Attached files

file filename
EX-31.2 - CERTIFICATION - Corporate Capital Trust, Inc.d924389dex312.htm
EX-31.1 - CERTIFICATION - Corporate Capital Trust, Inc.d924389dex311.htm
EX-32.1 - CERTIFICATION - Corporate Capital Trust, Inc.d924389dex321.htm
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 quarterly period ended March 31, 2015

OR

 

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

Commission file number: 814-00827

CORPORATE CAPITAL TRUST, INC.

(Exact name of registrant as specified in its charter)

 

Maryland   27-2857503

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

CNL Center at City Commons

450 South Orange Avenue

Orlando, Florida

  32801
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (866) 745-3797

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

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

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

 

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

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

The number of shares of common stock of the registrant outstanding as of May 12, 2015 was 246,073,757.

 

 

 


Table of Contents

CORPORATE CAPITAL TRUST, INC.

INDEX

 

         PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements:   
 

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

     2   
 

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

     3   
 

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

     4   
 

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

     5   
 

Condensed Consolidated Schedules of Investments as of March 31, 2015 (unaudited) and December 31, 2014

     6   
 

Notes to Condensed Consolidated Financial Statements (unaudited)

     24   

Item 2.

 

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

     52   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     72   

Item 4.

 

Controls and Procedures

     74   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     75   

Item 1A.

 

Risk Factors

     75   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     76   

Item 3.

 

Defaults Upon Senior Securities

     76   

Item 4.

 

Mine Safety Disclosures

     76   

Item 5.

 

Other Information

     76   

Item 6.

 

Exhibits

     76   

Signatures

     77   

Exhibit Index

     78   


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share amounts)

 

     March 31, 2015     December 31, 2014  
     (unaudited)        

Assets

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (amortized cost of $2,791,817 and $2,569,096, respectively) - including $245,207 and $258,344, respectively, of investments pledged to creditors (Note 10)

   $ 2,700,393      $ 2,512,428   

Non-controlled, affiliated investments (amortized cost of $227,789 and $213,925, respectively)

     201,182        203,272   

Controlled, affiliated investments (amortized cost of $55,500 and $5,500, respectively)

     55,600        5,500   
  

 

 

   

 

 

 

Total investments, at fair value (amortized cost of $3,075,106 and $2,788,521, respectively)

  2,957,175      2,721,200   

Cash

  45,878      46,388   

Cash denominated in foreign currency (cost of $1,486 and $618, respectively)

  1,408      589   

Restricted cash

  9,076      —     

Collateral on deposit with custodian

  124,640      115,700   

Dividends and interest receivable

  45,128      32,523   

Receivable for investments sold

  8,131      —     

Principal receivable

  10,800      1,420   

Unrealized appreciation on derivative instruments

  61,585      40,903   

Deferred offering expense

  1,969      2,612   

Prepaid and other deferred expenses

  10,122      10,385   
  

 

 

   

 

 

 

Total assets

  3,275,912      2,971,720   
  

 

 

   

 

 

 

Liabilities

Revolving credit facilities

  465,000      377,450   

Term loan payable, net of discount

  394,322      395,228   

Payable for investments purchased

  74,867      34,888   

Shareholders’ distributions payable

  18,081      —     

Accrued performance-based incentive fees

  8,011      5,108   

Accrued investment advisory fees

  5,441      4,964   

Accrued directors’ fees

  51      57   

Unrealized depreciation on derivative instruments

  —        3,903   

Other accrued expenses and liabilities

  3,075      4,301   
  

 

 

   

 

 

 

Total liabilities

  968,848      825,899   

Commitments and contingencies ($189,206 as of March 31, 2015, Note 11)

  

 

 

   

 

 

 

Net Assets

$ 2,307,064    $ 2,145,821   
  

 

 

   

 

 

 

Components of Net Assets

Common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 236,833,241 and 219,131,729 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

$ 237    $ 219   

Paid-in capital in excess of par value

  2,341,825      2,166,554   

Undistributed net investment income

  9,099      9,099   

Undistributed net realized gains

  12,417      335   

Accumulated net unrealized depreciation on investments, derivative instruments and foreign currency translation

  (56,514   (30,386
  

 

 

   

 

 

 

Net assets

$ 2,307,064    $ 2,145,821   
  

 

 

   

 

 

 

Net asset value per share

$ 9.74    $ 9.79   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except share and per share amounts)

 

     Three Months Ended March 31,  
     2015     2014  

Investment income

    

Interest income:

    

Non-controlled, non-affiliated investments (net of tax withholding, $90 and $—, respectively)

   $ 56,653      $ 42,578   

Non-controlled, affiliated investments

     740        —     
  

 

 

   

 

 

 

Total interest income

  57,393      42,578   
  

 

 

   

 

 

 

Payment-in-kind interest income:

Non-controlled, non-affiliated investments

  3,307      7,075   

Non-controlled, affiliated investments

  3,501      —     
  

 

 

   

 

 

 

Total payment-in-kind interest income

  6,808      7,075   
  

 

 

   

 

 

 

Fee income:

Non-controlled, non-affiliated investments

  9,601      276   
  

 

 

   

 

 

 

Total fee income

  9,601      276   
  

 

 

   

 

 

 

Dividend and other income:

Non-controlled, non-affiliated investments

  41      4   

Non-controlled, affiliated investments

  111      —     
  

 

 

   

 

 

 

Total dividend and other income

  152      4   
  

 

 

   

 

 

 

Total investment income

  73,954      49,933   
  

 

 

   

 

 

 

Operating expenses

Investment advisory fees

  15,135      10,681   

Performance-based incentive fees

  7,983      9,786   

Interest expense

  7,798      4,481   

Offering expense

  1,443      1,875   

Administrative services

  714      684   

Professional services

  538      519   

Custodian and accounting fees

  270      196   

Director fees and expenses

  126      167   

Other

  735      833   
  

 

 

   

 

 

 

Total operating expenses

  34,742      29,222   
  

 

 

   

 

 

 

Net investment income before taxes

  39,212      20,711   

Income tax expense

  22      —     
  

 

 

   

 

 

 

Net investment income

  39,190      20,711   
  

 

 

   

 

 

 

Net realized and unrealized gains (losses):

Net realized gains (losses) on:

Non-controlled, non-affiliated investments

  (6,322   12,198   

Derivative instruments

  26,388      (191

Foreign currency transactions

  (1,344   (1,022
  

 

 

   

 

 

 

Net realized gains

  18,722      10,985   
  

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on:

Non-controlled, non-affiliated investments

  (34,756   14,582   

Non-controlled, affiliated investments

  (15,954   —     

Controlled, affiliated investments

  100      —     

Derivative instruments

  24,585      (173

Foreign currency translation

  (103   (1,613
  

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation)

  (26,128   12,796   
  

 

 

   

 

 

 

Net realized and unrealized gains (losses)

  (7,406   23,781   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

$ 31,784    $ 44,492   
  

 

 

   

 

 

 

Net investment income per share

$ 0.17    $ 0.14   
  

 

 

   

 

 

 

Diluted and basic earnings per share

$ 0.14    $ 0.30   
  

 

 

   

 

 

 

Weighted average number of shares of common stock outstanding (basic and diluted)

  227,625,054      149,009,440   
  

 

 

   

 

 

 

Distributions declared per share

$ 0.20    $ 0.18   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except share amounts)

 

     Three Months Ended March 31,  
     2015     2014  

Operations

    

Net investment income

   $ 39,190      $ 20,711   

Net realized gains on investments, derivative instruments and foreign currency transactions

     18,722        10,985   

Net change in unrealized appreciation (depreciation) on investments, derivative instruments and foreign currency translation

     (26,128     12,796   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

  31,784      44,492   
  

 

 

   

 

 

 

Distributions to shareholders from

Net investment income

  (39,190   (15,778

Net realized gains

  (6,640   (10,985
  

 

 

   

 

 

 

Net decrease in net assets resulting from shareholders distributions

  (45,830   (26,763
  

 

 

   

 

 

 

Capital share transactions

Issuance of shares of common stock

  166,445      111,167   

Reinvestment of shareholders distributions

  14,296      21,311   

Repurchase of shares of common stock

  (5,452   (3,233
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

  175,289      129,245   
  

 

 

   

 

 

 

Total increase in net assets

  161,243      146,974   

Net assets at beginning of period

  2,145,821      1,430,434   
  

 

 

   

 

 

 

Net assets at end of period

$ 2,307,064    $ 1,577,408   
  

 

 

   

 

 

 

Capital share activity

Shares issued from subscriptions

  16,812,623      10,930,795   

Shares issued from reinvestment of distributions

  1,444,063      2,095,496   

Shares repurchased

  (555,174   (323,324
  

 

 

   

 

 

 

Net increase in shares outstanding

  17,701,512      12,702,967   
  

 

 

   

 

 

 

Undistributed (distributions in excess of) net investment income at end of period

$ 9,099    $ (963
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Three Months Ended March 31,  
     2015     2014  

Operating Activities:

    

Net increase in net assets resulting from operations

   $ 31,784      $ 44,492   

Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:

    

Purchases of investments

     (407,247     (286,051

Increase (decrease) in payable for investments purchased

     39,979        (18,531

Payment-in-kind interest capitalized

     (1,823     (1,010

Proceeds from sales of investments

     33,346        304,509   

Proceeds from principal payments

     103,175        122,900   

Net realized loss (gain) on investments

     6,322        (12,198

Net change in unrealized (appreciation) depreciation on investments

     50,610        (14,582

Net change in unrealized (appreciation) depreciation on derivative instruments

     (24,585     173   

Net change in unrealized depreciation on foreign currency translation

     103        1,613   

Amortization of premium/discount, net

     (1,655     (1,285

Amortization of deferred financing costs

     807        518   

Accretion of discount on term loan payable

     94        —     

(Increase) decrease in short-term investments, net

     (18,703     17,295   

Increase in restricted cash

     (9,076     —     

(Increase) decrease in collateral on deposit with custodian

     (8,940     1,501   

Increase in dividends and interest receivable

     (12,660     (8,648

(Increase) decrease in receivable for investments sold

     (8,131     37,477   

Increase in principal receivable

     (9,380     (193

Increase in receivable from advisors

     —          (388

Decrease in other assets

     494        697   

Increase (decrease) in accrued investment advisory fees

     477        (291

Increase in accrued performance-based incentive fees

     2,903        2,179   

Decrease in other accrued expenses and liabilities

     (1,232     (742
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

  (233,338   189,435   
  

 

 

   

 

 

 

Financing Activities:

Proceeds from issuance of shares of common stock

  166,445      111,167   

Payments on repurchases of shares of common stock

  (5,452   (3,233

Distributions paid

  (13,453   (20,375

Repayments under term loan payable

  (1,000   —     

Borrowings under revolving credit facilities

  235,000      —     

Repayments of revolving credit facilities

  (147,450   (276,926

Deferred financing costs paid

  (395   (294
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

  233,695      (189,661
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

  (48   —     
  

 

 

   

 

 

 

Net increase (decrease) in cash

  309      (226

Cash and cash denominated in foreign currency, beginning of period

  46,977      86,205   
  

 

 

   

 

 

 

Cash and cash denominated in foreign currency, end of period

$ 47,286    $ 85,979   
  

 

 

   

 

 

 

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

Cash paid for interest

$ 6,827    $ 4,274   

Distributions reinvested

$ 14,296    $ 21,311   

Distributions payable

$ 18,081    $ —     

See notes to condensed consolidated financial statements.

 

5


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited)

As of March 31, 2015

(in thousands, except share amounts)

 

Company (a)(b)    Footnotes   Industry   Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
            Cost (d)     Fair Value  

Senior Secured Loans—First Lien—55.4%

  

       

ABILITY Network, Inc.

   (e)   Health Care Equipment & Services     L + 500        1.00     5/14/2021      $         20,114      $         19,914      $         20,177   

Algeco/Scotsman (LU)

   (f)(g)(h)(i)   Consumer Durables & Apparel     15.75% PIK                5/1/2018        30,859        30,684        26,611   

AltEn, LLC

   (h)(j)   Energy     L + 900        1.00     9/12/2018        29,610        26,972        25,435   

American Freight, Inc.

   (e)(h)   Retailing     L + 625        1.00     10/31/2020        32,608        32,455        32,717   

Amtek Global Technology Pte. Ltd. (SG)

   (g)(h)(i)(k)(EUR)   Automobiles & Components     E + 800        1.00     11/10/2019      62,849        75,839        65,783   

Applied Systems, Inc.

   (e)(f)   Software & Services     L + 325        1.00     1/25/2021      $ 653        648        654   

Aspen Dental Management, Inc.

   (e)(f)   Health Care Equipment & Services     L + 550        1.50     10/6/2016        5,976        5,947        5,991   

BeyondTrust Software, Inc.

   (e)(h)   Software & Services     L + 700        1.00     9/25/2019        12,980        12,847        12,871   

BRG Sports, Inc.

   (j)   Consumer Durables & Apparel     L + 550        1.00     4/15/2021        4,006        3,934        4,071   

Caesars Entertainment Operating Co., Inc.

   (e)(f)(i)(l)   Consumer Services     L + 725                3/1/2017        10,800        10,163        9,965   

California Pizza Kitchen, Inc.

   (e)(f)   Food & Staples Retailing     L + 425        1.00     3/29/2018        18,508        17,801        18,100   

Charlotte Russe, Inc.

   (e)   Retailing     L + 550        1.25     5/22/2019        4,703        4,678        4,606   
     (e)         L + 550        1.25     5/22/2019        19,212        19,035        18,780   

CityCenter Holdings, LLC

   (e)(f)   Real Estate     L + 325        1.00     10/16/2020        5,919        5,868        5,948   

Coyote Logistics, LLC

   (e)(m)   Transportation     L + 525        1.00     3/24/2022        1,655        1,639        1,668   

David’s Bridal, Inc.

   (e)(f)   Retailing     L + 400        1.25     10/11/2019        9,950        9,678        9,684   
     (e)         L + 400        1.25     10/11/2019        1,266        1,245        1,232   

See notes to condensed consolidated financial statements.

 

6


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

Company (a)(b)    Footnotes   Industry   Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
            Cost (d)     Fair Value  

Distribution International, Inc.

   (e)(f)   Retailing     L + 500        1.00%        12/10/2021      $         6,408      $         6,345      $         6,448   

Emerald Performance Materials, LLC

   (f)(j)   Materials     L + 350        1.00%        7/30/2021        652        649        653   

Exemplis Corp.

   (e)(h)   Commercial & Professional Services     L + 700        1.00%        3/23/2022        67,777        67,101        67,099   

Football Association of Ireland (IE)

   (g)(h)(i)(EUR)   Consumer Durables & Apparel     6.4%                12/20/2020      43,615        58,456        47,241   

Greenway Medical Technologies

   (e)   Health Care Equipment & Services     L + 500        1.00%        11/4/2020      $ 1,759        1,751        1,765   

Greystone & Co., Inc.

   (e)(h)   Diversified Financials     L + 800        1.00%        3/26/2021        33,834        33,305        33,000   

Grocery Outlet, Inc.

   (e)(f)   Food & Staples Retailing     L + 475        1.00%        10/21/2021        4,148        4,163        4,171   

Gymboree Corp.

   (e)   Retailing     L + 350        1.50%        2/23/2018        14,197        12,716        10,854   

Hanson Building Products North America

   (i)(j)   Materials     L + 550        1.00%        3/13/2022        12,190        11,886        12,190   

Harbor Freight Tools USA, Inc.

   (e)(f)   Capital Goods     L + 375        1.00%        7/26/2019        2,955        2,961        2,979   

Hillman Group, Inc.

   (e)(f)   Capital Goods     L + 350        1.00%        6/30/2021        836        837        844   

iPayment, Inc.

   (e)(f)   Software & Services     L + 525        1.50%        5/8/2017        36,163        35,926        35,394   

J. Jill

   (e)(h)   Retailing     L + 850        1.50%        4/29/2017        5,032        5,032        5,032   

Jacuzzi Brands, Inc.

   (e)(h)   Capital Goods     L + 650        1.25%        7/3/2019        19,751        19,447        19,702   

Jacuzzi Brands, Inc. (LU)

   (e)(g)(h)   Capital Goods     L + 650        1.25%        7/3/2019        20,118        19,809        20,068   

KeyPoint Government Solutions, Inc.

   (e)(h)   Capital Goods     L + 650        1.25%        11/13/2017        35,453        35,039        35,807   

Keystone Australia Holdings, Pty. Ltd. (AU)

   (g)(h)(i)(AUD)   Consumer Services     15.00%                8/7/2019      A$ 36,858      $         32,319      $         26,591   

Koosharem, LLC

   (e)(f)   Commercial & Professional Services     L + 650        1.00%        5/15/2020      $ 42,968        42,574        42,646   

Kurt Geiger Ltd. (UK)

   (g)(h)(i)(n)(GBP)   Consumer Durables & Apparel    
 
10.00%, 1.00%
PIK
  
  
    1.00%        4/8/2019      £ 46,862        77,124        69,926   

Marshall Retail Group, LLC

   (e)(h)   Retailing     L + 600        1.00%        8/25/2020      $         16,762        16,596        16,038   

MCS AMS Sub-Holdings, LLC (e)

       Commercial & Professional Services     L + 600        1.00%        10/15/2019        44,699        43,652        40,006   

MSX International, Inc.

   (e)   Software & Services     L + 500        1.00%        8/18/2020        8,646        8,245        8,700   

Neiman Marcus Group, LLC

   (e)(f)   Retailing     L + 325        1.00%        10/25/2020        4,964        4,892        4,954   

New Enterprise Stone & Lime Co., Inc.

   (e)(h)   Capital Goods     L + 700        1.00%        2/12/2019        56,298        56,298        56,429   

Nine West Holdings, Inc.

   (e)(f)   Consumer Durables & Apparel     L + 375        1.00%        10/8/2019        13,520        13,292        12,832   

Pacific Union Financial, LLC

   (h)(j)   Diversified Financials     L + 800        1.00%        5/31/2019        46,378        45,734        43,827   

Petroplex Acidizing, Inc.

   (e)(h)   Energy     L + 725        1.00%        12/4/2019        36,347        35,831        35,663   

Proserv Acquisition, LLC

   (e)(i)   Energy     L + 537.5        1.00%        2/24/2022        27,530        21,749        22,437   

Proserv Acquisition, LLC (UK)

   (e)(g)(i)(m)   Energy     L + 537.5        1.00%        2/24/2022        16,159        12,766        13,170   

RedPrairie Corp.

   (e)(f)   Software & Services     L + 500        1.00%        12/21/2018        26,477        25,439        26,127   

Riverbed Technology, Inc.

   (e)(f)(m)   Technology Hardware & Equipment     L + 500        1.00%        2/25/2022        7,730        7,691        7,815   

 

See notes to condensed consolidated financial statements.

 

7


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

Company (a)(b)   Footnotes   Industry   Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
           Cost (d)            Fair Value  

Surgery Center Holdings, Inc.

  (e)(f)   Health Care Equipment & Services     L + 425        1.00     11/3/2020      $ 14,797      $          14,728      $          14,871   

Sutherland Global Services, Inc.

  (e)(f)(i)   Software & Services     L + 500        1.00     4/23/2021        12,700          12,406          12,785   
    (e)(i)         L + 500        1.00     4/23/2021        2,956                2,888                2,976   

TIBCO Software, Inc.

  (f)(j)(m)   Software & Services     L + 550        1.00     12/4/2020        52,157                50,363                52,255   

Towergate Finance PLC (UK)

  (e)(g)(i)(o)(GBP)   Insurance     L + 450                11/15/2017      £ 475                665                666   

Travelport, LLC (LU)

  (e)(f)(g)(i)   Software & Services     L + 475        1.00     9/2/2021      $ 19,702                19,471                19,915   

Tweddle Group, Inc.

  (e)(h)   Automobiles & Components     L + 675        1.00     4/7/2020        44,662                43,676                44,223   

Varsity Brands, Inc.

  (e)(f)   Consumer Durables & Apparel     L + 500        1.00     12/10/2021        5,781                5,725                5,851   

Waste Pro USA, Inc.

  (e)(h)   Transportation     L + 750        1.00     10/15/2020        36,589                36,589                36,399   

Willbros Group, Inc.

  (h)(j)   Energy     L + 975        1.25     12/15/2019        56,753                56,753                53,518   

Wilton Brands, LLC

  (e)(f)   Materials     L + 625        1.25     8/30/2018        5,068                5,001                4,865   

Z Gallerie, Inc.

  (e)(h)   Retailing     L + 650        1.00     10/8/2020        33,254                32,895                33,496   

Zayo Group, LLC

  (e)(f)(i)   Telecommunication Services     L + 300        1.00     7/2/2019        1,592                1,573                1,596   

Total Senior Secured Loans - First Lien

              $              1,321,705      $              1,278,117   
               

 

 

     

 

 

 

Senior Secured Loans - Second Lien—33.8%

                                                   

American Casino & Entertainment Properties, LLC

(e) Consumer Services   L + 1000      1.25   1/3/2020    $ 6,090    $        6,280    $        6,333   

Angelica Corp.

(e)(h) Health Care Equipment & Services   L + 875      1.25   7/15/2019      50,869            50,868            45,925   

Applied Systems, Inc.

(e)(f) Software & Services   L + 650      1.00   1/24/2022    $ 33,191    $        33,515    $        33,201   

AssuredPartners, Inc.

(e) Insurance   L + 675      1.00   4/2/2022      7,097            7,092            6,848   

Brake Bros Ltd. (UK)

(f)(g)(i)(n)(o)
(GBP)
Food & Staples Retailing  
 
L + 325, 3.00
 

PIK 
        3/12/2017    £ 8,979            12,968            13,069   

BRG Sports, Inc.

(j) Consumer Durables & Apparel   L + 925      1.00   4/15/2022    $ 23,855            23,665            24,094   

Catalina Marketing Corp.

(j) Media   L + 675      1.00   4/11/2022      6,020            5,978            4,680   

CHG Companies, Inc.

(e)(f) Health Care Equipment & Services   L + 775      1.25   11/19/2020      13,457            13,370            13,513   

CTI Foods Holding Co., LLC

(e) Food, Beverage & Tobacco   L + 725      1.00   6/28/2021      23,219            22,926            22,929   

Emerald Performance Materials, LLC

(j) Materials   L + 675      1.00   8/1/2022      2,041            2,031            2,010   

Excelitas Technologies Corp.

(e)(h) Technology Hardware & Equipment   L + 1125      1.00   4/29/2021      109,406            109,406            108,270   

Greenway Medical Technologies

(e) Health Care Equipment & Services   L + 825      1.00   11/4/2021      26,396            26,046            25,934   

Grocery Outlet, Inc.

(e) Food & Staples Retailing   L + 825      1.00   10/21/2022      49,470            47,964            48,975   

Gruppo Argenta S.p.A.

(g)(h)(i)(n)(EUR) Retailing   12.00 % PIK          1/31/2019    3,287            3,469            3,097   

Gruppo Argenta S.p.A. (LU)

(g)(h)(i)(n)(EUR)     12.00 % PIK          1/31/2019      24,142            27,012            22,748   

Gypsum Management & Supply, Inc.

(e) Capital Goods   L + 675      1.00   4/1/2022    $ 13,207            13,088            12,976   

Integra Telecom Holdings, Inc.

(e)(f) Telecommunication Services   L + 850      1.25   2/21/2020      3,000            3,057            2,991   

iParadigms Holdings, LLC

(e) Software & Services   L + 725      1.00   7/29/2022      23,349            23,184            22,999   

 

See notes to condensed consolidated financial statements.

 

8


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 


Company (a)(b)
  Footnotes   Industry   Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
          
Cost (d)
          
Fair Value
 

Learfield Communications, Inc.

  (e)(m)   Media     L + 775        1.00     10/8/2021      $ 13,488      $          13,586      $          13,496   

Lightower Fiber, LLC

  (e)   Telecommunication Services     L + 675        1.25     4/12/2021        5,282                5,316                5,269   

Maxim Crane, LP

  (e)(f)   Capital Goods     L + 925        1.00     11/26/2018        5,168                5,284                5,091   

Misys Ltd. (UK)

  (f)(g)(i)   Software & Services     12%                6/12/2019        3,000                3,304                3,278   

NewWave Communications

  (e)   Media     L + 800        1.00     10/30/2020        13,712                13,674                13,507   

P2 Energy Solutions, Inc.

  (e)(i)   Software & Services     L + 800        1.00     4/30/2021        9,283          9,202          8,587   
    (e)(i)         L + 800        1.00     4/30/2021        74,312                72,188                68,738   

Polyconcept Finance B.V. (NL)

  (g)(h)(i)(j)   Consumer Durables & Apparel     L + 875        1.25     6/28/2020        46,727                46,727                45,970   

Progressive Solutions

  (f)(j)   Health Care Equipment & Services     L + 850        1.00     10/22/2021        21,145                20,995                20,775   

RedPrairie Corp.

  (e)   Software & Services     L + 1000        1.25     12/21/2019        43,731                41,197                39,795   

Safety Technology Holdings, Inc.

  (e)(h)   Technology Hardware & Equipment     L + 825        1.00     6/2/2020        30,402                29,761                30,512   

SI Organization, Inc.

  (e)   Capital Goods     L + 800        1.00     5/23/2020        56,000                55,501                56,630   

Talbots, Inc.

  (e)   Retailing     L + 725        1.00     3/19/2021        15,074                14,979                14,509   

The TelX Group, Inc.

  (e)(f)   Telecommunication Services     L + 650        1.00     4/9/2021        11,696                11,681                11,594   

Websense, Inc.

  (e)(f)   Technology Hardware & Equipment     L + 725        1.00     12/24/2020        22,131                22,040                22,200   

Total Senior Secured Loans—Second Lien

              $              797,354      $              780,543   
               

 

 

     

 

 

 

Senior Secured Bonds—7.3%

                                                   

Altice International S.A.R.L. (LU)

(g)(i)(q)(r) Media   6.625%            2/15/2023    $ 5,046    $        5,046    $        5,197   

Artesyn Technologies, Inc.

(q)(r) Technology Hardware & Equipment   9.75%            10/15/2020      24,387            23,803            23,533   

Guitar Center, Inc.

(q)(r) Retailing   6.50%            4/15/2019      26,191            25,847            22,852   

Hot Topic, Inc.

(q)(r) Consumer Durables & Apparel   9.25%            6/15/2021      2,396            2,375            2,594   

iPayment, Inc.

(q)(r) Software & Services   9.50%            12/15/2019      8,597            8,597            8,038   

Louisiana Public Facilities Authority

(h)(q) Energy   11.50%      1/1/2020      50,580      49,330      50,313   
  (e)(h)(q)     L + 1000            1/1/2020      10,650            10,650            10,595   

New Enterprise Stone & Lime Co., Inc.

(n)(r) Capital Goods  
 
6.00%, 7.00%
PIK
  
  
        3/15/2018      11,220            11,291            12,062   

OAG Holdings, LLC

(h)(n) Energy  
 
8.00%, 2.00%
PIK
  
  
        12/20/2020      20,519            18,012            10,419   

Pinnacle Agriculture Holdings, LLC

(q)(r) Materials   9.00%            11/15/2020      1,267            1,295            1,280   

Ryerson, Inc.

(f) Materials   9.00%            10/15/2017      5,814            5,814            5,872   

SquareTwo Financial Corp.

(r) Banks   11.625%            4/1/2017      16,359            16,179            14,519   

Towergate Finance PLC (UK)

(e)(g)(i)(o)(q)(GBP) Insurance   L + 550            2/15/2018    £       1,100            1,382            1,583   

Total Senior Secured Bonds

$        179,621    $            168,857   
               

 

 

     

 

 

 

Total Senior Debt

$            2,298,680    $        2,227,517   
               

 

 

     

 

 

 

 

See notes to condensed consolidated financial statements.

 

9


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

Company (a)(b)   Footnotes   Industry   Interest Rate     Base Rate
Floor
  Maturity
Date
    No. Shares/
Principal
Amount (c)
           Cost (d)            Fair Value  

Subordinated Debt—20.3%

                                                                   

24 Hour Fitness Worldwide, Inc.

  (q)(r)   Consumer Services     8.00%            6/1/2022      $         7,192      $          6,648      $          6,149   

Cemex Materials, LLC

  (q)(r)   Materials     7.70%            7/21/2025        27,562                27,797                30,180   

Cequel Communications Holdings, LLC

  (q)(r)   Media     5.125%            12/15/2021        17,080                16,807                17,080   

Ceridian Corp.

  (r)   Commercial & Professional Services     11.00%            3/15/2021        9,605                10,294                9,941   

CHS/Community Health Systems, Inc.

  (i)(r)   Health Care Equipment & Services     6.875%            2/1/2022        114                114                121   

Datatel, Inc.

  (f)(q)   Software & Services     9.625%            12/1/2018        9,287                9,217                9,380   

Eagle Midco, Inc.

  (q)(r)   Software & Services     9.00%            6/15/2018        31,796                32,551                32,392   

Essar Steel Algoma, Inc. (CA)

  (g)(i)(n)(q)(r)   Materials     14.00% PIK            2/13/2020        4,732                4,031                3,170   

Exemplis Corp.

  (e)(h)   Commercial & Professional Services     L + 700            3/23/2020        25,000                25,000                25,000   

GCI, Inc.

    Telecommunication Services     8.625%          11/15/2019        53,119          55,793          55,576   
  (r)       6.75%          6/1/2021        2,430          2,423          2,460   
    (q)         6.875%            4/15/2025        28,024                27,781                28,234   

Global Closure SystemS (FR)

  (g)(h)(i)(n)(EUR)   Materials     13.00% PIK            11/15/2019      20,221                26,735                21,492   

Gruppo Argenta S.p.A. (LU)

  (g)(h)(i)(n)(EUR)   Retailing     15.00% PIK            11/11/2018        684                937                596   

Hilding Anders (SE)

  (g)(h)(i)(n)(EUR)   Consumer Durables & Apparel     13.00% PIK          6/30/2021        92,571          111,092          87,710   
  (g)(h)(i)(l)(n)(EUR)       12.00% PIK          12/31/2023        17,653          939          1,201   
    (g)(h)(i)(n)(EUR)         18.00% PIK            12/31/2024        8,331                8,487                6,982   

Hillman Group, Inc.

  (q)(r)   Capital Goods     6.375%            7/15/2022      $ 7,620$                7,409      $          7,620   

Hot Topic, Inc.

  (q)(r)   Consumer Durables & Apparel     12.00%            5/15/2019        8,113                7,979                8,296   

JC Penney Corp., Inc.

  (i)(r)   Retailing     5.65%            6/1/2020        8,440                6,440                7,280   

Pharmaceutical Product Development, Inc.

  (q)(r)   Pharmaceuticals, Biotechnology & Life Sciences     9.375%            10/15/2017        5,151                5,231                5,267   

Stuart Weitzman, Inc.

  (h)   Consumer Durables & Apparel     11.50%            8/29/2019        56,918                55,653                56,764   

Summit Materials, LLC

  (r)   Materials     10.50%            1/31/2020        19,800                21,565                21,978   

The TelX Group, Inc.

