Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - Corporate Capital Trust, Inc. | ex-321certificationofprinc.htm |
| EX-31.2 - EXHIBIT 31.2 - Corporate Capital Trust, Inc. | ex-312certificationofprinc.htm |
| EX-31.1 - EXHIBIT 31.1 - Corporate Capital Trust, Inc. | ex-311certificationofprinc.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2017 |
For the quarterly period ended September 30, 2018
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.) | |
201 Rouse Boulevard Philadelphia, Pennsylvania | 19112 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (215) 495-1150
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of exchange on which registered | |
Common Stock, $0.001 par value per share | The New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act:
None
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock of the registrant outstanding as of November 6, 2018 was 124,119,644.
CORPORATE CAPITAL TRUST, INC.
INDEX
PAGE | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | Financial Statements: | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Assets and Liabilities (unaudited)
(in thousands, except share and per share amounts)
September 30, 2018 | December 31, 2017 | |||||||
Assets | ||||||||
Investments at fair value: | ||||||||
Non-controlled, non-affiliated investments (amortized cost of $3,257,152 and $3,319,093, respectively) | $ | 3,182,671 | $ | 3,225,827 | ||||
Non-controlled, affiliated investments (amortized cost of $302,845 and $298,489, respectively) | 261,305 | 242,985 | ||||||
Controlled, affiliated investments (amortized cost of $712,653 and $540,609, respectively) | 672,295 | 500,285 | ||||||
Total investments, at fair value (amortized cost of $4,272,650 and $4,158,191, respectively) | 4,116,271 | 3,969,097 | ||||||
Cash | 129,797 | 127,186 | ||||||
Cash denominated in foreign currency (cost of $19,094 and $3,724, respectively) | 18,939 | 3,778 | ||||||
Restricted cash | 10,008 | 51,181 | ||||||
Dividends and interest receivable | 43,737 | 42,517 | ||||||
Receivable for investments sold | 20,276 | 2,320 | ||||||
Principal receivable | 3,480 | 3,389 | ||||||
Unrealized appreciation on swap contracts | 6,644 | 3,763 | ||||||
Unrealized appreciation on foreign currency forward contracts | 1,179 | 1,194 | ||||||
Receivable from advisers | — | 2,802 | ||||||
Other assets | 20,783 | 14,273 | ||||||
Total assets | 4,371,114 | 4,221,500 | ||||||
Liabilities | ||||||||
Revolving credit facilities | 1,579,226 | 965,000 | ||||||
Term loan payable, net | — | 382,768 | ||||||
Unsecured notes payable, net | 241,267 | 240,612 | ||||||
Payable for investments purchased | 29,586 | 47,097 | ||||||
Unrealized depreciation on swap contracts | 19,673 | 29,604 | ||||||
Unrealized depreciation on foreign currency forward contracts | 793 | 3,401 | ||||||
Accrued performance-based incentive fees | 10,946 | 8,418 | ||||||
Accrued investment advisory fees | 5,176 | 5,214 | ||||||
Shareholders’ distributions payable | 49,920 | 46,959 | ||||||
Deferred tax liability | 3,410 | 178 | ||||||
Accrued directors' fees | 3 | — | ||||||
Other accrued expenses and liabilities | 17,636 | 7,147 | ||||||
Total liabilities | 1,957,636 | 1,736,398 | ||||||
Commitments and contingencies (Note 11) | ||||||||
Net Assets | $ | 2,413,478 | $ | 2,485,102 | ||||
Components of Net Assets | ||||||||
Common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 124,119,644 and 127,130,589 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively | $ | 124 | $ | 127 | ||||
Paid-in capital in excess of par value | 2,749,403 | 2,799,400 | ||||||
Accumulated deficit | (336,049 | ) | (314,425 | ) | ||||
Net assets | $ | 2,413,478 | $ | 2,485,102 | ||||
Net asset value per share | $ | 19.44 | $ | 19.55 | ||||
See notes to condensed consolidated financial statements.
2
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, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Investment income | ||||||||||||||||
Interest income: | ||||||||||||||||
Non-controlled, non-affiliated investments (net of tax withholding, $-, $(1,416), $64 and $385, respectively) | $ | 80,970 | $ | 80,539 | $ | 242,462 | $ | 240,168 | ||||||||
Non-controlled, affiliated investments | 1,190 | 1,475 | 5,165 | 4,597 | ||||||||||||
Controlled, affiliated investments | 1,942 | 5 | 4,633 | 5 | ||||||||||||
Total interest income | 84,102 | 82,019 | 252,260 | 244,770 | ||||||||||||
Payment-in-kind interest income: | ||||||||||||||||
Non-controlled, non-affiliated investments | 1,501 | 2,531 | 3,940 | 4,667 | ||||||||||||
Non-controlled, affiliated investments | 58 | — | 58 | — | ||||||||||||
Controlled, affiliated investments | 4,086 | 2,706 | 11,532 | 8,109 | ||||||||||||
Total payment-in-kind interest income | 5,645 | 5,237 | 15,530 | 12,776 | ||||||||||||
Fee income: | ||||||||||||||||
Non-controlled, non-affiliated investments | 1,881 | 4,416 | 6,767 | 12,666 | ||||||||||||
Total fee income | 1,881 | 4,416 | 6,767 | 12,666 | ||||||||||||
Dividend and other income: | ||||||||||||||||
Non-controlled, non-affiliated investments | 569 | 722 | 2,701 | 4,911 | ||||||||||||
Non-controlled, affiliated investments | — | — | — | — | ||||||||||||
Controlled, affiliated investments | 11,664 | 5,199 | 30,009 | 15,792 | ||||||||||||
Total dividend and other income | 12,233 | 5,921 | 32,710 | 20,703 | ||||||||||||
Total investment income | 103,861 | 97,593 | 307,267 | 290,915 | ||||||||||||
Operating expenses | ||||||||||||||||
Investment advisory fees | 15,817 | 21,173 | 46,595 | 62,858 | ||||||||||||
Interest expense | 23,663 | 18,177 | 65,749 | 47,532 | ||||||||||||
Performance-based incentive fees | 10,946 | 2,046 | 35,029 | 7,721 | ||||||||||||
Professional services | 5,885 | 1,045 | 9,778 | 4,050 | ||||||||||||
Investment adviser expenses | 905 | 373 | 1,365 | 2,982 | ||||||||||||
Administrative services | 827 | 876 | 2,284 | 2,486 | ||||||||||||
Custodian and accounting fees | 435 | 439 | 1,273 | 1,275 | ||||||||||||
Offering expenses | — | 67 | — | 394 | ||||||||||||
Director fees and expenses | 118 | 131 | 416 | 432 | ||||||||||||
Other | 740 | 926 | 1,712 | 3,067 | ||||||||||||
Total operating expenses | 59,336 | 45,253 | 164,201 | 132,797 | ||||||||||||
Net investment income before taxes | 44,525 | 52,340 | 143,066 | 158,118 | ||||||||||||
Income tax expense (benefit), including excise tax | 741 | (1,024 | ) | 366 | (703 | ) | ||||||||||
Net investment income | 43,784 | 53,364 | 142,700 | 158,821 | ||||||||||||
Net realized and unrealized gains (losses) | ||||||||||||||||
Net realized gains (losses) on: | ||||||||||||||||
Non-controlled, non-affiliated investments | (411 | ) | (11,731 | ) | (16,538 | ) | (81,839 | ) | ||||||||
Non-controlled, affiliated investments | (27,146 | ) | — | (27,146 | ) | — | ||||||||||
Controlled, affiliated investments | (550 | ) | (7,869 | ) | (13,347 | ) | (15,282 | ) | ||||||||
Swap contracts | 82 | 3,471 | 2,493 | 17,782 | ||||||||||||
Foreign currency forward contracts | 2,604 | (7,848 | ) | 7,081 | (7,926 | ) | ||||||||||
Foreign currency transactions | 10 | 1,471 | 2,523 | 3,353 | ||||||||||||
Net realized losses | (25,411 | ) | (22,506 | ) | (44,934 | ) | (83,912 | ) | ||||||||
See notes to condensed consolidated financial statements.
3
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (unaudited), continued
(in thousands, except share and per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||||||||||
Non-controlled, non-affiliated investments | $ | (13,070 | ) | $ | 21,464 | $ | 18,785 | $ | 120,905 | |||||||
Non-controlled, affiliated investments | 36,480 | 189 | 13,964 | (519 | ) | |||||||||||
Controlled, affiliated investments | (13,341 | ) | 12,720 | (34 | ) | 35,525 | ||||||||||
Swap contracts | 4,903 | (13,558 | ) | 12,812 | (53,448 | ) | ||||||||||
Foreign currency forward contracts | 85 | 2,746 | 2,593 | (9,235 | ) | |||||||||||
Foreign currency translation | (48 | ) | (1,911 | ) | (263 | ) | (2,636 | ) | ||||||||
Provision for taxes | (1,968 | ) | (7,227 | ) | (3,232 | ) | 1,462 | |||||||||
Net change in unrealized appreciation | 13,041 | 14,423 | 44,625 | 92,054 | ||||||||||||
Net realized and unrealized gains (losses) | (12,370 | ) | (8,083 | ) | (309 | ) | 8,142 | |||||||||
Net increase in net assets resulting from operations | $ | 31,414 | $ | 45,281 | $ | 142,391 | $ | 166,963 | ||||||||
Net investment income per share | $ | 0.35 | $ | 0.39 | $ | 1.13 | $ | 1.16 | ||||||||
Diluted and basic earnings per share | $ | 0.25 | $ | 0.33 | $ | 1.13 | $ | 1.22 | ||||||||
Weighted average number of shares of common stock outstanding (basic and diluted) | 124,194,701 | 136,484,597 | 125,761,583 | 137,008,726 | ||||||||||||
Distributions declared per share | $ | 0.40 | $ | 0.40 | $ | 1.31 | $ | 1.31 | ||||||||
See notes to condensed consolidated financial statements.
4
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, | ||||||||
2018 | 2017 | |||||||
Operations | ||||||||
Net investment income | $ | 142,700 | $ | 158,821 | ||||
Net realized gains on investments, swap contracts, foreign currency forward contracts and foreign currency transactions | (44,934 | ) | (83,912 | ) | ||||
Net change in unrealized appreciation on investments, swap contracts, foreign currency forward contracts and foreign currency translation | 44,625 | 92,054 | ||||||
Net increase in net assets resulting from operations | 142,391 | 166,963 | ||||||
Distributions to shareholders from | ||||||||
Net investment income | (142,700 | ) | (158,821 | ) | ||||
Distributions in excess of net investment income (Note 8) | (21,315 | ) | (20,134 | ) | ||||
Net decrease in net assets resulting from shareholders’ distributions | (164,015 | ) | (178,955 | ) | ||||
Capital share transactions | ||||||||
Reinvestment of shareholders’ distributions | — | 88,089 | ||||||
Repurchase of shares of common stock | (50,000 | ) | (116,221 | ) | ||||
Net decrease in net assets resulting from capital share transactions | (50,000 | ) | (28,132 | ) | ||||
Total decrease in net assets | (71,624 | ) | (40,124 | ) | ||||
Net assets at beginning of period | 2,485,102 | 2,759,332 | ||||||
Net assets at end of period | $ | 2,413,478 | $ | 2,719,208 | ||||
Capital share activity | ||||||||
Shares issued from reinvestment of distributions | — | 4,316,511 | ||||||
Shares repurchased | (3,010,945 | ) | (5,764,919 | ) | ||||
Net decrease in shares outstanding | (3,010,945 | ) | (1,448,408 | ) | ||||
See notes to condensed consolidated financial statements.
5
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Operating Activities: | ||||||||
Net increase in net assets resulting from operations | $ | 142,391 | $ | 166,963 | ||||
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by (used in) operating activities: | ||||||||
Purchases of investments | (1,231,600 | ) | (1,167,065 | ) | ||||
Decrease in payable for investments purchased | (17,511 | ) | (22,204 | ) | ||||
Payment-in-kind interest capitalized | (12,512 | ) | (8,301 | ) | ||||
Proceeds from sales of investments | 435,054 | 530,159 | ||||||
Proceeds from principal payments | 653,825 | 731,751 | ||||||
Net realized loss on investments | 57,031 | 97,121 | ||||||
Net change in unrealized appreciation on investments | (32,715 | ) | (155,911 | ) | ||||
Net change in unrealized (appreciation) depreciation on swap contracts | (12,812 | ) | 53,448 | |||||
Net change in unrealized (appreciation) depreciation on foreign currency forward contracts | (2,593 | ) | 9,235 | |||||
Net change in unrealized depreciation on foreign currency translation | 263 | 2,636 | ||||||
Amortization of premium/discount, net | (16,945 | ) | (16,819 | ) | ||||
Amortization of deferred financing costs | 5,276 | 3,232 | ||||||
Accretion of discount on term loan payable | 582 | 304 | ||||||
Decrease (increase) in short-term investments, net | 688 | (732 | ) | |||||
Increase in collateral on deposit with custodian | — | 95,000 | ||||||
Decrease (increase) in dividends and interest receivable | (1,222 | ) | 4,769 | |||||
Decrease (increase) in receivable for investments sold | (17,956 | ) | 21,318 | |||||
Increase in principal receivable | (91 | ) | (15,049 | ) | ||||
Decrease in receivable from advisers | 2,802 | 2,040 | ||||||
Decrease in deferred tax asset | — | — | ||||||
Decrease (increase) in other assets | 348 | (773 | ) | |||||
Decrease in accrued investment advisory fees | (38 | ) | (478 | ) | ||||
Increase (decrease) in accrued performance-based incentive fees | 2,528 | (2,859 | ) | |||||
Increase (decrease) in deferred tax liability | 3,232 | (1,462 | ) | |||||
Increase in other accrued expenses and liabilities | 10,204 | 2,300 | ||||||
Net cash provided by (used in) operating activities | (31,771 | ) | 328,623 | |||||
Financing Activities: | ||||||||
Payments on repurchases of shares of common stock | (50,000 | ) | (116,221 | ) | ||||
Distributions paid | (161,054 | ) | (90,866 | ) | ||||
Repayments under term loan payable | (385,000 | ) | (3,000 | ) | ||||
Borrowings under revolving credit facilities | 1,772,675 | 718,500 | ||||||
Repayments of revolving credit facilities | (1,158,449 | ) | (902,500 | ) | ||||
Borrowings under unsecured notes payable | — | 245,000 | ||||||
Repayments under repurchase agreement | — | (24,726 | ) | |||||
Deferred financing costs paid | (9,594 | ) | (4,613 | ) | ||||
Net cash provided by (used in) financing activities | 8,578 | (178,426 | ) | |||||
Effect of exchange rate changes on cash | (208 | ) | 44 | |||||
Net increase (decrease) in cash | (23,401 | ) | 150,241 | |||||
Cash, cash denominated in foreign currency and restricted cash, beginning of period | 182,145 | 146,613 | ||||||
Cash, cash denominated in foreign currency and restricted cash, end of period(1) | $ | 158,744 | $ | 296,854 | ||||
Supplemental disclosure of cash flow information and non-cash financing activities: | ||||||||
Cash paid for interest | $ | 50,041 | $ | 39,732 | ||||
Taxes paid, including excise tax | $ | 1,893 | $ | 3,830 | ||||
Distributions reinvested | $ | — | $ | 88,089 | ||||
Change in distributions payable | $ | (2,961 | ) | $ | — | |||
Deferred financing costs accrued in other accrued expenses and liabilities | $ | 288 | $ | — | ||||
(1) | Includes cash of $129,797 and $255,363, cash denominated in foreign currency of $18,939 and $32,747 and restricted cash of $10,008 and $8,744 as of September 30, 2018 and 2017, respectively. |
See notes to condensed consolidated financial statements.
6
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
First Lien Senior Secured Loan—66.7% | |||||||||||||||||||||||
A10 Capital, LLC | (f)(2) | Diversified Financials | L + 650 | 1.00 | % | 5/1/2023 | $ | 30,265 | $ | 29,731 | $ | 29,879 | |||||||||||
Abaco Systems, Inc. | (f)(g)(h)(3) | Capital Goods | L + 500 | 1.00 | % | 12/7/2021 | 62,006 | 60,341 | 60,836 | ||||||||||||||
ABB CONCISE Optical Group, LLC | (2) | Retailing | L + 500 | 1.00 | % | 6/15/2023 | 13,095 | 13,124 | 13,168 | ||||||||||||||
Accuride Corp. | (h)(3) | Capital Goods | L + 525 | 1.00 | % | 11/17/2023 | 18,165 | 17,859 | 18,386 | ||||||||||||||
ACG Materials | (f)(g)(2) | Materials | L + 700 | 1.00 | % | 4/27/2024 | 18,741 | 18,566 | 18,382 | ||||||||||||||
(f)(g)(2) | L + 700 | 1.00 | % | 4/27/2024 | 425 | 425 | 299 | ||||||||||||||||
Acosta Holdco, Inc. | (2) | Commercial & Professional Services | L + 325 | 1.00 | % | 9/26/2021 | 19,227 | 17,669 | 14,408 | ||||||||||||||
Advantage Sales & Marketing, Inc. | (2) | Commercial & Professional Services | L + 325 | 1.00 | % | 7/23/2021 | 15,029 | 14,227 | 13,955 | ||||||||||||||
Agro Merchants Global, LP | (3) | Transportation | L + 375 | 1.00 | % | 12/6/2024 | 698 | 694 | 703 | ||||||||||||||
Aleris International, Inc. | (2) | Materials | L + 475 | 2/27/2023 | 3,405 | 3,372 | 3,472 | ||||||||||||||||
Alion Science & Technology Corp. | (2) | Capital Goods | L + 450 | 1.00 | % | 8/19/2021 | 2,716 | 2,715 | 2,735 | ||||||||||||||
AltEn, LLC | (f)(i)(j)(k)(4) | Energy | L + 400 (L + 400 Max PIK) | 9/12/2021 | 33,055 | 2,691 | 2,691 | ||||||||||||||||
AM General, LLC | (f)(g)(h)(2) | Capital Goods | L + 725 | 1.00 | % | 12/28/2021 | 81,681 | 80,833 | 82,621 | ||||||||||||||
See notes to condensed consolidated financial statements.
7
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Amtek Global Technology Pte. Ltd. (GER) | (f)(l)(m)(n)(EUR) | Automobiles & Components | 5.00% | 4/1/2023 | € | 49,233 | $ | 60,473 | $ | 57,162 | |||||||||||||
Berner Food & Beverage, LLC | (f)(g)(h)(3) | Food & Staples Retailing | L + 675 | 1.00 | % | 2/2/2023 | $ | 56,395 | 55,891 | 53,696 | |||||||||||||
Blackhawk Mining, LLC | (f)(3) | Energy | L + 1050 | 2/26/2022 | 3,320 | 3,244 | 3,239 | ||||||||||||||||
Charlotte Russe, Inc. | (f)(j) | Retailing | 8.50% | 2/2/2023 | 9,428 | 9,428 | 7,170 | ||||||||||||||||
Commercial Barge Line Co. | (2) | Transportation | L + 875 | 1.00 | % | 11/12/2020 | 4,631 | 4,174 | 3,599 | ||||||||||||||
CSM Bakery Products | (3) | Food, Beverage & Tobacco | L + 400 | 1.00 | % | 7/3/2020 | 1,119 | 1,085 | 1,085 | ||||||||||||||
CTI Foods Holding Co., LLC | (5) | Food, Beverage & Tobacco | L + 350 | 1.00 | % | 6/29/2020 | 3,762 | 3,614 | 3,146 | ||||||||||||||
Distribution International, Inc. | (3) | Retailing | L + 500 | 1.00 | % | 12/15/2021 | 28,144 | 23,996 | 26,737 | ||||||||||||||
Eagle Family Foods, Inc. | (f)(g)(h)(2) | Food, Beverage & Tobacco | L + 650 | 1.00 | % | 6/14/2024 | 25,046 | 24,734 | 24,311 | ||||||||||||||
Eagleclaw Midstream Ventures, LLC | (2) | Energy | L + 425 | 1.00 | % | 6/24/2024 | 1,030 | 1,009 | 1,017 | ||||||||||||||
Frontline Technologies Group, LLC | (f)(g)(h)(2) | Software & Services | L + 650 | 1.00 | % | 9/18/2023 | 61,295 | 60,373 | 58,586 | ||||||||||||||
Greystone & Co, Inc. | (f)(g)(6) | Diversified Financials | L + 800 | 1.00 | % | 4/17/2024 | 37,687 | 37,368 | 38,735 | ||||||||||||||
Hunt Mortgage | (f)(g)(2) | Diversified Financials | L + 750 | 1.00 | % | 2/14/2023 | 60,619 | 59,888 | 60,917 | ||||||||||||||
Integro Ltd./United States | (f)(g)(h)(3) | Insurance | L + 575 | 10/30/2022 | 25,719 | 25,598 | 25,719 | ||||||||||||||||
JAKKS Pacific, Inc. | (f)(2) | Consumer Durables & Apparel | L + 900 | 1.50 | % | 6/14/2021 | 2,544 | 2,527 | 2,524 | ||||||||||||||
JHT Holdings, Inc. | (f)(g)(h)(3) | Capital Goods | L + 850 | 1.00 | % | 5/4/2022 | 26,765 | 26,405 | 28,104 | ||||||||||||||
See notes to condensed consolidated financial statements.
8
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Jo-Ann Stores, Inc. | (3) | Retailing | L + 500 | 1.00 | % | 10/20/2023 | $ | 16,110 | $ | 15,975 | $ | 16,211 | |||||||||||
Koosharem, LLC | (3) | Commercial & Professional Services | L + 500 | 1.00 | % | 4/18/2025 | 2,781 | 2,818 | 2,810 | ||||||||||||||
Matchesfashion, Ltd. (GBR) | (f)(g)(l)(n)(3) | Consumer Durables & Apparel | L + 462.50 | 10/16/2024 | 12,688 | 11,849 | 12,149 | ||||||||||||||||
Mitel US Holdings, Inc. | (3) | Technology Hardware & Equipment | L + 450 | 7/11/2025 | 7,696 | 7,676 | 7,785 | ||||||||||||||||
Murray Energy Corp | (f)(2) | Materials | L + 900 | 1.00 | % | 2/12/2021 | 9,922 | 9,854 | 9,846 | ||||||||||||||
National Debt Relief, LLC | (f)(g)(h)(3) | Diversified Financials | L + 675 | 1.00 | % | 5/31/2023 | 22,397 | 22,305 | 22,621 | ||||||||||||||
(f)(g)(3) | L + 675 | 1.00 | % | 5/31/2023 | 7,163 | 7,130 | 7,270 | ||||||||||||||||
(f)(g)(3) | L + 675 | 1.00 | % | 5/31/2023 | 3,763 | 3,749 | 3,801 | ||||||||||||||||
NaviHealth, Inc. | (2) | Health Care Equipment & Services | L + 500 | 8/1/2025 | 12,201 | 11,470 | 11,774 | ||||||||||||||||
NBG Home | (h)(5) | Consumer Durables & Apparel | L + 550 | 1.00 | % | 4/26/2024 | 25,350 | 24,913 | 25,604 | ||||||||||||||
NCI, Inc. | (f)(g)(h)(3) | Software & Services | L + 750 | 1.00 | % | 8/15/2024 | 83,758 | 82,838 | 83,802 | ||||||||||||||
Nine West Holdings | (f) | Consumer Durables & Apparel | 10.00% | 12/31/2018 | 2,562 | 2,464 | 2,591 | ||||||||||||||||
(7) | P + 275 | 10/8/2019 | 6,223 | 5,714 | 6,114 | ||||||||||||||||||
See notes to condensed consolidated financial statements.
9
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Onvoy, LLC | (3) | Telecommunication Services | L + 450 | 1.00 | % | 2/10/2024 | $ | 1,141 | $ | 1,105 | $ | 1,119 | |||||||||||
Pacific Union Financial, LLC | (f)(2) | Diversified Financials | L + 750 | 1.00 | % | 4/21/2022 | 72,102 | 71,528 | 67,625 | ||||||||||||||
PAE Holding Corp. | (3) | Capital Goods | L + 550 | 1.00 | % | 10/20/2022 | 2,499 | 2,494 | 2,513 | ||||||||||||||
Patriot Well Solutions, LLC | (f)(2) | Energy | L + 875 | 1.00 | % | 3/31/2021 | 4,333 | 4,265 | 4,223 | ||||||||||||||
Payless, Inc. | (f)(2) | Retailing | L + 870 | 1.00 | % | 8/10/2022 | 7,219 | 7,079 | 7,146 | ||||||||||||||
Petroplex Acidizing, Inc. | (f)(i)(3) | Energy | L + 725, 1.75% PIK (1.75% Max PIK) | 1.00 | % | 12/5/2019 | 22,740 | 22,740 | 22,607 | ||||||||||||||
(f)(i)(k) | 15.00% PIK (15.00% Max PIK) | 12/5/2019 | 23,029 | 13,809 | 11,980 | ||||||||||||||||||
Qdoba Restaurant Corp. | (2) | Consumer Services | L + 700 | 1.00 | % | 3/21/2025 | 12,935 | 12,686 | 13,162 | ||||||||||||||
Raley's | (h)(2) | Food & Staples Retailing | L + 525 | 1.00 | % | 5/18/2022 | 7,206 | 7,055 | 7,251 | ||||||||||||||
Refinitiv | (3) | Application Software | L + 400 | 10/1/2025 | 1,233 | 1,233 | 1,234 | ||||||||||||||||
Reliant Rehab Hospital Cincinnati, LLC | (f)(g)(h)(2) | Health Care Equipment & Services | L + 675 | 1.00 | % | 7/31/2024 | 50,245 | 49,747 | 50,044 | ||||||||||||||
Revere Superior Holdings, Inc. | (f)(3) | Software & Services | L + 675 | 1.00 | % | 11/21/2022 | 17,860 | 17,704 | 17,769 | ||||||||||||||
(f)(g)(h)(3) | L + 675 | 1.00 | % | 11/21/2022 | 65,192 | 64,638 | 65,262 | ||||||||||||||||
(f)(g)(h)(3) | L + 675 | 1.00 | % | 11/21/2022 | 2,345 | 2,305 | 2,347 | ||||||||||||||||
(f)(3) | L + 675 | 1.00 | % | 11/21/2022 | 3,162 | 3,074 | 2,507 | ||||||||||||||||
See notes to condensed consolidated financial statements.
10
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Savers, Inc. | (3) | Retailing | L + 375 | 1.25 | % | 7/9/2019 | $ | 11,095 | $ | 10,795 | $ | 10,810 | |||||||||||
Sequa Corp. | (3) | Materials | L + 500 | 1.00 | % | 11/28/2021 | 25,930 | 25,971 | 25,552 | ||||||||||||||
SI Group, Inc. | (3) | Materials | L + 475 | 8/21/2025 | 2,060 | 1,977 | 2,072 | ||||||||||||||||
SIRVA Worldwide, Inc. | (3) | Commercial & Professional Services | L + 550 | 8/2/2025 | 4,216 | 4,154 | 4,232 | ||||||||||||||||
SMART Global Holdings Inc. | (f)(n)(3) | Semiconductors & Semiconductor Equipment | L + 625 | 1.00 | % | 8/9/2022 | 37,618 | 37,604 | 37,995 | ||||||||||||||
Smile Brands Group, Inc. | (f)(h)(3) | Health Care Equipment & Services | L + 625 | 1.00 | % | 8/15/2022 | 11,887 | 11,783 | 12,006 | ||||||||||||||
(f)(2) | L + 625 | 1.00 | % | 8/17/2022 | 778 | 778 | 813 | ||||||||||||||||
Staples Canada (CAN) | (f)(l)(n)(8)(CAD) | Retailing | CDOR + 700 | 1.00 | % | 9/12/2023 | C$ | 4,500 | 3,484 | 3,526 | |||||||||||||
Sutherland Global Services, Inc. | (n)(3) | Software & Services | L + 537.50 | 1.00 | % | 4/23/2021 | $ | 1,470 | 1,423 | 1,411 | |||||||||||||
(n)(3) | L + 537.50 | 1.00 | % | 4/23/2021 | 6,316 | 6,113 | 6,061 | ||||||||||||||||
Sweet Harvest Foods Management Co. | (f)(g)(h)(3) | Food & Staples Retailing | L + 675 | 1.00 | % | 5/30/2023 | 26,818 | 26,707 | 22,778 | ||||||||||||||
Team Health, Inc. | (2) | Health Care Equipment & Services | L + 275 | 1.00 | % | 2/6/2024 | 12,628 | 12,254 | 12,304 | ||||||||||||||
ThreeSixty Group | (f)(g)(h)(2) | Retailing | L + 700 | 1.00 | % | 3/1/2023 | 51,111 | 50,508 | 49,828 | ||||||||||||||
(f)(g)(h)(2) | L + 700 | 1.00 | % | 3/1/2023 | 50,294 | 49,700 | 49,154 | ||||||||||||||||
Utility One Source, LP | (2) | Capital Goods | L + 550 | 1.00 | % | 4/18/2023 | 9,632 | 9,555 | 9,861 | ||||||||||||||
Vee Pak, Inc. | (f)(g)(h)(2) | Household & Personal Products | L + 675 | 1.00 | % | 3/9/2023 | 33,094 | 32,703 | 31,398 | ||||||||||||||
Virgin Pulse, Inc. | (f)(g)(h)(2) | Software & Services | L + 650 | 1.00 | % | 5/22/2025 | 58,769 | 58,209 | 58,179 | ||||||||||||||
Vivint, Inc. | (3) | Commercial & Professional Services | L + 500 | 4/1/2024 | 22,203 | 22,125 | 22,147 | ||||||||||||||||
See notes to condensed consolidated financial statements.
11
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Wheels Up Partners, LLC | (f)(3) | Transportation | L + 850 | 1.00 | % | 1/26/2021 | $ | 13,668 | $ | 13,640 | $ | 13,654 | |||||||||||
(f)(3) | L + 850 | 1.00 | % | 8/26/2021 | 6,961 | 6,952 | 6,932 | ||||||||||||||||
(f)(3) | L + 710 | 1.00 | % | 6/30/2024 | 22,633 | 22,595 | 22,705 | ||||||||||||||||
(f)(3) | L + 710 | 1.00 | % | 11/1/2024 | 9,277 | 9,258 | 9,307 | ||||||||||||||||
(f)(3) | L + 710 | 1.00 | % | 12/21/2024 | 29,510 | 29,413 | 29,615 | ||||||||||||||||
(f)(3) | L + 710 | 1.00 | % | 12/21/2024 | 4,751 | 4,707 | 4,767 | ||||||||||||||||
WireCo WorldGroup, Inc. | (2) | Capital Goods | L + 500 | 1.00 | % | 9/29/2023 | 2,613 | 2,629 | 2,650 | ||||||||||||||
Z Gallerie, LLC | (f)(k)(4) | Retailing | L + 650 | 1.00 | % | 10/8/2020 | 30,790 | 30,186 | 13,963 | ||||||||||||||
Total First Lien Senior Secured Loan | $ | 1,637,494 | $ | 1,610,169 | |||||||||||||||||||
Second Lien Senior Secured Loan—41.4% | |||||||||||||||||||||||
Abaco Systems, Inc. | (f)(g)(3) | Capital Goods | L + 1050 | 1.00 | % | 6/7/2022 | $ | 63,371 | $ | 62,526 | $ | 62,566 | |||||||||||
Access CIG, LLC | (2) | Software & Services | L + 775 | 2/27/2026 | 548 | 549 | 551 | ||||||||||||||||
Advantage Sales & Marketing, Inc. | (2) | Commercial & Professional Services | L + 650 | 1.00 | % | 7/25/2022 | 3,868 | 3,439 | 3,273 | ||||||||||||||
Agro Merchants Global LP (CYM) | (f)(l)(3) | Transportation | L + 800 | 1.00 | % | 11/30/2025 | 15,000 | 14,653 | 14,839 | ||||||||||||||
Albany Molecular Research, Inc. | (2) | Pharmaceuticals, Biotechnology & Life Sciences | L + 700 | 1.00 | % | 8/28/2025 | 8,265 | 8,318 | 8,303 | ||||||||||||||
Ammeraal Beltech Holding BV (NLD) | (f)(l)(2) | Capital Goods | L + 800 | 7/27/2026 | 30,000 | 29,400 | 29,400 | ||||||||||||||||
See notes to condensed consolidated financial statements.
12
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Amtek Global Technology Pte. Ltd. (GER) | (f)(l)(m)(n)(EUR) | Automobiles & Components | 5.00% | 4/1/2023 | € | 32,822 | $ | 40,315 | $ | 38,108 | |||||||||||||
Belk, Inc. | (f)(g) | Retailing | 10.50% | 6/12/2023 | $ | 99,615 | 98,170 | 85,465 | |||||||||||||||
CommerceHub, Inc. | (f)(2) | Software & Services | L + 775 | 5/21/2026 | 69,278 | 67,255 | 67,584 | ||||||||||||||||
CTI Foods Holding Co., LLC | (5) | Food, Beverage & Tobacco | L + 725 | 1.00 | % | 6/28/2021 | 23,219 | 23,071 | 9,868 | ||||||||||||||
Culligan International Co. | (f)(2) | Household & Personal Products | L + 850 | 1.00 | % | 12/13/2024 | 65,984 | 65,357 | 66,281 | ||||||||||||||
Direct ChassisLink, Inc. | (2) | Transportation | L + 600 | 6/15/2023 | 1,315 | 1,345 | 1,330 | ||||||||||||||||
EaglePicher Technologies, LLC | (2) | Capital Goods | L + 725 | 3/8/2026 | 2,970 | 2,949 | 2,973 | ||||||||||||||||
Emerald Performance Materials, LLC | (2) | Materials | L + 775 | 1.00 | % | 8/1/2022 | 2,041 | 2,036 | 2,048 | ||||||||||||||
Excelitas Technologies Corp. | (5) | Technology Hardware & Equipment | L + 750 | 1.00 | % | 12/1/2025 | 7,344 | 7,472 | 7,460 | ||||||||||||||
FleetPride Corporation | (3) | Capital Goods | L + 900 | 1.25 | % | 5/19/2023 | 18 | 18 | 19 | ||||||||||||||
Grocery Outlet, Inc. | (2) | Food & Staples Retailing | L + 825 | 1.00 | % | 10/21/2022 | 15,346 | 15,036 | 15,423 | ||||||||||||||
Higginbotham Insurance Agency, Inc. | (f)(2) | Insurance | L + 725 | 1.00 | % | 12/19/2025 | 18,696 | 18,532 | 18,693 | ||||||||||||||
Integro Ltd/United States | (f)(3) | Insurance | L + 925 | 6/8/2025 | 4,778 | 4,732 | 4,773 | ||||||||||||||||
Invictus | (2) | Materials | L + 675 | 3/30/2026 | 3,371 | 3,412 | 3,363 | ||||||||||||||||
iParadigms Holdings, LLC | (3) | Software & Services | L + 725 | 1.00 | % | 7/29/2022 | 21,868 | 21,766 | 21,814 | ||||||||||||||
Jo-Ann Stores, Inc. | (2) | Retailing | L + 925 | 1.00 | % | 5/21/2024 | 610 | 601 | 605 | ||||||||||||||
LBM Borrower, LLC | (6) | Capital Goods | L + 925 | 1.00 | % | 8/20/2023 | 21,256 | 21,153 | 21,415 | ||||||||||||||
MedAssets, Inc. | (f)(g)(2) | Health Care Equipment & Services | L + 975 | 1.00 | % | 4/20/2023 | 63,000 | 61,589 | 63,945 | ||||||||||||||
Misys, Ltd. (GBR) | (n)(3) | Software & Services | L + 725 | 1.00 | % | 6/13/2025 | 8,403 | 8,347 | 8,348 | ||||||||||||||
See notes to condensed consolidated financial statements.
13
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
NBG Home | (f)(3) | Consumer Durables & Apparel | L + 975 | 1.00 | % | 9/30/2024 | $ | 34,205 | $ | 33,758 | $ | 34,582 | |||||||||||
NEP Broadcasting, LLC | (2) | Media & Entertainment | L + 700 | 1.00 | % | 1/23/2023 | 5,955 | 5,996 | 5,978 | ||||||||||||||
One Call Medical, Inc. | (f)(2) | Insurance | L + 975 | 4/30/2024 | 25,366 | 25,127 | 25,023 | ||||||||||||||||
P2 Energy Solutions, Inc. | (3) | Software & Services | L + 800 | 1.00 | % | 4/30/2021 | 71,312 | 70,407 | 66,944 | ||||||||||||||
Peak 10 Holding Corp. | (3) | Telecommunication Services | L + 725 | 1.00 | % | 8/1/2025 | 190 | 187 | 186 | ||||||||||||||
Petrochoice Holdings, Inc. | (f)(g)(6) | Capital Goods | L + 875 | 1.00 | % | 8/21/2023 | 65,000 | 63,611 | 64,570 | ||||||||||||||
Plaskolite, LLC | (f)(2) | Materials | L + 800 | 1.00 | % | 11/3/2023 | 53,793 | 52,753 | 53,550 | ||||||||||||||
Polyconcept North America, Inc. | (f)(2) | Consumer Durables & Apparel | L + 1000 | 1.00 | % | 2/16/2024 | 29,376 | 28,835 | 30,257 | ||||||||||||||
Rise Baking Company | (f)(2) | Food, Beverage & Tobacco | L + 800 | 1.00 | % | 8/9/2026 | 16,389 | 16,226 | 16,197 | ||||||||||||||
Sequa Corp. | (6) | Materials | L + 900 | 1.00 | % | 4/28/2022 | 22,037 | 21,858 | 21,734 | ||||||||||||||
SIRVA Worldwide, Inc. | (3) | Commercial & Professional Services | L + 950 | 8/2/2026 | 3,787 | 3,507 | 3,521 | ||||||||||||||||
SMG/PA | (2) | Consumer Services | L + 700 | 1/23/2026 | 1,262 | 1,278 | 1,275 | ||||||||||||||||
Sparta Systems, Inc. | (f)(g)(2) | Software & Services | L + 825 | 1.00 | % | 7/27/2025 | 35,062 | 34,589 | 33,218 | ||||||||||||||
Vestcom International, Inc. | (f)(2) | Consumer Services | L + 825 | 1.00 | % | 12/31/2024 | 70,481 | 69,834 | 71,186 | ||||||||||||||
WireCo WorldGroup, Inc. | (2) | Capital Goods | L + 900 | 1.00 | % | 9/30/2024 | 12,253 | 12,203 | 12,375 | ||||||||||||||
Total Second Lien Senior Secured Loan | $ | 1,022,210 | $ | 999,043 | |||||||||||||||||||
See notes to condensed consolidated financial statements.
