarily of broadly syndicated senior secured bank loans. The first investment was in the income notes of a $625.9 million CLO of

 

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Octagon Investment Partners XIV, Ltd. The income notes are part of a class of subordinated notes, which are paid equal with other subordinated notes within this class. The subordinated notes are subordinated to the claims of $569.3 million in secured notes issued by the structure. The second investment was in the income notes of a $724.5 million CLO of Sheridan Square CLO Ltd. The income notes are part of a class of subordinated notes, which are paid equal with other subordinated notes within this class. The subordinated notes are subordinated to the claims of $658.7 million in secured notes issued by the structure. The third investment was in the subordinated notes of the $517.0 million CLO of Adirondack Park CLO Ltd. There is only one class of subordinated notes that are subordinated to the claims of $463.5 million in secured notes issued by the structure. The fourth investment was in the subordinated notes of a $516.4 million CLO of Dryden 30 Senior Loan Fund. The subordinated notes are subordinated to the claims of $473.2 million in secured notes issued by the structure.

In each case, the subordinated notes do not have a stated rate of interest, but are entitled to receive distributions on quarterly payment dates subject to the priority of payments to secured note holders in the structures if and to the extent funds are available for such purpose. The payments on the subordinated notes are subordinated not only to the interest and principal claims of all secured notes issued, but to certain administrative expenses, taxes, and the base and subordinated fees paid to the collateral manager. Payments to the subordinated notes may vary significantly quarter to quarter for a variety of reasons and may be subject to 100% loss. Investments in subordinated notes, due to the structure of the CLO, can be significantly impacted by change in the market value of the assets, the distributions on the assets, defaults and recoveries on the assets, capital gains and losses on the assets along with prices, interest rates and other risks associated with the assets.

Investment in Tax Receivable Agreement Payment Rights

In June 2012, we invested in a TRA that entitles us to certain payment rights, or TRA Payment Rights, from Duff & Phelps Corporation, or Duff & Phelps. The TRA transfers the economic value of certain tax deductions, or tax benefits, taken by Duff & Phelps to us and entitles us to a stream of payments to be received. The TRA payment right is, in effect, a subordinated claim on the issuing company which can be valued based on the credit risk of the issuer, which includes projected future earnings, the liquidity of the underlying payment right, risk of tax law changes, the effective tax rate and any other factors which might impact the value of the payment right.

Through the TRA, we are entitled to receive an annual tax benefit payment based upon 85% of the savings from certain deductions along with interest. The payments that we are entitled to receive result from cash savings, if any, in U.S. federal, state or local income tax that Duff & Phelps realizes (i) from the tax savings derived from the goodwill and other intangibles created in connection with the Duff & Phelps initial public offering and (ii) from other income tax deductions. These tax benefit payments will continue until the relevant deductions are fully utilized, which is projected to be 17 years. Pursuant to the TRA, we maintain the right to enforce Duff & Phelps payment obligations as a transferee of the TRA contract. If Duff & Phelps chooses to pre-pay and terminate the TRA, we will be entitled to the present value of the expected future TRA payments. If Duff & Phelps breaches any material obligation than all obligations are accelerated and calculated as if an early termination occurred. Failure to make a payment is a breach of a material obligation if the failure occurs for more than three months.

The projected annual tax benefit payment will be accrued on a quarterly basis and paid annually. The payment will be allocated between a reduction in the cost basis of the investment and interest income based upon an amortization schedule. Based upon the characteristics of the investment, we have chosen to categorize the investment in the TRA payment rights as investment in payment rights in the fair value hierarchy.

Asset Quality

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

As part of the monitoring process, the Advisor assesses the risk profile of each of our investments and assigns each investment a score of a 1, 2, 3, 4 or 5

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

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

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

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

 

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

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

For any investment receiving a score of a 3 or lower, our manager increases its level of focus and prepares regular updates for the investment committee summarizing current operating results, material impending events and recommended actions. In 2013, we assigned an investment score of 4 to two portfolio companies.

The Advisor monitors and, when appropriate, changes the investment scores assigned to each investment in our portfolio. In connection with our investment valuation process, the Advisor and board of directors review these investment scores on a quarterly basis. Our average investment score was 2.08 as of September 30, 2013 and 2.12 as of December 31, 2012, respectively. The following is a distribution of the investment scores of our portfolio companies at September 30, 2013 (in millions):

 

     September 30, 2013     December 31, 2012  

Investment Score

   Fair Value      % of Total
Portfolio
    Fair Value      % of Total
Portfolio
 

1(a)

   $ 67.4         11.79   $ 20.0         5.1

2(b)

     415.7         72.71     312.4         79.2

3(c)

     72.0         12.60     55.5         14.1

4(d)

     16.6         2.90     6.4         1.6

5

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 571.7         100.00   $ 394.3         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) As of September 30, 2013, Investment Score “1” included no loans to companies in which we also hold equity securities. As of December 31, 2012, Investment Score “1” included $8.2 million of loans to companies in which we also hold equity securities.
(b) As of September 30, 2013 and December 31, 2012, Investment Score “2” included $39.1 million and $49.4 million, respectively, of loans to companies in which we also hold equity securities.
(c) As of September 30, 2013 and December 31, 2012, Investment Score “3” included $14.3 million and $27.0 million, respectively, of loans to companies in which we also hold equity securities.
(d) As of September 30, 2013, Investment Score “4” included $10.2 million of loans to companies in which we also hold equity securities. As of December 31, 2012, Investment Score “4” included no loans to companies in which we also hold equity securities.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when it is no longer probable that principal or interest will be collected. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. As of September 30, 2013, we had two loans on non-accrual with an amortized cost basis of $21.0 million and fair value of $16.6 million. As of December 31, 2012, we had no loans on non-accrual.

Results of Operations

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

Comparison of the Three and Nine Months Ended September 30, 2013 and 2012

Investment Income

We generate revenues primarily in the form of interest on the debt and other income-producing securities we hold. Income-producing securities include investments in funds, investment in payment rights and collateralized loan obligation, or CLO, residual interests. Our investments in fixed income instruments generally have an expected maturity of five to seven years, and typically bear

 

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interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt instruments and preferred stock investments may defer payments of dividends or pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. In addition to interest income, we may receive dividends and other distributions related to our equity investments. We may also generate revenue in the form of fees from the management of Greenway and Greenway II, prepayment premiums, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

The following shows the breakdown of investment income for the three and nine months ended September 30, 2013 and 2012 (in millions):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Interest income on debt securities

           

Cash interest on debt securities

   $ 13.8       $ 9.6       $ 36.9       $ 26.2   

PIK interest

     0.6         1.1         2.6         3.0   

Prepayment premiums

     0.3         1.2         1.0         1.5   

Accretion of discounts and other fees

     1.2         0.8         3.3         2.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest on debt securities

     15.9         12.7         43.8         32.7   

Dividend income

     0.4         —           4.9         —     

Interest income and accretion of discounts on income-producing securities

     1.8         0.9         4.7         2.0   

Fees related to Greenway and Greenway II

     0.9         0.5         2.1         1.8   

Other income

     0.1         0.1         0.7         0.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19.1       $ 14.2       $ 56.2       $ 36.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

The increases in investment income from the respective periods were due to the growth in the overall investment portfolio and dividends received from our equity investments in YP Equity Investors, LLC, or YP, and Surgery Center Holdings, Inc., or Surgery for each of the respective periods.

