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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarter Ended March 31, 2015

 

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

Commission File Number: 814-00849

 

 

SOLAR SENIOR CAPITAL LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-4288022
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

500 Park Avenue

New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212) 993-1670

(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 and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    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 registrant’s Common Stock, $.01 par value, outstanding as of May 4, 2015 was 11,533,315.

 

 

 


Table of Contents

SOLAR SENIOR CAPITAL LTD.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2015

TABLE OF CONTENTS

 

 

     PAGE  
PART I. FINANCIAL INFORMATION       

Item 1.

   Financial Statements   
   Consolidated Statements of Assets and Liabilities as of March 31, 2015 (unaudited) and December 31, 2014      3   
  

Consolidated Statements of Operations for the three months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)

     4   
  

Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2015 (unaudited) and the year ended December 31, 2014

     5   
  

Consolidated Statements of Cash Flows for the three months ended March 31, 2015 (unaudited) and March 31, 2014 (unaudited)

     6   
  

Consolidated Schedule of Investments as of March 31, 2015 (unaudited)

     7   
  

Consolidated Schedule of Investments as of December 31, 2014

     10   
  

Notes to Consolidated Financial Statements (unaudited)

     13   
  

Report of Independent Registered Public Accounting Firm

     30   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      47   

Item 4.

   Controls and Procedures      47   
PART II. OTHER INFORMATION   

Item 1.

   Legal Proceedings      48   

Item 1A.

   Risk Factors      48   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3.

   Defaults Upon Senior Securities      48   

Item 4.

   Mine Safety Disclosures      48   

Item 5.

   Other Information      48   

Item 6.

   Exhibits      49   
   Signatures      51   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

In this Quarterly Report, “Solar Senior”, “Company”, “Fund”, “we”, “us”, and “our” refer to Solar Senior Capital Ltd. unless the context states otherwise.

 

Item 1. Financial Statements

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share amounts)

 

     March 31,
2015
(unaudited)
    December 31,
2014
 

Assets

    

Investments at fair value:

    

Companies less than 5% owned (cost: $277,445 and $302,343, respectively)

   $ 278,209      $ 302,422   

Companies 5% to 25% owned (cost: $4,034 and $4,034, respectively)

     3,487        3,623   

Companies more than 25% owned (cost: $62,423 and $32,839, respectively)

     63,657        34,421   
  

 

 

   

 

 

 

Total investments (cost: $343,902 and $339,216, respectively)

     345,353        340,466   

Cash

     4,840        7,471   

Cash equivalents

     35,003        35,000   

Interest receivable

     779        1,029   

Dividends receivable

     591        442   

Receivable for investments sold

     90        —     

Prepaid expenses and other assets

     520        389   
  

 

 

   

 

 

 

Total assets

   $ 387,176      $ 384,797   
  

 

 

   

 

 

 

Liabilities

    

Credit facility payable (see note 6 and 7)

   $ 140,900      $ 143,200   

Payable for investments and cash equivalents purchased

     39,978        35,000   

Distributions payable

     1,355        1,355   

Management fee payable (see note 3)

     866        798   

Interest payable

     291        277   

Administrative services expense payable (see note 3)

     34        444   

Other liabilities and accrued expenses

     213        204   
  

 

 

   

 

 

 

Total liabilities

   $ 183,637      $ 181,278   
  

 

 

   

 

 

 

Commitments and contingencies (see note 10 and 11)

    

Net Assets

    

Common stock, par value $0.01 per share, 200,000,000 and 200,000,000 common shares authorized, respectively, and 11,533,315 and 11,533,315 issued and outstanding, respectively

   $ 115      $ 115   

Paid-in capital in excess of par

     211,449        211,449   

Distributions in excess of net investment income

     (3,719     (3,529

Accumulated net realized loss

     (5,757     (5,766

Net unrealized appreciation

     1,451        1,250   
  

 

 

   

 

 

 

Total net assets

   $ 203,539      $ 203,519   
  

 

 

   

 

 

 

Net Asset Value Per Share

   $ 17.65      $ 17.65   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except share amounts)

 

     Three months ended  
     March 31,
2015
    March 31,
2014
 

INVESTMENT INCOME:

    

Interest:

    

Companies less than 5% owned

   $ 5,119      $ 4,862   

Companies 5% to 25% owned

     53        57   

Dividends:

    

Companies more than 25% owned

     969        817   

Other income:

    

Companies more than 25% owned

     2        —     
  

 

 

   

 

 

 

Total investment income

     6,143        5,736   
  

 

 

   

 

 

 

EXPENSES:

    

Management fees (see note 3)

   $ 866      $ 687   

Performance-based incentive fees (see note 3)

     157        213   

Interest and other credit facility expenses (see note 7)

     832        437   

Administrative services expense (see note 3)

     254        242   

Other general and administrative expenses

     315        304   
  

 

 

   

 

 

 

Total expenses

     2,424        1,883   
  

 

 

   

 

 

 

Performance-based incentive fees waived (see note 3)

     (157     —     
  

 

 

   

 

 

 

Net expenses

     2,267        1,883   
  

 

 

   

 

 

 

Net investment income

   $ 3,876      $ 3,853   
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND CASH EQUIVALENTS:

    

Net realized gain (loss) on investments and cash equivalents (companies
less than 5% owned)

   $ 9      $ (812

Net change in unrealized gain on investments and cash equivalents

     201        947   
  

 

 

   

 

 

 

Net realized and unrealized gain (loss) on investments and cash equivalents

     210        135   
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 4,086      $ 3,988   
  

 

 

   

 

 

 

EARNINGS PER SHARE (see note 5)

   $ 0.35      $ 0.35   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share amounts)

 

     Three months ended
March 31, 2015
(unaudited)
    Year ended
December 31, 2014
 

Increase in net assets resulting from operations:

    

Net investment income

   $ 3,876      $ 13,814   

Net realized gain (loss)

     9        (638

Net change in unrealized gain (loss)

     201        (1,486
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     4,086        11,690   
  

 

 

   

 

 

 

Distributions to stockholders:

    

From net investment income

     (4,066     (14,842

From other sources

     —          (1,419 )† 
  

 

 

   

 

 

 

Net distributions to stockholders

     (4,066     (16,261
  

 

 

   

 

 

 

Capital transactions:

    

Reinvestment of distributions

     —          73   
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     —          73   
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     20        (4,498

Net assets at beginning of period

     203,519        208,017   
  

 

 

   

 

 

 

Net assets at end of period(1)

   $ 203,539      $ 203,519   
  

 

 

   

 

 

 

Capital share activity:

    

Common stock issued from reinvestment of distributions

     —          4,012   
  

 

 

   

 

 

 

Net increase from capital share activity

     —          4,012   
  

 

 

   

 

 

 

 

Represents tax return of capital.
(1) Includes undistributed (overdistributed) net investment income of ($3,719) and ($3,529), respectively.

See notes to consolidated financial statements.

 

5


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

     Three months ended  
     March 31,
2015
    March 31,
2014
 

Cash Flows from Operating Activities:

    

Net increase in net assets resulting from operations

   $ 4,086      $ 3,988   

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

    

Net realized (gain) loss on investments and cash equivalents

     (9     812   

Net change in unrealized (gain) loss on investments and cash equivalents

     (201     (947

(Increase) decrease in operating assets:

    

Purchase of investments

     (24,720     (49,873

Proceeds from disposition of investments

     20,073        43,009   

Capitalization of payment-in-kind interest

     (30     (23

Receivable for investments sold

     (90     (88

Interest receivable

     250        (32

Dividends receivable

     (149     (40

Prepaid expenses and other assets

     (131     (193

Increase (decrease) in operating liabilities:

    

Payable for investments and cash equivalents purchased

     4,978        17,234   

Management fee payable

     68        (16

Performance-based incentive fees payable

     —          180   

Administrative services expense payable

     (410     (326

Interest payable

     14        38   

Other liabilities and accrued expenses

     9        96   
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     3,738        13,819   
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash distributions paid

     (4,066     (4,051

Proceeds from borrowings

     12,100        34,300   

Repayments of borrowings

     (14,400     (39,100
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     (6,366     (8,851
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (2,628     4,968   

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     42,471        2,774   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 39,843      $ 7,742   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 818      $ 399   
  

 

 

   

 

 

 

Non-cash financing activities consist of the reinvestment of distributions of $0 and $73 for the three months ended March 31, 2015 and 2014, respectively. Additionally, during the three months ended March 31, 2015, $29,584 of investments were transferred from the Company to First Lien Loan Program LLC (see note 11).

See notes to consolidated financial statements.

 

6


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)

March 31, 2015

(in thousands, except share/unit amounts)

 

Description 

 

Industry

  Spread
above
Index(3)
    Libor
Floor 
    Interest
Rate(1)
    Acquisition
Date
    Maturity
Date
    Par
Amount
    Cost     Fair
Value
 

Bank Debt/Senior Secured Loans — 136.2%

                 

Advantage Sales and Marketing, Inc

  Professional Services     L+650        1.00     7.50     2/14/2013        7/21/2022      $ 8,000      $ 7,944      $ 8,028   

Aegis Toxicology Sciences Corporation

  Health Care Services     L+850        1.00     9.50     2/20/2014        8/24/2021        4,000        3,946        3,940   

ALG B.V. (Apple Leisure)(2)(4)

  Hotels, Restaurants & Leisure     L+575        1.25     7.00     2/28/2013        2/28/2019        2,776        2,756        2,776   

ALG USA Holdings, LLC (Apple Leisure)(2)

  Hotels, Restaurants & Leisure     L+575        1.25     7.00     2/28/2013        2/28/2019        3,679        3,654        3,679   

AmeriQual Group, LLC(2)

  Food Products     L+500        1.50     7.25 %(5)      3/28/2011        3/28/2016        11,189        11,151        10,965   

Aperture Group, LLC (Trade Monster)(2)

  Capital Markets     L+625        1.00     7.25     9/2/2014        8/29/2019        3,980        3,962        3,980   

Asurion, LLC

  Insurance     L+750        1.00     8.50     2/27/2014        3/3/2021        2,500        2,467        2,516   

Athletico Management, LLC and Accelerated Holdings, LLC(2)

  Health Care Facilities     L+550        0.75     6.25     12/1/2014        12/2/2020        9,975        9,880        9,975   

Blue Coat Systems, Inc

  Internet Software & Services     L+850        1.00     9.50     6/28/2013        6/28/2020        4,500        4,463        4,590   

Blue Ribbon, LLC (Pabst)(2)

  Beverages     L+475        1.00     5.75     11/5/2014        11/13/2021        1,477        1,463        1,490   

Capstone Logistics Acqusition, Inc.(2)

  Professional Services     L+450        1.00     5.50     10/3/2014        10/7/2021        8,479        8,398        8,394   

Castle Management Borrower LLC (Highgate Hotels)(2)

  Real Estate Management & Development     L+450        1.00     5.50     10/10/2014        9/18/2020        7,960        7,886        7,960   

CGSC of Delaware Holdings Corp. (Cooper Gay)

  Insurance     L+700        1.25     8.25     4/5/2013        10/16/2020        4,000        3,956        3,640   

Confie Seguros Holding II Co.(2)

  Insurance     L+450        1.25     5.75     11/9/2012        11/9/2018        13,130        13,022        13,130   

ConvergeOne Holdings Corp.(2)

  Communications Equipment     L+500        1.00     6.00     6/16/2014        6/17/2020        6,948        6,886        6,947   

CT Technologies Intermediate Holdings(2)

  Health Care Technology     L+500        1.00     6.00     12/1/2014        12/1/2021        4,988        4,939        4,988   

Engineering Solutions & Products, LLC(7)

  Aerospace & Defense     L+600        2.00     8.00     11/5/2013        5/4/2018        324        324        324   

Engineering Solutions & Products, LLC(7)

  Aerospace & Defense     L+600        2.00     8.00     11/5/2013        11/5/2018        2,343        2,343        2,343   

Epic Health Services, Inc.(2)

  Health Care Services     L+475        1.00     5.75     2/20/2015        2/17/2021        3,000        2,970        2,970   

Filtration Group Corp.