14
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Other Senior Secured Debt—8.1% | |||||||||||||||||||||||
Alliant Holdings I, Inc. | (o) | Insurance | 8.25 | % | 8/1/2023 | $ | 1,524 | $ | 1,577 | $ | 1,581 | ||||||||||||
Angelica Corp. | (f)(i) | Health Care Equipment & Services | 10.00% PIK (10.00% Max PIK) | 12/30/2022 | 37,761 | 37,189 | 33,210 | ||||||||||||||||
Artesyn Technologies, Inc. | (o) | Technology Hardware & Equipment | 9.75 | % | 10/15/2020 | 20,962 | 20,579 | 20,019 | |||||||||||||||
Avantor, Inc. | (o) | Pharmaceuticals, Biotechnology & Life Sciences | 6.00 | % | 10/1/2024 | 10,250 | 10,407 | 10,429 | |||||||||||||||
Boyne USA, Inc. | (o) | Consumer Services | 7.25 | % | 5/1/2025 | 5,115 | 5,256 | 5,435 | |||||||||||||||
Cleaver-Brooks Inc. | (o) | Capital Goods | 7.88 | % | 3/1/2023 | 12,052 | 12,277 | 12,353 | |||||||||||||||
Cornerstone Chemical Co. | (o) | Materials | 6.75 | % | 8/15/2024 | 11,133 | 11,228 | 11,163 | |||||||||||||||
Direct ChassisLink, Inc. | (o) | Transportation | 10.00 | % | 6/15/2023 | 14,026 | 14,851 | 14,938 | |||||||||||||||
DJO Finance, LLC | (o) | Health Care Equipment & Services | 8.13 | % | 6/15/2021 | 18,575 | 17,687 | 19,063 | |||||||||||||||
Genesys Telecommunications Laboratories, Inc. | (o) | Technology Hardware & Equipment | 10.00 | % | 11/30/2024 | 18,863 | 20,968 | 20,938 | |||||||||||||||
Maxim Crane Works LP / Maxim Finance Corp. | (o) | Capital Goods | 10.13 | % | 8/1/2024 | 899 | 996 | 987 | |||||||||||||||
PAREXEL International Corp. | (o) | Pharmaceuticals, Biotechnology & Life Sciences | 6.38 | % | 9/1/2025 | 1,334 | 1,292 | 1,271 | |||||||||||||||
Pattonair Holdings, Ltd. | (n)(o) | Capital Goods | 9.00 | % | 11/1/2022 | 8,350 | 8,497 | 8,642 | |||||||||||||||
Ply Gem Holdings, Inc. | (o) | Capital Goods | 8.00 | % | 4/15/2026 | 5,235 | 5,249 | 5,287 | |||||||||||||||
RedPrairie Corp. | (o) | Software & Services | 7.38 | % | 10/15/2024 | 1,034 | 1,073 | 1,075 | |||||||||||||||
Rockport (Relay) | (f)(i)(j)(k) | Consumer Durables & Apparel | 15.00% PIK (15.00% Max PIK) | 7/31/2022 | 34,842 | 30,920 | 10,115 | ||||||||||||||||
See notes to condensed consolidated financial statements.
15
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Surgery Partners Holdings, LLC | (o) | Health Care Equipment & Services | 8.88 | % | 4/15/2021 | $ | 479 | $ | 491 | $ | 501 | ||||||||||||
Vivint, Inc. | Commercial & Professional Services | 7.88 | % | 12/1/2022 | 8,787 | 8,683 | 8,985 | ||||||||||||||||
7.63 | % | 9/1/2023 | 11,150 | 11,620 | 10,356 | ||||||||||||||||||
Total Other Senior Secured Debt | $ | 220,840 | $ | 196,348 | |||||||||||||||||||
Total Senior Debt | $ | 2,880,544 | $ | 2,805,560 | |||||||||||||||||||
Subordinated Debt—13.7% | |||||||||||||||||||||||
Alion Science & Technology Corp. | (f)(g)(o) | Capital Goods | 11.00 | % | 8/1/2022 | $ | 68,603 | $ | 67,919 | $ | 67,170 | ||||||||||||
(f)(o) | 11.00 | % | 8/31/2022 | 22,156 | 21,824 | 21,693 | |||||||||||||||||
ClubCorp Club Operations, Inc. | (o) | Consumer Services | 8.50 | % | 9/15/2025 | 23,366 | 23,107 | 22,256 | |||||||||||||||
Exemplis Corp. | (f)(i)(3) | Commercial & Professional Services | L + 700, 4.00% PIK (4.00% Max PIK) | 3/23/2020 | 5,880 | 5,880 | 5,880 | ||||||||||||||||
Hilding Anders (SWE) | (f)(i)(l)(m)(n)(EUR) | Consumer Durables & Apparel | 13.00% PIK (13.00% Max PIK) | 6/30/2021 | € | 106,412 | 117,078 | 85,952 | |||||||||||||||
(f)(i)(k)(l)(m)(n)(EUR) | 12.00% PIK (12.00% Max PIK) | 12/31/2022 | 3,026 | 507 | 893 | ||||||||||||||||||
(f)(i)(k)(l)(m)(n)(EUR) | 12.00% PIK (12.00% Max PIK) | 12/31/2023 | 22,230 | 939 | — | ||||||||||||||||||
(f)(i)(k)(l)(m)(n)(EUR) | 18.00% PIK (18.00% Max PIK) | 12/31/2024 | 41,136 | 12,851 | 12,141 | ||||||||||||||||||
See notes to condensed consolidated financial statements.
16
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | ||||||||||||||||
Home Partners of America, Inc. | (f)(j)(2) | Real Estate | L + 625 | 1.00 | % | 10/8/2022 | $ | 42,857 | $ | 42,234 | $ | 42,692 | ||||||||||||
Hub International, Ltd. | (o) | Insurance | 7.00 | % | 5/1/2026 | 1,820 | 1,818 | 1,827 | ||||||||||||||||
Ken Garff Automotive, LLC | (o) | Retailing | 7.50 | % | 8/15/2023 | 5,434 | 5,447 | 5,651 | ||||||||||||||||
Kenan Advantage Group, Inc. | (o) | Transportation | 7.88 | % | 7/31/2023 | 5,069 | 5,100 | 5,269 | ||||||||||||||||
Quorum Health Corp. | Health Care Equipment & Services | 11.63 | % | 4/15/2023 | 3,896 | 3,890 | 3,920 | |||||||||||||||||
SRS Distribution, Inc. | (o) | Capital Goods | 8.25 | % | 7/1/2026 | 17,058 | 16,905 | 16,760 | ||||||||||||||||
Surgery Center Holdings, Inc. | (o) | Health Care Equipment & Services | 6.75 | % | 7/1/2025 | 8,407 | 8,024 | 8,092 | ||||||||||||||||
Team Health, Inc. | (o) | Health Care Equipment & Services | 6.38 | % | 2/1/2025 | 2,496 | 2,255 | 2,172 | ||||||||||||||||
Vertiv Group Corp. | (o) | Technology Hardware & Equipment | 9.25 | % | 10/15/2024 | 23,061 | 23,258 | 24,099 | ||||||||||||||||
Vivint, Inc. | Commercial & Professional Services | 8.75 | % | 12/1/2020 | 4,006 | 3,773 | 4,016 | |||||||||||||||||
Total Subordinated Debt | $ | 362,809 | $ | 330,483 | ||||||||||||||||||||
Asset Based Finance—17.9% | ||||||||||||||||||||||||
AMPLIT JV LP, Limited Partnership Interest | (f)* | Diversified Financials | N/A | $ | 7,137 | $ | 2,146 | |||||||||||||||||
Bank of Ireland (IRL) | (f)(l)(o)(3)* | Banks | L + 1185 | 12/4/2027 | $ | 15,105 | 15,105 | 15,269 | ||||||||||||||||
Central Park Leasing Aggregator, L.P. (LUX), Partnership Interest | (f)(l) | Capital Goods | 29.19 | % | 5/31/2023 | N/A | 47,797 | 68,038 | ||||||||||||||||
Comet Aircraft SARL (LUX), Common Shares | (f)(l)(m) | Capital Goods | 8.08 | % | 2/28/2022 | 34,518 | 34,518 | 32,124 | ||||||||||||||||
See notes to condensed consolidated financial statements.
17
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||
KKR Zeno Aggregator, LP (IRL) | (f)(l)* | Capital Goods | 30,501 | $ | 30,501 | $ | 30,501 | ||||||||||||||
LSF IX Java Investments Ltd. (IRL) | (f)(l)(9)*(EUR) | Diversified Financials | E + 365 | 12/3/2019 | 56,406 | 58,001 | 64,304 | ||||||||||||||
Montgomery Credit Holdings, LP, Membership Interest | (f) | Diversified Financials | N/A | 10,395 | 9,495 | ||||||||||||||||
Neos SPV I (NLD) | (f)(l)(EUR) | Diversified Financials | 2,318 | 2,703 | 2,692 | ||||||||||||||||
Orchard Marine, Ltd. (VGB), Class B Common Stock | (f)(j)(l)* | Transportation | 1,964 | 3,069 | — | ||||||||||||||||
Orchard Marine, Ltd. (VGB), Series A Preferred Stock | (f)(j)(l)(p)* | Transportation | 58,920 | 57,963 | 32,733 | ||||||||||||||||
Star Mountain SMB Multi-Manager Credit Platform, LP, Limited Partnership Interest | (f) | Diversified Financials | N/A | 59,352 | 73,199 | ||||||||||||||||
Toorak Capital Partners, LLC, Membership Interest | (f)(m)* | Diversified Financials | N/A | 11,534 | 13,277 | ||||||||||||||||
(f)(m) | N/A | 75,562 | 86,980 | ||||||||||||||||||
Total Asset Based Finance | $ | 413,637 | $ | 430,758 | |||||||||||||||||
Strategic Credit Opportunities Partners, LLC—12.7% | |||||||||||||||||||||
Strategic Credit Opportunities Partners, LLC | (f)(m)(n) | Diversified Financials | 294,027 | $ | 294,028 | $ | 307,458 | ||||||||||||||
Strategic Credit Opportunities Partners, LLC | $ | 294,028 | $ | 307,458 | |||||||||||||||||
Equity/Other—10.0% | |||||||||||||||||||||
Alion Science & Technology Corp., Class A Membership Interest | (f)* | Capital Goods | N/A | $ | 7,350 | $ | 7,373 | ||||||||||||||
AltEn, LLC, Membership Units | (f)(j)* | Energy | 2,384 | 2,955 | — | ||||||||||||||||
Amtek Global Technology Pte, Ltd. (GER), Ordinary Shares | (f)(l)(m)*(EUR) | Automobiles & Components | 5,735,799,959 | 30,687 | 28,037 | ||||||||||||||||
See notes to condensed consolidated financial statements.
18
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | ||||||||||||||
Amtek Global Technology Pte, Ltd. (SGP), Trade Claim | (f)(l)(m)(EUR) | Automobiles & Components | € | 3,590,032 | $ | 3,016 | $ | 2,669 | ||||||||||||||
Angelica Corp., Limited Partnership Interest | (f)* | Health Care Equipment & Services | 877,044 | 47,562 | 1,333 | |||||||||||||||||
Belk, Inc., Units | (f)* | Retailing | 1,642 | 7,846 | 8,244 | |||||||||||||||||
Cengage Learning Holdings II, LP, Common Stock | (f)* | Media & Entertainment | 227,802 | 7,529 | 3,588 | |||||||||||||||||
Charlotte Russe, Inc., Common Stock | (f)(j)* | Retailing | 22,575 | 12,478 | — | |||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Class A shares | (f)* | Technology Hardware & Equipment | 40,529 | — | 3 | |||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Class A1-A5 shares | (f)* | Technology Hardware & Equipment | 3,463,150 | 120 | 745 | |||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Ordinary Shares | (f)* | Technology Hardware & Equipment | 41,339 | — | 3 | |||||||||||||||||
(f)* | 2,768,806 | — | — | |||||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Preferred Shares | (f)* | Technology Hardware & Equipment | 1,050,465 | — | 80 | |||||||||||||||||
Hilding Anders (SWE), Arle PIK Interest | (f)(i)(k)(l)(n)(EUR) | Consumer Durables & Apparel | 12.00% PIK (12.00% Max PIK) | 12/31/2022 | 3,834 | — | — | |||||||||||||||
Hilding Anders (SWE), Class A Common Stock | (f)(l)(m)*(SEK) | Consumer Durables & Apparel | 4,503,411 | 132 | — | |||||||||||||||||
Hilding Anders (SWE), Class B Common Stock | (f)(l)(m)*(SEK) | Consumer Durables & Apparel | 574,791 | 25 | — | |||||||||||||||||
Hilding Anders (SWE), Class C Common Stock | (f)(l)*(EUR) | Consumer Durables & Apparel | 213,201 | — | — | |||||||||||||||||
Hilding Anders (SWE), Equity Options | (f)(l)(m)*(SEK) | Consumer Durables & Apparel | 12/31/2020 | 236,160,807 | 14,988 | 4,501 | ||||||||||||||||
Home Partners of America, Inc., Common Stock | (f)(j)* | Real Estate | 100,044 | 101,876 | 139,655 | |||||||||||||||||
Home Partners of America, Inc., Warrants | (f)(j)* | Real Estate | 8/7/2024 | 2,675 | 292 | 1,384 | ||||||||||||||||
See notes to condensed consolidated financial statements.
19
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||
Jones Apparel Holdings, Inc., Common Stock | (f) | Consumer Durables & Apparel | 5,451 | $ | 872 | $ | — | ||||||||||||||
Keystone Australia Holdings, Pty. Ltd. (AUS), Residual Claim | (f)(l)*(AUD) | Consumer Services | N/A | 7,682 | 412 | ||||||||||||||||
KKR BPT Holdings Aggregator, LLC, Membership Interest | (f)(m)* | Diversified Financials | N/A | 16,000 | 2,993 | ||||||||||||||||
NBG Home, Common Stock | (f)* | Consumer Durables & Apparel | 1,903 | 2,565 | 3,057 | ||||||||||||||||
Nine West Holdings, Inc., Common Stock | (f) | Consumer Durables & Apparel | 5,451 | 6,542 | — | ||||||||||||||||
Petroplex Acidizing, Inc., Warrants | (f)* | Energy | 12/29/2026 | 8 | — | — | |||||||||||||||
Polyconcept North America, Inc., Class A-1 Units | (f)* | Consumer Durables & Apparel | 29,376 | 2,938 | 4,409 | ||||||||||||||||
Proserv Acquisition, LLC (GBR), Class A Common Units | (f)(j)(l)* | Energy | 2,635,005 | 33,547 | 15,256 | ||||||||||||||||
Proserv Acquisition, LLC (GBR), Class A Preferred Units | (f)(j)(l)* | Energy | 837,780 | 5,392 | 9,609 | ||||||||||||||||
Rockport (Relay), Class A Units | (f)(j)* | Consumer Durables & Apparel | 219,349 | — | — | ||||||||||||||||
Sentry Holdings, Ltd. (JEY), Common Shares A | (f)*(GBP) | Insurance | 16,450 | — | — | ||||||||||||||||
Sentry Holdings, Ltd. (JEY), Preferred B Shares | (f)*(GBP) | Insurance | 6,113,719 | 9,065 | 8,499 | ||||||||||||||||
Stuart Weitzman, Inc., Common Stock | (f)* | Consumer Durables & Apparel | 5,451 | — | — | ||||||||||||||||
Towergate (GBR), Ordinary Shares | (f)(l)*(GBP) | Insurance | 116,814 | 173 | 162 | ||||||||||||||||
Total Equity/Other | $ | 321,632 | $ | 242,012 | |||||||||||||||||
TOTAL INVESTMENTS — 170.5%(q) | $ | 4,272,650 | $ | 4,116,271 | |||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS—(70.5%) | $ | (1,702,793 | ) | ||||||||||||||||||
NET ASSETS—100.0% | $ | 2,413,478 | |||||||||||||||||||
See notes to condensed consolidated financial statements.
20
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
A summary of outstanding financial instruments at September 30, 2018 is as follows:
Foreign currency forward contracts
Foreign Currency | Settlement Date | Counterparty | Amount and Transaction | US$ Value at Settlement Date | US$ Value at September 30, 2018 | Unrealized Appreciation (Depreciation) | ||||||||||||||
AUD | October 12, 2018 | JP Morgan Chase Bank | A$ | 2,572 Sold | $ | 1,919 | $ | 1,859 | $ | 60 | ||||||||||
CAD | October 22, 2018 | State Street Bank and Trust Company | C$ | 12,813 Sold | 9,744 | 9,924 | (180 | ) | ||||||||||||
CAD | October 26, 2018 | JP Morgan Chase Bank | C$ | 4,500 Sold | 3,473 | 3,486 | (13 | ) | ||||||||||||
EUR | October 12, 2018 | JP Morgan Chase Bank | € | 84,000 Sold | 98,190 | 97,605 | 585 | |||||||||||||
EUR | October 22, 2018 | State Street Bank and Trust Company | € | 10,500 Sold | 12,225 | 12,210 | 15 | |||||||||||||
EUR | October 22, 2018 | State Street Bank and Trust Company | € | 10,250 Sold | 11,934 | 11,919 | 15 | |||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 5,641 Sold | 6,357 | 6,713 | (356 | ) | ||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 22,300 Sold | 26,298 | 26,539 | (241 | ) | ||||||||||||
EUR | July 17, 2023 | JP Morgan Chase Bank | € | 1,300 Sold | 1,744 | 1,735 | 9 | |||||||||||||
GBP | October 22, 2018 | State Street Bank and Trust Company | £ | 2,400 Sold | 3,133 | 3,131 | 2 | |||||||||||||
GBP | October 22, 2018 | State Street Bank and Trust Company | £ | 14,000 Sold | 18,276 | 18,264 | 12 | |||||||||||||
GBP | October 22, 2018 | JP Morgan Chase Bank | £ | 29,125 Sold | 38,014 | 37,995 | 19 | |||||||||||||
GBP | January 11, 2023 | JP Morgan Chase Bank | £ | 1,936 Sold | 2,942 | 2,708 | 234 | |||||||||||||
GBP | January 11, 2023 | JP Morgan Chase Bank | £ | 1,721 Sold | 2,634 | 2,406 | 228 | |||||||||||||
GBP | January 11, 2023 | JP Morgan Chase Bank | £ | 3,400 Sold | 4,752 | 4,755 | (3 | ) | ||||||||||||
Total | $ | 241,635 | $ | 241,249 | $ | 386 | ||||||||||||||
Cross currency swaps
Counterparty | Company Receives Fixed Rate | Company Pays Fixed Rate | Termination Date | Premiums Paid/(Received) | Unrealized Appreciation (Depreciation) | |||||||||
JP Morgan Chase Bank | 2.200% on USD notional amount of $188,109 | 0.000% on EUR notional amount of €177,545 | 12/31/2019 | $ | — | $ | (19,673 | ) | ||||||
$ | — | $ | (19,673 | ) | ||||||||||
Interest rate swaps
Counterparty | Notional Amount | Company Receives Floating Rate | Company Pays Fixed Rate | Termination Date | Premiums Paid/(Received) | Value | Unrealized Appreciation (Depreciation) | ||||||||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 1.36 | % | 12/31/2020 | $ | — | $ | 3,498 | $ | 3,498 | |||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 0.84 | % | 3/31/2019 | — | 836 | 836 | ||||||||||||||
BMO Capital Markets | $ | 200,000 | 3-Month LIBOR | 2.77 | % | 3/8/2023 | — | 2,310 | 2,310 | ||||||||||||||
$ | — | $ | 6,644 | $ | 6,644 | ||||||||||||||||||
As of September 30, 2018, for the above contracts and/or agreements, the Company had sufficient cash and/or securities to cover the commitments or the collateral requirements, if any, of the relevant broker or exchange.
See notes to condensed consolidated financial statements.
21
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
(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 (the "1940 Act"), unless otherwise indicated. Non-controlled/non-affiliated investments are investments that are neither controlled investments nor affiliated investments. |
(c) | Represents maturity of debt securities and expiration of applicable equity investments. |
(d) | Denominated in U.S. dollars unless otherwise noted. |
(e) | Represents amortized cost for debt securities and cost for equity investments translated to U.S. dollars. |
(f) | Investments classified as Level 3 for which fair value was determined by the Company’s Board of Directors (see Note 2). |
(g) | Security or portion thereof was held within CCT New York Funding LLC and was pledged as collateral supporting the amounts outstanding under the revolving credit facility with JPMorgan Chase Bank as of September 30, 2018. |
(h) | Security or portion thereof was held within CCT Tokyo Funding LLC and was pledged as collateral supporting the amounts outstanding under the revolving credit facility with Sumitomo Mitsui Banking Corporation as of September 30, 2018. |
(i) | The underlying credit agreement or indenture 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. |
(j) | 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, 2018 represented 10.8% of the Company’s net assets. Fair value as of September 30, 2018 and December 31, 2017 along with transactions during the nine months ended September 30, 2018 in these affiliated investments were as follows (amounts in thousands): |
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||||||
Non-Controlled, Affiliated Investments | Fair Value at December 31, 2017 | Gross Additions (Cost)* | Gross Reductions (Cost)** | Net Unrealized Gain (Loss) | Fair Value at September 30, 2018 | Net Realized Gain (Loss) | Interest Income*** | Fee Income | Dividend Income | |||||||||||||||||||||||||||
AltEn, LLC | ||||||||||||||||||||||||||||||||||||
Membership Units | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Term Loan | 4,253 | 2,691 | (29,836 | ) | 25,583 | 2,691 | (27,146 | ) | — | — | — | |||||||||||||||||||||||||
Home Partners of America, Inc. | ||||||||||||||||||||||||||||||||||||
Subordinated Debt | 76,500 | 633 | (32,143 | ) | (2,298 | ) | 42,692 | — | 4,518 | — | — | |||||||||||||||||||||||||
Common Stock | 122,652 | — | — | 17,003 | 139,655 | — | — | — | — | |||||||||||||||||||||||||||
Warrants | 805 | — | — | 579 | 1,384 | — | — | — | — | |||||||||||||||||||||||||||
Orchard Marine, Ltd. | ||||||||||||||||||||||||||||||||||||
Class B Common Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Series A Preferred Stock | 21,009 | 1 | — | 11,723 | 32,733 | — | — | — | — | |||||||||||||||||||||||||||
Rockport Company LLC | ||||||||||||||||||||||||||||||||||||
Term Loan | 17,766 | 8,918 | (6,753 | ) | (9,816 | ) | 10,115 | — | 167 | — | — | |||||||||||||||||||||||||
Class A Units | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Charlotte Russe, Inc. | ||||||||||||||||||||||||||||||||||||
Term Loan | — | 9,476 | (48 | ) | (2,258 | ) | 7,170 | — | 538 | — | — | |||||||||||||||||||||||||
Common Stock | — | 12,478 | — | (12,478 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Proserv Acquisition LLC | ||||||||||||||||||||||||||||||||||||
Class A Preferred Units | — | 5,392 | — | 4,217 | 9,609 | — | — | — | — | |||||||||||||||||||||||||||
Class A Common Units | — | 33,547 | — | (18,291 | ) | 15,256 | — | — | — | — | ||||||||||||||||||||||||||
Totals | $ | 242,985 | $ | 73,136 | $ | (68,780 | ) | $ | 13,964 | $ | 261,305 | $ | (27,146 | ) | $ | 5,223 | $ | — | $ | — | ||||||||||||||||
See notes to condensed consolidated financial statements.
22
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
* | 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 PIK interest income. |
(k) | Investment was on non-accrual status as of September 30, 2018. |
(l) | 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. |
(m) | 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 September 30, 2018 represented 27.9% of the Company’s net assets. Fair value as of September 30, 2018 and December 31, 2017 along with transactions during the nine months ended September 30, 2018 in these controlled investments were as follows (amounts in thousands): |
Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||||||||||||
Controlled Investments | Fair Value at December 31, 2017 | Gross Additions (Cost)* | Gross Reductions (Cost)** | Net Unrealized Gain (Loss) | Fair Value at September 30, 2018 | Net Realized Gain (Loss) | Interest Income*** | Fee Income | Dividend Income | |||||||||||||||||||||||||||
Comet Aircraft S.A.R.L | $ | 35,760 | $ | — | $ | (14,174 | ) | $ | 10,538 | $ | 32,124 | $ | (12,797 | ) | $ | 2,243 | $ | — | $ | 902 | ||||||||||||||||
Hilding Anders | ||||||||||||||||||||||||||||||||||||
Subordinated Debt | 104,554 | 7,771 | — | (13,339 | ) | 98,986 | — | 11,532 | — | — | ||||||||||||||||||||||||||
Class A Common Stock | 3 | — | — | (3 | ) | — | — | — | — | — | ||||||||||||||||||||||||||
Class B Common Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Class C Common Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Equity Options | 409 | — | — | 4,092 | 4,501 | — | — | — | — | |||||||||||||||||||||||||||
KKR BPT Holdings Aggregator, LLC | 5,376 | 3,000 | — | (5,383 | ) | 2,993 | — | — | — | — | ||||||||||||||||||||||||||
Strategic Credit Opportunities Partners, LLC | 300,652 | — | — | 6,806 | 307,458 | — | — | — | 24,215 | |||||||||||||||||||||||||||
Toorak Capital Partners, LLC | 53,531 | 47,550 | (6,594 | ) | 5,770 | 100,257 | — | — | — | 4,892 | ||||||||||||||||||||||||||
Amtek Global Technology Pte Ltd. | ||||||||||||||||||||||||||||||||||||
Term Loan | — | 100,788 | — | (5,518 | ) | 95,270 | — | 2,390 | — | — | ||||||||||||||||||||||||||
Ordinary Shares | — | 30,687 | — | (2,650 | ) | 28,037 | — | — | — | — | ||||||||||||||||||||||||||
Trade Claim | — | 15,615 | (12,599 | ) | (347 | ) | 2,669 | (550 | ) | — | — | — | ||||||||||||||||||||||||
Totals | $ | 500,285 | $ | 205,411 | $ | (33,367 | ) | $ | (34 | ) | $ | 672,295 | $ | (13,347 | ) | $ | 16,165 | $ | — | $ | 30,009 | |||||||||||||||
* | 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 PIK interest income. |
See notes to condensed consolidated financial statements.
23
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
(n) | 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 assets other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of September 30, 2018, 74.5% of the Company’s total assets represented qualifying assets. |
(o) | 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. |
(p) | The issuer of this investment has elected to pay the stated dividend rate upon liquidation of the investment. |
(q) | As of September 30, 2018, the aggregate gross unrealized appreciation for all securities and derivatives in which there was an excess of value over tax cost was $153,368; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $322,390; the net unrealized depreciation was $169,022; and the aggregate cost of securities for Federal income tax purposes was $4,272,650. |
* | Non-income producing security. |
(1) | Not used. |
(2) | The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at September 30, 2018 was 2.26%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(3) | The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at September 30, 2018 was 2.40%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(4) | The interest rate on these investments is subject to a base rate 12-Month LIBOR, which at September 30, 2018 was 2.92%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(5) | The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at September 30, 2018 was 2.60%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(6) | The interest rate on these investments is subject to a base rate of 2-Month LIBOR, which at September 30, 2018 was 2.31%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(7) | The interest rate on these investments is subject to a base rate of 3-Month PRIME, which at September 30, 2018 was 5.25%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(8) | The interest rate on these investments is subject to a base rate of 3-Month Canadian Banker Acceptance Rate, which at September 30, 2018 was 2.02%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(9) | The interest rate on these investments is subject to a base rate of 3-Month EURIBOR, which at September 30, 2018 was (0.32%). The current base rate for each investment may be different from the reference rate on September 30, 2018. |
See notes to condensed consolidated financial statements.
24
Corporate Capital Trust, Inc. and Subsidiaries
Condensed Consolidated Schedule of Investments (continued)
As of September 30, 2018
(in thousands, except share amounts)
Abbreviations: | ||
AUD - Australian Dollar; local currency investment amount is denominated in Australian Dollar. A$1 / US $0.723 as of September 30, 2018. | ||
CAD - Canadian Dollar; local currency investment amount is denominated in Canadian Dollar. C$1 / US $0.774 as of September 30, 2018. | ||
EUR - Euro; local currency investment amount is denominated in Euros. €1 / US $1.161 as of September 30, 2018. | ||
GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1 / US $1.303 as of September 30, 2018. | ||
SEK - Swedish Krona; local currency investment amount is denominated in Swedish Kronor. SEK1 / US $0.113 as of September 30, 2018. | ||
AUS - Australia | ||
CYM - Cayman Islands | ||
GER - Germany | ||
GBR - United Kingdom | ||
IRL - Ireland | ||
JEY - Jersey | ||
LUX - Luxembourg | ||
NLD - Netherland | ||
SWE - Sweden | ||
VGB - British Virgin Islands | ||
E = EURIBOR - Euro Interbank Offered Rate | ||
L = LIBOR - London Interbank Offered Rate | ||
P = PRIME - U.S. Prime Rate | ||
PIK - Payment-in-kind; the issuance of additional securities by the borrower to settle interest payment obligations. | ||
See notes to condensed consolidated financial statements.
25
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | ||||||||||||||||
First Lien Senior Secured Loans—67.3% | ||||||||||||||||||||||||
Abaco Systems, Inc. | (f)(g)(2) | Capital Goods | L + 600 | 1.00 | % | 12/7/2021 | $ | 65,015 | $ | 62,924 | $ | 62,168 | ||||||||||||
ABB CONCISE Optical Group, LLC | (2) | Retailing | L + 500 | 1.00 | % | 6/15/2023 | 6,795 | 6,795 | 6,812 | |||||||||||||||
Accuride Corp. | (2) | Capital Goods | L + 525 | 1.00 | % | 11/17/2023 | 18,295 | 17,954 | 18,638 | |||||||||||||||
Acosta Holdco, Inc. | (3) | Commercial & Professional Services | L + 325 | 1.00 | % | 9/26/2021 | 8,000 | 7,576 | 7,067 | |||||||||||||||
Advantage Sales & Marketing, Inc. | (2) | Commercial & Professional Services | L + 325 | 1.00 | % | 7/23/2021 | 5,093 | 4,894 | 4,978 | |||||||||||||||
Agro Merchants Global, LP | (3) | Transportation | L + 375 | 1.00 | % | 12/6/2024 | 703 | 699 | 710 | |||||||||||||||
Alion Science & Technology Corp. | (3) | Capital Goods | L + 450 | 1.00 | % | 8/19/2021 | 2,766 | 2,764 | 2,771 | |||||||||||||||
AltEn, LLC | (f)(h)(i)(j)(4) | Energy | L + 900 PIK (L + 900 Max PIK) | 9/12/2018 | 40,494 | 29,836 | 4,253 | |||||||||||||||||
AM General, LLC | (f)(g)(3) | Automobiles & Components | L + 725 | 1.00 | % | 12/28/2021 | 87,604 | 86,514 | 88,813 | |||||||||||||||
Amtek Global Technology Pte, Ltd. (SGP) | (f)(k)(l)(5)(EUR) | Automobiles & Components | 5.00 | % | 11/10/2019 | € | 82,055 | 91,286 | 98,454 | |||||||||||||||
Bay Club, Co. | (3) | Consumer Services | L + 650 | 1.00 | % | 8/31/2022 | $ | 5,536 | 5,523 | 5,619 | ||||||||||||||
Cengage Learning, Inc. | (3) | Media | L + 425 | 1.00 | % | 6/7/2023 | 10,000 | 9,638 | 9,574 | |||||||||||||||
Charlotte Russe, Inc. | (i)(4) | Retailing | L + 550 | 1.25 | % | 5/22/2019 | 18,136 | 18,073 | 7,322 | |||||||||||||||
(i)(4) | L + 550 | 1.25 | % | 5/22/2019 | 4,440 | 4,430 | 1,792 | |||||||||||||||||
See notes to condensed consolidated financial statements.
26
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Commercial Barge Line Co. | (3) | Transportation | L + 875 | 1.00 | % | 11/12/2020 | $ | 7,502 | $ | 6,411 | $ | 4,383 | |||||||||||
CTI Foods Holding Co, LLC | (3) | Food, Beverage & Tobacco | L + 350 | 1.00 | % | 6/29/2020 | 3,762 | 3,556 | 3,344 | ||||||||||||||
Distribution International, Inc. | (2) | Retailing | L + 500 | 1.00 | % | 12/15/2021 | 28,243 | 23,308 | 24,024 | ||||||||||||||
Eacom Timber Corp. (CAN) | (f)(k)(l)(6) | Materials | L + 650 | 1.00 | % | 11/30/2023 | 73,209 | 72,484 | 72,727 | ||||||||||||||
EagleView Technology Corp. | (2) | Capital Goods | L + 425 | 1.00 | % | 7/15/2022 | 6,842 | 6,795 | 6,911 | ||||||||||||||
FleetPride Corporation | (2) | Capital Goods | L + 400 | 1.25 | % | 11/19/2019 | 8,088 | 8,078 | 8,076 | ||||||||||||||
Frontline Technologies Group, LLC | (f)(g)(2) | Software & Services | L + 650 | 1.00 | % | 9/18/2023 | 61,759 | 60,718 | 60,715 | ||||||||||||||
Greystone & Co, Inc. | (f)(g)(6) | Diversified Financials | L + 800 | 1.00 | % | 4/17/2024 | 37,781 | 37,431 | 38,473 | ||||||||||||||
Hunt Mortgage | (f)(g)(3) | Diversified Financials | L + 750 | 1.00 | % | 2/14/2023 | 60,619 | 59,790 | 60,292 | ||||||||||||||
JHT Holdings, Inc. | (f)(g)(2) | Capital Goods | L + 850 | 1.00 | % | 5/4/2022 | 29,080 | 28,628 | 30,560 | ||||||||||||||
Jo-Ann Stores, Inc. | (9) | Retailing | L + 500 | 1.00 | % | 10/20/2023 | 16,369 | 16,215 | 15,837 | ||||||||||||||
KeyPoint Government Solutions, Inc. | (f)(2) | Capital Goods | L + 600 | 1.00 | % | 4/18/2024 | 14,437 | 14,304 | 14,484 | ||||||||||||||
Koosharem, LLC | (g)(2) | Commercial & Professional Services | L + 650 | 1.00 | % | 5/15/2020 | 20,787 | 20,581 | 20,302 | ||||||||||||||
Matchesfashion, Ltd. (GBR) | (f)(g)(k)(l)(3) | Consumer Durables & Apparel | L + 462.50 | 10/16/2024 | 12,688 | 11,752 | 11,852 | ||||||||||||||||
See notes to condensed consolidated financial statements.
27
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
McGraw-Hill Global Education Holdings, LLC | (3) | Media | L + 400 | 1.00 | % | 5/4/2022 | $ | 14,770 | $ | 14,806 | $ | 14,763 | |||||||||||
National Debt Relief, LLC | (f)(g)(2) | Diversified Financials | L + 675 | 1.00 | % | 5/31/2023 | 11,290 | 11,237 | 11,273 | ||||||||||||||
(f)(g)(2) | L + 675 | 1.00 | % | 5/31/2023 | 7,526 | 7,489 | 7,510 | ||||||||||||||||
NBG Home | (2) | Consumer Durables & Apparel | L + 550 | 1.00 | % | 4/26/2024 | 25,838 | 25,345 | 26,128 | ||||||||||||||
NCI, Inc. | (f)(g)(2) | Software & Services | L + 750 | 1.00 | % | 8/15/2024 | 84,394 | 83,381 | 83,595 | ||||||||||||||
New Enterprise Stone & Lime Co, Inc. | (f)(g)(2) | Capital Goods | L + 800 | 1.00 | % | 7/8/2021 | 102,461 | 101,693 | 109,584 | ||||||||||||||
(f)(g)(2) | L + 800 | 1.00 | % | 7/8/2021 | 51,745 | 51,357 | 55,342 | ||||||||||||||||
Nine West Holdings | (2) | Consumer Durables & Apparel | L + 1000 | 1.00 | % | 10/8/2019 | 16,195 | 15,558 | 14,697 | ||||||||||||||
P2 Energy Solutions, Inc. | (k)(2) | Software & Services | L + 400 | 1.00 | % | 10/30/2020 | 2,992 | 2,932 | 2,935 | ||||||||||||||
Pacific Union Financial, LLC | (f)(3) | Diversified Financials | L + 750 | 1.00 | % | 4/21/2022 | 72,404 | 71,728 | 71,976 | ||||||||||||||
PAE Holding Corp. | (6) | Capital Goods | L + 550 | 1.00 | % | 10/20/2022 | 3,254 | 3,246 | 3,279 | ||||||||||||||
Petroplex Acidizing, Inc. | (f)(h)(2) | Energy | L + 725, 1.75% PIK (1.75% Max PIK) | 1.00 | % | 12/5/2019 | 22,609 | 22,609 | 21,669 | ||||||||||||||
(f)(h)(i) | 15.00% PIK (15.00% Max PIK) | 12/5/2019 | 20,596 | 13,809 | 3,199 | ||||||||||||||||||
Proserv Acquisition, LLC | (f)(k)(2) | Energy | L + 537.50 | 1.00 | % | 12/22/2021 | 26,758 | 21,153 | 13,636 | ||||||||||||||
Proserv Acquisition, LLC (GBR) | (f)(k)(l)(2) | L + 537.50 | 1.00 | % | 12/22/2021 | 15,706 | 12,407 | 8,004 | |||||||||||||||
See notes to condensed consolidated financial statements.
