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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2015

OR

 

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

For the transition period                     to                    

Commission File No. 000-54899

 

 

CARLYLE GMS FINANCE, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Maryland   80-0789789

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

520 Madison Avenue, 38th Floor, New York, NY 10022

(Address of principal executive office) (Zip Code)

(212) 813-4900

(Registrant’s telephone number, including area code)

 

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at August 12, 2015

Common stock, $0.01 par value   26,757,953

 

 

 


Table of Contents

CARLYLE GMS FINANCE, INC.

INDEX

 

Part I.

 

Financial Information

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Assets and Liabilities as of June 30, 2015 (unaudited) and
December 31, 2014

     3   
 

Consolidated Statements of Operations for the three month and six month periods ended June 30, 2015 (unaudited) and June 30, 2014 (unaudited)

     4   
 

Consolidated Statements of Changes in Net Assets for the six month periods ended June  30, 2015 (unaudited) and June 30, 2014 (unaudited)

     5   
 

Consolidated Statements of Cash Flows for the six month periods ended June 30, 2015 (unaudited) and June 30, 2014 (unaudited)

     6   
 

Consolidated Schedules of Investments as of June 30, 2015 (unaudited) and December 31, 2014

     7   
 

Notes to Consolidated Financial Statements (unaudited)

     20   

Item 2.

 

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

     46   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     65   

Item 4.

 

Controls and Procedures

     66   

Part II.

  Other Information   

Item 1.

 

Legal Proceedings

     67   

Item 1A.

 

Risk Factors

     67   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     69   

Item 3.

 

Defaults Upon Senior Securities

     69   

Item 4.

 

Mine Safety Disclosures

     69   

Item 5.

 

Other Information

     70   

Item 6.

 

Exhibits

     71   
 

Signatures

     72   

 

2


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(dollar amounts in thousands, except per share data)

 

     June 30,
2015
    December 31,
2014
 
     (unaudited)        

ASSETS

    

Investments—non-controlled/non-affiliated, at fair value (amortized cost of $917,292 and $707,701, respectively)

   $ 912,502      $ 698,662   

Cash

     46,477        8,754   

Deferred financing costs

     6,687        4,635   

Interest receivable

     2,702        4,512   

Prepaid expenses and other assets

     1,328        157   
  

 

 

   

 

 

 

Total assets

   $ 969,696      $ 716,720   
  

 

 

   

 

 

 

LIABILITIES

    

Payable for investments purchased

   $ 30,523      $ 55,343   

Secured borrowings (Note 5)

     134,958        308,441   

2015-1 Notes payable (Note 6)

     273,000        —     

Due to Investment Adviser

     43        41   

Interest and credit facility fees payable (Notes 5 and 6)

     3,368        1,192   

Base management and incentive fees payable (Note 4)

     5,916        6,319   

Dividend payable (Note 8)

     9,902        6,276   

Administrative service fees payable (Note 4)

     120        91   

Other accrued expenses and liabilities

     1,214        760   
  

 

 

   

 

 

 

Total liabilities

     459,044        378,463   
  

 

 

   

 

 

 

Commitments and contingencies (Notes 7 and 11)

    

NET ASSETS

    

Common stock, $0.01 par value; 200,000,000 shares authorized; 26,755,935 shares and 17,932,697 shares, respectively, issued and outstanding

     268        179   

Paid-in capital in excess of par value

     522,674        351,636   

Offering costs

     (74     (74

Accumulated net investment income (loss), net of cumulative dividends of $35,897 and $18,162, respectively

     (7,698     (4,388

Accumulated net realized gain (loss)

     272        (57

Accumulated net unrealized appreciation (depreciation)

     (4,790     (9,039
  

 

 

   

 

 

 

Total net assets

   $ 510,652      $ 338,257   
  

 

 

   

 

 

 

NET ASSETS PER SHARE

   $ 19.09      $ 18.86   
  

 

 

   

 

 

 

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

 

3


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollar amounts in thousands, except per share data)

(unaudited)

 

    For the three month periods ended     For the six month periods ended  
      June 30, 2015          June 30, 2014         June 30, 2015          June 30, 2014    

Investment income:

         

Interest income from non-controlled/non-affiliated investments

  $ 15,925       $ 9,944      $ 28,904       $ 16,577   
 

 

 

    

 

 

   

 

 

    

 

 

 

Total investment income

    15,925         9,944        28,904         16,577   
 

 

 

    

 

 

   

 

 

    

 

 

 

Expenses:

         

Base management fees (Note 4)

    3,080         1,455        5,803         2,446   

Incentive fees (Note 4)

    1,986         1,149        3,606         2,089   

Professional fees

    465         596        849         1,193   

Administrative service fees (Note 4)

    188         218        300         475   

Interest expense (Notes 5 and 6)

    2,129         634        3,909         983   

Credit facility fees (Note 5)

    446         1,526        874         2,056   

Directors’ fees and expenses

    106         103        207         185   

Transfer agency fees

    44         34        93         60   

Other general and administrative

    562         178        772         330   
 

 

 

    

 

 

   

 

 

    

 

 

 

Total expenses

    9,006         5,893        16,413         9,817   

Waiver of base management fees
(Note 4)

    1,026         485        1,934         815   
 

 

 

    

 

 

   

 

 

    

 

 

 

Net expenses

    7,980         5,408        14,479         9,002   
 

 

 

    

 

 

   

 

 

    

 

 

 

Net investment income (loss)

    7,945         4,536        14,425         7,575   

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments:

         

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

    593         145        329         191   

Net change in unrealized appreciation (depreciation) on investments—non-controlled/non-affiliated

    677         (89     4,249         842   
 

 

 

    

 

 

   

 

 

    

 

 

 

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments

    1,270         56        4,578         1,033   
 

 

 

    

 

 

   

 

 

    

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ 9,215       $ 4,592      $ 19,003       $ 8,608   
 

 

 

    

 

 

   

 

 

    

 

 

 

Basic and diluted earnings per common share (Note 8)

  $ 0.40       $ 0.36      $ 0.89       $ 0.73   
 

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares of common stock outstanding—Basic and Diluted (Note 8)

    23,062,818         12,891,548        21,330,007         11,819,417   
 

 

 

    

 

 

   

 

 

    

 

 

 

Dividends declared per common share
(Note 8)

  $ 0.37       $ 0.27      $ 0.74       $ 0.46  

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

 

4


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(dollar amounts in thousands)

(unaudited)

 

     For the six month periods ended  
     June 30, 2015     June 30, 2014  

Increase (decrease) in net assets resulting from operations:

    

Net investment income (loss)

   $ 14,425      $ 7,575   

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

     329        191   

Net change in unrealized appreciation (depreciation) on investments—non-controlled/non-affiliated

     4,249        842   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     19,003        8,608   
  

 

 

   

 

 

 

Capital transactions:

    

Common stock issued

     171,082        65,472   

Reinvestment of dividends

     45        3   

Dividends declared (Note 11)

     (17,735     (5,930
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from capital share transactions

     153,392        59,545   
  

 

 

   

 

 

 

Net increase (decrease) in net assets

     172,395        68,153   
  

 

 

   

 

 

 

Net assets at beginning of period

     338,257        186,002   
  

 

 

   

 

 

 

Net assets at end of period

   $ 510,652      $ 254,155   
  

 

 

   

 

 

 

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

 

5


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(unaudited)

 

     For the six month periods ended  
     June 30, 2015     June 30, 2014  

Cash flows from operating activities:

    

Net increase (decrease) in net assets resulting from operations

   $ 19,003      $ 8,608   

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

    

Amortization of deferred financing costs

     516        1,347   

Net accretion of discount on securities

     (1,223     (518

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

     (329     (191

Net change in unrealized (appreciation) depreciation on investments—non- controlled/non-affiliated

     (4,249     (842

Cost of investments purchased and change in payable for investments purchased

     (359,342     (225,613

Proceeds from sales and repayments of investments

     126,483        55,267   

Changes in operating assets:

    

Interest receivable

     1,810        (3,404

Prepaid expenses and other assets

     (1,171     (82

Changes in operating liabilities:

    

Due to Investment Adviser

     2        5   

Interest and credit facility fees payable

     283        178   

Base management and incentive fees payable

     (403     2,433   

Administrative service fees payable

     29        29   

Other accrued expenses and liabilities

     454        114   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (218,137     (162,669
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     171,082        65,472   

Borrowings on Revolving Credit Facility and Facility

     223,700        108,100   

Repayments of Revolving Credit Facility and Facility

     (397,183     (21,182

Proceeds from issuance of 2015-1 Notes

     273,000        —    

Debt issuance costs paid

     (675     (1,958

Dividends paid in cash

     (14,064     (2,446 )
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     255,860        147,986   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     37,723        (14,683

Cash, beginning of period

     8,754        42,010   
  

 

 

   

 

 

 

Cash, end of period

   $ 46,477      $ 27,327   
  

 

 

   

 

 

 

Supplemental disclosures:

    

Offering expenses and financing costs due

   $ 1,893      $ —    

Interest paid during the period

   $ 3,562      $ 795   

Dividends declared during the period

   $ 17,735      $ 5,930   

Reinvestment of dividends

   $ 45      $ 3   

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

 

6


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

Investments—non-controlled/non-affiliated (1)

  Industry   Interest
Rate
    Maturity
Date
    Acquisition
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of
Net Assets
 

First Lien Debt (72.47%)

               

Access CIG, LLC (2) (3) (5) (13)

  Business Services     6.00     10/17/2021        10/16/2014      $ 18,616      $ 18,471      $ 18,616        3.64

ACP Tower Merger Sub, Inc. (Telular Corporation) (2) (3) (4)

  Telecommunications     5.50        6/24/2019        6/24/2013        5,625        5,610        5,560        1.09   

AF Borrower LLC (Accuvant) (2) (3) (5) (13)

  High Tech Industries     6.25        1/28/2022        12/15/2014        16,359        16,122        16,305        3.19   

Alpha Packaging Holdings, Inc. (2) (3) (4) (13)

  Containers, Packaging & Glass     5.25        5/12/2020        5/12/2014        11,409        11,398        11,211        2.19   

Anaren, Inc. (2) (3) (4) (13)

  Telecommunications     5.50        2/18/2021        2/18/2014        11,439        11,345        11,299        2.21   

APX Group, Inc. (5) (8)

  Consumer Services     6.38        12/1/2019        10/15/2014        10,000        9,723        9,700        1.90   

Audax AAMP Holdings, Inc. (2) (3) (4) (13)

  Durable Consumer Goods     6.50        6/24/2017        5/22/2015        11,325        11,229        11,300        2.21   

Blue Bird Body Company (2) (3) (4) (8) (13)

  Transportation: Consumer     6.50        6/27/2020        7/22/2014        10,969        10,488        10,476        2.05   

Brooks Equipment Company, LLC (2) (3) (4) (13)

  Construction & Building     6.75        8/29/2020        8/29/2014        7,595        7,538        7,567        1.48   

Capstone Logistics Acquisition, Inc. (2) (3) (4) (13)

  Transportation: Cargo     5.50        10/7/2021        10/3/2014        19,900        19,719        19,623        3.84   

Captive Resources Midco, LLC (2) (3) (5) (9) (13)

  Banking, Finance, Insurance &
Real Estate
    6.75        6/30/2020        6/30/2015        30,000        29,486        29,667        5.81   

Castle Management Borrower LLC (Highgate Hotels
L.P.) (2) (3) (4) (13)

  Hotel, Gaming & Leisure     5.50        9/18/2020        10/10/2014        9,928        9,850        9,692        1.90   

Central Security Group, Inc. (2) (3) (4) (13)

  Consumer Services     6.25        10/6/2020        10/3/2014        24,875        24,541        24,298        4.76   

Consolidated Aerospace Manufacturing, LLC. (2) (3) (4) (13)

  Aerospace & Defense     5.00        3/27/2020        2/28/2014        6,183        6,165        6,048        1.19   

Coyote Logistics, LLC (2) (3) (5) (13)

  Transportation: Cargo     6.25        3/26/2022        3/24/2015        20,800        20,600        21,008        4.11   

CRCI Holdings Inc. (CLEAResult Consulting,
Inc.) (2) (3) (4) (13)

  Utilities: Electric     5.25        7/10/2019        7/29/2014        5,943        5,922        5,903        1.16   

Dent Wizard International Corporation (2) (3) (4) (13)

  Automotive     5.75        4/7/2020        4/28/2015        8,000        7,961        7,913        1.55   

DTZ U.S. Borrower, LLC (2) (3) (4) (13)

  Construction & Building     5.50        11/5/2021        10/28/2014        10,448        10,304        10,286        2.01   

EP Minerals, LLC (2) (3) (4) (13)

  Metals & Mining     5.50        8/20/2020        8/20/2014        10,421        10,378        10,376        2.03   

FCX Holdings Corp. (2) (3) (4) (13)

  Capital Equipment     5.50        8/4/2020        8/4/2014        10,098        10,091        9,951        1.95   

Genex Holdings, Inc. (2) (3) (13)

  Banking, Finance, Insurance &
Real Estate
    5.25        5/30/2021        5/22/2014        4,265        4,247        4,265        0.84   

Green Energy Partners/Stonewall LLC (2) (3) (5) (10) (13)

  Energy: Electricity     6.50        11/13/2021        11/12/2014        8,300        8,146        8,456        1.66   

Indra Holdings Corp. (Totes Isotoner) (2) (3) (5) (13)

  Non-durable Consumer Goods     5.25        5/1/2021        4/29/2014        14,850        14,724        14,526        2.84   

Miller Heiman, Inc. (2) (3) (4) (13)

  Business Services     6.75        9/30/2019        10/1/2013        19,468        19,252        18,885        3.70   

MSX International, Inc. (2) (3) (4) (13)

  Automotive     6.00        8/21/2020        8/18/2014        10,617        10,526        10,626        2.08   

National Technical Systems, Inc. (2) (3) (4) (5) (13) (14)

  Aerospace & Defense     7.00        6/12/2021        6/12/2015        26,000        25,646        25,881        5.07   

NES Global Talent Finance US LLC (United Kingdom) (2) (3) (4) (8) (13)

  Energy: Oil & Gas     6.50        10/3/2019        10/2/2013        12,031        11,851        11,674        2.29   

 

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

 

7


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

Investments—non-controlled/non-affiliated (1)

  Industry   Interest
Rate
    Maturity
Date
    Acquisition
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of
Net Assets
 

First Lien Debt (72.47%) (continued)

               

Novetta, LLC (2) (3) (4) (13)

  Aerospace & Defense     6.00 %       10/2/2020        11/19/2014      $ 12,139      $ 12,040      $ 12,039        2.36 %  

Paradigm Acquisition Corp. (2) (3) (5) (13)

  Business Services     6.00        6/2/2022        6/2/2015        23,600        23,250        23,345        4.57   

Pelican Products, Inc. (2) (3) (4) (13)

  Containers, Packaging & Glass     5.25        4/11/2020        4/8/2014        7,857        7,874        7,712        1.51   

Plano Molding Company, LLC (2) (3) (5) (13)

  Hotel, Gaming & Leisure     7.00        5/8/2021        5/1/2015        22,600        22,391        22,510        4.41   

Prowler Acquisition Corp. (Pipeline Supply and Service, LLC) (2) (3) (4)

  Wholesale     5.50        1/28/2020        1/24/2014        10,967        10,885        9,794        1.92   

PSC Industrial Holdings Corp (2) (3) (4) (13)

  Environmental Industries     5.75        12/5/2020        12/5/2014        11,940        11,833        11,836        2.32   

PSI Services LLC (2) (3) (4) (12)

  Business Services     7.75        2/27/2021        2/27/2015        18,000        17,494        18,625        3.65   

SolAero Technologies Corp. (2) (3) (4)

  Telecommunications     5.75        12/10/2020        12/9/2014        11,109        11,017        10,975        2.15   

SolAero Technologies Corp. (2) (3) (13)

  Telecommunications     6.25        12/10/2020        5/1/2015        9,341        9,250        9,302        1.82   

Stafford Logistics, Inc. (Custom Ecology, Inc.) (2) (3) (4)

  Environmental Industries     6.75        6/26/2019        7/1/2013        9,540        9,472        9,180        1.80   

Synarc-Biocore Holdings, LLC (2) (3) (4) (13)

  Healthcare & Pharmaceuticals     5.50        3/10/2021        3/6/2014        13,331        13,221        12,977        2.54   

Systems Maintenance Services Holding, Inc. (2) (3) (13)

  High Tech Industries     5.00        10/18/2019        10/18/2013        2,204        2,197        2,171        0.42   

TASC, Inc. (2) (3) (4) (8) (13)

  Aerospace & Defense     7.00        5/23/2020        12/17/2014        19,900        19,144        19,999        3.92   

Teaching Strategies, LLC (2) (3) (4) (13)

  Media: Advertising, Printing &
Publishing
    6.00        10/1/2019        2/5/2015        14,811        14,752        14,695        2.88   

The Hilb Group, LLC (2) (3) (5) (12) (15)

  Banking, Finance, Insurance &
Real Estate
    6.75        6/24/2021        6/24/2015        22,600        21,944        22,406        4.39   

The Hygenic Corporation (Performance Health) (2) (3) (5) (13)

  Non-durable Consumer Goods     6.00        10/11/2020        2/27/2015        16,000        15,783        15,886        3.11   

The SI Organization, Inc. (2) (3) (4) (13)

  Aerospace & Defense     5.75        11/23/2019        5/16/2014        8,824        8,754        8,835        1.73   

The Topps Company, Inc. (2) (3) (4) (13)

  Non-durable Consumer Goods     7.25        10/2/2018        10/1/2013        11,454        11,374        11,453        2.24   

TruckPro, LLC (2) (3) (4) (13)

  Automotive     5.75        8/6/2018        8/6/2013        9,274        9,236        9,219        1.80   

U.S. Farathane, LLC (2) (3) (4) (13)

  Automotive     6.75        12/23/2021        2/6/2015        16,234        15,925        16,330        3.20   

Vetcor Professional Practices LLC (2) (3) (4) (5) (13) (16)

  Consumer Services     7.00        4/20/2021        5/19/2015        8,400        8,289        8,375        1.64   

Violin Finco S.A.R.L. (Alexander Mann Solutions) (United Kingdom) (2) (3) (4) (8) (13)

