10-Q 1 d812479d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended September 30, 2014

OR

 

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

For the transition period from                  to                 

Commission file number 814-00712

 

 

BLACKROCK KELSO CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-2725151

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

40 East 52nd Street, New York, NY   10022
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: 212-810-5800

 

 

 

      

 

Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.

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

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

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

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

Smaller reporting company ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ¨    No  þ

The number of shares of the Registrant’s common stock, $.001 par value per share, outstanding at November 5, 2014 was 74,547,622.

 

 

 


Table of Contents

BLACKROCK KELSO CAPITAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2014

Table of Contents

 

    

INDEX

   PAGE NO.  

PART I.

   FINANCIAL INFORMATION   

Item 1.

   CONSOLIDATED FINANCIAL INFORMATION   
  

Consolidated Statements of Assets and Liabilities as of September 30, 2014 and December 31, 2013 (unaudited)

     3   
  

Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)

     4   
  

Consolidated Statements of Changes in Net Assets for the nine months ended September  30, 2014 and 2013 (unaudited)

     5   
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)

     6   
  

Consolidated Schedules of Investments as of September 30, 2014 and December 31, 2013 (unaudited)

     7   
   Notes to Consolidated Financial Statements (unaudited)      21   

Item 2.

  

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

     41   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      51   

Item 4.

   Controls and Procedures      51   

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      52   

Item 1A.

   Risk Factors      52   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      52   

Item 3.

   Defaults Upon Senior Securities      52   

Item 4.

   Mine Safety Disclosures      52   

Item 5.

   Other Information      52   

Item 6.

   Exhibits      52   

SIGNATURES

     53   

 

2


Table of Contents

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to BlackRock Kelso Capital Corporation unless the context states otherwise.

Item 1. Consolidated Financial Statements

BlackRock Kelso Capital Corporation

Consolidated Statements of Assets and Liabilities

(Unaudited)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $737,468,122 and $854,947,802)

   $ 743,840,944      $ 881,305,181   

Non-controlled, affiliated investments (cost of $96,801,768 and $75,514,208)

     187,377,344        134,096,291   

Controlled investments (cost of $133,765,471 and $154,038,211)

     122,603,340        202,570,992   
  

 

 

   

 

 

 

Total investments at fair value (cost of $968,035,361 and $1,084,500,221)

     1,053,821,628        1,217,972,464   

Cash and cash equivalents

     42,452,397        18,474,784   

Receivable for investments sold

     29,048,791        22,756,286   

Interest receivable

     15,147,334        11,033,061   

Prepaid expenses and other assets

     10,314,226        11,410,320   
  

 

 

   

 

 

 

Total Assets

   $   1,150,784,376      $   1,281,646,915   
  

 

 

   

 

 

 

Liabilities

    

Payable for investments purchased

   $ —       $ 21,000,000   

Debt

     360,165,635        477,981,494   

Interest payable

     3,260,713        7,896,016   

Distributions payable

     15,657,129        19,344,682   

Base management fees payable

     5,621,443        5,803,497   

Incentive management fees payable

     17,247,288        34,725,204   

Accrued administrative services

     120,750        270,000   

Other accrued expenses and payables

     5,482,107        4,921,681   
  

 

 

   

 

 

 

Total Liabilities

     407,555,065        571,942,574   
  

 

 

   

 

 

 

Net Assets

    

Common stock, par value $.001 per share, 200,000,000 common shares authorized, 76,193,338 and 75,827,692 issued and 74,557,583 and 74,402,185 outstanding

     76,193        75,828   

Paid-in capital in excess of par

     897,867,522        894,649,992   

Distributions in excess of taxable net investment income

     (23,182,167     (19,373,748

Accumulated net realized loss

     (203,419,163     (286,693,363

Net unrealized appreciation (depreciation)

     83,143,221        130,522,308   

Treasury stock at cost, 1,635,755 and 1,425,507 shares held

     (11,256,295     (9,476,676
  

 

 

   

 

 

 

Total Net Assets

     743,229,311        709,704,341   
  

 

 

   

 

 

 

Total Liabilities and Net Assets

   $ 1,150,784,376      $ 1,281,646,915   
  

 

 

   

 

 

 

Net Asset Value Per Share

   $ 9.97      $ 9.54   

 

3


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Statements of Operations

(Unaudited)

 

     Three months ended     Nine months ended  
     September 30, 
2014
    September 30, 
2013
    September 30, 
2014
    September 30, 
2013
 

Investment Income:

        

Interest income:

        

Non-controlled, non-affiliated investments

   $   23,400,184      $   21,370,250      $   70,712,028      $   73,117,037   

Non-controlled, affiliated investments

     1,223,632        3,876,098        3,433,189        5,958,969   

Controlled investments

     3,075,657        2,702,931        8,955,752        7,641,475   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     27,699,473        27,949,279        83,100,969        86,717,481   

Fee income:

        

Non-controlled, non-affiliated investments

     4,821,002        29,875        11,418,307        7,578,694   

Non-controlled, affiliated investments

     —         —          —          —     

Controlled investments

     25,000        2,350,000        225,000        2,638,680   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee income

     4,846,002        2,379,875        11,643,307        10,217,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividend income:

        

Non-controlled, non-affiliated investments

     37,366        640,163        109,224        1,226,348   

Non-controlled, affiliated investments

     579,827        413,302        1,637,805        487,141   

Controlled investments

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total dividend income

     617,193        1,053,465        1,747,029        1,713,489   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     33,162,668        31,382,619        96,491,305        98,648,344   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Base management fees

     5,621,443        5,286,986        17,892,011        15,826,168   

Interest and credit facility fees

     5,283,546        5,455,017        16,899,287        15,128,057   

Incentive management fees

     593,837        9,358,529        7,022,626        16,692,244   

Investment advisor expenses

     574,964        479,871        1,684,238        1,520,714   

Amortization of debt issuance costs

     524,766        568,678        1,588,436        1,431,226   

Professional fees

     450,052        541,180        1,550,416        1,647,600   

Director fees

     194,500        194,500        531,000        474,000   

Administrative services

     108,840        174,288        395,967        607,429   

Other

     478,262        449,909        2,069,346        2,263,313   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     13,830,210        22,508,958        49,633,327        55,590,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income

     19,332,458        8,873,661        46,857,978        43,057,593   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized and Unrealized Gain (Loss):

        

Net realized gain (loss):

        

Non-controlled, non-affiliated investments

     26,856        307,321        34,419,907        (25,980,491

Non-controlled, affiliated investments

     423,373        —          423,373        21   

Controlled investments

     —          769,604        48,430,920        (31,890,556

Foreign currency

     —          (933,861     —          (166,934
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss)

     450,229        143,064        83,274,200        (58,037,960
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation or depreciation:

        

Non-controlled, non-affiliated investments

     4,031,126        (408,094     (19,267,935     21,595,785   

Non-controlled, affiliated investments

     17,734,541        4,602,853        31,993,493        28,621,996   

Controlled investments

     (12,201,674     6,507,911        (59,694,912     26,688,350   

Foreign currency translation

     (377,158     124,348        (409,733     (261,485
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation or depreciation

     9,186,835        10,827,018        (47,379,087     76,644,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss)

     9,637,064        10,970,082        35,895,113        18,606,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Increase in Net Assets Resulting from Operations

   $ 28,969,522      $ 19,843,743      $ 82,753,091      $ 61,664,279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income Per Share - basic

   $ 0.26      $ 0.12      $ 0.63      $ 0.58   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share - basic

   $ 0.39      $ 0.27      $ 1.11      $ 0.83   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and Diluted Weighted-Average Shares Outstanding - basic

     74,556,389        74,239,932        74,536,270        74,099,028   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Investment Income Per Share - diluted

   $ 0.25      $ 0.12      $ 0.61      $ 0.57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share - diluted

   $ 0.36      $ 0.26      $ 1.04      $ 0.80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and Diluted Weighted-Average Shares Outstanding - diluted

     84,453,116        84,136,659        84,432,998        82,183,168   

Dividends Declared Per Share

   $ 0.21      $ 0.26      $ 0.68      $ 0.78   

 

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Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Statements of Changes in Net Assets

(Unaudited)

 

    

Nine months ended

 
     September 30, 2014     September 30, 2013  

Net Increase in Net Assets Resulting from Operations:

    

Net investment income

   $     46,857,978      $     43,057,593   

Net realized gain (loss)

     83,274,200        (58,037,960

Net change in unrealized appreciation or depreciation

     (47,379,087     76,644,646   
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     82,753,091        61,664,279   
  

 

 

   

 

 

 

Dividend Distributions to Stockholders from:

    

Net investment income

     (50,666,397     (57,797,976
  

 

 

   

 

 

 

Capital Share Transactions:

    

Equity component of convertible debt

     —          1,189,747   

Reinvestment of dividends

     3,217,895        3,864,460   

Purchases of treasury stock

     (1,779,619     —     
  

 

 

   

 

 

 

Net increase in net assets resulting from capital share transactions

     1,438,276        5,054,207   
  

 

 

   

 

 

 

Total Increase in Net Assets

     33,524,970        8,920,510   

Net assets at beginning of period

     709,704,341        687,379,692   
  

 

 

   

 

 

 

Net assets at end of period

   $ 743,229,311      $ 696,300,202   
  

 

 

   

 

 

 

Capital Share Activity:

    

Purchases of treasury stock

     (210,248     —     

Shares issued from reinvestment of dividends

     365,646        409,112   
  

 

 

   

 

 

 

Net increase in shares outstanding

     155,398        409,112   
  

 

 

   

 

 

 

 

5


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Statements of Cash Flows

(Unaudited)

 

    

Nine months ended

 
    

September 30, 2014

   

September 30, 2013

 

Operating Activities:

    

Net increase in net assets resulting from operations

   $ 82,753,091      $ 61,664,279   

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

    

PIK interest and dividends

     (3,495,780     (7,902,257

Net amortization on investments

     (2,437,570     (13,105,237

Amortization of debt issuance costs

     1,588,436        1,431,226   

Net change in unrealized on investments

     46,969,354        (76,906,131

Net change in unrealized on foreign currency translation

     409,733        261,485   

Net realized (gain) loss on investments

     (83,274,200     56,913,656   

Net realized (gain) loss on foreign currency

     —          166,934   

Changes in operating assets:

    

Purchase of investments

     (292,562,922     (357,071,616

Purchase of foreign currency contracts—net

     —          (59,002

Proceeds from disposition of investments

     497,825,599        319,283,096   

Change in receivable for investments sold

     (6,292,505     (9,852,915

Change in interest receivable

     (4,114,273     (4,691,134

Change in prepaid expenses and other assets

     (492,342     (8,722,364

Changes in operating liabilities:

    

Change in payable for investments purchased

     (21,000,000     30,235,510   

Change in interest payable

     (4,635,303     (1,911,778

Change in management fees payable

     (182,054     (339,907

Change in incentive management fees payable

     (17,477,916     (8,919

Change in accrued administrative services

     (149,250     (55,033

Change in other accrued expenses and payables

     1,277,048        1,843,373   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     194,709,146        (8,826,734
  

 

 

   

 

 

 

Financing Activities:

    

Dividend distributions paid in cash

     (51,136,054     (53,827,143

Proceeds from debt

     394,184,140        388,840,837   

Repayments of debt

     (512,000,000     (321,581,650

Purchases of treasury stock

     (1,779,619     —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (170,731,533     13,432,044   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     23,977,613        4,605,310   

Cash and cash equivalents, beginning of period

     18,474,784        9,122,141   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 42,452,397      $ 13,727,451   
  

 

 

   

 

 

 

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

    

Cash paid during period for:

    

Interest

   $ 20,553,401      $ 15,997,777   

Taxes

   $ 191,439      $ 493,801   

Dividend distributions reinvested

   $ 3,217,895      $ 3,864,460   

 

6


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments

September 30, 2014

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Senior Secured Notes—13.7%

           

Advanced Lighting Technologies, Inc., First Lien(i)

  Lighting   10.50%   6/1/19   $ 20,000,000      $ 19,641,395      $ 16,000,000   

AGY Holding Corp., Second Lien(d)(i)

  Glass

Yarns/Fibers

  11.00%   12/15/16     21,762,500        20,060,732        19,803,875   

American Piping Products, Inc., Second Lien(i)

  Distribution   12.88%   11/15/17     10,000,000        9,867,488        10,200,000   

BPA Laboratories Inc., First Lien(i)

  Healthcare

Services

  12.25%   4/1/17     35,078,000        34,440,554        35,078,000   

New Gulf Resources, LLC, First Lien(i)

  Energy   11.75%   5/15/19     21,000,000        20,820,980        21,000,000   
         

 

 

   

 

 

 

Total Senior Secured Notes

            104,831,149        102,081,875   
         

 

 

   

 

 

 

Unsecured Debt—14.2%

           

Higginbotham Insurance Holdings, Inc.

