10-Q 1 tv520971_10q.htm FORM 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

 

 

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

 For the quarterly period ended March 31, 2019

 

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

For the transition period from          to

 

Commission File No. 814-00735

 

Portman Ridge Finance Corporation

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware 20-5951150
   
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
Identification Number)

 

650 Madison Avenue, 23rd Floor

New York, New York 10022

(Address of principal executive offices)

 

(212) 891-2880

(Registrant's telephone number, including area code)

 

 

 

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

 

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

 

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

 

Large accelerated filer ¨   Accelerated filer x
         
Non-accelerated filer ¨ Smaller reporting company ¨
         
Emerging growth company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.01 per share   PTMN   The NASDAQ Global Select Market
6.125% Notes due 2022   KCAPL   The NASDAQ Global Select Market

 

The number of outstanding shares of common stock of the registrant as of May 7, 2019 was 37,356,061.

 

 

 

 

 

 

TABLE OF CONTENTS

 

    Page
     
  Part I. Financial Information  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 5
     
  Consolidated Statements of Operations (unaudited) for the three months ended March 31, 2019 and 2018 6
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the three months ended March 31, 2019 and 2018 7
     
  Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2019 and 2018 8
     
  Consolidated Schedule of Investments as of March 31, 2019 (unaudited) and December 31, 2018 9
     
  Consolidated Financial Highlights (unaudited) for the three months ended March 31, 2019 and 2018 29
     
  Notes to Consolidated Financial Statements (unaudited) 30
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 66
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 90
     
Item 4. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 91
     
Item 5. Controls and Procedures 92
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 93
     
Item 1A. Risk Factors 93
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 96
     
Item 3. Defaults Upon Senior Securities 96
     
Item 4. Mine Safety Disclosures 96
     
Item 5. Other Information 97
     
Item 6. Exhibits 97
     
Signatures    

 

2

 

 

NOTE ABOUT REFERENCES TO PORTMAN RIDGE FINANCE CORPORATION

 

In this Quarterly Report on Form 10-Q, “Portman Ridge,” “Company,” “we,” “us,” and “our” refer to Portman Ridge Finance Corporation, the “Company”, “Portman Ridge”, “we”, “us” and “our” refer to Portman Ridge Finance Corporation and its wholly-owned subsidiaries, Great Lakes KCAP Funding I LLC, Kohlberg Capital Funding I LLC, KCAP Senior Funding I, LLC and KCAP Senior Funding I Holdings, LLC, unless the context otherwise requires.

 

NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

The information contained in this item should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report and in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2018, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”). In addition, some of the statements in this report constitute forward-looking statements. The matters discussed in this Quarterly Report, as well as in future oral and written statements by management of Portman Ridge Finance Corporation, that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “outlook, ”believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Important assumptions include our ability to originate new investments, achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans or objectives will be achieved. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

our future operating results;

 

our business prospects and the prospects of our existing and prospective portfolio companies;
   
the return or impact of current and future investments;
   
our contractual arrangements and other 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 financial condition and ability of our existing and prospective portfolio companies to achieve their objectives;
   
our expected financings and investments;
   
our regulatory structure and tax treatment;
   
our ability to operate as a business development company (“BDC”) and a regulated investment company (“RIC”), including the impact of changes in laws or regulations governing our operations or the operations of our portfolio companies;
   
the adequacy of our cash resources and working capital;
   
the timing of cash flows, if any, from the operations of our portfolio companies;
   
3

 

 

the ability of Sierra Crest Investment Management LLC (the “Adviser”) to locate suitable investments for us to monitor and administer our investments;
   
the ability of the Adviser to attract and retain highly talented professionals;
   
actual and potential conflicts of interest with the Adviser and its affiliates;
   
our ability to qualify and maintain our qualification as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a BDC;
   
the effect of legal, tax, and regulatory changes;
   
the impact of a protracted decline in the liquidity of credit markets on our business;
   
the impact of fluctuations in interest rates on our business;
   
the valuation of our investments in portfolio companies, particularly those having no liquid trading market;
   
our ability to recover unrealized losses;
   
market conditions and our ability to access additional capital; and
   
the timing, form and amount of any dividend distributions.

 

For a more detailed discussion of factors that could cause our actual results to differ from forward-looking statements contained in this Quarterly Report, please see the discussion in Part II, “Item 1A. Risk Factors”, and in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. You should not place undue reliance on these forward-looking statements. The forward-looking statements made in this Quarterly Report relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date this Quarterly Report is filed with the SEC.

 

4

 

 

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED BALANCE SHEETS

 

  

As of

March 31, 2019

  

As of

December 31, 2018

 
    (unaudited)      
ASSETS          
Investments at fair value:          
Short-term investments (cost: 2019 - $44,120,648; 2018 - $44,756,478)  $44,120,648   $44,756,478 
Debt securities (amortized cost: 2019 - $164,699,256; 2018 - $162,264,482)   152,196,382    147,861,744 
CLO Fund Securities managed by affiliates (amortized cost: 2019 - $4,416,048; 2018 - $4,407,106)   4,400,213    4,473,840 
CLO Fund Securities managed by non-affiliates (amortized cost: 2019 - $49,883,910; 2018 - $51,073,520)   41,204,802    39,851,160 
Equity securities (cost: 2019 - $29,326,114; 2018 - $21,944,430)   16,835,340    14,504,687 
Asset Manager Affiliates (cost: 2019 - $17,791,230; 2018 - $17,791,230)       3,470,000 
Joint Venture (cost: 2019 - $24,914,858; 2018 - $24,914,858)   23,707,969    18,390,440 
Total Investments at Fair Value (cost: 2019 - $335,152,064; 2018 - $327,152,104)   282,465,354    273,308,349 
Cash   3,288,010    5,417,125 
Restricted cash   1,466,002    3,907,341 
Interest receivable   877,156    1,342,970 
Due from affiliates   928,098    1,007,631 
Operating lease right-of-use asset   3,181,469     
Other assets   570,370    481,265 
Total Assets  $292,776,459   $285,464,681 
           
LIABILITIES          
6.125% Notes Due 2022 (net of offering costs of: 2019-$2,071,220; 2018 - $2,207,342)  $75,335,980   $75,199,858 
Great Lakes KCAP Funding I, LLC Revolving Credit Facility (net of offering costs of: 2019-$1,327,960; 2018 - $1,155,754)   42,543,122    25,200,331 
Operating lease liability   3,553,359     
Payable for open trades   23,624,746    23,204,564 
Accounts payable and accrued expenses   3,898,900    3,591,910 
Accrued interest payable   134,324    131,182 
Due to affiliates       115,825 
Total Liabilities   149,090,431    127,443,670 
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,526,568 issued, and 37,331,709 outstanding at March 31, 2019, and 37,521,705 issued, and 37,326,846 outstanding at December 31, 2018   373,317    373,268 
Capital in excess of par value   307,099,763    306,784,387 
Total distributable (loss) earnings   (163,787,052)   (149,136,644)
           
Total Stockholders' Equity   143,686,028    158,021,011 
           
Total Liabilities and Stockholders' Equity  $292,776,459   $285,464,681 
           
NET ASSET VALUE PER COMMON SHARE  $3.85   $4.23 

 

See accompanying notes to consolidated financial statements.

 

5

 

 

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended
March 31,
 
   2019   2018 
         
Investment Income:          
Interest from investments in debt securities  $2,936,796   $3,398,197 
Payment-in-kind investment income   2,022    362,937 
Interest from cash and time deposits   35,669    49,205 
Investment income on CLO Fund Securities managed by affiliates   132,446    1,833,667 
Investment income on CLO Fund Securities managed by non-affiliates   1,681,274    99,361 
Dividends from Asset Manager Affiliates       320,000 
Investment income - Joint Venture   950,000    700,000 
Capital structuring service fees   61,203    63,110 
           
Total investment income   5,799,410    6,826,477 
           
Expenses:          
Interest and amortization of debt issuance costs   1,800,926    1,863,848 
Compensation   3,688,578    1,207,337 
Professional fees   1,668,122    714,410 
Insurance   88,651    78,022 
Administrative and other   748,320    502,118 
           
Total expenses   7,994,597    4,365,735 
           
Net Investment (Loss) Income   (2,195,187)   2,460,742 
Realized And Unrealized (Losses) Gains On Investments:          
Net realized (losses) gains from investment transactions   (13,349,430)   3,101 
Net change in unrealized (depreciation) appreciation on:          
Debt securities   1,899,864    (442,884)
Equity securities   (5,051,031)   63,596 
CLO Fund Securities managed by affiliates   (82,569)   (220,819)
CLO Fund Securities managed by non-affiliates   2,543,252    349,355 
Asset Manager Affiliates investments       314,000 
Joint Venture Investment   5,317,529    251,376 
           
Total net change in unrealized appreciation (depreciation)   4,627,045    314,624 
           
Net realized and unrealized (depreciation) appreciation on investments   (8,722,385)   317,725 
           
Realized losses on extinguishments of Debt       (169,074)
Net (Decrease) Increase In Stockholders’ Equity Resulting From Operations  $(10,917,572)  $2,609,393 
           
Net (Decrease) Increase In Stockholders' Equity Resulting from Operations per Common Share:          
Basic:  $(0.29)  $0.07 
Diluted:  $(0.29)  $0.07 
Net Investment (Loss) Income Per Common Share:          
Basic:  $(0.06)  $0.07 
Diluted:  $(0.06)  $0.07 
           
Weighted Average Shares of Common Stock Outstanding—Basic   37,335,094    37,350,411 
Weighted Average Shares of Common Stock Outstanding—Diluted   37,335,094    37,350,411 

 

See accompanying notes to consolidated financial statements.

 

6

 

 

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS(1)

(unaudited)

 

  

Three Months Ended

March 31,

 
   2019   2018 
         
Operations:          
Net investment (loss) income  $(2,195,187)  $2,460,742 
Net realized (losses) gains from investment transactions   (13,349,430)   3,101 
Realized losses from extinguishments of debt       (169,074)
Net change in unrealized appreciation on investments   4,627,045    314,624 
Net (decrease) increase in stockholders’ equity resulting from operations   (10,917,572)   2,609,393 
           
Stockholder distributions:   (3,732,836)   (3,716,297)
           
Capital share transactions:          
Issuance of common stock for:          
Dividend reinvestment plan   56,489    51,560 
Stock based compensation   258,936    252,855 
           
Net increase in net assets resulting from capital share transactions   315,425    304,415 
           
Net assets at beginning of period   158,021,011    181,804,576 
           
Net assets at end of period  $143,686,028   $181,002,087 
           
Net asset value per common share  $3.85   $4.85 
Common shares outstanding at end of period   37,331,709    37,354,479 

 

(1) Refer to note 9 "Stockholders' Equity" for additional information on changes in components of Stockholders' Equity

 

See accompanying notes to consolidated financial statements.

 

7

 

 

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Three Months Ended
March 31,
 
   2019   2018 
         
OPERATING ACTIVITIES:          
Net (decrease) increase in stockholder's equity resulting from operations  $(10,917,572)  $2,609,393 
Adjustments to reconcile net (decrease) increase in stockholder’s equity resulting from operations to net cash (used in) provided by in operations:          
Net realized losses (gains) on investment transactions   13,349,430    (3,101)
Net change in unrealized appreciation from investments   (4,627,045)   (314,624)
Purchases of investments   (35,189,571)   (52,140,700)
Proceeds from sales and redemptions of investments   19,050,340    84,965,082 
Net accretion of investments   (1,744,332)   (1,886,762)
Amortization of debt issuance costs   227,366    170,035 
Realized losses on extinguishments of debt       169,074 
Net amortization of operating lease   3,098     
Payment-in-kind interest income   (2,022)   (362,937)
Stock-based compensation   258,936    252,855 
Changes in operating assets and liabilities:          
Increase (decrease) in payable for open trades   420,182    (25,262,689)
Decrease in receivable for open trades       2,993,750 
Decrease (increase) in interest and dividends receivable   465,814    (394,858)
Increase in accrued interest payable   3,142    72,161 
(Increase) decrease in other assets   (89,105)   7,151 
Decrease (increase) in due from affiliates   79,532    (1,436,404)
(Decrease) increase in due to affiliates   (115,825)   94,977 
Decrease (increase) in accounts payable and accrued expenses   681,979    (1,295,838)
           
Net cash (used in) provided by operating activities   (18,145,653)   8,236,565 
           
FINANCING ACTIVITIES:          
Debt issuance costs   (263,450)   (1,353,761)
Distributions to stockholders   (3,676,349)   (3,664,438)
Repayment 7.375 Notes Due 2019       (20,000,000)
Borrowings under Great Lakes KCAP Funding LLC, Revolving Credit Facility   23,000,000    20,000,000 
Repayment of Great Lakes KCAP Funding LLC, Revolving Credit Facility   (5,485,002)   (172,256)
           
Net cash provided by (used in) financing activities   13,575,199    (5,190,455)
           
CHANGE IN CASH AND RESTRICTED CASH   (4,570,454)   3,046,110 
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD   9,324,466    2,034,095 
           
CASH AND RESTRICTED CASH, END OF PERIOD  $4,754,012   $5,080,205 
           
Supplemental Information:          
Interest paid during the period  $1,570,418   $1,693,813 
Dividends paid during the period under the dividend reinvestment plan  $56,489   $51,560 
Supplemental non-cash information:          
Realized loss on Asset Manager Affiliates  $3,470,000   $ 
Amounts per balance sheet          
Cash  $3,288,010   $1,933,851 
Restricted cash   1,466,002    3,146,354 
Total Cash and Restricted cash  $4,754,012   $5,080,205 

 

See accompanying notes to consolidated financial statements.

