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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 September 30, 2015

OR

 

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

Commission file number: 814-00827

 

 

CORPORATE CAPITAL TRUST, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-2857503

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

CNL Center at City Commons

450 South Orange Avenue

Orlando, Florida

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

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

 

 

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

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

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

 

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

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

The number of shares of common stock of the registrant outstanding as of November 10, 2015 was 278,583,194.

 

 

 


Table of Contents

CORPORATE CAPITAL TRUST, INC.

INDEX

 

         PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements:   
  Condensed Consolidated Statements of Assets and Liabilities as of September 30, 2015 (unaudited) and December 31, 2014      2   
  Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014 (unaudited)      3   
  Condensed Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2015 and 2014 (unaudited)      4   
  Condensed Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2015 and 2014 (unaudited)      5   
  Condensed Consolidated Schedules of Investments as of September 30, 2015 (unaudited) and December 31, 2014      6   
  Notes to Condensed Consolidated Financial Statements (unaudited)      40   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      71   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      93   

Item 4.

  Controls and Procedures      96   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      96   

Item 1A.

  Risk Factors      96   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      98   

Item 3.

  Defaults Upon Senior Securities      98   

Item 4.

  Mine Safety Disclosures      98   

Item 5.

  Other Information      98   

Item 6.

  Exhibits      98   

Signatures

     99   

Exhibit Index

     100   


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Assets and Liabilities

(in thousands, except share and per share amounts)

 

     September 30, 2015     December 31, 2014  
     (unaudited)        

Assets

    

Investment at fair value:

    

Non-controlled, non-affiliated investments (amortized cost of $3,266,498 and $2,569,096, respectively) - including $343,765 and $258,344, respectively, of investments pledged to creditors (Note 10)

   $ 3,119,783      $ 2,512,428   

Non-controlled, affiliated investments (amortized cost of $275,487 and $213,925, respectively)

     216,803        203,272   

Controlled, affiliated investments (amortized cost of $141,588 and $5,500, respectively)

     143,167        5,500   
  

 

 

   

 

 

 

Total investments, at fair value (amortized cost of $3,683,573 and $2,788,521, respectively)

     3,479,753        2,721,200   

Cash

     48,219        46,388   

Cash denominated in foreign currency (cost of $4,823 and $618, respectively)

     4,663        589   

Collateral on deposit with custodian

     142,640        115,700   

Dividends and interest receivable

     52,818        32,523   

Receivable for investments sold

     6,269        —     

Principal receivable

     2,239        1,420   

Unrealized appreciation on derivative instruments

     1,917        40,903   

Receivable from advisors

     500        —     

Deferred offering expense

     1,808        2,612   

Prepaid and other deferred expenses

     9,787        10,385   
  

 

 

   

 

 

 

Total assets

     3,750,613        2,971,720   
  

 

 

   

 

 

 

Liabilities

    

Revolving credit facilities

     815,000        377,450   

Term loan payable, net of discount

     392,514        395,228   

Accrued investment advisory fees

     6,201        4,964   

Unrealized depreciation on derivative instruments

     3,676        3,903   

Payable for investments purchased

     3,488        34,888   

Accrued directors’ fees

     83        57   

Accrued performance-based incentive fees

     —          5,108   

Other accrued expenses and liabilities

     3,290        4,301   
  

 

 

   

 

 

 

Total liabilities

     1,224,252        825,899   

Commitments and contingencies ($255,779 as of September 30, 2015, Note 11)

    
  

 

 

   

 

 

 

Net Assets

   $ 2,526,361      $ 2,145,821   
  

 

 

   

 

 

 

Components of Net Assets

    

Common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 272,706,171 and 219,131,729 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively

   $ 273      $ 219   

Paid-in capital in excess of par value

     2,694,282        2,166,554   

Undistributed net investment income

     9,099        9,099   

Accumulated net realized gains

     28,516        335   

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

     (205,809     (30,386
  

 

 

   

 

 

 

Net assets

   $ 2,526,361      $ 2,145,821   
  

 

 

   

 

 

 

Net asset value per share

   $ 9.26      $ 9.79   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations (unaudited)

(in thousands, except share and per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Investment income

        

Interest income:

        

Non-controlled, non-affiliated investments (net of tax withholding, $116, $-, $279 and $-, respectively)

   $ 60,885      $ 43,953      $ 177,355      $ 123,646   

Non-controlled, affiliated investments

     756        —          2,245        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     61,641        43,953        179,600        123,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Payment-in-kind interest income:

        

Non-controlled, non-affiliated investments

     5,710        6,804        14,221        20,447   

Non-controlled, affiliated investments

     2,627        4,781        10,087        8,787   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total payment-in-kind interest income

     8,337        11,585        24,308        29,234   
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee income:

        

Non-controlled, non-affiliated investments

     2,539        1,010        14,023        2,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     2,539        1,010        14,023        2,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividend and other income:

        

Non-controlled, non-affiliated investments

     19        4,734        207        4,744   

Non-controlled, affiliated investments

     459        2,066        977        2,643   

Controlled, affiliated investments

     4,936        —          4,936        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend and other income

     5,414        6,800        6,120        7,387   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     77,931        63,348        224,051        162,639   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Investment advisory fees

     18,867        12,561        51,004        34,506   

Interest expense

     9,487        7,295        25,561        17,506   

Performance-based incentive fees

     —          3,722        7,983        15,325   

Offering expenses

     957        1,677        3,598        5,351   

Administrative services

     717        745        2,031        2,137   

Professional services

     621        520        1,988        1,570   

Custodian and accounting fees

     377        226        958        604   

Director fees and expenses

     158        126        478        417   

Other

     1,029        886        2,741        2,389   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,213        27,758        96,342        79,805   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before taxes

     45,718        35,590        127,709        82,834   

Income tax expense

     90        —          131        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     45,628        35,590        127,578        82,834   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

        

Net realized gains (losses) on:

        

Non-controlled, non-affiliated investments

     (1,094     1,407        (28,783     15,738   

Derivative instruments

     51,360        (548     80,933        (1,326

Foreign currency transactions

     (2,200     (593     (2,828     (2,939
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains

     48,066        266        49,322        11,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation) on:

        

Non-controlled, non-affiliated investments

     (77,888     (35,877     (90,047     (20,515

Non-controlled, affiliated investments

     (29,875     (9,486     (48,031     (701

Controlled, affiliated investments

     (96     —          1,579        —     

Derivative instruments

     (45,350     31,440        (38,759     28,139   

Foreign currency translation

     (216     (98     (165     1,453   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation (depreciation)

     (153,425     (14,021     (175,423     8,376   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

     (105,359     (13,755     (126,101     19,849   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

   $ (59,731   $ 21,835      $ 1,477      $ 102,683   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per share

   $ 0.17      $ 0.19      $ 0.52      $ 0.49   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted and basic (losses) earnings per share

   $ (0.23   $ 0.12      $ 0.01      $ 0.61   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     264,030,528        186,785,383        246,351,875        167,389,712   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per share

   $ 0.20      $ 0.22      $ 0.60      $ 0.60   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except share amounts)

 

     Nine Months Ended September 30,  
     2015     2014  

Operations

    

Net investment income

   $ 127,578      $ 82,834   

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

     49,322        11,473   

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

     (175,423     8,376   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     1,477        102,683   
  

 

 

   

 

 

 

Distributions to shareholders from

    

Net investment income

     (127,578     (82,834

Net realized gains

     (21,141     (11,473

Distributions in excess of net investment income (Note 8)

     —          (6,013
  

 

 

   

 

 

 

Net decrease in net assets resulting from shareholders’ distributions

     (148,719     (100,320
  

 

 

   

 

 

 

Capital share transactions

    

Issuance of shares of common stock

     472,250        498,652   

Reinvestment of shareholders’ distributions

     76,446        51,383   

Repurchase of shares of common stock

     (20,914     (12,591
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     527,782        537,444   
  

 

 

   

 

 

 

Total increase in net assets

     380,540        539,807   

Net assets at beginning of period

     2,145,821        1,430,434   
  

 

 

   

 

 

 

Net assets at end of period

   $ 2,526,361      $ 1,970,241   
  

 

 

   

 

 

 

Capital share activity

    

Shares issued from subscriptions

     47,926,637        49,031,534   

Shares issued from reinvestment of distributions

     7,798,343        5,052,427   

Shares repurchased

     (2,150,538     (1,246,240
  

 

 

   

 

 

 

Net increase in shares outstanding

     53,574,442        52,837,721   
  

 

 

   

 

 

 

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

   $ 9,099      $ (11,909
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     Nine Months Ended September 30,  
     2015     2014  

Operating Activities:

    

Net increase in net assets resulting from operations

   $ 1,477      $ 102,683   

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

    

Purchases of investments

     (1,467,289     (1,260,847

Decrease in payable for investments purchased

     (31,400     (49,555

Payment-in-kind interest capitalized

     (19,441     (20,146

Proceeds from sales of investments

     251,954        442,624   

Proceeds from principal payments

     385,296        351,163   

Net realized losses (gains) on investments

     28,783        (15,738

Net change in unrealized depreciation on investments

     136,499        21,216   

Net change in unrealized (appreciation) depreciation on derivative instruments

     38,759        (28,139

Net change in unrealized (appreciation) depreciation on foreign currency translation

     165        (1,453

Amortization of premium/discount, net

     (6,102     (4,541

Amortization of deferred financing costs

     2,359        2,073   

Accretion of discount on term loan payable

     286        132   

(Increase) decrease in short-term investments, net

     (68,253     148,676   

Increase in collateral on deposit with custodian

     (26,940     (25,899

Increase in dividends and interest receivable

     (20,259     (14,012

(Increase) decrease in receivable for investments sold

     (6,339     37,949   

(Increase) decrease in principal receivable

     (819     67   

Increase in receivable from advisors

     (500     (680

(Increase) decrease in other assets

     (130     251   

Increase in accrued investment advisory fees

     1,237        492   

Increase (decrease) in accrued performance-based incentive fees

     (5,108     2,556   

Decrease in other accrued expenses and liabilities

     (985     (330
  

 

 

   

 

 

 

Net cash used in operating activities

     (806,750     (311,458
  

 

 

   

 

 

 

Financing Activities:

  

Proceeds from issuance of shares of common stock

     472,250        498,652   

Payments on repurchases of shares of common stock

     (20,914     (12,591

Distributions paid

     (72,273     (48,917

Borrowings under term loan payable

     —          398,000   

Repayments under term loan payable

     (3,000     (2,000

Borrowings under revolving credit facilities

     702,000        347,000   

Repayments of revolving credit facilities

     (264,450     (867,331

Deferred financing costs paid

     (827     (7,026
  

 

 

   

 

 

 

Net cash provided by financing activities

     812,786        305,787   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (131     —     
  

 

 

   

 

 

 

Net increase (decrease) in cash

     5,905        (5,671

Cash and cash denominated in foreign currency, beginning of period

     46,977        86,205   
  

 

 

   

 

 

 

Cash and cash denominated in foreign currency, end of period

   $ 52,882      $ 80,534   
  

 

 

   

 

 

 

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

    

Cash paid for interest

   $ 22,628      $ 14,767   
  

 

 

   

 

 

 

Distributions reinvested

   $ 76,446      $ 51,383   
  

 

 

   

 

 

 

Taxes paid, including excise tax

   $ 1,953      $ —     
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Senior Secured Loans—First Lien—53.3%

  

       

ABILITY Network, Inc.

   (e)(f)   Health Care Equipment & Services     L + 500        1.00     5/14/2021      $         20,012      $         19,829      $         19,988   

Algeco/Scotsman (LU)

   (g)(h)(i)(j)(o)   Consumer Durables & Apparel     15.75% PIK                5/1/2018        33,302        32,643        7,396   

Alion Science & Technology Corp.

   (k)(l)   Capital Goods     L + 450        1.00     8/19/2021        2,876        2,862        2,858   

AltEn, LLC

   (i)(l)(m)   Energy     L + 900        1.00     9/12/2018        29,610        27,225        15,314   

American Freight, Inc.

   (f)(i)   Retailing     L + 625        1.00     10/31/2020        32,445        32,303        32,411   

Amtek Global Technology Pte. Ltd. (SG)

   (g)(i)(j)(n)(EUR)   Automobiles & Components     E + 900        1.00     11/10/2019      62,849        63,637        63,750   
   (g)(i)(j)(n)(EUR)       E + 900        1.00     11/10/2019        61,898        62,674        62,785   
     (g)(i)(j)(n)(EUR)         E + 900        1.00     11/10/2019        8,728        8,838        8,853   

Applied Systems, Inc.

   (e)(f)   Software & Services     L + 325        1.00     1/25/2021      $ 649        645        649   

BeyondTrust Software, Inc.

   (f)(i)   Software & Services     L + 700        1.00     9/25/2019        12,915        12,794        12,871   

BRG Sports, Inc.

   (l)   Consumer Durables & Apparel     L + 550        1.00     4/15/2021        3,872        3,807        3,855   

Caesars Entertainment Operating Co., Inc.

   (e)(f)(g)(o)   Consumer Services     L + 725                3/1/2017        10,800        10,163        10,053   

California Pizza Kitchen, Inc.

   (e)(f)   Food & Staples Retailing     L + 425        1.00     3/29/2018        18,335        17,724        18,083   

Charlotte Russe, Inc.

   (f)   Retailing     L + 550        1.25     5/22/2019        18,291        18,146        15,182   
     (f)         L + 550        1.25     5/22/2019        4,478        4,456        3,739   

CityCenter Holdings, LLC

   (e)(f)   Real Estate     L + 325        1.00     10/16/2020        5,919        5,872        5,911   

David’s Bridal, Inc.

   (e)(f)   Retailing     L + 400        1.25     10/11/2019        8,368        8,159        7,336   

See notes to condensed consolidated financial statements.

 

6


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Distribution International, Inc.

   (e)(f)   Retailing     L + 500        1.00     12/10/2021      $ 6,375      $ 6,317      $ 6,296   

EagleView Technology Corp.

   (p)   Software & Services     L + 425        1.00     7/15/2022        7,000        6,931        6,933   

Emerald Performance Materials, LLC

   (e)(l)   Materials     L + 350        1.00     7/30/2021        649        646        646   

Exemplis Corp.

   (f)(i)   Commercial & Professional Services     L + 650        1.00     3/23/2022        67,777        67,142        68,426   

Football Association of Ireland (IE)

   (g)(i)(j)(EUR)   Consumer Durables & Apparel     6.40%                12/20/2020      43,615        58,530        49,445   

Greystone & Co., Inc.

   (f)(i)   Diversified Financials     L + 800        1.00     3/26/2021      $         33,665                33,173                32,430   

Grocery Outlet, Inc.

   (e)(f)   Food & Staples Retailing     L + 375        1.00     10/21/2021        2,960        2,970        2,957   

Gymboree Corp.

   (f)   Retailing     L + 350        1.50     2/23/2018        11,892        10,958        7,877   

Hanson Building Products North America

   (e)(f)(g)   Materials     L + 550        1.00     3/13/2022        23,053        22,854        22,895   

Harbor Freight Tools USA, Inc.

   (e)(f)   Capital Goods     L + 375        1.00     7/26/2019        2,900        2,906        2,916   

Hillman Group, Inc.

   (e)(f)   Consumer Durables & Apparel     L + 350        1.00     6/30/2021        831        833        830   

iPayment, Inc.

   (e)(f)   Software & Services     L + 525        1.50     5/8/2017        36,163        35,979        35,593   

Jacuzzi Brands, Inc.

   (f)(i)   Capital Goods     L + 650        1.25     7/3/2019        18,717        18,456        18,690   

Jacuzzi Brands, Inc. (LU)

   (f)(i)(j)   Capital Goods     L + 650        1.25     7/3/2019        20,118        19,838        20,089   

KeyPoint Government Solutions, Inc.

   (f)(i)   Capital Goods     L + 650        1.25     11/13/2017        33,295        32,973        33,462   

 

See notes to condensed consolidated financial statements.

 

7


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Keystone Australia Holdings, Pty. Ltd. (AU)

   (g)(i)(j)(AUD)   Consumer Services     15.00%                8/7/2019      A$         31,021      $         29,057      $         21,518   

Koosharem, LLC

   (e)(f)   Commercial & Professional Services     L + 650        1.00     5/15/2020      $ 42,753        42,373        42,192   

Kurt Geiger Ltd. (UK)

   (g)(h)(i)(j)(GBP)   Consumer Durables & Apparel    
 
10.00%, 1.00%
PIK
  
  
            4/8/2019      £ 47,099        77,594        72,094   

Marshall Retail Group, LLC

   (f)(i)   Retailing     L + 600        1.00     8/25/2020      $ 16,678        16,524        15,354   

MCS AMS Sub-Holdings, LLC

   (f)   Commercial & Professional Services     L + 650        1.00     10/15/2019        42,887        41,967        35,596   

MSX International, Inc.

   (f)   Software & Services     L + 500        1.00     8/18/2020        2,507        2,399        2,507   

Neiman Marcus Group, LLC

   (e)(f)   Retailing     L + 325        1.00     10/25/2020        4,939        4,873        4,843   

New Enterprise Stone & Lime Co., Inc.

   (f)(i)   Capital Goods     L + 700        1.00     2/12/2019        56,298        56,298        56,081   

Nine West Holdings, Inc.

   (e)(f)   Consumer Durables & Apparel     L + 375        1.00     10/8/2019        13,452        13,236        11,098   

P & L Development, LLC

   (h)(i)(l)   Pharmaceuticals, Biotechnology & Life Sciences    
 
L  +  750, 1.00%
PIK
  
  
            5/1/2020        56,301        55,779        54,314   

Pacific Union Financial, LLC

   (i)(l)   Diversified Financials     L + 800        1.00     5/31/2019        53,959        53,202        53,523   

Paradigm Acquisition Corp.

   (q)   Health Care Equipment & Services     L + 500        1.00     6/2/2022        11,063        10,903        10,980   

Payless, Inc.

   (i)(l)   Retailing     L + 625        1.00     3/2/2019        12,973        12,758        12,832   

Petroplex Acidizing, Inc.

   (f)(i)   Energy     L + 725        1.00     12/4/2019        36,438        35,964        31,319   

 

See notes to condensed consolidated financial statements.

 

8


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Proserv Acquisition, LLC

   (f)(g)   Energy     L + 538        1.00     12/22/2021      $         27,378      $          21,630      $          20,762   

Proserv Acquisition, LLC (UK)

   (f)(g)(j)   Energy     L + 538        1.00     12/22/2021        16,070                12,695                12,186   

Raley’s

   (f)   Food & Staples Retailing     L + 625        1.00     4/10/2022        29,591                28,594                29,591   

RedPrairie Corp.

   (e)(f)   Software & Services     L + 500        1.00     12/21/2018        26,343                25,399                23,511   

Riverbed Technology, Inc.

   (e)(f)   Technology Hardware & Equipment     L + 500        1.00     4/24/2022        7,691                7,654                7,713   

TIBCO Software, Inc.

   (e)(l)   Software & Services     L + 550        1.00     12/4/2020        57,806                56,176                57,372   

TTM Technologies, Inc.

   (g)(l)   Technology Hardware & Equipment     L + 500        1.00     5/31/2021        11,980                11,576                11,201   

Tweddle Group, Inc.

   (f)(i)   Automobiles & Components     L + 675        1.00     4/7/2020        43,485                42,600                42,985   

Waste Pro USA, Inc.

   (f)(i)   Transportation     L + 750        1.00     10/15/2020        36,406                36,406                36,326   

Willbros Group, Inc.

   (i)(l)   Energy     L + 975        1.25     12/15/2019        52,642                52,642                45,621   

Z Gallerie, Inc.

   (f)(i)   Retailing     L + 650        1.00     10/8/2020        32,436                32,111                32,488   

Total Senior Secured Loans—First Lien

               $              1,432,693      $              1,344,526   
                

 

 

     

 

 

 

Senior Secured Loans—Second Lien—38.9%

                                                                   

Angelica Corp.

   (f)(i)   Health Care Equipment & Services     L + 875        1.25     8/20/2019      $ 50,869      $          50,869      $          45,013   

Applied Systems, Inc.

   (e)(f)   Software & Services     L + 650        1.00     1/24/2022        34,703                35,022                34,486   

AssuredPartners, Inc.

   (f)   Insurance     L + 675        1.00     4/2/2022        3,135                3,148                3,170   

Brake Bros Ltd. (UK)

   (g)(h)(j)(r)(GBP)   Food & Staples Retailing    
 
L  +  325, 3.00%
PIK
  
  
            3/12/2017      £ 6,062                8,726                9,088   

 

See notes to condensed consolidated financial statements.

 

9


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


Company (a)(b)
   Footnotes  
Industry
  Interest
Rate
    Base Rate
Floor
    Maturity
Date
   

No. Shares/
Principal
Amount (c)

   
        Cost (d)
   
Fair Value
 

BRG Sports, Inc.

   (l)   Consumer Durables & Apparel     L + 925        1.00     4/15/2022      $ 23,855      $ 23,673      $ 23,497   

CPI International, Inc.

   (f)(i)   Capital Goods     L + 700        1.00     9/16/2017        28,000        27,449        27,440   

CTI Foods Holding Co., LLC

   (f)   Food, Beverage & Tobacco     L + 725        1.00     6/28/2021        23,219        22,945        22,406   

Deltek, Inc.

   (e)(f)   Software & Services     L + 850        1.00     6/17/2023        62,369        61,762        62,564   

EagleView Technology Corp.

   (p)   Software & Services     L + 825        1.00     7/14/2023        33,000        32,511        31,845   

Emerald Performance Materials, LLC

   (e)(l)   Materials     L + 675        1.00     8/1/2022        2,041        2,031        2,026   

Excelitas Technologies Corp.

   (f)(h)(i)   Technology Hardware & Equipment    
 
L  +  975, 1.50%
PIK
  
  
    1.00     4/29/2021                110,242                110,242                108,150   

Genoa, a QoL Healthcare Co., LLC

   (f)   Health Care Equipment & Services     L + 775        1.00     4/28/2023        6,403        6,341        6,403   

Greenway Medical Technologies

   (f)   Health Care Equipment & Services     L + 825        1.00     11/4/2021        23,057        22,770        22,481   

Grocery Outlet, Inc.

   (e)(f)   Food & Staples Retailing     L + 825        1.00     10/21/2022        49,688        48,250        49,564   

Gruppo Argenta S.p.A. (LU)

   (g)(h)(i)(j)(EUR)   Retailing     12.00% PIK          1/31/2019      25,598        28,987        25,358   
     (g)(h)(i)(j)(EUR)         12.00% PIK                1/31/2019        3,485        3,726        3,452   

Gypsum Management & Supply, Inc.

   (e)(f)   Capital Goods     L + 675        1.00     4/1/2022      $ 14,802        14,399        14,534   

iParadigms Holdings, LLC

   (f)   Software & Services     L + 725        1.00     7/29/2022        24,366        24,201        24,244   

Learfield Communications, Inc.

   (f)   Media     L + 775        1.00     10/8/2021        27,756        27,975        27,686   

 

See notes to condensed consolidated financial statements.

 

10


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Lightower Fiber, LLC

   (e)(f)   Telecommunication Services     L + 675        1.25     4/12/2021      $         35,406      $          35,006      $          35,140   

Maxim Crane, LP

   (e)(f)   Capital Goods     L + 925        1.00     11/26/2018        970                989                966   

Misys Ltd. (UK)

   (e)(g)(j)   Software & Services     12.00%                6/12/2019        3,000                3,273                3,269   

NewWave Communications

   (f)   Media     L + 800        1.00     10/30/2020        13,712                13,677                13,507   

P2 Energy Solutions, Inc.

   (e)(g)(q)   Software & Services     L + 800        1.00     4/30/2021        9,283          9,207          8,169   
     (f)(g)         L + 800        1.00     4/30/2021        74,312                72,356                65,394   

Petrochoice Holdings, Inc.

   (f)(i)   Capital Goods     L + 875        1.00     8/21/2023        50,000                49,003                49,348   

Polyconcept Finance B.V. (NL)

   (g)(i)(j)(l)   Consumer Durables & Apparel     L + 875        1.25     6/28/2020        46,727                46,727                46,556   

Progressive Solutions

   (l)   Health Care Equipment & Services     L + 850        1.00     10/22/2021        21,145                21,004                21,053   

RedPrairie Corp.

   (f)   Software & Services     L + 1000        1.25     12/21/2019        39,868                37,602                34,606   

Safety Technology Holdings, Inc.

   (f)(i)   Technology Hardware & Equipment     L + 825        1.00     6/2/2020        30,402                29,809                30,322   

SI Organization, Inc.

   (f)   Capital Goods     L + 800        1.00     5/23/2020        56,000                55,539                55,113   

Talbots, Inc.

   (e)(f)   Retailing     L + 850        1.00     3/19/2021        8,022                7,991                7,878   

The TelX Group, Inc.

   (e)(l)   Telecommunication Services     L + 650        1.00     4/9/2021        23,683                23,811                23,773   

Valeo Foods Group Ltd. (IE)

   (g)(i)(j)(s)(GBP)   Food, Beverage & Tobacco     L + 800        1.00     5/8/2023      £ 29,125                43,603                43,215   

Total Senior Secured Loans—Second Lien

            $              1,004,624      $                  981,716   
                

 

 

     

 

 

 

 

See notes to condensed consolidated financial statements.

 

11


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Senior Secured Bonds—8.1%

  

               

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

   (g)(j)(t)(u)   Media     6.63%            2/15/2023      $ 5,046      $          5,046      $          4,844   

Artesyn Technologies, Inc.

   (e)(t)(u)   Technology Hardware & Equipment     9.75%            10/15/2020                24,387                        23,922                        24,387   

Guitar Center, Inc.

   (t)(u)   Retailing     6.50%            4/15/2019        27,676                27,253                25,462   

Hot Topic, Inc.

   (t)(u)   Consumer Durables & Apparel     9.25%            6/15/2021        3,556                3,637                3,473   

iPayment, Inc.

   (t)(u)   Software & Services     9.50%            12/15/2019        8,597                8,597                8,511   

Louisiana Public Facilities Authority

   (i)   Energy     11.50%          1/1/2020        34,330          33,550          33,628   
     (f)(i)(t)         L + 1000            1/1/2020        10,650                10,650                10,403   

NESCO, LLC

   (t)(u)   Capital Goods     6.88%            2/15/2021        10,532                7,022                7,399   

New Enterprise Stone & Lime Co., Inc.

   (h)(u)   Capital Goods    
 
7.00%, 6.00%
PIK
  
  
        3/15/2018        36,933                39,429                38,226   

OAG Holdings, LLC

   (h)(i)   Energy    
 
8.00%, 2.00%
PIK
  
  
        12/20/2020        20,728                18,270                3,218   

Rockport Group, LLC

   (i)   Consumer Durables & Apparel     9.50%            7/31/2022        28,516                27,813                27,712   

Ryerson, Inc.

   (e)   Materials     9.00%            10/15/2017        5,814                5,814                5,189   

SquareTwo Financial Corp.

   (u)   Banks     11.63%            4/1/2017        16,044                15,903                9,626   

 

See notes to condensed consolidated financial statements.

 

12


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Towergate (UK)

   (g)(j)(u)(GBP)   Insurance     8.75%            4/2/2020      £ 936      $          1,425      $          1,300   

Total Senior Secured Bonds

               $          228,331      $          203,378   
                

 

 

     

 

 

 

Total Senior Debt

               $          2,665,648      $          2,529,620   
                

 

 

     

 

 

 

Subordinated Debt—19.2%

                                                                    

Alion Science & Technology Corp.

   (i)(t)   Capital Goods     11.00%            8/19/2022      $ 68,603      $          67,580      $          66,388   

Block Communications, Inc.

   (t)(u)   Media     7.25%            2/1/2020        463                474                458   

Builders FirstSource, Inc.

   (g)(t)(u)   Capital Goods     10.75%            8/15/2023        15,522                15,522                15,503   

Cemex Materials, LLC

   (t)(u)   Materials     7.70%            7/21/2025        58,454                62,348                60,500   

Cequel Communications Holdings, LLC

   (t)(u)   Media     5.13%          12/15/2021        20,751          20,527          18,261   
   (t)(u)       5.13%          12/15/2021        178          179          157   
     (g)(t)(u)         7.75%            7/15/2025        20,456                20,135                18,052   

CHS/Community Health Systems, Inc.