  Business Services     5.75        12/20/2019        12/18/2013        11,315        11,230        11,315        2.22   

Vitera Healthcare Solutions, LLC (2) (3) (4) (13)

  Healthcare & Pharmaceuticals     6.00        11/4/2020        11/1/2013        9,489        9,414        9,449        1.85   

Zest Holdings, LLC (2) (3) (4) (13)

  Durable Consumer Goods     5.25        8/16/2020        8/18/2014        11,751        11,750        11,766        2.30   
           

 

 

   

 

 

   

 

 

 

First Lien Debt Total

            $ 659,852      $ 661,306        129.50
           

 

 

   

 

 

   

 

 

 

 

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

 

8


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

Investments—non-controlled/non-affiliated (1)

  Industry   Interest
Rate
    Maturity
Date
    Acquisition
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of
Net Assets
 

Second Lien Debt (19.49%)

               

AF Borrower LLC (Accuvant) (2) (3) (5)

  High Tech Industries     10.00 %       1/28/2023        12/15/2014      $ 8,000      $ 7,924      $ 7,974        1.56

Allied Security Holdings LLC (2) (3) (5) (13)

  Business Services     8.00        8/14/2021        9/25/2014        8,000        7,945        7,990        1.57   

Ascensus Inc. (2) (3) (4)

  Banking, Finance, Insurance &Real
Estate
    9.00        12/2/2020        12/2/2013        8,000        7,902        7,929        1.55   

Berlin Packaging L.L.C. (2) (3) (5) (13)

  Containers, Packaging & Glass     7.75        10/1/2022        9/24/2014        9,200        9,136        9,304        1.82   

Charter NEX US Holdings, Inc. (2) (3) (5) (13)

  Chemicals, Plastics & Rubber     9.25        2/5/2023        1/30/2015        10,000        9,858        9,621        1.88   

Confie Seguros Holding II Co. (2) (3) (5)

  Banking, Finance, Insurance &
Real Estate
    10.25        5/8/2019        6/29/2015        12,000        11,884        11,995        2.35   

Creganna Finance (US) LLC (Ireland) (2) (3) (5) (8)

  Healthcare & Pharmaceuticals     9.00        6/1/2022        11/20/2014        9,900        9,809        9,962        1.95   

DiversiTech Corporation (2) (3) (5) (13)

  Capital Equipment     9.00        11/19/2022        5/19/2015        8,400        8,288        8,145        1.60   

Drew Marine Group Inc. (2) (3) (4) (5)

  Chemicals, Plastics & Rubber     8.00        5/19/2021        11/19/2013        12,500        12,477        11,993        2.35   

Genex Holdings, Inc. (2) (3) (5) (17)

  Banking, Finance, Insurance &
Real Estate
    8.75        5/30/2022        5/22/2014        5,990        5,901        5,861        1.14   

Genoa, a QoL Healthcare Company, LLC (2) (3) (5) (13)

  Retail     8.75        4/30/2023        4/21/2015        9,900        9,802        9,538        1.87   

Institutional Shareholder Services Inc. (2) (3) (5) (13)

  Banking, Finance, Insurance &
Real Estate
    8.50        4/30/2022        4/30/2014        12,500        12,391        11,953        2.34   

Jazz Acquisition, Inc. (Wencor) (2) (3) (5) (13)

  Aerospace & Defense     7.75        6/19/2022        6/25/2014        6,700        6,672        6,466        1.27   

Landslide Holdings, Inc. (LANDesk Software) (2) (3) (13)

  Software     8.25        2/25/2021        2/25/2014        3,500        3,478        3,236        0.63   

MRI Software, LLC (2) (3) (5)

  Software     9.00        6/23/2022        6/19/2015        11,250        11,084        10,929        2.14   

Phillips-Medisize Corporation (2) (3) (5) (13)

  Chemicals, Plastics & Rubber     8.25        6/16/2022        6/13/2014        5,000        4,956        4,982        0.98   

Power Stop, LLC (5)

  Automotive     11.00        5/29/2022        5/29/2015        10,000        9,802        9,964        1.95   

Prime Security Services Borrower, LLC (Protection One Inc.) (2) (3) (5)

  Consumer Services     9.75        7/1/2022        6/19/2015        6,700        6,602        6,612        1.30   

Prowler Acquisition Corp. (Pipeline Supply and Service, LLC) (2) (3) (5)

  Wholesale     9.50        7/28/2020        1/24/2014        3,000        2,950        2,474        0.48   

Systems Maintenance Services Holding, Inc. (2) (3) (4)

  High Tech Industries     9.25        10/18/2020        10/18/2013        6,000        5,956        5,935        1.16   

TASC, Inc. (5) (8)

  Aerospace & Defense     12.00        5/23/2021        12/17/2014        6,000        5,884        6,263        1.23   

Vitera Healthcare Solutions, LLC (2) (3) (5)

  Healthcare & Pharmaceuticals     9.25        11/4/2021        11/1/2013        2,000        1,975        1,908        0.37   

Watchfire Enterprises, Inc. (2) (3) (5) (13)

  Media: Advertising, Printing &
Publishing
    9.00        10/2/2021        10/2/2013        7,000        6,918        6,777        1.33   
           

 

 

   

 

 

   

 

 

 

Second Lien Debt Total

            $ 179,594      $ 177,811        34.82
           

 

 

   

 

 

   

 

 

 

 

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

 

9


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

Investments—non-controlled/non-affiliated (1)

  Industry     Maturity
Date
    Acquisition
Date
    Par/
Principal
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage of
Net Assets
 

Structured Finance Obligations (7.80%) (5) (8) (11)

             

1776 CLO I, Ltd., Subordinated Notes

    Structured Finance        5/8/2020        2/27/2014      $ 11,750      $ 8,962      $ 7,285        1.43

AIMCO CLO, Series 2014-A, Class F, 5.47% (2)

    Structured Finance        7/20/2026        5/12/2014        2,700        2,359        2,174        0.43   

AIMCO CLO, Series 2014-A, Subordinated Notes

    Structured Finance        7/20/2026        5/12/2014        11,500        9,325        8,079        1.58   

Ares XXVIII CLO Ltd., Subordinated Notes

    Structured Finance        10/17/2024        10/10/2013        7,000        4,956        4,480        0.88   

Babson CLO Ltd. 2005-I, Subordinated Notes

    Structured Finance        4/15/2019        7/16/2013        7,632        432        185        0.04   

Blackrock Senior Income Series V, Limited, Subordinated Notes (Ireland)

    Structured Finance        8/13/2019        3/11/2014        4,600        2,397        2,266        0.44   

CIFC Funding 2007-III, Ltd., Income Notes

    Structured Finance        7/26/2021        5/20/2014        6,500        3,138        3,282        0.64   

Clydesdale CLO 2005, Ltd., Subordinated Notes

    Structured Finance        12/6/2017        7/15/2013        5,750        —         10        0.00   

Flagship VII Limited, Subordinated Notes

    Structured Finance        1/20/2026        12/18/2013        7,000        5,473        4,637        0.91   

GoldenTree Loan Opportunities V, Limited, Subordinated Notes

    Structured Finance        10/18/2021        10/11/2013        5,000        3,022        2,975        0.58   

ING Investment Management CLO IV, Ltd., Preferred Shares

    Structured Finance        6/14/2022        5/7/2014        9,575        5,163        5,410        1.06   

ING IM CLO 2012-1 LLC, Preferred Shares

    Structured Finance        3/14/2022        12/5/2014        7,610        4,866        5,083        1.00   

ING IM CLO 2012-1 LLC, Subordinated Notes

    Structured Finance        3/14/2022        12/5/2014        2,500        1,597        1,670        0.33   

MSIM Peconic Bay, Ltd., Subordinated Notes

    Structured Finance        7/20/2019        10/22/2013        4,500        1,027        1,193        0.23   

Nautique Funding Ltd., Income Notes

    Structured Finance        4/15/2020        2/24/2014        5,000        2,878        2,781        0.54   

Steele Creek CLO 2014-I, LLC, Subordinated Notes

    Structured Finance        8/21/2026        7/18/2014        18,000        14,328        13,950        2.73   

Venture VI CDO Limited, Preference Shares

    Structured Finance        8/3/2020        4/17/2014        7,000        3,659        3,710        0.73   

Westwood CDO I, Ltd., Subordinated Notes

    Structured Finance        3/25/2020        4/30/2015        4,000        2,049        2,000        0.39   
         

 

 

   

 

 

   

 

 

 

Structured Finance Obligations Total

          $ 75,631      $ 71,170        13.94
         

 

 

   

 

 

   

 

 

 

 

Investments—non-controlled/non-affiliated (1)

   Industry    Maturity
Date
   Acquisition
Date
     Par/
Principal
Amount
     Cost      Fair
Value (7)
     Percentage of
Net Assets
 

Equity Investments (0.24%) (5) (8)

                    

Power Stop, LLC

   Automotive         5/29/2015         7       $ 715       $ 715         0.14

The Hilb Group, LLC

   Banking, Finance, Insurance
& Real Estate
        6/24/2015         1,500         1,500         1,500         0.29   
              

 

 

    

 

 

    

 

 

 

Equity Investments Total

               $ 2,215       $ 2,215         0.43
              

 

 

    

 

 

    

 

 

 

Total Investments—non-controlled/non-affiliated

               $ 917,292       $ 912,502         178.69
              

 

 

    

 

 

    

 

 

 

 

(1)

Unless otherwise indicated, issuers of debt and equity investments held by Carlyle GMS Finance, Inc. (“GMS Finance” or the “Company”) are domiciled in the United States and issuers of structured finance obligations are domiciled in the Cayman Islands. Under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the “Investment Company Act”), the Company would be deemed to “control” a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. As of June 30, 2015, the Company does not “control” any of these portfolio companies.

 

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

 

10


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

  Under the Investment Company Act, the Company would be deemed an “affiliated person” of a portfolio company if the Company owns 5% or more of the portfolio company’s outstanding voting securities. As of June 30, 2015, the Company is not an “affiliated person” of any portfolio company.
(2) Variable rate loans to the portfolio companies and variable rate notes of structured finance obligations bear interest at a rate that may be determined by reference to either LIBOR or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), which generally resets quarterly. For each such loan and note, the Company has provided the interest rate in effect as of June 30, 2015.
(3) Loan includes interest rate floor feature.
(4) Denotes that all or a portion of the assets are owned by the Company’s wholly owned subsidiary, Carlyle GMS Finance SPV LLC (the “Borrower Sub”). The Borrower Sub has a senior secured revolving credit facility (as amended, the “Revolving Credit Facility”). The lenders of the Revolving Credit Facility have a first lien security interest in substantially all of the assets of the Borrower Sub (see Note 5, Borrowings) and such assets are assets of the Borrower Sub to satisfy obligations of the Borrower Sub under the Revolving Credit Facility and are not available to creditors of the Company.
(5) Denotes that all or a portion of the assets are owned by the Company. The Company has a senior secured revolving credit facility (as amended, the “Facility”), which was subsequently amended on January 8, 2015 (the “First Facility Amendment Effective Date”). The lenders of the Facility have a perfected first-priority security interest in substantially all of the portfolio investments held by the Company (see Note 5, Borrowings).
(6) Amortized cost represents original cost, including origination fees, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method. Equity tranche collateralized loan obligation (“CLO”) fund investments, which are referred to as “structured finance obligations”, are recorded at amortized cost using the effective interest method.
(7) Fair value is determined in good faith by or under the direction of the Board of Directors of the Company (Notes 2 and 3), pursuant to the Company’s valuation policies.
(8) The Company has determined the indicated investments are non-qualifying assets under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
(9) Captive Resources Midco, LLC has an undrawn delayed draw term loan of $3,125 par value at LIBOR + 5.75%, 1.00% floor, and an undrawn revolver of $1,875 par value at LIBOR + 5.75%, 1.00% floor. An unused rate of 1.25% and 0.50% is charged on the delayed draw term loan and revolver principal, respectively, while undrawn.
(10) Green Energy Partners/Stonewall LLC has an undrawn delayed draw term loan of $8,300 par value at LIBOR + 5.50%, 1.00% floor. An unused rate of 3.00% is charged on the principal while undrawn.
(11) As of June 30, 2015, the Company has a greater than 25% but less than 50% equity or subordinated notes ownership interest in certain structured finance obligations. These investments have governing documents that preclude the Company from controlling management of the entity and therefore the Company has determined that the issuer of the investment is not a controlled affiliate or a non-controlled affiliate because the investments are not “voting securities”.
(12) In addition to the interest earned based on the stated interest rate of this loan, which is the amount reflected in this schedule, the Company is entitled to receive additional interest as a result of an agreement among lenders.
(13) Denotes that all or a portion of the assets secures the notes offered in connection with a $400 million term debt securitization completed by the Company on June 26, 2015 (see Note 6, 2015-1 Notes). These assets are owned by Carlyle GMS Finance MM CLO 2015-1 LLC, a wholly-owned and consolidated subsidiary of the Company, and are not available to the creditors of the Borrower Sub or the Company.
(14) National Technical Systems, Inc. has an undrawn delayed draw term loan of $4,469 par value at LIBOR + 6.00%, 1.00% floor, and an undrawn revolver of $2,031 par value at LIBOR + 6.00%, 1.00% floor. An unused rate of 1.00% and 0.50% is charged on the delayed draw term loan and revolver principal, respectively, while undrawn.
(15) The Hilb Group, LLC has an undrawn delayed draw term loan of $10,892 par value at LIBOR + 5.75%, 1.00% floor (12). An unused rate of 1.00% is charged on the principal while undrawn.
(16) Vetcor Professional Practices LLC has an undrawn delayed draw term loan of $4,200 par value at LIBOR + 6.00%, 1.00% floor. An unused rate of 1.00% is charged on the principal while undrawn.
(17) Genex Holdings, Inc. has an undrawn delayed draw second lien term loan of $2,000 par value at LIBOR + 7.75%, 1.00% floor. An unused rate of 8.75% is charged on the principal while undrawn.

 

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

 

11


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

As of June 30, 2015, investments—non-controlled/non-affiliated at fair value consisted of the following:

 

Type

   Amortized
Cost
     Fair Value      % of Fair Value  

First Lien Debt

   $ 659,852       $ 661,306         72.47

Second Lien Debt

     179,594         177,811         19.49   

Structured Finance Obligations

     75,631         71,170         7.80   

Equity Investments

     2,215         2,215         0.24   
  

 

 

    

 

 

    

 

 

 

Total

   $ 917,292       $ 912,502         100.00
  

 

 

    

 

 

    

 

 

 

The industrial composition of investments—non-controlled/non-affiliated at fair value as of June 30, 2015 was as follows:

 

Industry

   Amortized
Cost
     Fair Value      % of Fair Value  

Aerospace & Defense

   $ 84,305       $ 85,531         9.37

Automotive

     54,165         54,767         6.00   

Banking, Finance, Insurance & Real Estate

     95,255         95,576         10.47   

Business Services

     97,642         98,776         10.83   

Capital Equipment

     18,379         18,096         1.98   

Chemicals, Plastics & Rubber

     27,291         26,596         2.91   

Construction & Building

     17,842         17,853         1.96   

Consumer Services

     49,155         48,985         5.37   

Containers, Packaging & Glass

     28,408         28,227         3.09   

Durable Consumer Goods

     22,979         23,066         2.53   

Energy: Electricity

     8,146         8,456         0.93   

Energy: Oil & Gas

     11,851         11,674         1.28   

Environmental Industries

     21,305         21,016         2.30   

Healthcare & Pharmaceuticals

     34,419         34,296         3.76   

High Tech Industries

     32,199         32,385         3.55   

Hotel, Gaming & Leisure

     32,241         32,202         3.53   

Media: Advertising, Printing & Publishing

     21,670         21,472         2.35   

Metals & Mining

     10,378         10,376         1.14   

Non-durable Consumer Goods

     41,881         41,865         4.59   

Retail

     9,802         9,538         1.05   

Software

     14,562         14,165         1.55   

Structured Finance

     75,631         71,170         7.80   

Telecommunications

     37,222         37,136         4.07   

Transportation: Cargo

     40,319         40,631         4.45   

Transportation: Consumer

     10,488         10,476         1.15   

Utilities: Electric

     5,922         5,903         0.65   

Wholesale

     13,835         12,268         1.34   
  

 

 

    

 

 

    

 

 

 

Total

   $ 917,292       $ 912,502         100.00
  

 

 

    

 

 

    

 

 

 

 

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

 

12


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of June 30, 2015

(dollar amounts in thousands)

(unaudited)

 

The geographical composition of investments—non-controlled/non-affiliated at fair value as of June 30, 2015 was as follows:

 

Geography

   Amortized
Cost
     Fair Value      % of Fair Value  

Cayman Islands

   $ 73,234       $ 68,904         7.55

Ireland

     12,206         12,228         1.34   

United Kingdom

     23,081         22,989         2.52   

United States

     808,771         808,381         88.59   
  

 

 

    

 

 

    

 

 

 

Total

   $ 917,292       $ 912,502         100.00
  

 

 

    

 

 

    

 

 

 

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

 

13


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2014

(dollar amounts in thousands)

 

Investments—non-controlled/non-affiliated (1)

  Industry   Interest
Rate
    Maturity
Date
    Acquisition
Date
    Par
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of
Net Assets
 

First Lien Debt (73.68%)

               

Access CIG, LLC (2) (3) (5)

  Business Services     6.00     10/17/2021        10/16/2014      $ 15,000      $ 14,855      $ 14,865        4.40

Accuvant Finance, LLC (2) (3) (5)

  High Tech Industries     7.00        10/22/2020        4/22/2014        8,988        8,917        8,988        2.66   

ACP Tower Merger Sub, Inc. (Telular Corporation) (2) (3) (4)

  Telecommunications     5.50        6/24/2019        6/24/2013        5,781        5,764        5,689        1.68   

AF Borrower LLC (Accuvant) (2) (3) (5)

  High Tech Industries     6.25        1/28/2022        12/15/2014        12,000        11,762        11,842        3.50   

Alpha Packaging Holdings, Inc. (2) (3) (4)

  Containers, Packaging & Glass     5.25        5/12/2020        5/12/2014        11,567        11,554        11,301        3.34   