  (h)(n)   Telecommunication Services     13.50% PIK            7/9/2021        3,456                3,672                3,449   

TIBCO Software, Inc.

  (q)(r)   Software & Services     11.375%            12/1/2021        16,567                16,117                16,774   

Towergate Finance PLC

  (g)(i)(l)(q)(GBP)   Insurance     10.50%            2/15/2019      £ 14,608                23,195                433   

Towergate Finance PLC (UK)

  (g)(h)(i)(GBP)   Insurance     10.00%            5/29/2015        1,335                2,049                1,980   

Total Subordinated Debt

              $                  515,956      $                  467,505   
               

 

 

     

 

 

 

Structured Products—3.9%

                                               

Comet Aircraft S.A.R.L. (LU)

(g)(h)(i)(q)(s) Capital Goods               $ 50,000    $        50,000    $        50,100   

KKR BPT Holdings Aggregator, LLC

(h)(i)(s)* Diversified Financials                 N/A            5,500            5,500   

Trade Finance Funding I, Ltd. 2013-1A Class B (KY)

(g)(h)(i)(q) Diversified Financials   10.75%        11/13/2018      28,221            28,221            28,362   

VSK Holdings Ltd. (KY)

(g)(h)(i)(t)(EUR) Banks   7.77%        10/31/2020              6,650,429                       4,848   

Total Structured Products

$        83,721    $        88,810   
               

 

 

     

 

 

 

 

See notes to condensed consolidated financial statements.

 

10


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

Company (a)(b)   Footnotes   Industry   Interest
Rate
    Base Rate
Floor
  Maturity
Date
    No. Shares/
Principal
Amount (c)
                   Cost (d)            Fair Value  

Equity / Other—6.7%

                                                                   

AltEn, LLC, Membership Units

  (h)(t)*   Energy                         611      $          2,955      $          2,394   

Cengage Learning Holdings II, LP, Common Stock

  (f)   Media                         227,802                7,529                5,126   

Education Management Corp., Series A-2 Preferred Stock

  (h)   Consumer Services                 1/5/2022        11,923                1,041                242   

Education Management Corp., Warrants

  (h)                     1/5/2022        2,320,791                369                77   

Excelitas Technologies Corp., Class A Membership Interest

  (h)*   Technology Hardware & Equipment                         N/A                5,636                5,518   

Genesys Telecommunications Laboratories, Inc., Common Stock

  (h)*   Software & Services                         448,908                449                740   

Global Closure Systems (FR), Limited Partnership Interest

  (g)(h)(i)*(EUR)   Materials                         N/A                823                1,292   

Gruppo Argenta S.p.A. (LU), Warrants

  (g)(h)(i)*(EUR)   Retailing                         225,289                5,342                2,652   

Hilding Anders (SE), Class A Common Stock

  (g)(h)(i)(t)*(SEK)   Consumer Durables & Apparel                         1,394,288                132                185   

Hilding Anders (SE), Class B Common Stock

  (g)(h)(i)(t)*(SEK)                             260,253                25                35   

Hilding Anders (SE), Equity Options

  (g)(h)(i)(t)*(SEK)                     12/31/2020        236,160,807                14,988                9,707   

Home Partners of America, Inc., Common Stock

  (h)(t)*   Real Estate                         29,400                29,279                29,159   

Home Partners of America, Inc., Warrant Delivery Rights

  (h)(t)*                             1,845                30                30   

Home Partners of America, Inc., Warrants

  (h)(t)*                             830                91                90   

iPayment, Inc., Common Stock

  (h)   Software & Services                         538,144                2,223                2,018   

Jones Apparel Group Holdings, Inc., Common Stock

  (h)   Consumer Durables & Apparel                         5,451      $          872      $          2,281   

Keystone Australia Holdings, Pty. Ltd. (AU), Warrants

  (g)(h)(i)*(AUD)   Consumer Services                         1,588,469                1,019                381   

Kurt Geiger Ltd. (UK), Common Stock

  (g)(h)(i)*   Consumer Durables & Apparel                         5,451                106                6,328   

Nine West Holdings, Inc., Common Stock

  (h)*   Consumer Durables & Apparel                         5,451                6,541                4,030   

OAG Holdings, LLC, Overriding Royalty Interest

  (h)   Energy                         N/A                2,354                282   

Orchard Marine, Ltd. (VG), Class B Common Stock

  (g)(h)(i)(t)*   Transportation                         1,964                3,069                2,893   

Orchard Marine, Ltd. (VG), Series A Preferred Stock

  (g)(h)(i)(t)         9.00                 30,688                29,730                30,513   

Star Mountain SMB Multi-Manager Credit Platform, LP, Limited Partnership Interest(h)(i)

      Diversified Financials                         N/A                32,029                29,734   

Stuart Weitzman, Inc., Common Stock

  (h)   Consumer Durables & Apparel                         5,451                3,025                10,544   

Willbros Group, Inc., Common Stock

  *   Energy                         2,810,814                7,760                7,760   

Total Equity / Other

              $          157,417      $          154,011   
               

 

 

     

 

 

 

Total Investments, excluding Short Term
Investments —127.4%

$            3,055,774    $            2,937,843   
               

 

 

     

 

 

 

Short Term Investments—0.8%

Goldman Sachs Financial Square Funds—Prime Obligations Fund FST Preferred Shares (f)(u)

      0.01           16,826,012    $        16,826    $        16,826   

State Street Institutional Liquid Reserves Fund, Institutional Class

(u)     0.06           2,505,705            2,506            2,506   

Total Short Term Investments

$        19,332    $        19,332   
               

 

 

     

 

 

 

 

See notes to condensed consolidated financial statements.

 

11


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

Company (a)(b)   Footnotes   Industry   Interest
Rate
    Base Rate
Floor
  Maturity
Date
    No. Shares/
Principal
Amount (c)
                   Cost (d)            Fair Value  

TOTAL INVESTMENTS — 128.2%(v)

              $              3,075,106      $              2,957,175   
               

 

 

     

 

 

 

LIABILITIES IN EXCESS OF OTHER ASSETS—(28.2%)

  (650,111
                   

 

 

 

NET ASSETS—100.0%

$        2,307,064   
                   

 

 

 

Collateral on Deposit with Custodian—5.4%

                                               

Bank of Nova Scotia - Certificate of Deposit

      0.13     6/30/2015    $ 124,640$            124,640    $        124,640   

Total Collateral on Deposit with Custodian

$        124,640    $        124,640   
               

 

 

     

 

 

 

Derivative Instruments (Note 4)—2.7%

                                               

Foreign currency forward contracts

(h)(i) $             59,421   

Total return swaps

(h)(i)                       $                   2,164   

Total Derivative Instruments

$           $        61,585   
               

 

 

     

 

 

 

 

* Non-income producing security.

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

 

(b) Non-controlled/non-affiliated investments as defined by the Investment Company Act of 1940, as amended (“1940 Act”), unless otherwise indicated non-controlled/non-affiliated investments are investments that are neither controlled investments nor affiliated investments.

 

(c) Denominated in U.S. Dollars unless otherwise noted.

 

(d) Represents amortized cost for debt securities and cost for common stocks translated to U.S. dollars.

 

(e) The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at March 31, 2015 was 0.27%. The current base rate for each investment may be different from the reference rate on March 31, 2015.

 

(f) Security or portion thereof was held within CCT Funding, LLC and was pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank as of March 31, 2015.

 

(g) A portfolio company domiciled in a foreign country. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company.

 

(h) Investments classified as Level 3 whereby fair value was determined by the Company’s Board of Directors (see Note 2).

 

See notes to condensed consolidated financial statements.

 

12


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

(i) The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The Company calculates its compliance with the qualifying assets test on a “look through” basis by disregarding the value of the Company’s total return swaps and treating each loan underlying the total return swaps as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 75.7% of the Company’s total assets represented qualifying assets as of March 31, 2015

 

(j) The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at March 31, 2015 was 0.18%. The current base rate for each investment may be different from the reference rate on March 31, 2015.

 

(k) The interest rate on these investments is subject to the base rate of 3-Month EURIBOR, which at March 31, 2015 was 0.02%. The current base rate for each investment may be different from the reference rate on March 31, 2015.

 

(l) Investment was on non-accrual status as of March 31, 2015.

 

(m) Position or portion thereof unsettled as of March 31, 2015.

 

See notes to condensed consolidated financial statements.

 

13


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

(n) The interest rate on these investments contains a PIK provision, whereby the issuer has either the option or the obligation to make interest payments with the issuance of additional securities. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum PIK interest rate allowed under the existing credit agreements.

 

              Three Months Ended March 31, 2015                    

PIK Security Name

  Local
Currency
  Local Par as
of
December 31,
2014
    Local Par
Additions
    Local Par
Capitalized
PIK
    Local Par
Reductions
    Local Par
as of
March 31,
2015
    Total
Current
Interest
Rate
    Current
PIK Rate
    Maximum
Current
PIK Rate
 

Algeco/Scotsman - 15.75% PIK

  USD     30,859                             30,859        15.75     15.75     15.75

Brake Bros Ltd. - L + 325, 3.00% PIK

  GBP     8,912               67               8,979        L + 625     3.00     3.00

Datatel, Inc. - 9.63%

  USD     9,287                             9,287        9.63     0.00     10.38

Eagle Midco, Inc. - 9.00%

  USD     31,796                             31,796        9.00     0.00     9.75

Education Management, LLC - 16.00% PIK

  USD     1,403                      (1,403            N/A        N/A        N/A   

Essar Steel Algoma, Inc. - 14.00% PIK

  USD     4,570               162               4,732        14.00     14.00     14.00

Excelitas Technologies Corp. - L + 113, 1.50% PIK

  USD     108,997               409               109,406        L + 1125        1.50     1.50

Global Closure Systems - 13.00% PIK

  EUR     20,221                             20,221        13.00     13.00     13.00

Gruppo Argenta S.p.A. - 15.00% PIK

  EUR     684                             684        15.00     15.00     15.00

Gruppo Argenta S.p.A. - 12.00% PIK

  EUR     22,754               1,388               24,142        12.00     12.00     12.00

Gruppo Argenta S.p.A. - 12.00% PIK

  EUR     3,205               82               3,287        12.00     12.00     12.00

Hilding Anders - 18.00% PIK

  EUR     8,331                             8,331        18.00     18.00     18.00

Hilding Anders - 13.00% PIK

  EUR     92,571                             92,571        13.00     13.00     13.00

Hilding Anders - 12.00% PIK

  EUR     17,653                             17,653        12.00     12.00     12.00

Hot Topic, Inc. - 12.00%

  USD     8,113                             8,113        12.00     0.00     12.75

Kurt Geiger Ltd. - 10.00%, 1.00% PIK

  GBP     46,862                             46,862        11.00     1.00     1.00

New Enterprise Stone & Lime Co., Inc. - 6.00%, 7.00% PIK

  USD     10,841               379               11,220        13.00     7.00     11.00

OAG Holdings, LLC - 8.00%, 2.00% PIK

  USD     20,417               102               20,519        10.00     2.00     2.00

Pharmaceutical Product Development, Inc. - 9.38%

  USD     5,151                             5,151        9.38     0.00     10.13

Stuart Weitzman, Inc. - 11.50%

  USD     56,918                             56,918        11.50     0.00     12.50

The TelX Group, Inc. - 13.50% PIK

  USD     3,457                      (1     3,456        13.50     13.50     13.50

Towergate Finance PLC - 10.00% PIK

  GBP            1,325        10               1,335        10.00     10.00     10.00

 

(o) The interest rate on these investments is subject to the base rate of 3-Month GBP LIBOR, which at March 31, 2015 was 0.56%. The current base rate for each investment may be different from the reference rate on March 31, 2015.

 

(p) The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at March 31, 2015 was 0.40%. The current base rate for each investment may be different from the reference rate on March 31, 2015.

 

(q) This security was acquired in a transaction that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Rule 144A thereunder. This security may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers.

 

(r) Security or portion thereof is held within Paris Funding, LLC and is pledged as collateral supporting the amounts outstanding under the committed facility agreement with BNP Paribas Prime Brokerage, Inc. and eligible to be hypothecated as allowed under Rule 15c2-1(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) subject to the limits of the Rehypothecation Agreement. See Note 10. “Borrowings” for additional information.

 

See notes to condensed consolidated financial statements.

 

14


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

(s) Controlled investment as defined by the 1940 Act, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at March 31, 2015 represented 2.4% of the Company’s net assets. Fair value as of December 31, 2014 and March 31, 2015 along with transactions during the three months ended March 31, 2015 in these controlled investments were as follows (amounts in thousands):

 

            Three Months Ended March 31, 2015             Three Months Ended March 31, 2015  

Controlled Investments

   Fair Value at
December 31,
2014
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
     Net
Unrealized
Gain (Loss)
     Fair Value at
March 31,
2015
     Net Realized
Gain (Loss)
     Interest
Income
     Fee
Income
     Dividend
Income
 

Comet Aircraft S.A.R.L

                          

Structured Products

   $ —         $ 50,000       $ —         $ 100       $ 50,100       $ —         $ —         $ —         $ —     

KKR BPT Holdings Aggregator,

                          

LLC Structured Product

   $ 5,500       $ —         $ —         $ —         $ 5,500       $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 5,500       $ 50,000       $ —         $ 100       $ 55,600       $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

 

  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

 

See notes to condensed consolidated financial statements.

 

15


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

(t) Affiliated investment as defined by the 1940 Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at March 31, 2015 represented 8.7% of the Company’s net assets. Fair value as of December 31, 2014 and March 31, 2015 along with transactions during the three months ended March 31, 2015 in these affiliated investments were as follows (amounts in thousands):

 

          Three Months Ended March 31, 2015           Three Months Ended March 31, 2015  

Non-Controlled, Affiliated Investments

  Fair Value at
December 31,
2014
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
    Net
Unrealized
Gain (Loss)
    Fair Value at
March 31, 2015
    Net Realized
Gain (Loss)
    Interest
Income
    Fee
Income
    Dividend
Income
 

AltEn, LLC

             

Common Stock

  $ 2,787      $ -      $ -      $ (393   $ 2,394      $ -      $ -      $ -      $ -   

Term Loan

    25,792        147          (504     25,435        -        740        -        -   

Hilding Anders

                 

Subordinated Debt

    110,973        229        -        (15,309     95,893        -        3,501        -        -   

Class A Common Stock

    257        -        -        (72     185        -        -        -        -   

Class B Common Stock

    48        -        -        (13     35        -        -        -        -   

Equity Options

    11,724        -        -        (2,017     9,707        -        -        -        -   

Home Partners of America, Inc.

                 

Common Stock

    22,223        7,338        -        (402     29,159        -        -        -        -   

Warrants

    78        14        -        (2     90        -        -        -        -   

Warrants Delivery Rights

    32        -        (2     -        30        -        -        -        -   

Orchard Marine, Ltd.

                 

Class B Common Stock

    3,001        -        -        (108     2,893        -        -        -        -   

Series A Preferred Stock

    23,760        6,138        -        615        30,513        -        -        -        111   

VSK Holdings, Ltd.

                 

Structured Product

    2,597        -        -        2,251        4,848        -        -        -        -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 203,272      $ 13,866      $ (2   $ (15,954   $ 201,182      $ -      $ 4,241      $ -      $ 111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category.

 

  ** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category.

 

(u) 7-day effective yield as of March 31, 2015.

 

(v) As of March 31, 2015, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $45,409; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $163,340; the net unrealized depreciation was $117,931; the aggregate cost of securities for federal income tax purposes was $3,075,106.

Abbreviations:

AUD - Australian Dollar; local currency investment amount is denominated in Australian Dollar. A$1 / US $0.769 as of March 31, 2015.

EUR - Euro; local currency investment amount is denominated in Euros. €1 / US $1.085 as of March 31, 2015.

GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1 / US $1.483 as of March 31, 2015.

SEK - Swedish Krona; local currency investment amount is denominated in Swedish Kronor. SEK1 / US $0.116 as of March 31, 2015.

 

See notes to condensed consolidated financial statements.

 

16


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of March 31, 2015

(in thousands, except share amounts)

 

AU - Australia

CA - Canada

FR - France

IE - Ireland

KY - Cayman Islands

LU - Luxembourg

NL - The Netherlands

SG - Singapore

SE - Sweden

UK - United Kingdom

VG - British Virgin Islands

E = EURIBOR - Euro Interbank Offered Rate

L = LIBOR - London Interbank Offered Rate, typically 3-Month

PIK - Payment-in-kind; the issuance of additional securities by the borrower to settle interest payment obligations.

 

See notes to condensed consolidated financial statements.

 

17


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments

As of December 31, 2014

(in thousands, except share amounts)

 


Company (a)(b)
   Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
   
        Cost (d)
   
Fair Value
 

Senior Secured Loans—First Lien—52.6%

  

       

ABILITY Network, Inc.

   (e)(f)   Health Care Equipment & Services     L + 500        1.00     5/14/2021      $ 20,165      $ 19,958      $ 19,812   

Algeco/Scotsman (LU)

   (e)(g)(h)(i)(k)   Consumer Durables & Apparel     15.75% PIK                5/1/2018        30,859        30,674        27,711   

AltEn, LLC

   (j)(k)   Energy     L + 900        1.00     9/12/2018        29,610        26,825        25,792   

American Freight, Inc.

   (f)(k)   Retailing     L + 625        1.00     10/31/2020        32,690        32,531        32,614   

Amtek Global Technology Pte. Ltd. (SG)

   (g)(h)(k)(v)(EUR)   Automobiles & Components     E + 800        1.00     11/10/2019      62,849        75,769        73,287   

Applied Systems, Inc.

   (e)(f)   Software & Services     L + 325        1.00     1/25/2021      $ 654        650        646   

Aspen Dental Management, Inc.

   (e)(f)   Health Care Equipment & Services     L + 550        1.50     10/6/2016        5,992        5,958        6,010   

BeyondTrust Software, Inc.

   (f)(k)   Software & Services     L + 700        1.00     9/25/2019        11,156        11,046        11,036   

BRG Sports, Inc.

   (e)(j)   Consumer Durables & Apparel     L + 550        1.00     4/15/2021        4,221        4,143        4,231   

Caesars Entertainment Operating Co., Inc.

   (e)(f)(h)   Consumer Services     L + 675                3/1/2017        10,800        10,141        9,492   

California Pizza Kitchen, Inc.

   (e)(f)   Food & Staples Retailing     L + 425        1.00     3/29/2018        18,602        17,816        17,936   

Charlotte Russe, Inc.

   (e)(f)   Retailing     L + 550        1.25     5/22/2019        19,261        19,075        18,828   
     (e)(f)         L + 550        1.25     5/22/2019        4,715        4,689        4,605   

CityCenter Holdings, LLC

   (e)(f)   Real Estate     L + 325        1.00     10/16/2020        5,919        5,866        5,880   

David’s Bridal, Inc.

   (e)(f)   Retailing     L + 400        1.25     10/11/2019        11,216        10,909        10,716   

Distribution International, Inc.

   (e)(f)(l)   Retailing     L + 475        1.00     12/10/2021        6,424        6,359        6,408   

Emerald Performance Materials, LLC

   (e)(j)   Materials     L + 350        1.00     7/30/2021      $ 654      $ 650      $ 640   

Football Association of Ireland (IE)

   (g)(h)(k)(EUR)   Consumer Durables & Apparel     6.40%                12/20/2020      43,615        58,419        53,164   

Greenway Medical Technologies

   (e)(f)   Health Care Equipment & Services     L + 500        1.00     11/4/2020      $ 1,763        1,755        1,754   

Greystone & Co., Inc.

   (f)(k)   Diversified Financials     L + 800        1.00     3/26/2021        33,918        33,373        33,892   

Grocery Outlet, Inc.

   (e)(f)(l)   Food & Staples Retailing     L + 475        1.00     10/21/2021        1,802        1,803        1,807   

Gymboree Corp.

   (e)(f)   Retailing     L + 350        1.50     2/23/2018        14,197        12,716        9,347   

Harbor Freight Tools USA, Inc.

   (e)(f)   Capital Goods     L + 375        1.00     7/26/2019        3,063        3,070        3,059   

Hillman Group, Inc.

   (e)(f)   Capital Goods     L + 350        1.00     6/30/2021        838        840        829   

iPayment, Inc.

   (e)(f)   Software & Services     L + 525        1.50     5/8/2017        36,163        35,902        35,560   

J. Jill

   (f)(k)   Retailing     L + 850        1.50     4/29/2017        5,721        5,721        5,721   

Jacuzzi Brands, Inc.

   (f)(k)   Capital Goods     L + 650        1.25     7/3/2019        20,268        19,942        20,116   

Jacuzzi Brands, Inc. (LU)

   (f)(g)(h)(k)   Capital Goods     L + 650        1.25     7/3/2019        20,118        19,795        19,967   

KeyPoint Government Solutions, Inc.

   (f)(k)   Capital Goods     L + 650        1.25     11/13/2017        37,071        36,602        37,441   

Keystone Australia Holdings, Pty. Ltd. (AU)

   (g)(h)(i)(k)(AUD)   Consumer Services    
 
7.00%, 8.00%
PIK
  
  
            8/7/2019      A$ 38,054        33,263        29,430   

Kurt Geiger Ltd. (UK)

   (g)(h)(i)(k)(GBP)   Consumer Durables & Apparel    
 
10.00%, 1.00%
PIK
  
  
            4/8/2019      £ 46,862        77,069        72,668   

Marshall Retail Group, LLC

   (f)(k)   Retailing     L + 600        1.00     8/25/2020      $ 16,804        16,644        16,822   

See notes to condensed consolidated financial statements.

 

18


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


Company (a)(b)
   Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
          
        Cost (d)
          
Fair Value
 

MCS AMS Sub-Holdings, LLC

   (f)   Commercial & Professional Services     L + 600        1.00     10/15/2019      $ 45,605      $          44,490      $          40,817   

MSX International, Inc.

   (f)   Software & Services     L + 500        1.00     8/18/2020        9,102                8,663                9,056   

Neiman Marcus Group, LLC

   (e)(f)   Retailing     L + 325        1.00     10/25/2020        4,976                4,901                4,877   

New Enterprise Stone & Lime Co., Inc.

   (f)(k)   Capital Goods     L + 700        1.00     2/12/2019        56,298                56,298                56,549   

Nine West Holdings, Inc.

   (e)(f)   Consumer Durables & Apparel     L + 375        1.00     10/8/2019        13,554                13,306                12,715   

OpenLink Financial, Inc.

   (f)   Software & Services     L + 500        1.25     10/30/2017        46                46                45   

Pacific Union Financial, LLC

   (j)(k)   Diversified Financials     L + 800        1.00     5/31/2019        46,378                45,734                46,078   

Petroplex Acidizing, Inc.

   (f)(k)   Energy     L + 725        1.00     12/4/2019        36,438                35,899                35,891   

RedPrairie Corp.

   (e)(f)(l)   Software & Services     L + 500        1.00     12/21/2018        10,005                9,659                9,348   

Surgery Center Holdings, Inc.

   (e)(f)   Health Care Equipment & Services     L + 425        1.00     11/3/2020        14,834                14,762                14,482   

Sutherland Global Services, Inc.

   (e)(f)(h)   Software & Services     L + 500        1.00     4/23/2021        2,964          2,891          2,956   
     (e)(f)(h)         L + 500        1.00     4/23/2021        12,732                12,419                12,700   

TIBCO Software, Inc.

   (e)(f)(h)(l)   Software & Services     L + 550        1.00     12/4/2020        43,971                42,246                42,762   

Towergate Finance PLC (UK)

   (g)(h)(m)(o)(GBP)   Insurance     L + 450                11/15/2017      £ 475                659                665   

Travelport, LLC (LU)

   (e)(f)(g)(h)   Software & Services     L + 500        1.00     9/2/2021      $ 19,751                19,513                19,751   

Tweddle Group, Inc.

   (f)(k)   Automobiles & Components     L + 675        1.00     4/7/2020        45,242                44,205                45,035   

Varsity Brands, Inc.

   (e)(f)(l)   Consumer Durables & Apparel     L + 500        1.00     12/10/2021        5,796                5,738                5,800   

Waste Pro USA, Inc.

   (f)(k)   Transportation     L + 750        1.00     10/15/2020      $ 36,681      $          36,681      $          36,749   

Willbros Group, Inc.

   (f)(k)   Energy     L + 975        1.25     12/15/2019        74,944                74,944                74,944   

Wilton Brands, LLC

   (e)(f)   Materials     L + 625        1.25     8/30/2018        5,141                5,068                4,807   

Z Gallerie, Inc.

   (k)(n)   Retailing     L + 650        1.00     10/8/2020        33,254                32,883                33,413   

Zayo Group, LLC

   (e)(f)(h)   Telecommunication Services     L + 300        1.00     7/2/2019        1,596                1,577                1,583   

Total Senior Secured Loans - First Lien

               $              1,152,555      $              1,128,244   
                

 

 

     

 

 

 

Senior Secured Loans - Second Lien—39.3%

                                                   

American Casino & Entertainment Properties, LLC

(f) Consumer Services   L + 1000      1.25   1/3/2020    $ 1,832    $        1,889    $        1,901   

Angelica Corp.

(f)(k) Health Care Equipment & Services   L + 875      1.25   7/15/2019      50,869            50,868            46,131   

Applied Systems, Inc.

(e)(f) Software & Services   L + 650      1.00   1/24/2022      24,905            25,336            24,427   

Arysta Lifescience SPC, LLC

(e)(f)(h) Food, Beverage & Tobacco   L + 700      1.25   11/30/2020      16,305            16,167            16,295   

AssuredPartners, Inc.

(f) Insurance   L + 675      1.00   4/2/2022      7,097            7,092            6,866   

Brake Bros Ltd. (UK)

(g)(h)(i)(o)(GBP) Food & Staples Retailing  
 
L  +  325, 3.00%
PIK
  
  
        3/12/2017    £ 8,912            12,872            13,242   

BRG Sports, Inc.

(j) Consumer Durables & Apparel   L + 925      1.00   4/15/2022    $ 23,855            23,661            24,034   

Catalina Marketing Corp.

(j) Media   L + 675      1.00   4/11/2022      6,020            5,978            5,613   

CHG Companies, Inc.

(e)(f) Health Care Equipment & Services   L + 775      1.25   11/19/2020      9,871            9,764            9,896   

CRC Health Group, Inc.

(f) Health Care Equipment & Services   L + 800      1.00   9/28/2021      42,358            42,134            43,381   

 

 

See notes to condensed consolidated financial statements.

 

19


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


Company (a)(b)
  Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
    Maturity
Date
    No. Shares/
Principal
Amount (c)
          
Cost (d)
          
Fair Value
 

CTI Foods Holding Co., LLC

  (f)   Food, Beverage & Tobacco     L + 725        1.00     6/28/2021      $ 23,219      $          22,918      $          22,813   

Emerald Performance Materials, LLC

  (j)   Materials     L + 675        1.00     8/1/2022        2,041                2,031                1,989   

Excelitas Technologies Corp.

  (f)(k)   Technology Hardware & Equipment     L + 1125        1.00     4/29/2021        108,997                108,997                109,556   

Greenway Medical Technologies

  (f)   Health Care Equipment & Services     L + 825        1.00     11/4/2021        26,396                26,035                25,736   

Grocery Outlet, Inc.

  (f)   Food & Staples Retailing     L + 825        1.00     10/21/2022        41,616                40,175                41,304   

Gruppo Argenta S.p.A. (LU)

  (g)(h)(i)(k)(EUR)   Retailing     12.00% PIK          1/31/2019      3,205          3,356          3,374   
    (g)(h)(i)(k)(EUR)         12.00% PIK                1/31/2019        22,754                25,262                23,951   

Gypsum Management & Supply, Inc.

  (f)   Capital Goods     L + 675        1.00     4/1/2022      $ 13,207                13,085                13,207   

Integra Telecom Holdings, Inc.

  (f)   Telecommunication Services     L + 850        1.25     2/21/2020        3,000                3,059                2,989   

iParadigms Holdings, LLC

  (f)   Software & Services     L + 725        1.00     7/29/2022        23,349                23,180                23,028   

Learfield Communications, Inc.

  (f)   Media     L + 775        1.00     10/8/2021        12,767                12,875                12,703   

Lightower Fiber, LLC

  (e)(f)   Telecommunication Services     L + 675        1.25     4/12/2021        5,282                5,317                5,220   

Maxim Crane, LP

  (e)(f)   Capital Goods     L + 925        1.00     11/26/2018        5,168                5,291                5,220   

Misys Ltd. (UK)

  (e)(g)(h)   Software & Services     12.00%                6/12/2019        3,000                3,319                3,266   

NewWave Communications

  (f)   Media     L + 800        1.00     10/30/2020        13,712                13,673                13,541   

P2 Energy Solutions, Inc.

  (f)(h)   Software & Services     L + 800        1.00     4/30/2021        74,312                72,104                70,782   
    (f)         L + 800        1.00     4/30/2021        9,283                9,200                8,935   

Polyconcept Finance B.V. (NL)

  (g)(h)(j)(k)   Consumer Durables & Apparel     L + 875        1.25     6/28/2020      $       46,727      $          46,727      $          46,487   

Progressive Solutions

  (j)   Health Care Equipment & Services     L + 850        1.00     10/22/2021        21,145                20,991                20,511   

RedPrairie Corp.

  (e)(f)   Software & Services     L + 1000        1.25     12/21/2019        38,114                36,592                32,270   

Sabine Oil & Gas, LLC

  (e)(f)   Energy     L + 750        1.25     12/31/2018        14,527                14,421                11,258   

SafeNet, Inc.

  (j)(k)   Software & Services     L + 750        1.00     3/5/2021        20,829                20,544                21,015   

Safety Technology Holdings, Inc.

  (f)(k)   Technology Hardware & Equipment     L + 825        1.00     6/2/2020        30,402                29,738                30,560   

SI Organization, Inc.

  (f)   Capital Goods     L + 800        1.00     5/23/2020        56,000                55,483                55,160   

Talbots, Inc.

  (f)   Retailing     L + 725        1.00     3/19/2021        15,074                14,976                14,547   

The TelX Group, Inc.

  (f)   Telecommunication Services     L + 650        1.00     4/9/2021        11,696                11,682                11,448   

Websense, Inc.

  (f)   Technology Hardware & Equipment     L + 725        1.00     12/24/2020        22,131                22,037                21,301   

Total Senior Secured Loans—Second Lien

              $                858,829      $          843,957   
               

 

 

     

 

 

 

Senior Secured Bonds—6.9%

                                                   

Artesyn Technologies, Inc.

(p)(q) Technology Hardware & Equipment   9.75%            10/15/2020    $ 14,012    $        13,912    $        13,276   

Guitar Center, Inc.

(p)(q) Retailing   6.50%            4/15/2019      26,191            25,826            22,524   

Hot Topic, Inc.

(p)(q) Consumer Durables & Apparel   9.25%            6/15/2021      2,396            2,375            2,564   

Louisiana Public Facilities Authority

(k)(p) Energy   11.50%      1/1/2020      50,580      49,283      50,141   
  (k)(p)     L + 1000            1/1/2020      10,650            10,650            10,534   

 

 

See notes to condensed consolidated financial statements.