  Industrial Conglomerates     L+725        1.00     8.25     11/15/2013        11/21/2021        2,000        1,982        2,012   

Fulton Holding Corp.(2)

  Specialty Retail     —          —          8.50     5/10/2013        5/28/2018        15,000        15,076        15,150   

Global Tel*Link Corp

  Communications Equipment     L+775        1.25     9.00     5/21/2013        11/23/2020        3,000        2,951        2,945   

HC Group Holdings III, Inc. (Walgreens)

  Health Care Services     L+500        1.00     6.00     3/25/2015        4/7/2022        5,000        4,975        4,975   

Hostway Corporation(2)

  Internet Software & Services     L+475        1.25     6.00     6/27/2014        12/13/2019        9,688        9,648        9,688   

Ikaria, Inc

  Health Care Technology     L+775        1.00     8.75     2/4/2014        2/12/2022        4,000        3,973        4,040   

Innovative Xcessories & Services, LLC(2)

  Automotive Retail     L+425        1.00     5.25     8/21/2014        2/21/2020        4,625        4,584        4,625   

IPC Systems, Inc.(2)

  Communications Equipment     L+550        1.00     6.50     2/03/2015        8/6/2021        5,000        4,852        5,041   

Kellermeyer Bergensons Services, LLC  (KBS)(2)

  Commercial Services & Supplies     L+500        1.00     6.00     10/31/2014        10/29/2021        4,988        4,940        4,987   

KODA Distribution Group, Inc.(2)

  Distributors     L+500        1.00     6.00     9/30/2013        4/9/2018        9,650        9,624        9,554   

Landslide Holdings, Inc

  Software     L+725        1.00     8.25     2/25/2014        2/25/2021        3,310        3,306        3,310   

Material Handling Services, LLC (TFS)(2)

  Air Freight & Logistics     L+475        1.00     5.75     3/3/2014        3/26/2020        11,685        11,583        11,568   

Metamorph US 3, LLC (Metalogix)(2)

  Software     L+550        1.00     6.50     12/1/2014        12/1/2020        9,938        9,700        9,739   

Miller Heiman, Inc.(2)

  Professional Services     L+575        1.00     6.75     9/30/2013        9/30/2019        7,272        7,211        7,126   

MYI Acquiror Corp. (McLarens Young)(2)

  Insurance     L+450        1.25     5.75     5/21/2014        5/28/2019        3,483        3,453        3,413   

MYI Acquiror Ltd. (McLarens Young)(2)(4)

  Insurance     L+450        1.25     5.75     5/21/2014        5/28/2019        4,478        4,439        4,388   

Pearl Merger Sub LLC (PetVet)(2)

  Health Care Facilities     L+450        1.00     5.50     1/29/2015        12/17/2020        4,489        4,401        4,399   

PM Holdings III Corp.(Pro Mach)(2)

  Machinery     L+450        1.00     5.50     10/17/2014        10/22/2021        8,978        8,892        8,978   

QBS Holding Company, Inc. (Quorum).(2)

  Software     L+475        1.00     5.75     8/1/2014        8/7/2021        6,484        6,424        6,354   

QoL Meds, LLC(2)

  Health Care Services     L+450        1.00     5.50     7/14/2014        7/15/2020        7,960        7,924        7,960   

Richelieu Foods, Inc.(2)

  Food Products     L+475        1.00     5.75     11/21/2014        5/21/2020        6,948        6,849        6,843   

Securus Technologies, Inc

  Communications Equipment     L+775        1.25     9.00     4/17/2013        4/30/2021        10,000        9,924        9,880   

Shoes for Crews, Inc.(2)

  Footwear     L+425        1.25     5.50     3/27/2012        3/27/2017        3,267        3,265        3,267   

Skinnypop Popcorn, LLC(2)

  Food Products     L+450        1.00     5.50     7/17/2014        7/17/2019        4,938        4,894        4,938   

Trident USA Health Services(2)

  Health Care Services     L+525        1.25     6.50     7/29/2013        7/31/2019        8,968        8,903        8,743   

Varsity Brands Holdings Co., Inc.(2)

  Diversified Consumer Services     L+500        1.00     6.00     12/10/2014        12/11/2021        6,484        6,421        6,562   

WNA Holdings, Inc. (Waddington)

  Containers & Packaging     L+725        1.25     8.50     5/24/2013        12/7/2020        4,000        3,970        4,040   
               

 

 

   

 

 

 

Total Bank Debt/Senior Secured Loans

  

  $ 276,574      $ 277,160   
               

 

 

   

 

 

 

Unsecured Notes — 1.8%

                 

Apollo Investment Corporation(4)

  Diversified Financial Services     —          —          5.75     11/10/2011        1/15/2016      $ 3,650      $ 3,538      $ 3,716   
               

 

 

   

 

 

 

Common Equity/Equity Interests — 31.7%

                Shares/Units       
             

 

 

     

Engineering Solutions & Products, LLC(7)(8)

  Aerospace & Defense           11/5/2013          133,668      $ 1,367      $ 820   

First Lien Loan Program LLC(4)(6)

  Asset Management           2/13/2015          2,958,396        29,584        28,519   

Gemino Healthcare Finance, LLC(4)(6)(9)

  Diversified Financial Services           9/30/2013          32,839        32,839        35,138   
               

 

 

   

 

 

 

Total Common Equity/Equity Interests

  

  $ 63,790      $ 64,477   
               

 

 

   

 

 

 

Total Investments(10) — 169.7%

  

  $ 343,902      $ 345,353   

Cash Equivalents — 17.2%

                Par Amount       
             

 

 

     

U.S. Treasury Bill

  Government           3/30/2015        4/23/2015        35,000      $ 35,003      $ 35,003   
               

 

 

   

 

 

 

Total Investments & Cash Equivalents —186.9%

  

  $ 378,905      $ 380,356   

Liabilities in Excess of Other Assets — (86.9%)

  

      (176,817
                 

 

 

 

Net Assets — 100.0%

  

    $ 203,539   
                 

 

 

 

 

See notes to consolidated financial statements.

 

7


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2015

(in thousands)

 

(1) Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of March 31, 2015.
(2) Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary SUNS SPV LLC. Such investments are pledged as collateral under the Senior Secured Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of Solar Senior Capital Ltd. The respective par amounts for investments that are partially held through SUNS SPV LLC are: AmeriQual Group, LLC $4,735. Par balances in excess of these stated amounts are held directly by Solar Senior Capital Ltd. All other investments not listed above are wholly held through SUNS SPV LLC.
(3) Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to a LIBOR or PRIME rate floor.
(4) Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of March 31, 2015, on a fair value basis, non-qualifying assets in the portfolio represented 19.3% of the total assets of the Company.
(5) A portion of the coupon is payable in kind (PIK). Of the current 7.25% coupon, 6.50% is paid in cash and a range of 0.50%-1.00%, currently 0.75%, is PIK.
(6) Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, 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 three months ended March 31, 2015 in these controlled investments are as follows:

 

Name of Issuer

   Fair Value at
December 31, 2014
     Gross
Additions
     Gross
Reductions
     Realized Gain
(Loss)
     Dividend/Other
         Income        
     Fair Value at
March 31,
2015
 

First Lien Loan Program LLC

   $ —         $ 29,584      $ —        $ —        $ 109      $ 28,519   

Gemino Healthcare Finance, LLC

     34,421         —          —          —          862        35,138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 34,421       $ 29,584       $ —         $ —         $ 971       $ 63,657   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(7) Denotes investments in which we are 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 three months ended March 31, 2015 in these affiliated investments are as follows:

 

Name of Issuer

   Fair Value at
December 31, 2014
     Gross
Additions
     Gross
Reductions
     Realized Gain
(Loss)
     Interest
Income
     Fair Value at
March 31,
2015
 

Engineering Solutions & Products, LLC (1st lien)

   $ 324       $ —        $ —        $ —        $ 6      $ 324   

Engineering Solutions & Products, LLC (2nd lien)

     2,343         —          —          —          47        2,343   

Engineering Solutions & Products, LLC (equity interests)

     956         —           —           —           —          820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,623       $ —         $ —         $ —         $ 53       $ 3,487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(8) Our equity investment in Engineering Solutions & Products, LLC is held through ESP SSC Corp., a taxable subsidiary.
(9) Investment represents the operating company after consolidation of the holding company Gemino Senior Secured Healthcare LLC.
(10) Aggregate net unrealized depreciation for federal income tax purposes is $895; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $2,949 and $3,844, respectively, based on a tax cost of $346,248.
Non-income producing security.

 

See notes to consolidated financial statements.

 

8


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2015

 

Industry Classification

   Percentage of Total
Investments (at
fair value) as of
March 31,

2015
 

Diversified Financial Services

     11.3%   

Health Care Services

     8.3%   

Asset Management

     8.3%   

Insurance

     7.8%   

Communications Equipment

     7.2%   

Professional Services

     6.8%   

Food Products

     6.6%   

Software

     5.6%   

Specialty Retail

     4.4%   

Health Care Facilities

     4.2%   

Internet Software & Services

     4.1%   

Air Freight & Logistics

     3.3%   

Distributors

     2.8%   

Health Care Technology

     2.6%   

Machinery

     2.6%   

Real Estate Management & Development

     2.3%   

Diversified Consumer Services

     1.9%   

Hotels, Restaurants & Leisure

     1.9%   

Commercial Services & Supplies

     1.4%   

Automotive Retail

     1.3%   

Containers & Packaging

     1.2%   

Capital Markets

     1.2%   

Aerospace & Defense

     1.0%   

Footwear

     0.9%   

Industrial Conglomerates

     0.6%   

Beverages

     0.4%   
  

 

 

 

Total Investments

     100.0%   
  

 

 

 

See notes to consolidated financial statements.