   (g)(u)   Health Care Equipment & Services     6.88%            2/1/2022        114                114                116   

Datatel, Inc.

   (e)(h)(t)(u)   Software & Services     9.63%          12/1/2018        10,725          10,684          10,939   
     (t)         9.00%            9/30/2023        3,120                3,013                3,019   

Essar Steel Algoma, Inc. (CA)

   (g)(h)(j)(u)   Materials     14.00% PIK            2/13/2020        5,069                4,414                2,230   

Exemplis Corp.

   (f)(h)(i)   Commercial & Professional Services    
 
L  +  700, 2.00%
PIK
  
  
        3/23/2020        25,244                25,244                25,346   

GCI, Inc.

   (u)   Telecommunication Services     6.75%          6/1/2021        2,430          2,423          2,473   
   (u)       6.88%          4/15/2025        30,141          29,971          30,292   

 

See notes to condensed consolidated financial statements.

 

13


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Global Closure Systems (FR)

   (g)(h)(i)(j)(EUR)   Materials     13.00% PIK            11/15/2019      21,536      $          28,270      $          23,963   

Gruppo Argenta S.p.A. (LU)

   (g)(h)(i)(j)(EUR)   Retailing     15.00% PIK            11/11/2018        773                1,035                679   

Hilding Anders (SE)

   (g)(h)(i)(j)(m)(EUR)   Consumer Durables & Apparel     13.00% PIK          6/30/2021        98,621          118,344          93,170   
   (g)(h)(i)(j)(m)(o)(EUR)       12.00% PIK          12/31/2023        17,653          939            
     (g)(h)(i)(j)(m)(o)(EUR)         18.00% PIK            12/31/2024        8,331                8,485                  

Hillman Group, Inc.

   (t)(u)   Consumer Durables & Apparel     6.38%            7/15/2022      $ 3,953                3,807                3,637   

Hot Topic, Inc.

   (h)(t)(u)   Consumer Durables & Apparel     12.00%            5/15/2019        10,488                10,427                9,859   

IMS Health, Inc.

   (g)(t)(u)   Health Care Equipment & Services     6.00%            11/1/2020        9,513                9,897                9,751   

JC Penney Corp., Inc.

   (g)(u)   Retailing     5.65%            6/1/2020        8,440                6,584                7,596   

Kenan Advantage Group, Inc.

   (t)(u)   Transportation     7.88%            7/31/2023        30,097                30,097                30,548   

Lightower Fiber, LLC

   (i)   Telecommunication Services     10.00%          2/12/2022        11,555          11,332          11,242   
     (h)(i)         12.00% PIK            8/12/2025        8,531                8,363                8,221   

Summit Materials, LLC

   (u)   Materials     10.50%            1/31/2020        4,873                5,280                5,214   

The TelX Group, Inc.

   (h)(i)   Telecommunication Services     13.50% PIK            7/9/2021        3,689                3,895                3,800   

TIBCO Software, Inc.

   (t)(u)   Software & Services     11.38%            12/1/2021        21,219                20,712                21,166   

 

See notes to condensed consolidated financial statements.

 

14


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Transdigm, Inc.

   (g)(t)(u)   Capital Goods     6.50%            5/15/2025      $ 1,485      $          1,485      $          1,396   

Total Subordinated Debt

                   531,580      $          483,976   
                

 

 

     

 

 

 

Structured Products—3.6%

                                                                    

Comet Aircraft S.A.R.L. (LU), Common Shares

   (g)(i)(j)(v)   Capital Goods                         549,451      $          50,000      $          52,479   

KKR BPT Holdings Aggregator, LLC, Membership Interest

   (g)(i)(v)*   Diversified Financials                         N/A                7,500                5,775   

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

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

VSK Holdings Ltd. (KY), Class B Preferred Shares

   (g)(i)(j)(m)(EUR)   Banks     7.77%            10/31/2020            6,650,429                               5,053   

Total Structured Products

               $          85,721      $          91,669   
                

 

 

     

 

 

 

Equity/Other—12.1%

                                                                    

Alion Science & Technology Corp., Membership Interest

   (i)*   Capital Goods                         N/A      $          7,350      $          7,742   

AltEn, LLC, Membership Units

   (i)(m)*   Energy                         611                2,955                  

Amtek Global Technology Pte. Ltd. (SG), Warrants

   (g)(i)(j)*(EUR)   Automobiles & Components         12/31/2018        9,991          4,785          4,863   
     (g)(i)(j)*(EUR)                     12/31/2017        9,991                4,636                4,701   

Cengage Learning Holdings II, LP, Common Stock

       Media                         227,802                7,529                6,037   

Education Management Corp., Common Stock

   *   Consumer Services           3,779,591          1,047            

 

See notes to condensed consolidated financial statements.

 

15


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Education Management Corp., Warrants

   (i)*                 1/5/2022        2,320,791      $          371      $            

Excelitas Technologies Corp., Class A Membership Interest

   (i)*   Technology Hardware & Equipment                     N/A                5,636                3,395   

GA Capital Specialty Lending Fund, Limited Partnership Interest

   (g)(i)*   Diversified Financials                     N/A                16,875                16,875   

Genesys Telecommunications Laboratories, Inc., Common Stock

   (i)*   Software & Services                     5,775                449                675   

Global Closure Systems (FR), Limited Partnership Interest

   (g)(i)(j) *(EUR)   Materials                     N/A                823                1,215   

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

   (g)(i)(j)*(EUR)   Retailing                     225,289                5,342                2,312   

Guardian Investors, LLC, Membership Interest

   (g)(i)(v)*   Diversified Financials                     N/A                36,292                36,005   

Hilding Anders (SE), Class A Common Stock

   (g)(i)(j)(m)*(SEK)   Consumer Durables & Apparel           1,394,288          132            

Hilding Anders (SE), Class B Common Stock

   (g)(i)(j)(m)*(SEK)             260,253          25            

Hilding Anders (SE), Equity Options

   (g)(i)(j)(m)*(SEK)                 12/31/2020        236,160,807                14,988                  

Home Partners of America, Inc., Common Stock

   (i)(m)*   Real Estate           62,475          62,213          61,367   

Home Partners of America, Inc., Warrant Delivery Rights

   (i)(m)*             322          5          5   

Home Partners of America, Inc., Warrants

   (i)(m)*           8/7/2024        2,353          257          230   

 

See notes to condensed consolidated financial statements.

 

16


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Innovating Partners, LLC, Membership Interest

   (g)(i)(v)   Diversified Financials                     N/A      $          47,796      $          48,908   

iPayment, Inc., Common Stock

   (i)*   Software & Services                     538,144                1,988                2,239   

Jones Apparel Group Holdings, Inc., Common Stock

   (i)*   Consumer Durables & Apparel                     5,451                872                3,120   

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

   (g)(i)(j)*(AUD)   Consumer Services                     1,588,469                1,019                81   

Kurt Geiger Ltd. (UK), Common Stock

   (g)(i)(j)   Consumer Durables & Apparel                     5,451                65                7,301   

Nine West Holdings, Inc., Common Stock

   (i)*   Consumer Durables & Apparel                     5,451                6,541                853   

OAG Holdings, LLC, Overriding Royalty Interest

   (i)   Energy                     N/A                2,354                  

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

   (g)(i)(j)(m)*   Transportation           1,964          3,069          2,448   

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

   (g)(i)(j)(m)         9.00%                37,807                36,850                39,216   

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

   (g)(i)   Diversified Financials                     N/A                42,481                41,529   

Stuart Weitzman, Inc., Other

   (i)   Consumer Durables & Apparel                     N/A                               1,107   

SUN NewCo, Common Shares A

   (g)(i)(GBP)   Insurance           16,450                     

SUN NewCo, Preference B Shares

   (g)(i)(GBP)                             6,113,719                9,064                9,655   

Towergate (UK), Ordinary Shares

   (g)(i)(j)*(GBP)   Insurance                     116,814                173                185   

Willbros Group, Inc., Common Stock

   *   Energy                     2,810,814      $          7,760      $          3,542   

Total Equity/Other

               $                  331,742      $                  305,606   
                

 

 

     

 

 

 

 

See notes to condensed consolidated financial statements.

 

17


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Total Investments, excluding Short Term Investments — 135.2%

          $          3,614,691      $          3,410,871   
                

 

 

     

 

 

 

Short Term Investments—2.7%

                                                                    

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

   (e)(w)       0.01%            39,057,163      $          39,057      $          39,057   

State Street Institutional Liquid Reserves Fund, Institutional Class

   (w)         0.13%                    29,825,040                29,825                29,825   

Total Short Term Investments

               $          68,882      $          68,882   
                

 

 

     

 

 

 

TOTAL INVESTMENTS — 137.9%(x)

               $              3,683,573      $                  3,479,753   
                

 

 

     

 

 

 

LIABILITIES IN EXCESS OF OTHER ASSETS—(37.9%)

                  (953,392

NET ASSETS—100.0%

                   $          2,526,361   

Collateral on Deposit with Custodian—5.7%

                                                               

Bank of Nova Scotia—Certificate of Deposit

             0.27%            12/31/2015        142,640      $          142,640                142,640   

Total Collateral on Deposit with Custodian

            $          142,640      $          142,640   
                

 

 

     

 

 

 

Derivative Instruments (Note 4)—(0.2%)

                                                               

Cross Currency Swaps

   (g)(i)             $                   302   

Foreign currency forward contracts

   (g)(i)             $                   386   

 

See notes to condensed consolidated financial statements.

 

18


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 


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

Total return swaps

   (g)(i)                   $        $               $          (2,447

Total Derivative Instruments

               $               $          (1,759
                

 

 

     

 

 

 

 

* Non-income producing security.

 

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

 

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

 

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

 

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

 

(e) Security or portion thereof was held within CCT Funding, LLC and was pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank as of September 30, 2015.

 

(f) The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at September 30, 2015 was 0.33%. The current base rate for each investment may be different from the reference rate on September 30, 2015.

 

(g) The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The Company calculates its compliance with the qualifying assets test on a “look through” basis by disregarding the value of the Company’s total return swaps and treating each loan underlying the total return swaps as either a qualifying asset or non-qualifying asset based on whether the obligor is an eligible portfolio company. On this basis, 73.2% of the Company’s total assets represented qualifying assets as of September 30, 2015.

 

See notes to condensed consolidated financial statements.

 

19


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

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

 

                 Nine Months Ended September 30, 2015                           

PIK Security Name

   Local
Currency
   Local Par
as of
December 31,
2014
     Local Par
Additions
     Local Par
Capitalized
PIK
     Local Par
Reductions
    Local Par
as of
September 30,
2015
     Total
Current
Interest
Rate
    Current
PIK Rate
    Maximum
Current
PIK Rate
 

Algeco/Scotsman - 15.75% PIK

   USD      30,859                 2,443                33,302         15.75     15.75     15.75

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

   GBP      8,912                 203         (3,053     6,062         L + 625        3.00     3.00

Datatel, Inc. - 9.63%

   USD      9,287         1,438                        10,725         9.63     0.00     10.38

Eagle Midco, Inc. - 9.00%

   USD      31,796                         (31,796             N/A        N/A        N/A   

Education Management, LLC - 16.00% PIK

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

Essar Steel Algoma, Inc. - 14.00% PIK

   USD      4,570                 499                5,069         14.00     14.00     14.00

Excelitas Technologies Corp. - L + 975, 1.50% PIK

   USD      108,997                 1,245                110,242         L + 1125        1.50     1.50

Exemplis Corp. - L + 700, 2.00% PIK

   USD              25,000         244                25,244         L + 900        2.00     2.00

Global Closure Systems - 13.00% PIK

   EUR      20,221                 1,315                21,536         13.00     13.00     13.00

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

   EUR      684                 89                773         15.00     15.00     15.00

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

   EUR      22,754                 2,844                25,598         12.00     12.00     12.00

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

   EUR      3,205                 280                3,485         12.00     12.00     12.00

Hilding Anders - 18.00% PIK

   EUR      8,331                                8,331         18.00     18.00     18.00

Hilding Anders - 13.00% PIK

   EUR      92,571                 6,050                98,621         13.00     13.00     13.00

Hilding Anders - 12.00% PIK

   EUR      17,653                                17,653         12.00     12.00     12.00

Hot Topic, Inc. - 12.00%

   USD      8,113         2,419                 (44     10,488         12.00     0.00     12.75

Kurt Geiger Ltd. - 10.00%, 1.00% PIK

   GBP      46,862                 237                47,099         11.00     1.00     1.00

Lightower Fiber, LLC - 12.00% PIK

   USD              8,531                        8,531         12.00     12.00     12.00

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

   USD      10,841         50,397         1,455         (25,760     36,933         13.00     6.00     12.00

OAG Holdings, LLC - 8.00%, 2.00% PIK

   USD      20,417                 311                20,728         10.00     2.00     2.00

P & L Development, LLC - L + 750, 1.00% PIK

   USD              56,205         237         (141     56,301         L + 850        1.00     1.00

Pharmaceutical Product Development, Inc. - 9.38%

   USD      5,151                         (5,151             9.38     0.00     10.13

Stuart Weitzman, Inc. - 11.50%

   USD      56,918                         (56,918             N/A        N/A        N/A   

The TelX Group, Inc. - 13.50% PIK

   USD      3,457                 232                3,689         13.50     13.50     13.50

Towergate Finance PLC - 13.50% PIK

   GBP              1,325         10         (1,335             N/A        N/A        N/A   

 

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

 

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

 

(k) Position or portion thereof unsettled as of September 30, 2015.

 

(l) The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at September 30, 2015 was 0.19%. The current base rate for each investment may be different from the reference rate on September 30, 2015.

 

See notes to condensed consolidated financial statements.

 

20


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

(m) Affiliated investment as defined by the 1940 Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at September 30, 2015 represented 8.6% of the Company’s net assets. Fair value as of December 31, 2014 and September 30, 2015 along with transactions during the nine months ended September 30, 2015 in these affiliated investments are as follows (amounts in thousands):

 

            Nine Months Ended September 30, 2015            Nine Months Ended September 30, 2015  

Non-Controlled, Affiliated Investments

   Fair Value at
December 31,
2014
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
    Net
Unrealized
Gain (Loss)
    Fair Value at
September 30,
2015
     Net Realized
Gain (Loss)
     Interest
Income***
     Fee
Income
     Dividend
Income
 

AltEn, LLC

                        

Common Stock

   $ 2,787       $ -       $ -      $ (2,787   $ -       $ -       $ -       $ -       $ -   

Term Loan

     25,792         400           (10,878     15,314         -         2,245         -         -   

Hilding Anders

                        

Subordinated Debt

     110,973         7,479         -        (25,282     93,170         -         10,087         -         -   

Class A Common Stock

     257         -         -        (257     -         -         -         -         -   

Class B Common Stock

     48         -         -        (48     -         -         -         -         -   

Equity Options

     11,724         -         -        (11,724     -         -         -         -         -   

Home Partners of America, Inc.

                        

Common Stock

     22,223         40,272         -        (1,128     61,367         -         -         -         -   

Warrants

     78         180         -        (28     230         -         -         -         -   

Warrants Delivery Rights

     32         -         (27     -        5         -         -         -         -   

Orchard Marine, Ltd.

                        

Class B Common Stock

     3,001         -         -        (553     2,448         -         -         -         -   

Series A Preferred Stock

     23,760         13,258         -        2,198        39,216         -         -         -         977   

VSK Holdings, Ltd.

                        

Class B Preferred Shares

     2,597         -         -        2,456        5,053         -         -         -         -   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 203,272       $ 61,589       $ (27   $ (48,031   $ 216,803       $ -       $ 12,332       $ -       $ 977   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

*** Includes payment-in-kind interest income.

 

(n) The interest rate on these investments is subject to the base rate of 3-Month EURIBOR, which at September 30, 2015 was 0.04%. The current base rate for each investment may be different from the reference rate on September 30, 2015.

 

(o) Investment was on non-accrual status as of September 30, 2015.

 

(p) The Interest rate on these investments is subject to the base rate of 2-Month LIBOR, which at September 30, 2015 was 0.26%. The current base rate for each investment may be different from the reference rate on September 30, 2015.

 

(q) The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at September 30, 2015 was 0.53%. The current base rate for each investment may be different from the reference rate on September 30, 2015.

 

See notes to condensed consolidated financial statements.

 

21


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

(r) The interest rate on these investments is subject to the base rate of 3-Month GBP LIBOR, which at September 30, 2015 was 0.58%. The current base rate for each investment may be different from thereference rate on September 30, 2015.

 

(s) The interest rate on these investments is subject to the base rate of 1-Month GBP LIBOR, which at September 30, 2015 was 0.51%. The current base rate for each investment may be different from the reference rate on September 30, 2015.

 

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

 

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

 

(v) Controlled investment as defined by the 1940 Act, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled investments at September 30, 2015 represented 5.7% of the Company’s net assets. Fair value as of December 31, 2014 and September 30, 2015 along with transactions during the nine months ended September 30, 2015 in these controlled investments were as follows (amounts in thousands):

 

            Nine Months Ended September 30, 2015            Nine Months Ended September 30, 2015  

Controlled Investments

   Fair Value at
December 31,
2014
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
     Net
Unrealized
Gain (Loss)
    Fair Value at
September 30,
2015
     Net
Realized
Gain (Loss)
     Interest
Income
     Fee
Income
     Dividend
Income
 

Comet Aircraft S.A.R.L

                         

Common Shares

   $ —         $ 50,000       $ —         $ 2,479      $ 52,479       $ —         $ —         $ —         $ 3,588   

Guardian Investors, LLC, Membership Interest

     —           36,292         —           (287     36,005         —           —           —           —     

Innovating Partners, LLC, Membership Interest

     —           47,796         —           1,112        48,908         —           —           —           1,348   

KKR BPT Holdings Aggregator, LLC, Membership Interest

     5,500         2,000         —           (1,725     5,775         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 5,500       $ 136,088       $ —         $ 1,579      $ 143,167       $ —         $ —         $ —         $ 4,936   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

(w) 7-day effective yield as of September 30, 2015.

 

(x) As of September 30, 2015, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $38,106; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $241,926; the net unrealized depreciation was $203,820; the aggregate cost of securities for Federal income tax purposes was $3,683,573.

 

See notes to condensed consolidated financial statements.

 

22


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Condensed Consolidated Schedule of Investments (unaudited) (continued)

As of September 30, 2015

(in thousands, except share amounts)

 

Abbreviations:

AUD - Australian Dollar; local currency investment amount is denominated in Australian Dollar. A$1 / US $0.702 as of September 30, 2015.

EUR - Euro; local currency investment amount is denominated in Euros. €1 / US $1.117 as of September 30, 2015.

GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1 / US $1.513 as of September 30, 2015.

SEK - Swedish Krona; local currency investment amount is denominated in Swedish Kronor. SEK1 / US $0.119 as of September 30, 2015.

AU - Australia

CA - Canada

FR - France

IE - Ireland

KY - Cayman Islands

LU - Luxembourg

NL - The Netherlands

SG - Singapore

SE - Sweden

UK - United Kingdom

VG - British Virgin Islands

E = EURIBOR - Euro Interbank Offered Rate

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

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

 

See notes to condensed consolidated financial statements.

 

23


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments

As of December 31, 2014

(in thousands, except share amounts)

 


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

Senior Secured Loans—First Lien—52.6%

  

ABILITY Network, Inc.

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

Algeco/Scotsman (LU)

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

AltEn, LLC

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

American Freight, Inc.

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

Amtek Global Technology Pte. Ltd. (SG)

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

Applied Systems, Inc.

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

Aspen Dental Management, Inc.

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

BeyondTrust Software, Inc.

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

BRG Sports, Inc.

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

Caesars Entertainment Operating Co., Inc.

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

California Pizza Kitchen, Inc.

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

Charlotte Russe, Inc.

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

CityCenter Holdings, LLC

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

David’s Bridal, Inc.

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

Distribution International, Inc.

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

See notes to condensed consolidated financial statements.

 

24


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

Emerald Performance Materials, LLC

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

Football Association of Ireland (IE)

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

Greenway Medical Technologies

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

Greystone & Co., Inc.

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

Grocery Outlet, Inc.

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

Gymboree Corp.

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

Harbor Freight Tools USA, Inc.

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

Hillman Group, Inc.

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

iPayment, Inc.

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

J. Jill

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

Jacuzzi Brands, Inc.

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

Jacuzzi Brands, Inc. (LU)

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

KeyPoint Government Solutions, Inc.

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

Keystone Australia Holdings, Pty. Ltd. (AU)

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

Kurt Geiger Ltd. (UK)

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

Marshall Retail Group, LLC

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

 

See notes to condensed consolidated financial statements.

 

25


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

MCS AMS Sub-Holdings, LLC

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

MSX International, Inc.

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

Neiman Marcus Group, LLC

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

New Enterprise Stone & Lime Co., Inc.

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

Nine West Holdings, Inc.

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

OpenLink Financial, Inc.

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

Pacific Union Financial, LLC

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

Petroplex Acidizing, Inc.

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

RedPrairie Corp.

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

Surgery Center Holdings, Inc.

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

Sutherland Global Services, Inc.

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

TIBCO Software, Inc.

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

Towergate Finance PLC (UK)

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

Travelport, LLC (LU)

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

Tweddle Group, Inc.

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

Varsity Brands, Inc.

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

 

See notes to condensed consolidated financial statements.

 

26


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

Waste Pro USA, Inc.

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

Willbros Group, Inc.

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

Wilton Brands, LLC

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

Z Gallerie, Inc.

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

Zayo Group, LLC

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

Total Senior Secured Loans—First Lien

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

 

 

     

 

 

 

Senior Secured Loans—Second Lien—39.3%

                                                                        

American Casino & Entertainment Properties, LLC

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

Angelica Corp.

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

Applied Systems, Inc.

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

Arysta Lifescience SPC, LLC

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

AssuredPartners, Inc.

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

Brake Bros Ltd. (UK)

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

BRG Sports, Inc.

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

Catalina Marketing Corp.

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

CHG Companies, Inc.

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

CRC Health Group, Inc.

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

 

See notes to condensed consolidated financial statements.

 

27


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

CTI Foods Holding Co., LLC

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

Emerald Performance Materials, LLC

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

Excelitas Technologies Corp.

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

Greenway Medical Technologies

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

Grocery Outlet, Inc.

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

Gruppo Argenta S.p.A. (LU)

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

Gypsum Management & Supply, Inc.

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

Integra Telecom Holdings, Inc.

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

iParadigms Holdings, LLC

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

Learfield Communications, Inc.

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

Lightower Fiber, LLC

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

Maxim Crane, LP

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

Misys Ltd. (UK)

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

NewWave Communications

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

P2 Energy Solutions, Inc.

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

 

See notes to condensed consolidated financial statements.

 

28


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

Polyconcept Finance B.V. (NL)

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

Progressive Solutions

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

RedPrairie Corp.

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

Sabine Oil & Gas, LLC

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

SafeNet, Inc.

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

Safety Technology Holdings, Inc.

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

SI Organization, Inc.

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

Talbots, Inc.

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

The TelX Group, Inc.

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

Websense, Inc.

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

Total Senior Secured Loans—Second Lien

  

  $                858,829      $          843,957   
                

 

 

     

 

 

 

Senior Secured Bonds—6.9%

                                                                        

Artesyn Technologies, Inc.

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

Guitar Center, Inc.

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

Hot Topic, Inc.

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

Louisiana Public Facilities Authority

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

 

See notes to condensed consolidated financial statements.

 

29


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

New Enterprise Stone & Lime Co., Inc.

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

OAG Holdings, LLC

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

Ryerson, Inc.

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

SquareTwo Financial Corp.

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

Towergate Finance PLC (UK)

   (g)(h)(m)(o)(p)

(GBP)

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

Total Senior Secured Bonds

               $          154,125      $          147,817   
                

 

 

     

 

 

 

Total Senior Debt

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

 

 

     

 

 

 

Subordinated Debt—20.2%

                                                                    

24 Hour Fitness Worldwide, Inc.

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

Cemex Materials, LLC

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

Cequel Communications Holdings, LLC

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

Ceridian Corp.

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

CHS/Community Health Systems, Inc.

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

Datatel, Inc.

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

Eagle Midco, Inc.

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

Education Management Corp.

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

 

See notes to condensed consolidated financial statements.

 

30


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

Essar Steel Algoma, Inc. (CA)

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

GCI, Inc.

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

Global Closure Systems (FR)

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

Gruppo Argenta S.p.A. (LU)

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

Hilding Anders (SE)

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

Hillman Group, Inc.

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

Hot Topic, Inc.

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

iPayment, Inc.

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

JC Penney Corp., Inc.

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

Pharmaceutical Product Development, Inc.

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

Stuart Weitzman, Inc.

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

Summit Materials, LLC

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

The TelX Group, Inc.

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

TIBCO Software, Inc.

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

 

See notes to condensed consolidated financial statements.

 

31


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

Towergate Finance PLC (UK)

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

Total Subordinated Debt

               $          459,004      $          433,755   
                

 

 

     

 

 

 

Structured Products—1.7%

                                                                    

KKR BPT Holdings Aggregator, LLC

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

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

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

VSK Holdings, Ltd. (KY)

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

Total Structured Products

               $          33,721      $          36,421   
                

 

 

     

 

 

 

Equity / Other—6.1%

                                                                    

AltEn, LLC, Membership Units

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

Cengage Learning Holdings II, LP, Common Stock

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

Excelitas Technologies Corp., Class A Membership Interest

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

Genesys Telecommunications Laboratories, Inc., Common Stock

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

Global Closure Systems (FR), Limited Partnership Interest

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

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

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

Hilding Anders (SE), Class A Common Stock

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

Hilding Anders (SE), Class B Common Stock

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

Hilding Anders (SE), Equity Options

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

 

See notes to condensed consolidated financial statements.

 

32


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

Home Partners of America, Inc., Common Stock

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

Home Partners of America, Inc., Warrant Delivery Rights

   (k)(r)*             1,968          32          32   

Home Partners of America, Inc., Warrants

   (k)(r)*                         707                77                78   

iPayment, Inc. Common Stock

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

Jones Apparel Group Holdings, Inc., Common Stock

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

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

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

Kurt Geiger Ltd. (UK), Common Stock

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

Nine West Holdings, Inc., Common Stock

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

OAG Holdings, LLC, Overriding Royalty Interest

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

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

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

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

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

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

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

Stuart Weitzman, Inc., Common Stock

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

Total Equity / Other

               $          129,658      $          130,377   
                

 

 

     

 

 

 

Total Investments, excluding Short Term Investments—126.8%

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

 

 

     

 

 

 

Short Term Investments—0.0%

                                                                

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

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

 

See notes to condensed consolidated financial statements.

 

33


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 


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

State Street Institutional Liquid Reserves Fund, Institutional Class

   (t)           0.06                   45,440       $           45       $           45   

Total Short Term Investments

                    $           629       $           629   
                      

 

 

       

 

 

 

TOTAL INVESTMENTS — 126.8%(u)

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

 

 

       

 

 

 

LIABILITIES IN EXCESS OF OTHER ASSETS—(26.8%)

                         (575,379

NET ASSETS—100.0%

                    $                 2,145,821   

Collateral on Deposit with Custodian—5.4%

                                                                            

Bank of Nova Scotia—Certificate of Deposit

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

Total Collateral on Deposit with Custodian

                    $           115,700       $           115,700   
                      

 

 

       

 

 

 

Derivative Instruments (Note 4)—1.7%

                                                                            

Foreign currency forward contracts

   (h)(k)                  $                      40,445   

Total return swaps

   (h)(k)                                        $                            (3,445

Total Derivative Instruments

                    $                 $           37,000   
                      

 

 

       

 

 

 

 

* Non-income producing security.

 

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

 

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

 

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

 

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

 

See notes to condensed consolidated financial statements.