American Tire Distributors, Inc. (2) (3) (5)

  Automotive     5.75        6/1/2018        6/12/2014        3,192        3,193        3,116        0.92   

Anaren, Inc. (2) (3) (4)

  Telecommunications     5.50        2/18/2021        2/18/2014        11,497        11,396        11,363        3.36   

APX Group, Inc. (5) (8)

  Consumer Services     6.38        12/1/2019        10/15/2014        10,000        9,688        9,575        2.83   

Blue Bird Body Company (2) (3) (4) (8)

  Transportation: Consumer     6.50        6/27/2020        7/22/2014        11,250        10,719        10,940        3.24   

Brooks Equipment Company, LLC (2) (3) (4)

  Construction & Building     6.75        8/29/2020        8/29/2014        7,890        7,826        7,766        2.30   

Capstone Logistics Acquisition, Inc. (2) (3) (4)

  Transportation: Cargo     5.50        10/7/2021        10/3/2014        19,950        19,757        19,477        5.76   

Castle Management Borrower LLC (Highgate Hotels
L.P.) (2) (3) (4) (9)

  Hotel, Gaming & Leisure     5.50        9/18/2020        10/10/2014        8,778        8,693        8,610        2.55   

Central Security Group, Inc. (2) (3) (4) 

  Consumer Services     6.25        10/6/2020        10/3/2014        25,000        24,638        24,780        7.33   

Consolidated Aerospace Manufacturing, LLC. (2) (3) (4) 

  Aerospace & Defense     5.00        3/27/2020        2/28/2014        6,730        6,708        6,558        1.94   

CRCI Holdings Inc. (CLEAResult Consulting, Inc.) (2) (3) (4)

  Utilities: Electric     5.25        7/10/2019        7/29/2014        5,985        5,962        5,858        1.73   

DTZ U.S. Borrower, LLC (2) (3) (4)

  Construction & Building     5.50        11/5/2021        10/28/2014        10,500        10,347        10,290        3.04   

EP Minerals, LLC (2) (3) (4)

  Metals & Mining     5.50        8/20/2020        8/20/2014        10,474        10,426        10,298        3.04   

FCX Holdings Corp. (2) (3) (4)

  Capital Equipment     5.50        8/4/2020        8/4/2014        10,149        10,141        9,942        2.94   

Genex Holdings, Inc. (2) (3) (4)

  Banking, Finance, Insurance & Real
Estate
    5.25        5/30/2021        5/22/2014        4,286        4,268        4,227        1.25   

Green Energy Partners/Stonewall LLC (2) (3) (5) (10)

  Energy: Electricity     6.50        11/13/2021        11/12/2014        8,300        8,136        8,338        2.46   

Hercules Achievement, Inc. (Varsity Brands Holding Co., Inc.) (2) (3) (5)

  Durable Consumer Goods     6.00        12/11/2021        12/10/2014        20,000        19,803        19,820        5.86   

Indra Holdings Corp. (Totes Isotoner) (2) (3) (5)

  Non-durable Consumer Goods     5.25        5/1/2021        4/29/2014        14,925        14,790        14,701        4.35   

Landslide Holdings, Inc. (LANDesk Software) (2) (3) (4)

  Software     5.00        2/25/2020        2/25/2014        9,875        9,878        9,705        2.87   

Meritas Schools Holdings, LLC (2) (3) (4)

  Consumer Services     7.00        6/25/2019        6/21/2013        7,080        7,025        7,138        2.11   

Miller Heiman, Inc. (2) (3) (4)

  Business Services     6.75        9/30/2019        10/1/2013        19,719        19,479        19,338        5.72   

MRI Software LLC (2) (3) (4)

  Software     5.25        2/4/2021        1/31/2014        14,888        14,823        14,560        4.30   

MSX International, Inc. (2) (3) (4)

  Automotive     6.00        8/21/2020        8/18/2014        11,176        11,072        11,039        3.26   

NES Global Talent Finance US LLC (United Kingdom) (2) (3) (4) (8)

  Energy: Oil & Gas     6.50        10/3/2019        10/2/2013        12,188        11,988        12,188        3.60   

Novetta, LLC (2) (3) (4)

  Aerospace & Defense     6.00        10/2/2020        11/19/2014        12,220        12,112        12,017        3.55   

 

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

 

14


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of December 31, 2014

(dollar amounts in thousands)

 

Investments—non-controlled/non-affiliated (1)

  Industry   Interest
Rate
    Maturity
Date
    Acquisition
Date
    Par
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of
Net Assets
 

First Lien Debt (73.68%) (continued)

               

Pelican Products, Inc. (2) (3) (4)

  Containers, Packaging & Glass     5.25 %       4/11/2020        4/8/2014      $ 7,897      $ 7,915      $ 7,748        2.29

Prowler Acquisition Corp. (Pipeline Supply and Service, LLC) (2) (3) (4)

  Wholesale     5.50        1/28/2020        1/24/2014        11,024        10,933        10,764        3.18   

PSC Industrial Holdings Corp (2) (3) (4)

  Environmental Industries     7.00        12/5/2020        12/5/2014        12,000        11,884        11,820        3.50   

QoL Meds, LLC (2) (3) (4)

  Retail     5.50        7/15/2020        7/14/2014        12,988        12,929        12,757        3.77   

RCHP, Inc. (Regionalcare) (2) (3) (4)

  Healthcare & Pharmaceuticals     6.00        4/23/2019        4/21/2014        19,792        19,612        19,630        5.80   

SolAero Technologies Corp. (2) (3) (4)

  Telecommunications     5.75        12/10/2020        12/9/2014        11,250        11,150        10,936        3.23   

Stafford Logistics, Inc. (Custom Ecology, Inc.) (2) (3) (4)

  Environmental Industries     6.75        6/26/2019        7/1/2013        9,540        9,466        9,006        2.66   

Sterling Infosystems, Inc (2) (3) (4)

  Business Services     5.50        5/13/2021        5/12/2014        8,955        8,916        8,895        2.63   

Synarc-Biocore Holdings, LLC (2) (3) (4)

  Healthcare & Pharmaceuticals     5.50        3/10/2021        3/6/2014        13,399        13,280        12,953        3.83   

Systems Maintenance Services Holding, Inc. (2) (3) (4)

  High Tech Industries     5.00        10/18/2019        10/18/2013        2,215        2,208        2,170        0.64   

TASC, Inc (2) (3) (5) (8)

  Aerospace & Defense     7.00        5/23/2020        12/17/2014        20,000        19,200        19,600        5.79   

The SI Organization, Inc. (2) (3) (4)

  Aerospace & Defense     5.75        11/23/2019        5/16/2014        9,372        9,288        9,465        2.80   

The Topps Company, Inc. (2) (3) (4)

  Non-durable Consumer Goods     7.25        10/2/2018        10/1/2013        11,512        11,422        11,363        3.36   

TruckPro, LLC (2) (3) (4)

  Automotive     5.75        8/6/2018        8/6/2013        9,499        9,456        9,415        2.78   

Violin Finco S.A.R.L. (Alexander Mann Solutions)

               

(United Kingdom) (2) (3) (4) (8)

  Business Services     5.75        12/20/2019        12/18/2013        12,375        12,274        12,375        3.66   

Vitera Healthcare Solutions, LLC (2) (3) (4)

  Healthcare & Pharmaceuticals     6.00        11/4/2020        11/1/2013        9,533        9,453        9,462        2.80   

Zest Holdings, LLC (2) (3) (4)

  Durable Consumer Goods     5.25        8/16/2020        8/18/2014        12,344        12,344        12,099        3.58   
           

 

 

   

 

 

   

 

 

 

First Lien Debt Total

            $ 517,450      $ 514,787        152.19
           

 

 

   

 

 

   

 

 

 

Second Lien Debt (15.44%)

               

AF Borrower LLC (Accuvant) (2) (3) (5)

  High Tech Industries     10.00        1/28/2023        12/15/2014        8,000        7,921        7,839        2.32   

Allied Security Holdings LLC (2) (3) (5)

  Business Services     8.00        8/14/2021        9/25/2014        8,000        7,942        7,850        2.32   

Ascensus Inc. (2) (3) (4)

  Banking, Finance, Insurance & Real
Estate
    9.00        12/2/2020        12/2/2013        8,000        7,896        7,983        2.36   

Berlin Packaging L.L.C. (2) (3) (5)

  Containers, Packaging & Glass     7.75        10/1/2022        9/24/2014        9,200        9,132        9,062        2.68   

Creganna Finance (US) LLC (Ireland) (2) (3) (5) (8)

  Healthcare & Pharmaceuticals     9.00        6/1/2022        11/20/2014        9,900        9,804        9,402        2.78   

Drew Marine Group Inc. (2) (3) (5)

  Chemicals, Plastics & Rubber     8.00        5/19/2021        11/19/2013        12,500        12,475        11,720        3.46   

Genex Holdings, Inc. (2) (3) (5)

  Banking, Finance, Insurance & Real
Estate
    8.75        5/30/2022        5/22/2014        4,990        4,936        4,740        1.40   

Institutional Shareholder Services Inc. (2) (3) (5)

  Banking, Finance, Insurance & Real
Estate
    8.50        4/30/2022        4/30/2014        12,500        12,386        11,600        3.43   

Jazz Acquisition, Inc. (Wencor) (2) (3) (5)

  Aerospace & Defense     7.75        6/19/2022        6/25/2014        6,700        6,671        6,283        1.86   

Landslide Holdings, Inc. (LANDesk Software) (2) (3) (5)

  Software     8.25        2/25/2021        2/25/2014        3,500        3,477        3,335        0.99   

 

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

 

15


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of December 31, 2014

(dollar amounts in thousands)

 

Investments—non-controlled/non-affiliated (1)

  Industry   Interest
Rate
    Maturity
Date
    Acquisition
Date
    Par
Amount
    Amortized
Cost (6)
    Fair
Value (7)
    Percentage
of
Net Assets
 

Second Lien Debt (15.44%) (continued)

               

Phillips-Medisize Corporation (2) (3) (5)

  Chemicals, Plastics & Rubber     8.25 %       6/16/2022        6/13/2014      $ 5,000      $ 4,954      $ 4,743        1.40 %  

Prowler Acquisition Corp. (Pipeline Supply and Service, LLC) (2) (3) (5)

  Wholesale     9.50        7/28/2020        1/24/2014        3,000        2,947        2,816        0.83   

Systems Maintenance Services Holding, Inc. (2) (3) (4)

  High Tech Industries     9.25        10/18/2020        10/18/2013        6,000        5,953        5,830        1.72   

TASC, Inc (5) (8)

  Aerospace & Defense     12.00        5/23/2021        12/17/2014        6,000        5,880        6,060        1.79   

Vitera Healthcare Solutions, LLC (2) (3) (5)

  Healthcare & Pharmaceuticals     9.25        11/4/2021        11/1/2013        2,000        1,973        1,929        0.57   

Watchfire Enterprises, Inc. (2) (3) (5)

  Media: Advertising, Printing &Publishing     9.00        10/2/2021        10/2/2013        7,000        6,914        6,682        1.98   
           

 

 

   

 

 

   

 

 

 

Second Lien Debt Total

            $ 111,261      $ 107,874        31.89
           

 

 

   

 

 

   

 

 

 

 

Investments—non-controlled/non-affiliated (1)

   Industry      Maturity
Date
     Acquisition
Date
     Par
Amount
     Amortized
Cost (6)
     Fair
Value (7)
     Percentage
of
Net Assets
 

Structured Finance Obligations (10.88%) (5) (8) (11)

                    

1776 CLO I, Ltd., Subordinated Notes

     Structured Finance         5/8/2020         2/27/2014       $ 11,750       $ 10,106       $ 8,813         2.61

AIMCO CLO, Series 2014-A, Class F, 5.47% (2)

     Structured Finance         7/20/2026         5/12/2014         2,700         2,350         2,187         0.65   

AIMCO CLO, Series 2014-A, Subordinated Notes

     Structured Finance         7/20/2026         5/12/2014         11,500         9,732         9,832         2.91   

Ares XXVIII CLO Ltd., Subordinated Notes

     Structured Finance         10/17/2024         10/10/2013         7,000         5,242         5,278         1.56   

Babson CLO Ltd. 2005-I, Subordinated Notes

     Structured Finance         4/15/2019         7/16/2013         7,632         432         161         0.05   

Blackrock Senior Income Series V, Limited, Subordinated Notes (Ireland)

     Structured Finance         8/13/2019         3/11/2014         4,600         2,592         2,521         0.75   

CIFC Funding 2007-III, Ltd., Income Notes

     Structured Finance         7/26/2021         5/20/2014         6,500         3,525         3,510         1.04   

Clydesdale CLO 2005, Ltd., Subordinated Notes

     Structured Finance         12/6/2017         7/15/2013         5,750         —          10         0.00   

Flagship VII Limited, Subordinated Notes

     Structured Finance         1/20/2026         12/18/2013         7,000         5,823         5,628         1.66   

GoldenTree Loan Opportunities V, Limited, Subordinated Notes

     Structured Finance         10/18/2021         10/11/2013         5,000         3,136         2,920         0.86   

ING Investment Management CLO IV, Ltd., Preferred Shares

     Structured Finance         6/14/2022         5/7/2014         8,925         5,327         5,690         1.68   

ING IM CLO 2012-1 LLC, Preferred Shares

     Structured Finance         3/14/2022         12/5/2014         3,500         2,367         2,494         0.74   

ING IM CLO 2012-1 LLC, Subordinated Notes

     Structured Finance         3/14/2022         12/5/2014         2,500         1,691         1,781         0.53   

Landmark VIII, CLO Ltd., Income Notes

     Structured Finance         10/19/2020         10/22/2013         8,600         3,603         3,337         0.99   

MSIM Peconic Bay, Ltd., Subordinated Notes

     Structured Finance         7/20/2019         10/22/2013         4,500         1,210         1,018         0.30   

Nautique Funding Ltd., Income Notes

     Structured Finance         4/15/2020         2/24/2014         5,000         2,991         2,980         0.88   

Pacifica CDO V, Ltd., Subordinated Notes

     Structured Finance         1/26/2020         3/28/2014         4,700         87         70         0.02   

Steele Creek CLO 2014-I, LLC, Subordinated Notes

     Structured Finance         8/21/2026         7/18/2014         18,000         15,030         14,040         4.15   

Venture VI CDO Limited, Preference Shares

     Structured Finance         8/3/2020         4/17/2014         7,000         3,746         3,731         1.09   
              

 

 

    

 

 

    

 

 

 

Structured Finance Obligations Total

               $ 78,990       $ 76,001         22.47
              

 

 

    

 

 

    

 

 

 

Total Investments—non-controlled/non-affiliated

               $ 707,701       $ 698,662         206.55
              

 

 

    

 

 

    

 

 

 

 

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

 

16


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of December 31, 2014

(dollar amounts in thousands)

 

(1) Unless otherwise indicated, issuers of debt investments of GMS Finance are domiciled in the United States and issuers of structured finance obligations are domiciled in the Cayman Islands. Under the Investment Company Act, the Company would be deemed to “control” a portfolio company if the Company owned more than 25% of its outstanding voting securities and/or held the power to exercise control over the management or policies of the portfolio company. As of December 31, 2014, the Company does not “control” any of these portfolio companies. Under the Investment Company Act, the Company would be deemed an “affiliated person” of a portfolio company if the Company owns 5% or more of the portfolio company’s outstanding voting securities. As of December 31, 2014, the Company is not an “affiliated person” of any portfolio company.
(2) Variable rate loans to the portfolio companies and variable rate notes of structured finance obligations bear interest at a rate that may be determined by reference to either LIBOR or an alternate base rate (commonly based on the Federal Funds Rate or the Prime Rate), which generally resets quarterly. For each such loan and note, the Company has provided the interest rate in effect as of December 31, 2014.
(3) Loan includes interest rate floor feature.
(4) These assets are owned by the Borrower Sub. The Borrower Sub has the Revolving Credit Facility. The lenders of the Revolving Credit Facility have a first lien security interest in substantially all of the assets of the Borrower Sub (see Note 5, Borrowings) and such assets are assets of the Borrower Sub to satisfy obligations of the Borrower Sub under the Revolving Credit Facility and are not available to creditors of the Company.
(5) These assets are owned by the Company. The Company has the Facility, which was subsequently amended on the First Facility Amendment Effective Date. The lenders of the Facility have a perfected first-priority security interest in substantially all of the portfolio investments held by the Company. The lenders of the Facility also have a perfected first-priority security interest in the unfunded investor equity capital commitments (provided that the amount of unfunded capital commitments ultimately available to the lenders is limited to $100,000) and such security interest will be released once the Company receives equity capital contributions in an amount equal to $100,000 subsequent to the First Facility Amendment Effective Date (see Note 5, Borrowings).
(6) Amortized cost represents original cost, including origination fees, adjusted for the accretion/amortization of discounts/premiums, as applicable, on debt investments using the effective interest method. Equity tranche structured finance obligations are recorded at amortized cost using an effective interest method.
(7) Fair value is determined in good faith by or under the direction of the Board of Directors of the Company (Notes 2 and 3), pursuant to the Company’s valuation policies.
(8) The Company has determined the indicated investments are non-qualifying assets under Section 55(a) of the Investment Company Act. Under the Investment Company Act, the Company may not acquire any non-qualifying assets unless, at the time such acquisition is made, qualifying assets represent at least 70% of the Company’s total assets.
(9) Castle Management Borrower LLC (Highgate Hotels L.P.) has an undrawn delayed draw term loan of $1,200 par value at LIBOR + 4.50%, 1.00% floor. An unused rate of 1.00% is charged on the principal while undrawn. The delayed draw term loan is owned by the Company.
(10) Green Energy Partners/Stonewall LLC has an undrawn delayed draw term loan of $8,300 par value at LIBOR + 5.50%, 1.00% floor. An unused rate of 3.00% is charged on the principal while undrawn.
(11) As of December 31, 2014, the Company has a greater than 25% but less than 50% equity or subordinated notes ownership interest in certain structured finance obligations. These investments have governing documents that preclude the Company from controlling management of the entity and therefore the Company has determined that the issuer of the investment is not a controlled affiliate or a non-controlled affiliate because the investments are not “voting securities”.