 

9


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2014

(in thousands, except share/unit amounts)

 

Description 

 

Industry

  Interest(1)   Basis Point
Spread
Above
Index(3)
    Maturity     Acquisition
Date
    Par Amount     Cost     Fair
Value
 

Bank Debt/Senior Secured Loans — 148.1%

               

Advantage Sales and Marketing, Inc

  Professional Services   7.50%     L+650        7/21/2022        2/14/2013      $ 8,000      $ 7,942      $ 7,936   

Aegis Toxicology Sciences Corporation

  Health Care Services   9.50%     L+850        8/24/2021        2/20/2014        4,000        3,945        4,000   

ALG B.V. (Apple Leisure)(2)(4)

  Hotels, Restaurants & Leisure   7.00%     L+575        2/28/2019        2/28/2013        2,776        2,755        2,776   

ALG USA Holdings, LLC (Apple Leisure)(2)

  Hotels, Restaurants & Leisure   7.00%     L+575        2/28/2019        2/28/2013        3,679        3,652        3,679   

AmeriQual Group, LLC(2)

  Food Products   7.50% (6.5%

Cash /

1% PIK)

    L+500        3/28/2016        3/28/2011        11,159        11,112        10,964   

Asurion, LLC

  Insurance   8.50%     L+750        3/3/2021        2/27/2014        2,500        2,466        2,492   

Athletico Management, LLC and Accelerated Holdings, LLC(2)

  Health Care Facilities   6.25%     L+550        12/2/2020        12/1/2014        15,000        14,852        14,850   

Blue Coat Systems, Inc

  Internet Software & Services   9.50%     L+850        6/28/2020        6/28/2013        4,500        4,462        4,433   

Blue Ribbon, LLC (Pabst)(2)

  Beverages   5.75%     L+475        11/13/2021        11/5/2014        1,500        1,485        1,495   

Capstone Logistics Acqusition, Inc.(2)

  Professional Services   5.50%     L+450        10/7/2021        10/3/2014        12,968        12,841        12,838   

Castle Management Borrower LLC (Highgate Hotels)(2)

  Real Estate Management & Development   5.50%     L+450        9/18/2020        10/10/2014        11,970        11,854        11,850   

CGSC of Delaware Holdings Corp (Cooper Gay).

  Insurance   8.25%     L+700        10/16/2020        4/5/2013        4,000        3,954        3,600   

Confie Seguros Holding II Co.(2)

  Insurance   5.75%     L+450        11/9/2018        11/9/2012        13,164        13,049        13,123   

ConvergeOne Holdings Corp.(2)

  Communications Equipment   6.00%     L+500        6/17/2020        6/16/2014        6,965        6,900        6,965   

CT Technologies Intermediate Holdings(2)

  Health Care Technology   6.00%     L+500        12/1/2021        12/1/2014        5,000        4,950        4,950   

Engineering Solutions & Products, LLC(6)

  Aerospace & Defense   8.00%     L+600        5/4/2018        11/5/2013        324        324        324   

Engineering Solutions & Products, LLC(6)

  Aerospace & Defense   8.00%     L+600        11/5/2018        11/5/2013        2,343        2,343        2,343   

Epic Health Services, Inc.(2)

  Health Care Services   6.50%     L+525        10/18/2018        10/21/2013        6,650        6,599        6,650   

Filtration Group Corp

  Industrial Conglomerates   8.25%     L+725        11/21/2021        11/15/2013        2,000        1,982        2,002   

Fulton Holding Corp.(2)

  Specialty Retail   8.50%     —          5/28/2018        5/10/2013        15,000        15,081        15,150   

Global Tel*Link Corp

  Communications Equipment   9.00%     L+775        11/23/2020        5/21/2013        3,000        2,950        2,945   

Hostway Corporation(2)

  Internet Software & Services   6.00%     L+475        12/13/2019        6/27/2014        9,750        9,709        9,750   

Ikaria, Inc

  Health Care Technology   8.75%     L+775        2/12/2022        2/4/2014        4,000        3,972        3,950   

Innovative Xcessories & Services,  LLC(2)

  Automotive Retail   5.25%     L+425        2/21/2020        8/21/2014        7,289        7,220        7,289   

IPC Systems, Inc.(2)

  Communications Equipment   6.00%     L+500        11/8/2020        5/02/2014        9,950        9,858        9,950   

Kellermeyer Bergensons Services, LLC (KBS)(2)

  Commercial Services & Supplies   6.00%     L+500        10/29/2021        10/31/2014        7,500        7,426        7,425   

KODA Distribution Group, Inc.(2)

  Distributors   6.00%     L+500        4/9/2018        9/30/2013        9,712        9,684        9,664   

Landslide Holdings, Inc

  Software   8.25%     L+725        2/25/2021        2/25/2014        3,310        3,306        3,260   

Material Handling Services, LLC (TFS)(2)

  Air Freight & Logistics   5.75%     L+475        3/26/2020        3/3/2014        9,775        9,688        9,677   

Metamorph US 3, LLC (Metalogix)(2)

  Software   6.50%     L+550        12/1/2020        12/1/2014        15,000        14,629        14,625   

Miller Heiman, Inc.(2)

  Professional Services   6.75%     L+575        9/30/2019        9/30/2013        7,319        7,254        7,172   

MYI Acquiror Corp. (McLarens Young)(2)

  Insurance   5.75%     L+450        5/28/2019        5/21/2014        3,491        3,460        3,456   

MYI Acquiror Ltd. (McLarens Young)(2)(4)

  Insurance   5.75%     L+450        5/28/2019        5/21/2014        4,489        4,449        4,444   

OH Acquisition, LLC (Trade Monster)(2)

  Capital Markets   7.25%     L+625        8/29/2019        9/2/2014        3,990        3,971        3,990   

PM Holdings III Corp. (Pro Mach)(2)

  Machinery   5.50%     L+450        10/22/2021        10/17/2014        9,000        8,912        8,910   

QBS Holding Company, Inc. (Quorum).(2)

  Software   5.75%     L+475        8/7/2021        8/1/2014        10,000        9,904        9,900   

QoL Meds, LLC(2)

  Health Care Services   5.50%     L+450        7/15/2020        7/14/2014        7,980        7,942        7,920   

Richelieu Foods, Inc.(2)

  Food Products   5.75%     L+475        5/21/2020        11/21/2014        7,000        6,897        6,895   

Securus Technologies, Inc

  Communications Equipment   9.00%     L+775        4/30/2021        4/17/2013        10,000        9,921        9,850   

Shoes for Crews, Inc.(2)

  Footwear   5.50%     L+425        3/27/2017        3/27/2012        3,526        3,523        3,526   

Skinnypop Popcorn, LLC(2)

  Food Products   5.50%     L+450        7/17/2019        7/17/2014        5,000        4,954        4,950   

Trident USA Health Services(2)

  Health Care Services   6.50%     L+525        7/31/2019        7/29/2013        8,993        8,924        8,858   

Varsity Brands Holdings Co., Inc.(2)

  Diversified Consumer Services   6.00%     L+500        12/11/2021        12/10/2014        6,500        6,435        6,504   

WNA Holdings, Inc. (Waddington)

  Containers & Packaging   8.50%     L+725        12/7/2020        5/24/2013        4,000        3,969        4,020   
             

 

 

   

 

 

 

Total Bank Debt/Senior Secured Loans

  

  $ 301,505      $ 301,350   
             

 

 

   

 

 

 

Unsecured Notes — 1.8%

               

Apollo Investment Corporation(4)

  Diversified Financial Services   5.75%     —          1/15/2016        11/10/2011      $ 3,650      $ 3,505      $ 3,739   
             

 

 

   

 

 

 

Common Equity/Equity Interests — 17.4%

              Shares/Units       

Engineering Solutions & Products, LLC(6)(7)

  Aerospace & Defense           11/5/2013        133,668      $ 1,367      $ 956   

Gemino Healthcare Finance, LLC(4)(5)(8)

  Diversified Financial Services           9/30/2013        32,839        32,839        34,421   
             

 

 

   

 

 

 

Total Common Equity/Equity Interests

  

  $ 34,206      $ 35,377   
             

 

 

   

 

 

 

Total Investments(9) — 167.3%

  

  $ 339,216      $ 340,466   

Cash Equivalents — 17.2%

              Par Amount       

U.S. Treasury Bill

  Government   0.000%     —          1/29/2015        12/29/2014        35,000      $ 35,000      $ 35,000   
             

 

 

   

 

 

 

Total Investments & Cash Equivalents  184.5%

  

  $ 374,216      $ 375,466   

Liabilities in Excess of Other Assets — (84.5%)

  

      (171,947
               

 

 

 

Net Assets— 100.0%

  

    $ 203,519   
               

 

 

 

See notes to consolidated financial statements.

 

10


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2014

(in thousands)

 

(1) Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2014.
(2) Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary SUNS SPV LLC. Such investments are pledged as collateral under the Senior Secured Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to the creditors, if any, of Solar Senior Capital Ltd. The respective par amounts for investments that are partially held through SUNS SPV LLC are: AmeriQual Group, LLC $4,722; Athletico Management, LLC and Accelerated Holdings, LLC $10,000; Capstone Logistics Acquisition, Inc. $8,479; Castle Management Borrower LLC $7,980; Kellermeyer Bergensons Services, LLC $5,000; and Metamorph US 3, LLC $10,000. Par balances in excess of these stated amounts are held directly by Solar Senior Capital Ltd. All other investments not listed above are wholly held through SUNS SPV LLC.
(3) Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to a LIBOR or PRIME rate floor.
(4) Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended.
(5) Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, 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, 2014 in these controlled investments are as follows:

 

Name of Issuer

   Fair Value at
December 31, 2013
     Gross
Additions
     Gross
Reductions
     Realized Gain
(Loss)
     Dividend
Income
     Fair Value at
December 31,

2014
 

Gemino Healthcare Finance, LLC

   $ 34,500       $ —        $ —        $ —        $ 3,277      $ 34,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(6) Denotes investments in which we are 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, 2014 in these affiliated investments are as follows:

 

Name of Issuer

   Fair Value at
December 31, 2013
     Gross
Additions
     Gross
Reductions
     Realized Gain
(Loss)
     Interest
Income
     Fair Value at
December 31,

2014
 

Engineering Solutions & Products, LLC (revolving loan)

   $ —         $ 231      $ 231      $ —        $ 2      $ —     

Engineering Solutions & Products, LLC (1st lien)

     405         —          81        —          27        324   

Engineering Solutions & Products, LLC (2nd lien)

     2,637         —          294        —          192        2,343   

Engineering Solutions & Products, LLC (equity interests)

     1,367         —           —          —           —          956   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,409       $ 231       $ 606       $ —         $ 221       $ 3,623   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(7) Our equity investment in Engineering Solutions & Products, LLC is held through ESP SSC Corporation, a taxable subsidiary.
(8) Investment represents the operating company after consolidation of the holding company Gemino Senior Secured Healthcare LLC.
(9) Aggregate net unrealized depreciation for U.S. federal income tax purposes is $1,496; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $1,822 and $3,318, respectively, based on a tax cost of $341,962.
Non-income producing security.

 

See notes to consolidated financial statements.