The following shows a rollforward of PIK income activity for the nine months ended September 30, 2013 and for the year ended December 31, 2012 (in millions):

 

Accumulated PIK balance at December 31, 2011

   $ 3.5   

PIK income capitalized/receivable

     4.1   

PIK received in cash from full repayments

     (1.8
  

 

 

 

Accumulated PIK balance at December 31, 2012

     5.8   

PIK income capitalized/receivable

     2.6   

PIK received in cash from full repayments

     (2.3
  

 

 

 

Accumulated PIK balance at September 30, 2013

   $ 6.1   
  

 

 

 

In certain investment transactions, we may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned. We had no income from advisory services related to portfolio companies for the three and nine months ended September 30, 2013 and 2012.

Expenses

Our primary operating expenses include the payment of base management fees, an incentive fee, and expenses reimbursable under the investment management agreement and the allocable portion of overhead under the administration and investment management agreements (“administrator expenses”). The base management fee compensates the Advisor for work in identifying,

 

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evaluating, negotiating, closing and monitoring our investments. Our investment management agreement and administration agreement provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for facilities, office equipment and utilities allocable to the performance by the Advisor of its duties under the agreements, as well as any costs and expenses incurred by the Advisor relating to any administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

The following shows the breakdown of expenses for the three and nine months ended September 30, 2013 and 2012 (in millions):

 

     Three months ended September 30,      Nine months ended September 30,  
     2013     2012      2013      2012  

Expenses

          

Incentive fees(a)

   $ 2.1      $ 1.7       $ 8.1       $ 4.8   

Base management fees

     2.1        1.3         5.3         3.4   

Administrator expenses

     0.8        0.7         2.5         2.2   

Credit facility fees and expenses

     1.7        1.3         4.9         2.9   

Other general and administrative expenses

     0.9        0.8         2.7         2.3   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses before taxes

     7.6        5.8         23.5         15.6   

Income tax (benefit) provision

     (0.1     —           0.4         —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Total expenses after taxes

   $ 7.5      $ 5.8       $ 23.9       $ 15.6   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

(a) For the three months ended September 30, 2013 and 2012, incentive fees include the effect of unrealized depreciation of ($0.7) million and ($0.3) million, respectively. For the nine months ended September 30, 2013 and 2012, incentive fees include the effect of unrealized depreciation of ($0.3) million and ($0.4) million, respectively. There can be no assurance that such unrealized depreciation will be realized in the future.

The increase in operating expenses for the respective periods was due primarily to the increase in base management fees and incentive fee, which was the result of growing the size of our portfolio and resultant performance, and credit facility expenses, which was a result of an increase in the credit facility commitments and usage.

We expect certain of our operating expenses, including administrator expenses, professional fees and other general and administrative expenses to decline as a percentage of our total assets during periods of growth and increase as a percentage of our total assets during periods of asset declines.

Net Investment Income

Net investment income was $11.6 million, or $0.34 per common share based on a weighted average of 33,905,202 common shares outstanding for the three months ended September 30, 2013, as compared to $8.5 million, or $0.41 per common share based on a weighted average of 20,617,702 common shares outstanding for the three months ended September 30, 2012.

Net investment income was $32.3 million, or $1.11 per common share based on a weighted average of 29,067,620 common shares outstanding for the nine months ended September 30, 2013, as compared to $21.2 million, or $1.04 per common share based on a weighted average of 20,353,668 common shares outstanding for the nine months ended September 30, 2012.

The increase in net investment income is primarily attributable to the growth in the portfolio, increase in fees related to our managed fund Greenway II, and dividend income received from our equity investments in YP and Surgery for each of the respective periods.

Net Realized Gains and Losses on Investments

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

We recognized realized (losses) gains on our portfolio investments of $(0.4) million and $2.4 million during the three and nine months ended September 30, 2013, respectively, related primarily to the proceeds received from YP. We recorded an estimated tax benefit related to the realized gain of $1.1 million and $0 million during the three and nine months ended September 30, 2013, respectively. Realized losses of ($0.4) million for the three months ended September 30, 2013, reflect a revision to previously recognized estimated realized gains and dividend income as a result of adjusted tax estimates from YP.

 

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We did not recognize any realized gains or losses on our portfolio investments during the three and nine months ended September 30, 2012.

Net Change in Unrealized Appreciation of Investments

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

The following shows the breakdown in the changes in unrealized appreciation of investments for the three and nine months ended September 30, 2013 and 2012 (in millions):

 

     Three Months ended September 30,     Nine Months ended September 30,  
     2013     2012     2013     2012  

Gross unrealized appreciation on investments

   $ 2.1      $ 1.2      $ 7.3      $ 2.1   

Gross unrealized depreciation on investments

     (5.2     (1.8     (8.6     (2.9

Reversal of prior period net unrealized appreciation upon a realization

     —         (1.1     (0.8 )     (1.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (3.1   $ (1.7   $ (2.1   $ (2.1
  

 

 

   

 

 

   

 

 

   

 

 

 

The change in unrealized appreciation on our investments was driven primarily by changes in the capital market conditions, financial performance of certain portfolio companies and the reversal of unrealized appreciation of investments repaid or recapitalized in 2013.

Provision for Taxes on Unrealized Gain on Investments

Certain consolidated subsidiaries of ours are subject to U.S. federal and state income taxes. These taxable entities are not consolidated with the Company for income tax purposes and may generate income tax liabilities or assets from temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries. For the three and nine months ended September 30, 2013, the Company recognized a provision for tax on unrealized gain on investments of $1.1 million and $1.0 million, respectively, for two consolidated subsidiaries. For the three and nine months ended September 30, 2012, the Company did not recognize a provision for tax on unrealized gain on investments. As of September 30, 2013 and December 31, 2012, $1.4 million and $0.5 million, respectively, were included in deferred tax liability on the Consolidated Statements of Assets and Liabilities relating to deferred tax on unrealized gain on investments.

Realized and Unrealized Gain (Loss) of Interest Rate Derivative

The interest rate derivative was entered into on May 10, 2012. Unrealized depreciation reflects the value of the interest rate derivative agreement during the reporting period. For the three months ended September 30, 2013 and 2012, the net change of unrealized depreciation on interest rate derivative totaled ($0.3) million and ($0.5) million, respectively. For the nine months ended September 30, 2013 and 2012, the net change of unrealized depreciation on interest rate derivative totaled $0.7 million and ($1.1) million, respectively. The changes were due to capital market changes impacting swap rates.

We measure realized gains or losses on the interest rate derivative based upon the difference between the proceeds received or the amount paid on the interest rate derivative. For the three months ended September 30, 2013 and 2012, we realized a loss of $0.1 million and $0.1 million, respectively, as interest rate derivative periodic interest payments, net. For the nine months ended September 30, 2013 and 2012, we realized a loss of $0.3 million and $0.1 million, respectively, as interest rate derivative periodic interest payments, net.

Net Increase in Net Assets Resulting from Operations

Net increase in net assets resulting from operations totaled $7.8 million, or $0.23 per common share based on a weighted average of 33,905,202 common shares for the three months ended September 30, 2013, as compared to $6.2 million, or $0.30 per common share based on a weighted average of 20,617,702 common shares outstanding, for the three months ended September 30, 2012.

