UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2014

 

OR

 

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

 

COMMISSION FILE NUMBER: 1-36447 

 

 

ALCENTRA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

Maryland		46-2961489
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

200 Park Avenue, 7^th Floor

New York, NY

(Address of Principal Executive Offices) (Zip Code)

 

(212) 922-8240

(Registrant’s Telephone Number, Including Area Code) 

 

 

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  x    No  ¨

 

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

 

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		x  (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 Exchange Act).    Yes  ¨    No  x

 

The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of November 10, 2014 was 13,516,766.

 

  

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION		3
Item 1. Financial Statements		3
Consolidated Financial Statements of Alcentra Capital Corporation:
Consolidated Statement of Assets and Liabilities as of September 30, 2014 (unaudited)		3
Consolidated Statement of Operations for the three months ended September 30, 2014 (unaudited) and for the period from May 8, 2014 (commencement of operations) to September 30, 2014 (unaudited)		4
Consolidated Statement of Changes in Net Assets for the period from May 8, 2014 (commencement of operations) to September 30, 2014 (unaudited)		5
Consolidated Statement of Cash Flows for the period from May 8, 2014 (commencement of operations) to September 30, 2014 (unaudited)		6
Consolidated Schedule of Investments of Alcentra Capital Corporation as of September 30, 2014 (unaudited)		7
Financial Statements of BNY Mellon-Alcentra Mezzanine III, L.P.:
Statement of Assets and Liabilities as of December 31, 2013		3
Statements of Operations for the period from January 1, 2014 to May 7, 2014, and for the three- and nine-month periods ended September 30, 2013 (unaudited)		4
Statements of Changes in Net Assets for the period from January 1, 2014 to May 7, 2014 and for the nine-month period ended September 30, 2013 (unaudited)		5
Statements of Cash Flows for the period from January 1, 2014 to May 7, 2014 and for the nine-month period ended September 30, 2013 (unaudited)		6
Schedule of Investments of BNY Mellon-Alcentra Mezzanine III, L.P. as of December 31, 2013		11
Notes to Unaudited Consolidated Financial Statements		15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		41
PART II. OTHER INFORMATION		42
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults Upon Senior Securities		42
Item 4. Mine Safety Disclosures		42
Item 5. Other Information		42
Item 6. Exhibits		42
SIGNATURES		43

 

 

PART I — FINANCIAL INFORMATION

 

On May 8, 2014, Alcentra Capital Corporation (the “Company”) acquired substantially all of the investment portfolio of BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolio of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company for purposes of this Quarterly Report. 

 

Item 1. Financial Statements

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statement of Assets and Liabilities

 

		Alcentra Capital Corporation and Subsidiary				BNY Mellon-Alcentra Mezzanine III, L.P.
		As of September 30, 2014 (Unaudited)				As of December 31, 2013
Assets
Portfolio investments, at fair value
Non-controlled, non-affiliated investments, at fair value  (cost $120,342,994 and $57,569,745, respectively)		$	121,161,355			$	63,987,210
Non-controlled, affiliated investments, at fair value (cost $58,958,590 and $35,529,197, respectively)			59,927,161				35,037,384
Controlled, affiliated investments, at fair value (cost $30,293,405 and $27,274,576, respectively)			33,127,224				25,941,243
Total of portfolio investments, at fair value (cost $209,594,989 and $120,373,518, respectively)			214,215,740				124,965,837
Cash			19,196,748				729,431
Dividends and interest receivable			941,221				736,223
Receivable for investments sold			263,373				-
Due from Limited Partners			-				6,635
Deferred financing costs			1,434,391				-
Prepaid expenses and other assets			169,202				350,000
Total Assets		$	236,220,675			$	126,788,126
Liabilities
Credit facility payable		$	26,939,154			$	15,000,000
Payable for investments purchased			39,753				-
Other accrued expenses and liabilities			1,013,775				326,696
Due to affiliate			-				10,989
Directors’ fees payable			60,245				-
Professional fees payable			155,775				-
Interest and credit facility expense payable			314,708				15,614
Management fee payable			314,910				715,014
Distributions payable			4,595,700				168
Capital contributions paid in advance			-				80,218
Total Liabilities			33,434,020				16,148,699
Commitments and Contingencies (Note 12)
Net Assets
General Partner			-				4,967,879
Limited Partners			-				105,671,548
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,516,766 shares issued and outstanding)			13,517				-
Additional paid-in capital			198,085,871				-
Accumulated net realized gain (loss)			17,875				-
Distributions in excess of net investment income			48,641				-
Net unrealized appreciation (depreciation) on investments			4,620,751				-
Total Net Assets			202,786,655				110,639,427
Total Liabilities and Net Assets		$	236,220,675			$	126,788,126
Net Asset Value Per Share		$	15.00				N.A.

 

See notes to unaudited consolidated financial statements

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statement of Operations (Unaudited)

 

 

 

	Alcentra Capital Corporation and Subsidiary			BNY Mellon-Alcentra Mezzanine III, L.P.			BNY Mellon-Alcentra Mezzanine III, L.P.			Alcentra Capital Corporation and Subsidiary			BNY Mellon-Alcentra Mezzanine III, L.P.
Investment Income:	For the three months ended September 30, 2014 (Unaudited)			For the three months ended September 30, 2013 (Unaudited)			For the period from January 1, 2014 through May 7, 2014 (Unaudited)			For the period from May 8, 2014* through September 30, 2014 (Unaudited)			For the nine months ended September 30, 2013 (Unaudited)
From non-controlled, non-affiliated investments:
Interest income from portfolio investments	$	2,000,127		$	1,331,815		$	2,335,475		$	3,695,002		$	4,035,210
Paid in-kind interest income from portfolio investments		142,614			99,969			569,637			611,686			403,612
Other income from portfolio investments		882,879			71,002			649,961			882,879			139,974
Dividend income from portfolio investments		374,660			-			251,752			374,660			-
From non-controlled, affiliated investments:
Interest income from portfolio investments		968,009			680,045			1,089,807			1,542,931			2,348,827
Paid in-kind interest income from portfolio investments		411,491			25,875			341,850			664,379			79,725
Other income from portfolio investments		947			15,228			788,083			947			36,870
From controlled, affiliated investments:
Interest income from portfolio investments		698,620			-			769,953			1,157,492			566,666
Paid in-kind interest income from portfolio investments		209,415			-			521,321			393,410			-
Other income from portfolio investments		172,425			1,663			444,055			172,425			4,787
Total investment income		5,861,187			2,225,597			7,761,894			9,495,811			7,615,671
Expenses:
Management fees		925,477			715,017			699,473			1,450,025			2,113,105
Incentive fees		763,550			-			-			763,550			-
Professional fees - Legal & Accounting		141,252			126,229			84,642			224,822			210,057
Valuation Services		-			-			-			162,700			-
Interest and credit facility expense		376,569			32,366			50,214			595,924			97,857
Amortization of deferred financing costs		123,905			-			-			194,683			-
Directors' fees		26,916			-			-			106,916			-
Other expenses		281,937			-			7			320,983			-
Total expenses		2,639,606			873,612			834,336			3,819,603			2,421,019
Waiver of management and incentive fees by the Investment Advisor		(1,374,118	)		-			-			(1,374,118	)		-
Net expenses		1,265,488			873,612			834,336			2,445,485			2,421,019
Net investment income		4,595,699			1,351,985			6,927,558			7,050,326			5,194,652
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments
Net realized gain (loss) on:
Non-controlled, non-affiliated investments		17,875			2,830,783			51,961			17,875			2,872,411
Non-controlled, affiliated investments		-			-			-			-			-
Controlled, affiliated investments		-			-			-			-			-
Net realized gain (loss) from portfolio investments		17,875			2,830,783			51,961			17,875			2,872,411
Net change in unrealized appreciation (depreciation) on:
Non-controlled, non-affiliated investments		870,554			(1,255,245	)		2,974,591			818,361			453,750
Non-controlled, affiliated investments		1,118,082			(1,327,000	)		-			968,571			(1,286,000	)
Controlled, affiliated investments		1,299,642			-			-			2,833,819			-
Net change in unrealized appreciation (depreciation) from portfolio investments		3,288,278			(2,582,245	)		2,974,591			4,620,751			(832,250	)
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments		3,306,153			248,538			3,026,552			4,638,626			2,040,161
Net Increase in Net Assets from Operations	$	7,901,852		$	1,600,523		$	9,954,110		$	11,688,952		$	7,234,813
Basic and diluted:
Net investment income per share	$	0.34			N.A.			N.A.		$	0.52			N.A.
Earnings per share	$	0.58			N.A.			N.A.		$	0.86			N.A.
Weighted Average Shares of Common Stock Outstanding		13,516,766			N.A.			N.A.			13,516,766			N.A.
Dividends declared per common share	$	0.340			N.A.			N.A.		$	0.518			N.A.

   

*

Commencement of operations of the Company

 

 

See notes to unaudited consolidated financial statements

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statement of Changes in Net Assets (Unaudited)

 

		BNY Mellon- Alcentra Mezzanine III, L.P.				Alcentra Capital Corporation and Subsidiary				BNY Mellon- Alcentra Mezzanine III, L.P.
		For the period from January 1, 2014 through May 7, 2014 (Unaudited)				For the period from May 8, 2014* through September 30, 2014 (Unaudited)				For the nine months ended September 30, 2013 (Unaudited)
Beginning Balances
General Partner		$	4,967,879				N.A.			$	3,237,056
Limited Partners			105,671,548				N.A.				93,482,529
Total Beginning Balances			110,639,427				N.A.				96,719,585
Capital contributions
General Partner			-				N.A.				-
Limited Partners			58,915,014				N.A.				14,141,033
Total			58,915,014				N.A.				14,141,033
Distributions
General Partner			-				N.A.				(74,140	)
Limited Partners			(3,941,341	)			N.A.				(23,340,311	)
Total			(3,941,341	)			N.A.				(23,414,451	)
Net increase in net assets resulting from operations
General Partner			924,600				N.A.				-
Limited Partners			9,029,510				N.A.				7,234,813
Total			9,954,110				N.A.				7,234,813
Carried interest allocation
General Partner			(5,966,619	)			N.A.				-
Limited Partners			5,966,619				N.A.				-
Total			-				N.A.				-
Total - General Partner			(74,140	)			N.A.				3,162,916
Total - Limited Partners			175,641,350				N.A.				91,518,064
Ending Balance		$	175,567,210				N.A.			$	94,680,980
Increase (decrease) in net assets resulting from operations
Net investment income			N.A.			$	7,050,326				N.A.
Net realized gain (loss) on investments			N.A.				17,875				N.A.
Net change in unrealized appreciation (depreciation) on investments			N.A.				4,620,751				N.A.
Net increase in net assets resulting from operations			N.A.				11,688,952				N.A.
Capital transactions
Proceeds from issuance of common stock from initial public offering (net of sales load)			N.A.				107,912,490				N.A.
Proceeds from issuance of common stock to the Partnership			N.A.				91,500,000				N.A.
Offering costs			N.A.				(1,314,602	)			N.A.
Net increase (decrease) in net assets resulting from capital transactions			N.A.				198,097,888				N.A.
Distributions to shareholders from:
Net investment income			N.A.				(7,001,685	)			N.A.
Realized gains			N.A.				-				N.A.
Total distributions to shareholders			N.A.				(7,001,685	)			N.A.
Total increase (decrease) in net assets			N.A.				202,785,155				N.A.
Net assets at beginning of period			N.A.				1,500				N.A.
Net assets at end of period (including Accumulated net investment income (loss) of $48,641)			N.A.			$	202,786,655				N.A.