28
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Raley's | (3) | Food & Staples Retailing | L + 525 | 1.00 | % | 5/18/2022 | $ | 11,003 | $ | 10,734 | $ | 11,127 | |||||||||||
RedPrairie Corp. | (3) | Software & Services | L + 300 | 1.00 | % | 10/12/2023 | 9,643 | 9,743 | 9,702 | ||||||||||||||
Revere Superior Holdings, Inc. | (f)(g)(2) | Software & Services | L + 675 | 1.00 | % | 11/21/2022 | 2,345 | 2,299 | 2,338 | ||||||||||||||
(f)(2) | L + 675 | 1.00 | % | 11/21/2022 | 471 | 371 | 106 | ||||||||||||||||
(f)(g)(2) | L + 700 | 1.00 | % | 11/21/2022 | 65,665 | 65,019 | 65,380 | ||||||||||||||||
Safety Technology Holdings, Inc. | (f)(3) | Technology Hardware & Equipment | L + 600 | 1.00 | % | 7/7/2022 | 7,409 | 7,236 | 7,517 | ||||||||||||||
(f)(3) | L + 600 | 1.00 | % | 7/29/2022 | 1,188 | 1,160 | 1,212 | ||||||||||||||||
Savers, Inc. | (2) | Retailing | L + 375 | 1.25 | % | 7/9/2019 | 11,183 | 10,607 | 10,546 | ||||||||||||||
Sequa Corp. | (2) | Materials | L + 500 | 1.00 | % | 11/28/2021 | 14,606 | 14,687 | 14,732 | ||||||||||||||
SIRVA Worldwide, Inc. | (2) | Commercial & Professional Services | L + 650 | 1.00 | % | 11/22/2022 | 21,843 | 21,372 | 22,062 | ||||||||||||||
SMART Global Holdings, Inc. | (f)(k)(7) | Semiconductors & Semiconductor Equipment | P + 300 | 8/9/2022 | 288 | 288 | 232 | ||||||||||||||||
(f)(k)(2) | L + 625 | 1.00 | % | 8/9/2022 | 20,302 | 19,922 | 20,466 | ||||||||||||||||
Smile Brands Group, Inc. | (f)(2) | Health Care Equipment & Services | L + 625 | 1.00 | % | 8/15/2022 | 12,344 | 12,218 | 12,611 | ||||||||||||||
SouthernCarlson | (f)(2) | Capital Goods | L + 700 | 1.00 | % | 7/26/2021 | 3,109 | 3,079 | 3,140 | ||||||||||||||
(f)(2) | L + 700 | 1.00 | % | 7/26/2022 | 38,253 | 37,812 | 38,080 | ||||||||||||||||
(f)(2) | L + 700 | 1.00 | % | 7/26/2022 | 5,182 | 5,133 | 5,234 | ||||||||||||||||
See notes to condensed consolidated financial statements.
29
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Staples Canada (CAN) | (f)(g)(k)(l)(8)(CAD) | Retailing | CDOR + 700 | 1.00 | % | 9/12/2023 | C$ | 35,641 | $ | 28,869 | $ | 27,640 | |||||||||||
Sweet Harvest Foods Management Co | (f)(g)(2) | Food & Staples Retailing | L + 675 | 1.00 | % | 5/30/2023 | $ | 27,021 | 26,895 | 26,745 | |||||||||||||
ThreeSixty Group | (f)(g)(3) | Retailing | L + 700 | 1.00 | % | 3/31/2023 | 52,106 | 51,411 | 51,121 | ||||||||||||||
Transplace | (3) | Transportation | L + 425 | 1.00 | % | 10/9/2024 | 4,501 | 4,561 | 4,552 | ||||||||||||||
Utility One Source LP | (3) | Capital Goods | L + 550 | 1.00 | % | 4/18/2023 | 9,705 | 9,617 | 9,936 | ||||||||||||||
Vee Pak, Inc. | (f)(g)(2) | Household & Personal Products | L + 675 | 1.00 | % | 3/9/2023 | 39,800 | 39,268 | 38,236 | ||||||||||||||
Waste Pro USA, Inc. | (f)(g)(3) | Commercial & Professional Services | L + 750 | 1.00 | % | 10/15/2020 | 35,581 | 35,581 | 35,581 | ||||||||||||||
Wheels Up Partners, LLC | (f)(2) | Transportation | L + 855 | 1.00 | % | 1/26/2021 | 6,712 | 6,682 | 6,659 | ||||||||||||||
(f)(2) | L + 855 | 1.00 | % | 8/26/2021 | 7,651 | 7,616 | 7,590 | ||||||||||||||||
(f)(2) | L + 710 | 1.00 | % | 6/30/2024 | 24,312 | 24,149 | 24,111 | ||||||||||||||||
(f)(2) | L + 710 | 1.00 | % | 11/1/2024 | 9,949 | 9,868 | 9,867 | ||||||||||||||||
(f)(2) | L + 710 | 1.00 | % | 12/21/2024 | 4,974 | 4,925 | 4,925 | ||||||||||||||||
Willbros Group, Inc. | (f)(3) | Energy | L + 1175 | 1.25 | % | 12/15/2019 | 4,164 | 4,164 | 4,239 | ||||||||||||||
(f)(g)(2) | L + 975 | 1.25 | % | 12/15/2019 | 25,599 | 25,599 | 26,062 | ||||||||||||||||
WireCo WorldGroup, Inc. | (2) | Capital Goods | L + 550 | 1.00 | % | 9/29/2023 | 2,633 | 2,651 | 2,658 | ||||||||||||||
Z Gallerie, LLC. | (f)(6) | Retailing | L + 650 | 1.00 | % | 10/8/2020 | 31,704 | 31,507 | 29,230 | ||||||||||||||
Total First Lien Senior Secured Loans | $ | 1,712,750 | $ | 1,672,178 | |||||||||||||||||||
See notes to condensed consolidated financial statements.
30
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
Second Lien Senior Secured Loans—38.0% | |||||||||||||||||||||||
Abaco Systems, Inc. | (f)(g)(2) | Capital Goods | L + 1050 | 1.00 | % | 6/7/2022 | $ | 63,371 | $ | 62,398 | $ | 58,040 | |||||||||||
Agro Merchants Global LP (CYM) | (f)(l)(3) | Transportation | L + 800 | 1.00 | % | 11/30/2025 | 20,000 | 19,502 | 19,500 | ||||||||||||||
Amtek Global Technology Pte. Ltd (SGP) | (f)(k)(l)*(EUR) | Automobiles & Components | 11/10/2019 | 59,281 | 55,225 | 40,475 | |||||||||||||||||
Belk, Inc | (f)(g) | Retailing | 10.50% | 6/12/2023 | 99,615 | 98,009 | 85,711 | ||||||||||||||||
CTI Foods Holding Co., LLC | (3) | Food, Beverage & Tobacco | L + 725 | 1.00 | % | 6/28/2021 | 23,219 | 23,036 | 18,111 | ||||||||||||||
Culligan International Co | (f)(3) | Household & Personal Products | L + 850 | 1.00 | % | 12/13/2024 | 65,984 | 65,303 | 66,098 | ||||||||||||||
Emerald Performance Materials, LLC | (3) | Materials | L + 775 | 1.00 | % | 8/1/2022 | 2,041 | 2,035 | 2,044 | ||||||||||||||
Genoa (QoL) | (3) | Health Care Equipment & Services | L + 800 | 1.00 | % | 10/28/2024 | 10,828 | 10,682 | 11,018 | ||||||||||||||
Grocery Outlet, Inc. | (2) | Food & Staples Retailing | L + 825 | 1.00 | % | 10/21/2022 | 15,346 | 14,994 | 15,408 | ||||||||||||||
Higginbotham Insurance Agency, Inc. | (f)(3) | Insurance | L + 725 | 1.00 | % | 12/1/2025 | 18,696 | 18,509 | 18,509 | ||||||||||||||
iParadigms Holdings, LLC | (2) | Software & Services | L + 725 | 1.00 | % | 7/29/2022 | 21,868 | 21,750 | 21,431 | ||||||||||||||
MedAssets, Inc. | (f)(g)(3) | Health Care Equipment & Services | L + 975 | 1.00 | % | 4/20/2023 | 63,000 | 61,428 | 63,945 | ||||||||||||||
Misys, Ltd. (GBR) | (k)(l)(2) | Software & Services | L + 725 | 1.00 | % | 6/13/2025 | 8,403 | 8,343 | 8,450 | ||||||||||||||
NBG Home | (f)(2) | Consumer Durables & Apparel | L + 975 | 1.00 | % | 9/30/2024 | 34,205 | 33,720 | 34,366 | ||||||||||||||
NEP Broadcasting, LLC | (3) | Media | L + 700 | 1.00 | % | 1/23/2023 | 5,955 | 6,002 | 6,007 | ||||||||||||||
P2 Energy Solutions, Inc. | (k)(2) | Software & Services | L + 800 | 1.00 | % | 4/30/2021 | 71,312 | 70,163 | 65,963 | ||||||||||||||
See notes to condensed consolidated financial statements.
31
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | ||||||||||||||||
Petrochoice Holdings, Inc. | (f)(g)(6) | Capital Goods | L + 875 | 1.00 | % | 8/21/2023 | $ | 65,000 | $ | 63,458 | $ | 62,812 | ||||||||||||
Plaskolite, LLC | (f)(2) | Materials | L + 900 | 1.00 | % | 11/3/2023 | 33,543 | 32,703 | 33,879 | |||||||||||||||
Polyconcept North America, Inc. | (f)(3) | Consumer Durables & Apparel | L + 1000 | 1.00 | % | 2/16/2024 | 29,376 | 28,766 | 30,029 | |||||||||||||||
Sequa Corp. | (2) | Materials | L + 900 | 1.00 | % | 4/28/2022 | 20,976 | 20,789 | 21,264 | |||||||||||||||
Sparta Systems, Inc. | (f)(g)(2) | Software & Services | L + 825 | 1.00 | % | 7/27/2025 | 35,062 | 34,555 | 34,250 | |||||||||||||||
SquareTwo Financial Corp. | (f)(h)(i)(4) | Diversified Financials | L + 1000 PIK (L + 1000 Max PIK) | 1.00 | % | 5/24/2019 | 6,685 | 6,458 | 618 | |||||||||||||||
Sungard Public Sector, LLC | (f)(g)(2) | Software & Services | L + 850 | 1.00 | % | 1/31/2025 | 16,109 | 15,961 | 16,089 | |||||||||||||||
Vencore, Inc. | (2) | Capital Goods | L + 875 | 1.00 | % | 5/23/2020 | 57,673 | $ | 57,117 | $ | 58,322 | |||||||||||||
Vertafore, Inc. | (f)(3) | Software & Services | L + 900 | 1.00 | % | 6/30/2024 | 81,500 | $ | 79,444 | $ | 82,342 | |||||||||||||
Vestcom International, Inc. | (f)(3) | Consumer Services | L + 850 | 1.00 | % | 4/28/2024 | 58,000 | 57,256 | 57,776 | |||||||||||||||
WireCo WorldGroup, Inc. | (2) | Capital Goods | L + 900 | 1.00 | % | 9/30/2024 | 11,226 | 11,158 | 11,296 | |||||||||||||||
Total Second Lien Senior Secured Loans | $ | 978,764 | $ | 943,753 | ||||||||||||||||||||
Other Senior Secured Debt—5.7% | ||||||||||||||||||||||||
Angelica Corp. | (f)(h) | Health Care Equipment & Services | 10.00% PIK (10.00% Max PIK) | 12/30/2022 | $ | 34,205 | $ | 33,568 | $ | 34,205 | ||||||||||||||
Artesyn Technologies, Inc. | (m) | Technology Hardware & Equipment | 9.75 | % | 10/15/2020 | 20,962 | 20,455 | 20,595 | ||||||||||||||||
Cleaver-Brooks Inc | (m) | Capital Goods | 7.88 | % | 3/1/2023 | 9,687 | 9,817 | 9,929 | ||||||||||||||||
Direct ChassisLink, Inc. | (m) | Transportation | 10.00 | % | 6/15/2023 | 17,425 | 18,706 | 19,385 | ||||||||||||||||
See notes to condensed consolidated financial statements.
32
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||||
DJO Finance, LLC | (m) | Health Care Equipment & Services | 8.13% | 6/15/2021 | $ | 9,950 | $ | 9,245 | $ | 9,303 | |||||||||||||
Guitar Center, Inc. | (m) | Retailing | 6.50% | 4/15/2019 | 5,377 | 5,107 | 4,974 | ||||||||||||||||
Nesco | (m) | Capital Goods | 6.88% | 2/15/2021 | 9,125 | 5,962 | 7,756 | ||||||||||||||||
Pattonair Holdings, Ltd. | (m) | Capital Goods | 9.00% | 11/1/2022 | 5,645 | 5,663 | 5,836 | ||||||||||||||||
Rockport (Relay) | (f)(h)(i)(j) | Consumer Durables & Apparel | 15.00% PIK (15.00% Max PIK) | 7/31/2022 | $ | 29,299 | 28,755 | 17,766 | |||||||||||||||
Vivint, Inc. | Commercial & Professional Services | 7.63 | % | 9/1/2023 | 10,925 | 11,476 | 11,553 | ||||||||||||||||
Total Other Senior Secured Debt | $ | 148,754 | $ | 141,302 | |||||||||||||||||||
Total Senior Debt | $ | 2,840,268 | $ | 2,757,233 | |||||||||||||||||||
Subordinated Debt—15.4% | |||||||||||||||||||||||
Alion Science & Technology Corp. | (f)(g)(m) | Capital Goods | 11.00 | % | 8/19/2022 | $ | 68,603 | $ | 67,822 | $ | 66,816 | ||||||||||||
Cemex Materials, LLC | (m) | Materials | 7.70 | % | 7/21/2025 | 58,454 | $ | 61,665 | $ | 66,345 | |||||||||||||
Cengage Learning, Inc. | (m) | Media | 9.50 | % | 6/15/2024 | 15,000 | 13,557 | 13,575 | |||||||||||||||
ClubCorp Club Operations, Inc. | (m) | Consumer Services | 8.50 | % | 9/15/2025 | 14,600 | $ | 14,500 | $ | 14,235 | |||||||||||||
Exemplis Corp. | (f)(h)(2) | Commercial & Professional Services | L + 700, 4.00% PIK (4.00% Max PIK) | 3/23/2020 | 13,017 | 13,017 | 13,017 | ||||||||||||||||
See notes to condensed consolidated financial statements.
33
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | ||||||||||||||||
Hilding Anders (SWE) | (f)(h)(k)(l)(n)(EUR) | Consumer Durables & Apparel | 13.00% PIK (13.00% Max PIK) | 6/30/2021 | € | 99,748 | $ | 109,308 | $ | 90,604 | ||||||||||||||
(f)(h)(i)(k)(l)(n)(EUR) | 12.00% PIK (12.00% Max PIK) | 12/31/2022 | 3,026 | 507 | 956 | |||||||||||||||||||
(f)(h)(i)(k)(l)(n)(EUR) | 12.00% PIK (12.00% Max PIK) | 12/31/2023 | 22,230 | 939 | 1 | |||||||||||||||||||
(f)(h)(i)(k)(l)(n)(EUR) | 18.00% PIK (18.00% Max PIK) | 12/31/2024 | 41,136 | 12,850 | 12,993 | |||||||||||||||||||
Home Partners of America, Inc. | (f)(j)(3) | Real Estate | L + 700 | 1.00 | % | 10/8/2022 | $ | 75,000 | 73,744 | 76,500 | ||||||||||||||
Kenan Advantage Group, Inc./The | (m) | Transportation | 7.88 | % | 7/31/2023 | 2,308 | 2,215 | 2,389 | ||||||||||||||||
Vertiv Group Corp. | (m) | Technology Hardware & Equipment | 9.25 | % | 10/15/2024 | 22,713 | 22,929 | 24,246 | ||||||||||||||||
Total Subordinated Debt | $ | 393,053 | $ | 381,677 | ||||||||||||||||||||
Asset Based Finance—13.9% | ||||||||||||||||||||||||
AMPLIT JV LP, Limited Partnership Interest | (f)(k) | Diversified Financials | N/A | $ | 7,137 | $ | 1,896 | |||||||||||||||||
Bank of Ireland (IRL) | (f)(k)(l)(m)(2) | Banks | L + 1185 | 12/4/2027 | $ | 15,105 | 15,105 | 15,105 | ||||||||||||||||
Comet Aircraft SARL (LUX), Common Shares | (f)(k)(l)(n) | Capital Goods | 549,451 | 48,692 | 35,760 | |||||||||||||||||||
Central Park Leasing Aggregator, L.P. (LUX), Partnership Interest | (f)(k)(l) | Capital Goods | N/A | 64,177 | 72,045 | |||||||||||||||||||
LSF IX Java Investments Ltd. (IRL) | (f)(k)(l)(10)(EUR) | Diversified Financials | E + 315 | 12/3/2019 | € | 56,406 | 54,892 | 65,774 | ||||||||||||||||
Montgomery Credit Holdings, LP, Limited Partnership Interest | (f)(k) | Diversified Financials | N/A | 18,357 | 18,312 | |||||||||||||||||||
Orchard Marine, Ltd. (VGB), Class B Common Stock | (f)(j)(k)(l) | Transportation | 1,964 | 3,069 | — | |||||||||||||||||||
Orchard Marine, Ltd. (VGB), Series A Preferred Stock | (f)(j)(k)(l)(o) | Transportation | 58,920 | 57,962 | 21,009 | |||||||||||||||||||
See notes to condensed consolidated financial statements.
34
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||
Star Mountain SMB Multi-Manager Credit Platform, LP, Limited Partnership Interest | (f)(k) | Diversified Financials | N/A | $ | 56,504 | $ | 63,075 | ||||||||||||||
Toorak Capital Partners, LLC, Membership Interest | (f)(k)(n) | Diversified Financials | N/A | 46,140 | 53,531 | ||||||||||||||||
Total Asset Based Finance | $ | 372,035 | $ | 346,507 | |||||||||||||||||
Strategic Credit Opportunities Partners, LLC—12.1% | |||||||||||||||||||||
Strategic Credit Opportunities Partners, LLC | (f)(k)(n) | Diversified Financials | 294,027 | $ | 294,028 | $ | 300,652 | ||||||||||||||
Strategic Credit Opportunities Partners, LLC | $ | 294,028 | $ | 300,652 | |||||||||||||||||
Equity/Other—7.3% | |||||||||||||||||||||
Algeco/Scotsman Holdings SARL (LUX), Class B Limited Partnership Interests | (f)(k)(l)* | Consumer Durables & Apparel | 301 | $ | 3,007 | $ | 6,255 | ||||||||||||||
Alion Science & Technology Corp., Class A Membership Interest | (f)* | Capital Goods | N/A | 7,350 | 5,125 | ||||||||||||||||
AltEn, LLC, Membership Units | (f)(j)* | Energy | 2,384 | 2,955 | — | ||||||||||||||||
Amtek Global Technology Pte. Ltd (SGP), Warrants | (f)(k)(l)*(EUR) | Automobiles & Components | 12/31/2018 | 9,991 | 4,785 | — | |||||||||||||||
Angelica Corp., Limited Partnership Interest | (f)* | Health Care Equipment & Services | 877,044 | 47,562 | 9,257 | ||||||||||||||||
Belk, Inc., Units | (f)* | Retailing | 1,642 | 7,846 | 2,349 | ||||||||||||||||
Cengage Learning Holdings II, LP, Common Stock | (f)* | Media | 227,802 | 7,529 | 3,681 | ||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Class A Shares | (f)* | Technology Hardware & Equipment | 40,529 | — | — | ||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Class A1-A5 shares | (f)* | 3,463,150 | 120 | 658 | |||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Ordinary Shares | (f)* | 2,768,806 | — | — | |||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Ordinary Shares | (f)* | 41,339 | — | — | |||||||||||||||||
Genesys Telecommunications Laboratories, Inc., Preferred Shares | (f)* | 1,050,465 | — | — | |||||||||||||||||
See notes to condensed consolidated financial statements.
35
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | |||||||||||||
Hilding Anders (SWE), Arle PIK Interest | (f)(h)(i)(k)(l)(n)(EUR) | Consumer Durables & Apparel | 12/31/2022 | 3,834 | $ | — | $ | — | |||||||||||||
Hilding Anders (SWE), Class A Common Stock | (f)(k)(l)(n)*(SEK) | 4,503,411 | 132 | 3 | |||||||||||||||||
Hilding Anders (SWE), Class B Common Stock | (f)(k)(l)(n)*(SEK) | 574,791 | 25 | — | |||||||||||||||||
Hilding Anders (SWE), Class C Common Stock | (f)(k)(l)(n)*(SEK) | 213,201 | — | — | |||||||||||||||||
Hilding Anders (SWE), Equity Options | (f)(k)(l)(n)*(SEK) | 12/31/2020 | 236,160,807 | 14,988 | 409 | ||||||||||||||||
Home Partners of America, Common Stock | (f)(j)* | Real Estate | 100,044 | 101,876 | 122,652 | ||||||||||||||||
Home Partners of America, Warrants | (f)(j)* | 8/7/2024 | 2,675 | 292 | 805 | ||||||||||||||||
Jones Apparel Holdings, Inc., Common Stock | (f)* | Consumer Durables & Apparel | 5,451 | 872 | — | ||||||||||||||||
Nine West Holdings, Inc., Common Stock | (f)* | Consumer Durables & Apparel | 5,451 | 6,541 | — | ||||||||||||||||
Keystone Australia Holdings, Pty. Ltd. (AUS), Residual Claim | (f)(k)(l)*(AUD) | Consumer Services | N/A | 7,945 | 1,975 | ||||||||||||||||
KKR BPT Holdings Aggregator, LLC, Membership Interest | (f)(k)(n)* | Diversified Financials | N/A | 13,000 | 5,376 | ||||||||||||||||
Louisiana-Pacific Corp, Lien Reserve Claim, Lien Reserve Claim | (f)* | Materials | 9/15/2024 | 380 | — | 380 | |||||||||||||||
NBG Home, Common Stock | (f)* | Consumer Durables & Apparel | 1,903 | 2,565 | 3,130 | ||||||||||||||||
Petroplex Acidizing, Inc., Warrants | (f)* | Energy | 8 | — | — | ||||||||||||||||
Polyconcept North America, Inc., Class A-1 Units | (f)* | Consumer Durables & Apparel | 29,376 | 2,938 | 2,719 | ||||||||||||||||
PQ Corp., Class B Common Stock | * | Materials | 270,885 | 3,337 | 4,456 | ||||||||||||||||
Rockport (Relay), Class A Unit | (f)(j)* | Consumer Durables & Apparel | 219,349 | — | — | ||||||||||||||||
Sentry Holdings, Ltd. (JEY), Common Shares A | (f)(k)(l)*(GBP) | Insurance | 16,450 | — | — | ||||||||||||||||
Sentry Holdings, Ltd. (JEY), Preferred B Shares | (f)(k)(l)*(GBP) | 6,113,719 | 9,064 | 8,948 | |||||||||||||||||
See notes to condensed consolidated financial statements.
36
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Company (a)(b) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date (c) | No. Shares/ Principal Amount (d) | Cost (e) | Fair Value | ||||||||||||||
SquareTwo Financial Corp., Series A Preferred Stock | (f)(h)(i) | Diversified Financials | 12.50% PIK (12.50% Max PIK) | 16,044 | $ | 5,457 | $ | — | ||||||||||||||
Stuart Weitzman, Inc., Common Stock | (f)* | Consumer Durables & Apparel | 5,451 | — | — | |||||||||||||||||
Towergate (GBR), Ordinary Shares | (f)(k)(l)*(GBP) | Insurance | 116,814 | 173 | 171 | |||||||||||||||||
Willbros Group, Inc., Common Stock | * | Energy | 2,810,814 | 7,760 | 3,991 | |||||||||||||||||
Total Equity/Other | $ | 258,119 | $ | 182,340 | ||||||||||||||||||
Total Investments, excluding Short Term Investments — 159.7% | $ | 4,157,503 | $ | 3,968,409 | ||||||||||||||||||
Short Term Investments—0.0% | ||||||||||||||||||||||
Goldman Sachs Financial Square Funds - Prime Obligations Fund | (p) | 1.40 | % | 688,065 | $ | 688 | $ | 688 | ||||||||||||||
Total Short Term Investments | $ | 688 | $ | 688 | ||||||||||||||||||
TOTAL INVESTMENTS — 159.7%(q) | $ | 4,158,191 | $ | 3,969,097 | ||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS—(59.7%) | (1,483,995 | ) | ||||||||||||||||||||
NET ASSETS—100.0% | $ | 2,485,102 | ||||||||||||||||||||
See notes to condensed consolidated financial statements.
37
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
A summary of outstanding financial instruments at December 31, 2017 is as follows:
Foreign currency forward contracts
Foreign Currency | Settlement Date | Counterparty | Amount and Transaction | US$ Value at Settlement Date | US$ Value at December 31, 2017 | Unrealized Appreciation (Depreciation) | ||||||||||||||
AUD | January 11, 2018 | JP Morgan Chase Bank | A$ | 4,736 Sold | $ | 3,624 | $ | 3,695 | $ | (71 | ) | |||||||||
AUD | January 11, 2018 | JP Morgan Chase Bank | A$ | 2,000 Bought | (1,512 | ) | (1,560 | ) | 48 | |||||||||||
CAD | September 11, 2018 | State Street Bank and Trust Company | C$ | 35,650 Sold | 29,328 | 28,429 | 899 | |||||||||||||
EUR | January 11, 2018 | JP Morgan Chase Bank | € | 76,299 Sold | 90,523 | 91,590 | (1,067 | ) | ||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 5,641 Sold | 6,357 | 7,033 | (676 | ) | ||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 22,300 Sold | 26,298 | 27,806 | (1,508 | ) | ||||||||||||
GBP | January 11, 2018 | JP Morgan Chase Bank | £ | 9,836 Bought | (13,036 | ) | (13,283 | ) | 247 | |||||||||||
GBP | April 9, 2018 | JP Morgan Chase Bank | £ | 8,433 Sold | 11,345 | 11,424 | (79 | ) | ||||||||||||
Total | $ | 152,927 | $ | 155,134 | $ | (2,207 | ) | |||||||||||||
Cross currency swaps
Counterparty | Company Receives Fixed Rate | Company Pays Fixed Rate | Termination Date | Premiums Paid/(Received) | Unrealized Appreciation (Depreciation) | |||||||||
JP Morgan Chase Bank | 2.200% on USD notional amount of $188,109 | 0.000% on EUR notional amount of €177,545 | 12/31/2019 | — | $ | (26,362 | ) | |||||||
JP Morgan Chase Bank | 1.960% on USD notional amount of $36,092 | 0.500% on GBP notional amount of £29,125 | 6/30/2018 | — | (3,242 | ) | ||||||||
$ | — | $ | (29,604 | ) | ||||||||||
Interest rate swaps
Counterparty | Notional Amount | Company Receives Floating Rate | Company Pays Fixed Rate | Termination Date | Premiums Paid/(Received) | Value | Unrealized Appreciation | ||||||||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 1.36 | % | 12/31/2020 | $ | — | $ | 2,282 | $ | 2,282 | |||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 0.84 | % | 3/31/2019 | — | 1,481 | 1,481 | ||||||||||||||
$ | — | $ | 3,763 | $ | 3,763 | ||||||||||||||||||
As of December 31, 2017, for the above contracts and/or agreements, the Company had sufficient cash and/or securities to cover commitments or collateral requirements, if any, of the relevant broker or exchange.
See notes to condensed consolidated financial statements.
38
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
(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) | Represents maturity of debt securities and expiration of applicable equity investments. |
(d) | Denominated in U.S. dollars unless otherwise noted. |
(e) | Represents amortized cost for debt securities and cost for equity investments translated to U.S. dollars. |
(f) | Investments classified as Level 3 whereby fair value was determined by the Company’s Board of Directors. (see Note 2). |
(g) | Security or portion thereof was held within CCT New York Funding LLC (formerly, CCT SE I LLC) and was pledged as collateral supporting the amounts outstanding under the revolving credit facility with JPMorgan Chase Bank as of December 31, 2017. |
(h) | The underlying credit agreement or indenture 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. |
(i) | Investment was on non-accrual status as of December 31, 2017. |
(j) | 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, 2017 represented 9.8% of the Company’s net assets. Fair value as of December 31, 2017 along with transactions during the year ended December 31, 2017 in these affiliated investments were as follows (amounts in thousands): |
Fair Value at December 31, 2016 | Year Ended December 31, 2017 | Fair Value at December 31, 2017 | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||||||
Non-Controlled, Affiliated Investments | Gross Additions (Cost)* | Gross Reductions (Cost)** | Net Unrealized Gain (Loss) | Net Realized Gain (Loss) | Interest Income*** | Fee Income | Dividend Income | |||||||||||||||||||||||||||||
AltEn, LLC | ||||||||||||||||||||||||||||||||||||
Membership Units | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
Term Loan | 8,733 | — | — | (4,480 | ) | 4,253 | — | — | — | — | ||||||||||||||||||||||||||
Home Partners of America, Inc. | ||||||||||||||||||||||||||||||||||||
Subordinated Debt | — | 73,744 | — | 2,756 | 76,500 | — | 6,185 | — | — | |||||||||||||||||||||||||||
Common Stock | 113,013 | 2,150 | — | 7,489 | 122,652 | — | — | — | — | |||||||||||||||||||||||||||
Warrants | 607 | — | — | 198 | 805 | — | — | — | — | |||||||||||||||||||||||||||
Orchard Marine, Ltd. | ||||||||||||||||||||||||||||||||||||
Class B Common Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Series A Preferred Stock | 20,502 | 6,137 | — | (5,630 | ) | 21,009 | — | — | — | — | ||||||||||||||||||||||||||
Rockport Company LLC | ||||||||||||||||||||||||||||||||||||
Term Loan | — | 28,755 | — | (10,989 | ) | 17,766 | — | 194 | — | — | ||||||||||||||||||||||||||
Private Equity | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Totals | $ | 142,855 | $ | 110,786 | $ | — | $ | (10,656 | ) | $ | 242,985 | $ | — | $ | 6,379 | $ | — | $ | — | |||||||||||||||||
* | 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. |
See notes to condensed consolidated financial statements.
39
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
(k) | 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 assets 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, 72.4% of the Company’s total assets represented qualifying assets as of December 31, 2017. |
(l) | 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. |
(m) | 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. |
(n) | 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, 2017 represented 20.1% of the Company’s net assets. Fair value as of December 31, 2017 along with transactions during the year ended December 31, 2017 in these controlled investments were as follows (amounts in thousands): |
Fair Value at December 31, 2016 | Year Ended December 31, 2017 | Fair Value at December 31, 2017 | Year Ended December 31, 2017 | |||||||||||||||||||||||||||||||||
Controlled Investments | Gross Additions (Cost)* | Gross Reductions (Cost)** | Net Unrealized Gain (Loss) | Net Realized Gain (Loss) | Interest Income*** | Fee Income | Dividend Income | |||||||||||||||||||||||||||||
Comet Aircraft S.A.R.L | $ | 49,157 | $ | — | $ | (926 | ) | $ | (12,471 | ) | $ | 35,760 | $ | — | $ | — | $ | — | $ | 9,764 | ||||||||||||||||
Guardian Investors, LLC | 3,704 | — | (8,860 | ) | 5,156 | — | (3,413 | ) | — | — | — | |||||||||||||||||||||||||
Hilding Anders | ||||||||||||||||||||||||||||||||||||
Subordinated Debt | 84,693 | 11,138 | (31,839 | ) | 40,562 | 104,554 | (9,389 | ) | 11,546 | — | — | |||||||||||||||||||||||||
Class A Common Stock | — | — | — | 3 | 3 | — | — | — | — | |||||||||||||||||||||||||||
Class B Common Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Class C Common Stock | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Equity Options | 2,253 | — | — | (1,844 | ) | 409 | — | — | — | — | ||||||||||||||||||||||||||
Innovating Partners, LLC | 4,372 | — | (11,363 | ) | 6,991 | — | (4,441 | ) | — | — | — | |||||||||||||||||||||||||
KKR BPT Holdings Aggregator, LLC | 9,835 | 1,000 | (1,200 | ) | (4,259 | ) | 5,376 | — | — | — | — | |||||||||||||||||||||||||
Strategic Credit Opportunities Partners, LLC | 98,998 | 201,628 | — | 26 | 300,652 | — | — | — | 11,314 | |||||||||||||||||||||||||||
Toorak Capital Partners, LLC | 6,984 | 39,156 | — | 7,391 | 53,531 | — | — | — | 609 | |||||||||||||||||||||||||||
Totals | $ | 259,996 | $ | 252,922 | $ | (54,188 | ) | $ | 41,555 | $ | 500,285 | $ | (17,243 | ) | $ | 11,546 | $ | — | $ | 21,687 | ||||||||||||||||
* | 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. |
See notes to condensed consolidated financial statements.
40
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
(o) | The issuer of this investment has elected to pay the stated dividend rate upon liquidation of the investment. |
(p) | 7-day effective yield as of December 31, 2017. |
(q) | As of December 31, 2017, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $125,530; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $314,624; the net unrealized depreciation was $189,094; and the aggregate cost of securities for Federal income tax purposes was $4,158,191. |
* | Non-income producing security. |
(1) | Not used. |
(2) | The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2017 was 1.69%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(3) | The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2017 was 1.56%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(4) | The interest rate on these investments is subject to a base rate of 12-Month LIBOR, which at December 31, 2017 was 2.11%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(5) | The interest rate on these investments is subject to a base rate of 3-month EURIBOR, which at December 31, 2017 was (0.33%). The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(6) | The interest rate on these investments is subject to a base rate of 2-Month LIBOR, which at December 31, 2017 was 1.62%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(7) | The interest rate on these investments is subject to a base rate of PRIME rate, which at December 31, 2017 was 4.50%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(8) | The interest rate on these investments is subject to a base rate of 3-Month Canadian Banker Acceptance Rate, which at December 31, 2017 was 1.54%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(9) | The interest rate on these investments is subject to a base rate of 6-Month LIBOR, which at December 31, 2017 was 1.84%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(10) | The interest rate on these investments is subject to a base rate of 1-month EURIBOR, which at December 31, 2017 was (0.37%). The current base rate for each investment may be different from the reference rate on December 31, 2017. |
Abbreviations:
AUD - Australian Dollar; local currency investment amount is denominated in Australian Dollar. A$1 / US $0.780 as of December 31, 2017.
CAD - Canadian Dollar; local currency investment amount is denominated in Canadian Dollar. C$1 / US $0.796 as of December 31, 2017.
EUR - Euro; local currency investment amount is denominated in Euros. €1 / US $1.200 as of December 31, 2017.
GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1 / US $1.350 as of December 31, 2017.
SEK - Swedish Krona; local currency investment amount is denominated in Swedish Kronor. SEK1 / US $0.122 as of December 31, 2017.
AUS - Australia
CAN - Canada
CYM - Cayman Islands
GBR - United Kingdom
IRL - Ireland
JEY - Jersey
LUX - Luxembourg
SGP - Singapore
See notes to condensed consolidated financial statements.
41
Corporate Capital Trust, Inc. and Subsidiaries
Consolidated Schedule of Investments (continued)
As of December 31, 2017
(in thousands, except share amounts)
Abbreviations (continued):
SWE - Sweden
VGB - British Virgin Islands
E = EURIBOR - Euro Interbank Offered Rate
L = LIBOR - London Interbank Offered Rate, typically 3-Month
PIK - PIK - Payment-in-kind; the issuance of additional securities by the borrower to settle interest payment obligations.
P = PRIME - U.S. Prime Rate
CDOR = Canadian Banker Acceptance Rate
See notes to condensed consolidated financial statements.
42
CORPORATE CAPITAL TRUST, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 is 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 adviser. 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.
Through November 2017, the Company was externally managed by CNL Fund Advisors Company (“CNL”) and KKR Credit Advisors (US) LLC (“KKR,” and together with CNL, the “Former Advisers”), which were 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. The Former Advisers are registered as investment advisers with the Securities and Exchange Commission (“SEC”). CNL also provided the administrative services necessary for the Company to operate. On November 14, 2017, shares of the Company’s common stock commenced trading on the New York Stock Exchange with the ticker symbol “CCT” (the “Listing”). Concurrent with the Listing, KKR acquired certain of CNL’s assets primarily used in its role as investment adviser to the Company, and in connection with that transaction, KKR became the sole investment adviser of the Company. On April 9, 2018, FS/KKR LLC, a newly formed entity that is jointly operated by KKR and an affiliate of Franklin Square Holdings, L.P. (the "Joint Advisor") became the sole investment adviser of the Company. The Joint Advisor is registered as an investment adviser with the SEC.
As of September 30, 2018 the Company had various wholly owned subsidiaries including, among others, (i) CCT Tokyo Funding LLC (“CCT Tokyo Funding”) and CCT New York Funding LLC (“CCT New York Funding”), special purpose financing subsidiaries organized for the purpose of arranging secured debt financing with banks and borrowing money to invest in portfolio companies and (ii) FCF LLC, CCT Holdings LLC and CCT Holdings II LLC (collectively, the “Taxable Subsidiaries”), wholly-owned 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.
On July 22, 2018, the Company entered into a definitive agreement with FS Investment Corporation (“FSIC”), IC Acquisition, Inc., a wholly-owned subsidiary of FSIC, and the Joint Advisor under which the Company will be merged with and into FSIC, with FSIC surviving the merger (the "Proposed Merger"), subject to the conditions in the agreement. Under the terms of the agreement, the Company’s shareholders will receive a number of FSIC shares with an aggregate net asset value (“NAV”) equal to the aggregate NAV of the shares of the Company they hold, as determined no more than two business days before closing. The combined company will remain externally managed by the Joint Advisor. The Proposed Merger is subject to approval by FSIC and the Company’s shareholders and other customary closing conditions. On September 27, 2018, the Company filed a definitive proxy statement soliciting shareholder approval of the Proposed Merger at our annual meeting scheduled for December 3, 2018.
2. Significant Accounting Policies
Basis of Presentation – The accompanying condensed consolidated financial statements of the Company are prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America ("GAAP"). 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.
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, 2017, which was filed with the SEC on March 14, 2018. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
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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.
In accordance with the guidance for the consolidation of variable interest entities (each, a “VIE”), the Company analyzes its variable interests, including its equity investments, to determine if the entity in which it has a variable interest is a variable interest entity. The Company’s analysis includes both quantitative and qualitative reviews. The Company bases its quantitative analysis on the forecasted cash flows of the entity, and its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and financial agreements. The Company also uses its quantitative and qualitative analyses to determine if it is the primary beneficiary of the VIE, and if such determination is made, it will include the accounts of the VIE in its condensed consolidated financial statements.
The Company does not consolidate its equity interest in Strategic Credit Opportunities Partners, LLC, a joint venture with Conway Capital ("Conway"), an affiliate of Guggenheim Life and Annuity Company and Delaware Life Insurance Company (“SCJV”). For a further description of the Company’s investment in SCJV, see Note 3. “Investments”.
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 – Cash consists of demand deposits and foreign currency.
Restricted Cash – Amounts included in restricted cash represent collections of principal and interest on investments held in a segregated custody account as collateral for one of the Company’s credit facilities. The cash is released to the Company quarterly.
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 and interest rate 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 illiquid corporate bonds and loans, unlisted common and preferred stock investments, and equity options that lack observable market pricing.
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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 (the "Board") 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, based on, among other things, the input of the Company’s investment adviser and management, its audit committee, and independent third-party valuation firms.
The Company and the Board conduct the 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 were 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.
On April 9, 2018, the Joint Advisor became the investment adviser of the Company. Beginning November 14, 2017 and until April 8, 2018, KKR served the Company as its investment adviser. Prior to November 14, 2017, the Former Advisers served the Company as its investment adviser. The valuation process described below was substantially the same under each investment adviser.