Net increase in net assets resulting from operations totaled $32.0 million, or $1.10 per common share based on a weighted average of 29,067,620 common shares for the nine months ended September 30, 2013, as compared to $17.8 million, or $0.88 per common share based on a weighted average of 20,353,668 common shares outstanding, for the nine months ended September 30, 2012.

 

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The increase in net assets resulting from operations is due to the continued growth in net investment income, which is a result of growing our portfolio, dividends and realized gains from YP as well as changes in the unrealized values of our investments and interest rate derivative.

Financial condition, liquidity and capital resources

Cash Flows from Operating and Financing Activities

Our liquidity and capital resources are derived from our credit facilities, equity raises and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies, payment of dividends to the holders of our common stock and payments of fees and other operating expenses we incur. We have used, and expect to continue to use, our borrowings and the proceeds from the turnover in our portfolio and from public and private offerings of securities to finance our investment objectives, to the extent permitted by the 1940 Act.

We may raise additional equity or debt capital through both registered offerings off our effective shelf registration statement and private offerings of securities, by securitizing a portion of our investments or borrowings. To the extent we determine to raise additional equity through an offering of our common stock at a price below net asset value, existing investors will experience dilution. During our 2013 Annual Stockholder Meeting held on June 10, 2013, our stockholders authorized us, with the approval of our Board of Directors, to sell up to 25% of our outstanding common stock at a price below our then current net asset value per share and to offer and issue debt with warrants or debt convertible into shares of our common stock at an exercise or conversion price that will not be less than the fair market value per share but may be below the then current net asset value per share. There can be no assurance that these capital resources will be available.

On June 24, 2013, we received $106.2 million in proceeds, net of offering fees and underwriting discount, from our public equity offering of common stock and used $92.3 million to pay down outstanding loans on our Revolving Facility.

On March 15, 2013, we closed an additional $50 million of commitments to our Facilities, which brings the aggregate size to $240 million of commitments. As of September 30, 2013, we had a total of $70.0 million outstanding on our Term Loan Facility and $55.9 million outstanding under the Revolving Facility. The total amount outstanding had a weighted average interest rate of 4.41%. We borrowed $291.6 million under our Revolving Facility and $20.0 million under our Term Loan Facility for the nine months ended September 30, 2013 and repaid $235.7 million on our Revolving Facility from proceeds received from the equity offering, term loan and investment income. We borrowed $134.9 million under our Revolving Facility and $50.0 million under our Term Loan Facility for the nine months ended September 30, 2012 and repaid $139.9 million on our Revolving Facility from proceeds received from the Term Loan Facility and investment income.

Our operating activities used cash of $143.5 million and $84.3 million for the nine months ended September 30, 2013 and 2012, respectively, primarily in connection with the purchase of portfolio investments. For nine months ended September 30, 2013, our financing activities provided cash of $182.1 million from our common stock offering, net of offering costs, and net borrowings and used cash of $31.9 million for distributions to stockholders and $1.5 million for the payment of financing costs. For the nine months ended September 30, 2012, our financing activities provided cash of $127.0 million from our common stock offering, net of offering costs, and net borrowings and used cash of $19.4 million for distributions to stockholders and $2.9 million for the payment of financing costs.

As of September 30, 2013 and December 31, 2012, we had cash of $10.0 million and $4.8 million, respectively. We had no cash equivalents as of September 30, 2013 and December 31, 2012.

We believe cash balances, our Revolving Facility capacity and any proceeds generated from the sale or pay down of investments provides us with ample liquidity to acquit our pipeline for the coming quarters.

Credit Facility

On March 15, 2013, we entered into an amendment, or the Revolver Amendment, to our existing revolving credit agreement, or Revolving Facility, and entered into an amendment, or the Term Loan Amendment, to our term loan agreement credit facility, or Term Loan Facility, and together with the Revolving Facility, the Facilities, with ING Capital LLC.

The Revolver Loan Amendment revised the Revolving Facility dated May 10, 2012 to among other things, increase the amount available for borrowing under the Revolving Facility from $140.0 million to $170.0 million and extend the maturity date from May 2016 to May 2017 (with a one year term out period beginning in May 2016). The one year term out period is the one year anniversary between the revolver termination date, or the end of the availability period, and the maturity date. During this time, we are required to

 

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make mandatory prepayments on our loans from the proceeds we receive from the sale of assets, extraordinary receipts, returns of capital or the issuances of equity or debt. The Revolver Amendment also changes the interest rate of the Revolving Facility to (i) when the facility is more than or equal to 35% drawn and the step-down condition is satisfied, LIBOR plus 2.75%, (ii) when the facility is more than or equal to 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.00%, (iii) when the facility is less than 35% drawn and the step-down condition is satisfied, LIBOR plus 2.75%, and (iv) when the facility is less than 35% drawn and the step-down condition is not satisfied, LIBOR plus 3.25%. The non-use fee is 1.00% annually if we use 35% or less of the Revolving Facility and 0.50% annually if we use more than 35% of the Revolving Facility. We elect the LIBOR rate on the loans outstanding on our Revolving Facility, which can have a maturity date that is one, two, three or six months.

The Term Loan Amendment revised the Term Loan Facility dated May 10, 2012 to increase the $50.0 million senior secured term loan, or Term Loan, to $70.0 million and extend the maturity date from May 2017 to May 2018. The Term Loan bears interest at LIBOR plus 4.00% (with no LIBOR Floor) and has substantially similar terms to our existing Revolving Facility (as amended by the Amendment). We elect the LIBOR rate on our Term Loan, which can have a maturity date that is one, two, three or six months. The LIBOR rate on our Term Loan currently has a one month maturity.

Each of the Facilities includes an accordion feature permitting us to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $400.0 million.The Facilities generally require payment of interest on a quarterly basis for ABR loans, and at the end of the applicable interest period for Eurocurrency loans bearing interest at LIBOR, the interest rate benchmark used to determine the variable rates paid on the Facilities. LIBOR maturities can range between one and six months at the election of the Company. All outstanding principal is due upon each maturity date. The Facilities also require a mandatory prepayment of interest and principal upon certain customary triggering events (including, without limitation, the disposition of assets or the issuance of certain securities).

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

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

For the nine months ended September 30, 2013, we borrowed $311.6 million and repaid $235.7 million under the Facilities. For the nine months ended September 30, 2012, we borrowed $184.9 million and repaid $139.9 million under the Facilities.

As of September 30, 2013 and December 31, 2012, there were $125.9 million and $50.0 million of borrowings outstanding under the Facilities at a weighted average interest rate of 4.41% and 4.21%, respectively. The fair values of our Facilities are determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of our Facilities are estimated based upon market interest rates and entities with similar credit risk. As of September 30, 2013 and December 31, 2012, the Facilities would be deemed to be level 3 of the fair value hierarchy.

Interest expense and related fees of $1.4 million and $1.0 million were incurred in connection with the Facilities during the three months ended September 30, 2013 and 2012, respectively. Interest expense and related fees of $3.9 million and $2.2 million were incurred in connection with the Facilities during the nine months ended September 30, 2013 and 2012, respectively.

In accordance with the 1940 Act, with certain exceptions, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. The asset coverage as of September 30, 2013 is in excess of 200%.