  Insurance   11.00%   6/11/19     36,750,000        36,750,000        36,750,000   

QHB Holdings LLC(o)

  Materials   16.00%   12/17/19     20,000,000        20,000,000        20,000,000   

Red Apple Stores Inc.(f)(g)(j)(o)

  Discount

Stores

  18.00%   7/11/17     6,251,879        6,251,879        4,251,278   

SVP Worldwide Ltd.(g)(j)(o)

  Consumer
Products
  14.00%   6/27/18     44,505,855        44,505,855        44,505,855   
         

 

 

   

 

 

 

Total Unsecured Debt

            107,507,734        105,507,133   
         

 

 

   

 

 

 

Subordinated Debt—7.6%

           

Advantage Insurance Holdings Ltd.(d)(g)(i)(j)

  Insurance   12.00%   9/30/15     7,395,373        7,395,373        7,395,373   

Automobile Protection Corporation—APCO(n)

  Insurance   9.73%   6/17/19     25,000,000        25,000,000        25,000,000   

New Gulf Resources, LLC(i)(o)

  Energy   12.00%   11/15/19     4,000,000        3,493,495        3,440,000   

The Pay-O-Matic Corp.(o)

  Financial

Services

  14.00%   9/30/16     20,400,000        20,400,000        20,196,000   
         

 

 

   

 

 

 

Total Subordinated Debt

            56,288,868        56,031,373   
         

 

 

   

 

 

 

 

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Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2014

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Senior Secured Loans—79.7%(e)

           

Accriva Diagnostics, Inc., First Lien

  Healthcare   12.25%   1/17/19   $ 21,000,000      $ 21,000,000      $ 21,000,000   

AGY Holding Corp., Second Lien(d)

  Glass

Yarns/Fibers

  12.00%   9/15/16     8,899,729        8,899,729        8,899,729   

AL Solutions, Inc., Term Loan B, Second Lien(o)

  Metals   5.00%   12/31/19     73,760        —          —     

AmQuip Crane Rental LLC, Second Lien

  Construction

Equipment

  12.00%   12/19/17     41,068,361        41,068,361        41,068,361   

Bankruptcy Management Solutions, Inc., Term Loan A, First Lien(f)(n)

  Financial

Services

  4.50%   6/27/17     1,946,092        1,869,294        1,887,709   

Bankruptcy Management Solutions, Inc., Term Loan B, First Lien(f)(n)

  Financial

Services

  7.00%   6/27/18     11,932,241        10,246,517        10,261,728   

Expert Global Solutions, Inc., First Lien(n)

  Business

Services

  8.50%   4/3/18     3,922,550        3,853,439        3,927,456   

GSE Environmental, Inc., First Lien(n)

  Manufacturing   11.00%   8/11/21     42,352,941        42,352,941        42,352,941   

Hunter Defense Technologies, Inc., Second Lien(n)

  Defense   11.00%   2/5/20     45,000,000        45,000,000        45,000,000   

K2 Pure Solutions Nocal, L.P. First Lien(n)

  Chemicals   10.00%   8/19/19     19,875,000        19,552,275        19,875,000   

MD America Energy, LLC, First Lien(n)

  Energy   9.50%   8/4/19     20,000,000        19,026,795        19,026,795   

MediMedia USA, Inc., First Lien(n)

  Information

Services

  8.00%   11/20/18     14,837,858        14,615,062        14,392,722   

MediMedia USA, Inc., Second Lien(n)

  Information

Services

  12.25%   11/20/19     60,000,000        58,572,039        58,200,000   

Pre-Paid Legal Services, Inc., Second Lien(n)

  Legal

Services

  9.75%   7/1/20     25,000,000        24,690,588        25,000,000   

Quality Home Brands Holdings LLC, Second Lien(n)

  Materials   11.75%   6/17/19     40,000,000        40,000,000        40,000,000   

Red Apple Stores Inc., Second Lien(f)(g)(j)

  Discount

Stores

  16.00%   1/11/17     21,800,000        21,800,000        21,800,000   

Royal Adhesives and Sealants, LLC, Second Lien(n)

  Chemicals   9.75%   1/31/19     6,000,000        5,905,474        6,097,498   

Shoreline Energy LLC, Second Lien(n)

  Energy   10.25%   3/30/19     29,166,666        28,447,935        29,166,666   

Sur La Table, Inc., First Lien

  Consumer

Products

  12.00%   7/28/17     50,000,000        50,000,000        51,000,000   

 

8


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2014

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

U.S. Well Services, LLC, First Lien(n)

  Energy   12.00%   5/2/19   $ 43,945,153      $ 43,945,153      $ 43,945,153   

United Subcontractors, Inc., First Lien(d)(n)(o)

  Building and

Construction

  4.24%   6/30/15     6,349,276        6,262,721        6,349,276   

Water Pik, Inc., Second Lien(n)

  Consumer

Products

  9.75%   1/8/21     24,315,789        23,567,667        24,315,789   

WBS Group LLC, First Lien(f)(n)

  Software   9.50%   6/30/15     27,284,255        27,284,255        27,284,255   

WBS Group LLC, Second Lien(f)(n)

  Software   10.50%   12/31/15     24,999,000        24,787,575        24,999,000   

Westward Dough Operating Company, LLC, First Lien(f)

  Restaurants   9.00%   3/2/17     6,590,896        6,590,896        6,590,896   
         

 

 

   

 

 

 

Total Senior Secured Loans

            589,338,716        592,440,974   
         

 

 

   

 

 

 

Preferred Stock—3.9%

           

Advantage Insurance Holdings Ltd.(d)(g)(i)(j)

  Insurance   8.00%       750,000        8,059,803        8,059,803   

KAGY Holding Company, Inc. (AGY Holding Corp.)(d)

  Glass

Yarns/Fibers

  20.00%       22,960        5,718,381        3,169,657   

Progress Financial Corporation, Series F-1(c)

  Financial

Services

        963,710        740,313        1,570,847   

Progress Financial Corporation, Series G(c)

  Financial

Services

        1,758,256        2,013,112        2,865,957   

USI Senior Holdings, Inc. (United Subcontractors)(c)(d)

  Building and

Construction

        260,798        5,374,317        7,823,940   

VSS-AHC Consolidated Holdings Corp. (Advanstar Global LLC)(d)

  Printing/

Publishing

  15.00%       4,809        5,810,177        5,810,177   
         

 

 

   

 

 

 

Total Preferred Stock

            27,716,103        29,300,381   
         

 

 

   

 

 

 

Common Stock—10.6%(c)

           

Bankruptcy Management Solutions, Inc.(f)

  Financial

Services

        368,790        16,654,505        18,513,258   

DynaVox Inc.(k)

  Augmentative

Communication

Products

        272,369        758,069        15,253   

M & M Tradition Holdings Corp.(d)

  Sheet Metal

Fabrication

        500,000        5,000,000        11,750,000   

Red Apple Stores Inc.(f)(g)(h)(j)

  Discount

Stores

        8,756,859        7,833,088        —    

Tygem Holdings, Inc., Class A

  Metals         30,000        —         —    

 

9


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2014

(Unaudited)

 

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

USI Senior Holdings, Inc. (United Subcontractors)(d)

  Building and

Construction

        260,798      $ 9,019,888      $ 48,552,764   
         

 

 

   

 

 

 

Total Common Stock

            39,265,550        78,831,275   
         

 

 

   

 

 

 

Limited Partnership/Limited Liability Company Interests—10.7%

  

ECI Cayman Holdings, LP(c)(g)(i)(j)

  Electronics         3,184        3,183,840        3,517,174   

Higginbotham Investment Holdings, LLC(c)

  Insurance         1,163        1,139,535        2,039,535   

Marquette Transportation Company Holdings, LLC(c)(l)

  Transportation         25,000        5,000,000        6,247,000   

Marsico Holdings, LLC(c)(i)

  Financial
Services
        91,445        1,848,077        18,732   

Penton Business Media Holdings, LLC(c)(d)

  Information
Services
        226        9,050,000        39,125,660   

PG Holdco, LLC

  Healthcare
Services
  15.00%       333        478,676        478,676   

PG Holdco, LLC, Class A(c)

  Healthcare
Services
        16,667        166,667        494,289   

Sentry Security Systems Holdings, LLC(c)

  Security
Services
        147,271        147,271        14,727   

Sentry Security Systems Holdings, LLC

  Security
Services
  8.00%       602,729        1,086,005        1,086,005   

VSS-AHC Holdings LLC (Advanstar Global LLC)(c)(d)

  Printing/
Publishing
        884,716        6,150,647        20,637,090   

WBS Group LLC(c)(f)(m)

  Software         —         1,000        1,804,291   

Westward Dough Holdings, LLC, Class A(c)(f)

  Restaurants         350,000        9,260,324        3,962,000   
         

 

 

   

 

 

 

Total Limited Partnership/Limited Liability Company Interests

      37,512,042        79,425,179   
         

 

 

   

 

 

 

Equity Warrants/Options—1.4%(c)

         

Bankruptcy Management Solutions, Inc., Tranche A(f)

  Financial

Services

    expire 6/27/18     28,464        375,040        401,342   

Bankruptcy Management Solutions, Inc., Tranche B(f)

  Financial

Services

    expire 6/27/19     30,654        342,295        359,265   

Bankruptcy Management Solutions, Inc., Tranche C(f)

  Financial

Services

    expire 6/27/20     45,981        468,803        488,318   

Facet Investment, Inc.

  Medical

Devices

    expire 1/18/21     1,978        250,000        —    

 

10


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

September 30, 2014

(Unaudited)

 

Portfolio Company   Industry   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(a)    

Fair

Value(b)

 

Marsico Parent Superholdco, LLC(i)

  Financial

Services

    expire 12/14/19     455      $ 444,450      $ —    

New Gulf Resources, LLC(i)

  Energy     expire 5/9/24     4,000        506,505        506,505   

Progress Financial Corporation

  Financial

Services

    expire various     6,959,220        3,183,106        7,610,508   

Twin River Worldwide Holdings, Inc., Contingent Value Rights

  Gaming     expire 11/5/17     1,000        5,000        837,500   
         

 

 

   

 

 

 

Total Equity Warrants/Options

            5,575,199        10,203,438   
         

 

 

   

 

 

 

TOTAL INVESTMENTS—141.8%

          $ 968,035,361        1,053,821,628   
         

 

 

   

OTHER ASSETS & LIABILITIES (NET)—(41.8)%

        (310,592,317
           

 

 

 

NET ASSETS—100.0%

            $ 743,229,311   
           

 

 

 

 

  (a) Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
  (b) Fair value is determined by or under the direction of the Company’s Board of Directors. See Note 2 for further details.
  (c) Non-income producing equity securities at September 30, 2014.
  (d) Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities.
  (e) Approximately 75% of the senior secured loans of the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 74% of such senior secured loans have floors of 0.50% to 1.50%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at September 30, 2014 of all contracts within the specified loan facility.

 

11


Table of Contents
                                  Nine Months Ended September 30, 2014  
Non-controlled, Affiliated Investments   Fair Value at
December 31,
2013
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
    Net
Unrealized
Gain (Loss)
   

Fair Value at
September 30,

2014

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

Advantage Insurance Holdings Ltd.:

                 

Subordinated Debt

  $ —        $ 7,395,373      $ —        $ —        $ 7,395,373      $ —        $ 43,764      $ —        $ —     

Preferred Stock

    5,100,822        2,958,981        —          —          8,059,803        —          —          —          333,978   

AGY Holding Corp.:

                 

Senior Secured Note

    19,151,000        598,222        —          54,653        19,803,875        —          2,393,629        —          —     

Senior Secured Loan

    7,964,650        935,079        —          —          8,899,729        —          753,458        —          —     

BKC CLO 2014-1, Ltd.

                 

Preferred Stock

    —          6,972,000        (6,972,000     —          —   †       423,373        —          —          —     

KAGY Holding Company, Inc.
(AGY Holding Corp.)

                 

Preferred Stock

    4,732,950        701,862        —          (2,265,155     3,169,657        —          —          —          701,861   

M&M Tradition Holdings Corp.

                 

Common Stock

    9,250,000        —          —          2,500,000        11,750,000        —          —          —          —     

Penton Business Media Holdings, LLC

                 

Limited Liability Co. Interest

    36,441,130        —          —          2,684,530        39,125,660        —          —          —          —     

United Subcontractors, Inc.

                 

Senior Secured Loan

    5,015,119        1,328,790        —          5,367        6,349,276        —          242,338        —          —     

USI Senior Holdings, Inc.:

                 

Common Stock

    21,575,553        5,205,607        —          21,771,604        48,552,764        —          —          —          —     

Preferred Stock

    6,262,254        1,561,682        —          4        7,823,940        —          —          —          —     

VSS-AHC Consolidated Holdings Corp. (Advanstar Global LLC)

                 

Preferred Stock

    5,208,213       
601,964
  
    —          —         
5,810,177
  
    —          —          —         
601,966
  

VSS-AHC Holdings LLC.
(Advanstar Global LLC)

                 

Limited Liability Co. Interest

   
13,394,600
  
    —          —         
7,242,490
  
    20,637,090        —          —          —          —     
 

 

 

 

Totals

  $ 134,096,291      $ 28,259,560      $ (6,972,000   $ 31,993,493      $ 187,377,344      $ 423,373      $ 3,433,189      $ —        $ 1,637,805   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind (“PIK”) interest or dividends, 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.
  Investment no longer held at of September 30, 2014.

The aggregate fair value of non-controlled, affiliated investments at September 30, 2014 represents 25.2% of the Company’s net assets.

 

 

 

  (f) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities.
  (g) Non-U.S. company or principal place of business outside the U.S.
  (h) Original purchase denominated in Canadian dollars.
  (i) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 17% of the Company’s net assets at September 30, 2014.
  (j) BDCs are required to invest at least 70% of their total assets primarily in securities of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. Government securities and other high quality debt investments that mature in one year or less. The securities referenced represent either fully or partially non-qualified assets for purposes of this requirement.
  (k) During the period DynaVox completed an exchange of the outstanding L.L.C. units into an equivalent number of common shares.
  (l) The Company is the sole stockholder of BKC MTCH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC and thus a non-controlled, non-affiliated investment.
  (m) The Company is the sole stockholder of BKC-WBS, LLC, a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of WBS Group LLC and thus a controlled investment.

 

12


Table of Contents
                                  Nine Months Ended September 30, 2014  
Controlled Investments   Fair Value at
December 31,
2013
   

Gross

Additions
(Cost)*

    Gross
Reductions
(Cost)**
   

Net

Unrealized
Gain (Loss)

   

Fair Value at
September 30,

2014

   

Net

Realized

Gain

(Loss)

    Interest
    Income    
   

Fee

    Income    

 

Bankruptcy Management Solutions, Inc.:

               

Senior Secured Loan, First Lien, A

  $ 1,596,458      $ 356,918      $ (33,074   $ (32,593   $ 1,887,709      $ —       $ 83,429      $ 225,000   

Senior Secured Loan, First Lien, B

    10,458,655        387,014        (228,987     (354,954     10,261,728        —         1,028,409        —    

Common Stock

    17,242,928        —         —         1,270,330        18,513,258        —         —         —    

Warrants

    1,193,880        —         —         55,045        1,248,925        —         —         —    

ECI Holdco, Inc.

               

Common Stock

    68,604,042        1,920        (23,079,617     (45,526,345     —       48,430,920        —         —    

Red Apple Stores Inc.:

               

Unsecured Debt

    5,454,365        797,514        —         (2,000,601     4,251,278        —         797,514        —    

Senior Secured Loan

    20,000,000        1,800,000        —         —         21,800,000        —         2,516,288        —    

Common Stock

    8,242,821        273,127        (682,860     (7,833,088     —          —         —         —    

WBS Group LLC:

               

Senior Secured Loan, First Lien

    27,284,255        —         —         —         27,284,255        —         1,965,603        —    

Senior Secured Loan, Second Lien

    24,999,000        135,305        —         (135,305     24,999,000        —         2,125,849        —    

Limited Liability Co. Interest

    6,056,783        —         —         (4,252,492     1,804,291        —         151,590        —    

Westward Dough Operating Company, LLC

               

Senior Secured Loan

    6,656,805        —         —         (65,909     6,590,896        —         287,070        —    

Westward Dough Holdings, LLC

               

Limited Liability Co. Interest

    4,781,000        —         —         (819,000     3,962,000        —         —         —    
 

 

 

 

Totals

  $ 202,570,992      $ 3,751,798      $ (24,024,538   $ (59,694,912   $ 122,603,340      $ 48,430,920      $ 8,955,752      $ 225,000   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, 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.
  Investment no longer held at September 30, 2014.

