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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

þ 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 001-33559

 

 

BLACKROCK KELSO CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-2725151

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

40 East 52nd Street, New York, NY   10022
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: 212-810-5800

 

 

 

      

 

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    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 þ    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  þ

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 6, 2013 was 74,402,185.

 

 

 


Table of Contents

BLACKROCK KELSO CAPITAL CORPORATION

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

Table of Contents

 

    

INDEX

   PAGE NO.  

PART I.

   CONSOLIDATED FINANCIAL INFORMATION      3   

Item 1.

   Consolidated Financial Statements      3   
  

Consolidated Statements of Assets and Liabilities as of September 30, 2013 and December 31, 2012 (unaudited)

     3   
  

Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 (unaudited)

     4   
  

Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2013 and 2012 (unaudited)

     5   
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (unaudited)

     6   
  

Consolidated Schedules of Investments as of September 30, 2013 and December 31, 2012 (unaudited)

     7   
   Notes to Consolidated Financial Statements (unaudited)      21   

Item 2.

  

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

     41   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      52   

Item 4.

   Controls and Procedures      52   

PART II.

   OTHER INFORMATION      54   

Item 1.

   Legal Proceedings      54   

Item 1A.

   Risk Factors      54   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      54   

Item 3.

   Defaults Upon Senior Securities      54   

Item 4.

  

Mine Safety Disclosures

     54   

Item 5.

   Other Information      54   

Item 6.

   Exhibits      54   

SIGNATURES

     55   

 

2


Table of Contents

PART 1. CONSOLIDATED FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to BlackRock Kelso Capital Corporation unless the context states otherwise.

Item 1. Consolidated Financial Statements

BlackRock Kelso Capital Corporation

Consolidated Statements of Assets and Liabilities

(Unaudited)

 

     September 30,
2013
    December 31,
2012
 

Assets

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $791,002,833 and $849,028,227)

   $ 802,818,060      $ 850,511,125   

Non-controlled, affiliated investments (cost of $98,337,878 and $50,983,674)

     143,726,372        67,750,172   

Controlled investments (cost of $149,890,939 and $137,337,392)

     192,543,797        143,336,244   
  

 

 

   

 

 

 

Total investments at fair value (cost of $1,039,231,650 and $1,037,349,293)

     1,139,088,229        1,061,597,541   

Cash and cash equivalents

     13,727,451        9,122,141   

Unrealized appreciation on forward foreign currency contracts

     —         369,417   

Receivable for investments sold

     10,357,911        504,996   

Interest receivable

     18,739,382        14,048,248   

Prepaid expenses and other assets

     11,666,665        4,375,527   
  

 

 

   

 

 

 

Total Assets

   $   1,193,579,638      $   1,090,017,870   
  

 

 

   

 

 

 

Liabilities

    

Payable for investments purchased

   $ 30,675,753      $ 440,243   

Debt

     412,919,440        346,850,000   

Interest payable

     3,365,354        5,277,132   

Dividend distributions payable

     19,302,790        19,196,418   

Base management fees payable

     5,286,986        5,626,893   

Incentive management fees payable

     20,269,011        20,277,930   

Accrued administrative services

     221,967        277,000   

Other accrued expenses and payables

     5,238,135        4,692,562   
  

 

 

   

 

 

 

Total Liabilities

     497,279,436        402,638,178   
  

 

 

   

 

 

 

Net Assets

    

Common stock, par value $.001 per share, 200,000,000 common shares authorized, 75,667,000 and 75,257,888 issued and 74,241,493 and 73,832,381 outstanding

     75,667        75,258   

Paid-in capital in excess of par

     922,588,375        917,534,577   

Distributions in excess of taxable net investment income

     (37,031,405     (22,291,022

Accumulated net realized loss

     (277,308,567     (219,270,607

Net unrealized appreciation

     97,452,808        20,808,162   

Treasury stock at cost, 1,425,507 and 1,425,507 shares held

     (9,476,676     (9,476,676
  

 

 

   

 

 

 

Total Net Assets

     696,300,202        687,379,692   
  

 

 

   

 

 

 

Total Liabilities and Net Assets

   $ 1,193,579,638      $ 1,090,017,870   
  

 

 

   

 

 

 

Net Asset Value Per Share

   $ 9.38      $ 9.31   

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Statements of Operations

(Unaudited)

 

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

Investment Income:

       

Interest income:

       

Non-controlled, non-affiliated investments

  $ 21,370,250      $ 27,543,637      $ 73,117,037      $ 81,802,597   

Non-controlled, affiliated investments

    3,876,098        1,037,387        5,958,969        4,053,330   

Controlled investments

    2,702,931        3,071,070        7,641,475        6,501,767   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

    27,949,279        31,652,094        86,717,481        92,357,694   

Fee income:

       

Non-controlled, non-affiliated investments

    29,875        8,369,140        7,578,694        15,457,315   

Non-controlled, affiliated investments

    —         602,344        —          735,708   

Controlled investments

    2,350,000        57,679        2,638,680        136,170   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

    2,379,875        9,029,163        10,217,374        16,329,193   
 

 

 

   

 

 

   

 

 

   

 

 

 

Dividend income:

       

Non-controlled, non-affiliated investments

    640,163        38,845        1,226,348        706,157   

Non-controlled, affiliated investments

    413,302        —          487,141        —     

Controlled investments

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

    1,053,465        38,845        1,713,489        706,157   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    31,382,619        40,720,102        98,648,344        109,393,044   
 

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

       

Incentive management fees

    9,358,529        2,963,803        16,692,244        5,177,662   

Interest and credit facility fees

    5,455,017        5,180,706        15,128,057        14,917,849   

Base management fees

    5,286,986        5,964,904        15,826,168        16,877,541   

Amortization of debt issuance costs

    568,678        634,677        1,431,226        1,890,236   

Professional fees

    541,180        577,051        1,647,600        1,080,582   

Investment advisor expenses

    479,871        511,774        1,520,714        1,364,420   

Director fees

    194,500        113,500        474,000        347,063   

Administrative services

    174,288        164,074        607,429        416,608   

Other

    449,909        671,341        2,263,313        1,975,362   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    22,508,958        16,781,830        55,590,751        44,047,323   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income

    8,873,661        23,938,272        43,057,593        65,345,721   
 

 

 

   

 

 

   

 

 

   

 

 

 

Realized and Unrealized Gain (Loss):

       

Net realized gain (loss):

       

Non-controlled, non-affiliated investments

    307,321        (4,417     (25,980,491     (75,340,007

Non-controlled, affiliated investments

    —          2,441,751        21        2,123,846   

Controlled investments

    769,604        —          (31,890,556     —     

Foreign currency

    (933,861     362,009        (166,934     (217,703
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss)

    143,064        2,799,343        (58,037,960     (73,433,864
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation or depreciation:

       

Non-controlled, non-affiliated investments

    (408,094     (1,814,151     21,595,785        77,069,859   

Non-controlled, affiliated investments

    4,602,853        5,287,500        28,621,996        6,300,604   

Controlled investments

    6,507,911        (14,735,396     26,688,350        (20,004,775

Foreign currency translation

    124,348        (1,146,461     (261,485     331,946   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation or depreciation

    10,827,018        (12,408,508     76,644,646        63,697,634   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

    10,970,082        (9,609,165     18,606,686        (9,736,230
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase in Net Assets Resulting from Operations

  $ 19,843,743      $ 14,329,107      $ 61,664,279      $ 55,609,491   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income Per Share - basic

  $ 0.12      $ 0.32      $ 0.58      $ 0.89   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share - basic

  $ 0.27      $ 0.19      $ 0.83      $ 0.76   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and Diluted Weighted-Average Shares Outstanding - basic

    74,239,932        73,692,104        74,099,028        73,555,011   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income Per Share - diluted

  $ 0.12      $ 0.32      $ 0.57      $ 0.89   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share - diluted

  $ 0.26      $ 0.19      $ 0.80      $ 0.76   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and Diluted Weighted-Average Shares Outstanding - diluted

    84,136,659        73,692,104        82,183,168        73,555,011   

Dividends Declared Per Share

  $ 0.26      $ 0.26      $ 0.78      $ 0.78   

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Statements of Changes in Net Assets

(Unaudited)

 

    

Nine months ended

 
     September 30, 2013     September 30, 2012  

Net Increase in Net Assets Resulting from Operations:

    

Net investment income

   $     43,057,593      $     65,345,721   

Net realized gain (loss)

     (58,037,960     (73,433,864

Net change in unrealized appreciation or depreciation

     76,644,646        63,697,634   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     61,664,279        55,609,491   
  

 

 

   

 

 

 

Dividend Distributions to Stockholders from:

    

Net investment income

     (57,797,976     (57,375,884
  

 

 

   

 

 

 

Capital Share Transactions:

    

Equity component of convertible debt

     1,189,747        —     

Reinvestment of dividends

     3,864,460        4,291,772   
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     5,054,207        4,291,772   
  

 

 

   

 

 

 

Total Increase in Net Assets

     8,920,510        2,525,379   

Net assets at beginning of period

     687,379,692        701,008,849   
  

 

 

   

 

 

 

Net assets at end of period

   $ 696,300,202      $ 703,534,228   
  

 

 

   

 

 

 

Capital Share Activity:

    

Shares issued from reinvestment of dividends

     409,112        484,529   
  

 

 

   

 

 

 

Net increase in shares outstanding

     409,112        484,529   
  

 

 

   

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

    

Nine months ended

 
     September 30, 2013     September 30, 2012  

Operating Activities:

    

Net increase in net assets resulting from operations

      $ 61,664,279         $ 55,609,491   

Adjustments to reconcile net increase in net assets resulting from operations:

    

PIK interest and dividends

     (7,902,257     (3,177,221

Net amortization on investments

     (13,105,237     (11,364,420

Amortization of debt issuance costs

     1,431,226        1,890,236   

Net change in unrealized on investments

     (76,906,131     (63,365,688

Net change in unrealized on foreign currency translation

     261,485        (331,946

Net realized (gain) loss on investments

     56,913,656        73,216,161   

Net realized (gain) loss on foreign currency

     166,934        217,703   

Changes in operating assets:

    

Purchase of investments

     (357,071,616     (235,299,728

Purchase of foreign currency contracts - net

     (59,002     (220,986

Proceeds from disposition of investments

     319,283,096        203,491,979   

Change in receivable for investments sold

     (9,852,915     2,530,110   

Change in interest receivable

     (4,691,134     (6,397,850

Change in dividends receivable

     —          (317,146

Change in prepaid expenses and other assets

     (8,722,364     (92,350

Changes in operating liabilities:

    

Change in payable for investments purchased

     30,235,510        1,119,625   

Change in interest payable

     (1,911,778     (3,034,453

Change in management fees payable

     (339,907     671,149   

Change in incentive management fees payable

     (8,919     (8,914,356

Change in accrued administrative services

     (55,033     20,424   

Change in other accrued expenses and payables

     1,843,373        310,598   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (8,826,734     6,561,332   
  

 

 

   

 

 

 

Financing Activities:

    

Dividend distributions paid in cash

     (53,827,143     (52,963,972

Proceeds from debt

     388,840,837        225,900,000   

Repayments of debt

     (321,581,650     (184,300,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     13,432,044        (11,363,972
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          393   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     4,605,310        (4,802,247

Cash and cash equivalents, beginning of period

     9,122,141        7,778,993   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 13,727,451      $ 2,976,746   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information and non-cash financing activities:

    

Cash paid during period for:

    

Interest

       $ 15,997,777          $ 17,289,778   

Taxes

       $ 493,801          $ 1,503,347   

Dividend distributions reinvested

       $ 3,864,459          $ 4,291,772   

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments

September 30, 2013

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Senior Secured Notes—31.4%

           

Advanced Lighting Technologies, Inc., First Lien(i)

  Lighting   10.50%   6/1/19   $ 20,000,000      $ 19,568,872      $ 15,000,000   

AGY Holding Corp., Second Lien(d)(i)

  Glass

Yarns/Fibers

  11.00%   12/15/16     21,762,500        19,309,254        19,151,000   

American Piping Products, Inc., Second Lien(i)

  Distribution   12.88%   11/15/17     20,000,000        19,653,586        19,800,000   

American Residential Services L.L.C. et al., Second Lien(i)

  HVAC/

Plumbing

Services

  12.00%   4/15/15     46,000,000        45,772,112        46,000,000   

BPA Laboratories Inc., First Lien(i)

  Healthcare

Services

  12.25%   4/1/17     35,078,000        34,178,885        34,376,440   

Gastar Exploration USA Inc., Second Lien(i)

  Energy   8.63%   5/15/18     1,680,000        1,591,540        1,621,200   

Sizzling Platter LLC et al., First Lien(i)

  Restaurants   12.25%   4/15/16     30,000,000        29,454,642        30,600,000   

TriMark USA, LLC., Second Lien(n)(o)

  Food Service

Equipment

  13.00%   6/29/16     51,882,110        51,882,110        51,882,110   
         

 

 

   

 

 

 

Total Senior Secured Notes

            221,411,001        218,430,750   
         

 

 

   

 

 

 

Unsecured Debt—10.0%

           

Higginbotham Insurance Holdings, Inc.