 

20


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


Company (a)(b)
   Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
  Maturity
Date
    No. Shares/
Principal
Amount (c)
          
        Cost (d)
          
Fair Value
 

New Enterprise Stone & Lime Co., Inc.

   (i)(q)   Capital Goods     6.00%, 7.00% PIK            3/15/2018      $ 10,841      $          10,913      $          11,437   

OAG Holdings, LLC

   (i)(k)   Energy     8.00%, 2.00% PIK            12/20/2020        20,417                17,838                13,675   

Ryerson, Inc.

   (e)   Materials     9.00%            10/15/2017        5,814                5,814                5,974   

SquareTwo Financial Corp.

   (q)   Banks     11.625%            4/1/2017                16,359                16,153                16,196   

Towergate Finance PLC (UK)

   (g)(h)(m)(o)(p)

(GBP)

  Insurance     L + 550            2/15/2018      £ 1,100                1,361                1,496   

Total Senior Secured Bonds

               $          154,125      $          147,817   
                

 

 

     

 

 

 

Total Senior Debt

$              2,165,509    $              2,120,018   
                

 

 

     

 

 

 

Subordinated Debt—20.2%

                                               

24 Hour Fitness Worldwide, Inc.

(p)(q) Consumer Services   8.00%        6/1/2022    $ 7,192    $        6,636    $        5,754   

Cemex Materials, LLC

(p)(q) Materials   7.70%        7/21/2025      27,562            27,804            30,870   

Cequel Communications Holdings, LLC

(p)(q) Media   5.125%        12/15/2021      7,205            7,018            6,989   

Ceridian Corp.

(q) Commercial & Professional Services   11.00%        3/15/2021      16,201            17,433            17,723   

CHS/Community Health Systems, Inc.

(h)(q) Health Care Equipment & Services   6.875%        2/1/2022      114            114            121   

Datatel, Inc.

(e)(p) Software & Services   9.625%        12/1/2018      9,287            9,215            9,333   

Eagle Midco, Inc.

(p)(q) Software & Services   9.00%        6/15/2018      31,796            32,607            32,511   

Education Management Corp.

(i)(k)(m)(p) Consumer Services   16.00% PIK        7/1/2018      1,403            1,410            567   

Essar Steel Algoma, Inc. (CA)

(g)(h)(i)(q) Materials   14.00% PIK        2/13/2020    $ 4,570    $        3,850    $        4,044   

GCI, Inc.

(q) Telecommunication Services   8.625%      11/15/2019      53,119      55,914      55,709   
  (q)     6.75%        6/1/2021      158            151            155   

Global Closure Systems (FR)

(g)(h)(i)(k)(EUR) Materials   13.00% PIK        11/15/2019    20,221            26,720            24,452   

Gruppo Argenta S.p.A. (LU)

(g)(h)(i)(k)(EUR) Retailing   15.00% PIK        11/11/2018      684            937            663   

Hilding Anders (SE)

(g)(h)(i)(k)(r)(EUR) Consumer Durables & Apparel   13.00% PIK      6/30/2021    92,571      110,851      101,486   
(g)(h)(i)(k)(m)(r)(EUR)   12.00% PIK      12/31/2023      17,653      939      1,502   
  (g)(h)(i)(k)(r)(EUR)     18.00% PIK        12/31/2024      8,331            8,499            7,985   

Hillman Group, Inc.

(p)(q) Capital Goods   6.375%        7/15/2022    $ 3,305            3,174            3,173   

Hot Topic, Inc.

(p)(q) Consumer Durables & Apparel   12.00%        5/15/2019      8,113            7,973            8,275   

iPayment, Inc.

(q) Software & Services   10.25%        5/15/2018      8,597            8,597            8,597   

JC Penney Corp., Inc.

(h)(q) Retailing   5.65%        6/1/2020      8,440            6,371            6,541   

Pharmaceutical Product Development, Inc.

(p)(q) Pharmaceuticals, Biotechnology & Life Sciences   9.375%        10/15/2017      5,151            5,237            5,264   

Stuart Weitzman, Inc.

(k) Consumer Durables & Apparel   11.50%        8/29/2019      56,918            55,585            56,724   

Summit Materials, LLC

(q) Materials   10.50%        1/31/2020      19,800            21,625            21,978   

The TelX Group, Inc.

(i)(k) Telecommunication Services   13.50% PIK        7/9/2021      3,457            3,680            3,480   

TIBCO Software, Inc.

(h)(p)(q) Software & Services   11.375%        12/1/2021      13,819            13,435            13,370   

 

 

See notes to condensed consolidated financial statements.

 

21


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


Company (a)(b)
   Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
  Maturity
Date
    No. Shares/
Principal
Amount (c)
          
        Cost (d)
          
Fair Value
 

Towergate Finance PLC (UK)

   (g)(h)(m)(p)(q)(GBP)   Insurance     10.50         2/15/2019      £ 14,608      $          23,229      $          6,489   

Total Subordinated Debt

               $          459,004      $          433,755   
                

 

 

     

 

 

 

Structured Products—1.7%

                                               

KKR BPT Holdings Aggregator, LLC

(h)(k)(s)* Diversified Financials                 N/A    $        5,500    $        5,500   

Trade Finance Funding I, Ltd. 2013-1A Class B (KY)

(g)(h)(k)(p) Diversified Financials   10.75     11/13/2018    $ 28,221            28,221            28,324   

VSK Holdings, Ltd. (KY)

(g)(h)(k)(r)(EUR) Diversified Financials                 620,377                       2,597   

Total Structured Products

$              33,721    $              36,421   
                

 

 

     

 

 

 

Equity / Other—6.1%

                                               

AltEn, LLC, Membership Units

(k)(r)* Energy                 611    $        2,955    $        2,787   

Cengage Learning Holdings II, LP, Common Stock

(e) Media                 227,802            7,529            5,069   

Excelitas Technologies Corp., Class A Membership Interest

(k)* Technology Hardware & Equipment                 N/A            5,636            6,312   

Genesys Telecommunications Laboratories, Inc., Common Stock

(k)* Software & Services                 5,775            449            760   

Global Closure Systems (FR), Limited Partnership Interest

(g)(h)(k)*(EUR) Materials                 N/A            823            1,566   

Gruppo Argenta S.p.A. (LU), Warrants

(g)(h)(k)*(EUR) Retailing                 225,289            5,342            3,951   

Hilding Anders (SE), Class A Common Stock

(g)(h)(k)(r)*(SEK) Consumer Durables & Apparel           1,394,288      132      257   

Hilding Anders (SE), Class B Common Stock

(g)(h)(k)(r)*(SEK)   260,253      25      48   

Hilding Anders (SE), Equity Options

(g)(h)(k)(r)*(SEK)             12/31/2020      236,160,807            14,988            11,724   

Home Partners of America, Inc., Common Stock

(k)(r)* Real Estate   22,050    $        21,941    $        22,223   

Home Partners of America, Inc., Warrant Delivery Rights

(k)(r)*   1,968      32      32   

Home Partners of America, Inc., Warrants

(k)(r)*                   707            77            78   

iPayment, Inc. Common Stock

(k) Software & Services                 538,144            2,223            2,223   

Jones Apparel Group Holdings, Inc., Common Stock

(k) Consumer Durables & Apparel                 5,451            872            2,502   

Keystone Australia Holdings, Pty. Ltd. (AU), Warrants

(g)(h)(k)*(AUD) Consumer Services                 1,588,469            1,019            903   

Kurt Geiger Ltd. (UK), Common Stock

(g)(h)(k)* Consumer Durables & Apparel                 5,451            1,090            6,336   

Nine West Holdings, Inc., Common Stock

(k)* Consumer Durables & Apparel                 5,451            6,541            3,672   

OAG Holdings, LLC, Overriding Royalty Interest

(k) Energy                 N/A            2,354            1,542   

Orchard Marine, Ltd. (VG), Class B Common Stock

(g)(h)(k)(r)* Transportation   1,964      3,069      3,001   

Orchard Marine, Ltd. (VG), Series A Preferred Stock

(g)(h)(k)(r)     9.00           24,550            23,592            23,760   

Star Mountain SMB Multi-Manager Credit Platform, LP, Limited Partnership Interest

(h)(k) Diversified Financials                 N/A            25,944            23,206   

Stuart Weitzman, Inc., Common Stock

(k) Consumer Durables & Apparel                 5,451            3,025            8,425   

Total Equity / Other

$        129,658    $        130,377   
                

 

 

     

 

 

 

Total Investments, excluding Short Term Investments—126.8%

$        2,787,892    $        2,720,571   
                

 

 

     

 

 

 

Short Term Investments—0.0%

                                               

Goldman Sachs Financial Square Funds—Prime Obligations Fund, FST Preferred Shares

(e)(t)     0.01           583,543    $        584    $        584   

 

See notes to condensed consolidated financial statements.

 

22


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


Company
   Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
  Maturity
Date
    No. Shares/
Principal
Amount
          
        Cost
          
Fair Value
 

State Street Institutional Liquid Reserves Fund, Institutional Class

   (t)         0.06                 45,440      $          45      $          45   

Total Short Term Investments

            $          629      $          629   
                

 

 

     

 

 

 

TOTAL INVESTMENTS—126.8%(u)

$        2,788,521    $        2,721,200   
                

 

 

     

 

 

 

LIABILITIES IN EXCESS OF OTHER ASSETS—(26.8%)

  (575,379
                    

 

 

 

NET ASSETS—100.0%

$        2,145,821   
                    

 

 

 

Collateral on Deposit with Custodian—5.4%

                                               

Bank of Nova Scotia—Certificate of Deposit

      0.13     3/31/2015      115,700    $        115,700            115,700   

Total Collateral on Deposit with Custodian

$        115,700    $        115,700   
                

 

 

     

 

 

 

Derivative Instruments (Note 4)—1.7%

                                               

Foreign currency forward contracts

(h)(k) $             40,445   

Total return swaps

(h)(k)                       $                   (3,445

Total Derivative Instruments

$           $        37,000   
                

 

 

     

 

 

 

 

* Non-income producing security.

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

 

(b) Non-Controlled/Non-Affiliate investments as defined by the Investment Company Act of 1940, as amended (“1940 Act”), unless otherwise indicated. Non-controlled/Non-Affiliate Investments are investments that are neither Controlled Investments nor Affiliate Investments.

 

(c) Denominated in U.S. Dollars unless otherwise noted.

 

(d) Represents amortized cost for debt securities and cost for common stocks translated to U.S. dollars.

 

(e) Security or portion thereof was held within CCT Funding, LLC and was pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank as of December 31, 2014.

 

(f) The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2014 was 0.26%. The current base rate for each investment may be different from the reference rate on December 31, 2014.

 

(g) A portfolio company domiciled in a foreign country. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company.

 

(h) The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The Company calculates its compliance with the qualifying assets test on a “look through” basis by disregarding the value of the Company’s total return swaps and treating each loan underlying the total return swaps as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 72.6% of the Company’s total assets represented qualifying assets as of December 31, 2014.

 

(i) The interest rate on these investments contains a PIK provision, whereby the issuer has either the option or the obligation to make interest payments with the issuance of additional securities. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum PIK interest rate allowed under the existing credit agreements.

 

See notes to condensed consolidated financial statements.

 

23


Table of Contents

CORPORATE CAPITAL TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

1.       Principal Business and Organization

Corporate Capital Trust, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on June 9, 2010. The Company is a non-diversified closed-end management investment company and regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company’s investment objective is to provide its shareholders with current income and, to a lesser extent, long-term capital appreciation, by investing primarily in the debt of privately owned U.S. companies with a focus on originated transactions sourced through the networks of its advisors. The Company commenced business operations on June 17, 2011 and investment operations on July 1, 2011. The Company has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”) and operates in a manner so as to qualify for the tax treatment applicable to RICs.

The Company is externally managed by CNL Fund Advisors Company (“CNL”) and KKR Credit Advisors (US) LLC (“KKR”) (collectively, the “Advisors”), which are responsible for sourcing potential investments, analyzing and conducting due diligence on prospective investment opportunities, structuring investments and ongoing monitoring of the Company’s investment portfolio. Both Advisors are registered as investment advisers with the Securities and Exchange Commission (“SEC”). CNL also provides the administrative services necessary for the Company to operate.

The Company sold approximately 141 million shares of common stock through its initial continuous public offering (the “Initial Offering”). The Company is currently offering and selling shares of its common stock pursuant to a registration statement on Form N-2 (the “Follow-On Registration Statement”) covering its follow-on continuous public offering of up to 209 million shares of common stock (the “Follow-On Offering”). The Initial Offering and Follow-On Offering are collectively referred to as the “Offerings.”

In January 2015, the Company filed a shelf registration statement with the SEC on Form N-2 (the “Shelf Registration Statement”) to provide for the Company the ability to offer, from time to time, in one or more offerings or series up to $750 million of its securities, on terms to be determined at the time of each such offering. The Shelf Registration Statement was declared effective by the SEC in January 2015.

As of March 31, 2015, the Company had various wholly owned subsidiaries including, among others, (i) CCT Funding LLC (“CCT Funding”) and Paris Funding LLC (“Paris Funding”), special purpose financing subsidiaries organized for the purpose of arranging secured debt financing with banks and borrowing money to invest in portfolio companies, (ii) Halifax Funding LLC (“Halifax Funding”), a special purpose financing subsidiary organized to enter into total return swaps (“TRS”) and (iii) FCF LLC and CCT Holdings LLC, taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes and were organized to hold equity securities of portfolio companies organized as pass-through entities for U.S. tax purposes.

2.       Significant Accounting Policies

Basis of Presentation - The accompanying financial statements of the Company are prepared in accordance with the instructions to Form 10-Q. The Company is an investment company following accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services—Investment Companies (“ASC Topic 946” ). The unaudited condensed consolidated financial statements reflect all normal recurring adjustments, which are, in the opinion of management, necessary for the fair presentation of the Company’s results for the interim periods presented. The results of operations for interim periods are not indicative of results to be expected for the full year.

Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 20, 2015. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.

Principles of Consolidation - Under ASC Topic 946, the Company is precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services to benefit the Company. In accordance therewith, the Company has consolidated the results of its wholly owned subsidiaries in its condensed consolidated financial statements. All intercompany account balances and transactions have been eliminated in consolidation.

 

24


Table of Contents

Use of Estimates - The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, (ii) the reported amounts of income and expenses during the reporting periods presented and (iii) disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates.

Cash and Cash Equivalents - Cash and cash equivalents consist of demand deposits, foreign currency, and highly liquid investments with original maturities of three months or less.

Valuation of Investments - The Company measures the value of its investments in accordance with ASC Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), issued by FASB. Fair value is 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. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC Topic 820, the Company considers its principal market to be the market that has the greatest volume and level of activity.

ASC Topic 820 defines hierarchical levels directly related to the amount of subjectivity associated with the inputs used to determine fair values of assets and liabilities. The hierarchical levels and types of inputs used to measure fair value for each level are described as follows:

Level 1 – Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities and debt securities, publicly listed derivatives, money market/short-term investment funds and foreign currency are generally included in Level 1. The Company does not adjust the quoted price for these investments.

Level 2 – Valuation inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from orderly transactions for similar investments in active markets between market participants and provided by reputable dealers or independent pricing services. In determining the value of a particular investment, independent pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments, and various relationships between investments. Investments generally included in this category are corporate bonds and loans, convertible debt indexed to publicly listed securities, foreign currency forward contracts and certain over-the-counter derivatives.

Level 3 – Valuation inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments generally included in this category are TRS agreements, illiquid corporate bonds and loans, common and preferred stock investments, and equity options that lack observable market pricing.

In certain cases, the inputs used to measure fair value may fall within different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Depending on the relative liquidity in the markets for certain investments, the Company may transfer assets to Level 3 if it determines that observable quoted prices, obtained directly or indirectly, are not available or reliable. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and the consideration of factors specific to the investment.

Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to the Company’s portfolio investments for which market quotations are not readily available, the Company’s board of directors is responsible for determining in good faith the fair value of the Company’s portfolio investments in accordance with the valuation policy and procedures approved by the board of directors, based on, among other things, the input of the Company’s Advisors and management, its audit committee, and independent third-party valuation firms.

The Company and the board of directors conduct its fair value determination process on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio 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 determined had

 

25


Table of Contents

a readily available market value existed for such investments, and the differences could be material. Further, such investments are generally less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment that does not have a readily available market value in a forced or liquidation sale, the Company could realize significantly less than the value recorded by the Company.

The Company and its Advisors undertake a multi-step valuation process each quarter for determining the fair value of the Company’s investments whose market prices are not readily available, as described below:

 

  Each portfolio company or investment is initially valued by KKR (internal valuation) and/or the Company’s independent third party valuation firm (external valuation), which provides a valuation range.

 

  Valuation recommendations are formulated and documented by KKR and reviewed by KKR’s valuation committee. The KKR valuation committee then provides its valuation recommendation for each portfolio investment, along with supporting documentation, to CNL and the Company.

 

  After the Company’s management has substantially completed its review, it forwards the valuation recommendations and supporting documentation for audit committee review.

 

  The Company’s board of directors then discusses the investment valuation recommendations with the Advisors and management and, based on those discussions and the related review process conducted by the Company’s audit committee, determines the fair value of the investments in good faith.

The valuation techniques used by the Company for the assets and liabilities that are classified as Level 3 in the fair value hierarchy are described below.

Senior Debt and Subordinated Debt: Senior debt and subordinated debt investments are valued at initial transaction price and are subsequently valued using (i) market data for similar instruments (e.g., recent transactions or indicative broker quotes), (ii) comparisons to benchmark derivative indices or (iii) valuation models. Valuation models are based on yield analysis and discounted cash flow techniques, where the key inputs are based on relative value analyses and the assignment of risk-adjusted discounted rates, based on the analysis of similar instruments from similar issuers. In addition, an illiquidity discount is applied where appropriate.

Equity/Other Investments: Equity/other investments are valued at initial transaction price and are subsequently valued using valuation models in the absence of readily observable market prices. Valuation models are generally based on (i) market and income (discounted cash flow) approaches, in which various internal and external factors are considered, and (ii) earnings before interest, taxes, depreciation and amortization (“EBITDA”) valuation multiples analysis. Factors include key financial inputs and recent public and private transactions for comparable investments. Key inputs used for the discounted cash flow approach include the weighted average cost of capital and assumed inputs used to calculate terminal values, such as EBITDA exit multiples. The fair value for a particular investment will generally be within the value range conclusions derived by the two approaches. Upon completion of the valuations conducted, an illiquidity discount is applied where appropriate.

The Company relies primarily on information provided by managers of private investment funds in valuing the Company’s investments in such funds. The Advisors monitor the valuation methodology used by the asset manager and/or issuer of the private investment fund. Following procedures adopted by the Company’s board of directors, in the absence of specific transaction activity in a particular private investment fund, the Company’s board of directors considers whether it is appropriate, in light of all relevant circumstances, to value the Company’s investment at the net asset value reported by the private investment fund at the time of valuation or to adjust the value to reflect a premium or discount.

Total Return Swaps: The Company values its TRS in accordance with the TRS agreements between its wholly owned subsidiary and the TRS counterparty, which collectively established the TRS. Pursuant to the TRS agreements, the value of the TRS is based on (i) the increase or decrease in the value of the TRS assets relative to the notional amounts, (ii) collected and accrued interest income and fee income related to the TRS assets, (iii) TRS financing costs on the TRS settled notional amounts, and (iv) certain other expenses incurred under the TRS. The TRS assets are valued pursuant to the valuation algorithm specified in the TRS agreements, including reliance on indicative bid prices provided by independent third-party pricing services. Bid prices reflect the highest price that market participants may be willing to pay. On a quarterly basis, the Company’s Advisors review, test and compare (i) the indicative bid prices assigned to each TRS asset by the TRS counterparty with (ii) pricing inputs that are independently sourced by the Company’s management and/or its Advisors from third-party pricing services. Additionally, the Company’s Advisors review the calculations of (i) collected and accrued interest, (ii) TRS financing costs, and (iii) realized gains and losses as included components of the TRS fair value. For additional disclosures on the Company’s TRS, including quantitative disclosures of the current period fair value components, see Note 4. “Derivative Instruments.”

 

26


Table of Contents

The Company utilizes several valuation techniques that use unobservable pricing inputs and assumptions in determining the fair value of its Level 3 investments. The valuation techniques, as well as the key unobservable inputs that have a significant impact on the Company’s Level 3 valuations, are described in Note 5. “Fair Value of Financial Instruments.” The unobservable pricing inputs and assumptions may differ by asset and in the application of the Company’s valuation methodologies. The reported fair value estimates could vary materially if the Company had chosen to incorporate different unobservable pricing inputs and other assumptions.

Security Transactions, Realized/Unrealized Gains or Losses, and Income Recognition - Investments purchased on a secondary basis are recorded on the trade date. Loan originations are recorded on the funding date. The Company measures realized gains or losses from the repayment or sale of investments using the specific identification method. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment without regard to unrealized gains or losses previously recognized, and include investments charged off during the period, net of recoveries. Unrealized gains or losses primarily reflect the change in investment values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. The amortized cost basis of investments includes (i) the original cost and (ii) adjustments for the accretion/amortization of market discounts and premiums, original issue discount and loan origination fees. The Company reports changes in fair value of investments as a component of net change in unrealized appreciation (depreciation) on investments in the condensed consolidated statements of operations.

Interest Income - Interest income is recorded on an accrual basis and includes amortization of premiums to par value and accretion of discounts to par value. Discounts and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. Loan origination, closing, commitment and other fees received by the Company directly or indirectly from borrowers in connection with the closing of investments are accreted over the contractual life of the debt investment as interest income based on the effective interest method. Upon prepayment of a debt investment, any prepayment penalties and unamortized loan fees and discounts are recorded as interest income.

Certain of the Company’s investments in debt securities contain a contractual payment-in-kind (“PIK”) interest provision. The PIK provisions generally feature the obligation or the option at each interest payment date of making interest payments in (i) cash, (ii) additional securities or (iii) a combination of cash and additional securities. PIK interest, computed at the contractual rate specified in the investment’s credit agreement, is accrued as interest income and recorded as interest receivable up to the interest payment date. On the interest payment dates, the Company will capitalize the accrued interest receivable attributable to PIK as additional principal due from the borrower. When additional PIK securities are received on the interest payment date, they typically have the same terms, including maturity dates and interest rates as the original securities issued. PIK interest generally becomes due at maturity of the investment or upon the investment being called by the issuer.

If the portfolio company valuation indicates the value of the PIK investment is not sufficient to cover the contractual PIK interest, the Company will not accrue additional PIK interest income and will record an allowance for any accrued PIK interest receivable as a reduction of interest income in the period the Company determines it is not collectible.

Debt securities are placed on non-accrual status when principal or interest payments are at least 90 days past due or when there is reasonable doubt that principal or interest will be collected. Generally, accrued interest is reversed against interest income when a debt security is placed on non-accrual status. Interest payments received on debt securities on non-accrual status may be recognized as interest income or applied to principal based on management’s judgment. Debt securities on non-accrual status are restored to accrual status when past due principal and interest are paid and, in management’s judgment, such investments are likely to remain current on interest payment obligations. The Company may make exceptions to this treatment if the debt security has sufficient collateral value and is in the process of collection.

Fee Income - In its role as the Company’s investment sub-advisor, KKR or its affiliates may provide financial advisory services to portfolio companies and in return may receive fees for capital structuring services. KKR is obligated to remit to the Company any earned capital structuring fees based on the pro-rata portion of the Company’s investment in co-investment transactions and originated investments. These fees are generally non-recurring and are recognized as fee income by the Company upon the earlier of the investment commitment execution date or closing date.

The Company may also receive fees for commitments, amendments and other services rendered to portfolio companies. Such fees are recognized as fee income when earned or the services are rendered.

 

27


Table of Contents

Dividend Income - Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Each distribution received from limited liability company (“LLC”) and limited partnership (“LP”) investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.

Derivative Instruments - The Company’s derivative instruments include foreign currency forward contracts and the TRS. The Company recognizes all derivative instruments as assets or liabilities at fair value in its condensed consolidated financial statements. Derivative contracts entered into by the Company are not designated as hedging instruments, and as a result, the Company presents changes in fair value through net change in unrealized appreciation (depreciation) on derivative instruments in the condensed consolidated statements of operations. TRS unrealized appreciation (depreciation) is composed of accrued interest income, net of accrued TRS financing charges owed, and the overall change in fair value of the TRS assets. Realized gains and losses that occur upon the cash settlement of the derivative instruments are included in net realized gains (losses) on derivative instruments in the condensed consolidated statements of operations. TRS realized gains and losses are composed of realized gains or losses on the TRS assets and the net interest and fees received or paid on the quarterly TRS settlement date.

Deferred Financing Costs - Financing costs, including upfront fees, commitment fees and legal fees related to the Company’s credit facilities, term loan and the TRS are deferred and amortized over the life of the related financing instrument using either the effective interest method or straight-line method. Unamortized deferred financing costs are included in prepaid and other deferred expenses in the condensed consolidated statements of assets and liabilities. The amortization of deferred financing costs is included in interest expense in the condensed consolidated statements of operations.

Paid In Capital - The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid-in capital in excess of par value, excluding selling commissions and marketing support fees.

Foreign Currency Translation, Transactions and Gains/Losses - Foreign currency amounts are translated into U.S. dollars on the following basis: (i) at the exchange rate on the last business day of the reporting period for the fair value of investment securities, other assets and liabilities; and (ii) at the prevailing exchange rate on the respective recording dates for the purchase and sale of investment securities, income, expenses, gains and losses.

Net assets and fair values are presented based on the applicable foreign exchange rates described above and the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore, fluctuations related to foreign exchange rate conversions are included with the net realized gains (losses) and unrealized appreciation (depreciation) on investments.

Net realized gains or losses on foreign currency transactions arise from activity in foreign currency forward contracts, sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded by the Company and the U.S. dollar equivalent of the amounts actually received or paid by the Company.

Unrealized appreciation (depreciation) from foreign currency translation for foreign currency forward contracts is included in net change in unrealized appreciation (depreciation) in derivative instruments in the condensed consolidated statements of operations and is included with unrealized appreciation (depreciation) on derivative instruments in the condensed consolidated statements of assets and liabilities. Unrealized appreciation (depreciation) from foreign currency translation for other receivables or payables is presented as net change in unrealized appreciation (depreciation) in foreign currency translation in the condensed consolidated statements of operations.

Management Fees - The Company incurs a base management fee (recorded as investment advisory fees) and performance-based incentive fees, including (i) a subordinated incentive fee on income and (ii) an incentive fee on capital gains, due to its Advisors pursuant to an investment advisory agreement described in Note 6. “Related Party Transactions.” The two components of performance-based incentive fees are combined and expensed in the condensed consolidated statements of operations and accrued in the condensed consolidated statements of assets and liabilities as accrued performance-based incentive fees. Pursuant to the terms of the investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement) based on the Company’s realized capital gains on a

 

28


Table of Contents

cumulative basis from inception, net of all realized capital losses and unrealized depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. Although the terms of the investment advisory agreement do not provide for the inclusion of unrealized gains in the calculation of the incentive fee on capital gains, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the incentive fee on capital gains expense and related accrued incentive fee on capital gains. This accrual reflects the incentive fees that would be payable to the Advisors if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though the Advisors are not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

Offering Expenses - Continuous offering expenses incurred in connection with the Company’s Offerings, including reimbursement payments to the Advisors, but excluding selling commissions and marketing support fees, are accumulated monthly and capitalized as deferred offering expenses and then subsequently expensed over a 12-month period.

The Company records expenses related to its Shelf Registration Statement as prepaid assets. These expenses will be charged as a reduction of capital upon utilization, in accordance with ASC 946, Financial Services—Investment Companies. Such expenses relating to issuances of debt securities by the Company will be capitalized as deferred financing costs and amortized over the term of the related debt using the effective interest or straight line method, as applicable.

Earnings per Share - Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reporting period.

Distributions - Weekly distributions are generally declared by the Company’s board of directors and recognized as a liability on the applicable record date. Distributions are paid monthly. The Company has adopted a distribution reinvestment plan that provides for reinvestment of distributions on behalf of shareholders. Shareholders who have elected to participate in the distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of common stock at a price per share equivalent to the public offering price, net of selling commissions and marketing support fees.

Federal Income Taxes - The Company has elected to be treated for federal income tax purposes, and intends to maintain its qualification, as a RIC under Subchapter M of the Code. Generally, a RIC is not subject to federal income taxes on distributed income and gains if it distributes at least 90% of its “Investment Company Taxable Income,” as defined in the Code. The Company intends to distribute sufficient dividends to maintain its RIC status each year and it does not anticipate paying a material level of federal income taxes.

The Company is generally subject to nondeductible federal excise taxes if it does not distribute to its shareholders an amount at least equal to the sum of (i) 98% of its net ordinary income for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no federal income tax. The Company may, at its discretion, pay a 4% nondeductible federal excise tax on under-distribution of capital gains and taxable income.

The Taxable Subsidiaries hold certain of the Company’s portfolio investments. The Taxable Subsidiaries are consolidated for GAAP reporting purposes, and the portfolio investments held by such entities are included in the condensed consolidated financial statements. The Taxable Subsidiaries may generate income tax expense, or benefit, and related tax assets and liabilities. As a result, any such income tax expense, or benefit and the related tax assets and liabilities are recorded in the Company’s condensed consolidated financial statements. Deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, using statutory tax rates in effect for the year in which the temporary differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Similarly, certain foreign investments might incur foreign income taxes and have deferred tax assets and liabilities.

The Company recognizes in its condensed consolidated financial statements the effect of a tax position when it is deemed more likely than not, based on the technical merits, that the position will be sustained upon examination. Tax benefits of positions not deemed to meet the more-likely-than-not threshold are recorded as a tax expense in the current year. The Company did not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740-10-25, Income Taxes – Overall –Recognition, nor did it have any unrecognized tax benefits for the periods presented herein. Although the Company and the Taxable Subsidiaries file federal and state tax returns, their major tax jurisdiction is federal.

Permanent book and tax basis differences are reclassified among the Company’s capital accounts, as appropriate. Additionally, the tax character of distributions is determined in accordance with the Code which differs from GAAP.

 

29


Table of Contents

Reclassifications - Certain prior year amounts in the condensed consolidated financial statements have been reclassified to conform to the current period presentation.

Recent Accounting Pronouncements - In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis,” which requires amendments to both the variable interest entity (“VIE”) and voting models. The amendments (i) modify the identification of variable interests (fees paid to a decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination under the VIE model, and (ii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using either a modified retrospective or full retrospective approach. The Company is currently evaluating the effect the guidance will have on its consolidated financial position, results of operations and cash flows.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires that loan 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 or premiums. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The ASU is to be applied retrospectively for each period presented. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The Company is currently evaluating the effect the amendments will have on its consolidated financial position, results of operations and cash flows.

3.       Investments

The Company is engaged in a strategy to invest primarily in the debt of privately owned and thinly traded U.S. companies. The primary investment concentrations include (i) senior debt securities and (ii) subordinated debt securities. The Company’s investments may, in some cases, be accompanied by warrants, options or other forms of equity participation. The Company may separately purchase common or preferred equity interests or limited partnership interests. The Company may also invest in structured products, such as collateralized loan obligations. The fair value of the Company’s investments will generally fluctuate with, among other things, changes in prevailing interest rates, the general supply of, and demand for, debt capital among private and public companies, general domestic and global economic conditions, the condition of certain financial markets, developments or trends in any particular industry and changes in the financial condition and credit quality of each security’s issuer.