The aggregate fair value of controlled investments at September 30, 2014 represents 16.5% of the Company’s net assets.

 

 

 

  (n) Security bears interest at a floating rate that may or may not include an interest rate floor.
  (o) Interest may be paid in cash or PIK, or a combination thereof which is generally at the option of the borrower. PIK earned is included in the cost basis of the security. PIK represented approximately 2.6% of interest income earned for the nine months ended September 30, 2014. In accordance with the Company’s policy, PIK may be recorded on an effective yield basis.

 

13


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments

December 31, 2013

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Senior Secured Notes—31.9%

           

Advanced Lighting Technologies, Inc., First Lien(i)

  Lighting   10.50%   6/1/19   $ 20,000,000      $ 19,582,933      $ 15,000,000      

AGY Holding Corp., Second Lien(d)(i)

  Glass

Yarns/Fibers

  11.00%   12/15/16     21,762,500        19,462,510        19,151,000      

American Piping Products, Inc., Second Lien(i)

  Distribution   12.88%   11/15/17     20,000,000        19,669,891        19,800,000      

American Residential Services L.L.C. et al., Second Lien(i)

  HVAC/

Plumbing

Services

  12.00%   4/15/15     46,000,000        45,801,024        46,000,000      

BPA Laboratories Inc., First Lien(i)

  Healthcare

Services

  12.25%   4/1/17     35,078,000        34,243,609        35,078,000      

Sizzling Platter LLC et al., First Lien(i)

  Restaurants   12.25%   4/15/16     30,000,000        29,508,767        30,600,000      

TriMark USA, LLC., Second Lien(n)(o)

  Food Service

Equipment

  13.00%   6/29/16     52,138,638        52,138,638        52,138,638      

U.S. Well Services, LLC, Second Lien(i)

  Energy   14.50%   2/15/17     9,000,000        8,917,538        8,917,538      
         

 

 

   

 

 

 

Total Senior Secured Notes

            229,324,910        226,685,176      
         

 

 

   

 

 

 

Unsecured Debt—16.7%

           

Higginbotham Insurance Holdings, Inc.

  Insurance   11.00%   12/14/18     36,750,000        36,750,000        36,750,000      

QHB Holdings LLC(o)

  Materials   16.00%   12/17/19     20,000,000        20,000,000        20,000,000      

Red Apple Stores Inc.(f)(g)(o)(q)

  Discount

Stores

  18.00%   7/11/17     5,454,365        5,454,365        5,454,365      

SVP Worldwide Ltd.(g)(o)(q)

  Consumer
Products
  14.00%   6/27/18     44,170,052        44,170,052        44,170,052      

Townsquare Media, LLC(o)

  Media &
Entertainment
  10.00%   9/30/19     12,156,667        12,156,667        12,156,667      
         

 

 

   

 

 

 

Total Unsecured Debt

              118,531,084        118,531,084      
         

 

 

   

 

 

 

Subordinated Debt—11.1%

           

A & A Manufacturing Co., Inc.(o)

  Protective

Enclosures

  14.00%   5/16/16     32,995,314        32,995,314        32,995,314      

Automobile Protection Corporation—APCO(n)

  Insurance   9.74%   6/17/19     25,000,000        25,000,000        25,000,000      

The Pay-O-Matic Corp.(o)

  Financial

Services

  14.00%   9/30/16     20,400,000        20,400,000        20,400,000      
         

 

 

   

 

 

 

Total Subordinated Debt

            78,395,314        78,395,314      
         

 

 

   

 

 

 

 

14


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2013

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Senior Secured Loans—74.3%(e)

           

Accriva Diagnostics, Inc., First Lien

  Healthcare   12.25%   1/17/19   $ 21,000,000      $     21,000,000      $ 21,000,000   

AGY Holding Corp., Second Lien(d)

  Glass

Yarns/Fibers

  12.00%   9/15/16     7,964,650        7,964,650        7,964,650   

AL Solutions, Inc., Term Loan B, Second Lien(o)

  Metals   5.00%   12/31/19     71,032        —         —    

Alpha Media Group Inc., First Lien(o)

  Publishing   12.00%   7/15/16     6,280,313        4,338,433        538,000   

AmQuip Crane Rental LLC, Second Lien

  Construction

Equipment

  12.00%   12/19/17     41,068,361        41,068,361        39,014,942   

Arclin US Holdings Inc., Second Lien(g)(n)(q)

  Chemicals   7.75%   1/15/15     3,451,615        3,271,711        3,451,615   

Ascend Learning, LLC, Second Lien(n)

  Education   11.50%   12/6/17     20,000,000        20,000,000        20,000,000   

Attachmate Corporation et al., Second Lien(n)

  Software   11.00%   11/22/18     24,191,324        23,849,327        24,191,324   

Bankruptcy Management Solutions, Inc., Term Loan A, First Lien(f)(n)

  Financial

Services

  4.50%   6/27/17     1,645,833        1,545,450        1,596,458   

Bankruptcy Management Solutions, Inc., Term Loan B, First Lien(f)(n)

  Financial

Services

  7.00%   6/27/18     12,161,227        10,088,490        10,458,655   

Citrus Energy Appalachia, LLC, Second Lien(n)

  Energy   9.75%   7/26/18     27,787,500        26,993,013        26,953,875   

Isola USA Corp., First Lien(n)

  Laminate
Products
  9.25%   11/29/18     5,000,000        4,925,500        5,050,000   

K2 Pure Solutions Nocal, L.P. First Lien(n)

  Chemicals   10.00%   8/19/19     20,000,000        19,624,645        20,000,000   

MediMedia USA, Inc., First Lien(n)

  Information

Services

  8.00%   11/20/18     9,950,000        9,683,071        9,651,500   

MediMedia USA, Inc., Second Lien(n)

  Information

Services

  12.25%   11/20/19     60,000,000        58,360,932        58,200,000   

Omnitracs, Inc., Second Lien(n)

  Trucking Fleet
Management
Systems
  8.75%   5/25/21     3,000,000        2,970,195        3,020,625   

Pre-Paid Legal Services, Inc., Second Lien(n)

  Legal

Services

  9.75%   7/1/20     25,000,000        24,649,793        25,000,000   

Quality Home Brands Holdings LLC, Second Lien(n)

  Materials   11.75%   6/17/19     40,000,000        40,000,000        40,000,000   

Red Apple Stores Inc., Second Lien(f)(g)(q)

  Discount

Stores

  16.00%   1/11/17     20,000,000        20,000,000        20,000,000   

 

15


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2013

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Renaissance Learning, Inc., Second Lien(n)

  Education
Software
  8.75%   5/14/21   $ 3,000,000      $ 2,955,733      $ 3,031,875   

Road Infrastructure Investment, LLC, Second Lien(n)

  Manufacturing   10.25%   9/30/18     15,000,000        14,831,430        15,000,000   

Royal Adhesives and Sealants, LLC, Second Lien(n)

  Chemicals   9.75%   1/31/19     6,000,000        5,888,863        6,075,000   

Shoreline Energy LLC, Second Lien(n)

  Energy   10.25%   3/30/19     30,000,000        29,139,991        30,000,000   

Sur La Table, Inc., First Lien

  Consumer

Products

  12.00%   7/28/17     50,000,000        50,000,000        51,000,000   

United Subcontractors, Inc., First Lien(d)(n)(o)

  Building and

Construction

  4.25%   6/30/15     5,015,119        4,933,931        5,015,119   

Water Pik, Inc., Second Lien(n)

  Consumer
Products
  9.75%   1/8/21     22,500,000        21,552,192        22,050,000   

WBS Group LLC, First Lien(f)(n)

  Software   9.50%   6/30/15     27,284,255        27,284,255        27,284,255   

WBS Group LLC, Second Lien(f)(n)

  Software   10.50%   12/31/15     24,999,000        24,652,270        24,999,000   

Westward Dough Operating Company, LLC, First Lien(f)

  Restaurants   8.00%   3/2/17     6,590,896        6,590,896        6,656,805   
         

 

 

   

 

 

 

Total Senior Secured Loans

              528,163,132        527,203,698   
         

 

 

   

 

 

 

Preferred Stock—3.5%

           

Advantage Insurance Holdings Ltd.(d)(g)(i)(q)

  Insurance   8.00%       500,000        5,100,822        5,100,822   

Alpha Media Group Holdings Inc., Series A-2(p)

  Publishing         5,000        —         —    

KAGY Holding Company, Inc. (AGY Holding Corp.)(d)

  Glass

Yarns/Fibers

  20.00%       22,960        5,016,519        4,732,950   

Progress Financial Corporation,
Series F-1(p)

  Financial Services         963,710        740,313        1,263,255   

Progress Financial Corporation,
Series G(p)

  Financial Services         1,758,256        2,013,112        2,304,765   

USI Senior Holdings, Inc. (United Subcontractors)(d)(p)

  Building and

Construction

        208,742        3,812,635        6,262,254   

VSS-AHC Consolidated Holdings Corp. (Advanstar Global LLC)(d)

  Printing/

Publishing

  15.00%       4,809        5,208,213        5,208,213   
         

 

 

   

 

 

 

Total Preferred Stock

            21,891,614        24,872,259   
         

 

 

   

 

 

 

Common Stock—20.2%(p)

           

Alpha Media Group Holdings Inc., Class B

  Publishing         12,500        —         —    

Arclin Cayman Holdings Ltd.(g)(q)

  Chemicals         450,532        9,722,203        18,440,000   

Bankruptcy Management Solutions, Inc.(f)

  Financial

Services

        368,124        16,654,505        17,242,928   

 

16


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2013

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

ECI Holdco, Inc., Class A-1(f)

  Electronics         20,540,133      $ 23,077,697      $ 68,604,042   

M & M Tradition Holdings Corp.(d)

  Sheet Metal

Fabrication

        500,000        5,000,000        9,250,000   

Red Apple Stores Inc.(f)(g)(h)(q)

  Discount

Stores

        8,756,859        8,242,821        8,242,821   

Tygem Holdings, Inc., Class A

  Metals         30,000        —         —    

USI Senior Holdings, Inc. (United Subcontractors)(d)

  Building and

Construction

        208,742        3,814,281        21,575,553   
         

 

 

   

 

 

 

Total Common Stock

            66,511,507        143,355,344   
         

 

 

   

 

 

 

Limited Partnership/Limited Liability Company Interests—9.6%

           

ARS Investment Holdings, LLC(j)(p)

  HVAC/ Plumbing

Services

        128,358        21,658        1,130,000   

DynaVox Systems Holdings, LLC(k)(p)

  Augmentative

Communication

Products

        272,369        758,069        32,684   

Higginbotham Investment Holdings, LLC(p)

  Insurance         1,163        1,139,535        1,715,117   

Marquette Transportation Company Holdings, LLC(l)(p)

  Transportation         25,000        5,000,000        2,912,000   

Marsico Holdings, LLC(i)(p)

  Financial Services         91,445        1,848,077        18,732   

Penton Business Media Holdings, LLC(d)(p)

  Information
Services
        226        9,050,000        36,441,130   

PG Holdco, LLC

  Healthcare
Services
  15.00%       333        430,772        430,772   

PG Holdco, LLC, Class A(p)

  Healthcare
Services
        16,667        166,667        410,569   

Sentry Security Systems Holdings, LLC(p)

  Security Services         147,271        147,271        15,943   

Sentry Security Systems Holdings, LLC

  Security Services   8.00%       602,729        1,024,686        1,024,686   

VSS-AHC Holdings LLC (Advanstar
Global LLC)(d)(p)

  Printing/
Publishing
        884,716        6,150,647        13,394,600   

WBS Group LLC(f)(m)(p)

  Software         —          1,000        6,056,783   

Westward Dough Holdings, LLC, Class A(f)(p)

  Restaurants         350,000        9,260,324        4,781,000   
         

 

 

   

 

 

 

Total Limited Partnership/Limited Liability Company Interests

      34,998,706        68,364,016   
         

 

 

   

 

 

 

 

17


Table of Contents

BlackRock Kelso Capital Corporation

Consolidated Schedules of Investments—(Continued)

December 31, 2013

 

Portfolio Company   Industry(a)   Interest Rate   Maturity  

Principal

Amount or

Number of

Shares/Units

    Cost(b)    

Fair

Value(c)

 

Equity Warrants/Options—
4.3%(p)

         

Arclin Cayman Holdings Ltd., Tranche 1(g)(q)

  Chemicals     expire 1/15/14     230,159      $ 403,815      $ 6,082,021   

Arclin Cayman Holdings Ltd., Tranche 2(g)(q)

  Chemicals     expire 1/15/15     230,159        323,052        6,088,754   

Arclin Cayman Holdings Ltd., Tranche 3(g)(q)

  Chemicals     expire 1/15/14     230,159        484,578        5,391,543   

Arclin Cayman Holdings Ltd., Tranche 4(g)(q)

  Chemicals     expire 1/15/15     230,159        403,815        5,399,833   

Bankruptcy Management Solutions,
Inc., Tranche A(f)

  Financial
Services
    expire 6/27/18     28,464        375,040        375,725   

Bankruptcy Management Solutions,
Inc., Tranche B(f)

  Financial
Services
    expire 6/27/19     30,654        342,295        343,631   

Bankruptcy Management Solutions,
Inc., Tranche C(f)

  Financial
Services
    expire 6/27/20     45,981        468,803        474,524   

Facet Investment, Inc.

  Medical
Devices
    expire 1/18/21     1,978        250,000        80,415   

Marsico Parent Superholdco, LLC(i)

  Financial
Services
    expire 12/14/19     455        444,450        —    

Progress Financial Corporation

  Financial
Services
    expire various     6,959,220        3,183,106        5,729,127   

Twin River Worldwide Holdings, Inc., Contingent Value Rights

  Gaming     expire 11/5/17     1,000        5,000        600,000   
         

 

 

   

 

 

 

Total Equity Warrants/Options

      6,683,954        30,565,573   
         

 

 

   

 

 

 

TOTAL INVESTMENTS—171.6%

    $ 1,084,500,221        1,217,972,464   
         

 

 

   

OTHER ASSETS & LIABILITIES (NET)—(71.6)%

        (508,268,123
           

 

 

 

NET ASSETS—100.0%

            $ 709,704,341   
           

 

 

 

 

  (a) Unaudited.
  (b) Represents amortized cost for fixed income securities and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options.
  (c) Fair value is determined by or under the direction of the Company’s Board of Directors. See Note 2 for further details.
  (d) Transaction and other information for “non-controlled, affiliated” investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio company’s outstanding voting securities.
  (e) Approximately 72% of the senior secured loans of the Company’s portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrower’s option. In addition, approximately 71% of such senior secured loans have floors of 1.00% to 1.75%. The borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate at December 31, 2013 of all contracts within the specified loan facility.