 

34


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

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

 

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

 

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

 

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

 

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

 

              Year Ended December 31, 2014                          

PIK Security Name

  Local
Currency
  Local Par
as of
December 31,
2013
    Local Par
Additions
    Local Par
Capitalized
PIK
    Local Par
Reductions
    Local Par
as of
December 31,
2014
    Total
Current
Interest
Rate
    Currant
PIK
Rate
    Maximum
Current
PIK Rate
 

Algeco/Scotsman - 15.75% PIK

  USD     26,464               4,395               30,859        15.75     15.75     15.75

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

  GBP     8,650               262               8,912        L + 625     3.00     3.00

Datatel, Inc. - 9.63%

  USD     9,287                             9,287        9.63     0.00     10.38

Eagle Midco, Inc. - 9.00%

  USD     39,815        31,796               (39,815     31,796        9.00     0.00     9.75

Education Management, LLC - 15.00%, 1.00% PIK

  USD     1,299                      (1,299            N/A        N/A        N/A   

Education Management, LLC - 16.00% PIK

  USD            1,299        104               1,403        16.00     16.00     16.00

Essar Steel Algoma, Inc. - 14.00% PIK

  USD            4,570                      4,570        14.00     14.00     14.00

Excelitas Technologies Corp. - L + 975, 1.50% PIK

  USD     107,355               1,642               108,997        L + 1125        1.50     1.50

Global Closure Systems - 13.00% PIK

  EUR     17,828               2,393               20,221        13.00     13.00     13.00

Griffins Foods, Ltd. - 13.75% PIK

  NZD     47,417               5,601        (53,018            N/A        N/A        N/A   

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

  EUR            635        49               684        15.00     15.00     15.00

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

  EUR            21,459        1,295               22,754        12.00     12.00     12.00

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

  EUR            3,205                      3,205        12.00     12.00     12.00

Hilding Anders - 18.00% PIK

  EUR            7,046        1,285               8,331        18.00     18.00     18.00

Hilding Anders - 13.00% PIK

  EUR     81,478               11,093               92,571        13.00     13.00     13.00

Hilding Anders - 12.00% PIK

  EUR            15,739        1,914               17,653        12.00     12.00     12.00

Hot Topic, Inc. - 12.00%

  USD     8,113                             8,113        12.00     12.00     12.75

Keystone Australia Holdings, Pty. Ltd. - 7.00%, 8.00% PIK

  AUD            36,858        1,196               38,054        15.00     8.00     8.00

Kurt Geiger Ltd. - 10.00%, 1.00% PIK

  GBP            46,625        237               46,862        11.00     1.00     1.00

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

  USD     10,071               770               10,841        13.00     7.00     11.00

OAG Holdings, LLC - 8.00%, 2.00% PIK

  USD     20,008               409               20,417        10.00     2.00     2.00

Pharmaceutical Product Development, Inc. - 9.38%

  USD            5,151                      5,151        9.38     0.00     10.13

Stuart Weitzman, Inc. - 11.50%

  USD            56,918                      56,918        11.50     0.00     12.50

The TelX Group, Inc. - 13.50% PIK

  USD            3,142        315               3,457        13.50     13.50     13.50

 

See notes to condensed consolidated financial statements.

 

35


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

(j) The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2014 was 0.17%. The current base rate for each investment may be different from the reference rate on December 31, 2014.

 

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

 

(l) Position or portion thereof unsettled as of December 31, 2014.

 

(m) Investment was on non-accrual status as of December 31, 2014.

 

(n) The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at December 31, 2014 was 0.36%. The current base rate for each investment may be different from the reference rate on December 31, 2014.

 

(o) The interest rate on these investments is subject to the base rate of 3-Month GBP LIBOR, which at December 31, 2014 was 0.56%. The current base rate for each investment may be different from the reference rate on December 31, 2014.

 

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

 

(q) Security or portion thereof was held within Paris Funding, LLC and was pledged as collateral supporting the amounts outstanding under the committed facility agreement with BNP Paribas Prime Brokerage, Inc. as of December 31, 2014 and was eligible to be hypothecated as allowed under Rule 15c2-1(a)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) subject to the limits of the Rehypothecation Agreement.

 

See notes to condensed consolidated financial statements.

 

36


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

(r) Affiliated investment as defined by the 1940 Act, whereby the Company owns between 5% and 25% of the portfolio company’s outstanding voting securities and the investments are not classified as controlled investments. The aggregate fair value of non-controlled, affiliated investments at December 31, 2014 represented 9.5% of the Company’s net assets. Fair value as of December 31, 2013 and December 31, 2014 along with transactions during the year ended December 31, 2014 in affiliated investments were as follows (amounts in thousands):

 

            Year Ended December 31, 2014            Year Ended December 31, 2014  

Non-controlled, Affiliated
Investments

   Fair Value at
December 31,
2013
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
    Net
Unrealized
Gain (Loss)
    Fair Value at
December 31,
2014
     Net
Realized
Gain (Loss)
     Interest
Income
     Fee
Income
     Dividend
Income
 

AltEn, LLC

                     

Common Stock

   $ -       $ 2,955       $ -      $ (168   $ 2,787       $ -       $ -       $ -       $ -   

Term Loan

        26,825           (1,033     25,792         -         913         592         -   

Hilding Anders

                     

Subordinated Debt

     -         120,289         -        (9,316     110,973         -         12,298         -         -   

Class A Common Stock

     -         132         -        125        257         -         -         -         -   

Class B Common Stock

     -         25         -        23        48         -         -         -         -   

Equity Options

     -         14,988         -        (3,264     11,724         -         -         -         -   

Home Partners of America, Inc.

                     

Common Stock

     -         21,941         -        282        22,223         -         -         -         -   

Warrants

     -         77         -        1        78         -         -         -         -   

Warrants Delivery Rights

     -         32         -        -        32         -         -         -         -   

Orchard Marine, Ltd.

                     

Class B Common Stock

     -         3,069         -        (68     3,001         -         -         -         -   

Series A Preferred Stock

     -         23,592         -        168        23,760         -         -         -         511   

VSK Holdings, Ltd.

                     

Structured Product

     21,481         -         (21,474     2,590        2,597         -         -         -         2,643   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 21,481       $ 213,925       $ (21,474   $ (10,660   $ 203,272       $  -       $ 13,211       $ 592       $ 3,154   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

See notes to condensed consolidated financial statements.

 

37


Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

(s) Controlled investment as defined by the 1940 Act, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities or maintains the ability to nominate greater than 50% of the board representation. The aggregate fair value of controlled at December 31, 2014 represented 0.3% of the Company’s net assets. Fair value as of December 31, 2013 and 2014 along with transactions during the year ended December 31, 2014 in controlled investments were as follows (amounts in thousands):

 

            Year Ended December 31, 2014             Year Ended December 31, 2014  

Controlled Investments

   Fair Value at
December 31,
2013
     Gross
Additions
(Cost)*
     Gross
Reductions
(Cost)**
     Net
Unrealized
Gain (Loss)
     Fair Value at
December 31,

2014
     Net
Realized
Gain (Loss)
     Interest
Income
     Fee
Income
     Dividend
Income
 

KKR BPT Holdings Aggregator, LLC Structured Product

   $ 2,500       $ 3,000       $ —         $ —         $ 5,500       $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Totals

   $ 2,500       $ 3,000       $ —         $ —         $ 5,500       $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

(t) 7-day effective yield as of December 31, 2014.

 

(u) As of December 31, 2014, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $39,298; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $106,618; the net unrealized depreciation was $67,320; the aggregate cost of securities for Federal income tax purposes was $2,788,521.

 

(v) The interest rate on these investments is subject to a base rate of 3-Month EURIBOR LIBOR, which at December 31, 2014 was 0.08%. The current base rate for each investment may be different from the reference rate on December 31, 2014.

Abbreviations:

AUD - Australian Dollar; local currency investment amount is denominated in Australian Dollar. A$1 / US $0.816 as of December 31, 2014.

EUR - Euro; local currency investment amount is denominated in Euros. €1 / US $1.210 as of December 31, 2014.

GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1 / US $1.559 as of December 31, 2014.

SEK - Swedish Krona; local currency investment amount is denominated in Swedish Kronas. SEK1 / US $0.128 as of December 31, 2014.

AU - Australia

CA - Canada

FR - France

IE - Ireland

KY - Cayman Islands

LU - Luxembourg

NL - The Netherlands

 

See notes to condensed consolidated financial statements.

 

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Table of Contents

Corporate Capital Trust, Inc. and Subsidiaries

Consolidated Schedule of Investments (continued)

As of December 31, 2014

(in thousands, except share amounts)

 

SE - Sweden

SG - Singapore

UK - United Kingdom

VG - British Virgin Islands

E = EURIBOR – Euro Interbank Offered Rate

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

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

 

See notes to condensed consolidated financial statements.

 

39


Table of Contents

CORPORATE CAPITAL TRUST, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

1.         Principal Business and Organization

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

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

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

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

As of September 30, 2015, the Company had various wholly owned subsidiaries including, among others, (i) CCT Funding LLC (“CCT Funding”) and Paris Funding LLC (“Paris Funding”), special purpose financing subsidiaries organized for the purpose of arranging secured debt financing with banks and borrowing money to invest in portfolio companies, (ii) Halifax Funding LLC (“Halifax Funding”), a special purpose financing subsidiary organized to enter into total return swaps (“TRS”) and (iii) FCF LLC and CCT Holdings LLC, taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for federal income tax purposes and were organized to hold certain equity securities of portfolio companies organized as pass-through entities for U.S. tax purposes.

2.         Significant Accounting Policies

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

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

 

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Table of Contents

2.         Significant Accounting Policies (continued)

 

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

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

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

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

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

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

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

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

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

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

 

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Table of Contents

2.        Significant Accounting Policies (continued)

 

The Company and the board of directors conduct its fair value determination process on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been determined had a readily available market value existed for such investments, and the differences could be material. Further, such investments are generally less liquid than publicly traded securities. If the Company was required to liquidate a portfolio investment that does not have a readily available market value in a forced or liquidation sale, the Company could realize significantly less than the value recorded by the Company.

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

 

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

 

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

 

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

 

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

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

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

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

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

 

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Table of Contents

2.         Significant Accounting Policies (continued)

 

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

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

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

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

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

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

 

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2.         Significant Accounting Policies (continued)

 

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

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

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

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

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

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

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

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

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

 

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2.         Significant Accounting Policies (continued)

 

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

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

Management Fees - The Company incurs a base management fee (recorded as investment advisory fees) and performance-based incentive fees, including (i) a subordinated incentive fee on income and (ii) an incentive fee on capital gains, due to its Advisors pursuant to an investment advisory agreement described in Note 6. “Related Party Transactions.” The two components of performance-based incentive fees are combined and expensed in the condensed consolidated statements of operations and accrued in the condensed consolidated statements of assets and liabilities as accrued performance-based incentive fees. Pursuant to the terms of the investment advisory agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory agreement) based on the Company’s realized capital gains on a cumulative basis from inception, net of all realized capital losses on a cumulative basis and unrealized depreciation at year end, less the aggregate amount of any previously paid capital gains incentive fees. Although the terms of the investment advisory agreement do not provide for the inclusion of unrealized gains in the calculation of the incentive fee on capital gains, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the incentive fee on capital gains expense and related accrued incentive fee on capital gains. This accrual reflects the incentive fees that would be payable to the Advisors if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though the Advisors are not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

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

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

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

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

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

 

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2.         Significant Accounting Policies (continued)

 

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

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

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

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

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

Recent Accounting Pronouncements - In February 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis,” which requires amendments to both the variable interest entity (“VIE”) and voting models. The amendments (i) modify the identification of variable interests (fees paid to a decision maker or service provider), the VIE characteristics for a limited partnership or similar entity and primary beneficiary determination under the VIE model, and (ii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The amendments may be applied using either a modified retrospective or full retrospective approach. The Company has determined that it will not early adopt this ASU and is currently evaluating the effect the guidance will have on its consolidated financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which requires that loan costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts or premiums. The new guidance is effective for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2015 with early adoption permitted. The ASU is to be applied retrospectively for each period presented. Upon adoption, an entity is required to comply with the applicable disclosures for a change in an accounting principle. The FASB subsequently issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which clarifies that, given the absence of authoritative guidance in ASU 2015-03 regarding presentation and subsequent measurement of loan costs related to line-of-credit arrangements, the SEC Staff would not object to an entity deferring and presenting loan costs as an asset and subsequently amortizing the loan costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company has determined that it will not early adopt this ASU and is currently evaluating the effect the amendments will have on its consolidated financial position, results of operations or cash flows.

 

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3.          Investments

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

As of September 30, 2015 and December 31, 2014, the Company’s investment portfolio consisted of the following (in thousands):

 

     As of September 30, 2015  
Asset Category    Amortized
Cost
     Fair Value      Percentage of
Investment
Portfolio
     Percentage of
Net Assets
 

Senior Debt

           

Senior secured loans – first lien

     $ 1,432,693          $   1,344,526          39.4%           53.2%     

Senior secured loans – second lien

     1,004,624          981,716          28.8              38.9        

Senior secured bonds

     228,331          203,378          5.9              8.1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

     2,665,648          2,529,620          74.1              100.2        

Subordinated debt

     531,580          483,976          14.2              19.2        

Structured products

     85,721          91,669          2.7              3.5        

Equity/Other

     331,742          305,606          9.0              12.1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     3,614,691          3,410,871                      100.0%                      135.0%     
        

 

 

    

Short term investments

     68,882          68,882             2.7        
  

 

 

    

 

 

       

 

 

 

Total investments

     $ 3,683,573          $ 3,479,753             137.7%    
  

 

 

    

 

 

       

 

 

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

Senior Debt

           

Senior secured loans – first lien

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

Senior secured loans – second lien

     858,829          843,957          31.0              39.3        

Senior secured bonds

     154,125          147,817          5.4              6.9        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

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

Subordinated debt

     459,004          433,755          16.0              20.2        

Structured products

     33,721          36,421          1.3              1.7        

Equity/Other

     129,658          130,377          4.8              6.1        
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

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

 

 

    

Short term investments

     629          629             —        
  

 

 

    

 

 

       

 

 

 

Total investments

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

 

 

    

 

 

       

 

 

 

As of September 30, 2015, debt investments on nonaccrual status represented 1.4% and 0.5% of total investments on an amortized cost basis and fair value basis, respectively. As of December 31, 2014, debt investments on nonaccrual status represented 1.0% and 0.4% of total investments on an amortized cost basis and fair value basis, respectively.

 

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3.         Investments (continued)

 

The industry composition, geographic dispersion, and local currencies of the Company’s investment portfolio as a percentage of total fair value of the Company’s investments, excluding short term investments and derivative instruments, as of September 30, 2015 and December 31, 2014 were as follows:

 

Industry Composition

   September 30, 2015      December 31, 2014  

Capital Goods

     13.8%            8.3%      

Software & Services

     13.2               14.5         

Consumer Durables & Apparel

     10.7               16.8         

Diversified Financials

     7.7               5.1         

Retailing

     6.2               8.0         

Automobiles & Components

     5.5               4.3         

Technology Hardware & Equipment

     5.4               6.7         

Energy

     5.2               8.3         

Commercial & Professional Services

     5.0               2.2         

Health Care Equipment & Services

     4.0               6.9         

Materials

     3.6               3.5         

Telecommunication Services

     3.4               3.0         

Food & Staples Retailing

     3.2               2.7         

Transportation

     3.2               2.3         

Media

     2.6               1.6         

Real Estate

     2.0               1.0         

Food, Beverage & Tobacco

     1.9               1.4         

Pharmaceutical, Biotechnology & Life Science

     1.6               0.2         

Consumer Services

     0.9               1.8         

Remaining Industries

     0.9               1.4         
  

 

 

    

 

 

 

Total

                                              100.0%           100.0%     
  

 

 

    

 

 

 

Geographic Dispersion (1)

     

United States

     78.8%            77.3%      

Singapore

     4.2               2.7         

Luxembourg

     3.4               3.7         

United Kingdom

     3.1               3.8         

Sweden

     2.7               4.5         

Ireland

     2.7               2.0         

Netherlands

     1.4               1.7         

British Virgin Islands

     1.2               1.0         

Cayman Islands

     1.0               1.1         

Remaining Countries

     1.5               2.2         
  

 

 

    

 

 

 

Total

                                              100.0%                                                    100.0%     
  

 

 

    

 

 

 

Local Currency

     

U.S. Dollar

     85.1%            84.0%      

Euro

     10.3               11.0         

British Pound Sterling

     4.0               3.5         

Australian Dollar

     0.6               1.1         

Swedish Krona

     —               0.4         
  

 

 

    

 

 

 

Total

                                                  100.0%           100.0%     
  

 

 

    

 

 

 

 

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

 

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4.         Derivative Instruments

The following is a summary of the fair value and location of the Company’s derivative instruments in the condensed consolidated statements of assets and liabilities held as of September 30, 2015 and December 31, 2014 (in thousands):

 

          Fair Value  

Derivative Instrument                    

  

Statement Location                

   September 30, 2015     December 31, 2014  

Cross currency swaps

   Unrealized appreciation on derivative instruments      $       1,531        $   

Cross currency swaps

   Unrealized depreciation on derivative instruments      (1,229       

Foreign currency forward contracts

   Unrealized appreciation on derivative instruments      386              40,903   

Foreign currency forward contracts

   Unrealized depreciation on derivative instruments             (458

TRS

   Unrealized depreciation on derivative instruments      (2,447     (3,445
     

 

 

   

 

 

 

Total

     $ (1,759     $ 37,000   
     

 

 

   

 

 

 

Net realized and unrealized gains and losses on derivative instruments recorded by the Company for the three and nine months ended September 30, 2015 and 2014 are in the following locations in the condensed consolidated statements of operations (in thousands):

 

          Net Realized Gain (Loss)  
          Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Derivative Instrument

  

Statement Location

   2015      2014      2015      2014  

Cross currency swaps

   Net realized gain on derivative instruments      $ 249          $ —          $ 249          $ —    

Foreign currency forward contracts

   Net realized gains (losses) on derivative instruments              47,021          (1,486)         71,081          (4,658)   

TRS

   Net realized gains on derivative instruments      4,090                      938                    9,603                    3,332    
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        $ 51,360          $ (548)         $ 80,933          $ (1,326)   
     

 

 

    

 

 

    

 

 

    

 

 

 
          Net Unrealized Gain (Loss)  
          Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Derivative Instrument

  

Statement Location

   2015      2014      2015      2014  

Cross currency swaps

   Net change in unrealized appreciation on derivative instruments      $ 302          $ —          $ 302          $ —    

Foreign currency forward contracts

   Net change in unrealized appreciation (depreciation) on derivative instruments      (42,016)         32,950          (40,059)         31,019    

TRS

   Net change in unrealized appreciation (depreciation) on derivative instruments      (3,636)         (1,510)         998          (2,880)   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total

        $ (45,350)         $ 31,440          $ (38,759)         $ 28,139    
     

 

 

    

 

 

    

 

 

    

 

 

 

Offsetting of Derivative Instruments

The Company has derivative instruments that are subject to master netting agreements. These agreements include provisions to offset positions with the same counterparty in the event of default by one of the parties. The Company’s unrealized appreciation and depreciation on derivative instruments are reported as gross assets and liabilities, respectively, in the condensed consolidated statements of assets and liabilities. The following tables present the Company’s assets and liabilities related to derivatives by counterparty, net of amounts available for offset under a master netting arrangement and net of any collateral received or pledged by the Company for such assets and liabilities as of September 30, 2015.

 

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4.         Derivative Instruments (continued)

 

Counterparty

   Derivative
Assets Subject to
Master Netting
Agreement
     Derivatives
Available
for Offset
     Non-cash
Collateral
Received (1)
     Cash
Collateral
Received (1)
     Net
Amount of
Derivative
Assets (2)
 

J.P. Morgan Chase Bank

     $ 1,917         $ —           $ —           $ —           $ 1,917     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $         1,917         $         —           $         —           $         —           $         1,917     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Counterparty

   Derivative
Liabilities
Subject to
Master Netting
Agreement
     Derivatives
Available
for Offset
     Non-cash
Collateral
Received (1)
     Cash
Collateral
Received (1)
     Net
Amount of
Derivative
Liabilities (2)
 

Bank of Nova Scotia

     $ 2,447           $ —           $ —           $ 2,447           $ —     

J.P. Morgan Chase Bank

     1,229           —           —           —           1,229     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $         3,676           $         —           $         —           $         2,447           $         1,229     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Foreign Currency Forward Contracts and Cross Currency Swaps:

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

As of September 30, 2015 and December 31, 2014, the Company’s open foreign currency forward contracts were as follows (in thousands):

 

     September 30, 2015  

Foreign Currency

   Settlement Date    Counterparty      Amount and
Transaction
     US$ Value at
Settlement Date
     US$ Value at
September 30, 2015
     Unrealized
Appreciation
(Depreciation)
 

AUD

   Apr 7, 2016      JP Morgan Chase Bank       A$         17,726 Sold         $ 12,439         $ 12,327         $ 112   

EUR

   Jan 11, 2016      JP Morgan Chase Bank       50,485 Sold         56,584         56,517         67   

GBP

   Jan 11, 2016      JP Morgan Chase Bank       £ 8,953 Sold         13,746         13,539         207   
           

 

 

    

 

 

    

 

 

 

Total

              $         82,769         $         82,383         $         386   
           

 

 

    

 

 

    

 

 

 

 

50


Table of Contents

4.         Derivative Instruments (continued)

 

December 31, 2014  

Foreign
Currency

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

AUD

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

EUR

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

GBP

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

GBP

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

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

 

The Company entered into three cross currency swaps with a total notional amount of $455.75 million during the nine months ended September 30, 2015. Cross currency swaps are interest rate swaps in which interest cash flows are exchanged between two parties based on the notional amounts of two different currencies. These swaps are marked-to-market by recognizing the difference between the present value of cash flows of each leg of the swap as unrealized appreciation or depreciation. Realized gain or loss is recognized when periodic payments are received or paid and when the swaps are terminated. The entire notional value of a cross currency swap is subject to the risk that the counterparty to the swap will default on its contractual delivery obligations. The Company attempts to limit counterparty risk by only dealing with well-known counterparties.

As of September 30, 2015, the Company’s open cross currency swaps were as follows ($ in thousands). The Company did not have any cross currency swaps at December 31, 2014.

 

Counterparty

  

Company Receives

Fixed Rate

  

Company Pays

Fixed Rate

   Termination
Date
     Unrealized
Appreciation
(Depreciation)
 

JPMorgan Chase Bank, N.A.

  

0.300% on USD notional

amount of $9,342

   1.975% on AUD notional amount of $13,161      June 30, 2017         $ 55     

JPMorgan Chase Bank, N.A

  

0.759% on USD notional

amount of $316,351

   0.026% on EUR notional amount of $282,962      December 31, 2017         $ (1,229)    

JPMorgan Chase Bank, N.A

  

0.590% on USD notional

amount of $130,061

   1.006% on GBP notional amount of $84,637      December 31, 2017         $ 1,476     
           

 

 

 
              $ 302     
           

 

 

 

As of September 30, 2015, the combined contractual notional balance of the Company’s foreign currency forward contracts and cross currency swaps totaled $538.52 million, all of which related to economic hedging of the Company’s foreign currency denominated debt investments. The table below displays the Company’s foreign currency denominated debt investments and foreign currency forward contracts, summarized by foreign currency type (in thousands).

 

     Debt Investments Denominated in Foreign Currencies      Hedges  
     As of September 30, 2015      As of September 30, 2015  

Foreign Currency

   Par Value in Local
Currency
     Par Value in
US$
     Fair Value      Foreign Currency
Hedge Amount in
Local Currency
     Foreign
Currency Hedge
Amount in U.S.
Dollars
 

AUD

   A$   31,021         $ 21,773         $ 21,518       A$   30,887         $ 21,781   

EUR

   353,087         394,539         331,455       333,447         372,935   

GBP

   £ 83,222         125,894         125,697       £ 93,590         143,807   
     

 

 

    

 

 

       

 

 

 

Total

        $     542,206         $         478,670            $         538,523   
     

 

 

    

 

 

       

 

 

 

 

51


Table of Contents
4.       Derivative Instruments (continued)

 

Equity Options and Warrants:

The Company holds equity options and warrants in certain portfolio companies in an effort to achieve additional investment returns. In holding equity options and warrants, the Company bears the risk of an unfavorable change in the value of the underlying equity interests. Equity options and warrants are recorded as investments at fair value in the condensed consolidated statements of assets and liabilities. The aggregate fair value of equity options and warrants included in investments at fair value in the Company’s condensed consolidated statements of assets and liabilities as of September 30, 2015 and December 31, 2014 represented 0.5% and 1.2%, respectively, of the Company’s net assets.

Below is a summary of the Company’s investments in equity options and warrants as of September 30, 2015 (in thousands, except share amounts):

 

Company

   Expiration
Date
    No. Shares      Cost      Fair Value  

Amtek Global Technology Pte. Ltd. (SG), Warrants

     12/31/2017        9,991        $ 4,636        $ 4,701   

Amtek Global Technology Pte. Ltd. (SG), Warrants

     12/31/2018        9,991         4,785         4,863   

Education Management Corp., Warrants

     1/5/2022        2,320,791         371         —     

Gruppo Argenta S.p.A., Warrants

     (1)        225,289         5,342         2,312   

Hilding Anders, Equity Options

     12/31/2020        236,160,807         14,988         —     

Home Partners of America, Inc., Warrant Delivery Rights

     (1)        322         5         5   

Home Partners of America, Inc., Warrants

     8/7/2024        2,353         257         230   

Keystone Australia Holdings, Pty. Ltd., Warrants

     (1)        1,588,469         1,019         81   
       

 

 

    

 

 

 

Total

         $         31,403        $         12,192   
       

 

 

    

 

 

 

 

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

The Company may enter into other derivative instruments and incur other exposures with other counterparties in the future. The derivative instruments held as of September 30, 2015 and December 31, 2014 generally reflect the volume of derivative activity throughout the periods presented.

Total Return Swaps:

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

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

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

The obligations of Halifax Funding under the TRS agreements are nonrecourse to the Company and the Company’s exposure to the TRS is limited to its equity in Halifax Funding, which is generally equal to the collateral posted by Halifax Funding. The Company has no contractual obligation to post any collateral or to pay any financing charges to BNS. The Company may, but is not obligated to, increase its equity investment in Halifax Funding for the purpose of funding additional collateral or payment obligations for which Halifax Funding may become obligated during the term of the TRS agreements. If the Company does not make any such additional equity investment in Halifax Funding and Halifax Funding fails to meet its obligations under the TRS agreements, then BNS will have the right to terminate the TRS agreements and use the collateral posted by Halifax Funding with the custodian to offset any amount

 

52


Table of Contents
4.       Derivative Instruments (continued)

 

owed to BNS. Halifax Funding may terminate the TRS agreements at any time upon providing at least 30 days’ notice prior to the proposed settlement date of the TRS assets related to such termination. In the absence of an early termination, the TRS will terminate on January 15, 2016. In the event of an early termination of the TRS, Halifax Funding may be required to pay a make-whole fee based on a minimum spread amount to be earned by BNS over the life of the TRS agreements. Halifax Funding would have been required to pay a make-whole fee of $2.69 million if the TRS had been terminated as of September 30, 2015.

As of September 30, 2015 and December 31, 2014, Halifax Funding had selected 53 and 49 underlying debt positions, respectively, and had posted $142.64 million and $115.70 million, respectively, in collateral, which are recorded as collateral on deposit with custodian in the condensed consolidated statements of assets and liabilities. The following table reconciles the TRS settled notional amount, upon which the financing charge to BNS is based, to the total, or trade basis, notional amount as of September 30, 2015 and December 31, 2014 (in thousands).