The Company and its investment adviser undertake a multi-step valuation process each quarter for determining the fair value of the Company’s investments the market prices of which are not readily available, as described below:
• | Each portfolio company or investment is initially valued by the Company’s independent third party valuation firm (external valuation), which provides a valuation range and/or by the Joint Advisor (internal valuation). |
• | Valuation recommendations are formulated and documented by the Joint Advisor and reviewed by the Joint Advisor’s valuation committee. The Joint Advisor valuation committee then provides its valuation recommendation for each portfolio investment, along with supporting documentation, to 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 Board then discusses the investment valuation recommendations with the Joint Advisor and the Company's independent third party valuation firm 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 initially valued at 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 initially valued at 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
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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 Joint Advisor monitors the valuation methodology used by the asset manager and/or issuer of the private investment fund. Following procedures adopted by the Board, in the absence of specific transaction activity in a particular private investment fund, the Board 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.
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 – Investment transactions are recorded on the trade date. The Company measures realized gains or losses from the sale of investments using the specific identification method. Realized gains or losses are measured by the difference between the net proceeds from the 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.
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 – The Joint Advisor or its affiliates may provide financial advisory services to portfolio companies and in return may receive fees for capital structuring services. The Joint Advisor 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
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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 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 interest rate swaps and, until June 30, 2017, included 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) was 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 occurred 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 and term loan are deferred and amortized over the life of the related financing instrument using either the effective interest method or straight-line method. The amortization of deferred financing costs is included in interest expense in the condensed consolidated statements of operations.
Paid In Capital – The Company recorded the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid-in capital in excess of par value, excluding selling commissions and marketing support fees.
Foreign Currency Translation, Transactions and Gains/Losses – Foreign currency amounts are translated into U.S. dollars on the following basis: (i) at the exchange rate on the last business day of the reporting period for the fair value of investment securities, other assets and liabilities; and (ii) at the prevailing exchange rate on the respective recording dates for the purchase and sale of investment securities, income, expenses, gains and losses.
Net assets and fair values are presented based on the applicable foreign exchange rates described above and the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore, fluctuations related to foreign exchange rate conversions are included with the net realized gains (losses) and unrealized appreciation (depreciation) on investments.
Net realized gains or losses on foreign currency transactions arise from 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 – On April 9, 2018, the Joint Advisor became the investment adviser of the Company. Beginning November 14, 2017 and until to April 8, 2018, KKR served the Company as its investment adviser. Prior to November 14, 2017, the Former Advisers served the Company as its investment adviser. The management fees described below were calculated in substantially the same manner under each investment advisor.
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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 the Joint Advisor 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 capitalized 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, for GAAP purposes, 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 Joint Advisor if the Company’s entire portfolio was liquidated at its fair value as of the balance sheet date even though the Joint Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
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 – Distributions to the Company’s shareholders are recorded as of the record date. Subject to the discretion of the Company’s Board and applicable legal restrictions, the Company intends to declare and pay such distributions on a quarterly basis.
The Company has adopted a dividend reinvestment plan that provides for reinvestment of any distributions the Company declares in cash on behalf of its shareholders, unless a shareholder elects to receive cash. As a result, if the Company's Board authorizes, and the Company declares a cash dividend, then the Company's shareholders who have not "opted out" of the Company's dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of the Company's common stock, rather than receiving the cash dividend. If the Company's shares are trading at a discount to net asset value and the Company is otherwise permitted under applicable law to purchase such shares, the Company may purchase shares in the open market in connection with the Company's obligations under the dividend reinvestment plan. However, the Company reserves the right to issue new shares of the Company's common stock in connection with the Company's obligations under the dividend reinvestment plan even if the Company's shares are trading below net asset value.
Federal Income Taxes – The Company has elected to be treated for federal income tax purposes, and intends to maintain its qualification annually, 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 amounts to maintain its RIC status and minimize income taxes on undistributed capital gains and investment company taxable income.
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 pay a 4% nondeductible federal excise tax on under-distribution of capital gains and ordinary 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. 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. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
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
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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 foreign, 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 on an annual basis. Additionally, the tax character and amount of distributions is determined in accordance with the Code which differs from GAAP.
Reclassifications – On October 31, 2017, in anticipation of the Listing, the Company filed Articles of Amendment to its Articles of Incorporation with the State Department of Assessments and Taxation of the State of Maryland to effect a 1-for-2.25 reverse stock split of the Company’s shares of common stock. As a result of the reverse stock split, every 2.25 shares of the Company’s common stock issued and outstanding were automatically combined into one share of common stock. In connection with the reverse stock split, the Company eliminated all outstanding fractional shares by rounding up the numbers of fractional shares held by each of the Company’s shareholders to the nearest whole number of shares as of November 3, 2017. The reverse stock split did not modify the rights or preferences of the Company’s common stock. All prior year share amounts have been reclassified to reflect the reverse stock split. A summary of the Company’s weighted average number of shares of common stock outstanding and earnings per share after adjusting for the reverse stock split is as follows:
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | |||||||
Weighted average number of shares of common stock outstanding (as reported) | 307,090,344 | 308,269,633 | ||||||
Weighted average number of shares of common stock outstanding (pro-forma) | 136,484,597 | 137,008,726 | ||||||
Net investment income per share (as reported) | $ | 0.17 | $ | 0.52 | ||||
Net investment income per share (pro-forma) | $ | 0.39 | $ | 1.16 | ||||
Diluted and basic earnings per share (as reported) | $ | 0.15 | $ | 0.54 | ||||
Diluted and basic earnings per share (pro-forma) | $ | 0.33 | $ | 1.22 | ||||
Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605). Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this ASU and the related amendments on January 1, 2018 and the adoption did not materially impact the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The Company is currently assessing the impact this ASU will have on its consolidated financial statements.
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 in transactions, including non-controlling equity investments. Additionally, the Company may invest in convertible securities, derivatives and private investment funds. The Company may also co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring jointly controlled or non-controlling interests in certain investments in conjunction with participation by one or more third parties in such investment. 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.
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As of September 30, 2018 and December 31, 2017, the Company’s investment portfolio consisted of the following (in thousands):
As of September 30, 2018 | ||||||||||||||
Amortized Cost | Fair Value | Percentage of Investment Portfolio | Percentage of Net Assets | |||||||||||
Asset Category | ||||||||||||||
Senior Debt | ||||||||||||||
First Lien Senior Secured Loans | $ | 1,637,494 | $ | 1,610,169 | 39.1 | % | 66.7 | % | ||||||
Second Lien Senior Secured Loans | 1,022,210 | 999,043 | 24.3 | 41.4 | ||||||||||
Other Senior Secured Debt | 220,840 | 196,348 | 4.8 | 8.1 | ||||||||||
Total Senior Debt | 2,880,544 | 2,805,560 | 68.2 | 116.2 | ||||||||||
Subordinated Debt | 362,809 | 330,483 | 8.0 | 13.7 | ||||||||||
Asset Based Finance | 413,637 | 430,758 | 10.4 | 17.9 | ||||||||||
Strategic Credit Opportunities Partners, LLC | 294,028 | 307,458 | 7.5 | 12.7 | ||||||||||
Equity/Other | 321,632 | 242,012 | 5.9 | 10.0 | ||||||||||
Total Investments | $ | 4,272,650 | $ | 4,116,271 | 100.0 | % | 170.5 | % | ||||||
As of December 31, 2017 | ||||||||||||||
Amortized Cost | Fair Value | Percentage of Investment Portfolio | Percentage of Net Assets | |||||||||||
Asset Category | ||||||||||||||
Senior Debt | ||||||||||||||
First Lien Senior Secured Loans | $ | 1,712,750 | $ | 1,672,178 | 42.1 | % | 67.3 | % | ||||||
Second Lien Senior Secured Loans | 978,764 | 943,753 | 23.8 | 38.0 | ||||||||||
Other Senior Secured Debt | 148,754 | 141,302 | 3.6 | 5.7 | ||||||||||
Total Senior Debt | 2,840,268 | 2,757,233 | 69.5 | 111.0 | ||||||||||
Subordinated Debt | 393,053 | 381,677 | 9.6 | 15.4 | ||||||||||
Asset Based Finance | 372,035 | 346,507 | 8.7 | 13.9 | ||||||||||
Strategic Credit Opportunities Partners, LLC | 294,028 | 300,652 | 7.6 | 12.1 | ||||||||||
Equity/Other | 258,119 | 182,340 | 4.6 | 7.3 | ||||||||||
Subtotal | 4,157,503 | 3,968,409 | 100.0 | % | 159.7 | |||||||||
Short Term Investments | 688 | 688 | — | |||||||||||
Total Investments | $ | 4,158,191 | $ | 3,969,097 | 159.7 | % | ||||||||
As of September 30, 2018, debt investments on non-accrual status represented 2.2% and 1.3% of total investments on an amortized cost basis and fair value basis, respectively. As of December 31, 2017, debt investments on non-accrual status represented 2.9% and 1.2% of total investments on an amortized cost basis and fair value basis, respectively.
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, 2018 and December 31, 2017 were as follows:
50
Industry Compositions (1) | September 30, 2018 | December 31, 2017 | ||||
Capital Goods | 16.3 | % | 19.3 | % | ||
Software & Services | 12.0 | 11.4 | ||||
Diversified Financials | 11.8 | 10.0 | ||||
SCJV | 7.5 | 7.6 | ||||
Retailing | 7.2 | 6.7 | ||||
Consumer Durables & Apparel | 5.7 | 6.3 | ||||
Health Care Equipment & Services | 5.3 | 3.6 | ||||
Real Estate | 4.5 | 5.0 | ||||
Transportation | 3.9 | 3.2 | ||||
Materials | 3.7 | 5.5 | ||||
Automobiles & Components | 3.1 | 5.8 | ||||
Consumer Services | 2.8 | 2.0 | ||||
Food & Staples Retailing | 2.4 | 1.3 | ||||
Household & Personal Products | 2.4 | 2.6 | ||||
Commercial & Professional Services | 2.3 | 2.9 | ||||
Insurance | 2.1 | 0.7 | ||||
Technology Hardware & Equipment | 2.0 | 1.4 | ||||
Energy | 1.7 | 2.1 | ||||
Food, Beverage & Tobacco | 1.3 | 0.5 | ||||
Semiconductors & Semiconductor Equipment | 0.9 | 0.5 | ||||
Pharmaceuticals, Biotechnology & Life Sciences | 0.5 | — | ||||
Banks | 0.4 | 0.4 | ||||
Media & Entertainment | 0.2 | 1.2 | ||||
Telecommunication Services | — | — | ||||
Application Software | — | — | ||||
Total | 100.0 | % | 100.0 | % | ||
Geographic Dispersion (1)(2) | ||||||
United States | 86.4 | % | 84.4 | % | ||
Germany | 3.0 | — | ||||
Ireland | 2.7 | 2.0 | ||||
Sweden | 2.5 | 2.7 | ||||
Luxembourg | 2.4 | 2.9 | ||||
United Kingdom | 0.9 | 0.7 | ||||
Virgin Islands, British | 0.8 | 0.5 | ||||
Netherlands | 0.8 | — | ||||
Cayman Islands | 0.3 | 0.5 | ||||
Canada | 0.1 | 2.5 | ||||
Singapore | 0.1 | 3.5 | ||||
Australia | — | 0.1 | ||||
Jersey | — | 0.2 | ||||
Total | 100.0 | % | 100.0 | % | ||
Local Currency (1) | ||||||
U.S. Dollar | 92.5 | % | 91.3 | % | ||
Euro | 7.1 | 7.8 | ||||
British Pound Sterling | 0.2 | 0.2 | ||||
Swedish Krona | 0.1 | — | ||||
Canadian Dollar | 0.1 | 0.7 | ||||
Australian Dollar | — | — | ||||
Total | 100.0 | % | 100.0 | % | ||
(1) | Amounts are rounded to nearest .01%. |
(2) | The geographic dispersion is determined by the portfolio company’s country of domicile or the jurisdiction of the security’s issuer. |
51
Strategic Credit Opportunities Partners, LLC
In May 2016, SCJV, a joint venture between the Company and Conway, an affiliate of Guggenheim Life and Annuity Company and Delaware Life Insurance Company, was formed pursuant to the terms of a limited liability company agreement between the Company and Conway. Pursuant to the terms of the agreement, the Company and Conway each have 50% voting control of SCJV and are required to agree on all investment decisions as well as all other significant actions for SCJV. SCJV was formed to invest its capital in a range of investments, including senior secured loans (both first lien and second lien) to middle market companies, broadly syndicated loans, equity, warrants and other investments. The Company and Conway have agreed to provide capital to SCJV of up to $500 million in the aggregate. The Company and Conway will provide 87.5% and 12.5%, respectively, of the committed capital. As administrative agent of SCJV, the Company performs certain day-to-day management responsibilities on behalf of SCJV. As of September 30, 2018, the Company and Conway have funded approximately $336.03 million to SCJV, of which $294.03 million was from the Company.
Jersey City Funding LLC (“Jersey City Funding”), a wholly-owned subsidiary of SCJV, has a revolving credit facility with Goldman Sachs Bank (as amended, the "GS Credit Facility"), which provides for up to $350 million and $250 million of borrowings as of September 30, 2018 and December 31, 2017, respectively. The GS Credit Facility contains an "accordion" feature that allows Jersey City Funding, under certain circumstances, to increase the size of the facility to a maximum of $400 million. The GS Credit Facility provides loans in U.S. dollars, Australian dollars, Euros and Pound Sterling. U.S. dollar loans will bear interest at the rate of LIBOR plus 2.25%. Foreign currency loans will bear interest at the floating rate plus the spread applicable to the specified currency. Jersey City Funding also pays a commitment fee of up to 0.50% on undrawn commitments. The GS Credit Facility matures on September 29, 2021. As of September 30, 2018 and December 31, 2017, total outstanding borrowings under the GS Credit Facility were $321.34 million and $166.02 million, respectively. Borrowings under the GS Credit Facility are secured by substantially all of the assets of Jersey City Funding.
Prior to February 15, 2018, Charlotte Funding LLC (“Charlotte Funding”), a wholly-owned subsidiary of SCJV, had a $165 million credit facility with Bank of America Merrill Lynch (the " BAML Credit Facility "). As of December 31, 2017, there were $102.20 million of borrowings outstanding under the BAML Credit Facility. On February 15, 2018, Charlotte Funding fully paid down and terminated the BAML Credit Facility.
During the three and nine months ended September 30, 2018 the Company sold investments with a fair value $14.20 million and $318.13 million, respectively, to SCJV and recognized a net realized gain (loss) of $(0.23) million and $2.02 million, respectively, in connection with the transactions. As of September 30, 2018, $14.26 million of these sales to SCJV are included in receivable for investments sold in the condensed consolidated statements of assets and liabilities.
As of September 30, 2018 and December 31, 2017, SCJV had total investments with a fair value of $591.54 million and $514.04 million, respectively. As of September 30, 2018 and December 31, 2017, SCJV had no investments on non-accrual status.
Below is a summary of SCJV’s portfolio, followed by a listing of the individual loans in SCJV’s portfolio as of September 30, 2018 and December 31, 2017 ($ in thousands):
As of | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Total debt investments (1) | $ | 533,174 | $ | 522,210 | ||||
Weighted average current interest rate on debt investments (2) | 8.07 | % | 7.04 | % | ||||
Number of portfolio companies in SCJV | 37 | 35 | ||||||
Largest investment in a single portfolio company (1) | $ | 70,464 | $ | 57,854 | ||||
Unfunded Commitments | $ | 31,223 | $ | 15,666 | ||||
(1) | At par amount. |
(2) | Computed as the (a) annual stated interest rate on accruing debt, divided by (b) total debt at par amount. |
52
Strategic Credit Opportunities Partners, LLC Portfolio
As of September 30, 2018 (in thousands)
Company (a) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount (b) | Cost | Fair Value | ||||||||||||||||
First Lien Senior Secured Loans —113.2% | ||||||||||||||||||||||||
Acosta Holdco, Inc. | (g)(1) | Commercial & Professional Services | L + 325 | 1.00 | % | 9/26/2021 | $ | 3,972 | $ | 3,803 | $ | 2,977 | ||||||||||||
Apex Group, Limited (GBR) | (c)(d)(1) | Diversified Financials | L + 650 | 1.00 | % | 6/15/2025 | 14,251 | 13,674 | 13,750 | |||||||||||||||
Belk, Inc. | (1) | Retailing | L + 475 | 1.00 | % | 12/12/2022 | 4,116 | 3,716 | 3,613 | |||||||||||||||
Brand Energy & Infrastructure Services, Inc. | (2) | Capital Goods | L + 425 | 1.00 | % | 6/21/2024 | 17,826 | 17,856 | 17,963 | |||||||||||||||
Bugaboo International BV (NLD) | (c)(d)(EUR) | Consumer Durables & Apparel | 7.75% | 3/20/2025 | € | 26,115 | 30,642 | 29,382 | ||||||||||||||||
Casual Dining Group, Ltd. (GBR) | (c)(d)(2)(GBP) | Consumer Services | L + 725 | 1.00 | % | 12/10/2022 | £ | 5,068 | 6,434 | 6,606 | ||||||||||||||
(d)(e)(2)(GBP) | Consumer Services | L + 725 | 1.00 | % | 12/10/2022 | $ | 16,712 | 17,371 | 21,783 | |||||||||||||||
CommerceHub, Inc. | (1) | Software & Services | L + 375 | 5/21/2025 | 2,162 | 2,164 | 2,170 | |||||||||||||||||
Commercial Barge Line, Co. | (c)(g)(1) | Transportation | L + 875 | 1.00 | % | 11/12/2020 | 4,341 | 4,207 | 3,374 | |||||||||||||||
David’s Bridal, Inc. | (2) | Retailing | L + 400 | 1.25 | % | 10/11/2019 | 1,494 | 1,445 | 1,331 | |||||||||||||||
Dentix (SPN) | (c)(d)(3)(EUR) | Health Care Equipment & Services | E + 825 | 12/1/2022 | € | 21,000 | 24,838 | 23,653 | ||||||||||||||||
Eacom Timber Corp. (CAN) | (c)(d)(2) | Materials | L + 650 | 1.00 | % | 11/30/2023 | $ | 70,464 | 70,520 | 70,271 | ||||||||||||||
FleetPride Corporation | (1) | Capital Goods | L + 450 | 1.25 | % | 11/18/2022 | 2,669 | 2,685 | 2,703 | |||||||||||||||
Harbor Freight Tools USA, Inc. | (1) | Retailing | L + 250 | 0.75 | % | 8/18/2023 | 2,590 | 2,598 | 2,595 | |||||||||||||||
Huws Gray, Ltd (GBR) | (c)(d)(2)(GBP) | Materials | L + 525 | 0.50 | % | 2/22/2025 | £ | 17,360 | 26,300 | 25,322 | ||||||||||||||
ID Verde (FRA) | (c)(d)(4)(EUR) | Commercial & Professional Services | E + 700 | 3/29/2025 | € | 14,979 | 18,289 | 18,176 | ||||||||||||||||
(c)(d)(4)(GBP) | Commercial & Professional Services | E + 725 | 3/29/2025 | £ | 5,804 | 7,632 | 7,534 | |||||||||||||||||
Koosharem, LLC | (c)(2) | Commercial & Professional Services | L + 500 | 1.00 | % | 4/18/2025 | $ | 16,050 | 15,936 | 16,221 | ||||||||||||||
Marshall Retail Group, LLC | (c)(2) | Retailing | L + 600 | 1.00 | % | 8/25/2020 | 16,124 | 15,454 | 15,853 | |||||||||||||||
MedAssets, Inc. | (1) | Health Care Equipment & Services | L + 450 | 1.00 | % | 10/20/2022 | 6,948 | 6,994 | 7,009 | |||||||||||||||
P2 Energy Solutions, Inc. | (2) | Software & Services | L + 400 | 1.00 | % | 10/30/2020 | 2,955 | 2,942 | 2,927 | |||||||||||||||
Plaskolite, LLC | (5) | Materials | P + 250 | 11/3/2022 | 3,998 | 3,998 | 4,008 | |||||||||||||||||
Raley’s | (c)(g)(1) | Food & Staples Retailing | L + 525 | 1.00 | % | 5/18/2022 | 2,749 | 2,739 | 2,767 | |||||||||||||||
53
Company (a) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount (b) | Cost | Fair Value | ||||||||||||||||
Savers, Inc. | (c)(g)(2) | Retailing | L + 375 | 1.25 | % | 7/9/2019 | $ | 9,766 | $ | 9,298 | $ | 9,515 | ||||||||||||
SMART Global Holdings, Inc. | (c)(e)(5) | Semiconductors & Semiconductor Equipment | P + 275 | 8/9/2022 | 459 | 403 | 408 | |||||||||||||||||
(c)(e)(2) | Semiconductors & Semiconductor Equipment | L + 625 | 1.00 | % | 8/9/2022 | 18,741 | 18,937 | 18,928 | ||||||||||||||||
Standard Aero, Ltd. | (1) | Capital Goods | L + 375 | 1.00 | % | 7/7/2022 | 977 | 982 | 984 | |||||||||||||||
Staples Canada (CAN) | (c)(d)(g)(6)(CAD) | Retailing | CDOR + 700 | 1.00 | % | 9/12/2023 | C$ | 34,692 | 26,482 | 27,186 | ||||||||||||||
TIBCO Software, Inc. | (1) | Software & Services | L + 350 | 1.00 | % | 12/4/2020 | $ | 18,943 | 18,590 | 19,051 | ||||||||||||||
Transplace | (1) | Transportation | L + 375 | 1.00 | % | 10/9/2024 | 3,336 | 3,348 | 3,364 | |||||||||||||||
Utility One Source LP | (c)(g)(1) | Capital Goods | L + 550 | 1.00 | % | 4/18/2023 | 7,706 | 7,645 | 7,889 | |||||||||||||||
Vee Pak, LLC | (c)(g)(1) | Household & Personal Products | L + 675 | 1.00 | % | 3/9/2023 | 8,888 | 8,840 | 8,433 | |||||||||||||||
Total First Lien Senior Secured Loans | $ | 396,762 | $ | 397,746 | ||||||||||||||||||||
Second Lien Senior Secured Loans—13.5% | ||||||||||||||||||||||||
Casual Dining Group, Ltd. (GBR) | (c)(d)(f)(GBP) | Consumer Services | 11.50% PIK (11.50% Max PIK) | 12/10/2022 | £ | 13,177 | $ | 17,703 | $ | 17,176 | ||||||||||||||
Grocery Outlet, Inc. | (c)(g)(1) | Food & Staples Retailing | L + 825 | 1.00 | % | 10/21/2022 | $ | 30,000 | 30,281 | 30,150 | ||||||||||||||
Total Second Lien Senior Secured Loans | $ | 47,984 | $ | 47,326 | ||||||||||||||||||||
Other Senior Secured Debt—2.4% | ||||||||||||||||||||||||
Artesyn Technologies, Inc. | (c)(g) | Technology Hardware & Equipment | 9.75 | % | 10/15/2020 | $ | 8,900 | $ | 8,095 | $ | 8,499 | |||||||||||||
Total Other Senior Secured Debt | $ | 8,095 | $ | 8,499 | ||||||||||||||||||||
Total Senior Debt | $ | 452,841 | $ | 453,571 | ||||||||||||||||||||
Subordinated Debt—26.0% | ||||||||||||||||||||||||
Cemex Materials, LLC | (f) | Materials | 7.70 | % | 7/21/2025 | $ | 58,454 | $ | 66,638 | $ | 66,638 | |||||||||||||
GCI, Inc. | Telecommunication Services | 6.88 | % | 4/15/2025 | 7,211 | 7,442 | 7,493 | |||||||||||||||||
Hillman Group, Inc. | (f) | Consumer Durables & Apparel | 6.38 | % | 7/15/2022 | 1,893 | 1,781 | 1,713 | ||||||||||||||||
JC Penney Corp., Inc. | Retailing | 8.13 | % | 10/1/2019 | 53 | 55 | 53 | |||||||||||||||||
Kenan Advantage Group, Inc. | (c)(f)(g) | Transportation | 7.88 | % | 7/31/2023 | 7,692 | 7,545 | 7,995 | ||||||||||||||||
Solera Holdings, Inc. | (f) | Software & Services | 10.50 | % | 3/1/2024 | 6,818 | 7,349 | 7,505 | ||||||||||||||||
Total Subordinated Debt | $ | 90,810 | $ | 91,397 | ||||||||||||||||||||
Asset Based Finance —10.1% | ||||||||||||||||||||||||
GA Capital Specialty Lending Fund, Limited Partnership Interest | (c) | Diversified Financials | N/A | $ | 27,570 | $ | 35,690 | |||||||||||||||||
$ | 27,570 | $ | 35,690 | |||||||||||||||||||||
Equity/Other —3.1% | ||||||||||||||||||||||||
Casual Dining Group, Ltd., Common Stock (GBR) | (c)(d)(GBP) | Consumer Services | 12,670 | $ | 15,900 | $ | 10,883 | |||||||||||||||||
54
Company (a) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount (b) | Cost | Fair Value | ||||||||||||||||
$ | 15,900 | $ | 10,883 | |||||||||||||||||||||
TOTAL INVESTMENTS — 168.3% | $ | 587,121 | $ | 591,541 | ||||||||||||||||||||
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Investments classified as Level 3. |
(d) | 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. |
(e) | The underlying credit agreement or indenture 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. |
(f) | This security was acquired in a transaction that was exempt from the registration requirements of 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. |
(g) | This investment is held by both the Company and SCJV as of September 30, 2018. |
(1) | The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at September 30, 2018 was 2.26%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(2) | The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at September 30, 2018 was 2.40%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(3) | The interest rate on these investments is subject to a base rate of 6-Month EURIBOR, which at September 30, 2018 was (0.27)%. |
(4) | The interest rate on these investments is subject to a base rate of 3-Month EURIBOR, which at September 30, 2018 was (0.32)%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(5) | The interest rate for these investments is subject to the base rate of PRIME, which at September 30, 2018 was 5.25%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
(6) | The interest rate for these investments is subject to a 3 month CDOR, which at September 30, 2018 was 2.02%. The current base rate for each investment may be different from the reference rate on September 30, 2018. |
Abbreviations:
CAD - Canadian Dollar; local currency investments amount is denominated in Canadian Dollar. C$1/US$ 0.774 as of September 30, 2018.
EUR - Euro; local currency investment amount is denominated in Euros. €1/US$ 1.161 as of September 30, 2018.
GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1/US$ 1.303 as of September 30, 2018.
CAN - Canada
FRA - France
GBR - United Kingdom
NLD - Netherlands
SPN - Spain
CDOR - Canadian Banker Acceptance Rate
E - EURIBOR - Euro Interbank Offered Rate
L - LIBOR - London Interbank Offered Rate, typically 1 or 3-Month
P - PRIME - U.S. Prime Rate
PIK - Payment-in-kind; the issuance of additional securities by the borrower to settle interest obligations.
55
Strategic Credit Opportunities Partners, LLC Portfolio
As of December 31, 2017 (in thousands)
Company (a) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount (b) | Cost | Fair Value | |||||||||||||||
First Lien Senior Secured Loan—105.8% | |||||||||||||||||||||||
A10 Capital, LLC | (c)(1) | Real Estate | L + 700 | 1.00 | % | 1/21/2022 | $ | 32,688 | $ | 33,310 | $ | 33,015 | |||||||||||
Acosta Holdco, Inc. | (f)(1) | Commercial & Professional Services | L + 325 | 1.00 | % | 9/26/2021 | 4,002 | 3,797 | 3,536 | ||||||||||||||
American Freight, Inc. | (c)(1) | Retailing | L + 625 | 1.00 | % | 10/31/2020 | 31,709 | 31,709 | 31,709 | ||||||||||||||
Bay Club, Co. | (f)(1) | Consumer Services | L + 650 | 1.00 | % | 8/31/2022 | 8,887 | 8,953 | 9,021 | ||||||||||||||
Belk, Inc. | (2) | Retailing | L + 475 | 1.00 | % | 12/12/2022 | 4,153 | 3,742 | 3,422 | ||||||||||||||
Brand Energy | (2) | Capital Goods | L + 425 | 1.00 | % | 6/21/2024 | 7,961 | 7,942 | 8,003 | ||||||||||||||
Casual Dining Group, Ltd. (GBR) | (c)(d)(2)(GBP) | Consumer Services | L + 825, 0.5% PIK (0.5% Max PIK) | 12/7/2020 | 40,595 | 50,466 | 50,312 | ||||||||||||||||
Commercial Barge Line, Co. | (f)(1) | Transportation | L + 875 | 1.00 | % | 11/12/2020 | 7,032 | 6,757 | 4,108 | ||||||||||||||
David’s Bridal, Inc. | (2) | Retailing | L + 400 | 1.25 | % | 10/11/2019 | 3,167 | 3,023 | 2,780 | ||||||||||||||
Dentix (SPN) | (c)(d)(3)(EUR) | Health Care Equipment & Services | E + 825 | 12/1/2022 | € | 21,000 | 24,857 | 25,362 | |||||||||||||||
Harbor Freight Tools USA, Inc. | (1) | Retailing | L + 325 | 0.75 | % | 8/18/2023 | $ | 2,636 | 2,646 | 2,657 | |||||||||||||
KeyPoint Government Solutions, Inc. | (c)(f)(2) | Capital Goods | L + 600 | 1.00 | % | 4/18/2024 | 20,657 | 20,605 | 20,724 | ||||||||||||||
Koosharem, LLC | (f)(2) | Commercial & Professional Services | L + 650 | 1.00 | % | 5/15/2020 | 20,997 | 19,240 | 20,507 | ||||||||||||||
Marshall Retail Group, LLC | (c)(2) | Retailing | L + 600 | 1.00 | % | 8/25/2020 | 16,262 | 15,340 | 15,605 | ||||||||||||||
56
Company (a) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount (b) | Cost | Fair Value | ||||||||||||||||
MedAssets, Inc. | (1) | Health Care Equipment & Services | L + 450 | 1.00 | % | 10/20/2022 | $ | 7,002 | $ | 7,055 | $ | 7,028 | ||||||||||||
Netsmart Technologies, Inc. | (2) | Health Care Equipment & Services | L + 450 | 1.00 | % | 4/19/2023 | 1,956 | 1,967 | 1,981 | |||||||||||||||
NMI Holdings, Inc. | (c)(1) | Insurance | L + 675 | 1.00 | % | 11/10/2019 | 37,052 | 37,398 | 37,052 | |||||||||||||||
Raley’s | (f)(1) | Food & Staples Retailing | L + 525 | 1.00 | % | 5/18/2022 | 4,198 | 4,178 | 4,246 | |||||||||||||||
RedPrairie Corp. | (f)(1) | Software & Services | L + 300 | 1.00 | % | 10/12/2023 | 11,175 | 11,128 | 11,243 | |||||||||||||||
Savers, Inc. | (f)(2) | Retailing | L + 375 | 1.25 | % | 7/9/2019 | 9,844 | 9,110 | 9,283 | |||||||||||||||
Standard Aero, Ltd | (1) | Capital Goods | L + 375 | 1.00 | % | 7/7/2022 | 985 | 990 | 994 | |||||||||||||||
TIBCO Software, Inc. | (1) | Software & Services | L + 350 | 1.00 | % | 12/4/2020 | 19,087 | 18,626 | 19,167 | |||||||||||||||
Utility One Source LP | (f)(1) | Capital Goods | L + 550 | 1.00 | % | 4/18/2023 | 7,764 | 7,695 | 7,949 | |||||||||||||||
Vee Pak, LLC | (c)(f)(2) | Household & Personal Products | L + 675 | 1.00 | % | 3/9/2023 | 10,720 | 10,652 | 10,298 | |||||||||||||||
Total First Lien Senior Secured Loan | $ | 341,186 | $ | 340,002 | ||||||||||||||||||||
Second Lien Senior Secured Loan—26.0% | ||||||||||||||||||||||||
Grocery Outlet, Inc. | (2) | Food & Staples Retailing | L + 825 | 1.00 | % | 10/21/2022 | $ | 30,000 | $ | 30,281 | $ | 30,122 | ||||||||||||
Sungard Public Sector LLC | (c)(f)(2) | Software & Services | L + 850 | 1.00 | % | 1/31/2025 | 8,236 | 8,254 | 8,226 | |||||||||||||||
Vencore, Inc. | (f)(2) | Capital Goods | L + 875 | 1.00 | % | 5/23/2020 | 30,000 | 30,263 | 30,337 | |||||||||||||||
Total Second Lien Senior Secured Loan | $ | 68,798 | $ | 68,685 | ||||||||||||||||||||
Other Senior Secured Debt—6.5% | ||||||||||||||||||||||||
Artesyn Technologies, Inc. | (e)(f) | Technology Hardware & Equipment | 9.75 | % | 10/15/2020 | $ | 8,900 | $ | 7,854 | $ | 8,744 | |||||||||||||
GCP Applied Technologies, Inc. | (e) | Materials | 9.50 | % | 2/1/2023 | 4,796 | 5,367 | 5,324 | ||||||||||||||||
Guitar Center, Inc. | (e)(f) | Retailing | 6.50 | % | 4/15/2019 | 8,523 | 7,996 | 7,884 | ||||||||||||||||
Total Other Senior Secured Debt | $ | 21,217 | $ | 21,952 | ||||||||||||||||||||
Total Senior Debt | $ | 431,201 | $ | 430,639 | ||||||||||||||||||||
Subordinated Debt—14.1% | ||||||||||||||||||||||||
GCI, Inc. | Telecommunication Services | 6.88 | % | 4/15/2025 | $ | 7,211 | $ | 7,463 | $ | 7,680 | ||||||||||||||
Hillman Group, Inc. | (e) | Consumer Durables & Apparel | 6.38 | % | 7/15/2022 | 2,238 | 2,084 | 2,232 | ||||||||||||||||
Kenan Advantage Group, Inc. | (e)(f) | Transportation | 7.88 | % | 7/31/2023 | 7,692 | 7,529 | 7,961 | ||||||||||||||||
57
Company (a) | Footnotes | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount (b) | Cost | Fair Value | |||||||||||||||
Solera Holdings, Inc. | (e) | Software & Services | 10.50 | % | 3/1/2024 | $ | 6,818 | $ | 7,404 | $ | 7,670 | ||||||||||||
Total Subordinated Debt | $ | 24,480 | $ | 25,543 | |||||||||||||||||||
Asset Based Finance—17.2% | |||||||||||||||||||||||
GA Capital Specialty Lending Fund, Limited Partnership Interest | Diversified Financials | N/A | $ | 57,854 | $ | 57,854 | |||||||||||||||||
Total Asset Based Finance | $ | 57,854 | $ | 57,854 | |||||||||||||||||||
TOTAL INVESTMENTS — 169.6% | $ | 513,535 | $ | 514,036 | |||||||||||||||||||
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Denominated in U.S. dollars unless otherwise noted. |
(c) | Investments classified as Level 3. |
(d) | 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. |
(e) | This security was acquired in a transaction that was exempt from the registration requirements of 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. |
(f) | This investment is held by both the Company and SCJV as of December 31, 2017. |
(1) | The interest rate on these investments is subject to a base rate of 1-Month LIBOR, which at December 31, 2017 was 1.56%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(2) | The interest rate on these investments is subject to a base rate of 3-Month LIBOR, which at December 31, 2017 was 1.69%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
(3) | The interest rate on these investments is subject to a base rate of 3-Month EURIBOR, which at December 31, 2017 was (0.33)%. The current base rate for each investment may be different from the reference rate on December 31, 2017. |
Abbreviations:
GBP - British Pound Sterling; local currency investment amount is denominated in Pound Sterling. £1/US$ 1.350 as of December 31, 2017.
EUR - Euro; local currency investment amount is denominated in Euros. €1/US$ 1.200 as of December 31, 2017.
GBR - United Kingdom
SPN - Spain
L - LIBOR - London Interbank Offered Rate, typically 1 or 3-Month
P - PRIME - U.S. Prime Rate
PIK - Payment-in-kind; the issuance of additional securities by the borrower to settle interest obligations.