 

18


Table of Contents
                                  For the Year Ended December 31, 2013  
Non-controlled, Affiliated Investments   Fair Value at
December 31,
2012
    Gross
Additions
(Cost)*
    Gross
Reductions
(Cost)**
   

Net
Unrealized
Gain

(Loss)

   

Fair

Value at
December 31,
2013

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

Advantage Insurance Holdings Ltd.

                 

Preferred Stock

  $ —       $ 5,100,822      $ —       $ —       $ 5,100,822      $ —       $ —       $ —       $ 100,823   

AGY Holding Corp.:

                 

Senior Secured Note

    —         19,462,510        —         (311,510     19,151,000 †      —         1,528,400        —         —    

Senior Secured Loan

    —         7,964,650        —         —         7,964,650 †      —         496,462        —         —    

KAGY Holding Company, Inc. (AGY Holding Corp.)

                 

Preferred Stock

    —         5,016,519        —         (283,569     4,732,950 †      —         —         —         501,229   

M&M Tradition Holdings Corp.

                 

Common Stock

    6,250,000        —         —         3,000,000        9,250,000        —         —         —         —    

Penton Business Media Holdings, LLC

                 

Limited Liability Co. Interest

    22,111,124        —         —         14,330,006        36,441,130        —         —         —         —    

Penton Media, Inc. et al.

                 

Senior Secured Loan

    20,822,342        3,834,740        (23,687,192     (969,890     —         —         4,599,171        —         —    

United Subcontractors, Inc.

                 

Senior Secured Loan

    3,242,631        1,454,257        —         318,231        5,015,119        21        406,643        —         —    

USI Senior Holdings, Inc.:

                 

Common Stock

    3,485,140        88,832        (344     18,001,925        21,575,553        —         —         —         —    

Preferred Stock

    4,934,133        87,527        —         1,240,594        6,262,254        —         —         —         —    

VSS-AHC Consolidated Holdings Corp. (Advanstar Global LLC)

                 

Preferred Stock

    —         5,208,213        —         —         5,208,213        —         —         —         399,212   

VSS-AHC Holdings LLC. (Advanstar Global LLC)

                 

Limited Liability Co. Interest

    6,904,802        —         —         6,489,798        13,394,600        —         —         —         —    
 

 

 

 

Totals

  $ 67,750,172      $ 48,218,070      $ (23,687,536   $ 41,815,585      $ 134,096,291      $ 21      $ 7,030,676      $ —       $ 1,001,264   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-in-kind (“PIK”) interest or dividends, 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.
  Investment moved into non-controlled, affiliated category during the period.

The aggregate fair value of non-controlled, affiliated investments at December 31, 2013 represents 18.9% of the Company’s net assets.

 

 

 

  (f) Transaction and other information for “controlled” investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio company’s outstanding voting securities.
  (g) Non-U.S. company or principal place of business outside the U.S.
  (h) Original purchase denominated in Canadian dollars.
  (i) Security is exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 27% of the Company’s net assets at December 31, 2013.
  (j) The Company is the sole stockholder of BKC ARS Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C. and thus a non-controlled, non-affiliated investment.
  (k) The Company is the sole stockholder of BKC DVSH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC and thus a non-controlled, non-affiliated investment.
  (l) The Company is the sole stockholder of BKC MTCH Blocker, Inc., a consolidated subsidiary, which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC and thus a non-controlled, non-affiliated investment.
  (m) The Company is the sole stockholder of BKC-WBS, LLC, a consolidated subsidiary, which is the beneficiary of more than 25% of the voting securities of WBS Group LLC and thus a controlled investment.

 

19


Table of Contents
                                  For the Year Ended December 31, 2013  
Controlled Investments   Fair Value at
December 31,
2012
   

Gross

Additions
(Cost)*

    Gross
Reductions
(Cost)**
   

Net

Unrealized
Gain (Loss)

   

Fair Value at
December 31,

2013

   

Net

  Realized  

Gain

(Loss)

   

    Interest    

Income

   

Fee

  Income  

 

Bankruptcy Management Solutions, Inc.:

               

Senior Secured Loan, First Lien, A

  $ 1,960,000      $ 2,156,660      $ (2,354,167   $ (166,035   $ 1,596,458      $ 218,374      $ 129,497      $ 358,705   

Senior Secured Loan, First Lien, B

    17,148,766        32,131,115        (35,752,294     (3,068,932     10,458,655        2,269,456        2,779,506        100,000   

Senior Secured Loan, Second Lien

    7,703,412        406,328        (25,556,717     17,446,977        —   †      (24,547,868     494,976        —    

Common Stock

    —         16,658,378        (3,873     588,423        17,242,928        (9,600,072     —         —    

Warrants

    —         1,216,827        (30,689     7,742        1,193,880        (396,273     —         —    

BKC CSP Blocker, Inc.

               

Common Stock

    —         167,401        (167,401     —         —         167,401        —         —    

ECI Holdco, Inc.

               

Common Stock

    47,981,132        4,050,000        —         16,572,910        68,604,042        —         —         —    

Red Apple Stores Inc.:

               

Unsecured Debt

    —         5,454,365        —         —         5,454,365 ††      —         454,544        —    

Senior Secured Loan

    —         20,000,000        —         —         20,000,000 ††      —         1,546,669        1,250,000   

Common Stock

    —         8,512,095        (269,274     —         8,242,821 ††      —         —         —    

WBS Group LLC:

               

Senior Secured Loan, First Lien

    27,284,255        —         —         —         27,284,255        —         2,055,137        1,000,000   

Senior Secured Loan, Second Lien

    24,999,000        188,354        (140,633     (47,721     24,999,000        134        2,635,733        29,975   

Limited Liability Co. Interest

    6,056,783        —         —         —         6,056,783        —         —         —    

Westward Dough Operating Company, LLC

               

Senior Secured Loan

    6,590,896        —         —         65,909        6,656,805        —         523,243        —    

Westward Dough Holdings, LLC

               

Limited Liability Co. Interest

    3,612,000        —         —         1,169,000        4,781,000        —         —         —    
 

 

 

 

Totals

  $ 143,336,244      $ 90,941,523      $ (64,275,048   $ 32,568,273      $ 202,570,992      $ (31,888,848   $ 10,619,305      $ 2,738,680   
 

 

 

 

 

  * Gross additions include increases in the cost basis of investments resulting from new portfolio investments, PIK interest or dividends, 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.
  Investment no longer held at December 31, 2013.
  †† Investment moved into controlled category during the period.

The aggregate fair value of controlled investments at December 31, 2013 represents 28.5% of the Company’s net assets.

 

 

 

  (n) Security bears interest at a floating rate that may or may not include an interest rate floor.
  (o) Interest may be paid in cash or PIK, or a combination thereof which is generally at the option of the borrower. PIK earned is included in the cost basis of the security. PIK represented approximately 6.1% of interest income earned for the year ended December 31, 2013. In accordance with the Company’s policy, PIK may be recorded on an effective yield basis.
  (p) Non-income producing equity securities at December 31, 2013.
  (q) BDCs are required to invest at least 70% of their total assets primarily in securities of private or thinly traded U.S. public companies, cash, cash equivalents, U.S. Government securities and other high quality debt investments that mature in one year or less. The securities referenced represent either fully or partially non-qualified assets for purposes of this requirement.

 

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BlackRock Kelso Capital Corporation

Notes to Consolidated Financial Statements (Unaudited)

1. Organization

BlackRock Kelso Capital Corporation and subsidiaries (the “Company”) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986 (the “Code”). The Company is registered as an investment advisor under the Investment Advisers Act of 1940 (the “Advisers Act”).

The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.

2. Significant accounting policies

Unaudited Interim Consolidated Financial Statements

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission (“SEC”) on March 6, 2014.

Basis of Presentation

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements and the reported amounts of income and expenses during the reported period. The Company is an investment company following accounting and reporting guidance in Accounting Standards Codification (“ASC”) 946. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material.

The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, which were established to hold certain investments of the Company. The Company owns 100% of each subsidiary and, as such, the subsidiaries are consolidated into the Company’s consolidated financial statements. The subsidiaries hold investments which are treated as pass through entities for tax purposes. By investing through these 100% owned subsidiaries, the Company is able to benefit from corporate tax treatment for these entities and thereby create a tax structure that is more advantageous with respect to the RIC status of the Company. Transactions between subsidiaries, to the extent they occur, are eliminated in consolidation.

Investments

Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase. Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment. 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. Realized gains or losses on the disposition of investments are calculated using the specific identification method.

 

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Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company obtains market quotations, when available, from an independent pricing service or one or more broker-dealers or market makers and utilizes the average of the range of bid and ask quotations. Debt and equity securities for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued at fair value as determined in good faith by or under the direction of the Company’s Board of Directors.

Because the Company expects that there will not be a readily available market for substantially all of the investments in its portfolio, the Company expects to value substantially all of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty and subjectivity of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments and may differ materially from the values that the Company may ultimately realize.

In addition, changes in the market environment and other events may have differing impacts on the market quotations used to value some of the Company’s investments than on the fair values of the Company’s investments for which market quotations are not readily available. Market quotations may be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Company’s investment advisor (the “Advisor”), believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a “forced” sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread.

With respect to the Company’s investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors has approved a multi-step valuation process applied each quarter, as described below:

(i) The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment;

(ii) The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor;

(iii) The audit committee of the Board of Directors reviews the preliminary valuations prepared by the independent valuation firms; and

(iv) The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current

 

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market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, (e.g. non-performance risk), its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the Company’s principal market (as the reporting entity) and enterprise values.

Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is held at amortized cost, which the Advisor believes approximates fair value under the circumstances. As of that date, an independent valuation firm conducts an initial independent appraisal of the investment.

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), issued by the Financial Accounting Standards Board (“FASB”), defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. See note 10 for further details.

Cash and Cash Equivalents

Cash equivalents include short-term liquid overnight investments.

Revenue recognition

Interest income is recorded on an accrual basis and includes amortization of premiums and accretion of discounts. Discounts and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security. Premiums and discounts are determined based on the cash flows expected to be received for a particular investment upon maturity.

Dividend income is recorded on the ex-dividend date and is adjusted to the extent that the Company expects to collect such amounts. For loans and securities with payment-in-kind (“PIK”) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, such income is accrued only to the extent that the Advisor believes that the PIK income is likely to be collected. To maintain the Company’s status as a RIC, this non-cash source of income must be paid out to stockholders in the form of dividends, even though the Company has not yet collected the cash.

Fee income, such as structuring fees, origination, closing, commitment and other upfront fees are generally non-recurring and are recognized as revenue when earned. In instances where the Company does not perform significant services in connection with the related investment, fees paid to the Company may be deferred and amortized over the estimated life of the investment. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as income.

U.S. Federal income taxes

The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of our ordinary income and 98.2% of net capital gains from the current year and any undistributed ordinary income and net capital gains from the preceding years. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated undistributed taxable income as required.

 

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Distributions from net investment income and distributions from net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent, they are charged or credited to paid-in-capital or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Company’s annual RIC tax return.

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

The Company may pay distributions in excess of its taxable net investment income. This excess would be a tax-free return of capital in the period and reduce the shareholder’s tax basis in its shares. The cumulative amount is disclosed on the Consolidated Statements of Assets and Liabilities as distributions in excess of taxable net investment income. Cumulative distributions in excess of taxable net investment income are $23,182,167 and $19,373,748 as of September 30, 2014 and December 31, 2013, respectively.

Distributions to Common Stockholders

Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a distribution is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.

The Company has adopted a dividend reinvestment plan that provides for reinvestment of distributions on behalf of stockholders, unless a stockholder elects to receive cash. As a result, if the Board of Directors authorizes, and the Company declares, a cash distribution, then stockholders who have not “opted out” of the dividend reinvestment plan will have their cash dividends automatically reinvested in additional shares of Common Stock, rather than receiving the cash distributions.

Foreign Currency

Foreign currency amounts are translated into United States dollars on the following basis:

 

  (i) market value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and

 

  (ii) purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such transactions, income or expenses.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, 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. Such fluctuations are included with the net realized and unrealized gain or loss from investments.

Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.

Debt Issuance Costs

Debt issuance costs are amortized over the term of the related debt using the straight line method.

 

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Equity Offering Expenses

The Company records registration expenses related to its shelf registration statement and related SEC filings as prepaid assets. These expenses are charged as a reduction of capital upon utilization, in accordance with ASC 946, Financial Services—Investment Companies.

Non-Accrual Loans

Loans or debt securities are placed on non-accrual status, as a general matter, when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest generally is reversed when a loan or debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan has sufficient collateral value and is in the process of collection.

Recently Issued Accounting Pronouncements

In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (“ASU 2013-01”). This update clarifies that the scope of ASU 2011-11 applies to derivatives accounted for in accordance with Topic 815. This update was effective for the Company for the year ended December 31, 2013, and did not have a material effect on the Company’s consolidated financial statements.

In June 2013, the FASB issued ASU No. 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). ASU 2013-08 changes the approach to the assessment of whether a company is an investment company, clarifies the characteristics of an investment company, provides comprehensive guidance for the investment company assessment and contains certain disclosure requirements. ASU 2013-08 was effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. This update was effective for the Company for the year ended December 31, 2013, and did not have a material effect on the Company’s consolidated financial statements.

3. Agreements and related party transactions

Base Management Fee

The Company has entered into an Investment Management Agreement (the “Management Agreement”) with the Advisor, under which the Advisor, subject to the overall supervision of the Company’s Board of Directors, manages the day-to-day operations of, and provides investment advisory services to the Company. For providing these services, the Advisor receives a base management fee (the “Management Fee”) from the Company quarterly in arrears at an annual rate of 2.0% of the Company’s total assets, including any assets acquired with the proceeds of leverage.

For the three and nine months ended September 30, 2014, the Advisor earned $5,621,443 and $17,892,011, respectively, in Management Fees under the Management Agreement. For the three and nine months ended September 30, 2013, the Advisor earned $5,286,986 and $15,826,168, respectively, in Management Fees under the Management Agreement.

Incentive Management Fee

The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the “Incentive Fee”) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders do not meet an 8.0% annualized rate of return during the applicable fee

 

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measurement period and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return during such period. Annualized rate of return in this context is computed by reference to the Company’s net asset value and does not take into account changes in the market price of the Company’s common stock.