 

     September 30, 2015     December 31, 2014  

Settled notional amount

     $ 324,124         $ 277,375    

Unsettled additions

     —         10,366    
  

 

 

   

 

 

 

Total notional amount

     $ 324,124         $ 287,741    
  

 

 

   

 

 

 
The following table summarizes the fair value components of the TRS portfolio (in thousands):   
     September 30, 2015     December 31, 2014  

Interest and fee income

     $ 5,174         $ 3,545    

Financing charge

     (794     (513

Net realized loss

     (517     (26

Net unrealized depreciation of TRS assets

     (6,310     (6,451
  

 

 

   

 

 

 

TRS total fair value

     $ (2,447     $ (3,445
  

 

 

   

 

 

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Interest and fee income

     $ 5,138        $ 994        $ 12,294        $ 3,426   

Financing charge

     (1,181     (127     (2,889     (372

Net realized gains

     133        71        198        278   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains on derivative instruments related to the TRS

     $         4,090        $         938        $         9,603        $         3,332   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

53


Table of Contents
4. Derivative Instruments (continued)

 

The following is a summary of the TRS assets as of September 30, 2015 (in thousands):

 

Company (a)                Industry               

Interest

Rate

 

    LIBOR    

Floor

 

Maturity

Date

  

    Notional    

Amount

       Fair Value       

Unrealized      

Appreciation      
(Depreciation)      

 

Senior Secured Loans - First Lien

                  

ABILITY Network, Inc.

   Health Care Equipment
& Services
   L + 500   1.00%   5/14/2021    $ 6,815       $ 6,840           $ 25   

Acosta Holdco, Inc.

   Commercial &
Professional Services
   L + 325   1.00%   9/26/2021      4,260         4,211         (49

Applied Systems, Inc.

   Software & Services    L + 325   1.00%   1/25/2021      10,790         10,790         —     

Aspen Dental Management, Inc.

   Health Care Equipment
& Services
   L + 450   1.00%   4/29/2022      6,185         6,244         59   

AssuredPartners, Inc.

   Insurance    L + 400   1.00%   4/2/2021      9,427         9,408         (19

BJ’s Wholesale Club, Inc.

   Food & Staples
Retailing
   L + 350   1.00%   9/26/2019      3,949         3,909         (40

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

   Consumer Services    L + 725   0.00%   3/1/2017      3,745         3,722         (23

California Pizza Kitchen, Inc.

   Food & Staples
Retailing
   L + 425   1.00%   3/29/2018      3,770         3,848         78   

Catalina Marketing Corp.

   Media    L + 350   1.00%   4/9/2021      1,797         1,520         (277

CHG Companies, Inc.

   Health Care Equipment
& Services
   L + 325   1.00%   11/19/2019      2,865         2,856         (9

CityCenter Holdings, LLC

   Real Estate    L + 325   1.00%   10/16/2020      12,762         12,751         (11

CPI International, Inc.

   Capital Goods    L + 325   1.00%   11/17/2017      4,784         4,678         (106

CSM Bakery Products

   Food, Beverage &
Tobacco
   L + 400   1.00%   7/3/2020      4,900         4,904         4   

CTI Foods Holding Co., LLC

   Food, Beverage &
Tobacco
   L + 350   1.00%   6/29/2020      3,957         3,874         (83

Distribution International, Inc.

   Retailing    L + 500   1.00%   12/10/2021      4,913         4,832         (81

DJO Finance, LLC

   Health Care Equipment
& Services
   L + 325   1.00%   6/8/2020      8,846         8,734         (112

Emerald Expositions Holding, Inc.

   Media    L + 375   1.00%   6/17/2020      9,961         9,852         (109

Four Seasons Holdings, Inc. (b)

   Consumer Services    L + 275   0.75%   6/27/2020      406         409         3   

Grocery Outlet, Inc.

   Food & Staples
Retailing
   L + 375   1.00%   10/21/2021      4,990         4,888         (102

Gymboree Corp.

   Retailing    L + 350   1.50%   2/23/2018      2,834         2,062         (772

Gypsum Management & Supply, Inc.

   Capital Goods    L + 375   1.00%   4/1/2021      8,374         8,202         (172

Hanson Building Products North America (b)

   Materials    L + 550   1.00%   3/13/2022      12,495         12,603         108   

Harbor Freight Tools USA, Inc.

   Capital Goods    L + 375   1.00%   7/26/2019      7,790         7,765         (25

Hillman Group, Inc.

   Consumer Durables &
Apparel
   L + 350   1.00%   6/30/2021      12,844         12,782         (62

HUB International, Ltd.

   Insurance    L + 300   1.00%   10/2/2020      14,109         14,028         (81

Hyland Software, Inc.

   Software & Services    L + 375   1.00%   7/1/2022      6,921         6,865         (56

Informatica Corp. (b)

   Software & Services    L + 350   1.00%   8/5/2022      7,307         7,261         (46

iPayment, Inc.

   Software & Services    L + 525   1.50%   5/8/2017      7,885         7,794         (91

Kronos, Inc.

   Software & Services    L + 350   1.00%   10/30/2019      9,859         9,864         5   

Learfield Communications, Inc.

   Media    L + 350   1.00%   10/9/2020      7,380         7,329         (51

Milacron, LLC

   Capital Goods    L + 350   1.00%   9/28/2020      1,281         1,288         7   

MultiPlan, Inc.

   Health Care Equipment
& Services
   L + 275   1.00%   3/31/2021      8,592         8,466         (126

Neiman Marcus Group, LLC

   Retailing    L + 325   1.00%   10/25/2020      8,819         8,701         (118

OneStopPlus Group

   Retailing    L + 375   1.00%   3/18/2021      351         345         (6

P2 Energy Solutions, Inc. (b)

   Software & Services    L + 400   1.00%   10/30/2020      4,698         4,607         (91

RedPrairie Corp.

   Software & Services    L + 500   1.00%   12/21/2018      4,851         4,464         (387

Riverbed Technology, Inc.

   Technology Hardware
& Equipment
   L + 500   1.00%   4/24/2022      4,950         4,978         28   

Savers, Inc.

   Retailing    L + 375   1.25%   7/9/2019      8,819         7,595         (1,224

Talbots, Inc.

   Retailing    L + 450   1.00%   3/19/2020      10,161         10,024         (137

The TelX Group, Inc.

   Telecommunication
Services
   L + 350   1.00%   4/9/2020      3,962         3,928         (34

TIBCO Software, Inc.

   Software & Services    L + 550   1.00%   12/4/2020      4,726         4,954         228   

Triple Point Technology, Inc.

   Software & Services    L + 425   1.00%   7/10/2020      6,985         5,984         (1,001
            

 

 

    

 

 

    

 

 

 
Total Senior Secured Loans - First Lien                275,115         270,159         (4,956
            

 

 

    

 

 

    

 

 

 

Senior Secured Loans - Second Lien

                  

Applied Systems, Inc.

   Software & Services    L + 650   1.00%   1/24/2022      3,796         3,730         (66

Gypsum Management & Supply, Inc.

   Capital Goods    L + 675   1.00%   4/1/2022      5,633         5,730         97   

Maxim Crane, LP

   Capital Goods    L + 925   1.00%   11/26/2018      9,021         8,735         (286

Misys Ltd. (b)

   Software & Services    12.00%     6/12/2019      2,898         3,038         140   

NEP Group, Inc.

   Media    L + 875   1.25%   7/22/2020      8,790         8,831         41   

RedPrairie Corp.

   Software & Services    L + 1000   1.25%   12/21/2019      5,550         4,648         (902

The TelX Group, Inc.

   Telecommunication
Services
   L + 650   1.00%   4/9/2021      4,844         4,866         22   
            

 

 

    

 

 

    

 

 

 
Total Senior Secured Loans - Second Lien                40,532         39,578         (954
            

 

 

    

 

 

    

 

 

 

Senior Secured Bonds

                  

Artesyn Technologies, Inc.

   Technology Hardware
& Equipment
   9.75%     10/15/2020      3,640         3,491         (149

Hot Topic, Inc.

   Consumer Durables &
Apparel
   9.25%     6/15/2021      3,675         3,413         (262
            

 

 

    

 

 

    

 

 

 
Total Senior Secured Bonds                        7,315         6,904         (411
            

 

 

    

 

 

    

 

 

 

Subordinated Debt

                  

GCI, Inc.

   Telecommunication
Services
   6.75%     6/1/2021      1,002         1,020         18   

Summit Materials, LLC

   Materials    10.50%     1/31/2020      160         153         (7
            

 

 

    

 

 

    

 

 

 
Total Subordinated Debt                1,162         1,173         11   
            

 

 

    

 

 

    

 

 

 
TOTAL              $     324,124       $ 317,814       $ (6,310
            

 

 

    

 

 

    

 

 

 

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

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

(c) Investment was on non-accrual status as of September 30, 2015.

 

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Table of Contents
4. Derivative Instruments (continued)

 

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

 

Company (a)                Industry                Interest
Rate
   

    LIBOR    

Floor

   

    Maturity

    Date

  

    Notional    

Amount

       Fair Value        Unrealized      
Appreciation      
(Depreciation)      
 

Senior Secured Loans - First Lien

                  

ABILITY Network, Inc.

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

Applied Systems, Inc. (c)

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

AssuredPartners, Inc.

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

BJ’s Wholesale Club, Inc.

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

Caesars Entertainment Operating Co., Inc. (b)

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

California Pizza Kitchen, Inc.

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

Catalina Marketing Corp.

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

Ceridian Corp.

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

CHG Companies, Inc.

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

CityCenter Holdings, LLC

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

CRC Health Group, Inc.

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

CSM Bakery Products

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

CTI Foods Holding Co., LLC

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

Emerald Expositions Holding, Inc.

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

First American Payment Systems, L.P.

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

Four Seasons Holdings, Inc. (b)

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

Gymboree Corp.

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

Gypsum Management & Supply, Inc.

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

Harbor Freight Tools USA, Inc.

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

Hillman Group, Inc.

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

HUB International, Ltd.

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

Hyland Software, Inc.

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

iPayment, Inc.

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

Kronos, Inc. (c)

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

Learfield Communications, Inc.

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

Neiman Marcus Group, LLC

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

OneStopPlus Group

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

OpenLink Financial, Inc.

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

P2 Energy Solutions, Inc.

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

RedPrairie Corp.

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

Savers, Inc. (c)

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

SGS International, Inc.

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

Surgery Center Holdings, Inc.

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

The TelX Group, Inc.

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

TIBCO Software, Inc. (b)

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

Travelport, LLC (b)

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

Triple Point Technology, Inc.

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

Varsity Brands, Inc. (c)

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

Wilton Brands, LLC

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

Zayo Group, LLC

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

 

 

    

 

 

    

 

 

 

Total Senior Secured Loans - First Lien

               255,966         250,662         (5,304
            

 

 

    

 

 

    

 

 

 

Senior Secured Loans - Second Lien

                  

CRC Health Group, Inc.

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

Maxim Crane, LP

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

Misys Ltd. (b)

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

NEP Group, Inc.

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

RedPrairie Corp.

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

 

 

    

 

 

    

 

 

 

Total Senior Secured Loans - Second Lien

               22,802         21,932         (870
            

 

 

    

 

 

    

 

 

 

Senior Secured Bonds

                  

Hot Topic, Inc.

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

Artesyn Technologies, Inc.

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

 

 

    

 

 

    

 

 

 

Total Senior Secured Bonds

               7,315         7,066         (249
            

 

 

    

 

 

    

 

 

 

Subordinated Debt

                  

GCI, Inc.

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

Summit Materials, LLC

   Materials      10.50     1/31/2020      656         649         (7
            

 

 

    

 

 

    

 

 

 

Total Subordinated Debt

               1,658         1,630         (28
            

 

 

    

 

 

    

 

 

 

TOTAL

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

 

 

    

 

 

    

 

 

 

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

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

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

 

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Table of Contents
5. Fair Value of Financial Instruments

The Company’s investments were categorized in the fair value hierarchy described in Note 2. “Significant Accounting Policies”, as follows as of September 30, 2015 and December 31, 2014 (in thousands):

 

     September 30, 2015  

Description

   Level 1      Level 2      Level 3      Total  

Senior debt

     $         $ 1,175,428          $ 1,354,192          $ 2,529,620    

Subordinated debt

             251,167          232,809          483,976    

Structured products

                     91,669          91,669    

Equity/Other

             9,579          296,027          305,606    
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

             1,436,174          1,974,697          3,410,871    

Short-term investments

     68,882                          68,882    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     $     68,882          $ 1,436,174          $ 1,974,697          $ 3,479,753    
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Instruments

   Level 1      Level 2      Level 3      Total  

Assets

           

Cross currency swaps

     $         $ 1,531        $         $ 1,531    

Foreign currency forward contracts

             386                  386    

Liabilities

           

Cross currency swaps

             (1,229)                 (1,229)   

Total return swaps

                     (2,447)         (2,447)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $         $ 688          $ (2,447)         $ (1,759)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  

Description

   Level 1      Level 2      Level 3      Total  

Senior debt

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

Subordinated debt

             236,896          196,859          433,755    

Structured products

                     36,421          36,421    

Equity/Other

             5,069          125,308          130,377    
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

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

Short-term investments

     629                          629    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

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

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Instruments

   Level 1      Level 2      Level 3      Total  

Assets

           

Foreign currency forward contracts

     $         $ 40,903          $         $ 40,903    

Liabilities

           

Total return swaps

                     (3,445)         (3,445)   

Foreign currency forward contracts

             (458)                 (458)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2015 and 2014.

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

 

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5. Fair Value of Financial Instruments (continued)

At September 30, 2015, the Company held 84 distinct investment positions classified as Level 3, representing an aggregate fair value of $1.97 billion and 56.7% of the total investment portfolio. At December 31, 2014, the Company held 63 distinct investment positions classified as Level 3, representing an aggregate fair value of $1.50 billion and 55.2% of the total investment portfolio. The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2015 and December 31, 2014 were as follows (in thousands):

 

As of September 30, 2015

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

Senior Debt

     $1,328,264       Discounted Cash Flow    Discount Rate    7.84% - 19.49% (11.54%)    Decrease
         Market Yield    2.52% - 19.00% (9.26%)    Decrease
         Yield Premium    0.00% - 6.50% (2.33%)    Decrease
         Weighted Average Cost of Capital    6.30% - 22.10% (10.88%)    Decrease
         EBITDA Multiple    3.40x - 19.30x  (8.23x)    Increase
         Tangible Book Value Multiple    1.40x  (1.40x)    Increase
                 Interest Rate Volatility    25.00% (25.00%)    Decrease
     15,314       Waterfall    EBITDA Multiple    5.20x  (5.20x)    Increase
     7,396       Discounted Cash    Discount Rate    108.74% (108.74%)    Decrease
            Flow/Liquidation
Analysis/Quote
   Expected Recovery Given Liquidation Quote   

0.00% (0.00%)

17.50% (17.50%)

   Increase

Increase

       3,218       Liquidation Analysis    Expected Recovery Given Liquidation    16.25% (16.25%)    Increase

Subordinated Debt

     229,009       Discounted Cash Flow    Discount Rate    7.25% - 21.14% (12.99%)    Decrease
         Market Yield    7.04% - 19.42% (10.33%)    Decrease
         Yield Premium    0.00% - 4.25% (3.97%)    Decrease
         Weighted Average Cost of Capital    10.75% - 19.50% (13.60%)    Decrease
         EBITDA Multiple    3.20x - 14.21x  (9.41x)    Increase
                 Interest Rate Volatility    25.00% (25.00%)    Decrease
     3,800       Waterfall    EBITDA Multiple    14.21x  (14.21x)    Increase
      -          Option Pricing Model    EBITDA Multiple    9.58x  (9.58x)    Increase
         Implied Volatility    38.40% (38.40%)    Increase
         Risk Free Rate    0.82% (0.82%)    Increase
         Yield    0.00% (0.00%)    Decrease
         Term    2.25 years  (2.25 years)    Increase
                   Illiquidity Discounts    0.00% (0.00%)    Decrease

Structured Products

     85,894       Discounted Cash Flow    Discount Rate    9.77% - 17.11% (14.68%)    Decrease
       5,775       Book Value    Book Value    1.00x  (1.00x)    Increase

Equity/Other

     103,266       Waterfall    Asset Appraisals    N/A    Increase
         Change in Market Index    2.46% (2.46%)    Increase
                 Additional Discounts    3.00% (3.00%)    Decrease
     86,020       Discounted Cash Flow    Discount Rate    11.80% - 13.88% (13.78%)    Decrease
     58,404       Net Asset Value    Net Asset Value    N/A    Increase
     35,608       Market Comparables    EBITDA Multiple    4.90x - 12.08x  (9.40x)    Increase
         Revenue Multiple    0.30x  (0.30x)    Increase
                 Illiquidity Discounts    10.00% - 15.00% (12.56%)    Decrease
     12,729       Option Pricing Model    EBITDA Multiple    6.00x - 11.15x  (7.10x)    Increase
         Implied Volatility    30.00% - 38.40% (35.64%)    Increase
         Risk Free Rate    0.17% - 1.07% (0.34%)    Increase
         Yield    0.00% - 0.00% (0.00%)    Decrease
         Term    0.75 years - 3.25 years  (2.67 years)    Increase
                   Illiquidity Discounts    0.00% - 15.00% (10.34%)    Decrease

Total

     $1,974,697               
  

 

 

             

 

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5. Fair Value of Financial Instruments (continued)

 

As of December 31, 2014

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

Senior Debt

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

Subordinated Debt

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

Structured Products

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

Equity/Other

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

Total

     $1,502,332               
  

 

 

             

 

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

The above tables represent the significant unobservable inputs as they relate to the Company’s determination of fair values for the majority of its investments categorized within Level 3 as of September 30, 2015 and December 31, 2014. In addition to the techniques and inputs noted in the tables above, according to the Company’s valuation policy, it may also use other valuation techniques and methodologies when determining the fair value estimates for the Company’s investments. Any significant increases or decreases in the unobservable inputs would result in significant increases or decreases in the fair value of the Company’s investments.

Investments that do not have a readily available market value are valued utilizing a market approach, an income approach (i.e. discounted cash flow approach), or both approaches, as appropriate. The market comparables approach uses prices, including third-party indicative broker quotes, and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) that are discounted based on a required or expected discount rate to derive a single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors the Company may take into account to determine the fair value of its investments include, as relevant: available current market data, including an assessment of the credit quality of the security’s issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its

 

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Table of Contents
5. Fair Value of Financial Instruments (continued)

 

earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.

The following tables provide reconciliations for the three and nine months ended September 30, 2015 of investments for which Level 3 inputs were used in determining fair value (in thousands):

 

     Three Months Ended September 30, 2015  
     Senior
Debt
    Subordinated
Debt
    Structured
Products
    Equity/
Other
    Total Return
Swaps
    Total  

Fair Value Balance as of July 1, 2015

     $ 1,241,057        $ 157,475        $         92,596        $         240,189        $         1,189        $ 1,732,506   

Additions (1)

     190,089        87,442        -        72,646        -        350,177   

Net realized gains (losses) (2)

     (5,244     -        -        812        4,090        (342

Net change in unrealized appreciation (depreciation) (3)

     (42,258     (12,392     (927     (12,522     (3,636     (71,735

Sales or repayments (4)

     (30,450     -        -        (5,098     (4,090     (39,638

Net discount accretion

     998        284        -        -        -        1,282   

Transfers out of Level 3

     -        -        -        -        -        -   

Transfers into Level 3

     -        -        -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Balance as of September 30, 2015

     $ 1,354,192        $ 232,809        $ 91,669        $ 296,027        $ (2,447     $ 1,972,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2015 (3)

     $ (50,059     $ (12,392     $ (927     $ (12,522     $ (3,636     $ (79,536
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2015  
     Senior
Debt
    Subordinated
Debt
    Structured
Products
    Equity/
Other
    Total Return
Swaps
    Total  

Fair Value Balance as of January 1, 2015

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

Additions (1)

     386,372        123,133        52,000        204,120        -        765,625   

Net realized gains (losses) (2)

     (4,971     1,154        -        6,516        9,603        12,302   

Net change in unrealized appreciation (depreciation) (3)

     (73,826     (28,915     3,248        (23,606     998        (122,101

Sales or repayments (4)

     (99,990     (60,368     -        (16,311     (9,603     (186,272

Net discount accretion

     2,863        946        -        -        -        3,809   

Transfers out of Level 3

     -        -        -        -        -        -   

Transfers into Level 3

     -        -        -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Balance as of September 30, 2015

     $ 1,354,192        $ 232,809        $ 91,669        $ 296,027        $ (2,447     $ 1,972,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2015 (3)

     $ (75,927     $ (28,619     $ 5,846        $ (23,606     $ 998        $ (121,308
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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5. Fair Value of Financial Instruments (continued)

 

The following tables provide reconciliations for the three and nine months ended September 30, 2014 of investments for which Level 3 inputs were used in determining fair value (in thousands):

 

     Three Months Ended September 30, 2014  
     Senior
Debt
    Subordinated
Debt
    Structured
Products
    Equity/
Other
    Total
Return
Swaps
    Total  

Fair Value Balance as of July 1, 2014

     $     801,501        $     190,221        $     36,053        $     61,047        $       491        $       1,089,313   

Additions (1)

     111,235        58,655        -        42,455        -        212,345   

Net realized gains (2)

     311        -        -        -        938        1,249   

Net change in unrealized appreciation (depreciation) (3)

     (9,838     (12,408     (2,111     1,641        (1,510     (24,226

Sales or repayments (4)

     (34,315     (336     -        (4,577     (938     (40,166

Net discount accretion

     650        358        -        -        -        1,008   

Transfers out of Level 3

     -        -        -        -        -        -   

Transfers into Level 3

     -        -        -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Balance as of September 30, 2014

     $ 869,544        $ 236,490        $ 33,942        $ 100,566        $ (1,019     $ 1,239,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2015 (3)

     $ (9,089     $ (9,182     $ (2,111     $ 1,641        $ (1,510     $ (20,251
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Nine Months Ended September 30, 2014  
     Senior
Debt
    Subordinated
Debt
    Structured
Products
    Equity/
Other
    Total
Return
Swaps
    Total  

Fair Value Balance as of January 1, 2014

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

Additions (1)

     409,176        82,085        -        80,706        -        571,967   

Net realized gains (losses) (2)

     605        466        (199     -        3,332        4,204   

Net change in unrealized appreciation (depreciation) (3)

     2,066        (9,864     3,165        7,319        (2,880     (194

Sales or repayments (4)

     (155,201     (9,041     (24,597     (4,601     (3,332     (196,772

Net discount accretion (premium amortization)

     1,622        923        (2     -        -        2,543   

Transfers out of Level 3

     -        -        -        (7,529     -        (7,529

Transfers into Level 3

     -        -        -        -        -        -   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair Value Balance as of September 30, 2014

     $ 869,544        $ 236,490        $ 33,942        $ 100,566        $ (1,019     $ 1,239,523   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2014 (3)

     $ 3,251        $ (6,453     $ 3,199        $ 7,319        $ (2,880     $ 4,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

No securities were transferred into the Level 3 hierarchy during the nine months ended September 30, 2015 and 2014 and one was transferred out of Level 3 hierarchy during the nine months ended September 30, 2014. This investment was transferred at fair value as of the beginning of the quarter in which they were transferred. The classification transfers between Level 3 and Level 2 were based on the observed changes in liquidity based on information supplied by a third party pricing source, whereby such liquidity information is routinely reviewed no less frequently than monthly. All realized and unrealized gains and losses are included in earnings and are reported as separate line items within the Company’s condensed consolidated statements of operations.

 

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6. Related Party Transactions

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

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

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

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

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

The terms of the Investment Advisory Agreement entitle CNL (and indirectly KKR) to receive up to 5% of gross proceeds in connection with the Offerings as reimbursement for organization and offering expenses incurred by the Advisors on behalf of the Company. During the nine months ended September 30, 2015, the Company recorded $2.79 million in deferred offering expenses related to the Follow-On Offering, or 0.5% of gross offering proceeds of the Follow-On Offering.

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

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

 

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6. Related Party Transactions (continued)

 

Related party fees, expenses and expenses incurred on behalf of the Company during the three and nine months ended September 30, 2015 and 2014 are summarized below (in thousands):

 

         Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Related Party

  

Source Agreement & Description

  2015     2014     2015     2014  

CNL Securities Corp.  

  

Managing Dealer Agreement:

Selling commissions and marketing support fees

    $                 14,328        $                 19,495        $             46,798        $                 51,195   

CNL and KKR

  

Investment Advisory Agreement:

Base management fees (investment advisory fees)

    18,867        12,561        51,004        34,506   

CNL and KKR

  

Investment Advisory Agreement:

Subordinated incentive fee on income(1)

    -        6,763        7,983        11,926   

CNL and KKR

  

Investment Advisory Agreement:

Incentive fee on capital gains(2)

    -        -        -        -   

CNL and KKR

  

Investment Advisory Agreement:

Offering expenses(3)

    1,092        1,585        2,794        4,961   

KKR

  

Investment Sub-Advisory Agreement:

Investment expenses reimbursement

    360        226        995        683   

CNL

  

Administrative Services Agreement:

Administrative and compliance services(4)

    432        511        1,108        1,574   

 

(1) Subordinated incentive fees on income are included in performance-based incentive fees in the condensed consolidated statements of operations. During the nine months ended September 30, 2015 and 2014, $13.09 million and $10.44 million, respectively, of subordinated incentive fees on income were paid to the Advisors.

 

(2) Incentive fees on capital gains are included in performance-based incentive fees in the condensed consolidated statements of operations. The following table provides additional details for the incentive fee on capital gains for the nine months ended September 30, 2015 and 2014 (in thousands):

 

Incentive Fee on Capital Gains for the Nine Months Ended September 30,

   2015      2014  

Accrued incentive fee on capital gains as of January 1,

     $             -         $         11,128   

Incentive fee on capital gains expense during the nine months ended September 30,

     -         3,399   

Less: Incentive fee on capital gains paid to the Advisors during the nine months ended September 30,

     -         (2,323
  

 

 

    

 

 

 

Accrued incentive fee on gains as of September 30,

     -         12,204   

Less: Accrued incentive fee on capital gains attributable to unrealized gains as of September 30,

     -         (12,204
  

 

 

    

 

 

 

Incentive fee on capital gains earned by and payable to the Advisors as of September 30,

     $ -         $ -   
  

 

 

    

 

 

 

 

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

 

Offering Expenses Reimbursement for the Nine Months Ended September 30,

   2015      2014  

Offering expenses reimbursement payable as of January 1,

     $         272         $         240   

Additional offering expenses deferred during the nine months ended September 30,

     2,794         4,961   

Offering expenses reimbursement payable as of September 30,

     (517      (342
  

 

 

    

 

 

 

Offering expenses reimbursement paid to the Advisors during the nine months ended September 30,

     $ 2,549         $ 4,859   
  

 

 

    

 

 

 

Outstanding unreimbursed offering expenses (net of amounts payable) as of September 30,

     $ 41         $ -   
  

 

 

    

 

 

 

 

(4) Includes $0.16 million and $0.49 million for reimbursement payments to CNL for services provided to the Company for its Chief Compliance Officer and Chief Financial Officer for the three and nine months ended September 30, 2014, respectively. Effective January 1, 2015, these services were no longer reimbursable Advisor expenses.

KKR is obligated to remit to the Company any earned capital structuring fees based on the Company’s pro-rata portion of the co-investment transactions or originated investments in which the Company participates. As a result, the Company earned capital structuring fees of $1.03 million and $3.69 million during the three and nine months ended September 30, 2015, respectively, and $0.91 million and $1.89 million during the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, $0.50 million of capital structuring fees were receivable from the Advisors.

Indemnification - The Investment Advisory Agreement and the Sub-Advisory Agreement provide certain indemnification to the Advisors, their directors, officers, persons associated with the Advisors, and their affiliates. The managing dealer agreement provides certain indemnification to the managing dealer and each participating broker and their respective officers, directors, partners, employees, associated persons, agents and control persons. In addition, the Company’s articles of incorporation provide certain indemnifications to its officers, directors, agents, and certain other persons. As of September 30, 2015, management believed that the risk of incurring any losses for such indemnification was remote.