  Insurance   11.00%   12/14/18     21,000,000        21,000,000        21,000,000   

Red Apple Stores Inc.(f)(g)(p)

  Discount

Stores

  18.00%   7/11/17     5,209,207        5,209,207        5,209,207   

SVP Worldwide Ltd.(g)(o)(p)

  Consumer
Products
  14.00%   6/27/18     44,057,461        44,057,461        43,616,885   
         

 

 

   

 

 

 

Total Unsecured Debt

            70,266,668        69,826,092   
         

 

 

   

 

 

 

Subordinated Debt—7.7%

           

A & A Manufacturing Co., Inc.(o)

  Protective

Enclosures

  14.00%   5/16/16     32,995,314        32,995,314        32,995,314   

The Pay-O-Matic Corp.(o)

  Financial

Services

  14.00%   9/30/16     20,400,000        20,400,000        20,400,000   
         

 

 

   

 

 

 

Total Subordinated Debt

            53,395,314        53,395,314   
         

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

7


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2013

(Unaudited)

 

Portfolio Company   Industry   Interest Rate     Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Senior Secured Loans—78.7%(e)

           

AGY Holding Corp., Second Lien(d)

  Glass

Yarns/Fibers

    12.00   9/15/16   $ 7,964,650      $ 7,964,650      $ 7,964,650   

AL Solutions, Inc., Term Loan B, Second Lien(o)

  Metals     5.00   12/31/19     70,136        —         —    

Alpha Media Group Inc., First Lien(o)

  Publishing     12.00   7/15/16     6,093,448        4,321,548        550,000   

AmQuip Crane Rental LLC, Second Lien

  Construction

Equipment

    12.00   12/19/17     41,186,747        41,186,747        38,715,542   

Arclin US Holdings Inc., Second Lien(g)(n)(p)

  Chemicals     7.75   1/15/15     3,460,581        3,236,090        3,460,581   

Ascend Learning, LLC, Second Lien(n)

  Education     11.50   12/6/17     20,000,000        20,000,000        20,000,000   

Attachmate Corporation et al., Second Lien(n)

  Software     11.00   11/22/18     29,191,324        28,713,051        29,191,324   

Bankruptcy Management Solutions, Inc., Term Loan A, First Lien(f)(n)

  Financial

Services

    4.50   6/27/17     1,656,250        1,547,930        1,590,000   

Bankruptcy Management Solutions, Inc., Term Loan B, First Lien(f)(n)

  Financial

Services

    7.00   6/27/18     12,238,196        10,035,187        10,402,467   

BBTS Borrower LP, First Lien(n)

  Energy     7.75   6/4/19     4,935,000        4,888,033        5,009,025   

Citrus Energy Appalachia, LLC, Second Lien(n)

  Energy     9.75   7/26/18     27,857,143        27,016,708        27,016,708   

Dial Global, Inc. et. al., Priority Second Lien

  Media &
Entertainment
    12.00   7/21/17     32,130,000        32,130,000        32,130,000   

Dial Global, Inc. et. al., Term Loan A, Second Lien(o)

  Media &
Entertainment
    6.00   4/16/18     7,710,172        7,710,172        7,710,172   

Dial Global, Inc. et. al., Term Loan B, Second Lien(o)

  Media &
Entertainment
    22.45   4/16/18     8,300,979        8,300,979        8,300,979   

K2 Pure Solutions Nocal, L.P. First Lien(n)

  Chemicals     10.00   8/19/19     20,000,000        19,607,851        19,607,851   

MediMedia USA, Inc., First Lien(n)

  Information

Services

    8.00   11/20/18     9,975,000        9,693,601        9,675,750   

MediMedia USA, Inc., Second Lien(n)

  Information

Services

    12.25   11/20/19     60,000,000        58,290,762        58,200,000   

Penton Media, Inc. et al., First Lien(d)(n)(o)

  Information

Services

    6.00   8/1/14     23,504,760        23,504,760        23,504,760   

Pre-Paid Legal Services, Inc., First Lien(n)

  Legal

Services

    6.25   7/1/19     9,516,129        9,424,294        9,516,129   

Pre-Paid Legal Services, Inc., Second Lien(n)

  Legal

Services

    9.75   7/1/20     25,000,000        24,636,216        25,000,000   

Red Apple Stores Inc., Second Lien(f)(g)(p)

  Discount

Stores

    16.00   1/11/17     20,000,000        20,000,000        20,000,000   

Road Infrastructure Investment, LLC, Second Lien(n)

  Manufacturing     10.25   9/30/18     15,000,000        14,822,481        15,000,000   

Royal Adhesives and Sealants, LLC, Second Lien(n)

  Chemicals     9.75   1/31/19     6,000,000        5,883,353        5,883,353   

Shoreline Energy LLC, Second Lien(n)

  Energy     10.25   3/30/19     30,000,000        29,100,000        29,100,000   

The accompanying notes are an integral part of these consolidated financial statements.

 

8


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2013

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Sur La Table, Inc., First Lien

  Consumer

Products

  12.00%   7/28/17   $ 50,000,000      $ 50,000,000      $ 51,000,000   

United Subcontractors, Inc., First Lien(d)(n)(o)

  Building and

Construction

  6.25%   6/30/15     5,015,119        4,920,223        4,814,510   

Water Pik, Inc., Second Lien(n)

  Consumer
Products
  9.75%   1/8/21     22,500,000        21,518,260        21,518,260   

WBS Group LLC, First Lien(f)(n)

  Software   6.50%   6/30/14     27,284,255        27,284,255        27,284,255   

WBS Group LLC, Second Lien(f)(n)

  Software   10.50%   12/31/14     24,999,000        24,581,705        24,999,000   

Wellbiz Brands, Inc. (Fitness Together Franchise Corp.), First Lien(o)

  Personal

Fitness

  11.50%   11/10/13     4,523,577        4,523,577        4,523,577   

Westward Dough Operating Company, LLC, First Lien(f)

  Restaurants   8.00%   3/2/17     6,590,896        6,590,896        6,590,896   
         

 

 

   

 

 

 

Total Senior Secured Loans

            551,433,329        548,259,789   
         

 

 

   

 

 

 

Preferred Stock—5.5%

           

Advantage Insurance Holdings, Ltd.(d)(g)(i)(p)

  Insurance   8.00%       500,000        5,000,000        5,000,000   

Alpha Media Group Holdings Inc.,
Series A-2(c)

  Publishing         5,000        —         —    

Dial Global, Inc. et. al.

  Media &

Entertainment

  15.00%       35,871        17,196,098        14,226,238   

KAGY Holding Company, Inc. (AGY Holding Corp.)(d)

  Glass

Yarns/Fibers

  20.00%       22,960        4,785,036        4,441,920   

Progress Financial Corporation, Series F-1(c)

  Financial Services         963,710        740,313        1,106,674   

Progress Financial Corporation, Series G(c)

  Financial Services         1,758,256        2,013,112        2,019,088   

USI Senior Holdings, Inc. (United Subcontractors)(c)(d)

  Building and

Construction

        209,419        3,812,635        6,282,571   

VSS-AHC Consolidated Holdings Corp. (Advanstar Global LLC)(d)

  Printing/

Publishing

  15.00%       4,809        5,026,392        5,027,761   
         

 

 

   

 

 

 

Total Preferred Stock

            38,573,586        38,104,252   
         

 

 

   

 

 

 

Common Stock—18.0%(c)

           

Alpha Media Group Holdings Inc., Class B

  Publishing         12,500        —         —    

Arclin Cayman Holdings Ltd.(g)(p)

  Chemicals         450,532        9,722,203        16,700,000   

Bankruptcy Management Solutions, Inc.(f)

  Financial

Services

        368,124        16,654,505        16,922,660   

ECI Holdco, Inc., Class A-1(f)

  Electronics         19,040,132        19,027,697        59,214,810   

M & M Tradition Holdings Corp.(d)

  Sheet Metal

Fabrication

        500,000        5,000,000        8,500,000   

Red Apple Stores Inc.(f)(g)(h)

  Discount

Stores

        8,756,859        8,512,095        8,512,095   

Tygem Holdings, Inc., Class A

  Metals         30,000        —         —    

The accompanying notes are an integral part of these consolidated financial statements.

 

9


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2013

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

USI Senior Holdings, Inc. (United Subcontractors)(d)

  Building and

Construction

        209,419      $ 3,814,281      $ 15,704,331   
         

 

 

   

 

 

 

Total Common Stock

            62,730,781        125,553,896   
         

 

 

   

 

 

 

Limited Partnership/Limited Liability Company
Interests—8.7%

           

ARS Investment Holdings, LLC(c)(j)

  HVAC/Plumbing

Services

        102,601        —         990,000   

DynaVox Systems
Holdings, LLC(c)(k)

  Augmentative

Communication

Products

        272,369        758,069        24,513   

Higginbotham Investment Holdings,
LLC(c)

  Insurance         1,163        1,500,000        1,736,047   

Marquette Transportation Company Holdings, LLC(c)(l)

  Transportation         25,000        5,000,000        2,261,000   

Marsico Holdings, LLC(c)(i)

  Financial Services         91,445        1,848,077        7,803   

Penton Business Media Holdings,
LLC(c)(d)

  Information
Services
        226        9,050,000        33,815,325   

PG Holdco, LLC

  Healthcare
Services
  15.00%       333        416,240        416,240   

PG Holdco, LLC, Class A(c)

  Healthcare
Services
        16,667        166,667        337,670   

Sentry Security Systems Holdings, LLC(c)

  Security Services         147,271        147,271        16,217   

Sentry Security Systems Holdings, LLC

  Security Services   8.00%       602,729        1,005,563        1,005,563   

VSS-AHC Holdings LLC (Advanstar
Global LLC)(c)(d)

  Printing/
Publishing
        884,716        6,150,647        9,519,544   

WBS Group LLC(c)(f)(m)

  Software         —         1,000        6,056,783   

Westward Dough Holdings, LLC,
Class A(c)(f)

  Restaurants         350,000        9,260,324        4,564,000   
         

 

 

   

 

 

 

Total Limited Partnership/Limited Liability Company Interests

      35,303,858        60,750,705   
         

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

10


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2013

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Equity Warrants/Options—3.6%(c)

       

Arclin Cayman Holdings Ltd.,
Tranche 1(g)(p)

  Chemicals       expire 1/15/14        230,159      $ 403,815      $ 4,658,497   

Arclin Cayman Holdings Ltd.,
Tranche 2(g)(p)

  Chemicals       expire 1/15/15        230,159        323,052        4,666,895   

Arclin Cayman Holdings Ltd.,
Tranche 3(g)(p)

  Chemicals       expire 1/15/14        230,159        484,578        4,078,743   

Arclin Cayman Holdings Ltd.,
Tranche 4(g)(p)

  Chemicals       expire 1/15/15        230,159        403,815        4,090,324   

Bankruptcy Management Solutions,
Inc., Tranche A(f)

  Financial Services       expire 6/27/18        28,464        375,040        378,856   

Bankruptcy Management Solutions,
Inc., Tranche B(f)

  Financial Services       expire 6/27/19        30,654        342,295        345,164   

Bankruptcy Management Solutions,
Inc., Tranche C(f)

  Financial Services       expire 6/27/20        45,981        468,803        473,604   

Dial Global, Inc. et. al., 7.5%

  Media &
Entertainment
      expire 4/16/18        4,624,213        —         530,997   

Dial Global, Inc. et. al., 12.0%

  Media &
Entertainment
      expire 4/16/18        3,888,543        —         —    

Facet Investment, Inc.

  Medical Devices       expire 1/18/21        1,978        250,000        80,415   

Marsico Parent Superholdco, LLC (i)

  Financial Services       expire 12/14/19        455        444,450        —    

Progress Financial Corporation

  Financial Services       expire various        4,767,868        2,616,265        4,963,936   

Twin River Worldwide Holdings, Inc., Contingent Value Rights

  Gaming       expire 11/5/17        1,000        5,000        500,000   
         

 

 

   

 

 

 

Total Equity Warrants/Options

            6,117,113        24,767,431   
         

 

 

   

 

 

 

TOTAL INVESTMENTS—163.6%

          $ 1,039,231,650        1,139,088,229   
         

 

 

   

OTHER ASSETS & LIABILITIES (NET)—(63.6)%

              (442,788,027
           

 

 

 

NET ASSETS—100.0%

            $ 696,300,202   
           

 

 

 

 

  (a) Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
  (b) Fair value is determined by or under the direction of the Company’s Board of Directors. See Note 2 for further details.
  (c) Non-income producing equity securities at September 30, 2013.
  (d) Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities.
  (e) Approximately 68% of the senior secured loans of the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 67% of such senior secured loans have floors of 1.00% to 1.75%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2013 of all contracts within the specified loan facility.

The accompanying notes are an integral part of these consolidated financial statements.

 

11


Table of Contents
                                  Nine Months Ended September 30, 2013  

Non-controlled,

Affiliated Investments

  Fair Value at
December 31, 2012
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
    Net
Unrealized
Gain (Loss)
   

Fair Value at
September 30,

2013

    Net
Realized
Gain
(Loss)
    Interest
Income
    Fee
Income
    Dividend
Income
 

Advantage Insurance Holdings, Ltd.

                 

Preferred Stock

  $ —        $ 5,000,000      $ —        $ —        $ 5,000,000      $ —        $ —        $ —        $ —     

AGY Holding Corp.:

                 

Senior Secured Note

    —          19,309,254        —          (158,254     19,151,000 †      —          776,673        —          —     

Senior Secured Loan

    —          7,964,650        —          —          7,964,650 †      —          252,213        —          —     

KAGY Holding Company, Inc.
(AGY Holding Corp.)

                 

Preferred Stock

    —          4,785,036        —          (343,116     4,441,920 †      —          —          —          269,748   

M&M Tradition Holdings Corp.

                 

Common Stock

    6,250,000        —          —          2,250,000        8,500,000        —          —          —          —     

Penton Business Media Holdings, LLC

                 

Limited Liability Co. Interest

    22,111,124        —          —          11,704,201        33,815,325        —          —          —          —     

Penton Media, Inc. et al.

                 

Senior Secured Loan

    20,822,342        3,834,740        (182,432     (969,890     23,504,760        —          4,591,336        —          —     

United Subcontractors, Inc.