 

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

 

17


Table of Contents

CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of December 31, 2014

(dollar amounts in thousands)

 

As of December 31, 2014, investments—non-controlled/non-affiliated at fair value consisted of the following:

 

Type

   Amortized
Cost
     Fair Value      % of Fair Value  

First Lien Debt

   $ 517,450       $ 514,787         73.68

Second Lien Debt

     111,261         107,874         15.44   

Structured Finance Obligations

     78,990         76,001         10.88   
  

 

 

    

 

 

    

 

 

 

Total

   $ 707,701       $ 698,662         100.00
  

 

 

    

 

 

    

 

 

 

The industrial composition of investments—non-controlled/non-affiliated at fair value as of December 31, 2014 was as follows:

 

Industry

   Amortized
Cost
     Fair Value      % of Fair Value  

Aerospace & Defense

   $ 59,859       $ 59,983         8.59

Automotive

     23,721         23,570         3.37   

Banking, Finance, Insurance & Real Estate

     29,486         28,550         4.09   

Business Services

     63,466         63,323         9.06   

Capital Equipment

     10,141         9,942         1.42   

Chemicals, Plastics & Rubber

     17,429         16,463         2.36   

Construction & Building

     18,173         18,056         2.58   

Consumer Services

     41,351         41,493         5.94   

Containers, Packaging & Glass

     28,601         28,111         4.02   

Durable Consumer Goods

     32,147         31,919         4.57   

Energy: Electricity

     8,136         8,338         1.19   

Energy: Oil & Gas

     11,988         12,188         1.74   

Environmental Industries

     21,350         20,826         2.98   

Healthcare & Pharmaceuticals

     54,122         53,376         7.64   

High Tech Industries

     36,761         36,669         5.25   

Hotel, Gaming & Leisure

     8,693         8,610         1.23   

Media: Advertising, Printing & Publishing

     6,914         6,682         0.96   

Metals & Mining

     10,426         10,298         1.47   

Non-durable Consumer Goods

     26,212         26,064         3.73   

Retail

     12,929         12,757         1.83   

Software

     28,178         27,600         3.95   

Structured Finance

     78,990         76,001         10.88   

Telecommunications

     28,310         27,988         4.01   

Transportation: Cargo

     19,757         19,477         2.79   

Transportation: Consumer

     10,719         10,940         1.57   

Utilities: Electric

     5,962         5,858         0.84   

Wholesale

     13,880         13,580         1.94   
  

 

 

    

 

 

    

 

 

 

Total

   $ 707,701       $ 698,662         100.00
  

 

 

    

 

 

    

 

 

 

 

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

 

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CARLYLE GMS FINANCE, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS (Continued)

As of December 31, 2014

(dollar amounts in thousands)

 

The geographical composition of investments—non-controlled/non-affiliated at fair value as of December 31, 2014 was as follows:

 

Geography

   Amortized
Cost
     Fair Value      % of Fair Value  

Cayman Islands

   $ 76,398       $ 73,480         10.52

Ireland

     12,396         11,923         1.70   

United Kingdom

     24,262         24,563         3.51   

United States

     594,645         588,696         84.27   
  

 

 

    

 

 

    

 

 

 

Total

   $ 707,701       $ 698,662         100.00
  

 

 

    

 

 

    

 

 

 

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

 

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CARLYLE GMS FINANCE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

June 30, 2015

(dollar amounts in thousands, except per share data)

1. ORGANIZATION

Carlyle GMS Finance, Inc. (“GMS Finance” or the “Company”) is a Maryland corporation formed on February 8, 2012, and structured as an externally managed, non-diversified closed-end investment company. On May 2, 2013, GMS Finance filed its election to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the “Investment Company Act”). GMS Finance has elected to be treated, and intends to continue to comply with the requirements to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

GMS Finance’s investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle market companies, which the Company defines as companies with approximately $10 million to $100 million of earnings before interest, taxes, depreciation and amortization (“EBITDA”). GMS Finance seeks to achieve its investment objective by investing primarily in first lien senior secured loans (which may include stand-alone first lien loans; “last out” first lien loans, which are loans that have a secondary priority behind “first out” first lien loans; “unitranche” loans, which are loans that combine features of first lien, second lien or subordinated loans, generally in a first lien position; and secured corporate bonds with similar features to these categories of first lien loans) and second lien senior secured loans (which may include senior secured loans, and, to a lesser extent, secured corporate bonds, with a secondary priority behind first lien loans) (collectively, “Middle Market Senior Loans”). The Middle Market Senior Loans are generally made to private U.S. middle market companies that are, in many cases, controlled by private equity firms. Depending on market conditions, GMS Finance expects that between 70% and 80% of the value of its assets will be invested in Middle Market Senior Loans, with the balance invested in higher-yielding investments, which may include middle market junior loans such as corporate mezzanine loans, equity co-investments, broadly syndicated first lien and second lien senior secured loans, high-yield bonds, structured finance obligations and/or other opportunistic investments. GMS Finance expects that the composition of its portfolio will change over time given Carlyle GMS Investment Management L.L.C.’s (the “Investment Adviser”) view on, among other things, the economic and credit environment (including with respect to interest rates) in which the Company is operating.

On May 2, 2013, GMS Finance completed its initial closing of capital commitments (the “Initial Closing”) and subsequently commenced substantial investment operations. Prior to May 2, 2013, GMS Finance had not commenced operations and was a development stage company as defined by Accounting Standards Codification (“ASC”) 915, Development Stage Entity. During this time, GMS Finance focused substantially all of its efforts on establishing its business. If GMS Finance has not consummated an initial public offering of its common stock that results in an unaffiliated public float of at least 15% of the aggregate capital commitments received prior to the date of such initial public offering (a “Qualified IPO”) by May 2, 2018, then GMS Finance (subject to any necessary stockholder approvals and applicable requirements of the Investment Company Act) will use its best efforts to wind down and/or liquidate and dissolve.

GMS Finance is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. GMS Finance will remain an emerging growth company for up to five years following an initial public offering, although if the market value of the common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, GMS Finance would cease to be an emerging growth company as of the following December 31.

Carlyle GMS Finance SPV LLC (the “Borrower Sub”) is a Delaware limited liability company that was formed on January 3, 2013. The Borrower Sub invests in first and second lien senior secured loans. The Borrower Sub is a wholly-owned subsidiary of the Company and is consolidated in these consolidated financial statements commencing from the date of its formation, January 3, 2013.

 

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On June 26, 2015, the Company completed a $400 million term debt securitization (the “2015-1 Debt Securitization”). The notes offered in the 2015-1 Debt Securitization (the “2015-1 Notes”) were issued by Carlyle GMS Finance MM CLO 2015-1 LLC (the “2015-1 Issuer”), a wholly-owned and consolidated subsidiary of the Company, and are secured by a diversified portfolio consisting primarily of first and second lien senior secured loans. Refer to Note 6 for details. The 2015-1 Issuer is consolidated in these consolidated financial statements commencing from the date of its formation, May 8, 2015.

GMS Finance is externally managed by the Investment Adviser, an investment adviser registered under the Investment Advisers Act of 1940, as amended. Carlyle GMS Finance Administration L.L.C. (the “Administrator”) provides the administrative services necessary for GMS Finance to operate. Both the Investment Adviser and the Administrator are wholly-owned subsidiaries of Carlyle Investment Management L.L.C., a subsidiary of The Carlyle Group L.P. “Carlyle” refers to The Carlyle Group L.P., its affiliates and its consolidated subsidiaries, a global alternative asset manager publicly traded on NASDAQ Global Select Market under the symbol “CG”. Refer to the sec.gov website for further information on Carlyle.

As a BDC, GMS Finance is required to comply with certain regulatory requirements. As part of these requirements, the Company must not acquire any assets other than “qualifying assets” specified in the Investment Company Act unless, at the time the acquisition is made, at least 70% of its total assets are qualifying assets (with certain limited exceptions).

GMS Finance has elected to be treated, and intends to continue to comply with the requirements to qualify annually, as a RIC under the Code, and operates in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, GMS Finance must, among other things, meet certain source-of-income and asset diversification requirements and timely distribute to its stockholders generally at least 90% of its investment company taxable income, as defined by the Code, for each year. Pursuant to this election, GMS Finance generally does not have to pay corporate level taxes on any income that it distributes to stockholders, provided that GMS Finance satisfies those requirements.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States (“US GAAP”). The Company is an investment company for the purposes of accounting and financial reporting in accordance with Accounting Standards Update (“ASU”) 2013-08, Financial Services—Investment Companies (“ASU 2013-08”): Amendments to the Scope, Measurement and Disclosure Requirements. The consolidated financial statements include the accounts of GMS Finance and its wholly-owned subsidiaries, the Borrower Sub and the 2015-1 Issuer. All significant intercompany balances and transactions have been eliminated. US GAAP for an investment company requires investments to be recorded at fair value. The carrying value for all other assets and liabilities approximates their fair value.

The interim financial statements have been prepared in accordance with US GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, certain disclosures accompanying the annual consolidated financial statements prepared in accordance with US GAAP are omitted. In the opinion of management, all adjustments considered necessary for the fair presentation of consolidated financial statements for the interim period presented have been included. These adjustments are of a normal, recurring nature. This Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2014. The results of operations for the three month and six month periods ended June 30, 2015 are not necessarily indicative of the operating results to be expected for the full year.

 

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Use of Estimates

The preparation of consolidated financial statements in conformity with US GAAP requires management to make assumptions and estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experiences and other factors, including expectations of future events that management believes to be reasonable under the circumstances. It also requires management to exercise judgment in the process of applying the Company’s accounting policies. Assumptions and estimates regarding the valuation of investments and their resulting impact on base management and incentive fees involve a higher degree of judgment and complexity and these assumptions and estimates may be significant to the consolidated financial statements. Actual results could differ from these estimates and such differences could be material.

Investments

Investment transactions are recorded on the trade date. 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 using the specific identification method without regard to unrealized appreciation or depreciation previously recognized, and includes investments charged off during the period, net of recoveries. Net change in unrealized appreciation or depreciation on investments as presented in the accompanying Consolidated Statements of Operations reflects the net change in the fair value of investments, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized. See Note 3 for further information about fair value measurements.

Cash

Cash consists of demand deposits. The Company’s cash is held with two large financial institutions and cash held in such financial institutions may, at times, exceed the Federal Deposit Insurance Corporation insured limit.

Revenue Recognition

Interest from Investments and Realized Gain/Loss on Investments

Interest income is recorded on an accrual basis and includes the accretion of discounts and amortization of premiums. Discounts from and premiums to par value on debt securities purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. The amortized cost of debt investments represents the original cost, including origination fees, adjusted for the accretion of discounts and amortization of premiums, if any. At time of exit, the realized gain or loss on an investment is the difference between the amortized cost at time of exit and the cash received at exit using the specific identification method.

The Company may have loans in its portfolio that contain payment-in-kind (“PIK”) provisions. PIK represents interest that is accrued and recorded as interest income at the contractual rates, increases the loan principal on the respective capitalization dates, and is generally due at maturity. As of June 30, 2015 and December 31, 2014 and for the three month and six month periods ended June 30, 2015 and 2014, no loans in the portfolio contained PIK provisions.

Interest income from investments in the “equity” class of collateralized loan obligation (“CLO”) funds, which are included in “structured finance obligations”, is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financials Assets. We monitor the expected cash inflows from our CLO equity investments, including the expected residual payments and the effective yield is determined and updated at least quarterly. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties, including the amount and timing of principal payments which are impacted by prepayments, repurchases, defaults,

 

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delinquencies and liquidations of or within the CLO funds. These uncertainties are difficult to predict and are subject to future events that could have impacted the Company’s estimates if the information was known at the time. As a result, actual results may differ significantly from these estimates. Interest income from investments in the notes of CLO funds, which are also included in “structured finance obligations”, is recorded on an accrual basis.

Other Income

Other income may include income such as consent, waiver and amendment fees associated with the Company’s investment activities as well as any fees for managerial assistance services rendered by the Company to portfolio companies. Such fees are recognized as income when earned or the services are rendered. The Company may receive a fee for guaranteeing the outstanding debt of a portfolio company. Such fee will be amortized into other income over the life of the guarantee. The unamortized amount, if any, is included in other assets in the accompanying Consolidated Statements of Assets and Liabilities.

Non-Accrual Income

Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest are paid current and, in management’s judgment, are likely to remain current. Management may not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. As of June 30, 2015 and December 31, 2014, and for the three month and six month periods ended June 30, 2015 and 2014, no loans in the portfolio were on non-accrual status.

Revolving Credit Facility, Facility and 2015-1 Notes Related Costs, Expenses and Deferred Financing Costs (See Note 5, Borrowings, and Note 6, 2015-1 Notes)

Interest expense and unused commitment fees on the Revolving Credit Facility and Facility are recorded on an accrual basis. Unused commitment fees are included in credit facility fees in the accompanying Consolidated Statements of Operations.

The Revolving Credit Facility and Facility are recorded at carrying value, which approximates fair value.

Deferred financing costs include capitalized expenses related to the closing of the Revolving Credit Facility and Facility. Amortization of deferred financing costs for each credit facility is computed on the straight-line basis over the respective term of each credit facility, except for a portion that was accelerated in connection with the amendment of the Revolving Credit Facility as described in Note 5. The amortization of such costs is included in credit facility fees in the accompanying Consolidated Statements of Operations.

Deferred financing costs also include capitalized expenses including structuring and arrangement fees related to the offering of the 2015-1 Notes. Amortization of deferred financing costs for the 2015-1 Notes is computed on the effective yield method over the term of 2015-1 Notes. The amortization of such costs is included in interest expense in the accompanying Consolidated Statements of Operations.

Organization and Offering Costs

The Company agreed to reimburse the Investment Adviser for initial organization and offering costs incurred on behalf of GMS Finance up to $1,500. As of June 30, 2015 and December 31, 2014, $1,500 of organization and offering costs had been incurred by GMS Finance and $57 of excess organization and offering costs had been incurred by the Investment Adviser. The $1,500 of incurred organization and offering costs are

 

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allocated to all stockholders based on their respective capital commitment and are re-allocated amongst all stockholders at the time of each capital drawdown subsequent to the Initial Closing. The Company’s organization costs incurred are expensed and the offering costs are charged against equity when incurred.

Income Taxes

For federal income tax purposes, GMS Finance has elected to be treated as a RIC under the Code, and intends to make the required distributions to its stockholders as specified therein. In order to qualify as a RIC, GMS Finance must meet certain minimum distribution, source-of-income and asset diversification requirements. If such requirements are met, then GMS Finance is generally required to pay income taxes only on the portion of its taxable income and gains it does not distribute.

The minimum distribution requirements applicable to RICs require GMS Finance to distribute to its stockholders at least 90% of its investment company taxable income (“ICTI”), as defined by the Code, each year. Depending on the level of ICTI earned in a tax year, GMS Finance may choose to carry forward ICTI in excess of current year distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.

In addition, based on the excise distribution requirements, GMS Finance is subject to a 4% nondeductible federal excise tax on undistributed income unless GMS Finance distributes in a timely manner an amount at least equal to the sum of (1) 98% of its ordinary income for each calendar year, (2) 98.2% of capital gain net income (both long-term and short-term) for the one-year period ending October 31 in that calendar year and (3) any income realized, but not distributed, in the preceding year. For this purpose, however, any ordinary income or capital gain net income retained by GMS Finance that is subject to corporate income tax is considered to have been distributed. GMS Finance intends to make sufficient distributions each taxable year to satisfy the excise distribution requirements.

The Company evaluates tax positions taken or expected to be taken in the course of preparing its consolidated financial statements to determine whether the tax positions are “more-likely than not” to be sustained by the applicable tax authority. All penalties and interest associated with income taxes, if any, are included in income tax expense.

The Borrower Sub and the 2015-1 Issuer are disregarded entities for tax purposes and are consolidated with the tax return of GMS Finance.

Capital Calls and Dividends and Distributions to Common Stockholders

The Company records the shares issued in connection with capital calls as of the effective date, or due date, of the capital call, which is the date shares are issued. To the extent that the Company has taxable income available, the Company intends to make quarterly distributions to its common stockholders. Dividends and distributions to common stockholders are recorded on the record date. The amount to be distributed is determined by the Board of Directors each quarter and is generally based upon the taxable earnings estimated by management and available cash. Net realized capital gains, if any, are generally distributed at least annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions on behalf of its stockholders, for those who have elected to participate in the plan. As a result of adopting such a plan, if the Board of Directors authorizes, and GMS Finance declares a cash dividend or distribution, the stockholders who have elected to participate in the dividend reinvestment plan would have their cash dividends or distributions automatically reinvested in additional shares of the Company’s common stock, rather than receiving cash. Prior to a Qualified IPO, the Company intends to use primarily newly issued shares of its

 

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common stock to implement the plan issued at the net asset value per share most recently determined by the Board of Directors. After a Qualified IPO, the Company intends to use primarily newly issued shares to implement the plan so long as the market value per share is equal to or greater than the net asset value per share as of the close of business on the relevant payment date for such dividend or distribution. If the market value per share is less than the net asset value per share as of the close of business on the relevant payment date, the plan administrator would purchase the common stock on behalf of participants in the open market, unless the Company instructs the plan administrator otherwise.

Functional Currency

The functional currency of the Company is the U.S. Dollar and all transactions were in U.S. Dollars.

Recent Accounting Standards Updates

On April 7, 2015, the Financial Accounting Standards Board issued ASU 2015-3, Interest—Imputation of Interest (Subtopic 835-30—Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-3”). ASU 2015-3 requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts and premiums. This guidance is effective for the Company on January 1, 2016 and the ASU requires the guidance to be applied on a retrospective basis. This guidance is not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

3. FAIR VALUE MEASUREMENTS

The Company applies fair value accounting in accordance with the terms of Financial Accounting Standards Board ASC Topic 820, Fair Value Measurement (“ASC 820”). ASC 820 defines fair value as the amount that would be exchanged to sell an asset or transfer a liability in an orderly transfer between market participants at the measurement date. The Company values securities/instruments traded in active markets on the measurement date by multiplying the closing price of such traded securities/instruments by the quantity of shares or amount of the instrument held. The Company may also obtain quotes with respect to certain of its investments, such as its securities/instruments traded in active markets and its liquid securities/instruments that are not traded in active markets, from pricing services, brokers, or counterparties (i.e. “consensus pricing”). When doing so, the Company determines whether the quote obtained is sufficient according to US GAAP to determine the fair value of the security. The Company may use the quote obtained or alternative pricing sources may be utilized including valuation techniques typically utilized for illiquid securities/instruments.