 

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7. Fee Income

Fee income, which is nonrecurring, consisted of the following (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Fee Income

   2015      2014      2015      2014  

Capital structuring fees

     $         1,029         $         912         $         3,691         $         1,888   

Amendment fees

     571         93         9,355         202   

Acquisition fees

     500                 500           

Commitment fees

     439                 477         46   

Other

             5                 236   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $ 2,539         $ 1,010         $ 14,023         $ 2,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8. Distributions

The Company’s board of directors declared distributions for 39 record dates in each of the nine months ended September 30, 2015 and 2014, respectively. Declared distributions are paid monthly. The total and the sources of declared distributions on a GAAP basis for the nine months ended September 30, 2015 and 2014 are presented in the tables below (in thousands, except per share amounts).

 

     Nine Months Ended September 30,  
     2015     2014  
     Per Share      Amount      Allocation     Per Share      Amount      Allocation  

Total Declared Distributions

   $       0.60        $       148,719          100.0   $       0.60        $       100,320          100.0

From net investment income

     0.52          127,578          85.8        0.49          82,834          82.6   

From net realized gains

     0.08          21,141          14.2        0.07          11,473          11.4   

Distributions in excess of net investment income

     —          —                 0.04          6,013          6.0   

Sources of distributions, other than net investment income and realized gains on a GAAP basis, include (i) the ordinary income component of prior year tax basis undistributed earnings and (ii) required adjustments to GAAP net investment income in the current period to determine taxable income available for distributions. The following table summarizes the primary sources of differences between GAAP net investment income and taxable income available for distributions that contribute to tax-related distributions in excess of net investment income for the nine months ended September 30, 2015 and 2014 (amounts in thousands).

 

Nine Months Ended September 30,

         2015                  2014        

Ordinary income component of tax basis undistributed earnings

     $ 56,222            $ 3,531      

Estimated unearned performance-based incentive fee

     —            3,399      

Offering expenses

     3,598            5,351      

Net change in unrealized depreciation on total return swaps

     998            (2,880)     

Net change in unrealized depreciation on foreign currency forward contracts

     (40,059)           31,019      
  

 

 

    

 

 

 

Total

     $ 20,759            $ 40,420      
  

 

 

    

 

 

 

 

(1) The above table does not present all adjustments to calculate taxable income available for distributions.

For the nine months ended September 30, 2015, there were no distributions in excess of net investment income and the Company estimates that none of the distributions declared during the nine months ended September 30, 2015 would be classified as a tax basis return of capital. None of the distributions declared during the year ended December 31, 2014 were classified as a tax basis return of capital.

On September 29, 2015, the Company’s board of directors declared distributions of $0.015483 per share for four record dates beginning on October 6, 2015 through and including October 27, 2015.

 

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9. Share Transactions

The following table summarizes the total shares issued and proceeds received in connection with the Company’s Offerings for the nine months ended September 30, 2015 and 2014 (in thousands except share and per share amounts).

 

     Nine Months Ended September 30,  
     2015     2014  
     Shares      Amount     Shares      Amount  

Gross proceeds from offering

         47,926,637           $    519,048            49,031,534           $    549,847   

Commissions and marketing support fees

     -         (46,798     -         (51,195
  

 

 

    

 

 

   

 

 

    

 

 

 

Net proceeds to company

         47,926,637             472,250            49,031,534         498,652   

Reinvestment of distributions

     7,798,343         76,446        5,052,427         51,383   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net proceeds from offering

         55,724,980           $    548,696            54,083,961           $    550,035   
  

 

 

    

 

 

   

 

 

    

 

 

 

Average net proceeds per share

     $9.85        $10.17   

As of September 30, 2015, the Company has sold 277.18 million shares of common stock through the Offerings, including reinvestment of distributions, for total gross proceeds of $3.01 billion.

The Company conducts quarterly tender offers pursuant to its share repurchase program. The Company currently limits the number of shares to be repurchased during any calendar year to the number of shares it can repurchase with the proceeds it receives from the issuance of shares of its common stock under its distribution reinvestment plan. At the discretion of the Company’s board of directors, the Company may also use cash on hand, cash available from borrowings and cash from the sale of investments as of the end of the applicable period to repurchase shares. The Company limits repurchases in each quarter to 2.5% of the weighted average number of shares of common stock outstanding in the prior four calendar quarters. The Company’s board of directors may amend, suspend or terminate the share repurchase program upon 30 days’ notice.

The following table is a summary of the share repurchases completed during the nine months ended September 30, 2015 and 2014 (in thousands, except share and per share amounts):

 

Repurchase Date

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

2015:

              

March 2, 2015

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

May 29, 2015

     4,919,566         501,943         4,889         10%         9.74   

August 28, 2015

     5,424,683         1,093,421         10,573         20%         9.67   
  

 

 

    

 

 

    

 

 

       

Total

     14,779,321         2,150,538       $ 20,914         15%      
  

 

 

    

 

 

    

 

 

       

2014:

              

March 3, 2014

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

June 2, 2014

     3,091,175         307,909         3,116         10%         10.12   

August 29, 2014

     3,550,268         615,007         6,242         17%         10.15   
  

 

 

    

 

 

    

 

 

       

Total

     9,253,998         1,246,240       $ 12,591         13%      
  

 

 

    

 

 

    

 

 

       

 

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10.       Borrowings

The Company’s outstanding borrowings as of September 30, 2015 and December 31, 2014 were as follows (in thousands):

 

    As of September 30, 2015     As of December 31, 2014  
    Total Aggregate
Principal
Amount Committed
    Principal Amount
Outstanding
    Carrying Value     Total Aggregate
Principal
Amount Committed
    Principal
Amount
Outstanding
    Carrying Value  

Deutsche Bank Credit
Facility (1)

    $ 250,000           $ 175,000          $ 175,000           $ 340,000           $ 47,000           $ 47,000      

BNP Credit
Facility (1)

    200,000           163,000            163,000           200,000           100,450           100,450      

Senior Secured Revolving Credit Facility(1)

    700,000(2)        477,000            477,000           655,000(2)        230,000           230,000      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total credit facilities

    1,150,000           815,000            815,000           1,195,000           377,450           377,450      

2014 Senior Secured Term Loan

    394,000           394,000            392,514(3)        397,000           397,000           395,228(3)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowings

    $           1,544,000           $       1,209,000            $       1,207,514           $       1,592,000           $       774,450             $       772,678      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The weighted average stated interest rate and weighted average remaining years to maturity of the Company’s outstanding borrowings as of September 30, 2015 were 2.88% and 2.3 years, respectively, and as of December 31, 2014 were 3.24% and 3.2 years, respectively.

Deutsche Bank Credit Facility

In 2011, CCT Funding became a party to a revolving credit facility with Deutsche Bank AG, New York Branch (“Deutsche Bank”) and the other lenders from time to time thereto (the “Deutsche Bank Credit Facility”). Deutsche Bank serves as administrative agent under the credit facility.

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

On September 11, 2015, CCT Funding entered into an amendment (the “Sixth Amendment”) to the Deutsche Bank Credit Facility. The Sixth Amendment provides for, among other things, up to an additional $100 million in borrowings on a committed basis (the “Tranche F Loans”). Upfront fees and unfunded commitment fees were also incurred with respect to the Tranche F Loans. Pursuant to the Sixth Amendment, the Tranche F Loans are scheduled to mature, and all accrued and unpaid interest thereunder will be due and payable on September 11, 2017.

Interest on the Tranche E Loans is charged at the rate of three-month LIBOR plus 1.85%. Interest on the Tranche F Loans is charged at the rate of three-month LIBOR plus 1.95%. CCT Funding also pays an annual commitment fee on any unused commitment amounts of 0.50%, plus an additional annual commitment fee of 1.95% on the excess, if any, of (i) 80% of the total commitment less (ii) the aggregate principal amount outstanding. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the Deutsche Bank Credit Facility for the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Stated interest expense

   $                     828            $                 22            $                 2,084            $                     2,233        

Unused commitment fees

     27              516              213              905        

Amortization of deferred financing costs

     59              213              218              576        
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 914            $ 751            $ 2,515            $ 3,714        
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average interest rate

     2.2%           2.1%           2.2%           2.3%     

Average borrowings

   $ 150,272            $ 4,402            $ 128,769            $ 128,727       

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

 

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10. Borrowings (continued)

 

BNP Credit Facility

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

Interest on the BNP Credit Facility is charged at the rate of one month LIBOR plus 1.10% and is payable monthly. Paris Funding also pays an annual commitment fee on any unused commitment amounts of 0.40% or 0.50%, depending on utilization levels. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the BNP Credit Facility for the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Stated interest expense

   $                     540             $                     307             $                     1,061             $                     847         

Unused commitment fees

     38               200               313               631         

Amortization of deferred financing costs

     —               —               —               208         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 578             $ 507             $ 1,374             $ 1,686         
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average interest rate

     1.3%           1.3%           1.3%           1.3%     

Average borrowings

   $ 163,000             $ 95,993               $108,630             $ 88,990         

Paris Funding pledges certain of its assets as collateral to secure borrowings under the BNP Credit Facility. As of September 30, 2015 and December 31, 2014, Paris Funding had investments with a fair value of $343.76 million and $258.34 million, respectively, pledged as collateral under the BNP Credit Facility. Under the terms of the BNP Credit Facility, BNP has the ability to borrow a portion of the pledged collateral (“Rehypothecated Securities”), provided that, among other things, the fair value of the borrowed collateral does not exceed the value of the loan against which the collateral was pledged and any single borrowed security does not represent the entire position of such security held by Paris Funding. Paris Funding may designate any security within the pledged collateral as ineligible to be a Rehypothecated Security, provided there are eligible securities within the segregated custody account in an amount equal to the outstanding borrowings owed by Paris Funding to BNP. Paris Funding may recall any Rehypothecated Security at any time and BNP must, to the extent commercially reasonable, return such security or equivalent security within a commercially reasonable period. In the event BNP does not return the security, Paris Funding will have the right to, among other things, apply and set off an amount equal to 100% of the then-current fair market value of such Rehypothecated Securities against any outstanding borrowings owed to BNP under the BNP Credit Facility. Rehypothecated Securities are marked-to-market daily and if the value of all Rehypothecated Securities exceeds 100% of the outstanding borrowings owed by Paris Funding under the BNP Credit Facility, BNP may either reduce the amount of Rehypothecated Securities to eliminate such excess or deposit into the segregated custody account an amount of cash equal to such excess. Paris Funding will continue to receive interest and the scheduled repayment of principal balances on Rehypothecated Securities. Paris Funding may receive a fee from BNP in connection with Rehypothecated Securities meeting certain criteria. Paris Funding did not recognize any fees on Rehypothecated Securities during the nine months ended September 30, 2015 and 2014. As of September 30, 2015, there were no securities rehypothecated by BNP.

Senior Secured Revolving Credit Facility

In September 2013, the Company entered into a revolving credit facility (the “Senior Secured Revolving Credit Facility”) with certain lenders and JPMorgan Chase Bank, N.A., acting as administrative agent. The Senior Secured Revolving Credit Facility consists of loans to be made in U.S. dollars and other foreign currencies in an aggregate amount of $700 million as of September 30, 2015, with an “accordion” feature that allows the Company, under certain circumstances, to increase the size of the facility to a maximum of $900 million. On May 28, 2015 and September 18, 2015, the aggregate loan commitment under the Senior Secured Revolving Credit Facility was increased by $20 million and $25 million, respectively. Availability under the Senior Secured Revolving Credit Facility will terminate on September 4, 2016 and the outstanding loans under the Senior Secured Revolving Credit Facility will mature on September 4, 2017. The Senior Secured Revolving Credit Facility is secured by substantially all of the Company’s portfolio investments and its cash and securities accounts, excluding those held by CCT Funding, Paris Funding and Halifax Funding, and provides for a guaranty by certain other subsidiaries of the Company.

 

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10. Borrowings (continued)

 

The stated borrowing rate under the Senior Secured Revolving Credit Facility is generally based on LIBOR plus an applicable spread of 2.50% or, with respect to borrowings in foreign currencies, on a base interest rate applicable to such currency borrowing plus an applicable spread of 2.50%. The Company also pays an annual commitment fee on any unused commitment amounts between 0.375% and 1.00%, depending on utilization levels. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the Senior Secured Revolving Credit Facility for the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Stated interest expense

   $                     2,878             $                     —             $                     6,001             $                     2,670         

Unused commitment fees

     256               1,254               1,233               2,069         

Amortization of deferred financing costs

     446               330               1,310               890         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 3,580             $ 1,584             $ 8,544             $ 5,629         
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average interest rate

     2.8%           —%           2.8%           3.2%    

Average borrowings

   $ 411,674             $ —               $291,824             $ 112,236         

2014 Senior Secured Term Loan

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

Maturities of the 2014 Senior Secured Term Loan for the remainder of 2015 and each of the next four years, in aggregate, as of September 30, 2015 were as follows (in thousands):

 

2015

   $ 1,000   

2016

     4,000   

2017

     4,000   

2018

     4,000   

2019

     381,000   
  

 

 

 
   $ 394,000   
  

 

 

 

The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the 2014 Senior Secured Term Loan for the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Stated interest expense

   $                 4,037             $                 4,078             $                 12,011             $                 5,945         

Accretion of original issue discount

     97               94               286               132         

Amortization of deferred financing costs

     274               273               810               378         
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 4,408             $ 4,445             $ 13,107             $ 6,455         
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average interest rate

     4.2%           4.2%           4.2%           4.2%     

Average borrowings

   $ 394,989             $ 398,989 (1)         $395,978             $ 399,298 (1)   

 

(1) Average borrowings for the 2014 Term Loan for the nine months ended September 30, 2014 are calculated since the inception date of the facility, or May 20, 2014.

In connection with each of the credit facilities and 2014 Senior Secured Term Loan, the Company has made customary representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. As of September 30, 2015 and December 31, 2014, the Company believes it was in compliance with the covenant requirements for all of its credit facilities and 2014 Senior Secured Term Loan.

 

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11. Commitments and Contingencies

Unfunded commitments to provide funds to portfolio companies are not recorded in the Company’s condensed consolidated statements of assets and liabilities. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company has sufficient liquidity to fund these commitments. As of September 30, 2015, the Company’s unfunded commitments consisted of the following (in thousands):

 

Category / Company (1)

      

Unfunded revolvers:

  

Beyond Trust Software

   $ 1,090   
  

 

 

 

Unfunded delayed draw loans:

  

Pacific Union Financial, LLC

     6,691   

Marshall Retail Group, LLC

     1,200   
  

 

 

 
     7,891   
  

 

 

 

Term Loans:

  

Plaskolite

     29,373   

GE Embedded Systems

     63,364   

Belk

     5,006   
  

 

 

 
     97,743   
  

 

 

 

Unfunded equity commitments:

  

Orchard Marine, Ltd

     21,113   

Star Mountain SMB Multi-Manager Credit Platform, LP

     46,292   

Home Partners of America, Inc.

     11,025   

KKR BPT Holdings Aggregator, LLC

     12,500   

Great American Group

     58,125   
  

 

 

 
     149,055   
  

 

 

 

Total Unfunded Commitments

   $ 255,779   
  

 

 

 

 

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

As of September 30, 2015, the Company’s unfunded debt commitments have a fair value of ($0.20) million. The Company funds its equity investments as it receives funding notices from the portfolio companies. As of September 30, 2015, the Company’s unfunded equity commitments have a fair value of zero.

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at September 30, 2015 and December 31, 2014.

 

12. Income Taxes

During the nine months ended September 30, 2015, the Company recorded foreign income tax expense of $0.30 million, of which $0.28 million represents foreign tax withholding and is recorded net against the related interest income in the condensed consolidated statements of operations, and federal excise tax expense of $0.11 million. As of September 30, 2015, the Company recorded deferred tax assets of approximately $2.63 million and a corresponding valuation allowance of $2.63 million for its Taxable Subsidiaries. The deferred tax assets are primarily comprised of net operating losses and unrealized depreciation on investments. The valuation allowance was recorded as the Company believes it is more likely than not the deferred tax asset would not be realized in a future period.

 

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13. Financial Highlights

The following is a schedule of financial highlights for one share of common stock during the nine months ended September 30, 2015 and 2014.

 

     Nine Months Ended September 30,  
     2015      2014  

OPERATING PERFORMANCE PER SHARE

  

Net Asset Value, Beginning of Period

   $ 9.79          $ 10.00      
  

 

 

    

 

 

 

Net investment income (1)

     0.52            0.49      

Net realized and unrealized gain (loss) (1) (2)

     (0.48)           0.15      
  

 

 

    

 

 

 

Net increase resulting from investment operations

     0.04            0.64      
  

 

 

    

 

 

 

Distributions from net investment income (3)

     (0.52)           (0.49)     

Distributions from realized gains (3)

     (0.08)           (0.07)     

Distributions in excess of net investment income (3) (4)

     —            (0.04)     
  

 

 

    

 

 

 

Net decrease resulting from distributions to common shareholders

     (0.60)           (0.60)     
  

 

 

    

 

 

 

Issuance of common stock above net asset value (5)

     0.03            0.02      

Repurchases of common stock (6)

     —            —      
  

 

 

    

 

 

 

Net increase resulting from capital share transactions

     0.03            0.02      
  

 

 

    

 

 

 

Net Asset Value, End of Period

   $ 9.26          $ 10.06      
  

 

 

    

 

 

 

OPERATING PERFORMANCE PER SHARE

  

Total investment return – net price (7)

     (0.5)%         4.9%   

Total investment return – net asset value (8)

     0.6%         6.7%   

RATIOS/SUPPLEMENTAL DATA (all amounts in thousands except ratios)

  

Net assets, end of period

   $ 2,526,361          $ 1,970,241      

Average net asset (9)

   $ 2,385,563          $ 1,689,396      

Average borrowings (9)

   $ 925,201          $ 524,996      

Shares outstanding, end of period

     272,706            195,862      

Weighted average shares outstanding

     246,352            169,390      

Ratios to average net assets: (9)

     

Total operating expenses

     4.04%            4.72%   

Net investment income

     5.35%            4.90%   

Total investment income

     9.39%            9.63%   

Portfolio turnover rate

     8%            22%   

Asset coverage ratio (10)

     2.82            4.14      

 

(1)  The per share data was derived by using the weighted average shares outstanding during the period.
(2)  The amount shown at this caption is the balancing figure derived from the other figures in the schedule. The amount shown at this caption for a share outstanding throughout the period may not agree with the change in the aggregate gains and losses in portfolio securities for the period because of the timing of sales of the Company’s shares in relation to fluctuating market values for the portfolio.
(3)  The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period; distributions per share are rounded to the nearest $0.01.
(4)  See Note 8 for further information on the source of distributions from other than net investment income and realized gains.
(5)  The continuous issuance of common stock may cause an incremental increase in net asset value per share due to the sale of shares at the then prevailing public offering price and the receipt of net proceeds per share by the Company in excess of net asset value per share on each subscription closing date. The per share data was derived by computing (i) the sum of (A) the number of shares issued in connection with subscriptions and/or distribution reinvestment on each share transaction date times (B) the differences between the net proceeds per share and the net asset value per share on each share transaction date, divided by (ii) the total shares outstanding at the end of the period.
(6)  The per share impact of the Company’s repurchase of common stock is a reduction to net asset value of less than $0.01 per share during the applicable period.
(7)  Total investment return-net price is a measure of total return for shareholders who purchased the Company’s common stock at the beginning of the period, including distributions declared during the period. Total investment return-net price is based on (i) the purchase of one share at the public offering price, net of sales load, on the first day of the period, (ii) the sale at the net asset value per share on the last day of the period, of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) distributions payable relating to one share, if any, on the last day of the period. The total investment return-net price calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. Since there is no public market for the Company’s shares, the terminal sales price per share is assumed to be equal to the net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares of common stock.

 

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13. Financial Highlights (continued)

 

(8)  Total investment return-net asset value is a measure of the change in total value for shareholders who held the Company’s common stock at the beginning and end of the period, including distributions declared during the period. Total investment return-net asset value is based on (i) net asset value per share on the first day of the period, (ii) the net asset value per share on the last day of the period, of (A) one share plus (B) any fractional shares issued in connection with the reinvestment of monthly distributions, and (iii) distributions payable relating to one share, if any, on the last day of the period. The total investment return-net asset value calculation assumes that (i) monthly cash distributions are reinvested in accordance with the Company’s distribution reinvestment plan and (ii) the fractional shares issued pursuant to the distribution reinvestment plan are issued at the then current public offering price, net of sales load, on each monthly distribution payment date. Since there is no public market for the Company’s shares, terminal market value per share is assumed to be equal to net asset value per share on the last day of the period presented. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Investment performance is presented without regard to sales load that may be incurred by shareholders in the purchase of the Company’s shares of common stock.
(9)  The computation of average net assets and average borrowings during the period is based on the daily value of net assets and borrowing balances, respectively. Ratios are not annualized.
(10)  Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. For purposes of the asset coverage ratio test applicable to the Company as a business development company, the Company regards the TRS total notional amount at the end of the period, less the total amount of cash collateral posted by Halifax Funding under the TRS, as a senior security. These data are presented in Note 4 of the condensed consolidated financial statements.

 

14.       Subsequent Events

In October 2015, the Company entered into a series of pay-fixed, receive-floating interest rate swaps that will be effective on December 31, 2015. The Company will pay an annual fixed rate of 1.3633% to 1.428% and receive three-month LIBOR on an aggregate notional amount of $500 million. The interest rate swaps will have quarterly settlement payments beginning in March 2016.

On October 13, 2015, the Company filed a tender offer statement with the SEC on Schedule TO. The Company offered to purchase up to 5,911,358 shares of common stock at a cash price of $9.25 per share. The tender offer will expire on November 25, 2015 at 5:00 p.m., central time.

On October 22, 2015, Halifax Funding amended the TRS agreements. The amended TRS agreements, among other things, increased the rate at which Halifax Funding pays interest to BNS to 1.4% per annum while also reducing the required collateral amount to 33.3% of the settled notional amount. In addition, the amended TRS agreements extended the termination date to January 15, 2019. In conjunction with the execution of the amended TRS agreements, any make-whole fee that may have been due to BNS upon the original termination date of January 15, 2016 will now be included in the calculation of any make-whole fee that may be due upon termination on January 15, 2019.

On October 29, 2015, the Company’s board of directors declared distributions of $0.015483 per share for four record dates beginning on November 3, 2015 through and including November 24, 2015.

During the period October 1, 2015 through November 10, 2015, the Company received additional net proceeds of approximately $55.34 million from its Follow-On Offering, including amounts through its distribution reinvestment plan.

 

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

The following discussion is based on the unaudited condensed consolidated financial statements as of September 30, 2015 and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014. Amounts as of December 31, 2014 included in the unaudited condensed consolidated financial statements have been derived from the audited consolidated financial statements as of that date. This information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto, as well as, the audited consolidated financial statements, notes and management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the year ended December 31, 2014. Capitalized terms used in this Item 2 have the same meaning as in the accompanying unaudited condensed consolidated financial statements in Item 1 unless otherwise defined herein.

Cautionary Note Regarding Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q for the nine months and the quarter ended September 30, 2015 (this “Quarterly Report”) that are not statements of historical or current fact may constitute forward-looking statements within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that do not relate strictly to historical or current facts, but reflect management’s current understandings, intentions, beliefs, plans, expectations, assumptions and/or predictions regarding the future of the Company’s business and its performance, the economy, and other future conditions and forecasts of future events, and circumstances. Forward-looking statements are typically identified by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plans,” “continues,” “pro forma,” “may,” “will,” “seeks,” “should” and “could,” and words and terms of similar substance in connection with discussions of future operating or financial performance, business strategy and portfolios, projected growth prospects, cash flows, costs and financing needs, legal proceedings, amount and timing of anticipated future distributions, estimated per share net asset value of the Company’s common stock, and other matters. The Company’s forward-looking statements are not guarantees of future performance and the Company’s actual results could differ materially from those set forth in the forward-looking statements. As with any projection or forecast, forward-looking statements are necessarily dependent on assumptions, data and/or methods that may be incorrect or imprecise, and may not be realized. While the Company believes that the current expectations reflected in its forward-looking statements are based upon reasonable assumptions, such statements are inherently susceptible to a variety of risks, uncertainties, changes in circumstances and other factors, many of which are beyond the Company’s ability to control or accurately predict.

Important factors that could cause the Company’s actual results to vary materially from those expressed or implied in its forward-looking statements include, but are not limited to, economic, strategic, political and social conditions, and the following: persistent economic weakness at the global or national level, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global capital market conditions, the Company’s ability to obtain or maintain credit lines, credit facilities or other borrowings on satisfactory terms, changes in interest rates, availability of proceeds from the offering of the Company’s common stock, the Company’s ability to identify suitable investments, the Company’s ability to close on identified investments, the Company’s ability to maintain the Company’s qualification as a regulated investment company and as a business development company, the ability of the Company’s advisors and their affiliates to attract and retain highly talented professionals, inaccuracies of the Company’s accounting estimates, the ability of the Company’s advisors to locate suitable borrowers for the Company’s loans and the ability of such borrowers to make payments under their respective loans. Given these uncertainties, the Company cautions you not to place undue reliance on forward-looking information.

Forward-looking statements should be read in light of the risks identified in Item 1A in Part II “Risk Factors” of this Quarterly Report, and in Item 1A of Part I “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014, copies of which may be obtained from the Company’s website at www.corporatecapitaltrust.com, as well as the information in the Company’s other filings made from time to time with the U.S. Securities and Exchange Commission (the “SEC”), copies of which may be obtained from the SEC’s website at www.sec.gov.

All written and oral forward-looking statements attributable to the Company or persons acting on its behalf are qualified in their entirety by this cautionary note. Forward-looking statements speak only as of the date on which they are made; and the Company undertakes no obligation, and expressly disclaims any obligation, to publicly release the results of any revisions to its forward-looking statements made to reflect future events or circumstances, new information, changed assumptions, the occurrence of unanticipated subsequent events, or changes to future operating results over time, except as otherwise required by law.

The Company’s forward-looking statements and projections are excluded from the safe harbor protection of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

 

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Overview

We are a non-diversified closed-end management investment company that has elected to be treated as a business development company under the 1940 Act. Formed as a Maryland corporation on June 9, 2010, we are externally managed by CNL Fund Advisors Company (“CNL”) and KKR Credit Advisors (US) LLC (“KKR”), collectively, the “Advisors,” which are responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments, determining the securities and other assets that we will purchase, retain or sell, and monitoring our portfolio on an ongoing basis. Both Advisors are registered as investment advisers with the SEC. CNL also provides the administrative services necessary for us to operate.

Investment Objective, Investment Program and Primary Investment Types

Our investment objective is to provide our shareholders with current income and, to a lesser extent, long-term capital appreciation. We pursue our investment objective by investing primarily in the debt of privately owned and thinly traded U.S. companies (also referred to as “portfolio companies”) with a focus on originated transactions sourced through the networks of our Advisors. We define originated transactions as any negotiated investment where we, through our Advisors’ direct efforts, provide funds directly to a portfolio company. We also have the ability, as granted through our SEC Exemptive Order, to co-invest in privately negotiated transactions alongside other investment funds managed by or affiliated with KKR (the “Co-Investment Transactions”). We anticipate that a substantial portion of our investment portfolio will consist of senior and subordinated debt, which we believe offer potential opportunities for superior risk-adjusted returns and income generation. Our debt investments may take the form of corporate loans or bonds, may be secured or unsecured and may, in some cases, be accompanied by warrants, options or other forms of equity participation. We may separately purchase common or preferred equity interests in transactions. We may also invest in structured products, such as collateralized loan obligations, and loan participations and assignments.

As of September 30, 2015, our investment program consisted of two main components. First, since the inception of our investment activities, we have been engaged in the direct purchase of debt and equity securities, primarily issued by portfolio companies, through both secondary market and direct lending transactions. We refer to this investment program component as our “Investment Portfolio.” Second, beginning in November 2012, we supplemented our economic exposure to portfolio companies by entering into total return swap arrangements (the “TRS”) with a commercial bank counterparty and directing the creation of a portfolio of debt investments that serve as reference assets under the TRS. We refer to this investment program component as our portfolio of TRS assets or our “TRS Portfolio.” In the case of our TRS Portfolio, we receive all (i) realized income and fees and (ii) realized capital gains generated by the TRS assets. In return, we must pay quarterly to the TRS counterparty a payment consisting of (i) realized capital losses generated by the TRS assets and (ii) financing costs that are based on (a) a floating financing rate and (b) the settled notional amount of TRS assets.