   

*

Commencement of operations of the Company

 

 

See notes to unaudited consolidated financial statements

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statement of Cash Flows (Unaudited)

 

		BNY Mellon-Alcentra Mezzanine III, L.P.				Alcentra Capital Corporation and Subsidiary				BNY Mellon-Alcentra Mezzanine III, L.P.
		For the period from January 1, 2014 through May 7, 2014				For the period from May 8, 2014* through September 30, 2014				For the nine months ended September 30, 2013
		(Unaudited)				(Unaudited)				(Unaudited)
Cash Flows from Operating Activities
Net increase in net assets resulting from operations		$	9,954,110			$	11,688,952			$	7,234,813
Adjustments to reconcile net increase in net assets from operations to net cash provided by (used in) operating activities:
Net realized (gain) loss from portfolio investments			(51,961	)			(17,875	)			(2,872,411)
Net change in unrealized (appreciation) depreciation of portfolio investments			(2,974,591	)			(4,620,751	)			832,250
Paid in-kind interest income from portfolio investments			(1,432,808	)			(1,669,475	)			(483,337)
Accretion of discount on debt securities			(2,122,109	)			(50,336	)			(115,443)
Purchases of portfolio investments			(48,769,079	)			(143,466,845	)			(14,969,063)
Net proceeds from sale/return of capital of portfolio investments			15,780,666				27,109,542				18,782,201
Amortization of deferred financing costs			-				(194,683	)			-
(Increase) decrease in operating assets:
Dividends and interest receivable			87,770				(941,221	)			(288,283)
Due from Limited Partners			(30,023	)			-				239,373
Deferred financing costs			-				(1,239,708	)			-
Receivable for investments sold			-				(263,373	)			-
Prepaid expenses and other assets			348,518				(169,202	)			-
Escrow receivable			-				-				180,525
Increase (decrease) in operating liabilities:
Payable for investments purchased			-				39,753				-
Other accrued expenses and liabilities			25,661				970,307				31,281
Accrued organization and offering costs			-				(1,271,134	)			-
Due to affiliate			(5,940	)			-				13,100
Directors' fees payable			-				60,245				-
Professional fees payable			-				155,775				-
Interest and credit facility expense payable			(15,614	)			314,708				12,906
Management fee payable			(714,014	)			314,910				-
Net cash provided by (used in) operating activities			(29,919,414	)			(113,250,411	)			8,597,912
Cash Flows from Financing Activities
Proceeds from issuance of common stock from initial public offering			-				107,912,490				-
Proceeds from bridge facility			-				94,154,819				-
Payment of bridge facility			-				(94,154,819	)			-
Proceeds from credit facility payable			15,000,000				76,265,808				21,321,413
Payment from credit facility payable			-				(49,326,654	)			-
Distributions paid to Shareholders			-				(2,405,985	)			-
Capital contributions received from Partners			58,834,796				-				14,141,033
Repayments of credit facility payable			(30,000,000	)			-				(15,000,000)
Cash distributions paid to Partners			(3,941,341	)			-				(23,414,283)
Net cash provided by (used in) financing activities			39,893,455				132,445,659				(2,951,837)
Increase (decrease) in cash and cash equivalents			9,974,041				19,195,248				5,646,075
Cash and cash equivalents at beginning of period			729,431				1,500				869,836
Cash and Cash Equivalents at End of Period		$	10,703,472			$	19,196,748			$	6,515,911
Supplemental and non-cash financing activities:
Cash paid during the period for interest		$	65,828			$	475,899			$	84,951
Accrued offering costs		$	-			$	43,468			$	-
Accrued distributions payable		$	168			$	4,595,700			$	168
Acquisition of investments via exchange of common shares of the Company		$	-			$	91,500,000			$	-

  

* Commencement of operations of the Company

 

See notes to unaudited consolidated financial statements

 

 

Alcentra Capital Corporation

Consolidated Schedule of Investments

As of September 30, 2014

(Unaudited)

  

Company***		Industry		Interest Rate		Base Rate Floor		Maturity Date		No. Shares/ Principal Amount			Cost(1)		Fair Value		% of Net Assets
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 59.75%
Senior Secured - First Lien — 24.41%
Aphena Pharma Solutions		Packaging		7% Cash, 3.5% PIK				3/3/2019		3,666,494			$3,697,815		$3,697,815		1.82%
Black Diamond Rentals		Oil & Gas Services		12% Cash, 2% PIK				7/8/2018		12,702,325			12,702,325		13,421,000		6.62%
Datascan Holdings, Inc.		Business Services		LIBOR + 9.50%		1.00%		12/17/2018		3,000,000			3,000,000		3,000,000		1.48%
HealthFusion, Inc.		Healthcare Services		13% Cash				10/7/2018		5,750,000			5,750,000		5,750,000		2.84%
Response Team Holdings LLC		Restoration Services		LIBOR + 8.50% Cash, 1.00% PIK		2.00%		3/28/2019		9,485,592			9,494,024		9,496,000		4.68%
Stancor, Inc. (2)		Wholesale/Distribution		LIBOR + 8.0%		0.75%		8/19/2019		7,000,000			7,000,000		7,000,000		3.45%
Well Biz Brands		Consumer Services		7% Cash, 3.5% PIK				10/23/2018		7,130,699			7,130,699		7,130,699		3.52%
Total Senior Secured - First Lien													48,774,863		49,495,514		24.41%
Senior Secured - Second Lien — 6.69%
Nation Safe Drivers (NSD) (2)		Automotive		LIBOR + 8.0%		2.00%		9/29/2020		6,173,798			$6,173,798		$6,173,798		3.04%
Puerto Rico Cable Acquisition Company d/b/a Choice Cable TV		Media: Broadcasting & Subscription		LIBOR + 8.50%		1.00%		5/30/2019		7,500,000			7,392,799		7,392,799		3.65%
Total Senior Secured - Second Lien													13,566,597		13,566,597		6.69%
Senior Subordinated — 12.56%
Dentistry For Children, Inc.		Healthcare Services		11% Cash, 2.25% PIK				9/1/2017		14,425,405			$14,425,405		$14,425,405		7.12%
GST Autoleather		Automotive		11% Cash, 2% PIK				1/11/2021		8,036,444			8,036,444		8,036,444		3.96%
Media Storm, LLC		Media & Entertainment		10% Cash				8/28/2019		3,000,000			3,000,000		3,000,000		1.48%
Total Senior Subordinated													25,461,849		25,461,849		12.56%
Equity/Other — 16.09%
American Addiction Centers, Series A Redeemable Preferred Equity(3)		Healthcare & Pharmaceuticals		12% Cash				4/15/2019		8,000,000			$8,000,000		$8,000,000		3.94%
City Carting Holding Company, Inc.,  Series A Preferred Shares		Waste Management		7% Cash, 15% PIK				4/30/2015		7,381,556			7,381,556		7,381,556		3.64%
Series B Preferred Shares				10% Cash, 8% PIK						3,876,840			3,876,840		3,876,840		1.91%
													11,258,396		11,258,396		5.55%
Dentistry For Children, Inc., Class A-1 Units(4)		Healthcare Services								1,500,000			2,203,000		2,287,999		1.13%
HealthFusion, Inc., Warrants(4)		Healthcare Services								418,000			418,000		424,000		0.21%
Media Storm, LLC, Preferred Shares(4)		Media & Entertainment								1,216,204			2,346,964		2,612,000		1.29%

 

See notes to unaudited consolidated financial statements

 

Alcentra Capital Corporation

Consolidated Schedule of Investments (continued)

As of September 30, 2014

(Unaudited)

 

 

Company***		Industry		Interest Rate		Base Rate Floor		Maturity Date		No. Shares/ Principal Amount			Cost(1)		Fair Value		% of Net Assets
Proserve Offshore Group, Warrants(4)		Oil & Gas Services						6/21/2018		793,000			$793,000		$743,000		0.37%
Response Team Holdings LLC, Preferred Shares		Restoration Services		12% PIK				3/28/2019		2,520,325			2,520,325		2,516,000		1.24%
Wholesome Sweeteners, Inc., Common Shares(4)		Food & Beverage								5,000			5,000,000		4,796,000		2.36%
Total Equity/Other													32,539,685		32,637,395		16.09%
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies													120,342,994		121,161,355		59.75%
Investments in Non-Controlled, Affiliated Portfolio Companies — 29.55%*
Senior Secured - First Lien — 2.83%
Show Media, Inc.		Media & Entertainment		5.5% Cash, 5.5% PIK				8/10/2017		7,365,739			$6,590,989		$5,741,000		2.83%
Total Senior Secured - First Lien													6,590,989		5,741,000		2.83%
Senior Subordinated — 19.19%
ACT Lighting		Wholesale		12% Cash, 2% PIK				7/24/2019		9,787,375			$9,592,375		$9,787,375		4.83%
				8% PIK				7/24/2019		1,776,444			1,598,444		1,638,000		0.81%
													11,190,819		11,425,375		5.64%
Battery Solutions, Inc.		Environmental/Energy Services		12% Cash, 2% PIK				12/20/2018		5,183,693			5,183,693		4,665,000		2.30%
DBI Holding, LLC		Infrastructure Maintenance		12% Cash, 1% PIK				9/6/2019		8,609,783			8,609,783		8,609,783		4.25%
				13% PIK				9/6/2019		6,937,133			6,462,759		6,480,000		3.19%
													15,072,542		15,089,783		7.44%
Southern Technical Institute, Inc.		Education		12.5% Cash				10/15/2016		7,699,048			7,699,047		7,732,000		3.81%
Total Senior Subordinated													39,146,101		38,912,158		19.19%
Equity/Other — 7.53%
ACT Lighting, Warrants (4)		Wholesale						7/24/2019		143,000			$143,000		$587,000		0.29%
Battery Solutions, Inc., Class A Units(4)		Environmental/Energy Services								5,000,000			1,058,000		525,000		0.26%
DBI Holding, LLC, Warrants(4)		Infrastructure Maintenance						3/6/2024		519,412			519,412		1,200,000		0.59%
Net Access Corporation, Class A Units(4)		Technology								3,000,000			8,112,000		9,437,001		4.65%
Show Media, Inc., Units(4)(5)		Media & Entertainment								324,321			324,321		—		—
Southern Technical Institute, Inc.,  Class A Units(4)		Education								4,739,563			2,954,500		3,414,735		1.68%
Warrants(4)										110,267			110,267		110,267		0.06%
													3,064,767		3,525,002		1.74%
Total Equity/Other													13,221,500		15,274,003		7.53%
Total Investments in Non-Controlled, Affiliated Portfolio Companies													58,958,590		59,927,161		29.55%

 

See notes to unaudited consolidated financial statements

 

Alcentra Capital Corporation

Consolidated Schedule of Investments (continued)

As of September 30, 2014

(Unaudited)

 

 

Company***		Industry		Interest Rate		Base Rate Floor		Maturity Date		No. Shares/ Principal Amount			Cost(1)		Fair Value		% of Net Assets
Investments in Controlled, Affiliated Portfolio Companies — 16.34%**
Senior Secured - First Lien — 10.46%
FST Technical Services, LLC		Technology & Telecom		12% Cash, 2% PIK				11/18/2018		12,500,000			$12,500,000		$12,879,000		6.35%
DRC Emergency Services		Disaster Recovery Services		10% Cash				1/11/2020		5,000,000			5,000,000		5,000,000		2.47%
				8% Cash				12/31/2014		3,333,226			3,333,226		3,333,226		1.64%
													8,333,226		8,333,226		4.11%
Total Senior Secured - First Lien													20,833,226		21,212,226		10.46%
Equity/Other — 5.88%
FST Technical Services, LLC, Common Shares		Technology & Telecom		9% PIK						1,750,000			$1,806,542		$3,960,000		1.95%
DRC Emergency Services, Preferred Shares		Disaster Recovery Services		10% PIK						8,986,637			7,653,637		7,954,998		3.93%
Total Equity/Other													9,460,179		11,914,998		5.88%
Total Investments in Controlled, Affiliated Portfolio Companies													30,293,405		33,127,224		16.34%
Total Investments													209,594,989		214,215,740		105.64%
Liabilities In Excess Of Other Assets															(11,429,085)		(5.64%)
Net Assets														$	202,786,655		100.00%