 

8

 

 

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of March 31, 2019

 

Debt Securities Portfolio

 

Portfolio Company /
Principal Business
 

Investment

Interest Rate¹ / Maturity15

  Initial
Acquisition
Date
   Principal  

Amortized

Cost

   Fair Value2 

Advanced Lighting Technologies, Inc.(5)(8)(13)

Consumer goods: Durable

 

Junior Secured Loan — Second Lien Notes

9.6% Cash, 10.0% PIK, 3 month LIBOR(2.60%) + 7.00%; LIBOR Floor 1.00% , Due 10/23  

   6/13/2012   $1,007,062   $1,007,062   $2,474 
                        

AlixPartners, LLP(8)(13)

Services: Business

 

Senior Secured Loan — 2017 Refinancing Term Loan

5.2% Cash, 1 month LIBOR(2.50%) + 2.75%; LIBOR Floor 1.00% , Due 4/24  

   12/28/2018    994,924    956,531    989,699 
                        

Asurion, LLC (fka Asurion Corporation)(8)(13)

Banking, Finance, Insurance & Real Estate

 

Senior Secured Loan — Amendment No. 14 Replacement B-4 Term Loan

5.5% Cash, 1 month LIBOR(2.50%) + 3.00% , Due 8/22  

   12/28/2018    1,503,083    1,448,764    1,497,987 
                        

BMC Acquisition, Inc. (aka BenefitMall)(8)(13)(14)

Banking, Finance, Insurance & Real Estate

 

Senior Secured Loan — Initial Term Loan

8.1% Cash, 6 month LIBOR(2.88%) + 5.25%; LIBOR Floor 1.00% , Due 12/24  

   1/2/2018    2,962,500    2,961,067    2,888,437 
                        

Bristol Hospice, L.L.C.(8)(13)(14)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.7% Cash, 1 month LIBOR(2.50%) + 7.25%; LIBOR Floor 1.00% , Due 1/24  

   3/29/2019    8,800,000    8,743,583    8,756,000 
                        

BW NHHC Holdco Inc.(8)(13)(14)

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan (First Lien)

7.5% Cash, 1 month LIBOR(2.49%) + 5.00% , Due 5/25  

   5/16/2018    1,985,000    1,958,871    1,937,023 
                        

Carestream Health, Inc.(8)(13)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Extended Term Loan (Second Lien)

12.0% Cash, 1 month LIBOR(2.50%) + 9.50%; LIBOR Floor 1.00% , Due 6/21  

   10/7/2014    1,510,955    1,497,587    1,488,291 
                        

Child Development Schools, Inc.(8)(14)

Services: Business

 

Senior Secured Loan — Term Loan

6.8% Cash, 3 month LIBOR(2.52%) + 4.25% , Due 5/23  

   6/6/2018    4,726,027    4,716,164    4,714,212 
                        

Community Care Health Network, Inc. (aka Matrix Medical Network)(8)(14)

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Closing Date Term Loan

7.2% Cash, 1 month LIBOR(2.50%) + 4.75%; LIBOR Floor 1.00% , Due 2/25  

   2/9/2018    1,985,000    1,980,821    1,871,458 
                        

Corsair Gaming, Inc.(8)

High Tech Industries

 

Junior Secured Loan — Term Loan (Second Lien)

11.1% Cash, 3 month LIBOR(2.60%) + 8.50%; LIBOR Floor 1.00% , Due 8/25  

   9/29/2017    5,000,000    4,938,888    4,929,000 

 

9

 

  

Portfolio Company/
Principal Business
 

Investment

Interest Rate¹ / Maturity15

  Initial
Acquisition
Date
   Principal  

Amortized

Cost

   Fair Value2 

Corsair Gaming, Inc.(8)(14)

High Tech Industries

 

Senior Secured Loan — Term Loan (First Lien)

6.9% Cash, 3 month LIBOR(2.60%) + 4.25%; LIBOR Floor 1.00% , Due 8/24  

   9/29/2017    1,984,926    1,980,728    1,965,077 
                        

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(8)

Beverage, Food and Tobacco

 

Junior Secured Loan — Term Loan (Second Lien)

10.6% Cash, 3 month LIBOR(2.80%) + 7.75%; LIBOR Floor 1.00% , Due 7/21  

   5/23/2013    3,000,000    3,005,685    2,812,500 
                        

CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)(8)(13)(14)

Healthcare & Pharmaceuticals

 

Senior Secured Loan — New Term Loan Facility

6.7% Cash, 1 month LIBOR(2.50%) + 4.25%; LIBOR Floor 1.00% , Due 12/21  

   11/19/2014    3,953,793    3,948,258    3,432,387 
                        

Decolin Inc.(3)(13)(14)

Textiles and Leather

 

Senior Secured Loan — Initial Term Loan

7.0% Cash, 1 month LIBOR(2.50%) + 4.50%; LIBOR Floor 1.00% , Due 12/23  

   1/26/2018    2,190,363    2,181,554    2,090,482 
                        

Digitran Innovations B.V. (Pomeroy Solutions Holding Company, Inc.)(8)(13)(14)

High Tech Industries

 

Senior Secured Loan — Term Loan

10.1% Cash, 3 month LIBOR(2.61%) + 7.50%; LIBOR Floor 1.50% , Due 7/24  

   12/10/2018    4,974,937    4,927,919    4,912,751 
                        

Drilling Info Holdings, Inc.(8)(13)(14)

High Tech Industries

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.7% Cash, 1 month LIBOR(2.50%) + 4.25% , Due 7/25  

   2/12/2019    2,485,239    2,479,579    2,479,026 
                        

Evergreen North America Acquisition, LLC (f/k/a Industrial Services Acquisition, LLC)(8)(13)(14)

Environmental Industries

 

Senior Secured Loan — Term Loan

7.6% Cash, 3 month LIBOR(2.63%) + 5.00%; LIBOR Floor 1.00% , Due 6/22  

   6/21/2016    1,087,683    1,091,368    1,087,683 
                        

First American Payment Systems, L.P.(8)(13)(14)

Banking, Finance, Insurance & Real Estate

 

Junior Secured Loan — Term Loan (Second Lien)

13.1% Cash, 3 month LIBOR(2.64%) + 10.50%; LIBOR Floor 1.00% , Due 7/24  

   1/4/2017    1,500,000    1,468,354    1,409,400 
                        

Flexera Software LLC (fka Flexera Software, Inc.)(8)

High Tech Industries

 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.8% Cash, 1 month LIBOR(2.50%) + 7.25%; LIBOR Floor 1.00% , Due 2/26  

   1/25/2018    1,099,654    1,111,069    1,092,781 

 

10

 

 

Portfolio Company/
Principal Business
 

Investment

Interest Rate¹ / Maturity15

  Initial
Acquisition
Date
   Principal  

Amortized

Cost

   Fair Value2 

GI Advo Opco, LLC(5)(8)(13)(14)

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan

9.5% Cash, Due 11/21  

   11/19/2015    180,304    179,431    - 
                        

GK Holdings, Inc. (aka Global Knowledge)(8)(13)

Services: Business

 

Junior Secured Loan — Initial Term Loan (Second Lien)

12.9% Cash, 3 month LIBOR(2.60%) + 10.25%; LIBOR Floor 1.00% , Due 1/22  

   1/30/2015    1,500,000    1,487,894    1,344,450 
                        

Global Tel*Link Corporation(8)(13)

Telecommunications

 

Junior Secured Loan — Loan (Second Lien)

10.7% Cash, 1 month LIBOR(2.50%) + 8.2%, Due 11/26  

   5/21/2013    5,000,000    4,918,578    4,906,500 
                        

Global Tel*Link Corporation(8)(13)(14)

Telecommunications

 

Junior Secured Loan — Loan (Second Lien)

10.7% Cash, 1 month LIBOR(2.50%) + 8.2%, Due 11/26  

   5/21/2013    2,000,000    1,966,427    1,962,600 
                        

Global Tel*Link Corporation(8)(13)(14)

Telecommunications

 

Senior Secured Loan — Term Loan (First Lien)

6.7% Cash, 1 month LIBOR(2.50%), Due 11/25  

   5/21/2013    1,470,104    1,466,908    1,453,051 
                        

Grupo HIMA San Pablo, Inc.(8)(13)

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term B Loan (First Lien)

9.8% Cash, 3 month LIBOR(2.75%) + 7.00%; LIBOR Floor 1.50% , Due 1/18  

   1/30/2013    2,776,116    2,776,116    2,685,892 
                        

Grupo HIMA San Pablo, Inc.(5)(8)(13)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

13.8% Cash, Due 7/18  

   1/30/2013    7,191,667    7,169,109    4,536,036 
                        

Harland Clarke Holdings Corp. (fka Clarke American Corp.)(8)(13)(14)

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Initial Term Loan

7.4% Cash, 3 month LIBOR(2.60%) + 4.75%; LIBOR Floor 1.00% , Due 11/23  

   6/18/2013    2,774,851    2,792,996    2,538,989 
                        

Hoffmaster Group, Inc.(8)(13)(14)

Forest Products & Paper

 

Junior Secured Loan — Initial Term Loan (Second Lien)

12.0% Cash, 1 month LIBOR(2.50%) + 9.50%; LIBOR Floor 1.00% , Due 11/24  

   5/6/2014    1,600,000    1,566,065    1,554,080 
                        

Ivanti Software, Inc. (fka LANDesk Group, Inc.)(8)(13)

High Tech Industries

 

Junior Secured Loan — Loan (Second Lien)

11.5% Cash, 1 month LIBOR(2.50%) + 9.00%; LIBOR Floor 1.00% , Due 1/25  

   3/10/2017    3,228,619    3,228,619    3,102,057 
                        

Kellermeyer Bergensons Services, LLC(8)

Services: Business

 

Senior Secured Loan — 2018 Replacement Term Loan (First Lien)

7.4% Cash, 3 month LIBOR(2.63%) + 4.75%; LIBOR Floor 1.00% , Due 10/21  

   10/31/2014    2,088,206    2,085,776    2,068,994 

 

11

 

  

Portfolio Company/
Principal Business
 

Investment

Interest Rate¹ / Maturity15

  Initial
Acquisition
Date
   Principal  

Amortized

Cost

   Fair Value2 

MB Aerospace Holdings II Corp.(8)(13)(14)

Aerospace and Defense

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.0% Cash, 1 month LIBOR(2.50%) + 3.50%; LIBOR Floor 1.00% , Due 1/25  

   5/10/2013    1,234,375    1,229,225    1,206,602 
                        

Navex Topco, Inc.(8)(13)(14)

Electronics

 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.5% Cash, 1 month LIBOR(2.50%) + 7.00% , Due 9/26  

   12/4/2018    6,700,000    6,633,298    6,566,000 
                        

Pinstripe Holdings, LLC (Aka Cielo)(8)(13)(14)

Services: Consumer

 

Senior Secured Loan — Initial Term Loan

8.5% Cash, 1 month LIBOR(2.50%) + 6.00%; LIBOR Floor 1.00% , Due 1/25  

   1/17/2019    5,000,000    4,902,799    4,900,000 
                        

Playpower, Inc.(8)(13)(14)

Construction & Building

 

Senior Secured Loan — Initial Term Loan (First Lien)

7.4% Cash, 3 month LIBOR(2.60%) + 4.75%; LIBOR Floor 1.00% , Due 6/21  

   6/23/2015    1,524,087    1,529,905    1,524,392 
                        

PSC Industrial Holdings Corp.(8)(13)

Environmental Industries

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.98% Cash, 1 month LIBOR(2.48%) + 8.50%; LIBOR Floor 1.00% , Due 10/25  

   10/5/2017    3,000,000    2,950,892    2,865,000 
                        

PVHC Holding Corp(8)(13)(14)