Securities/instruments that are illiquid or for which the pricing source does not provide a valuation or methodology or provides a valuation or methodology that, in the judgment of the Investment Adviser or GMS Finance’s Board of Directors, does not represent fair value shall each be valued as of the measurement date using all techniques appropriate under the circumstances and for which sufficient data is available. These valuation techniques may vary by investment and include comparable public market valuations, comparable precedent transaction valuations and/or discounted cash flow analyses. The process generally used to determine the applicable value is as follows: (i) the value of each portfolio company or investment is initially reviewed by the investment professionals responsible for such portfolio company or investment and, for non-traded investments, a standardized template designed to approximate fair market value based on observable market inputs, updated credit statistics and unobservable inputs is used to determine a preliminary value, which is also reviewed alongside consensus pricing, where available; (ii) preliminary valuation conclusions are documented and reviewed by a valuation committee comprised of members of senior management; (iii) the Board of Directors engages a third-party valuation firm to provide positive assurance on portions of the Middle Market Senior Loans and equity investments portfolio each quarter (such that each non-traded investment is reviewed by a third-party valuation firm at least once on a rolling twelve month basis) including a review of management’s preliminary valuation and conclusion on fair value; (iv) the Audit Committee of the Board of Directors (the “Audit

 

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Committee”) reviews the assessments of the Investment Adviser and the third-party valuation firm and provides the Board of Directors with any recommendations with respect to changes to the fair value of each investment in the portfolio; and (v) the Board of Directors discusses the valuation recommendations of the Audit Committee and determines the fair value of each investment in the portfolio in good faith based on the input of the Investment Adviser and, where applicable, the third-party valuation firm.

All factors that might materially impact the value of an investment are considered, including, but not limited to the assessment of the following factors, as relevant:

 

    the nature and realizable value of any collateral;

 

    call features, put features and other relevant terms of debt;

 

    the portfolio company’s leverage and ability to make payments;

 

    the portfolio company’s public or private credit rating;

 

    the portfolio company’s actual and expected earnings and discounted cash flow;

 

    prevailing interest rates and spreads for similar securities and expected volatility in future interest rates;

 

    the markets in which the portfolio company does business and recent economic and/or market events; and

 

    comparisons to comparable transactions and publicly traded securities.

Investment performance data utilized are the most recently available financial statements and compliance certificates received from the portfolio companies as of the measurement date which in many cases may reflect a lag in information.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may fluctuate from period to period. Because of the inherent uncertainty of valuation, these estimated values may differ significantly from the values that would have been reported had a ready market for the investments existed, and it is reasonably possible that the difference could be material.

In addition, changes in the market environment and other events that may occur over the life of the investments may cause the realized gains or losses on investments to be different from the net change in unrealized appreciation or depreciation currently reflected in the consolidated financial statements as of June 30, 2015 and December 31, 2014.

US GAAP establishes a hierarchical disclosure framework which ranks the level of observability of market price inputs used in measuring investments at fair value. The observability of inputs is impacted by a number of factors, including the type of investment and the characteristics specific to the investment and state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available quoted prices or for which fair value can be measured from quoted prices in active markets generally have a higher degree of market price observability and a lesser degree of judgment applied in determining fair value.

Investments measured and reported at fair value are classified and disclosed based on the observability of inputs used in determination of fair values, as follows:

 

    Level I—inputs to the valuation methodology are quoted prices available in active markets for identical investments as of the reporting date. The types of financial instruments in Level I generally include unrestricted securities, including equities and derivatives, listed in active markets. The Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

 

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    Level II—inputs to the valuation methodology are either directly or indirectly observable as of the reporting date and are those other than quoted prices in active markets. The type of financial instruments in this category generally includes less liquid and restricted securities listed in active markets, securities traded in other than active markets, government and agency securities, and certain over-the-counter derivatives where the fair value is based on observable inputs.

 

    Level III—inputs to the valuation methodology are unobservable and significant to overall fair value measurement. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are in this category generally include investments in privately-held entities, collateralized loan obligations, and certain over-the-counter derivatives where the fair value is based on unobservable inputs.

In certain cases, the inputs used to measure fair value may fall into 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 overall fair value measurement. The Investment Adviser’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. For the three month and six month periods ended June 30, 2015 and 2014, there were no transfers between levels.

The following tables summarize the Company’s investments measured at fair value on a recurring basis by the above fair value hierarchy levels as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015  
     Level I      Level II      Level III      Total  

Assets

           

First Lien Debt

   $ —        $ 9,700       $ 651,606       $ 661,306   

Second Lien Debt

     —          —          177,811         177,811   

Structured Finance Obligations

     —          —          71,170         71,170   

Equity Investments

     —          —          2,215         2,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 9,700       $ 902,802       $ 912,502   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Level I      Level II      Level III      Total  

Assets

           

First Lien Debt

   $ —        $ 9,575      $ 505,212       $ 514,787   

Second Lien Debt

     —          —          107,874         107,874   

Structured Finance Obligations

     —          —          76,001         76,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 9,575       $ 689,087       $ 698,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The changes in the Company’s investments at fair value for which the Company has used Level III inputs to determine fair value and net change in unrealized appreciation (depreciation) included in earnings for Level III investments still held are as follows:

 

           Financial Assets
For the three month period ended June 30, 2015
 
     First Lien
Debt
    Second
Lien Debt
     Structured
Finance
Obligations
    Equity
Investments
     Total  

Balance, beginning of period

   $ 582,393      $ 118,198       $ 78,131      $ —         $ 778,722   

Purchases

     167,679        58,419         2,240        2,215         230,553   

Sales

     (9,857 )     —          (5,110     —           (14,967

Paydowns

     (90,728     —          (3,192     —           (93,920

Accretion of discount

     840        36         5        —           881   

Net realized gains (losses)

     205        —          388        —           593   

Net change in unrealized appreciation (depreciation)

     1,074        1,158         (1,292     —           940   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 651,606      $ 177,811       $ 71,170      $ 2,215       $ 902,802   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) included in earnings related to investments still held as of June 30, 2015 included in net change in unrealized appreciation (depreciation) on investments non-controlled/non-affiliated on the Consolidated Statements of Operations

   $ 579      $ 1,158       $ (1,252   $ —         $ 485   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Financial Assets
For the three month period ended June 30, 2014
 
     First Lien
Debt
    Second
Lien Debt
    Structured
Finance
Obligations
    Total  

Balance, beginning of period

   $ 223,959      $ 46,575      $ 47,811      $ 318,345   

Purchases

     80,968        30,939        29,437        141,344   

Sales

     —         (4,050     —         (4,050

Paydowns

     (32,234     (3,570     (1,664     (37,468

Accretion of discount

     308        76        —         384   

Net realized gains (losses)

     —         120        25        145   

Net change in unrealized appreciation (depreciation)

     898        1,048        (2,035     (89
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 273,899      $ 71,138      $ 73,574      $ 418,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) included in earnings related to investments still held as of June 30, 2014 included in net change in unrealized appreciation (depreciation) on investments non-controlled/non-affiliated on the Consolidated Statements of Operations

   $ 860      $ 1,022      $ (2,035   $ (153
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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           Financial Assets
For the six month period ended June 30, 2015
 
     First Lien
Debt
    Second
Lien Debt
     Structured
Finance
Obligations
    Equity
Investments
     Total  

Balance, beginning of period

   $ 505,212      $ 107,874       $ 76,001      $ —         $ 689,087   

Purchases

     253,976        68,272         10,059        2,215         334,522   

Sales

     (9,857     —           (8,421     —           (18,278

Paydowns

     (103,076     —           (5,129     —           (108,205

Accretion of discount

     1,117        61         10        —           1,188   

Net realized gains (losses)

     207        —           122        —           329   

Net change in unrealized appreciation (depreciation)

     4,027        1,604         (1,472     —           4,159   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 651,606      $ 177,811       $ 71,170      $ 2,215       $ 902,802   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) included in earnings related to investments still held as of June 30, 2015 included in net change in unrealized appreciation (depreciation) on investments non-controlled/non-affiliated on the Consolidated Statements of Operations

   $ 3,436      $ 1,604       $ (1,755   $ —         $ 3,285   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Financial Assets
For the six month period ended June 30, 2014
 
     First Lien
Debt
    Second
Lien Debt
    Structured
Finance
Obligations
    Total  

Balance, beginning of period

   $ 141,676      $ 39,767      $ 31,364      $ 212,807   

Purchases

     170,216        37,353        51,951        259,520   

Sales

     —          (4,050     (3,125     (7,175

Paydowns

     (39,742     (3,570     (4,780     (48,092

Accretion of discount

     432        86        —          518   

Net realized gains (losses)

     —          120        71        191   

Net change in unrealized appreciation (depreciation)

     1,317        1,432        (1,907     842   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 273,899      $ 71,138      $ 73,574      $ 418,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) included in earnings related to investments still held as of June 30, 2014 included in net change in unrealized appreciation (depreciation) on investments non-controlled/non-affiliated on the Consolidated Statements of Operations

   $ 1,378      $ 1,406      $ (1,903   $ 881   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company generally uses the following framework when determining the fair value of investments that are categorized as Level III:

Investments in debt securities are initially evaluated to determine whether the enterprise value of the portfolio company is greater than the applicable debt. The enterprise value of the portfolio company is estimated using a market approach and an income approach. The market approach utilizes market value (EBITDA) multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The Company carefully considers numerous factors when selecting the appropriate companies whose multiples are used to value its portfolio companies. These factors include, but are not limited to, the type of organization, similarity to the business being valued, relevant risk factors, as well as size, profitability and growth expectations. The income approach typically uses a discounted cash flow analysis of the portfolio company.

 

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Investments in debt securities that do not have sufficient coverage through the enterprise value analysis are valued based on an expected probability of default and discount recovery analysis.

Investments in debt securities with sufficient coverage through the enterprise value analysis are generally valued using a discounted cash flow analysis of the underlying security. Projected cash flows in the discounted cash flow typically represent the relevant security’s contractual interest, fees and principal payments plus the assumption of full principal recovery at the security’s expected maturity date. The discount rate to be used is determined using an average of two market-based methodologies.

Investments in structured finance obligations are generally valued using a discounted cash flow and/or consensus pricing.

Investments in equities are generally valued using a market approach and/or an income approach. The market approach utilizes EBITDA multiples of publicly traded comparable companies and available precedent sales transactions of comparable companies. The income approach typically uses a discounted cash flow analysis of the portfolio company.

The following tables summarize the quantitative information related to the significant unobservable inputs for Level III instruments which are carried at fair value as of June 30, 2015 and December 31, 2014:

 

    Fair Value as
of June 30,
2015
    Valuation Techniques   Significant
Unobservable
Inputs
  Range     Weighted
Average
 
        Low     High    

Investments in First Lien Debt

  $ 551,529      Discounted Cash Flow   Discount Rate     5.40     10.90     6.88
    100,077      Consensus Pricing   Indicative Quotes     99.13        100.94        100.05   
 

 

 

           

Total First Lien Debt

    651,606             
 

 

 

           

Investments in Second Lien Debt

    119,010      Discounted Cash Flow   Discount Rate     9.26     15.18     10.12
    58,801      Consensus Pricing   Indicative Quotes     96.50        104.38        100.11   
 

 

 

           

Total Second Lien Debt

    177,811             
 

 

 

           

Investments in Structured Finance Obligations

    68,802      Discounted Cash Flow   Discount Rate     14.60     22.70     17.01
      Default Rate     0.19        1.26        0.77   
      Prepayment Rate     17.01        32.00        21.19   
      Recovery Rate     68.59        75.00        73.92   
    2,368      Consensus Pricing   Indicative Quotes     0.18        80.50        74.06   
 

 

 

           

Total Structured Finance Obligations

    71,170             
 

 

 

           

Investments in Equity

    2,215      Income Approach   Discount Rate     9.70     10.44     10.20
    Market Approach   Comparable
Multiple
    10.56     11.09     10.92
 

 

 

           

Total Equity Investments

    2,215             
 

 

 

           

Total Level III Investments

  $ 902,802             
 

 

 

           

 

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    Fair Value as
of December 31,
2014
    Valuation Techniques   Significant
Unobservable
Inputs
  Range     Weighted
Average
 
        Low     High    

Investments in First Lien Debt

  $ 469,796      Discounted Cash Flow   Discount Rate     5.23     9.02     6.33
    35,416      Consensus Pricing   Indicative Quotes     98.50        99.33        98.71   
 

 

 

           

Total First Lien Debt

    505,212             
 

 

 

           

Investments in Second Lien Debt

    84,902      Discounted Cash Flow   Discount Rate     9.15     11.32     10.05
    22,972      Consensus Pricing   Indicative Quotes     98.13        101.00        99.03   
 

 

 

           

Total Second Lien Debt

    107,874             
 

 

 

           

Investments in Structured Finance Obligations

    59,533      Discounted Cash Flow   Discount Rate     12.65     15.80     13.87
      Default Rate     —          1.32        0.60   
      Prepayment Rate     18.78        32.50        25.41   
      Recovery Rate     67.54        75.00        73.28   
    16,468      Consensus Pricing   Indicative Quotes     0.18        81.00        77.28   
 

 

 

           

Total Structured Finance Obligations

    76,001             
 

 

 

           

Total Level III Investments

  $ 689,087             
 

 

 

           

The significant unobservable inputs used in the fair value measurement of the Company’s investments in first and second lien debt securities are discount rates and indicative quotes. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in indicative quotes in isolation may result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s investments in structured finance obligations are discount rates, default rates, prepayment rates, recovery rates and indicative quotes. Significant increases in discount rates, default rates or prepayment rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value. Significant decreases in indicative quotes in isolation may result in a significantly lower fair value measurement.

The significant unobservable inputs used in the fair value measurement of the Company’s investments in equities are discount rates and comparable EBITDA multiples. Significant increases in discount rates would result in a significantly lower fair value measurement. Significant decreases in comparable EBITDA multiples would result in a significantly lower fair value measurement.

Financial instruments disclosed but not carried at fair value

The following table presents the carrying value and fair value of the Company’s secured borrowings and 2015-1 Notes disclosed but not carried at fair value as of June 30, 2015 and December 31, 2014.

 

     June 30, 2015      December 31, 2014  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Secured borrowings

   $ 134,958       $ 134,958       $ 308,441       $ 308,441   

2015-1 Notes

     273,000         273,000         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 407,958       $ 407,958       $ 308,441       $ 308,441   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The carrying values of the secured borrowings and 2015-1 Notes approximate their respective fair values and are categorized as Level III within the hierarchy. Secured borrowings and 2015-1 Notes are valued generally using discounted cash flow analysis. The significant unobservable inputs used in the fair value measurement of the Company’s secured borrowings are discount rates. Significant increases in discount rates would result in a significantly lower fair value measurement. The significant unobservable inputs used in the fair value measurement of the Company’s 2015-1 Notes are discount rates, default rates, prepayment rates and recovery rates. Significant increases in discount rates, default rates or prepayment rates in isolation would result in a significantly lower fair value measurement, while a significant increase in recovery rates in isolation would result in a significantly higher fair value.

The carrying value of other financial assets and liabilities approximates their fair value based on the short term nature of these items.

4. RELATED PARTY TRANSACTIONS

Investment Advisory Agreement

On April 3, 2013, the Company’s Board of Directors, including a majority of the directors who are not “interested persons” as defined in Section 2(a)(19) of the Investment Company Act (“Independent Directors”), approved an investment advisory and management agreement (the “Investment Advisory Agreement”) between the Company and the Investment Adviser in accordance with, and on the basis of an evaluation satisfactory to such directors as required by, Section 15(c) of the Investment Company Act. The initial term of the Investment Advisory Agreement is two years from April 3, 2013 and, unless terminated earlier, the Investment Advisory Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by the vote of the Board of Directors and by the vote of a majority of the Independent Directors. On March 11, 2015, the Company’s Board of Directors, including a majority of the Independent Directors, approved the continuance of the Advisory Agreement for a one year period. The Investment Advisory Agreement will automatically terminate in the event of an assignment and may be terminated by either party without penalty upon at least 60 days’ written notice to the other party. Subject to the overall supervision of the Board of Directors, the Investment Adviser provides investment advisory services to the Company. For providing these services, the Investment Adviser receives fees from the Company consisting of two components—a base management fee and an incentive fee.

Prior to a Qualified IPO, the base management fee is calculated and payable quarterly in arrears at an annual rate of 1.50% of the average daily gross assets of the Company for the period adjusted for share issuances or repurchases, excluding any cash and cash equivalents and including assets acquired with leverage from use of the Revolving Credit Facility and Facility and 2015-1 Notes (see Note 5, Borrowings, and Note 6, 2015-1 Notes). For purposes of this calculation, cash and cash equivalents include any temporary investments in cash-equivalents, U.S. government securities and other high quality investment grade debt investments that mature in 12 months or less from the date of investment. Base management fees for any partial quarter are prorated. The Investment Adviser contractually waived one-third (0.50%) of the base management fee prior to a Qualified IPO. The fee waiver will terminate if and when a Qualified IPO has been consummated.

The incentive fee has two parts. The first part is calculated and payable quarterly in arrears based on the pre-incentive fee net investment income for the immediately preceding calendar quarter. The second part is determined and payable in arrears based on capital gains as of the end of each calendar year.

Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the operating expenses accrued for the quarter (including the base management fee, expenses payable under the administration agreement, and any interest expense or fees on any credit facilities or outstanding debt and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income does not include, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with pay-in-kind interest and

 

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zero coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

Prior to any Qualified IPO of the Company’s common stock, pre-incentive fee net investment income, expressed as a rate of return on the average daily Hurdle Calculation Value (as defined below) throughout the immediately preceding calendar quarter, is compared to a “hurdle rate” of 1.50% per quarter (6% annualized). “Hurdle Calculation Value” means, on any given day, the sum of (x) the value of net assets as of the end of the calendar quarter immediately preceding such day plus (y) the aggregate amount of capital drawn from investors (or reinvested in the Company pursuant to a dividend reinvestment plan) from the beginning of the current quarter to such day minus (z) the aggregate amount of distributions (including share repurchases) made by the Company from the beginning of the current quarter to such day but only to the extent such distributions were not declared and accounted for on the books and records in a previous quarter.