The Advisor will be entitled to receive the Incentive Fee if the Company’s performance exceeds a “hurdle rate” during different measurement periods: trailing four quarters’ periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on capital gains). The “trailing four quarters’ periods” for purposes of determining the income portion of the Incentive Fee payable for the three and nine months ended September 30, 2014 and 2013 was determined by reference to the four quarter periods ended on September 30, 2014 and 2013, respectively. The term “annual period” means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.

The hurdle rate for each measurement period is 2.0% multiplied by the Company’s net asset values at the beginning of each calendar quarter during the measurement period, calculated after giving effect to any distributions that occurred during the measurement period. A portion of the Incentive Fee is based on the Company’s income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.

Quarterly Incentive Fee Based on Income. For each trailing four quarters’ period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess of (A) over (B) described in this paragraph for each period is referred to as the excess income amount.

The portion of the Incentive Fee based on income for each period will equal 50% of the period’s excess income amount, until the cumulative Incentive Fee payments for the period equal 20% of the period’s income amount distributed or distributable to stockholders as described in clause (A) of the preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the period’s remaining excess income amount.

For the three and nine months ended September 30, 2014 the Advisor did not earn an incentive fee based on income. For the three and nine months ended September 30, 2013, the Advisor earned zero and $1,917,968, respectively, in Incentive Fees based on income from the Company.

Annual Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated and paid on an annual basis beginning on July 1, 2007, the first day of the calendar quarter in which the Public Market Event occurred and each annual period thereafter, ending on June 30 of the next calendar year. For each annual period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed gross unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the period’s hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess of (A) over (B) described in this paragraph is referred to as the excess gain amount.

The portion of the Incentive Fee based on capital gains for each period will equal 50% of the period’s excess gain amount, until such payments equal 20% of the period’s capital gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the period’s remaining excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the period’s hurdle, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the capital gain amount.

In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the

 

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“period-to-period” method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and gross unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.

We are required under GAAP to accrue a hypothetical capital gains Incentive Fee based upon net realized capital gains and unrealized capital appreciation and depreciation on investments held at the end of each period. The accrual of this hypothetical capital gains incentive fee assumes all unrealized capital appreciation and depreciation is realized in order to reflect a hypothetical capital gains incentive fee that would be payable at each measurement date. If such amount is positive at the end of the period, then we record a capital gains incentive fee equal to 20% of such amount, less the amount of capital gains related incentive fees already accrued in prior periods. If the resulting amount is negative, the accrual for GAAP in a given period may result in an additional expense. There can be no assurance that such unrealized capital appreciation will be realized in the future. However, it should be noted that a fee so calculated and accrued would not be payable under the Investment Advisers Act of 1940 or the Management Agreement. Amounts actually paid will be consistent with the Advisers Act which specifically excludes consideration of unrealized capital appreciation.

The capital gains incentive fee due to the Advisor as calculated under the Management Agreement as described above, at September 30, 2014 and 2013 was zero. In accordance with GAAP the hypothetical incentive fee for the three and nine months ended September 30, 2014, resulted in a capital gains incentive fee of $593,837 and $7,022,626, respectively, and for the three and nine months ended September 30, 2013, resulted in a capital gains incentive fee of $9,358,529 and $14,774,276. The total cumulative accrued balance at September 30, 2014 and 2013 was $17,247,288 and $20,269,011, respectively.

Advisor Reimbursements

The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three and nine months ended September 30, 2014, the Company incurred $574,964 and $1,684,238, respectively, and for the three and nine months ended September 30, 2013, the Company incurred $479,871 and $1,520,714, respectively, for such investment advisor expenses under the Management Agreement.

From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for such purposes during the three and nine months ended September 30, 2014 were $406,861 and $1,616,263 respectively, and during the three and nine months ended September 30, 2013 were $749,072 and $2,391,977, respectively.

No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.

Administration

The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the “Administrator”) under which the Administrator provides certain administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Company’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Company’s allocable portion of the cost of

 

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certain of the Company’s officers and their respective staff. For the three and nine months ended September 30, 2014, the Company incurred $108,840 and $391,306, respectively, for administrative services expenses payable to the Administrator under the administration agreement. For the three and nine months ended September 30, 2013, the Company incurred $123,801 and $456,516, respectively, in such expenses.

Advisor Stock Transactions

In 2007, the Company’s Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Company’s common stock, in the Advisor’s discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to this authorization, during the nine months ended September 30, 2014 the Advisor purchased 84,600 shares of the Company’s common stock in the open market for $716,146, including brokerage commissions. There were no such purchases during the nine months ended September 30, 2013.

In March 2011, the Company’s Board of Directors authorized the purchase in a private placement of up to 1,000,000 shares of the Company’s common stock, by the Advisor in its discretion, subject to compliance with the Company’s and the Advisor’s applicable policies and requirements of law. Pursuant to this authorization, on March 16, 2011, the Company issued and sold to the Advisor in a private placement 200,000 shares of common stock for $2,000,000 or $10.00 per share, which was the closing price of the Company’s common stock price on The NASDAQ Global Select Market on that date. There were no private placement purchases during the three and nine months ended September 30, 2014 and 2013.

At September 30, 2014 and December 31, 2013, the Advisor owned and had the right to vote approximately 185,000 and 46,000 shares, respectively, of the Company’s common stock, representing less than 1.0% of the total shares outstanding. On such dates, under compensation arrangements for its officers and employees the Advisor owned of record but did not have the right to vote an additional 61,000 and 125,000 shares, respectively, of the Company’s common stock. At September 30, 2014 and December 31, 2013, other entities affiliated with the Administrator beneficially owned approximately 3,383,000 and 4,808,000 shares, respectively, of the Company’s common stock, representing approximately 4.5% and 6.5% of the total shares outstanding. An entity affiliated with the Administrator has ownership and financial interests in the Advisor.

4. Earnings per share

The following information sets forth the computation of basic and diluted net increase in net assets from operations per share (earnings per share) for the three and nine months ended September 30, 2014 and 2013.

 

     Three Months Ended      Nine Months Ended  
     September 30,
2014
     September 30,
2013
     September 30,
2014
     September 30,
2013
 

Earnings per share – basic:

           

Net increase in net assets resulting from operations

   $ 28,969,522       $ 19,843,743       $ 82,753,091       $ 61,664,279   

Weighted average shares outstanding – basic

     74,556,389         74,239,932         74,536,270         74,099,028   

Earnings per share – basic:

   $ 0.39       $ 0.27       $ 1.11       $ 0.83   

Earnings per share – diluted:

           

Net increase in net assets resulting from operations, before adjustments

   $ 28,969,522       $ 19,843,743       $ 82,753,091       $ 61,664,279   

Adjustments for interest on unsecured convertible senior notes

     1,643,304         1,643,305         4,927,891         4,006,281   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net increase in net assets resulting from operations, as adjusted

   $ 30,612,826       $ 21,487,048       $ 87,680,982       $ 65,670,560   

Weighted average shares outstanding – diluted

     84,453,116         84,136,659         84,432,998         82,183,168   

Earnings per share – diluted:

   $ 0.36       $ 0.26       $ 1.04       $ 0.80   

 

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5. Investments

Purchases of investments, including PIK, for the three months ended September 30, 2014 and 2013 totaled $142,583,979 and $133,132,350, respectively, and for the nine months ended September 30, 2014 and 2013 totaled $296,058,702 and $364,973,873, respectively. Sales/repayments of investments for the three months ended September 30, 2014 and 2013 totaled $117,312,739 and $15,953,022, respectively, and for the nine months ended September 30, 2014 and 2013 totaled $497,825,599 and $319,283,096, respectively.

At September 30, 2014, investments consisted of the following:

 

     Cost      Fair Value  
  

 

 

 

Senior secured notes

   $ 104,831,149       $ 102,081,875   

Unsecured debt

     107,507,734         105,507,133   

Subordinated debt

     56,288,868         56,031,373   

Senior secured loans:

     

First lien

     266,599,348         267,893,931   

Second/other priority lien

     322,739,368         324,547,043   
  

 

 

 

Total senior secured loans

     589,338,716         592,440,974   
  

 

 

 

Preferred stock

     27,716,103         29,300,381   

Common stock

     39,265,550         78,831,275   

Limited partnership/limited liability company interests

     37,512,042         79,425,179   

Equity warrants/options

     5,575,199         10,203,438   
  

 

 

 

Total investments

   $ 968,035,361       $ 1,053,821,628   
  

 

 

 

At December 31, 2013, investments consisted of the following:

 

     Cost      Fair Value  
  

 

 

 

Senior secured notes

   $ 229,324,910       $ 226,685,176   

Unsecured debt

     118,531,084         118,531,084   

Subordinated debt

     78,395,314         78,395,314   

Senior secured loans:

     

First lien

     160,014,671         158,250,792   

Second/other priority lien

     368,148,461         368,952,906   
  

 

 

    

 

 

 

Total senior secured loans

     528,163,132         527,203,698   
  

 

 

    

 

 

 

Preferred stock

     21,891,614         24,872,259   

Common stock

     66,511,507         143,355,344   

Limited partnership/limited liability company interests

     34,998,706         68,364,016   

Equity warrants/options

     6,683,954         30,565,573   
  

 

 

    

 

 

 

Total investments

   $ 1,084,500,221       $ 1,217,972,464   
  

 

 

    

 

 

 

 

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Industry Composition

The industry composition of the portfolio at fair value at September 30, 2014 and December 31, 2013 was as follows:

 

      September 30,     December 31,  
Industry    2014     2013  

Consumer Products

     17.0     14.6

Healthcare

     12.3        12.1   

Personal and Other Services

     11.5        17.1   

Energy

     11.1        5.4   

Manufacturing

     9.0        8.3   

Printing, Publishing and Media

     6.2        5.6   

Financial Services

     6.1        4.9   

Building and Real Estate

     6.0        2.7   

Business Services

     5.6        7.1   

Chemicals

     5.5        8.5   

Defense

     4.3        —     

Retail

     2.5        2.8   

Beverage, Food and Tobacco

     1.0        3.5   

Distribution

     1.0        1.6   

Containers and Packaging

     0.6        0.2   

Electronics

     0.3        5.6   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

The geographic composition of the portfolio at fair value at September 30, 2014 was United States 95.7%, Canada 2.5% and the Cayman Islands 1.8%, and at December 31, 2013 was United States 93.1%, Canada 6.5% and the Cayman Islands 0.4%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.

Market and Credit Risk

In the normal course of business, the Company invests in securities and enters into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Company may decline in response to certain events, including those directly involving the issuers whose securities are owned by the Company; conditions affecting the general economy; overall market changes; local, regional or global political, social or economic instability; and currency and interest rate and price fluctuations. Similar to issuer credit risk, the Company may be exposed to counterparty credit risk, or the risk that an entity with which the Company has unsettled or open transactions may fail to or be unable to perform on its commitments. The Company manages counterparty risk by entering into transactions only with counterparties that they believe have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Company to market, issuer and counterparty credit risks, consist principally of investments in portfolio companies. The extent of the Company’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is generally approximated by their value recorded in the consolidated statements of assets and liabilities. The Company is also exposed to credit risk related to maintaining all of its cash at a major financial institution.

The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than

 

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more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.

6. Derivatives

Foreign Currency

The Company may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate 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 forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Company’s forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during each calendar quarter. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with only creditworthy counterparties. There were no open forward foreign currency contracts at September 30, 2014 or December 31, 2013.

Warrants

The Company holds warrants and options in certain portfolio companies in an effort to achieve additional investment return. In purchasing warrants and options, the Company bears the risk of an unfavorable change in the value of the underlying equity interest. The aggregate fair value of warrants and options as of September 30, 2014 and December 31, 2013 represents 1.4% and 4.3%, respectively, of the Company’s net assets.

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, 2014 and December 31, 2013 reflect the volume of derivative activity throughout the periods presented.

7. Debt

In accordance with the 1940 Act, with certain limited exceptions, the Company is only allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, is at least 200% after such borrowing. As of September 30, 2014, the Company’s asset coverage was 304%.

On March 27, 2014, the Company entered into an Amended and Restated Senior Secured Revolving Credit Facility (the “Credit Facility”) which has an initial aggregate principal amount of up to $405,000,000 and canceled the prior credit facility that was outstanding at December 31, 2013. The Credit Facility has a stated maturity date of March 27, 2019. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 2.25%. The Credit Facility’s commitment may increase in size, under certain circumstances, up to a total of $750,000,000.

On March 27, 2014, the Company entered into an Amended and Restated Senior Secured Term Loan Credit Agreement (the “Term Loan”) which has a principal amount of $15,000,000. The Term Loan has a stated maturity date of March 27, 2019. The interest rate applicable to borrowings thereunder is generally LIBOR plus an applicable margin of 3.25%.

On February 19, 2013, the Company closed a private offering of $100,000,000 in aggregate principal amount of 5.50% unsecured convertible senior notes due 2018 (the “Convertible Notes”). The initial purchasers of the Convertible Notes fully exercised their overallotment option and purchased an additional $15,000,000 in

 

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aggregate principal amount of the Convertible Notes. The closing of the overallotment option took place on March 4, 2013. With the exercise of the overallotment option, a total of $115,000,000 in aggregate principal amount of the Convertible Notes was sold. Net proceeds to the Company from the offering, including the exercise of the overallotment option, were approximately $111,300,000. The Convertible Notes were only offered to qualified institutional buyers as defined in the Securities Act of 1933, as amended (the “Securities Act”) pursuant to Rule 144A under the Securities Act.

The Convertible Notes are unsecured and bear interest at a rate of 5.50% per year, payable semi-annually in arrears. In certain circumstances and during certain periods, the Convertible Notes are convertible into cash, shares of BlackRock Kelso Capital’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election, at an initial conversion rate of 86.0585 shares of common stock per $1,000 principal amount of the Convertible Notes, which is equivalent to an initial conversion price of approximately $11.62 per share of the Company’s common stock, subject to defined anti-dilution adjustments. The Company does not have the right to redeem the Convertible Notes prior to maturity. The Convertible Notes mature on February 15, 2018, unless repurchased or converted in accordance with their terms prior to such date.

On January 18, 2011, the Company closed a private placement issuance of $158,000,000 in aggregate principal amount of five-year, senior secured notes with a fixed interest rate of 6.50% and a maturity date of January 18, 2016 and $17,000,000 million in aggregate principal amount of seven-year, senior secured notes with a fixed interest rate of 6.60% and a maturity date of January 18, 2018 (collectively, the “Senior Secured Notes”). The Senior Secured Notes were sold to certain institutional accredited investors pursuant to an exemption from registration under the Securities Act of 1933, as amended. Interest on the Senior Secured Notes is due semi-annually on January 18 and July 18, commencing on July 18, 2011.