E - EURIBOR - Euro Interbank Offered Rate
Below is selected balance sheet information for SCJV as of September 30, 2018 and December 31, 2017 (in thousands):
As of | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Selected Balance Sheet Information | ||||||||
Total investments, at fair value | $ | 591,541 | $ | 514,036 | ||||
Cash and other assets | 96,238 | 101,529 | ||||||
Total assets | 687,779 | 615,565 | ||||||
Debt | 321,342 | 268,221 | ||||||
Other liabilities | 15,057 | 3,741 | ||||||
Total liabilities | 336,399 | 271,962 | ||||||
Member’s equity | $ | 351,380 | $ | 343,602 | ||||
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Below is selected statement of operations information for SCJV for the three and nine months ended September 30, 2018 and 2017 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Selected Statement of Operation Information | ||||||||||||||||
Total investment income | $ | 12,614 | $ | 4,487 | $ | 38,800 | $ | 13,728 | ||||||||
Expenses | ||||||||||||||||
Interest expense | 3,531 | 1,311 | 9,396 | 3,654 | ||||||||||||
Custodian and accounting fees | 72 | (48 | ) | 162 | 57 | |||||||||||
Administrative services | 83 | 114 | 212 | 143 | ||||||||||||
Professional services | 57 | 20 | 192 | 45 | ||||||||||||
Other | 9 | 4 | 57 | 9 | ||||||||||||
Total expenses | 3,752 | 1,401 | 10,019 | 3,908 | ||||||||||||
Net investment income | 8,862 | 3,086 | 28,781 | 9,820 | ||||||||||||
Net realized and unrealized losses | 1,884 | (459 | ) | 6,671 | (1,598 | ) | ||||||||||
Net increase in net assets resulting from operations | $ | 10,746 | $ | 2,627 | $ | 35,452 | $ | 8,222 | ||||||||
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, 2018 and December 31, 2017 (in thousands):
Fair Value | ||||||||||
Derivative Instrument | Statement Location | September 30, 2018 | December 31, 2017 | |||||||
Cross currency swaps | Unrealized depreciation on swap contracts | $ | (19,673 | ) | $ | (29,604 | ) | |||
Foreign currency forward contracts | Unrealized appreciation on foreign currency forward contracts | 1,179 | 1,194 | |||||||
Foreign currency forward contracts | Unrealized depreciation on foreign currency forward contracts | (793 | ) | (3,401 | ) | |||||
Interest rate swaps | Unrealized appreciation on swap contracts | 6,644 | 3,763 | |||||||
Total | $ | (12,643 | ) | $ | (28,048 | ) | ||||
59
Net realized and unrealized gains and losses on derivative instruments recorded by the Company for the three and nine months ended September 30, 2018 and 2017 are in the following locations in the condensed consolidated statements of operations (in thousands):
Net Realized Gains (Losses) | ||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
Derivative Instrument | Statement Location | 2018 | 2017 | 2018 | 2017 | |||||||||||||
Cross currency swaps | Net realized gains (losses) on swap contracts | $ | 1,023 | $ | 808 | $ | 1,362 | $ | 12,854 | |||||||||
Foreign currency forward contracts | Net realized gains (losses) on foreign currency forward contracts | 2,604 | (7,848 | ) | 7,081 | (7,926 | ) | |||||||||||
Interest rate swaps | Net realized gains (losses) on swap contracts | (941 | ) | 2,663 | 1,131 | 1,914 | ||||||||||||
TRS | Net realized gains on swap contracts | — | — | — | 3,014 | |||||||||||||
Total | $ | 2,686 | $ | (4,377 | ) | $ | 9,574 | $ | 9,856 | |||||||||
Net Unrealized Gains (Losses) | ||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
Derivative Instrument | Statement Location | 2018 | 2017 | 2018 | 2017 | |||||||||||||
Cross currency swaps | Net change in unrealized appreciation (depreciation) on swap contracts | $ | 1,100 | $ | (9,037 | ) | $ | 9,931 | $ | (43,844 | ) | |||||||
Foreign currency forward contracts | Net change in unrealized appreciation (depreciation) on foreign currency forward contracts | 85 | 2,746 | 2,593 | (9,235 | ) | ||||||||||||
Interest rate swaps | Net change in unrealized depreciation on swap contracts | 3,803 | (4,521 | ) | 2,881 | (6,207 | ) | |||||||||||
TRS | Net change in unrealized depreciation on swap contracts | — | — | — | (3,397 | ) | ||||||||||||
Total | $ | 4,988 | $ | (10,812 | ) | $ | 15,405 | $ | (62,683 | ) | ||||||||
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, 2018 and December 31, 2017 (in thousands):
As of September 30, 2018 | ||||||||||||||||||||
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) | |||||||||||||||
BMO Capital Markets | $ | 2,310 | $ | — | $ | — | $ | — | $ | 2,310 | ||||||||||
Total | $ | 2,310 | $ | — | $ | — | $ | — | $ | 2,310 | ||||||||||
Counterparty | Derivative Liabilities Subject to Master Netting Agreement | Derivatives Available for Offset | Non-cash Collateral Pledged (1) | Cash Collateral Pledged(1) | Net Amount of Derivative Liabilities (3) | |||||||||||||||
J.P. Morgan Chase Bank | $ | 20,286 | $ | (5,469 | ) | $ | — | $ | — | $ | 14,817 | |||||||||
State Street Bank and Trust Company | 180 | (44 | ) | — | (136 | ) | — | |||||||||||||
Total | $ | 20,466 | $ | (5,513 | ) | $ | — | $ | (136 | ) | $ | 14,817 | ||||||||
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As of December 31, 2017 | ||||||||||||||||||||
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) | |||||||||||||||
State Street Bank and Trust Company | $ | 899 | $ | — | $ | — | $ | — | $ | 899 | ||||||||||
Total | $ | 899 | $ | — | $ | — | $ | — | $ | 899 | ||||||||||
Counterparty | Derivative Liabilities Subject to Master Netting Agreement | Derivatives Available for Offset | Non-cash Collateral Pledged (1) | Cash Collateral Pledged(1) | Net Amount of Derivative Liabilities (3) | |||||||||||||||
J.P. Morgan Chase Bank | $ | 33,005 | $ | (4,058 | ) | $ | — | $ | — | $ | 28,947 | |||||||||
Total | $ | 33,005 | $ | (4,058 | ) | $ | — | $ | — | $ | 28,947 | |||||||||
(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.
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 swaps as unrealized appreciation or depreciation. Realized gain or loss is recognized when periodic payments are received or paid and 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.
The foreign currency forward contracts and cross currency swaps open at the end of the period are generally indicative of the volume of activity during the period.
As of September 30, 2018 and December 31, 2017, the Company’s open foreign currency forward contracts were as follows ($ in thousands):
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As of September 30, 2018 | ||||||||||||||||||||
Foreign Currency | Settlement Date | Counterparty | Amount and Transaction | US$ Value at Settlement Date | US$ Value at September 30, 2018 | Unrealized Appreciation (Depreciation) | ||||||||||||||
AUD | October 12, 2018 | JP Morgan Chase Bank | A$ | 2,572 Sold | $ | 1,919 | $ | 1,859 | $ | 60 | ||||||||||
CAD | October 22, 2018 | State Street Bank and Trust Company | C$ | 12,813 Sold | 9,744 | 9,924 | (180 | ) | ||||||||||||
CAD | October 26, 2018 | JP Morgan Chase Bank | C$ | 4,500 Sold | 3,473 | 3,486 | (13 | ) | ||||||||||||
EUR | October 12, 2018 | JP Morgan Chase Bank | € | 84,000 Sold | 98,190 | 97,605 | 585 | |||||||||||||
EUR | October 22, 2018 | State Street Bank and Trust Company | € | 10,500 Sold | 12,225 | 12,210 | 15 | |||||||||||||
EUR | October 22, 2018 | State Street Bank and Trust Company | € | 10,250 Sold | 11,934 | 11,919 | 15 | |||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 5,641 Sold | 6,357 | 6,713 | (356 | ) | ||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 22,300 Sold | 26,298 | 26,539 | (241 | ) | ||||||||||||
EUR | July 17, 2023 | JP Morgan Chase Bank | € | 1,300 Sold | 1,744 | 1,735 | 9 | |||||||||||||
GBP | October 22, 2018 | State Street Bank and Trust Company | £ | 2,400 Sold | 3,133 | 3,131 | 2 | |||||||||||||
GBP | October 22, 2018 | State Street Bank and Trust Company | £ | 14,000 Sold | 18,276 | 18,264 | 12 | |||||||||||||
GBP | October 22, 2018 | JP Morgan Chase Bank | £ | 29,125 Sold | 38,014 | 37,995 | 19 | |||||||||||||
GBP | January 11, 2023 | JP Morgan Chase Bank | £ | 1,936 Sold | 2,942 | 2,708 | 234 | |||||||||||||
GBP | January 11, 2023 | JP Morgan Chase Bank | £ | 1,721 Sold | 2,634 | 2,406 | 228 | |||||||||||||
GBP | January 11, 2023 | JP Morgan Chase Bank | £ | 3,400 Sold | 4,752 | 4,755 | (3 | ) | ||||||||||||
Total | $ | 241,635 | $ | 241,249 | $ | 386 | ||||||||||||||
As of December 31, 2017 | ||||||||||||||||||||
Foreign Currency | Settlement Date | Counterparty | Amount and Transaction | US$ Value at Settlement Date | US$ Value at December 31, 2017 | Unrealized Appreciation (Depreciation) | ||||||||||||||
AUD | January 11, 2018 | JP Morgan Chase Bank | A$ | 4,736 Sold | $ | 3,624 | $ | 3,695 | $ | (71 | ) | |||||||||
AUD | January 11, 2018 | JP Morgan Chase Bank | A$ | 2,000 Bought | (1,512 | ) | (1,560 | ) | 48 | |||||||||||
CAD | September 11, 2018 | State Street Bank and Trust Company | C$ | 35,650 Sold | 29,328 | 28,429 | 899 | |||||||||||||
EUR | January 11, 2018 | JP Morgan Chase Bank | € | 76,299 Sold | 90,523 | 91,590 | (1,067 | ) | ||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 5,641 Sold | 6,357 | 7,033 | (676 | ) | ||||||||||||
EUR | July 8, 2019 | JP Morgan Chase Bank | € | 22,300 Sold | 26,298 | 27,806 | (1,508 | ) | ||||||||||||
GBP | January 11, 2018 | JP Morgan Chase Bank | £ | 9,836 Bought | (13,036 | ) | (13,283 | ) | 247 | |||||||||||
GBP | April 9, 2018 | JP Morgan Chase Bank | £ | 8,433 Sold | 11,345 | 11,424 | (79 | ) | ||||||||||||
Total | $ | 152,927 | $ | 155,134 | $ | (2,207 | ) | |||||||||||||
As of September 30, 2018 and December 31, 2017, the Company’s open cross currency swaps were as follows ($ in thousands).
62
As of September 30, 2018 | ||||||||||
Counterparty | Company Receives Fixed Rate | Company Pays Fixed Rate | Termination Date | Unrealized Appreciation (Depreciation) | ||||||
JP Morgan Chase Bank | 2.200% on USD notional amount of $188,109 | 0.000% on EUR notional amount of €177,545 | 12/31/2019 | $ | (19,673 | ) | ||||
$ | (19,673 | ) | ||||||||
As of December 31, 2017 | ||||||||||
Counterparty | Company Receives Fixed Rate | Company Pays Fixed Rate | Termination Date | Unrealized Appreciation (Depreciation) | ||||||
JP Morgan Chase Bank | 2.200% on USD notional amount of $188,109 | 0.000% on EUR notional amount of €177,545 | 12/31/2019 | $ | (26,362 | ) | ||||
JP Morgan Chase Bank | 1.960% on USD notional amount of $36,092 | 0.500% on GBP notional amount of £29,125 | 6/30/2018 | (3,242 | ) | |||||
$ | (29,604 | ) | ||||||||
As of September 30, 2018 and December 31, 2017, the combined contractual notional balance of the Company’s foreign currency forward contracts and cross currency swaps totaled $429.74 million and $377.13 million, respectively, all of which related to economic hedging of the Company’s foreign currency denominated debt investments. The tables below display the Company’s foreign currency denominated debt investments and foreign currency forward contracts, summarized by foreign currency type as of September 30, 2018 and December 31, 2017 (in thousands).
Debt Investments Denominated in Foreign Currencies As of September 30, 2018 | Hedges As of September 30, 2018 | |||||||||||||||||||||
(in thousands) | Par Value in Local Currency | Par Value in US$ | Fair Value | Net Foreign Currency Hedge Amount in Local Currency | Net Foreign Currency Hedge Amount in U.S. Dollars | |||||||||||||||||
Euros | € | 311,265 | $ | 361,067 | $ | 258,560 | € | 311,536 | $ | 344,857 | ||||||||||||
Canadian Dollars | C$ | 4,500 | 3,501 | 3,526 | C$ | 17,313 | 13,217 | |||||||||||||||
British Pound Sterling | £ | — | — | — | £ | 52,582 | 69,751 | |||||||||||||||
Australian Dollars | A$ | — | — | — | A$ | 2,572 | 1,919 | |||||||||||||||
Total | $ | 364,568 | $ | 262,086 | $ | 429,744 | ||||||||||||||||
Debt Investments Denominated in Foreign Currencies As of December 31, 2017 | Hedges As of December 31, 2017 | |||||||||||||||||||||
(in thousands) | Par Value in Local Currency | Par Value in US$ | Fair Value | Net Foreign Currency Hedge Amount in Local Currency | Net Foreign Currency Hedge Amount in U.S. Dollars | |||||||||||||||||
Euros | € | 363,882 | $ | 436,604 | $ | 309,257 | € | 281,785 | $ | 311,287 | ||||||||||||
Canadian Dollars | C$ | 35,641 | 28,354 | 27,640 | C$ | 35,650 | 29,328 | |||||||||||||||
British Pound Sterling | £ | — | — | — | £ | 27,722 | 34,401 | |||||||||||||||
Australian Dollars | A$ | — | — | — | A$ | 2,736 | 2,112 | |||||||||||||||
Total | $ | 464,958 | $ | 336,897 | $ | 377,128 | ||||||||||||||||
Interest Rate Swaps:
Interest rate swap contracts are privately negotiated agreements between the Company and a counterparty. Pursuant to interest rate swap agreements, the Company makes fixed-rate payments to a counterparty in exchange for payments on a floating benchmark interest rate. Payments received or made are recorded as realized gains or losses. During the term of the outstanding swap agreement, changes in the underlying value of the swap are recorded as unrealized gains or losses. The value of the swap is determined by changes in the relationship between two rates of interest. The Company is exposed to credit loss in the event of non-performance by the swap counterparty. Risk may also arise from movements in interest rates. The Company attempts to limit counterparty risk by dealing only with well-known counterparties.
The interest rate swaps open at the end of the period are generally indicative of the volume of activity during the period.
As of September 30, 2018 and December 31, 2017, the Company’s open interest rate swaps were as follows ($ in thousands).
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As of September 30, 2018 | |||||||||||||||||||||||
Counterparty | Notional Amount | Company Receives Floating Rate | Company Pays Fixed Rate | Termination Date | Premiums Paid/ (Received) | Value | Unrealized Appreciation (Depreciation) | ||||||||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 1.36 | % | 12/31/2020 | $ | — | $ | 3,498 | $ | 3,498 | |||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 0.84 | % | 3/31/2019 | — | 836 | 836 | ||||||||||||||
BMO Capital Markets | $ | 200,000 | 3-Month LIBOR | 2.77 | % | 3/8/2023 | — | 2,310 | 2,310 | ||||||||||||||
$ | — | $ | 6,644 | $ | 6,644 | ||||||||||||||||||
As of December 31, 2017 | |||||||||||||||||||||||
Counterparty | Notional Amount | Company Receives Floating Rate | Company Pays Fixed Rate | Termination Date | Premiums Paid/ (Received) | Value | Unrealized Appreciation (Depreciation) | ||||||||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 1.36 | % | 12/31/2020 | $ | — | $ | 2,282 | $ | 2,282 | |||||||||||
JP Morgan Chase Bank | $ | 100,000 | 3-Month LIBOR | 0.84 | % | 3/31/2019 | — | 1,481 | 1,481 | ||||||||||||||
$ | — | $ | 3,763 | $ | 3,763 | ||||||||||||||||||
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 represented 0.24% and 0.05% of the Company’s net assets as of each of September 30, 2018 and December 31, 2017, respectively.
Below is a summary of the Company’s investments in equity options and warrants as of September 30, 2018 and December 31, 2017 (in thousands, except share amounts):
As of September 30, 2018 | |||||||||||||
Company | Expiration Date | No. Shares | Cost | Fair Value | |||||||||
Hilding Anders, Equity Options | 12/31/2020 | 236,160,807 | 14,988 | 4,501 | |||||||||
Home Partners of America, Inc., Warrants | 8/7/2024 | 2,675 | 292 | 1,384 | |||||||||
Petroplex Acidizing, Inc., Warrants | 12/29/2026 | 8 | — | — | |||||||||
Total | $ | 15,280 | $ | 5,885 | |||||||||
As of December 31, 2017 | |||||||||||||
Company | Expiration Date | No. Shares | Cost | Fair Value | |||||||||
Amtek Global Technology Pte. Ltd., Warrants | 12/31/2018 | 9,991 | $ | 4,785 | $ | — | |||||||
Hilding Anders, Equity Options | 12/31/2020 | 236,160,807 | 14,988 | 409 | |||||||||
Home Partners of America, Inc., Warrants | 8/7/2024 | 2,675 | 292 | 805 | |||||||||
Petroplex Acidizing, Inc., Warrants | 12/29/2026 | 8 | — | — | |||||||||
Total | $ | 20,065 | $ | 1,214 | |||||||||
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, 2018 and December 31, 2017 generally reflect the volume of derivative activity throughout the periods presented.
Total Return Swaps:
On June 30, 2017, Halifax Funding terminated the TRS with the Bank of Nova Scotia (“BNS” or the “Counterparty”) in conjunction with the Company’s ongoing transition towards directly originated private credit investments, as TRS arrangements were primarily limited to the financing of traded investments. The TRS arrangement with BNS consisted of a set of TRS agreements, pursuant to which Halifax Funding selected 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 constituted a separate total return swap transaction, although all calculations, payments and transfers required to be made under the TRS agreements were calculated and treated on an aggregate basis, based upon all such transactions.
64
Halifax Funding received 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 paid to BNS (i) a financing charge on the TRS settled notional amount at a rate equal to the three- month LIBOR plus 1.40% per annum and (ii) realized losses, if any, related to the TRS assets. In addition, upon the termination of the TRS arrangement, Halifax Funding paid to BNS any net realized loss, on the liquidation of TRS assets.
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, 2017 | Nine Months Ended September 30, 2017 | |||||||
Interest and fee income | $ | — | $ | 11,526 | ||||
Financing charge (1) | — | (10,131 | ) | |||||
Net realized gains (losses) | — | 1,619 | ||||||
Net realized gains on derivative instruments related to the TRS | $ | — | $ | 3,014 | ||||
(1) | Financing charge for the nine months ended September 30, 2017 includes a make-whole fee of $6.40 million. |
65
The Company’s investments were categorized in the fair value hierarchy described in Note 2. “Significant Accounting Policies”, as follows as of September 30, 2018 and 2017 (in thousands):
September 30, 2018 | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Debt | $ | — | $ | 666,917 | $ | 2,138,643 | $ | 2,805,560 | ||||||||
Subordinated Debt | — | 94,062 | 236,421 | 330,483 | ||||||||||||
Asset Based Finance | — | — | 430,758 | 430,758 | ||||||||||||
Strategic Credit Opportunities Partners, LLC | — | — | 307,458 | 307,458 | ||||||||||||
Equity/Other | — | — | 242,012 | 242,012 | ||||||||||||
Total investments | $ | — | $ | 760,979 | $ | 3,355,292 | $ | 4,116,271 | ||||||||
Derivative Instruments | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Foreign currency forward contracts | $ | — | $ | 1,179 | $ | — | $ | 1,179 | ||||||||
Interest rate swaps | — | 6,644 | — | 6,644 | ||||||||||||
Liabilities | ||||||||||||||||
Cross currency swaps | — | (19,673 | ) | — | (19,673 | ) | ||||||||||
Foreign currency forward contracts | — | (793 | ) | — | (793 | ) | ||||||||||
Interest rate swaps | — | — | — | — | ||||||||||||
Total | $ | — | $ | (12,643 | ) | $ | — | $ | (12,643 | ) | ||||||
December 31, 2017 | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Debt | $ | — | $ | 623,922 | $ | 2,133,311 | $ | 2,757,233 | ||||||||
Subordinated Debt | — | 120,790 | 260,887 | 381,677 | ||||||||||||
Asset Based Finance | — | — | 346,507 | 346,507 | ||||||||||||
Strategic Credit Opportunities Partners, LLC | — | — | 300,652 | 300,652 | ||||||||||||
Equity/Other | 4,456 | 3,991 | 173,893 | 182,340 | ||||||||||||
Subtotal | 4,456 | 748,703 | 3,215,250 | 3,968,409 | ||||||||||||
Short term investments | 688 | — | — | 688 | ||||||||||||
Total investments | $ | 5,144 | $ | 748,703 | $ | 3,215,250 | $ | 3,969,097 | ||||||||
Derivative Instruments | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets | ||||||||||||||||
Foreign currency forward contracts | $ | — | $ | 1,194 | $ | — | $ | 1,194 | ||||||||
Interest rate swaps | — | 3,763 | — | 3,763 | ||||||||||||
Liabilities | ||||||||||||||||
Cross currency swaps | — | (29,604 | ) | — | (29,604 | ) | ||||||||||
Foreign currency forward contracts | — | (3,401 | ) | — | (3,401 | ) | ||||||||||
Total | $ | — | $ | (28,048 | ) | $ | — | $ | (28,048 | ) | ||||||
There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2018 and year ended December 31, 2017.
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.
At September 30, 2018, the Company held 126 distinct investment positions classified as Level 3, representing an aggregate fair value of $3.4 billion and 81.5% of the total investment portfolio. At December 31, 2017, the Company held 114 distinct investment positions classified as Level 3, representing an aggregate fair value of $3.22 billion and 81.0% of the total investment portfolio. The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2018 and December 31, 2017 were as follows ($ in thousands):
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As of September 30, 2018 | ||||||||||||
Asset Group | Fair Value(1) | Valuation Techniques(2) | Unobservable Inputs | Range (Weighted Average)(3) | Impact to Valuation from an Increase in Input (4) | |||||||
Senior Debt | $ | 1,961,653 | Discounted Cash Flow | Discount Rate | 8.3% - 15.0% (11.3%) | Decrease | ||||||
176,990 | Waterfall | EBITDA Multiple | 3.71x - 10.30x (6.44x) | Increase | ||||||||
Subordinated Debt | 137,435 | Discounted Cash Flow | Discount Rate | 9.6% - 15.2% (11.6%) | Decrease | |||||||
85,952 | Waterfall | EBITDA Multiple | 9.75x (9.75x) | Increase | ||||||||
13,034 | Option Pricing Model | Implied Volatility | 30.0% (30.0%) | Increase | ||||||||
Asset Based Finance | 191,376 | Discounted Cash Flow | Discount Rate | 5.4% - 18.0% (10.2%) | Decrease | |||||||
173,456 | Waterfall | EBITDA Multiple | 1.39x - 4.20x (2.57x) | Increase | ||||||||
65,926 | Net Asset Value | Price to Book Value | 1.00x (1.00x) | Increase | ||||||||
Strategic Credit Opportunities Partners | 307,458 | Net Asset Value | Net Asset Value | N/A | Increase | |||||||
Equity/Other | 141,039 | Option Pricing Model | Illiquidity Discount | 10.0% (10.0%) | Decrease | |||||||
100,973 | Waterfall | EBITDA Multiple | 1.00x - 13.63x (5.32x) | Increase | ||||||||
Total | $ | 3,355,292 | ||||||||||
As of December 31, 2017 | ||||||||||||
Asset Group | Fair Value(1) | Valuation Techniques(2) | Unobservable Inputs | Range (Weighted Average)(3) | Impact to Valuation from an Increase in Input (4) | |||||||
Senior Debt | $ | 1,769,358 | Discounted Cash Flow | Discount Rate | 1.30% - 24.30% (11.00%) | Decrease | ||||||
363,953 | Waterfall | EBITDA Multiple | 4.13x - 9.53x (6.89x) | Increase | ||||||||
Subordinated Debt | 157,420 | Waterfall | EBITDA Multiple | 8.61x - 10.74x (9.51x) | Increase | |||||||
13,950 | Option Pricing Model | Implied Volatility | 27.50% (27.50%) | Increase | ||||||||
89,517 | Discounted Cash Flow | Discount Rate | 9.10% - 14.30% (9.90%) | Decrease | ||||||||
Asset Based Finance | 208,892 | Discounted Cash Flow | Discount Rate | 5.39% - 18.0% (12.0%) | Decrease | |||||||
116,606 | Waterfall | EBITDA Multiple | 1.31x - 4.00x (2.76x) | Increase | ||||||||
21,009 | Net Asset Value | Net Asset Value | N/A | Increase | ||||||||
Strategic Credit Opportunities Partners | 300,652 | Net Asset Value | Net Asset Value | N/A | Increase | |||||||
Equity/Other | 173,481 | Waterfall | Illiquidity Discount | 0.00% - 20.00% (10.68%) | Decrease | |||||||
412 | Option Pricing Model | Implied Volatility | 27.50% (27.50%) | Increase | ||||||||
Total | $ | 3,215,250 | ||||||||||
(1) | Certain investments may be valued at cost for a period of time after an acquisition as the best indicator of fair value. |
(2) | 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. |
(3) | Weighted average amounts are based on the estimated fair values. |
(4) | 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, 2018 and December 31, 2017. 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
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single present value amount. The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors the Company may take into account to determine the fair value of its investments include, as relevant: available current market data, including an assessment of the credit quality of the security’s issuer, relevant and applicable market trading and transaction comparables, applicable market yields and multiples, illiquidity discounts, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, data derived from merger and acquisition activities for comparable companies, and enterprise values, among other factors.
The following tables provide reconciliations for the three and nine months ended September 30, 2018 and 2017 of investments for which Level 3 inputs were used in determining fair value (in thousands):
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||
Senior Debt | Subordinated Debt | Asset Based Finance | Strategic Credit Opportunities Partners, LLC | Equity/Other | Total | |||||||||||||||||||
Fair value balance as of July 1, 2018 | $ | 2,156,652 | $ | 212,743 | $ | 413,133 | $ | 306,736 | $ | 253,239 | $ | 3,342,503 | ||||||||||||
Additions (1) | 113,313 | 29,622 | 45,108 | — | 1,000 | 189,043 | ||||||||||||||||||
Net realized gains (losses) (2) | (24,967 | ) | — | — | — | (751 | ) | (25,718 | ) | |||||||||||||||
Net change in unrealized appreciation (depreciation) (3) | 24,638 | (6,010 | ) | (5,761 | ) | 722 | 634 | 14,223 | ||||||||||||||||
Sales or repayments (4) | (132,430 | ) | — | (22,757 | ) | — | (12,110 | ) | (167,297 | ) | ||||||||||||||
Net discount accretion | 1,437 | 66 | 1,035 | — | — | 2,538 | ||||||||||||||||||
Transfers into Level 3 | — | — | — | — | — | — | ||||||||||||||||||
Fair value balance as of September 30, 2018 | $ | 2,138,643 | $ | 236,421 | $ | 430,758 | $ | 307,458 | $ | 242,012 | $ | 3,355,292 | ||||||||||||
Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2018 (3) | $ | 27,213 | $ | (6,103 | ) | $ | (5,304 | ) | $ | 722 | $ | 437 | $ | 16,965 | ||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
Senior Debt | Subordinated Debt | Asset Based Finance | Strategic Credit Opportunities Partners, LLC | Equity/Other | Total | |||||||||||||||||||
Fair value balance as of January 1, 2018 | $ | 2,133,311 | $ | 260,887 | $ | 346,507 | $ | 300,652 | $ | 173,893 | $ | 3,215,250 | ||||||||||||
Additions (1) | 825,504 | 29,840 | 84,844 | — | 101,126 | 1,041,314 | ||||||||||||||||||
Net realized gains (losses) (2) | (32,004 | ) | 492 | (12,797 | ) | — | (4,884 | ) | (49,193 | ) | ||||||||||||||
Net change in unrealized appreciation (depreciation) (3) | 4,761 | (15,509 | ) | 42,650 | 6,806 | (6,503 | ) | 32,205 | ||||||||||||||||
Sales or repayments (4) | (796,875 | ) | (39,543 | ) | (33,555 | ) | — | (21,620 | ) | (891,593 | ) | |||||||||||||
Net discount accretion | 3,946 | 254 | 3,109 | — | — | 7,309 | ||||||||||||||||||
Transfers into Level 3 | — | — | — | — | — | — | ||||||||||||||||||
Fair value balance as of September 30, 2018 | $ | 2,138,643 | $ | 236,421 | $ | 430,758 | $ | 307,458 | $ | 242,012 | $ | 3,355,292 | ||||||||||||
Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2018 (3) | $ | 1,841 | $ | (14,421 | ) | $ | 43,736 | $ | 6,806 | $ | (13,302 | ) | $ | 24,660 | ||||||||||
(1) | Includes increases in the cost basis of investments resulting from new and add-on portfolio investments, the capitalization of PIK interest, or the exchange of one or more existing securities for one or more new securities. |
(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, proceeds from sales of investments, distributions received on equity investments classified as return of capital or the exchange of one or more existing securities for one or more new securities. |
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Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
Senior Debt | Subordinated Debt | Asset Based Finance | Strategic Credit Opportunities Partners, LLC | Equity/Other | Total Return Swaps | Total | ||||||||||||||||||||||
Fair value balance as of July 1, 2017 | $ | 2,169,620 | $ | 410,668 | $ | 390,208 | $ | 98,101 | $ | 198,517 | $ | — | $ | 3,267,114 | ||||||||||||||
Additions (1) | 308,548 | 5,619 | 25,756 | 201,628 | — | — | 541,551 | |||||||||||||||||||||
Net realized gains (losses) (2) | (9,440 | ) | (15 | ) | (7,853 | ) | — | (3,585 | ) | — | (20,893 | ) | ||||||||||||||||
Net change in unrealized appreciation (depreciation) (3) | 11,426 | 5,889 | 12,722 | (523 | ) | 2,049 | — | 31,563 | ||||||||||||||||||||
Sales or repayments (4) | (338,998 | ) | (2,521 | ) | (126,978 | ) | — | (6,011 | ) | — | (474,508 | ) | ||||||||||||||||
Net discount accretion | 1,602 | 179 | 976 | — | — | — | 2,757 | |||||||||||||||||||||
Transfers into Level 3 | — | — | — | — | — | — | — | |||||||||||||||||||||
Fair value balance as of September 30, 2017 | $ | 2,142,758 | $ | 419,819 | $ | 294,831 | $ | 299,206 | $ | 190,970 | $ | — | $ | 3,347,584 | ||||||||||||||
Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2017 (3) | $ | 4,111 | $ | 5,547 | $ | 5,903 | $ | (523 | ) | $ | (1,603 | ) | $ | — | $ | 13,435 | ||||||||||||
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||
Senior Debt | Subordinated Debt | Asset Based Finance | Strategic Credit Opportunities Partners, LLC | Equity/Other | Total Return Swaps | Total | ||||||||||||||||||||||
Fair value balance as of January 1, 2017 | $ | 2,166,597 | $ | 405,203 | $ | 344,305 | $ | 98,998 | $ | 174,381 | $ | 3,397 | $ | 3,192,881 | ||||||||||||||
Additions (1) | 752,620 | 6,695 | 91,560 | 201,628 | 62,768 | — | 1,115,271 | |||||||||||||||||||||
Net realized gains (losses) (2) | (87,737 | ) | (7,428 | ) | (7,853 | ) | — | (5,758 | ) | 3,014 | (105,762 | ) | ||||||||||||||||
Net change in unrealized appreciation (depreciation) (3) | 129,968 | 42,444 | 14,470 | (1,420 | ) | (32,376 | ) | — | 153,086 | |||||||||||||||||||
Sales or repayments (4) | (823,192 | ) | (27,625 | ) | (150,358 | ) | — | (8,045 | ) | (6,411 | ) | (1,015,631 | ) | |||||||||||||||
Net discount accretion | 4,502 | 530 | 2,707 | — | — | — | 7,739 | |||||||||||||||||||||
Transfers into Level 3 | — | — | — | — | — | — | — | |||||||||||||||||||||
Fair value balance as of September 30, 2017 | $ | 2,142,758 | $ | 419,819 | $ | 294,831 | $ | 299,206 | $ | 190,970 | $ | — | $ | 3,347,584 | ||||||||||||||
Change in net unrealized appreciation (depreciation) in investments still held as of September 30, 2017 (3) | $ | 66 | $ | 31,030 | $ | 6,670 | $ | (1,420 | ) | $ | (38,771 | ) | $ | — | $ | (2,425 | ) | |||||||||||
(1) | Includes increases in the cost basis of investments resulting from new and add-on portfolio investments, the capitalization of PIK interest, or the exchange of one or more existing securities for one or more new securities. |
(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, distributions received on equity investments classified as return of capital or the exchange of one or more existing securities for one or more new securities. |
No securities were transferred into the Level 3 hierarchy and no securities were transferred out of the Level 3 hierarchy during the nine months ended September 30, 2018 and 2017. Investments are transferred at fair value as of the beginning of the quarter in which they are transferred. 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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The Joint Advisor receives, and KKR, CNL and certain CNL affiliates received, compensation or reimbursement for advisory services and other services in connection with the performance and supervision of administrative services and investment advisory activities.
Since April 9, 2018, the Company is a party to an investment advisory agreement with the Joint Advisor (the “Joint Advisor Investment Advisory Agreement”) for the overall management of the Company’s investment activities. Under the terms of the Joint Advisor Investment Advisory Agreement, the Joint Advisor earns a base management fee (referred to as an investment advisory fee) equal to an annual rate of 1.5% 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 excludes cash and short-term investments. Concurrent with the Listing and prior to April 9, 2018, the Company was a party to an investment advisory agreement with KKR (the “Former KKR Investment Advisory Agreement”). Prior to the Listing, the Company was a party to an investment advisory agreement with CNL, (the “Former CNL Investment Advisory Agreement”). The terms of the Former KKR Investment Advisory Agreement were substantially the same as the Joint Advisor Investment Advisory Agreement. Under the terms of the Former CNL Investment Advisory Agreement, CNL earned a base management fee equal to an annual rate of 2% of the Company's average gross assets, computed using the same method as under the Joint Advisor Investment Advisory Agreement. Also prior to the Listing, the Company and CNL had entered into a sub-advisory agreement with KKR (the “Former Sub-Advisory Agreement”), under which KKR was responsible for the day-to-day management of the Company’s investment portfolio. CNL compensated KKR for advisory services that it provided to the Company with 50% of the base management fees and performance-based incentive fees that CNL received under the Former CNL Investment Advisory Agreement.
The Joint Advisor also earns a performance-based incentive fee comprised of a subordinated incentive fee on income and an incentive fee on capital gains. KKR and CNL earned similar performance-based incentive fees pursuant to the Former KKR Investment Advisory Agreement and Former CNL Investment Advisory Agreement, respectively. The subordinated incentive fee on pre-incentive fee net investment income (as defined in the Investment Advisory Agreement) is paid quarterly if earned, and is computed as the sum of (a) 100% of quarterly pre-incentive fee net investment income in excess of 1.75% of average net assets but less than or equal to 2.1875% of average net assets, and (b) 20% of pre-incentive fee net investment income in excess of 2.1875% of average net assets.
Under the Joint Advisor Investment Advisory Agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides generally that no incentive fee will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the same period. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of pre-incentive fee net investment income when pre-incentive fee net investment income exceeds the applicable quarterly hurdle rate for such calendar quarter, subject to the catch-up provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for the then-current and 11 preceding calendar quarters.
Under the Former CNL Investment Advisory Agreement, the subordinated incentive fee on income became subject to a total return requirement on January 1, 2017. The terms of the total return requirement under the Former CNL Investment Advisory Agreement were similar to the Joint Advisor Investment Advisory Agreement, except the calculation covered the then-current and three preceding calendar quarters and base management fees were added to the calculation of "cumulative net increase in net assets resulting from operations." The Former KKR Investment Advisory Agreement contained a total return requirement similar to that in the Former CNL Investment Advisory Agreement. Additionally, concurrently with the Listing, KKR agreed to certain waivers. Specifically, KKR agreed to irrevocably waive subordinated incentive fees that would otherwise be payable under the Former KKR Investment Advisory Agreement up to the amount that would cause the total subordinated fees paid in any calendar quarter (or partial calendar quarter for which the subordinated incentive fee is required to be calculated) to not exceed the amount that would be payable if the following revised definitions had applied in such period: (a) “look back period” as defined on or after December 31, 2017 to be the most recently completed quarter and the 11 preceding calendar quarters and (b) “cumulative net increase in net assets resulting from operations” as defined to remove the addition of management fees paid following the Listing.
The incentive fee on capital gains is paid annually if earned, and is equal to (i) 20% of all realized gains on a cumulative basis from inception, net of (x) all realized losses on a cumulative basis, (y) unrealized depreciation at year end and (z) disregarding any net realized gains associated with the TRS interest spread (which represents the difference between (a) the interest and fees
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received on the TRS, and (b) the financing fees paid to the TRS Counterparty), less (ii) the aggregate amount of any previously paid incentive fee on capital gains.
In addition, under the terms of the Joint Advisor Investment Advisory Agreement, the Joint Advisor is entitled to reimbursement of certain expenses incurred on behalf of the Company including expenses incurred in connection with its investment operations and investment transactions. Under the terms of the Former KKR Investment Advisory Agreement (and previously under the terms of the Former Sub-Advisory Agreement), KKR was entitled to reimbursement of certain expenses incurred on behalf of the Company including expenses incurred in connection with its investment operations and investment transactions.
Since April 9, 2018, the Company is a party to an administrative services agreement with the Joint Advisor (the "Joint Advisor Administrative Services Agreement") whereby the Joint Advisor performs, and oversees the performance of, various administrative services on behalf of the Company. Administrative services 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 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. The Company agreed to reimburse the Joint Advisor for the professional services and expenses it incurs in performing its administrative obligations on behalf of the Company. Concurrent with the Listing and prior to April 9, 2018, the Company was a party to an administrative service agreement (the "Former KKR Administrative Services Agreement") with KKR with similar terms. Prior to Listing, the Company was a party to an administrative service agreement (the "Former CNL Administrative Services Agreement") with CNL with similar terms.
Related party fees, expenses and expenses incurred on behalf of the Company during the three and nine months ended September 30, 2018, and 2017 are summarized below (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||
Related Party | Source Agreement & Description | 2018 | 2017 | 2018 | 2017 | |||||||||||||
Joint Advisor | Joint Advisor Investment Advisory Agreement: Base management fees (investment advisory fees) | $ | 15,817 | $ | — | $ | 30,088 | $ | — | |||||||||
KKR | Former KKR Investment Advisory Agreement: Base management fees (investment advisory fees) | — | — | 16,507 | — | |||||||||||||
CNL and KKR | Former CNL Investment Advisory Agreement: Base management fees (investment advisory fees) | — | 21,173 | — | 62,858 | |||||||||||||
Joint Advisor | Joint Advisor Investment Advisory Agreement: Subordinated incentive fee on income(1) | 10,946 | — | 22,656 | — | |||||||||||||
KKR | Former KKR Investment Advisory Agreement: Subordinated incentive fee on income(1) | — | — | 12,373 | — | |||||||||||||
CNL and KKR | Former CNL Investment Advisory Agreement: Subordinated incentive fee on income(1) | — | 2,046 | — | 7,721 | |||||||||||||
Joint Advisor | Joint Advisor Investment Advisory Agreement: Investment expenses reimbursement(2) | 905 | — | 1,172 | — | |||||||||||||
KKR | Former KKR Investment Advisory Agreement: Investment expenses reimbursement(2) | — | 373 | 193 | 2,982 | |||||||||||||
Joint Advisor | Joint Administrative Services Agreement: Administrative and compliance services | 605 | — | 1,058 | — | |||||||||||||
KKR | Former KKR Administrative Services Agreement: Administrative and compliance services | — | — | 486 | — | |||||||||||||
CNL | Former CNL Administrative Services Agreement: Administrative and compliance services | — | 531 | — | 1,585 | |||||||||||||
(1) | Subordinated incentive fees on income are included in performance-based incentive fees in the condensed consolidated statements of operations. As of September 30, 2018 and December 31, 2017, a subordinated incentive fee on income of $10.95 million and $8.42 million, respectively, was payable to the Company's investment adviser. |
(2) | Includes fees related to transactional expenses related to prospective investments, including fees and expenses associated with performing due diligence reviews of investments that do not close, often referred to as “broken deal” costs. Broken deal costs amounted to $0.18 million and $0.40 million for the three and nine months ended September 30, 2018, respectively, and $0.24 |
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million and $0.53 million during the three and nine months ended September 30, 2017, respectively. Prior to November 14, 2017, these expenses were reimbursed pursuant to the Sub-Advisory Agreement.