GMS Finance pays its Investment Adviser an incentive fee with respect to its pre-incentive fee net investment income in each calendar quarter as follows:

 

    no incentive fee based on pre-incentive fee net investment income in any calendar quarter in which its pre-incentive fee net investment income does not exceed the hurdle of 1.50%;

 

    100% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 1.875% in any calendar quarter (7.50% annualized). The Company refers to this portion of the pre-incentive fee net investment income (which exceeds the hurdle but is less than 1.875%) as the “catch-up.” The “catch-up” is meant to provide the Investment Adviser with approximately 20% of the Company’s pre-incentive fee net investment income as if a hurdle did not apply if this net investment income exceeds 1.875% in any calendar quarter; and

 

    20% of the amount of pre-incentive fee net investment income, if any, that exceeds 1.875% in any calendar quarter (7.50% annualized) will be payable to the Investment Adviser. This reflects that once the hurdle is reached and the catch-up is achieved, 20% of all pre-incentive fee investment income thereafter is allocated to the Investment Adviser.

The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20% of realized capital gains, if any, on a cumulative basis from inception through the date of determination, computed net of all realized capital losses on a cumulative basis and unrealized capital depreciation, less the aggregate amount of any previously paid capital gain incentive fees, provided that, the incentive fee determined at the end of the first calendar year of operations may be calculated for a period of shorter than twelve calendar months to take into account any realized capital gains computed net of all realized capital losses on a cumulative basis and unrealized capital depreciation.

The Company will defer payment of any incentive fee otherwise earned by the Investment Adviser if, during the most recent four full calendar quarter periods (or, if less, the number of full calendar quarters completed since the initial drawdown of capital from the stockholders, “Initial Drawdown”) ending on or prior to the date such payment is to be made, the sum of (a) the aggregate distributions to stockholders and (b) the change in net assets (defined as gross assets less indebtedness and before taking into account any incentive fees payable during the period) is less than 6.0% of net assets (defined as gross assets less indebtedness) at the beginning of such period, provided, that such percentage will be appropriately prorated during the four full calendar quarters immediately following the Initial Drawdown. These calculations are adjusted for any share issuances or repurchases. Any deferred incentive fees are carried over for payment in subsequent calculation periods. The Investment Adviser may earn an incentive fee under the Investment Advisory Agreement on the Company’s repurchase of debt issued by the Company at a gain.

Prior to a Qualified IPO and subject to the receipt of any necessary regulatory approvals, the Company’s Investment Adviser intends to make (or require individual employees or entities in which employees own an

 

33


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interest to make) capital commitments to purchase shares of the Company’s common stock in an amount equal to approximately 25% of each installment of the net after tax incentive fee that the Investment Adviser receives from the Company. For the three month and six month periods ended June 30, 2015, incentive fee paid on pre-incentive fee net investment income resulted in new commitments of $274 by the Investment Adviser related to the after tax incentive. For the three month and six month periods ended June 30, 2014, there was no incentive fee paid on pre-incentive fee net investment income or realized capital gains, therefore, no commitments were made and no shares were issued to the Investment Adviser related to the after tax incentive.

For the three month and six month periods ended June 30, 2015, base management fees were $2,054 and $3,869, respectively (net of waiver of $1,026 and $1,934, respectively), incentive fees related to pre-incentive fee net investment income were $1,986 and $3,606, respectively, and there were no incentive fees related to realized capital gains. For the three month and six month periods ended June 30, 2014, base management fees were $970 and $1,631, respectively (net of waiver of $485 and $815, respectively), incentive fees related to pre-incentive fee net investment income were $1,137 and $1,933, respectively, and there were no incentive fees related to realized capital gains. For the three month and six month periods ended June 30, 2015, the Company recorded an accrued capital gains incentive fee of $0 and $0, respectively, based upon the cumulative net realized and unrealized appreciation/ (depreciation) as of June 30, 2015. For the three month and six month periods ended June 30, 2014, the Company recorded an accrued capital gains incentive fee of $12 and $156, respectively, based upon the cumulative net realized and unrealized appreciation/ (depreciation) as of June 30, 2014.The accrual for any capital gains incentive fee under US GAAP in a given period may result in an additional expense if such cumulative amount is greater than in the prior period or a reduction of previously recorded expense if such cumulative amount is less than in the prior period. If such cumulative amount is negative, then there is no accrual.

As of June 30, 2015 and December 31, 2014, $5,916 and $6,319, respectively, was included in base management and incentive fees payable in the accompanying Consolidated Statements of Assets and Liabilities.

On April 3, 2013, the Investment Adviser entered into a personnel agreement with The Carlyle Group Employee Co., L.L.C. (“Carlyle Employee Co.”), an affiliate of the Investment Adviser, pursuant to which Carlyle Employee Co. provides the Investment Adviser with access to investment professionals.

Administration Agreement

On April 3, 2013, the Company’s Board of Directors approved an administration agreement (the “Administration Agreement”) between the Company and the Administrator. Pursuant to the Administration Agreement, the Administrator provides services and receives reimbursements equal to an amount that reimburses the Administrator for its costs and expenses and the Company’s allocable portion of overhead incurred by the Administrator in performing its obligations under the Administration Agreement, including the Company’s allocable portion of the compensation paid to or compensatory distributions received by the Company’s officers (including the Chief Compliance Officer and Chief Financial Officer) and respective staff who provide services to the Company, operations staff who provide services to the Company, and any internal audit staff, to the extent internal audit performs a role in the Company’s Sarbanes-Oxley Act internal control assessment. Reimbursement under the Administration Agreement occurs quarterly in arrears.

The initial term of the Administration Agreement is two years from April 3, 2013 and, unless terminated earlier, the Administration Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board of Directors or by a majority vote of the outstanding voting securities of the Company and (ii) the vote of a majority of the Company’s Independent Directors. On March 11, 2015, the Company’s Board of Directors, including a majority of the Independent Directors, approved the continuance of the Administration Agreement for a one year period. The Administration Agreement may not be assigned by a party without the consent of the other party and may be terminated by either party without penalty upon at least 60 days’ written notice to the other party.

 

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For the three month and six month periods ended June 30, 2015, GMS Finance incurred $188 and $300, respectively, and for the three month and six month periods ended June 30, 2014, GMS Finance incurred $218 and $475, respectively in fees under the Administrative Agreement, which were included in administrative service fees in the accompanying Consolidated Statements of Operations. As of June 30, 2015 and December 31, 2014, $120 and $91, respectively, was unpaid and included in administrative service fees payable in the accompanying Consolidated Statements of Assets and Liabilities.

Sub-Administration Agreements

On April 3, 2013, the Administrator entered into sub-administration agreements with Carlyle Employee Co. and CELF Advisors LLP. Pursuant to the agreements, Carlyle Employee Co. and CELF Advisors LLP provide the Administrator with access to personnel.

On April 3, 2013, the Administrator entered into a sub-administration agreement with State Street Bank and Trust Company (as amended, the “Sub-Administration Agreement”). On March 11, 2015, the Company’s Board of Directors, including a majority of the Independent Directors, approved an amendment to the Sub-Administration Agreement. As amended, effective as of April 1, 2015, the initial term of the Sub-Administration Agreement ends on April 1, 2017 and, unless terminated earlier, the Sub-Administration Agreement will renew automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (i) the vote of the Board of Directors or by the vote of a majority of the outstanding voting securities of the Company and (ii) the vote of a majority of the Company’s Independent Directors. The Sub-Administration Agreement may be terminated upon at least 60 days’ written notice and without penalty by the vote of a majority of the outstanding securities of the Company, or by the vote of the Board of Directors or by either party to the Sub-Administration Agreement.

For the three month and six month periods ended June 30, 2015, fees incurred in connection with the Sub-Administration Agreement, which amounted to $128 and $219, respectively, were included in other general and administrative in the accompanying Consolidated Statements of Operations. For the three month and six month periods ended June 30, 2014, fees incurred in connection with the Sub-Administration Agreement, which amounted to $50 and $80, respectively, were included in other general and administrative in the accompanying Consolidated Statements of Operations. As of June 30, 2015 and December 31, 2014, $127 and $80, respectively, was unpaid and included in other accrued expenses and liabilities in the accompanying Consolidated Statements of Assets and Liabilities.

Placement Fees

On April 3, 2013, the Company entered into a placement fee arrangement with TCG Securities, L.L.C. (“TCG”), a licensed broker-dealer and an affiliate of the Investment Adviser, which may require stockholders to pay a placement fee to TCG for TCG’s services.

For the three month and six month periods ended June 30, 2015, TCG earned placement fees of $1 and $2, respectively, from GMS Finance stockholders in connection with the issuance or sale of the Company’s common stock. For the three month and six month periods ended June 30, 2014, TCG did not earn or receive any placement fees from GMS Finance stockholders in connection with the issuance or sale of the Company’s common stock.

Board of Directors

GMS Finance’s Board of Directors currently consists of seven members, four of whom are Independent Directors. On April 3, 2013, the Board of Directors also established an Audit Committee consisting of its Independent Directors, and may establish additional committees in the future. For the three month and six month periods ended June 30, 2015, GMS Finance incurred $106 and $207, respectively, and for the three month and six month periods ended June 30, 2014, GMS Finance incurred $103 and $185, respectively, in fees and expenses associated with its Independent Directors and Audit Committee. As of June 30, 2015 and December 31, 2014, $2

 

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and $5, respectively, was unpaid and included in other accrued expenses and liabilities in the accompanying Consolidated Statements of Assets and Liabilities. As of June 30, 2015 and December 31, 2014, certain current directors had committed $1,541 and $1,500, respectively, in capital commitments to the Company.

5. BORROWINGS

In accordance with the Investment Company Act, the Company is only allowed to borrow amounts such that its asset coverage, as defined in the Investment Company Act, is at least 200% after such borrowing. As of June 30, 2015 and December 31, 2014, asset coverage was 225.17%, including the 2015-1 Notes, and 209.67%, respectively. During the six month period ended June 30, 2015, there were net secured borrowings of $223,700 under the Revolving Credit Facility and Facility and net repayments of $397,183 under the Revolving Credit Facility and Facility. During the six month period ended June 30, 2014, there were net repayments of $7,082 under the Revolving Credit Facility and secured borrowings of $94,000 under the Facility. As of June 30, 2015 and December 31, 2014, there was $134,958 and $308,441, respectively, in secured borrowings outstanding.

Revolving Credit Facility

The Borrower Sub closed on May 24, 2013 on the Revolving Credit Facility, which was subsequently amended on June 30, 2014 (“First Amendment”) and further amended on June 19, 2015 (“Second Amendment”). The Second Amendment, among other things (a) provided for the distribution of loan assets to the Company in connection with the 2015-1 Debt Securitization, (b) extended the scheduled commitment termination date from May 24, 2017 to May 24, 2018, (c) extended the scheduled final maturity date from May 22, 2020 to May 22, 2021, (d) increased the per annum drawn margin from 1.85% to 1.90%, (e) changed the unused margin schedule and (f) modified certain other tests, restrictions and requirements set forth in the Revolving Credit Facility. The size and other material terms of the Revolving Credit Facility were unchanged.

Advances under the Revolving Credit Facility first became available once the Borrower Sub held at least $30,000 of minimum equity in its assets. The Revolving Credit Facility provides for secured borrowings during the applicable revolving period up to an amount equal to the lesser of $400,000, the borrowing base as calculated pursuant to the terms of the Revolving Credit Facility, and the amount of net cash proceeds and unpledged capital commitments the Company has received with an accordion feature that can, subject to certain conditions, increase the aggregate maximum credit commitment up to an amount not to exceed $750,000, subject to restrictions imposed on borrowings under the Investment Company Act and certain restrictions and conditions set forth in the Revolving Credit Facility, including adequate collateral to support such borrowings. The Revolving Credit Facility has a revolving period through May 24, 2018 and a maturity date of May 22, 2021. Borrowings under the Revolving Credit Facility bear interest initially at the applicable commercial paper rate (if the lender is a conduit lender) or LIBOR (or, if applicable, a rate based on the prime rate or federal funds rate) plus 1.90% per year during the revolving period, with pre-determined future interest rate increases of 1.00%-1.85% over the three years following the end of the revolving period. The Borrower Sub is also required to pay an undrawn commitment fee of between 0.25% and 0.75% per year depending on the usage of the Revolving Credit Facility. Payments under the Revolving Credit Facility are made quarterly. The lenders have a first lien security interest on substantially all of the assets of the Borrower Sub.

As part of the Revolving Credit Facility, the Borrower Sub is subject to limitations as to how borrowed funds may be used and the types of loans that are eligible to be acquired by the Borrower Sub including, but not limited to, restrictions on sector and geographic concentrations, loan size, payment frequency, tenor and minimum investment ratings (or estimated ratings). In addition, borrowed funds are intended to be used primarily to purchase first lien loan assets, and the Borrower Sub is limited in its ability to purchase certain other assets (including, but not limited to, second lien loans, covenant-lite loans, revolving and delayed draw loans and discount loans) and other assets are not permitted to be purchased (including, but not limited to paid-in-kind loans and structured finance obligations). The Revolving Credit Facility has certain requirements relating to interest coverage, collateral quality and portfolio performance, including limitations on delinquencies and charge

 

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offs, certain violations of which could result in the acceleration of the amounts due under the Revolving Credit Facility. The Revolving Credit Facility is also subject to a borrowing base that applies different advance rates to assets held by the Borrower Sub based generally on the fair market value of such assets. Under certain circumstances as set forth in the Revolving Credit Facility, the Company could be obliged to repurchase loans from the Borrower Sub.

Related to the First Amendment, which reduced the maximum commitments under the Revolving Credit Facility, $827 of deferred financing costs (representing the prorated financing costs related to the reduction in commitments) were immediately expensed on June 30, 2014 in lieu of continuing to amortize over the term of the Revolving Credit Facility.

As of June 30, 2015 and December 31, 2014, the Borrower Sub was in compliance with all covenants and other requirements of the Revolving Credit Facility.

Facility

The Company closed on March 21, 2014 on the Facility, which was subsequently amended on January 8, 2015 (the “First Facility Amendment Effective Date”). The amendment modified the release of the $100,000 pledge of unfunded investor equity capital commitments to occur once $100,000 of incremental capital has been called and received by the Company subsequent to the First Facility Amendment Effective Date (as opposed to subsequent to the original March 21, 2014 closing date of the Facility). The maximum principal amount of the Facility is $150,000, subject to availability under the Facility, which is based on certain advance rates multiplied by the value of the Company’s portfolio investments (subject to certain concentration limitations) net of certain other indebtedness that the Company may incur in accordance with the terms of the Facility. Proceeds of the Facility may be used for general corporate purposes, including the funding of portfolio investments. Maximum capacity under the Facility may be increased to $225,000 through the exercise by the Company of an uncommitted accordion feature through which existing and new lenders may, at their option, agree to provide additional financing. The Facility includes a $20,000 limit for swingline loans and a $5,000 limit for letters of credit. The Company may borrow amounts in U.S. dollars or certain other permitted currencies. Amounts drawn under the Facility, including amounts drawn in respect of letters of credit, will bear interest at either LIBOR plus an applicable spread of 2.25%, or an “alternative base rate” (which is the highest of a prime rate, the federal funds effective rate plus 0.50%, or one month LIBOR plus 1.00%) plus an applicable spread of 1.25%. The Company may elect either the LIBOR or the “alternative base rate” at the time of drawdown, and loans may be converted from one rate to another at any time, subject to certain conditions. The Company also pays a fee of 0.375% on undrawn amounts under the Facility and, in respect of each undrawn letter of credit, a fee and interest rate equal to the then-applicable margin under the Facility while the letter of credit is outstanding. The availability period under the Facility will terminate on March 21, 2018 (the “Commitment Termination Date”) and the Facility will mature on March 21, 2019 (the “Maturity Date”). During the period from the Commitment Termination Date to the Maturity Date, the Company will be obligated to make mandatory prepayments under the Facility out of the proceeds of certain asset sales, other recovery events and equity and debt issuances.

Subject to certain exceptions, the Facility is secured by a perfected first-priority security interest in substantially all of the portfolio investments held by the Company and the Company’s unfunded investor equity capital commitments (provided that the amount of unfunded capital commitments ultimately available to the lenders is limited to $100,000). The pledge of unfunded investor equity capital commitments was subject to release once $100,000 of incremental capital had been called and received by the Company subsequent to the First Facility Amendment Effective Date. Such capital call commitment had not been satisfied as of December 31, 2014. The pledge of unfunded investor equity capital commitments had been released as of June 30, 2015. The Facility includes customary covenants, including certain financial covenants related to asset coverage, shareholders’ equity and liquidity, certain limitations on the incurrence of additional indebtedness and liens, and other maintenance covenants, as well as usual and customary events of default for senior secured revolving credit facilities of this nature.

 

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As of June 31, 2015 and December 31, 2014, the Company was in compliance with all covenants and other requirements of the Facility.

Summary of Facilities

The facilities of the Company and the Borrower Sub consisted of the following as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015  
     Total Facility      Borrowings
Outstanding
     Unused Portion (1)      Amount
Available (2)
 

Revolving Credit Facility

   $ 400,000       $ 103,958       $ 296,042       $ 21,591   

Facility

     150,000         31,000         119,000         119,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 550,000       $ 134,958       $ 415,042       $ 140,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Total Facility      Borrowings
Outstanding
     Unused Portion (1)      Amount
Available (2)
 

Revolving Credit Facility

   $ 400,000       $ 246,441       $ 153,559       $ 10,557   

Facility

     150,000         62,000         88,000         58,623   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 550,000       $ 308,441       $ 241,559       $ 69,180   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The unused portion is the amount upon which commitment fees are based.
(2) Available for borrowing based on the computation of collateral to support the borrowings.