The Company’s outstanding debt as of September 30, 2014 and December 31, 2013 was as follows:

 

    As of  
  September 30, 2014     December 31, 2013  
  Total
Aggregate
Principal
Amount
Available(1)
    Principal
Amount
Outstanding
    Carrying Value     Total
Aggregate
Principal
Amount
Available(1)
    Principal
Amount
Outstanding
    Carrying Value  

Credit Facility

  $ 405,000,000 (2)    $ 56,000,000      $ 56,000,000      $ 350,000,000 (2)    $ 179,000,000      $ 179,000,000   

Senior Secured Notes

    175,000,000        175,000,000        175,000,000        175,000,000        175,000,000        175,000,000   

Convertible Notes

    115,000,000        115,000,000        114,165,635 (3)      115,000,000        115,000,000        113,981,494 (4) 

Term Loan

    15,000,000        15,000,000        15,000,000        10,000,000        10,000,000        10,000,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 710,000,000      $ 361,000,000      $ 360,165,635      $ 650,000,000      $ 479,000,000      $ 477,981,494   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Subject to borrowing base and leverage restrictions.
(2) Provides for a feature that allows the Company, under certain circumstances, up to a total of $750,000,000.
(3) Represents the aggregate principal amount outstanding of the Convertible Notes less the unaccreted discount initially recorded upon issuance of the Convertible Notes. The total unaccreted discount for the 2018 Convertible Notes, was $834,365 as of September 30, 2014.
(4) Represents the aggregate principal amount outstanding of the Convertible Notes less the unaccreted discount initially recorded upon issuance of the Convertible Notes. The total unaccreted discount for the 2018 Convertible Notes was $1,018,506 as of December 31, 2013.

At September 30, 2014, the Company had $56,000,000 drawn on the Credit Facility versus $179,000,000 at December 31, 2013. Subject to compliance with applicable covenants and borrowing base limitations, the remaining amount available under the Credit Facility was $349,000,000 at September 30, 2014 and $171,000,000 at December 31, 2013.

The Company’s average outstanding debt balance during the three and nine months ended September 30, 2014 was $345,808,859 and $414,616,028, respectively, and during the three and nine months ended September 30,

 

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2013 was $374,921,359 and $334,448,747, respectively. The maximum amounts borrowed during the three and nine months ended September 30, 2014 were $384,165,636 and $517,165,636, respectively, and during the three and nine months ended September 30, 2013 was $392,410,652 and $465,260,652.

The weighted average annual interest cost for the three and nine months ended September 30, 2014 was 5.66% and 5.20%, respectively, and for the three and nine months ended September 30, 2013 was 5.47% and 5.68%, exclusive of commitment fees and of other prepaid expenses related to establishing the Credit Facility, the Senior Secured Notes, the Convertible Notes and the Term Loan. With respect to any unused portion of the commitments under the Credit Facility, the Company incurs an annual commitment fee of 0.375%. Commitment fees incurred for the three and nine months ended September 30, 2014 were $348,188 and $787,206, respectively, and for the three and nine months ended September 30, 2013 were $262,553 and $871,040.

At September 30, 2014, the Company was in compliance with all covenants required under the Credit Facility, the Senior Secured Notes and the Term Loan.

8. Capital stock

In 2008, the Company’s Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an additional 2.5 percent of its outstanding shares of common stock.

In April 2014, the repurchase plan was further extended through the earlier of September 30, 2015 or until the approved number of shares has been repurchased. During the nine months ended September 30, 2014 and 2013 the Company purchased a total of 210,248 and zero shares, respectively of its common stock on the open market for $1,779,619, including brokerage commissions. Since inception of the repurchase plan through September 30, 2014, the Company has purchased 1,635,755 shares of its common stock on the open market for $11,256,295, including brokerage commissions. At September 30, 2014, the total number of remaining shares authorized for repurchase was 1,120,895. The Company currently holds the shares it repurchased in treasury.

9. Guarantees and commitments

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at September 30, 2014 and December 31, 2013.

In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Company’s rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its consolidated financial statements.

10. Fair value of financial instruments

Fair Value Measurements and Disclosure

ASC 820-10 defines fair value, establishes a framework for measuring fair value and requires disclosures about fair value measurements. ASC 820-10 defines fair value as the price that the Company would receive upon

 

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selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. ASC 820-10 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk.

Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.

Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2 – Valuations based on unadjusted quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation.

Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing level occurred from the beginning to the end of the period.

The Company’s valuation policy and fair value disclosures are consistent with ASC 820-10. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value and categorizes each investment within the fair value hierarchy pursuant to ASC 820-10.

Under the 1940 Act, the Company is required to separately identify non-controlled investments where it owns 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, under the 1940 Act, the Company is required to separately identify investments where it owns more than 25% of a portfolio company’s outstanding voting securities as investments in “controlled” companies. Detailed information with respect to the Company’s non-controlled non-affiliated, non-controlled affiliated and controlled investments is contained in the accompanying consolidated schedules of investments and other consolidated financial statements. The information in the tables below is presented on an aggregate portfolio basis, without segregating the non-controlled non-affiliated, non-controlled affiliated and controlled investment categories.

The carrying values of the Company’s financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The fair value of the Company’s Credit Facility, the Senior Secured Notes, the Convertible Notes and the Term Loan is derived by taking the average of the high and low quotes as obtained from a broker. The fair value of the Credit Facility, Senior Secured Notes, the Convertible Notes and the Term Loan would be classified as Level 2 with respect to the fair value hierarchy.

The carrying and fair values of the Company’s outstanding debt as of September 30, 2014 and December 31, 2013 were as follows:

 

     September 30, 2014      December 31, 2013  
     Carrying Value      Fair Value      Carrying Value      Fair Value  

Credit Facility

   $ 56,000,000       $ 55,160,000       $ 179,000,000       $ 176,315,000   

Senior Secured Notes

     175,000,000         186,279,400         175,000,000         187,375,280   

Convertible Notes

     114,165,635         117,876,018         113,981,494         116,546,078   

Term Loan

     15,000,000         14,925,000         10,000,000         9,950,000   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 360,165,635       $ 374,240,418       $ 477,981,494       $ 490,186,358   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following tables summarize the fair values of the Company’s investments, forward foreign currency contracts and cash and cash equivalents based on the inputs used at September 30, 2014 and December 31, 2013 in determining such fair values:

 

            Fair Value Inputs at September 30, 2014  
     Fair Value
at September 30,
2014
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior secured notes

   $ 102,081,875       $ —         $ —        $ 102,081,875   

Unsecured debt

     105,507,133         —           —           105,507,133   

Subordinated debt

     56,031,373         —           —           56,031,373   

Senior secured loans

     592,440,974         —           —           592,440,974   

Preferred stock

     29,300,381         —           —           29,300,381   

Common stock

     78,831,275         —           —           78,831,275   

Limited partnership/limited liability company interests

     79,425,179         —           —           79,425,179   

Equity warrants/options

     10,203,438         —           —           10,203,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,053,821,628         —           —           1,053,821,628   

Cash and cash equivalents

     42,452,397         42,452,397         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,096,274,025       $ 42,452,397       $           —         $ 1,053,821,628   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Inputs at December 31, 2013  
     Fair Value
at December 31,
2013
     Price
Quotations
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Senior secured notes

   $ 226,685,176       $ —         $ —        $ 226,685,176   

Unsecured debt

     118,531,084         —           —           118,531,084   

Subordinated debt

     78,395,314         —           —           78,395,314   

Senior secured loans

     527,203,698         —           —           527,203,698   

Preferred stock

     24,872,259         —           —           24,872,259   

Common stock

     143,355,344         —           —           143,355,344   

Limited partnership/limited liability company interests

     68,364,016         —           —           68,364,016   

Equity warrants/options

     30,565,573         —           —           30,565,573   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

     1,217,972,464         —           —           1,217,972,464   

Cash and cash equivalents

     18,474,784         18,474,784         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,236,447,248       $ 18,474,784       $           —         $ 1,217,972,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

The valuation techniques used at September 30, 2014 and December 31, 2013 in determining the fair values of the Company’s investments for which significant unobservable inputs were used were the market approach, income approach or both using third party valuation firms or broker quotes for identical or similar assets. The total fair market value using the market or income approach or using third party valuation firms was $1,042,943,923 and $1,200,162,280 as of September 30, 2014 and December 31, 2013, respectively. The remaining balance was determined using broker quotes for identical or similar assets.

 

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The following is a reconciliation for the three months ended September 30, 2014 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
June 30,
2014
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2014
 

Senior secured notes

  $ 100,453,531      $ 308,665      $ —        $ 1,319,679      $ —        $ —        $  —       $ 102,081,875   

Unsecured debt

    119,885,381        —          —          (2,000,601     394,451        (12,772,098     —          105,507,133   

Subordinated debt

    82,191,314        —          —          (53,495     7,395,373        (33,501,819     —          56,031,373   

Senior secured loans

    526,217,305        453,908        —          (1,659,100     131,045,455        (63,616,594     —          592,440,974   

Preferred stock

    34,136,892        —          423,373        (1,069,340     3,204,829        (7,395,373     —          29,300,381   

Common stock

    72,498,067        —          55        6,710,366        —          (377,213     —          78,831,275   

Limited partnership/ LLC Interest

    75,430,008        —          26,801        3,957,805        37,366        (26,801     —          79,425,179   

Equity warrants/options

    8,584,776        —          —          1,112,157        506,505        —          —          10,203,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,019,397,274      $ 762,573      $ 450,229      $ 8,317,471      $ 142,583,979      $ (117,689,898   $ —        $ 1,053,821,628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation for the nine months ended September 30, 2014 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
December 31,
2013
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2014
 

Senior secured notes

  $ 226,685,176      $ 1,075,125      $ 768,735      $ (109,540   $ 20,805,330      $ (147,142,951   $ —        $ 102,081,875   

Unsecured debt

    118,531,084        (2     —          (2,000,601     1,748,750        (12,772,098     —          105,507,133   

Subordinated debt

    78,395,314        —          —          (257,495     11,395,373        (33,501,819     —          56,031,373   

Senior secured loans

    527,203,698        1,362,447        (3,531,997     4,061,692        231,958,362        (168,613,228     —          592,440,974   

Preferred stock

    24,872,259        —          423,373        (1,396,367     12,796,489        (7,395,373     —          29,300,381   

Common stock

    143,355,344        —          72,347,735        (37,278,112     13,740,790        (113,334,482     —          78,831,275   

Limited partnership/ LLC Interest

    68,364,016        —          183,682        8,547,827        3,380,230        (1,050,576     —          79,425,179   

Equity warrants/options

    30,565,573        —          13,082,672        (19,253,380     506,505        (14,697,932     —          10,203,438   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,217,972,464      $ 2,437,570      $ 83,274,200      $ (47,685,976   $ 296,331,829      $ (498,508,459   $ —        $ 1,053,821,628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a reconciliation for the three months ended September 30, 2013 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
June 30,
2013
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2013
 

Senior secured notes

  $ 218,139,030      $ 338,067      $ —        $ (304,467   $ 258,120      $ —        $  —       $ 218,430,750   

Unsecured debt

    64,397,211        —          —          (2,220     5,431,101        —          —          69,826,092   

Subordinated debt

    53,395,314        —          —          —          —          —          —          53,395,314   

Senior secured loans

    455,840,159        1,062,839        884,105        (678,672     128,318,434        (37,167,076     —          548,259,789   

Preferred stock

    32,573,853        —          —          (2,540,785     8,071,184        —          —          38,104,252   

Common stock

    100,719,935        —          30,020        12,407,230        12,426,731        (30,020     —          125,553,896   

Limited partnership / LLC Interest

    61,633,155        —          162,801        (916,105     33,655        (162,801     —          60,750,705   

Equity warrants/options

    22,522,193        —          —          2,245,238        —          —          —          24,767,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,009,220,850      $ 1,400,906      $ 1,076,926      $ 10,210,219      $ 154,539,225      $ (37,359,897   $           —        $ 1,139,088,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following is a reconciliation for the nine months ended September 30, 2013 of investments for which Level 3 inputs were used in determining fair value:

 

    Fair Value at
December 31,
2012
    Amortization
of Premium/
Discount - Net
    Net
Realized
Gain (Loss)
    Net Change in
Unrealized
Appreciation or
Depreciation
    Purchases
and PIK
    Sales or
Repayments
    Net Transfers
in and/or
out of
Level 3
    Fair Value at
September 30,
2013
 

Senior secured notes

  $ 193,934,286      $ 2,000,373      $ 9,050,474      $ (309,660   $ 57,280,277      $ (43,525,000   $  —       $ 218,430,750   

Unsecured debt

    69,725,040        85,875        —          (526,451     5,541,628        (5,000,000     —          69,826,092   

Subordinated debt

    97,910,598        1,099,329        —          65,692        31,979        (45,712,284     —          53,395,314   

Senior secured loans

    556,456,919        8,878,834        (24,621,419     22,869,123        350,990,869        (366,314,537     —          548,259,789   

Preferred stock

    5,848,306        216,156        (32,772,628     (1,852,219     67,861,618        (1,196,981     —          38,104,252   

Common stock

    72,341,231        —          (8,342,930     37,557,649        24,088,978        (91,032     —          125,553,896   

Limited partnership / LLC Interest

    49,037,167        —          96,431        11,615,106        98,432        (96,431     —          60,750,705   

Equity warrants/options

    16,343,994        824,670        (323,584     6,189,090        1,805,951        (72,690     —          24,767,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

  $ 1,061,597,541      $ 13,105,237      $ (56,913,656   $ 75,608,330      $ 507,699,732      $ (462,008,955   $           —       $ 1,139,088,229   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no transfers between Levels during the three and nine months ended September 30, 2014 and 2013. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s consolidated statements of operations.

The significant unobservable inputs used in the market approach of fair value measurement of the Company’s investments are the market multiples of earnings before income tax, depreciation and amortization (“EBITDA”) of the comparable guideline public companies. The independent valuation firms select a population of public companies for each investment with similar operations and attributes of the subject company. Using these guideline public companies’ data, a range of multiples of enterprise value to EBITDA is calculated. The independent valuation firms select percentages from the range of multiples for purposes of determining the subject company’s estimated enterprise value based on said multiple and generally the latest twelve months EBITDA of the subject company (or other meaningful measure). Significant increases or decreases in the multiple will result in an increase or decrease in enterprise value, resulting in an increase or decrease in the fair value estimate of the investment.

The significant unobservable input used in the income approach of fair value measurement of the Company’s investments is the discount rate or market yield used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Significant increases or decreases in the discount rate would result in an decrease or increase in the fair value measurement. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable company investments, and call provisions.