                 

Senior Secured Loan

    3,242,631        1,440,549        —          131,330        4,814,510        21        338,747        —          —     

USI Senior Holdings, Inc.:

                 

Common Stock

    3,485,140        88,832        (344     12,130,703        15,704,331        —          —          —          —     

Preferred Stock

    4,934,133        87,527        —          1,260,911        6,282,571        —          —          —          —     

VSS-AHC Consolidated Holdings Corp.
(Advanstar Global LLC)

                 

Preferred Stock

    —          5,026,392        —          1,369        5,027,761        —          —          —          217,393   

VSS-AHC Holdings LLC.
(Advanstar Global LLC)

                 

Limited Liability Co. Interest

    6,904,802        —          —          2,614,742        9,519,544        —          —          —          —     
 

 

 

 

Totals

  $ 67,750,172      $ 47,536,980      $ (182,776   $ 28,621,996      $ 143,726,372      $ 21      $ 5,958,969      $ —        $ 487,141   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind (“PIK”) interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment moved into non-controlled, affiliated category during the period.

The aggregate fair value of non-controlled, affiliated investments at September 30, 2013 represents 20.6% of the Company’s net assets.

 

 

 

  (f) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities.
  (g) Non-U.S. company or principal place of business outside the U.S.
  (h) Original purchase denominated in Canadian dollars.
  (i) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 25% of the Company’s net assets at September 30, 2013.
  (j) The Company is the sole stockholder of BKC ARS Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C. and thus a non-controlled, non-affiliated investment.
  (k) The Company is the sole stockholder of BKC DVSH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC and thus a non-controlled, non-affiliated investment.
  (l) The Company is the sole stockholder of BKC MTCH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC and thus a non-controlled, non-affiliated investment.
  (m) The Company is the sole stockholder of BKC-WBS, LLC, a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of WBS Group LLC and thus a controlled investment.
  (n) Security bears interest at a floating rate that may or may not include an interest rate floor.
  (o) Interest may be paid in cash or PIK, or a combination thereof which is generally at the option of the borrower. PIK earned is included in the cost basis of the security. PIK represented approximately 7.1% of interest income earned for the nine months ended September 30, 2013. In accordance with the Company’s policy, PIK may be recorded on an effective yield basis.

The accompanying notes are an integral part of these consolidated financial statements.

 

12


Table of Contents
                                  Nine Months Ended September 30, 2013  
Controlled Investments   Fair Value at
December 31,
2012
   

Gross

Additions
(Cost)*

    Gross
Reductions
(Cost)**
   

Net

Unrealized
Gain (Loss)

    Fair Value at
September 30,
2013
   

Net

Realized

Gain

(Loss)

    Interest
    Income    
   

Fee

    Income    

 

Bankruptcy Management Solutions, Inc.:

               

Senior Secured Loan, First Lien, A

  $ 1,960,000      $ 2,148,723      $ (2,343,750   $ (174,973   $ 1,590,000      $ 216,666      $ 102,513      $ 258,705   

Senior Secured Loan, First Lien, B

    17,148,766        32,000,130        (35,674,612     (3,071,817     10,402,467        2,269,456        2,430,298        100,000   

Senior Secured Loan, Second Lien

    7,703,412        406,328        (25,556,717     17,446,977        —    †      (24,547,868     494,976        —    

Common Stock

    —         16,658,378        (3,873     268,155        16,922,660        (9,600,072     —         —    

Warrants

    —         1,216,827        (30,689     11,486        1,197,624        (396,273     —         —    

BKC CSP Blocker, Inc.

               

Common Stock

    —         167,401        (167,401     —         —         167,401        —         —    

ECI Holdco, Inc.

               

Common Stock

    47,981,132        —         —         11,233,678        59,214,810        —         —         —    

Red Apple Stores, Inc.:

               

Unsecured Debt

    —         5,209,207        —         —         5,209,207 ††      —         209,207        —    

Senior Secured Loan

    —         20,000,000        —         —         20,000,000 ††      —         728,890        1,250,000   

Common Stock

    —         8,512,095        —         —         8,512,095 ††      —         —         —    

WBS Group LLC:

               

Senior Secured Loan, First Lien

    27,284,255        —         —         —         27,284,255        —         1,313,763        1,000,000   

Senior Secured Loan, Second Lien

    24,999,000        117,789        (140,633     22,844        24,999,000        134        1,973,332        29,975   

Limited Liability Co. Interest

    6,056,783        —         —         —         6,056,783        —         —         —    

Westward Dough Operating Company, LLC

               

Senior Secured Loan

    6,590,896        —         —         —         6,590,896        —         388,496        —    

Westward Dough Holdings, LLC

               

Limited Liability Co. Interest

    3,612,000        —         —         952,000        4,564,000        —         —         —    
 

 

 

 

Totals

  $ 143,336,244      $ 86,436,878      $ (63,917,675   $ 26,688,350      $ 192,543,797      $ (31,890,556   $ 7,641,475      $ 2,638,680   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment no longer held at September 30, 2013.
  †† Investment moved into controlled category during the period.

The aggregate fair value of controlled investments at September 30, 2013 represents 27.7% of the Company’s net assets.

 

 

 

  (p) BDCs are required to invest at least 70% of their total assets primarily in securities of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. Government securities and other high quality debt investments that mature in one year or less. The securities referenced represent either fully or partially non-qualified assets for purposes of this requirement.

The accompanying notes are an integral part of these consolidated financial statements.

 

13


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments

December 31, 2012

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Senior Secured Notes—28.2%

           

Advanced Lighting Technologies, Inc., First Lien(i)

  Lighting   10.50%   6/1/19   $ 20,000,000      $ 19,529,046      $ 20,000,000      

AGY Holding Corp., Second Lien

  Glass

Yarns/Fibers

  11.00%   11/15/14     28,475,000        22,580,140        19,647,750      

American Piping Products, Inc., Second Lien(i)

  Distribution   12.88%   11/15/17     20,000,000        19,606,207        20,000,000      

American Residential Services L.L.C. et al., Second Lien(i)

  HVAC/

Plumbing

Services

  12.00%   4/15/15     40,000,000        39,893,591        39,600,000      

BPA Laboratories Inc., First Lien(i)

  Healthcare

Services

  12.25%   4/1/17     33,250,000        32,260,771        32,917,500      

Sizzling Platter LLC et al., First Lien(i)

  Restaurants   12.25%   4/15/16     30,000,000        29,294,034        30,000,000      

TriMark USA, Inc., Second Lien(q)(r)

  Food Service

Equipment

  11.50%   11/30/13     33,441,088        33,441,088        31,769,036      
         

 

 

   

 

 

 

Total Senior Secured Notes

            196,604,877        193,934,286      
         

 

 

   

 

 

 

Unsecured Debt—10.1%

           

Higginbotham Insurance Holdings, Inc.

  Insurance   11.00%   12/14/18     21,000,000        21,000,000        21,000,000      

Maple Hill Acquisition LLC(q)

  Rigid

Packaging

  13.50%   10/1/15     5,000,000        4,914,125        5,000,000      

SVP Worldwide Ltd.(p)(q)

  Consumer

Products

  14.00%   6/27/18     43,725,040        43,725,040        43,725,040      
         

 

 

   

 

 

 

Total Unsecured Debt

            69,639,165        69,725,040      
         

 

 

   

 

 

 

Subordinated Debt—14.2%

           

A & A Manufacturing Co., Inc.(q)

  Protective

Enclosures

  14.00%   5/16/16     32,995,314        32,995,314        32,995,314      

MediMedia USA, Inc.(i)

  Information

Services

  11.38%   11/15/14     19,950,000        19,219,198        18,753,000      

The Pay-O-Matic Corp.(q)

  Financial

Services

  14.00%   9/30/16     20,400,000        20,400,000        20,400,000      

Sarnova HC, LLC et al.(q)

  Healthcare

Products

  14.00%   4/6/16     25,762,284        25,361,778        25,762,284      
         

 

 

   

 

 

 

Total Subordinated Debt

            97,976,290        97,910,598      
         

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

14


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2012

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Senior Secured Loans—81.0%(e)

           

Advantage Sales & Marketing Inc., Second Lien(r)

  Marketing

Services

  9.25%   6/17/18   $ 10,000,000      $ 9,890,614      $ 10,000,000   

Airvana Network Solutions Inc., First Lien(r)

  Software   10.00%   3/25/15     1,376,190        1,360,814        1,376,190   

AL Solutions, Inc., Term Loan B, Second Lien(q)

  Metals   5.00%   12/31/19     67,543        —         —    

Alpha Media Group Inc., First Lien(q)

  Publishing   12.00%   7/15/13     5,570,965        4,276,112        445,676   

AmQuip Crane Rental LLC, Second Lien

  Construction

Equipment

  12.00%   12/19/17     41,186,747        41,186,747        36,656,205   

Arclin US Holdings Inc., Second Lien(g)(p)(r)

  Chemicals   7.75%   1/15/15     3,487,477        3,128,529        3,487,477   

Ascend Learning, LLC, Second Lien(r)

  Education   11.50%   12/6/17     20,000,000        19,574,806        20,000,000   

Ashton Woods USA L.L.C., Second Lien

  Homebuilding   11.75%   7/6/15     52,500,000        52,500,000        52,500,000   

Attachmate Corporation et al., Second Lien(r)

  Software   11.00%   11/22/18     20,000,000        19,456,360        19,600,000   

Bankruptcy Management Solutions, Inc., Term Loan A, First Lien(f)(r)

  Financial

Services

  7.50%   8/20/14     2,000,000        1,742,957        1,960,000   

Bankruptcy Management Solutions, Inc., Term Loan B, First Lien(f)(q)(r)

  Financial

Services

  7.50%   8/20/14     21,435,958        13,709,669        17,148,766   

Bankruptcy Management Solutions, Inc., Term Loan A, Second Lien(f)(q)(r)

  Financial

Services

  8.21%   8/20/15     34,237,388        25,150,389        7,703,412   

The Bargain! Shop Holdings Inc., First Lien(g)(h)(p)

  Discount

Stores

  16.00%   7/1/14     23,857,000        23,870,128        23,934,774   

Berlin Packaging L.L.C., Second Lien(r)

  Rigid

Packaging

  6.71%   8/17/15     24,000,000        23,763,460        23,520,000   

Dial Global, Inc. et. al., Second Lien(q)(r)

  Media &

Entertainment

  13.00%   7/21/17     43,911,945        43,434,129        36,007,795   

Fitness Together Franchise Corporation, First Lien(q)

  Personal

Fitness

  11.50%   11/10/13     4,554,665        4,554,665        4,326,933   

InterMedia Outdoors, Inc., Second Lien(r)

  Printing/

Publishing

  7.01%   1/31/14     10,000,000        10,000,000        10,000,000   

MCCI Group Holdings, LLC, Second Lien(r)

  Healthcare

Services

  10.75%   1/29/18     57,000,000        57,000,000        57,000,000   

MediMedia USA, Inc.(r)

  Information

Services

  6.25%   8/15/14     15,000,000        13,850,567        13,850,567   

The accompanying notes are an integral part of these consolidated financial statements.

 

15


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2012

 

Portfolio Company   Industry(a)   Interest Rate   Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Penton Media, Inc. et al., First Lien(d)(q)(r)

  Information

Services

  5.00%     8/1/14      $ 23,395,890      $ 19,852,452      $ 20,822,342   

Pre-Paid Legal Services, Inc., First Lien(r)

  Legal

Services

  11.00%     12/31/16        15,000,000        14,673,297        15,000,000   

Progress Financial Corporation, Second Lien(r)

  Financial

Services

  13.00%     6/18/15        35,750,000        35,176,063        35,750,000   

Road Infrastructure Investment, LLC, Second Lien(r)

  Manufacturing   10.25%     9/30/18        10,000,000        9,821,828        10,000,000   

SOURCEHOV LLC, Second Lien(r)

  Process

Outsourcing

  10.50%     4/29/18        25,000,000        22,566,623        23,250,000   

Sur La Table, Inc., First Lien

  Consumer

Products

  12.00%     7/28/17        50,000,000        50,000,000        50,000,000   

United Subcontractors, Inc., First Lien(d)(q)(r)

  Building and
Construction
  6.32%     6/30/15        3,602,923        3,479,674        3,242,631   

WBS Group LLC, First Lien(f)(r)

  Software   6.50%     6/30/13        27,284,255        27,284,255        27,284,255   

WBS Group LLC, Second Lien(f)(r)

  Software   10.50%     12/31/13        24,999,000        24,604,549        24,999,000   

Westward Dough Operating Company, LLC, First Lien(f)

  Restaurants   7.00%     3/2/17        6,590,896        6,590,896        6,590,896   
         

 

 

   

 

 

 

Total Senior Secured Loans

            582,499,583        556,456,919   
         

 

 

   

 

 

 

Preferred Stock—0.9%(s)

           

Alpha Media Group Holdings Inc., Series A-2

  Publishing         5,000        —         —    

Progress Financial Corporation, Series F-1

  Financial Services         963,710        740,313        914,173   

USI Senior Holdings, Inc. (United Subcontractors)(d)

  Building and
Construction
        164,471        3,725,108        4,934,133   
         

 

 

   

 

 

 

Total Preferred Stock

            4,465,421        5,848,306   
         

 

 

   

 

 

 

Common Stock—10.5%(s)

           

Alpha Media Group Holdings Inc., Class B

  Publishing         12,500        —         —    

Arclin Cayman Holdings Ltd.(g)(p)

  Chemicals         450,532        9,722,203        14,624,959   

Bankruptcy Management Solutions, Inc.(f)

  Financial

Services

        326,873        9,600,072        —    

ECI Holdco, Inc., Class A-1 (Electrical Components)(f)

  Electronics         19,040,132        19,027,697        47,981,132   

The accompanying notes are an integral part of these consolidated financial statements.