As of June 30, 2015 and December 31, 2014, $1,282 and $1,025, respectively, of interest expense, $80 and $139, respectively, of unused commitment fees, and $26 and $28, respectively, of other fees were included in interest and credit facility fees payable related to the facilities. For the three month and six month periods ended June 30, 2015, the weighted average interest rate was 2.22% and 2.20%, respectively, and average principal debt outstanding was $363,649 and $345,319, respectively. For the three month and six month periods ended June 30, 2014, the weighted average interest rate was 2.13% and 2.12%, respectively, and average principal debt outstanding was $117,699 and $92,401, respectively. As of June 30, 2015 and December 31, 2014, the interest rate was 2.20% and 2.17%, respectively, based on floating LIBOR rates.

For the three month and six month periods ended June 30, 2015 and 2014, the components of interest expense and credit facility fees related to the facilities were as follows:

 

     For the three month periods ended      For the six month periods ended  
    

 June 30, 2015 

    

 June 30, 2014 

    

 June 30, 2015 

    

 June 30, 2014 

 

Interest expense

   $ 2,041       $ 634       $ 3,821       $ 983   

Facility unused commitment fee

     132         372         302         658   

Amortization of deferred financing costs

     281         1,128         513         1,347   

Other fees

     30         26         56         51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and credit facility fees

   $ 2,484       $ 2,160       $ 4,692       $ 3,039   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $ 2,112       $ 510       $ 3,562       $ 795   

6. 2015-1 Notes

On June 26, 2015, the Company completed the 2015-1 Debt Securitization. The 2015-1 Notes were issued by the 2015-1 Issuer, a wholly-owned and consolidated subsidiary of the Company, and are secured by a

 

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diversified portfolio consisting primarily of first and second lien senior secured loans. The 2015-1 Debt Securitization was executed through a private placement of the 2015-1 Notes, consisting of $160 million of Aaa/AAA Class A-1A Notes which bear interest at the three-month London Interbank Offered Rate (“LIBOR”), plus 1.85%; $40 million of Aaa/AAA Class A-1B Notes which bear interest at the three-month LIBOR plus 1.75% for first 24 months and the three-month LIBOR plus 2.05% thereafter; $27 million of Aaa/AAA Class A-1C Notes which bear interest at 3.75% and $46 million of Aa2 Class A-2 Notes which bear interest at the three-month LIBOR plus 2.70%. The 2015-1 Notes were issued at par and are scheduled to mature on July 15, 2027. The Company received 100% of the preferred interests (the “Preferred Interests”) issued by the 2015-1 Issuer on the closing date of the 2015-1 Debt Securitization in exchange for the Company’s contribution to the Issuer of the initial closing date loan portfolio. The Preferred Interests do not bear interest and had a nominal value of $125.9 million at closing. In connection with the contribution, the Company has made customary representations, warranties and covenants to the 2015-1 Issuer in the purchase agreement. The Class A-1A, Class A-1B and Class A-1C and Class A-2 Notes are included in the June 30, 2015 consolidated financial statements. The Preferred Interests were eliminated in consolidation.

On the closing date of the 2015-1 Debt Securitization, the 2015-1 Issuer effected a one-time distribution to the Company of a substantial portion of the proceeds of the private placement of the 2015-1 Notes, net of expenses, which distribution was used to repay a portion of the certain amounts outstanding under the Revolving Credit Facility and the Facility. As part of the 2015-1 Debt Securitization, certain first and second lien senior secured loans were distributed by the Borrower Sub to the Company pursuant to a distribution and contribution agreement. The Company contributed the loans that comprised the initial closing date loan portfolio (including the loans distributed to the Company from the Borrower Sub) to the 2015-1 Issuer pursuant to a contribution agreement. Future loans transfers from the Company to the 2015-1 Issuer will be made pursuant to a sale agreement and are subject to the approval of the Company’s Board of Directors. Assets of the 2015-1 Issuer are not available to the creditors of the Borrower Sub or the Company. In connection with the issuance and sale of the 2015-1 Notes, the Company has made customary representations, warranties and covenants in the purchase agreement.

During the reinvestment period, pursuant to the indenture governing the 2015-1 Notes, all principal collections received on the underlying collateral may be used by the 2015-1 Issuer to purchase new collateral under the direction of Investment Adviser in its capacity as collateral manager of the 2015-1 Issuer and in accordance with the Company’s investment strategy.

The Investment Adviser serves as collateral manager to the 2015-1 Issuer under a collateral management agreement (the “Collateral Management Agreement”). Pursuant to the Collateral Management Agreement, the 2015-1 Issuer will pay management fees (comprised of base management fees, subordinated management fees and incentive management fees) (“Management Fees”) to the Investment Adviser for rendering collateral management services. As per the Collateral Management Agreement, for the period the Company retains all of the Preferred Interests, the Investment Adviser will not earn Management Fees for providing such collateral management services. The Company currently retains all of the Preferred Interests, thus there were no management fees for the three and six month periods ended June 30, 2015.

Pursuant to an undertaking by the Company in connection with the 2015-1 Debt Securitization, the Company has agreed to hold on an ongoing basis Preferred Interests with an aggregate dollar purchase price at least equal to 5% of the aggregate outstanding amount of all collateral obligations by the 2015-1 Issuer for so long as any securities of the 2015-1 Issuer remain outstanding. As of June 30, 2015, the Company was in compliance with its undertaking.

The 2015-1 Issuer pays ongoing administrative expenses to the trustee, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports, and providing required services in connection with the administration of the 2015-1 Issuer.

 

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As of June 30, 2015, there were 55 first lien and second lien senior secured loans with a total fair value of approximately $391,436 securing the 2015-1 Notes. The pool of loans in the securitization must meet certain requirements, including asset mix and concentration, term, agency rating, collateral coverage, minimum coupon, minimum spread and sector diversity requirements.

For the six months ended June 30, 2015, the effective annualized weighted average interest rate, which includes amortization of debt issuance costs on the 2015-1 Notes, was 2.39%, based on floating LIBOR rates. For the six months ended June 30, 2015, interest expense, including the amortization of deferred debt issuance costs, was $91. There was no cash paid for interest during the six months ended June 30, 2015.

For the three month and six month periods ended June 30, 2015 and 2014, the components of interest expense on the 2015-1 Notes were as follows:

 

     For the three month periods ended      For the six month periods ended  
     June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014  

Interest expense

   $ 88       $ —         $ 88       $ —     

Amortization of deferred financing costs

     3         —           3         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense and credit facility fees

   $ 91       $ —         $ 91       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash paid for interest expense

   $  —         $  —         $  —         $  —     

The following were the carrying values and fair values of the Company’s 2015-1 Notes as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015      December 31, 2014  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Aaa/AAA Class A-1A Notes

   $ 160,000       $ 160,000       $  —         $  —     

Aaa/AAA Class A-1B Notes

     40,000         40,000         —           —     

Aaa/AAA Class A-1C Notes

     27,000         27,000         —           —     

Aa2 Class A-2 Notes

     46,000         46,000         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 273,000       $ 273,000       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

7. COMMITMENTS AND CONTINGENCIES

A summary of significant contractual payment obligations was as follows as of June 30, 2015 and December 31, 2014:

 

     Revolving Credit Facility and Facility      2015-1 Notes  

Payment Due by Period

   June 30, 2015      December 31, 2014      June 30, 2015      December 31, 2014  

Less than 1 Year

   $ —        $ —        $ —        $  —     

1-3 Years

     —          —          —          —     

3-5 Years

     31,000         62,000         —          —     

More than 5 Years

     103,958         246,441         273,000         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 134,958       $ 308,441       $ 273,000       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

In the ordinary course of its business, the Company enters into contracts or agreements that contain indemnification or warranties. Future events could occur that lead to the execution of these provisions against the Company. The Company believes that the likelihood of such an event is remote; however, the maximum potential exposure is unknown. No accrual has been made in the consolidated financial statements as of June 30, 2015 and December 31, 2014 for any such exposure.

 

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As of June 30, 2015 and December 31, 2014, the Company had $1,151,104 and $1,129,522, respectively, in total capital commitments from stockholders, of which $627,250 and $776,750, respectively, was unfunded. As of June 30, 2015 and December 31, 2014, certain current directors had committed $1,541 and $1,500, respectively, in capital commitments to the Company.

As of December 31, 2014, there was a $100,000 pledge of unfunded investor equity capital commitments to the lenders of the Facility, which was subject to release once $100,000 of incremental capital had been called and received by the Company subsequent to the effective date of the First Facility Amendment Effective Date. Such capital call commitment had not been satisfied as of December 31, 2014. The pledge of unfunded investor equity capital commitments had been released as of June 30, 2015.

The Company had the following unfunded commitments to fund delayed draw senior secured loans as of the indicated dates:

 

     Par Value as of  
     June 30, 2015      December 31, 2014  

Unfunded delayed draw commitments

   $ 32,986       $ 9,500   

Unfunded revolving term loan commitments

     3,906         —     
  

 

 

    

 

 

 

Total unfunded commitments

   $ 36,892       $ 9,500   
  

 

 

    

 

 

 

8. NET ASSETS

The Company has the authority to issue 200,000,000 shares of common stock, $0.01 per share par value.

During the six month period ended June 30, 2015, the Company issued 8,823,238 shares for $171,127. The following table summarizes capital activity during the six month period ended June 30, 2015:

 

    Common Stock     Capital
in Excess
of Par
Value
    Offering
Costs
    Accumulated
Net Investment
Income (Loss)
    Accumulated
Net Realized
Gain (Loss)
on
Investments
    Accumulated
Net
Unrealized
Appreciation
(Depreciation)

on
Investments
    Total
Net
Assets
 
  Shares     Amount              

Balance, beginning of period

    17,932,697      $ 179      $ 351,636      $ (74 )   $ (4,388   $ (57   $ (9,039 )   $ 338,257   

Common stock issued

    8,820,836        89        170,993        —         —         —         —         171,082   

Reinvestment of dividends

    2,402        —         45        —         —         —         —         45   

Net investment income (loss)

    —         —         —         —         14,425        —         —         14,425   

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

    —         —         —         —         —         329        —         329   

Net change in unrealized appreciation (depreciation) on investments—non-controlled/ non-affiliated

    —         —         —         —         —         —         4,249        4,249   

Dividends declared

    —         —         —         —         (17,735     —         —         (17,735
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    26,755,935      $ 268      $ 522,674      $ (74   $ (7,698   $ 272     $ (4,790   $ 510,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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During the six month period ended June 30, 2014, the Company issued 3,315,579 shares for $65,475. The following table summarizes capital activity during the six month period ended June 30, 2014:

 

    Common Stock     Capital
In Excess
Of Par
Value
    Offering
Costs
    Accumulated
Net Investment
Income (Loss)
    Accumulated
Net Realized
Gain (Loss)
on
Investments
    Accumulated Net
Change in
Unrealized
Appreciation
(Depreciation) on
Investments
    Total
Net
Assets
 
    Shares     Amount              

Balance, beginning of period

    9,575,990      $ 96      $ 186,965      $ (74   $ (664   $  —       $ (321   $ 186,002   

Common stock issued

    3,315,431        33        65,439        —         —         —         —         65,472   

Reinvestment of dividends

    148        —          3        —         —         —         —         3   

Net investment income (loss)

    —         —         —         —         7,575        —         —         7,575   

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

    —         —         —         —         —         191        —         191   

Net change in unrealized appreciation (depreciation) on investments—non-controlled/non-affiliated

    —         —         —         —         —         —         842        842   

Dividends declared

    —         —         —         —         (5,930     —         —         (5,930
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

    12,891,569      $ 129      $ 252,407      $ (74   $ 981      $ 191      $ 521      $ 254,155   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table summarizes total shares issued and proceeds received related to capital drawdowns delivered pursuant to subscriptions for the Company’s common stock and reinvestment of dividends during the six month period ended June 30, 2015:

 

     Shares Issued      Proceeds Received  

January 16, 2015

     924,977       $ 18,000   

January 26, 2015**

     1,051         20   

February 26, 2015

     2,312,659         45,005   

April 21, 2015**

     1,351         25   

May 1, 2015

     1,462,746         28,085   

May 22, 2015

     1,708,068         33,000   

June 25, 2015

     2,412,386         46,992   
  

 

 

    

 

 

 

Total

     8,823,238       $ 171,127   
  

 

 

    

 

 

 

 

**  Represents shares issued upon the reinvestment of dividends

The following table summarizes total shares issued and proceeds received related to capital drawdowns delivered pursuant to subscriptions for the Company’s common stock during the six month period ended June 30, 2014:

 

     Shares Issued      Proceeds Received  

January 27, 2014

     1,020,810         19,998   

February 21, 2014

     491,849         9,689   

March 21, 2014

     1,802,772         35,785   

April 14, 2014**

     148         3   
  

 

 

    

 

 

 

Total

     3,315,579       $ 65,475   
  

 

 

    

 

 

 

 

**  Represents shares issued upon the reinvestment of dividends

 

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Subscribed but unissued shares are presented in equity with a deduction of subscriptions receivable until cash is received for a subscription. There were no subscribed but unissued shares as of June 30, 2015 and December 31, 2014.

Subscription transactions during the six month periods ended June 30, 2015 and 2014 were executed at an offering price at a premium to net asset value due to the requirement to use prior quarter net asset value as the offering price unless it would result in the Company selling shares of its common stock at a price below the current net asset value and also in order to effect a reallocation of organizational costs to subsequent investors. Such subscription transactions increased net asset value by $0.10 per share and $0.04 per share, respectively, for the six month periods ended June 30, 2015 and 2014.

The Company computes earnings per common share in accordance with ASC 260, Earnings Per Share. Basic earnings per common share were calculated by dividing net increase (decrease) in net assets resulting from operations attributable to the Company by the weighted-average number of common shares outstanding for the period.

Basic and diluted earnings per common share were as follows:

 

     For the three month periods ended      For the six month periods ended  
         June 30, 2015              June 30, 2014          June 30, 2015      June 30, 2014  

Net increase (decrease) in net assets resulting from operations

   $ 9,215       $ 4,592       $ 19,003       $ 8,608   

Weighted-average common shares outstanding

     23,062,818         12,891,548         21,330,007         11,819,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted earnings per common share

   $ 0.40       $ 0.36       $ 0.89       $ 0.73   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the Company’s dividends declared and payable since inception through the quarter ended June 30, 2015:

 

Date

Declared

   Record
Date
   Payment
Date
   Per Share
Amount
     Total
Amount
 

March 13, 2014

   March 31, 2014    April 14, 2014    $ 0.19      $ 2,449  

June 26, 2014

   June 30, 2014    July 14, 2014    $ 0.27      $ 3,481   

September 12, 2014

   September 18, 2014    October 9, 2014    $ 0.44      $ 5,956   

December 19, 2014

   December 29, 2014    January 26, 2015    $ 0.35      $ 6,276   

March 11, 2015

   March 13, 2015    April 17, 2015    $ 0.37       $ 7,833   

June 24, 2015

   June 30, 2015    July 22, 2015    $ 0.37       $ 9,902   

 

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9. CONSOLIDATED FINANCIAL HIGHLIGHTS

The following is a schedule of consolidated financial highlights for the six month periods ended June 30, 2015 and 2014:

 

     For the six month periods ended  
     June 30, 2015     June 30, 2014  

Per Share Data:

    

Net asset value per share, beginning of period

   $ 18.86      $ 19.42   

Net investment income (loss) (1)

     0.68        0.64   

Net realized gain (loss) and net change in unrealized appreciation (depreciation) on investments

     0.19        0.07   
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.87        0.71   
  

 

 

   

 

 

 

Dividends declared (2)

     (0.74     (0.46

Effect of subscription offering price (3)

     0.10        0.04   
  

 

 

   

 

 

 

Net asset value per share, end of period

   $ 19.09      $ 19.71   
  

 

 

   

 

 

 

Number of shares outstanding, end of period

     26,755,935        12,891,569   

Total return (4)

     5.14     3.86

Net assets, end of period

   $ 510,652      $ 254,155   

Ratio to average net assets:

    

Expenses net of waiver, before incentive fees

     2.55     2.88

Expenses net of waiver, after incentive fees

     3.40     3.75

Expenses gross of waiver, after incentive fees

     3.86     4.09

Net investment income (loss) (5)

     3.39     3.16

Interest expense and credit facility fees

     1.12     1.27

Ratios/Supplemental Data:

    

Asset coverage

     225.17     265.31

Portfolio turnover

     16.21     16.98

Total committed capital, end of period

   $ 1,151,104      $ 1,109,162   

Ratio of total contributed capital to total committed capital, end of period

     45.51     22.85

Weighted-average shares outstanding

     21,330,007        11,819,417   

 

(1) Net investment income (loss) per share was calculated as net investment income (loss) for the period divided by the weighted average number of shares outstanding for the period.
(2) Dividends declared per share was calculated as the sum of dividends declared during the period divided by the number of shares outstanding at each respective quarter-end date (refer to Note 8).
(3) Increase is due to offering price of subscriptions during the period (refer to Note 8).
(4) Total return (not annualized) is based on the change in net asset value per share during the period plus the declared dividends, assuming reinvestment of dividends in accordance with the dividend reinvestment plan, divided by the beginning net asset value for the period. Total return for the six month periods ended June 30, 2015 and 2014 is inclusive of $0.10 and $0.04, respectively, per share increase in net asset value for the periods related to the offering price of subscriptions. Excluding the effects of the higher offering price of subscriptions, total return (not annualized) would have been 4.61% and 3.66%, respectively (refer to Note 8).
(5) The net investment income ratio is net of the waiver of base management fees.

 

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10. LITIGATION

The Company may become party to certain lawsuits in the ordinary course of business. The Company does not believe that the outcome of current matters, if any, will materially impact the Company or its consolidated financial statements. As of June 30, 2015 and December 31, 2014, the Company was not subject to any material legal proceedings, nor, to the Company’s knowledge, is any material legal proceeding threatened against the Company.

In addition, portfolio investments of the Company could be the subject of litigation or regulatory investigations in the ordinary course of business. The Company does not believe that the outcome of any current contingent liabilities of its portfolio investments, if any, will materially affect the Company or these consolidated financial statements.

11. TAX

The Company has not recorded a liability for any uncertain tax positions pursuant to the provisions of ASC 740, Income Taxes, as of June 30, 2015 and December 31, 2014.