 

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The ranges of significant unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of September 30, 2014 and December 31, 2013 were as follows:

September 30, 2014

EBITDA Multiples:

 

         Cost      Fair Value      Low to High    Weighted Average    
 

Unsecured debt

   $   6,251,879       $   4,251,278       4.06x to 4.61x    4.34x  
 

Senior secured loans

     73,871,830         74,083,255       6.35x to 7.20x    6.78x  
 

Preferred stock

     27,716,103         29,300,381       5.38x to 6.08x    5.73x  
 

Common stock

     38,507,481         78,816,022       6.90x to 7.67x    7.28x  
 

LP/LLC

     35,663,965         79,406,447       8.89x to 9.75x    9.32x  
 

Equity warrants/options

     4,875,749         9,365,938       6.18x to 6.98x    6.58x  

Market Yields:

             
 

Senior secured notes

     104,831,149         102,081,875       15.00% to 16.80%    15.90%  
 

Unsecured debt

     101,255,855         101,255,855       13.58% to 14.58%    14.08%  
 

Subordinated debt

     56,288,868         56,031,373       12.94% to 14.31%    13.63%  
 

Senior secured loans

     358,259,876         360,884,668       10.13% to 11.20%    10.67%  

December 31, 2013

EBITDA Multiples:

 

         Cost      Fair Value      Low to High    Weighted Average    
 

Unsecured debt

   $   5,454,365       $     5,454,365       4.94x to 5.62x    5.28x  
 

Senior secured loans

     71,936,525           72,283,255       6.65x to 7.54x    7.09x  
 

Preferred stock

     21,891,614           24,872,259       5.60x to 6.20x    5.90x  
 

Common stock

     66,511,507         143,355,344       6.37x to 7.15x    6.76x  
 

Limited partnerships/LLC interest

     32,392,560           68,312,600       8.98x to 9.80x    9.39x  
 

Equity warrants/options

       5,984,504           29,885,158       5.60x to 6.54x    6.07x  

Market Yields:

             
 

Senior secured notes

     220,407,372         217,767,638       13.43% to 14.93%    14.18%  
 

Unsecured debt

     80,920,052         80,920,052       12.25% to 12.75%    12.50%  
 

Subordinated debt

     53,395,314         53,395,314       13.00% to 15.00%    14.00%  
 

Senior secured loans

     378,486,316         376,742,943       10.00% to 10.71%    10.35%  
 

Limited partnerships/LLC interest

     1,848,077         18,732        2.75% to   2.90%    2.83%  
 

Equity warrants/options

     444,450                 2.75% to   2.90%    2.83%  

 

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11. Financial highlights

The following per share data and ratios have been derived from information provided in the consolidated financial statements. The following is a schedule of financial highlights for a common share outstanding during the nine months ended September 30, 2014 and 2013.

 

     Nine months
ended
September 30, 2014
    Nine months
ended
September 30, 2013
 

Per Share Data:

    

Net asset value, beginning of period

       $ 9.54          $ 9.31   
  

 

 

   

 

 

 

Net investment income

     0.63        0.58   

Net realized and unrealized gain (loss)

     0.48        0.25   
  

 

 

   

 

 

 

Total from investment operations

     1.11        0.83   

Dividend distributions to stockholders from net investment income

     (0.68     (0.78

Equity component of warrant

     —          0.01   

Issuance (reinvestment) of stock at prices (below) above net asset value

     —          0.01   
  

 

 

   

 

 

 

Net increase / (decrease) in net assets

     0.43        0.07   
  

 

 

   

 

 

 

Net asset value, end of period

       $ 9.97          $ 9.38   
  

 

 

   

 

 

 

Market price, end of period

       $ 8.54          $ 9.48   
  

 

 

   

 

 

 

Total return(1)(2)

     (0.67%)        2.23%   

Ratios / Supplemental Data:

    

Ratio of operating expenses to average net assets(3)(4)

     5.80%        7.52%   

Ratio of interest and other debt related expenses to average net assets(3)

     3.45%        3.19%   
  

 

 

   

 

 

 

Ratio of total expenses to average net assets(3)(5)

     9.25%        10.71%   

Ratio of net investment income to average net assets(3)

     8.73%        8.29%   

Net assets, end of period

       $ 743,229,311          $ 696,300,202   

Average debt outstanding

       $ 414,616,028          $ 334,448,747   

Weighted average shares outstanding

     74,536,270        74,099,028   

Average debt per share(6)

       $ 5.56          $ 4.51   

Portfolio turnover(2)

     46%        31%   

 

 

(1) Total return is based on the change in market price per share during the respective periods. Total return calculations take into account distributions, if any, reinvested in accordance with the Company’s dividend reinvestment plan and do not reflect brokerage commissions.
(2) Not annualized.
(3) Annualized.
(4) Ratio excluding capital gains incentive fee for the nine months ended September 30, 2014 and 2013 is 4.50% and 4.67%, respectively.
(5) Ratio excluding capital gains incentive fee for the nine months ended September 30, 2014 and 2013 is 7.94% and 7.86%, respectively.
(6) Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period.

12. Subsequent events

On October 1, 2014, a U.K. based media company announced its intention to buy Advanstar Communications, Inc. with a targeted close of January 2015. Anticipated proceeds of $26.4 million on our combined preferred and LLC interests are expected to result in realized gains of approximately $14.4 million. As anticipated, this would further reduce our portfolio’s equity composition while generating additional proceeds to redeploy into income producing assets.

 

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On October 31, 2014, we completed a transaction with Gordon Brothers Group to launch Gordon Brothers Finance Company (“GBFC”) which will be a majority owned portfolio company comprised of twenty-three loans at close. We invested approximately $94.6 million which consisted of $71.0 million of newly issued LIBOR + 11.0% (1.0% Floor) senior notes, $13.0 million of newly issued 13.5% coupon preferred stock, and $10.6 million of common equity.

On November 5, 2014, the Company’s Board of Directors declared a distribution of $0.21 per share, payable on January 7, 2015 to stockholders of record at the close of business on December 24, 2014.

On November 5, 2014, BlackRock Advisors, LLC (“BlackRock Advisors”), a wholly-owned subsidiary of BlackRock, Inc. (“BlackRock”), and BlackRock Kelso Capital Advisors LLC (“BKCA”), the advisor to the Company, entered into a definitive agreement wherein BlackRock Advisors will acquire certain assets of BKCA (the “Transaction”). Contingent upon BlackRock Kelso Capital Corporation (“BKCC”) stockholder approval and subject to other closing conditions, BlackRock Advisors will enter into an investment management agreement with the Company and serve as BKCC’s investment manager following the completion of the Transaction.

BlackRock has substantial investment and portfolio management experience, which we believe will be beneficial to the Company and our stockholders. As part of the BlackRock platform, we will continue to seek to enhance the risk-return profile of the Company, strengthen its distribution paying capacity and optimize the valuation for our shareholders.

Upon completion of the Transaction, James R. Maher and Michael B. Lazar will be stepping down from their roles with the Company. Mr. Maher, the Company’s Chairman and Chief Executive Officer, will remain on the Board of Directors and will become a senior advisor to BlackRock to assist in the transition of the business. Mr. Lazar, Chief Operating Officer of the Company has also agreed to serve as an advisor to BlackRock in transitioning the business, including portfolio responsibility and business operations. Mr. Lazar will step down from the Board at closing. Steve Sterling, Managing Director and head of BlackRock’s Global Capital Markets group, will assume the role of CEO of the Company at closing, subject to Board approval.

Completion of the Transaction is expected to occur in the first quarter of 2015 and remains subject to customary closing conditions.

In addition to the subsequent events included in these notes to the consolidated financial statements, the Company conducted a review for additional subsequent events and determined that no additional subsequent events had occurred that would require accrual or additional disclosures.

 

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

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

This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to factors previously identified elsewhere in the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the “SEC”), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

    our future operating results;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact of investments that we expect to make;

 

    our contractual arrangements and relationships with third parties;

 

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

 

    the ability of our portfolio companies to achieve their objectives;

 

    our expected financings and investments;

 

    the adequacy of our cash resources and working capital, including our ability to obtain continued financing on favorable terms;

 

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

 

    the impact of increased competition;

 

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

 

    potential conflicts of interest in the allocation of opportunities between us and other investment funds managed by the Advisor or its affiliates;

 

    the ability of the Advisor to attract and retain highly talented professionals;

 

    fluctuations in foreign currency exchange rates; and

 

    the impact of changes to tax legislation and, generally, our tax position.

Overview

We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private and certain public U.S. middle-market companies.

 

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We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

Investments

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

As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.

Revenues

We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly or semi-annually. In some cases, our debt instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any 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 prepayment fees, commitment, origination, capital structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees.

Expenses

Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the Advisor under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions.

Critical accounting policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.

 

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Management considers the critical accounting policies important to understanding the consolidated financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to the consolidated financial statements. See Note 2 to the consolidated financial statements for a description of significant accounting policies and of recently issued accounting pronouncements.

Financial and operating highlights

At September 30, 2014:

Investment Portfolio: $1,096.3 million

Net Assets: $743.2 million

Indebtedness (borrowings under Credit Facility, Convertible Notes, Term Loan and

Senior Secured Notes): $360.2 million

Net Asset Value per share: $9.97

Portfolio Activity for the Three Months Ended September 30, 2014:

Cost of investments during period, including PIK: $142.6 million

Sales, repayments and other exits during period: $117.3 million

Number of portfolio companies at end of period: 42

Operating Results for the Three Months Ended September 30, 2014:

Net investment income per share: $0.26

Distributions declared per share: $0.21

Earnings per share: $0.39

Net investment income: $19.3 million

Net realized and unrealized gains: $9.6 million

Net increase in net assets from operations: $29.0 million

Net investment income per share, as adjusted1: $0.23

Earnings per share as adjusted1: $0.36

Net investment income, as adjusted1: $17.3 million

As Adjusted1: Amounts are adjusted to remove the incentive management fee expense based on Gains, as required by GAAP, and to include only the incremental incentive management fee expense based on Income. The incremental incentive management fee is based on each trailing four-fiscal quarter period, applied to the current quarter’s incremental earnings, and without any reduction for incentive management fees paid during the prior three quarters. Amounts reflect the Company’s ongoing operating results and reflect the Company’s financial performance over time.

Portfolio and investment activity

We invested $142.6 million during the three months ended September 30, 2014. The investments consisted primarily of senior secured loans secured by first liens ($86.0 million, or 60.3%), or second liens ($45.0 million, or 31.6%), and unsecured or subordinated debt securities and equity securities ($11.6 million, or 8.1%). Additionally, we received proceeds from sales/repayments and other exits of approximately $117.3 million during the three months ended September 30, 2014.

At September 30, 2014, our portfolio of $1,096.3 million (at fair value) consisted of 42 portfolio companies and was invested 54% in senior secured loans, 18% in equity investments, 15% in unsecured or subordinated debt securities, 9% in senior secured notes, and 4% in cash and cash equivalents. Our average investment by portfolio company at amortized cost, excluding investments below $5.0 million, was approximately $28.1 million at September 30, 2014. Our largest portfolio company investment by value was approximately $58.2 million and our five largest portfolio company investments by value comprised

 

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approximately 23% of our portfolio at September 30, 2014. At December 31, 2013, our portfolio consisted of 51 portfolio companies and was invested 43% in senior secured loans, 22% in equity investments, 18% in senior secured notes, 16% in unsecured or subordinated debt securities and 1% in cash and cash equivalents. Our average investment by portfolio company at amortized cost, excluding investments below $5.0 million, was approximately $26.0 million at December 31, 2013.

The weighted average yield of the debt and income producing equity securities in our portfolio at fair value was 11.9% at September 30, 2014 and 12.1% at December 31, 2013. The weighted average yields on our senior secured loans and other debt securities at fair value were 11.3% and 13.2%, respectively, at September 30, 2014, versus 11.4% and 13.1%, at December 31, 2013. The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11.8% at September 30, 2014 and 12.0% at December 31, 2013. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 11.4% and 13.0%, respectively, at September 30, 2014, versus 11.4% and 13.0%, at December 31, 2013. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, and cash and cash equivalents.

At September 30, 2014, 55% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 45% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 51% at September 30, 2014. At December 31, 2013, 48% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 52% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest subject to an interest rate floor was 45% at December 31, 2013.

The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrower’s business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:

Grade 1: Investments in portfolio companies whose performance is substantially within the Advisor’s expectations and whose risk factors are neutral to favorable to those at the time of the original investment.

Grade 2: Investments in portfolio companies whose performance is below the Advisor’s expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.

Grade 3: Investments in portfolio companies whose performance is below the Advisor’s expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 generally will be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.

Grade 4: Investments in portfolio companies whose performance is materially below the Advisor’s expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.

 

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The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.18 at September 30, 2014 and 1.14 at December 31, 2013. The following is a distribution of the investment ratings of our portfolio companies at September 30, 2014 and December 31, 2013:

 

     September 30, 2014      December 31, 2013  

Grade 1

   $ 879,903,840       $ 1,054,695,245   

Grade 2

     160,744,260         159,112,129   

Grade 3

     10,498,278         2,912,000   

Grade 4

     1,837,750         572,675   

Not Rated

     837,500         680,415   
  

 

 

    

 

 

 

Total investments

   $ 1,053,821,628       $ 1,217,972,464   
  

 

 

    

 

 

 

Results of operations

Results comparisons for the three months ended September 30, 2014 and 2013.

Investment income

Investment income totaled $33,162,668 and $31,382,619, respectively, for the three months ended September 30, 2014 and 2013, of which $22,165,859 and $18,919,863 were attributable to interest and fees on senior secured loans, $10,378,038 and $11,408,229 to interest earned on other debt securities, $617,193 and $1,053,465 to dividends from equity securities, and $1,578 and $1,062 to interest earned on cash equivalents, respectively. The increase in investment income for the three months ended September 30, 2014 is primarily attributable to an increase in amendment fees and prepayment premiums earned during the three months ended September 30, 2014.

For the three months ended September 30, 2014 fee income included $2,604,412 from capital structuring fees earned, and $1,278,000 from amendment fees, $851,962 from prepayment premiums, and $111,628 from commitment, consent and administration fees. For the three months ended September 30, 2013 fee income included $2,250,000 from capital structuring fees earned, and $129,875 from commitment and administration fees. Interest income earned is comprised of cash interest of approximately 98% as well as PIK interest of approximately 2% for the three months ended September 30, 2014. The increase in fee income for the three months ended September 30, 2014 is primarily attributable to an increase in amendment fees and prepayment premiums earned during the three months ended September 30, 2014.