 

(1)	The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid in-kind on such securities.
(2)	The investment has an unfunded commitment as of September 30, 2014 which is excluded from the presentation (see Note 12).
(3)	The Company provided financing to Behavioral Healthcare Realty, a wholly owned subsidiary of American Addiction Centers.
(4)	Non-income producing security.
(5)	As part of the December 2013 amendment, the senior secured notes of Show Media, Inc. contain a provision that, under certain circumstances, allow the holder to convert a portion of the notes into equity, subject to a maximum ownership of 49% of the Common Stock of the business.
Abbreviation Legend

PIK - Payment-In-Kind

 

 

See notes to unaudited consolidated financial statements

 

 

Alcentra Capital Corporation

Consolidated Schedule of Investments (continued)

September 30, 2014
(Unaudited)

 

*

Denotes investments in which the Company is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2014 in these affiliated investments are as follows:

 

		Fair Value at												Interest/				Fair Value at
		December 31,				Gross				Gross				Dividend/				September 30,
Name of Issuers		2013				Addition				Reductions				Other income				2014
ACT Lighting		$	-			$	11,333,819			$	-			$	292,270			$	12,012,375
Battery Solutions, Inc.			6,075,969				42,124				-				633,792				5,190,000
DBI Holding, LLC			-				15,384,612				-				1,707,389				16,289,783
Net Access Corporation			11,964,457				-				3,920,230				359,709				9,437,001
Show Media, Inc.			6,294,000				473,824				-				616,808				5,741,000
Southern Technical Institute, Inc.			10,702,958				787,500				1,034,286				818,028				11,257,002
		$	35,037,384			$	28,021,879			$	4,954,516			$	4,427,996			$	59,927,161

 

**

Denotes investments in which the Company is an “Affiliate Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2014 in these affiliated and controlled investments are as follows:

 

		Fair value at												Interest/				Fair Value at
		December 31,				Gross				Gross				Dividend/				September 30,
Name of Issuers		2013				Addition				Reductions				Other income				2014
DRC Emergency Services		$	11,906,520			$	8,458,824			$	4,774,620			$	1,599,344			$	16,288,224
FST Technical Services, LLC			14,034,723				37,779				156,873				1,859,313				16,839,000
		$	25,941,243			$	8,496,603			$	4,931,493			$	3,458,657			$	33,127,224

 

***

Pledged as collateral under the credit facility with ING Capital LLC.

 

 

See notes to unaudited consolidated financial statements

 

 

BNY Mellon-Alcentra Mezzanine III, L.P.

 

Schedule of Investments

December 31, 2013

 

Investment Description		Industry		Type of investment		Par/Share Amount				Maturity				Cost as of December 31, 2013(1)				Fair Value as of December 31, 2013
Investments in Non-Controlled, Non-Affiliated Portfolio Companies
Proserv Offshore Group (.72%)*		Energy Services		Warrant			—				6/21/2018			$	5			$	793,000
City Carting Holding Company, Inc. (9.76%)*		Waste Management		Series A Preferred Shares (7% Cash, 15% PIK)(2)			571				4/30/2015				7,028,768				7,028,768
				Series B Preferred Shares (10% Cash, 8% PIK)			329				—				3,774,016				3,774,016
Dentistry For Children, Inc. (11.14%)*		Healthcare Services		Senior Subordinated Note (11% Cash, 2.25% PIK)		$	10,638,182				9/1/2017				10,622,797				10,622,797
				Equity			1,500,000				—				1,500,000				1,703,000
GTT Communications Inc. (9.48%)*		Telecommunication Services		Senior Subordinated Note (11% Cash)		$	4,750,000				6/30/2016				4,343,184				4,343,184
				Common Shares			666,666.66				—				2,000,000				4,769,000
				Warrant			—				—				410,939				1,381,000
HealthFusion, Inc. (5.50%)*		Healthcare Services		Senior Subordinated Note (13% Cash)		$	5,750,000				11/18/2018				5,665,994				5,665,994
				Warrants			—				—				—				418,000
Kaseman Holdings, LLC/Sallyport Holdings, LLC (0.54%)*		Defense Service		Class A interest			500,000				—				500,000				594,409
Media Storm, LLC (9.49%)*		Media & Entertainment		Senior Subordinated Note (12% Cash, 2% PIK)		$	8,219,008				10/23/2017				8,155,514				8,155,514
				Preferred Shares			1,216,204				—				1,176,964				2,346,964
Wholesome Sweeteners, Inc. (11.20%)*		Food Distribution		Senior Subordinated Notes (12% Cash, 2% PIK)		$	8,079,306				10/6/2017				7,891,564				7,891,564
				Common Shares			4,500				—				4,500,000				4,500,000
Total Non-Controlled, Non-Affiliated (57.83%)*														$	57,569,745			$	63,987,210

 

See notes to unaudited consolidated financial statements

 

BNY Mellon-Alcentra Mezzanine III, L.P.

 

Schedule of Investments (continued)

December 31, 2013

 

Investment Description		Industry		Type of investment		Percentage of class owned				Maturity				Cost as of December 31, 2013(1)				Fair Value as of December 31, 2013
Investments in Non-Controlled, Affiliated Portfolio Companies**
Battery Solutions, Inc. (5.49%)*		Energy Services		Senior Subordinated Note (12% Cash, 2% PIK)		$	5,105,732				12/20/2018			$	5,017,969			$	5,017,969
				Class A Units			5,000,000				—				5,000,000				1,058,000
Net Access Corporation (10.81%)*		Technology		Senior Subordinated Note (13% Cash)		$	3,920,230				7/19/2018				3,852,457				3,852,457
				Class A Units			3,000,000				—				3,000,000				8,112,000
Show Media, Inc. (5.69%)*		Media & Entertainment		Senior Secured Note (5.5% Cash, 5.5% PIK) (3)		$	7,068,750				8/10/2017				7,068,750				6,294,000
Southern Technical Institute, Inc. (9.68%)*		Education		Senior Subordinated Note (12.5% Cash)		$	8,483,333				10/15/2016				8,425,691				8,425,691
				Class A Units			3,000,000				—				3,164,063				2,167,000
				Warrants			—				—				267				110,267
Total Non-Controlled, Affiliated Portfolio Companies (31.67%)*														$	35,529,197			$	35,037,384
Investments in Controlled, Affiliated Portfolio Companies***
The DRC Group (10.76%)*		Disaster Recovery		Senior Secured Note (10% Cash)		$	5,000,000				1/11/2020				4,906,520				4,906,520
		Services		Preferred Shares (10% PIK)			—				—				8,333,333				7,000,000
FST Technical Services, LLC (12.69%)*		Technology and Telecom		Senior Subordinated Note (12% Cash, 2% PIK)		$	12,530,556				11/18/2018				12,284,723				12,284,723
				Common Shares			1,750,000								1,750,000				1,750,000
Total Non-Controlled, Affiliated Portfolio Companies (23.45%)*														$	27,274,576			$	25,941,243
Total Portfolio Investments (112.95%)*														$	120,373,518			$	124,965,837

 

See notes to unaudited consolidated financial statements

 

BNY Mellon-Alcentra Mezzanine III, L.P.

 

Schedule of Investments (continued)

December 31, 2013

 

(1)

The cost of debt securities is adjusted for accretion of discount and interest paid in-kind on such securities.

(2)

Paid in-kind.

(3)

Amended on December 31, 2013 (due to default)  to 5.5% cash and 5.5% PIK effective January 1, 2014.

 

* Fair value as a percentage of Net Assets.

 

See notes to unaudited consolidated financial statements

 

BNY Mellon-Alcentra Mezzanine III, L.P.

 

Schedule of Investments (continued)

December 31, 2013

 

**

Denotes investments in which the Partnership is an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2013 in these affiliated investments are as follows:

 

Name of Issuers		Fair Value at December 31, 2012				Gross Addition				Gross Reductions				Interest/Dividend/ Other income				Fair Value at December 31, 2013
Battery Solutions, Inc.		$	9,902,220			$	115,749			$	-			$	735,815			$	6,075,969
Kaseman Holdings, LLC/Sallyport Holdings, LLC (aka KS International, LLC)			471,000				-				-				-				-
Net Access Corporation			8,593,721				8,736				250,000				536,957				11,964,457
Show Media, Inc.			10,529,000				-				2,931,250				715,656				6,294,000
Southern Technical Institute, Inc.			12,778,476				178,212				1,366,667				1,174,125				10,702,958
		$	42,274,417			$	302,697			$	4,547,917			$	3,162,553			$	35,037,384

 

***

Denotes investments in which the Partnership is an “Affiliate Person” and exceeding a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2013 in these affiliated and controlled investments are as follows:

 

Name of Issuers		Fair Value at December 31, 2012				Gross Addition				Gross Reductions				Interest/Dividend/ Other income				Fair Value at December 31, 2013
The DRC Group		$	-			$	13,239,853			$	-			$	550,964			$	11,906,520
FST Technical Services			-				14,034,723				-				218,056				14,034,723
		$	-			$	27,274,576			$	-			$	769,020			$	25,941,243

 

See notes to unaudited consolidated financial statements

 

ALCENTRA CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2014 (Unaudited)

 

1.

Organization and Purpose

 

Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation on June 6, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”) and is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra intends to elect to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ending December 31, 2014.

 

The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY, LLC and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY is wholly-owned by BNY Alcentra Group Holdings, Inc. (“Alcentra Group”), which is wholly-owned by The Bank of New York Mellon Corporation.

 

On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.

 

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the Offering to fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.

 

On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes. This subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.

 

The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization) through first lien, second lien, unitranche and mezzanine debt financing, with corresponding equity co-investments. It sources investments primarily through the extensive network of relationships that the principals of its investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

  

Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Agreement”) with State Street Bank and Trust Company (the “Administrator”).

  

2.

Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements of the Partnership and the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles(“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain financial information that is normally included in annual audited financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2014.

 

The accounting records of the Company and the Partnership are maintained in United States dollars. 

 

 

As of September 30, 2013, the Company had not yet begun investment operations. Alcentra NY purchased the initial 100 shares for $1,500 on March 12, 2014. As such any per share data is not calculable as of September 30, 2013.

 

Use of Estimates

 

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.

 

Consolidation

 

In accordance with Regulation S-X Article 6.03 and ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.

 

Portfolio Investment Classification

 

The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation. “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.

 

Cash and Cash Equivalents

 

The Company considers cash equivalents to be highly liquid investments with original maturities of three months or less at date of acquisition.

 

At September 30, 2014, cash balances totaling $19,196,748 exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that risk of loss associated with any uninsured balance is remote.

  

Deferred Financing Costs

 

Deferred financing costs consist of fees and expenses paid in connection with the credit facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the credit facility.

 

Valuation of Portfolio Investments

 

Portfolio investments are carried at fair value as determined by the General Partner of the Partnership and, in case of the fair value as of September 30, 2014, by the Board of Directors (the “Board”) of Alcentra.