 

11


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2014

 

Industry Classification

   Percentage of Total
Investments (at
fair value) as of
December 31, 2014
 

Diversified Financial Services

     11.2%   

Communications Equipment

     8.7%   

Professional Services

     8.2%   

Software

     8.2%   

Health Care Services

     8.1%   

Insurance

     8.0%   

Food Products

     6.7%   

Specialty Retail

     4.4%   

Health Care Facilities

     4.4%   

Internet Software & Services

     4.2%   

Real Estate Management & Development

     3.5%   

Air Freight & Logistics

     2.8%   

Distributors

     2.8%   

Health Care Technology

     2.6%   

Machinery

     2.6%   

Commercial Services & Supplies

     2.2%   

Automotive Retail

     2.1%   

Hotels, Restaurants & Leisure

     1.9%   

Diversified Consumer Services

     1.9%   

Containers & Packaging

     1.2%   

Capital Markets

     1.2%   

Aerospace & Defense

     1.1%   

Footwear

     1.0%   

Industrial Conglomerates

     0.6%   

Beverages

     0.4%   
  

 

 

 

Total Investments

     100.0%   
  

 

 

 

See notes to consolidated financial statements.

 

12


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

March 31, 2015

(in thousands, except share amounts)

Note 1. Organization

Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, “SUNS”, “we”, “us”, or “our”), a Maryland corporation formed on December 16, 2010, is a closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, we have elected to be treated as a regulated investment company (“RIC”), under the Internal Revenue Code of 1986, as amended (“the Code”).

On January 28, 2011, Solar Senior was capitalized with initial equity of $2 and commenced operations. On February 24, 2011, Solar Senior priced its initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, at a price of $20.00 per share. Concurrent with this offering, management purchased an additional 500,000 shares through a private placement, also at $20.00 per share.

The Company’s investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by directly or indirectly investing primarily in senior secured loans, including first lien and second lien debt instruments, made primarily to leveraged private middle-market companies whose debt is rated below investment grade, which the Company refers to collectively as “senior loans.” From time to time, we may also invest in public companies that are thinly traded. Under normal market conditions, at least 80% of the value of the Company’s net assets (including the amount of any borrowings for investment purposes) will be invested in senior loans.

Note 2. Significant Accounting Policies

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and include the accounts of the Company and its wholly-owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current period presentation.

Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2015.

In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for the fair presentation of financial statements, have been included.

The significant accounting policies consistently followed by the Company are:

 

  (a) Investment transactions are accounted for on the trade date;

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

  (b) The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on a quarterly basis, or more frequently if required. Investments for which market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (the “Investment Adviser”), does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company’s board of directors (the “Board”).

Investments for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology or provide a valuation or methodology that, in the judgment of the Investment Adviser or the Board does not represent fair value, shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default; (iv) the Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm.

The recommendation of fair value generally considers the following factors among others, as relevant: applicable market yields; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flow; the markets in which the issuer does business; and comparisons to publicly traded securities, among others.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. 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 the 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.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the three months ended March 31, 2015, there has been no change to the Company’s valuation techniques and the nature of the related inputs considered in the valuation process.

ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.

 

  (c) Gains or losses on investments are calculated by using the specific identification method.

 

  (d) The Company records interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized and we amortize such amounts into income using the interest method or on a straight-line basis, as applicable. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record call premiums on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee and other fee income for services rendered, if any, are recorded as other income when earned.

 

  (e) The Company intends to comply with the applicable provisions of the Internal Revenue Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate. As of March 31, 2015 the accrual for excise tax was $0.

 

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

 

  (g) Distributions to common stockholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.

 

  (h)

In accordance with Regulation S-X and ASC Topic 810—Consolidation, the Company consolidates its interest in investment company subsidiaries, financing subsidiaries and certain wholly-owned holding

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

  companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company.

 

  (i) The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against the U.S. dollar on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company’s investments in foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.

 

  (j) The Company has made an irrevocable election to apply the fair value option of accounting to its senior secured revolving credit facility (the “Credit Facility”), in accordance with ASC 825-10 and uses an independent third-party valuation firm to assist in measuring its fair value.

 

  (k) The Company may record origination and other expenses related to certain debt issuances as prepaid assets. These expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and when it approximates the effective yield method.

 

  (l) The Company records expenses related to shelf filings and applicable equity offering costs as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with ASC 946-20-25.

 

  (m) 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 such investments may be recognized as income or applied to principal depending on management’s judgment.

 

  (n) The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less from the date of issue would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis. The update changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Public companies are required to apply ASU 2015-02 for interim and annual

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

reporting periods beginning after December 15, 2015. Accordingly, the Company is currently evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements and disclosures.

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company is currently evaluating the impact of the adoption of ASU 2015-03 on its consolidated financial statements and disclosures.

Note 3. Agreements

Solar Senior has an Investment Advisory and Management Agreement with the Investment Adviser, under which the Investment Adviser manages the day-to-day operations of, and provides investment advisory services to, Solar Senior. For providing these services, the Investment Adviser receives a fee from Solar Senior, consisting of two components—a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.00% of gross assets. For services rendered under the Investment Advisory and Management Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters. Base management fees for any partial month or quarter will be appropriately pro-rated. From time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined.

The incentive fee has two parts, as follows: one is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (other than fees for providing managerial assistance) accrued during the calendar quarter, minus our operating expenses for the quarter (excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments, if any, with a deferred interest feature (such as original issue discount, debt instruments with pay-in-kind interest and zero-coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, computed net of all realized capital losses or unrealized capital depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). The Company pays the Investment Adviser an incentive fee with respect to pre-incentive fee net investment income for each calendar quarter as follows:

 

   

no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%;

 

   

50% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.9167% in any calendar quarter (11.67% annualized);

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

and

 

   

20% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.9167% in any calendar quarter (11.67% annualized) will be payable to the Investment Adviser.

For the three months ended March 31, 2015 and 2014, the Company recognized $866 and $687, respectively, in base management fees and $157 and $213, respectively, in performance-based incentive fees. For the three months ended March 31, 2015 and 2014, $157 and $0, respectively, of such performance-based incentive fees were waived. This voluntary fee waiver was made at the Investment Adviser’s discretion and is not subject to recapture by the Investment Adviser or reimbursement by the Company.

The second part of the incentive fee is determined 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 will equal 20% of the Company’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all net capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement purposes, the second part of the incentive fee is accrued based upon 20% of cumulative net realized gains and net unrealized capital appreciation. No accrual was required for the three months ended March 31, 2015 and 2014.

Solar Senior has also entered into an Administration Agreement with Solar Capital Management, LLC (the “Administrator”) under which the Administrator provides administrative services for Solar Senior. For providing these services, facilities and personnel, Solar Senior reimburses the Administrator for Solar Senior’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent. The Administrator will also provide, on Solar Senior’s behalf, managerial assistance to those portfolio companies to which Solar Senior is required to provide such assistance.

For the three months ended March 31, 2015 and 2014, the Company recognized expenses under the Administration Agreement of $254 and $242, respectively. No managerial assistance fees were accrued or collected for the three months ended March 31, 2015 and 2014.

Note 4. Net Asset Value Per Share

At March 31, 2015, the Company’s total net assets and net asset value per share were $203,539 and $17.65, respectively. This compares to total net assets and net asset value per share at December 31, 2014 of $203,519 and $17.65, respectively.

Note 5. Earnings Per Share

The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations, pursuant to ASC 260-10, for the three months ended March 31, 2015 and 2014:

 

     Three months ended
March 31,
 
     2015      2014  

Earnings per share (basic & diluted)

     

Numerator—net increase in net assets resulting from operations:

   $ 4,086       $ 3,988   

Denominator—weighted average shares:

     11,533,315         11,531,975   

Earnings per share:

   $ 0.35       $ 0.35   

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

Note 6. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

  a) Quoted prices for similar assets or liabilities in active markets;

 

  b) Quoted prices for identical or similar assets or liabilities in non-active markets;

 

  c) Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

 

  d) Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).

Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of the appropriate category as of the end of the quarter in which the reclassifications occur.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, as of March 31, 2015 and December 31, 2014:

Fair Value Measurements

As of March 31, 2015

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Bank Debt/Senior Secured Loans

   $ —        $ 55,065       $ 222,095       $ 277,160   

Unsecured Notes

     —          3,716         —          3,716   

Common Equity/Equity Interests

     —          —           64,477         64,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

     —          58,781         286,572         345,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Credit Facility

   $ —        $ —        $ 140,900       $ 140,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Measurements

As of December 31, 2014

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Bank Debt/Senior Secured Loans

   $ —        $ 49,527       $ 251,823       $ 301,350   

Unsecured Notes

     —          3,739         —          3,739   

Common Equity/Equity Interests

     —          —           35,377         35,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ —        $ 53,266       $ 287,200       $ 340,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Credit Facility

   $ —        $ —        $ 143,200       $ 143,200   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the three months ended March 31, 2015, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at March 31, 2015:

Fair Value Measurements Using Level 3 Inputs

 

     Bank Debt/Senior
Secured Loans
    Common
Equity/Equity
Interests
 

Fair value, December 31, 2014

   $ 251,823      $ 35,377   

Total gains or losses included in earnings:

    

Net realized gain (loss)

     10        —     

Net change in unrealized gain (loss)

     10        (484

Purchase of investment securities

     19,850        29,584   

Proceeds from dispositions of investment securities

     (49,598     —     

Transfers in/out of Level 3

     —          —    
  

 

 

   

 

 

 

Fair value, March 31, 2015

   $ 222,095      $ 64,477   
  

 

 

   

 

 

 

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

    

Net change in unrealized gain (loss):

   $ 153      $ (484
  

 

 

   

 

 

 

During the three months ended March 31, 2015, there were no transfers in and out of Levels 1 and 2.

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the three months ended March 31, 2015:

 

Beginning fair value at December 31, 2014

   $  143,200   

Borrowings

     12,100   

Repayments

     (14,400

Transfers in/out of Level 3

     —    
  

 

 

 

Ending fair value at March 31, 2015

   $ 140,900   
  

 

 

 

The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10. On March 31, 2015, there were borrowings of $140,900 on the Credit Facility. For the three months ended March 31, 2015, the Credit Facility had no net change in unrealized (appreciation) depreciation. The Company uses an independent third-party valuation firm to assist in measuring the fair value of our Credit Facility.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31, 2014, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2014:

Fair Value Measurements Using Level 3 Inputs

 

     Bank Debt/Senior
Secured Loans
    Common
Equity/Equity
Interests
 

Fair value, December 31, 2013

   $ 185,330      $ 35,867   

Total gains or losses included in earnings:

    

Net realized gain (loss)

     (644     —     

Net change in unrealized gain (loss)

     146        (490

Purchase of investment securities

     184,392        —     

Proceeds from dispositions of investment securities

     (121,941     —     

Transfers in/out of Level 3

     4,540        —    
  

 

 

   

 

 

 

Fair value, December 31, 2014

   $ 251,823      $ 35,377   
  

 

 

   

 

 

 

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

    

Net change in unrealized gain (loss):

   $ (465   $ (490
  

 

 

   

 

 

 

During the fiscal year ended December 31, 2014, investments with a fair value of $4,540 were transferred from Level 2 to Level 3. These transfers were a result of changes in the quantity and quality of information used as valuation inputs by the Investment Adviser. There were no other transfers between levels.