 

16


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2012

 

Portfolio Company   Industry(a)   Interest Rate     Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

M & M Tradition Holdings
Corp.(d)

  Sheet Metal

Fabrication

        500,000      $ 5,000,000      $ 6,250,000   

Tygem Holdings, Inc., Class A

  Metals         30,000        —         —    

USI Senior Holdings, Inc. (United Subcontractors)(d)

  Building and

Construction

        164,471        3,725,793        3,485,140   
         

 

 

   

 

 

 

Total Common Stock

            47,075,765        72,341,231   
         

 

 

   

 

 

 

Limited Partnership/Limited Liability Company Interests—7.1%

           

ARS Investment Holdings,
LLC(k)(s)

  HVAC/Plumbing

Services

        102,601        —         790,000   

DynaVox Systems Holdings,
LLC(m)(s)

  Augmentative

Communication

Products

        272,369        758,069        100,777   

Higginbotham Investment Holdings, LLC(s)

  Insurance         1,163        1,500,000        1,500,000   

Marquette Transportation Company Holdings, LLC(n)(s)

  Transportation         25,000        5,000,000        6,169,000   

Marsico Holdings, LLC(i)(s)

  Financial Services         91,445        1,848,077        143,569   

Penton Business Media Holdings, LLC(d)(s)

  Information

Services

        226        9,050,000        22,111,124   

PG Holdco, LLC (Press Ganey)

  Healthcare

Services

    15.00       333        374,585        374,585   

PG Holdco, LLC (Press Ganey), Class A(s)

  Healthcare

Services

        16,667        166,667        317,477   

Sentry Security Systems Holdings, LLC(s)

  Security Services         147,271        147,271        8,264   

Sentry Security Systems Holdings, LLC

  Security Services     8.00       602,729        948,786        948,786   

VSS-AHC Holdings LLC (Advanstar Global LLC)(d)(s)

  Printing/
Publishing
        884,716        6,150,647        6,904,802   

WBS Group LLC (f)(o)(s)

  Software         —         1,000        6,056,783   

Westward Dough Holdings, LLC, Class A(f)(s)

  Restaurants         350,000        9,260,324        3,612,000   
         

 

 

   

 

 

 

Total Limited Partnership/Limited Liability Company Interests

            35,205,426        49,037,167   
         

 

 

   

 

 

 

Equity Warrants/Options—2.4%(s)

           

Arclin Cayman Holdings Ltd., Tranche 1(g)(p)

  Chemicals       expire 1/15/14        230,159        403,815        3,743,759   

The accompanying notes are an integral part of these consolidated financial statements.

 

17


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2012

 

Portfolio Company   Industry(a)   Interest Rate   Maturity    

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Arclin Cayman Holdings Ltd., Tranche 2(g)(p)

  Chemicals       expire 1/15/15        230,159      $ 323,052      $ 3,802,514      

Arclin Cayman Holdings Ltd., Tranche 3(g)(p)

  Chemicals       expire 1/15/14        230,159        484,578        3,189,738      

Arclin Cayman Holdings Ltd., Tranche 4(g)(p)

  Chemicals       expire 1/15/15        230,159        403,815        3,303,049      

Bankruptcy Management Solutions, Inc.(f)

  Financial Services       expire 10/1/17        23,046        365,584        —        

Facet Investment, Inc.

  Medical Devices       expire 1/18/21        1,978        250,000        80,415      

Marsico Parent Superholdco, LLC(i)

  Financial Services       expire 12/14/19        455        444,450        —        

Progress Financial Corporation

  Financial Services       expire various        3,761,553        1,202,472        2,124,519      

Twin River Worldwide Holdings, Inc., Contingent Value Rights

  Gaming       expire 11/5/17        1,000        5,000        100,000      
         

 

 

   

 

 

 

Total Equity Warrants/Options

            3,882,766        16,343,994      
         

 

 

   

 

 

 

TOTAL INVESTMENTS—154.4%

      $ 1,037,349,293        1,061,597,541      
         

 

 

   

OTHER ASSETS & LIABILITIES (NET)—(54.4)%

  

        (374,217,849)      
           

 

 

 

NET ASSETS—100.0%

        $ 687,379,692      
           

 

 

 

 

  (a) Unaudited
  (b) Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
  (c) Fair value is determined by or under the direction of the Company’s Board of Directors. See Note 2 for further details.
  (d) Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities.
  (e) Approximately 69% of the senior secured loans of the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 61% of such senior secured loans have floors of 1.00% to 2.00%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at December 31, 2012 of all contracts within the specified loan facility.
  (f) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities.
  (g) Non-U.S. company or principal place of business outside the U.S.
  (h) Principal amount is denominated in Canadian dollars.
  (i) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 23.5% of the Company’s net assets at December 31, 2012.

The accompanying notes are an integral part of these consolidated financial statements.

 

18


Table of Contents
                                  For the Year Ended December 31, 2012  
Non-controlled, Affiliated Investments  

Fair Value at

December 31,

2011

   

Gross

Additions

(Cost)*

   

Gross

Reductions

(Cost)**

   

Net

Unrealized

Gain

(Loss)

   

Fair

Value at

December 31,

2012

   

Net

Realized

Gain

(Loss)

   

Interest

Income

   

Fee

Income

   

Dividend

Income

 

Advanstar Global LLC

                 

Limited Liability Co. Interest

  $ —        $ 5,855,188      $ —        $ 1,049,614      $ 6,904,802 ††    $ —        $ —        $ —        $ —     

Conney Safety Products, LLC

                 

Subordinated Debt

    25,582,734        735,708        (25,582,733     (735,709     —   †      —          2,137,580        735,708        —     

Conney Prime Holdings LLC

                 

Limited Liability Co. Interest

    1,785,488        —          (4,742,576     2,957,088        —   †      2,415,317        —          —          —     

M&M Tradition Holdings Corp.

                 

Common Stock

    7,250,000        —          —          (1,000,000     6,250,000        —          —          —          2,500,000   

MGHC Holding Corporation:

                 

Common Stock

    224,200        —          (1,223,666     999,466        —   †      (51,302     —          —          —     

Warrants

    —          —          (136,297     136,297        —   †      (136,297     —          —          —     

Penton Business Media Holdings, LLC

                 

Limited Liability Co. Interest

    20,321,858        —          —          1,789,266        22,111,124        —          —          —          —     

Penton Media, Inc. et al.

                 

Senior Secured Loan

    8,067,187        10,921,947        (172,396     2,005,604        20,822,342        3        2,572,608        —          —     

United Subcontractors, Inc.

                 

Senior Secured Loan

    1,809,875        1,594,303        (178,130     16,583        3,242,631        (4,006     255,002        —          —     

USI Senior Holdings, Inc.:

                 

Common Stock

    5,994,457        99,635        (3,762,412     1,153,460        3,485,140        (344     —          —          —     

Preferred Stock

    —          3,725,108        —          1,209,025        4,934,133        —          —          —          —     
 

 

 

 

Totals

  $ 71,035,799      $ 22,931,889      $ (35,798,210   $ 9,580,694      $ 67,750,172      $ 2,223,371      $ 4,965,190      $ 735,708      $ 2,500,000   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind (“PIK”) interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  Investment no longer held at December 31, 2012.
  †† Investment moved into non-controlled, affiliated category during the period.

The aggregate fair value of non-controlled, affiliated investments at December 31, 2012 represents 9.9% of the Company’s net assets.

 

 

 

  (j) The Company is sole stockholder of BKC CSP Blocker, Inc., a consolidated subsidiary and thus a controlled investment.
  (k) The Company is the sole stockholder of BKC ARS Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C. and thus a non-controlled, non-affiliated investment.
  (l) The Company is the sole stockholder of BKC ASW Blocker, Inc., a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC and thus a controlled investment.
  (m) The Company is the sole stockholder of BKC DVSH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC and thus a non-controlled, non-affiliated investment.
  (n) The Company is the sole stockholder of BKC MTCH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC and thus a non-controlled, non-affiliated investment.
  (o) The Company is the sole stockholder of BKC-WBS, LLC, a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of WBS Group LLC and thus a controlled investment.

The accompanying notes are an integral part of these consolidated financial statements.

 

19


Table of Contents
                                  For the Year Ended December 31, 2012  
Controlled Investments   Fair Value at
December 31,
2011
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
    Net
Unrealized
Gain (Loss)
    Fair Value at
December 31,
2012
   

Net

  Realized  

Gain

(Loss)

   

  Interest  

Income

   

Fee

  Income  

 

American SportWorks LLC

               

Senior Secured Loan

  $ 3,550,900      $ —        $ (8,000,000   $ 4,449,100      $ —   †    $ (7,391,074   $ —        $ —     

ASW International LLC(l)

               

Limited Liability Co. Interest

    —          —          (7,428,827     7,428,827        —   †      (7,428,827     —          —     

Bankruptcy Management Solutions, Inc.:

               

Senior Secured Loan, First Lien, A

    1,948,000        157,842        —          (145,842     1,960,000        —          168,256        157,843   

Senior Secured Loan, First Lien, B

    15,512,497        3,402,401        (187,575     (1,578,557     17,148,766        —          3,379,989        —     

Senior Secured Loan, Second Lien

    21,992,702        2,872,037        —          (17,161,327     7,703,412        —          2,985,806        —     

Common Stock

    1,772,470        —          —          (1,772,470     —          —          —          —     

Warrants

    4,190        —          —          (4,190     —          —          —          —     

BKC CSP Blocker, Inc.(j)

               

Common Stock

    —          —          —          —          —   †      —          —          —     

ECI Holdco, Inc.

               

Common Stock

    42,444,480        178,861        —          5,357,791        47,981,132        —          —          —     

WBS Group LLC:

               

Senior Secured Loan, First Lien

    —          27,284,255        —          —          27,284,255        —          870,035        —     

Senior Secured Loan, Second Lien

    —          25,461,454        —          (462,454     24,999,000        —          1,766,157        35,849   

WBS Group LLC

               

Limited Liability Co. Interest

    —          7,492,304        —          (1,435,521     6,056,783        —          —          —     

Westward Dough Operating Company, LLC

               

Senior Secured Loan

    —          6,790,896        (200,000     —          6,590,896        —          397,411        —     

Westward Dough Holdings, LLC

               

Limited Liability Co. Interest

    —          9,260,324        —          (5,648,324     3,612,000        —          —          —     
 

 

 

 

Totals

  $ 87,225,239      $ 82,900,374      $ (15,816,402   $ (10,972,967   $ 143,336,244      $ (14,819,901   $ 9,567,654      $ 193,692   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.
  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.
  *** For the year ended December 31, 2012.
  Investment no longer held at December 31, 2012.

The aggregate fair value of controlled investments at December 31, 2012 represents 20.9% of the Company’s net assets.

 

 

 

  (p) BDCs are required to invest at least 70% of their total assets primarily in securities of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. Government securities and other high quality debt investments that mature in one year or less. The securities referenced represent either fully or partially non-qualified assets for purposes of this requirement.
  (q) Interest may be paid in cash or PIK which is generally at the option of the borrower. PIK earned is included in the cost basis of the security. PIK represented approximately 4.5% of interest income earned for the year ended December 31, 2012. In accordance with the Company’s policy, PIK may be recorded on an effective yield basis.
  (r) Security bears interest at a floating rate that may or may not include an interest rate floor.
  (s) Non-income producing equity securities at December 31, 2012.

The accompanying notes are an integral part of these consolidated financial statements.

 

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BlackRock Kelso Capital Corporation

Notes to Consolidated Financial Statements (Unaudited)

1. Organization

BlackRock Kelso Capital Corporation and subsidiaries (the “Company”) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company and as an investment advisor (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”). The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, which was filed with the Securities and Exchange Commission (“SEC”) on March 7, 2013.

2. Significant accounting policies

Basis of Presentation

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material. In the opinion of management, all adjustments, consisting solely of normal recurring accruals considered necessary for the fair presentation of financial statements for the interim period, have been included.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, which were established to hold certain investments of the Company. The Company owns 100% of each subsidiary and, as such, the subsidiaries are consolidated into the Company’s consolidated financial statements. The subsidiaries hold investments which are treated as pass through entities for tax purposes. By investing through these 100% owned subsidiaries, the Company is able to benefit from corporate tax treatment for these entities and thereby create a tax structure that is more advantageous with respect to the RIC status of the Company. Transactions between subsidiaries, to the extent they occur, are eliminated in consolidation.

Expenses are recorded on an accrual basis.

Investments

Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. Realized gains or losses on the disposition of investments are calculated using the specific identification method.

 

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Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company obtains market quotations, when available, from an independent pricing service or one or more broker-dealers or market makers and utilizes the average of the range of bid and ask quotations. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by or under the direction of the Company’s Board of Directors.

Because the Company expects that there will not be a readily available market for substantially all of the investments in its portfolio, the Company expects to value substantially all of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that the Company may ultimately realize.

In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Company’s investment advisor (the “Advisor”), believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

With respect to the Company’s investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors has approved a multi-step valuation process applied each quarter, as described below:

(i) The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment;

(ii) The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;

(iii) The audit committee of the Board of Directors reviews the preliminary valuations prepared by the independent valuation firms; and

(iv) The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current

 

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market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, (e.g., non-performance risk), its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the Company’s principal market (as the reporting entity) and enterprise values.

Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is held at amortized cost, which the Advisor believes approximates fair value under the circumstances. As of that date, an independent valuation firm conducts an initial independent appraisal of the investment.

Accounting Standards Codification (“ASC”) 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), issued by the Financial Accounting Standards Board (“FASB”), defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. See note 10 for further details.

Cash and Cash Equivalents

Cash equivalents include short-term liquid overnight investments.

Revenue recognition

Interest income is recorded on an accrual basis and includes amortization of premiums and accretion of discounts. Discounts and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security. Premiums and discounts are determined based on the cash flows expected to be received for a particular investment upon maturity.