Chemicals, Plastics and Rubber

 

Senior Secured Loan — Initial Term Loan

7.36% Cash, 3 month LIBOR(2.61%) + 4.75%; LIBOR Floor 1.00% , Due 8/24  

   8/10/2018    2,865,600    2,851,108    2,793,960 
                        

Q Holding Company (fka Lexington Precision Corporation)(8)(13)(14)

Chemicals, Plastics and Rubber

 

Senior Secured Loan — Term B Loan

7.50% Cash, 1 month LIBOR(2.50%) + 5.00%; LIBOR Floor 1.00% , Due 12/21  

   12/16/2016    1,974,227    1,995,570    1,951,721 
                        

Ravn Air Group, Inc.(8)(13)(14)

Aerospace and Defense

 

Senior Secured Loan — Initial Term Loan

7.6% Cash, 3 month LIBOR(2.61%) + 5.00%; LIBOR Floor 1.00% , Due 7/21  

   7/29/2015    1,867,866    1,867,866    1,867,866 
                        

Robertshaw US Holding Corp. (fka Fox US Bidco Corp.) (8)(13)

Capital Equipment

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.5% Cash, 1 month LIBOR(2.50%) + 8.00%; LIBOR Floor 1.00% , Due 2/26  

   2/15/2018    3,000,000    2,974,023    2,777,100 
                        

Roscoe Medical, Inc.(5)(8)(13)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, Due 9/19  

   3/26/2014    1,700,000    1,698,495    816,000 
                        

Roscoe Medical, Inc.(5)(8)(13)(14)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, Due 9/19  

   3/26/2014    5,000,000    4,995,580    2,400,000 

 

12

 

 

Portfolio Company/
Principal Business
 

Investment

Interest Rate¹ / Maturity15

  Initial
Acquisition
Date
   Principal  

Amortized

Cost

   Fair Value2 

Salient CRGT Inc.(8)(13)(14)

High Tech Industries

 

Senior Secured Loan — Initial Term Loan

8.2% Cash, 1 month LIBOR(2.50%) + 5.75%; LIBOR Floor 1.00% , Due 2/22  

   2/27/2017    1,828,971    1,845,166    1,761,117 
                        

SCSG EA Acquisition Company, Inc.(8)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.0% Cash, 3 month LIBOR(2.80%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  

   8/18/2017    1,000,000    991,578    985,000 
                        

SCSG EA Acquisition Company, Inc.(8)(14)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.0% Cash, 3 month LIBOR(2.80%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  

   8/18/2017    5,000,000    4,961,208    4,925,000 
                        

Sierra Enterprises, LLC (aka Lyons Magnus)(8)(13)(14)

Beverage, Food and Tobacco

 

Senior Secured Loan — Tranche B-1 Term Loan (First Lien)

6.0% Cash, 1 month LIBOR(2.50%) + 3.50%; LIBOR Floor 1.00% , Due 11/24  

   11/3/2017    2,962,575    2,950,127    2,947,762 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(5)(8)(13)

Environmental Industries

 

Junior Secured Loan — Restructured Term Loan

1.0% Cash, 8.3% PIK, Due 10/22  

   6/25/2013    2,035,770    1,984,160    - 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(5)(8)(13)

Environmental Industries

 

Senior Secured Loan — Term Loan

1.0% Cash, 3 month LIBOR(2.82%) + 12.00% , Due 10/22  

   6/25/2013    339,788    339,788    47,634 
                        

Tank Partners Holdings, LLC(8)(13)

Energy: Oil & Gas

  Senior Unsecured Bond — TankConvert, 10.0% PIK, Due 2/22     2/15/2019    456,974    456,974    456,974 
                        

Tex-Tech Industries, Inc.(8)(13)

Textiles and Leather

 

Junior Secured Loan — Term Loan (Second Lien)

11.5% Cash, 1 month LIBOR(2.50%) + 9.00%; LIBOR Floor 1.00% , Due 8/24  

   8/24/2017    8,008,000    7,961,681    7,847,840 
                        

Time Manufacturing Acquisition, LLC(8)(13)(14)

Capital Equipment

 

Senior Secured Loan — Term Loan

7.7% Cash, 6 month LIBOR(2.69%) + 5.00%; LIBOR Floor 1.00% , Due 2/23  

   2/3/2017    3,437,374    3,438,848    3,421,562 
                        

TLE Holdings, LLC(8)(13)(14)

Services: Consumer

 

Senior Secured Loan — Term Loan

8.0% Cash, 1 month LIBOR(2.50%) + 5.50%; LIBOR Floor 1.00% , Due 6/24  

   3/29/2019    5,732,229    5,702,583    5,703,568 
                        

TronAir Parent Inc.(8)(13)(14)

Aerospace and Defense

 

Senior Secured Loan — Initial Term Loan (First Lien)

7.6% Cash, 12 month LIBOR(2.82%) + 4.75%; LIBOR Floor 1.00% , Due 9/23  

   9/30/2016    984,848    982,924    961,015 
                        

TRSO I, Inc.(8)(13)

Energy: Oil & Gas

 

Junior Secured Loan — Term Loan (Second Lien)

14.0% Cash, Due 12/19  

   12/24/2012    1,000,000    997,911    1,000,000 

 

13

 

 

Portfolio Company/
Principal Business
 

Investment

Interest Rate¹ / Maturity15

  Initial
Acquisition
Date
   Principal  

Amortized

Cost

   Fair Value2 

Verdesian Life Sciences, LLC(8)(13)(14)

Environmental Industries

 

Senior Secured Loan — Initial Term Loan

7.7% Cash, 3 month LIBOR(2.74%) + 5.00%; LIBOR Floor 1.00% , Due 7/20  

   6/25/2014    2,041,874    2,007,410    1,837,687 
                        

WireCo WorldGroup Inc. (8)(13)

Capital Equipment

 

Junior Secured Loan — Initial Term Loan (Second Lien)

11.5% Cash, 1 month LIBOR(2.50%) + 9.00%; LIBOR Floor 1.00% , Due 9/24  

   8/9/2016    3,000,000    2,969,008    2,889,900 
                        

Zest Acquisition Corp.(8)(13)

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.0% Cash, 1 month LIBOR(2.49%) + 7.50%; LIBOR Floor 1.00% , Due 3/26  

   3/8/2018    3,500,000    3,480,435    3,281,241 
                        
Total Investment in Debt Securities
(106% of net asset value at fair value)
          $165,747,211   $164,699,256   $152,196,382 

 

14

 

  

Equity Securities Portfolio

 

Portfolio Company /
Principal Business
  Investment15  Initial
Acquisition
Date
  

Percentage

Ownership/Shares

   Cost   Fair Value2 

Advanced Lighting Technologies, Inc,(8)(13)

Consumer goods: Durable

  Warrants     6/13/2012    1.90%  $-   $1,000 
                        

Advanced Lighting Technologies, Inc.(8)(13)

Consumer goods: Durable

  Membership Interests     6/13/2012    0.40%   181,999    1,000 
                        

Aerostructures Holdings L.P.(8)(13)

Aerospace and Defense

  Partnership Interests     2/28/2007    1.16%   157,717    50,000 
                        

BCP Great Lakes Holdings LP(10)(17)(18)

Limited Partnership

  Partnership Interests     12/11/2018    55.6%   15,185,556    14,966,706 
                        

Caribe Media Inc. (fka Caribe Information Investments Incorporated)(8)(13)

Media: Advertising, Printing & Publishing

  Common     12/18/2006    1.17%   359,765    108,675 
                        

eInstruction Acquisition, LLC(3)(8)(13)

Services: Business

  Membership Units     7/2/2007    1.10%   1,079,617    1,000 
                        

FP WRCA Coinvestment Fund VII, Ltd.(13)

Capital Equipment

  Class A Shares     2/2/2007    0.41%   1,500,000    624,000 
                        

New Millennium Holdco, Inc. (Millennium Health, LLC)(8)(13)

Healthcare & Pharmaceuticals

  Common     10/7/2014    0.20%   1,953,299    1,000 
                        

Roscoe Investors, LLC(8)(13)

Healthcare & Pharmaceuticals

  Class A Units      3/26/2014    1.56%   1,000,000    - 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(13)

Environmental Industries

  Class B Units     6/25/2013    1.56%   -    1,000 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(13)

Environmental Industries

  Class B Equity     6/25/2013    1.56%   -    1,000 
                        

Tank Partners Holdings, LLC(8)(10)(13)

Energy: Oil & Gas

  Class A Units     8/28/2014    48.5%   6,228,000    568,905 
                        

Ohene Holdings B.V.- Digitran Pomeroy(13)

Services: Business

  Warrants     8/28/2014    0.2%   -    1,000 
                        

TRSO II, Inc.(8)(13)

Energy: Oil & Gas

  Common Stock     12/24/2012    5.40%   1,680,161    510,054 
                        
Total Investment in Equity Securities
(12% of net asset value at fair value)
               $29,326,114   $16,835,340 

 

15

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company  Investment15,11  Initial
Acquisition
Date
  Percentage
Ownership
   Amortized Cost   Fair Value 
Katonah III, Ltd.(3)(12)(13) 

Subordinated Securities, effective interest N/M, 5/15 maturity (16)

  12/11/2006   23.1%  $1,287,155   $369,280 
Catamaran CLO 2013- 1 Ltd.(3)(13)  Subordinated Securities, effective interest 21.1%, 1/28 maturity  6/4/2013   23.3%   6,371,659    7,506,434 
Catamaran CLO 2014-1 Ltd.(3)(13)  Subordinated Securities, effective interest 13.5%, 4/30 maturity  5/6/2014   22.2%   10,316,641    9,112,278 
Dryden 30 Senior Loan Fund(3)(13)  Subordinated Securities, effective interest 27.2%, 12/29 maturity  10/10/2013   6.8%   1,468,739    2,014,262 
Catamaran CLO 2014-2 Ltd.(3)(13)  Subordinated Securities, effective interest 10.1%, 11/25 maturity  8/15/2014   24.9%   6,316,361    2,591,820 
Catamaran CLO 2015-1 Ltd.(3)(13)  Subordinated Securities, effective interest 11.3%, 10/26 maturity    5/5/2015   9.9%   4,303,600    3,157,769 
Catamaran CLO 2016-1 Ltd.(3)(13)  Subordinated Securities, effective interest 9.1%, 4/27 maturity    12/21/2016   24.9%   9,620,439    7,502,959 
Catamaran CLO 2018-1 Ltd(3)(13)  Subordinated Securities, effective interest 14.5%, 10/31 maturity    9/27/2018   24.8%   10,199,316    8,950,000 
                      
Total Investment in CLO Subordinated Securities          $49,883,910   $41,204,802 

 

CLO Rated-Note Investment

 

Portfolio Company  Investment15  Initial
Acquisition
Date
  Percentage
Ownership
   Amortized Cost   Fair Value 
Great Lakes KCAP F3C Senior,
LLC (fka KCAP F3C Senior
Funding, LLC)(6)(13)
  Class E Notes, 10.13% Cash, 3 month LIBOR (2.63%) + 7.50%, Due 12/29    10/24/2017   27.4%   4,416,048    4,400,213 
                      
Total Investment in CLO Rated-Note             $4,416,048   $4,400,213 
                      
Total Investment in CLO Fund Securities
(32% of net asset value at fair value)
             $54,299,958   $45,605,015 

 

16

 

 

Asset Manager Affiliates

 

Portfolio Company /
Principal Business
  Investment15  Initial
Acquisition
Date
 

Percentage

Ownership

   Cost   Fair Value2 
Asset Manager Affiliates(8)(13)(17)  Asset Management Company    12/11/2006   100%  $17,791,230   $- 
                      
Total Investment in Asset Manager Affiliates
(% of net asset value at fair value)
          $17,791,230   $- 

 

Joint Ventures

 

Portfolio Company /
Principal Business
  Investment15  Initial
Acquisition
Date
 

Percentage

Ownership

   Cost   Fair Value 
KCAP Freedom 3 LLC(9)(13)  Joint Venture    7/19/2017   60%  $24,914,858   $23,707,969 
                      
Total Investment in Joint Ventures
(16% of net asset value at fair value)
          $24,914,858   $23,707,969 

 

Short-term Investments

 

Short-term Investments  Investment15  Initial
Acquisition
Date
  Yield   Par /Amortized
Cost
   Fair Value2 
US Bank Money Market Account(7)(8)  Money Market Account    N/A   0.20%  $24,121,902   $24,121,902 
                      
US Treasury Bill (Cusip:912796UV9)(8)  U.S. Government Obligation        2.29%   19,998,746    19,998,746 
Total Short-term Investments
(31% of net asset value at fair value)
             $44,120,648   $44,120,648 
                      
Total Investments4             $335,152,064   $282,465,354 

 

1A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at March 31, 2019. As noted in the table above, 78% (based on par) of debt securities contain floors which range between 1.00% and 1.50%.