The Joint Advisor is, and KKR was, 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 $1.47 million and $4.67 million during the three and nine months ended September 30, 2018, respectively, and $3.72 million and $7.44 million during the three and nine months ended September 30, 2017. There were no capital structuring fees receivable from the Joint Advisor as of September 30, 2018. As of December 31, 2017, $2.80 million of capital structuring fees were receivable from the Joint Advisor.
Indemnification – The Joint Advisor Investment Advisory Agreement contains certain indemnification provisions in favor of the Joint Advisor, its directors, officers, associated persons, and its affiliates. In addition, the Company’s articles of incorporation contain certain indemnification provisions in favor of the Company’s officers, directors, agents, and certain other persons and the Company has entered into indemnification agreements with each of its directors, providing that the Company will indemnify each director to the fullest extent permitted by applicable law in any proceeding related to such person's service as a director of the Company. As of September 30, 2018, management believed that the risk of incurring any losses for such indemnification was remote.
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 | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Capital structuring fees | $ | 1,466 | $ | 3,719 | $ | 4,672 | $ | 7,442 | ||||||||
Break-up fees | — | 349 | — | 3,970 | ||||||||||||
Amendment fees | 415 | 205 | 1,435 | 1,111 | ||||||||||||
Commitment fees | — | 143 | 140 | 143 | ||||||||||||
Consent fees | — | — | 520 | — | ||||||||||||
Total | $ | 1,881 | $ | 4,416 | $ | 6,767 | $ | 12,666 | ||||||||
8. Distributions
The total and the sources of declared distributions on a GAAP basis for the nine months ended September 30, 2018, and 2017 are presented in the tables below (in thousands, except per share amounts).
Nine Months Ended September 30, | ||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||
Per Share | Amount | Allocation | Per Share | Amount | Allocation | |||||||||||||||||
Total Declared Distributions | $ | 1.31 | (1) | $ | 164,015 | 100.0 | % | $ | 1.31 | $ | 178,955 | 100.0 | % | |||||||||
From net investment income | 1.13 | 142,700 | 87.0 | 1.16 | 158,821 | 88.7 | ||||||||||||||||
Distributions in excess of net investment income | 0.18 | 21,315 | 13.0 | 0.15 | 20,134 | 11.3 | ||||||||||||||||
(1) | Includes a special cash distribution in the amount of $0.10125 per share. |
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 and realized gains, if any, in the current period to determine taxable income available for distributions. The following table summarizes the primary sources of differences between (i) GAAP net investment income and realized gains and (ii) taxable income available for distributions that contribute to tax-related distributions in excess of net investment income for the nine months ended September 30, 2018, and 2017 (in thousands).
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Nine Months Ended September 30, | 2018 | 2017 | ||||||
Ordinary income component of tax basis undistributed earnings | $ | 55,862 | $ | 69,343 | ||||
Offering expenses | — | 394 | ||||||
Net change in unrealized appreciation (depreciation) on foreign currency forward contracts | 2,593 | (9,235 | ) | |||||
Net change in unrealized appreciation on total return swaps | — | (3,397 | ) | |||||
Total (1) | $ | 58,455 | $ | 57,105 | ||||
(1) | The above table does not present all adjustments to calculate taxable income available for distributions. |
For the nine months ended September 30, 2018, the tax-related sources of distributions of $58.46 million were greater than the distributions in excess of net investment income of $21.32 million. None of the distributions declared during the year ended December 31, 2017 were classified as a tax basis return of capital.
Undistributed net investment income was $16.32 million and $37.63 million as of September 30, 2018 and December 31, 2017, respectively.
The Company has adopted a distribution reinvestment plan (the "DRP") that enables its registered shareholders to elect for the reinvestment of distributions in shares of common stock. Pursuant to the DRP, the Company will reinvest all distributions declared by the Board on behalf of registered shareholders who do not elect to receive their distributions in cash (the “Participants”). As a result, if the Board declares a distribution, then Participants will have their distributions automatically reinvested in additional shares of our common stock as described below.
With respect to each distribution pursuant to the DRP, the Company reserves the right to either issue new shares of its common stock or purchase such shares in the open market. Unless the Company, in its sole discretion, otherwise directs the plan administrator, (a) if the market price per share is equal to or greater than the net asset value per share, then the Company will issue shares of its common stock at the greater of (i) net asset value per share and (ii) 95% of the market price per share; and (b) if the market price per share is less than the net asset value per share, then, in the Company's sole discretion, (i) shares of its common stock will be purchased in open market transactions for the accounts of Participants to the extent practicable, or (ii) the Company will issue shares of its common stock at net asset value per share. Pursuant to the terms of the DRP, the number of shares of the Company's common stock to be issued to a Participant will be determined by dividing the total dollar amount of the distribution payable to a Participant by the price per share at which the Company issues such shares. However, shares purchased in open market transactions by the plan administrator will be allocated to a Participant based on the average purchase price, excluding any brokerage charges or other charges, of all shares of the Company's common stock purchased in the open market. During the three and nine months ended September 30, 2018, the administrator for the Company's DRP purchased 102,745 and 416,795 shares of common stock, respectively, for an average price per share of $16.64 and $16.59, respectively, in the open market and distributed such shares to participants in the Company’s DRP.
9. Share Transactions
During the nine months ended September 30, 2017, the Company issued 4,316,511 shares of common stock pursuant to its distribution reinvestment plan, for total proceeds of $88.09 million and average proceeds per share of $20.41. The Company did not issue any shares of common stock to satisfy the reinvestment portion of distributions paid during the nine months ended September 30, 2018 and instead purchased shares on the open market.
In February 2018, the Company's Board authorized a share repurchase program. Under the program, the Company could repurchase up to $50 million in the aggregate of the Company's outstanding common stock in the open market at prices below the current net asset value per share, in accordance with the guidelines specified in Rule 10b-18 of the Exchange Act. As a result, on March 15, 2018, the Company entered into a share repurchase plan (the "Repurchase Plan"). Under the Repurchase Plan, the Company could repurchase up to $50 million in the aggregate of its outstanding common stock in the open market at prices below the current net asset value per share, in accordance with the guidelines specified in Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The timing, manner, price and amount of any share repurchases were determined by the Company, in its discretion, based upon the evaluation of economic and market conditions, the stock price, applicable legal and regulatory requirements and other factors. On July 20, 2018, the Company completed all repurchases under the Repurchase Plan with the repurchase of 3,010,945 shares for an aggregate purchase price of $50.00 million and an average price per share of $16.61, including commissions paid.
Prior to the Listing, the Company conducted quarterly tender offers pursuant to its share repurchase program. In anticipation of the Listing and the concurrent liquidity it was expected to provide, on August 10, 2017, the Company’s Board voted to
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terminate the Company’s share repurchase program following the completion of the Company’s tender offer, which commenced on July 17, 2017 and expired on August 21, 2017.
The following table is a summary of the share repurchases completed under the Company's share repurchase program during the nine months ended September 30, 2017 ($ 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 | ||||||||||||
2017: | |||||||||||||||||
January 17, 2017 | 3,383,256 | 1,647,860 | $ | 33,369 | 49 | % | $ | 20.25 | |||||||||
May 24, 2017 | 3,414,328 | 1,711,986 | $ | 34,745 | 50 | % | $ | 20.30 | |||||||||
August 24, 2017 | 3,424,376 | 2,405,073 | $ | 48,107 | 70 | % | $ | 20.00 | |||||||||
Total | 10,221,960 | 5,764,919 | $ | 116,221 | 56 | % | |||||||||||
10. Borrowings
The Company’s outstanding borrowings as of September 30, 2018 and December 31, 2017 were as follows (in thousands):
As of September 30, 2018 | As of December 31, 2017 | ||||||||||||||||||||||||
Total Aggregate Principal Amount Committed | Principal Amount Outstanding | Carrying Value | Total Aggregate Principal Amount Committed | Principal Amount Outstanding | Carrying Value | ||||||||||||||||||||
2018 Senior Secured Revolving Credit Facility(1) | $ | 1,450,000 | (2) | $ | 1,139,226 | $ | 1,139,226 | $ | — | $ | — | $ | — | ||||||||||||
2013 Senior Secured Revolving Credit Facility(1) | — | — | — | 958,000 | 615,000 | 615,000 | |||||||||||||||||||
SMBC Credit Facility(1) | 300,000 | 200,000 | 200,000 | 300,000 | 110,000 | 110,000 | |||||||||||||||||||
JPM Credit Facility(1) | 300,000 | 240,000 | 240,000 | 300,000 | 240,000 | 240,000 | |||||||||||||||||||
Total credit facilities | 2,050,000 | 1,579,226 | 1,579,226 | 1,558,000 | 965,000 | 965,000 | |||||||||||||||||||
2014 Senior Secured Term Loan | — | — | — | 385,000 | 385,000 | 382,768 | (3) | ||||||||||||||||||
2022 Notes | 245,000 | 245,000 | 241,267 | (4) | 245,000 | 245,000 | 240,612 | (4) | |||||||||||||||||
Total borrowings | $ | 2,295,000 | $ | 1,824,226 | $ | 1,820,493 | $ | 2,188,000 | $ | 1,595,000 | $ | 1,588,380 | |||||||||||||
(1) | Subject to borrowing base and leverage restrictions. |
(2) | Includes an accordion feature that allows the Company under certain circumstances to increase the size of the 2018 Senior Secured Revolving Credit Facility to a maximum of $2.18 billion. |
(3) | Comprised of outstanding principal less the unaccreted original issue discount of $0.58 million and deferring financing costs of $1.65 million as of December 31, 2017. |
(4) | Comprised of outstanding principal less deferred financing costs of $3.73 million and $4.39 million as of September 30, 2018 and December 31, 2017, respectively. |
The weighted average stated interest rate and weighted average remaining years to maturity of the Company’s outstanding borrowings as of September 30, 2018 were 4.37% and 4.2 years, respectively, and as of December 31, 2017 were 4.45% and 3.0 years, respectively.
2018 Senior Secured Revolving Credit Facility
On August 9, 2018 (the "Effective Date"), the Company entered into a senior secured revolving credit facility (the “2018 Senior Secured Revolving Credit Facility”) with FSIC, FS Investment Corporation II, FS Investment Corporation III, JPMorgan Chase Bank, N.A. (“JPMCB”) as administrative agent, ING Capital LLC (“ING”) as collateral agent and the lenders party thereto. The 2018 Senior Secured Revolving Credit Facility provides that the Company may borrow up to a sublimit of $1.45 billion of the total facility amount, which sublimit may be reduced or increased from time to time pursuant to the terms of the 2018 Senior Secured Revolving Credit Facility and subject to the oversight and approval of the Board. The 2018 Senior Secured Revolving Credit Facility provides for borrowings in U.S. dollars and certain agreed upon foreign currencies in an initial aggregate amount of up to $3.44 billion, with an option for the Company to request that existing or new lenders, at their election, provide up to $1.72 billion of additional commitments. The 2018 Senior Secured Revolving Credit Facility provides for the issuance of letters of credit on behalf of the Company in an aggregate face amount not to exceed $25 million. The 2018 Senior Secured Revolving Credit Facility does not contain cross default or cross collateralization provisions with other borrowers. The Company’s obligations under the Credit Facility are guaranteed by certain of the Company’s subsidiaries including FCF LLC, CCT Holdings LLC and CCT Holdings II LLC. The Company’s obligations under the 2018 Senior Secured Revolving Credit Facility
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are secured by a first priority security interest in substantially all of the assets of the Company and the subsidiary guarantors thereunder.
Availability under the 2018 Senior Secured Revolving Credit Facility will terminate on August 8, 2022 (the “Revolver Termination Date”) and the outstanding loans under the 2018 Senior Secured Revolving Credit Facility will mature on August 8, 2023. The 2018 Senior Secured Revolving Credit Facility also requires mandatory prepayment of interest and principal upon certain events during the term-out period commencing on the Revolver Termination Date.
The proceeds of the 2018 Senior Secured Revolving Credit Facility drawn by the Company on the Effective Date were used in part to prepay in full all borrowings outstanding on the Effective Date under the 2013 Senior Secured Revolving Credit Facility and 2014 Senior Secured Term Loan.
Interest under the 2018 Senior Secured Revolving Credit Facility is generally based on LIBOR plus an applicable spread of 1.75% or 2.00%, depending on collateral levels. The Company will also pay an annual commitment fee on any unused commitment amounts between 0.375% and 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 2018 Senior Secured Revolving Credit Facility for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
Three and Nine Months Ended September 30, | ||||
2018 | ||||
Stated interest expense | $ | 6,569 | ||
Unused commitment fees | 207 | |||
Amortization of deferred financing costs | 438 | |||
Total interest expense | $ | 7,214 | ||
Weighted average interest rate | 4.21 | % | ||
Average borrowings | $ | 1,039,792 | ||
2013 Senior Secured Revolving Credit Facility
The Company was a party to a revolving credit facility (as amended, the “2013 Senior Secured Revolving Credit Facility”) with certain lenders and JPMorgan Chase Bank, N.A., acting as administrative agent. The 2013 Senior Secured Revolving Credit Facility provided for loans to be made in U.S. dollars and other foreign currencies up to an aggregate amount of $958 million. On August 9, 2018, the Company terminated the 2013 Senior Secured Revolving Credit Facility.
The stated borrowing rate under the 2013 Senior Secured Revolving Credit Facility was generally based on LIBOR plus an applicable spread of 2.00% or 2.25%, depending on collateral levels, or with respect to borrowings in foreign currencies, on a base rate applicable to such currency borrowing plus an applicable spread of 2.00% to 2.25%, depending on collateral levels. The Company also paid an annual commitment fee on any unused commitment amounts between 0.375% and 1.50%, 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 2013 Senior Secured Revolving Credit Facility for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stated interest expense | $ | 3,176 | $ | 5,884 | $ | 16,558 | $ | 16,764 | ||||||||
Unused commitment fees | 161 | 275 | 907 | 739 | ||||||||||||
Amortization of deferred financing costs | 602 | 494 | 1,598 | 1,463 | ||||||||||||
Total interest expense | $ | 3,939 | $ | 6,653 | $ | 19,063 | $ | 18,966 | ||||||||
Weighted average interest rate | 4.44 | % | 3.61 | % | 4.13 | % | 3.35 | % | ||||||||
Average borrowings (1) | $ | 669,359 | $ | 655,706 | $ | 665,632 | $ | 672,872 | ||||||||
(1) | Average borrowings for the 2013 Senior Secured Revolving Credit Facility for the three and nine months ended September 30, 2018 are calculated through the termination date of the facility, or August 8, 2018. |
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SMBC Credit Facility
CCT Tokyo Funding is party to a revolving credit facility (as amended, the “SMBC Credit Facility”) with Sumitomo Mitsui Banking Corporation (“SMBC”), as the administrative agent, collateral agent, and lender, which allows CCT Tokyo Funding to borrow up to $300 million. The SMBC Credit Facility is secured by all of the assets held by CCT Tokyo Funding, including its portfolio of assets. Such pledged assets are held in a segregated custody account with Wells Fargo Bank, National Association (“Wells Fargo”). The end of the reinvestment period and the stated maturity date for the SMBC Credit Facility are December 2, 2018 and December 2, 2021, respectively. The reinvestment period and the stated maturity date are both subject to two one-year extensions by mutual agreement.
Amounts available to borrow under the SMBC Funding Facility are subject to a borrowing base that applies an advance rate to assets held by CCT Tokyo Funding. At the option of CCT Tokyo Funding, interest is charged at either the rate of three month LIBOR plus 1.75%, if the average advances outstanding are greater than $150 million, otherwise plus 2.00%, or the higher of the Prime Rate (as defined in the Loan and Servicing Agreement) or the Federal Funds rate plus 0.50%, plus 0.75% if the average advances outstanding are greater than $150 million, otherwise plus 1.00%. Interest is payable quarterly. CCT Tokyo Funding also pays a quarterly non-usage fee of 0.35% on any unused commitment amounts if the average daily amount of the advances outstanding during a remittance period is equal to or greater than the lesser of (i) 50% of the borrowing base during the remittance period and (ii) $150 million (such lesser amount, the “Later Period Threshold Amount”). If the average daily amount of the advances outstanding during a remittance period is less than the Later Period Threshold Amount, CCT Tokyo Funding will pay a fee of 0.875% for any unused portion up to or equal to the difference of the Later Period Threshold Amount less the amount of advances outstanding in addition to the non-usage fee of 0.35% on any remaining unused portion.
The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the SMBC Credit Facility for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stated interest expense | $ | 2,090 | $ | 1,141 | $ | 5,102 | $ | 2,635 | ||||||||
Unused commitment fees | 90 | 48 | 289 | 216 | ||||||||||||
Amortization of deferred financing costs | 207 | 143 | 616 | 423 | ||||||||||||
Total interest expense | $ | 2,387 | $ | 1,332 | $ | 6,007 | $ | 3,274 | ||||||||
Weighted average interest rate | 4.15 | % | 3.12 | % | 3.98 | % | 2.97 | % | ||||||||
Average borrowings | $ | 200,000 | $ | 146,739 | $ | 171,282 | $ | 119,051 | ||||||||
JPM Credit Facility
CCT New York Funding is a party to a revolving credit facility (as amended, the “JPM Credit Facility”) pursuant to a Loan and Security Agreement with the Company, as the portfolio manager, JPMorgan Chase Bank, National Association (“JPMorgan”), as administrative agent and lender, together with any additional lenders from time to time party thereto, and the collateral administrator, collateral agent and securities intermediary party thereto (as amended, the “Loan Agreement”). CCT New York Funding’s obligations to JPMorgan under the JPM Credit Facility are secured by a first priority security interest in substantially all of the assets of CCT New York Funding, including its portfolio of loans. The obligations of CCT New York Funding under the JPM Credit Facility are non-recourse to the Company.
The JPM Credit Facility provides for borrowings in an aggregate principal amount up to $300 million with an accordion feature which allows for the expansion of the borrowing limit up to $400 million, subject to consent from the lender and other customary conditions. Borrowings under the JPM Credit Facility are subject to compliance with a net asset value coverage ratio with respect to the value of CCT New York Funding’s portfolio and various eligibility criteria must be satisfied with respect to the acquisition of each loan in CCT New York Funding’s portfolio. Any amounts borrowed under the JPM Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on January 16, 2021.
Interest on the JPM Credit Facility is charged at the rate of three month LIBOR plus 2.50% and is payable quarterly. CCT New York Funding also pays an annual commitment fee on any unused commitment amounts of 0.50% through May 29, 2017, and 0.70% thereafter. CCT New York Funding also paid an upfront fee and incurred certain other customary costs and expenses in connection with obtaining the JPM Credit Facility. The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the JPM Credit Facility for the three and nine months ended September 30, 2018 and 2017 were as follows (in thousands):
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stated interest expense | $ | 2,954 | $ | 2,698 | $ | 8,291 | $ | 6,480 | ||||||||
Unused commitment fees | 107 | 131 | 326 | 448 | ||||||||||||
Amortization of deferred financing costs | 106 | 110 | 313 | 327 | ||||||||||||
Total interest expense | $ | 3,167 | $ | 2,939 | $ | 8,930 | $ | 7,255 | ||||||||
Weighted average interest rate | 4.88 | % | 4.37 | % | 4.62 | % | 4.22 | % | ||||||||
Average borrowings | $ | 240,000 | $ | 248,772 | $ | 240,000 | $ | 206,242 | ||||||||
2014 Senior Secured Term Loan
The Company was party to 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 was due to mature in May 2019, and was charged interest at LIBOR plus 3.25% (with a LIBOR floor of 0.75%). The 2014 Senior Secured Term Loan was secured by substantially all of the Company’s portfolio investments and its cash and securities accounts, excluding those held by CCT Tokyo Funding and CCT New York Funding. On August 9, 2018, the Company terminated the 2014 Senior Secured Term Loan.
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, 2018 and 2017 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stated interest expense | $ | 2,230 | $ | 4,513 | $ | 12,455 | $ | 13,004 | ||||||||
Amortization of original discount | 375 | 104 | 582 | 304 | ||||||||||||
Amortization of deferred financing costs | 1,062 | 292 | 1,650 | 860 | ||||||||||||
Total interest expense | $ | 3,667 | $ | 4,909 | $ | 14,687 | $ | 14,168 | ||||||||
Weighted average interest rate | 5.57 | % | 4.83 | % | 5.49 | % | 4.62 | % | ||||||||
Average borrowings (1) | $ | 383,000 | $ | 386,978 | $ | 384,209 | $ | 387,978 | ||||||||
(1) | Average borrowings for the 2014 Senior Secured Term Loan for the three and nine months ended September 30, 2018 are calculated through the termination date of the facility, or August 8, 2018. |
2022 Notes
In 2017, the Company and The Bank of New York Mellon Trust Company, N.A. entered into an Indenture (the “Indenture”) relating to the Company’s issuance of $245 million aggregate principal amount of 5.00% senior unsecured notes due 2022. (the “2022 Notes”). The 2022 Notes will mature on June 28, 2022 and may be redeemed in whole or in part at the Company’s option at any time or from time to time at the applicable redemption price set forth in the Indenture. The 2022 Notes bear interest at a rate of 5.00% per year payable semi-annually. The interest rate on the 2022 Notes is subject to adjustment in certain instances set forth in the Indenture (up to a maximum interest rate of 5.50%), based on the corporate ratings of the Company by Fitch Ratings, Inc., Kroll Bond Rating Agency, Inc. and Standard & Poor’s Rating Services. The 2022 Notes are general unsecured obligations of the Company that rank senior in right of payment to all of the Company’s existing and future indebtedness that is expressly subordinated in right of payment to the 2022 Notes and rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by the Company.
The components of interest expense for the 2022 Notes for the three and nine months ended September 30, 2018 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Stated interest expense | $ | 3,062 | $ | 2,189 | $ | 9,187 | $ | 2,247 | ||||||||
Amortization of deferred financing costs | 227 | 155 | 661 | 159 | ||||||||||||
Total interest expense | $ | 3,289 | $ | 2,344 | $ | 9,848 | $ | 2,406 | ||||||||
Weighted average interest rate | 5.00 | % | 5.04 | % | 5.00 | % | 5.04 | % | ||||||||
Average borrowings | $ | 245,000 | $ | 175,380 | $ | 245,000 | $ | 174,263 | ||||||||
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Credit Facility Compliance
In connection with each of the credit facilities, 2014 Senior Secured Term Loan and the 2022 Notes, 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, 2018, the Company believes it was in compliance with the covenant requirements for all of its credit facilities and the 2022 Notes.
BNP Credit Facility
Paris Funding was party to a revolving credit facility with BNP Paribas Prime Brokerage, Inc. (“BNP”) which allowed Paris Funding to borrow up to $200 million (as amended, the “BNP Credit Facility”). The BNP Credit Facility was used primarily to finance traded credit investments. On June 30, 2017, Paris Funding terminated the BNP Credit Facility in connection with the Company’s ongoing transition to directly originated private credit investments.
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, 2017 were as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
2017 | 2017 | |||||||
Stated interest expense | $ | — | $ | 860 | ||||
Unused commitment fees (1) | — | 421 | ||||||
Total interest expense | $ | — | $ | 1,281 | ||||
Weighted average interest rate | — | % | 1.96 | % | ||||
Average borrowings (2) | $ | — | $ | 88,816 | ||||
(1) | Unused commitment fees for the nine months ended September 30, 2017 include a $0.15 million fee paid upon the termination of the BNP Credit Facility on June 30, 2017. |
(2) | Average borrowings for the BNP Credit Facility for the nine months ended September 30, 2017 are calculated through the termination date of the facility, or June 30, 2017. |
CS Facility
The Company was a party to a debt financing arrangement with Credit Suisse Securities (Europe) Limited (“CS”). The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a lower cost than would be available through alternate arrangements.
On June 30, 2016, the Company purchased a portion of a Tranche B term loan issued by LSF IX Java Investments, Ltd (the “Tranche B Loan”) with a par value of €56.41 million from Credit Suisse AG. The company financed a portion of the purchase by entering into a repurchase transaction with CS effective as of June 30, 2016 (the “CS Facility”). Under the terms of the CS Facility, CS purchased the Tranche B Loan from the Company for a purchase price of €22.28 million. The Company, on a monthly basis, repurchased the Tranche B Loan from CS and subsequently resold the Tranche B Loan to CS. The final repurchase transaction occurred on June 30, 2017. The repurchase price paid to CS for each repurchase of the Tranche B Loan was equal to the purchase price paid by CS for the Tranche B Loan plus interest thereon accrued at EURIBOR plus a spread of 0.75% for the term of the first repurchase transaction and 1.50% for each subsequent repurchase transaction. The Company recorded interest expense of $0.18 million for the CS Facility for the nine months ended September 30, 2017. The CS Facility was terminated on June 29, 2017. The Company has no further obligations under the CS Facility.
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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, 2018, the Company’s unfunded commitments consisted of the following (in thousands):
Category / Company (1) | Commitment Amount | ||
Unfunded revolvers/delayed draw loan commitments: | |||
A10 Capital, LLC | $ | 14,123 | |
Access CIG, LLC | 29 | ||
ACG Materials, LLC | 6,148 | ||
Berner Food & Beverage, LLC | 37,597 | ||
Eagle Family Foods, Inc. | 3,759 | ||
Frontline Technologies Holdings, LLC | 12,140 | ||
National Debt Relief LLC | 3,581 | ||
Patriot Well Solutions LLC | 2,167 | ||
Revere Superior Holdings, Inc. | 7,395 | ||
Total unfunded revolvers/delayed draw loan commitments | $ | 86,939 | |
Unfunded term loans | |||
Wheels Up Partners LLC | $ | 14,923 | |
Total unfunded term loans | $ | 14,923 | |
Unfunded equity commitments: | |||
KKR BPT Holdings Aggregator, LLC | $ | 4,000 | |
NEOS SPV I | 20,113 | ||
Polyconcept North America Holdings, Inc. | 1,211 | ||
Star Mountain SMB Multi-Manager Credit Platform, LP | 13,124 | ||
Toorak Capital | 12,075 | ||
Total unfunded equity commitments | $ | 50,523 | |
(1) | May be commitments to one or more entities affiliated with the named company. |
(2) | As of the date of this filing, the unfunded commitments have expired. |
As of September 30, 2018, the Company also has an unfunded commitment to provide $143.47 million of capital to SCJV. The capital commitment can be satisfied with contributions of cash and/or investments. The capital commitments cannot be drawn without an affirmative vote by both the Company’s and Conway’s representatives on SCJV’s board of managers.
As of September 30, 2018, the Company’s unfunded debt commitments have a fair value representing unrealized appreciation (depreciation) of $(2.03) million. The Company funds its equity investments as it receives funding notices from the portfolio companies. As of September 30, 2018, 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 such 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, 2018 and December 31, 2017.
12. Income Taxes
The Company is subject to federal, state, foreign income, and foreign withholding taxes. For the nine months ended September 30, 2018 and 2017, the company recorded a tax expense of $3.66 million and $(1.78) million, respectively, and had an effective tax rate of 2.51% and (1.09)%, respectively.
As of September 30, 2018 and December 31, 2017, the Company had a net deferred tax liability of $3.41 million and $0.18 million, respectively. These deferred tax items are primarily comprised of basis differences in partnerships and liabilities, net operating losses, unrealized investment depreciation, gross deferred tax assets of $37.09 million and $18.33 million and valuation allowances of $20.13 million and $16.81 million as of September 30, 2018 and December 31, 2017, respectively.
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The following is a schedule of financial highlights for one share of common stock during the nine months ended September 30, 2018 and 2017.
Nine Months Ended September 30, | |||||||||
2018 | 2017 | ||||||||
OPERATING PERFORMANCE PER SHARE | |||||||||
Net asset value, beginning of year | $ | 19.55 | $ | 20.09 | |||||
Net investment income(1) | 1.13 | 1.16 | |||||||
Net realized and unrealized gain (loss)(1)(2) | (0.01 | ) | 0.06 | ||||||
Net increase resulting from investment operations | 1.12 | 1.22 | |||||||
Distributions from net investment income(3) | (1.13 | ) | (1.16 | ) | |||||
Distributions from realized gains(3) | — | — | |||||||
Distributions in excess of net investment income(3)(4) | (0.18 | ) | (0.15 | ) | |||||
Net decrease resulting from distributions to common shareholders | (1.31 | ) | (1.31 | ) | |||||
Issuance of common stock above net asset value(5) | — | 0.01 | |||||||
Repurchases of common stock | 0.08 | — | (6) | ||||||
Net increase resulting from capital share transactions | 0.08 | 0.01 | |||||||
Net asset value, end of period | $ | 19.44 | $ | 20.01 | |||||
OPERATING PERFORMANCE PER SHARE | |||||||||
Total investment return-net asset value(7) | 7.46 | % | 6.12 | % | |||||
Total investment return-market value(8) | 3.38 | % | — | ||||||
RATIOS/SUPPLEMENTAL DATA (all amounts in thousands except ratios) | |||||||||
Net assets, end of period | $ | 2,413,478 | $ | 2,719,208 | |||||
Average net assets(9) | $ | 2,494,777 | $ | 2,759,036 | |||||
Average borrowings(9) | $ | 1,711,095 | $ | 1,520,934 | |||||
Shares outstanding, end of period | 124,120 | 135,903 | |||||||
Weighted average shares outstanding | 125,762 | 137,009 | |||||||
Ratios to Average Net Assets:(8) | |||||||||
Total operating expenses | 6.60 | % | 4.79 | % | |||||
Net investment income | 5.72 | % | 5.76 | % | |||||
Portfolio turnover rate | 27 | % | 29 | % | |||||
Asset coverage ratio(10) | 2.32 | 2.63 | |||||||
(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 year may not agree with the change in the aggregate gains and losses in portfolio securities for the year 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. “Distributions” 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 reflects a change in net asset value of less than $0.01 per share during the applicable period. |
(7) | 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 |
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price, net of sales load, on each monthly distribution payment date. The Company’s performance changes over time and currently may be different than that shown above. Past performance is no guarantee of future results. Total investment return-net asset value is not annualized.
(8) | Total investment return-market value is calculated based on the change in market price during the applicable period, including the impact of distributions reinvested in accordance with the Company’s DRP. Total investment return-market value assumes a purchase of common stock at the current market price on the first day of the period and a sale at the current market price on the last day of the period, plus any distributions declared and payable as of the end of the period. Total investment return-market value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The calculation of total return based on market value in the table should not be considered a representation of the Company’s future total return based on market value, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets, general economic conditions and fluctuations in per share market value. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. Total investment return-market value is not annualized. |
(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. |
(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. |
14. Subsequent Events
On October 10, 2018, the Company completed the purchase of 103,583 shares of its common stock for an average price per share of $15.19 in the open market in order to satisfy the reinvestment portion of the dividends declared in August 2018.
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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, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and 2017. Amounts as of December 31, 2017 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, 2017. Capitalized terms used in this Item 2 have the same meaning as in the accompanying unaudited condensed consolidated financial statements in Item 1 unless otherwise defined herein.
Statement Regarding Forward-Looking Information
The following information contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements generally are characterized by the use of terms such as “may,” “should,” “plan,” “anticipate,” “estimate,” “intend,” “predict,” “believe” and “expect” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Some factors that might cause such a difference include the following: persistent economic weakness at the global or national level, increased direct competition, changes in government regulations or accounting rules, changes in local, national and global capital market conditions, our ability to obtain or maintain credit lines or credit facilities on satisfactory terms, changes in interest rates, availability of proceeds from our offering of shares, our ability to identify suitable investments, our ability to close on identified investments, our ability to maintain our qualification as a regulated investment company and as a business development company, the ability of our investment adviser and their affiliates to attract and retain highly talented professionals, inaccuracies of our accounting estimates, the ability of our investment adviser to locate suitable borrowers for our loans and the ability of such borrowers to make payments under their respective loans. Given these uncertainties, we caution you not to place undue reliance on such statements, which apply only as of the date hereof. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances or to reflect the occurrence of unanticipated events. The forward-looking statements should be read in light of the risk factors identified in the “Risk Factors” section of our Annual Report on Form 10-K filing for the year ended December 31, 2017 and Item 1A in Part II of this Quarterly Report.
The forward-looking statements and projections contained in this report are excluded from the safe harbor protection provided by Section 27A of the Securities Act and Section 21E of the Exchange Act.
Overview
We were incorporated under the general corporation laws of the State of Maryland on June 9, 2010 and commenced business operations on June 17, 2011. 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. Through November 2017, we were externally managed by CNL Fund Advisors Company (“CNL”) and KKR Credit Advisors (US) LLC (“KKR,” and, together with CNL, the “Former Advisers”) under the Former CNL Investment Advisory Agreement and the Former CNL Administrative Services Agreement. On November 14, 2017, shares of our common stock commenced trading on the New York Stock Exchange with the ticker symbol “CCT” (the “Listing”). Concurrent with the Listing, KKR acquired certain of CNL’s assets primarily used in its role as investment adviser to the Company, and in connection with that transaction and through April 8, 2018, KKR became our sole investment adviser under the Former KKR Investment Advisory Agreement. In addition, we entered into a new administrative services agreement with KKR, the terms of which were substantially similar to our prior administrative services agreement with CNL, pursuant to which KKR replaced CNL as our administrator.
On April 9, 2018, we entered into a new investment advisory agreement (the “Joint Advisor Investment Advisory Agreement”) with FS/KKR Advisor, LLC (the “Joint Advisor”), a newly-formed entity that is jointly operated by KKR and an affiliate of Franklin Square Holdings, L.P. (“FS Investments”). The Joint Advisor Investment Advisory Agreement replaced the KKR Former Investment Advisory Agreement, as further described below under “Changes to Advisory Structure and Other Agreements.” In addition, we entered into a new administrative services agreement with the Joint Advisor (the “Joint Administrative Services Agreement”), which replaced the Former KKR Administrative Services Agreement, as further described below under “Changes to Advisory Structure and Other Agreements.”
Our Former Advisers and KKR were, and commencing April 9, 2018, our Joint Advisor is 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
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ongoing basis. Each of the Former Advisers and KKR was, and the Joint Adviser is, registered as an investment adviser with the Securities and Exchange Commission (the “SEC”).
Changes to Advisory Structure and Other Agreements
In December 2017, our board of directors (the "Board") approved an investment advisory agreement and administrative services agreement to be entered into between us and our Joint Advisor (subject to approval by our shareholders). In January 2018, we filed a definitive proxy statement soliciting shareholder approval of these new agreements, each of which would replace the Former KKR Investment Advisory Agreement and the Former KKR Administrative Services Agreement. The Company’s shareholders approved these agreements at a special meeting on March 26, 2018.
On April 9, 2018, we entered into a new investment advisory agreement with the Joint Advisor, which replaced the Former KKR Investment Advisory Agreement, dated November 14, 2017, by and between our company and KKR (the “KKR Investment Advisory Agreement”).
We pay the Joint Advisor a fee for its services under the Joint Advisor Investment Advisory Agreement consisting of two components—a base management fee based on the average value of our gross assets and an incentive fee based on our performance. The base management fee is calculated at an annual rate of 1.50% of the average value of our gross assets. The terms of the incentive fee are substantially the same as those of the KKR Investment Advisory Agreement.
On April 9, 2018, we also entered into the Joint Administrative Services Agreement, which replaced the Administrative Services Agreement, dated November 14, 2017, by and between our company and KKR (the “KKR Administrative Agreement"). Under the Joint Advisor Administrative Services Agreement, the Joint Advisor serves as our administrator. The terms of the Joint Administrative Services Agreement, including the services to be provided by the Joint Advisor as administrator and the amount of reimbursements to be paid by us for certain administrative expenses, are substantially the same as those of the KKR Administrative Services Agreement.
Additional information on the above agreements can be located in our Form 8-K filed with the SEC on April 9, 2018.
Proposed Merger
On July 22, 2018, we entered into a definitive agreement with FS Investment Corporation (“FSIC”), IC Acquisition, Inc., a wholly-owned subsidiary of FSIC, and the Joint Advisor under which our Company will be merged with and into FSIC, with FSIC surviving the merger (the "Proposed Merger"), subject to the conditions in the agreement. Under the terms of the agreement, our shareholders will receive a number of FSIC shares with an aggregate net asset value (“NAV”) equal to the aggregate NAV of our shares they hold, as determined no more than two business days before closing. The combined company will remain externally managed by the Joint Advisor. The Proposed Merger is subject to approval by FSIC and our shareholders and other customary closing conditions. On September 27, 2018, we filed a definitive proxy statement soliciting shareholder approval of the Proposed Merger at our annual meeting scheduled for December 3, 2018. FSIC and our Company expect to close the Proposed Merger in the fourth quarter of 2018. Additional information on the Proposed Merger can be located in our Form 8-K filed with the SEC on July 23, 2018.
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 Joint Advisor's network. We define originated transactions as any investment where the Joint Advisor negotiates the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. Additionally, we have the ability to participate in other originated transactions where there may be third parties involved, or a bank acting as an intermediary, for a closely held club, or similar transactions. We refer to these originated transactions together as our “Originated Strategies.” 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. On April 3, 2018, we obtained an amended exemptive order (the “SEC Exemptive Order”) from the SEC extending the co-investment exemptive relief previously granted to us by the SEC in June 2017 to allow us, together with the other business development companies managed by the Joint Advisor, to co-invest in privately negotiated investment transactions with certain other accounts managed by KKR.
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Historically, 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 direct lending and, to a lesser extent, secondary market transactions. We refer to this investment program component as our “Investment Portfolio” in this report. Second, beginning in November 2012 and until June 2017, we supplemented our economic exposure to portfolio companies by entering into total return swap arrangements (“TRS”) with a commercial bank counterparty and directing the creation of a portfolio of debt investments that served as reference assets under the TRS. We refer to this investment program component as our portfolio of TRS assets or our “TRS Portfolio” in this report. In the case of our TRS Portfolio, we received all (i) realized income and fees and (ii) realized capital gains generated by the TRS assets. In return, we paid 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. We terminated the TRS on June 30, 2017, in connection with the Company’s ongoing transition towards directly originated private credit investments, as the TRS arrangements were primarily limited to the financing of traded investments.
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 Joint Advisor to develop an investment thesis and a proprietary view of a potential portfolio company’s intrinsic value. We believe our flexible approach to investing allows us to take advantage of opportunities that offer favorable risk/reward characteristics.