 

The methodologies used in determining these valuations include:

 

(1) Preferred shares/membership units and common shares/membership units

 

In determining estimated fair value for common shares/membership units and preferred shares, the Company or the Partnership makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Partnership’s or Company’s own assumptions and taking into account all material events and circumstance which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:

  

(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment; (ii) pending disposition by the Company or Partnership of all or a major portfolio investments; and (iii) sales prices of recent public or private transactions in identical or comparable investments.

 

 

 

One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).

 

(2) Debt

 

The yield to maturity analysis is used to estimate the fair value of debt, including the unitranche facilities, which are a combination of senior and subordinated debt in one debt instrument. The calculation of yield to maturity takes into account the current market price, par value, coupon interest rate and time to maturity.

 

(3) Warrants

 

Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.

 

Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value. The valuation process begins with each investment being initially valued by the investment professionals of the General Partner or for the Company, its Adviser. Preliminary valuation conclusions are then documented and discussed with senior investment professionals of the General Partner of the Partnership or for the Company, its Adviser. The Investment Committee reviews the valuation of the investment professionals and then determines the fair value of each investment in good faith based on the input of the investment professionals.

 

With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter, as described below:

 

·

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

 

·

preliminary valuation conclusions will then be documented and discussed with Alcentra’s senior management and the Adviser;

 

·

the audit committee of the Board then reviews these preliminary valuations;

 

·

at least once quarterly, independent valuation firms engaged by the Board prepare preliminary valuations on a selected basis and submit the reports to the Board; and

 

·

the Board of Directors then discuss valuations and determine the fair value of each investment in Alcentra’s portfolio in good faith, based on the input of the Adviser, the independent valuation firms and the audit committee.

 

The Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board is ultimately and solely responsible for the valuation of its portfolio investments at fair value as determined in good faith pursuant to its valuation policy and a consistently applied valuation process.

 

Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a readily available market for the securities existed or from those which will ultimately be realized.

 

Organizational and Offering Costs – Organization expenses, including reimbursement payments to the Adviser, are expensed on the Company’s consolidated statement of operations. These expenses consist principally of legal and accounting fees incurred in connection with the organization of the Company and have been expensed as incurred. Offering expenses consist principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing of a registration statement. Offering costs are offset against proceeds of the offering in paid-in capital in excess of par in the consolidated statement of changes in net assets. $1.25 million of offering costs were incurred with the initial public offering. $0.1 million of organization expenses were incurred as of September 30, 2014 for Alcentra.

 

  

The Partnership is obligated to reimburse the General Partner for 100% of the placement fee and for organizational costs of the Partnership in an amount not to exceed $1,250,000 on a cumulative basis. Organizational costs paid by the Partnership in excess of $1,250,000 (“Excess Organizational Expenses”) and all placement fees paid by the Partnership will reduce the management fee as described in Note 7. No costs were charged for the Partnership for the periods ended September 30, 2014 or September 30, 2013.

 

Paid-In-Capital

 

The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions.

 

Earnings and Net Asset Value Per Share – Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period.  Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.

 

Investments - Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion of original issue discounts. Fees may be charged to the issuer by the Company and Partnership in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.

 

Original Issue Discount - When the Company and Partnership receive warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.

 

Interest and Dividend Income – Interest is recorded on the accrual basis to the extent that the Company and Partnership expect to collect such amounts. The Company and Partnership accrue paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as increase in cost basis of investments and as income.

 

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There were no non-accrual investments as of September 30, 2014 and December 31, 2013.

 

Other Income – The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are capitalized as unearned income and offset against investment cost basis on the consolidated statements of assets and liabilities and accreted into income over the life of the investment.

 

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

 

Income Taxes – Beginning with its first taxable year, the Company intends to elect for U.S. federal income tax purposes to be treated as a RIC under Subchapter M of the Code, and to operate in a manner so as to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to our stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.

 

The Partnership is structured as a partnership for U.S. Federal income tax purposes, and as such, is not subject to income taxes; each Partner (depending on its structure for tax purposes) may be individually liable for income taxes, if any, on its share of the Partnership’s taxable income.

 

Alcentra BDC Equity Holdings LLC has elected to be a taxable entity (the Taxable Subsidiary”). The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements.

 

 

 

GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnerships’ financial statements to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions with respect to tax at the partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner has concluded that no provision for income tax is required in the Partnerships’ financial statements. However, the General Partner’s conclusions regarding uncertain tax positions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.

 

The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States – 2010.

 

Indemnification

 

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.

 

3.

Fair Value of Portfolio Investments

 

The Company and Partnership account for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”), Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.

 

Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

 

Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company and Partnership has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company and Partnership, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company and Partnership holds a large position and a sale could reasonably impact the quoted price.

 

Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.

 

Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company and Partnership. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company and Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

  

 

The following table summarizes the levels in the fair value hierarchy into which the Company and Partnership’s financial instruments are categorized as of September 30, 2014 and December 31, 2013:

 

As of September 30, 2014 (unaudited): 

		Level 1				Level 2				Level 3				Total
Senior Secured – First Lien		$	-			$	-			$	76,448,740			$	76,448,740
Senior Secured – Second Lien			-				-				13,566,597				13,566,597
Subordinated Debt			-				-				64,374,007				64,374,007
Equity/Other			-				-				59,826,396				59,826,396
Total investments		$	-			$	-			$	214,215,740			$	214,215,740

  

As of December 31, 2013: 

		Level 1				Level 2				Level 3				Total
Debt		$	-			$	-			$	77,460,413			$	77,460,413
Common Shares/Membership Units			-				4,769,000				19,884,409				24,653,409
Preferred Shares/Membership Units			-				-				20,149,748				20,149,748
Warrants			-				-				2,702,267				2,702,267
Total investments		$	-			$	4,769,000			$	120,196,837			$	124,965,837

 

There were no transfers between levels 1, 2 and 3 during the period from May 8, 2014 to September 30, 2014 and during the year ended December 31, 2013.

  

The changes in investments classified as Level 3 are as follows for the period from May 8, 2014 to September 30, 2014 and the year ended December 31 2013. 

 

		Senior				Senior
		Secured -				Secured -				Senior				Equity/
		First Lien				Second Lien				Subordinated				Other				Total
Balance as of May 8, 2014 (*)		$	68,848,668			$	-			$	61,151,338			$	54,590,510			$	184,590,516
Amortized discounts/premiums			-				5,299				45,037				-				50,336
Paid in-kind interest			521,740				-				655,228				492,507				1,669,475
Net realized gain (loss)			-				-				17,875				-				17,875
Net change in unrealized appreciation (depreciation)			249,662				-				(233,944	)			4,605,033				4,620,751
Purchases			14,545,032				13,561,298				22,127,000				142,999				50,376,329
Sales/Return of capital			(7,716,362	)			-				(19,388,527	)			(4,653	)			(27,109,542	)
Transfers in			-				-				-				-				-
Transfers out			-				-				-				-				-
Balance as of September 30, 2014		$	76,448,740			$	13,566,597			$	64,374,007			$	59,826,396			$	214,215,740
Net change in unrealized appreciation(depreciation) from investments still held as of September 30, 2014		$	249,662			$	-			$	(233,944	)		$	4,929,354			$	4,945,072

  

* Investment portfolios acquired from the Partnership and the Warehouse Portfolios (see Note 1)

 

		Debt				Common Shares/ Membership Units				Preferred Shares/ Membership Units				Warrants				Total
Balance as of January 1, 2013		$	65,446,132			$	21,874,000			$	10,858,157			$	1,739,267			$	99,917,556
Amortized discounts/premiums			190,362				-				-				-				190,362
Paid in-kind interest			640,407				-				1,065,627				-				1,706,034
Net realized gain (loss)			317,374				3,229,861				-				-				3,547,235
Net change in unrealized appreciation (depreciation)			(774,750	)			(2,843,413	)			(1,107,369	)			552,061				(4,173,471	)
Purchases			32,057,812				1,914,063				4,333,333				410,939				38,716,147
Sales/Return of capital			(15,416,924	)			(4,290,102	)			-				-				(19,707,026	)
Transfers in			-				-				5,000,000				-				5,000,000
Transfers out			(5,000,000	)			-				-				-				(5,000,000	)
Balance as of December 31, 2013		$	77,460,413			$	19,884,409			$	20,149,748			$	2,702,267			$	120,196,837
Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2013		$	(774,750	)		$	(2,013,654	)		$	(1,107,369	)		$	552,061			$	(3,343,712	)

  

 

 

During the year ended December 31, 2013, a portion of one of the Level 3 investments held by the Partnership was converted from debt to preferred shares.

 

The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of September 30, 2014 and December 31, 2013, respectively.

  

As of September 30, 2014 (unaudited):

 

Assets at Fair Value		Fair Value at September 30, 2014				Valuation Technique		Unobservable Input			Range of Inputs				Weighted Average
Senior Secured - First Lien		$	76,448,740			Yield to Maturity		Comparable Market Rate				8.0% - 22.1%				11.9	%
Senior Secured - Second Lien		$	13,566,597			Yield to Maturity		Comparable Market Rate				9.5% - 10.0%				9.7	%
Senior Subordinated		$	64,374,007			Yield to Maturity		Comparable Market Rate				8.0% - 20.0%				13.9	%
Preferred Ownership		$	32,341,396			Market Approach		Enterprise Value/LTM EBITDA Multiple				4.0x – 13.5x				8.8	%
Common Ownership/ Common Warrants		$	27,485,000			Market Approach		Enterprise Value/LTM EBITDA Multiple				6.0x – 13.0x				12.7	%
Total		$	214,215,740

  

As of December 31, 2013:

 

Assets at Fair Value

Fair Value at December 31, 2013

Valuation Technique

Unobservable Input

Range of Inputs

Weighted Average

Preferred Ownership

$

20,149,748

Market Approach

Enterprise Value/LTM EBITDA Multiple

5.25x – 9.0x

7.5

x

Common Ownership/ Common Warrants

$

22,586,676

Market Approach

Enterprise Value/LTM EBITDA Multiple

5.0x – 14.0x

9.2

x

Debt

$

77,460,413

Yield Analysis/ Market Approach

Yield to Maturity

6.7x – 14.0x

12.3

Total

$

120,196,837

  

4.

Share Transactions/Partners’ Capital

 

The following table summarizes the total shares issued and proceeds received in connection with the Company’s Offering for the period ended September 30, 2014 (May 8, 2014 – September 30, 2014).

 

		Shares				Amount
Issuance of shares to Limited Partners of the Partnership			6,100,000			$	91,500,000
Issuance of shares in the Offering			6,666,666				99,999,990
Overallotment			750,000				11,250,000
Total shares issued			13,516,666				202,749,990
Less:
Underwriting costs (sales load)			—				3,337,500
Offering costs			—				1,314,602
Total shares outstanding/net proceeds to Company			13,516,666			$	198,097,888

  

The Partnership held its initial closing on May 14, 2010, accepting capital commitments amounting to $105,850,000 from Limited Partners. Seven additional closings were held subsequent to May 14, 2010. The most recent of which being the final closing, took place on August 10, 2012, bringing total commitments to $210,200,000. Such capital commitments are due and payable when called by the General Partner. As of May 7, 2014 and September 30, 2013, Limited Partners have contributed $226,397,552 and $152,439,711 or 107.71% and 72.52% of their total capital commitments to the Partnership, respectively. As of May 7, 2014, the capital balances of Class A Limited Partners and Class B Limited Partners amounted to 70.02% and 30.02% of total partners’ capital, respectively.  As of September 30, 2013 the capital balances of Class A Limited Partners and Class B Limited Partners amounted to 67.56% and 29.10% of total partners’ capital, respectively.

 

5.

Distributions

 

Alcentra Capital Corporation

 

The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually, although the Company may decide to retain such capital gains for investment and pay a 4% excise tax on such excess.