In the normal course of business, the Company is subject to examination by federal and certain state, local and foreign tax regulators for the 2013 and 2014 tax years. As of June 30, 2015 and December 31, 2014, the Company had filed tax returns and therefore is subject to examination.

The Company’s taxable income for each period is an estimate and will not be finally determined until the Company files its tax return for each year. Therefore, the final taxable income, and the taxable income earned in each period and carried forward for distribution in the following period, may be different than this estimate. The estimated tax character of dividends declared for the six month periods ended June 30, 2015 and 2014 was as follows:

 

     For the six month periods ended  
     June 30, 2015      June 30, 2014  

Ordinary income

   $ 17,735      $ 5,930  

Tax return of capital

   $ —        $ —    

12. SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date the consolidated financial statements were issued. There have been no subsequent events that require recognition or disclosure through the date the consolidated financial statements were issued, except as disclosed below.

Subsequent to June 30, 2015, the Company borrowed $38,000 under the Revolving Credit Facility and $14,000 under the Facility to fund investment acquisitions. The Company also voluntarily repaid $5,000 under the Facility.

On August 7, 2015, the Company issued a capital call and delivered capital drawdown notices totaling $20,000. Proceeds from the capital call and the related issuance of 1,032,504 shares is expected on or about August 21, 2015.

 

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

(dollar amounts in thousands, except per share data, unless otherwise indicated)

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

We have included or incorporated by reference in this Form 10-Q, and from time to time our management may make, “forward-looking statements”. These forward-looking statements are not historical facts, but instead relate to future events or the future performance or financial condition of Carlyle GMS Finance, Inc. (“we,” “us,” “our,” “GMS Finance,” or the “Company”). These statements are based on current expectations, estimates and projections about us, our current or prospective portfolio investments, our industry, our beliefs, and our assumptions. The forward-looking statements contained in this Form 10-Q and the documents incorporated by reference herein involve a number of risks and uncertainties, including statements concerning:

 

    our, or our portfolio companies’, future business, operations, operating results or prospects;

 

    the return or impact of current and future investments;

 

    the impact of a protracted decline in the liquidity of credit markets on our business;

 

    the impact of fluctuations in interest rates on our business;

 

    the impact of changes in laws or regulations (including the interpretation thereof) governing our operations or the operations of our portfolio companies;

 

    the valuation of our investments in portfolio companies, particularly those having no liquid trading market;

 

    our ability to recover unrealized losses;

 

    market conditions and our ability to access alternative debt markets and additional debt and equity capital;

 

    our contractual arrangements and relationships with third parties;

 

    the general economy and its impact on the industries in which we invest;

 

    the financial condition of and ability of our current and prospective portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

    our ability to successfully integrate any acquisitions;

 

    the adequacy of our cash resources and working capital;

 

    the timing, form and amount of any dividend distributions;

 

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

 

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

 

    our intent to satisfy the requirements of a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended.

We use words such as “anticipates,” “believes,” “expects,” “intends,” “will,” “should,” “may” and similar expressions to identify forward-looking statements, although not all forward-looking statements include these words. Our actual results and condition could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014 and Part II, Item 1A of and elsewhere in this Form 10-Q.

 

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

OVERVIEW

Management’s Discussion and Analysis should be read in conjunction with Part I, Item 1 of this Form 10-Q “Financial Statements.” This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to those described in Part I, Item 1A of our annual report on Form 10-K for the year ended December 31, 2014 and Part II, Item 1A of this Form 10-Q “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements.

Carlyle GMS Finance, Inc. (“we,” “us,” “our,” “GMS Finance,” or the “Company”) is a Maryland corporation formed on February 8, 2012, and structured as an externally managed, non-diversified closed-end investment company. On May 2, 2013, GMS Finance filed its election to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (together with the rules and regulations promulgated thereunder, the “Investment Company Act”). GMS Finance has elected to be treated, and intends to continue to comply with the requirements to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended, (the “Code”).

GMS Finance’s investment objective is to generate current income and capital appreciation primarily through debt investments in U.S. middle market companies, which we define as companies with approximately $10 million to $100 million of earnings before interest, taxes, depreciation and amortization (“EBITDA”). GMS Finance seeks to achieve its investment objective by investing primarily in first lien senior secured loans (which may include stand-alone first lien loans; “last out” first lien loans, which are loans that have a secondary priority behind “first out” first lien loans; “unitranche” loans, which are loans that combine features of first lien, second lien or subordinated loans, generally in a first lien position; and secured corporate bonds with similar features to these categories of first lien loans) and second lien senior secured loans (which may include senior secured loans, and, to a lesser extent, secured corporate bonds, with a secondary priority behind first lien loans) (collectively, “Middle Market Senior Loans”). The Middle Market Senior Loans are generally made to private U.S. middle market companies that are, in many cases, controlled by private equity firms. Depending on market conditions, GMS Finance expects that between 70% and 80% of the value of its assets will be invested in Middle Market Senior Loans, with the balance invested in higher-yielding investments, which may include middle market junior loans such as corporate mezzanine loans, equity co-investments, broadly syndicated first lien and second lien senior secured loans, high-yield bonds, structured finance obligations and/or other opportunistic investments. We expect that the composition of our portfolio will change over time given our Investment Adviser’s view on, among other things, the economic and credit environment (including with respect to interest rates) in which we are operating.

GMS Finance is externally managed by the Investment Adviser, an investment adviser registered under the Investment Advisers Act of 1940, as amended. Carlyle GMS Finance Administration L.L.C. (the “Administrator”) provides the administrative services necessary for GMS Finance to operate. Both the Investment Adviser and the Administrator are wholly-owned subsidiaries of Carlyle Investment Management L.L.C., a subsidiary of The Carlyle Group L.P. “Carlyle” refers to The Carlyle Group L.P., its affiliates and its consolidated subsidiaries, a global alternative asset manager publicly traded on NASDAQ Global Select Market under the symbol “CG”. Refer to the sec.gov website for further information on Carlyle.

 

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Investments

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

Revenue

We generate revenue primarily in the form of interest and fee income on debt investments we hold and capital gains, if any, on investments. Our debt investments generally have a stated term of five to eight years and generally bear interest at a floating rate usually determined on the basis of a benchmark such as LIBOR. Interest on these debt securities is generally paid quarterly. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. We may also generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of: (i) investment advisory fees, including base management fees and incentive fees, to our Investment Adviser pursuant to an investment advisory and management agreement (the “Investment Advisory Agreement”) between us and our Investment Adviser; (ii) costs and other expenses and our allocable portion of overhead incurred by Administrator in performing its administrative obligations under an administration agreement (the “Administration Agreement”) between us and our Administrator; and (iii) other operating expenses as detailed below:

 

    our initial organization costs and offering costs incurred prior to the filing of our election to be regulated as a BDC (the amount in excess of $1,500 to be paid by our Investment Adviser);

 

    the costs associated with the Private Offering;

 

    the costs of any other offerings of our common stock and other securities, if any;

 

    calculating individual asset values and our net asset value (including the cost and expenses of any independent valuation firms);

 

    expenses, including travel expenses, incurred by the Investment Adviser, or members of the Investment Adviser team managing our investments, or payable to third parties, performing due diligence on prospective portfolio companies and, if necessary, expenses of enforcing our rights;

 

    the base management fee and any incentive fee payable under our Investment Advisory Agreement;

 

    certain costs and expenses relating to distributions paid on our shares;

 

    administration fees payable under our Administration Agreement and sub-administration agreements, including related expenses;

 

    debt service and other costs of borrowings or other financing arrangements;

 

    the allocated costs incurred by the Investment Adviser in providing managerial assistance to those portfolio companies that request it;

 

    amounts payable to third parties relating to, or associated with, making or holding investments;

 

    the costs associated with subscriptions to data service, research-related subscriptions and expenses and quotation equipment and services used in making or holding investments;

 

    transfer agent and custodial fees;

 

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    costs of hedging;

 

    commissions and other compensation payable to brokers or dealers;

 

    federal and state registration fees;

 

    any U.S. federal, state and local taxes, including any excise taxes;

 

    independent director fees and expenses;

 

    costs of preparing financial statements and maintaining books and records, costs of preparing tax returns, costs of Sarbanes-Oxley Act compliance and attestation and costs of filing reports or other documents with the SEC (or other regulatory bodies), and other reporting and compliance costs, including registration and listing fees, and the compensation of professionals responsible for the preparation or review of the foregoing;

 

    the costs of any reports, proxy statements or other notices to our stockholders (including printing and mailing costs), the costs of any stockholders’ meetings and the compensation of investor relations personnel responsible for the preparation of the foregoing and related matters;

 

    the costs of specialty and custom software for monitoring risk, compliance and overall portfolio, including any development costs incurred prior to the filing of our election to be regulated as a BDC;

 

    our fidelity bond;

 

    directors and officers/errors and omissions liability insurance, and any other insurance premiums;

 

    indemnification payments;

 

    direct fees and expenses associated with independent audits, agency, consulting and legal costs; and

 

    all other expenses incurred by us or the Administrator in connection with administering our business, including our allocable share of certain officers and their staff compensation.

We expect our general and administrative expenses to be relatively stable or to decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.

PORTFOLIO AND INVESTMENT ACTIVITY

As of June 30, 2015 and December 31, 2014, average loan size in the portfolio was approximately $11,344 and $10,141, respectively, at amortized cost, with no single industry representing more than 11% and 11%, respectively, of total fair value.

The fair value of our investments was approximately $912,502 comprised of 83 portfolio companies/structured finance obligations as of June 30, 2015. The fair value of our investments was approximately $698,662 comprised of 72 portfolio companies/structured finance obligations as of December 31, 2014.

 

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The Company’s investment activity for the three month periods ended June 30, 2015 and 2014 is presented below (information presented herein is at amortized cost unless otherwise indicated).

 

     For the three month periods ended  
     June 30, 2015     June 30, 2014  

Investments—non-controlled/non-affiliated:

    

Total Investments—non-controlled/non-affiliated, beginning of period

   $ 794,139      $ 317,735   

New investments

     230,553        141,344   

Net accretion of discount on securities

     894        384   

Net realized gain (loss) on investments

     593        145   

Investments sold or repaid

     (108,887     (41,518
  

 

 

   

 

 

 

Total Investments—non-controlled/non-affiliated, end
of period

   $ 917,292      $ 418,090   
  

 

 

   

 

 

 

Principal amount of investments funded:

    

First Lien Debt

   $ 170,147      $ 81,675   

Second Lien Debt

     59,250        31,000   

Structured Finance Obligations

     4,000        42,100   

Equity investments

     1,507        —    
  

 

 

   

 

 

 

Total

   $ 234,904      $ 154,775   
  

 

 

   

 

 

 

Principal amount of investments sold or repaid:

    

First Lien Debt

   $ (100,388   $ (32,234

Second Lien Debt

     —         (7,500

Structured Finance Obligations

     (11,700     —    
  

 

 

   

 

 

 

Total

   $ (112,088   $ (39,734
  

 

 

   

 

 

 

Number of new funded investments

     19        20   

Average new funded investment amount

   $ 12,134      $ 7,067   

Percentage of new funded debt investments at floating rates

     96     100

Percentage of new funded debt investments at fixed rates

     4     0

As of June 30, 2015 and December 31, 2014, investments—non-controlled/non-affiliated consisted of the following:

 

     June 30, 2015      December 31, 2014  
     Amortized
Cost
     Fair Value      Amortized
Cost
     Fair Value  

First Lien Debt

   $ 659,852       $ 661,306       $ 517,450       $ 514,787   

Second Lien Debt

     179,594         177,811         111,261         107,874   

Structured Finance Obligations

     75,631         71,170         78,990         76,001   

Equity Investments

     2,215         2,215         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 917,292       $ 912,502       $ 707,701       $ 698,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted average yields (1) for our first and second lien debt, based on the amortized cost and fair value as of June 30, 2015 and December 31, 2014, were as follows:

 

     June 30, 2015     December 31, 2014  
     Amortized
Cost
    Fair Value     Amortized
Cost
    Fair Value  

First Lien Debt

     6.49     6.47     6.01     6.04

Second Lien Debt

     9.18     9.27     8.86     9.14

 

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(1) Yields do not include the effect of accretion of discounts and amortization of premiums and are based on interest rates as of June 30, 2015 and December 31, 2014. Actual yields earned over the life of each investment could differ materially from the yields presented above.

Weighted average yields on first lien and second lien debt have increased as of June 30, 2015 compared to December 31, 2014 primarily due to a shift in mix to higher yielding assets, including unitranche loans.

See the Consolidated Schedules of Investments as of June 30, 2015 and December 31, 2014 in our consolidated financial statements in Part I, Item 1 of this Form 10-Q for more information on these investments, including a list of companies and type and amount of investments.

As part of the monitoring process, our Investment Adviser has developed risk policies pursuant to which it regularly assesses the risk profile of each of our debt investments and rates each of them based on the following categories, which we refer to as “Internal Risk Ratings”:

Internal Risk Ratings Definitions

 

Rating

  

Definition

1

   Performing—Low Risk: Borrower is operating more than 10% ahead of the Base Case.

2

   Performing—Stable Risk: Borrower is operating within 10% of the Base Case (above or below). This is the initial rating assigned to all new borrowers.

3

   Performing—Management Notice: Borrower is operating more than 10% below the Base Case. A financial covenant default may have occurred, but there is a low risk of payment default.

4

   Watch List: Borrower is operating more than 20% below the Base Case and there is a high risk of covenant default, or it may have already occurred. Payments are current although subject to greater uncertainty, and there is moderate to high risk of payment default.

5

   Watch List—Possible Loss: Borrower is operating more than 30% below the Base Case. At the current level of operations and financial condition, the borrower does not have the ability to service and ultimately repay or refinance all outstanding debt on current terms. Payment default is very likely or may have occurred. Loss of principal is possible.

6

   Watch List—Probable Loss: Borrower is operating more than 40% below the Base Case, and at the current level of operations and financial condition, the borrower does not have the ability to service and ultimately repay or refinance all outstanding debt on current terms. Payment default is very likely or may have already occurred. Additionally, the prospects for improvement in the borrower’s situation are sufficiently negative that impairment of some or all principal is probable.

Our Investment Adviser’s risk rating model is based on evaluating portfolio company performance in comparison to the Base Case when considering certain credit metrics including, but not limited to, adjusted EBITDA and net senior leverage as well as specific events including, but not limited to, default and impairment.

Our Investment Adviser monitors and, when appropriate, changes the investment ratings assigned to each debt investment in our portfolio. In connection with our quarterly valuation process, our Investment Adviser reviews our investment ratings on a regular basis. The following table summarizes the Internal Risk Ratings as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015     December 31, 2014  
     Fair Value      % of Fair Value     Fair Value      % of Fair Value  
(dollar amounts in millions)                           

Internal Risk Rating 1

   $ 48.3         5.76   $ 55.6         8.93

Internal Risk Rating 2

     721.3         85.96        517.1         83.04   

Internal Risk Rating 3

     48.1         5.73        41.0         6.58   

Internal Risk Rating 4

     21.4         2.55        9.0         1.45   

Internal Risk Rating 5

     —           —          —           —     

Internal Risk Rating 6

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 839.1         100.00   $ 622.7         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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As part of our monitoring process, our Investment Adviser has developed risk policies pursuant to which it regularly assesses the risk profile of each of the structured finance obligation investments.

CONSOLIDATED RESULTS OF OPERATIONS

For the three month and six month periods ended June 30, 2015 and 2014

The net increase or decrease in net assets from operations may vary substantially from period to period as a result of various factors, including the recognition of realized gains and losses and net change in unrealized appreciation and depreciation. As a result, quarterly comparison may not be meaningful.

Investment Income

Interest income for the three month and six month periods ended June 30, 2015 and 2014 were as follows:

 

     For the three month periods ended      For the six month periods ended  
     June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014  

Interest income from non-controlled/non-affiliated investments

   $ 15,925       $ 9,944       $ 28,904       $ 16,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

   $ 15,925       $ 9,944       $ 28,904       $ 16,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in interest income and net investment income for the three month and six month periods ended June 30, 2015 and 2014 was driven by our deployment of capital and increasing invested balance. As of June 30, 2015 and 2014, the size of our portfolio was $917,292 and $418,090, respectively, at amortized cost, with total principal amount of investments outstanding of $978,808 and $468,209, respectively. As of June 30, 2015 and 2014, the weighted average yield of our first and second lien debt was 7.06% and 6.46%, respectively, on amortized cost.

Interest income on our first and second lien debt investments is dependent on the composition and credit quality of the portfolio. Generally, we expect the portfolio to generate predictable quarterly interest income based on the terms stated in each loan’s credit agreement. As of June 30, 2015 and 2014, all of our first and second lien debt investments were performing and current on their interest payments. Interest income from structured finance obligations is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows. The effective yield is updated at least quarterly based on payments received and expected future payments. In estimating these cash flows, there are a number of assumptions that are subject to uncertainties, including the amount and timing of principal payments which are impacted by prepayments, repurchases, defaults, delinquencies and liquidations of or within the CLO funds. These uncertainties are difficult to predict and are subject to future events that could have impacted the Company’s estimates if the information was known at the time. As a result, actual results may differ significantly from these estimates.

Net investment income (loss) for the three month and six month periods ended June 30, 2015 and 2014 was as follows:

 

     For the three month periods ended     For the six month periods ended  
     June 30, 2015     June 30, 2014     June 30, 2015     June 30, 2014  

Total investment income from non-controlled/non-affiliated investments

   $ 15,925      $ 9,944      $ 28,904      $ 16,577   

Net expenses

     (7,980     (5,408     (14,479     (9,002
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income (loss)

   $ 7,945      $ 4,536      $ 14,425      $ 7,575   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Expenses

 

     For the three month periods ended      For the six month periods ended  
     June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014  

Base management fees

   $ 3,080       $ 1,455       $ 5,803       $ 2,446   

Incentive fees

     1,986         1,149         3,606         2,089   

Professional fees

     465         596         849         1,193   

Administrative service fees

     188         218         300         475   

Interest expense

     2,129         634         3,909         983   

Credit facility fees

     446         1,526         874         2,056   

Directors’ fees and expenses

     106         103         207         185   

Transfer agency fees

     44         34         93         60   

Other general and administrative

     562         178         772         330