 

30


Table of Contents

As of March 31, 2015 and December 31, 2014, the Company’s investment portfolio consisted of the following (in thousands):

 

  As of March 31, 2015  
Asset Category Amortized Cost   Fair Value   Percentage of
Investment
Portfolio
  Percentage of
Net Assets
 

Senior debt

Senior secured loans - first lien

  $ 1,321,705       $ 1,278,117       43.5%       55.4%    

Senior secured loans - second lien

  797,354       780,543       26.6           33.8        

Senior secured bonds

  179,621       168,857       5.8           7.3        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

  2,298,680       2,227,517       75.9           96.5        

Subordinated debt

  515,956       467,505       15.9           20.3        

Structured products

  83,721       88,810       3.0           3.9        

Equity/Other

  157,417       154,011       5.2           6.7        
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

  3,055,774       2,937,843                   100.0%       127.4%    
        

 

 

    

Short term investments

  19,332       19,332       0.8        
  

 

 

    

 

 

       

 

 

 

Total investments

  $ 3,075,106       $ 2,957,175       128.2%    
  

 

 

    

 

 

       

 

 

 
  As of December 31, 2014  
Asset Category Amortized Cost   Fair Value   Percentage of
Investment
Portfolio
  Percentage of
Net Assets
 

Senior debt

Senior secured loans - first lien

  $     1,152,555       $     1,128,244       41.5%       52.6%    

Senior secured loans - second lien

  858,829       843,957       31.0           39.3        

Senior secured bonds

  154,125       147,817       5.4           6.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

  2,165,509       2,120,018       77.9           98.8        

Subordinated debt

  459,004       433,755       16.0           20.2        

Structured products

  33,721       36,421       1.3           1.7        

Equity/Other

  129,658       130,377       4.8           6.1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

  2,787,892       2,720,571                   100.0%       126.8%    
        

 

 

    

Short term investments

  629       629       -        
  

 

 

    

 

 

       

 

 

 

Total investments

  $       2,788,521       $ 2,721,200       126.8%    
  

 

 

    

 

 

       

 

 

 

As of March 31, 2015, debt investments on non-accrual status represented 1.1% and 0.4% of total investments on an amortized cost basis and fair value basis, respectively. As of December 31, 2014, debt investments on non-accrual status represented 1.0% and 0.4% of total investments on an amortized cost basis and fair value basis, respectively.

 

31


Table of Contents

The industry composition, geographic dispersion, and local currencies of the Company’s investment portfolio as a percentage of total fair value of the Company’s investments, excluding short-term investments and derivative instruments, as of March 31, 2015 and December 31, 2014 were as follows:

 

Industry Composition

   March 31, 2015      December 31, 2014  

Consumer Durables & Apparel

     14.7%            16.8%      

Software & Services

     14.2               14.5         

Capital Goods

     9.5               8.3         

Energy

     7.9               8.3         

Retailing

     7.4               8.0         

Technology Hardware & Equipment

     6.7               6.7         

Commercial & Professional Services

     6.3               2.2         

Health Care Equipment & Services

     5.1               6.9         

Diversified Financials

     4.8               5.1         

Telecommunication Services

     3.8               3.0         

Automobiles & Components

     3.7               4.3         

Materials

     3.6               3.5         

Food & Staples Retailing

     2.9               2.7         

Transportation

     2.4               2.3         

Media

     2.0               1.6         

Consumer Services

     1.7               1.8         

Real Estate

     1.2               -         

Food, Beverage & Tobacco

     0.8               1.4         

Remaining Industries

     1.3               2.6         
  

 

 

    

 

 

 

Total

     100.0%           100.0%     
  

 

 

    

 

 

 

Geographic Dispersion (1)

     

United States

     78.0%            77.3%      

Luxembourg

     5.1               3.7         

United Kingdom

     3.8               3.8         

Sweden

     3.6               4.5         

Singapore

     2.2               2.7         

Ireland

     1.6               2.0         

Netherlands

     1.6               1.7         

Cayman Islands

     1.1               1.1         

British Virgin Islands

     1.1               1.0         

Australia

     0.9               1.1         

Remaining Countries

     1.0               1.1         
  

 

 

    

 

 

 

Total

                                              100.0%                                                    100.0%     
  

 

 

    

 

 

 

Local Currency

     

U.S. Dollar

     86.7%            84.0%      

Euro

     9.0               11.0         

British Pound Sterling

     3.0               3.5         

Australian Dollar

     1.0               1.1         

Swedish Krona

     0.3               0.4         
  

 

 

    

 

 

 

Total

     100.0%           100.0%     
  

 

 

    

 

 

 

 

(1) The geographic dispersion is determined by the portfolio company’s country of domicile or the jurisdiction of the security’s issuer.

 

32


Table of Contents
4. Derivative Instruments

The following is a summary of the fair value and location of the Company’s derivative instruments in the condensed consolidated statements of assets and liabilities held as of March 31, 2015 and December 31, 2014 (in thousands):

 

    Fair Value  

Derivative Instrument                    

Statement Location                

March 31, 2015   December 31, 2014  

Foreign currency forward contracts

Unrealized appreciation on derivative instruments   $ 59,421      $ 40,903   

Foreign currency forward contracts

Unrealized depreciation on derivative instruments   -      (458)   

TRS

Unrealized appreciation (depreciation) on derivative instruments

  2,164      (3,445)   
     

 

 

    

 

 

 

Total

  $     61,585      $         37,000   
     

 

 

    

 

 

 

Realized and unrealized gains and losses on derivative instruments recorded by the Company for the three months ended March 31, 2015 and 2014 are in the following locations in the condensed consolidated statements of operations (in thousands):

 

    Realized Gains (Losses)  
    Three Months Ended
March 31,
 

Derivative Instrument

      Statement Location      

2015   2014  

Foreign currency forward contracts

Net realized gains (losses) on derivative instruments

  $ 23.965      $ (2,053)   

TRS

Net realized gains on derivative instruments

  2,423      1,862   
    

 

 

   

 

 

 

Total

  $ 26,388      $ (191)   
    

 

 

   

 

 

 
    Unrealized Gains (Losses)  
    Three Months Ended
March 31,
 

Derivative Instrument

Statement Location

2015   2014  

Foreign currency forward contracts

Net change in unrealized appreciation (depreciation) on derivative instruments

  $ 18,976      $ 919   

TRS

Net change in unrealized appreciation (depreciation) on derivative instruments

  5,609      (1,092)   
    

 

 

   

 

 

 

Total

  $         24,585      $         (173)   
    

 

 

   

 

 

 

Offsetting of Derivative Instruments

The Company has derivative instruments that are subject to master netting agreements. These agreements include provisions to offset positions with the same counterparty in the event of default by one of the parties. The Company’s derivative assets and liabilities are reported gross in the condensed consolidated statements of assets and liabilities. The following tables present the Company’s derivatives assets and liabilities by counterparty, net of amounts available for offset under a master netting arrangement and net of any collateral received or pledged by the Company for such assets and liabilities as of March 31, 2015.

 

Counterparty

Derivative
Assets Subject
to Master
Netting
Agreement
  Derivatives
Available for
Offset
  Non-cash
Collateral
Received (1)
  Cash
Collateral
Received (1)
  Net
Amount of
Derivative

Assets (2)
 

Bank of Nova Scotia

  $ 2,164        $                     -        $                     -        $                     -        $ 2,164     

J.P. Morgan Chase Bank

  34,415        -        -        -        34,415     

State Street Bank and Trust

  25,006        -        -        -        25,006     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $             61,585        -        -        -        $             61,585     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

33


Table of Contents

Counterparty

Derivative
Liabilities
Subject to
Master

Netting
Agreement
  Derivatives
Available for
Offset
  Non-cash
Collateral
Pledged (1)
  Cash
Collateral
Pledged (1)
  Net Amount
of Derivative
Liabilities (3)
 

Bank of Nova Scotia

  $                     -        $                     -        $                     -        $                     -        $                 -     

J.P. Morgan Chase Bank

  -        -        -        -        -     

State Street Bank and Trust

  -        -        -        -        -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $ -        -        -        -        $ -     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) In some instances, the actual amount of the collateral received and/or pledged may be more than the amount shown due to overcollateralization.
(2) Net amount of derivative assets represents the net amount due from the counterparty to the Company in the event of default.
(3) Net amount of derivative liabilities represents the net amount due from the Company to the counterparty in the event of default.

Foreign Currency Forward Contracts:

The Company may enter into foreign currency forward contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies and to economically hedge the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A foreign currency forward contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract forward exchange rate and the forward market exchange rate on the last day of the period presented as unrealized appreciation or depreciation. Realized gains or losses are recognized when forward contracts are settled. Risks arise as a result of the potential inability of the counterparties to meet the terms of their contracts; the Company attempts to limit counterparty risk by only dealing with well-known counterparties. The foreign currency forward contracts open at the end of the period are generally indicative of the volume of activity during the period.

As of March 31, 2015, the net contractual notional balance of the Company’s foreign currency forward contracts totaled $463.67 million, all of which related to hedging of the Company’s foreign currency denominated debt investments. The table below displays the Company’s foreign currency denominated debt investments and foreign currency forward contracts, summarized by foreign currency type.

 

  Debt Investments Denominated in Foreign
Currencies
  Foreign Currency Forward Contracts  
  As of March 31, 2015       As of March 31, 2015  

(in thousands)

Par Value in
Local Currency
  Par Value in
US$
  Fair Value   Amount in
Local Currency
  US $ Value  

Euros

      273,354    $       293,923    $       256,850          259,053    $       327,560   

British Pound Sterling

£ 73,358      108,820      87,657    £ 64,500      103,074   

Australian Dollars

A$ 36,858      28,073      26,591    A$ 36,489      33,032   
     

 

 

    

 

 

       

 

 

 

Total

$ 430,816    $ 371,098    $ 463,666   
     

 

 

    

 

 

       

 

 

 

As of March 31, 2015 and December 31, 2014, the Company’s open foreign currency forward contracts were as follows (in thousands):

 

March 31, 2015  

Foreign Currency

Settlement Date

Counterparty

Amount and
Transaction
  US$ Value at
Settlement Date
  US$ Value at
March 31, 2015
  Unrealized
Appreciation
(Depreciation)
 

AUD

Oct 9, 2015 State Street Bank and Trust A$ 36,489 Sold       $ 33,032       $ 27,522       $ 5,510    

EUR

Jul 9, 2015 State Street Bank and Trust 38,125 Sold       45,514       41,051       4,463    

EUR

Oct 9, 2015 State Street Bank and Trust 61,278 Sold       78,369       66,085       12,284    

EUR

Jan 11, 2016 J.P. Morgan Chase Bank 5,400 Sold       7,413       5,836       1,577    

EUR

Jan 11, 2016 J.P. Morgan Chase Bank 61,000 Sold       83,435       65,923       17,512    

EUR

Jul 7, 2016 State Street Bank and Trust 19,850 Sold       23,909       21,586       2,323    

EUR

Jan 12, 2017 J.P. Morgan Chase Bank 29,900 Sold       36,224       32,770       3,454    

EUR

Jan 12, 2017 J.P. Morgan Chase Bank 43,500 Sold       52,696       47,675       5,021    

GBP

Apr 7, 2015 State Street Bank and Trust £ 4,200 Sold       6,371       6,230       141    

GBP

Oct 9, 2015 State Street Bank and Trust £ 8,500 Sold       12,880       12,595       285    

GBP

Apr 7, 2017 J.P. Morgan Chase Bank £ 45,700 Sold       74,737       67,908       6,829    

GBP

Apr 7, 2017 J.P. Morgan Chase Bank £ 6,100 Sold       9,086       9,064       22    
           

 

 

    

 

 

    

 

 

 

Total

  $ 463,666       $ 404,245       $ 59,421    
           

 

 

    

 

 

    

 

 

 

 

34


Table of Contents
December 31, 2014  

Foreign Currency

Settlement Date

Counterparty

Amount and
Transaction
  US$ Value at
Settlement Date
  US$ Value at
December 31, 2014
  Unrealized
Appreciation
(Depreciation)
 

AUD

Oct. 9, 2015 State Street Bank and Trust A$ 36,489 Sold      $ 33,032      $ 29,251      $ 3,781    

EUR

Jan. 8, 2015 State Street Bank and Trust 17,000 Sold      22,919      20,572      2,347    

EUR

Jan. 8, 2015 State Street Bank and Trust 43,500 Sold      59,608      52,639      6,969    

EUR

Jan. 8, 2015 State Street Bank and Trust 16,903 Sold      22,845      20,455      2,390    

EUR

Jan. 8, 2015 State Street Bank and Trust 1,153 Sold      1,559      1,396      163    

EUR

Jan. 8, 2015 State Street Bank and Trust 16,000 Sold      22,235      19,361      2,874    

EUR

Jan. 8, 2015 State Street Bank and Trust 11,100 Sold      15,114      13,432      1,682    

EUR

Jan. 8, 2015 State Street Bank and Trust 11,100 Sold      15,112      13,432      1,680    

EUR

Jan. 8, 2015 State Street Bank and Trust 3,650 Bought      (4,875   (4,417   (458)   

EUR

Jan. 8, 2015 State Street Bank and Trust 4,053 Sold      5,237      4,905      332    

EUR

Jan. 8, 2015 State Street Bank and Trust 3,575 Sold      4,517      4,326      191    

EUR

Jan. 8, 2015 State Street Bank and Trust 3,205 Sold      3,983      3,878      105    

EUR

Oct. 9, 2015 State Street Bank and Trust 61,278 Sold      78,369      74,397      3,972    

EUR

Jan. 11, 2016 J.P. Morgan Chase Bank 5,400 Sold      7,413      6,571      842    

EUR

Jan. 11, 2016 J.P Morgan Chase Bank 61,000 Sold      83,436      74,228      9,208    

GBP

Jan. 8, 2015 State Street Bank and Trust £ 22,000 Sold      35,388      34,288      1,100    

GBP

Apr. 7, 2017 J.P. Morgan Chase Bank £ 45,700 Sold      74,737      71,470      3,267    
       

 

 

   

 

 

   

 

 

 

Total

  $ 480,629      $ 440,184      $ 40,445    
       

 

 

   

 

 

   

 

 

 

Equity Options and Warrants:

The Company holds equity options and warrants in certain portfolio companies in an effort to achieve additional investment returns. In purchasing equity options and warrants, the Company bears the risk of an unfavorable change in the value of the underlying equity interests. Equity options and warrants are recorded as investments at fair value in the condensed consolidated statements of assets and liabilities. The aggregate fair value of equity options and warrants are included in investments at fair value in the Company’s condensed consolidated statements of assets and liabilities as of March 31, 2015 and December 31, 2014 represented 0.6% and 1.2%, respectively, of the Company’s net assets.

Below is a summary of the Company’s investments in equity options and warrants as of March 31, 2015 (in thousands, except share amounts):

 

Company

Expiration Date No. Shares   Cost   Fair Value  

Education Management Corp.

1/5/2022   2,320,791    $ 369    $ 77   

Gruppo Argenta S.p.A., Warrants

(1)   225,289      5,342      2,652   

Hilding Anders, Equity Options

12/31/2020   236,160,807      14,988      9,707   

Home Partners of America, Inc., Warrant Delivery Rights

8/7/2024   1,845      30      30   

Home Partners of America, Inc., Warrants

8/7/2024   830      91      90   

Keystone Australia Holdings, Pty. Ltd., Warrants

(1)   1,588,469      1,019      381   
        

 

 

    

 

 

 

Total

$ 21,839    $ 12,937   
        

 

 

    

 

 

 

 

(1)  Expiration date contingent on certain events pursuant to underlying agreements.

The Company may enter into other derivative instruments and incur other exposures with other counterparties in the future. The derivative instruments held as of March 31, 2015 and December 31, 2014 generally reflect the volume of derivative activity throughout the periods presented.

Total Return Swaps:

On November 15, 2012, Halifax Funding entered into the TRS with the Bank of Nova Scotia (“BNS” or the “Counterparty”). The TRS arrangement with BNS consists of a set of TRS agreements. Pursuant to the TRS agreements, Halifax Funding may select a portfolio of single-name corporate loans and/or bonds (each, a “TRS asset” and together, the “TRS assets”) with a maximum aggregate notional amount of $500 million. Under the terms of the TRS agreements, each TRS asset included in the TRS portfolio constitutes a separate total return swap transaction, although all calculations, payments and transfers required to be made under the TRS agreements are calculated and treated on an aggregate basis, based upon all such transactions.

 

35


Table of Contents

Halifax Funding receives quarterly from BNS (i) all collected interest and fees generated by the TRS assets and (ii) realized gains from the sale or principal payments/paydowns of TRS assets, if any. Halifax Funding pays to BNS (i) a financing charge on the TRS settled notional amount at a rate equal to the three-month LIBOR plus 0.80% per annum if the initial investment amount (i.e. posted collateral) equals or exceeds 50% of the TRS trade basis notional amount, or three-month LIBOR plus 1.00% if the initial investment amount is less than 50% of the TRS trade basis notional amount and (ii) realized losses, if any, related to the TRS assets. In addition, upon the termination of the TRS arrangement, Halifax Funding will either receive from BNS any net realized gain, or pay to BNS any net realized loss, on the liquidation of TRS assets.

Halifax Funding posts collateral in the form of certificates of deposit held by a custodian. Generally, the required collateral amount is at least 40% of the notional amount of each TRS asset at the time that such TRS asset is confirmed for acquisition by the Counterparty. Halifax Funding may be required to post additional collateral in the event the value of the TRS assets decreases below a specified amount. Halifax Funding is required to post additional collateral to ensure that the collateral’s market value, as solely determined by BNS, is at least equal to 25% of the value of the TRS portfolio.

The obligations of Halifax Funding under the TRS agreements are non-recourse to the Company and the Company’s exposure to the TRS is limited to its equity in Halifax Funding, which is generally equal to the collateral posted by Halifax Funding. The Company has no contractual obligation to post any collateral or to pay any financing charges to BNS. The Company may, but is not obligated to, increase its equity investment in Halifax Funding for the purpose of funding additional collateral or payment obligations for which Halifax Funding may become obligated during the term of the TRS agreements. If the Company does not make any such additional equity investment in Halifax Funding and Halifax Funding fails to meet its obligations under the TRS agreements, then BNS will have the right to terminate the TRS agreements and use the collateral posted by Halifax Funding with the custodian to offset any amount owed to BNS. Halifax Funding may terminate the TRS agreements at any time upon providing at least 30 days’ notice prior to the proposed settlement date of the TRS assets related to such termination. In the absence of an early termination, the TRS will terminate on January 15, 2016. In the event of an early termination of the TRS, Halifax Funding may be required to pay a make-whole fee based on a minimum spread amount to be earned by BNS over the life of the TRS agreements. Halifax Funding would have been required to pay an early termination fee of $4.33 million if the TRS had been terminated as of March 31, 2015.

As of March 31, 2015 and December 31, 2014, Halifax Funding had selected 50 and 49 underlying debt positions, respectively, and had posted $124.64 million and $115.70 million in collateral, respectively, which are recorded as collateral on deposit with custodian in the condensed consolidated statements of assets and liabilities. The following table reconciles the TRS settled notional amount, upon which the financing charge to BNS is based, to the total, or trade basis, notional amount as of March 31, 2015 and December 31, 2014 (in thousands).

 

  March 31, 2015   December 31, 2014  

Settled notional amount

  $ 296,569       $ 277,375    

Unsettled additions

  13,885       10,366    
  

 

 

    

 

 

 

Total notional amount

  $ 310,454       $ 287,741    
  

 

 

    

 

 

 

The following table summarizes the fair value components of the TRS portfolio (in thousands):

 

  March 31, 2015   December 31, 2014  

Interest and fee income

  $ 4,272       $ 3,545    

Financing charge

  (599   (513

Net realized gains (losses)

  80       (26

Net unrealized depreciation of TRS assets

  (1,589   (6,451
  

 

 

   

 

 

 

TRS total fair value

  $ 2,164       $ (3,445
  

 

 

   

 

 

 

The following table summarizes the components of the net realized gains on derivative instruments relating to the TRS (in thousands):

 

  Three Months Ended
March 31,
 
  2015   2014  

Interest and fee income

  $ 3,251       $ 1,682    

Financing charges

  (799   (152

Net realized gains (losses)

  (29   332    
  

 

 

   

 

 

 

Net realized gains on derivative instruments related to the TRS

  $         2,423       $         1,862    
  

 

 

   

 

 

 

 

36


Table of Contents

The following is a summary of the TRS assets (trade basis) as of March 31, 2015 (in thousands):

 

Company (a)             Industry                 Interest
    Rate
    LIBOR    
Floor

Maturity

Date

    Notional    
Amount
   Fair Value    Unrealized      
Appreciation      
(Depreciation)      
 

Senior Secured Loans - First Lien

ABILITY Network, Inc.

Health Care
Equipment &
Services
L + 500 1.00% 5/14/2021 $ 6,850    $ 6,843    $ (7

Applied Systems, Inc.

Software & Services L + 325 1.00% 1/25/2021              10,846      10,888      42   

AssuredPartners, Inc.

Insurance L + 400 1.00% 4/2/2021   9,474      9,479      5   

BJ’s Wholesale Club, Inc.

Food & Staples
Retailing
L + 350 1.00% 9/26/2019   3,965      3,950      (15

Caesars Entertainment Operating Co., Inc. (b)(d)

Consumer Services L + 725 0.00% 3/1/2017   3,745      3,669      (76

California Pizza Kitchen, Inc.

Food & Staples
Retailing
L + 425 1.00% 3/29/2018   3,806      3,852      46   

Catalina Marketing Corp.

Media L + 350 1.00% 4/9/2021   3,992      3,376      (616

Ceridian Corp.

Commercial &
Professional Services
L + 350 1.00% 9/15/2020   2,050      2,008      (42

CHG Companies, Inc.

Health Care
Equipment &
Services
L + 325 1.00% 11/19/2019   12,895      12,928      33   

CityCenter Holdings, LLC

Real Estate L + 325 1.00% 10/16/2020   12,762      12,821      59   

Coyote Logistics, LLC (c)

Transportation L + 525 1.00% 3/24/2022   8,910      8,988      78   

CSM Bakery Products

Food, Beverage &
Tobacco
L + 400 1.00% 7/3/2020   4,925      4,970      45   

CTI Foods Holding Co., LLC

Food, Beverage &
Tobacco
L + 350 1.00% 6/28/2020   3,977      3,950      (27

Distribution International, Inc.

Retailing L + 500 1.00% 12/10/2021   4,938      4,978      40   

Emerald Expositions Holding, Inc.

Media L + 375 1.00% 6/17/2020   10,379      10,369      (10

First American Payment Systems, L.P.

Software & Services L + 450 1.25% 10/12/2018   2,404      2,372      (32

Four Seasons Holdings, Inc. (b)

Consumer Services L + 275 0.75% 6/27/2020   4,919      4,977      58   

Gymboree Corp.

Retailing L + 350 1.50% 2/23/2018   2,834      2,383      (451

Gypsum Management & Supply, Inc.

Capital Goods L + 375 1.00% 4/1/2021   8,416      8,216      (200

Hanson Building Products North America (b)

Materials L + 550 1.00% 3/13/2022   9,750      9,981      231   

Harbor Freight Tools USA, Inc.

Capital Goods L + 375 1.00% 7/26/2019   7,936      7,932      (4

Hillman Group, Inc.

Capital Goods L + 350 1.00% 6/30/2021   12,909      12,971      62   

HUB International, Ltd.

Insurance L + 300 1.00% 10/2/2020   14,181      14,320      139   

Hyland Software, Inc.

Software & Services L + 375 1.00% 2/19/2021   6,956      6,960      4   

iPayment, Inc.

Software & Services L + 525 1.50% 5/8/2017   7,885      7,744      (141

Kronos, Inc.

Software & Services L + 350 1.00% 10/30/2019   9,863      9,909      46   

Learfield Communications, Inc.

Media L + 350 1.00% 10/9/2020   7,398      7,383      (15

Neiman Marcus Group, LLC

Retailing L + 325 1.00% 10/25/2020   8,864      8,911      47   

OneStopPlus Group

Consumer Durables &
Apparel
L + 375 1.00% 3/18/2021   352      346      (6

P2 Energy Solutions, Inc. (b)

Software & Services L + 400 1.00% 10/30/2020   4,972      4,793      (179

RedPrairie Corp.

Software & Services L + 500 1.00% 12/21/2018   4,875      4,895      20   

Riverbed Technology, Inc. (c)

Technology Hardware
& Equipment
L + 500 1.00% 2/25/2022   4,975      5,039      64   

Savers, Inc.

Retailing L + 375 1.25% 7/9/2019   8,864      8,722      (142

SGS International, Inc.

Media L + 325 1.00% 10/17/2019   4,853      4,859      6   

Surgery Center Holdings, Inc.

Health Care
Equipment &
Services
L + 425 1.00% 11/3/2020   5,000      4,997      (3

The TelX Group, Inc.

Telecommunication
Services
L + 350 1.00% 4/9/2020   3,982      3,941      (41

TIBCO Software, Inc.

Software & Services L + 550 1.00% 12/4/2020   4,750      4,995      245   

Travelport, LLC (b)

Software & Services L + 475 1.00% 9/2/2021   3,940      4,018      78   

Triple Point Technology, Inc.

Software & Services L + 425 1.00% 7/10/2020   7,120      6,985      (135

Varsity Brands, Inc.

Consumer Durables &
Apparel
L + 500 1.00% 12/10/2021   4,938      5,031      93   

Wilton Brands, LLC

Materials L + 625 1.25% 8/30/2018   3,051      3,031      (20

Zayo Group, LLC (b)

Telecommunication
Services
L + 300 1.00% 7/2/2019   13,188      13,332      144   
            

 

 

    

 

 

    

 

 

 

Total Senior Secured Loans - First Lien

  282,689      282,112      (577
            

 

 

    

 

 

    

 

 

 

Senior Secured Loans - Second Lien

Maxim Crane, LP

Capital Goods L + 925 1.00% 11/26/2018   9,021      8,666      (355

Misys Ltd. (b)

Software & Services 12.00% 6/12/2019   2,898      3,066      168   

NEP Group, Inc.

Media L + 825 1.25% 7/22/2020   1,323      1,300      (23

RedPrairie Corp.

Software & Services L + 1000 1.25% 12/21/2019   5,550      4,885      (665
            

 

 

    

 

 

    

 

 

 

Total Senior Secured Loans - Second Lien

  18,792      17,917      (875
            

 

 

    

 

 

    

 

 

 

Senior Secured Bonds

Artesyn Technologies, Inc.

Technology Hardware
& Equipment
9.75% 10/15/2020   3,640      3,378      (262

Hot Topic, Inc.

Consumer Durables &
Apparel
9.25% 6/15/2021   3,675      3,798      123   
            

 

 

    

 

 

    

 

 

 

Total Senior Secured Bonds

  7,315      7,176      (139
            

 

 

    

 

 

    

 

 

 

Subordinated Debt

GCI, Inc.

Telecommunication
Services
6.75% 6/1/2021   1,002      1,015      13   

Summit Materials, LLC

Materials 10.50% 1/31/2020   656      645      (11
            

 

 

    

 

 

    

 

 

 

Total Subordinated Debt

  1,658      1,660      2   
            

 

 

    

 

 

    

 

 

 

TOTAL

$     310,454    $ 308,865    $ (1,589
            

 

 

    

 

 

    

 

 

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

(b) The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act.

(c) TRS asset position or portion thereof unsettled as of March 31, 2015.

(d) Investment was on non-accrual status as of March 31, 2015.

 

37


Table of Contents

The following is a summary of the TRS assets (trade basis) as of December 31, 2014 (in thousands):

 

Company (a)             Industry                 Interest
    Rate
      LIBOR    
Floor
      Maturity
    Date
    Notional    
Amount
      Fair Value       Unrealized      
Appreciation      
(Depreciation)      
 

Senior Secured Loans - First Lien

ABILITY Network, Inc.

Health Care Equipment & Services   L + 500      1.00 5/14/2021       $ 6,867    $ 6,719          $ (148

Applied Systems, Inc. (c)

Software & Services   L + 325      1.00 1/25/2021   10,873      10,706      (167

AssuredPartners, Inc.

Insurance   L + 350      1.00 4/2/2021   9,498      9,408      (90

BJ’s Wholesale Club, Inc.

Food & Staples Retailing   L + 350      1.00 9/26/2019   3,975      3,880      (95

Caesars Entertainment Operating Co., Inc. (b)

Consumer Services   L + 675      0.00 3/1/2017   3,745      3,488      (257

California Pizza Kitchen, Inc.

Food & Staples Retailing   L + 425      1.00 3/29/2018   3,826      3,817      (9

Catalina Marketing Corp.

Media   L + 350      1.00 4/9/2021   4,002      3,768      (234

Ceridian Corp.

Commercial & Professional Services   L + 350      1.00 9/15/2020   2,055      2,009      (46

CHG Companies, Inc.

Health Care Equipment & Services   L + 325      1.00 11/19/2019   12,929      12,694      (235

CityCenter Holdings, LLC

Real Estate   L + 325      1.00 10/16/2020   12,762      12,639      (123

CRC Health Group, Inc.

Health Care Equipment & Services   L + 425      1.00 3/29/2021   2,995      2,993      (2

CSM Bakery Products

Food, Beverage & Tobacco   L + 400      1.00 7/3/2020   4,938      4,875      (63

CTI Foods Holding Co., LLC

Food, Beverage & Tobacco   L + 350      1.00 6/28/2020   3,988      3,883      (105

Emerald Expositions Holding, Inc.

Media   L + 375      1.00 6/17/2020   10,407      10,096      (311

First American Payment Systems, L.P.

Software & Services   L + 450      1.25 10/12/2018   2,404      2,360      (44

Four Seasons Holdings, Inc. (b)

Consumer Services   L + 275      0.75 6/27/2020   4,919      4,875      (44

Gymboree Corp.

Retailing   L + 350      1.50 2/23/2018   2,834      2,038      (796

Gypsum Management & Supply, Inc.

Capital Goods   L + 375      1.00 4/1/2021   8,437      8,174      (263

Harbor Freight Tools USA, Inc.

Capital Goods   L + 375      1.00 7/26/2019   8,227      8,142      (85

Hillman Group, Inc.

Capital Goods   L + 350      1.00 6/30/2021   12,941      12,718      (223

HUB International, Ltd.

Insurance   L + 325      1.00 10/2/2020   14,217      14,037      (180

Hyland Software, Inc.

Software & Services   L + 375      1.00 2/19/2021   6,973      6,860      (113

iPayment, Inc.

Software & Services   L + 525      1.50 5/8/2017   7,885      7,767      (118

Kronos, Inc. (c)

Software & Services   L + 350      1.00 10/30/2019   9,965      9,906      (59

Learfield Communications, Inc.