 

2Reflects the fair market value of all investments as of March 31, 2019 as determined by the Company’s Board of Directors.

 

3Non-U.S. company or principal place of business outside the U.S.

 

4The aggregate cost of investments for federal income tax purposes is approximately $335 million. The aggregate gross unrealized appreciation is approximately $0.1 million, the aggregate gross unrealized depreciation is approximately $52.8 million, and the net unrealized depreciation is approximately $52.7 million.

 

5Loan or debt security is on non-accrual status and therefore is considered non-income producing.

 

6An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).

 

7Money market account.

 

8Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Qualifying assets represent approximately 70.3% of the total assets at March 31, 2019.

 

17

 

 

9As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Other than for purposes of the 1940 Act, the Company does not believe that it has control over this portfolio company.

 

10Non-voting.

 

11CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.

 

12Notice of redemption has been received for this security.

 

13Fair value of this investment was determined using significant unobservable inputs.

 

14As of March 31, 2019, this investment is owned by Great Lakes KCAP Funding I, LLC and was pledged to secure Great Lakes KCAP Funding I, LLC’s debt obligation pursuant to its senior secured revolving credit facility (the “Revolving Credit Facility”) with the Company, as the servicer, certain institutional lenders, State Bank and Trust Company, as the administrative agent, lead arranger and bookrunner, and CIBC Bank USA, as documentation agent.

 

15The Company's investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities'' under the Securities Act of 1933.

 

16The remaining collateral in this CLO Fund portfolio is illiquid and not producing meaningful cash flows, and thus, the Company’s investment in the CLO Subordinated securities are not currently receiving periodic cash distributions. Accordingly, the Company is no longer recording any investment income from these investments, and has thus noted the effective interest as not meaningful, or N/M. The fair value of the investment reflects the Company’s estimated share of the fair value of the underlying collateral.

 

17As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company.

 

18Ownership of LP interest held through the holding company BCP Great Lakes Fund, LP.

 

See accompanying notes to consolidated financial statements.

 

18

 

 

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of December 31, 2018

 

Debt Securities Portfolio

 

Portfolio Company /
Principal Business
  Investment
Interest Rate¹ / Maturity15
  Initial
Acquisition
Date
   Principal   Amortized
Cost
   Fair Value2 
                    

Advanced Lighting Technologies, Inc.(5)(8)(13)

Consumer goods: Durable

  Junior Secured Loan — Second Lien Notes
9.8% Cash, 10.0% PIK, 3 month LIBOR(2.80%) + 7.00%; LIBOR Floor 1.00% , Due 10/23  
   6/13/2012   $1,007,062   $958,499   $362,240 
                        

AlixPartners, LLP(8)(13)

Services: Business

  Senior Secured Loan — 2017 Refinancing Term Loan
5.3% Cash, 1 month LIBOR(2.52%) + 2.75%; LIBOR Floor 1.00% , Due 4/24  
   12/28/2018    997,462    957,563    957,563 
                        

Asurion, LLC (fka Asurion Corporation)(8)(13)

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Amendment No. 14 Replacement B-4 Term Loan
5.5% Cash, 1 month LIBOR(2.52%)+ 3.00%; LIBOR Floor 1.00% , Due 8/22  
   12/28/2018    1,520,851    1,463,819    1,460,001 
                        

BMC Acquisition, Inc. (aka BenefitMall)(8)(13)(14)

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Initial Term Loan
7.8% Cash, 6 month LIBOR(2.59%) + 5.25%; LIBOR Floor 1.00% , Due 12/24  
   1/2/2018    2,970,000    2,968,502    2,942,082 
                        

BW NHHC Holdco Inc.(8)(13)(14)

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan (First Lien)
7.5% Cash, 1 month LIBOR(2.47%) + 5.00% , Due 5/25  
   5/16/2018    1,990,000    1,962,751    1,950,200 
                        

Carestream Health, Inc.(8)(13)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Extended Term Loan (Second Lien)
12.0% Cash, 1 month LIBOR(2.52%) + 9.50%; LIBOR Floor 1.00% , Due 6/21  
   10/7/2014    1,510,955    1,496,079    1,480,736 
                        

Child Development Schools, Inc.(8)(13)(14)

Services: Business

  Senior Secured Loan — Term Loan
6.7% Cash, 3 month LIBOR(2.50%) + 4.25% , Due 5/23  
   6/6/2018    4,794,521    4,783,918    4,782,534 
                        

Community Care Health Network, Inc. (aka Matrix Medical Network)(8)(14)

Healthcare & Pharmaceuticals

  Senior Secured Loan — Closing Date Term Loan
7.3% Cash, 1 month LIBOR(2.52%) + 4.75%; LIBOR Floor 1.00% , Due 2/25  
   2/9/2018    1,990,000    1,985,635    1,873,784 
                        

Corsair Gaming, Inc.(8)

High Tech Industries

  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, 3 month LIBOR(2.80%) + 8.50%; LIBOR Floor 1.00% , Due 8/25  
   9/29/2017    5,000,000    4,936,538    4,929,000 
                        

Corsair Gaming, Inc.(8)(14)

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
7.1% Cash, 3 month LIBOR(2.80%) + 4.25%; LIBOR Floor 1.00% , Due 8/24  
   9/29/2017    1,989,954    1,985,554    1,968,678 

 

19

 

 

Portfolio Company /
Principal Business
  Investment
Interest Rate¹ / Maturity15
  Initial
Acquisition
Date
   Principal   Amortized
Cost
   Fair Value2 
                    

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)(8)

Beverage, Food and Tobacco

  Junior Secured Loan — Term Loan (Second Lien)
10.2% Cash, 3 month LIBOR(2.41%) + 7.75%; LIBOR Floor 1.00% , Due 7/21  
   5/23/2013    3,000,000    3,006,304    2,841,300 
                        

CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)(8)(14)

Healthcare & Pharmaceuticals

  Senior Secured Loan — New Term Loan Facility
6.8% Cash, 1 month LIBOR(2.52%) + 4.25%; LIBOR Floor 1.00% , Due 12/21  
   11/19/2014    3,964,063    3,958,001    3,306,683 
                        

Decolin Inc.(3)(13)(14)

Textiles and Leather

  Senior Secured Loan — Initial Term Loan
7.0% Cash, 1 month LIBOR(2.51%) + 4.50%; LIBOR Floor 1.00% , Due 12/23  
   1/26/2018    2,190,363    2,181,096    2,092,454 
                        

Dell International L.L.C. (EMC Corporation)(8)(13)

High Tech Industries

  Senior Secured Loan — Refinancing Term B Loan
4.5% Cash, 1 month LIBOR(2.53%) + 2.00%; LIBOR Floor 0.75% , Due 9/23  
   12/28/2018    2,000,000    1,930,000    1,930,000 
                        

Digitran Innovations B.V. (Pomeroy Solutions Holding Company, Inc.)(8)(13)(14)

High Tech Industries

  Senior Secured Loan — Term Loan
10.3% Cash, 3 month LIBOR(2.81%) + 7.50%; LIBOR Floor 1.50% , Due 7/24  
   12/10/2018    4,987,469    4,938,132    4,937,594 
                        

Drew Marine Group Inc.(8)(13)(14)

Transportation: Cargo

  Junior Secured Loan — Term Loan (Second Lien)
9.5% Cash, 1 month LIBOR(2.52%) + 7.00%; LIBOR Floor 1.00% , Due 5/21  
   11/19/2013    4,000,000    4,000,634    4,000,400 
                        

Evergreen North America Acquisition, LLC (f/k/a Industrial Services Acquisition, LLC)(8)(13)(14)

Environmental Industries

  Senior Secured Loan — Term Loan
7.8% Cash, 3 month LIBOR(2.81%) + 5.00%; LIBOR Floor 1.00% , Due 6/22  
   6/21/2016    1,103,728    1,107,755    1,103,728 
                        

First American Payment Systems, L.P.(8)(13)(14)

Banking, Finance, Insurance & Real Estate

  Junior Secured Loan — Term Loan (Second Lien)
13.0% Cash, 3 month LIBOR(2.54%) + 10.50%; LIBOR Floor 1.00% , Due 7/24  
   1/4/2017    1,500,000    1,466,870    1,399,200 
                        

Flexera Software LLC (fka Flexera Software, Inc.)(8)

High Tech Industries

  Junior Secured Loan — Initial Term Loan (Second Lien)
9.8% Cash, 1 month LIBOR(2.53%) + 7.25%; LIBOR Floor 1.00% , Due 2/26  
   1/25/2018    1,099,654    1,111,477    1,090,032 
                        

GI Advo Opco, LLC(5)(8)(13)(14)

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
9.5% Cash, Due 11/21  
   11/19/2015    180,304    179,431    117,919 

 

20

 

  

Portfolio Company /
Principal Business
  Investment
Interest Rate¹ / Maturity15
  Initial
Acquisition
Date
   Principal   Amortized
Cost
   Fair Value2 
                    

GK Holdings, Inc. (aka Global Knowledge)(8)(13)

Services: Business

  Junior Secured Loan — Initial Term Loan (Second Lien)
13.1% Cash, 3 month LIBOR(2.80%) + 10.25%; LIBOR Floor 1.00% , Due 1/22  
   1/30/2015    1,500,000    1,486,831    1,376,250 
                        

Global Tel*Link Corporation(8)(13)

Telecommunications

  Junior Secured Loan — Loan (Second Lien)
11.0% Cash, 3 month LIBOR(2.71%) + 8.25% , Due 11/26  
   5/21/2013    5,000,000    4,915,960    4,912,500 
                        

Global Tel*Link Corporation(8)(13)(14)

Telecommunications

  Junior Secured Loan — Loan (Second Lien)
11.0% Cash, 3 month LIBOR(2.71%) + 8.25% , Due 11/26  
   5/21/2013    2,000,000    1,965,349    1,965,000 
                        

Global Tel*Link Corporation(8)(13)(14)

Telecommunications

  Senior Secured Loan — Term Loan (First Lien)
7.0% Cash, 3 month LIBOR(2.71%) + 4.25% , Due 11/25  
   12/7/2017    1,473,788    1,470,466    1,466,419 
                        

Grupo HIMA San Pablo, Inc.(8)(13)

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term B Loan (First Lien)
9.5% Cash, 3 month LIBOR(2.52%) + 7.00%; LIBOR Floor 1.50% , Due 1/18  
   1/30/2013    2,813,058    2,813,058    2,728,666 
                        

Grupo HIMA San Pablo, Inc.(5)(13)(14)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
13.8% Cash, Due 7/18  
   1/30/2013    7,191,667    7,169,109    4,789,650 
                        

Harland Clarke Holdings Corp. (fka Clarke American Corp.)(8)(13)(14)

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Initial Term Loan
7.6% Cash, 3 month LIBOR(2.80%) + 4.75%; LIBOR Floor 1.00% , Due 11/23  
   6/18/2013    2,817,177    2,836,587    2,564,688 
                        

Hoffmaster Group, Inc.(8)(13)(14)

Forest Products & Paper

  Junior Secured Loan — Initial Term Loan (Second Lien)
12.0% Cash, 1 month LIBOR(2.52%) + 9.50%; LIBOR Floor 1.00% , Due 11/24  
   5/6/2014    1,600,000    1,564,583    1,553,920 
                        

Infobase Holdings, Inc.(8)(13)(14)

High Tech Industries

  Senior Secured Loan — Term Loan
7.1% Cash, 3 month LIBOR(2.63%) + 4.50%; LIBOR Floor 1.00% , Due 12/22  
   12/13/2017    4,017,393    3,981,675    3,977,219 
                        

Ion Media Networks, Inc.(8)(13)

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term B-3 Loan
5.3% Cash, 1 month LIBOR(2.53%) + 2.75%; LIBOR Floor 1.00% , Due 12/20  
   12/28/2018    3,000,000    2,917,500    2,917,500 
                        

Ivanti Software, Inc. (fka LANDesk Group, Inc.)(8)(13)

High Tech Industries

  Junior Secured Loan — Loan (Second Lien)
11.4% Cash, 1 month LIBOR(2.35%) + 9.00%; LIBOR Floor 1.00% , Due 1/25  
   3/10/2017    3,228,619    3,228,619    3,071,062 

 

21

 

 

Portfolio Company /
Principal Business
  Investment
Interest Rate¹ / Maturity15
  Initial
Acquisition
Date
   Principal   Amortized
Cost
   Fair Value2 
                    

Jane Street Group, LLC(8)(13)