We primarily focus on the following investment types:
• | Senior Debt. We invest in senior debt, in which we generally take a security interest in the available assets of the portfolio company, including equity interests in any of its subsidiaries. These investments generally take the form of senior secured first lien loans, senior secured second lien loans or senior secured bonds. In some circumstances, our lien could be subordinated to claims of other creditors. |
• | Subordinated Debt. Our subordinated debt investments are generally subordinated to senior debt and are generally unsecured. These investments are generally structured with interest-only payments throughout the life of the security, with the principal due at maturity. |
• | Structured Products. We also invest in structured products, which may include collateralized debt obligations, collateralized bond obligations, collateralized loan obligations, 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. |
• | Convertible Securities. We may invest in convertible securities, such as bonds, debentures, notes, preferred stocks or other securities that may be converted into, or exchanged for, a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. |
• | Investments in Private Investment Funds. We may invest in, or wholly own, private investment funds, including hedge funds, private equity funds, limited liability companies, REITs, and other business entities. In particular, we expect we may invest in asset-based opportunities through joint ventures, investment platforms or build-ups that provide one or more of the following services: origination or sourcing of potential investment opportunities, due diligence and negotiation of potential investment opportunities and/or servicing, development and management (including turnaround) and disposition of investments. Such investments in joint ventures, platforms and build-ups may be in or alongside existing or newly formed operators, consultants and/or managers that pursue such opportunities and may or may not include capital and/or assets contributed by third party investors. Such investments may include opportunities to direct-finance physical assets, such as airplanes and ships, and/or operating assets, such as financial service entities, as opposed to investment securities, or to invest in origination and/or servicing platforms directly. These asset-based opportunities are expected to offer mezzanine-like structural downside protection as well as asset collateral, and equity-like upside that can be achieved through appreciation at the asset-level or, in the case of platforms, through growth of the enterprise value. Key areas of focus include, without limitation, (i) aircraft, (ii) shipping, (iii) renewables, (iv) real estate, (v) consumer finance, and (vi) energy/infrastructure. |
• | Derivatives. We may invest in various types of derivatives, including TRS, interest rate swaps and foreign currency forward contracts and options. |
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• | Investments with Third-Parties. We may co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring jointly-controlled or non-controlling interests in certain investments in conjunction with participation by one or more third parties in such investment. Such joint venture partners or third party managers may include former Joint Advisor personnel or associated persons. |
We also co-invest with Conway Capital, LLC (“Conway”), an affiliate of Guggenheim Life and Annuity Company and Delaware Life Insurance Company, through an unconsolidated, limited liability company, Strategic Credit Opportunities Partners (“SCJV”). SCJV was formed in May 2016 to invest its capital in a range of investments, including senior secured loans (both first lien and second lien) to middle market companies, broadly syndicated loans, equity, warrants and other investments. We and Conway each have 50% voting control of SCJV and together are required to agree on all investment decisions as well as all other significant actions for SCJV. As of September 30, 2018, SCJV had total capital commitments of $500 million, $437.50 million of which was from us and the remaining $62.50 million from Conway. As of September 30, 2018, we had funded approximately $294.03 million of our commitment. SCJV had $350 million of borrowing capacity through a revolving credit facility with Goldman Sachs Bank USA (the “GS Credit Facility”) with a maturity date of September 29, 2021. As of September 30, 2018, our investment in SCJV was approximately $307.46 million at fair value. We do not consolidate SCJV in our consolidated financial statements.
Our investment activity may vary substantially from period to period depending on many factors, including: the demand for debt from creditworthy privately owned and thinly traded 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, cash available from operations 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 all private U.S. companies, U.S. companies whose securities are not listed on a national securities exchange and certain public U.S. 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 generated interest income and fees through its termination on June 30, 2017, such amounts, net of the financing expenses, were recognized as realized gains pursuant to generally accepted accounting principles (“GAAP”) when payable to us quarterly and upon the termination of the TRS.
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. The investment advisory fee and performance-based incentive fees compensate the investment adviser services in identifying, evaluating, negotiating, closing and monitoring our investments.
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Financial and Operating Highlights
The following table presents financial and operating highlights as of September 30, 2018 and December 31, 2017, and for the nine months ended September 30, 2018 and 2017:
As of (in thousands, except ratios and per share amounts) | September 30, 2018 | December 31, 2017 | ||||||
Total assets | $ | 4,371,114 | $ | 4,221,500 | ||||
Adjusted total assets (Total assets, net of payable for investments purchased) | $ | 4,341,528 | $ | 4,174,403 | ||||
Investments in portfolio companies | $ | 4,116,271 | $ | 3,968,409 | ||||
Borrowings | $ | 1,824,226 | $ | 1,595,000 | ||||
Net assets | $ | 2,413,478 | $ | 2,485,102 | ||||
Net asset value per share | $ | 19.44 | $ | 19.55 | ||||
Leverage ratio (Borrowings/Adjusted total assets) | 42 | % | 38 | % | ||||
Activity for the Nine Months Ended September 30, | ||||||||
(in thousands, except per share amounts) | 2018 | 2017 | ||||||
Average net assets | $ | 2,494,777 | $ | 2,759,036 | ||||
Average borrowings under credit facilities and term loan | $ | 1,711,095 | $ | 1,520,934 | ||||
Purchases of investments | $ | 1,231,600 | $ | 1,368,693 | ||||
Sales, principal payments and other exits | $ | 1,088,879 | $ | 1,463,538 | ||||
Net investment income | $ | 142,700 | $ | 158,821 | ||||
Net realized gains (losses) on investments, derivative instruments and foreign currency transactions | $ | (44,934 | ) | $ | (83,912 | ) | ||
Net change in unrealized appreciation (depreciation) on investments, derivative instruments and foreign currency translation | $ | 44,625 | $ | 92,054 | ||||
Net increase in net assets resulting from operations | $ | 142,391 | $ | 166,963 | ||||
Total distributions declared | $ | 164,015 | $ | 178,955 | ||||
Net investment income per share | $ | 1.13 | $ | 1.16 | ||||
Earnings per share | $ | 1.13 | $ | 1.22 | ||||
Distributions declared per share outstanding for the entire period | $ | 1.31 | $ | 1.31 | ||||
Summary of Common Stock Activity for the Nine Months Ended September 30, | ||||||||
(in thousands, except share and per share amounts) | 2018 | 2017 | ||||||
Reinvestment of distributions (1) | $ | — | $ | 88,089 | ||||
Average net proceeds per share (1) | $ | — | $ | 20.41 | ||||
Shares issued in connection with reinvestment of distributions (1) | — | 4,316,511 | ||||||
(1) | We did not issue any shares of common stock to satisfy the reinvestment portion of distributions paid during the nine months ended September 30, 2018 and instead purchased shares on the open market. |
Business Environment
Our focus is on Originated Strategy investments because they offer an illiquidity premium over broadly syndicated investments and often have better structures therefore have attractive risk-adjusted returns today. As of September 30, 2018, 82.8% of total investments at fair market value were in Originated Strategy Investments. An additional focus is on senior secured investments which represented 73.7% of the portfolio (excluding the impact of SCJV) and also floating rate investments which comprised 75.1% of the portfolio as of September 30, 2018. We believe that our Company’s investment strategy, and as a closed-ended business development company, offers a route for investors to access these risk adjusted returns over the long term without being subject to the technical pressures of more broadly syndicated or traded assets.
We believe this has been evident over the first nine months of 2018 as the more broadly syndicated traditional sub-investment grade credit asset classes exhibited volatility due to fears of a global trade war and a move to quantitative tightening by central banks. For example, during the first six months of 2018, the high yield index returned just 0.08% but during the three months ended September 30, 2018 the same index returned 2.4%. Floating rate loans, which have been less impacted by the more hawkish central banks stance, returned 1.8% and 4.0% during the three and nine months ended September 30, 2018, respectively.
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Portfolio and Investment Activity
Portfolio Investment Activity as of and for the nine months ended September 30, 2018 and 2017
The following tables summarize our investment activity as of September 30, 2018 and December 31, 2017 and for the nine months ended September 30, 2018 and 2017, excluding our short term investments:
Investment Activity Summary as of ($ in thousands) | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Total fair value | $ | 4,116,271 | $ | 3,968,409 | ||||
No. portfolio companies | 140 | 113 | ||||||
No. debt investments | 160 | 124 | ||||||
No. asset based finance investments | 13 | 10 | ||||||
No. equity/other investments | 34 | 35 | ||||||
Investment Portfolio Activity Summary ($ in thousands) | TRS Portfolio Activity Summary ($ in thousands) | |||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2017 | 2017 | |||||||||||||||||||
Purchases of Investments: | ||||||||||||||||||||||||
First Lien Senior Secured Loans | $ | 129,269 | $ | 248,396 | $ | 725,553 | $ | 808,719 | $ | — | $ | 40,411 | ||||||||||||
Second Lien Senior Secured Loans | 67,065 | 72,219 | 233,241 | 185,423 | — | 4,661 | ||||||||||||||||||
Other Senior Secured Debt | 205 | 1,486 | 113,698 | 66,630 | — | 1,542 | ||||||||||||||||||
Subordinated Debt | 36,025 | — | 65,872 | 9,517 | — | — | ||||||||||||||||||
Asset Based Finance | 45,108 | 25,757 | 84,844 | 91,560 | — | — | ||||||||||||||||||
Strategic Credit Opportunities Partners, LLC (1) | — | 201,628 | — | 201,628 | — | — | ||||||||||||||||||
Equity/Other | 1,000 | — | 8,392 | 5,216 | — | — | ||||||||||||||||||
Total | $ | 278,672 | $ | 549,486 | $ | 1,231,600 | $ | 1,368,693 | $ | — | $ | 46,614 | ||||||||||||
Sales, Principal Payments and Other Exits: | ||||||||||||||||||||||||
First Lien Senior Secured Loans (1) | $ | 84,821 | $ | 333,893 | $ | 696,746 | $ | 753,678 | $ | — | $ | 244,425 | ||||||||||||
Second Lien Senior Secured Loans | 110,797 | 227,418 | 175,071 | 283,179 | — | 44,673 | ||||||||||||||||||
Other Senior Secured Debt | 7,068 | 5,892 | 31,689 | 81,104 | — | 4,939 | ||||||||||||||||||
Subordinated Debt | 4,100 | 3,778 | 124,634 | 190,513 | — | 12,458 | ||||||||||||||||||
Asset Based Finance | 22,756 | 126,978 | 33,554 | 150,358 | — | — | ||||||||||||||||||
Equity/Other | 12,110 | 2,673 | 27,185 | 4,706 | — | — | ||||||||||||||||||
Total | $ | 241,652 | $ | 700,632 | $ | 1,088,879 | $ | 1,463,538 | $ | — | $ | 306,495 | ||||||||||||
Portfolio Company Additions | 15 | 8 | 49 | 26 | — | 2 | ||||||||||||||||||
Portfolio Company Exits | (7 | ) | (31 | ) | (22 | ) | (50 | ) | — | (45 | ) | |||||||||||||
Debt Investment Additions(2) | 25 | 12 | 79 | 46 | — | 9 | ||||||||||||||||||
Debt Investment Exits(2) | (16 | ) | (43 | ) | (41 | ) | (82 | ) | — | (56 | ) | |||||||||||||
(1) | Includes $201.63 million for the three and nine months ended September 30, 2017, of investments sold to SCJV in exchange for equity interest in SCJV. |
(2) | Debt investment additions and exits includes any asset based finance investments with a stated interest rate or expected return. |
The changes in the fair value of our Investment Portfolio are directly related to (i) the changes in its cost basis as a result of incremental purchases, sales and principal payments as described in the table above, and (ii) the changes in fair value for assets held at the beginning and end of the period. The net change in unrealized appreciation (depreciation) for the three months ended September 30, 2018 and 2017 was $10.07 million and $34.37 million, respectively, for our Investment Portfolio. The net change in unrealized appreciation (depreciation) for the nine months ended September 30, 2018 and 2017 was $32.72 million and $155.91 million, respectively, for our Investment Portfolio. The net change in unrealized appreciation (depreciation) for the three and nine months ended September 30, 2017 was $— million and $0.39 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.
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As discussed above under “— Overview,” since obtaining co-investment exemptive relief from the SEC, we have increased our focus on Originated Strategies as a main element of our investment strategy. Through our Originated Strategies investments we are able to participate alongside KKR’s institutional clients and proprietary funds in certain investments. Our total new fundings of Originated Strategies investments, at par, plus future expected fundings related to such investments, totaled approximately $813.65 million and $802.84 million for the nine months ended September 30, 2018 and 2017, respectively, representing 32% and 49% of approximately $2.57 billion and $1.64 billion in total originations by KKR in Originated Strategies investments for each respective period.
The following summarizes our investment activity associated with our investment focus on new originated investments during the nine months ended September 30, 2018 and 2017 and the status of originated investments held in the Investment Portfolio as of September 30, 2018 and 2017:
September 30, | ||||||||
Originated Strategies Activity for the Nine Months Ended ($ in thousands) | 2018 | 2017 | ||||||
Number of investments, by issuer | 29 | 23 | ||||||
Total amount of investments, at cost (1) | $ | 838,113 | $ | 845,830 | ||||
Percentage of total investment activity (2) | 68.1 | % | 72.5 | % | ||||
Fee income recognized in connection with originated transactions | $ | 4,672 | $ | 7,442 | ||||
Originated Strategies Investments Summary as of ($ in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Total investments, at fair value | $ | 3,408,216 | $ | 3,343,924 | ||||
Percentage of total Investment Portfolio, at fair value | 82.8 | % | 84.3 | % | ||||
Weighted average annual yield of debt investments (3)(4) | 10.8 | % | 9.7 | % | ||||
(1) | The total amount of investments, at cost, includes new issuers during the reporting periods and any follow-on investments from existing issuers. |
(2) | Percentage of total investment activity excludes our investments in SCJV. |
(3) | The weighted average annual yield on debt investments is based on amortized cost as of the end of the applicable period. The weighted average annual yield for our debt investments is computed as (i) the sum of (a) the annual interest rate of each accruing or partial accruing debt investment multiplied by its par amount as of the end of the applicable reporting period, plus (b) the annual accretion or amortization of the purchase or original issue discount or premium of each accreting or amortizing debt investment, if any; divided by (ii) the total amortized cost of all accruing debt investments included in the calculated group as of the end of the applicable reporting period. |
(4) | The weighted average 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 realized and unrealized gains and losses. Total investment return – net asset value was 7.5% and 6.1%, respectively, for the nine months ended September 30, 2018 and 2017. See Note 13. “Financial Highlights” in our condensed consolidated financial statements for information on how such returns were calculated. |
The following information presents additional analysis of our Investment Portfolio as of September 30, 2018 and December 31, 2017, 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 securities and (ii) subordinated debt securities.
Investment Portfolio as of (in thousands) | ||||||||||||||||
September 30, 2018 | December 31, 2017 | |||||||||||||||
Asset Category | Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Senior Debt | ||||||||||||||||
First Lien Senior Secured Loans | $ | 1,637,494 | $ | 1,610,169 | $ | 1,712,750 | $ | 1,672,178 | ||||||||
Second Lien Senior Secured Loans | 1,022,210 | 999,043 | 978,764 | 943,753 | ||||||||||||
Other Senior Secured Debt | 220,840 | 196,348 | 148,754 | 141,302 | ||||||||||||
Total Senior Debt | 2,880,544 | 2,805,560 | 2,840,268 | 2,757,233 | ||||||||||||
Subordinated Debt | 362,809 | 330,483 | 393,053 | 381,677 | ||||||||||||
Asset Based Finance | 413,637 | 430,758 | 372,035 | 346,507 | ||||||||||||
Strategic Credit Opportunities Partners, LLC | 294,028 | 307,458 | 294,028 | 300,652 | ||||||||||||
Equity/Other | 321,632 | 242,012 | 258,119 | 182,340 | ||||||||||||
Total | $ | 4,272,650 | $ | 4,116,271 | $ | 4,157,503 | $ | 3,968,409 | ||||||||
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The weighted average yield on debt investments at amortized cost held in our Investment Portfolio as of September 30, 2018 and December 31, 2017 were as follows:
September 30, 2018 | December 31, 2017 | |||||||||||||
Asset Category | Investment Portfolio at Amortized Cost (1) | Weighted Average Yield | Investment Portfolio at Amortized Cost (1) | Weighted Average Yield | ||||||||||
Senior Debt (2)(3) | ||||||||||||||
First Lien Senior Secured Loans | $ | 1,590,808 | 9.4 | % | $ | 1,646,602 | 8.9 | % | ||||||
Second Lien Senior Secured Loans | 1,022,210 | 11.0 | % | 972,306 | 10.3 | % | ||||||||
Other Senior Secured Debt | 189,920 | 8.5 | % | 119,999 | 9.4 | % | ||||||||
Subordinated Debt (2)(3) | 348,512 | 11.2 | % | 378,757 | 9.8 | % | ||||||||
Asset Based Finance (2)(3)(4) | 155,421 | 16.2 | % | 69,997 | 11.8 | % | ||||||||
(1) | Excludes investments on non-accrual status. |
(2) | The weighted average yield on debt investments is based on amortized cost as of the end of the applicable period. The weighted average yield for our debt investments is computed as (i) the sum of (a) the annual interest rate of each accruing or partial accruing debt investment multiplied by its par amount as of the end of the applicable reporting period, plus (b) the annual accretion or amortization of the purchase or original issue discount or premium of each accreting or amortizing debt investment, if any; divided by (ii) the total amortized cost of all accruing debt investments included in the calculated group as of the end of the applicable reporting period. |
(3) | The weighted average 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 realized and unrealized gains and losses. Total investment return – net asset value was 7.5% and 6.1%, respectively, for the nine months ended September 30, 2018 and 2017. See Note 13. “Financial Highlights” in our condensed consolidated financial statements for information on how such returns were calculated. |
(4) | Includes any investments with a stated interest rate or expected return. |
The following table presents a summary of interest rate and maturity statistics for the debt investments, based on par value, in our Investment Portfolio as of September 30, 2018 and December 31, 2017:
Investment Portfolio as of | ||||||
Floating interest rate debt investments: | September 30, 2018 | December 31, 2017 | ||||
Percent of debt portfolio | 75.1 | % | 78.4 | % | ||
Percent of floating rate debt investments with interest rate floors | 86.4 | % | 91.9 | % | ||
Weighted average interest rate floor | 1.0 | % | 1.0 | % | ||
Weighted average coupon spread to base rate (1) | 713 bps | 719 bps | ||||
Weighted average years to maturity | 4.7 | 4.7 | ||||
Fixed interest rate debt investments: | ||||||
Percent of debt portfolio | 24.9 | % | 21.6 | % | ||
Weighted average coupon rate (1) | 9.4 | % | 9.5 | % | ||
Weighted average years to maturity | 4.4 | 4.7 | ||||
(1) | Excludes investments on non-accrual status. |
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 1.70% and 2.40%, and 1.00% and 1.34% during the nine months ended September 30, 2018 and 2017, respectively, and was 2.40% and 1.69% on September 30, 2018 and December 31, 2017, respectively. Base rate resets for floating interest rate investments will only result in interest income increases when the reset base interest rate exceeds the associated interest rate floor.
Our weighted average annual yield on debt investments, adjusting for any non-accreting or partial accrual investments, was 10.4% and 9.5% as of September 30, 2018 and December 31, 2017, respectively. The weighted average 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 realized and unrealized gains and losses. Total investment return – net asset value was 7.5% and 6.1%, respectively, for the nine months ended September 30, 2018 and 2017. See Note 13. “Financial Highlights” in our condensed consolidated financial statements.
The following table shows the credit ratings of the investments in our Investment Portfolio as of September 30, 2018 and December 31, 2017, based upon the rating scale of Standard & Poor’s Ratings Services:
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Investment Portfolio as of (in thousands) | ||||||||||||||
September 30, 2018 | December 31, 2017 | |||||||||||||
Standard & Poor’s rating | Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | ||||||||||
BB | $ | — | — | % | $ | 66,725 | 1.7 | % | ||||||
BB- | 30,991 | 0.8 | 30,512 | 0.8 | ||||||||||
B+ | 9,395 | 0.2 | 52,336 | 1.3 | ||||||||||
B | 157,182 | 3.8 | 184,924 | 4.7 | ||||||||||
B- | 206,675 | 5.0 | 110,375 | 2.8 | ||||||||||
CCC+ | 347,597 | 8.4 | 438,159 | 11.0 | ||||||||||
CCC | 167,857 | 4.1 | 171,561 | 4.3 | ||||||||||
CCC- | 31,602 | 0.8 | 34,370 | 0.9 | ||||||||||
CC | — | — | 9,114 | 0.2 | ||||||||||
D | 6,114 | 0.2 | — | — | ||||||||||
Not rated | 3,158,858 | 76.7 | 2,870,333 | 72.3 | ||||||||||
Total | $ | 4,116,271 | 100.0 | % | $ | 3,968,409 | 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 portfolio companies’ interest payment obligations.
PIK Summary as of ($ in thousands) (1) | September 30, 2018 | December 31, 2017 | ||||||
Total number of all investments with PIK feature | 11 | 11 | ||||||
Par value of all investments with PIK feature | $ | 383,126 | $ | 366,248 | ||||
Total number of all investments that have active PIK election | 11 | 11 | ||||||
Par value of all investments that have active PIK election | $ | 383,126 | $ | 366,248 | ||||
Percent of debt investment portfolio with active PIK election, at par value | 10.9 | % | 10.5 | % | ||||
Number of originated investments with PIK feature and active PIK election | 11 | 10 | ||||||
Par value of originated investments with PIK feature and active PIK election | $ | 383,126 | $ | 359,563 | ||||
(1) | Includes investments on non-accrual status. |
Nine Months Ended September 30, | ||||||||
PIK Interest Income Activity for the Year Ended (in thousands) | 2018 | 2017 | ||||||
PIK interest income | $ | 15,530 | $ | 12,776 | ||||
PIK interest income as a percentage of interest income and PIK interest income | 5.8 | % | 5.0 | % | ||||
PIK interest income as a percentage of total investment income | 5.1 | % | 4.4 | % | ||||
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As of September 30, 2018, our Investment Portfolio consisted of 140 portfolio companies, diversified across 24 industry classifications, as compared to our Investment Portfolio as of December 31, 2017 which consisted of 113 portfolio companies, diversified across 21 industry classifications. The following table presents a summary of our Investment Portfolio as of September 30, 2018 and December 31, 2017, arranged by industry classifications of the portfolio companies:
Investment Portfolio as of (in thousands) | ||||||||||||||
September 30, 2018 | December 31, 2017 | |||||||||||||
Industry Classification | Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | ||||||||||
Capital Goods | $ | 671,952 | 16.3 | % | $ | 764,598 | 19.3 | % | ||||||
Software & Services | 495,458 | 12.0 | 453,296 | 11.4 | ||||||||||
Diversified Financials | 485,934 | 11.8 | 398,106 | 10.0 | ||||||||||
SCJV | 307,458 | 7.5 | 300,652 | 7.6 | ||||||||||
Retailing | 297,678 | 7.2 | 267,358 | 6.7 | ||||||||||
Consumer Durables & Apparel | 234,889 | 5.7 | 251,908 | 6.3 | ||||||||||
Health Care Equipment & Services | 219,177 | 5.3 | 140,339 | 3.6 | ||||||||||
Real Estate | 183,731 | 4.5 | 199,957 | 5.0 | ||||||||||
Transportation | 160,391 | 3.9 | 125,080 | 3.2 | ||||||||||
Materials | 151,481 | 3.7 | 215,827 | 5.5 | ||||||||||
Automobiles & Components | 125,976 | 3.1 | 227,742 | 5.8 | ||||||||||
Consumer Services | 113,726 | 2.8 | 79,605 | 2.0 | ||||||||||
Food & Staples Retailing | 99,148 | 2.4 | 53,280 | 1.3 | ||||||||||
Household & Personal Products | 97,679 | 2.4 | 104,334 | 2.6 | ||||||||||
Commercial & Professional Services | 93,583 | 2.3 | 114,560 | 2.9 | ||||||||||
Insurance | 86,277 | 2.1 | 27,628 | 0.7 | ||||||||||
Technology Hardware & Equipment | 81,132 | 2.0 | 54,228 | 1.4 | ||||||||||
Energy | 70,622 | 1.7 | 85,053 | 2.1 | ||||||||||
Food, Beverage & Tobacco | 54,607 | 1.3 | 21,455 | 0.5 | ||||||||||
Semiconductors & Semiconductor Equipment | 37,995 | 0.9 | 20,698 | 0.5 | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences | 20,003 | 0.5 | — | — | ||||||||||
Banks | 15,269 | 0.4 | 15,105 | 0.4 | ||||||||||
Media & Entertainment | 9,566 | 0.2 | 47,600 | 1.2 | ||||||||||
Telecommunication Services | 1,305 | — | — | — | ||||||||||
Application Software | 1,234 | — | — | — | ||||||||||
Total | $ | 4,116,271 | 100.0 | % | $ | 3,968,409 | 100.0 | % | ||||||
Portfolio Asset Quality
In addition to various risk management and monitoring tools, the Joint Advisor uses a risk grading system to characterize and monitor the expected level of returns on each investment in our portfolio. The Joint Advisor uses a risk grading scale of A to E. The following is a description of the conditions associated with each risk grade:
Risk Grades | Summary Description | |
A | Investment is performing as expected and there are no concerns about the portfolio company’s performance or ability to meet covenant requirements. | |
B | No concern about repayment of both interest and our cost basis but there may be some concerns about the company’s recent performance or trends in the industry. | |
C | Expect to fully recover both interest and our cost basis but covenant headroom is tight and a covenant violation is possible or the company and/or industry are facing headwinds. | |
D | Concerned about the recoverability of principal or interest or a material covenant has been violated. | |
E | Investment is in or near default. | |
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The following table shows the distribution of our Investment Portfolio on the A to E risk grading scale at fair value as of September 30, 2018 and December 31, 2017:
Investment Portfolio as of (in thousands) | ||||||||||||||
September 30, 2018 | December 31, 2017 | |||||||||||||
Risk Grade | Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | ||||||||||
A | $ | 1,592,512 | 38.7 | % | $ | 1,682,750 | 42.4 | % | ||||||
B | 1,433,765 | 34.8 | 1,190,791 | 30.0 | ||||||||||
C | 972,748 | 23.6 | 846,518 | 21.3 | ||||||||||
D | 55,474 | 1.4 | 135,683 | 3.4 | ||||||||||
E | 61,772 | 1.5 | 112,667 | 2.9 | ||||||||||
Total | $ | 4,116,271 | 100.0 | % | $ | 3,968,409 | 100.0 | % | ||||||
Strategic Credit Opportunities Partners, LLC
In May 2016, SCJV was formed pursuant to the terms of a limited liability company agreement between our company and Conway. Pursuant to the terms of the agreement, we and Conway each have 50% voting control of SCJV and together are required to agree on all investment decisions as well as all other significant actions for SCJV. SCJV was formed to invest its capital in a range of investments, including senior secured loans (both first lien and second lien) to middle market companies, broadly syndicated loans, equity, warrants and other investments. We, along with Conway, have agreed to provide capital to SCJV of up to $500 million in the aggregate. We will provide 87.5% and 12.5%, respectively, of the committed capital. As administrative agent of SCJV, we perform certain day-to-day management responsibilities on behalf of SCJV. As of September 30, 2018, the Company and Conway have funded approximately $336.03 million to SCJV, of which $294.03 million was from the Company.
Jersey City Funding LLC (“Jersey City Funding”), a wholly-owned subsidiary of SCJV, has a revolving credit facility with Goldman Sachs Bank (as amended, the "GS Credit Facility"), which provides for up to $350 million and $250 million of borrowings as of September 30, 2018 and December 31, 2017, respectively. The GS Credit Facility contains an "accordion" feature that allows Jersey City Funding, under certain circumstances, to increase the size of the facility to a maximum of $400 million. The GS Credit Facility provides loans in U.S. dollars, Canadian dollars, Australian dollars, Euros and Pound Sterling. U.S. dollar loans will bear interest at the rate of LIBOR plus 2.25%. Foreign currency loans will bear interest at the floating rate plus the spread applicable to the specified currency. Jersey City Funding also pays a commitment fee of up to 0.50% on undrawn commitments. The GS Credit Facility matures on September 29, 2021. As of September 30, 2018 and December 31, 2017, total outstanding borrowings under the GS Credit Facility were $321.34 million and $166.02 million, respectively. Borrowings under the GS Credit Facility are secured by substantially all of the assets of Jersey City Funding.
Prior to February 15, 2018, Charlotte Funding LLC (“Charlotte Funding”), a wholly-owned subsidiary of SCJV, had a $165 million credit facility with Bank of America Merrill Lynch (the " BAML Credit Facility "). As of December 31, 2017, there were $102.20 million of borrowings outstanding under the BAML Credit Facility. On February 15, 2018, Charlotte Funding fully paid down and terminated the BAML Credit Facility.
During the three and nine months ended September 30, 2018 we sold investments with a fair value $14.20 million and $318.13 million, respectively, to SCJV and recognized a net realized (loss) gain of $(0.23) million and $2.02 million, respectively, in connection with the transactions. As of September 30, 2018, $14.26 million of these sales to SCJV are included in receivable for investments sold in the condensed consolidated statements of assets and liabilities.
As of September 30, 2018 and December 31, 2017, SCJV had total investments with a fair value of $591.54 million and $514.04 million, respectively. As of September 30, 2018 and December 31, 2017, SCJV had no investments on non-accrual status.
The investment portfolio and SCJV’s portfolio had 11 and 16 debt investment positions in common as of September 30, 2018 and December 31, 2017, respectively, and 18 portfolio companies in common as of each of September 30, 2018 and December 31, 2017.
See Note 3. “Investments” in our condensed consolidated financial statements for more details on SCJV’s portfolio and summary balance sheet information as of September 30, 2018 and December 31, 2017, and summary statement of operations information for the three and nine months ended September 30, 2018.
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Capital Resources and Liquidity
Sources and Uses of Capital
Our capital resources and liquidity are derived primarily from cash flows from operations, including investment sales and repayments and borrowings. Our primary uses of funds include (i) investments in portfolio companies, (ii) distributions to our shareholders, (iii) payment of principal and interest on our borrowings, and (iv) operating expenses. We have used, and expect to continue to use, proceeds from the turnover of our Investment Portfolio, and borrowings under our credit facilities to finance our investment activities primarily focused on directly originated investments in portfolio companies.
Liquidity
During the nine months ended September 30, 2018 and 2017, proceeds from sales of investments and principal payments totaled $1.09 billion and $1.26 billion, respectively. In addition, distributions reinvested in the company as a percentage of total distributions paid during the nine months ended September 30, 2017 was 49.2%, or $88.09 million. As of September 30, 2018, we had the following sources of immediate liquidity available to us:
(in thousands) | Amount | ||
Cash and Foreign Currency | $ | 148,736 | |
Credit Facilities-Effective Borrowing Capacity(1) | 376,289 | ||
Total | $ | 525,025 | |
(1) | Effective borrowing capacity represents additional amounts that we could borrow from our credit facilities based on collateral in place as of September 30, 2018. |
Borrowings
Our outstanding borrowings as of September 30, 2018 and December 31, 2017 were as follows:
As of September 30, 2018 | As of December 31, 2017 | ||||||||||||||||||||||||
Total Aggregate Principal Amount Committed | Principal Amount Outstanding | Carrying Value | Total Aggregate Principal Amount Committed | Principal Amount Outstanding | Carrying Value | ||||||||||||||||||||
2018 Senior Secured Revolving Credit Facility(1) | $ | 1,450,000 | (2) | $ | 1,139,226 | $ | 1,139,226 | $ | — | $ | — | $ | — | ||||||||||||
2013 Senior Secured Revolving Credit Facility(1) | — | — | — | 958,000 | 615,000 | 615,000 | |||||||||||||||||||
SMBC Credit Facility(1) | 300,000 | 200,000 | 200,000 | 300,000 | 110,000 | 110,000 | |||||||||||||||||||
JPM Credit Facility(1) | 300,000 | 240,000 | 240,000 | 300,000 | 240,000 | 240,000 | |||||||||||||||||||
Total credit facilities | 2,050,000 | 1,579,226 | 1,579,226 | 1,558,000 | 965,000 | 965,000 | |||||||||||||||||||
2014 Senior Secured Term Loan | — | — | — | 385,000 | 385,000 | 382,768 | (3) | ||||||||||||||||||
2022 Notes | 245,000 | 245,000 | 241,267 | (4) | 245,000 | 245,000 | 240,612 | (4) | |||||||||||||||||
Total borrowings | $ | 2,295,000 | $ | 1,824,226 | $ | 1,820,493 | $ | 2,188,000 | $ | 1,595,000 | $ | 1,588,380 | |||||||||||||
(1) | Subject to borrowing base and leverage restrictions. |
(2) | Includes an accordion feature that allows the Company under certain circumstances to increase the size of the 2018 Senior Secured Revolving Credit Facility to a maximum of $2.18 billion. |
(3) | Comprised of outstanding principal less the unaccreted original issue discount of $0.58 million and deferring financing costs of $1.65 million as of December 31, 2017. |
(4) | Comprised of outstanding principal less deferred financing costs of $3.73 million and $4.39 million as of September 30, 2018 and December 31, 2017, respectively. |
For the nine months ended September 30, 2018 and 2017, our total all-in cost of financing, including fees and expenses, was 5.14% and 4.20%, 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 $2.30 billion that is available to us from our existing financing arrangements.
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See Note 10. “Borrowings” and Note 14. "Subsequent Events" in our condensed consolidated financial statements for additional disclosures regarding our borrowings.
Total Return Swaps
On June 30, 2017, Halifax Funding LLC (“Halifax Funding”), our wholly owned, special purpose financing subsidiary, terminated its TRS arrangement with The Bank of Nova Scotia (“BNS”). Upon termination of the TRS, Halifax Funding recognized $5.50 million of net realized losses, including a make-whole fee of $6.40 million, an amount based on a minimum spread amount that would have been earned by BNS over the life the TRS agreements.
See Note 4. “Derivative Instruments” in our condensed consolidated financial statements for additional disclosures on the TRS.
Commitments and Contingencies
See Note 11. “Commitments and Contingencies” in our condensed consolidated financial statements for information on our commitments and contingencies as of September 30, 2018.
Distributions to Shareholders
We intend to pay quarterly distributions to our shareholders in the form of cash. Registered shareholders may elect to reinvest their distributions as additional shares of our common stock under our distribution reinvestment plan. Dividends are taxable to our shareholders even if they are reinvested in additional shares of our common stock. The following table reflects the cash distributions per share and the total amount of distributions that we have declared on our common stock during the nine months ended September 30, 2018 and 2017:
(in thousands, except per share amounts) | Per Share | Amount | ||||||
Quarter Ended: | ||||||||
September 30, 2018 | $ | 0.40219 | $ | 49,920 | ||||
June 30, 2018 (1) | 0.50344 | 62,964 | ||||||
March 31, 2018 | 0.40219 | 51,131 | ||||||
$ | 1.30782 | $ | 164,015 | |||||
Quarter Ended: | ||||||||
September 30, 2017 | $ | 0.40217 | $ | 54,628 | ||||
June 30, 2017 | 0.45288 | 62,068 | ||||||
March 31, 2017 | 0.45288 | 62,259 | ||||||
$ | 1.30793 | $ | 178,955 | |||||
(1) Included a special distribution of $0.10125 per share | ||||||||
We have adopted a distribution reinvestment plan that provides for reinvestment of any distributions we declare in cash on behalf of our shareholders, unless a shareholder elects to receive cash (the "DRP"). Pursuant to the DRP, we will reinvest all distributions declared by the Board on behalf of registered shareholders who do not elect to receive their distributions in cash (the “Participants”). As a result, if the Board declares a distribution, then shareholders who have not opted out of the DRP will have their distributions automatically reinvested in additional shares of our common stock as described below.
With respect to each distribution pursuant to the DRP, we reserve the right to either issue new shares of our common stock or purchase such shares in the open market. Unless we, in our sole discretion, otherwise direct the plan administrator, (a) if the market price per share is equal to or greater than the net asset value per share, then we will issue shares of our common stock at the greater of (i) net asset value per share and (ii) 95% of the market price per share; and (b) if the market price per share is less than the net asset value per share, then, in our sole discretion, (i) shares of our common stock will be purchased in open market transactions for the accounts of Participants to the extent practicable, or (ii) we will issue shares of our common stock at net asset value per share. Pursuant to the terms of the DRP, the number of shares of our common stock to be issued to a Participant will be determined by dividing the total dollar amount of the distribution payable to a Participant by the price per share at which we issue such shares. However, shares purchased in open market transactions by the plan administrator will be allocated to a Participant based on the average purchase price, excluding any brokerage charges or other charges, of all shares of our common stock purchased in the open market. The plan administrator will establish an account for shares acquired through the DRP for each shareholder who has not elected to receive distributions in cash.
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We had sufficient taxable income to support 100% of our declared distributions for the nine months ended September 30, 2018. We routinely disclose the sources of funds used to pay distributions to our registered shareholders in periodic reports that accompany (i) quarterly account statements and (ii) quarterly distribution checks that are prepared and sent directly by our transfer agent to our registered shareholders. See Note 8. “Distributions” in our condensed consolidated financial statements for a discussion of the sources of funds used to pay distributions on a GAAP basis for the periods presented.
Share Repurchase Program
In February 2018, our Board authorized a share repurchase program. Under the program, we could repurchase up to $50 million in the aggregate of our outstanding common stock in the open market at prices below the current net asset value per share, in accordance with the guidelines specified in Rule 10b-18 of the Exchange Act. As a result, on March 15, 2018, we entered into a share repurchase plan (as amended, the "Repurchase Plan"). Under the Repurchase Plan, we could repurchase up to $50 million in the aggregate of our outstanding common stock in the open market at prices below the current net asset value per share, in accordance with the guidelines specified in Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The timing, manner, price and amount of any share repurchases were determined by us, in our discretion, based upon the evaluation of economic and market conditions, the stock price, applicable legal and regulatory requirements and other factors. On July 20, 2018, we completed all repurchases under the Repurchase Plan with the repurchase of 3,010,945 shares for an aggregate purchase price of $50.00 million and an average price per share of $16.61, including commissions paid.
Results of Operations
As of September 30, 2018, our Investment Portfolio had a fair value of $4.12 billion. The majority of our investments at September 30, 2018 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, 2018 and 2017.