 

 

 

The following table reflects the Company’s dividends declared and paid or to be paid on its common stock:

 

Date Declared		Record Date		Payment Date		Amount Per Share
June 24, 2014		June 30, 2014		July 7, 2014		$	0.178
August 12, 2014		September 30, 2014		October 6, 2014		$	0.340

 

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the Plan Administrator, before any associated brokerage or other costs.

 

BNY Mellon-Alcentra Mezzanine III, L.P.

 

Proceeds from portfolio investments will be distributed to the partners in proportion to their contributions to such investment until the partners have received a) first, 100% to all Limited Partners until the Limited Partners have received an amount equal to their aggregate capital contributions made to the Partnership (including, capital contributions made to the Partnership to fund the Partnership’s organizational expenses, management fees and other ongoing costs); b) second, 100% to all Limited Partners until the Limited Partners have received preferred returns of 8% and 5%, for Class A Limited Partners and Class B Limited Partners, respectively, per annum on the aggregate capital contributions made to the Partnership (including, capital contributions made to the Partnership to fund the Partnership’s organizational expenses, management fees and other ongoing costs); c) third, for Class A Limited Partners only, 100% to the General Partner as a carried interest distribution until the General Partner has received an amount equal to 20% of the aggregate amount of distributions; and d) thereafter (a) 80% to such Partner and (b) 20% to the General Partner. Income from short-term investments is distributed to all partners in proportion to such partners’ contributions to such investments.

 

For the period from January 1, 2014 to May 7, 2014 and the nine months ended September 30, 2013, the Partnership made distributions to the Limited Partners totaling $3,941,341 and $23,414,451, respectively. For the period from January 1, 2014 to May 7, 2014, distributions made to Class A Limited Partners and Class B Limited Partners amounted to 70.03% and 29.97% of total distributions, respectively. For the nine months ended September 30, 2013, distributions made to Class A Limited Partners and Class B Limited Partners amounted to 29.88% and 69.81% of total distributions, respectively.

 

Upon the termination of the Partnership, if it is determined that the General Partner has received carried interest distributions in excess of the amount it would have received had such distributions been determined on a cumulative basis, a clawback payment of such excess is required of the General Partner.

 

Distributions to limited partners in 2014 are broken down as follows:

 

Return on capital		$	3,191,341
Return of capital			750,000
Total		$	3,941,341

 

6.

Allocation of Profits and Losses

 

Allocations of Partnership profits are made in a manner which is consistent with, and gives effect to, the distribution procedures outlined in Note 5 above. Partnership losses are allocated to all partners in proportion to such partners’ capital commitments or to such partners’ percentage ownership in such investment from which the losses arose, or if there is no such investment, in proportion to their capital commitment. For the period from January 1, 2014 to May 7, 2014 and the nine months ended September 30, 2013, the General Partner was allocated carried interest distributions of $(5,966,619) and $0, respectively. As a result of the completion of Alcentra’s initial public offering, the General Partner’s allocated carried interest as of May 7, 2014 was reallocated to the Limited Partners in accordance with the provisions of the Partnership’s Limited Partnership Agreement (December 31, 2013, as revised). Accordingly, the carried interest allocated to the General Partner through May 7, 2014 of approximately $6 million was reallocated to the Limited Partners.

 

 

7.

Related Party Transactions

 

Management Fee

 

Alcentra Capital Corporation

 

Under the Investment Advisory Agreement, we have agreed to pay Alcentra NY an annual base management fee based on our gross assets as well as an incentive fee based on our performance. The base management fee is calculated at an annual rate as follows: 1.75% of our gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if our gross assets are below $625 million; 1.625% if our gross assets are between $625 million and $750 million; and 1.5% if our gross assets are greater than $750 million. The various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to our entire gross assets in the event our gross assets exceed the various gross asset thresholds. The base management fee will be payable quarterly in arrears and shall be calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarter.

 

The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of our ‘‘pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a ‘‘catch-up’’ feature. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Advisory Agreement, as of the termination date) and equals 20% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until we have received such income in cash.

 

For the three months ended September 30, 2014 and for the period from May 8, 2014 to September 30, 2014, the Company recorded an expense for base management fees of $925,477 and $1,450,025, respectively, of which $314,910 was payable at September 30, 2014. For the three and nine months ended September 30, 2013, the Partnership recorded an expense for base management fees of $715,017 and $2,113,105, respectively, of which $0 was payable at September 30, 2013.

 

Our Adviser may waive its fees (base management and incentive fee), without recourse against or reimbursement by us, for the remainder of the quarter in which the initial public offering is completed and the subsequent four quarters to the extent required in order for the Company to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis). For the three months ended September 30, 2014 and for the period from May 8, 2014 to September 30, 2014, the Company incurred incentive fees of $763,550, of which $0 was payable at September 30, 2014. For the three months ended September 30, 2014 and for the period from May 8, 2014 to September 30, 2014, the Company recorded a waiver of management and incentive fees of $1,374,118.

  

BNY Mellon-Alcentra Mezzanine III, L.P.

 

For the period from the Commencement Date to the fifth anniversary of the Final Closing Date, the Partnership will pay to the Manager a management fee at an annual rate equal to the product of 1.50% for each Class A Limited Partner and 1.00% - 1.25% for each Class B Limited Partner, in each case multiplied by such Limited Partner’s capital commitment. After the fifth anniversary of the Final Closing Date, the management fee will be paid at annual rates of 1.50% and 1.00% - 1.25% for Class A Limited Partners and Class B Limited Partners, respectively, in each case multiplied by the aggregate amount of such Limited Partner’s capital contributions used to fund the cost of investments that have not been the subject of a disposition less the aggregate amount of such Limited Partner’s capital contributions with respect to all investments which have not been disposed of prior to the date of such distribution and which have been permanently written off. The management fee is payable quarterly in advance. For the period from January 1, 2014 to May 7, 2014, Class A Limited Partners were charged $528,719 and Class B Limited Partners were charged $170,754 in management fees. For the nine months ended September 30, 2013, Class A Limited Partners were charged $1,577,892 and Class B Limited Partners were charged $535,213 in management fees.

 

The management fee is reduced by the placement fees and Excess Organization Expenses paid by the Partnership. The management fee is further reduced by 100% of all transaction fees, investment fees, monitoring fees, management fees and directors’ fees received by the General Partner or any affiliate thereof, net of unreimbursed out-of-pocket expenses. For the period from January 1, 2014 to May 7, 2014 and the nine months ended September 30, 2013 there were no placement fees, Excess Organizational Expenses, or fees received by the Manager that reduced management fee expense in the reporting period.

 

Certain employees of the Manager are Limited Partners of the Partnership. As of May 7, 2014, an affiliate of the Partnership also had a $50.0 million commitment to the Partnership as a Limited Partner. As of May 7, 2014 and December 31, 2013, this Limited Partner has contributed $56,602,997 and $40,136,386, respectively, or 113.21% and 80.27%, respectively, of its total capital commitments to the Partnership.

 

 

As of December 31, 2013, the amounts due from Limited Partners, amounts due to affiliates and distributions payable amounting to $6,635, $10,989 and $168, respectively, relate to capital activity during the period. Additionally, the Partnership incurred $699,473 in management fees, for the period from January 1, 2014 to May 7, 2014 and $2,113,105 for the nine months ended September 30, 2013.

 

8.

Directors Fees

 

The independent directors of the Company each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person each board of directors meeting and $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting telephonically. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee, the nominating and corporate governance committee and the compensation committee will receive an annual fee of $10,000, $5,000 and $5,000, respectively. We have obtained directors’ and officers’ liability insurance on behalf of our directors and officers.

 

For the three months ended September 30, 2014 and for the period May 8, 2014 through September 30, 2014, the Company recorded directors fee expense of $26,916 and $106,916, respectively, of which $60,245 was payable at September 30, 2014. For the three and nine months ended September 30, 2013, the Company did not record any directors fee expense.

  

9.

Purchases and Sales (Investment Transactions)

 

Investment purchases, sales and principal payments/paydowns are summarized below for the period from January 1, 2014 through May 7, 2014, the period from May 8, 2014 through September 30, 2014 and the nine months ended September 30, 2013.

 

		For the period from January 1, 2014 through				For the period from May 8, 2014* through				For the nine months ended
		May 7, 2014				September 30, 2014				September 30, 2013
Investment purchases, at cost (including PIK interest)		$	50,201,887			$	52,045,804			$	14,969,063
Investment sales, proceeds (including Principal payments/paydown proceeds)			15,780,666				27,109,542				18,782,201

 

* Commencement of operations of the Company

** Excludes $185 million of investment portfolios acquired by the Company from the Partnership and the Warehouse Portfolios (see Note 1)

 

10.

Credit Facility/Line of Credit

  

On May 8, 2014, the Company entered into a senior secured revolving credit agreement(the “Credit Facility”) with ING Capital LLC(“ING”), as administrative agent, collateral agent and lender to provide liquidity in support of its investment and operational activities. The Credit Facility has an initial commitment of $80 million with an accordion feature that allows for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial convenants. The Credit Facility is secured primarily by the Company’s assets. The stated maturity date for the Credit Facility is May 8, 2017, which may be extended by mutual agreement. Deferred financing costs related to this credit facility were $1.43 million and $0 as of September 30, 2014 and December 31, 2013, respectively.

 

Amounts available to borrow under the Credit Facility are subject to a minimum borrowing /collateral base that applies an advance rate to certain investments held by the Company. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, portfolio company leverage which may affect the borrowing base and therefore amounts available to borrow.

 

Borrowings under the Credit Facility bear interest, subject to the Company’s election, at a rate per annum equal to (i) the one, three or six month LIBOR, as applicable, plus 3.25% or (ii) 2.25% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. The Company pays a commitment fee between 0.5% and 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s consolidated statements of operations.

 

The Company has made customary representations and warranties and is required to comply with various covenants and reporting requirements. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of September 30, 2014, the Company was in compliance in all material respects with the terms of the Credit Facility.

 

As of September 30, 2014 and December 31, 2013, the Company had United States dollar borrowings of $26.9 million and $15.0 million outstanding under the Credit Facility, respectively.

 

The Partnership entered into a credit agreement with the Administrator under which the Partnership can borrow an aggregate principal amount of $15 million for the financing of portfolio investments. Interest is charged at the LIBOR Rate plus 1.00%. The credit agreement terminated on April 24, 2014. As of December 31, 2013, the Partnership had outstanding borrowings of $15,000,000. As of September 30, 2014 and December 31, 2013, Alcentra and the Partnership borrowed an average of $21,953,080 and $9,484,749, respectively. Alcentra’s weighted average interest rate as of September 30, 2014 is 4.16%. 

  

 

 

11.

Market and Other Risk Factors

 

At September 30, 2014, the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is concentrated in the twenty industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.

 

Economic conditions in 2014 continued to impact revenues and operating cash flows for most businesses and continued to impact the lending markets, leaving many businesses unable to borrow or refinance debt obligations. These restrictions on obtaining available financing, coupled with the continuing economic slowdown, have resulted in a low volume of purchase and sale transactions across all industries, which have limited the amount of observable inputs available to the Company in estimating the fair value of the Company’s investments. The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.

 

Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.

 

The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.

 

12.

Commitments and Contingencies

 

In the normal course of business, the Company and the Partnership enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.

 

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2014, the Company had four unfunded commitments under loan and financing agreements. As of December 31, 2013, the Partnership’s unfunded commitment under loan and financing agreements are presented below.

 

		As of
		September 30,  2014				December 31,  2013
Dentistry for Children, Inc.		$	3,500,000			$	2,625,000
National Safe Drivers (NSD)			826,202				-
Stancor, Inc.			278,000				-
DRC Emergency Services			3,333,225				-
Total		$	7,937,427			$	2,625,000

   

13.