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Dollar Term Loan (2018)
5.5% Cash, 1 month LIBOR(2.50%) + 3.00% , Due 8/22  
   12/28/2018    2,992,500    2,932,650    2,932,650 
                        

Kellermeyer Bergensons Services, LLC(8)

Services: Business

  Senior Secured Loan — 2018 Replacement Term Loan (First Lien)
7.5% Cash, 3 month LIBOR(2.71%) + 4.75%; LIBOR Floor 1.00% , Due 10/21  
   10/31/2014    2,093,452    2,090,784    2,096,069 
                        

MB Aerospace Holdings II Corp.(8)(13)(14)

Aerospace and Defense

  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1 month LIBOR(2.52%) + 3.50%; LIBOR Floor 1.00% , Due 1/25  
   5/10/2013    1,237,500    1,232,118    1,149,390 
                        

Navex Topco, Inc.(8)(13)(14)

Electronics

  Junior Secured Loan — Initial Term Loan (Second Lien)
9.5% Cash, 1 month LIBOR(2.53%) + 7.00% , Due 9/26  
   12/4/2018    3,000,000    3,007,500    3,007,500 
                        

Playpower, Inc.(8)(13)(14)

Construction & Building

  Senior Secured Loan — Initial Term Loan (First Lien)
7.6% Cash, 3 month LIBOR(2.80%) + 4.75%; LIBOR Floor 1.00% , Due 6/21  
   6/23/2015    1,393,745    1,400,223    1,394,163 
                        

PSC Industrial Holdings Corp.(8)(13)

Environmental Industries

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.96% Cash, 1 month LIBOR(2.46%) + 8.50%; LIBOR Floor 1.00% , Due 10/25  
   10/5/2017    3,000,000    2,949,039    2,940,300 
                        

PVHC Holding Corp(8)(13)(14)

Chemicals, Plastics and Rubber

  Senior Secured Loan — Initial Term Loan
7.57% Cash, 3 month LIBOR(2.82%) + 4.75%; LIBOR Floor 1.00% , Due 8/24  
   8/10/2018    2,872,800    2,859,340    2,859,872 
                        

Q Holding Company (fka Lexington Precision Corporation)(8)(13)(14)

Chemicals, Plastics and Rubber

  Senior Secured Loan — Term B Loan
7.5% Cash, 1 month LIBOR(2.52%) + 5.00%; LIBOR Floor 1.00% , Due 12/21  
   12/16/2016    1,979,381    2,002,724    1,941,773 
                        

Ravn Air Group, Inc.(8)(13)(14)

Aerospace and Defense

  Senior Secured Loan — Initial Term Loan
7.8% Cash, 3 month LIBOR(2.81%) + 5.00%; LIBOR Floor 1.00% , Due 7/21  
   7/29/2015    1,894,549    1,894,549    1,894,549 
                        

Robertshaw US Holding Corp. (fka Fox US Bidco Corp.) (8)(13)

Capital Equipment

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.6% Cash, 1 month LIBOR(2.56%) + 8.00%; LIBOR Floor 1.00% , Due 2/26  
   2/15/2018    3,000,000    2,973,097    2,775,000 
                        

Roscoe Medical, Inc.(8)(13)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, Due 9/19  
   3/26/2014    1,700,000    1,697,733    1,525,750 

 

22

 

 

Portfolio Company /
Principal Business
  Investment
Interest Rate¹ / Maturity15
  Initial
Acquisition
Date
   Principal   Amortized
Cost
   Fair Value2 
                    

Roscoe Medical, Inc.(8)(13)(14)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, Due 9/19  
   3/26/2014    5,000,000    4,993,345    4,487,500 
                        

SCSG EA Acquisition Company, Inc.(8)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.6% Cash, 3 month LIBOR(2.40%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  
   8/18/2017    1,000,000    991,195    990,400 
                        

SCSG EA Acquisition Company, Inc.(8)(14)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.6% Cash, 3 month LIBOR(2.40%) + 8.25%; LIBOR Floor 1.00% , Due 9/24  
   8/18/2017    5,000,000    4,959,445    4,952,000 
                        

Sierra Enterprises, LLC (aka Lyons Magnus)(8)(13)(14)

Beverage, Food and Tobacco

  Senior Secured Loan — Tranche B-1 Term Loan (First Lien)
6.0% Cash, 1 month LIBOR(2.52%) + 3.50%; LIBOR Floor 1.00% , Due 11/24  
   11/3/2017    2,970,056    2,957,029    2,955,206 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(5)(8)(13)

Environmental Industries

  Junior Secured Loan — Restructured Term Loan
1.0% Cash, 8.3% PIK, 3 month LIBOR (2.80%) + 5.50% , Due 10/22  
   6/25/2013    2,035,770    1,941,220    560,855 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(13)(14)

Environmental Industries

  Senior Secured Loan — Term Loan
14.8% Cash, 3 month LIBOR(2.82%) + 12.00% , Due 10/22  
   6/25/2013    339,788    339,788    339,788 
                        

Tank Partners Holdings, LLC(5)(8)(13)

Energy: Oil & Gas

  Senior Secured Loan — Loan
3.0% Cash, 12.5% PIK, 1 month PRIME (5.00%)+7.5%; PRIME Floor 3.00% , Due 8/19  
   8/28/2014    15,295,083    14,149,836    7,398,223 
                        

Tex-Tech Industries, Inc.(8)(13)

Textiles and Leather

  Junior Secured Loan — Term Loan (Second Lien)
11.5% Cash, 1 month LIBOR (2.52%) + 9.00%; LIBOR Floor 1.00% , Due 8/24  
   8/24/2017    8,008,000    7,959,567    7,847,840 
                        

Time Manufacturing Acquisition, LLC(8)(13)(14)

Capital Equipment

  Senior Secured Loan — Term Loan
7.6% Cash, 6 month LIBOR(2.63%) + 5.00%; LIBOR Floor 1.00% , Due 2/23  
   2/3/2017    3,446,143    3,447,715    3,430,291 
                        

TronAir Parent Inc.(8)(13)(14)

Aerospace and Defense

  Senior Secured Loan — Initial Term Loan (First Lien)
7.6% Cash, 6 month LIBOR(2.82%) + 4.75%; LIBOR Floor 1.00% , Due 9/23  
   9/30/2016    987,374    985,337    954,001 
                        

TRSO I, Inc.(8)(13)

Energy: Oil & Gas

  Junior Secured Loan — Term Loan (Second Lien)
14.0% Cash, Due 12/19  
   12/24/2012    1,000,000    997,207    1,000,000 

 

23

 

 

Portfolio Company /
Principal Business
  Investment
Interest Rate¹ / Maturity15
  Initial
Acquisition
Date
   Principal   Amortized
Cost
   Fair Value2 
                    

Verdesian Life Sciences, LLC(8)(13)(14)

Environmental Industries

  Senior Secured Loan — Initial Term Loan
7.5% Cash, 1 month LIBOR(2.53%) + 5.00%; LIBOR Floor 1.00% , Due 7/20  
   6/25/2014    2,075,305    2,033,378    1,993,123 
                        

Weiman Products, LLC(8)(13)(14)

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
7.3% Cash, 3 month LIBOR(2.80%) + 4.50%; LIBOR Floor 1.00% , Due 11/21  
   11/22/2013    1,440,525    1,434,568    1,440,525 
                        

WireCo WorldGroup Inc. (8)(13)

Capital Equipment

  Junior Secured Loan — Initial Term Loan (Second Lien)
11.5% Cash, 1 month LIBOR(2.52%) + 9.00%; LIBOR Floor 1.00% , Due 9/24  
   8/9/2016    3,000,000    2,967,619    2,957,100 
                        

Zest Acquisition Corp.(8)(13)

Healthcare & Pharmaceuticals

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.0% Cash, 1 month LIBOR(2.45%) + 7.50%; LIBOR Floor 1.00% , Due 3/26  
   3/8/2018    3,500,000    3,479,741    3,430,000 
                        
(103% of net asset value at fair value)          $164,541,812   $162,264,482   $147,861,744 

 

24

 

 

Equity Securities Portfolio

 

Portfolio Company /
Principal Business
  Investment15  Initial
Acquisition
Date
   Percentage
Ownership/Shares
   Cost   Fair Value2 
                    

Advanced Lighting Technologies, Inc,(8)(13)

Consumer goods: Durable

  Warrants     6/13/2012    1.90%  $-   $1,000 
                        

Advanced Lighting Technologies, Inc.(8)(13)

Consumer goods: Durable

  Membership Interests     6/13/2012    0.40%   181,999    1,000 
                        

Aerostructures Holdings L.P.(8)(13)

Aerospace and Defense

  Partnership Interests     2/28/2007    1.16%   157,717    50,000 
                        

BCP Great Lakes Holding LP(17)

Limited Partnership

  Partnership Interests     12/11/2018    55.6%   12,466,667    12,466,667 
                        

Caribe Media Inc. (fka Caribe Information Investments Incorporated)(8)(13)

Media: Advertising, Printing & Publishing

  Common     12/18/2006    1.17%   359,765    108,675 
                        

eInstruction Acquisition, LLC(3)(13)

Services: Business

  Membership Units     7/2/2007    1.10%   1,079,617    1,000 
                        

FP WRCA Coinvestment Fund VII, Ltd.(13)

Capital Equipment

  Class A Shares     2/2/2007    0.41%   1,500,000    669,000 
                        

New Millennium Holdco, Inc. (Millennium Health, LLC)(13)

Healthcare & Pharmaceuticals

  Common     10/7/2014    0.20%   1,953,299    1,000 
                        

Perseus Holding Corp.(8)(13)

Hotel, Gaming & Leisure

  Common     4/5/2007    0.19%   400,000    1,000 
                        
Roscoe Investors, LLC(8)(13)  Healthcare & Pharmaceuticals  Class A Units      3/26/2014    1.56%   1,000,000    653,000 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(13)

Environmental Industries

  Class B Units     6/25/2013    1.56%   -    1,000 
                        

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)(8)(10)(13)

Environmental Industries

  Class B Equity     6/25/2013    1.56%   -    1,000 
                        

Tank Partners Holdings, LLC(8)(13)

Aerospace and Defense

  Unit     8/28/2014    15.5%   980,000    1,000 
                        

Tank Partners Holdings, LLC(8)(13)

Aerospace and Defense

  Warrants     8/28/2014    1.04%   185,205    1,000 
                        

TRSO II, Inc.(8)(13)

Energy: Oil & Gas

  Common Stock     12/24/2012    5.40%   1,680,161    548,345 
                        
Total Investment in Equity Securities (10% of net asset value at fair value)               $21,944,430   $14,504,687 

 

25

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company  Investment15,11  Initial
Acquisition
Date
   Percentage
Ownership
   Amortized Cost   Fair Value 
Katonah III, Ltd.(3)(12)(13)  Subordinated Securities, effective interest N/M, 5/15 maturity
16
   12/11/2006    23.1%  $1,287,155   $369,280 
Catamaran CLO 2013- 1 Ltd.(3)(13)  Subordinated Securities, effective interest 21.9%, 1/28 maturity   6/4/2013    23.3%   6,378,611    7,016,733 
Catamaran CLO 2014-1 Ltd.(3)(13)  Subordinated Securities, effective interest 13.6%, 4/30 maturity   5/6/2014    25.1%   11,740,622    9,777,251 
Dryden 30 Senior Loan Fund(3)(13)  Subordinated Securities, effective interest 27.0%, 12/29 maturity   10/10/2013    6.8%   1,438,701    1,913,925 
Catamaran CLO 2014-2 Ltd.(3)(13)  Subordinated Securities, effective interest 10.4%, 11/25 maturity   8/15/2014    24.9%   6,314,484    2,158,200 
Catamaran CLO 2015-1 Ltd.(3)(13)  Subordinated Securities, effective interest 11.4%, 10/26 maturity     5/5/2015    9.9%   4,353,347    3,048,698 
Catamaran CLO 2016-1 Ltd.(3)(13)  Subordinated Securities, effective interest 9.1%, 4/27 maturity     12/21/2016    24.9%   9,717,150    7,067,073 
Catamaran CLO 2018-1 Ltd(3)(13)  Subordinated Securities, effective interest 14.5%, 10/31 maturity     9/27/2018    24.8%   9,843,450    8,500,000 
Total Investment in CLO Subordinated Securities               $51,073,520   $39,851,160 

 

CLO Rated-Note Investment

 

Portfolio Company  Investment15  Initial
Acquisition
Date
   Percentage
Ownership
   Amortized Cost   Fair Value 
KCAP 2017-1A(6)(13)  Class E Notes, 10.29% Cash, 3 month LIBOR (2.79%) + 7.50%, Due 12/29     10/24/2017    27.4%   4,407,106    4,473,840 
                        