Dividend income is recorded on the ex-dividend date and is adjusted to the extent that the Company expects to collect such amounts. For loans and securities with payment-in-kind (“PIK”) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, such income is accrued only to the extent that the Advisor believes that the PIK income is likely to be collected. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash.

Fee income, such as structuring fees, origination, closing, commitment and other upfront fees are generally non-recurring and are recognized as revenue when earned. In instances where the Company does not perform significant services in connection with the related investment, fees paid to the Company may be deferred and amortized over the estimated life of the investment. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as income.

U.S. Federal income taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and

 

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pay a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated undistributed taxable income as required.

Dividends from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Company’s annual RIC tax return.

Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified among the Company’s capital accounts. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.

The Company may pay distributions in excess of its taxable net investment income. This information would be disclosed in the Company’s annual Form 10-K as part of the required RIC tax disclosures. This excess would be a tax-free return of capital in the period and reduce the shareholder’s tax basis in its shares. The cumulative amounts disclosed on the Consolidated Statements of Assets and Liabilities as distributions in excess of taxable net investment income are $37,031,405 and $22,291,022 at September 30, 2013 and December 31, 2012, respectively.

Dividends to Common Stockholders

Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a dividend is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of distributions on behalf of stockholders, unless a stockholder elects to receive cash. As a result, if the Board of Directors authorizes, and the Company declares, a cash dividend, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of Common Stock, rather than receiving the cash dividends.

Foreign Currency

Foreign currency amounts are translated into United States dollars on the following basis:

 

  (i) market value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and

 

  (ii) purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such transactions, income or expenses.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.

Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.

 

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Debt Issuance Costs

Debt issuance costs are amortized over the term of the related debt using the straight line method.

Equity Offering Expenses

The Company records registration expenses related to its shelf registration statement and related SEC filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with ASC 946, Financial Services—Investment Companies.

Non-Accrual Loans

Loans or debt securities are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan has sufficient collateral value and is in the process of collection.

Recently Issued Accounting Pronouncements

In December 2011, the FASB issued Accounting Standards Update (“ASU”) 2011-11, Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). These disclosure requirements are intended to help investors and other financial statement users to better assess the effect or potential effect of offsetting arrangements on an entity’s financial position. They also improve transparency in the reporting of how companies mitigate credit risk, including disclosure of related collateral pledged or received. In addition, ASU 2011-11 facilitates comparison between those entities that prepare their financial statements on the basis of U.S. GAAP and those entities that prepare their financial statements on the basis of International Financial Reporting Standards (“IFRS”). ASU 2011-11 requires entities to disclose both gross and net information about both instruments and transactions eligible for offset in the financial position; and to disclose instruments and transactions subject to a master netting or similar agreement. ASU 2011-11 was effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of ASU 2011-11 did not have a material impact on the Company’s disclosures, which has been reflected in the notes to these consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”). This update clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815. This update was effective for the Company for the year ending December 31, 2013, and did not have a material effect on the Company’s consolidated financial statements.

3. Agreements and related party transactions

Base Management Fee

The Company has entered into an Investment Management Agreement (the “Management Agreement”) with the Advisor, under which 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. For providing these services, the Advisor receives a base management fee (the “Management Fee”) from the Company quarterly in arrears at an annual rate of 2.0% of the Company’s total assets, including any assets acquired with the proceeds of leverage.

 

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For the three and nine months ended September 30, 2013, the Advisor earned $5,286,986 and $15,826,168, respectively, in Management Fees under the Management Agreement. For the three and nine months ended September 30, 2012, the Advisor earned $5,964,904 and $16,877,541, respectively, in Management Fees under the Management Agreement.

Incentive Management Fee

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders do not meet an 8.0% annualized rate of return during the applicable fee measurement period and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to the Company’s net asset value and does not take into account changes in the market price of the Company’s common stock.

The Advisor will be entitled to receive the Incentive Fee if the Company’s performance exceeds a “hurdle rate” during different measurement periods: trailing four quarters’ periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on capital gains). The “trailing four quarters’ periods” for purposes of determining the income portion of the Incentive Fee payable for the three months ended September 30, 2013 and 2012 was determined by reference to the four quarter periods ended on September 30, 2013 and 2012, respectively. The term “annual period” means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

The hurdle rate for each measurement period is 2.0% multiplied by the Company’s net asset values at the beginning of each calendar quarter during the measurement period, calculated after giving effect to any distributions that occurred during the measurement period. A portion of the Incentive Fee is based on the Company’s income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income. For each trailing four quarters’ period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess of (A) over (B) described in this paragraph for each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period will equal 50% of the period’s excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the period’s income amount distributed or distributable to stockholders as described in clause (A) of the preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the period’s remaining excess income amount.

For the three and nine months ended September 30, 2013 the Advisor earned zero and $1,917,968 respectively. For the three and nine months ended September 30, 2012, the Advisor earned zero and $2,213,859, respectively, in Incentive Fees based on Income from the Company.

Annual Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated and paid on an annual basis beginning on July 1, 2007, the first day of the calendar quarter in which the Public Market Event occurred and each annual period thereafter, ending on June 30 of the next calendar year. For each annual period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed gross unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

 

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The portion of the Incentive Fee based on capital gains for each period will equal 50% of the period’s excess gain amount, until such payments equal 20% of the period’s capital gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the period’s remaining excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the period’s hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the capital gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the “period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and gross unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

The Company is required under GAAP to accrue a hypothetical capital gains Incentive Fee based upon net realized capital gains and unrealized capital appreciation and depreciation on investments held at the end of each period. The accrual of this hypothetical capital gains incentive fee assumes all unrealized capital appreciation and depreciation is realized in order to reflect a hypothetical capital gains incentive fee that would be payable at each measurement date. If such amount is positive at the end of the period, then we record a capital gains incentive fee equal to 20% of such amount, less the amount of capital gains related incentive fees already accrued in prior periods. If the resulting amount is negative, the accrual for GAAP in a given period may result in an additional expense. There can be no assurance that such unrealized capital appreciation will be realized in the future. However, it should be noted that a fee so calculated and accrued would not be payable under the Investment Advisers Act of 1940 or the Management Agreement. Amounts actually paid will be consistent with the Advisers Act which specifically excludes consideration of unrealized capital appreciation.

The capital gains fee due to the Advisor as calculated under the Management Agreement as described above, for the three and nine months ended September 30, 2013 and 2012 were zero. In accordance with GAAP the hypothetical incentive fee for the three and nine months ended September 30, 2013, resulted in a capital gains incentive fee of $9,358,529 and $14,774,276, respectively, and for the three and nine months ended September 30, 2012, resulted in a capital gains incentive fee of $2,963,803. The total cumulative accrued balance at September 30, 2013 and 2012 was $20,269,011 and $2,963,803, respectively.

Advisor Reimbursements

The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2013, the Company incurred $479,871 and $1,520,714, respectively, and for the three and nine months ended September 30, 2012, the Company incurred $511,774 and $1,364,420, respectively, for such investment advisor expenses under the Management Agreement.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for such purposes during the three and nine months ended September 30, 2013 were $749,072 and $2,391,977 respectively, and during the three and nine months ended September 30, 2012 were $832,640 and $2,295,143, respectively.

 

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No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.

Administration

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides certain administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of certain of the Company’s officers and their respective staff. For the three and nine months ended September 30, 2013, the Company incurred $123,801 and $456,516, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2012, the Company incurred $112,976 and $261,160, respectively, in such expenses.

Advisor Stock Transactions

In 2007, the Company’s Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Company’s common stock, in the Advisor’s discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. There were no such purchases during the three and nine months ended September 30, 2013 and 2012.

In March 2011, the Company’s Board of Directors authorized the purchase in a private placement of up to 1,000,000 shares of the Company’s common stock, in the Advisor’s discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. There were no private placement purchases during the three and nine months ended September 30, 2013 and 2012.

At September 30, 2013 and December 31, 2012, the Advisor owned and had the right to vote approximately 49,000 and 94,000 shares, respectively, of the Company’s common stock, representing less than 1.0% of the total shares outstanding. On such dates, under compensation arrangements for its officers and employees the Advisor owned of record but did not have the right to vote an additional 125,000 and 261,000 shares, respectively, of the Company’s common stock. At September 30, 2013 and December 31, 2012, other entities affiliated with the Administrator beneficially owned approximately 5,015,000 and 6,019,000 shares, respectively, of the Company’s common stock, representing approximately 6.8% and 8.2% of the total shares outstanding. An entity affiliated with the Administrator has ownership and financial interests in the Advisor.

 

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4. Earnings per share

The following information sets forth the computation of basic and diluted net increase in net assets from operations per share (earnings per share) for the three and nine months ended September 30, 2013 and 2012.

 

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

Earnings per share – basic:

           

Net increase in net assets resulting from operations

   $ 19,843,743       $ 14,329,107       $ 61,664,279       $ 55,609,491   

Weighted average shares outstanding – basic

     74,239,932         73,692,104         74,099,028         73,555,011   

Earnings per share – basic:

   $ 0.27       $ 0.19       $ 0.83       $ 0.76   

Earnings per share – diluted:

        

Net increase in net assets resulting from operations, before adjustments

   $ 19,843,743       $ 14,329,107       $ 61,664,279       $ 55,609,491   

Adjustments for interest on unsecured convertible senior notes

     1,643,305         —          4,006,281         —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations, as adjusted

   $ 21,487,048       $ 14,329,107       $ 65,670,560       $ 55,609,491   

Weighted average shares outstanding – diluted

     84,136,659         73,692,104         82,183,168         73,555,011   

Earnings per share – diluted:

   $ 0.26       $ 0.19       $ 0.80       $ 0.76   

Diluted net increase in net assets per share from operations equals basic net increase in net assets per share from operations for the three and nine months ended September 30, 2012, because there were no common stock equivalents or convertible notes outstanding during those periods.

5. Investments

Purchases of investments, including PIK, for the three months ended September 30, 2013 and 2012 totaled $133,132,350 and $16,788,620, respectively, and for the nine months ended September 30, 2013 and 2012 totaled $364,973,873 and $238,476,949, respectively. Sales/repayments of investments for the three months ended September 30, 2013 and 2012 totaled $15,953,022 and $82,255,990, respectively, and for the nine months ended September 30, 2013 and 2012 totaled $319,283,096 and $203,491,979, respectively.

At September 30, 2013, investments consisted of the following:

 

     Cost      Fair Value  
  

 

 

    

 

 

 

Senior secured notes

   $ 221,411,001       $ 218,430,750   

Unsecured debt

     70,266,668         69,826,092   

Subordinated debt

     53,395,314         53,395,314   

Senior secured loans:

     

First lien

     176,342,155         174,069,220   

Second/other priority lien

     375,091,174         374,190,569   
  

 

 

    

 

 

 

Total senior secured loans

     551,433,329         548,259,789   
  

 

 

    

 

 

 

Preferred stock

     38,573,586         38,104,252   

Common stock

     62,730,781         125,553,896   

Limited partnership/limited liability company interests

     35,303,858         60,750,705   

Equity warrants/options

     6,117,113         24,767,431   
  

 

 

    

 

 

 

Total investments

   $ 1,039,231,650       $ 1,139,088,229   
  

 

 

    

 

 

 

 

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At December 31, 2012, investments consisted of the following:

 

     Cost      Fair Value  
  

 

 

    

 

 

 

Senior secured notes

   $ 196,604,877       $ 193,934,286   

Unsecured debt

     69,639,165         69,725,040   

Subordinated debt

     97,976,290         97,910,598   

Senior secured loans:

     

First lien

     185,245,486         185,983,030   

Second/other priority lien

     397,254,097         370,473,889   
  

 

 

    

 

 

 

Total senior secured loans

     582,499,583         556,456,919   
  

 

 

    

 

 

 

Preferred stock

     4,465,421         5,848,306   

Common stock

     47,075,765         72,341,231   

Limited partnership/limited liability company interests

     35,205,426         49,037,167   

Equity warrants/options

     3,882,766         16,343,994   
  

 

 

    

 

 

 

Total investments

   $ 1,037,349,293       $ 1,061,597,541   
  

 

 

    

 

 

 

Industry Composition

The industry composition of the portfolio at fair value at September 30, 2013 and December 31, 2012 was as follows:

 

      September 30,     December 31,  
Industry    2013     2012  

Personal and Other Services

     14.5     10.7

Printing, Publishing and Media

     11.9        9.1   

Healthcare

     10.8        13.5   

Consumer Products

     10.2        8.8   

Manufacturing

     9.7        10.0   

Chemicals

     8.3        4.9   

Business Services

     7.8        10.6   

Energy

     5.5        0.0   

Electronics

     5.2        4.5   

Financial Services

     5.1        8.1   

Beverage, Food and Tobacco

     3.7        3.8   

Retail

     3.0        2.3   

Building and Real Estate

     2.4        6.0   

Distribution

     1.7        4.3   

Transportation

     0.2        0.6   

Containers and Packaging

     0.0        2.7   

Telecommunications

     0.0        0.1   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

The geographic composition of the portfolio at fair value at September 30, 2013 was United States 93.3%, Canada 6.3% and the Cayman Islands 0.4%, and at December 31, 2012 was United States 94.7% and Canada 5.3%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

 

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Market and Credit Risk

In the normal course of business, the Company invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Company may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Company; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Company may be exposed to counterparty credit risk, or the risk that an entity with which the Company has unsettled or open transactions may fail to or be unable to perform on its commitments. The Company manages counterparty risk by entering into transactions only with counterparties that they believe have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Company to market, issuer and counterparty credit risks, consist principally of investments in portfolio companies. The extent of the Company’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the consolidated statements of assets and liabilities. The Company is also exposed to credit risk related to maintaining all of its cash at a major financial institution.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Derivatives

Foreign Currency

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Company’s forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with only creditworthy counterparties. There were no open forward foreign currency contracts at September 30, 2013.