Media   L + 350      1.00 10/9/2020   7,417      7,251      (166

Neiman Marcus Group, LLC

Retailing   L + 325      1.00 10/25/2020   8,886      8,760      (126

OneStopPlus Group

Consumer Durables & Apparel   L + 350      1.00 3/18/2021   353      344      (9

OpenLink Financial, Inc.

Software & Services   L + 500      1.25 10/30/2017   822      808      (14

P2 Energy Solutions, Inc.

Software & Services   L + 400      1.00 10/30/2020   4,985      4,789      (196

RedPrairie Corp.

Software & Services   L + 500      1.00 12/21/2018   4,888      4,607      (281

Savers, Inc. (c)

Retailing   L + 375      1.25 7/9/2019   8,877      8,647      (230

SGS International, Inc.

Media   L + 325      1.00 10/17/2019   4,918      4,835      (83

Surgery Center Holdings, Inc.

Health Care Equipment & Services   L + 425      1.00 11/3/2020   5,013      4,813      (200

The TelX Group, Inc.

Telecommunication Services   L + 350      1.00 4/9/2020   3,992      3,858      (134

TIBCO Software, Inc. (b)

Software & Services   L + 550      1.00 12/4/2020   4,750      4,807      57  

Travelport, LLC (b)

Software & Services   L + 500      1.00 9/2/2021   3,950      3,989      39  

Triple Point Technology, Inc.

Software & Services   L + 425      1.00 7/10/2020   4,186      4,123      (63

Varsity Brands, Inc. (c)

Consumer Durables & Apparel   L + 500      1.00 12/10/2021   4,950      4,965      15  

Wilton Brands, LLC

Materials   L + 625      1.25 8/30/2018   3,095      3,020      (75

Zayo Group, LLC

Telecommunication Services   L + 300      1.00 7/2/2019   13,222      13,194      (28
            

 

 

    

 

 

    

 

 

 

Total Senior Secured Loans - First Lien

  255,966      250,662      (5,304
            

 

 

    

 

 

    

 

 

 

Senior Secured Loans - Second Lien

CRC Health Group, Inc.

Health Care Equipment & Services   L + 800      1.00 9/28/2021   4,010      4,077      67  

Maxim Crane, LP

Capital Goods   L + 925      1.00 11/26/2018   9,021      8,932      (89

Misys Ltd. (b)

Software & Services   12.00 6/12/2019   2,898      3,047      149  

NEP Group, Inc.

Media   L + 825      1.25 7/22/2020   1,323      1,301      (22

RedPrairie Corp.

Software & Services   L + 1000      1.25 12/21/2019   5,550      4,575      (975
            

 

 

    

 

 

    

 

 

 

Total Senior Secured Loans - Second Lien

  22,802      21,932      (870
            

 

 

    

 

 

    

 

 

 

Senior Secured Bonds

Hot Topic, Inc.

Consumer Durables & Apparel   9.25 6/15/2021   3,675      3,763      88  

Artesyn Technologies, Inc.

Technology Hardware & Equipment   9.75 10/15/2020   3,640      3,303      (337
            

 

 

    

 

 

    

 

 

 

Total Senior Secured Bonds

  7,315      7,066      (249
            

 

 

    

 

 

    

 

 

 

Subordinated Debt

GCI, Inc.

Telecommunication Services   6.75 6/1/2021   1,002      981      (21

Summit Materials, LLC

Materials   10.50 1/31/2020   656      649      (7
            

 

 

    

 

 

    

 

 

 

Total Subordinated Debt

  1,658      1,630      (28
            

 

 

    

 

 

    

 

 

 

TOTAL

      $       287,741          $     281,290          $     (6,451
            

 

 

    

 

 

    

 

 

 

(a) Security may be an obligation of one or more entities affiliated with the named company.

(b) The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act.

(c) TRS asset position or portion thereof unsettled as of December 31, 2014.

 

38


Table of Contents
5. Fair Value of Financial Instruments

The Company’s investments were categorized in the fair value hierarchy described in Note 2. “Significant Accounting Policies”, as follows as of March 31, 2015 and December 31, 2014 (in thousands):

 

  March 31, 2015  

Description

Level 1   Level 2   Level 3   Total  

Senior debt

  $      $ 1,092,192       $ 1,135,325       $ 2,227,517    

Subordinated debt

       262,331       205,174       467,505    

Structured products

            88,810       88,810    

Equity/Other

       12,886       141,125       154,011    
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

       1,367,409       1,570,434       2,937,843    

Short term investments

  19,332                 19,332    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

  $ 19,332       $ 1,367,409       $ 1,570,434       $ 2,957,175    
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Instruments

Level 1   Level 2   Level 3   Total  

Assets

Foreign currency forward contracts

  $      $ 59,421       $      $ 59,421    

Total return swaps

            2,164       2,164    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $      $ 59,421       $ 2,164       $ 61,585    
  

 

 

    

 

 

    

 

 

    

 

 

 
  December 31, 2014  

Description

Level 1   Level 2   Level 3   Total  

Senior debt

  $      $ 976,274       $ 1,143,744       $ 2,120,018    

Subordinated debt

       236,896       196,859       433,755    

Structured products

            36,421       36,421    

Equity/Other

       5,069       125,308       130,377    
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

       1,218,239       1,502,332       2,720,571    

Short term investments

  629                 629    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

  $ 629       $ 1,218,239       $ 1,502,332       $ 2,721,200    
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Instruments

Level 1   Level 2   Level 3   Total  

Assets

Foreign currency forward contracts

  $      $ 40,903       $      $ 40,903    

Liabilities

Total return swaps

            (3,445)      (3,445)   

Foreign currency forward contracts

       (458)           (458)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $      $ 40,445       $ (3,445)      $ 37,000    
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2015 and year ended December 31, 2014.

The carrying value of cash and foreign currency is classified as Level 1 with respect to the fair value hierarchy. The carrying values of the Company’s collateral on deposit with custodian, term loan and revolving credit facilities approximate their fair value and are classified as Level 2 with regards to the fair value hierarchy.

 

39


Table of Contents

At March 31, 2015, the Company held 67 distinct investment positions classified as Level 3, representing an aggregate fair value of $1.57 billion and 53.1% of the total investment portfolio. At December 31, 2014, the Company held 63 distinct investment positions classified as Level 3, representing an aggregate fair value of $1.50 billion and 55.2% of the total investment portfolio. The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of March 31, 2015 and December 31, 2014 were as follows (in thousands):

 

As of March 31, 2015

Asset Group    Fair Value (1)(2)      Valuation Techniques (3)    Unobservable Inputs    Range (Weighted Average) (4)    Impact to Valuation
from an Increase in
Input (5)

Senior Debt

     $1,135,325       Discounted Cash Flow    Discount Rate    6.03% - 29.10% (11.69%)    Decrease
         Market Yield    5.97% - 29.4% (9.40%)    Decrease
         Yield Premium    0.00% - 6.50% (2.26%)    Decrease
         Weighted Average Cost of Capital    7.10% - 18.50% (10.91%)    Decrease
         EBITDA Multiple    4.25x - 12.10x  (8.12x)    Increase
         Tangible Book Value Multiple    1.60x (1.60x)    Increase
                   Interest Rate Volatility    25.00% (25.00%)    Decrease

Subordinated Debt

     196,991       Discounted Cash Flow    Discount Rate    11.42% - 20.05% (14.10%)    Decrease
         Market Yield    8.17% - 17.56% (10.28%)    Decrease
         Yield Premium    4.25% (4.25%)    Decrease
         Weighted Average Cost of Capital    9.75% - 19.50% (13.74%)    Decrease
         EBITDA Multiple    6.80x - 12.25x (9.81x)    Increase
                 Interest Rate Volatility    25.00% (25.00%)    Decrease
     8,183       Option Pricing Model    EBITDA Multiple    10.60x  (10.60x)    Increase
         Implied Volatility    45.00% (45.00%)    Increase
         Risk Free Rate    0.94% (0.94%)    Increase
         Yield    0.00% (0.00%)    Decrease
                   Term    2.75 years  (2.75 years)    Increase

Structured Products

     88,810       Discounted Cash Flow    Discount Rate    10.50% - 17.57% (15.04%)    Decrease

Equity/Other

     45,233       Market Comparables    EBITDA Multiple    5.50x - 10.60x (8.80x)    Increase
         Revenue Multiple    0.18x (0.18x)    Increase
                 Illiquidity Discounts    10.00% - 15.00% (11.64%)    Decrease
     3,191       Option Pricing Model    EBITDA Multiple    5.40x - 12.10x (11.33x)    Increase
         Implied Volatility    30.00% - 45.00% (32.43%)    Increase
         Risk Free Rate    0.94% - 1.35% (1.14%)    Increase
         Term    2.75 years - 4.00 years (3.08 years)    Increase
         Yield    0.00% - 0.00% (0.00%)    Decrease
                 Illiquidity Discounts    0.00% - 15.00% (9.81%)    Decrease
     62,685       Waterfall    Asset Appraisals    N/A    Increase
         Change in Market Index    1.12% (1.12%)    Increase
                 Additional Discounts    3.00% (3.00%)    Decrease
     29,734       Net Asset Value    Net Asset Value    N/A    Increase
       282       Discounted Cash Flow    Discount Rate    12.40% (12.40%)    Decrease

Total

     $1,570,434               
  

 

 

             

 

40


Table of Contents

As of December 31, 2014

Asset Group    Fair Value (1)(2)      Valuation Techniques (3)    Unobservable Inputs    Range (Weighted Average) (4)    Impact to Valuation
from an Increase in
Input (5)

Senior Debt

     $1,143,744       Discounted Cash Flow    Discount Rate    6.07% - 20.50% (11.49%)    Decrease
         Market Yield    5.89% - 19.69% (8.98%)    Decrease
         Yield Premium    0.00% - 6.50% (1.88%)    Decrease
         Weighted Average Cost of Capital    6.60% - 17.85% (10.78%)    Decrease
         EBITDA Multiple    4.25x -  17.00x  (8.34x)    Increase
         Tangible Book Value Multiple    1.65x (1.65x)    Increase
                   Interest Rate Volatility    25.00% (25.00%)    Decrease

Subordinated Debt

     186,805       Discounted Cash Flow    Discount Rate    11.37% - 20.11% (13.89%)    Decrease
         Market Yield    8.08% - 17.51% (10.15%)    Decrease
         Yield Premium    3.80% - 4.00% (3.91%)    Decrease
         Weighted Average Cost of Capital    9.45% - 19.50% (13.33%)    Decrease
         EBITDA Multiple    6.50x - 13.50x (9.53x)    Increase
                 Interest Rate Volatility    25.00% (25.00%)    Decrease
     9,487       Option Pricing Model    EBITDA Multiple    10.30x  (10.30x)    Increase
         Implied Volatility    45.00% (45.00%)    Increase
         Risk Free Rate    1.10% (1.10%)    Increase
                 Term    3.00 years  (3.00 years)    Increase
       567       Market Comparables    EBITDA Multiple    4.00x (4.00x)    Increase

Structured Products

     36,421       Discounted Cash Flow    Discount Rate    10.95% - 15.50% (11.33%)    Decrease

Equity/Other

     47,210       Market Comparables    EBITDA Multiple    5.30x - 10.50x (8.68x)    Increase
         Revenue Multiple    0.18x (0.18x)    Increase
                 Illiquidity Discount    10.00% - 15.00% (12.22%)    Decrease
     4,256       Option Pricing Model    EBITDA Multiple    10.30x - 13.50x (13.27x)    Increase
         Implied Volatility    30.00% - 45.00% (31.07%)    Increase
         Risk Free Rate    1.10% - 1.28% (1.27%)    Increase
         Term    3.00 years - 4.00 years (3.93 years)    Increase
                 Illiquidity Discount    0.00% - 10.00% (9.28%)    Decrease
     49,094       Waterfall    Asset Appraisals    N/A    Increase
         Change in Market Index    5.47% (5.47%)    Increase
                 Illiquidity Discount    3.50% (3.50%)    Decrease
     23,206       Net Asset Value    Net Asset Value    N/A    Increase
       1,542       Discounted Cash Flow    Discount Rate    12.30% - 13.10% (12.90%)    Decrease

Total

     $1,502,332               
  

 

 

             

 

(1)  The TRS was valued in accordance with the TRS agreements as discussed in Note 2. See Note 4 for quantitative disclosures of the fair value of the TRS.
(2)  Certain investments may be valued at cost for a period of time after an acquisition as the best indicator of fair value.
(3)  For the assets and investments that have more than one valuation technique, the Company may rely on the stated techniques individually or in the aggregate based on a weight ascribed to each valuation technique, ranging from 0 – 100%. Indicative broker quotes obtained for valuation purposes are reviewed by the Company relative to other valuation techniques.
(4)  Weighted average amounts are based on the estimated fair values.
(5)  This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements.

The above tables represent the significant unobservable inputs as they relate to the Company’s determination of fair values for the majority of its investments categorized within Level 3 as of March 31, 2015 and December 31, 2014. In addition to the techniques and inputs noted in the tables above, according to the Company’s valuation policy, it may also use other valuation techniques and methodologies when determining the fair value estimates for the Company’s investments. Any significant increases or decreases in the unobservable inputs would result in significant increases or decreases in the fair value of the Company’s investments.

Investments that do not have a readily available market value are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), or both approaches, as appropriate. The market comparables approach uses prices, including third-party

 

41


Table of Contents

indicative broker quotes, 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) that are discounted based on a required or expected discount rate to derive a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors the Company may take into account to determine the fair value of its investments include, as relevant: available current market data, including an assessment of the credit quality of the security’s issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.

The following tables provide reconciliations for the three months ended March 31, 2015 and 2014 of investments for which Level 3 inputs were used in determining fair value (in thousands):

 

     Three Months Ended March 31, 2015  
     Senior     Subordinated     Structured     Equity/     Total Return        
     Debt     Debt     Products     Other     Swaps     Total  

Fair Value Balance as of January 1, 2015

     $ 1,143,744        $ 196,859        $ 36,421        $ 125,308        $ (3,445     $ 1,498,887   

Additions (1)

     79,534        27,049        50,000        21,157        -        177,740   

Net realized gains (losses) (2)

     330        (15     -        -        2,423        2,738   

Net change in unrealized appreciation (depreciation) (3)

     (36,874     (17,629     2,389        (4,183     5,609        (50,688

Sales or repayments (4)

     (52,327     (1,464     -        (1,157     (2,423     (57,371

Net discount accretion

     918        374        -        -        -        1,292   

Transfers out of Level 3

     -        -        -        -        -        -   

Transfers into Level 3

     -        -        -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Balance as of March 31, 2015

  $ 1,135,325      $ 205,174      $ 88,810      $ 141,125      $ 2,164      $ 1,572,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of March 31, 2015 (3)

  $ (36,403   $ (18,472   $ 4,987      $ (4,183   $ 5,609      $ (48,462
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended March 31, 2014  
     Senior     Subordinated     Structured     Equity/     Total Return        
     Debt     Debt     Products     Other     Swaps     Total  

Fair Value Balance as of January 1, 2014

     $ 611,276        $ 171,921        $         55,575        $         24,671        $         1,861        $ 865,304   

Additions (1)

     133,693        540        -        20,087        -        154,320   

Net realized gains (losses) (2)

     14        652        (13     -        1,862        2,515   

Net change in unrealized appreciation (depreciation) (3)

     6,883        3,847        5,068        (635     (1,092     14,071   

Sales or repayments (4)

     (51,021     (2,954     (3,310     (24     (1,862     (59,171

Net discount accretion

     469        166        (1     -        -        634   

Transfers out of Level 3

     -        -        -        -        -        -   

Transfers into Level 3

     -        -        -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Balance as of March 31, 2014

  $ 701,314      $ 174,172      $ 57,319      $ 44,099      $ 769      $ 977,673   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of March 31, 2014 (3)

  $ 7,333      $ 4,134      $ 5,102      $ (635   $ (1,092   $ 14,842   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes increases in the cost basis of investments resulting from new and add-on portfolio investments or the capitalization of PIK interest.
(2)  Included in net realized gains (losses) in the condensed consolidated statements of operations.
(3)  Included in net change in unrealized appreciation (depreciation) in the condensed consolidated statements of operations.
(4)  Includes principal payments/paydowns on debt investments, collection of PIK interest, TRS settlement payments, proceeds from sales of investments and distributions received on equity investments classified as return of capital.

 

42


Table of Contents

No securities were transferred into or out of the Level 3 hierarchy during the three months ended March 31, 2015 and 2014. All realized and unrealized gains and losses are included in earnings and are reported as separate line items within the Company’s condensed consolidated statements of operations.

 

6.       Related Party Transactions

CNL, certain CNL affiliates, and KKR receive compensation for advisory services and other services in connection with (i) the performance and supervision of administrative services (ii) investment advisory activities and (iii) the Company’s Offerings.

CNL Securities Corp., an affiliate of CNL, serves as the managing dealer of the Company’s Offerings and in connection therewith receives selling commissions of up to 7% of gross offering proceeds and a marketing support fee of up to 3% of gross offering proceeds. All or any portion of these fees may be reallowed to participating brokers as determined by CNL Securities Corp. The Company will pay a maximum sales load of 10% of gross offering proceeds related to the Offerings for all combined selling commissions and marketing support fees.

The Company is a party to an investment advisory agreement with CNL, as amended (the “Investment Advisory Agreement”) for the overall management of the Company’s investment activities. The Company and CNL have entered into a sub-advisory agreement with KKR (the “Sub-Advisory Agreement”), under which KKR is responsible for the day-to-day management of the Company’s investment portfolio. CNL compensates KKR for advisory services that it provides to the Company with 50% of the base management fees and performance-based incentive fees that CNL receives under the Investment Advisory Agreement. CNL earns a base management fee (referred to as an investment advisory fee) equal to an annual rate of 2% of the Company’s average gross assets as of the end of the two most recently completed months, computed and paid monthly. The computation of gross assets includes unrealized depreciation, appreciation and collateral posted with the custodian in connection with the TRS, and excludes deferred offering expenses. CNL also earns performance-based incentive fees comprised of the following two parts:

(i) a subordinated incentive fee on pre-incentive fee net investment income (as defined in the Investment Advisory Agreement), paid quarterly if earned, computed as the sum of (A) 100% of quarterly pre-incentive fee net investment income in excess of 1.75% of average adjusted capital up to a limit of 0.4375% of average adjusted capital, and (B) 20% of pre-incentive fee net investment income in excess of 2.1875% of average adjusted capital and

(ii) an incentive fee on capital gains, paid annually if earned, equal to (A) 20% of all realized gains on a cumulative basis from inception, net of (1) all realized losses on a cumulative basis, (2) unrealized depreciation at year end and (3) disregarding any net realized gains associated with the TRS interest spread (which represents the difference between (a) the interest and fees received on the TRS, and (b) the financing fees paid to the TRS Counterparty), less (B) the aggregate amount of any previously paid incentive fee on capital gains.

The terms of the Investment Advisory Agreement entitle CNL (and indirectly KKR) to receive up to 5% of gross proceeds in connection with the Offerings as reimbursement for organization and offering expenses incurred by the Advisors on behalf of the Company. During the three months ended March 31, 2015, the Company reimbursed the Advisors $0.80 million in expenses related to the Follow-On Offering, or 0.4% of gross offering proceeds of the Follow-On Offering.

In addition, under the terms of the Investment Advisory Agreement, the Advisors are entitled to reimbursement of certain expenses incurred on behalf of the Company including expenses incurred in connection with its investment operations and investment transactions.

The Company is a party to an administrative services agreement with CNL (the “Administrative Services Agreement”) whereby CNL performs, and oversees the performance of, various administrative services on behalf of the Company. Administrative services may include transfer agency oversight and supervisory services, shareholder communication services, general ledger accounting services, calculating the Company’s net asset value, maintaining required corporate and financial records, financial reporting for the Company and its subsidiaries, internal audit services, reporting to the Company’s board of directors and lenders, preparing and filing income tax returns, preparing and filing SEC reports, preparing, printing and disseminating shareholder reports, overseeing the payment of the Company’s expenses and shareholder distributions, administering the Company’s share repurchase program, and management and oversight of service providers in their performance of administrative and professional services rendered for the Company. CNL may also enter into agreements with its affiliates for the performance of select administrative services. The Company reimburses CNL for the professional services and expenses it incurs in performing its administrative obligations on behalf of the Company. Through December 31, 2014, CNL also received reimbursement payments from the Company for professional services provided by certain officers of the Company.

 

43


Table of Contents

Related party fees, expenses and reimbursement of expenses incurred by the Company during the three months ended March 31, 2015 and 2014 are summarized below (in thousands):

 

         Three Months Ended
March 31,
 

Related Party

  

Source Agreement & Description

  2015     2014  

CNL Securities Corp.  

  

Managing Dealer Agreement:

Selling commissions and marketing support fees

    $             16,753        $             11,579   

CNL and KKR

  

Investment Advisory Agreement:

Base management fees (investment advisory fees)

    15,135        10,681   

CNL and KKR

  

Investment Advisory Agreement:

Subordinated incentive fee on income(1)

    7,983        5,163   

CNL and KKR

  

Investment Advisory Agreement:

Incentive fee on capital gains(2)

    -        -   

CNL and KKR

  

Investment Advisory Agreement:

Organization and offering expenses reimbursement(3)

    800        1,225   

KKR

  

Investment Sub-Advisory Agreement:

Investment expenses reimbursement

    188        306   

CNL

  

Administrative Services Agreement:

Administrative and compliance services(4)

    363        538   

 

(1)  Subordinated incentive fees on income are included in performance-based incentive fees in the condensed consolidated statements of operations. During the three months ended March 31, 2015 and 2014, $5.11 million and $5.28 million, respectively, of subordinated incentive fees on income were paid to the Advisors.

 

(2)  Incentive fees on capital gains are included in performance-based incentive fees in the condensed consolidated statements of operations. The following table provides additional details for the incentive fee on capital gains for the three months ended March 31, 2015 and 2014 (in thousands):

 

Incentive Fee on Capital Gains for the Three Months Ended March 31,

   2015      2014  

Accrued incentive fee on capital gains as of January 1,

     $                   -         $         11,128   

Incentive fee on capital gains expense during the three months ended March 31,

     -         4,623   

Less: Incentive fee on capital gains paid to the Advisors during the three months ended March 31,

     -         (2,323
  

 

 

    

 

 

 

Accrued incentive fee on gains as of March 31,

     -         13,428   

Less: Accrued incentive fee on capital gains attributable to unrealized gains unearned by the Advisors as of March 31,

     -         (13,428
  

 

 

    

 

 

 

Incentive fee on capital gains earned by and payable to the Advisors as of March 31,

     $ -         $ -   
  

 

 

    

 

 

 

 

(3)  The following table provides additional details for the organization and offering expenses reimbursement (in thousands):

 

Organization and Offering Expenses Reimbursement for the Three Months Ended March 31,

   2015      2014  

Offering expenses reimbursement payable as of January 1,

     $         272         $         240   

Additional offering expenses deferred during the three months ended March 31,

     800         1,225   

Offering expenses reimbursements payable as of March 31,

     (371      (494
  

 

 

    

 

 

 

Offering expenses reimbursements paid to the Advisors during the three months ended March 31,

     $ 701         $ 971   
  

 

 

    

 

 

 

Outstanding unreimbursed offering expenses (net of amounts payable) as of March 31,

     $ -         $ 1,516   
  

 

 

    

 

 

 

 

(4)  Includes $0.14 million for reimbursement payments to CNL for services provided to the Company for its Chief Compliance Officer and Chief Financial Officer for the three months ended March 31, 2014.

KKR is obligated to remit to the Company any earned capital structuring fees based on the Company’s pro-rata portion of the co-investment transactions or originated investments in which the Company participates. As a result, the Company earned capital structuring fees of $1.54 million and $0.21 million during the three months ended March 31, 2015 and 2014, respectively.

Indemnification - The Investment Advisory Agreement and the Sub-Advisory Agreement provide certain indemnification to the Advisors, their directors, officers, persons associated with the Advisors, and their affiliates. The managing dealer agreement provides certain indemnification to the managing dealer and each participating broker and their respective officers, directors, partners, employees, associated persons, agents and control persons. In addition, the Company’s articles of incorporation provide certain indemnifications to its officers, directors, agents, and certain other persons. As of March 31, 2015, management believed that the risk of incurring any losses for such indemnification was remote.

 

44


Table of Contents

7.      Fee Income

Fee income, which is non-recurring, consisted of the following (in thousands):

 

Fee Income

   Three Months Ended March 31,  
   2015      2014  

Capital structuring fees

     $ 1,538          $                     210    

Amendment fees

     8,063          53    

Other

                         -          13    
  

 

 

    

 

 

 

Total

  $ 9,601       $ 276    
  

 

 

    

 

 

 

8.      Distributions

The Company’s board of directors declared distributions for 13 and 12 record dates in the three months ended March 31, 2015 and 2014, respectively. Declared distributions are paid monthly. The total and the sources of declared distributions for the three months ended March 31, 2015 and 2014 are presented in the tables below (in thousands, except per share amounts).

 

  2015   2014  
  Per Share   Amount   Allocation   Per Share   Amount   Allocation  

Total Declared Distributions

  $       0.20       $       45,830       100.0   $       0.18       $       26,763       100.0

From net investment income

  0.17       39,190       85.5      0.11       15,778       59.0   

From realized gains

  0.03       6,640       14.5      0.07       10,985       41.0   

On December 19, 2014, January 28, 2015, February 25, 2015 and March 18, 2015, the Company’s board of directors declared distributions for January 2015, February 2015, March 2015 and April 2015, respectively. Distributions are and/or will be recorded weekly and paid monthly in accordance with the schedule below.

 

Record Date

Distribution
Payment Date
Declaration Distribution
Per Share

Per Record Date
 

January 6, 13, 20, and 27, 2015

January 28, 2015   $ 0.015483   

February 3, 10, 17, and 24, 2015

February 25, 2015   $ 0.015483   

March 3, 10, 17, 24, and 31, 2015

April 1, 2015   $ 0.015483   

April 7, 14, 21, and 28, 2015

April 29, 2015   $ 0.015483   

 

9. Share Transactions

The following table summarizes the total shares issued and proceeds received in connection with the Company’s Offerings for the three months ended March 31, 2015 and 2014 (in thousands except share and per share amounts).

 

     Three Months Ended March 31,  
     2015     2014  
     Shares      Amount     Shares      Amount  

Gross Proceeds from Offering

         16,812,623           $    183,198            10,930,795           $    122,746   

Commissions and Marketing Support Fees

     -         (16,753     -         (11,579
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Proceeds to Company

         16,812,623             166,445            10,930,795         111,167   

Reinvestment of Distributions

     1,444,063         14,296        2,095,496         21,311   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Proceeds from Offering

         18,256,686           $    180,741            13,026,291           $    132,478   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average Net Proceeds Per Share

     $9.90        $10.17   

As of March 31, 2015, the Company has sold 239.72 million shares of common stock through the Offerings, including reinvestment of distributions, for a total gross proceeds of $2.62 billion.

The Company conducts quarterly tender offers pursuant to its share repurchase program. The Company currently limits the number of shares to be repurchased during any calendar year to the number of shares it can repurchase with the proceeds it receives from the issuance of shares of its common stock under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the sale of investments as of the end of the

 

45


Table of Contents

applicable period to repurchase shares. The Company limits repurchases in each quarter to 2.5% of the weighted average number of shares of common stock outstanding in the prior four calendar quarters. The Company’s board of directors may amend, suspend or terminate the share repurchase program upon 30 days’ notice.

The following table is a summary of the share repurchases completed during the three months ended March 31, 2015 and 2014 (in thousands, except share and per share amounts):

 

Repurchase Date

   Total Number of
Shares Offered
  to Repurchase  
     Total Number of
  Shares Repurchased  
     Total
  Consideration  
     No. of Shares
  Repurchased /Total Offer  
     Price Paid
        per Share        
 

2015:

              

March 2, 2015

     4,435,072         555,174         $ 5,452         13%           $ 9.82   

2014:

              

March 3, 2014

     2,612,555         323,324         $ 3,233         12%           $ 10.00   

 

10. Borrowings

The Company’s outstanding borrowings as of March 31, 2015 and December 31, 2014 were as follows (in thousands):

 

    As of March 31, 2015     As of December 31, 2014  
    Total Aggregate
Principal
Amount Committed
    Principal
Amount
Outstanding
    Carrying
Value
    Total Aggregate
Principal
Amount Committed
    Principal
Amount
Outstanding
    Carrying
Value
 

Deutsche Bank Credit Facility(1)

    $ 150,000           $ 150,000        $ 150,000            $ 340,000            $ 47,000        $ 47,000       

BNP Credit Facility(1)

    200,000           85,000        85,000            200,000            100,450        100,450       

Senior Secured Revolving Credit Facility(1)

    655,000(2)        230,000        230,000            655,000(2)        230,000        230,000       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit facilities

  1,005,000         465,000      465,000          1,195,000          377,450      377,450       

2014 Senior Secured Term Loan

  396,000         396,000      394,322(3)      397,000          397,000      395,228(3)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

  $                 1,401,000         $         861,000      $     859,322          $                 1,592,000          $         774,450      $     772,678       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Subject to borrowing base and leverage restrictions.
(2)  Provides a feature that allows the Company, under certain circumstances, to increase the size of the Senior Secured Revolving Credit Facility to a maximum of $900 million.
(3)  Comprised of outstanding principal less the unaccreted original issue discount.

The weighted average stated interest rate and weighted average remaining years to maturity of the Company’s outstanding borrowings as of March 31, 2015 were 3.05% and 3.0 years, respectively, and as of December 31, 2014 were 3.24% and 3.2 years, respectively.

Deutsche Bank Credit Facility

In 2011, CCT Funding became a party to a revolving credit facility with Deutsche Bank AG, New York Branch (“Deutsche Bank”) and the other lenders from time to time thereto (the “Deutsche Bank Credit Facility”). Deutsche Bank serves as administrative agent under the credit facility. On January 9, 2015, CCT Funding entered into an amendment (the “Fifth Amendment”) to the Deutsche Bank Credit Facility. The Fifth Amendment amended the Deutsche Bank Credit Facility by providing for, among other things, (i) the termination of the Tranche B1 Commitment, Tranche B2 Commitment and Tranche D Commitment, and (ii) borrowings in an aggregate amount up to $150 million on a committed basis (the “Tranche E Loans”). From and after February 11, 2015, the Fifth Amendment effective date, all outstanding loans, including Tranche B1 Loans and Tranche B2 Loans, were converted into Tranche E Loans. The Fifth Amendment also modified the interest rate and maturity date applicable to the Tranche E Loans under the Credit Agreement. Pursuant to the Fifth Amendment, the Tranche E Loans are scheduled to mature, and all accrued and unpaid interest thereunder will be due and payable on February 8, 2017. Upfront fees and unfunded commitment fees were also incurred with respect to the Tranche E Loans.