See “Recent Developments” for a discussion of a recent amendment to the Facilities.

 

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Interest Rate Derivative

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

We record the change in valuation of the swap agreement in unrealized appreciation (depreciation) as of each measurement period. When the quarterly swap amounts are paid or received under the swap agreement, the amounts are recorded as a realized gain (loss) as interest rate derivative periodic interest payments, net on the Consolidated Statement of Operations.

For the three months ended September 30, 2013 and 2012, we recognized $0.1 million and $0.1 million, respectively, of realized loss from the swap agreement, which is reflected as interest rate derivative periodic interest payments, net in the Consolidated Statements of Operations. For the nine months ended September 30, 2013 and 2012, we recognized $0.3 million and $0.1 million, respectively, of realized loss from the swap agreement, which is reflected as interest rate derivative periodic interest payments, net in the Consolidated Statements of Operations.

For the three months ended September 30, 2013 and 2012, we recognized ($0.2) million and ($0.5) million of net change in unrealized depreciation from the swap agreement, respectively, which is listed under net change in unrealized depreciation on interest rate derivative in the Consolidated Statements of Operations. For nine months ended September 30, 2013 and 2012, we recognized $0.7 million and ($1.1) million of net change in unrealized depreciation from the swap agreement, respectively, which is listed under net change in unrealized depreciation on interest rate derivative in the Consolidated Statements of Operations. As of September 30, 2013 and December 31, 2012, our fair value of the swap agreement is $(0.3) million and $(1.1) million, respectively, which is listed as an interest rate derivative liability on the Consolidated Statements of Assets and Liabilities.

Commitments and Contingencies

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

Unfunded commitments to provide funds to portfolio companies are not reflected in our Consolidated Statements of Assets and Liabilities. Our unfunded commitments may be significant from time to time. These commitments will be subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We intend to use cash flow from normal and early principal repayments and proceeds from borrowings and offerings to fund these commitments.

As of September 30, 2013 and December 31, 2012, we have the following unfunded commitments to portfolio companies (in millions):

 

     As of  
     September 30, 2013      December 31, 2012  

Unfunded revolving commitments

   $ 10.7       $ 10.9   

Unfunded delayed draw and capital expenditure facilities

     8.0         12.0   

Unfunded commitments to investments in funds

     4.7         4.0   
  

 

 

    

 

 

 

Total unfunded commitments

   $ 23.4       $ 26.9   
  

 

 

    

 

 

 

Dividends

We have elected to be taxed as a regulated investment company under Subchapter M of the Code. In order to maintain our status as a regulated investment company, we are required to distribute at least 90% of our investment company taxable income. To avoid a 4% excise tax on undistributed earnings, we are required to distribute each calendar year the sum of (i) 98% of our ordinary income for such calendar year (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. We intend to make distributions to stockholders on a quarterly basis of substantially all of our net investment income. Although we intend to make distributions of net realized capital gains, if any, at least annually, out of assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. In addition, the extent and timing of special dividends, if any, will be determined by our board of directors and will largely be driven by portfolio specific events and tax considerations at the time.

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

 

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

 

Date Declared

   Record Date      Payment Date      Amount Per Share  

August 5, 2010

     September 2, 2010         September 30, 2010       $ 0.05   

November 4, 2010

     November 30, 2010         December 28, 2010       $ 0.10   

December 14, 2010

     December 31, 2010         January 28, 2011       $ 0.15   

March 10, 2011

     March 25, 2011         March 31, 2011       $ 0.23   

May 5, 2011

     June 15, 2011         June 30, 2011       $ 0.25   

July 28, 2011

     September 15, 2011         September 30, 2011       $ 0.26   

October 27, 2011

     December 15, 2011         December 30, 2011       $ 0.28   

March 6, 2012

     March 20, 2012         March 30, 2012       $ 0.29   

March 6, 2012

     March 20, 2012         March 30, 2012       $ 0.05   

May 2, 2012

     June 15, 2012         June 29, 2012       $ 0.30   

July 26, 2012

     September 14, 2012         September 28, 2012       $ 0.32   

November 2, 2012

     December 14, 2012         December 28, 2012       $ 0.33   

December 20, 2012

     December 31, 2012         January 28, 2013       $ 0.05   

February 27, 2013

     March 15, 2013         March 29, 2013       $ 0.33   

May 2, 2013

     June 14, 2013         June 28, 2013       $ 0.34   

August 2, 2013

     September 16, 2013         September 30, 2013       $ 0.34   

August 2, 2013

     September 16, 2013         September 30, 2013       $ 0.08   

October 30, 2013

     December 16, 2013         December 31, 2013       $ 0.34   

We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure stockholders that they will receive any distributions at a particular level. We maintain an “opt in” dividend reinvestment plan for our common stockholders. As a result, unless stockholders specifically elect to have their dividends automatically reinvested in additional shares of common stock, stockholders will receive all such dividends in cash. Under the terms of our dividend reinvestment plan, dividends will primarily be paid in newly issued shares of common stock. However, we reserve the right to purchase shares in the open market in connection with the implementation of the plan. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Distributions in excess of our current and accumulated profits and earnings would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions will be made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. If we had determined the tax attributes of our 2013 distributions as of September 30, 2013, 93.7% would be from ordinary income, 6.3% would be from capital gains and 0% would be a return of capital. There can be no certainty to stockholders that this determination is representative of what the tax attributes of our 2013 distributions to stockholders will actually be. Each year, a statement on Form 1099-DIV identifying the source of the distribution will be mailed to our stockholders.

Contractual obligations

We have entered into a contract with the Advisor to provide investment advisory services. Payments for investment advisory services under the investment management agreement in future periods will be equal to (a) an annual base management fee of 1.5% of our gross assets and (b) an incentive fee based on our performance. In addition, under our administration agreement, the Advisor will be reimbursed for administrative services incurred on our behalf. See description below under Related Party Transactions.

 

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The following table shows our contractual obligations as of September 30, 2013 (in millions):

 

     Payments due by period  

Contractual Obligations(1)

   Total      Less than
1 year
     1 - 3 years      3 - 5 years      After 5
years
 

Term Loan Facility

   $ 70.0         —          —        $ 70.0         —    

 

(1) 

Excludes commitments to extend credit to our portfolio companies.

We entered into an interest rate derivative to manage interest rate risk. We record the change in valuation of the swap agreement in unrealized appreciation (depreciation) as of each measurement period. When the quarterly interest rate swap amounts are paid or received under the swap agreement, the amounts are recorded as a realized gain (loss). Further discussion of the interest rate derivative is included in Note 1 “Significant Accounting Policies” and Note 7 “Interest Rate Derivative” in the “Notes to Consolidated Financial Statements”.

Off-Balance sheet arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Related Party Transactions

Investment Management Agreement

On February 27, 2013, our investment management agreement with the Advisor was re-approved by our Board of Directors. Under the investment management agreement, the Advisor, subject to the overall supervision of our board of directors, manages the day-to-day operations of, and provides investment advisory services to us.

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

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

For the three months ended September 30, 2013 and 2012, we incurred base management fees payable to the Advisor of $2.1 million, and $1.3 million, respectively. For the nine months ended September 30, 2013 and 2012, we incurred base management fees payable to the Advisor of $5.3 million, and $3.4 million, respectively. As of September 30, 2013 and December 31, 2012, $2.1 million and $1.5 million, respectively, was payable to the Advisor.