At December 31, 2012, details of open forward foreign currency contracts were as follows:

 

Foreign Currency

  Settlement Date     Amount and Transaction     US$ Value at
Settlement Date
    US$ Value at
December 31, 2012
    Unrealized
Appreciation 
(Depreciation)
 

Canadian dollar

    January 16, 2013        21,880,000 Sold        $    22,373,103        $    22,002,621        $      370,482   

Canadian dollar

    January 16, 2013        324,397 Purchased        (324,962     (326,215     1,253   

Canadian dollar

    January 16, 2013        334,652 Purchased        (338,845     (336,527     (2,318
     

 

 

 

Total

        $    21,709,296        $    21,339,879        $      369,417   
     

 

 

 

 

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All realized and unrealized gains and losses on forward foreign currency contracts are included in earnings (changes in net assets) and are reported as separate line items within the Company’s consolidated statements of operations. Unrealized gains and losses on forward foreign currency contracts are also reported as separate line items within the Company’s consolidated statements of assets and liabilities.

Warrants

The Company holds warrants and options in certain portfolio companies in an effort to achieve additional investment return. In holding such warrants and options, the Company bears the risk of an unfavorable change in the value of the underlying equity interest. The aggregate fair value of warrants and options at September 30, 2013 and December 31, 2012 represented 3.6% and 2.4%, respectively, of the Company’s net assets.

The Company may enter into other derivative instruments and incur other exposures with other counterparties in the future. The derivative instruments held at December 31, 2012 reflected the volume of derivative activity throughout the periods presented.

7. Debt

In accordance with the Investment Company Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, calculated pursuant to the Investment Company Act, is at least 200% after such borrowing. As of September 30, 2013, the Company’s asset coverage was 267%.

On June 7, 2013, the Company entered into a Senior Secured Term Loan Credit Agreement (“Term Loan”) which has a principal amount of $10,000,000. The Term Loan has a stated maturity date of May 31, 2018. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 3.75%.

On March 13, 2013, the Company entered into an Amended and Restated Senior Secured Revolving Credit Facility (“Credit Facility”) which has an initial aggregate principal amount of up to $350,000,000 and canceled the prior credit facility and the related term loan that were outstanding at December 31, 2012. The Credit Facility has a stated maturity date of March 13, 2017. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 2.50%. The Credit Facility’s commitment may increase in size, under certain circumstances, up to a total of $750,000,000.

At September 30, 2013, the Company had $114,000,000 drawn on the Credit Facility versus $171,850,000 at December 31, 2012. Subject to compliance with applicable covenants and borrowing base limitations, the remaining amount available under the Credit Facility was $236,000,000 at September 30, 2013.

On February 19, 2013, the Company closed a private offering of $100,000,000 in aggregate principal amount of 5.50% unsecured convertible senior notes due 2018 (the “Convertible Notes”). The initial purchasers of the Convertible Notes fully exercised their overallotment option and purchased an additional $15,000,000 in aggregate principal amount of the Convertible Notes. The closing of the overallotment option took place on March 4, 2013. With the exercise of the overallotment option, a total of $115,000,000 in aggregate principal amount of the Convertible Notes has been sold. Net proceeds to the Company from the offering, including the exercise of the overallotment option, were approximately $111,300,000. The Convertible Notes were only offered to qualified institutional buyers as defined in the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Rule 144A under the Securities Act.

The Convertible Notes are unsecured and bear interest at a rate of 5.50% per year, payable semi-annually in arrears. In certain circumstances and during certain periods, the Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 86.0585 shares of common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $11.62 per share of the Company’s common stock, subject to defined anti-dilution adjustments. The Company does not have

 

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the right to redeem the Convertible Notes prior to maturity. The Convertible Notes mature on February 15, 2018, unless repurchased or converted in accordance with their terms prior to such date.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of five-year, senior secured notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of seven-year, senior secured notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018 (collectively, the “Senior Secured Notes”). The Senior Secured Notes were sold to certain institutional accredited investors pursuant to an exemption from registration under the Securities Act of 1933, as amended. Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011.

The Company’s outstanding debt as of September 30, 2013 and December 31, 2012 was as follows:

 

    As of  
  September 30, 2013     December 31, 2012  
  Total
Aggregate
Principal
Amount
Available (1)
    Principal
Amount
Outstanding
    Carrying Value     Total
Aggregate
Principal
Amount
Available (1)
    Principal
Amount
Outstanding
    Carrying Value  

Credit Facility

  $ 350,000,000 (2)    $ 114,000,000      $ 114,000,000      $ 375,000,000 (3)    $ 171,850,000      $ 171,850,000   

Senior Secured Notes

    175,000,000        175,000,000        175,000,000        175,000,000        175,000,000        175,000,000   

Convertible Notes

    115,000,000        115,000,000        113,919,440 (4)      —          —          —     

Term Loan

    10,000,000        10,000,000        10,000,000        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 650,000,000      $ 414,000,000      $ 412,919,440      $ 550,000,000      $ 346,850,000      $ 346,850,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Subject to borrowing base and leverage restrictions.
(2) Provides for a feature that allows the Company, under certain circumstances, up to a total of $750,000,000.
(3) Provides for a feature that allows the Company, under certain circumstances, up to a total of $900,000,000.
(4) Represents the aggregate principal amount outstanding of the Convertible Notes less the unaccreted discount initially recorded upon issuance of the Convertible Notes. The total unaccreted discount for the 2018 Convertible Notes, was $1,080,560 as of September 30, 2013.

 

 

The Company’s average outstanding debt balance during the three and nine months ended September 30, 2013 was $374,921,359 and $334,448,747, respectively, and during the three and nine months ended September 30, 2012 was $420,729,348 and $390,714,051, respectively. The maximum amounts borrowed during the three and nine months ended September 30, 2013 were $392,410,652 and $465,260,652, respectively, and during the three and nine months ended September 30, 2012 was $469,900,000 and $469,900,000.

The weighted average annual interest cost for the three and nine months ended September 30, 2013 was 5.47% and 5.68%, respectively, and for the three and nine months ended September 30, 2012 was 4.73% and 4.87%, exclusive of commitment fees and of other prepaid expenses related to establishing the Credit Facility and the Senior Secured Notes. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.375%. Commitment fees incurred for the three and nine months ended September 30, 2013 were $262,553 and $871,040, respectively, and for the three and nine months ended September 30, 2012 were $164,923 and $611,922.

At September 30, 2013, the Company was in compliance with all covenants required under the Credit Facility, Convertible Notes, Senior Secured Notes and Term Loan.

 

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8. Capital stock

In 2008, the Company’s Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an additional 2.5 percent of its outstanding shares of common stock. In May 2013, the repurchase plan was further extended through the earlier of June 30, 2014 or until the approved number of shares has been repurchased. During the three and nine months ended September 30, 2013 and 2012, the Company purchased zero shares of its common stock on the open market. Since inception of the repurchase plan through September 30, 2013, the Company has purchased 1,425,507 shares of its common stock on the open market for $9,476,676, including brokerage commissions. At September 30, 2013, the total number of remaining shares authorized for repurchase was 1,331,143. The Company currently holds the shares it repurchased in treasury.

9. Guarantees and commitments

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at September 30, 2013 and 2012.

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its consolidated financial statements.

10. Fair value of financial instruments

Fair Value Measurements and Disclosure

ASC 820-10, Fair Value Measurement and Disclosures, defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. ASC 820-10 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on unadjusted quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

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Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation.

Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing level occurred from the beginning to the end of the period.

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The fair value of the Company’s Credit Facility, Convertible Notes, Senior Secured Notes and Term Loan is derived by taking the average of the high and low quotes as obtained from a broker. The fair value of the Credit Facility, Convertible Notes, Senior Secured Notes and Term Loan would be classified as Level 2 with respect to the fair value hierarchy.

The carrying and fair values of the Company’s Credit Facility payable were $114,000,000 and $111,720,000 at September 30, 2013 and $171,850,000 and $168,413,000 at December 31, 2012, respectively. The carrying and fair values of the Term Loan were $10,000,000 and $9,950,000 at September 30, 2013. The carrying and fair values of the Company’s Senior Secured Notes were $175,000,000 and $185,330,700 at September 30, 2013 and $175,000,000 and $189,507,410 at December 31, 2012, respectively. The carrying and fair values of the Company’s Convertible Notes were $113,919,440 and $116,625,027 at September 30, 2013. The carrying and fair values of the Company’s total debt outstanding were therefore $412,919,440 and $423,625,727 at September 30, 2013 and $346,850,000 and $357,920,410 at December 31, 2012, respectively.

The Company’s valuation policy and fair value disclosures are consistent with ASC 820-10. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value and categorizes each investment within the fair value hierarchy pursuant to ASC 820-10.

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities as investments in “controlled” companies. Detailed information with respect to the Company’s non-controlled non-affiliated, non-controlled affiliated and controlled investments is contained in the accompanying consolidated schedules of investments. The information in the tables below is presented on an aggregate portfolio basis, without segregating the non-controlled non-affiliated, non-controlled affiliated and controlled investment categories.

 

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The following tables summarize the fair values of the Company’s investments, forward foreign currency contracts and cash and cash equivalents based on the inputs used at September 30, 2013 and December 31, 2012 in determining such fair values:

 

            Fair Value Inputs at September 30, 2013  
     Fair Value
at September 30,
2013
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior secured notes

   $ 218,430,750       $ —        $ —        $ 218,430,750   

Unsecured debt

     69,826,092         —          —          69,826,092   

Subordinated debt

     53,395,314         —          —          53,395,314   

Senior secured loans

     548,259,789         —          —          548,259,789   

Preferred stock

     38,104,252         —          —          38,104,252   

Common stock

     125,553,896         —          —          125,553,896   

Limited partnership/limited liability company interests

     60,750,705         —          —          60,750,705   

Equity warrants/options

     24,767,431         —          —          24,767,431   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,139,088,229         —          —          1,139,088,229   

Forward foreign currency contracts

     —           —          —          —    

Cash and cash equivalents

     13,727,451         13,727,451         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,152,815,680       $ 13,727,451       $           —        $ 1,139,088,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Inputs at December 31, 2012  
     Fair Value
at December 31,
2012
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior secured notes

   $ 193,934,286       $ —        $           —        $ 193,934,286   

Unsecured debt

     69,725,040         —          —          69,725,040   

Subordinated debt

     97,910,598         —          —          97,910,598   

Senior secured loans

     556,456,919         —          —          556,456,919   

Preferred stock

     5,848,306         —          —          5,848,306   

Common stock

     72,341,231         —          —          72,341,231   

Limited partnership/limited liability company interests

     49,037,167         —          —          49,037,167   

Equity warrants/options

     16,343,994         —          —          16,343,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,061,597,541         —          —          1,061,597,541   

Forward foreign currency contracts

     369,417         —          369,417         —    

Cash and cash equivalents

     9,122,141         9,122,141         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,071,089,099       $ 9,122,141       $ 369,417       $ 1,061,597,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

In determining the fair values of the Company’s forward foreign currency contracts at December 31, 2012, the Company used unadjusted indicative price quotations for similar assets (Level 2).

The valuation techniques used at September 30, 2013 and December 31, 2012 in determining the fair values of the Company’s investments for which significant unobservable inputs were used were the market approach, income approach or both using third party valuation firms or broker quotes for identical or similar

 

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assets. The total fair market value using the market or income approach or using third party valuation firms was $1,138,563,716 and $1,061,396,764 as of September 30, 2013 and December 31, 2012, respectively. The remaining balance was determined using broker quotes for identical or similar assets.

The following is a reconciliation for the three months ended September 30, 2013 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
June 30,
2013
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2013
 

Senior secured notes

  $ 218,139,030      $ 338,067      $ —        $ (304,467   $ 258,120      $ —       $         —       $ 218,430,750   

Unsecured debt

    64,397,211        —          —         (2,220     5,431,101       —         —         69,826,092   

Subordinated debt

    53,395,314        —          —         —          —          —         —         53,395,314   

Senior secured loans

    455,840,159        1,062,839        884,105        (678,672     128,318,434        (37,167,076     —         548,259,789   

Preferred stock

    32,573,853        —          —          (2,540,785     8,071,184        —          —         38,104,252   

Common stock

    100,719,935        —         30,020        12,407,230        12,426,731        (30,020     —         125,553,896   

Limited partnership / LLC Interest

    61,633,155        —         162,801        (916,105     33,655        (162,801     —         60,750,705   

Equity warrants/options

    22,522,193        —          —          2,245,238        —          —          —         24,767,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,009,220,850      $ 1,400,906      $ 1,076,926      $ 10,210,219      $ 154,539,225      $ (37,359,897   $ —       $ 1,139,088,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation for the nine months ended September 30, 2013 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
December 31,
2012
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2013
 

Senior secured notes

  $ 193,934,286      $ 2,000,373      $ 9,050,474      $ (309,660   $ 57,280,277      $ (43,525,000   $         —        $ 218,430,750   

Unsecured debt

    69,725,040        85,875        —         (526,451     5,541,628        (5,000,000     —          69,826,092   

Subordinated debt

    97,910,598        1,099,329        —         65,692        31,979        (45,712,284     —          53,395,314   

Senior secured loans

    556,456,919        8,878,834        (24,621,419     22,869,123        350,990,869        (366,314,537     —          548,259,789   

Preferred stock

    5,848,306        216,156        (32,772,628     (1,852,219     67,861,618        (1,196,981     —          38,104,252   

Common stock

    72,341,231        —          (8,342,930     37,557,649        24,088,978        (91,032     —          125,553,896   

Limited partnership / LLC Interest

    49,037,167        —          96,431        11,615,106        98,432        (96,431     —          60,750,705   