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the year ended December 31, 2014:

 

Beginning fair value at December 31, 2013

   $ 61,400   

Borrowings

     206,100   

Repayments

     (124,300

Transfers in/out of Level 3

     —    
  

 

 

 

Ending fair value at December 31, 2014

   $ 143,200   
  

 

 

 

The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10. On December 31, 2014, there were borrowings of $143,200 on the Credit Facility. For the year ended December 31, 2014, the Credit Facility had no net change in unrealized (appreciation) depreciation. The Company uses an independent third-party valuation firm to assist in measuring the fair value of our Credit Facility.

Quantitative Information about Level 3 Fair Value Measurements

The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of our investment within each portfolio company.

Significant unobservable quantitative inputs typically used in the fair value measurement of the Company’s Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (“EBITDA”) multiples of similar companies, and comparable market transactions for equity securities.

Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of March 31, 2015 is summarized in the table below:

 

    Asset or
Liability
  Fair Value at
March 31, 2015
    Principal  Valuation
Technique/Methodology
  Unobservable Input   Range (Weighted
Average)
Bank Debt / Senior Secured Loans   Asset   $ 222,095      Yield Analysis   Market Yield   5.3% – 10.5% (6.8%)

Common Equity/Equity Interests

  Asset   $

$

$

820

35,138

28,519

  

  

  

  Enterprise Value

Enterprise Value

Net Asset Value

  EBITDA Multiple

Return on Equity

Market Yield

  9.7x – 11.8x (9.7x)

6.5% – 11.6% (10.8%)

5.3% – 7.1% (6.0%)

Credit Facility

  Liability   $ 140,900      Yield Analysis   Market Yield   L+0.5% – L+4.75%

(L+2.0%)

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets and liabilities.

Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of December 31, 2014 is summarized in the table below:

 

    Asset or
Liability
  Fair Value at
December 31, 2014
    Principal  Valuation
Technique/Methodology
  Unobservable Input   Range (Weighted
Average)
Bank Debt / Senior Secured Loans   Asset   $ 251,823      Yield Analysis   Market Yield   5.3% – 10.7% (6.7%)

Common Equity/Equity Interests

  Asset   $

$

956

34,421

  

  

  Enterprise Value

Enterprise Value

  EBITDA Multiple

Return on Equity

  7.9x – 10.3x (6.9x)
7.1% – 20.9% (11.3%)

Credit Facility

  Liability   $ 143,200      Yield Analysis   Market Yield   L+0.5% – L+4.75%

(L+2.0%)

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets and liabilities.

Note 7. Debt

Senior Secured Revolving Credit Facility—On August 26, 2011, the Company established SUNS SPV, LLC (“SUNS SPV”) which entered into the $200 million Credit Facility with Citigroup Global Markets Inc. acting as administrative agent. The Credit Facility was scheduled to mature on August 26, 2016 and generally bore interest at a rate of LIBOR plus 2.25%. The Credit Facility can also be expanded up to $600,000 and is secured by all of

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

the assets held by the SUNS SPV. Under the terms of the Credit Facility, Solar Senior and the SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature.

On November 7, 2012, the Company amended the Credit Facility. As a result of the amendment, the stated interest rate on the Credit Facility was reduced to LIBOR plus 2.00% from LIBOR plus 2.25%, and the Credit Facility continues to have no LIBOR floor requirement. The amendment also provided us greater investment flexibility and extended the final maturity date to November 6, 2017. On February 26, 2014, the Company utilized the Credit Facility’s delayed draw feature, expanding immediately available capital from $150,000 to $200,000, subject to borrowing base limitations.

On June 30, 2014, the Company again amended the Credit Facility. As a result of this amendment, commitments under the Credit Facility were reduced by $25,000 to $175,000 and may be expanded up to $600,000 under its accordion feature. This amendment to the Credit Facility also added greater investment flexibility and extends the final maturity date to June 28, 2019. The stated interest rate remains LIBOR plus 2.00% with no LIBOR floor requirement.

The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10. Accounting for the Credit Facility at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility. ASC 825-10 requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the Credit Facility are reported in the Consolidated Statement of Operations.

The average annualized interest cost for all borrowings for the three months ended March 31, 2015 and the year ended December 31, 2014 was 2.21% and 2.18%, respectively. These costs are exclusive of other credit facility expenses such as unused fees and fees paid to the back-up servicer, if any. The maximum amount borrowed on the Credit Facility during the three months ended March 31, 2015 and the year ended December 31, 2014, was $143,200 and $143,200, respectively.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

Note 8. Financial Highlights and Senior Securities Table

The following is a schedule of financial highlights for the three months ended March 31, 2015 and for the year ended December 31, 2014:

 

     Three months ended
March 31,

2015 (unaudited)
    Year ended
December 31,
2014
 

Per Share Data:(a)

    

Net asset value, beginning of year

   $ 17.65      $ 18.04   
  

 

 

   

 

 

 

Net investment income

     0.34        1.20   

Net realized and unrealized gain (loss)

     0.01        (0.18
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.35        1.02   

Issuance of common stock

     —         —    

Distributions to stockholders:

    

From net investment income

     (0.35 )     (1.29 )

From net realized gains

     —          —     

From other sources

     —          (0.12 )**

Anti-dilution

     —          —     

Offering costs and other

     —          —     
  

 

 

   

 

 

 

Net asset value, end of period

   $ 17.65      $ 17.65   
  

 

 

   

 

 

 

Per share market value, end of period

   $ 16.11      $ 14.97   

Total Return(b)

     10.03     (10.47 %) 

Net assets, end of period

   $ 203,539      $ 203,519   

Shares outstanding, end of period

     11,533,315        11,533,315   
  

 

 

   

 

 

 

Ratios to average net assets(c):

    

Net investment income

     1.90     6.69
  

 

 

   

 

 

 

Operating expenses

     0.71 %*      2.50 %* 

Interest and other credit facility expenses

     0.40     1.52
  

 

 

   

 

 

 

Total expenses

     1.11 %*      4.02 %* 
  

 

 

   

 

 

 

Average debt outstanding

   $ 140,139      $ 72,132   

Portfolio turnover ratio

     14.1     47.5

 

(a) Calculated using the average shares outstanding method.
(b) Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend reinvestment plan.
(c) Not annualized for periods less than one year.
* The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets is shown net of a voluntary incentive fee waiver (see note 3).

For the three months ended March 31, 2015, the ratios of operating expenses to average net assets and total expenses to average net assets would be 0.78% and 1.19%, respectively, without the voluntary incentive fee waiver. For the year ended December 31, 2014, the ratios of operating expenses to average net assets and total expenses to average net assets would be 2.61% and 4.13%, respectively, without the voluntary incentive fee waiver.

** Represents tax return of capital.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

Information about our senior securities is shown in the following table as of each year ended December 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total  Amount
Outstanding(1)
     Asset
Coverage
Per  Unit(2)
     Involuntary
Liquidating
Preference
Per Unit(3)
     Average
Market Value
Per Unit(4)
 

Revolving Credit Facility

           

Fiscal 2015 (through March 31, 2015)

   $ 140,900       $ 2,445       $ —           N/A   

Fiscal 2014

     143,200         2,421         —           N/A   

Fiscal 2013

     61,400         4,388         —           N/A   

Fiscal 2012

     39,100         5,453         —           N/A   

Fiscal 2011

     8,600         21,051         —           N/A   

 

(1) Total amount of each class of senior securities outstanding at the end of the period presented.
(2) The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit was divided based on the amount outstanding at the end of the period for each. As of March 31, 2015, asset coverage was 244.5%.
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
(4) Not applicable, we do not have senior securities that are registered for public trading.

Note 9. Gemino Healthcare Finance, LLC

Pursuant to a definitive agreement, dated September 30, 2013, we acquired Gemino Healthcare Finance, LLC (d/b/a Gemino Senior Secured Healthcare Finance) (“Gemino”) from affiliates of EDG Partners, D. E. Shaw AQ-SP Series 5-01, L.L.C. and other members of Gemino. Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare industry. Our initial investment in Gemino of $32,839 was funded from our existing Credit Facility. We have an additional $5,000 commitment to Gemino (which may be structured as debt or equity), conditional upon approval of the Gemino board of managers, among other conditions. The management team of Gemino committed to lead Gemino and co-invested in the transaction.

Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse, $100,000 credit facility with non-affiliates, which is expandable to $150,000 under its accordion feature. Effective March 31, 2014, the credit facility was expanded to $105,000 and again on June 27, 2014 to $110,000.

On December 31, 2013, we contributed our 32,839 units in Gemino to Gemino Senior Secured Healthcare LLC (“Gemino Senior Secured Healthcare”). In exchange for this contribution, we received 19,839 units of equity interests and $13,000 in floating rate secured notes of Gemino Senior Secured Healthcare bearing interest at LIBOR plus 7.50%, maturing on December 31, 2018. However, our financial statements, including our schedule of investments, reflect our investments in Gemino Senior Secured Healthcare on a consolidated basis. Gemino’s management team currently owns approximately 5% of the equity in Gemino. Gemino Senior Secured Healthcare owns approximately 95% of the equity in Gemino and Solar Senior owns 100% of the equity in Gemino Senior Secured Healthcare. Gemino and Gemino Senior Secured Healthcare are treated as pass-through entities for tax purposes.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of March 31, 2015, the portfolio totaled approximately $189,569 of commitments, of which $119,588 were funded, on total assets of $124,206. As of December 31, 2014, the portfolio totaled approximately $204,926 of commitments, of which $122,909 were funded, on total assets of $129,024. At March 31, 2015, the portfolio consisted of 36 issuers with an average balance of approximately $3,322 versus 38 issuers with an average balance of approximately $3,234 at December 31, 2014. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $90,000 and $95,000 of borrowings outstanding at March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, Gemino had net income of $1,155 and $908, respectively, on gross income of $3,298 and $2,922, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.

Note 10. Commitments and Contingencies

The Company had unfunded debt and equity commitments to various revolving and delayed draw loans, as well as to Gemino. The total amount of these unfunded commitments as of March 31, 2015 and December 31, 2014 is $6,736 and $6,736, respectively, comprised of the following:

 

     March 31,
2015
     December 31,
2014
 

Gemino Healthcare Finance, LLC*

   $ 5,000       $ 5,000   

Engineering Solutions & Products, LLC

     1,736        1,736   
  

 

 

    

 

 

 

Total Commitments

   $ 6,736       $ 6,736   
  

 

 

    

 

 

 

 

* The Company controls the funding of this commitment and may cancel it at its discretion.

As of March 31, 2015 and December 31, 2014, the Company had sufficient cash available and/or liquid securities available to fund these commitments.