Classification of Portfolio Investments

 

As of September 30, 2014, the Company’s portfolio investments were categorized as follows:

    

Industry		Cost				Fair Value				% of Net Assets
Healthcare Services		$	22,796,405			$	22,887,404				11.29	%
Technology & Telecom			14,306,542				16,839,000				8.30	%
Infrastructure Maintenance			15,591,954				16,289,783				8.03	%
Disaster Recovery Services			15,986,863				16,288,224				8.03	%
Automotive			14,210,242				14,210,242				7.01	%
Oil & Gas Services			13,495,325				14,164,000				6.99	%
Wholesale			11,333,819				12,012,375				5.92	%
Restoration Services			12,014,349				12,012,000				5.92	%
Media & Entertainment			12,262,274				11,353,000				5.60	%
Waste Management			11,258,396				11,258,396				5.55	%
Education			10,763,814				11,257,002				5.55	%
Technology			8,112,000				9,437,001				4.65	%
Healthcare & Pharmaceuticals			8,000,000				8,000,000				3.95	%
Media: Broadcasting & Subscription			7,392,799				7,392,799				3.65	%
Consumer Services			7,130,699				7,130,699				3.52	%
Wholesale/Distribution			7,000,000				7,000,000				3.45	%
Environmental/Energy Services			6,241,693				5,190,000				2.56	%
Food & Beverage			5,000,000				4,796,000				2.37	%
Packaging			3,697,815				3,697,815				1.82	%
Business Services			3,000,000				3,000,000				1.48	%
Total		$	209,594,989			$	214,215,740				105.64	%

 

 

 

Geographic Region		Cost				Fair Value				% of Net Assets
South		$	54,419,800			$	55,679,024				27.46	%
Eastern			47,309,314				49,597,180				24.46	%
South East			40,340,569				40,423,219				19.93	%
West			31,547,828				31,058,074				15.32	%
South West			14,306,542				16,839,000				8.30	%
Mid West			14,278,137				13,226,444				6.52	%
Puerto Rico			7,392,799				7,392,799				3.65	%
Total		$	209,594,989			$	214,215,740				105.64	%
Investment Type
Senior Secured – First Lien		$	76,199,078			$	76,448,740				37.70	%
Senior Subordinated			64,607,950				64,374,007				31.75	%
Equity/Other			55,221,364				59,826,396				29.50	%
Senior Secured – Second Lien			13,566,597				13,566,597				6.69	%
Total		$	209,594,989			$	214,215,740				105.64	%

 

*Fair value as a percentage of Net Assets

 

As of December 31, 2013, the Partnership's portfolio investments were categorized as follows:

 

Industry		Cost				Fair Value				% of Net Assets*
Technology		$	27,641,303			$	36,492,364				32.98	%
Healthcare			17,788,791				18,409,791				16.64	%
Media & Entertainment			16,401,228				16,796,478				15.18	%
Food and Beverage			12,391,564				12,391,564				11.20	%
Disaster Recovery Services			13,239,853				11,906,520				10.76	%
Waste Management Services			10,802,784				10,802,784				9.76	%
Education			11,590,021				10,702,958				9.68	%
Energy Service Company			10,017,974				6,868,969				6.21	%
Defense Services			500,000				594,409				0.54	%
Total		$	120,373,518			$	124,965,837				112.95	%
Geographic Region
Eastern United States		$	78,263,263			$	85,586,587				77.36	%
Midwest United States			22,409,538				19,260,533				17.41	%
West United States			19,700,717				20,118,717				18.18	%
Total		$	120,373,518			$	124,965,837				112.95	%
Investment Type
Debt		$	78,235,163			$	77,460,413				70.02	%
Common Shares/Membership Units			21,414,063				24,653,409				22.28	%
Preferred Shares/Membership Units			20,313,081				20,149,748				18.21	%
Warrants			411,211				2,702,267				2.44	%
Total		$	120,373,518			$	124,965,837				112.95	%

 

*Fair value as a percentage of Net Assets

 

    

14.

Financial Highlights

 

The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial highlights for one share of common stock for the period May 8, 2014 through September 30, 2014.

  

Per share data (1)
Net asset value, beginning of period		$	15.00
Net investment income (loss)			0.52
Net realized and unrealized gains (losses)			0.55
Net increase (decrease) in net assets resulting from operations			1.07
Distributions to shareholders: (2)
From net investment income			(0.52	)
Offering costs			(0.10	)
Sales load			(0.45	)
Net increase (decrease) in net assets resulting from capital share transactions			(0.55	)
Net asset value, end of period		$	15.00
Market value per share, end of period		$	13.28
Total return based on net asset value (3)(4)(5)			3.5	%
Total return based on market value (3)(4)(5)			(8.0	)%
Shares outstanding at end of period			13,516,766
Ratio/Supplemental Data:
Net assets, at end of period		$	202,786,655
Ratio of total expenses before waiver to average net assets (6)			4.87	%
Ratio of interest expense to average net assets (6)			1.01	%
Ratio of incentive fees to average net assets (6)			0.97	%
Ratio of waiver of management and incentive fees to average net assets (6)			1.75	%
Ratio of net expenses to average net assets (6)			3.12	%
Ratio of net investment income (loss) before waiver to average net assets (6)			7.24	%
Ratio of net investment income (loss) after waiver to average net assets (6)			8.99	%
Total Credit Facility payable outstanding		$	26,939,154
Asset coverage ratio (7)			8.5
Portfolio turnover rate (5)(8)			13	%

  

(1)	The per share data was derived by using the shares outstanding during the period.
(2)	The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period.
(3)	Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Company’s dividend reinvestment plan.
(4)	Total investment return on net asset value is calculated assuming a purchase at the offering price of $15.00 per share paid by the shareholder on the first day and a sale at the net asset value on the last day of the period reported with all distributions reinvested. Total investment return on market value is calculated assuming a purchase at the offering price of $15.00 per share paid by the shareholder on the first day and a sale at the current market price on the last day of the period reported with all distributions reinvested. Had the 2nd quarter used the same method, the outcome would have been (0.4)% and 0.2% for total return on a NAV basis and market price basis, respectively.
(5)	Not Annualized.
(6)	Annualized.
(7)	Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period.
(8)	For the period from May 8, 2014 to September 30, 2014.

  

The following performance ratios and internal rate of return (“IRR”) (since inception) are presented for the Limited Partners as a single class, taken as a whole. The actual ratios of each individual investor may vary and are dependent upon the specific allocations of income and expense to such investor and the timing of capital transactions for such investor.

 

The net investment income (loss) ratio and the expense ratio are computed using the weighted average capital of the Limited Partners during the periods. The net investment income (loss) ratio does not include the effects of the carried interest allocation. The weighted average capital calculation reflects a measure of capital after each capital contribution, distribution or other significant change in capital at the end of each quarterly accounting period. The IRR was computed based on the actual dates of Limited Partners’ cash inflows (capital contributions) and outflows (cash and stock distributions), and the residual value of the Limited Partners’ capital accounts from January 1, 2014 through May 7, 2014 and the year ended December 31, 2013.

 

 

 

		January 1, 2014 to May 7,				December 31,
		2014				2013
Net investment income (loss) ratio before carried interest allocation			15.06	%			7.50	%
Expense ratio before carried interest allocation			1.81	%			3.54	%
Carried interest allocation			(4.51	)%			1.80	%
Expense ratio after carried interest allocation			(2.70	)%			5.34	%
Cumulative IRR after carried interest allocation			13.69	%			10.03	%

 

These financial highlights may not be indicative of future performance.

 

15.

Tax Information

 

As of September 30, 2014, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:

 

Tax cost		$	209,594,989
Gross unrealized appreciation			7,105,079
Gross unrealized depreciation			(2,484,328	)
Net unrealized investment appreciation		$	4,620,751

  

The tax cost of the Company’s investments as of September 30, 2014, approximates their amortized cost.

 

16.

Unconsolidated Significant Subsidiaries

 

In accordance with the SEC’s Regulation S-X and GAAP, we have subsidiaries that are not required to be consolidated. We have certain unconsolidated significant subsidiaries that pursuant to Rule 4-08(g) of Regulation S-X, summarized financial information is presented below in aggregate as of and for the period ended September 30, 2014.

 

		As of						For the nine months ended
Balance Sheet		September 30, 2014				Income Statement		September 30, 2014
Current Assets			31,154,503			Net Sales			66,017,204
Noncurrent Assets			27,653,627			Gross Profit			24,211,377
Current Liabilities			10,925,071			Net Income (Loss)			9,801,827
Noncurrent Liabilities			20,252,439

 

In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities. In this regard, DRC Emergency Services LLC (“DRC ES”or the “Company”) derives significantly all of its revenue from contracts with federal, state and local governments and governmental agencies. As a result, if it does not comply with the terms of a contract or with regulations or statutes, it could be subject to downward contract price adjustments or refund obligations or could in extreme circumstances be assessed penalties or be debarred or suspended from obtaining future contracts for a specified period of time. Any such suspension or debarment or other sanction could have an adverse effect on its business.

 

Similarly, the business and growth of FST Technical Services, LLC (“FST”) depends in large part on the continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries. There can be no assurance that this trend in outsourcing will continue, as companies may elect to perform such services internally. A significant change in the direction of this trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce the use of, outsourced services such as those provided by it, could significantly decrease its revenues and such decreased revenues could have a material adverse effect on it or its results operations or financial condition.

 

On August 29, 2014, DRC ES was suspended from Federal Government contracting and from directly or indirectly receiving the benefits of federal assistance programs. In DRC ES’s opinion the suspension primarily resulted from alleged actions taken by former employees and subcontractors related to two particular contracts.  None of the employees in question work for DRC ES or any of its affiliates.  The Company is fully cooperating with all Government investigations.  The suspension was terminated on October 1, 2014. At this time we believe the Company’s contracts and customer relationships were not materially impacted by the suspension.

 

 

 

The aggregate summarized financial information for DRC and FST as of and for the year ended December 31, 2013 are presented below.

 

		As of						For the year ended
Balance Sheet		December 31, 2013				Income Statement		December 31, 2013
Current Assets			14,298,448			Net Sales			38,655,576
Noncurrent Assets			32,385,291			Gross Profit			11,532,026
Current Liabilities			4,606,485			Net Income (Loss)			(8,157,148	)
Noncurrent Liabilities			20,295,994

 

17.

Subsequent Events

 

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. 

 

Subsequent to September 30, 2014, the following activity occurred:

 

On October 1, 2014, Alcentra committed to fund $20,000,000 to Hotel Systems Pro.

 

On October 6, 2014, a dividend of $0.34 per share was paid to shareholders of record as of September 30, 2014 in the amount of $4,595,700.

  

On October 10, 2014, Bioventus LLC was funded for $12,000,000 (Libor + 10.0% ; 1.0% Libor Floor)

 

On October 16, 2014, Alcentra recently filed an exemptive application with the SEC to permit it to co-invest with funds or entities managed by the Adviser in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act.

 

Any such order will be subject to certain terms and conditions. Furthermore, there is no assurance that this application for exemptive relief will be granted by the SEC

 

On October 31, 2014, Alcentra committed to fund $15,000,000 to North Atlantic Petroleum.

  

 

Item 2.

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

 

Forward-Looking Statements

 

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:

 

•

our future operating results;

 

•

our business prospects and the prospects of our portfolio companies;

 

•

the effect of investments that we expect to make;

 

•

our contractual arrangements and relationships with third parties;

 

•

actual and potential conflicts of interest with Alcentra NY, LLC;

 

•

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

 

•

the ability of our portfolio companies to achieve their objectives;

 

•

the use of borrowed money to finance a portion of our investments;

 

•

the adequacy of our financing sources and working capital;

 

•

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

 

•

our ability to maintain our qualification as a business development company; and

 

•

the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies.