References to the term “settled notional amount” in association with the TRS mean the aggregate cost of the TRS assets underlying the TRS that are settled and owned by the counterparty. In addition, this aggregate cost serves as the basis for our payments of financing charges to the counterparty under the TRS. References to the term “total notional amount” mean the settled notional amount plus the effect of the purchase and sale cost of all TRS assets where trade settlement is pending. We will receive additional economic benefit if the value of the underlying TRS asset appreciates relative to the total notional amount through the final settlement date following termination of the agreement. Conversely, we will be required to pay the counterparty the amount, if any, by which the value of the underlying TRS asset declines relative to the total notional amount through such final settlement date. We do not own, or have physical custody of, the TRS assets and the TRS assets are not direct investments by us. Our subsidiary is required to post collateral with a custodian of at least 40% of the notional amount of each TRS asset and may be required to post additional collateral in the event the value of the TRS assets decreases below a specified amount.

Our investment strategy is focused on creating and growing an Investment Portfolio that generates superior risk-adjusted returns by carefully selecting investments through rigorous due diligence and actively managing and monitoring our Investment Portfolio. When evaluating an investment and the related portfolio company, we use the resources of our Advisors to develop an investment thesis and a proprietary view of a potential portfolio company’s intrinsic value. We believe our flexible approach to investing allows us to take advantage of opportunities that offer favorable risk/reward characteristics.

We primarily focus on the following investment types:

 

    Senior Debt. We invest in senior debt, in which we generally take a security interest in the available assets of the portfolio company, including equity interests in any of its subsidiaries. These investments generally take the form of senior secured first lien loans, senior secured second lien loans or senior secured bonds. In some circumstances, our lien could be subordinated to claims of other creditors.

 

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    Subordinated Debt. Our subordinated debt investments are generally subordinated to senior debt and are generally unsecured. These investments are generally structured with interest-only payments throughout the life of the security, with the principal due at maturity.

 

    Structured Products. We also invest in structured products, which may include collateralized debt obligations (“CDOs”), collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), structured notes and credit-linked notes. The issuers of such investment products may be structured as trusts or other types of pooled investment vehicles. Such products may also involve the deposit with or purchase by an entity of the underlying investments and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying investments or referencing an indicator related to such investments.

 

    Equity Investments. We also make selected equity investments. In addition, when we invest in senior and subordinated debt, we may acquire warrants or options to purchase equity securities or benefit from other types of equity participation. Our goal is ultimately to dispose of these equity interests and realize gains upon our disposition of such interests.

The level of our investment activity can and does vary substantially from period to period depending on many factors, including: the demand for debt from creditworthy privately owned U.S. companies, the level of merger, acquisition and refinancing activity involving private companies, the availability of credit to finance transactions, the general economic environment, the competitive investment environment for the types of investments we currently seek and intend to seek in the future, the amount of equity capital we raise from offering common stock in our company and the amount of capital we may borrow.

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

Revenues

We generate revenues primarily in the form of interest on the debt securities of portfolio companies that we acquire and hold for investment purposes. Our investments in debt securities generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically earn interest at fixed or floating rates. Interest on our debt securities is generally payable to us quarterly or semi-annually. Some of our investments in debt securities contain payment-in-kind (“PIK”) interest provisions. The outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of dividends from equity investments, prepayment fees, commitment fees, origination fees and fees for providing significant managerial assistance. While the TRS assets also generate interest income and fees, such amounts, net of the financing expenses, are recognized as (i) realized gains from derivative investments pursuant to generally accepted accounting principles (“GAAP”) when payable to us quarterly and (ii) unrealized gains from derivative investments for any accrued but unpaid amounts.

Operating Expenses

Our primary operating expenses include an investment advisory fee and, depending on our operating results, performance-based incentive fees, interest expense, administrative expenses, custodian and accounting fees, other third-party professional services and expenses and amortization of deferred offering expenses. The investment advisory fee and performance-based incentive fees compensate the Advisors for their services in identifying, evaluating, negotiating, closing and monitoring our investments.

 

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Financial and Operating Highlights

The following table presents our financial and operating highlights as of September 30, 2015 and December 31, 2014, and the nine months ended September 30, 2015 and 2014:

 

     September 30,     December 31,  

As of (in thousands, except ratios and per share amounts)

   2015     2014  

Total assets

   $ 3,750,613      $ 2,971,720   

Adjusted total assets (Total assets, net of payable for investments purchased)

   $ 3,747,125      $ 2,936,832   

Investments in portfolio companies

   $ 3,410,871      $ 2,720,571   

Borrowings - credit facilities and term loan, net of discount

   $ 1,207,514      $ 772,678   

Deemed borrowings (TRS implied leverage classified as senior securities)

   $ 181,484      $ 172,041   

Net assets

   $ 2,526,361      $ 2,145,821   

Net asset value per share

   $ 9.26      $ 9.79   

Leverage ratio (Borrowings + Deemed borrowings)/Adjusted total assets)

     37     32

Activity for the Nine Months Ended

   September 30,  

(in thousands, except per share amounts)

   2015     2014  

Average net assets

   $ 2,385,563      $ 1,689,396   

Average borrowings under credit facilities and term loan

   $ 925,201      $ 524,996   

Cost of investments purchased

   $ 1,467,289      $ 1,260,847   

Sales, principal payments and other exits

   $ 637,250      $ 793,787   

Net investment income

   $ 127,578      $ 82,834   

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

   $ 49,322      $ 11,473   

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

   $ (175,423   $ 8,376   

Net increase in net assets resulting from operations

   $ 1,477      $ 102,683   

Total distributions declared

   $ 148,719      $ 100,320   

Net investment income before unearned incentive fees per share

   $ 0.52      $ 0.52   

Net investment income per share

   $ 0.52      $ 0.49   

Earnings per share

   $ 0.01      $ 0.61   

Distributions declared per share outstanding for the entire period

   $ 0.60      $ 0.60   
Summary of Common Stock Offerings for the Nine Months Ended    September 30,  

(in thousands, except share and per share amounts)

   2015     2014  

Gross proceeds, excluding reinvestment of distributions

   $ 519,048      $ 549,847   

Net proceeds to Company, excluding reinvestment of distributions

   $ 472,250      $ 498,652   

Reinvestment of distributions

   $ 76,446      $ 51,383   

Average net proceeds per share

   $ 9.85      $ 10.17   

Shares issued in connection with Offerings, excluding reinvestment of distributions

     47,926,637        49,031,534   

Shares issued in connection with reinvestment of distributions

     7,798,343        5,052,427   

Business Environment

Although financial conditions have improved significantly since the recession of 2008-2009, our directly originated investments continue to have higher all-in yields than comparable secondary market debt; therefore, we maintain a focus on directly originated investment opportunities. As the capital markets environment has improved, large companies have been able to access capital with relative ease. However, there remain a substantial number of companies that, for a variety of reasons, are unable to access the syndicated debt markets on attractive terms. In the United States, access is often limited by the issuer’s size, complicated industry dynamics, regulatory overhang, and unique or complex capital structures. Given these market conditions, it is our ongoing view that providing senior and subordinated debt capital to such companies represents an attractive risk-adjusted return. Since receiving our SEC Exemptive Order allowing Co-Investment Transactions, directly originated investments have grown to approximately 54% of our Investment Portfolio. Furthermore, we believe future lending opportunities are likely to expand given the current regulatory setting, and a potential change in the current Central Bank-subsidized low-interest rate environment.

Considering the recent dynamic market environment, we continue to be mindful of a number of key themes. Notably, during the nine months ended September 30, 2015, volatility and general de-risking, driven primarily by geopolitical concerns as well as sector specific dislocations, such as in the energy sector has led to price declines across credit and equity markets. Despite this volatility, our basic investment premise emphasizing directly originated and other private credit investments remains unchanged. We believe that privately originated transactions to both U.S. and foreign middle market companies will outperform low-yielding government bonds and high grade credit over the long-term.

 

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Meanwhile, we continue to scan for attractive opportunities in secondary credit markets resulting from specific situations and volatility in market fundamentals.

Portfolio and Investment Activity

Portfolio Investment Activity as of September 30, 2015 and December 31, 2014 and for the Three and Nine Months ended September 30, 2015 and 2014

The following tables summarize our investment activity as of September 30, 2015 and December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014, excluding our short term investments:

 

     Investment Activity Summary as of ($ in thousands)  
     September 30, 2015      December 31, 2014  
     Investment Portfolio      TRS Portfolio      Investment Portfolio      TRS Portfolio  

Total Fair Value

   $ 3,410,871       $ 317,814       $ 2,720,571       $ 281,290   

No. Portfolio Companies

     120         49         112         47   

No. Debt Investments

     135         53         127         49   

No. Structured Product Investments

     4         —           3         —     

No. Equity/Other Investments

     34         —           22         —     
     Investment Portfolio Activity Summary ($ in thousands)  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Incremental Purchases

   $ 476,476       $ 449,447       $ 1,467,289       $ 1,260,847   

Investment Sales

     63,180         48,067         251,954         442,624   

Principal Payments

     146,205         101,692         385,296         351,163   

Portfolio Company Additions

     10         17         31         33   

Portfolio Company Exits

     (7      (11      (23      (27

Debt Investment Additions

     19         20         40         56   

Debt Investment Exits

     (12      (15      (32      (48
     TRS Portfolio Activity Summary ($ in thousands)  
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Incremental Purchases

   $ 14,320       $ 12,116       $ 162,132       $ 108,212   

Investment Sales

     65,254         11,106         79,206         31,918   

Principal Payments

     16,617         9,766         46,324         19,206   

Portfolio Company Additions

     —           2         12         22   

Portfolio Company Exits

     (10      (6      (10      (10

Debt Investment Additions

     3         5         16         26   

Debt Investment Exits

     (13      (9      (12      (13

While the Investment Portfolio and the TRS Portfolio are accounted for and presented as two distinct portfolios, the two portfolios had 26 and 12 debt investment positions and 30 and 21 portfolio companies in common as of September 30, 2015 and 2014, respectively. The changes in the fair value of our Investment Portfolio and our TRS Portfolio are directly related to (i) the changes in their cost basis and notional amounts, respectively, as a result of incremental purchases, sales and principal payments as described in the table above, and (ii) the changes in fair value for assets held at the beginning and end of the period. The net change in unrealized depreciation for the three months ended September 30, 2015 and 2014 was $107.86 million and $45.36 million, respectively, for our Investment Portfolio, and $3.64 million and $1.51 million, respectively, for our TRS Portfolio. The net change in unrealized appreciation (depreciation) for the nine months ended September 30, 2015 and 2014 was $(136.50) million and $(21.22) million, respectively, for our Investment Portfolio, and $1.0 million and $(2.88) million, respectively, for our TRS Portfolio. See “Results of Operations – Net Change in Unrealized Appreciation or Depreciation” below for further details relating to the changes.

As discussed above under “— Overview,” since receiving our SEC Exemptive Order, we have increased our focus on originated investments, including Co-Investment Transactions, as a main element of our investment strategy. Co-Investment Transactions give us the opportunity to participate in those investments alongside KKR’s institutional clients and proprietary funds. Our total origination activity in Co-Investment Transactions, at par, plus future expected fundings related to such investments, totaled

 

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approximately $438.39 million for the nine months ended September 30, 2015, representing 47.6% of approximately $920.84 million in total originations by KKR in Co-Investment Transactions for the period.

The following summarizes our investment activity associated with our investment focus on originated debt investments during the nine months ended September 30, 2015 and 2014 and the status of originated investments held in the Investment Portfolio as of September 30, 2015 and December 31, 2014:

 

     September 30,  

Originated Investment Activity for the Nine Months Ended ($ in thousands)

   2015     2014  

Number of new originated investments, by issuer

     12        16   

Total amount of originated investments, at cost (1)

   $ 586,577      $ 497,743   

Originated investments as a percentage of total investment activity

     40.0     37.5

Fee income recognized in connection with originated investments

   $ 3,691      $ 1,888   

Originated Investments Summary as of ($ in thousands)

   September
30, 2015
    December
31, 2014
 

Total originated investments, at fair value

   $ 1,852,228      $ 1,405,625   

Total originated investments as a percentage of total Investment Portfolio, at fair value

     54.3     51.7

Estimated forward-looking annual yield of originated debt
investments (2)(3)

     10.5     10.8

 

(1)  The total amount of originated investments, at cost, includes new issuers during the reporting periods and any follow-on originated investments from existing issuers.
(2)  The estimated forward-looking annual yield on debt investments is based on amortized cost as of the end of the applicable period. The estimated forward-looking annual yield for our debt investments is represented by a fraction, (i) the numerator of which is the sum of (a) the annual interest rate of each debt investment multiplied by its par amount as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each debt investment, if any; and (ii) the denominator of which is the total amortized cost of all debt investments included in the calculated group as of the end of the applicable reporting period.
(3)  The estimated forward-looking annual yield of originated debt investments is higher than what investors in our Company will realize because it does not reflect expenses of the Company or any sales load. Total investment return – net price and total investment return – net asset value were (0.5%) and 0.6%, respectively, as of September 30, 2015. See Note 13. “Financial Highlights” in the accompanying unaudited condensed consolidated financial statements for information on how such returns were calculated.

The following information presents additional analysis of our Investment Portfolio and TRS Portfolio as of September 30, 2015 and December 31, 2014, excluding our short-term investments. Our investment program is not managed with any specific asset category target goals. The primary investment type concentrations include (i) senior debt, and (ii) subordinated debt securities.

 

     Investment Portfolio as of (in thousands)  
     September 30, 2015      December 31, 2014  

Asset Category

   Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Senior debt

           

Senior secured loans - first lien

   $ 1,432,693       $ 1,344,526       $ 1,152,555       $ 1,128,244   

Senior secured loans - second lien

     1,004,624         981,716         858,829         843,957   

Senior secured bonds

     228,331         203,378         154,125         147,817   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

     2,665,648         2,529,620         2,165,509         2,120,018   

Subordinated debt

     531,580         483,976         459,004         433,755   

Structured products

     85,721         91,669         33,721         36,421   

Equity/Other

     331,742         305,606         129,658         130,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,614,691       $ 3,410,871       $ 2,787,892       $ 2,720,571   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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     TRS Portfolio as of (in thousands)  
     September 30, 2015      December 31, 2014  

Asset Category

   Notional Amount      Fair Value      Notional Amount      Fair Value  

Senior debt

           

Senior secured loans - first lien

   $ 275,115       $ 270,159       $ 255,966       $ 250,662   

Senior secured loans - second lien

     40,532         39,578         22,802         21,932   

Senior secured bonds

     7,315         6,904         7,315         7,066   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total senior debt

     322,962         316,641         286,083         279,660   

Subordinated debt

     1,162         1,173         1,658         1,630   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 324,124       $ 317,814       $ 287,741       $ 281,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents a summary of interest rate and maturity statistics for the debt investments, based on par value, in our Investment Portfolio and the TRS Portfolio as of September 30, 2015 and December 31, 2014:

 

     Investment Portfolio as of     TRS Portfolio as of  

Floating interest rate debt investments:

   September 30,
2015
    December 31,
2014
    September 30,
2015
    December 31,
2014
 

Percent of debt portfolio

     70.1     67.5     96.6     96.1

Percent of floating rate debt investments with interest rate floors

     95.1     97.9     98.7     98.6

Weighted average interest rate floor

     1.0     1.1     1.0     1.0

Weighted average coupon spread to base rate

     754 bps        748 bps        443 bps        419 bps   

Weighted average years to maturity

     5.0        5.4        4.9        5.3   

Fixed interest rate debt investments:

                        

Percent of debt portfolio

     29.9     32.5     3.4     3.9

Weighted average coupon rate

     10.4     10.9     9.9     9.9

Weighted average years to maturity

     5.6        5.3        5.0        5.7   

All of our floating interest rate debt investments have base rate reset frequencies of less than twelve months with the majority resetting at least quarterly. The three-month LIBOR, the most prevalent index employed among our floating interest rate debt investments, ranged between 0.251% and 0.345% during the nine months ended September 30, 2015 and the terminal value was 0.325% on September 30, 2015. Base rate resets for floating interest rate investments will only result in interest income increases when the reset base interest rate exceeds the associated interest rate floor.

Our estimated forward-looking annual yield on debt investments was 9.9% as of September 30, 2015, compared to 10.0% as of December 31, 2014. The decrease is partly attributable to a decrease in our investment concentration in fixed interest rate debt investments, which currently have a higher weighted average coupon rate than our floating interest rate debt investments, as illustrated in the above table. The estimated forward-looking annual yield on debt investments is higher than what investors in our Company will realize because it does not reflect expenses of the Company or any sales load. Total investment return—net price and total investment return – net asset value were (0.5%) and 0.6%, respectively, for the nine months ended September 30, 2015. See Note 13. “Financial Highlights” in the accompanying unaudited condensed consolidated financial statements.

 

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The following table shows the credit ratings of the investments in our Investment Portfolio and TRS Portfolio, based upon the rating scale of Standard & Poor’s Ratings Services, as of September 30, 2015 and December 31, 2014:

 

     Investment Portfolio as of (in thousands)     TRS Portfolio as of (in thousands)  
     September 30, 2015     December 31, 2014     September 30, 2015     December 31, 2014  

Standard & Poor’s rating

   Fair Value      Percentage
of

Portfolio
    Fair Value      Percentage
of

Portfolio
    Fair
Value
     Percentage
of

Portfolio
    Fair
Value
     Percentage
of

Portfolio
 

BB

   $ —           —     $ —           —     $ 409         0.1   $ —           —  

BB-

     46,436         1.4        21,536         0.8        31,388         9.9        27,610         9.8   

B+

     178,138         5.2        161,172         5.9        44,830         14.1        47,837         17.0   

B

     282,327         8.3        174,797         6.4        149,990         47.2        127,542         45.3   

B-

     362,840         10.6        331,145         12.2        57,417         18.1        53,309         19.0   

CCC+

     696,319         20.4        617,925         22.7        20,544         6.5        9,162         3.3   

CCC

     131,550         3.9        156,206         5.7        4,866         1.5        4,575         1.6   

CCC-

     44,432         1.3        53,089         2.0        4,648         1.4        11,255         4.0   

D

     10,053         0.3        567         —          3,722         1.2        —           —     

Not rated

     1,658,776         48.6        1,204,134         44.3        —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,410,871         100.0   $ 2,720,571         100.0   $ 317,814         100.0   $ 281,290         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The table below presents a summary of our debt investment positions held in our Investment Portfolio that feature PIK interest provisions for some or all of the applicable portfolio company’s interest payment obligations.

 

PIK Summary as of ($ in thousands)

  September 30,
2015
    December 31,
2014
 

Total number of all investments with PIK feature

    20        22   

Par value of all investments with PIK feature

  $ 598,330      $ 609,971   

Total number of all investments that have active PIK election

    18        17   

Par value of all investments that have active PIK election

  $ 577,117      $ 498,706   

Percent of debt investment portfolio with active PIK election, at par value

    17.7     18.5

Number of originated investments with PIK feature and active PIK election

    10        9   

Par value of originated investments with PIK feature and active PIK election

  $ 451,388      $ 402,244   
    September 30,  

PIK Interest Income Activity for the Nine Months Ended (in thousands)

  2015     2014  

PIK interest income

  $ 24,308      $ 29,234   

PIK interest income as a percentage of interest income

    11.9     19.1

PIK interest income as a percentage of total investment income

    10.8     18.0

As of September 30, 2015, our Investment Portfolio consisted of 120 portfolio companies, diversified across 21 industry classifications, as compared to our Investment Portfolio as of December 31, 2014 that consisted of 112 portfolio companies, diversified across 21 distinct industry classifications. As of September 30, 2015, the TRS Portfolio consisted of 49 portfolio companies, diversified across 15 distinct industry classifications, as compared to our TRS Portfolio as of December 31, 2014 that consisted of 47 portfolio companies, diversified across 15 distinct industry classifications. The following table presents a summary of our Investment Portfolio and TRS Portfolio arranged by industry classifications of the portfolio companies as of September 30, 2015 and December 31, 2014:

 

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     Investment Portfolio as of (in thousands)     TRS Portfolio as of (in thousands)  
     September 30, 2015     December 31, 2014     September 30, 2015     December 31, 2014  

Industry Classification

   Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
    Fair
Value
     Percentage
of Portfolio
 

Capital Goods

   $ 470,630         13.8   $ 226,158         8.3   $ 36,398         11.4   $ 37,966         13.5

Software & Services

     450,562         13.2        394,377         14.5        73,999         23.3        68,344         24.3   

Consumer Durables & Apparel

     365,003         10.7        458,310         16.8        16,195         5.1        9,072         3.2   

Diversified Financials

     263,407         7.7        139,597         5.1        —           —          —           —     

Retailing

     211,095         6.2        218,902         8.0        33,559         10.5        19,445         6.9   

Automobiles & Components

     187,937         5.5        118,322         4.3        —           —          —           —     

Technology Hardware & Equipment

     185,168         5.4        181,005         6.7        8,469         2.7        3,303         1.2   

Energy

     175,993         5.2        226,564         8.3        —           —          —           —     

Commercial & Professional Services

     171,560         5.0        58,540         2.2        4,211         1.3        2,009         0.7   

Health Care Equipment & Services

     135,785         4.0        187,834         6.9        33,140         10.4        31,296         11.1   

Materials

     123,878         3.6        96,320         3.5        12,756         4.0        3,669         1.3   

Telecommunications Services

     114,941         3.4        80,584         3.0        9,814         3.1        18,033         6.4   

Food & Staples Retailing

     109,283         3.2        74,289         2.7        12,645         4.0        7,697         2.7   

Transportation

     108,538         3.2        63,510         2.3        —           —          —           —     

Media

     89,002         2.6        43,915         1.6        27,532         8.7        27,251         9.7   

Real Estate

     67,513         2.0        28,213         1.0        12,751         4.0        —           —     

Food, Beverage & Tobacco

     65,621         1.9        39,108         1.4        8,778         2.8        8,758         3.1   

Pharmaceuticals, Biotechnology & Life Science

     54,314         1.6        5,264         0.2        —           —          12,639         4.5   

Consumer Services

     31,652         0.9        48,047         1.8        4,131         1.3        8,363         2.9   

Remaining Industries

     28,989         0.9        31,712         1.4        23,436         7.4        23,445         8.5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,410,871         100.0   $ 2,720,571         100.0   $ 317,814         100.0   $ 281,290         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Capital Resources and Liquidity

Sources and Uses of Capital

Our capital resources and liquidity are derived primarily from (i) equity capital proceeds of our Offerings, (ii) borrowings, (iii) cash flows from operations, including investment sales and repayments, and (iv) reinvested distributions. Our primary uses of funds include (i) investments in debt of portfolio companies, (ii) distributions to our shareholders, (iii) advisory fees, (iv) interest expense and other financing fees, (v) periodic reductions in the outstanding principal amounts on our borrowings, and (vi) operating expenses. We have used, and expect to continue to use, proceeds from the turnover of our Investment Portfolio, equity capital proceeds from our Offerings, and borrowings under our credit facilities to finance our investment activities primarily focused on directly originated investments in portfolio companies. In addition, in January 2015, we filed our Shelf Registration Statement with the SEC that was declared effective on January 16, 2015, under which we may offer, from time to time, up to $750 million of our debt and/or equity securities, on terms to be determined at the time of each such offering.

Liquidity

As of September 30, 2015, we had the following sources of immediate liquidity available to us:

 

(in thousands)

   Amount  

Cash and Foreign Currency

   $ 52,882   

Short Term Investments

     68,882   

Credit Facilities-Effective Borrowing Capacity (1)

     296,046   
  

 

 

 

Total

   $ 417,810   
  

 

 

 

 

(1)  Effective borrowing capacity represents additional amounts that we could borrow from our credit facilities based on collateral in place as of September 30, 2015.

In addition to the sources of immediate liquidity listed above, we continue to raise capital through our Follow-On Offering, although we anticipate terminating the Follow-On Offering on or around December 31, 2015. As of September 30, 2015, we had approximately 73 million additional shares of common stock available for sale through the Follow-On Offering. In addition, our Shelf Registration Statement provides us the ability of offer, from time to time, up to $750 million of debt and/or equity securities.

 

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Borrowings-Credit Facilities and Term Loan

Our outstanding borrowings as of September 30, 2015 and December 31, 2014 were as follows:

 

     As of September 30, 2015     As of December 31, 2014  

(in thousands)

   Total
Aggregate
Principal
Amount
Committed
     Principal
Amount
Outstanding
     Carrying
Value
    Total
Aggregate
Principal
Amount
Committed
     Principal
Amount
Outstanding
     Carrying
Value
 

Deutsche Bank Credit Facility (1)

   $ 250,000       $ 175,000       $ 175,000      $ 340,000       $ 47,000       $ 47,000   

BNP Credit Facility (1)

     200,000         163,000         163,000        200,000         100,450         100,450   

Senior Secured Revolving Credit
Facility (1) (2)

     700,000         477,000         477,000        655,000         230,000         230,000   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total credit facilities

     1,150,000         815,000         815,000        1,195,000         377,450         377,450   

2014 Senior Secured Term Loan

     394,000         394,000         392,514 (3)      397,000         397,000         395,228 (3) 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 1,544,000       $ 1,209,000       $ 1,207,514      $ 1,592,000       $ 774,450       $ 772,678   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1)  Subject to borrowing base and leverage restrictions. During the nine months ended September 30, 2015, CCT Funding LLC (“CCT Funding”) entered into two separate amendments to the Deutsche Bank Credit Facility whereby the aggregate amount of commitments were decreased by $90 million, net of an increase of $100 million, for a total facility size of $250 million as of September 30, 2015.
(2)  Senior Secured Revolving Credit Facility includes a provision that allows us, under certain circumstances, to increase the size of the Senior Secured Revolving Credit Facility to a maximum of $900 million.
(3)  Comprised of outstanding principal less unaccreted original issue discount.

For the nine months ended September 30, 2015 and 2014, our total all-in cost of financing, including fees and expenses, was 3.71% and 4.48%, respectively. We expect to continue to draw on the revolving credit facilities to finance our acquisition of investment positions in portfolio companies. We may further increase our aggregate borrowing capacity in the future beyond the current combined commitment amount of $1.54 billion that is available to us from our revolving credit facilities and term loan, and we may add additional credit arrangements or other forms of financing arrangements, including joint ventures.

See Note 10. “Borrowings” in our unaudited condensed consolidated financial statements for additional disclosures regarding our borrowings.

Total Return Swaps

In 2012, Halifax Funding LLC (“Halifax Funding”), our wholly owned, special purpose financing subsidiary, entered into a TRS arrangement with The Bank of Nova Scotia (“BNS”).

The obligations of Halifax Funding under the TRS agreements are nonrecourse to us and our exposure under the TRS agreements is limited to the amount of collateral that is posted by Halifax Funding pursuant to the terms of the TRS agreements. As of September 30, 2015, the posted collateral of $142.64 million equaled 44.0% of the total notional amount, as compared to $115.70 million, or 40.2% of the total notional amount as of December 31, 2014. The minimum required collateral amount (40% of the total notional amount, plus additional required collateral due to concentration limits in the TRS Portfolio) was $129.65 million as of September 30, 2015.

Halifax Funding may terminate the TRS agreements at any time upon providing at least 30 days’ notice prior to the proposed settlement date of the TRS assets related to such termination. In the absence of early termination, the TRS agreements will terminate on January 15, 2016. In the event of early termination of the TRS agreements, Halifax Funding may be required to pay an early termination fee. On October 22, 2015, Halifax Funding amended the TRS agreements. The amended TRS agreements, among other things, increased the rate at which Halifax Funding pays interest to BNS to 1.4% per annum while also reducing the required collateral amount to 33.3% of the settled notional amount. In addition, the amended TRS agreements extended the termination date to January 15, 2019. In conjunction with the execution of the amended TRS agreements, any make-whole fee that may have been due to BNS upon the original termination date of January 15, 2016 will now be included in the calculation of any make-whole fee that may be due upon termination on January 15, 2019.