Note 11. First Lien Loan Program LLC

On September 10, 2014, the Company entered into a limited liability company agreement to create a First Lien Loan Program (“FLLP”) with Voya Investment Management LLC (“Voya”). Voya acts as the investment advisor for several wholly-owned insurance subsidiaries of Voya Financial, Inc. (NYSE: VOYA). The joint venture vehicle, structured as an unconsolidated Delaware limited liability company, is expected to invest primarily in senior secured floating rate term loans to middle market companies predominantly owned by private equity sponsors or entrepreneurs. Solar Senior and Voya have committed to provide $50,000 and $7,250, respectively, of capital to the joint venture. All portfolio decisions and generally all other decisions in respect of the FLLP must be approved by an investment committee of the FLLP consisting of representatives of the Company and Voya (with approval from a representative of each required). On February 13, 2015, FLLP commenced operations. On February 13, 2015, FLLP as transferor and FLLP 2015-1, LLC, a newly formed wholly owned subsidiary of FLLP, as borrower entered into a $75,000 senior secured revolving credit facility (the “FLLP Facility”) with Wells Fargo Securities, LLC acting as administrative agent. Solar Senior Capital Ltd. acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature on February 13, 2020. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.25%-2.50%. FLLP and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

of this nature. There were no borrowings outstanding as of March 31, 2015. As of March 31, 2015 and December 31, 2014, Solar Senior and Voya contributed combined equity capital in the amount of $33,810 and $0, respectively. Of the $33,810 of contributed equity capital, the Company contributed $29,584 in the form of investments. The remaining $4,226 of contributed equity capital was in the form of cash. As of March 31, 2015, Solar Senior and Voya’s remaining commitments totaled $20,416 and $3,024, respectively.

As of March 31, 2015 and December 31, 2014, FLLP had total assets of $32,775 and $0, respectively. For the same periods, FLLP’s portfolio consisted of first lien floating rate senior secured loans to 8 and 0 different borrowers, respectively. For the period ended March 31, 2015, FLLP invested $32,049 across 8 portfolio companies. Investments sold or prepaid totaled $83 during the same period. At March 31, 2015, the weighted average yield of FLLP’s portfolio was 6.0%, measured at fair value.

FLLP Portfolio as of March 31, 2015

 

Description

  Industry   Interest
Rate(1)
    Maturity
Date
    Par
Amount
    Cost     Fair
Value(2)
 

Athletico Management, LLC and
Accelerated Holdings, LLC
(3)

  Health Care Facilities     6.25     12/02/20      $ 4,988      $ 4,938      $ 4,988   

Capstone Logistics
Acquisition, Inc.
(3)

  Professional Services     5.50     10/07/21        4,489        4,444        4,444   

Castle Management Borrower LLC (Highgate Hotels)(3)

 

Real Estate Management &
Development

    5.50     09/18/20        3,980        3,941        3,980   

Innovative Xcessories &
Services, LLC
(3)

  Automotive Retail     5.25     02/21/20        2,500        2,500        2,500   

Kellermeyer Bergensons Services, LLC (KBS)(3)

 

Commercial Services &
Supplies

    6.00     10/29/21        2,494        2,469        2,494   

Metamorph US 3, LLC (Metalogix)(3)

  Software     6.50     12/01/20        4,969        4,846        4,869   

Pearl Merger Sub, LLC (PetVet)(3)

  Health Care Facilities     5.50     12/17/20        5,486        5,378        5,377   

QBS Holding Company, Inc. (Quorum)(3)

  Software     5.75     08/07/21        3,491        3,457        3,420   
         

 

 

   

 

 

 
          $ 31,973      $ 32,072   
         

 

 

   

 

 

 

 

(1) Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of March 31, 2015.
(2) Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described elsewhere herein.
(3) The Company also holds a portion of this position on its balance sheet.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2015

(in thousands, except share amounts)

 

Below is certain summarized financial information for FLLP as of March 31, 2015 and for the period February 13, 2015 (commencement of operations) through March 31, 2015:

 

     As of March 31, 2015  

Selected Balance Sheet Information:

  

Investments, at fair value

   $ 32,072   

Cash and other assets

     703   
  

 

 

 

Total assets

   $ 32,775   
  

 

 

 

Debt outstanding

   $ —     

Distributions payable

     121   

Accrued expenses

     61   
  

 

 

 

Total liabilities

   $ 182   
  

 

 

 

Members’ equity

   $ 32,593   
  

 

 

 

Total liabilities and members’ equity

   $ 32,775   
  

 

 

 

 

     For the Period
February 13, 2015
(commencement of
operations) through

March 31, 2015
 

Selected Statement of Operations Information:

  

Interest Income

   $ 184   
  

 

 

 

Service fees

   $ 2   

Interest and other credit facility expenses*

     1,366   

Other general and administrative expenses

     11   
  

 

 

 

Total expenses

     1,379   
  

 

 

 

Net investment income (loss)

   $ (1,195
  

 

 

 

Net change in unrealized gain on investments

     99   
  

 

 

 

Net income (loss)

   $ (1,096
  

 

 

 

 

* FLLP made an irrevocable election to apply the fair value option of accounting to the FLLP Facility, in accordance with ASC 825-10. As such, all expenses related to the establishment of the FLLP Facility were expensed in the current period. This amount totaled $1,316.

Note 12. Subsequent Events

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

On April 9, 2015, the Board declared a monthly distribution of $0.1175 per share payable on May 1, 2015 to holders of record as of April 23, 2015.

On May 5, 2015, the Board declared a monthly distribution of $0.1175 per share payable on June 2, 2015 to holders of record as of May 21, 2015.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Solar Senior Capital Ltd.:

We have reviewed the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Solar Senior Capital Ltd. (the Company) as of March 31, 2015, the related consolidated statements of operations for the three-month periods ended March 31, 2015 and 2014, the consolidated statement of changes in net assets for the three-month period ended March 31, 2015, and the related consolidated statements of cash flows for the three-month periods ended March 31, 2015 and 2014. These consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Solar Senior Capital Ltd., as of December 31, 2014 and the related consolidated statement of changes in net assets, and cash flows for the year ended December 31, 2014, and in our report dated February 25, 2015, we expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

New York, New York

May 5, 2015

 

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

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

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

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of investments that we expect to make;

 

   

our contractual arrangements and relationships with third parties;

 

   

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

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital; and

 

   

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

We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in “Risk Factors” and elsewhere in this report.

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

Overview

Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, or “we”), a Maryland corporation formed in December 2010, is a closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

On February 24, 2011, we priced our initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, at a price of $20.00 per share. Concurrent with this offering, management purchased an additional 500,000 shares through a concurrent private placement, also at $20.00 per share.

On August 26, 2011, the Company established SUNS SPV, LLC (“SUNS SPV”) which entered into a $200 million senior secured revolving credit facility (the “Credit Facility”) with Citigroup Global Markets Inc. acting as administrative agent. The Credit Facility was scheduled to mature on August 26, 2016 and generally bore

 

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interest at the London Interbank Offered Rate (“LIBOR”) plus 2.25%. The Credit Facility had $150 million immediately available with an additional $50 million available under a delayed draw feature. The Credit Facility can also be expanded up to $600 million and is secured by all of the assets held by the SUNS SPV. Under the terms of the Credit Facility, Solar Senior and the SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature.

On November 7, 2012, we amended our Credit Facility. As a result of the amendment, the stated interest rate on the Credit Facility was reduced to LIBOR plus 2.00% from LIBOR plus 2.25%, and the Credit Facility continues to have no LIBOR floor requirement. The amendment also provided us greater investment flexibility and extended the final maturity date to November 6, 2017.

On June 30, 2014, the Company again amended the Credit Facility. As a result of this amendment, commitments under the Credit Facility were reduced by $25 million to $175 million and may be expanded up to $600 million under its accordion feature. This amendment to the Credit Facility also added greater investment flexibility and extends the final maturity date to June 28, 2019. The stated interest rate remains LIBOR plus 2.00% with no LIBOR floor requirement.

We invest primarily in U.S. middle market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. Our investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by directly and indirectly investing primarily in senior loans, including first lien and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of public companies that are thinly traded. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will be invested in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarily LIBOR, plus a premium. Senior loans in which we expect to invest are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans” or “high yield” securities, and may be considered “high risk” compared to debt instruments that are rated investment grade.

We expect to invest in senior loans made primarily to private, leveraged middle-market companies with approximately $20 million to $100 million of earnings before income taxes, depreciation and amortization (“EBITDA”). Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. We expect that our direct investments will generally range between $5 million and $30 million each, although we expect that this investment size will vary proportionately with the size of our capital base and/or with strategic initiatives. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of the United States. We may invest up to 30% of our total assets in such opportunistic investments, including senior loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the 1940 Act.

As of March 31, 2015, our adviser, Solar Capital Partners, LLC (the “Investment Adviser”), has invested approximately $4.7 billion in more than 190 different portfolio companies since it was founded in 2006. Over the same period, the Investment Adviser completed transactions with more than 120 different financial sponsors.

 

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Recent Developments

On April 9, 2015, the Board declared a monthly distribution of $0.1175 per share payable on May 1, 2015 to holders of record as of April 23, 2015.

On May 5, 2015, the Board declared a monthly distribution of $0.1175 per share payable on June 2, 2015 to holders of record as of May 21, 2015.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” The definition of “eligible portfolio company” includes certain public companies that do not have any securities listed on a national securities exchange and companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

Revenue

We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmark London interbank offered rate (“LIBOR”), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable quarterly but may be monthly or semi-annually. In addition, our investments may provide payment-in-kind (“PIK”) interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.

Expenses

All investment professionals of the Investment Adviser and its staff, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by the Investment Adviser. We bear all other costs and expenses of our operations and transactions, including those relating to:

 

   

investment advisory and management fees;

 

   

expenses incurred by the Investment Adviser payable to third parties, including agents, consultants or other advisors, in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;

 

   

calculation of our net asset value (including the cost and expenses of any independent valuation firm utilized);

 

   

direct costs and expenses of administration, including independent registered public accounting and legal costs;

 

   

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

 

   

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

 

   

offerings of our common stock and other securities;

 

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registration and listing fees;

 

   

fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments;

 

   

transfer agent and custodial fees;

 

   

taxes;

 

   

independent directors’ fees and expenses;

 

   

marketing and distribution-related expenses;

 

   

the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs;

 

   

our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

   

organizational costs; and

 

   

all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overhead under the administration agreement, including rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs.

We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.

Portfolio and Investment Activity

During the three months ended March 31, 2015, we invested $24.6 million across 5 portfolio companies. This compares to investing $49.7 million in 9 portfolio companies for the three months ended March 31, 2014. Investment sales and prepayments during the three months ended March 31, 2015 totaled $20.2 million versus $43.5 million for the three months ended March 31, 2014.