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

The ordinary income component is calculated, and payable, quarterly in arrears based on our preincentive fee net investment income for the immediately preceding calendar quarter, subject to a cumulative total return requirement and to deferral of non-cash amounts. The preincentive fee net investment income, which is expressed as a rate of return on the value of our net assets attributable to our common stock, for the immediately preceding calendar quarter, will have a 2.0% (which is 8.0% annualized) hurdle rate (also referred to as “minimum income level”). Preincentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under our administration agreement (discussed below), and any interest expense and any dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest. Preincentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. The Advisor receives no incentive fee for any calendar quarter in which our preincentive fee net investment income does not exceed the minimum income level. Subject to the cumulative total return requirement described below, the Advisor receives 100% of our preincentive fee net investment income for any calendar quarter with respect to that portion of the preincentive net investment income for such quarter, if any, that exceeds the minimum

 

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income level but is less than 2.5% (which is 10.0% annualized) of net assets (also referred to as the “catch-up” provision) and 20.0% of our preincentive fee net investment income for such calendar quarter, if any, greater than 2.5% (10.0% annualized) of net assets. The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of our preincentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20% of the amount by which our preincentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of our preincentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation for the then current and 11 preceding calendar quarters. In addition, the Advisor is not paid the portion of such incentive fee that is attributable to deferred interest until we actually receive such interest in cash.

For the three months ended September 30, 2013 and 2012, we incurred $2.7 million and $2.0 million, respectively, of incentive fees related to ordinary income. For the nine months September 30, 2013 and 2012, we incurred $7.9 million and $5.2 million, respectively, of incentive fees related to ordinary income.

The second component of the incentive fee (capital gains incentive fee) is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). This component is equal to 20.0% of our cumulative aggregate realized capital gains from inception through the end of that calendar year, computed net of the cumulative aggregate realized capital losses and cumulative aggregate unrealized capital depreciation through the end of such year. The aggregate amount of any previously paid capital gains incentive fees is subtracted from such capital gains incentive fee calculated. The capital gains incentive fee payable to our Advisor under the investment management agreement as of September 30, 2013 and December 31, 2012 was $0 and $0.04 million, respectively.

As of September 30, 2013 and December 31, 2012, $2.7 million and $2.3 million, respectively, of such incentive fees are currently payable to the Advisor. For the three months ended September 30, 2013, $0.1 million of incentive fees incurred by us were generated from deferred interest (i.e. PIK and certain discount accretion) and are not payable until such amounts are received in cash.

GAAP requires that the incentive fee accrual considers the cumulative aggregate unrealized capital appreciation or depreciation of investments or other financial instruments, such as an interest rate derivative, in the calculation, as an incentive fee would be payable if such unrealized capital appreciation or depreciation were realized, even though such unrealized capital appreciation or depreciation is not permitted to be considered in calculating the fee actually payable under the investment management agreement. For accounting purposes in accordance with GAAP only, in order to reflect the potential incentive fee that would be payable for a given period as if all unrealized gains or losses were realized, we have accrued incentive fees of $0.04 million and $0.3 million as of September 30, 2013 and December 31, 2012, respectively, based upon unrealized appreciation or depreciation of investments and the interest rate derivative for that period (in accordance with the terms of the investment management agreement). There can be no assurance that such unrealized appreciation or depreciation will be realized in the future. Accordingly, such fee, as calculated and accrued would not necessarily be payable under the investment management agreement, and may never be paid based upon the computation of incentive fees in subsequent periods.

Administration Agreement

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

 

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For the three months ended September 30, 2013 and 2012 we incurred administrator expenses payable to the Advisor of $0.8 million and $0.7 million, respectively. For the nine months ended September 30, 2013 and 2012 we incurred administrator expenses payable to the Advisor of $2.5 million and $2.2 million, respectively. As of September 30, 2013 and December 31, 2012, $0.05 million and $0.3 million, respectively, was payable to the Advisor.

License Agreement

We and the Advisor have entered into a license agreement with THL Partners under which THL Partners has granted to us and the Advisor a non-exclusive, personal, revocable worldwide non-transferable license to use the trade name and service mark THL, which is a proprietary mark of THL Partners, for specified purposes in connection with our respective businesses. This license agreement is royalty-free, which means we are not charged a fee for our use of the trade name and service mark THL. The license agreement is terminable either in its entirety or with respect to us or the Advisor by THL Partners at any time in its sole discretion upon 60 days prior written notice, and is also terminable with respect to either us or the Advisor by THL Partners in the case of certain events of non-compliance. After the expiration of its first one year term, the entire license agreement is terminable by either us or the Advisor at our or its sole discretion upon 60 days prior written notice. Upon termination of the license agreement, we and the Advisor must cease to use the name and mark THL, including any use in our respective legal names, filings, listings and other uses that may require us to withdraw or replace our names and marks. Other than with respect to the limited rights contained in the license agreement, we and the Advisor have no right to use, or other rights in respect of, the THL name and mark. We are an entity operated independently from THL Partners, and third parties who deal with us have no recourse against THL Partners.

Due to and from Affiliates

The Advisor paid certain other general and administrative expenses on our behalf. As of September 30, 2013, $0.1 million of expenses were included in due to affiliate on the Consolidated Statements of Assets and Liabilities. There were no amounts due to affiliate as of December 31, 2012.

We act as the investment adviser to Greenway and Greenway II and are entitled to receive certain fees. As a result, Greenway and Greenway II are classified as an affiliate. As of September 30, 2013 and December 31, 2012, $0.9 million and $0.4 million of fees related to Greenway and Greenway II, respectively, were included in due from affiliate on the Consolidated Statements of Assets and Liabilities.

Managed Funds

Greenway

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

Greenway has $150.0 million of capital committed by affiliates of a single institutional investor, and is managed by the Company. Our capital commitment to Greenway is $0.02 million. As of September 30, 2013 and December 31, 2012, all of the capital had been called by Greenway. Our nominal investment in Greenway LLC is reflected in the September 30, 2013 and December 31, 2012 Consolidated Schedule of Investments.

As manager of Greenway, we act as the investment adviser to Greenway and are entitled to receive certain fees relating to investment management services provided, including a base management fee, a performance fee and a portion of the closing fees on each investment transaction. As a result, Greenway is classified as an affiliate of the Company. For the three months ended September 30, 2013 and 2012, we earned $0.4 million and $0.6 million in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. For the nine months ended September 30, 2013, and 2012, we earned $1.4 million and $1.8 million in fees related to Greenway, respectively, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2013 and December 31, 2012, $0.4 million and $0.4 million, respectively, of fees related to Greenway were included in due from affiliate on the Consolidated Statements of Assets and Liabilities.

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

Greenway II

On January 31, 2013, Greenway II LLC was formed as a Delaware limited liability company and is a portfolio company of the Company. Greenway II LLC is a closed-end investment fund which provides for no liquidity or redemption options and is not readily marketable. Greenway II operates under a limited liability agreement dated February 11, 2013, as amended, or the Greenway II

 

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Agreement. Greenway II LLC will continue in existence for eight years from the final closing date, subject to earlier termination pursuant to certain terms of the Greenway II LLC Agreement. The term may also be extended for up to three additional one-year periods pursuant to certain terms of the Greenway II LLC Agreement. Greenway II LLC has a two year investment period.