 

46


Table of Contents

Interest on the Deutsche Bank Credit Facility is charged at the rate of three-month LIBOR plus 1.85%. CCT Funding also pays an annual commitment fee on any unused commitment amounts of 0.50% to 0.75%. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the Deutsche Bank Credit Facility for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended March 31,  
     2015      2014  

Stated interest expense

   $                     450            $                     1,412        

Unused commitment fees

     186              98        

Amortization of deferred financing costs

     106              151        
  

 

 

    

 

 

 

Total interest expense

$ 742         $ 1,661        
  

 

 

    

 

 

 

Weighted average interest rate

  2.2%        2.4%     

Average borrowings

$ 85,322         $ 244,273        

The Deutsche Bank Credit Facility is secured by the portfolio investments held in CCT Funding.

BNP Credit Facility

In 2013, Paris Funding became a party to a revolving credit facility with BNP Paribas Prime Brokerage, Inc. (“BNP”) under which it may borrow up to $200 million (the “BNP Credit Facility”). Paris Funding has the right to prepay loans under the BNP Credit Facility in whole or in part at any time. Paris Funding may terminate the BNP Credit Facility with 180 days’ notice. If certain margin and collateral requirements, minimum net assets or other covenants are not met, the BNP Credit Facility could be deemed in default and result in termination. Absent a default or facility termination event, BNP is required to provide Paris Funding with 364 days’ notice prior to terminating the BNP Credit Facility.

Interest on the BNP Credit Facility is charged at the rate of one month LIBOR plus 1.10% and is payable monthly. Paris Funding also pays an annual commitment fee on any unused commitment amounts of 0.40% or 0.50%, depending on utilization levels. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the BNP Credit Facility for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended March 31,  
     2015      2014  

Stated interest expense

   $                     181            $                     296        

Unused commitment fees

     167              199        

Amortization of deferred financing costs

     -              116        
  

 

 

    

 

 

 

Total interest expense

$ 348         $ 611        
  

 

 

    

 

 

 

Weighted average interest rate

  1.3%        1.3%     

Average borrowings

$ 56,988         $ 94,239        

Paris Funding pledges certain of its assets as collateral to secure borrowings under the BNP Credit Facility. As of March 31, 2015 and December 31, 2014, Paris Funding had investments with a fair value of $245.21 million and $258.34 million, respectively, pledged as collateral under the BNP Credit Facility. Under the terms of the BNP Credit Facility, BNP has the ability to borrow a portion of the pledged collateral (“Rehypothecated Securities”), provided that, among other things, the fair value of the borrowed collateral does not exceed the value of the loan against which the collateral was pledged and any single borrowed security does not represent the entire position of such security held by Paris Funding. Paris Funding may designate any security within the pledged collateral as ineligible to be a Rehypothecated Security, provided there are eligible securities within the segregated custody account in an amount equal to the outstanding borrowings owed by Paris Funding to BNP. Paris Funding may recall any Rehypothecated Security at any time and BNP must, to the extent commercially reasonable, return such security or equivalent security within a commercially reasonable period. In the event BNP does not return the security, Paris Funding will have the right to, among other things, apply and set off an amount equal to 100% of the then-current fair market value of such Rehypothecated Securities against any outstanding borrowings owed to BNP under the BNP Credit Facility. Rehypothecated Securities are marked-to-market daily and if the value of all Rehypothecated Securities exceeds 100% of the outstanding borrowings owed by Paris Funding under the BNP Credit Facility, BNP may either reduce the amount of Rehypothecated Securities to eliminate such excess or deposit into the segregated custody account an amount of cash equal to such excess. Paris Funding will continue to receive interest and the scheduled repayment of principal balances on Rehypothecated Securities. Paris Funding may receive a fee from BNP in connection with Rehypothecated securities meeting certain criteria. Paris Funding did not recognize any fees on Rehypothecated Securities during the three months ended March 31, 2015 and 2014. As of March 31, 2015, there were no securities rehypothecated by BNP.

 

47


Table of Contents

Senior Secured Revolving Credit Facility

In September 2013, the Company entered into a revolving credit facility (the “Senior Secured Revolving Credit Facility”) with certain lenders and JPMorgan Chase Bank, N.A., acting as administrative agent. The Senior Secured Revolving Credit Facility consists of loans to be made in U.S. dollars and other foreign currencies in an aggregate amount of $655 million as of March 31, 2015, with an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the facility to a maximum of $900 million. Availability under the Senior Secured Revolving Credit Facility will terminate on September 4, 2016 and the outstanding loans under the Senior Secured Revolving Credit Facility will mature on September 4, 2017. The Senior Secured Revolving Credit Facility is secured by substantially all of the Company’s portfolio investments and its cash and securities accounts, excluding those held by CCT Funding, Paris Funding and Halifax Funding, and provides for a guaranty by certain other subsidiaries of the Company.

The stated borrowing rate under the Senior Secured Revolving Credit Facility is generally based on LIBOR plus an applicable spread of 2.50% or, with respect to borrowings in foreign currencies, on a base interest rate applicable to such currency borrowing plus an applicable spread of 2.50%. The Company also pays an annual commitment fee on any unused commitment amounts between 0.375% and 1.00%, depending on utilization levels. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the Senior Secured Revolving Credit Facility for the three months ended March 31, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended March 31,  
     2015      2014  

Stated interest expense

   $                     1,545            $ 1,888        

Unused commitment fees

     398              69        

Amortization of deferred financing costs

     429              244        
  

 

 

    

 

 

 

Total interest expense

$ 2,372         $ 2,201        
  

 

 

    

 

 

 

Weighted average interest rate

  2.8%        3.1%     

Average borrowings

$ 230,000         $                     246,409        

2014 Senior Secured Term Loan

On May 20, 2014, the Company entered into a senior secured term loan credit facility (the “2014 Senior Secured Term Loan”) with certain lenders and JPMorgan Chase Bank, N.A., as administrative agent. The 2014 Senior Secured Term Loan initially provided the Company with $398 million in gross proceeds. The 2014 Senior Secured Term Loan matures in May 2019, and generally bears interest at LIBOR plus 3.25% (with a LIBOR floor of 0.75%). The 2014 Senior Secured Term Loan includes an accordion feature permitting the Company to expand the facility if certain conditions are satisfied; provided, however, that the aggregate amount of the 2014 Senior Secured Term Loan is limited to the amount as determined from time to time which would not cause the covered debt amount (i.e., the Company’s aggregate debt under both the 2014 Senior Secured Term Loan and the Senior Secured Revolving Credit Facility, other permitted debt and certain other unsecured debt) to exceed the borrowing/collateral base. The 2014 Senior Secured Term Loan is secured by substantially all of the Company’s portfolio investments and its cash and securities accounts, excluding those held by CCT Funding, Paris Funding and Halifax Funding.

Maturities of the 2014 Senior Secured Term Loan for the remainder of 2015 and each of the next four years, in aggregate, as of March 31, 2015 were as follows (in thousands):

 

2015

$ 3,000   

2016

  4,000   

2017

  4,000   

2018

  4,000   

2019

  381,000   
  

 

 

 
$ 396,000   
  

 

 

 

 

48


Table of Contents

The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the 2014 Senior Term Loan for the three months ended March 31, 2015 were as follows (in thousands):

 

  Three Months Ended
March 31, 2015
 

Stated interest expense

$                     3,970       

Accretion of original issue discount

  94       

Amortization of deferred financing costs

  265       
  

 

 

 

Total interest expense

$ 4,329       
  

 

 

 

Weighted average interest rate

  4.2%   

Average borrowings

$ 396,978       

In connection with each of the credit facilities and 2014 Senior Secured Term Loan, the Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. As of March 31, 2015 and December 31, 2014, the Company believes it was in compliance with the covenant requirements for all of its credit facilities and 2014 Senior Secured Term Loan.

 

11. Commitments and Contingencies

Unfunded commitments to provide funds to portfolio companies are not recorded in the Company’s condensed consolidated statements of assets and liabilities. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company has sufficient liquidity to fund these commitments. As of March 31, 2015, the Company’s unfunded commitments consisted of the following (in thousands):

 

Category / Company (1)

      

Unfunded revolvers:

  

Beyond Trust Software

   $ 1,090   
  

 

 

 

Unfunded delayed draw loans:

Pacific Union Financial, LLC

  14,272   

Marshall Retail Group, LLC

  1,200   
  

 

 

 
  15,472   
  

 

 

 

Unfunded unsecured bonds:

The Rockport Company, LLC

  28,516   
  

 

 

 

Unfunded equity commitments:

Orchard Marine, Ltd.

  28,233   

Star Mountain SMB Multi-Manager Credit Platform, LP

  57,295   

Home Partners of America, Inc.

  44,100   

KKR BPT Holdings Aggregator, LLC

  14,500   
  

 

 

 
  144,128   
  

 

 

 

Total Unfunded Commitments

$         189,206   
  

 

 

 

 

(1)  May be commitments to one or more entities affiliated with the named company.

As of March 31, 2015, the Company’s unfunded debt commitments have a fair value of approximately ($0.43) million. The Company funds its equity investments as it receives funding notices from the portfolio companies. As of March 31, 2015, the Company’s unfunded equity commitments have a fair value of zero.

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at March 31, 2015 and December 31, 2014.

 

49


Table of Contents
12. Income Taxes

During the three months ended March 31, 2015, the Company recorded foreign income tax expense of $0.11 million. $0.09 million of this expense represents foreign tax withholding is recorded net against the related interest income in the condensed consolidated statements of operations. There was no federal and state income tax expense for the three months ended March 31, 2015; however, the Company recorded additional deferred tax assets of approximately $0.17 million and a corresponding valuation allowance for the results of the Taxable Subsidiaries. The deferred tax assets are primarily comprised on net operating losses and unrealized depreciation in investments and the valuation allowance was recorded as the Company believes it is more likely than not the deferred tax asset would not be realized in a future period.

 

13. Financial Highlights

The following is a schedule of financial highlights for one share of common stock during the three months ended March 31, 2015 and 2014.

 

     Three Months Ended March 31,  
     2015      2014  

OPERATING PERFORMANCE PER SHARE

     

Net Asset Value, Beginning of Period

   $ 9.79          $ 10.00      
  

 

 

    

 

 

 

Net Investment Income(1)

  0.17         0.14      

Net Realized and Unrealized Gain (Loss)(1)(2)

  (0.03)        0.16      
  

 

 

    

 

 

 

Net Increase Resulting from Investment Operations

  0.14         0.30      
  

 

 

    

 

 

 

Distributions from Net Investment Income(3)

  (0.17)        (0.11)     

Distributions from Realized Gains(3)

  (0.03)        (0.07)     
  

 

 

    

 

 

 

Net Decrease Resulting from Distributions to Common Shareholders

  (0.20)        (0.18)     
  

 

 

    

 

 

 

Issuance of common stock above net asset value(5)

  0.01         0.01      

Repurchases of common stock(6)

  —         —      
  

 

 

    

 

 

 

Net Increase Resulting from Capital Share Transactions

  0.01         0.01      
  

 

 

    

 

 

 

Net Asset Value, End of Period

$ 9.74       $ 10.13      
  

 

 

    

 

 

 

INVESTMENT RETURNS

Total Investment Return-Net Price(7)

  0.4%      1.4%   

Total Investment Return-Net Asset Value(8)

  1.5%      3.1%   

RATIOS/SUPPLEMENTAL DATA (all amounts in thousands except ratios)

Net Assets, End of Period

$ 2,307,064       $ 1,577,408      

Average Net Assets(9)

$ 2,222,769       $ 1,498,679      

Average Borrowings(9)

$ 769,288       $ 584,921      

Shares Outstanding, End of Period

  236,833         155,727      

Weighted Average Shares Outstanding

  227,625         149,009      

Ratios to Average Net Assets:(9)

Total Operating Expenses

  1.56%      1.95%   

Net Investment Income

  1.76%      1.38%   

Total Investment Income

  3.33%      3.33%   

Portfolio Turnover Rate

  1%      16%   

Asset Coverage Ratio(10)

  3.20         4.62      

 

(1)  The per share data was derived by using the weighted average shares outstanding during the period.
(2)  The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio securities for the period because of the timing of sales of the Company’s shares in relation to fluctuating market values for the portfolio.
(3)  The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period; distributions per share are rounded to the nearest $0.01.
(4)  See Note 8 for further information on the source of distributions from other than net investment income and realized gains.

 

50


Table of Contents
(5)  The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding at the end of the period.
(6)  The per share impact of the Company’s repurchase of common stock is a reduction to net asset value of less than $0.01 per share during the applicable period.
(7)  Total investment return-net price is a measure of total return for shareholders who purchased the Company’s common stock at the beginning of the period, including distributions declared during the period. Total investment return-net price is based on (i) the purchase of one share at the public offering price, net of sales load, on the first day of the period, (ii) the sale at the net asset value per share on the last day of the period, of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) distributions payable relating to one share, if any, on the last day of the period. The total investment return-net price calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. Since there is no public market for the Company’s shares, the terminal sales price per share is assumed to be equal to the net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares of common stock.
(8)  Total investment return-net asset value is a measure of the change in total value for shareholders who held the Company’s common stock at the beginning and end of the period, including distributions declared during the period. Total investment return-net asset value is based on (i) net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period, of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) distributions payable relating to one share, if any, on the last day of the period. The total investment return-net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. Since there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares of common stock.
(9)  The computation of average net assets and average borrowings during the period is based on the daily value of net assets and borrowing balances, respectively. Ratios are not annualized.
(10)  Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. For purposes of the asset coverage ratio test applicable to the Company as a business development company, the Company regards the TRS total notional amount at the end of the period, less the total amount of cash collateral posted by Halifax Funding under the TRS, as a senior security. These data are presented in Note 4 of the condensed consolidated financial statements.

 

14. Subsequent Events

On April 14, 2015, the Company filed a tender offer statement with the SEC on Schedule TO. The Company offered to repurchase up to 4,919,566 shares of common stock at a cash price of $9.74 per share. The tender offer will expire on May 27, 2015 at 5:00 pm central time.

On April 27, 2015, the Company’s board of directors declared distributions of $0.015483 per share for four record dates beginning on May 5, 2015 through and including May 26, 2015.

During the period April 1, 2015 through May 8, 2015, the Company received additional net proceeds of approximately $91.49 million from its Follow-On Offering, including amounts through its distribution reinvestment plan.

 

51


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

The following discussion is based on the unaudited condensed consolidated financial statements as of March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014. Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as, the audited consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. Capitalized terms used in this Item 2 have the same meaning as in the accompanying unaudited condensed consolidated financial statements in Item 1 unless otherwise defined herein.

Statement Regarding Forward-Looking Information

The following information contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements generally are characterized by the use of terms such as “may,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: persistent economic weakness at the global or national level, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global capital market conditions, our ability to obtain or maintain credit lines or credit facilities on satisfactory terms, changes in interest rates, availability of proceeds from our offering of shares, our ability to identify suitable investments, our ability to close on identified investments, our ability to maintain our qualification as a regulated investment company and as a business development company, the ability of our Advisors (defined below) and their affiliates to attract and retain highly talented professionals, inaccuracies of our accounting estimates, the ability of our Advisors to locate suitable borrowers for our loans and the ability of such borrowers to make payments under their respective loans. Given these uncertainties, we caution you not to place undue reliance on such statements, which apply only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K filing for the year ended December 31, 2014 and Item 1A in Part II of this Quarterly Report.

The forward-looking statements and projections contained in this report are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.

Overview

We are a non-diversified closed-end management investment company that has elected to be treated as a business development company under the 1940 Act. Formed as a Maryland corporation on June 9, 2010, we are externally managed by CNL Fund Advisors Company (“CNL”) and KKR Credit Advisors (US) LLC (“KKR”), collectively, the “Advisors,” which are responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments, determining the securities and other assets that we will purchase, retain or sell, and monitoring our portfolio on an ongoing basis. Both Advisors are registered as investment advisers with the Securities and Exchange Commission (the “SEC”). CNL also provides the administrative services necessary for us to operate.

Investment Objective, Investment Program and Primary Investment Types

Our investment objective is to provide our shareholders with current income and, to a lesser extent, long-term capital appreciation. We pursue our investment objective by investing primarily in the debt of privately owned and thinly traded U.S. companies (also referred to as “portfolio companies”) with a focus on originated transactions sourced through the networks of our Advisors. We define originated transactions as any negotiated investment where we, through our Advisors’ direct efforts, provide funds directly to a portfolio company. We also have the ability, as granted through our SEC Exemptive Order, to co-invest in privately negotiated transactions alongside other investment funds managed by or affiliated with KKR (the “Co-Investment Transactions”). We anticipate that a substantial portion of our investment portfolio will consist of senior and subordinated debt, which we believe offer potential opportunities for superior risk-adjusted returns and income generation. Our debt investments may take the form of corporate loans or bonds, may be secured or unsecured and may, in some cases, be accompanied by warrants, options or other forms of equity participation. We may separately purchase common or preferred equity interests in transactions. We may also invest in structured products, such as collateralized loan obligations, and loan participations and assignments.

 

52


Table of Contents

As of March 31, 2015, our investment program consisted of two main components. First, since the inception of our investment activities, we have been engaged in the direct purchase of debt and equity securities, primarily issued by portfolio companies, through both secondary market and direct lending transactions. We refer to this investment program component as our “Investment Portfolio” in this report. Second, beginning in November 2012, we supplemented our economic exposure to portfolio companies by entering into total return swap arrangements (the “TRS”) with a commercial bank counterparty and directing the creation of a portfolio of debt investments that serve as reference assets under the TRS. We refer to this investment program component as our portfolio of TRS assets or our “TRS Portfolio” in this report. In the case of our TRS Portfolio, we receive all (i) realized income and fees and (ii) realized capital gains generated by the TRS assets. In return, we must pay quarterly to the TRS counterparty a payment consisting of (i) realized capital losses generated by the TRS assets and (ii) financing costs that are based on (a) a floating financing rate and (b) the settled notional amount of TRS assets.

References in this report to the term “settled notional amount” in association with the TRS mean the aggregate cost of the TRS assets underlying the TRS that are settled and owned by the counterparty. In addition, this aggregate cost serves as the basis for our payments of financing charges to the counterparty under the TRS. References to the term “total notional amount” mean the settled notional amount plus the effect of the purchase and sale cost of all TRS assets where trade settlement is pending. We will receive additional economic benefit if the value of the underlying TRS asset appreciates relative to the total notional amount through the final settlement date following termination of the agreement. Conversely, we will be required to pay the counterparty the amount, if any, by which the value of the underlying TRS asset declines relative to the total notional amount through such final settlement date. We do not own, or have physical custody of, the TRS assets and the TRS assets are not direct investments by us. Our subsidiary is required to post collateral with a custodian of at least 40% of the notional amount of each TRS asset and may be required to post additional collateral in the event the value of the TRS assets decreases below a specified amount.

Our investment strategy is focused on creating and growing an Investment Portfolio that generates superior risk-adjusted returns by carefully selecting investments through rigorous due diligence and actively managing and monitoring our Investment Portfolio. When evaluating an investment and the related portfolio company, we use the resources of our Advisors to develop an investment thesis and a proprietary view of a potential portfolio company’s intrinsic value. We believe our flexible approach to investing allows us to take advantage of opportunities that offer favorable risk/reward characteristics.

We primarily focus on the following investment types:

 

    Senior Debt. We invest in senior debt, in which we generally take a security interest in the available assets of the portfolio company, including equity interests in any of its subsidiaries. These investments generally take the form of senior secured first lien loans, senior secured second lien loans or senior secured bonds. In some circumstances, our lien could be subordinated to claims of other creditors.

 

    Subordinated Debt. Our subordinated debt investments are generally subordinated to senior debt and are generally unsecured. These investments are generally structured with interest-only payments throughout the life of the security, with the principal due at maturity.

 

    Structured Products. We also invest in structured products, which may include collateralized debt obligations (“CDOs”), collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), structured notes and credit-linked notes. The issuers of such investment products may be structured as trusts or other types of pooled investment vehicles. Such products may also involve the deposit with or purchase by an entity of the underlying investments and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying investments or referencing an indicator related to such investments.

 

    Equity Investments. We also make selected equity investments. In addition, when we invest in senior and subordinated debt, we may acquire warrants or options to purchase equity securities or benefit from other types of equity participation. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests.

The level of our investment activity can and does vary substantially from period to period depending on many factors, including: the demand for debt from creditworthy privately owned U.S. companies, the level of merger, acquisition and refinancing activity involving private companies, the availability of credit to finance transactions, the general economic environment, the competitive investment environment for the types of investments we currently seek and intend to seek in the future, the amount of equity capital we raise from offering common stock in our company and the amount of capital we may borrow.

 

53


Table of Contents

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

Revenues

We generate revenues primarily in the form of interest on the debt securities of portfolio companies that we acquire and hold for investment purposes. Our investments in debt securities generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically earn interest at fixed or floating rates. Interest on our debt securities is generally payable to us quarterly or semi-annually. Some of our investments in debt securities contain payment-in-kind (“PIK”) interest provisions. The outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of dividends from equity investments, prepayment fees, commitment fees, origination fees and fees for providing significant managerial assistance. While the TRS assets also generate interest income and fees, such amounts, net of the financing expenses, are recognized as (i) realized gains pursuant to generally accepted accounting principles (“GAAP”) when payable to us quarterly and (ii) unrealized gains for any accrued but unpaid amounts.

Operating Expenses

Our primary operating expenses include an investment advisory fee and, depending on our operating results, performance-based incentive fees, interest expense, administrative expenses, custodian and accounting fees, other third-party professional services and expenses and amortization of deferred offering expenses. The investment advisory fee and performance-based incentive fees compensate the Advisors for their services in identifying, evaluating, negotiating, closing and monitoring our investments.

 

54


Table of Contents

Financial and Operating Highlights

The following table presents financial and operating highlights as of March 31, 2015 and December 31, 2014, and the three months ended March 31, 2015 and 2014:

 

     March 31,     December 31,  

As of (in thousands, except ratios, share and per share amounts)

   2015     2014  

Total assets

   $ 3,275,912      $ 2,971,720   

Adjusted total assets (Total assets, net of payable for investments purchased)

   $ 3,201,045      $ 2,936,832   

Investments in portfolio companies

   $ 2,937,843      $ 2,720,571   

Borrowings - credit facilities and term loan, net of discount

   $ 859,322      $ 772,678   

Deemed borrowings (TRS implied leverage classified as senior securities)

   $ 185,814      $ 172,041   

Net assets

   $ 2,307,064      $ 2,145,821   

Net asset value per share

   $ 9.74      $ 9.79   

Leverage ratio (Borrowings + Deemed borrowings)/Adjusted total assets)

     33     32
Activity for the Three Months Ended    March 31,  

(in thousands, except ratios, share and per share amounts)

   2015     2014  

Average net assets

   $ 2,222,769      $ 1,498,679   

Average borrowings under credit facilities and term loan

   $ 769,288      $ 584,921   

Cost of investments purchased

   $ 407,247      $ 286,051   

Sales, principal payments and other exits

   $ 136,521      $ 427,409   

Net investment income

   $ 39,190      $ 20,711   

Net realized gains on investments, derivative instruments and foreign currency transactions

   $ 18,722      $ 10,985   

Net change in unrealized appreciation (depreciation) on investments, derivative instruments and foreign currency translation

   $ (26,128   $ 12,796   

Net increase in net assets resulting from operations

   $ 31,784      $ 44,492   

Total distributions declared

   $ 45,830      $ 26,763   

Net investment income before unearned incentive fees per share

   $ 0.17      $ 0.16   

Net investment income per share

   $ 0.17      $ 0.14   

Earnings per share

   $ 0.14      $ 0.30   

Distributions declared per share outstanding for the entire period

   $ 0.20      $ 0.18   
Summary of Common Stock Offerings for the Three Months Ended    March 31,  

(in thousands, except ratios, share and per share amounts)

   2015     2014  

Gross proceeds, excluding reinvestment of distributions

   $ 183,198      $ 122,746   

Net proceeds to Company, excluding reinvestment of distributions

   $ 166,445      $ 111,167   

Reinvestment of distributions

   $ 14,296      $ 21,311   

Average net proceeds per share

   $ 9.90      $ 10.17   

Shares issued in connection with Offerings, excluding reinvestment of distributions

     16,812,623        10,930,795   

Shares issued in connection with reinvestment of distributions

     1,444,063        2,095,496   

Business Environment

Although financial conditions have improved significantly since the recession of 2008-2009, our directly originated investments continue to have higher all-in yields than comparable secondary market debt; therefore, we maintain a focus on directly originated investment opportunities. Corporate credit fundamentals have improved and default activity has decreased dramatically over the prior three years and remains at historically low levels. As the capital markets environment has improved, new issue volumes have risen to unprecedented levels primarily from large corporate issuers. Despite the relative ease with which large companies are able to access capital, there remain a substantial number of companies that, for a variety of reasons, are unable to access the syndicated debt markets on attractive terms. In the United States, access is often limited by the issuer’s size, complicated industry dynamics, regulatory overhang, and unique or complex capital structures. Given these market conditions, it is our ongoing view that providing senior and subordinated debt capital to such companies represents an attractive risk-adjusted return. Since receiving our SEC Exemptive Order allowing Co-Investment Transactions, directly originated investments have grown to approximately 50% of our Investment Portfolio. Furthermore, we believe future lending opportunities are likely to expand given the current regulatory setting, gradual Federal Reserve tapering, and a potential change in the current Central Bank-subsidized low-interest rate environment.

Considering the recent dynamic market environment in credit, we continue to be mindful of a number of key themes. Notably, volatility has returned, driven primarily by geopolitical concerns as well as sector specific dislocations, such as in the energy sector. This overall volatility has been exacerbated by, among other things, large fund outflows, resulting in a lack of liquidity and a “flight to quality” among fund managers. Despite this volatility, our basic investment premise emphasizing directly originated and other private credit investments remains unchanged. We believe that privately originated transactions to both U.S. and foreign middle market companies will outperform low-yielding government bonds and high grade credit over the long-term. Meanwhile, we continue to scan for attractive opportunities in secondary credit markets resulting from specific situations and volatility in market fundamentals.

 

55


Table of Contents

We do believe regulations that burden commercial bank-lending practices will continue to expand the investment opportunities for non-bank investors and investment entities. We maintain a degree of caution as we progress through 2015 recognizing that credit defaults remain abnormally low and are likely unsustainable. We believe continued focus on the fundamentals, including rigorous due diligence, robust credit underwriting and direct structuring of investments best positions the portfolio to protect principal and generate attractive risk-adjusted returns.

Portfolio and Investment Activity

Portfolio Investment Activity for the Three Months ended March 31, 2015 and 2014

The following table summarizes our investment activity as of and for the three months ended March 31, 2015 and 2014, excluding our short term investments:

 

    Investment Activity Summary as of and for the Three Months Ended March 31,  ($ in thousands)  
    2015     2014  
    Investment Portfolio     TRS Portfolio     Investment Portfolio     TRS Portfolio  

Total Fair Value

  $ 2,937,843      $ 308,865      $ 1,812,586      $ 39,956   

Incremental Purchases

  $ 407,247      $ 27,491      $ 286,051      $ 20,926   

Investment Sales

  $ 33,346      $ 1,041      $ 304,509      $ 35,659   

Principal Payments

  $ 103,175      $ 8,882      $ 122,900      $ 160   

No. Portfolio Companies

    116        49        89        18   

Portfolio Company Additions

    9        4        10        4   

Portfolio Company Exits

    (5     (2     (15     (6

No. Debt Investments

    133        50        98        18   

Debt Investment Additions

    12        6        19        4   

Debt Investment Exits

    (6     (5     (24     (6

No. Structured Product Investments

    4        —          3        —     

No. Equity/Other Investments

    25        —          8        —     

While the Investment Portfolio and the TRS Portfolio are accounted for and presented as two distinct portfolios, the two portfolios had 25 and 16 debt investment positions and 36 and 16 portfolio companies in common as of March 31, 2015 and 2014, respectively. The changes in the fair value of our Investment Portfolio and our TRS Portfolio are directly related to (i) the changes in their cost basis and notional amounts, respectively, as a result of incremental purchases, sales and principal payments as described in the table above, and (ii) the changes in fair value for assets held at the beginning and end of the period. The net change in unrealized appreciation (depreciation) for the three months ended March 31, 2015 and 2014 were ($50.61) million and $14.58 million, respectively, for our Investment Portfolio, and $5.61 million and ($1.09) million, respectively, for our TRS Portfolio. See “Results of Operations – Net Change in Unrealized Appreciation or Depreciation” below for further details relating to the changes.

As discussed above under “— Overview,” since receiving our SEC Exemptive Order, we have increased our focus on originated investments, including Co-Investment Transactions, as a main element of our investment strategy. Co-Investment Transactions give us the opportunity to participate in those investments alongside KKR’s institutional clients and proprietary funds. Our total origination activity in Co-Investment Transactions, at cost, totaled approximately $151.55 million for the three months ended March 31, 2015, representing 50.4% of approximately $300.75 million in total originations by KKR in Co-Investment Transactions for the period.

 

56


Table of Contents

The following summarizes our investment activity associated with our investment focus on originated debt investments during the three months ended March 31, 2015 and 2014 and the status of originated investments held in the Investment Portfolio as of March 31, 2015 and December 31, 2014:

 

    March 31,  

Originated Investment Activity for the Three Months Ended ($ in thousands)

  2015     2014  

Number of originated investments, by issuer

    2        4   

Total amount of originated investments, at cost

  $ 151,550      $ 126,056   

Originated investments as a percentage of total investment activity

    37.2     44.1

Fee income recognized in connection with originated investments

  $ 1,538      $ 210   

Originated Investments Summary as of ($ in thousands)

  March 31,
2015
    December 31,
2014
 

Total originated investments, at fair value

  $ 1,492,694      $ 1,405,625   

Total originated investments as a percentage of total Investment Portfolio, at fair value

    50.8     51.7

Estimated forward-looking annual yield of originated debt investments (1)(2)

    10.2     10.8

 

(1)  The estimated forward-looking annual yield on debt investments is based on amortized cost as of the end of the applicable period. The estimated forward-looking annual yield for our debt investments is represented by a fraction, (i) the numerator of which is the sum of (a) the annual interest rate of each debt investment multiplied by its par amount as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each debt investment, if any; and (ii) the denominator of which is the total amortized cost of all debt investments included in the calculated group as of the end of the applicable reporting period.
(2)  The estimated forward-looking annual yield of originated debt investments is higher than what investors in our Company will realize because it does not reflect expenses of the Company or any sales load. Total investment return – net price and total investment return – net asset value were 0.4% and 1.5 %, respectively, as of March 31, 2015. See Note 13. “Financial Highlights” in the accompanying unaudited condensed consolidated financial statements for information on how such returns were calculated.

The following information presents additional analysis of our Investment Portfolio and TRS Portfolio as of March 31, 2015 and December 31, 2014, excluding our short-term investments. Our investment program is not managed with any specific asset category target goals. The primary investment type concentrations include (i) senior debt, and (ii) subordinated debt securities.