At March 31, 2015, our portfolio consisted of 46 portfolio companies and was invested 80.2% in senior secured loans, 1.1% in unsecured loans and 18.7% in common equity/equity interests measured at fair value versus 37 portfolio companies invested 85.7% in senior secured loans, 1.4% in unsecured loans and 12.9% in common equity/equity interests at March 31, 2014.

The weighted average yields on our income producing portfolio of investments were 6.9% and 7.7%, respectively, at March 31, 2015 and 2014 measured at fair value.

At March 31, 2015, 94.5% or $325.7 million of our income producing investment portfolio* is floating rate and 5.5% or $18.9 million is fixed rate, measured at fair value. At March 31, 2014, 93.0% or $254.5 million of our income producing investment portfolio* is floating rate and 7.0% or $19.0 million is fixed rate, measured at fair value.

Since the initial public offering of Solar Senior on February 24, 2011 and through March 31, 2015, invested capital totaled approximately $851 million in 87 portfolio companies. Over the same period, Solar Senior completed transactions with more than 55 different financial sponsors.

 

* 

We have included First Lien Loan Program LLC and Gemino Healthcare Finance, LLC as 100% floating rate within our income producing investment portfolio.

 

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Gemino Healthcare Finance, LLC

Pursuant to a definitive agreement, dated September 30, 2013, we acquired Gemino Healthcare Finance, LLC (d/b/a Gemino Senior Secured Healthcare Finance) (“Gemino”) from affiliates of EDG Partners, D. E. Shaw AQ-SP Series 5-01, L.L.C. and other members of Gemino. Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare industry. Our initial investment in Gemino of $32.8 million was funded from our existing Credit Facility. We have an additional $5.0 million commitment to Gemino (which may be structured as debt or equity), conditional upon approval of the Gemino board of managers, among other conditions. The management team of Gemino committed to lead Gemino and co-invested in the transaction.

Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse, $100.0 million credit facility with non-affiliates, which is expandable to $150.0 million under its accordion feature. Effective March 31, 2014, the credit facility was expanded to $105.0 million and again on June 27, 2014 to $110.0 million.

On December 31, 2013, we contributed our 32,839 units in Gemino to Gemino Senior Secured Healthcare LLC (“Gemino Senior Secured Healthcare”). In exchange for this contribution, we received 19,839 units of equity interests and $13.0 million in floating rate secured notes of Gemino Senior Secured Healthcare bearing interest at LIBOR plus 7.50%, maturing on December 31, 2018. However, our financial statements, including our schedule of investments, reflect our investments in Gemino Senior Secured Healthcare on a consolidated basis. Gemino’s management team currently owns approximately 5% of the equity in Gemino. Gemino Senior Secured Healthcare owns approximately 95% of the equity in Gemino and Solar Senior owns 100% of the equity in Gemino Senior Secured Healthcare. Gemino and Gemino Senior Secured Healthcare are treated as pass-through entities for tax purposes.

Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of March 31, 2015, the portfolio totaled approximately $189.6 million of commitments, of which $119.6 million were funded, on total assets of $124.2 million. As of December 31, 2014, the portfolio totaled approximately $204.9 million of commitments, of which $122.9 million were funded, on total assets of $129.0 million. At March 31, 2015, the portfolio consisted of 36 issuers with an average balance of approximately $3.3 million versus 38 issuers with an average balance of approximately $3.2 million at December 31, 2014. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $90.0 million and $95.0 million of borrowings outstanding at March 31, 2015 and December 31, 2014, respectively. For the three months ended March 31, 2015 and 2014, Gemino had net income of $1.2 million and $0.9 million, respectively, on gross income of $3.3 million and $2.9 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.

First Lien Loan Program LLC

On September 10, 2014, the Company entered into a limited liability company agreement to create a First Lien Loan Program (“FLLP”) with Voya Investment Management LLC (“Voya”). Voya acts as the investment advisor for several wholly-owned insurance subsidiaries of Voya Financial, Inc. (NYSE: VOYA). The joint venture vehicle, structured as an unconsolidated Delaware limited liability company, is expected to invest primarily in senior secured floating rate term loans to middle market companies predominantly owned by private equity sponsors or entrepreneurs. Solar Senior and Voya have committed to provide $50.0 million and $7.25 million, respectively, of capital to the joint venture. All portfolio decisions and generally all other decisions in respect of the FLLP must be approved by an investment committee of the FLLP consisting of representatives of the Company and Voya (with approval from a representative of each required). On February 13, 2015, FLLP commenced operations. On February 13, 2015, FLLP as transferor and FLLP 2015-1, LLC, a newly formed wholly owned subsidiary of FLLP, as borrower entered into a $75 million senior secured revolving credit facility

 

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(the “FLLP Facility”) with Wells Fargo Securities, LLC acting as administrative agent. Solar Senior Capital Ltd. acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature on February 13, 2020. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.25%-2.50%. FLLP and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. There were no borrowings outstanding as of March 31, 2015. As of March 31, 2015 and December 31, 2014, Solar Senior and Voya contributed combined equity capital in the amount of $33.8 million and $0, respectively. Of the $33.8 million of contributed equity capital, the Company contributed $29.6 million in the form of investments. The remaining $4.2 million of contributed equity capital was in the form of cash. As of March 31, 2015, Solar Senior and Voya’s remaining commitments totaled $20.4 million and $3.0 million, respectively.

As of March 31, 2015 and December 31, 2014, FLLP had total assets of $32.8 million and $0, respectively. For the same periods, FLLP’s portfolio consisted of first lien floating rate senior secured loans to 8 and 0 different borrowers, respectively. For the period ended March 31, 2015, FLLP invested $32.0 million across 8 portfolio companies. Investments sold or prepaid totaled $0.1 million during the same period. At March 31, 2015, the weighted average yield of FLLP’s portfolio was 6.0%, measured at fair value.

FLLP Portfolio as of March 31, 2015 (in thousands)

 

Description

  

Industry

   Interest
Rate(1)
    Maturity
Date
     Par
Amount
     Cost      Fair
Value(2)
 

Athletico Management, LLC and Athletico Management, LLC and Accelerated Holdings, LLC(3)

   Health Care Facilities      6.25     12/02/20       $ 4,988       $ 4,938       $ 4,988   

Capstone Logistics Acquisition, Inc.(3)

   Professional Services      5.50     10/07/21         4,489         4,444         4,444   

Castle Management Borrower LLC (Highgate Hotels)(3)

   Real Estate Management & Development      5.50     09/18/20         3,980         3,941         3,980   

Innovative Xcessories & Services, LLC(3)

   Automotive Retail      5.25     02/21/20         2,500         2,500         2,500   

Kellermeyer Bergensons Services, LLC (KBS)(3)

   Commercial Services & Supplies      6.00     10/29/21         2,494         2,469         2,494   

Metamorph US 3, LLC (Metalogix)(3)

   Software      6.50     12/01/20         4,969         4,846         4,869   

Pearl Merger Sub, LLC (PetVet)(3)

   Health Care Facilities      5.50     12/17/20         5,486         5,378         5,377   

QBS Holding Company, Inc. (Quorum)(3)

   Software      5.75     08/07/21         3,491         3,457         3,420   
             

 

 

    

 

 

 
              $ 31,973       $ 32,072   
             

 

 

    

 

 

 

 

(1) Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of March 31, 2015.
(2) Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described elsewhere herein.
(3) The Company also holds a portion of this position on its balance sheet.

 

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Below is certain summarized financial information for FLLP as of March 31, 2015 and for the period February 13, 2015 (commencement of operations) through March 31, 2015:

 

Selected Balance Sheet Information (in thousands):

   As of March 31, 2015  

Investments, at fair value

   $ 32,072   

Cash and other assets

     703   
  

 

 

 

Total assets

   $ 32,775   
  

 

 

 

Debt outstanding

   $ —     

Distributions payable

     121   

Accrued expenses

     61   
  

 

 

 

Total liabilities

   $ 182   
  

 

 

 

Members’ equity

   $ 32,593   
  

 

 

 

Total liabilities and members’ equity

   $ 32,775   
  

 

 

 

 

Selected Statement of Operations Information (in thousands):

   For the Period
February 13, 2015
(commencement of
operations) through

March 31, 2015
 

Interest Income

   $ 184   
  

 

 

 

Service fees

   $ 2   

Interest and other credit facility expenses*

     1,366   

Other general and administrative expenses

     11   
  

 

 

 

Total expenses

     1,379   
  

 

 

 

Net investment income (loss)

   $ (1,195
  

 

 

 

Net change in unrealized gain on investments

     99   
  

 

 

 

Net income (loss)

   $ (1,096
  

 

 

 

 

* FLLP made an irrevocable election to apply the fair value option of accounting to the FLLP Facility, in accordance with ASC 825-10. As such, all expenses related to the establishment of the FLLP Facility were expensed in the current period. This amount totaled $1,316.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.

Valuation of Portfolio Investments

We conduct the valuation of our assets, pursuant to which our net asset value is determined, at all times consistent with GAAP, and the 1940 Act. Our valuation procedures are set forth in more detail below:

The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on a quarterly basis, or more frequently if required. Investments for which

 

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market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company’s board of directors (the “Board”).

Investments for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology or provide a valuation or methodology that, in the judgment of the Investment Adviser or the Board does not represent fair value, each shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default; (iv) the Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm.

The recommendation of fair value generally considers the following factors among others, as relevant: applicable market yields; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flow; the markets in which the issuer does business; and comparisons to publicly traded securities, among others.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. 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 the 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.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the three months ended March 31, 2015, there has been no change to the Company’s valuation techniques and the nature of the related inputs considered in the valuation process.

 

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Accounting Standards Codification (“ASC”) Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.

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

Valuation of Credit Facility

The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10. We believe accounting for the Credit Facility at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility.

Revenue Recognition

The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Investments that are expected to pay regularly scheduled interest and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividend cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest/dividend cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining interest or dividend obligations. Interest or dividend cash payments received on investments may be recognized as income or applied to principal depending upon management’s judgment. Some of our investments may have contractual PIK interest or dividends. PIK interest and dividends computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, the Company capitalizes the accrued interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes due at the maturity of the investment or upon the investment being called by the issuer. At the point the Company believes PIK is not expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends is reversed from the related receivable through interest or dividend income, respectively. The Company does not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if the Company again believes that PIK is expected to be realized. Loan origination fees, original issue discount, and market discounts are capitalized and amortized into income using the interest method or straight-line, as applicable. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and other investments as interest income when we receive such amounts. Capital structuring fees are recorded as other income when earned.

The typically higher yields and interest rates on PIK securities, to the extent we invested, reflects the payment deferral and increased credit risk associated with such instruments and that such investments may

 

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represent a significantly higher credit risk than coupon loans. PIK securities may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the deferral of PIK interest also increases the loan-to-value ratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Investment Adviser based on non-cash accruals that ultimately may not be realized, but the Investment Adviser will be under no obligation to reimburse the Company for these fees. For the three months ended March 31, 2015, capitalized PIK income totaled less than $0.1 million.

Net Realized Gain or Loss and Net Change in Unrealized Gain or Loss

We generally measure realized gain or loss by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized.