See Note 4. “Derivative Instruments” in our unaudited condensed consolidated financial statements for additional disclosures on the TRS.

 

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Commitments and Contingencies

See Note 11. “Commitments and Contingencies” in our unaudited condensed consolidated financial statements for information on our commitments and contingencies as of September 30, 2015.

Distributions to Shareholders

We pay monthly distributions to our shareholders in the form of cash. Shareholders may elect to reinvest their distributions as additional shares of our common stock under our distribution reinvestment plan. Dividends may be taxable to our shareholders even if they are reinvested in additional shares of our common stock. The following table reflects the cash distributions per share and the total amount of distributions that we have declared on our common stock during each of the quarters during the nine months ended September 30, 2015 and 2014:

 

(in thousands, except per share amounts)

   Per Share      Amount  

Quarter Ended:

     

September 30, 2015 (13 record dates)

   $ 0.201279       $ 53,144   

June 30, 2015 (13 record dates)

     0.201279         49,745   

March 31, 2015 (13 record dates)

     0.201279         45,830   
  

 

 

    

 

 

 
   $ 0.603837       $ 148,719   
  

 

 

    

 

 

 

Quarter Ended:

     

September 30, 2014 (14 record dates)

   $ 0.216762       $ 40,387   

June 30, 2014 (13 record dates)

     0.201279         33,170   

March 31, 2014 (12 record dates)

     0.180048         26,763   
  

 

 

    

 

 

 
   $ 0.598089       $ 100,320   
  

 

 

    

 

 

 

Approximately 51% of the distributions we declared in each of the nine months ended September 30, 2015 and 2014 were reinvested in shares of our common stock by participants in our distribution reinvestment plan and the reinvested distributions represent an additional source of capital to us. Net investment income and realized capital gains represent the primary sources for us to pay distributions. See Note 8. “Distributions” in our unaudited condensed consolidated financial statements for additional disclosures on distributions.

We estimate we had sufficient taxable income to support 100% of our declared distributions for the nine months ended September 30, 2015. We do not expect to use equity capital or borrowed funds to pay distributions to shareholders nor do we expect any portion of our distributions paid in 2015 to be treated as a return of capital for tax purposes. We routinely disclose the sources of funds used to pay distributions to our shareholders in periodic reports that accompany (i) quarterly account statements and (ii) monthly distribution checks that are prepared and sent directly by our transfer agent to our shareholders. See Note 8. “Distributions” to the unaudited condensed consolidated financial statements for a discussion of the sources of funds used to pay distributions on a GAAP basis for the periods presented.

Results of Operations

As of September 30, 2015, the fair value of our investments totaled $3.41 billion for our Investment Portfolio and $317.81 million for our TRS Portfolio. The majority of our investments at September 30, 2015 consisted of debt investments. See the section entitled “Portfolio and Investment Activity” above for a discussion of the general terms and characteristics of our investments, and for information regarding investment activities during the three and nine months ended September 30, 2015 and 2014. The growth of our Investment Portfolio was the primary contributing factor to the significant increases in investment income, operating expenses, investment advisory fees, net investment income and net assets between the comparative periods, as discussed below.

 

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The following is a summary of our operating results for the three and nine months ended September 30, 2015 and 2014:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  

(in thousands)

  2015     2014     2015     2014  

Total investment income

  $ 77,931      $ 63,348      $ 224,051      $ 162,639   

Total operating expense

    (32,213     (27,758     (96,342     (79,805

Income tax expense

    (90     —          (131     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

    45,628        35,590        127,578        82,834   

Net realized gains

    48,066        266        49,322        11,473   

Net change in unrealized appreciation (depreciation)

    (153,425     (14,021     (175,423     8,376   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

  $ (59,731   $ 21,835      $ 1,477      $ 102,683   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment income

Investment income consisted of the following for the three and nine months ended September 30, 2015 and 2014:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Interest income

   $ 61,641       $ 43,953       $ 179,600       $ 123,646   

Payment-in-kind interest income

     8,337         11,585         24,308         29,234   
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     69,978         55,538         203,908         152,880   

Fee income

     2,539         1,010         14,023         2,372   

Dividend and other income

     5,414         6,800         6,120         7,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment income

   $ 77,931       $ 63,348       $ 224,051       $ 162,639   
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in interest income was due primarily to the growth of our portfolio of debt investments. Our average debt investment balance was $3.16 billion and $2.98 billion during the three and nine months ended September 30, 2015, respectively, as compared to $2.22 billion and $2.11 billion during the same periods in 2014, for an increase of 42.1% and 40.9%, respectively, based on par value. Interest income as a percentage of our average investment balance decreased during the three and nine months ended September 30, 2015, as compared to the same periods in 2014, partially due to an increase in our investment concentration in first lien senior secured loans which generally have lower interest rates than second lien loans or subordinated debt. As of September 30, 2015, our first lien senior secured loans were 39.6% of our Investment Portfolio, as compared to 36.8% as of September 30, 2014, based on amortized cost. Variations in interest income are also partly due to nonrecurring recognition of prepayment penalties and unamortized loan fees, discounts and premiums upon the prepayment of debt investments. We recorded interest income from these sources in the combined amount of $(0.83) million and $5.16 million for the three and nine months ended September 30, 2015, respectively, and $1.22 million and $9.54 million for the three and nine months ended September 30, 2014, respectively. For each of the three and nine months ended September 30, 2015, 11.9% of our total interest income was attributable to PIK interest income, as compared to 20.9% and 19.1% for the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, our estimated forward-looking debt portfolio yield was 9.9% based on amortized cost, as defined above in “Portfolio and Investment Activity.” As of September 30, 2015, approximately 70.1% of our debt investments had floating rate interest; therefore, changes in interest rates could have a material impact on our interest income in the future. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for further information on the impact interest rate changes could have on our results of operations.

Interest income earned on TRS assets is not included in investment income in the unaudited condensed consolidated statements of operations, but rather is recorded as part of (i) realized gains or losses on derivative instruments in connection with quarterly TRS settlement payments and (ii) unrealized appreciation (depreciation) on derivative instruments for amounts not yet received from the counterparty as of period end.

Our fee income is transaction based fees and is nonrecurring. The increase in fee income for the nine months ended September 30, 2015 was primarily due to an amendment fee received in the amount of $7.76 million earned during the first quarter of 2015 from one of our portfolio companies seeking financial covenant relief and an increase in capital structuring fees earned related to our Co-Investment Transactions. Going forward, we expect to earn additional structuring service fees on Co-Investment Transactions as a result of our persistent focus on direct lending activities. See Note 7. “Fee Income” in our unaudited condensed unconsolidated financial statements for additional information on fee income.

 

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Operating expenses

Our operating expenses for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Investment advisory fees

   $ 18,867       $ 12,561       $ 51,004       $ 34,506   

Performance-based incentive fees

     —           3,722         7,983         15,325   

Interest expense

     9,487         7,295         25,561         17,506   

Offering expenses

     957         1,677         3,598         5,351   

Administrative services

     717         745         2,031         2,137   

Professional services

     621         520         1,988         1,570   

Custodian and accounting fees

     377         226         958         604   

Director fees and expenses

     158         126         478         417   

Other

     1,029         886         2,741         2,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

   $ 32,213       $ 27,758       $ 96,342       $ 79,805   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment advisory fees and performance-based incentive fees – Our investment advisory fees are calculated at an annual rate of 2% of our average gross assets; therefore, the increase in these fees for the three and nine months ended September 30, 2015 was primarily attributable to the net increase in our gross assets.

Our Advisors are also eligible to receive incentive fees based on our performance. Our performance-based incentive fees, which are comprised of two parts, consisted of the following for the three and nine months ended September 30, 2015 and 2014:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Subordinated incentive fee on income

   $ —         $ 6,763       $ 7,983       $ 11,926   

Incentive fee on capital gains

     —           (3,041      —           3,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total performance-based incentive fees

   $ —         $ 3,722       $ 7,983       $ 15,325   
  

 

 

    

 

 

    

 

 

    

 

 

 

The subordinated incentive fee on income is payable to our Advisors each calendar quarter if our pre-incentive fee net investment income (as defined in the Investment Advisory Agreement and approved by our board of directors) exceeds a 1.75% quarterly preference return to our shareholders (the ratio of pre-incentive fee net investment income divided by average adjusted capital).

The annual incentive fee on capital gains recorded for GAAP purposes is equal to (i) 20% of our realized and unrealized capital gains on a cumulative basis since inception, net of all realized capital losses and unrealized depreciation on a cumulative basis from inception, less (ii) the aggregate amount of any previously paid incentive fees on capital gains. As discussed in Note 6. “Related Party Transactions” in our unaudited condensed consolidated financial statements, the calculation of performance-based incentive fees disregards any net realized and unrealized gains associated with the TRS interest spread. In addition, for financial reporting purposes, in accordance with GAAP, we include unrealized appreciation on our Investment Portfolio and derivative instruments in the calculation of the incentive fee on capital gains; however, such amounts are not payable by us unless and until the net unrealized appreciation is actually realized. The actual amount of the incentive fee on capital gains that is due and payable to the Advisors is determined at the end of the calendar year.

The components of incentive fees on capital gains consisted of the following for the three and nine months ended September 30, 2015 and 2014:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Incentive fees accrued on net realized gains (1)

   $ —         $ (660    $ —         $ —     

Incentive fees accrued for GAAP purposes on unrealized gains (2)

     —           (2,381      —           3,399   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ (3,041    $ —         $ 3,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Amount is based on cumulative realized gains, net of cumulative realized losses since inception and unrealized losses as of the end of the applicable period, less prior incentive fees paid. The incentive fee earned and payable to the Advisors is determined at the end of each calendar year.
(2)  This amount is not payable to the Advisors. Represents accrual for GAAP reporting purposes only for incentive fee on unrealized gains as of the end of the applicable period.

 

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The Advisors did not earn any incentive fees on capital gains for the nine months ended September 30, 2015 or the year ended December 31, 2014. As of September 30, 2015, we had unrealized losses of $175.54 million in excess of our cumulative realized net capital gains since inception. The Advisors were previously paid incentive fees on capital gains for the year ended December 31, 2013, at which time we had cumulative realized net capital gains since inception of $11.61 million in excess of our unrealized losses as of that date. Due to the cumulative nature of the incentive fee on capital gains, we will not owe the Advisors any incentive fees on capital gains for future years until such time, if any, that our cumulative realized net capital gains since inception exceed our unrealized losses as of a particular measurement date by $11.61 million.

See “—Contractual Obligations —Investment Advisory Agreements,” below for further details about the performance-based incentive fees.

Interest expense - The components of interest expense for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Stated interest expense

   $ 8,283       $ 4,408       $ 21,157       $ 11,696   

Unused commitment fees

     321         1,970         1,759         3,605   

Amortization of deferred financing costs

     786         823         2,359         2,073   

Accretion of discount on term loan

     97         94         286         132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

   $ 9,487       $ 7,295       $ 25,561       $ 17,506   
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in interest expense during the three and nine months ended September 30, 2015 was primarily attributable to the increase in our weighted average debt outstanding to $1,119.93 million and $925.20 million, respectively, as compared to $497.47 million and $525.00 million for the same periods in 2014, respectively. Although our interest expense increased, our annualized all-in cost of financing, including fees and expenses, decreased to 3.40% and 3.71% for the quarter and nine months ended September 30, 2015, respectively, as compared to 5.94% and 4.48% for the same periods in 2014, respectively. Our all-in cost of financing was higher during the three and nine months ended September 30, 2014 because the proceeds from our 2014 Senior Secured Term Loan, received in May 2014, were initially used to pay down other, lower-cost debt. Our all-in cost of financing will fluctuate between periods depending on the relative use of the 2014 Senior Secured Term Loan as compared to our other credit facilities, which bear lower stated interest rates.

Our performance-based incentive fees and interest expense, among other things, may increase or decrease our overall operating expenses and expense ratios relative to comparative periods depending on portfolio performance, an increase or reduction in borrowed funds and borrowing commitments, and changes in benchmark interest rates, such as LIBOR, among other factors.

All other operating expenses – In general, our other operating expenses increased period over period due to increased administrative and professional services associated with our owning a larger portfolio of investments. Our offering expenses have decreased during the three and nine months ended September 30, 2015 as a result of a decrease in the amount of reimbursement payments to our Advisors. Our offering expenses are capitalized as deferred offering expenses and then subsequently expensed over a 12-month period. During the three and nine months ended September 30, 2015, we recorded deferred offering expenses of $1.09 million and $2.79 million, respectively, as compared to $1.59 million and $4.96 million for the three and nine months ended September 30, 2014. The $1.81 million of deferred offering expenses recorded in the condensed consolidated statements of assets and liabilities as of September 30, 2015 represents the amount that will be recorded as offering expenses in the condensed consolidated statements of operations over the next 12 months.

During the three and nine months ended September 30, 2015, the ratio of annualized core operating expenses (excluding investment advisory fees, performance-based incentive fees, interest expense, and offering expenses) to average net assets was 0.46% and 0.47%, respectively, as compared to 0.53% and 0.56% for the same periods in 2014, respectively. As our asset base and number of shareholders have grown, our general and administrative expenses have increased, but at a slower rate compared to the growth rate in the asset base. We expect certain variable operating expenses to continue to increase due to the anticipated growth in the size of our asset base and the number of shareholders. Effective on January 1, 2015, we no longer reimburse CNL for certain personnel expenses as described in the Administrative Services Agreement. These personnel expenses were approximately $0.21 million and $0.66 million for the three and nine months ended September 30, 2014, respectively.

 

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Net realized gain and losses - Net realized gains and losses for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Net realized gains (losses) on investments

   $ (1,094    $ 1,407       $ (28,783    $ 15,738   

Net realized gains (losses) on derivative instruments

     51,360         (548      80,933         (1,326

Net realized losses on foreign currency transactions

     (2,200      (593      (2,828      (2,939
  

 

 

    

 

 

    

 

 

    

 

 

 

Net realized gains (losses)

   $ 48,066       $ 266       $ 49,322       $ 11,473   
  

 

 

    

 

 

    

 

 

    

 

 

 

As the result of our investment sales and principal payments, as described above in “Portfolio and Investment Activity,” we realized net gains (losses) on investments for each of the periods presented. The change in the amount of net realized gains (losses) on investments for the three and nine months ended September 30, 2015 was partially due to a restructure of one of the portfolio companies in whose debt securities we have invested, Towergate Finance PLC, resulting in a realized loss of $23.0 million. The amount of gains or losses realized upon investment sales will not bear a direct relationship to the volume of investment sales because such sales are driven largely by portfolio management and liquidity decisions, rather than by the gains to be realized upon the sale.

Our net realized gains (losses) on derivative instruments for the three and nine months ended September 30, 2015 and 2014 consisted of the following:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Net realized gains (losses) on:

           

Foreign currency forward contracts

   $ 47,021       $ (1,486    $ 71,081       $ (4,658

Cross currency swaps

     249         —           249         —     

TRS

     4,090         938         9,603         3,332   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,360       $ (548    $ 80,933       $ (1,326
  

 

 

    

 

 

    

 

 

    

 

 

 

See Note 4. “Derivative Instruments” in our unaudited condensed consolidated financial statements for more information about the components of the realized gain on TRS recorded during each period.

As described in Note 4. “Derivative Instruments” in our unaudited condensed consolidated financial statements, we utilize foreign currency forward contracts and cross currency swaps to economically hedge the impact that changes in foreign exchange rates have on the value of our investments denominated in foreign currencies. We record realized gains on these derivative instruments upon periodic settlement dates and upon maturity or termination. During the three months ended September 30, 2015, we terminated all of our outstanding foreign currency forward contracts and entered into new foreign currency forward contracts and cross currency swaps. Although both types of instruments serve as an economic hedge against changes in foreign exchange rates, the unrealized gains and losses may have differing tax treatments. By hedging our foreign investments with a combination of foreign currency forward contracts and cross currency swaps, we expect to reduce potential volatility in our taxable income while maintaining some flexibility to increase or decrease the overall notional balance of our hedges when deemed necessary. The terminated foreign currency forward contracts resulted in a realized gain of $43.54 million. The cross currency swaps generate realized gains or losses upon each quarterly settlement payment. The realized gains on foreign currency forward contracts and cross currency swaps help offset realized and unrealized losses in investments denominated in foreign currencies as a result of foreign currency movements, as described further below.

 

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Net change in unrealized appreciation or depreciation

For the three and nine months ended September 30, 2015 and 2014, the net change in unrealized appreciation and depreciation consisted of the following:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Net change in unrealized appreciation (depreciation) on:

           

Investments

   $ (107,859    $ (45,363    $ (136,499    $ (21,216

Derivative instruments

     (45,350      31,440         (38,759      28,139   

Foreign currency translation

     (216      (98      (165      1,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation)

   $ (153,425    $ (14,021    $ (175,423    $ 8,376   
  

 

 

    

 

 

    

 

 

    

 

 

 

The net change in unrealized appreciation (depreciation) on investments consisted of the following:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Net change in unrealized appreciation (depreciation) on investments:

           

Unrealized appreciation

   $ 11,811       $ 14,137       $ 33,330       $ 40,879   

Unrealized depreciation

     (125,439      (57,655      (189,017      (52,790

Net unrealized (appreciation) depreciation reversal related to net realized gains or losses (1)

     5,769         (1,845      19,188         (9,305
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net change in unrealized appreciation (depreciation)

   $ (107,859    $ (45,363    $ (136,499    $ (21,216
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents the unrealized appreciation or depreciation recorded on the related asset at the end of prior period.

Approximately 14.9% of our Investment Portfolio, measured at fair value, is denominated in foreign currencies. We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore, fluctuations related to foreign exchange rate conversions are included with unrealized appreciation (depreciation) on investments.

We have entered into foreign currency forward contracts and cross currency swaps to economically hedge the impact that changes in foreign exchange rates have on the value of our investments denominated in foreign currencies. The following table presents the combined realized and unrealized gains and losses on investments, including the impact of our hedges. Changes in foreign currency exchange rates could impact our earnings to the extent that our investments denominated in foreign currencies are not hedged or the hedges are not effective. See Item 3. “Quantitative and Qualitative Disclosures About Market Risk” for further discussion of the impact of foreign currency exchange rates on our earnings.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Net realized and unrealized gains (losses) on investments

   $ (108,953    $ (43,956    $ (165,282    $ (5,478

Net realized and unrealized gains (losses) on foreign currency forward contracts

     5,005         31,464         31,022         26,361   

Net realized and unrealized gains (losses) on cross currency swaps

     551         —           551         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (103,397    $ (12,492    $ (133,709    $ 20,883   
  

 

 

    

 

 

    

 

 

    

 

 

 

The net realized and unrealized losses on investments during the three and nine months ended September 30, 2015, after applying the net impacts of movements in valuation on the underlying foreign currency forward contracts and cross currency swaps put in place to mitigate currency risk, were partly attributable to declines in the fair values of the Company’s investments in securities of portfolio companies directly or indirectly related to the energy sector. During the three months ended September 30, 2015, volatility in commodities, energy and equities impacted various credits contributing to increasing unrealized depreciation in the portfolio. The net gain of $20.88 million for the nine months ended September 30, 2014 was related to a tightening of credit spreads that positively impacted the fair values of a number of investments, some that were sold during the period. The net realized and unrealized gains and losses on the foreign currency forward contracts largely offset the valuation movements in investments denominated in foreign currencies causes by foreign exchange rate fluctuations.

 

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The net change in unrealized appreciation (depreciation) on derivative instruments consisted of the following:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2015      2014      2015      2014  

Net change in unrealized appreciation (depreciation) on TRS Portfolio:

           

Unsettled amounts at end of period:

           

Spread interest income

   $ 4,380       $ 1,504       $ 4,380       $ 1,504   

Realized loss on TRS assets

     (517      (42      (517      (42

Receipt of prior period unsettled amounts

     (4,466      (1,030      (3,006      (1,676

Unrealized appreciation (depreciation) on TRS assets

     (3,033      (1,942      141         (2,666
  

 

 

    

 

 

    

 

 

    

 

 

 
     (3,636      (1,510      998         (2,880
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) on foreign currency forward contracts:

           

Unrealized appreciation

     386         31,416         386         28,856   

Unrealized depreciation

     —           (261      —           (269

Net unrealized (appreciation) depreciation reversal related to net realized gains or losses (1)

     (42,402      1,795         (40,445      2,432   
  

 

 

    

 

 

    

 

 

    

 

 

 
     (42,016      32,950         (40,059      31,019   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation (depreciation) on cross currency swaps:

           

Unrealized appreciation

     1,531         —           1,531         —     

Unrealized depreciation

     (1,229      —           (1,229      —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     302         —           302         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net change in unrealized appreciation (depreciation) on derivative instruments

   $ (45,350    $ 31,440       $ (38,759    $ 28,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents the unrealized appreciation or depreciation recorded at the end of prior period.

We are not aware of any material trends or uncertainties, favorable or unfavorable, that may be reasonably anticipated to have a material impact on either capital resources or the revenues or income to be derived from our investments, other than those described above, risk factors, if any, identified in Part II, Item 1A of this report, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections of our Annual Report on Form 10-K for the year ended December 31, 2014.

Adjusted net investment income

Our net investment income totaled $45.63 million ($0.17 per share) and $127.58 million ($0.52 per share) for the three and nine months ended September 30, 2015, respectively, as compared to $35.59 million ($0.19 per share) and $82.83 million ($0.49 per share) for the three and nine months ended September 30, 2014, respectively. As described above in “- Investment advisory fees and performance-based incentive fees,” we accrue estimated incentive fees on capital gains with respect to any net realized and unrealized appreciation in our Investment Portfolio and derivative instruments. The capital gains incentive fees are treated as an operating expense and therefore are a deduction in calculating our net investment income on a GAAP basis. However, the incentive fees on capital gains related to net unrealized appreciation on our Investment Portfolio and derivative instruments are not payable by us unless and until the net unrealized appreciation is actually realized. Therefore, in order to evaluate our net investment income without regard to unrealized appreciation in our Investment Portfolio, we have developed a supplemental, non-GAAP measure, which we refer to as “adjusted net investment income,” which presents net investment income before the effects of unearned performance-based incentive fees.

We believe that adjusted net investment income is useful to assess the sustainability of our distributions and operating performance. Adjusted net investment income is not necessarily indicative of cash flows available to fund cash needs and should not be considered as an alternative to net investment income as an indication of our performance, as an alternative to cash flows from operations as an indication of our liquidity, or indicative of funds available to fund our cash needs including our ability to make future distributions to our shareholders. Adjusted net investment income should not be construed as an historic performance measure or as more relevant or accurate than the current GAAP methodology in calculating net investment income and its applicability in evaluating our operating performance.

 

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The following table presents a reconciliation of our net investment income to adjusted net investment income for the three and nine months ended September 30, 2015 and 2014; the increase in adjusted net investment income was primarily the result in the growth of our Investment Portfolio and earnings thereon.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands, except per share amounts)

   2015      2014      2015      2014  

Net investment income (GAAP)

   $ 45,628       $ 35,590       $ 127,578       $ 82,834   

Add: Estimated unearned performance-based incentive fees

     —           (2,381      —           3,399   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net investment income (non-GAAP)

   $ 45,628       $ 33,209       $ 127,578       $ 86,233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net investment income per share (GAAP)

   $ 0.17       $ 0.19       $ 0.52       $ 0.49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net investment income per share (non-GAAP)

   $ 0.17       $ 0.18       $ 0.52       $ 0.52   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition, the relative utilization of the TRS can also cause variability in net investment income, because, in accordance with GAAP, earnings on assets within the TRS Portfolio are not included in the calculation of net investment income. The TRS Portfolio accrued interest income and financing charges are included in the fair value of the TRS and are not recorded as realized gain or loss on derivative instruments until quarterly TRS settlement payments are finalized. If the TRS assets had instead been included in our Investment Portfolio as owned assets, the interest income and financing charges would have been included in net investment income.

The following table shows the TRS interest income and financing charges for the three and nine months ended September 30, 2015 and 2014.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands, except per share amounts)

   2015      2014      2015      2014  

Interest and fee income included in TRS fair value

   $ 5,174       $ 1,688       $ 5,174       $ 1,688   

Financing charges included in TRS fair value

     (794      (184      (794      (184
  

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     4,380         1,504         4,380         1,504   

Interest and fee income included in TRS net realized gains

     5,138         1,093         12,294         3,524   

Financing charges included in TRS net realized gains

     (1,181      (184      (2,889      (429

Less: amounts included in prior period fair value

     (4,361      (922      (3,032      (1,703
  

 

 

    

 

 

    

 

 

    

 

 

 

TRS net interest spread

   $ 3,976       $ 1,491       $ 10,753       $ 2,896   
  

 

 

    

 

 

    

 

 

    

 

 

 

TRS net interest spread per share

   $ 0.02       $ 0.01       $ 0.04       $ 0.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net Assets, Net Asset Value per Share, Annual Investment Return and Total Return Since Inception

Net assets increased $380.54 million and $539.81 million during the nine months ended September 30, 2015 and 2014, respectively. The most significant increase in net assets during the nine months ended September 30, 2015 and 2014 was attributable to capital transactions including (i) the issuance of shares of common stock and (ii) reinvestment of distributions in the combined amount of $548.70 million and $550.04 million, respectively. Our operations resulted in net assets increasing $1.48 million and $102.68 million during the nine months ended September 30, 2015 and 2014, respectively. Our overall the change in net assets was partially offset by distributions to shareholders in the amount of $148.72 million and $100.32 million and the repurchase of shares of common stock in the amount of $20.91 million and $12.59 million during the nine months ended September 30, 2015 and 2014, respectively.

Our net asset value per share was $9.26 and $10.06 on September 30, 2015 and 2014, respectively. After considering (i) the overall changes in net asset value per share, (ii) distributions paid of approximately $0.60 and $0.60 per share during the nine months ended September 30, 2015 and 2014, respectively, and (iii) the assumed reinvestment of those distributions at 90% of the prevailing offering price per share, the total investment return was 0.57% and 6.66% (not annualized) for shareholders who held our shares over the entire nine-month period ending September 30, 2015 and 2014, respectively.

Initial shareholders who subscribed to the Initial Offering in June 2011 with an initial investment of $10,000 and an initial purchase price equal to $9.00 per share (public offering price net of sales load) have seen the value of their investment grow by 44.4% (see first chart below), or an annualized return of 8.9% (see second chart below). Initial shareholders who subscribed to the Initial Offering in June 2011 with an initial investment of $10,000 and an initial purchase price equal to $10.00 per share (the initial public offering price) have registered a total investment return of 30.0% (see first chart below), or an annualized return of 6.3% (see second chart below). The S&P/LSTA Leveraged Loan Index, a primary measure of senior debt covering the U.S. leveraged loan market, which currently consists of approximately 1,100 credit facilities throughout numerous industries, and the Merrill Lynch US High

 

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Yield Master II Index, a primary measure of subordinated debt consisting of approximately 2,000 high yield corporate bonds, registered cumulative total returns of approximately 17.9% and 23.9%, respectively, in the period from June 17, 2011 to September 30, 2015.

 

LOGO

The calculations for the Growth of $10,000 Initial Investment in the shares of our common stock are based upon (i) an initial investment of $10,000 in our common stock at the beginning of the period at a share price of $10.00 per share (including sales load) and $9.00 per share (excluding sales load), (ii) assumed reinvestment of monthly distributions in accordance with our distribution reinvestment plan, (iii) the sale of the entire investment position at the net asset value per share on the last day of the period; and (iv) distributions payable, if any, on the last day of the period.

 

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LOGO

 

Public Offering Price/Share

          $ 10.00              $ 11.10              $ 11.30   

Public Offering Price/Share

          $ 10.00              $ 11.10              $ 11.30   

Net Offering Price/Share

          $ 9.00              $ 9.99              $ 10.17   

Distributions/Share

          $ 3.35              $ 1.64              $ 0.81   

Terminal Value/Share (NAV)

          $ 9.26              $ 9.26              $ 9.26   

In the chart above, we also present the average annual returns for the trailing 24 months and trailing 12 months, in each case assuming (i) the purchase of shares of common stock at the public offering price and net offering price (90% of public offering price) at the beginning of the period, (ii) reinvestment of distributions in the common stock, (iii) a terminal value at September 30, 2015 equal to net asset value of $9.26 per share and (iv) distributions payable to shareholders as of September 30, 2015.