 

     Investment Portfolio as of (in thousands)  
     March 31, 2015      December 31, 2014  

Asset Category

   Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Senior debt

           

Senior secured loans - first lien

   $ 1,321,705       $ 1,278,117       $ 1,152,555       $ 1,128,244   

Senior secured loans - second lien

     797,354         780,543         858,829         843,957   

Senior secured bonds

     179,621         168,857         154,125         147,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

  2,298,680      2,227,517      2,165,509      2,120,018   

Subordinated debt

  515,956      467,505      459,004      433,755   

Structured products

  83,721      88,810      33,721      36,421   

Equity/Other

  157,417      154,011      129,658      130,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 3,055,774    $ 2,937,843    $ 2,787,892    $ 2,720,571   
  

 

 

    

 

 

    

 

 

    

 

 

 
     TRS Portfolio as of (in thousands)  
     March 31, 2015      December 31, 2014  

Asset Category

   Notional Amount      Fair Value      Notional Amount      Fair Value  

Senior debt

           

Senior secured loans - first lien

   $ 282,689       $ 282,112       $ 255,966       $ 250,662   

Senior secured loans - second lien

     18,792         17,917         22,802         21,932   

Senior secured bonds

     7,315         7,176         7,315         7,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

  308,796      307,205      286,083      279,660   

Subordinated debt

  1,658      1,660      1,658      1,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 310,454    $ 308,865    $ 287,741    $ 281,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

57


Table of Contents

The following table presents a summary of interest rate and maturity statistics for the debt investments, based on par value, in our Investment Portfolio and the TRS Portfolio as of March 31, 2015 and December 31, 2014:

 

    Investment Portfolio as of     TRS Portfolio as of  

Floating interest rate debt investments:

  March 31,
2015
    December 31,
2014
    March 31,
2015
    December 31,
2014
 

Percent of debt portfolio

    68.0     67.5     96.4     96.1

Percent of floating rate debt investments with interest rate floors

    96.8     97.9     98.7     98.6

Weighted average interest rate floor

    1.1     1.1     1.0     1.0

Weighted average coupon spread to base rate

    733 bps        748 bps        425 bps        419 bps   

Weighted average years to maturity

    5.3        5.4        3.2        5.3   

Fixed interest rate debt investments:

                       

Percent of debt portfolio

    32.0     32.5     3.6     3.9

Weighted average coupon rate

    10.6     10.9     9.9     9.9

Weighted average years to maturity

    5.2        5.3        5.4        5.7   

All of our floating interest rate debt investments have base rate reset frequencies of less than twelve months with the majority resetting at least quarterly. The three-month LIBOR, the most prevalent index employed among our floating interest rate debt investments, ranged between 0.251% and 0.275%, and 0.231% and 0.243% during the three months ended March 31, 2015 and 2014, respectively, and the terminal value was 0.271% and 0.256% on March 31, 2015 and December 31, 2014, respectively. Base rate resets for floating interest rate investments will only result in interest income increases when the reset base interest rate exceeds the associated interest rate floor.

Our estimated forward-looking annual yield on debt investments was 9.5% as of March 31, 2015, compared to 10.0% as of December 31, 2014. The change is partly attributable to an increase in our investment concentration in first lien senior secured loans which generally have lower interest rates than second lien loans or subordinated debt. As of March 31, 2015, our first lien senior secured loans were 43.3% of our Investment Portfolio as compared to 41.3% as of December 31, 2014, based on amortized cost. The estimated forward-looking annual yield on debt investments is higher than what investors in our Company will realize because it does not reflect expenses of the Company or any sales load. Total investment return - net price and total investment return – net asset value were 0.4% and 1.5%, respectively, for the three months ended March 31, 2015. See Note 13. “Financial Highlights” in the accompanying unaudited condensed consolidated financial statements.

The following table shows the credit ratings of the investments in our Investment Portfolio and TRS Portfolio, based upon the rating scale of Standard & Poor’s Ratings Services, as of March 31, 2015 and December 31, 2014:

 

     Investment Portfolio as of (in thousands)     TRS Portfolio as of (in thousands)  
     March 31, 2015     December 31, 2014     March 31, 2015     December 31, 2014  

Standard & Poor’s rating

   Fair Value      Percentage
of

Portfolio
    Fair Value      Percentage
of
Portfolio
    Fair Value      Percentage
of

Portfolio
    Fair Value      Percentage
of

Portfolio
 

BB-

   $ 26,906         0.9   $ 21,536         0.8   $ 4,977         1.6   $ 27,610         9.8

B+

     213,287         7.3        161,172         5.9        23,190         7.5        47,837         17.0   

B

     277,021         9.5        174,797         6.4        61,092         19.8        127,542         45.3   

B-

     355,328         12.1        331,145         12.2        143,899         46.6        53,309         19.0   

CCC+

     563,354         19.2        617,925         22.7        61,704         20.0        9,162         3.3   

CCC

     159,169         5.4        156,206         5.7        5,449         1.8        4,575         1.6   

CCC-

     7,280         0.2        53,089         2.0        4,885         1.5        11,255         4.0   

D

     9,965         0.3        567         —          3,669         1.2        —           —     

Not rated

     1,325,533         45.1        1,204,134         44.3        —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 2,937,843      100.0 $ 2,720,571      100.0 $ 308,865      100.0 $ 281,290      100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

58


Table of Contents

The table below presents a summary of our debt investment positions held in our Investment Portfolio that feature PIK interest provisions for some or all of the portfolio companies’ interest payment obligations.

 

PIK Summary as of ($ in thousands)

   March 31,
2015
    December 31,
2014
 

Total number of all investments with PIK feature

     21        22   

Par value of all investments with PIK feature

   $ 555,719      $ 609,971   

Number of originated investments with PIK feature and active PIK election

     8        9   

Par value of originated investments with PIK feature and active PIK election

   $ 350,948      $ 402,244   

Total number of all investments that have active PIK election

     16        17   

Par value of all investments that have active PIK election

   $ 444,454      $ 498,706   

Percent of debt investment portfolio with active PIK election, at par value

     15.7     18.5
     March 31,  

PIK Interest Income Activity for the Three Months Ended (in thousands)

   2015     2014  

PIK interest income

   $ 6,808      $ 7,075   

PIK interest income as a percentage of interest income

     10.6     14.2

PIK interest income as a percentage of total investment income

     9.2     14.2

As of March 31, 2015, our Investment Portfolio consisted of 116 portfolio companies, diversified across 20 industry classifications, as compared to our Investment Portfolio as of December 31, 2014 that consisted of 112 portfolio companies, diversified across 21 distinct industry classifications. As of March 31, 2015, the TRS Portfolio consisted of 49 portfolio companies, diversified across 16 distinct industry classifications, as compared to our TRS Portfolio as of December 31, 2014 that consisted of 47 portfolio companies, diversified across 15 distinct industry classifications. The following table presents a summary of our Investment Portfolio and TRS Portfolio arranged by industry classifications of the portfolio companies as of March 31, 2015 and December 31, 2014:

 

     Investment Portfolio as of (in thousands)     TRS Portfolio as of (in thousands)  
     March 31, 2015     December 31, 2014     March 31, 2015     December 31, 2014  

Industry Classification

   Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
 

Consumer Durables & Apparel

   $ 433,253         14.8   $ 458,310         16.8   $ —           —     $ 9,072         3.2

Software & Services

     417,617         14.2        394,377         14.5        71,510         23.2        68,344         24.3   

Capital Goods

     280,308         9.5        226,158         8.3        37,785         12.2        37,966         13.5   

Energy

     231,986         7.9        226,564         8.3        —           —          —           —     

Retailing

     217,575         7.4        218,902         8.0        24,994         8.1        19,445         6.9   

Commercial & Professional Services

     184,692         6.3        58,540         2.2        2,008         0.7        2,009         0.7   

Technology Hardware & Equipment

     197,848         6.7        181,005         6.7        8,417         2.7        3,303         1.2   

Health Care Equipment & Services

     149,072         5.1        187,834         6.9        24,768         8.0        31,296         11.1   

Diversified Financials

     140,423         4.8        139,597         5.1        —           —          —           —     

Telecommunications Services

     111,169         3.8        80,584         3.0        18,288         5.9        18,033         6.4   

Automobiles & Components

     110,006         3.7        118,322         4.3        —           —          —           —     

Materials

     104,982         3.6        96,320         3.5        13,657         4.4        3,669         1.3   

Food & Staples Retailing

     84,315         2.9        74,289         2.7        7,802         2.5        7,697         2.7   

Transportation

     71,473         2.4        63,510         2.3        8,988         2.9        —           —     

Media

     59,086         2.0        43,915         1.6        27,287         8.8        27,251         9.7   

Consumer Services

     49,738         1.7        48,047         1.8        8,646         2.8        8,363         2.9   

Real Estate

     35,227         1.2        28,213         1.0        12,821         4.2        —           —     

Food, Beverage & Tobacco

     22,929         0.8        39,108         1.4        8,920         2.9        8,758         3.1   

Remaining Industries

     36,144         1.2        36,976         1.6        32,974         10.7        36,084         13.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 2,937,843      100.0 $ 2,720,571      100.0 $ 308,865      100.0 $ 281,290      100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Capital Resources and Liquidity

Sources and Uses of Capital

Our capital resources and liquidity are derived primarily from (i) equity capital proceeds of our Offerings, (ii) borrowings from our credit facilities and term loan, (iii) cash flows from operations, including investment sales and repayments, and (iv) reinvested distributions. Our primary uses of funds include (i) investments in portfolio companies, (ii) distributions to our shareholders, (iii) advisory fees, (iv) interest expense and other financing fees, (v) periodic reductions in the outstanding principal amounts on our credit facilities and term loan, and (vi) operating expenses. We have used, and expect to continue to use, proceeds from the turnover of our Investment Portfolio, equity capital proceeds from our Offerings, and additional borrowings under our credit

 

59


Table of Contents

facilities to finance our investment activities primarily focused on directly originated investments in portfolio companies. In addition, in January 2015, we filed our Shelf Registration Statement with the SEC that was declared effective on January 16, 2015, under which we may offer, from time to time, up to $750 million of our securities, on terms to be determined at the time of each such offering. Our Follow-On Offering will terminate the earlier of (i) November 1, 2016, (ii) when the remaining shares available in the Follow-On Offering have been sold, or (iii) if our board of directors determines to terminate the Follow-On Offering.

Liquidity

As of March 31, 2015, we had the following sources of immediate liquidity available to us:

 

(in thousands)

   Amount  

Cash and Cash Equivalents

   $ 47,286   

Short Term Investments

     19,332   

Credit Facilities-Effective Borrowing Capacity (1)

     504,191   
  

 

 

 

Total

$ 570,809   
  

 

 

 

 

(1)  Effective borrowing capacity represents additional amounts that we could borrow from our credit facilities based on collateral in place as of March 31, 2015.

In addition to the sources of liquidity listed above, we continue to raise capital through our Follow-On Offering. As of March 31, 2015, we had approximately 110 million additional shares of common stock available for sale through the Follow-On Offering. In addition, our Shelf Registration Statement, which was declared effective on January 16, 2015, provides us the ability of offer, from time to time, up to $750 million of debt and/or equity securities, on terms to be determined at the time of each such offering.

Borrowings-Credit Facilities and Term Loan

Our outstanding borrowings as of March 31, 2015 and December 31, 2014 were as follows:

 

     As of March 31, 2015     As of December 31, 2014  

(in thousands)

   Total
Aggregate
Principal
Amount
Committed
     Principal
Amount
Outstanding
     Carrying
Value
    Total
Aggregate
Principal
Amount
Committed
     Principal
Amount
Outstanding
     Carrying
Value
 

Deutsche Bank Credit Facility (1)

   $ 150,000       $ 150,000       $ 150,000      $ 340,000       $ 47,000       $ 47,000   

BNP Credit Facility (1)

     200,000         85,000         85,000        200,000         100,450         100,450   

Senior Secured Revolving Credit Facility (1) (2)

     655,000         230,000         230,000        655,000         230,000         230,000   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total credit facilities

  1,005,000      465,000      465,000      1,195,000      377,450      377,450   

2014 Senior Secured Term Loan

  396,000      396,000      394,322 (3)    397,000      397,000      395,228 (3) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

$ 1,401,000    $ 861,000    $ 859,322    $ 1,592,000    $ 774,450    $ 772,678   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)  Subject to borrowing base and leverage restrictions. As of January 9, 2015, CCT Funding LLC (“CCT Funding”) entered into an amendment to the Deutsche Bank Credit Facility whereby the aggregate amount of commitments thereunder was decreased by $190 million, for a total facility size of $150 million.
(2)  Senior Secured Revolving Credit Facility includes a provision that allows us, under certain circumstances, to increase the size of the Senior Secured Revolving Credit Facility to a maximum of $900 million as of March 31, 2015 and December 31, 2014.
(3)  Comprised of outstanding principal less unaccreted original issue discount.

For the three months ended March 31, 2015 and 2014, our total all-in cost of financing, including fees and expenses, was 4.17% and 3.14%, respectively. We expect to continue to draw on the revolving credit facilities to finance our acquisition of investment positions in portfolio companies. We may further increase our aggregate borrowing capacity in the future beyond the current combined commitment amount of $1.4 billion that is available to us from our revolving credit facilities and term loan, and we may add additional credit arrangements.

See Note 10. “Borrowings” in our unaudited condensed consolidated financial statements for additional disclosures regarding our borrowings.

Total Return Swaps

In 2012, Halifax Funding LLC (“Halifax Funding”), our wholly owned, special purpose financing subsidiary, entered into a TRS arrangement with The Bank of Nova Scotia (“BNS”).

 

60


Table of Contents

The obligations of Halifax Funding under the TRS Agreements are non-recourse to us and our exposure under the TRS Agreements is limited to the amount of collateral that is posted by Halifax Funding pursuant to the terms of the TRS Agreements. As of March 31, 2015, the posted collateral of $124.64 million equaled 40.1% of the total notional amount, as compared to $115.70 million, or 40.2% of the total notional amount as of December 31, 2014. The minimum required collateral amount (40% of the total notional amount, plus additional required collateral due to concentration limits in the TRS Portfolio) was $124.18 million as of March 31, 2015.

Halifax Funding may terminate the TRS Agreements at any time upon providing at least 30 days’ notice prior to the proposed settlement date of the TRS assets related to such termination. In the absence of early termination, the TRS Agreements will terminate on January 15, 2016. In the event of early termination of the TRS Agreements, Halifax Funding may be required to pay an early termination fee.

See Note 4. “Derivative Instruments” in our unaudited condensed consolidated financial statements for additional disclosures on the TRS.

Commitments and Contingencies

See Note 11. “Commitments and Contingencies” in our unaudited condensed consolidated financial statements for information on our commitments and contingencies as of March 31, 2015.

Distributions to Shareholders

We pay monthly distributions to our shareholders in the form of cash. Shareholders may elect to reinvest their distributions as additional shares of our common stock under our distribution reinvestment plan. Dividends are taxable to our shareholders even if they are reinvested in additional shares of our common stock. The following table reflects the cash distributions per share and the total amount of distributions that we have declared on our common stock during the three months ended March 31, 2015 and 2014:

 

     Three Months Ended  

(in thousands, except per share amounts)

   Per Share      Amount  

March 31, 2015 (13 record dates)

   $ 0.201279       $ 45,830   

March 31, 2014 (12 record dates)

   $ 0.180048       $ 26,763   

Approximately 51% of the distributions we declared in each of the three months ended March 31, 2015 and 2014 were reinvested in shares of our common stock by participants in our distribution reinvestment plan and the reinvested distributions represent an additional source of capital to us. Net investment income and realized capital gains represent the primary sources for us to pay distributions. See Note 8. “Distributions” in our unaudited condensed consolidated financial statements for additional disclosures on distributions.

We estimate we had sufficient taxable income to support 100% of our declared distributions for the three months ended March 31, 2015. We do not expect to use equity capital or borrowed funds to pay distributions to shareholders nor do we expect any portion of our distributions paid in 2015 to be treated as a return of capital for tax purposes. We routinely disclose the sources of funds used to pay distributions to our shareholders in periodic reports that accompany (i) quarterly account statements and (ii) monthly distribution checks that are prepared and sent directly by our transfer agent to our shareholders. See Note 8. “Distributions” to the unaudited condensed consolidated financial statements for a discussion of the sources of funds used to pay distributions on a GAAP basis for the periods presented.

Results of Operations

As of March 31, 2015, the fair value of our investments totaled $2.94 billion for our Investment Portfolio and $308.86 million for our TRS Portfolio. The majority of our investments at March 31, 2015 consisted of debt investments. See the section entitled “Portfolio and Investment Activity” above for a discussion of the general terms and characteristics of our investments, and for information regarding investment activities during the three months ended March 31, 2015 and 2014. The growth of our Investment Portfolio was the primary contributing factor to the significant increases in investment income, operating expenses, investment advisory fees, net investment income and net assets between the comparative periods, as discussed below.

 

61


Table of Contents

The following is a summary of our operating results for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Total investment income

   $ 73,954       $ 49,933   

Net operating expense

     (34,742      (29,222

Income tax expense

     (22      —     
  

 

 

    

 

 

 

Net investment income

  39,190      20,711   

Net realized gains

  18,722      10,985   

Net change in unrealized appreciation (depreciation)

  (26,128   12,796   
  

 

 

    

 

 

 

Net increase in net assets resulting from operations

$ 31,784    $ 44,492   
  

 

 

    

 

 

 

Investment income

Investment income consisted of the following for the three months March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Interest income

   $ 57,393       $ 42,578   

Payment-in-kind interest income

     6,808         7,075   

Fee income

     9,601         276   

Dividend and other income

     152         4   
  

 

 

    

 

 

 

Total investment income

$ 73,954    $ 49,933   
  

 

 

    

 

 

 

The increase in interest income was due primarily to the growth of our portfolio of debt investments. Our average debt investment balance was $2.79 billion during the three months ended March 31, 2015, as compared to $1.82 billion during the same period in 2014, for an increase of 53.6%, based on par value. Interest income as a percentage of our average investment balance decreased during the three months ended March 31, 2015, as compared to the same period in 2014, primarily due to an increase in our investment concentration in first lien senior secured loans which generally have lower interest rates than second lien loans or subordinated debt. As of March 31, 2015, our first lien senior secured loans were 43.3% of our Investment Portfolio, as compared to 35.8% as of March 31, 2014, based on amortized cost. In addition, the decrease in interest income as a percentage of our average investment balance quarter over quarter is partly due to nonrecurring recognition of prepayment penalties and unamortized loan fees and discounts upon the prepayment of debt investments. We recorded interest income from these sources in the combined amount of $2.0 million and $7.37 million for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015, 10.6% of our total interest income was attributable to PIK interest income, as compared to 14.2% for the same period in 2014. We expect our portfolio of debt investments will continue to grow and, accordingly, we expect further moderate increases in interest income in future periods. As of March 31, 2015, our estimated forward-looking debt portfolio yield was 9.5% based on amortized cost, as defined above in “Portfolio and Investment Activity.” As of March 31, 2015, approximately 68.0% of our debt investments had floating rate interest; therefore, changes in interest rates could have a material impact on our interest income in the future. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for further information on the impact interest rate changes could have on our results of operations.

Interest income earned on TRS assets is not included in investment income in the unaudited condensed consolidated statements of operations, but rather is recorded as part of (i) realized gains or losses on derivative instruments in connection with quarterly TRS settlement payments and (ii) unrealized appreciation on derivatives for amounts not yet received from the counterparty as of period end.

The increase in fee income for the three months ended March 31, 2015 was primarily due to an amendment fee received in the amount of $7.76 million from one of our portfolio companies seeking financial covenant relief and increase in capital structuring fees earned related to our Co-Investment Transactions. Capital structuring fees are transaction based fees and are non-recurring. Going forward, we expect to earn additional structuring service fees on Co-Investment Transactions as a result of our persistent focus on direct lending activities. See Note 7. “Fee Income” in our unaudited condensed unconsolidated financial statements for additional information on fee income.

 

62


Table of Contents

Operating expenses

Our operating expenses for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Investment advisory fees

   $ 15,135       $ 10,681   

Interest expense

     7,798         4,481   

Performance-based incentive fees

     7,983         9,786   

Offering expense

     1,443         1,875   

Administrative services

     714         684   

Professional services

     538         519   

Custodian and accounting fees

     270         196   

Director fees and expenses

     126         167   

Other

     735         833   
  

 

 

    

 

 

 

Total operating expenses

$ 34,742    $ 29,222   
  

 

 

    

 

 

 

Investment advisory fees and performance-based incentive fees – Our investment advisory fees are calculated at an annual rate of 2% of our average gross assets; therefore, the increase in these fees for the three months ended March 31, 2015 was primarily attributable to the net increase in our gross assets.

Our Advisors are also eligible to receive incentive fees based on our performance. Our performance-based incentive fees, which are comprised of two parts, consisted of the following for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Subordinated Incentive fee on income

   $ 7,983       $ 5,163   

Incentive fee on capital gains

     —           4,623   
  

 

 

    

 

 

 

Total performance-based incentive fees

$ 7,983    $ 9,786   
  

 

 

    

 

 

 

Subordinated incentive fee on income is payable to our Advisors each calendar quarter if our pre-incentive fee net investment fee income (as defined in the Investment Advisory Agreement and approved by our board of directors) exceeds the 1.75% quarterly preference return to our shareholders (the ratio of pre-incentive fee net investment income divided by average adjusted capital).

The annual incentive fees on capital gains recorded for GAAP purposes is equal to (i) 20% of our realized and unrealized capital gains on a cumulative basis since inception, net of all realized capital losses and unrealized depreciation on a cumulative basis from inception, less (ii) the aggregate amount of any previously paid incentive fees on capital gains. As discussed in Note 6. “Related Party Transactions” in our unaudited condensed consolidated financial statements, the calculation of performance-based incentive fees disregards any net realized and unrealized gains associated with the TRS interest spread. In addition, for financial reporting purposes, in accordance with GAAP, we include unrealized appreciation on our Investment Portfolio and derivative instruments in the calculation of incentive fees on capital gains; however, such amounts are not payable by us unless and until the net unrealized appreciation is actually realized. The actual amount of incentive fees on capital gains that are due and payable to the Advisors is determined at the end of the calendar year.

The components of incentive fees on capital gains consisted of the following for the three months ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Incentive fees accrued on net realized gains (1)

   $ —         $ 1,703   

Incentive fees accrued for GAAP purposes on unrealized gains (2)

     —           2,920   
  

 

 

    

 

 

 
$ —      $ 4,623   
  

 

 

    

 

 

 

 

(1)  Amount is based on cumulative realized gains, net of cumulative realized and unrealized losses, since inception, less prior incentive fees paid. The incentive fee earned and payable to the Advisors is determined at the end of each calendar year.
(2)  This amount is not payable to the Advisors. Represents accrual for GAAP reporting purposes only for incentive fee on cumulative unrealized gains since inception.

 

63


Table of Contents

The Advisors did not earn any incentive fee on capital gain for the three months ended March 31, 2015 or the year ended December 31, 2014. As of March 31, 2015, we had unrealized losses of $112.34 million in excess of our cumulative realized net capital gains since inception. Due to the cumulative nature of the incentive fee on capital gains, we will not owe the Advisors any incentive fees on capital gains for future years until such time, if any, that our cumulative realized net capital gains since inception exceed our unrealized losses as of a particular measurement date by $11.61 million.

See “—Contractual Obligations —Investment Advisory Agreements,” below for further details about the performance-based incentive fees.

Interest expense - The components of interest expense for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Stated interest expense

   $ 6,146       $ 3,597   

Unused commitment fees

     751         366   

Amortization of deferred financing costs

     807         518   

Accretion of discount on term loan

     94         —     
  

 

 

    

 

 

 

Total interest expense

$ 7,798    $ 4,481   
  

 

 

    

 

 

 

The increase in interest expense during the three months ended March 31, 2015 was primarily attributable to the 2014 Senior Secured Term Loan that we entered into on May 20, 2014 in the amount of $400.0 million. The 2014 Senior Secured Term Loan also increased our all-in cost of financing, including fees and expenses, to 4.17%, as compared to 3.14% for the same period in 2014 due to having a higher stated interest rate as compared to our other credit facilities and the amortization of upfront fees incurred on both our Senior Secured Revolving Credit Facility and 2014 Senior Secured Term Loan.

Our performance-based incentive fees and interest expense, among other things, may increase or decrease our overall operating expenses and expense ratios relative to comparative periods depending on portfolio performance, an increase or reduction in borrowed funds and borrowing commitments, and changes in benchmark interest rates, such as LIBOR, among other factors.

All other operating expenses - In general, our other operating expenses increased quarter over quarter due to increased administrative and professional services associated with our owning a larger portfolio of investments.

During the three months ended March 31, 2015 and 2014, the ratio of annualized core operating expenses (excluding investment advisory fees, performance-based incentive fees, interest expense, and organization and offering expenses) to average net assets was 0.44% and 0.65% respectively. As our asset base and number of shareholders have grown, our general and administrative expenses have increased, but at a slower rate compared to the growth rate in the asset base. We expect certain variable operating expenses to continue to increase due to the anticipated growth in the size of our asset base and the number of shareholders. Effective on January 1, 2015, we no longer reimburse CNL for certain personnel expenses as described in the Administrative Services Agreement. These personnel expenses were approximately $0.24 million for the three months ended March 31, 2014.

Net realized gain and losses - Net realized gains and losses for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Net realized gains (losses) on investments

   $ (6,322    $ 12,198   

Net realized gains (losses) on derivative instruments

     26,388         (191

Net realized losses on foreign currency transactions

     (1,344      (1,022
  

 

 

    

 

 

 

Net realized gains

$ 18,722    $ 10,985   
  

 

 

    

 

 

 

As the result of our investment sales and principal payments, as described above in “Portfolio and Investment Activity,” we realized net gains (losses) on investments for each of the periods presented. The change in the amount of net realized gains (losses) on investments for the three months ended March 31, 2015 and 2014 was partially due to a decrease in investment sales during the first quarter of 2015. The amount of gains or losses realized upon investment sales will not bear a direct relationship to the volume of investment sales because such sales are driven largely by portfolio management and liquidity decisions, rather than by the gains to be realized upon the sale.

Our net realized gains on derivative instruments for the three months ended March 31, 2015 was comprised of realized gains on the TRS and foreign currency forward contracts of $2.42 million and $23.97 million, respectively. Our net realized losses on derivative instruments for the three months ended March 31, 2014 was comprised of a realized gain on the TRS of $1.86 million and realized losses on foreign currency forward contracts of $2.05 million. See Note 4. “Derivative Instruments” in our unaudited

 

64


Table of Contents

condensed consolidated financial statements for more information about the components of the realized gain on TRS recorded during each period. The change in realized gains and losses on foreign currency forward contracts was due to the combined impact of the increase in the notional amount of foreign currency forward contracts, plus the effect of currency changes over the term of the related contracts. Foreign currency forward contracts with a net notional amount of $203.64 million settled during the three months ended March 31, 2015 as compared to $50.68 million for the same period in 2014.

Net change in unrealized appreciation or depreciation

For the three months ended March 31, 2015 and 2014, net unrealized appreciation and depreciation consisted of the following:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Net change in unrealized appreciation (depreciation) on:

     

Investments

   $ (50,610    $ 14,582   

Derivative instruments

     24,585         (173

Foreign currency translation

     (103      (1,613
  

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation)

$ (26,128 $ 12,796   
  

 

 

    

 

 

 

The unrealized depreciation on investments recorded during the three months ended March 31, 2015 was comprised of a $2.45 million net decline in the fair value of our investments denominated in U.S. dollars and a $48.16 million net decline in the fair value of our investments that were denominated in foreign currencies. The decline in fair value of our foreign investments consisted of a $7.26 million decline in the fair value of the investments and a $40.90 million decline related to foreign exchange rate conversions due to the strengthening of the U.S. dollar. We have entered into foreign currency forward contracts to economically hedge the impact that changes in foreign exchange rates have on the value of our investments denominated in foreign currencies. The net unrealized appreciation of the foreign currency forward contracts increased by $18.98 million during the three months ended March 31, 2015, as presented in the table below. Additionally, we realized gains of $23.97 million on foreign currency forward contracts that settled during the three months ended March 31, 2015. Therefore, the combined appreciation related to foreign currency movements was $2.05 million. Further strengthening of the U.S. dollar, or other changes in foreign currency exchange rates could impact our earnings to the extent that our investments denominated in foreign currencies are not hedged or the hedges are not effective. See Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of the impact of foreign currency exchange rates on our earnings. The total net change in unrealized depreciation including the impact of our hedges for the three months ended March 31, 2015 of $31.63 million represents 1.1% of the average investments for the corresponding period, excluding short-term investments.

The net change in unrealized appreciation (depreciation) on investments consisted of the following:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Net change in unrealized appreciation (depreciation) on investments:

     

Unrealized appreciation

   $ 26,784       $ 27,504   

Unrealized depreciation

     (79,555      (8,361

Net unrealized (appreciation) depreciation reversal related to net realized gains or losses (1)

     2,161         (4,561
  

 

 

    

 

 

 

Total net unrealized appreciation (depreciation)

$ (50,610 $ 14,582   
  

 

 

    

 

 

 

 

(1)  Represents the unrealized appreciation or depreciation recorded on the related asset at the end of prior period.

 

65


Table of Contents

The net change in unrealized appreciation (depreciation) on derivative instruments consisted of the following:

 

     Three Months Ended
March 31,
 

(in thousands)

   2015      2014  

Net change in unrealized appreciation (depreciation) on TRS Portfolio:

     

Unsettled amounts at end of period:

     

Spread interest income

   $ 3,673       $ 842   

Realized gain (loss) on TRS assets

     80         (92

Receipt of prior period unsettled amounts

     (3,006      (1,676

Unrealized appreciation (depreciation) on TRS assets

     4,862         (166
  

 

 

    

 

 

 
  5,609      (1,092
  

 

 

    

 

 

 

Net change in unrealized appreciation on foreign currency forward contracts:

Unrealized appreciation

  38,352      194   

Unrealized depreciation

  —        (1,705

Net unrealized (appreciation) depreciation reversal related to net realized gains or losses (1)

  (19,376   2,430   
  

 

 

    

 

 

 
  18,976      919   
  

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) on derivative instruments

$ 24,585    $ (173
  

 

 

    

 

 

 

 

(1)  Represents the unrealized appreciation or depreciation recorded at the end of prior period.

While the notional amount of outstanding foreign currency forward contracts decreased from $480.63 million as of December 31, 2014 to $463.67 million as of March 31, 2015, the unrealized appreciation on foreign currency forward contracts has increased as a result of the strengthening of the U.S. Dollar against other major currencies during the three months ended March 31, 2015.

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above, risk factors, if any, identified in Part II, Item 1A of this report, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2014.

Adjusted net investment income

Our net investment income totaled $39.19 million ($0.17 per share) and $20.71 million ($0.14 per share) for the three months ended March 31, 2015 and 2014, respectively. As described above in “- Investment advisory fees and performance-based incentive fees,” we accrue estimated performance-based incentive fees with respect to any net realized and unrealized appreciation in our Investment Portfolio and derivative instruments. The performance-based incentive fees are treated as an operating expense and therefore are a deduction in calculating our net investment income on a GAAP basis. However, our net realized and unrealized appreciation on our Investment Portfolio and derivative instruments that partly determine these fees are not included in net investment income. Therefore, in order to evaluate our net investment income without regard to realized and unrealized appreciation in our Investment Portfolio, including the impact of related accrued performance-based fees and expense support from our Advisors, we have developed a supplemental, non-GAAP measure, which we refer to as “adjusted net investment income,” which presents net investment income before the effects of unearned performance-based incentive fees.