Greenway II LLC has $186.5 million of commitments primarily from institutional investors. The Company’s capital commitment to Greenway II is $0.004 million. Our nominal investment in Greenway II LLC is reflected in the September 30, 2013 Consolidated Schedule of Investments. Greenway II LLC is managed by the Company. As contemplated in the Greenway II LLC Agreement, we have established a related investment vehicle and entered into an investment management agreement with an account set up by an unaffiliated third party investor to invest alongside Greenway II LLC pursuant to similar economic terms. The account is also managed by the Company. References to “Greenway II” herein include Greenway II LLC and the accounts of related investment vehicles.

The Company acts as the investment adviser to Greenway II and is entitled to receive certain fees relating to investment management services provided, including a base management fee, a performance fee and a portion of the closing fees on each investment transaction. As a result, Greenway II is classified as an affiliate of the Company. For the three and nine months ended September 30, 2013, we earned $0.5 million and $0.7 million, respectively, in fees related to Greenway II, which are included in other income from non-controlled, affiliated investment in the Consolidated Statements of Operations. As of September 30, 2013, $0.4 million of fees related to Greenway II were included in due from affiliate on the Consolidated Statements of Assets and Liabilities. During the nine months ended September 30, 2013, the Company sold a portion of its investments in seven portfolio companies at fair value, for a total of $19.5 million, to Greenway II determined in accordance with the normal valuation policies with no significant realized gains on the transactions.

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

Critical accounting policies

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

Valuation of Portfolio Investments

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

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

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

We value our residual interest investments in collateralized loan obligations using an income approach that analyzes the discounted cash flows of our residual interest. The discounted cash flows model utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available. Specifically, we use Intex cash flow models, or an appropriate substitute to form the basis for the valuation of our residual interest. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market data and projections provided by third parties as well as management estimates.

We value our investment in payment rights using an income approach that analyzes the discounted projected future cash flow streams assuming an appropriate discount rate, which will among other things consider other transactions in the market, the current credit environment, performance of the underlying portfolio company and the length of the remaining payment stream.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future cash flows or earnings to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, the current investment performance rating, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, transaction comparables, our principal market as the reporting entity and enterprise values, among other factors.

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

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

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

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

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

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

 

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

Revenue Recognition

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt investments with contractual PIK interest which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity we will cease accruing PIK interest if there is insufficient value to support the accrual or if it does not expect amounts to be collectible. We do not accrue as a receivable interest on loans and debt investments if we determine that it is probable that we will not be able to collect such interest. Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when it is no longer probable that principal or interest will be collected. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. Upfront loan origination fees, original issue discount and market discount or premium are capitalized, and we then amortize such amounts as interest income using the effective yield method. We record prepayment premiums on loans and debt investments as interest income.

Interest income from our investment in TRA and CLO residual interest investments are recorded based upon an estimation of an effective yield to expected maturity using anticipated cash flows with any remaining amount recorded to the cost basis of the investment. We monitor the anticipated cash flows from our TRA and CLO residual interest investments and will adjust our effective yield periodically.

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, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized. We measure realized gains or losses on the interest rate derivative based upon the difference between the proceeds received or the amounts paid on the interest rate derivative. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values or value of the interest rate derivative during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.

Federal Income Taxes, including excise tax

We operate so as to maintain our status as a RIC under Subchapter M of the Code and intend to continue to do so. Accordingly, we are not subject to federal income tax on the portion of our taxable income and gains distributed to stockholders. In order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of our investment company taxable income, as defined by the Code. To avoid a 4% federal excise tax, we must distribute each calendar year the sum of (i) 98% of our ordinary income for each such calendar year, and (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. We may choose not to distribute all of our taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If we choose to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. We will accrue excise tax on undistributed taxable income as required. Please refer to “Dividends” above for a summary of the distributions made in 2012 and 2013. For the three and nine months ended September 30, 2013 and 2012, we did not incur any excise tax expense.

Certain consolidated subsidiaries are subject to U.S. federal and state income taxes. These taxable entities are not consolidated for income tax purposes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries.

For the three months ended September 30, 2013, we recognized a current income tax benefit of ($1.2) million, which is shown as income tax (benefit) provision of ($0.1) million and income tax (benefit) provision, realized gain of ($1.1) million in the Consolidated Statements of Operations. For the nine months ended September 30, 2013, we recognized a current income tax provision of $0.4 million, which is shown as income tax (benefit) provision in the Consolidated Statements of Operations. These income taxes relate primarily to the proceeds received in June 2013 from our equity investment in YP into one of our wholly owned tax blocker corporations. The expense reflects the tax impact of a revision to previously recognized estimated realized gains and dividend income as a result of adjusted tax estimates provided by YP during the quarter and may be subject to further change once tax information is finalized for the year. We did not recognize current tax expense for the three or nine months ended September 30, 2012. As of September 30, 2013, $0.4 million of income tax receivable was included in prepaid expenses and other assets and $0.1 million was included as income taxes payable on the Consolidated Statements of Assets and Liabilities relating to dividend income and other projected earnings of tax blocker corporations. As of December 31, 2012, there were no income taxes receivable or payable.

 

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For the three and nine months ended September 30, 2013, we recognized a provision for tax on unrealized gain on investments of $1.1 million and $1.0 million, respectively, for consolidated subsidiaries in the Consolidated Statements of Operations. We did not recognize a benefit or provision for tax on unrealized gain on investments during the three and nine months ended September 30, 2012. As of September 30, 2013 and December 31, 2012, $1.4 million and $0.5 million, respectively, were included in deferred tax liability on the Consolidated Statements of Assets and Liabilities relating to deferred tax on unrealized gain on investments held in tax blocker corporations.

Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

Recent Developments

From October 1, 2013 through November 4, 2013, we made new investments of $25.8 million in the financial services, food and beverage and media, entertainment and leisure industries. Of the $25.8 million of new investments, 97.5% were in first lien senior secured debt and 2.5% was an investment in funds. All of the new debt investments were floating rate and had a weighted average yield based upon cost at the time of investment of 10.8%.

From October 1, 2013 through November 4, 2013, we received proceeds of $21.6 million from prepayments, sales or refinancings of investments in energy/utilities, financial services, food and beverage and media, entertainment and leisure industries, including prepayment premiums of $0.2 million. Of the aggregate principal amount of investments repaid, sold or refinanced, 4.1% were first lien senior secured debt, 27.2% were second lien debt, 66.0% were subordinated debt and 2.8% were CLO residual interests. Of the debt investments prepaid, based upon par value, 4.2% were floating rate and 95.8% were fixed rate investments and 95.8% had a PIK election and 4.2% did not have a PIK election.

On October 9, 2013, we closed on an additional $85.0 million of commitments to our Facilities, which increased the commitments on the Revolving Facility from $170.0 million to $232.0 million and commitments on the Term Loan Facility from $70.0 million to $93.0 million.

On October 30, 2013, our board of directors declared a dividend of $0.34 per share payable on December 31, 2013 to stockholders of record at the close of business on December 16, 2013.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. As of September 30, 2013, 50.0%, or twenty, of the debt investments in our portfolio bore interest at fixed rates. Twenty of the debt investments in our portfolio have interest rate floors, which have effectively converted the debt investments to fixed rate loans in the current interest rate environment. In the future, we expect other debt investments in our portfolio will have floating rates. Our borrowings as well as the amount we receive under the interest rate derivative agreement are based upon floating rates.