Our shares are illiquid investments for which there is currently not a secondary market. You should not expect to be able to resell your shares regardless of how we perform. If you are able to sell your shares, you will likely receive less than your purchase price. Our net asset value and annualized returns — which are based in part upon determinations of fair value of Level 3 investments by our board of directors, not active market quotations — are inherently uncertain. Past performance is not a guarantee of future results.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements which have been prepared in accordance with GAAP. The preparation of our unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2. “Significant Accounting Policies” to our unaudited condensed consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We consider the accounting policies listed below to be critical because they involve management judgments and assumptions, require estimates about matters that are inherently uncertain and are important for understanding and evaluating our reported financial results. These judgments affect (i) the reported amounts of assets and liabilities, (ii) our disclosure of contingent assets and liabilities as of the dates of the financial statements and (iii) the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Changes in the economic

 

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environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially from the amounts reported based on these policies.

Valuation of Investments and Unrealized Gain (Loss) – Our investments consist primarily of investments in senior and subordinated debt of private U.S. companies and are presented in our consolidated financial statements at fair value. See Note 3. “Investments,” in the accompanying unaudited condensed consolidated financial statements for more information on our investments. As described more fully in Note 2. “Significant Accounting Policies” and Note 5. “Fair Value of Financial Instruments” in our unaudited condensed consolidated financial statements, a valuation hierarchy based on the level of independent, objective evidence available regarding value is used to measure the fair value of our investments. Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to our portfolio investments for which market quotations are not readily available, our board of directors is responsible for determining in good faith the fair value of our portfolio investments in accordance with, and the consistent application of, the valuation policy and procedures approved by the board of directors, based on, among other things, the input of our Advisors, audit committee and independent third-party valuation firms.

We utilize several valuation techniques that use unobservable inputs and assumptions in determining the fair value of our Level 3 investments. For senior debt, subordinated debt and structured products categorized as Level 3 investments, we initially value the investment at its initial transaction price and subsequently value using (i) market data for similar instruments (e.g., recent transactions or indicative broker quotes), (ii) comparisons to benchmark derivative indices and/or (iii) valuation models. Valuation models are based on yield analysis and discounted cash flow techniques, where the key inputs are based on relative value analyses and the assignment of risk-adjusted discounted rates derived from the analysis of similar credit investments from similar issuers. In addition, an illiquidity discount is applied where appropriate. The valuation techniques used by us for other types of assets and liabilities that are classified as Level 3 investments are described in Note 2 to our unaudited condensed consolidated financial statements. The unobservable inputs and assumptions may differ by asset and in the application of our valuation methodologies. The reported fair value estimates could vary materially if we had chosen to incorporate different unobservable inputs and other assumptions.

We and our board of directors conduct our fair value determination process on a quarterly basis and any other time when a decision regarding the fair value of our portfolio investments is required. A determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the our portfolio investments may differ significantly from the values that would have been determined had a readily available market value existed for such investments, and the differences could be material. Further, such investments are generally less liquid than publicly traded securities. If we were required to liquidate a portfolio investment that does not have a readily available market value in a forced or liquidation sale, we could realize significantly less than the fair value recorded by us.

The table below presents information on the significant presence of investments classified as Level 3 as of September 30, 2015 and December 31, 2014:

 

(in thousands)

   September 30, 2015     December 31, 2014  

Fair value of investments classified as Level 3

   $         1,974,697      $ 1,502,332   

Total fair value of investments

   $ 3,479,753      $ 2,721,200   

% of fair value classified as Level 3

     56.7     55.2

Number of positions classified as Level 3

     84        63   

Total number of positions

     175        154   

% of positions classified as Level 3

     48.0     40.9

Fair value of individual positions classified as Level 3:

    

Highest fair value

   $ 108,150      $ 109,556   

Lowest fair value

   $ 0      $ 32   

Average fair value

   $ 23,508      $ 23,847   

The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2015 and December 31, 2014 are described in Note 5. “Fair Value of Financial Instruments” in our unaudited condensed consolidated financial statements, as well as, the directional impact to the valuation from an increase in various unobservable inputs.

In addition to impacting the estimated fair value recorded for our investments in our statement of assets and liabilities, had we used different key unobservable inputs to determine the estimated fair value of our investments, amounts recorded in our statement

 

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of operations, including the net change in unrealized appreciation and depreciation on investments, investment advisory fees and performance-based incentive fees would also be impacted since such amounts are directly impacted by the estimated fair value of our assets. For instance, a 5% overstatement of the fair value of our Level 3 investments as of September 30, 2015, assuming all other estimates remain unchanged, would otherwise result in a $94.03 million overstatement of net change in unrealized appreciation on investments, a $0.15 million overstatement of our investment advisory fees payable to our Advisors, a $93.88 million overstatement of our net increase in net assets resulting from operations, and a $0.38 overstatement in our earnings per share for the nine months ended September 30, 2015, and a $0.34 overstatement of our net asset value per share as of September 30, 2015.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2015.

Contractual Obligations

Investment Advisory Agreements – We have entered into the Investment Advisory Agreement with CNL for the overall management of our investment activities. We and CNL have also entered into the Sub-Advisory Agreement with KKR, under which KKR is responsible for the day-to-day management of our Investment Portfolio. CNL compensates KKR for advisory services that it provides to us with 50% of the investment advisory fee and performance-based incentive fees that CNL receives under the Investment Advisory Agreement. Pursuant to the Investment Advisory Agreement, CNL earns the investment advisory fee equal to an annual rate of 2% of our average gross assets (including unrealized appreciation or depreciation on the TRS and collateral posted with the custodian in connection with the TRS, but excluding deferred offering expenses), and an incentive fee based on our performance. The incentive fee is comprised of the following two parts:

 

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

 

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

The terms of the Investment Advisory Agreement entitle CNL (and indirectly KKR) to receive up to 5% of gross proceeds in connection with the Offerings as reimbursement for organization and offering expenses incurred by the Advisors on our behalf.

The reimbursement rate was 0.5% of gross offering proceeds during the nine months ended September 30, 2015. As of September 30, 2015, the Advisors have been reimbursed $9.10 million for offering expenses from the Follow-On Offering, including any payable balances for reimbursement of offering expenses. As of September 30, 2015, the Advisors carried a balance of approximately $0.04 million for unreimbursed expenses incurred on our behalf in connection with the Follow-On Offering. The Advisors are expected to continue to incur offering expenses on our behalf throughout the remainder of the Follow-On Offering period and we expect to continue reimbursement of the Advisors for offering expenses they incur on our behalf through the termination date of the Follow-On Offering. We expect the reimbursement rate to remain at or below 1.0% of gross offering proceeds for the remainder of the Follow-On Offering.

See Note 6. “Related Party Transactions” in our unaudited condensed consolidated financial statements for expanded discussion of the Investment Advisory Agreement.

Unfunded Commitments - Unfunded commitments to provide funds to portfolio companies are not recorded on our consolidated statements of assets and liabilities. Because these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We intend to use cash flow from scheduled and early principal repayments and proceeds from borrowings and securities offerings to fund these commitments. As of September 30, 2015, our unfunded investment commitments totaled $255.78 million, representing 61.2% of our immediate liquidity available to us as of September 30, 2015. We believe we maintain sufficient liquidity to fund such unfunded loan commitments should the need arise.

Borrowings –As discussed above under “Capital Resources and Liquidity—Borrowings,” we, either directly or through our wholly owned subsidiaries, have borrowing agreements with several lenders in connection with our revolving credit facilities and

 

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the 2014 Senior Secured Term Loan. As of September 30, 2015, the credit facilities provided for $296.05 million of additional borrowing capacity. (See Note 10. “Borrowings” in our unaudited condensed consolidated financial statements for expanded discussion of the revolving credit facilities and 2014 Senior Secured Term Loan.)

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings and interest expense and other fees related to the credit facilities and 2014 Senior Secured Term Loan at September 30, 2015 is as follows:

 

(in thousands)

   Total      < 1 year      1-3 years      3-5 years      After 5 years  

BNP Credit Facility

   $ 163,000       $ 163,000       $ —         $ —         $ —     

Deutsche Bank Credit Facility

     175,000         —           175,000         —           —     

Senior Secured Revolving Credit Facility

     477,000         —           477,000         —           —     

2014 Senior Secured Term Loan

     394,000         4,000         8,000         382,000         —     

Interest and Credit Facilities Fees Payable(1)

     95,964         38,466         47,672         9,826         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,304,964       $ 205,466       $ 707,672       $ 391,826       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Estimated interest payments have been calculated based on interest rates of our credit facilities and term loan payables as of September 30, 2015.

Related Party Transactions

We have entered into agreements with our Advisors and certain of their affiliates, whereby, we agree to pay certain fees to, or reimburse certain expenses of, our Advisors and their affiliates for investment and advisory services, selling commissions and marketing support fees in connection with our Offerings, and reimbursement of offering expenses, and administrative and operating fees and costs. See Note 6. “Related Party Transactions” in the accompanying unaudited condensed consolidated financial statements and Part III — Item 13. “Certain Relationships and Related Transactions, and Director Independence” in our Form 10-K for the year ended December 31, 2014 for a discussion of the various related party transactions, agreements and fees.

Impact of Recent Accounting Pronouncements

See Item 1. “Financial Statements” for a summary of the impact of any recent accounting pronouncements, if any.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are subject to financial market risks, in particular changes in interest rates. Future changes in interest rates will likely have effects on the interest income we earn on our portfolio investments, the fair value of our fixed income investments, the interest rates and interest expense associated with the money we borrow and the fair value of loan balances.

Subject to the requirements of the 1940 Act, we may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts. Although hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates. During the nine months ended September 30, 2015 and 2014, we did not engage in interest rate hedging activities. In October 2015, we entered into a series of pay-fixed, receive-floating interest rate swaps that will be effective on December 31, 2015. We will pay an annual fixed rate of 1.3633% to 1.428% and receive three-month LIBOR on an aggregate notional amount of $500 million. The interest rate swaps will have quarterly settlement payments beginning in March 2016.

As of September 30, 2015, approximately 70.1% of our portfolio of debt investments (excluding TRS assets), or approximately $2.29 billion measured at par value, featured floating or variable interest rates. The variable interest rate debt investments usually provide for interest payments based on three-month LIBOR (the base rate) and typically have durations of three months after which the base rates are reset to then prevailing three-month LIBOR. At September 30, 2015, approximately 95.1% of our portfolio of variable interest rate debt investments, or approximately $2.18 billion measured at par value, featured minimum base rates, or base rate floors, and the weighted average base rate floor for such investments was 1.0 %. Variable interest rate investments that feature a base rate floor generally reset to the then prevailing three-month LIBOR only if the reset base rate exceeds the base rate floor on the applicable interest rate reset date, in which cases, we may benefit through an increase in interest income from such interest rate adjustments. At September 30, 2015, we held an aggregate investment position of $112.16 million at par value in variable interest rate debt investments that featured variable interest rates without any minimum base rates, or approximately 4.9% of our portfolio of variable interest rate debt investments. In the case of these “no base rate floor” variable interest debt investments held in our portfolio, we may benefit from increases in the base rates that may subsequently result in an increase in interest income from such interest rate adjustments.

 

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Because we borrow money to make investments, our net investment income is partially dependent upon the difference between the interest rate at which we invest borrowed funds and the interest rate at which we borrow funds. In periods of rising interest rates, if we have borrowed capital with floating interest rates, our interest expense will increase, which will increase our financing costs and may reduce our net investment income, especially to the extent we continue to acquire and hold fixed-rate debt investments. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income.

Pursuant to the terms of our credit facilities and 2014 Senior Secured Term Loan, as discussed above (see “— Capital Resources and Liquidity — Borrowings — Credit Facilities and Term Loan”), all of our borrowing as of September 30, 2015 provide for floating base rates based on short-term LIBOR. Therefore, if we were to completely draw down (i) the unused commitment amounts in our Deutsche Bank Credit Facility, (ii) the maximum commitment amount in our BNP Credit Facility and (iii) the maximum commitment in our Senior Secured Revolving Credit Facility under an interest election of LIBOR plus 2.50%, we expect that our weighted average stated interest rate would decrease by approximately 9 basis points (“bps”), as compared to our current weighted average direct interest cost for borrowed funds. We expect that any further expansion of our current revolving credit facilities, or any future credit facilities that we or any subsidiary may enter into, will also be based on a floating base rate. As a result, we are subject to continuous risks relating to changes in market interest rates.

Under the terms of the TRS agreements between Halifax Funding and BNS, Halifax Funding pays interest to BNS at a floating rate based on three-month LIBOR in exchange for the right to receive the economic benefits of a portfolio of TRS assets having a maximum aggregate notional amount of $500 million.

Assuming the consolidated schedule of investments as of September 30, 2015 was to remain constant with regards to the Investment Portfolio and no actions were taken to alter the existing interest rate sensitivity or Investment Portfolio allocations, the upper section of the table below presents an estimated and hypothetical increase in interest income for a 12-month period due to an immediate and persistent increase in the base rates associated with our debt investments featuring variable interest rates.

The middle section of the table below also presents sensitivity analysis for a 12-month period due to a persistent increase in the base interest rates that apply to our floating rate credit facilities and term loan and the associated increase in interest expense, as well as, the net effect of change in interest rates on the TRS unrealized appreciation (depreciation). For persistent LIBOR increases of less than approximately 200 basis points, the increase in interest expense exceeds the hypothetical increase in interest income associated with our floating rate debt investments due to the base rate floors on those investments; for a persistent LIBOR increase of approximately 200 basis points or more, the hypothetical increase in interest income associated with our floating rate debt investments begins to provide a positive contribution to net interest income, in both cases assuming that the consolidated schedule of investments as of September 30, 2015 was to remain constant with regards to the Investment Portfolio and no actions were taken to alter the existing interest rate sensitivity or Investment Portfolio allocations.

 

     Par            (in millions, except per share amounts)  
     Amount      Weighted     Increases in LIBOR  
   (in millions)      Avg. Floor     +50 bps     +100 bps     +150 bps     +200 bps  

No base rate floor

   $ 112.17         $ 0.489      $ 0.978      $ 1.467      $ 1.956   

Base rate floor

   $ 2,179.18         1.0     0.000        5.353        14.809        24.339   
       

 

 

   

 

 

   

 

 

   

 

 

 

Increase in Floating Rate Interest Income

        $ 0.489      $ 6.331      $ 16.276      $ 26.295   
       

 

 

   

 

 

   

 

 

   

 

 

 
            Base Rate Spread                          

BNP Credit Facility

   $ 163.00         110 bps      $ (0.815   $ (1.630   $ (2.445   $ (3.260

Deutsche Bank Credit Facility Tranche E Loans

   $ 150.00         185 bps        (0.750     (1.500     (2.250     (3.000

Deutsche Bank Credit Facility Tranche F Loans

   $ 25.00         195 bps        (0.125     (0.249     (0.375     (0.499

Senior Secured Revolving Credit Facility

   $ 477.00         250 bps        (2.385     (4.770     (7.155     (9.540

2014 Senior Secured Term Loan

   $ 394.00         325 bps        (0.295     (2.266     (4.236     (6.206
       

 

 

   

 

 

   

 

 

   

 

 

 

Increase to Floating Rate Interest Expense

          (4.370     (10.415     (16.461     (22.505
       

 

 

   

 

 

   

 

 

   

 

 

 

Change in Floating Rate Net Interest Income, before TRS

          (3.881     (4.084     (0.185     3.790   

Net change in TRS unrealized appreciation
(depreciation) (1)

          (1.604     (2.393     (2.630     (2.851
       

 

 

   

 

 

   

 

 

   

 

 

 

Overall Change in Floating Rate Net Interest Income, including TRS

        $ (5.485   $ (6.477   $ (2.815   $ 0.939   
       

 

 

   

 

 

   

 

 

   

 

 

 

Change in Floating Rate Net Interest Income Per Share Outstanding as of September 30, 2015

        $ (0.02   $ (0.02   $ (0.01   $ 0.00   

 

(1) 

Pursuant to the TRS agreements, Halifax Funding receives from BNS all collected interest and fees derived from the TRS assets and pays to BNS interest at a rate equal to three-month LIBOR plus 80 bps per annum on the settled notional amount of TRS assets. As of

 

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  September 30, 2015, 96.6% of the TRS assets, or approximately $315.25 million measured at par value, featured floating or variable interest rates. At September 30, 2015, 98.7% of the TRS assets with variable interest rates featured minimum base rate floors, or approximately $311.25 million measured at par value, and the weighted average base rate floor for such TRS assets was 1.0%. As of September 30, 2015, the settled notional amount was $324.12 million.

The interest rate sensitivity analysis presented above does not consider the potential impact of the changes in fair value of our debt investments and the net asset value of our common stock in the event of sudden increases in interest rates associated with high yield corporate bonds. Approximately 29.9% of our debt Investment Portfolio was invested in fixed interest rate, high yield corporate debt investments as of September 30, 2015. Rising market interest rates will most likely lead to fair value declines for high yield corporate bonds and a decline in the net asset value of our common stock, while declining market interest rates will most likely lead to an increase in bond values.

As of September 30, 2015, approximately 44.4% of our fixed interest rate debt investments, or approximately $382.85 million measured at fair value, had prices that are generally available from third party pricing services. We consider these debt investments to be one of the more liquid subsets of our Investment Portfolio since these types of assets are generally broadly syndicated and owned by a wide group of institutional investors, business development companies, mutual funds and other investment funds. Additionally, this group of assets is susceptible to revaluation, or changes in bid-ask values, in response to sudden changes in expected rates of return associated with these investments. We have other fixed interest rate investments in the less liquid subset of our Investment Portfolio that are not included in this analysis.

We have computed duration of approximately 4.8 for this liquid/fixed subset of our total portfolio. This implies that a sudden increase in the market’s expected rate of return of 100 basis points for this subset of our Investment Portfolio may result in a reduction in fair value of approximately 4.8%, all other financial and market factors assuming to remain unchanged. A 4.8% decrease in the valuation of this Investment Portfolio subset equates to a decrease of $18.4 million, or a 0.7% decline in net assets relative to $9.26 net asset value per share as of September 30, 2015.

Foreign Currency Risk

From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as, amounts translated into U.S. dollars for inclusion in our consolidated financial statements.

The table below presents the effect that a 10% immediate, unfavorable change in the foreign currency exchange rates (i.e. strengthening U.S. dollar) would have on the fair value of investments in our Investment Portfolio denominated in foreign currencies as of September 30, 2015, by foreign currency, all other valuation assumptions remaining constant. Our TRS Portfolio did not contain any investments denominated in foreign currencies as of September 30, 2015. In addition, the table below presents the par value of our investments denominated in foreign currencies and the combined notional amount of foreign currency forward contracts and cross currency swaps in local currency in place as of September 30, 2015, to hedge against foreign currency risks.

 

          Investments Denominated in Foreign Currencies      Hedges  
          As of September 30, 2015      Reduction in Fair      As of September 30, 2015  
          (in thousands)      Value as of      (in thousands)  
                               September 30,      Foreign Currency      Foreign Currency  
          Par Value/                    2015 if 10%      Hedge      Hedge  
          Cost in Local      Par Value/             Adverse Change      Amount in      Amount in  

(in thousands)

        Currency(1)      Cost in US$(1)      Fair Value      in Exchange Rate(2)      Local Currency      U.S. Dollars  

Euros

        366,094       $ 410,125       $ 349,599       $ 34,960       333,447       $ 372,935   

British Pound Sterling

   £      89,454         135,131         135,536         13,554       £ 93,590         143,807   

Australian Dollars

   A$      32,119         22,793         21,599         2,160       A$ 30,887         21,781   

Swedish Kronor

   SEK      97,249         15,145         —           —         SEK —           —     
        

 

 

    

 

 

    

 

 

       

 

 

 

Total

         $ 583,194       $ 506,734       $ 50,674          $ 538,523   
        

 

 

    

 

 

    

 

 

       

 

 

 

 

(1)  Amount represents the par value of debt investments and cost of equity investments denominated in foreign currencies.
(2)  Excludes effect, if any, of any foreign currency hedges.

As illustrated in the table above, we use derivative instruments from time to time, including foreign currency forward contracts and cross currency swaps, to manage the impact of fluctuations in foreign currency exchange rates. In addition, we have the ability to borrow in foreign currencies under our Senior Secured Revolving Credit Facility, which provides a natural hedge with regard to changes in exchange rates between the foreign currencies and the U.S. dollar and reduces our exposure to foreign exchange rate differences. We are typically a net receiver of these foreign currencies as related for our international investment positions, and, as a

 

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result, our investments denominated in foreign currencies, to the extent not hedged, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.

As of September 30, 2015, the net contractual amount of our foreign currency forward contracts and cross currency swaps totaled $538.52 million, all of which related to hedging of our foreign currency denominated debt investments. As of September 30, 2015, we did not have any amounts outstanding denominated in foreign currencies on our Senior Secured Revolving Credit Facility.

During the three and nine months ended September 30, 2015, our foreign currency transactions and foreign currency translation adjustment recorded in our condensed consolidated statements of operations resulted in a net realized and unrealized gains (losses) of $(2.42) million and $(2.99) million, respectively. Our foreign currency forward contracts and cross currency swaps, employed for hedging purposes, generated net realized and unrealized gains of $5.56 million and $31.57 million during the three and nine months ended September 30, 2015, respectively. We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore, the fluctuations related to foreign exchange rate conversion are included with the net realized gain (loss) and unrealized appreciation (depreciation) on investments. See “Results of Operations — Net Change in Unrealized Appreciation or Depreciation” for additional information on the foreign currency exchange changes.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Exchange Act, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

During the most recent fiscal quarter, there was no change in our internal controls over financial reporting (as defined under Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings – None

 

Item 1A.

Risk Factors – There have been no material changes to the risk factors previously disclosed in response to Item 1A. to Part I. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, except for the following:

The Company’s Advisors serve as advisers to one other business development company with substantially the same investment objectives and strategies as the Company, thereby subjecting the Advisors and their affiliates to actual and potential conflicts of interests in connection with the management of the Company’s business affairs.

The members of the senior management and investment teams of CNL, KKR, and certain of their respective affiliates are presently, and plan in the future to continue to be, involved with activities which are unrelated to us, including serving as officers, directors or principals of entities that operate in the same or a related line of business as the Company. For example, CNL’s senior management and investment teams and other CNL personnel also serve in similar capacities to the investment adviser for Corporate Capital Trust II, another business development company affiliated with CNL Financial Group. By serving in these multiple capacities, they may have obligations to Corporate Capital Trust II and/or other entities, and to the investors of such entities, which may conflict with the Company’s best interests or the best interest of the Company’s stockholders. For instance, the Company relies on CNL to manage its day-to-day activities and to implement its investment strategy. As a result of these activities, CNL, its senior management, investment team and other personnel, and certain of CNL’s affiliates may have conflicts of interest in allocating their time between the Company and the other activities in which they are or may become involved, including the management of Corporate Capital Trust II and other entities affiliated with CNL. Similarly, KKR, on which CNL relies to assist it in identifying investment opportunities and making investment recommendations, may have similar conflicts of interest, including serving as the investment sub-adviser to Corporate Capital Trust II. CNL, KKR and their respective managers, partners, officers and employees will

 

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devote only so much of its or their time to the Company’s business as CNL, KKR and their employees determine, in their respective judgments, is reasonably required, which may be substantially less than their full time.

Furthermore, the Company’s investment objectives overlap with those of Corporate Capital Trust II, and may overlap with the investment objectives of other clients and affiliates of CNL and KKR, subjecting the Advisors to additional conflicts of interest. For example, the Company may compete for investments with Corporate Capital Trust II, thereby subjecting the Advisors and their affiliates to certain conflicts of interest with respect to evaluating the suitability of investment opportunities on the Company’s behalf.

We are exposed to risks resulting from the current low interest rate environment.

Since we will borrow money to make investments, our net investment income depends, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. The current, historically low interest rate environment can, depending on our cost of capital, depress our net investment income, even though the terms of our investments generally will include a minimum interest rate. In addition, any reduction in the level of interest rates on new investments relative to interest rates on our current investments could adversely impact our net investment income, reducing our ability to service the interest obligations on, and to repay the principal of, our indebtedness, as well as our capacity to pay distributions. Any such developments would result in a decline in our net asset value and in net asset value per share. Floating interest rate investments tied to certain indices that tend to lag behind the market may perform better in a falling interest rate environment, while floating interest rate investments tied to other indices, such as LIBOR, may do better in a rising rate environment. Not all investments perform alike under different interest rate scenarios. Generally, our variable interest rate debt investments provide for interest payments based on three-month LIBOR (the base rate) and typically, every three months, the base rates are reset to then prevailing three-month LIBOR.

To the extent that we borrow money, the potential for gain or loss on amounts invested in us will be magnified and may increase the risk of investing in us. Borrowed money may also adversely affect the return on our assets, reduce cash available to service our debt or for distribution to our shareholders, and result in losses.

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on invested equity capital. Since we use leverage to partially finance our investments, through borrowing from banks and other lenders, you will experience increased risks of investing in our securities. If the value of our assets decreases, leveraging will cause our net asset value to decline more sharply than it otherwise would if we had not borrowed and employed leverage. Similarly, any decrease in our income would cause our net income to decline more sharply than it would have if we had not borrowed and employed leverage. Such a decline could negatively affect our ability to service our debt or make distributions to our shareholders. In addition, our shareholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the management or incentive fees payable to the Advisors.

The amount of leverage that we employ depends on our Advisors’ and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. There can be no assurance that additional leveraged financing will be available to us on favorable terms or at all. However, to the extent that we use leverage to finance our assets, our financing costs will reduce cash available for servicing our debt or distributions to shareholders. Moreover, we may not be able to meet our financing obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to liquidation or sale to satisfy the obligations. In such an event, we may be forced to sell assets at significantly depressed prices due to market conditions or otherwise, which may result in losses.

As a business development company, we are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. If this ratio declines below 200%, we cannot incur additional debt and could be required to sell a portion of our investments to repay some debt when it is disadvantageous to do so. This could have a material adverse effect on our operations, and we may not be able to service our debt or make distributions.

 

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The sale or likelihood of the sale of a large number of outstanding shares prior to completion of the listing of our securities on a national securities exchange could negatively affect our stock price.

The ability of our shareholders to liquidate their investment in our shares of common stock is limited. If we were to list our common stock on a securities exchange in the future, a large volume of sales of our shares could decrease the prevailing market prices of our common stock and could impair our ability to raise additional capital through the sale of equity securities in the future. Even if a substantial number of sales are not affected, the mere perception of the possibility of these sales could depress the market price of our common stock and have a negative effect on our ability to raise capital in the future. In addition, anticipated downward pressure on our common stock price due to actual or anticipated sales of common stock from this market overhang could cause some institutions or individuals to engage in short sales of our common stock, which may itself cause the price of our stock to decline.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

 

Item 3. Defaults Upon Senior Securities None

 

Item 4. Mine Safety Disclosures Not applicable

 

Item 5. Other Information None

 

Item 6. Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto and are filed or incorporated as part of this report.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th day of November 2015.

 

CORPORATE CAPITAL TRUST, INC.
By:  

/s/    Thomas K. Sittema        

  THOMAS K. SITTEMA
  Chief Executive Officer
  (Principal Executive Officer)
By:  

/s/    Steven D. Shackelford        

  STEVEN D. SHACKELFORD
  Chief Financial Officer
  (Principal Financial and Accounting Officer)

 

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EXHIBIT INDEX

Exhibits

The following exhibits are included or incorporated by reference in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 (and numbered in accordance with Item 601 of Regulation S-K).

 

Exhibit No.    Description
31.1    Certification of Chief Executive Officer of Corporate Capital Trust, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
31.2    Certification of Chief Financial Officer of Corporate Capital Trust, Inc., Pursuant to Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)
32.1    Certification of Chief Executive Officer and Chief Financial Officer of Corporate Capital Trust, Inc., Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.)

 

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