Total Investment in CLO Rated-Note               $4,407,106   $4,473,840 
                        
Total Investment in CLO Fund Securities
(31% of net asset value at fair value)
               $55,480,626   $44,325,000 

 

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Asset Manager Affiliates

 

Portfolio Company /
Principal Business
  Investment15  Initial
Acquisition
Date
   Percentage
Ownership
   Cost   Fair Value2 
Asset Manager Affiliates(8)(13)(17)  Asset Management Company     12/11/2006    100%  $17,791,230   $3,470,000 
                        
Total Investment in Asset Manager Affiliates
(2% of net asset value at fair value)
               $17,791,230   $3,470,000 

 

Joint Ventures

 

Portfolio Company /
Principal Business
  Investment15  Initial
Acquisition
Date
   Percentage
Ownership
   Cost   Fair Value 
KCAP Freedom 3 LLC(9)(13)  Joint Venture     7/19/2017    60%  $24,914,858   $18,390,440 
                        
Total Investment in Joint Ventures
(13% of net asset value at fair value)
               $24,914,858   $18,390,440 

 

Short-term Investments

 

Short-term Investments  Investment15  Initial
Acquisition
Date
   Yield   Par /Amortized
Cost
   Fair Value2 
US Bank Money Market Account(7)(8)  Money Market Account     N/A    0.20%  $34,757,129   $34,757,129 
                        
US Treasury Bill (Cusip:912796UH0)(8)  U.S. Government Obligation          1.04%   9,999,349    9,999,349 
Total Short-term Investments
(31% of net asset value at fair value)
               $44,756,478   $44,756,478 
Total Investments4               $327,152,104   $273,308,349 

 

1 A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2018. As noted in the table above, 81% (based on par) of debt securities contain floors which range between 0.75% and 3.00%.
2 Reflects the fair market value of all investments as of December 31, 2018, as determined by the Company’s Board of Directors.
3 Non-U.S. company or principal place of business outside the U.S.
4 The aggregate cost of investments for federal income tax purposes is approximately $327 million. The aggregate gross unrealized appreciation is approximately $0 million, the aggregate gross unrealized depreciation is approximately $53.8 million, and the net unrealized depreciation is approximately $53.8 million.
5 Loan or debt security is on non-accrual status and therefore is considered non-income producing.
6 An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
7 Money market account.
8 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940, as amended (the “1940 Act”). Qualifying assets represent approximately 72.0% of the total assets at December 31, 2018.

 

27

 

 

9 As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Other than for purposes of the 1940 Act, the Company does not believe that it has control over this portfolio company.
10 Non-voting.
11 CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.
12 Notice of redemption has been received for this security.
13 Fair value of this investment was determined using significant unobservable inputs.
14 As of December 31, 2018, this investment is owned by KCAP Funding I, LLC and was pledged to secure KCAP Funding I, LLC’s debt obligation pursuant to its senior secured revolving credit facility (the “Revolving Credit Facility”) with the Company, as the servicer, certain institutional lenders, State Bank and Trust Company, as the administrative agent, lead arranger and bookrunner, and CIBC Bank USA, as documentation agent.
15 The Company's investments are generally acquired in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”) and, therefore, are generally subject to limitations on resale, and may be deemed to be “restricted securities'' under the Securities Act of 1933.
16

The remaining collateral in these CLO Fund portfolios are illiquid and not producing meaningful cash flows, and thus, the Company’s investment in the CLO Subordinated securities are not currently receiving periodic cash distributions. Accordingly, the Company is no longer recording any investment income from these investments, and has thus noted the effective interest as not meaningful, or N/M. The fair value of the investment reflects the Company’s estimated share of the fair value of the underlying collateral.

 

17 As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company.

 

See accompanying notes to consolidated financial statements.

28

 

  

PORTMAN RIDGE FINANCE CORPORATION

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

  

Three Months Ended

March 31,

 
   20194   20184 
         
Per Share Data:          
Net asset value, at beginning of period  $4.23   $4.87 
Net investment (loss) income1   (0.06)   0.07 
Net realized (losses) gains from investments1   (0.36)   - 
Net change in unrealized appreciation on investments1   0.13    - 
Net (decrease) increase in net assets resulting from operations   (0.29)   0.07 
           
Net decrease in net assets resulting from distributions:   (0.10)   (0.10)
Net increase in net assets relating to stock-based transactions: Stock based compensation   0.01    0.01 
           
Net asset value, end of period  $3.85   $4.85 
Total net asset value return2   (6.6)%   1.6%
           
Ratio/Supplemental Data:          
Per share market value at beginning of period  $3.46   $3.41 
Per share market value at end of period  $3.62   $3.14 
Total market return3   7.5%   (5.0)%
Shares outstanding at end of period   37,331,709    37,354,479 
Net assets at end of period  $143,686,028   $181,002,087 
Portfolio turnover rate6   6.9%   28.6%
Average par debt outstanding  $101,476,204   $106,795,129 
Asset coverage ratio   216%   270%
Ratio of net investment (loss) income to average net assets5   (5.8)%   5.4%
Ratio of total expenses to average net assets5   21.2%   9.6%
Ratio of interest expense to average net assets5   4.8%   4.1%
Ratio of non-interest expenses to average net assets5   16.4%   5.5%

 

 

1Based on weighted average number of common shares outstanding-basic for the period.
2Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus distributions, divided by the beginning net asset value per share.
3Total market return (not annualized) equals the change in the ending market price, over the beginning of period price per share plus distributions, divided by the beginning market price.
4Totals may not sum due to rounding.
5Annualized.
6Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value.

 

See accompanying notes to consolidated financial statements.

 

29

 

 

PORTMAN RIDGE FINANCE CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1.ORGANIZATION

 

Portman Ridge Finance Corporation (“Portman Ridge” or the “Company”), formerly known as KCAP Financial, Inc., is an externally managed, non-diversified closed-end investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Company’s common stock in its initial public offering (“IPO”), converted to a corporation incorporated in Delaware on December 11, 2006.

 

During the third quarter of 2017, the Company formed a joint venture with Freedom 3 Opportunities LLC (“Freedom 3 Opportunities”), an affiliate of Freedom 3 Capital LLC, to create KCAP Freedom 3 LLC (the "Joint Venture"). The Company and Freedom 3 Opportunities LLC contributed approximately $37 million and $25 million, respectively, in assets to the Joint Venture, which in turn used the assets to capitalize a new fund (KCAP FC3 Senior Funding, L.L.C. or the "Fund") managed by KCAP Management, LLC, one of the Company's indirectly wholly-owned Asset Manager Affiliate subsidiaries. In addition, the Fund used cash on hand and borrowings under a credit facility to purchase approximately $184 million of loans from the Company and the Company used the proceeds from such sale to redeem approximately $147 million in debt issued by KCAP Senior Funding. The Joint Venture may originate loans from time to time and sell them to the Fund.

 

During the fourth quarter of 2017, the Fund was refinanced through the issuance of senior and subordinated notes. The Joint Venture purchased 100% of the subordinated notes issued by the Fund.  In connection with the refinancing, the Company received a cash distribution of $12.6 million, $11.8 million of which was a return of capital.

 

The Company originates, structures, and invests in secured term loans, bonds or notes and mezzanine debt primarily in privately-held middle market companies but may also invest in other investments such as loans to publicly-traded companies, high-yield bonds, and distressed debt securities (collectively the “Debt Securities Portfolio”). The Company also invests in joint ventures and debt and subordinated securities issued by collateralized loan obligation funds (“CLO Fund Securities”). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies and may also receive warrants or options to purchase common stock in connection with its debt investments.

 

The Company has elected to be treated and intends to continue to qualify as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a RIC, the Company must, among other things, meet certain source-of-income, and asset diversification and annual distribution requirements. As a RIC, the Company generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes in a timely manner to its stockholders.

 

On March 29, 2018, the Company’s Board of Directors, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act (“SBCA”). As a result, the Company’s asset coverage requirement for senior securities changed from 200% to 150%, effective as of March 29, 2019. However, despite the SBCA, we will continue to be prohibited by the indentures governing our 6.125% Notes (each, as defined and discussed in Note 6 - “Borrowings” below) from making distributions on our common stock if our asset coverage, as defined in the 1940 Act, falls below 200%. In any such event, we would be prohibited from making distributions required in order to maintain our status as a RIC.

 

30

 

 

LibreMax Transaction

 

On November 8, 2018, the Company entered into an agreement with LibreMax Intermediate Holdings, LP (“LibreMax”) under which Commodore Holdings, LLC (“Commodore”), a wholly-owned subsidiary of the Company, sold the Company’s wholly-owned asset manager subsidiaries Katonah Debt Advisors, LLC (“Katonah Debt Advisors”), Trimaran Advisors, L.L.C. (“Trimaran Advisors”), and Trimaran Advisors Management, L.L.C. (“Trimaran Advisors Management” and, together with Katonah Debt Advisors and Trimaran Advisors, the “Disposed Manager Affiliates”), for a cash purchase price of approximately $37.9 million (the “LibreMax Transaction”). The LibreMax Transaction closed on December 31, 2018. As of March 31, 2019, the Company’s remaining wholly-owned asset management subsidiaries (the “Asset Manager Affiliates”) were comprised of Commodore, Katonah Management Holdings, LLC, Katonah X Management LLC, Katonah 2007-1 Management, LLC and KCAP Management, LLC. Prior to their sale in the LibreMax Transaction, the Disposed Manager Affiliates represented substantially all of the Company’s investment in the Asset Manager Affiliates.

 

The Externalization Agreement

 

On December 14, 2018, the Company entered into a stock purchase and transaction agreement (the “Externalization Agreement”) with BC Partners Advisors L.P. (“BCP”), an affiliate of BC Partners, through which Sierra Crest Investment Management LLC (the “Adviser”), an affiliate of BC Partners LLP (“BC Partners”), became the Company’s investment adviser pursuant to an investment advisory Agreement (the “Advisory Agreement”) with the Company. At a special meeting of the Company’s stockholders (the “Special Meeting”) held on February 19, 2019, the Company’s stockholders approved the Advisory Agreement. The transactions contemplated by the Externalization Agreement closed on April 1, 2019 (the “Closing”), and the Company commenced operations as an externally managed BDC managed by the Adviser on that date.

 

Pursuant to the Externalization Agreement with BCP, the Adviser became the Company’s investment adviser in exchange for a cash payment from BCP, or its affiliate, of $25 million, or $0.669672 per share of the Company’s common stock, directly to the Company’s stockholders. In addition, the Adviser (or its affiliate) will use up to $10 million of the incentive fee actually paid to the Adviser prior to the second anniversary of the Closing to buy newly issued shares of the Company’s common stock at the most recently determined net asset value per share of the Company’s common stock at the time of such purchase. For the period of one year from the first day of the first quarter following the quarter in which the Closing occurred, the Adviser will permanently forego up to the full amount of the incentive fees earned by the Adviser without recourse against or reimbursement by the Company, to the extent necessary in order to achieve aggregate net investment income per common share of the Company for such one-year period to be at least equal to $0.40 per share, subject to certain adjustments.

 

On the date of the Closing, the Company changed its name from KCAP Financial, Inc. to Portman Ridge Finance Corporation and on April 2, 2019, began trading on the NASDAQ Global Select Market under the symbol “PTMN.”

 

On April 1, 2019, in connection with the Closing, all of the Company’s then-current directors resigned from their positions on the Board, with the exceptions of Dean Kehler and Christopher Lacovara. Prior to their resignations, the Board approved an increase in the size of the Board from seven members to eight members and appointed the following new individuals to serve on the Board: Graeme Dell; Alexander Duka; Ted Goldthorpe; George Grunebaum; David Moffitt; and Robert Warshauer. Additionally, in connection with the Closing all of the Company’s then-current officers resigned from their positions with the exceptions of Edward Gilpin and Daniel Gilligan. Effective as of the Closing, Ted Goldthorpe was appointed as President and Chief Executive Officer and Patrick Schafer was appointed as Chief Investment Officer of the Company.

 

About the Adviser

 

The Adviser is an affiliate of BC Partners. LibreMax owns a minority stake in the Adviser. Subject to the overall supervision of the Board, the Adviser is responsible for managing the Company’s business and activities, including sourcing investment opportunities, conducting research, performing diligence on potential investments, structuring the Company’s investments, and monitoring the Company’s portfolio companies on an ongoing basis through a team of investment professionals.

 

The Adviser seeks to invest on behalf of the Company in performing, well-established middle market businesses that operate across a wide range of industries (i.e., no concentration in any one industry). The Adviser employs fundamental credit analysis, targeting investments in businesses with relatively low levels of cyclicality and operating risk. The holding size of each position will generally be dependent upon a number of factors including total facility size, pricing and structure, and the number of other lenders in the facility. The Adviser has experience managing levered vehicles, both public and private, and seeks to enhance the Company’s returns through the use of leverage with a prudent approach that prioritizes capital preservation. The Adviser believes this strategy and approach offers attractive risk/return with lower volatility given the potential for fewer defaults and greater resilience through market cycles.