Equity warrants/options

    16,343,994        824,670        (323,584     6,189,090        1,805,951        (72,690     —          24,767,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,061,597,541      $ 13,105,237      $ (56,913,656   $ 75,608,330      $ 507,699,732      $ (462,008,955   $ —        $ 1,139,088,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation for the three months ended September 30, 2012 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
June 30,
2012
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2012
 

Senior secured notes

  $ 174,802,676      $ 550,364      $ —       $ (648,850   $ —       $ —       $         —       $ 174,704,190   

Unsecured debt

    48,500,000        7,876        —         (7,876     113,583        —         —         48,613,583   

Subordinated debt

    167,868,954        1,635,138        —         (3,070,611     —         (68,582,733     —         97,850,748   

Senior secured loans

    649,352,587        2,212,065        (8,420     (12,390,513     15,333,451        (10,262,860     —         644,236,310   

Preferred stock

    —         —         —         361,385        740,313        —         —         1,101,698   

Common stock

    70,923,064        —         67,998        1,595,669        (128,917     (80,382     —         72,377,432   

Limited partnership / LLC Interest

    44,431,152        —         2,377,756        282,234        30,345        (3,330,015     —         43,791,472   

Equity warrants / options

    9,664,681        —         —         938,158        699,845        —         —         11,302,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,165,543,114      $ 4,405,443      $ 2,437,334      $ (12,940,404   $ 16,788,620      $ (82,255,990   $ —       $ 1,093,978,117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following is a reconciliation for the nine months ended September 30, 2012 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
December 31,
2011
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2012
 

Senior secured notes

  $ 113,871,025      $ 1,380,576      $ —       $ 2,459,992      $ 56,992,597      $ —       $         —       $ 174,704,190   

Unsecured debt

    5,000,000        221,009        (45,124,241     45,203,232        43,613,583        (300,000     —         48,613,583   

Subordinated debt

    163,038,989        2,493,968        (8,185,353     3,887,004        10,661,605        (74,045,465     —         97,850,748   

Senior secured loans

    655,594,813        7,268,867        42,290        (9,732,498     115,887,205        (124,824,367     —         644,236,310   

Preferred stock

    —         —         —         361,385        740,313        —         —         1,101,698   

Common stock

    65,985,605        —         (113,608     7,219,077        278,489        (992,131     —         72,377,432   

Limited partnership /LLC Interest

    39,170,742        —         (19,698,952     9,235,441        18,414,257        (3,330,016     —         43,791,472   

Equity warrants /options

    6,291,268        —         (136,297     4,447,868        699,845        —         —         11,302,684   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,048,952,442      $ 11,364,420      $ (73,216,161   $ 63,081,501      $ 247,287,894      $ (203,491,979   $ —       $ 1,093,978,117   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers between Levels during the three and nine months ended September 30, 2013 and 2012. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s consolidated statements of operations.

The significant unobservable inputs used in the market approach of fair value measurement of the Company’s investments are the market multiples of earnings before income tax, depreciation and amortization (“EBITDA”) of the comparable guideline public companies. The independent valuation firms select a population of public companies for each investment with similar operations and attributes of the subject company. Using the data from these public companies, a range of multiples of enterprise value to EBITDA is calculated. The independent valuation firms select percentages from the range of multiples for purposes of determining the subject company’s estimated enterprise value based on said multiple and generally the latest twelve months EBITDA of the subject company (or other meaningful measure). Significant increases or decreases in the multiple will result in an increase or decrease in enterprise value, resulting in an increase or decrease in the fair value of the investment.

The significant unobservable input used in the income approach of fair value measurement of the Company’s investments is the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Significant increases or decreases in the discount rate would result in a decrease or increase in the fair value. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable company investments, and call provisions.

 

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The ranges of significant unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2013 were as follows:

EBITDA Multiples:

 

         Cost    Fair Value    Low    High    Weighted Average     
 

Unsecured debt

   $5,209,207    $5,209,207    3.00x    3.50x    3.25x   
 

Senior secured loans

   120,007,111    120,424,406    6.53x    6.97x    6.75x   
 

Preferred stock

     33,573,586      33,104,252    6.54x    7.13x    6.83x   
 

Common stock

     62,730,781    125,553,896    6.13x    6.88x    6.50x   
 

Limited partnerships/LLC interest

     34,545,789      60,726,192    8.92x    9.69x    9.30x   
 

Equity warrants/options

       5,862,113      24,187,016    5.64x    6.35x    6.00x   

Market Yields:

                 
 

Senior secured notes

   221,411,001    218,430,750    12.74%    13.96%    13.35%   
 

Unsecured debt

     65,057,461      64,616,885    12.25%    12.75%    12.50%   
 

Subordinated debt

     53,395,314      53,395,314    12.75%    14.75%    13.75%   
 

Senior secured loans

   295,950,161    296,130,874    10.06%    10.81%    10.44%   

 

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11. Financial highlights

The following per share data and ratios have been derived from information provided in the consolidated financial statements. The following is a schedule of financial highlights for a common share outstanding during the nine months ended September 30, 2013 and 2012.

 

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

Per Share Data:

    

Net asset value, beginning of period

       $ 9.31          $ 9.58   
  

 

 

   

 

 

 

Net investment income

     0.58        0.89   

Net realized and unrealized gain (loss)

     0.25        (0.13
  

 

 

   

 

 

 

Total from investment operations

     0.83        0.76   

Dividend distributions to stockholders from net investment income

     (0.78     (0.78

Equity component of warrant

     0.01        —     

Issuance (reinvestment) of stock at prices (below) above net asset value

     0.01        (0.01
  

 

 

   

 

 

 

Net increase / (decrease) in net assets

     0.07        (0.03
  

 

 

   

 

 

 

Net asset value, end of period

       $ 9.38          $ 9.55   
  

 

 

   

 

 

 

Market price, end of period

       $ 9.48          $ 9.72   
  

 

 

   

 

 

 

Total return(1)(2)

     2.23%        29.79%   

Ratios / Supplemental Data:

    

Ratio of operating expenses to average net assets(3)

     7.52%        5.12%   

Ratio of interest and other debt related expenses to average net assets(3)

     3.19%        3.16%   
  

 

 

   

 

 

 

Ratio of total expenses to average net assets(3)

     10.71%        8.28%   

Ratio of net investment income to average net assets(3)

     8.29%        12.29%   

Net assets, end of period

       $   696,300,202          $   703,534,228   

Average debt outstanding

       $ 334,448,747          $ 390,714,051   

Weighted average shares outstanding

     74,099,028        73,555,011   

Average debt per share(4)

       $ 4.51          $ 5.31   

Portfolio turnover(2)

     31%        19%   

 

 

(1) Total return is based on the change in market price per share during the respective periods. Total return calculations take into account dividends and distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.
(2) Not annualized.
(3) Annualized.
(4) Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period.

12. Subsequent events

On November 5, 2013, the Company’s Board of Directors declared a dividend of $0.26 per share, payable on January 3, 2014 to stockholders of record at the close of business on December 20, 2013.

In addition to the subsequent events included in these notes to the consolidated financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.

 

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

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

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 the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the “SEC”), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

    our future operating results;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact of investments that we expect to make;

 

    our contractual arrangements and relationships with third parties;

 

    the dependence of our future success on the general economy and its impact on the industries in which we invest;

 

    the ability of our portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

    the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms;

 

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

 

    the impact of increased competition;

 

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

 

    potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by the Advisor or its affiliates;

 

    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

We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private and certain public U.S. middle-market companies.

 

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

Investments

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

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, capital structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, interest and credit facility fees, expenses reimbursable under the Management Agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

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

 

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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.

Management considers the critical accounting policies important to understanding the consolidated financial statements. Our critical accounting policies are further described in the notes to the consolidated financial statements. See Note 2 to the consolidated financial statements for a description of significant accounting policies and of recently issued accounting pronouncements.

Financial and operating highlights

At September 30, 2013:

Investment Portfolio: $1,152.8 million

Net Assets: $696.3 million

Indebtedness (borrowings under Credit Facility, Convertible Notes,

Term Loan and Senior Secured Notes): $412.9 million

Net Asset Value per share: $9.38

Portfolio Activity for the Three Months Ended September 30, 2013:

Cost of investments during period: $133.1 million

Sales, repayments and other exits during period: $16.0 million

Number of portfolio companies at end of period: 47

Operating Results for the Three Months Ended September 30, 2013:

Net investment income per share: $0.12

Dividends declared per share: $0.26

Earnings per share: $0.27

Net investment income: $8.9 million

Net realized and unrealized losses: $11.0 million

Net increase in net assets from operations: $19.8 million

Net investment income per share, as adjusted1: $0.22

Net investment income, as adjusted1: $16.1 million

As Adjusted1: Amounts are adjusted to remove the incentive management fee expense based on Gains, as required by GAAP, and to include the incremental incentive management fee expense based on Income. The incremental incentive management fee is based on each trailing four-fiscal quarter period, applied to the current quarter’s incremental earnings, and without any reduction for incentive management fees paid during the prior three quarters. Amounts reflect the Company’s ongoing operating results and reflect the Company’s financial performance over time.

Portfolio and investment activity

We invested $133.1 million during the three months ended September 30, 2013. The investments consisted primarily of senior secured loans secured by second liens ($88.4 million, or 66.4%) or first liens ($19.9 million, or 15.0%), and unsecured, subordinated or equity securities ($24.5 million, or 18.4%) and senior secured notes ($0.3 million or 0.2%). Additionally, we received proceeds from sales/repayments and other exits of approximately $16.0 million during the three months ended September 30, 2013. During the quarter one existing portfolio investment was restructured, The Bargain! Shop Holdings Inc. As part of the restructuring the name was changed to Red Apple Stores, Inc.

At September 30, 2013, our portfolio of $1,152.8 million (at fair value) consisted of 47 portfolio companies and was invested 48% in senior secured loans, 21% in equity investments, 19% in senior secured notes, 11% in unsecured or subordinated debt securities, and 1% in cash and cash equivalents. Our average

 

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portfolio company investment at amortized cost, excluding investments below $5.0 million, was approximately $21.6 million at September 30, 2013. Our largest portfolio company investment by value was approximately $59.2 million and our five largest portfolio company investments by value comprised approximately 23% of our portfolio at September 30, 2013. At December 31, 2012, our portfolio of $1,070.7 million (at fair value) consisted of 47 portfolio companies was invested 52% in senior secured loans, 18% in senior secured notes, 16% in unsecured or subordinated debt securities, 13% in equity investments and 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost, excluding investments below $5.0 million, was approximately $26.9 million at December 31, 2012. Our largest portfolio company investment by value was approximately $57.0 million and our five largest portfolio company investments by value comprised approximately 23% of our portfolio at December 31, 2012.

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 11.8% at September 30, 2013 and 12.6% at December 31, 2012. The weighted average yields on our senior secured loans and other debt securities at fair value were 10.9% and 13.3%, respectively, at September 30, 2013, versus 11.9% and 13.6%, at December 31, 2012. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11.7% at September 30, 2013 and 12.2% at December 31, 2012. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10.9% and 13.2%, respectively, at September 30, 2013, versus 11.4% and 13.5%, at December 31, 2012. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, and cash and cash equivalents.

At September 30, 2013, 47.5% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 52.5% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 47.0% at September 30, 2013. At December 31, 2012, 45.1% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 54.9% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest subject to an interest rate floor was 40.2% at December 31, 2012.

The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:

Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor’s expectations and whose risk factors are neutral to favorable to those at the time of the original investment.

Grade 2: Investments in portfolio companies whose performance is below the Advisor’s expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisor’s expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the Advisor’s expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

 

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The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.11 at September 30, 2013 and 1.20 at December 31, 2012. The following is a distribution of the investment ratings of our portfolio companies at September 30, 2013 and December 31, 2012:

 

     September 30, 2013      December 31, 2012  

Grade 1

   $ 1,042,276,440       $ 890,646,222   

Grade 2

     78,639,119         127,996,599   

Grade 3

     2,261,000         42,176,795   

Grade 4

     14,800,258         597,510   

Not Rated

     1,111,412         180,415   
  

 

 

    

 

 

 

Total investments

   $ 1,139,088,229       $ 1,061,597,541   
  

 

 

    

 

 

 

Investment income

Investment income totaled $31,382,619 and $40,720,102, respectively, for the three months ended September 30, 2013 and 2012, of which $18,919,863 and $21,403,022 were attributable to interest and fees on senior secured loans, $11,408,229 and $19,274,373 to interest earned on other debt securities, $1,053,465 and $38,845 to dividends from equity securities, and $1,062 and $3,862 to interest earned on cash equivalents, respectively. The decrease in investment income for the three months ended September 30, 2013 is primarily attributable to a decrease in prepayment fees during the three months ended September 30, 2013.

For the three months ended September 30, 2013 fee income included $2,250,000 from capital structuring fees earned, and $129,875 from commitment and administration fees. For the three months ended September 30, 2012 fee income included $8,733,840 from prepayment fees, $248,953 from amortization of fees and $46,370 from commitment and administration fees. Interest income earned is comprised of cash interest of approximately 93% as well as PIK interest of approximately 7% for the three months ended September 30, 2013. The decrease in fee income for the three months ended September 30, 2013 is primarily attributable to a decrease in prepayment fees during the three months ended September 30, 2013.

Expenses

Expenses for the three months ended September 30, 2013 and 2012 were $22,508,958 and $16,781,830, respectively, which consisted of $9,358,529 and $2,963,803 in incentive management fees, $5,455,017 and $5,180,706 in interest expense and fees, $5,286,986 and $5,964,904 in base management fees, $568,678 and $634,677 in amortization of debt issuance costs, $541,180 and $577,051 in professional fees, $479,871 and $511,774 in Advisor expenses, $194,500 and $113,500 in director fees $174,288 and $164,074 in administrative services, and $449,909 and $671,341 in other expenses, respectively. The increase in expenses is primarily attributable to an increase in incentive management fees.