Income Taxes

Solar Senior Capital, a U.S. corporation, has elected to be treated as a RIC under Subchapter M of the Code, as amended. In order to qualify as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income. As of March 31, 2015, the accrual for excise tax was $0.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-02, Consolidation (Topic 810)—Amendments to the Consolidation Analysis. The update changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Public companies are required to apply ASU 2015-02 for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company is currently evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements and disclosures.

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest—Imputation of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015—03 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company is currently evaluating the impact of the adoption of ASU 2015-03 on its consolidated financial statements and disclosures.

RESULTS OF OPERATIONS

Results comparisons are for the three months ended March 31, 2015 and March 31, 2014:

Investment Income

For the three months ended March 31, 2015 and 2014, gross investment income totaled $6.1 million and $5.7 million, respectively. The increase in gross investment income year over year was primarily due to net portfolio growth.

 

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Expenses

Net expenses totaled $2.3 million and $1.9 million, respectively, for the three months ended March 31, 2015 and 2014, of which $0.9 million and $0.9 million, respectively, were management and net performance-based incentive fees and $0.8 million and $0.4 million, respectively, were interest and other credit facility expenses. Administrative services and other general and administrative expenses totaled $0.6 million and $0.5 million, respectively, for the three months ended March 31, 2015 and 2014. Expenses generally consist of management fees, performance-based incentive fees, administrative services expenses, insurance, legal expenses, directors’ expenses, audit and tax expenses, transfer agent fees and expenses, and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The increase in total expenses for the three months ended March 31, 2015 as compared to the year ago period was primarily due to increased interest expense on higher average borrowings and higher management fees on a comparatively larger portfolio.

Net Investment Income

The Company’s net investment income totaled $3.9 million and $3.9 million, or $0.34 and $0.33, per average share, respectively, for the three months ended March 31, 2015 and 2014.

Net Realized Gain (Loss)

The Company had investment sales and prepayments totaling approximately $49.8 million and $22.5 million, respectively, for the three months ended March 31, 2015 and 2014. Net realized gains (losses) over the same periods were $0.0 million and ($0.8) million, respectively. Net realized gains for the three months ended March 31, 2015 were primarily related to the sale of certain investments. Net realized losses for the three months ended March 31, 2014 were primarily related to the sale of our investment in SLT Environmental, Inc.

Net Change in Unrealized Gain

For the three months ended March 31, 2015 and 2014, net change in unrealized gain on the Company’s assets and liabilities totaled $0.2 million and $0.9 million, respectively. Net unrealized gain for the three months ended March 31, 2015 is primarily due to appreciation in the value of our investments in Gemino Healthcare Finance LLC, IPC Systems, Inc. and Blue Coat Systems, Inc., among others, partially offset by depreciation in First Lien Loan Program LLC and Engineering Solutions & Products, LLC., among others. Net unrealized gain for the three months ended March 31, 2014 was primarily due to the reversal of unrealized depreciation on our investment in SLT Environmental, Inc.

Net Increase in Net Assets From Operations

For the three months ended March 31, 2015 and 2014, the Company had a net increase in net assets resulting from operations of $4.1 million and $4.0 million, respectively. For the same periods, earnings per average share were $0.35 and $0.35, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s liquidity and capital resources are generally available through its Credit Facility, through periodic follow-on equity offerings, as well as from cash flows from operations, investment sales and pre-payments of investments. At March 31, 2015, the Company had $140.9 million in borrowings outstanding on its Credit Facility and $34.1 million of unused capacity, subject to borrowing base limits.

On January 18, 2013, the Company closed a follow-on public equity offering of 2.0 million shares of common stock at $18.85 per share raising approximately $37.2 million in net proceeds. In the future, the Company may raise additional equity or debt capital, among other considerations. The primary uses of funds will

 

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be investments in portfolio companies, reductions in debt outstanding and other general corporate purposes. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.

We currently expect that our liquidity needs will be met with cash flows from operations, borrowings under our Credit Facility, including its accordion feature, as well as from other available financing activities.

Cash Equivalents

We deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. We held approximately $35 million in cash equivalents as of March 31, 2015.

Debt

Senior Secured Revolving Credit Facility—On August 26, 2011, the Company established the SUNS SPV which entered into the Credit Facility with Citigroup Global Markets Inc. acting as administrative agent. The Credit Facility was scheduled to mature on August 26, 2016 and generally bore interest at a rate of LIBOR plus 2.25%. The Credit Facility can also be expanded up to $600 million and is secured by all of the assets held by the SUNS SPV. Under the terms of the Credit Facility, Solar Senior and the SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature.

On November 7, 2012, we amended our Credit Facility. As a result of the amendment, the stated interest rate on the Credit Facility was reduced to LIBOR plus 2.00% from LIBOR plus 2.25%, and the Credit Facility continues to have no LIBOR floor requirement. The amendment also provided us greater investment flexibility and extended the final maturity date to November 6, 2017. On February 26, 2014, the Company utilized the Credit Facility’s delayed draw feature, expanding immediately available capital from $150.0 million to $200.0 million, subject to borrowing base limitations.

On June 30, 2014, the Company again amended the Credit Facility. As a result of this amendment, commitments under the Credit Facility were reduced by $25.0 million to $175.0 million and may be expanded up to $600.0 million under its accordion feature. This amendment to the Credit Facility also added greater investment flexibility and extends the final maturity date to June 28, 2019. The stated interest rate remains LIBOR plus 2.00% with no LIBOR floor requirement. At March 31, 2015, the Company was in compliance with all financial and operational covenants required by the Credit Facility.

Contractual Obligations

 

     Payments due by Period as of March 31, 2015
(dollars in millions)
 
     Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Senior Secured Revolving Credit Facility(1)

   $ 140.9       $ —        $ —        $ 140.9       $ —    

 

(1) At March 31, 2015, $34.1 million of capacity remained unused.

 

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Information about our senior securities is shown in the following table as of each year ended December 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total Amount
Outstanding (dollars
in thousands)(1)
     Asset
Coverage
Per  Unit(2)
     Involuntary
Liquidating
Preference
Per Unit(3)
     Average
Market Value
Per Unit(4)
 

Revolving Credit Facility

           

Fiscal 2015 (through March 31, 2015)

   $ 140,900       $ 2,445       $ —           N/A   

Fiscal 2014

     143,200         2,421         —           N/A   

Fiscal 2013

     61,400         4,388         —           N/A   

Fiscal 2012

     39,100         5,453         —           N/A   

Fiscal 2011

     8,600         21,051         —           N/A   

 

(1) Total amount of each class of senior securities outstanding at the end of the period presented.
(2) The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit was divided based on the amount outstanding at the end of the period for each. As of March 31, 2015, asset coverage was 244.5%.
(3) The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
(4) Not applicable, we do not have senior securities that are registered for public trading.

We have also entered into two contracts under which we have future commitments: the Investment Advisory and Management Agreement, pursuant to which Solar Capital Partners, LLC has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which Solar Capital Management, LLC (the “Administrator”) has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the Investment Advisory and Management Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chief compliance officer and their respective staffs. Either party may terminate each of the investment advisory and management agreement and administration agreement without penalty upon 60 days’ written notice to the other. See note 3 to our Consolidated Financial Statements.

On September 10, 2014, FLLP entered into a servicing agreement with the Company. FLLP engaged and retained the Company to provide certain administrative services relating to the facilities, supplies and necessary ongoing overhead support services for the operation of FLLP’s ongoing business affairs in exchange for a fee. Either party may terminate this agreement upon 30 days’ written notice to the other.

 

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Table of Contents

Off-Balance Sheet Arrangements

The Company had unfunded debt and equity commitments to various revolving and delayed draw loans, as well as to Gemino. The total amount of these unfunded commitments as of March 31, 2015 and December 31, 2014 is $6.7 million and $6.7 million, respectively, comprised of the following:

 

     March 31,
2015
     December 31,
2014
 

(in millions)

     

Gemino Healthcare Finance, LLC*

   $ 5.0       $ 5.0   

Engineering Solutions & Products, LLC

     1.7        1.7   
  

 

 

    

 

 

 

Total Commitments

   $ 6.7       $ 6.7   
  

 

 

    

 

 

 

 

* The Company controls the funding of this commitment and may cancel it at its discretion.

As of March 31, 2015 and December 31, 2014, the Company had sufficient cash available and/or liquid securities available to fund these commitments.

In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our consolidated Statement of Assets and Liabilities.

 

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Distributions

The following table reflects the cash distributions per share on our common stock for the two most recent fiscal years and the current fiscal year to date:

 

<

Date Declared

   Record Date    Payment Date    Amount  

Fiscal 2015

        

May 5, 2015

   May 21, 2015    June 2, 2015    $ 0.1175   

April 9, 2015

   April 23, 2015    May 1, 2015      0.1175   

February 25, 2015

   March 19, 2015    April 2, 2015      0.1175   

February 3, 2015

   February 19, 2015    February 27, 2015      0.1175   

January 8, 2015

   January 22, 2015    January 30, 2015      0.1175   
        

 

 

 

YTD Total (2015)

         $ 0.5875   
        

 

 

 

Fiscal 2014

        

December 4, 2014

   December 18, 2014    January 5, 2015    $ 0.1175   

November 4, 2014

   November 20, 2014    December 2, 2014      0.1175   

October 8, 2014

   October 23, 2014    October 31, 2014      0.1175   

September 9, 2014

   September 25, 2014    October 2, 2014      0.1175   

August 4, 2014

   August 21, 2014    September 3, 2014      0.1175   

July 9, 2014

   July 24, 2014    August 1, 2014      0.1175   

June 6, 2014

   June 19, 2014    July 1, 2014      0.1175   

May 5, 2014

   May 22, 2014    May 30, 2014      0.1175   

April 8, 2014

   April 24, 2014    May 1, 2014      0.1175   

February 25, 2014

   March 20, 2014    April 1, 2014      0.1175   

February 6, 2014

   February 20, 2014    February 28, 2014      0.1175   

January 9, 2014

   January 23, 2014    January 31, 2014      0.1175   
        

 

 

 

Total (2014)

         $ 1.41   
        

 

 

 

Fiscal 2013

        

December 5, 2013

   December 19, 2013    January 3, 2014    $ 0.1175   

October 30, 2013

   November 21, 2013    December 3, 2013      0.1175   

October 8, 2013

   October 24, 2013    November 1, 2013      0.1175   

September 5, 2013

   September 19, 2013    October 2, 2013      0.1175   

July 31, 2013

   August 22, 2013    September 4, 2013      0.1175   

July 9, 2013

   July 25, 2013    August 1, 2013      0.1175   

June 5, 2013

   June 20, 2013    July 2, 2013      0.1175   

May 7, 2013

   May 23, 2013    June 3, 2013      0.1175   

April 8, 2013

   April 25, 2013    May 1, 2013      0.1175   

February 25, 2013

   March 21, 2013    April 2, 2013      0.1175   

February 5, 2013

   February 21, 2013    March 1, 2013      0.1175