 

Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.

 

We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

 

Overview

 

Alcentra Capital Corporation (the “Company”, “Alcentra”, “ACC”, “we”, “us” or “our”) was formed as a Maryland corporation on June 4, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Alcentra is managed by Alcentra NY, LLC (the “Adviser”, or “Alcentra NY”), registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra intends to elect to be treated as a regulated investment company (“RIC”), commencing with its tax year ending December 31, 2014, under Subchapter M of the Internal Revenue.

 

BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership” or “Fund III”) is a Delaware limited partnership, which commenced operations on May 14, 2010. The Partnership was formed for the purpose of seeking current income and long-term capital appreciation by making investments in senior debt securities, subordinated debt securities, and common and preferred equity securities with equity rights or participations in U.S.-based middle market companies. BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY, LLC (“Alcentra Group”) and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY, LLC is wholly owned by BNY Alcentra Group Holdings, Inc. which is wholly owned by The Bank of New York Mellon Corporation.

 

On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100,000,000. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.

  

  

Immediately prior to the Offering, Fund III sold all of its assets other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) to the Company for $64.4 million in cash and $91.5 million in shares of the Company’s common stock. Concurrent with the acquisition of the Fund III Acquired Assets from Fund III, the Company also purchased for $29 million in cash certain additional investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio consisted of approximately $29 million in debt investments originated by the investment professionals of the Manager and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the Offering.

 

The Company entered into a senior secured term loan agreement (the “Bridge Facility”) with ING Capital LLC as lender that it used to fund the purchase of the Warehouse Portfolio and to fund the cash portion of the consideration paid to Fund III. In May 2014, the Company used $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full.

 

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments by targeting investment opportunities with favorable risk-adjusted returns. The Company invests primarily in middle-market companies in the form of mezzanine and senior secured loans, each of which may include an equity component, and, to a lesser extent, by making direct equity investments in such companies

 

The Company is required to comply with certain regulatory requirements such as not acquiring 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. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.

 

Since Alcentra did not commence investment operations until May 8, 2014, the discussion and analysis of financial condition and results of operations through May 7, 2014 described in this section pertains to the historical operations of Fund III given that the Company acquired substantially all of Fund III’s investment portfolio. However, no liabilities of Fund III were assumed by the Company in connection with the acquisition of the Fund III Acquired Assets other than to fund $2.6 million under revolving lines of credit. As a result, you should be mindful of the foregoing facts when reviewing the discussion and analysis set forth in this section as well as in connection with reviewing the financial information contained elsewhere in this Form 10-Q.

 

As used in this section, the terms “we” and “us” refer to Fund III for the periods prior to the Offering and refer to Alcentra for the periods after the Offering.

 

Portfolio Composition and Investment Activity

 

Portfolio Composition

 

We originate and invest primarily in middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment.

 

As of September 30, 2014, we had $214.2 million (at fair value) invested in 24 companies. Our portfolio included approximately 35.6% of first lien debt, 6.3% of second lien debt, 30.1% of mezzanine debt and 27.9% of equity investments at fair value. The composition of our investments as of September 30, 2014 was as follows:

 

 

		Cost				Fair Value
Senior Secured – First Lien		$	76,199,078			$	76,448,740
Senior Secured – Second Lien			13,566,597				13,566,597
Unsecured Debt			64,607,950				64,374,007
Equity			55,221,364				59,826,396
Total Investments		$	209,594,989			$	214,215,740

  

As of December 31, 2013, we had $124.9 million (at fair value) invested in 14 portfolio companies, including $6.2 million (at fair value) relating to the shares of common stock and $2.4 million in warrants to purchase common stock of GTT Communications (“Excluded Assets”) which were not acquired by Alcentra in connection of the Fund III Acquired Assets. As of December 31, 2013, our portfolio included approximately 23% of first lien debt, 39% of mezzanine debt and 38% of equity investments at fair value. The composition of our investments as of December 31, 2013 was as follows:

 

		Cost				Fair Value
Senior Secured – First Lien		$	29,925,987			$	29,151,237
Unsecured Debt			48,309,176				48,309,176
Equity*			42,138,355				47,505,424
Total Investments		$	120,373,518			$	124,965,837

 

*

Includes the Excluded Assets. The aggregate cost basis and fair value of the Excluded Assets at December 31, 2013 was $2.4 million and $6.2 million, respectively.

 

Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of September 30, 2014 we had four such investments with an aggregate unfunded commitment of $7.9 million and at December 31, 2013, we had one such investment with aggregate unfunded commitments of $2.6 million.

 

The following is a summary of geographical concentration of our investment portfolio as of September 30, 2014:

 

		Cost				Fair Value				% of Total Net Assets
Connecticut		$	23,605,360			$	23,870,396				11.77	%
Texas			21,495,325				21,960,000				10.84	%
California			17,501,819				18,186,375				8.98	%
Florida			16,937,612				17,430,800				8.59	%
Arizona			14,306,542				16,839,000				8.30	%
Georgia			16,628,405				16,713,405				8.24	%
Pennsylvania			15,591,954				16,289,783				8.03	%
Alabama			15,986,863				16,288,224				8.03	%
Michigan			14,278,137				13,226,444				6.52	%
North Carolina			12,014,349				12,012,000				5.92	%
Tennessee			11,697,815				11,697,815				5.77	%
New Jersey			8,112,000				9,437,000				4.65	%
Puerto Rico			7,392,799				7,392,799				3.65	%
Colorado			7,130,699				7,130,699				3.52	%
Nevada			6,915,310				5,741,000				2.83	%
Total		$	209,594,989			$	214,215,740				105.64	%

 

 

The following is a summary of geographical concentration of our investment portfolio as of December 31, 2013:

 

		Cost				Fair Value				% of Net Assets
Connecticut		$	20,135,262			$	21,305,262				19.25	%
Arizona			14,034,723				14,034,723				12.69	%
Texas			12,391,569				13,184,564				11.92	%
California			12,734,744				12,377,994				11.19	%
Georgia			12,122,797				12,325,797				11.14	%
New Jersey			6,852,457				11,964,457				10.81	%
Alabama			13,239,853				11,906,520				10.76	%
Florida			11,590,021				10,702,958				9.67	%
Virginia*			6,754,123				10,493,184				9.48	%
Michigan			10,017,969				6,075,969				5.49	%
Pennsylvania			500,000				594,409				0.54	%
		$	120,373,518			$	124,965,837				112.95	%

 

*

Includes the Excluded Assets. The aggregate cost basis and fair value of the Excluded Assets at December 31, 2013 was $2.4 million and $6.2 million, respectively.

 

The following is a summary of industry concentration of our investment portfolio as of September 30, 2014:

 

Industry		Cost				Fair Value				% of Net Assets
Healthcare Services Total		$	22,796,405			$	22,887,404				11.29	%
Technology & Telecom Total			14,306,542				16,839,000				8.30	%
Infrastructure Maintenance Total			15,591,954				16,289,783				8.03	%
Disaster Recovery Services Total			15,986,863				16,288,224				8.03	%
Automotive Total			14,210,242				14,210,242				7.01	%
Oil & Gas Services Total			13,495,325				14,164,000				6.99	%
Wholesale Total			11,333,819				12,012,375				5.92	%
Restoration Services Total			12,014,349				12,012,000				5.92	%
Media & Entertainment Total			12,262,274				11,353,000				5.60	%
Waste Management Total			11,258,396				11,258,396				5.55	%
Education Total			10,763,814				11,257,002				5.55	%
Technology Total			8,112,000				9,437,001				4.65	%
Healthcare & Pharmaceuticals Total			8,000,000				8,000,000				3.95	%
Media: Broadcasting & Subscription Total			7,392,799				7,392,799				3.65	%
Consumer Services Total			7,130,699				7,130,699				3.52	%
Wholesale/Distribution Total			7,000,000				7,000,000				3.45	%
Environmental/Energy Services Total			6,241,693				5,190,000				2.56	%
Food & Beverage Total			5,000,000				4,796,000				2.37	%
Packaging Total			3,697,815				3,697,815				1.82	%
Business Services Total			3,000,000				3,000,000				1.48	%
Grand Total		$	209,594,989			$	214,215,740				105.64	%

  

 

The following is a summary of industry concentration of our investment portfolio as of December 31, 2013:

 

		Cost				Fair Value				% of Net Assets
Technology and Telecom*		$	27,641,303			$	36,492,364				32.98	%
Healthcare			17,788,791				18,409,791				16.64	%
Media and Entertainment			16,401,228				16,796,478				15.18	%
Food and Beverage			12,391,564				12,391,564				11.20	%
Disaster Recovery Services			13,239,853				11,906,520				10.76	%
Waste Management Services			10,802,784				10,802,784				9.76	%
Education			11,590,021				10,702,958				9.68	%
Energy Service Company			10,017,974				6,868,969				6.21	%
Defense Services			500,000				594,409				.54	%
		$	120,373,518			$	124,965,837				112.95	%

 

*

Includes the Excluded Assets. The aggregate cost basis and fair value of the Excluded Assets at December 31, 2013 was $2.4 million and $6.2 million, respectively.

 

At September 30, 2014, our average portfolio company investment at amortized cost and fair value was approximately $8.7 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $17.3 million and $16.2 million, respectively. At December 31, 2013, our average portfolio company investment at amortized cost and fair value was approximately $8.5 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $14.0 million and $14.0 million, respectively.

 

At September 30, 2014, 15.5% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 84.5% bore interest at fixed rates. At December 31, 2013, 100% of our debt investments bore interest at fixed rates.

 

The weighted average yield on all of our debt investments as of September 30, 2014 and December 31, 2013 was approximately 12% and 12.4%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount.

 

$91.1 million of the portfolio (45%) had a first dollar loss at 0.0x-1.0x EBITDA; $60.3 million of the portfolio (30%) had a first dollar loss at 1.0x-3.0x EBITDA; $33.8 million of the portfolio (16%) had a first dollar loss of 3.0x-4.0x EBITDA; and $18.3 million of the portfolio (9%) had a first dollar loss of 4.0x-4.5x EBITDA; and $0.5 million of the portfolio (<1%) had a first dollar loss >4.5x EBITDA;

  

As of September 30, 2014 and December 31, 2013, we had cash of $19.1 million and $0.7 million, respectively.

 

Investment Activity

 

During the period January 1, 2014 to May 7, 2014, the Partnership invested $48.7 million in new investments and $15.7 million of repayments were received.

 

From May 8, 2014 to September 30, 2014, Alcentra invested $45.6 million in seven new portfolio companies and $4.1 million of add on investments. We also received $27.4 million in paydowns. $19.3 million was repaid by Net Access Corp ($3.9 million), GTT Communications ($6.3 million) and Wholesome Sweeteners ($9.0 million). $8.1 million was due to principal paydowns.

 

During the three and nine months ended September 30, 2013, the Partnership invested $0 million and $15.0 million, respectively. During the same period we received $17.5 million and $18.8 million in proceeds from repayments, respectively.

 

Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital 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.

 

 

Asset Quality

 

We currently do not use a rating system to monitor portfolio performance. As the portfolio grows in size, we would expect to implement a portfolio rating system.

 

Loans and Debt Securities on Non-Accrual Status

 

We will generally not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest. As of September 30, 2014 and December 31, 2013, we had no loans on non-accrual status.