Net investment income

Net investment income was $8,873,661 and $23,938,272 for the three months ended September 30, 2013 and 2012, respectively. The decrease is primarily attributable to a decrease in prepayment fees and an increase in incentive management fees during the three months ended September 30, 2013.

 

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Net realized gain or loss

Net realized gain of $143,064 for the three months ended September 30, 2013 was the result of $1,076,925 in net gains realized from the disposition of our investments and $933,861 in net loss realized on foreign currency transactions. Net realized gain of $2,799,343 for the three months ended September 30, 2012 was the result of $2,437,334 in net gains realized from the disposition of our investments and $362,009 in net gain realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the three months ended September 30, 2013, and 2012 the change in net unrealized appreciation or depreciation on investments and foreign currency translation was an increase in net unrealized appreciation of $10,827,018 and a decrease in net unrealized depreciation of $12,408,508, respectively. The increase in net unrealized appreciation for the three months ended September 30, 2013 was comprised of an increase in net unrealized appreciation on investments of $10,702,670 and a net unrealized foreign currency translation gain of $124,348. The decrease in net unrealized appreciation for the three months ended September 30, 2012 was comprised of a decrease in net unrealized appreciation on investments of $11,262,047 and a net unrealized foreign currency translation loss of $1,146,461. The increase in net unrealized appreciation on investments for the three months ended September 30, 2013 was a result of the strong performance of our portfolio companies.

Net increase in net assets resulting from operations

The net increase in net assets resulting from operations for the three months ended September 30, 2013 and 2012 was an increase of $19,843,743 and $14,329,107, respectively. As compared to the prior period, the increase primarily reflects an increase in net realized and unrealized gains for the three months ended September 30, 2013.

Results comparisons for the nine months ended September 30, 2013 and 2012.

Investment income

Investment income totaled $98,648,344 and $109,393,044, respectively, for the nine months ended September 30, 2013 and 2012, of which $58,812,458 and $66,980,456 were attributable to interest and fees on senior secured loans, $38,115,112 and $41,697,592 to interest earned on other debt securities and $1,713,489 and $706,157 to dividends from equity securities and $7,285 and $8,839 in interest earned on cash equivalents, respectively. The decrease in investment income for the nine months ended September 30, 2013 is primarily attributable to a decrease in interest income due to repayments on investments.

Expenses

Expenses for the nine months ended September 30, 2013 and 2012 were $55,590,751 and $44,047,323, respectively, which consisted of $16,692,244 and $5,177,662 in incentive management fees, $15,826,168 and $16,877,541 in base management fees, $15,128,057 and $14,917,849 in interest expense and fees, $1,647,600, and $1,080,582 in professional fees, $1,520,714 and $1,364,420 in Advisor expenses, $1,431,226 and $1,890,236 in amortization of debt issuance costs, and $607,429 and $416,608 in administrative services, $474,000 and $347,063 in director fees and $2,263,313 and $1,975,362 in other expenses, respectively. The increase in expenses is primarily attributable to an increase in incentive management fees.

Net investment income

Net investment income was $43,057,593 and $65,345,721 for the nine months ended September 30, 2013 and 2012, respectively. The decrease is primarily a result of a decrease in investment income and an increase in incentive management fees.

 

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Net realized gain or loss

Net realized loss of $58,037,960 for the nine months ended September 30, 2013 was the result of $57,871,026 in net losses realized from the disposition of our investments and $166,934 in net loss realized on foreign currency transactions. Net realized loss of $57,871,026 was almost entirely attributable to losses relating to the restructuring of our investments in AGY Holding Corp., Bankruptcy Management Solutions, Inc. and Dial Global, Inc. et. al. Nearly the entire realized loss was reflected in unrealized depreciation in prior periods. Net realized loss on investments for the nine months ended September 30, 2012 resulted primarily from the disposition of our debt and equity investments in Big Dumpster Acquisition, Inc. et al. as well as the restructuring of our equity investment in WBS Group Holdings, LLC. Nearly the entire net realized loss on investments represents amounts that had been reflected in unrealized depreciation on investments in prior periods.

Net unrealized appreciation or depreciation

For the nine months ended September 30, 2013 and 2012, the change in net unrealized appreciation or depreciation was an increase in net unrealized appreciation of $76,644,646 and a decrease in net unrealized depreciation of $63,697,634. The increase in net unrealized appreciation for the nine months ended September 30, 2013 was comprised of an increase in net unrealized appreciation on investments of $76,906,131 and a net unrealized foreign currency translation loss of $261,485. The increase was mainly attributable to the reversal of unrealized depreciation for transactions realized during the nine months ended September 30, 2013. The decrease in net unrealized depreciation for the nine months ended September 30, 2012 was comprised of a decrease in net unrealized depreciation on investments of $63,365,688 and a net unrealized foreign currency translation gain of $331,946. The decrease was mainly attributable to the reversal of unrealized depreciation for transactions realized during the nine months ended September 30, 2012.

Net increase or decrease in net assets resulting from operations

The net increase in net assets resulting from operations for the nine months ended September 30, 2013 and 2012 was an increase of $61,664,279 and $55,609,491, respectively. As compared to the prior period, the increase primarily reflects a net increase in realized and unrealized losses offset by a decrease in net investment income for the nine months ended September 30, 2013.

Supplemental Non-GAAP information

We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial

 

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performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formula’s requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become, generally concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned on a quarterly basis, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our “as adjusted” results reflect Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarter’s incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The resulting amount represents an upper limit of each quarter’s incremental Incentive Fees that we may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the Incentive Fees payable with respect to prior quarters’ operating results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the consolidated financial statements in this Quarterly Report for a more detailed description of the Company’s incentive management fee.

 

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Computations for all periods are derived from our consolidated financial statements as follows:

 

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

GAAP Basis:

           

Net Investment Income

   $ 8,873,661       $ 23,938,272       $ 43,057,593       $ 65,345,721   

Net Investment Income per share

     0.12         0.32         0.58         0.89   

Addback: GAAP incentive management fee expense based on Gains

     9,358,529         2,963,803         14,774,276         2,963,803   

Addback: GAAP incentive management fee expense based on Income

     —          —          1,917,968         2,213,859   
           

Pre-Incentive Fee1:

           

Net Investment Income

   $ 18,232,190       $ 26,902,075       $ 59,749,837       $ 70,523,383   

Net Investment Income per share

     0.25         0.37         0.81         0.96   
           

Less: Incremental incentive management fee expense based on Income

     2,114,510         5,013,423         8,390,983         11,425,802   

As Adjusted2:

           

Net Investment Income

   $ 16,117,680       $ 21,888,652       $ 51,358,854       $ 59,097,581   

Net Investment Income per share

     0.22         0.30         0.69         0.80   

Pre-Incentive Fee1: Amounts are adjusted to remove all incentive management fees. Such fees are calculated but not necessarily due and payable at this time.

As Adjusted2: Amounts are adjusted to remove the incentive management fee expense based on Gains, as required by GAAP, and to include the incremental incentive management fee expense based on Income. The incremental incentive management fee is based on each trailing four-fiscal quarter period, applied to the current quarter’s incremental earnings, and without any reduction for incentive management fees paid during the prior three quarters. Amounts reflect the Company’s ongoing operating results and reflect the Company’s financial performance over time.

Financial condition, liquidity and capital resources

During the nine months ended September 30, 2013, cash flows from operating activities used was primarily due to outflows for new investments in senior secured loans and other debt securities, offset by sales or repayments of principal and settled purchases of selected portfolio company investments.

Net cash used in operating activities during the nine months ended September 30, 2013 was $8,826,734. Our primary use of cash from operating activities during the period was net purchases of $45,690,777.

Net cash provided by financing activities during the nine months ended September 30, 2013 was $13,432,044. Our primary source of cash from financing activities was $67,259,187 in net borrowings under the Credit Facility, Convertible Notes and Term Loan, partially offset by $53,827,143 for dividend distributions made during the period.

 

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On June 7, 2013, the Company entered into a Senior Secured Term Loan Credit Agreement (“Term Loan”) which has a principal amount of $10,000,000. The Term Loan has a stated maturity date of May 31, 2018. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 3.75%.

On March 13, 2013 the Company entered into an Amended and Restated Senior Secured Revolving Credit Facility (“Credit Facility”) which has an initial aggregate principal amount of up to $350,000,000 and canceled the prior credit facility and the related term loan that were outstanding at December 31, 2012. The Credit Facility has a stated maturity date of March 13, 2017. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 2.50%. The Credit Facility’s commitment may increase in size, under certain circumstances, up to a total of $750,000,000.

On February 19, 2013 the Company closed a private offering of $100,000,000 in aggregate principal amount of 5.50% unsecured convertible senior notes due 2018 (the “Convertible Notes”). The initial purchasers of the Convertible Notes fully exercised their overallotment option and purchased an additional $15,000,000 in aggregate principal amount of the Convertible Notes. The closing of the overallotment option took place on March 4, 2013. With the exercise of the overallotment option, a total of $115,000,000 in aggregate principal amount of the Convertible Notes has been sold. Net proceeds to the Company from the offering, including the exercise of the overallotment option, were approximately $111,300,000. The Convertible Notes were only offered to qualified institutional buyers as defined in the Securities Act of 1933, as amended pursuant to Rule 144A under the Securities Act.

The Convertible Notes are unsecured and bear interest at a rate of 5.50% per year, payable semi-annually in arrears. In certain circumstances and during certain periods, the Convertible Notes are convertible into cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 86.0585 shares of common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $11.62 per share of the Company’s common stock, subject to defined anti-dilution adjustments. The Company does not have the right to redeem the Convertible Notes prior to maturity. The Convertible Notes mature on February 15, 2018, unless repurchased or converted in accordance with their terms prior to such date.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of five-year, senior secured notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of seven-year, senior secured notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018 (collectively, the “Senior Secured Notes”). The Senior Secured Notes were sold to certain institutional accredited investors pursuant to an exemption from registration under the Securities Act of 1933, as amended. Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at September 30, 2013 is as follows:

 

     Payments Due By Period (dollars in millions)  
     Total      Less than 1 year      1-3 years      3-5 years      After 5 years  

Credit Facility(1)

   $ 114.0       $             —        $     —        $ 114.0       $         —     

Term Loan

     10.0         —          —          10.0         —    

Senior Secured Notes

     175.0         —          158.0         17.0         —    

Convertible Notes

     113.9         —          —          113.9         —    

Interest and Credit Facility Fees Payable

     3.7         3.7         —          —          —    

 

(1) At September 30, 2013, $236.0 million remained unused under our Credit Facility.

 

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Off-balance sheet arrangements

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at September 30, 2013.

Dividends

Our quarterly dividends, if any, are determined by our Board of Directors. Dividends are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends and distributions or at a particular level. The following table lists the quarterly dividend per share from our common stock since September 2011.

 

Dividend Amount

Per Share

Outstanding

  

Record Date

  

Payment Date

$0.26

   September 19, 2011    October 3, 2011

$0.26

   December 21, 2011    January 4, 2012

$0.26

   March 20, 2012    April 3, 2012

$0.26

   June 19, 2012    July 3, 2012

$0.26

   September 19, 2012    October 3, 2012

$0.26

   December 20, 2012    January 3, 2013

$0.26

   March 19, 2013    April 2, 2013

$0.26

   June 18, 2013    July 2, 2013

$0.26

   September 19, 2013    October 3, 2013

$0.26

   December 20, 2013    January 3, 2014

Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.

We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders 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, out of the assets legally available for distribution. Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred by the Company after December 31, 2010 will not be subject to expiration. In addition, such losses must be utilized prior to the losses incurred in the years preceding enactment. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of:

 

    98% of our ordinary income for the calendar year;

 

    98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31st; and

 

    any ordinary income and net capital gains for preceding years that were not distributed during such years.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a dividend, stockholders’ cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash dividends. With respect to our dividends and distributions paid to stockholders during the nine months ended September 30, 2013 and 2012, dividends reinvested pursuant to our dividend reinvestment plan totaled $3,864,460 and $4,291,772, respectively.

 

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Under the terms of an amendment to our dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date. 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. We may not be able to achieve operating results that will allow us to make dividends and distributions at a specific level or to increase the amount of these dividends and distributions from time to time. Also, we may be limited in our ability to make dividends and distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act and due to provisions in our existing and future debt arrangements.

If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to an excise tax. In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending prior to 2012) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes.

With respect to dividends paid to stockholders, certain income we receive from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies may cause our taxable income to exceed our GAAP income although the differences are expected to be temporary in nature.

Recent developments

On November 5, 2013, the Company’s Board of Directors declared a dividend of $0.26 per share, payable on January 3, 2014 to stockholders of record at the close of business on December 20, 2013.

Notice is hereby given in accordance with Section 23(c) of the 1940 Act that from time to time the Company may purchase shares of its common stock in the open market at prevailing market prices.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. At September 30, 2013, 47.5% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months. At September 30, 2013, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 47.0%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.

While hedging activities may help to insulate us against adverse changes in interest rates, they also may limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the nine months ended September 30, 2013 and 2012, we did not engage in any interest rate hedging activity.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of

 

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the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting 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.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.

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

Sales of unregistered securities

None.

Issuer purchases of equity securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5.  Other Information

None.

Item 6. Exhibits.

 

(a) Exhibits.

 

31.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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.

 

   BLACKROCK KELSO CAPITAL CORPORATION
Date: November 7, 2013    By:   

/s/ James R. Maher

      James R. Maher
      Chief Executive Officer
Date: November 7, 2013    By:   

/s/ Corinne Pankovcin

      Corinne Pankovcin
      Chief Financial Officer

 

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