 

31

 

 

The Adviser is affiliated with BC Partners, a leading buyout firm with a 30-year history investing across Europe and North America which has more than $24 billion in assets under management in private equity, private credit and real estate strategies. The assets under management for BC Partners are based on actively managed commitments of its managed funds and relevant vehicles formed for the purpose of co-investing alongside such funds. BC Partners operates a private equity investment platform (“BCP PE”) a credit investment platform (“BCP Credit”) and a real estate investment platform (“BCP RE”) as fully integrated businesses. The investment activity of the Company will take place primarily within the BCP Credit platform. Integration with the broader BC Partners platform allows BCP Credit to leverage a team of investment professionals across its private equity platform including its operations team. The BCP Credit Investment Team (the “Investment Team”) is led by Ted Goldthorpe who sits on both the BCP Credit and BCP PE investment committees. BCP Credit currently manages a private fund in the BCP Credit platform along with several separate managed accounts focused on credit investments and BC Partners Lending Corporation, a private BDC.

 

Advisory Agreement

 

The Adviser provides management services to the Company pursuant to the Advisory Agreement. Under the terms of the Advisory Agreement, the Adviser is responsible for the following:

 

managing the Company’s assets in accordance with our investment objective, policies and restrictions;

 

determining the composition of the Company’s portfolio, the nature and timing of the changes to the portfolio and the manner of implementing such changes;

 

identifying, evaluating and negotiating the structure of the Company’s investments;

 

monitoring the Company’s investments;

 

determining the securities and other assets that the Company will purchase, retain or sell;

 

assisting the Board with its valuation of the Company’s assets;

 

directing investment professionals of the Adviser to provide managerial assistance to the Company’s portfolio companies;

 

performing due diligence on prospective portfolio companies;

 

exercising voting rights in respect of portfolio securities and other investments for the Company;

 

serving on, and exercising observer rights for, boards of directors and similar committees of our portfolio companies; and

 

providing the Company with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of capital.

 

The Adviser’s services under the Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired.

 

Term

 

On April 1, 2019, the Company entered into the Advisory Agreement with the Adviser. Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect until April 1, 2021, a period of two years from the date it first became effective and will remain in effect from year-to-year thereafter if approved annually by a majority of the Board or by the holders of a majority of the outstanding shares, and, in each case, a majority of the independent directors.

 

32

 

 

The Advisory Agreement will automatically terminate within the meaning of the 1940 Act and related Securities and Exchange Commission (“SEC”) guidance and interpretations in the event of its assignment. In accordance with the 1940 Act, without payment of any penalty, we may terminate the Advisory Agreement with the Adviser upon 60 days’ written notice. The decision to terminate the agreement may be made by a majority of the Board or the stockholders holding a majority of the outstanding shares of our common stock. See “Advisory Agreement—Removal of Adviser” below. In addition, without payment of any penalty, the Adviser may generally terminate the Advisory Agreement upon 60 days’ written notice and, in certain circumstances, the Adviser may only be able to terminate the Advisory Agreement upon 120 days’ written notice.

 

Removal of Adviser

 

The Adviser may be removed by the Board or by the affirmative vote of a Majority of the Outstanding Shares. “Majority of the Outstanding Shares” means the lesser of (1) 67% or more of the outstanding shares of our common stock present at a meeting, if the holders of more than 50% of the outstanding shares of our common stock are present or represented by proxy or (2) a majority of outstanding shares of our common stock.

 

Compensation of Adviser

 

Pursuant to the terms of the Advisory Agreement, the Company pays the Adviser (i) a base management fee (the “Base Management Fee”) and (ii) an incentive fee (the “Incentive Fee”). For the period from the date of the Advisory Agreement (the “Effective Date”) through the end of the first calendar quarter after the Effective Date, the Base Management Fee will be calculated at an annual rate of 1.50% of the Company’s gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, as of the end of such calendar quarter. Subsequently, the Base Management Fee will be 1.50% of the Company’s average gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, at the end of the two most recently completed calendar quarters; provided, however, that the Base Management Fee will be 1.00% of the Company’s average gross assets, excluding cash and cash equivalents, but including assets purchased with borrowed amounts, that exceed the product of (i) 200% and (ii) the value of the Company’s net asset value at the end of the most recently completed calendar quarter. The Incentive Fee consists of two parts: (1) a portion based on the Company’s pre-incentive fee net investment income (the “Income-Based Fee”) and (2) a portion based on the net capital gains received on the Company’s portfolio of securities on a cumulative basis for each calendar year, net of all realized capital losses and all unrealized capital depreciation on a cumulative basis, in each case calculated from the Effective Date, less the aggregate amount of any previously paid capital gains Incentive Fee (the “Capital Gains Fee”). The Income-Based Fee is 17.50% of pre-incentive fee net investment income with a 7.00% hurdle rate. The Capital Gains Fee is 17.50%.

 

Pre-incentive fee net investment income means dividends (including reinvested dividends), interest and fee income accrued by the Company during the calendar quarter, minus operating expenses for the quarter (including the management fee, expenses payable under the administration agreement, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind(“PIK”) interest and zero coupon securities), accrued income that the Company may not have received in cash. The Adviser is not obligated to return the incentive fee it receives on PIK interest that is later determined to be uncollectible in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.

 

To determine the income incentive fee, pre-incentive fee net investment income is expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a calendar quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that calendar quarter due to realized capital losses and unrealized capital depreciation. In addition, because the quarterly hurdle rate is calculated based on our net assets, decreases in the Company’s net assets due to realized capital losses or unrealized capital depreciation in any given calendar quarter may increase the likelihood that the hurdle rate is reached and therefore the likelihood of the Company paying an incentive fee for the subsequent quarter. The Company’s net investment income used to calculate this component of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the management fee because gross assets are total assets (including cash received) before deducting liabilities (such as declared dividend payments).

  

33

 

  

The second component of the incentive fee, the capital gains incentive fee, payable at the end of each calendar year in arrears, equals 17.50% of cumulative realized capital gains through the end of such calendar year commencing with the calendar year ending December 31, 2019, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, in each case calculated from the Effective Date, less the aggregate amount of any previously paid capital gains incentive fee for prior periods. The Company will accrue, but will not pay, a capital gains incentive fee with respect to unrealized appreciation because a capital gains incentive fee would be owed to the Adviser if the Company were to sell the relevant investment and realize a capital gain. In no event will the capital gains incentive fee payable pursuant to the Investment Advisory Agreement be in excess of the amount permitted by the Investment Advisers Act of 1940, as amended (the “Advisers Act”) including Section 205 thereof.

 

The fees that are payable under the Investment Advisory Agreement for any partial period will be appropriately prorated.

 

Limitations of Liability and Indemnification

 

Under the Advisory Agreement, the Adviser, its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser, including without limitation its managing member, will not be liable to the Company for acts or omissions performed in accordance with and pursuant to the Advisory Agreement, except those resulting from acts constituting criminal conduct, gross negligence, willful misfeasance, bad faith or reckless disregard of the duties that the Adviser owes to the Company under the Advisory Agreement. In addition, as part of the Advisory Agreement, the Company has agreed to indemnify the Adviser and each of its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with the Adviser, including without limitation its general partner, and the Administrator from and against any damages, liabilities, costs and expenses, including reasonable legal fees and other expenses reasonably incurred, in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Company or its security holders) arising out of or otherwise based upon the performance of any of the Adviser’s duties or obligations under the Advisory Agreement or otherwise as an investment adviser of the Company, except where attributable to criminal conduct, gross negligence, willful misfeasance, bad faith or reckless disregard of such person’s duties under the Advisory Agreement.

 

Board Approval of the Advisory Agreement

 

On December 12, 2018, the then-current Board of the Company held an in-person meeting to consider and approve the Advisory Agreement and related matters. The Board of Directors was provided the information required to consider the Advisory Agreement, including: (a) the nature, quality and extent of the advisory and other services to be provided to the Company by the Adviser; (b) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives; (c) the Company projected operating expenses and expense ratio compared to BDCs with similar investment objectives; (d) any existing and potential sources of indirect income to the Adviser from its relationship with the Company and the profitability of that relationship; (e) information about the services to be performed and the personnel performing such services under the Advisory Agreement; (f) the organizational capability and financial condition of the Adviser and its affiliates; (g) the Adviser’s practices regarding the selection and compensation of brokers that may execute our portfolio transactions and the brokers’ provision of brokerage and research services to the Adviser; and (h) the possibility of obtaining similar services from other third-party service providers or continuing to operate as an internally managed BDC.

 

The Board of Directors, including a majority of independent directors, will oversee and monitor the Company’s investment performance and, beginning with the second anniversary of the effective date of the Advisory Agreement, will annually review the compensation we pay to the Adviser.

 

Administration Agreement

 

Under the terms of the administration agreement (the “Administration Agreement”) between the Company and BC Partners Management LLC (the “Administrator”), the Administrator will perform, or oversee the performance of, required administrative services, which includes providing office space, equipment and office services, maintaining financial records, preparing reports to stockholders and reports filed with the SEC, and managing the payment of expenses and the performance of administrative and professional services rendered by others. The Company will reimburse the Administrator for services performed for us pursuant to the terms of the Administration Agreement. In addition, pursuant to the terms of the Administration Agreement, the Administrator may delegate its obligations under the Administration Agreement to an affiliate or to a third party and the Company will reimburse the Administrator for any services performed for it by such affiliate or third party.

 

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Payments under the Administration Agreement are equal to an amount that reimburses the Administrator for its costs and expenses in performing its obligations and providing personnel and facilities (including rent, office equipment and utilities) for the Company’s use under the Administration Agreement, including an allocable portion of the compensation paid to the Company’s chief compliance officer and chief financial officer and their respective staff who provide services to the Company. The Board, including the independent directors, will review the general nature of the services provided by the Administrator as well as the related cost to the Company for those services and consider whether the cost is reasonable in light of the services provided.

 

On April 1, 2019, the Board approved the Administration Agreement with the Administrator. Unless earlier terminated as described below, the Administration Agreement will remain in effect until April 1, 2021, a period of two years from the date it first became effective and will remain in effect from year-to-year thereafter if approved annually by a majority of the Board or by the holders of a Majority of the Outstanding Shares, and, in each case, a majority of the independent directors.

 

The Company may terminate the Administration Agreement, without payment of any penalty, upon 60 days’ written notice. The decision to terminate the agreement may be made by a majority of the Board or the stockholders holding a Majority of the Outstanding Shares. In addition, the Adviser may terminate the Administration Agreement, without payment of any penalty, upon 60 days’ written notice.

 

Payment of Our Expenses under the Advisory and Administration Agreements

 

Except as specifically provided below, the Company anticipates that all investment professionals and staffs of the Adviser, when and to the extent engaged in providing investment advisory and management services to the Company, and the compensation and routine overhead expenses (including rent, office equipment and utilities), of such personnel allocable to such services, will be provided and paid for by the Adviser. The Company will bear an allocable portion of the compensation paid by the Adviser (or its affiliates) to the Company’s chief compliance officer and chief financial officer and their respective staffs (based on a percentage of time such individuals devote, on an estimated basis, to our business affairs). The Company will also bear all other costs and expenses of our operations, administration and transactions, including, but not limited to (i) investment advisory fees, including management fees and incentive fees, to the Adviser, pursuant to the Advisory Agreement; (ii) an allocable portion of overhead and other expenses incurred by the Adviser (or its affiliates) in performing its administrative obligations under the Advisory Agreement, and (iii) all other expenses of our operations and transactions including, without limitation, those relating to:

 

the cost of calculating the Company’s net asset value, including the cost of any third-party valuation services;

the cost of effecting any sales and repurchases of the Company’s common stock and other securities;

fees and expenses payable under any dealer manager or placement agent agreements, if any;

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

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

costs of hedging;

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

transfer agent and custodial fees;

fees and expenses associated with marketing efforts;

federal and state registration fees, any stock exchange listing fees and fees payable to rating agencies;

federal, state and local taxes;

independent directors’ fees and expenses including certain travel expenses;

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

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

commissions and other compensation payable to brokers or dealers;

research and market data;

fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums;

 

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direct costs and expenses of administration, including printing, mailing, long distance telephone and staff;

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

costs of winding up our affairs;

costs incurred by either the Administrator or us in connection with administering our business, including payments under the Administration Agreement;

extraordinary expenses (such as litigation or indemnification); and

costs associated with reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws.

 

 

2.SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2018, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”).