Expenses

Expenses for the three months ended September 30, 2014 and 2013 were $13,830,210 and $22,508,958, respectively, which consisted of $5,621,443 and $5,286,986 in base management fees, $5,283,546 and $5,455,017 in interest and credit facility fees, $593,837 and $9,358,529 in incentive management fees, $574,964 and $479,871 in investment advisor expenses, $524,766 and $568,678 in amortization of debt issuance costs, $450,052 and $541,180 in professional fees, $194,500 and $194,500 in director fees $108,840 and $174,288 in administrative services, and $478,262 and $449,909 in other expenses, respectively. The decrease in expenses is primarily attributable to a decrease in incentive management fees.

Net investment income

Net investment income was $19,332,458 and $8,873,661 for the three months ended September 30, 2014 and 2013, respectively. The increase is primarily attributable to a decrease in incentive management fees.

 

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Net realized gain or loss

Net realized gain of $450,229 for the three months ended September 30, 2014 was the result of net gains realized from the disposition of our investments. Net realized gain of $143,064 for the three months ended September 30, 2013 was the result of $1,076,925 in net gains realized from the disposition of our investments and $933,861 in net loss realized on foreign currency transactions.

Net unrealized appreciation or depreciation

For the three months ended September 30, 2014, and 2013 the change in net unrealized appreciation or depreciation on investments and foreign currency translation was an increase in net unrealized appreciation of $9,186,835 and an increase in net unrealized appreciation of $10,827,018, respectively. The increase in net unrealized appreciation for the three months ended September 30, 2014 was comprised of an increase in net unrealized appreciation on investments of $9,563,993, offset by an unrealized foreign currency translations loss of $377,158. The increase in net unrealized appreciation for the three months ended September 30, 2013 was comprised of an increase in net unrealized appreciation on investments of $10,702,670 and a net unrealized foreign currency translation gain of $124,348. The increase in net unrealized appreciation on investments for the three months ended September 30, 2014 was a result of the strong performance of our portfolio companies.

Net increase in net assets resulting from operations

The net increase in net assets resulting from operations for the three months ended September 30, 2014 and 2013 was an increase of $28,969,522 and $19,843,743, respectively. As compared to the prior period, the increase primarily reflects a decrease in incentive fees recorded for the three months ended September 30, 2014.

Results comparisons for the nine months ended September 30, 2014 and 2013.

Investment income

Investment income totaled $96,491,305 and $98,648,344, respectively, for the nine months ended September 30, 2014 and 2013, of which $54,432,756 and $58,812,458 were attributable to interest and fees on senior secured loans, $40,307,362 and $38,115,112 to interest earned on other debt securities and $1,747,029 and $1,713,489 to dividends from equity securities and $4,158 and $7,285 in interest earned on cash equivalents, respectively. The decrease in investment income for the nine months ended September 30, 2014 is primarily attributable to a decrease in interest income offset by an increase in fee income.

Expenses

Expenses for the nine months ended September 30, 2014 and 2013 were $49,633,327 and $55,590,751, respectively, which consisted of $17,892,011 and $15,826,168 in base management fees, $16,899,287 and $15,128,057 in interest and credit facility fees, $7,022,626 and $16,692,244 in incentive management fees, $1,684,238 and $1,520,714 in investment advisor expenses, $1,588,436 and $1,431,226 in amortization of debt issuance costs, $1,550,416, and $1,647,600 in professional fees, $531,000 and $474,000 in director fees, $395,967 and $607,429 in administrative services, and $2,069,346 and $2,263,313 in other expenses, respectively. The decrease in expenses is primarily attributable to a decrease in incentive management fees.

Net investment income

Net investment income was $46,857,978 and $43,057,593 for the nine months ended September 30, 2014 and 2013, respectively. The increase is primarily a result of a decrease in incentive management fees.

 

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Net realized gain or loss

Net realized gain of $83,274,200 for the nine months ended September 30, 2014 was the result of net gains realized from the disposition of our investments. Net realized gain was attributable to gains relating to the sales of Arclin Cayman Holdings Inc. and ECI Holdco, Inc. Nearly the entire realized gain was reflected in unrealized appreciation in prior periods. Net realized loss of $58,037,960 for the nine months ended September 30, 2013 was the result of $57,871,026 in net losses realized from the disposition of our investments and $166,934 in net loss realized on foreign currency transactions. Net realized loss of $57,871,026 was almost entirely attributable to losses relating to the restructuring of our investments in AGY Holding Corp., Bankruptcy Management Solutions, Inc. and Dial Global, Inc. et. al. Nearly the entire realized loss was reflected in unrealized depreciation in prior periods.

Net unrealized appreciation or depreciation

For the nine months ended September 30, 2014, the change in net unrealized appreciation was a decrease in net unrealized appreciation on investments of $46,969,354 and a net unrealized foreign currency translation loss of $409,733. The majority of the decrease in net unrealized appreciation for the nine months ended September 30, 2014 is attributable to reversals due to the recognition of realized gains associated with the sales of Arclin Cayman Holdings Inc. and ECI Holdco, Inc. offset by an increase in unrealized appreciation for investments held at September 30, 2014. The increase in net unrealized appreciation for the nine months ended September 30, 2013 was comprised of an increase in net unrealized appreciation on investments of $76,906,131 and a net unrealized foreign currency translation loss of $261,485. The increase was mainly attributable to the reversal of unrealized depreciation for transactions realized during the nine months ended September 30, 2013.

Net increase or decrease in net assets resulting from operations

The net increase in net assets resulting from operations for the nine months ended September 30, 2014 and 2013 was an increase of $82,753,091 and $61,664,279, respectively. As compared to the prior period, the increase primarily reflects an increase in net realized and unrealized gains for the nine months ended September 30, 2014.

Supplemental Non-GAAP information

We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.

We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formula’s requirement to reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become, generally concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned on a quarterly basis, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our “as adjusted” results reflect Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarter’s incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The

 

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resulting amount represents an upper limit of each quarter’s incremental Incentive Fees that we may become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. These estimates represent upper limits because, in any calendar year, subsequent quarters’ investment underperformance could reduce the Incentive Fees payable with respect to prior quarters’ operating results. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the consolidated financial statements in this Quarterly Report for a more detailed description of the Company’s incentive management fee.

Computations for all periods are derived from our consolidated financial statements as follows:

 

    Three months
ended
September 30,
2014
    Three months
ended
September 30,
2013
    Nine months
ended
September 30,
2014
    Nine months
ended
September 30,
2013
 

GAAP Basis:

       

Net Investment Income

  $ 19,332,458      $ 8,873,661      $ 46,857,978      $ 43,057,593   

Net Investment Income per share

    0.26        0.12        0.63        0.58   

Addback: GAAP incentive management fee expense based on Gains

    593,837        9,358,529        7,022,626        14,774,276   

Addback: GAAP incentive management fee expense based on Income

                      1,917,968   

Pre-Incentive Fee1:

       

Net Investment Income

  $ 19,926,295      $ 18,232,190      $ 53,880,604      $ 59,749,837   

Net Investment Income per share

    0.27        0.25        0.72        0.81   

Less: Incremental incentive management fee expense based on Income

    2,613,638        2,114,510        5,467,636        8,390,983   

As Adjusted2:

       

Net Investment Income

  $ 17,312,657      $ 16,117,680      $ 48,412,968      $ 51,358,854   

Net Investment Income per share

    0.23        0.22        0.65        0.69   

Pre-Incentive Fee1: Amounts are adjusted to remove all incentive management fees. Such fees are calculated but not necessarily due and payable at this time.

As Adjusted2: Amounts are adjusted to remove the incentive management fee expense based on Gains, as required by GAAP, and to include only the incremental incentive management fee expense based on Income. The incremental incentive management fee is based on each trailing four-fiscal quarter period, applied to the current quarter’s incremental earnings, and without any reduction for incentive management fees paid during the prior three quarters. Amounts reflect the Company’s ongoing operating results and reflect the Company’s financial performance over time.

Financial condition, liquidity and capital resources

During the nine months ended September 30, 2014, we generated operating cash flows primarily from loan repayments, interest earned and fees received on senior secured loans and other debt securities.

Net cash provided by operating activities during the nine months ended September 30, 2014 was $194,709,146. Our primary source of cash from operating activities during the period was net proceeds from repayments (net of purchases, including PIK of $296,058,702) of $201,766,897.

 

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Net cash used in financing activities during the nine months ended September 30, 2014 was $170,731,533. Our primary use of cash from financing activities was $117,815,860 in net repayments under the Credit Facility and by $51,136,054 for dividend distributions made during the period.

Contractual obligations

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings at September 30, 2014 is as follows:

 

     Payments Due By Period (dollars in millions)  
     Total      Less than 1 year      1-3 years      3-5 years      After 5 years  

Credit Facility(1)

   $ 56.0       $ —         $ —        $ 56.0       $     —     

Term Loan

     15.0         —          —          15.0         —    

Senior Secured Notes

     175.0         —            158.0         17.0         —    

Convertible Notes

     114.2         —          —          114.2         —    

Interest and Credit Facility Fees Payable

     3.6             3.6         —          —          —    

 

(1) At September 30, 2014, $349.0 million remained unused under our Credit Facility.

Off-balance sheet arrangements

In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. The Company has no such guarantees outstanding at September 30, 2014.

Distributions

Our quarterly distributions, if any, are determined by our Board of Directors. Distributions are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any distributions at all or distributions at a particular level. The following table lists the quarterly distributions per share from our common stock since September 2012.

 

Distributions Amount

Per Share

Outstanding

  

Record Date

  

Payment Date

$0.26

   September 19, 2012    October 3, 2012

$0.26

   December 20, 2012    January 3, 2013

$0.26

   March 19, 2013    April 2, 2013

$0.26

   June 18, 2013    July 2, 2013

$0.26

   September 19, 2013    October 3, 2013

$0.26

   December 20, 2013    January 3, 2014

$0.26

   March 20, 2014    April 3, 2014

$0.21

   June 18, 2014    July 2, 2014

$0.21

   September 19, 2014    October 3, 2014

$0.21

   December 24, 2014    January 7, 2015

Tax characteristics of all distributions are reported to stockholders on Form 1099 after the end of the calendar year.

 

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We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain favorable RIC tax treatment, we must distribute annually to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. Under the Regulated Investment Company Modernization Act of 2010, capital losses incurred by the Company after December 31, 2010 will not be subject to expiration. In addition, such losses must be utilized prior to the losses incurred in the years preceding enactment. In order to avoid certain excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of:

 

    98% of our ordinary income for the calendar year;

 

    98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31st; and

 

    any ordinary income and net capital gains for preceding years that were not distributed during such years.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, except as discussed below, if we declare a distribution, stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions. With respect to our distributions paid to stockholders during the nine months ended September 30, 2014 and 2013, distributions reinvested pursuant to our dividend reinvestment plan totaled $3,217,895 and $3,864,460, respectively.

Under the terms of an amendment to our dividend reinvestment plan adopted on March 4, 2009, distributions may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. Also, we may be limited in our ability to make distributions due to the asset coverage test applicable to us as a BDC under the 1940 Act and due to provisions in our existing and future debt arrangements.

If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of favorable RIC tax treatment. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a RIC and may be subject to an excise tax. In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending prior to 2012) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes.

Recent developments

On October 1, 2014, a U.K. based media company announced its intention to buy Advanstar Communications, Inc. with a targeted close of January 2015. Anticipated proceeds of $26.4 million on our combined preferred and LLC interests are expected to result in realized gains of approximately $14.4 million. As anticipated, this would further reduce our portfolio’s equity composition while generating additional proceeds to redeploy into income producing assets.

On October 31, 2014, we completed a transaction with Gordon Brothers Group to launch Gordon Brothers Finance Company (“GBFC”) which will be a majority owned portfolio company comprised of twenty-three loans

 

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at close. We invested approximately $94.6 million which consisted of $71.0 million of newly issued LIBOR + 11.0% (1.0% Floor) senior notes, $13.0 million of newly issued 13.5% coupon preferred stock, and $10.6 million of common equity.

On November 5, 2014, the Company’s Board of Directors declared a distribution of $0.21 per share, payable on January 7, 2015 to stockholders of record at the close of business on December 24, 2014.

On November 5, 2014, BlackRock Advisors, LLC (“BlackRock Advisors”), a wholly-owned subsidiary of BlackRock, Inc. (“BlackRock”), and BlackRock Kelso Capital Advisors LLC (“BKCA”), the advisor to the Company, entered into a definitive agreement wherein BlackRock Advisors will acquire certain assets of BKCA (the “Transaction”). Contingent upon BlackRock Kelso Capital Corporation (“BKCC”) stockholder approval and subject to other closing conditions, BlackRock Advisors will enter into an investment management agreement with the Company and serve as BKCC’s investment manager following the completion of the Transaction.

BlackRock has substantial investment and portfolio management experience, which we believe will be beneficial to the Company and our stockholders. As part of the BlackRock platform, we will continue to seek to enhance the risk-return profile of the Company, strengthen its distribution paying capacity and optimize the valuation for our shareholders.

Upon completion of the Transaction, James R. Maher and Michael B. Lazar will be stepping down from their roles with the Company. Mr. Maher, the Company’s Chairman and Chief Executive Officer, will remain on the Board of Directors and will become a senior advisor to BlackRock to assist in the transition of the business. Mr. Lazar, Chief Operating Officer of the Company has also agreed to serve as an advisor to BlackRock in transitioning the business, including portfolio responsibility and business operations. Mr. Lazar will step down from the Board at closing. Steve Sterling, Managing Director and head of BlackRock’s Global Capital Markets group, will assume the role of CEO of the Company at closing, subject to Board approval.

Completion of the Transaction is expected to occur in the first quarter of 2015 and remains subject to customary closing conditions.

Notice is hereby given in accordance with Section 23(c) of the 1940 Act that from time to time the Company may purchase shares of its common stock in the open market at prevailing market prices.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. At September 30, 2014, 55% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to nine months. At September 30, 2014, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 51%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to nine months only if the index exceeds the floor.

While hedging activities may help to insulate us against adverse changes in interest rates, they also may limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the nine months ended September 30, 2014 and 2013, we did not engage in any interest rate hedging activity.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of unregistered securities

None.

Issuer purchases of equity securities

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable

Item 5.  Other Information

None.

Item 6. Exhibits.

 

(a) Exhibits.

 

31.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   BLACKROCK KELSO CAPITAL CORPORATION
Date: November 6, 2014    By:   

/s/ James R. Maher

      James R. Maher
      Chief Executive Officer
Date: November 6, 2014    By:   

/s/ Corinne Pankovcin

      Corinne Pankovcin
      Chief Financial Officer

 

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