Based on our September 30, 2013 Consolidated Statement of Assets and Liabilities, the following table shows the annual impact on net income of changes in interest rates, which assumes no changes in our investments and borrowings (in millions):

 

Change in Basis Points

   Interest
Income
     Interest
Expense
     Net
Income
 

Up 300 basis points

   $ 5.1       $ 0.6       $ 4.5   

Up 200 basis points

   $ 2.5       $ 0.4       $ 2.1   

Up 100 basis points

   $ 0.2       $ 0.2       $ —     

Down 300 basis points

   $ —         $ —        $ —     

Down 200 basis points

   $ —         $ —        $ —     

Down 100 basis points

   $ —         $ —        $ —     

Based upon the current three month LIBOR rate, a hypothetical decrease in LIBOR would not affect our net income, due to the aforementioned floors in place on our debt investments. We currently hedge against interest rate fluctuations by using an interest rate swap whereby we pay a fixed rate of 1.1425% and receive three-month LIBOR on a notional amount of $50 million related to our Term Loan. In the future, we may use other standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments.

 

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Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer, under the supervision and with the participation of our management, conducted an evaluation of our disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of the end of the period covered by this quarterly report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not a defendant in any material pending legal proceeding, and no such material proceedings are known to be contemplated. However, from time to time, we may be party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under the contracts with our portfolio companies.

 

Item 1A. Risk Factors

In addition to the risks discussed below, important risk factors that could cause results or events to differ from current expectations are described in Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on March 4, 2013.

A failure or the perceived risk of a failure to raise the statutory debt limit of the United States could have a material adverse effect on our business, financial condition and results of operations.

As has been widely reported, the United States Treasury Secretary has stated that the federal government may not be able to meet its debt payments in the relatively near future (currently February 2014) unless the federal debt ceiling is raised. If legislation increasing the debt ceiling is not enacted and the debt ceiling is reached, the federal government may stop or delay making payments on its obligations. A failure by Congress to raise the debt limit would increase the risk of default by the United States on its obligations, as well as the risk of other economic dislocations. If the U.S. Government fails to complete its budget process or to provide for a continuing resolution before the expiration of the current continuing resolution (currently January 2014), another federal government shutdown may result. Such a failure or the perceived risk of such a failure consequently could have a material adverse effect on the financial markets and economic conditions in the United States and throughout the world. It could also limit our ability and the ability of our portfolio companies to obtain financing, and it could have a material adverse effect on the valuation of our portfolio companies. Consequently, the continued uncertainty in the general economic environment, including the recent government shutdown and potential debt ceiling implications, as well in specific economies of several individual geographic markets in which our portfolio companies operate, could adversely affect our business, financial condition and results of operations.

We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability.

General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will accrue interest at variable rates. The benchmarks used to determine the floating rates earned on our interest earning investments are LIBOR with maturities that range between one and twelve months and alternate base rate, or ABR, (commonly based on the Prime Rate or the Federal Funds Rate), with no fixed maturity date. 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. We anticipate using a combination of equity and long-term and short-term borrowings to finance our investment activities.

A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans and investments. We expect that a portion of our investments in debt will be at floating rates with a floor. However, in the event that we make investments in debt at variable rates, a significant increase in market interest rates could also result in an increase in our non-performing assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against the risk of adverse movement in interest rates in our short-term and long-term borrowings relative to our portfolio of assets. If we engage in hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations.

 

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Because we borrow money, there could be increased risk in investing in our company.

Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and may in the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation event, those lenders would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged.

Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on common stock. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. We and, indirectly, our stockholders will bear the cost associated with our leverage activity.

On May 10, 2012, we entered into the Amendment to our $50.0 million Term Loan Facility expiring in May 2017 with ING Capital LLC, or ING. The Amendment revised the Revolving Facility, dated March 11, 2011, to, among other things, increase the amount available for borrowing from $125.0 million to $140.0 million and extended the maturity date from May 2014 to May 2016 (with a one year term out period beginning in May 2015). The Revolving Facility and Term Loan facility, together the Facilities contain financial and operating covenants that could restrict our business activities, including our ability to declare dividends if we default under certain provisions.

On March 15, 2013, we amended our Revolving Facility and Term Loan Facility with ING. The Revolver Amendment revised the Revolving Facility to, among other things, increase the amount available for borrowing under the Revolving Facility from $140.0 million to $170.0 million and extend the maturity date from May 2016 to May 2017, with a one year term out period beginning in May 2016. The one year term out period is the one year anniversary between the revolver termination date, or the end of the availability period, and the maturity date. During this time, we are required to make mandatory prepayments on our loans from the proceeds we receive from the sale of assets, extraordinary receipts, returns of capital or the issuances of equity or debt. The Term Loan Amendment revised the Term Loan Facility to, among other things, increase the amount of the term loan commitments from $50 million to $70 million and extend the maturity date from May 2017 to May 2018. The amendments also modified the accordion feature in the Facilities to permit the Company to increase the Facilities, if certain conditions are satisfied, to an aggregate amount not to exceed the lesser of $400.0 million and the Company’s net worth, as determined under the Facilities. ING serves as administrative agent, lead arranger and bookrunner under each of the Facilities. As of September 30, 2013, there was $125.9 million of borrowings outstanding against the Facilities and our asset coverage ratio was over 200%. Our borrowings had a weighted average interest rate at the time of 4.41% exclusive of non-use and other fees associated with the Facilities. Accordingly, to cover the annual interest on our borrowings outstanding at September 30, 2013, at the then current rate, we would have to receive an annual yield of at least 0.23% (net of expenses). This example is for illustrative purposes only, and actual interest rates on our Facility borrowing are likely to fluctuate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital resources—Credit Facility” for additional information about the Amendment and the Term Loan Facility and the Facilities.

On October 9, 2013, we closed on an additional $85.0 million of commitments to our Facilities, which increased the commitments on the Revolving Facility from $170.0 million to $232.0 million and commitments on the Term Loan Facility from $70.0 million to $93.0 million.

As a BDC, generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able to make distributions.

 

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We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

For federal income tax purposes, we may include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with the making of a loan or possibly in other circumstances, or PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances as a result of PIK arrangements are included in income before we receive any corresponding cash payments. In addition, the PIK interest of many subordinated loans effectively operates as negative amortization of loan principal, thereby increasing credit risk exposure over the life of the loan because more will be owed at the end of the term of the loan than was owed when the loan was initially originated. We also may be required to include in income certain other amounts that we do not receive in cash.

Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to maintain our status as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements.

We may pay an incentive fee on income we do not receive in cash.

That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash. If a portfolio company defaults on a loan, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, while we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a formal clawback right against our investment adviser per se, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and thereby reduce such period’s incentive fee payment, but only to the extent that such an incentive fee is payable for that period because the write-off will not be carried forward to reduce any incentive fee payable in subsequent quarters.

We are dependent upon senior management personnel of our investment adviser for our future success, and if our investment adviser is unable to retain qualified personnel or if our investment adviser loses any member of its senior management team, our ability to achieve our investment objective could be significantly harmed.