The following is a summary of our operating results for the three and nine months ended September 30, 2018 and 2017:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Total investment income | $ | 103,861 | $ | 97,593 | $ | 307,267 | $ | 290,915 | ||||||||
Total operating expense | 59,336 | 45,253 | 164,201 | 132,797 | ||||||||||||
Net investment income before taxes | 44,525 | 52,340 | 143,066 | 158,118 | ||||||||||||
Income tax expense (benefit), including excise tax | 741 | (1,024 | ) | 366 | (703 | ) | ||||||||||
Net investment income | 43,784 | 53,364 | 142,700 | 158,821 | ||||||||||||
Net realized losses | (25,411 | ) | (22,506 | ) | (44,934 | ) | (83,912 | ) | ||||||||
Net change in unrealized appreciation (depreciation) | 13,041 | 14,423 | 44,625 | 92,054 | ||||||||||||
Net increase in net assets resulting from operations | $ | 31,414 | $ | 45,281 | $ | 142,391 | $ | 166,963 | ||||||||
Investment income
Investment income consisted of the following for the three and nine months ended September 30, 2018 and 2017:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Interest income | $ | 84,102 | $ | 82,019 | $ | 252,260 | $ | 244,770 | ||||||||
Payment-in-kind interest income | 5,645 | 5,237 | 15,530 | 12,776 | ||||||||||||
Subtotal | 89,747 | 87,256 | 267,790 | 257,546 | ||||||||||||
Fee income | 1,881 | 4,416 | 6,767 | 12,666 | ||||||||||||
Dividend and other income | 12,233 | 5,921 | 32,710 | 20,703 | ||||||||||||
Total investment income | $ | 103,861 | $ | 97,593 | $ | 307,267 | $ | 290,915 | ||||||||
Our average debt investment balance was $3.52 billion and $3.50 billion for the three and nine months ended September 30, 2018 as compared to $3.62 billion and $3.66 billion during the same period in 2017, respectively, based on par value. In addition to changes in the size of the portfolio of debt investments, 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
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debt investments. We recorded interest income from these sources in the combined amount of $4.67 million and $21.56 million for the three and nine months ended September 30, 2018 and $2.10 million and $16.52 million for the three and nine months ended September 30, 2017, respectively. For the three and nine months ended September 30, 2018, 6.3% and 5.8%, respectively, of our total interest income including PIK interest income was attributable to PIK interest income as compared to 6.0% and 5.0% for the same period in 2017. The increase in PIK interest income during the nine months ended September 30, 2018 is primarily due to the return to full accrual status of a PIK investment that had previously been on partial accrual and the addition of new PIK investments. These increases were partially offset by investments that were sold or placed on non-accrual. As of September 30, 2018, our weighted average annual yield on our accruing debt investments was 10.4% based on amortized cost, as defined above in “Portfolio and Investment Activity.” As of September 30, 2018, approximately 75.1% 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 during the nine months ended September 30, 2017 is not included in investment income in the 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 derivatives for amounts not yet received from the counterparty as of period end.
Our fee income consists of transaction-based fees and is nonrecurring. The decrease in fee income during the three and nine months ended September 30, 2018 as compared to the same periods in 2017 was primarily due to non-recurring break-up fees earned during the three and nine months ended September 30, 2017 as well as a higher level of capital structuring fees earned during the three and nine months ended September 30, 2017. Going forward, we expect to earn additional structuring services fees on Originated Strategies transactions as a result of our persistent focus on direct lending activities. See Note 7. “Fee Income” in our condensed consolidated financial statements for additional information on fee income.
The increase in dividend and other income during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 is primarily due to an increase in the dividends earned on our investment in SCJV.
Operating expenses
Our operating expenses for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Investment advisory fees | $ | 15,817 | $ | 21,173 | $ | 46,595 | $ | 62,858 | ||||||||
Interest expense | 23,663 | 18,177 | 65,749 | 47,532 | ||||||||||||
Performance-based incentive fees | 10,946 | 2,046 | 35,029 | 7,721 | ||||||||||||
Professional services | 5,885 | 1,045 | 9,778 | 4,050 | ||||||||||||
Investment adviser expenses | 905 | 373 | 1,365 | 2,982 | ||||||||||||
Administrative services | 827 | 876 | 2,284 | 2,486 | ||||||||||||
Custodian and accounting fees | 435 | 439 | 1,273 | 1,275 | ||||||||||||
Offering expense | — | 67 | — | 394 | ||||||||||||
Director fees and expenses | 118 | 131 | 416 | 432 | ||||||||||||
Other | 740 | 926 | 1,712 | 3,067 | ||||||||||||
Total operating expenses | $ | 59,336 | $ | 45,253 | $ | 164,201 | $ | 132,797 | ||||||||
Investment advisory fees and performance-based incentive fees — Since the Listing, pursuant to the terms of the Former KKR Investment Advisory Agreement and the current Joint Advisor Investment Advisory Agreement, our investment advisory fees are calculated at an annual rate of 1.5% of our average gross assets. Prior to the Listing, our investment advisory fees were calculated at an annual rate of 2% of our average gross assets. The decrease in these fees during the three and nine months ended September 30, 2018 was primarily attributable to the decrease in the annual rate of the fees.
The Joint Advisor, as our investment adviser, is and KKR and CNL, as our former investment advisers, were also eligible to receive incentive fees based on our performance. Our performance-based incentive fee, which is comprised of two parts, consisted of the following for the three and nine months ended September 30, 2018 and 2017:
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Subordinated Incentive fee on income | $ | 10,946 | $ | 2,046 | $ | 35,029 | $ | 7,721 | ||||||||
Incentive fee on capital gains | — | — | — | — | ||||||||||||
Total performance-based incentive fees | $ | 10,946 | $ | 2,046 | $ | 35,029 | $ | 7,721 | ||||||||
Prior to the Listing, a subordinated incentive fee on income was payable to our Former Advisers each calendar quarter if our pre-incentive fee net investment income (as defined in the Former CNL Investment Advisory Agreement and approved by our Board) exceeded the 1.75% quarterly preference return to our shareholders (the ratio of pre-incentive fee net investment income divided by average adjusted capital). Pursuant to the Former KKR Investment Advisory Agreement, average net assets replaced average adjusted capital in the calculation of the subordinated incentive fee on income.
Under the Joint Advisor Investment Advisory Agreement, the subordinated incentive fee on income is subject to a total return requirement, which provides generally that no incentive fee will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the same period. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of all of our pre-incentive fee net investment income when our pre-incentive fee net investment income exceeds the applicable quarterly hurdle rate for such calendar quarter, subject to the catch-up provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of our pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for the then-current and 11 preceding calendar quarters.
Under the Former CNL Investment Advisory Agreement, the subordinated incentive fee on income became subject to a total return requirement on January 1, 2017. The terms of the total return requirement under the Former CNL Investment Advisory Agreement were similar to the Joint Advisor Investment Advisory Agreement, except the calculation covered the then-current and three preceding calendar quarters and base management fees were added to the calculation of "cumulative net increase in net assets resulting from operations." The Former KKR Investment Advisory Agreement contained a total return requirement similar to that in the Former CNL Investment Advisory Agreement. Additionally, concurrently with the Listing, KKR agreed to certain waivers. Specifically, KKR agreed to irrevocably waive subordinated incentive fees that would otherwise be payable under the Investment Advisory Agreement up to the amount that would cause the total subordinated fees paid in any calendar quarter (or partial calendar quarter for which the subordinated incentive fee is required to be calculated) to not exceed the amount that would be payable if the following revised definitions had applied in such period: (a) “look back period” as defined on or after December 31, 2017 to be the most recently completed quarter and the 11 preceding calendar quarters and (b) “cumulative net increase in net assets resulting from operations” as defined to remove the addition of management fees paid following the Listing. Neither the total return requirement nor the waivers resulted in a reduction of the amount of incentive fees payable to the advisers for the nine months ended September 30, 2018 and 2017.
The annual incentive fees on capital gains recorded for GAAP purposes is equal to (i) 20% of our realized and unrealized capital gains on a cumulative basis since inception, net of all realized capital losses and unrealized depreciation on a cumulative basis from inception, less (ii) the aggregate amount of any previously paid incentive fees on capital gains. The calculation of performance-based incentive fees disregards any net realized and unrealized gains associated with the TRS interest spread earned through the termination of the TRS on June 30, 2017. In addition, for financial reporting purposes, in accordance with GAAP, we include unrealized appreciation on our Investment Portfolio and derivative instruments in the calculation of incentive fees on capital gains; however, such amounts are not payable by us unless and until the net unrealized appreciation is actually realized. The actual amount of incentive fees on capital gains that are due and payable to the investment adviser is determined at the end of the calendar year.
We did not record any incentive fees on capital gains for the nine months ended September 30, 2018 and 2017. As of September 30, 2018, we had cumulative realized and unrealized losses of $389.78 million in excess of our cumulative realized capital gains since inception. The Former Advisers earned incentive fees on capital gains of $2.32 million during the year ended December 31, 2013, at which time we had cumulative net realized capital gains of $11.61 million in excess of our unrealized losses. Due to the cumulative nature of the incentive fee on capital gains, we will not owe the investment adviser 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 more than $11.61 million.
See “—Contractual Obligations —Investment Advisory Agreement,” below for further details about the performance-based incentive fees. See also “—Transition of Investment Advisory Services," above and Note 14. "Subsequent Events" in the condensed consolidated financial statements for more information about our investment advisory agreement.
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Interest expense – The components of interest expense for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Stated interest expense | $ | 20,081 | $ | 16,425 | $ | 58,162 | $ | 42,172 | ||||||||
Unused commitment fees | 565 | 454 | 1,729 | 1,824 | ||||||||||||
Amortization of deferred financing costs | 2,642 | 1,194 | 5,276 | 3,232 | ||||||||||||
Accretion of discount on term loan | 375 | 104 | 582 | 304 | ||||||||||||
Total interest expense | $ | 23,663 | $ | 18,177 | $ | 65,749 | $ | 47,532 | ||||||||
The increase in interest expense during the three and nine months ended September 30, 2018 was attributable to the increase in our weighted average debt outstanding to $1.75 billion and $1.71 billion, respectively, as compared to $1.61 billion and $1.52 billion during the three and nine months ended September 30, 2017, respectively, as well as the increase in our all-in cost of financing to 5.36% and 5.14% for the three and nine months ended September 30, 2018, respectively, from 4.54% and 4.20% for the three and nine months ended September 30, 2017, respectively. Interest expense also increased during the three and nine months ended September 30, 2018 due to $1.64 million of accelerated amortization of deferred financing costs upon the termination of the 2014 Senior Secured Term Loan and 2013 Senior Secured Revolving Credit Facility.
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 – The increase in professional services expense during the three and nine months ended September 30, 2018 is primarily due to legal and advisory expenses incurred in connection with the Proposed Merger. The following table presents our expenses associated with the Proposed Merger during the three and nine months ended September 30, 2018:
(in thousands) | Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||
Professional services | $ | 4,950 | $ | 6,024 | ||||
Other | 275 | 275 | ||||||
Total | $ | 5,225 | $ | 6,299 | ||||
The decrease in investment adviser expenses for the three and nine months ended September 30, 2017 is due to a decrease in reimbursable expenses incurred by KKR related to the restructuring of existing investments and the underwriting and structuring of new transactions. Our offering expenses were capitalized as deferred offering expenses and then subsequently expensed over a 12-month period. As a result of the closing of our common stock offering in October 2016, all deferred offering expenses were fully expensed as of December 31, 2017. We did not record any offering expense during the three and nine months ended September 30, 2018 and 2017. Other expenses during the three and nine months ended September 30, 2017 were higher than during the three and nine months ended September 30, 2018 due to the expenses related to the Listing.
During the three and nine months ended September 30, 2018 and 2017, the ratio of core operating expenses (excluding investment advisory fees, performance-based incentive fees, interest expense and organization and offering expenses) to average net assets was 1.43% and 0.90%, respectively, as compared to 0.55% and 0.69% during the three and nine months ended September 30, 2017, respectively.
Income tax expense, including excise tax
We have elected to be treated as a RIC under the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must, among other things, timely distribute to our shareholders generally at least 90% of our investment company taxable income, as defined by the Code, for each year. In order to maintain our RIC status, we, among other things, have made and intend to continue to make the requisite distributions, including spillback distributions, to our shareholders which will generally relieve us from U.S. federal corporate-level income taxes.
Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current calendar year dividend distributions into the next tax year and pay a 4% excise tax on the amount of current year taxable income in excess of distributions, as required. In connection with the finalization of our federal tax return for the year ended December 31, 2017, we recorded additional excise tax expense of $0.49 million during the three and nine months
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ended September 30, 2018. In connection with the finalization of our federal tax return for the year ended December 31, 2016, we recorded an excise tax benefit of $1.09 million during the three and nine months ended September 30, 2017.
Certain of our consolidated subsidiaries are subject to U.S. federal and state income taxes and foreign income taxes. Certain of our investments are also subject to foreign tax withholding. For the three and nine months ended September 30, 2018 we recorded a net tax expense (benefit) of approximately $0.25 million and $(0.06) million, respectively, as compared to $(1.35) million and $0.77 million during the three and nine months ended September 30, 2017, respectively, for these subsidiaries. The net tax expense (benefit) includes foreign tax withholding of $0.06 million for the nine months ended September 30, 2018, and $(1.42) million and $0.39 million, for the three and nine months ended September 30, 2017, respectively. There was no foreign tax withholding recorded for the three months ended September 30, 2018. The foreign tax withholding is recorded net against the related interest income in the condensed consolidated statements of operations.
Net realized gain and losses—Net realized gains and losses for the three and nine months ended September 30, 2018 and 2017 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net realized gains (losses) on investments | $ | (28,107 | ) | $ | (19,600 | ) | $ | (57,031 | ) | $ | (97,121 | ) | ||||
Net realized gains (losses) on derivative instruments | 2,686 | (4,377 | ) | 9,574 | 9,856 | |||||||||||
Net realized losses on foreign currency transactions | 10 | 1,471 | 2,523 | 3,353 | ||||||||||||
Net realized gains (losses) | $ | (25,411 | ) | $ | (22,506 | ) | $ | (44,934 | ) | $ | (83,912 | ) | ||||
The net realized loss on investments for the three and nine months ended September 30, 2018 consisted of a net loss on the disposition of investments of $27.54 million and $67.36 million, respectively, and a net currency gain (loss) on those investments of $(0.57) million and $10.33 million, respectively, that were denominated in foreign currencies. The realized losses were driven primarily by the realization of unrealized losses previously recorded. The net realized gain on investments for the three and nine months ended September 30, 2017 consisted of a net loss on the disposition of investments of $9.59 million and $78.10 million, respectively, and a net currency loss of $10.01 million and $19.02 million, respectively, on those investments that were denominated in foreign currencies.
Our net realized gains (losses) on derivative instruments for the three and nine months ended September 30, 2018 and 2017 consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net realized gains (losses) on: | ||||||||||||||||
Cross currency swaps | $ | 1,023 | $ | 808 | $ | 1,362 | $ | 12,854 | ||||||||
Foreign currency forward contracts | 2,604 | (7,848 | ) | 7,081 | (7,926 | ) | ||||||||||
Interest rate swaps | (941 | ) | 2,663 | 1,131 | 1,914 | |||||||||||
TRS | — | — | — | 3,014 | ||||||||||||
$ | 2,686 | $ | (4,377 | ) | $ | 9,574 | $ | 9,856 | ||||||||
See Note 4. “Derivative Instruments” in our condensed consolidated financial statements for more information about the components of the realized gain on TRS recorded during the three and nine months ended September 30, 2017.
As described in Note 4. “Derivative Instruments” in our 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. 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 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, 2018 and 2017, net unrealized appreciation and depreciation consisted of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||||||||||
Investments | $ | 10,069 | $ | 34,373 | $ | 32,715 | $ | 155,911 | ||||||||
Derivative instruments | 4,988 | (10,812 | ) | 15,405 | (62,683 | ) | ||||||||||
Foreign currency translation | (48 | ) | (1,911 | ) | (263 | ) | (2,636 | ) | ||||||||
Provision for taxes | (1,968 | ) | (7,227 | ) | (3,232 | ) | 1,462 | |||||||||
Net change in unrealized appreciation | $ | 13,041 | $ | 14,423 | $ | 44,625 | $ | 92,054 | ||||||||
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) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net change in unrealized appreciation (depreciation) on investments: | ||||||||||||||||
Unrealized appreciation | $ | 75,641 | $ | 53,254 | $ | 149,132 | $ | 153,533 | ||||||||
Unrealized depreciation | (63,891 | ) | (31,836 | ) | (143,839 | ) | (131,609 | ) | ||||||||
Net unrealized (appreciation) depreciation reversal related to net realized gains or losses (1) | (1,681 | ) | 12,955 | 27,422 | 133,987 | |||||||||||
Total net unrealized appreciation (depreciation) | $ | 10,069 | $ | 34,373 | $ | 32,715 | $ | 155,911 | ||||||||
(1) | Represents the unrealized appreciation or depreciation recorded on the related asset at the end of prior period. |
Approximately 7.5% of our Investment Portfolio, measured at fair value, is denominated in foreign currencies. Such investments expose our portfolio to the risk that the value of the investments will be affected by changes in exchange rates between the currency in which the investments are denominated and the currency in which the investments are made. Our practice is to minimize these risks in certain cases by employing hedging techniques, including using foreign currency forward contracts and cross currency swaps, to reduce exposure to changes in exchange rates when a meaningful amount of capital has been invested in foreign currencies. We do not, however, hedge our currency exposure in all currencies or all investments.
The success of our hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to (or be able to) establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.
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. 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.
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Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net realized and unrealized gains (losses) on investments | $ | (18,038 | ) | $ | 14,773 | $ | (24,316 | ) | $ | 58,790 | ||||||
Net realized and unrealized gains (losses) on foreign currency forward contracts | 2,689 | (5,102 | ) | 9,674 | (17,161 | ) | ||||||||||
Net realized and unrealized losses on cross currency swaps | 2,123 | (8,229 | ) | 11,293 | (30,990 | ) | ||||||||||
$ | (13,226 | ) | $ | 1,442 | $ | (3,349 | ) | $ | 10,639 | |||||||
The net realized and unrealized losses on investments during the nine months ended September 30, 2018, 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 generally attributable to unrealized losses incurred on certain investments. These losses were partially offset by an improvement in performance for a few select investments, a tightening of credit spreads and a general improvement in market conditions experienced during the nine months ended September 30, 2018. The net realized and unrealized gains and losses on investments during the nine months ended September 30, 2017, 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 generally attributable to a tightening of credit spreads and a general improvement in market conditions experienced during the nine months ended September 30, 2017. These gains were offset by unrealized losses incurred on our investments in Amtek.
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) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Net change in unrealized appreciation (depreciation) on TRS: | ||||||||||||||||
Unsettled amounts at end of period: | ||||||||||||||||
Spread interest income | $ | — | $ | — | $ | — | $ | — | ||||||||
Realized gain (loss) on TRS assets | — | — | — | — | ||||||||||||
Receipt of prior period unsettled amounts | — | — | — | (3,787 | ) | |||||||||||
Unrealized appreciation (depreciation) on TRS assets | — | — | — | 390 | ||||||||||||
— | — | — | (3,397 | ) | ||||||||||||
Net change in unrealized appreciation (depreciation) on foreign currency forward contracts: | ||||||||||||||||
Unrealized appreciation | 1,178 | 960 | 2,767 | 960 | ||||||||||||
Unrealized depreciation | (196 | ) | (6,054 | ) | (196 | ) | (6,691 | ) | ||||||||
Net unrealized (appreciation) depreciation reversal related to net realized gains or losses upon maturity/termination (1) | (897 | ) | 7,840 | 22 | (3,504 | ) | ||||||||||
85 | 2,746 | 2,593 | (9,235 | ) | ||||||||||||
Net change in unrealized appreciation (depreciation) on cross currency swaps: | ||||||||||||||||
Unrealized appreciation | 1,100 | — | 7,945 | — | ||||||||||||
Unrealized depreciation | — | (9,037 | ) | — | (32,464 | ) | ||||||||||
Net unrealized (appreciation) depreciation reversal related to net realized gains or losses upon maturity/termination (1) | — | — | 1,986 | (11,380 | ) | |||||||||||
1,100 | (9,037 | ) | 9,931 | (43,844 | ) | |||||||||||
Net change in unrealized appreciation (depreciation) on interest rate swaps: | ||||||||||||||||
Unrealized appreciation | 4,191 | 113 | 3,526 | — | ||||||||||||
Unrealized depreciation | (388 | ) | (1,958 | ) | (645 | ) | (3,531 | ) | ||||||||
Net unrealized (appreciation) depreciation reversal related to net realized gains or losses upon maturity/termination | — | (2,676 | ) | — | (2,676 | ) | ||||||||||
3,803 | (4,521 | ) | 2,881 | (6,207 | ) | |||||||||||
Total net change in unrealized (depreciation) appreciation on derivative instruments | $ | 4,988 | $ | (10,812 | ) | $ | 15,405 | $ | (62,683 | ) | ||||||
(1) | Represents the unrealized appreciation or depreciation recorded at the end of prior period. |
The provision for taxes is attributable to investments held in our wholly-owned subsidiaries that are subject to U.S. federal, state and/or foreign income taxes.
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,
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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, 2017.
Net Assets, Net Asset Value per Share, Annual Investment Return and Total Return Since Inception
Net assets decreased $71.62 million and $40.12 million during the nine months ended September 30, 2018 and 2017, respectively. Our operations resulted in net assets increasing $142.39 million and $166.96 million during the nine months ended September 30, 2018 and 2017, respectively. The change in net assets during the nine months ended September 30, 2017 was also partially attributable to increases caused by the reinvestment of distributions in the amount of $88.09 million during the nine months ended September 30, 2017. Net assets decreased due to distributions to shareholders in the amount of $164.02 million and $178.96 million and the repurchase of shares of common stock in the amount of $50.00 million and $116.22 million during the nine months ended September 30, 2018 and 2017, respectively.
Our net asset value per share was $19.44 and $20.01 on September 30, 2018 and 2017, respectively. After considering (i) the overall changes in net asset value per share, (ii) distributions paid of approximately $1.31 per share during each of the nine months ended September 30, 2018 and 2017 and (iii) the assumed reinvestment of those distributions in accordance with our distribution reinvestment plan, the total investment return was 7.5% and 6.1% (not annualized) for shareholders who held our shares over the entire nine-month period ending September 30, 2018 and 2017, respectively.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements which have been prepared in accordance with GAAP. The preparation of our 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 condensed consolidated financial statements describes the significant accounting policies and methods used in the preparation of our condensed consolidated financial statements. We consider the accounting policies listed below to be critical because they involve management judgments and assumptions, requires estimates about matters that are inherently uncertain and are important for understanding and evaluating our reported financial results.
These judgments affect (i) the reported amounts of assets and liabilities, (ii) our disclosure of contingent assets and liabilities as of the dates of the financial statements and (iii) the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially from the amounts reported based on these policies.
Valuation of Investments and Unrealized Gain (Loss) – Our investments consist primarily of investments in senior and subordinated debt of private U.S. companies and are presented in our condensed consolidated financial statements at fair value. See Note 3. “Investments,” in our 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 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 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, based on, among other things, the input of the Joint Advisor, 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 transaction price and subsequently value using (i) market data for similar instruments (e.g., recent transactions or indicative broker quotes), (ii) comparisons to benchmarks, derivatives or 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. These valuation models typically incorporate forward LIBOR (or other) interest rate curves to estimate future cash flows and utilize various techniques to establish a discount rate. 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 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.
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We and our Board 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 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 investments classified as Level 3 as of September 30, 2018 and December 31, 2017:
(in thousands) | September 30, 2018 | December 31, 2017 | ||||||
Fair value of investments classified as Level 3 | $ | 3,355,292 | $ | 3,215,250 | ||||
Total fair value of investments | $ | 4,116,271 | $ | 3,969,097 | ||||
% of fair value classified as Level 3 | 81.5 | % | 81.0 | % | ||||
Number of positions classified as Level 3 | 126 | 114 | ||||||
Total number of positions | 208 | 171 | ||||||
% of positions classified as Level 3 | 60.6 | % | 66.7 | % | ||||
The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2018 and December 31, 2017 are described in Note 5. “Fair Value of Financial Instruments” in our condensed consolidated financial statements, as well as, the directional impact to the valuation from an increase in various unobservable inputs.
As discussed in Note 2. “Significant Accounting Policies” in our condensed consolidated financial statements, our independent third party valuation firm provides a valuation range from which valuation recommendations are formulated. If our Board had determined a fair value of our Level 3 investments that was 2% higher (lower) than the fair value recorded as of September 30, 2018, our earnings per share would have increased (decreased) by $0.53 and our net asset value per share would have increased (decreased) by $0.54.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of September 30, 2018.
Contractual Obligations
Investment Advisory Agreement – On April 9, 2018, we entered into the Joint Advisor Investment Advisory Agreement for the overall management of our investment activities. Pursuant to the Joint Advisor Investment Advisory Agreement, the Joint Advisor earns a base management fee equal to an annual rate of 1.5% of our average gross assets (excluding deferred offering expenses and cash and short-term investments), and an incentive fee based on our performance. The incentive fee was 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 net assets but less than or equal to 2.1875% of average net assets, and (b) 20% of pre-incentive fee net investment income in excess of 2.1875% of average net assets, 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 (i) the interest and fees received on total return swaps, and (ii) 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 subordinated incentive fee on income became subject to a total return requirement, which provides generally that no incentive fee will be payable except to the extent that 20.0% of the cumulative net increase in net assets resulting from operations over the then-current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the same period. Accordingly, any subordinated incentive fee on income that is payable in a calendar quarter will be limited to the lesser of (i) 20.0% of all of our pre-incentive fee net investment income when our pre-incentive fee net investment income exceeds the applicable quarterly hurdle rate for such calendar quarter, subject to the catch-up provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then-current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of our pre-incentive fee net investment income, base management fees prior to the Listing, realized gains and losses and unrealized appreciation and depreciation for the then-current and 11 preceding calendar quarters. There will be no accumulation of amounts on the hurdle rate from quarter to quarter and, accordingly, there will be no clawback of amounts previously paid if subsequent quarters are below the applicable quarterly hurdle rate and there will be no delay of payment if prior quarters are below the applicable quarterly hurdle rate.
As of September 30, 2018, we had accrued a subordinated incentive fee on income of $10.95 million. See Note 6. “Related Party Transactions” in our condensed consolidated financial statements for expanded discussion of the Investment Advisory and Sub-Advisory Agreements.
Unfunded Commitments - Unfunded commitments to provide funds to portfolio companies are not recorded on our condensed 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, 2018, our unfunded investment commitments are as follows:
Category / Company (1) | |||
Unfunded revolvers/delayed draw loan commitments: | |||
A10 Capital, LLC | $ | 14,123 | |
Access CIG, LLC | 29 | ||
ACG Materials, LLC | 6,148 | ||
Berner Food & Beverage, LLC | 37,597 | ||
Eagle Family Foods, Inc. | 3,759 | ||
Frontline Technologies Holdings, LLC | 12,140 | ||
National Debt Relief LLC | 3,581 | ||
Patriot Well Solutions LLC | 2,167 | ||
Revere Superior Holdings, Inc. | 7,395 | ||
Total unfunded revolvers/delayed draw loan commitments | $ | 86,939 | |
Unfunded term loans | |||
Wheels Up Partners LLC | $ | 14,923 | |
Total unfunded term loans | $ | 14,923 | |
Unfunded equity commitments: | |||
KKR BPT Holdings Aggregator, LLC | $ | 4,000 | |
NEOS SPV I | 20,113 | ||
Polyconcept North America Holdings, Inc. | 1,211 | ||
Star Mountain SMB Multi-Manager Credit Platform, LP | 13,124 | ||
Toorak Capital | 12,075 | ||
Total unfunded equity commitments | $ | 50,523 | |
(1) | May be commitments to one or more entities affiliated with the named company. |
(2) | As of the date of this filing, the unfunded commitments have expired. |
We also have a commitment to provide up to $143.47 million of capital to SCJV. The capital commitment to SCJV can be satisfied with contributions of either cash or assets, and no capital commitment can be drawn without an affirmative vote by one of our representatives on SCJV’s board of managers.
We estimate we have sufficient liquidity in the form of cash on hand, borrowing capacity under our revolving credit facilities and scheduled and early principal repayments to fund such unfunded commitments when the need arises.
Borrowings - As discussed above under “Capital Resources and Liquidity – Borrowings,” we, either directly or through our wholly owned subsidiaries, have borrowing agreements with several lenders in connection with our revolving credit facilities and the 2014 Senior Secured Term Loan. As of September 30, 2018, the credit facilities provided for $376.29 million of undrawn borrowing capacity. (See — “Capital Resources and Liquidity — Borrowings” above and Note 10. “Borrowings” in our condensed consolidated financial statements for expanded discussion of our borrowings.)
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A summary of our significant contractual payment obligations for the repayment of outstanding borrowings and interest expense and other fees related to our borrowings as of September 30, 2018 is as follows:
(in thousands) | Total | < 1 year | 1-3 years | 3-5 years | After 5 years | |||||||||||||||
2018 Senior Secured Revolving Credit Facility | $ | 1,139,226 | $ | — | $ | — | $ | 1,139,226 | $ | — | ||||||||||
SMBC Credit Facility | 200,000 | — | — | 200,000 | — | |||||||||||||||
JPM Credit Facility | 240,000 | — | 240,000 | — | — | |||||||||||||||
2022 Notes | 245,000 | — | — | 245,000 | — | |||||||||||||||
Interest and Credit Facilities Fees Payable(1) | 346,070 | 82,787 | 157,251 | 106,032 | — | |||||||||||||||
Total | $ | 2,170,296 | $ | 82,787 | $ | 397,251 | $ | 1,690,258 | $ | — | ||||||||||
(1) | Estimated interest payments have been calculated based on interest rates of our borrowings as of September 30, 2018. |
Related Party Transactions
We have entered into agreements with our investment adviser and certain of their affiliates, whereby we agree to pay certain fees to, or reimburse certain expenses of, our Advisers and their affiliates for investment and advisory services and reimbursement of administrative and operating fees and costs. See Note 6. “Related Party Transactions” and Note 14. "Subsequent Events" in our 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, 2017 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. As of September 30, 2018, we have three pay-fixed, receive-floating interest rate swaps which we pay an annual fixed rate of 0.84% to 2.77% and receive three-month LIBOR on an aggregate notional amount of $400 million. The interest rate swaps have quarterly settlement payments.
As of September 30, 2018, approximately 75.1% of our portfolio of debt investments, or approximately $2.63 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. As of September 30, 2018, approximately 86.4% of our portfolio of variable interest rate debt investments, or approximately $2.28 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. As of September 30, 2018, approximately 13.6% of our portfolio of variable interest rate debt investments, or approximately $356.89 million measured at par value, featured variable interest rates without any minimum base rates. In the case of these “no base rate floor” variable interest debt investments held in our portfolio, we may benefit from increases in the base rates that may subsequently result in an increase in interest income from such interest rate adjustments.
Because we borrow money to make investments, our net investment income is partially dependent upon the difference between the interest rates at which we invest borrowed funds and the interest rates 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.
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Pursuant to the terms of our credit facilities, as discussed above (see “Capital Resources and Liquidity – Borrowings”), the majority of our borrowings as of September 30, 2018 provide for floating base rates based on short-term LIBOR. Therefore, if we were to completely draw down the unused commitments in each of our credit facilities, we expect that our weighted average direct interest rate would decrease by approximately 3 basis points, 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.
Based on our September 30, 2018 balance sheet, the following table shows the annual impact of base rate changes in interest rates (considering interest rate floors for variable rate instruments) assuming no changes in our investment and borrowing structure:
As of September 30, 2018 (in millions) | ||||||||||||||||
Basis Point Change | Interest Income | Interest Expense | Net Investment Income (1) | Interest Rate Swap (2) | ||||||||||||
Down 50 basis points | $ | (1.571 | ) | $ | (7.896 | ) | $ | 6.325 | $ | (2.000 | ) | |||||
Up 50 basis points | $ | 11.197 | $ | 7.896 | $ | 3.301 | $ | 2.000 | ||||||||
Up 100 basis points | $ | 22.393 | $ | 15.792 | $ | 6.601 | $ | 4.000 | ||||||||
Up 150 basis points | $ | 33.590 | $ | 23.688 | $ | 9.902 | $ | 6.000 | ||||||||
Up 200 basis points | $ | 44.787 | $ | 31.585 | $ | 13.202 | $ | 8.000 | ||||||||
(1) | Excludes the impact of performance-based incentive fees. See Note 6. “Related Party Transactions” in our condensed consolidated financial statements for more information on the performance-based incentive fees. |
(2) | Excludes the impact of quarterly fixed rate payments on interest rate swaps. See Note 4. “Derivative Instruments” in our condensed consolidated financial statements for more information on our open interest rate swaps as of the end of the reporting period. |
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 24.9% of our debt investment portfolio was invested in fixed interest rate, high yield corporate debt investments as of September 30, 2018. 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, 2018, approximately 31.6% of our fixed interest rate debt investments, or approximately $247.09 million measured at fair value, had prices that are generally available from third party pricing services. We consider these debt investments to be one of the more liquid subsets of our Investment Portfolio since these types of assets are generally broadly syndicated and owned by a wide group of institutional investors, business development companies, mutual funds and other investment funds. Additionally, this group of assets is susceptible to revaluation, or changes in bid-ask values, in response to sudden changes in expected rates of return associated with these investments. We have other fixed interest rate investments in the less liquid subset of our Investment Portfolio that are not included in this analysis.
We have computed a duration of approximately 4.2 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 4.2%, all other financial and market factors assuming to remain unchanged. A 4.2% decrease in the valuation of this Investment Portfolio subset equates to a decrease of $10.38 million, or a 0.4% decline in net assets relative to $19.44 net asset value per share as of September 30, 2018.
Foreign Currency Risk
From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as, amounts translated into U.S. dollars for inclusion in our condensed consolidated financial statements.
The table below presents the effect that a 10% immediate, unfavorable change in the foreign currency exchange rates (i.e. strengthening of the U.S. dollar) would have on the fair value of investments in our Investment Portfolio denominated in foreign currencies as of September 30, 2018, by foreign currency, all other valuation assumptions remaining constant. In addition, the table below presents the par value of our investments denominated in foreign currencies and the notional amount of foreign currency forward contracts in local currency in place as of September 30, 2018, to hedge against foreign currency risks.
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Investments Denominated in Foreign Currencies | Hedges | |||||||||||||||||||||||
As of September 30, 2018 | Reduction in Fair Value as of September 30, 2018 if 10% Adverse Change in Exchange Rate(2) | As of September 30, 2018 | ||||||||||||||||||||||
(in thousands) | Par Value/ Cost in Local Currency(1) | Par Value/ Cost in US$(1) | Fair Value | Net Foreign Currency Hedge Amount in Local Currency | Net Foreign Currency Hedge Amount in U.S. Dollars | |||||||||||||||||||
Euros | € | 341,023 | $ | 397,473 | $ | 291,958 | $ | 29,196 | € | 311,536 | $ | 344,857 | ||||||||||||
Canadian Dollar | C$ | 4,500 | 3,501 | 3,526 | 353 | C$ | 17,313 | 13,217 | ||||||||||||||||
British Pound Sterling | £ | 6,231 | 9,238 | 8,661 | 866 | £ | 52,582 | 69,751 | ||||||||||||||||
Australian Dollar | A$ | 10,055 | 7,682 | 412 | 41 | A$ | 2,572 | 1,919 | ||||||||||||||||
Swedish Kronor | SEK | 97,249 | 15,145 | 4,501 | 450 | SEK | — | — | ||||||||||||||||
Total | $ | 433,039 | $ | 309,058 | $ | 30,906 | $ | 429,744 | ||||||||||||||||
(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 2018 Senior Secured Revolving Credit Facility, which provides a natural hedge with regard to changes in exchange rates between the foreign currencies and U.S. dollar and reduces our exposure to foreign exchange rate differences. We are typically a net receiver of these foreign currencies as related for our international investment positions, and, as a result, our investments denominated in foreign currencies, to the extent not hedged, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.
As of September 30, 2018, the net contractual amount of our foreign currency forward contracts and cross currency swaps totaled $429.74 million, all of which related to hedging of our foreign currency denominated debt investments. As of September 30, 2018, we did not have any outstanding borrowings denominated in foreign currencies on our 2018 Senior Secured Revolving Credit Facility.
During the three and nine months ended September 30, 2018, our foreign currency transactions and foreign currency translation adjustment recorded in our condensed consolidated statements of operations resulted in net realized and unrealized gains (losses) of $(0.04) million and $2.26 million, respectively. Our foreign currency forward contracts and cross currency swaps, employed for hedging purposes, generated net realized and unrealized gains of $4.81 million and $20.97 million during the three and nine months ended September 30, 2018, 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.
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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 to provide reasonable assurance that material information required to be included in our periodic SEC reports is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
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
Investing in our common stock involves a number of significant risks. In addition to the other information contained in this quarterly report on Form 10-Q, investors should consider carefully the risk factors set forth in our annual report on Form 10-K for the year ended December 31, 2017, as supplemented by our quarterly report on Form 10-Q for the quarter ended March 31, 2018 and in the definitive proxy statement for the Proposed Merger (filed on September 27, 2018).
All of the risk factors identified in Item 1A of our annual report on Form 10-K for the year ended December 31, 2017 that relate to our former investment adviser are applicable to the Joint Advisor, our current investment advisor.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | None. |
(b) | None. |
(c) | The information required by this Item 2(c) is set forth in Note 9 – “Share Transactions” to the unaudited condensed consolidated financial statements included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and is incorporated by reference herein. |
Item 3. Defaults Upon Senior Securities - None
Item 4. Mine Safety Disclosures – Not applicable
Item 5. Other Information - None
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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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EXHIBIT INDEX
The following exhibits are filed or incorporated as part of this report:
2.1 | Agreement and Plan of Merger, by and among FS Investment Corporation, IC Acquisition, Inc., Corporate Capital Trust, Inc. and FS/KKR Advisor, LLC, dated as of July 22, 2018 (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 23, 2018). | |
3.1 | Amendment No. 1 to the Third Amended and Restated Bylaws of Corporate Capital Trust, Inc. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on July 23, 2018). | |
10.1 | Form of Indemnification Agreement (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 23, 2018). | |
10.2 | Senior Secured Revolving Credit Agreement, dated as of August 9, 2018, among Corporate Capital Trust, Inc., FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, each other Person designated as a "Borrower" thereunder, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, and ING Capital LLC, as Collateral Agent. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 10, 2018). | |
31.1 | Certification of Principal 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 Principal 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 Principal Executive Officer and Principal 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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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 7th day of November 2018.
CORPORATE CAPITAL TRUST, INC. | ||
By: | /s/ Todd C. Builione | |
TODD C. BUILIONE | ||
President | ||
(Principal Executive Officer) | ||
By: | /s/ Thomas N. Murphy | |
THOMAS N. MURPHY | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
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