We believe that adjusted net investment income is useful to assess the sustainability of our distributions and operating performance. Adjusted net investment income is not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net investment income as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make future distributions to our shareholders. Adjusted net investment income should not be construed as an historic performance measure or as more relevant or accurate than the current GAAP methodology in calculating net investment income and its applicability in evaluating our operating performance.

 

66


Table of Contents

The following table presents a reconciliation of our net investment income to adjusted net investment income for the three months ended March 31, 2015 and 2014; the increase in adjusted net investment income was primarily the result in the growth of our Investment Portfolio and earnings thereon.

 

     Three Months Ended
March 31,
 

(in thousands, except per share amounts)

   2015      2014  

Net investment income (GAAP)

   $ 39,190       $ 20,711   

Add: Estimated unearned performance-based incentive fees

     —           2,920   
  

 

 

    

 

 

 

Adjusted net investment income (non-GAAP)

$ 39,190    $ 23,631   
  

 

 

    

 

 

 

Net investment income per share (GAAP)

$ 0.17    $ 0.14   
  

 

 

    

 

 

 

Adjusted net investment income per share (non-GAAP)

$ 0.17    $ 0.16   
  

 

 

    

 

 

 

In addition, the relative utilization of the TRS can also cause variability in net investment income, because earnings on assets within the TRS Portfolio are not included in the calculation of net investment income in accordance with GAAP. The TRS Portfolio accrued interest income and financing charges are included in the fair value of the TRS and are not recorded as realized gain or loss on derivative instruments until quarterly TRS settlement payments are finalized. If the TRS assets had instead been included in our Investment Portfolio as owned assets, the interest income and financing charges would have been included in net investment income.

The following table shows the TRS interest income and financing charges for the three months ended March 31, 2015 and 2014.

 

     Three Months Ended
March 31,
 

(in thousands, except per share amounts)

   2015      2014  

Interest and fee income included in TRS fair value

   $ 4,272       $ 903   

Financing charges included in TRS fair value

     (599      (61
  

 

 

    

 

 

 

Subtotal

  3,673      842   

Interest and fee income included in TRS net realized gains

  3,251      1,682   

Financing charges included in TRS net realized gains

  (799   (152

Less: amounts included in prior period fair value

  (3,032   (1,703
  

 

 

    

 

 

 

TRS net interest spread

$ 3,093    $ 669   
  

 

 

    

 

 

 

TRS Net interest spread per share

$ 0.01    $ 0.00   
  

 

 

    

 

 

 

Net Assets, Net Asset Value per Share, Annual Investment Return and Total Return Since Inception

Net assets increased $161.24 million and $146.97 million during the three months ended March 31, 2015 and 2014, respectively. The most significant increase in net assets during the three months ended March 31, 2015 was attributable to capital transactions including (i) the issuance of shares of common stock and (ii) reinvestment of distributions in the combined amount of $180.74 million and $132.48 million, respectively. Our operations resulted in net assets increasing $31.78 million and $44.49 million during the three months ended March 31, 2015 and 2014, respectively. Our overall increase in net assets was partially offset by distributions to shareholders in the amount of $45.83 million and $26.76 million and the repurchase of shares of common stock in the amount of $5.45 million and $3.23 million during the three months ended March 31, 2015 and 2014, respectively.

Our net asset value per share was $9.74 and $10.13 on March 31, 2015 and 2014, respectively. After considering (i) the overall changes in net asset value per share, (ii) distributions paid of approximately $0.20 and $0.18 per share during the three months ended March 31, 2015 and 2014, respectively, and (iii) the assumed reinvestment of those distributions at 90% of the prevailing offering price per share, the total investment return was 1.5% and 3.09% (not annualized) for shareholders who held our shares over the entire three-month period ending March 31, 2015 and 2014, respectively.

Initial shareholders who subscribed to the Initial Offering in June 2011 with an initial investment of $10,000 and an initial purchase price equal to $9.00 per share (public offering price net of sales load) have seen the value of their investment grow by 45.8% (see first chart below), or an annualized return of 10.5% (see second chart below). Initial shareholders who subscribed to the Initial Offering in June 2011 with an initial investment of $10,000 and an initial purchase price equal to $10.00 per share (the initial public offering price) have registered a total investment return of 31.2% (see first chart below), or an annualized return of 7.4% (see second chart below). The S&P/LSTA Leveraged Loan Index, a primary measure of senior debt covering the U.S. leveraged loan market, which currently consists of approximately 1,100 credit facilities throughout numerous industries, and the Merrill Lynch US High Yield Master II Index, a primary measure of subordinated debt consisting of approximately 2,000 high yield corporate bonds, registered cumulative total returns of approximately 18.7% and 30.4%, respectively, in the period from June 17, 2011 to March 31, 2015.

 

67


Table of Contents

 

LOGO

The calculations for the Growth of $10,000 Initial Investment in the shares of our common stock are based upon (i) an initial investment of $10,000 in our common stock at the beginning of the period at a share price of $10.00 per share (including sales load) and $9.00 per share (excluding sales load), (ii) assumed reinvestment of monthly distributions in accordance with our distribution reinvestment plan, (iii) the sale of the entire investment position at the net asset value per share on the last day of the period; and (iv) distributions payable, if any, on the last day of the period.

 

 

LOGO

 

Public Offering Price/Share

$10.00 $11.05 $11.30

Net Offering Price/Share

$  9.00 $  9.95 $10.17

Distributions/Share

$  2.95 $  1.63 $  0.82

Terminal Value/Share (NAV)

$  9.74 $  9.74 $  9.74

 

68


Table of Contents

In the chart above, we also present the average annual returns for the trailing 24 months and trailing 12 months, in each case assuming (i) the purchase of shares of common stock at the public offering price and net offering price (90% of public offering price) at the beginning of the period, (ii) reinvestment of distributions in the common stock, (iii) a terminal value at March 31, 2015 equal to net asset value of $9.74 per share and (iv) distributions payable to shareholders as of March 31, 2015.

Our shares are illiquid investments for which there is currently not a secondary market. You should not expect to be able to resell your shares regardless of how we perform. If you are able to sell your shares, you will likely receive less than your purchase price. Our net asset value and annualized returns — which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations — are inherently uncertain. Past performance is not a guarantee of future results.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2. “Significant Accounting Policies” to our unaudited condensed consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We consider the accounting policies listed below to be critical because they involve management judgments and assumptions, require estimates about matters that are inherently uncertain and are important for understanding and evaluating our reported financial results. These judgments affect (i) the reported amounts of assets and liabilities, (ii) our disclosure of contingent assets and liabilities as of the dates of the financial statements and (iii) the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially from the amounts reported based on these policies.

Valuation of Investments and Unrealized Gain (Loss) – Our investments consist primarily of investments in senior and subordinated debt of private U.S. companies and are presented in our consolidated financial statements at fair value. See Note 3. “Investments,” in the accompanying unaudited condensed consolidated financial statements for more information on our investments. As described more fully in Note 2. “Significant Accounting Policies” and Note 5. “Fair Value of Financial Instruments” in our unaudited condensed consolidated financial statements, a valuation hierarchy based on the level of independent, objective evidence available regarding value is used to measure the fair value of our investments. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to our portfolio investments for which market quotations are not readily available, our board of directors is responsible for determining in good faith the fair value of our portfolio investments in accordance with, and the consistent application of, the valuation policy and procedures approved by the board of directors, based on, among other things, the input of our Advisors, audit committee and independent third-party valuation firms.

We utilize several valuation techniques that use unobservable inputs and assumptions in determining the fair value of our Level 3 investments. For senior debt, subordinated debt and structured products categorized as Level 3 investments, we initially value the investment at its initial transaction price and subsequently valued using (i) market data for similar instruments (e.g., recent transactions or indicative broker quotes), (ii) comparisons to benchmark derivative indices and/or (iii) valuation models. Valuation models are based on yield analysis and discounted cash flow techniques, where the key inputs are based on relative value analyses and the assignment of risk-adjusted discounted rates derived from the analysis of similar credit investments from similar issuers. In addition, an illiquidity discount is applied where appropriate. The valuation techniques used by us for other types of assets and liabilities that are classified as Level 3 investments are described in Note 2 to our unaudited condensed consolidated financial statements. The unobservable inputs and assumptions may differ by asset and in the application of our valuation methodologies. The reported fair value estimates could vary materially if we had chosen to incorporate different unobservable inputs and other assumptions.

We and our board of directors conduct our fair value determination process on a quarterly basis and any other time when a decision regarding the fair value of our portfolio investments is required. A determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the our portfolio investments may differ significantly from the values that would have been determined had a readily available market value existed for such investments, and the differences could be material. Further, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment that does not have a readily available market value in a forced or liquidation sale, we could realize significantly less than the fair value recorded by us.

 

69


Table of Contents

The table below presents information on the significant presence of investments classified as Level 3 as of March 31, 2015 and December 31, 2014:

 

(in thousands)

   March 31, 2015     December 31, 2014  

Fair value of investments classified as Level 3

   $ 1,570,434      $ 1,502,332   

Total fair value of investments

   $ 2,957,175      $ 2,721,200   

% of fair value classified as Level 3

     53.1     55.2

Number of positions classified as Level 3

     67        63   

Total number of positions

     164        154   

% of positions classified as Level 3

     40.9     40.9

Fair value of individual positions classified as Level 3:

    

Highest fair value

   $ 108,270      $ 109,556   

Lowest fair value

   $ 30      $ 32   

Average fair value

   $ 23,439      $ 23,847   

The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of March 31, 2015 and December 31, 2014 are described in Note 5. “Fair Value of Financial Instruments” in our unaudited condensed consolidated financial statements, as well as, the directional impact to the valuation from an increase in various unobservable inputs.

In addition to impacting the estimated fair value recorded for our investments in our statement of assets and liabilities, had we used different key unobservable inputs to determine the estimated fair value of our investments, amounts recorded in our statement of operations, including the net change in unrealized appreciation and depreciation on investments, investment advisory fees and performance-based incentive fees would also be impacted since such amounts are directly impacted by the estimated fair value of our assets. For instance, a 5% overstatement of the fair value of our Level 3 investments as of March 31, 2015, assuming all other estimates remain unchanged, would otherwise result in a $74.78 million overstatement of net change in unrealized appreciation on investments, a $0.12 million overstatement of our investment advisory fees payable to our Advisors, a $74.66 million overstatement of our net increase in net assets resulting from operations, a $0.33 overstatement in our earnings per share and a $0.32 overstatement of our net asset value per share.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of March 31, 2015.

Contractual Obligations

Investment Advisory Agreements – We have entered into the Investment Advisory Agreement with CNL for the overall management of our investment activities. We and CNL have also entered into the Sub-Advisory Agreement with KKR, under which KKR is responsible for the day-to-day management of our Investment Portfolio. CNL compensates KKR for advisory services that it provides to us with 50% of the investment advisory fee and performance-based incentive fees that CNL receives under the Investment Advisory Agreement. Pursuant to the Investment Advisory Agreement, CNL earns the investment advisory fee equal to an annual rate of 2% of our average gross assets (including unrealized appreciation or depreciation on the TRS and collateral posted with the custodian in connection with the TRS, but excluding deferred offering expenses), and an incentive fee based on our performance. The incentive fee is comprised of the following two parts:

 

  (i) a subordinated incentive fee on pre-incentive fee net investment income, paid quarterly, if earned, computed as the sum of (a) 100% of quarterly pre-incentive fee net investment income in excess of 1.75% of average adjusted capital up to a limit of 0.4375% of average adjusted capital, and (b) 20% of pre-incentive fee net investment income in excess of 2.1875% of average adjusted capital, and

 

  (ii) an incentive fee on capital gains paid annually, if earned, equal to (A) 20% of all realized gains on a cumulative basis from inception, net of (1) all realized losses on a cumulative basis, (2) unrealized depreciation at year-end and (3) disregarding any net realized gains associated with the TRS interest spread, (which represents the difference between (a) the interest and fees received on total return swaps, and (b) the financing fees paid to the total return swaps counterparty), less (B) the aggregate amount of any previously paid incentive fee on capital gains.

 

70


Table of Contents

The terms of the Investment Advisory Agreement entitle CNL (and indirectly KKR) to receive up to 5% of gross proceeds in connection with the Offerings as reimbursement for organization and offering expenses incurred by the Advisors on our behalf.

The reimbursement rate was 0.4% of gross offering proceeds during the three months ended March 31, 2015. As of March 31, 2015, the Advisors had incurred $7.11 million for offering expenses from the Follow-On Offering. As of the date of this filing, the Advisors were fully reimbursed for all offering expenses in connection with the Follow-On Offering that they incurred on our behalf as of March 31, 2015. The Advisors are expected to continue to incur offering expenses on our behalf throughout the remainder of the Follow-On Offering period and we expect to continue reimbursement of the Advisors for offering expenses they incur on our behalf through the termination date of the Follow-On Offering. We expect the reimbursement rate to remain at or below 1.0% of gross offering proceeds for the remainder of the Follow-On Offering.

See Note 6. “Related Party Transactions” in our unaudited condensed consolidated financial statements for expanded discussion of the Investment Advisory Agreement.

Unfunded Commitments - Unfunded commitments to provide funds to portfolio companies are not recorded on our consolidated statements of assets and liabilities. Because these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We intend to use cash flow from scheduled and early principal repayments and proceeds from borrowings and securities offerings to fund these commitments. As of March 31, 2015, our unfunded investment commitments totaled $189.21 million. We believe we maintain sufficient liquidity to fund such unfunded loan commitments should the need arise.

Borrowings –As discussed above under “Capital Resources and Liquidity — Borrowings,” we, either directly or through our wholly owned subsidiaries, have borrowing agreements with several lenders in connection with our revolving credit facilities and the 2014 Senior Secured Term Loan. As of March 31, 2015, the credit facilities provided for $504.19 million of additional borrowing capacity. (See Note 10. “Borrowings” in our unaudited condensed consolidated financial statements for expanded discussion of the revolving credit facilities and 2014 Senior Secured Term Loan.)

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings and interest expense and other fees related to the credit facilities and 2014 Senior Secured Term Loan at March 31, 2015 is as follows:

 

(in thousands)

   Total      < 1 year      1-3 years      3-5 years      After 5 years  

BNP Credit Facility

   $ 85,000       $ 85,000       $ —         $ —         $ —     

Deutsche Bank Credit Facility

     150,000         —           150,000         —           —     

Senior Secured Revolving Credit Facility

     230,000         —           230,000         —           —     

2014 Senior Secured Term Loan

     396,000         4,000         8,000         384,000         —     

Interest and Credit Facilities Fees Payable(1)

     92,530         29,321         45,585         17,624         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 953,530    $ 118,321    $ 433,585    $ 401,624    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Estimated interest payments have been calculated based on interest rates of our credit facilities and term loan payables as of March 31, 2015.

Related Party Transactions

We have entered into agreements with our Advisors and certain of their affiliates, whereby, we agree to pay certain fees to, or reimburse certain expenses of, our Advisors and their affiliates for investment and advisory services, selling commissions and marketing support fees in connection with our Offerings, and reimbursement of offering and administrative and operating fees and costs. See Note 6. “Related Party Transactions” in the accompanying unaudited condensed consolidated financial statements and Part III - Item 13. “Certain Relationships and Related Transactions, and Director Independence” in our Form 10-K for the year ended December 31, 2014 for a discussion of the various related party transactions, agreements and fees.

Impact of Recent Accounting Pronouncements

See Item 1. “Financial Statements” for a summary of the impact of any recent accounting pronouncements, if any.

 

71


Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are subject to financial market risks, in particular changes in interest rates. Future changes in interest rates will likely have effects on the interest income we earn on our portfolio investments, the fair value of our fixed income investments, the interest rates and interest expense associated with the money we borrow and the fair value of loan balances.

Subject to the requirements of the 1940 Act, we may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. Although hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates. During the three months ended March 31, 2015 and 2014, we did not engage in interest rate hedging activities.

As of March 31, 2015, approximately 68.0% of our portfolio of debt investments (excluding TRS assets), or approximately $1.92 billion measured at par value, featured floating or variable interest rates. The variable interest rate debt investments usually provide for interest payments based on three-month LIBOR (the base rate) and typically have durations of three months after which the base rates are reset to then prevailing three-month LIBOR. At March 31, 2015, approximately 96.8% of our portfolio of variable interest rate debt investments, or approximately $1.86 billion measured at par value, featured minimum base rates, or base rate floors, and the weighted average base rate floor for such investments was 1.1%. Variable interest rate investments that feature a base rate floor generally reset to the then prevailing three-month LIBOR only if the reset base rate exceeds the base rate floor on the applicable interest rate reset date, in which cases, we may benefit through an increase in interest income from such interest rate adjustments. At March 31, 2015, we held an aggregate investment position of $62.11 million at par value in variable interest rate debt investments that featured variable interest rates without any minimum base rates, or approximately 3.2% of our portfolio of variable interest rate debt investments. In the case of these “no base rate floor” variable interest debt investments held in our portfolio, we may benefit from increases in the base rates that may subsequently result in an increase in interest income from such interest rate adjustments.

Because we borrow money to make investments, our net investment income is partially dependent upon the difference between the interest rate at which we invest borrowed funds and the interest rate at which we borrow funds. In periods of rising interest rates, if we have borrowed capital with floating interest rates, our interest expense will increase, which will increase our financing costs and may reduce our net investment income, especially to the extent we continue to acquire and hold fixed-rate debt investments. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Pursuant to the terms of our credit facilities and 2014 Senior Secured Term Loan, as discussed above (see “— Capital Resources and Liquidity — Borrowings — Credit Facilities and Term Loan”), all of our borrowing as of March 31, 2015 provide for floating base rates based on short-term LIBOR. Therefore, if we were to completely draw down (i) the unused commitment amounts in our Deutsche Bank Credit Facility, (ii) the maximum commitment amount in our BNP Credit Facility and (iii) the maximum commitment in our Senior Secured Revolving Credit Facility under an interest election of LIBOR plus 2.50%, we expect that our weighted average direct interest rate would decrease by approximately 24 basis points (“bps”), as compared to our current weighted average direct interest cost for borrowed funds. We expect that any further expansion of our current revolving credit facilities, or any future credit facilities that we or any subsidiary may enter into, will also be based on a floating base rate. As a result, we are subject to continuous risks relating to changes in market interest rates.

Under the terms of the TRS Agreements between Halifax Funding and BNS, Halifax Funding pays interest to BNS at a floating rate based on three-month LIBOR in exchange for the right to receive the economic benefits of a portfolio of TRS assets having a maximum aggregate notional amount of $500 million.

Assuming the consolidated schedule of investments as of March 31, 2015 was to remain constant with regards to the Investment Portfolio and no actions were taken to alter the existing interest rate sensitivity or Investment Portfolio allocations, the upper section of the table below presents an estimated and hypothetical increase in interest income for a 12-month period due to an immediate and persistent increase in the base rates associated with our debt investments featuring variable interest rates.

 

72


Table of Contents

The middle section of the table below also presents sensitivity analysis for a 12-month period due to a persistent increase in the base interest rates that apply to our floating rate credit facilities and term loan and the associated increase in interest expense, as well as, the net effect of change in interest rates on the TRS unrealized appreciation (depreciation). For persistent LIBOR increases of less than approximately 200 basis points, the increase in interest expense exceeds the hypothetical increase in interest income associated with our floating rate debt investments due to the base rate floors on those investments; for a persistent LIBOR increase of approximately 200 basis points or more, the hypothetical increase in interest income associated with our floating rate debt investments begins to provide a positive contribution to net interest income, in both cases assuming that the consolidated schedule of investments as of March 31, 2015 was to remain constant with regards to the Investment Portfolio and no actions were taken to alter the existing interest rate sensitivity or Investment Portfolio allocations.

 

           (in millions, except per share amounts)  
     Par
Amount
     Weighted
Avg. Floor
    Increases in LIBOR  
        +50 bps     +100 bps     +150 bps     +200 bps  

No base rate floor

   $ 62.11         $ 0.258      $ 0.515      $ 0.773      $ 1.031   

Base rate floor

   $ 1,860.22         1.1     0.000        3.544        11.575        19.732   
       

 

 

   

 

 

   

 

 

   

 

 

 

Increase in Floating Rate Interest Income

$ 0.258    $ 4.059    $ 12.348    $ 20.763   
       

 

 

   

 

 

   

 

 

   

 

 

 
            Base Rate Spread                          

BNP Credit Facility

   $ 85.00         110 bps      $ (0.425   $ (0.850   $ (1.275   $ (1.700

Deutsche Bank Credit Facility

   $ 150.00         185 bps        (0.750     (1.500     (2.250     (3.000

Senior Secured Revolving Credit Facility

   $ 230.00         250 bps        (1.150     (2.300     (3.450     (4.600

2014 Senior Secured Term Loan

   $ 396.00         325 bps        (0.082     (2.062     (4.042     (6.022
       

 

 

   

 

 

   

 

 

   

 

 

 

Increase to Floating Rate Interest Expense

  (2.407   (6.712   (11.017   (15.322
       

 

 

   

 

 

   

 

 

   

 

 

 

Change in Floating Rate Net Interest Income, before TRS

  (2.149   (2.653   1.331      5.441   

Net change in TRS unrealized appreciation (depreciation) (1)

  (1.552   (2.747   (3.600   (4.454
       

 

 

   

 

 

   

 

 

   

 

 

 

Overall Change in Floating Rate Net Interest Income, including TRS

$ (3.701 $ (5.400 $ (2.269 $ 0.987   
       

 

 

   

 

 

   

 

 

   

 

 

 

Change in Floating Rate Net Interest Income Per Share Outstanding as of March 31, 2015

$ (0.02 $ (0.02 $ (0.01 $ 0.00   

 

(1)  Pursuant to the TRS Agreements, Halifax Funding receives from BNS all collected interest and fees derived from the TRS assets and pays to BNS interest at a rate equal to three-month LIBOR plus 80 bps per annum on the settled notional amount of TRS assets. As of March 31, 2015, 96.4% of the TRS assets, or approximately $301.38 million measured at par value, featured floating or variable interest rates. At March 31, 2015, 98.7% of the TRS assets with variable interest rates featured minimum base rate floors, or approximately $297.38 million measured at par value, and the weighted average base rate floor for such TRS assets was 1.0%. As of March 31, 2015, the total notional amount of the portfolio of TRS assets was $310.45 million, and the settled notional amount was $296.57 million. For the purpose of presenting the net interest sensitivity analysis above, we have assumed that all TRS assets are settled as of March 31, 2015 and that the TRS notional amount would equal $310.45 million upon which the financing payments to BNS are based.

The interest rate sensitivity analysis presented above does not consider the potential impact of the changes in fair value of our debt investments and the net asset value of our common stock in the event of sudden increases in interest rates associated with high yield corporate bonds. Approximately 32.0% of our debt Investment Portfolio was invested in fixed interest rate, high yield corporate debt investments as of March 31, 2015. Rising market interest rates will most likely lead to fair value declines for high yield corporate bonds and a decline in the net asset value of our common stock, while declining market interest rates will most likely lead to an increase in bond values.

As of March 31, 2015, approximately 43.5% of our fixed interest rate debt investments, or approximately $361.56 million measured at fair value, had prices that are generally available from third party pricing services. We consider these debt investments to be one of the more liquid subsets of our Investment Portfolio since these types of assets are generally broadly syndicated and owned by a wide group of institutional investors, business development companies, mutual funds and other investment funds. Additionally, this group of assets is susceptible to revaluation, or changes in bid-ask values, in response to sudden changes in expected rates of return associated with these investments. We have other fixed interest rate investments in the less liquid subset of our Investment Portfolio that are not included in this analysis.

We have computed a duration of approximately 4.4 for this liquid/fixed subset of our total portfolio. This implies that a sudden increase in the market’s expected rate of return of 100 basis points for this subset of our Investment Portfolio may result in a reduction in fair value of approximately 4.4%, all other financial and market factors assuming to remain unchanged. A 4.4% decrease in the valuation of this Investment Portfolio subset equates to a decrease of $15.76 million, or a 0.7% decline in net assets relative to $9.74 net asset value per share as of March 31, 2015.

 

73


Table of Contents

Foreign Currency Risk

From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as, amounts translated into U.S. dollars for inclusion in our consolidated financial statements.

The table below presents the effect that a 10% immediate, unfavorable change in the foreign currency exchange rates (i.e. further strengthening U.S. Dollar) would have on the fair value of investments in our Investment Portfolio denominated in foreign currencies as of March 31, 2015, by foreign currency, all other valuation assumptions remaining constant. Our TRS Portfolio did not contain any investments denominated in foreign currencies as of March 31, 2015. In addition, the table below presents the par value of our investments denominated in foreign currencies and the notional amount of foreign currency forward contracts in local currency in place as of March 31, 2015, to hedge against foreign currency risks.

 

          Investments Denominated in Foreign Currencies      Hedges  
          As of March 31, 2015      Reduction in Fair
Value as of
March 31,
2015 if 10%
Adverse Change
in Exchange Rate (2)
     As of March 31, 2015  

(in thousands)

        Par Value/
Cost in Local
Currency (1)
     Par Value/
Cost in US$ (1)
     Fair Value         Foreign Currency
Forward Contracts
Amount in
Local Currency
     Foreign Currency
Forward Contracts
Amount in

U.S. Dollars
 

Euros

        277,912       $ 306,738       $ 265,642       $ 26,564            259,053       $ 327,560   

British Pound Sterling

   £      73,359         108,820         87,657         8,766       £      64,500         103,074   

Australian Dollars

   A$      37,956         29,092         26,973         2,697       A$      36,489         33,032   

Swedish Kronor

   SEK      97,249         15,145         9,927         993       SEK      —           —     
        

 

 

    

 

 

    

 

 

          

 

 

 

Total

$ 459,795    $ 390,199    $ 39,020    $ 463,666   
        

 

 

    

 

 

    

 

 

          

 

 

 

 

(1)  Amount represents the par value of debt investments and cost of equity investments denominated in foreign currencies.
(2)  Excludes effect, if any, of any foreign currency hedges.

As illustrated in the table above, we use derivative instruments from time to time, including foreign currency forward contracts, to manage the impact of fluctuations in foreign currency exchange rates. In addition, we have the ability to borrow in foreign currencies under our Senior Secured Revolving Credit Facility, which provides a natural hedge with regard to changes in exchange rates between the foreign currencies and the U.S. dollar and reduces our exposure to foreign exchange rate differences. We are typically a net receiver of these foreign currencies as related for our international investment positions, and, as a result, our investments denominated in foreign currencies, to the extent not hedged, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.

As of March 31, 2015, the net contractual amount of our foreign currency forward contracts totaled $463.67 million, all of which related to hedging of our foreign currency denominated debt investments. As of March 31, 2015, we did not have any amounts outstanding denominated in foreign currencies on our Senior Secured Revolving Credit Facility.

During the three months ended March 31, 2015, our foreign currency transactions and foreign currency translation adjustment recorded in our condensed consolidated statements of operations resulted in a net realized and unrealized losses of $1.45 million. Our foreign currency forward contracts, employed for hedging purposes, generated net realized and unrealized gains of $42.95 million during the three months ended March 31, 2015. We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore, the fluctuations related to foreign exchange rate conversion are included with the net realized gain (loss) and unrealized appreciation (depreciation) on investments. See “Results of Operations — Net Change in Unrealized Appreciation or Depreciation” for additional information on the foreign currency exchange changes.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Exchange Act, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the most recent fiscal quarter, there was no change in our internal controls over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

74


Table of Contents

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings - None

 

Item 1A. Risk Factors – There have been no material changes to the risk factors previously disclosed in response to Item 1A. to Part I. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, except for the following:

We are exposed to risks resulting from the current low interest rate environment.

Since we will borrow money to make investments, our net investment income depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. The current, historically low interest rate environment can, depending on our cost of capital, depress our net investment income, even though the terms of our investments generally will include a minimum interest rate. In addition, any reduction in the level of interest rates on new investments relative to interest rates on our current investments could adversely impact our net investment income, reducing our ability to service the interest obligations on, and to repay the principal of, our indebtedness, as well as our capacity to pay distributions. Any such developments would result in a decline in our net asset value and in net asset value per share. Floating interest rate investments tied to certain indices that tend to lag behind the market may perform better in a falling interest rate environment, while floating interest rate investments tied to other indices, such as LIBOR, may do better in a rising rate environment. Not all investments perform alike under different interest rate scenarios. Generally, our variable interest rate debt investments provide for interest payments based on three-month LIBOR (the base rate) and typically, every three months, the base rates are reset to then prevailing three-month LIBOR.

To the extent that we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available to service our debt or for distribution to our shareholders, and result in losses.

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. Since we use leverage to partially finance our investments, through borrowing from banks and other lenders, you will experience increased risks of investing in our securities. If the value of our assets decreases, leveraging will cause our net asset value to decline more sharply than it otherwise would if we had not borrowed and employed leverage. Similarly, any decrease in our income would cause our net income to decline more sharply than it would have if we had not borrowed and employed leverage. Such a decline could negatively affect our ability to service our debt or make distributions to our shareholders. In addition, our shareholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management or incentive fees payable to the Advisors.

The amount of leverage that we employ depends on our Advisors’ and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. There can be no assurance that additional leveraged financing will be available to us on favorable terms or at all. However, to the extent that we use leverage to finance our assets, our financing costs will reduce cash available for servicing our debt or distributions to shareholders. Moreover, we may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations. In such an event, we may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.

As a business development company, we are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. If this ratio declines below 200%, we cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so. This could have a material adverse effect on our operations, and we may not be able to service our debt or make distributions.

The sale or likelihood of the sale of a large number of outstanding shares prior to completion of the listing of our securities on a national securities exchange could negatively affect our stock price.

The ability of our shareholders to liquidate their investment in our shares of common stock is limited. If we were to list our common stock on a securities exchange in the future, a large volume of sales of our shares could decrease the prevailing market prices of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales are not affected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline.

 

75


Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

 

Item 3. Defaults Upon Senior Securities - None

 

Item 4. Mine Safety DisclosuresNot applicable

 

Item 5. Other Information - None

 

Item 6. Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

 

76


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of May 2015.

 

CORPORATE CAPITAL TRUST, INC.
By:  

/s/    Thomas K. Sittema        

  THOMAS K. SITTEMA
  Chief Executive Officer
  (Principal Executive Officer)
By:  

/s/    Steven D. Shackelford        

  STEVEN D. SHACKELFORD
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

77


Table of Contents

EXHIBIT INDEX

The following exhibits are filed or incorporated as part of this report

 

10.39 Fifth Amendment to Credit Agreement between CCT Funding LLC, the lenders referred to therein and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.39 to the Company’s Current Report on Form 8-K filed on January 9, 2015.)
31.1 Certification of Chief Executive Officer of Corporate Capital Trust, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2 Certification of Chief Financial Officer of Corporate Capital Trust, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1 Certification of Chief Executive Officer and Chief Financial Officer of Corporate Capital Trust, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

 

78