We depend on the members of senior management of THL Credit Advisors, particularly its Chief Executive Officer and Chief Investment Officer, James K. Hunt, its Co-Presidents, W. Hunter Stropp and Sam W. Tillinghast, its Chief Operating Officer and Chief Financial Officer, Terrence W. Olson, its Chief Compliance Officer and General Counsel, Stephanie Paré Sullivan, its Managing Director, Christopher J. Flynn, collectively, the THL Credit Principals. Messrs. Hunt, Stropp, Tillinghast and Flynn constitute the investment principals of THL Credit Advisors, or the THL Credit Investment Principals. The THL Credit Investment Principals and other investment professionals make up our investment team and are responsible for the identification, final selection, structuring, closing and monitoring of our investments. These investment team members have critical industry experience and relationships that we will rely on to implement our business plan. Our future success depends on the continued service of the THL Credit Principals and the rest of our investment adviser’s senior management team. The departure of any of the members of THL Credit Advisors’ senior management or a significant number of the members of its investment team could have a material adverse effect on our ability to achieve our investment objective. As a result, we may not be able to operate our business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer. In addition, we can offer no assurance that THL Credit Advisors will remain our investment adviser or our administrator.

Our investment adviser and its affiliates, senior management and employees may have certain conflicts of interest.

Our investment adviser, its senior management and employees serve or may serve as investment advisers, officers, directors or principals of entities that operate in the same or a related line of business. For example, THL Credit Advisors may serve as investment adviser to one or more registered closed-end funds. In addition, our officers may serve in similar capacities for one or more registered closed-end funds. Accordingly, these individuals may have obligations to investors in those entities or funds, the fulfillment of which might not be in our best interests or the best interests of our stockholders. In addition, certain of the personnel employed by our investment adviser or focused on our business may change in ways that are detrimental to our business. Any affiliated investment vehicle formed in the future and managed by THL Credit Advisors or its affiliates may invest in asset classes similar to those targeted by us. As a result, THL Credit Advisors may face conflicts in allocating investment opportunities between us and such other entities. Although THL Credit Advisors will endeavor to allocate investment opportunities in a fair and equitable manner, it is possible that we may not be given the opportunity to participate in such investments. In any such case, if THL Credit Advisors forms other affiliates in the future, it is possible we may co-invest on a concurrent basis with such other affiliates, subject to compliance with applicable regulations and regulatory guidance, as well as applicable allocation procedures. In certain circumstances, negotiated co-investmentsmay be made only if we receive an order from the SEC permitting us to do so. There can be no assurance when any such order would be obtained or that one will be obtained at all.

 

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There are potential conflicts of interest between us and the fund managed by us which could impact our investment returns.

THL Credit Greenway Fund LLC, or Greenway, is an investment fund with $150 million of capital committed by affiliates of a single institutional investor, which has been called and invested by Greenway, and is managed by us. THL Credit Greenway Fund II LLC, or Greenway II LLC, is an investment fund with $186.5 million of capital commitments from primarily institutional investors. Greenway II LLC is also managed by us. As contemplated in the Greenway II limited liability agreement, we established a related investment vehicle and entered into an investment management agreement with an account set up by an unaffiliated third party investor to invest alongside Greenway II LLC pursuant to similar economic terms. The account is also managed by us. References to “Greenway II” herein include Greenway II LLC and the accounts of related investment vehicles.

Certain of our officers serve or may serve in an investment management capacity to Greenway and Greenway II. As a result, investment professionals may allocate such time and attention as is deemed appropriate and necessary to carry out operations of Greenway and Greenway II. In this respect, they may experience diversions of their attention from us and potential conflicts of interest between their work for us and their work for Greenway and Greenway II in the event that the interests of Greenway and Greenway II run counter to our interests.

Greenway and Greenway II invests in the same or similar asset classes that we target. These investments may be made at the direction of the same individuals acting in their capacity on behalf of us, Greenway and Greenway II. As a result, there may be conflicts in the allocation of investment opportunities between us, Greenway and Greenway II. We may or may not participate in investments made by funds managed by us or one of our affiliates.

Uncertainty relating to the LIBOR calculation process may adversely affect the value of our portfolio of the LIBOR-indexed, floating rate debt securities

Concerns about under-reporting of inter-bank lending rates, which are used to calculate LIBOR, have existed since 2008. Following a review conducted at the request of U.K. Government, in September 2012 recommendations, known as the Wheatley Review, were published for reforming the setting and governing of LIBOR. The Wheatley Review made a number of recommendations for changes with respect to LIBOR, including the introduction of statutory regulation of LIBOR, the transfer of responsibility for LIBOR from the British Bankers Association to an independent administrator, changes to the method of compilation of lending rates and new regulatory oversight and enforcement mechanisms for rate-setting and reduction in the number of currencies and tenors for which LIBOR is published. In October 2012, the Financial Secretary to the U.K. Treasury endorsed the report’s recommendations and indicated that the U.K. Government would act without delay to implement them. However, it is not possible to predict the effect of any changes, including those recommended by the Wheatley Review, in the methods pursuant to which the LIBOR rates are determined. Any such changes or reforms to LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR rates, which could have an adverse impact on the value of your investment and/or our results of operations. In addition, uncertainty as to the extent and mechanism by which any reforms will be adopted and the timing of such changes may adversely affect the current trading market for LIBOR-based securities. Any uncertainty in the value of LIBOR or the development of a widespread market view that LIBOR has been or is being manipulated may adversely affect the liquidity of our loan portfolio in the secondary market. An increase in alternative types of financing at the expense of LIBOR-based syndicated commercial loans may make it more difficult for us to source secured floating rate loans or reinvest proceeds in secured floating rate loans that satisfy our investment criteria or increase interest expense.

 

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

We issued a total of 0 shares and 2 share of common stock under our dividend reinvestment plan during the nine months ended September 30, 2013 and 2012, respectively. The issuance was not subject to the registration requirements of the Securities Act of 1933, as amended. The aggregate price for the shares of common stock issued under the dividend reinvestment plan during the three and nine months ended September 30, 2012 was approximately $0 and $26, respectively. No shares of common stock were issued under the dividend reinvestment plan during the three and nine months ended September 30, 2013.

 

Item 3. Defaults Upon Senior Securities

None.

 

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Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):

 

10.1    Amendment No. 4 to Senior Secured Revolving Credit Agreement, dated as of October 9, 2013, among THL Credit, Inc. as borrower, the subsidiaries of THL Credit, Inc. party thereto, the lenders from time to time party thereto and ING Capital LLC as administrative agent.*
10.2    Amendment No. 3 to Senior Secured Term Loan Credit Agreement, dated as of October 9, 2013, among THL Credit, Inc. as borrower, the subsidiaries of THL Credit, Inc. party thereto, the lenders party thereto, and ING Capital LLC as administrative agent.*
11    Computation of Per Share Earnings (included in the notes to the consolidated financial statements contained in this report).
31.1    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
31.2    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.*
32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).*
32.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).*

 

(*) Filed herewith

 

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SIGNATURES

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

 

  THL CREDIT, INC.
Date: November 4, 2013   By:  

/S/ JAMES K. HUNT

    James K. Hunt
    Chief Executive Officer
Date: November 4, 2013   By:
 

/S/ TERRENCE W. OLSON

    Terrence W. Olson
    Chief Financial Officer

 

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