 

Results of Operations

 

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

 

Comparison of the three and nine months ended September 30, 2014 and 2013

 

Revenues

 

We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees. Total investment income for the period May 8, 2014 through September 30, 2014 totaled $9.5 million and was primarily composed of interest income, including $2.2 million of PIK income. Total investment income on the Partnership from January 1, 2014 through May 7, 2014 was $7.8 million and was primarily composed of $4.4 million of interest income, including $1.4 million of PIK income, $1.8 million of other income and $0.2 million of dividend income.

 

Total investment income for the three month period ended September 30, 2013 was $2.2 million, including $0.126 million of PIK interest and $0.088 million of other income.

 

Total investment income for the nine months ended September 30, 2013 was $7.6 million including $.482 million of PIK interest and $0.182 million of other income.

 

  

Expenses

 

Operating expenses for the Partnership for the period January 1, 2014 through May 7, 2014 totaled $0.8 million (inclusive of a management fee of $0.7 million).

 

Operating expenses for Alcentra for the period May 8, 2014 through September 30, 2014 totaled $2.4 million (inclusive of a management fee of $0.9 million).

 

Operating expenses for the Partnership for the period July 1, 2013 through September 30, 2013 totaled $0.873 million (including $0.715 million in management fees).

 

Operating expenses for the Partnership for the nine months ended September 30, 2013 totaled $2.4 million (inclusive of $2.1 million of management fees).

 

Operating expenses consist of base management fees, administrative services expenses, professional fees, and other general and administrative expenses.

 

The Partnership had entered into a credit agreement under which it could borrow an aggregate principal amount of $15 million for the financing of portfolio investments. Borrowings under the credit agreement were $10 million and $15.0 million as of May 7, 2014 and December 31, 2013, respectively.

 

Interest is charged at the Alternative Rate, defined as the higher of (a) the Federal Fund Rate and (b) the Overnight LIBOR Rate, plus 130 basis points. The interest rate, period to date, ranged from 1.39% to 1.40%. Fund III recorded interest and fee expense of $0.032 million for the three months ended September 30, 2014. The average borrowings under the credit agreement for the period ended May 7, 2014 was $9,512,147. The credit agreement, which was not assumed by Alcentra in connection with the acquisition of Fund III Acquired Assets, terminated on April 24, 2014.

 

For the period January 1, 2014 through May 7, 2014 interest expense was $0.050 million.

 

For the nine months ended September 30, 2013, interest expense was $0.097 million.

 

Interest expense for the period May 8, 2014 to September 30, 2014 was $.790 million.

 

In connection with the Offering, Alcentra entered into a senior secured revolving credit agreement (“Credit Facility”) with ING Capital LLC, as administrative agent and lender. The Credit Facility has an initial commitment of $80 million with an accordion feature that allows for an increase in total commitments to $160 million. The Credit Facility has a maturity date of May 8, 2018 and bears interest, at Alcentra’s election, at a rate per annum equal to (i) the one, three or six month LIBOR, as applicable, plus 3.25% or (ii) 2.25% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%.  The Credit Facility is secured by a first priority security interest in all of Alcentra’s portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. Alcentra is also subject to customary covenants and events of default typical of a facility of this type.

 

Under the Advisory Agreement, Alcentra pays Alcentra NY, LLC (the “Adviser”) a base management fee calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% of its total gross assets if our gross assets are between $625 million and $750 million; and 1.5% of its gross assets if its assets are greater than $750 million. These various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to ACC’s entire gross assets in the event its gross assets exceed the various gross asset thresholds.

 

In addition, ACC pays the Adviser an incentive fee under the Advisory Agreement which consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of ACC’s “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a “catch-up” feature. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Advisory Agreement, as of the termination date) and equals 20% of ACC’s aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.

  

The Adviser has agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by ACC, for the remainder of the quarter in which the Offering is completed and the subsequent four quarters to the extent required in order for ACC to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis).

 

Alcentra’s primary operating expenses will include the payment of fees to the Adviser under the Advisory Agreement and ACC’s allocable portion of overhead expenses under the Advisory Agreement, including payments under the administration agreement with the Administrator.

 

Aside from these operating expenses, ACC will bear all other out-of-pocket costs and expenses of its operations and transactions, including:

 

•

future offering expenses;

 

•

the cost of calculating its net asset value;

 

•

the cost of effecting sales and repurchases of shares of its common stock and other securities;

 

•

fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms);

 

	•	transfer agent and custodial fees;
	•	fees and expenses associated with marketing efforts (including attendance at industry and investor conferences and similar events);

 

•

federal and state registration fees;

  

•

any exchange listing fees;

 

 

•

federal, state and local taxes;

  

•

independent directors’ fees and expenses;

  

•

brokerage commissions;

 

•

costs of proxy statements, stockholders’ reports and notices;

  

•

costs of preparing government filings, including periodic and current reports with the SEC;

  

•

fidelity bond, liability insurance and other insurance premiums; and

  

•

printing, mailing, independent accountants and outside legal costs and all other direct expenses incurred by either our Adviser or Alcentra in connection with administering Alcentra’s business, including the compensation of Alcentra’s Chief Accounting Officer and Chief Compliance Officer, and their respective staffs that will be based upon Alcentra’s allocable portion of overhead and other expenses incurred by the Adviser in performing its obligations under the Advisory Agreement.

   

Net Investment Income

 

For the period January 1, 2014 to May 7, 2014, net investment income was $6.9 million.

 

For the period May 8, 2014 through September 30, 2014, net investment income was $7.1 million.

 

For the three and nine month period ended September 30, 2013, net investment income was $1.4 million and $5.2 million, respectively. 

 

Net Realized Gains and Losses

 

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

 

For the period May 8, 2014 through September 30, 2014, there were $27.4 million in paydowns on investments, there were no realized gains.

 

For the period January 1, 2014 to May 7, 2014, there was a realized gain of $0.05 million.

 

For the period January 1, 2014 to May 7, 2014, there was a realized loss of $0.04 million.

 

For the three and nine month period ended September 30, 2013 realized gains totaled $0.41 million and $2.9 million, respectively.

 

Net Change in Unrealized Appreciation (Depreciation) of Investments

 

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

 

Net change in unrealized appreciation (depreciation) on investments for the period January 1, 2014 to May 7, 2014 totaled $3.0 million.

 

Net change in unrealized appreciation (depreciation) on investments for the period July 1, 2014 to September 30, 2014 totaled $2.9 million.

 

Net change in unrealized appreciation (depreciation) on investments for the period May 8, 2014 through September 30, 2014 totaled $4.2 million.

 

Net change in unrealized appreciation (depreciation) on investments for the three and nine months ended September 30, 2013 were $1.5 million and $(.832) million, respectively.

 

Net Increase in Net Assets Resulting from Operations

 

For the period January 1, 2014 to May 7, 2014, net increase in net assets resulting from operations totaled $9.9 million.

 

For the period July 1, 2014 through September, 2014, net increase in assets resulting from operations totaled $7.5 million.

 

For the period May 8, 2014 through September 30, 2014, net increase in net assets resulting from operations totaled $11.3 million.

 

For the three and nine months ended September 30, 2013, net increase in net assets resulting from operations totaled $3.5 million and $7.2 million, respectively.

  

Financial condition, liquidity and capital resources

 

Cash Flows from Operating and Financing Activities

 

The Partnership’s net cash used in operating activities amounted to $29.9 million for the period from January 1, 2014 to May 7, 2014, primarily in connection with the purchase of investments. Financing activities for the period from January 1, 2014 to May 7, 2014 provided cash of $39.9 million primarily from capital contributions received from limited partners.

 

For the period May 8, 2014 through September 30, 2014, Alcentra’s operating activities used cash of $113 million, primarily in connection with the initial purchase of investments. Financing activities for the same period provided $132 million primarily through the Offering.

 

The Partnership’s operating activities used cash of $8.5 million for the nine months ended September 30, 2013, primarily in connection with purchases of investments. Financing activities for the nine months ended September 30, 2013 decreased cash by $2.9  million primarily from capital distributions made to limited partners.

 

Our liquidity and capital resources are derived from the capital contributions and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as distributions to our stock holders. We expect to use these capital resources as well as proceeds from turnover within our portfolio, borrowings under the Credit Facility and from public and private offerings of securities to finance our investment activities.

 

 

Off-Balance Sheet Arrangements

 

We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 2014, our off-balance sheet arrangements consisted of $7.9 million of unfunded commitments to provide debt financing to two of our portfolio companies. As of December 31, 2013, our off-balance sheet arrangements consisted of $2.6 million of unfunded commitments to provide debt financing to one of our portfolio companies.

 

Recent Developments

 

Subsequent to September 30, 2014, the following activity occurred:

 

On October 1, 2014, Alcentra committed to fund $20,000,000 to Hotel Systems Pro.

 

On October 6, 2014, a dividend of $0.34 per share was paid to shareholders of record as of September 30, 2014 in the amount of $4,595,700.

  

On October 10, 2014, Bioventus LLC was funded for $12,000,000 (Libor + 10.0% ; 1.0% Libor Floor)

 

On October 16, 2014, Alcentra recently filed an exemptive application with the SEC to permit it to co-invest with funds or entities managed by the Adviser in certain negotiated transactions where co-investing would otherwise be prohibited under the 1940 Act.

 

Any such order will be subject to certain terms and conditions. Furthermore, there is no assurance that this application for exemptive relief will be granted by the SEC

 

On October 31, 2014, Alcentra committed to fund $15,000,000 to North Atlantic Petroleum.

   

Critical Accounting Policies

 

The preparation of our 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.

 

Valuation of portfolio investments

 

We generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by Alcentra’s board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once annually. With respect to unquoted securities, we value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies and other factors.

 

Because there is not a readily available market for substantially all of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by Alcentra’s board of directors using a documented valuation policy and a consistently applied valuation process. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

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

 

•

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

 

•

Preliminary valuation conclusions are then documented and discussed with our senior management and the Adviser committee;

 

 

•

The audit committee of Alcentra’s board of directors then reviews these preliminary valuations;

 

•

At least once quarterly, independent valuation firms engaged by Alcentra’s board of directors will prepare valuations on a selected basis and submit reports to the board of directors; and

 

•

The board of directors then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of Adviser, the independent valuation firm and the audit committee.

 

Revenue recognition

 

We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest.

 

Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income.

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

We are subject to financial market risks, including changes in interest rates. For the period ended September 30, 2014 and September 30, 2013, 15.5% and 0%, or 5 and 0 of the loans in our portfolio bore interest at floating rates, respectively. In the future, we expect other loans in our portfolio will have floating rates. For the six months ended September 30, 2014 and September 30, 2013, we did not engage in hedging activities.

 

Changes in interest rates will affect our cost of funding. Our interest expense will be affected by changes in certain published indices such as the LIBOR rate in connection with the Credit Facility.

 

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer (“CEO”) and its Chief Accounting Officer (“CAO”), has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

 

(b) Changes in Internal Control Over Financial Reporting

 

Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

 

The Company is not currently subject to any material legal proceedings, nor, its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its financial condition or results of operations.

 

Item 1A. Risk Factors

 

There has been no material change in the information provided under the heading “Risk Factors” in the Company’s final prospectus filed with the SEC on May 9, 2014. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial may materially affect its business, financial condition and/or operating results.

 

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

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

Not applicable.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

Item 6.  Exhibits

 

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

Exhibit Number		Description
31.1		Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Chief Accounting Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

*

Filed herewith.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: November 10, 2014

 

	By:	/s/ Paul J. Echausse
		Name: Paul J. Echausse
		Title: Chief Executive Officer and President
	By:	/s/ Ellida McMillan
		Name: Ellida McMillan
		Title: Chief Accounting Officer, Secretary, and Treasurer

 

 

EXHIBIT INDEX

 

Exhibit Number		Description
31.1		Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2		Chief Accounting Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1		Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2		Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

 

*

Filed herewith.