 

The consolidated financial statements reflect all adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition for the periods presented. Furthermore, the preparation of the consolidated financial statements requires the Company to make significant estimates and assumptions including with respect to the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current year presentation.

 

The Company consolidates the financial statements of its wholly-owned special purpose financing subsidiaries Great Lakes KCAP Funding I LLC, Kolhberg Capital Funding LLC I, KCAP Senior Funding I, LLC and KCAP Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC received security interests in the assets which are owned by Great Lakes KCAP Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate. All of the borrowings of Kolhberg Capital Funding LLC I, and KCAP Senior Funding I, LLC have been fully repaid.

 

 In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (e.g., the Asset Manager Affiliates), unless the portfolio company is another investment company.

 

The Asset Manager Affiliates previously qualified as a “significant subsidiary” and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company. Summarized financial information regarding the Asset Manager Affiliates is set forth in Note 5 to these financial statements.

 

The determination of the tax character of distributions is made on an annual (full calendar-year) basis at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, an estimate of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

It is the Company’s primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the quarter ended March 31, 2019, the Company provided approximately $35.2 million to portfolio companies to support their growth objectives. Approximately $2.7 million of this support was contractually obligated. See also Note 8 – Commitments and Contingencies. As of March 31, 2019, the Company held loans it has made to 51 investee companies with aggregate principal amounts of approximately $165.7 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 – Investments. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by, among other things, leading a syndicate of lenders to provide the investee companies with financing. During the three months month period ended March 31, 2019, the Company did not engage in any such or similar activities.

 

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Recently adopted accounting pronouncements

 

In March 2017, the FASB issued an Accounting Standards Update, ASU 2017-08, Receivables — Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”) which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. ASU 2017-08 does not require any accounting change for debt securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of ASU 2017-08 did not have a material impact on the financial position or results of operations of the Company.

 

In February 2016, the FASB issued ASU 2016-02, Leases, and several amendments (collectively, “ASU 2016-02”), which requires lessees to recognize assets and liabilities arising from most operating leases on the consolidated statements of financial condition. For operating leases, a lessee is required to do the following: (a) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial condition; (b) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (c) classify all cash payments within operating activities in the statement of cash flows. The guidance is effective for fiscal periods beginning after December 15, 2018. Early application is permitted. The Company recorded a right of use asset (net of previously deferred rent expense) of approximately $3.3 million and a lease liability of approximately $3.7 million upon adoption of this standard.

 

Pending Accounting Pronouncements

 

In August 2018, the FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”)The standard will modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted upon issuance of this ASU 2018-13. We are permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. We are currently evaluating the impact of adopting ASU 2018-13 on our consolidated financial statements.

 

Investments

 

Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method.

 

Valuation of Portfolio Investments. The Company’s Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (“ASC 820: Fair Value”). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

The Company utilizes an independent valuation firm to provide third party valuation consulting services.  Each quarter the independent valuation firm will perform third party valuations of the Company’s investments in material illiquid securities such that they are reviewed at least once during a trailing 12-month period.  These third party valuation estimates are considered as one of the relevant data points in the Company’s determination of fair value. The Company intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.

 

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The Board of Directors may consider other methods of valuation than those set forth below to determine the fair value of Level III investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ materially from the values that would have been used had a readily available market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.

 

The majority of the Company’s investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market and asset specific inputs, which may include historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews.

 

Debt Securities. To the extent that the Company’s investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will be used to determine the fair value of the investments. Valuations from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the valuation, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, if the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns, the Company will determine fair value using alternative methodologies such as available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset-specific characteristics.

 

The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the subject assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the “Income Approach”). The Company also considers, among other things, recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market information related to its loan and debt securities. Because the Company has not identified any market index that directly correlates to the loan and debt securities held by the Company and therefore uses these benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Income Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Consolidated Schedules of Investments.

 

Equity Securities. The Company’s equity securities in portfolio companies for which there is no liquid public market are carried at fair value based on the enterprise value of the portfolio company, which is determined using various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization) and discounted cash flows from operations, less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. In the event market quotations are readily available for the Company’s equity securities in public companies, those investments may be valued using the Market Approach (as defined below). In cases where the Company receives warrants to purchase equity securities, a market standard Black-Scholes model is utilized.

 

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The significant inputs used to determine the fair value of equity securities include prices, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity securities are classified as Level III, when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.

 

Asset Manager Affiliates. The Company’s investments in its wholly-owned asset management companies, the Asset Manager Affiliates, are carried at fair value, which is primarily determined utilizing the discounted cash flow approach, which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation takes into consideration an analysis of comparable asset management companies and the amount of assets under management. The Asset Manager Affiliates are classified as a Level III investment. Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation. The Company sold substantially all of its investment in the Asset Manager Affiliates on December 31, 2018.

 

CLO Fund Securities.  The Company typically makes a minority investment in the most junior class of securities of CLO Funds. The investments held by CLO Funds generally relate to non-investment grade credit instruments issued by corporations.

 

The Company’s investments in CLO Fund Securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest expense, debt pay-down and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions to the class of securities owned by the Company, a Discounted Cash Flow approach, (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds, a Market Approach. The Company recognizes unrealized appreciation or depreciation on the Company’s investments in CLO Fund Securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund Securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund investment. The Company determines the fair value of its investments in CLO Fund Securities on a security-by-security basis.

 

Due to the individual attributes of each CLO Fund Security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund Security’s underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented.

 

For rated note tranches of CLO Fund Securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.

 

Joint Venture. The Company carries investments in joint ventures at fair value based upon the fair value of the investments held by the joint venture. See Note 4 below, for more information regarding the Joint Venture.

 

Cash. The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.

 

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Restricted Cash. Restricted cash and cash equivalents (e.g., money market funds) consists of cash held for reinvestment and quarterly interest and principal distribution (if any) to holders of notes issued by Great Lakes KCAP Funding I, LLC.

 

Short-term investments. Short-term investments are generally comprised of money market accounts, time deposits, and U.S. treasury bills.

 

Interest Income. Interest income, including the amortization of premium and accretion of discount and accrual of payment-in-kind (“PIK”) interest, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. For investments with PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we will not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not collectible (i.e. via a partial or full non-accrual). Loans which are on partial or full non-accrual remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of March 31, 2019, six of our investments were on non-accrual status.

 

Distributions from Asset Manager Affiliates. The Company records distributions from the Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits of the distributing affiliate company are recognized as tax-basis return of capital. For interim periods, the Company estimates the tax attributes of any distributions as being either from tax-basis earnings and profits (i.e., dividend income) or return of capital (i.e., adjustment to the Company’s cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from the Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

Investment Income on CLO Fund Securities.  The Company generates investment income from its investments in the most junior class of securities issued by CLO Funds (typically preferred shares or subordinated securities). The Company’s CLO Fund junior class securities are subordinated to senior note holders who typically receive a stated interest rate of return based on a floating rate index, such as the London Interbank Offered Rate (“LIBOR”) on their investment. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares.

 

GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax–basis investment income and from the cash distributions actually received by the Company during the period.

 

For non-junior class CLO Fund Securities, such as the Company’s investment in the Class E Notes of the Great Lakes KCAP F3C Senior, LLC, (formerly known as KCAP F3C Senior Funding, L.L.C.), interest is earned at a fixed spread relative to the LIBOR index.

 

Investment in Joint Venture. For three months ended March 31, 2019 and 2018, the Company recognized $950,000 and $700,000 in investment income from its investment in the Joint Venture. As of March 31, 2019 and December 31, 2018, the fair value of the Company’s investment in the Joint Venture was approximately $23.7 million and $18.4 million, respectively. The Company recognizes investment income on its investment in the Joint Venture based upon its share of the estimated earnings and profits of the Joint Venture. The final determination of the tax attributes of distributions from the Joint Venture is made on an annual (full calendar year) basis at year-end of the year based upon taxable income and distributions for the full year. Therefore, any estimate of tax attributes of distributions made on an interim basis may not be representative of the actual tax attributes of distributions for the full year.

 

Capital Structuring Service Fees. The Company may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method, recognize prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an investment transaction closes.

 

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Debt Issuance Costs.   Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s borrowings. These amounts are capitalized and amortized using the effective interest method over the expected term of the borrowing.

 

Extinguishment of debt. The Company must derecognize a liability if and only if it has been extinguished through delivery of cash, delivery of other financial assets, delivery of goods or services, or reacquisition by the Company of its outstanding debt securities whether the securities are cancelled or held. If the debt contains a cash conversion option, the Company must allocate the consideration transferred and transaction costs incurred to the extinguishment of the liability component and the reacquisition of the equity component and recognize a gain or loss in the statement of operations.

 

Expenses. During the reporting period the Company was internally managed and expensed costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing the Company’s investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. Through December 31, 2018, the Company and the Asset Manager Affiliates shared office space and certain other operating expenses. The Company entered into an Overhead Allocation Agreement with the Asset Manager Affiliates which provided for the sharing of such expenses based on an allocation of office lease costs and the ratable usage of other shared resources. Following the Closing, the Company will continue to bear the costs associated with the office lease entered into by the Company prior to the Closing.

 

Shareholder Distributions. Distributions to common stockholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter.

 

The Company has adopted a dividend reinvestment plan (the DRIP) that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder “opts out” of the DRIP to receive cash in lieu of having their cash distributions automatically reinvested in additional shares of the Company’s common stock.

 

3.EARNINGS (LOSSES) PER SHARE

 

In accordance with the provisions of ASC 260, “Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

The following information sets forth the computation of basic and diluted net increase (decrease) in stockholders’ equity per share for the three months ended March 31, 2019 and 2018:

 

   (unaudited) 
   Three Months Ended March 31, 
   2019   2018 
         
Net (decrease) increase in net assets resulting from operations  $(10,917,572)  $2,609,393 
Net increase in net assets allocated to unvested share awards       (20,773)
           
Net (decrease) increase in net assets available to common stockholders  $(10,917,572)  $2,588,620 
           
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   37,335,094    37,350,411 
           
Net (decrease) increase in net assets per basic common shares:          
Net (decrease) increase in net assets from operations  $(0.29)  $0.07 
Net (decrease) increase in net assets per diluted shares:          
Net (decrease) increase in net assets from operations  $(0.29)  $0.07 

 

Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to the Company’s employees and directors are considered participating securities when there are earnings in the period and the earnings per share calculations include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation.

 

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There were 30,000 and 35,000 options to purchase shares of common stock considered for the computation of the diluted per share information for the three months ended March 31, 2019 and 2018. Since the effects are anti-dilutive for both periods, the options were not included in the computation. These stock options were cancelled in connection with the Externalization.

 

4.INVESTMENTS

 

The following table shows the Company’s portfolio by security type at March 31, 2019 and December 31, 2018:

 

   March 31, 2019 (unaudited)   December 31, 2018 
Security Type  Cost/Amortized
Cost
   Fair Value      Cost/Amortized
Cost
   Fair Value    
Short-term investments²  $44,120,648   $44,120,648    16   $44,756,478   $44,756,478    17 
Senior Secured Loan   75,534,527    73,489,758    26    86,040,921    77,616,209    28 
Junior Secured Loan   88,707,755    78,249,650    28    76,223,561    70,245,535    26 
Senior Unsecured Bond   456,974    456,974    -              
CLO Fund Securities   54,299,958    45,605,015    16    55,480,626    44,325,000    16 
Equity Securities   29,326,114    16,835,340    6    21,944,430    14,504,687    5 
Asset Manager Affiliates³   17,791,230            17,791,230    3,470,000    1 
Joint Venture   24,914,858    23,707,969    8    24,914,858    18,390,440    7 
Total  $335,152,064   $282,465,354    100%  $327,152,104   $273,308,349    100%

 

 

¹Represents percentage of total portfolio at fair value.
²Includes money market accounts and U.S. treasury bills.
³Represents the equity investment in the Asset Manager Affiliates.

 

The industry concentrations based on the fair value of the Company’s investment portfolio as of March 31, 2019 and December 31, 2018, were as follows:

 

42

 

 

   March 31, 2019 (unaudited)   December 31, 2018 
Industry Classification  Cost/Amortized
Cost
   Fair Value   %1   Cost/Amortized
Cost
   Fair Value   %1 
Aerospace and Defense  $4,237,732   $4,085,483    1%  $5,434,927   $4,049,940    1%
Asset Management Company 2   17,791,230            17,791,230    3,470,000    1 
Banking, Finance, Insurance & Real Estate   5,878,184    5,795,824    2    8,831,841    8,733,933    3 
Beverage, Food and Tobacco   5,955,812    5,760,262    2    5,963,334    5,796,506    2 
Capital Equipment   10,881,878    9,712,562    3    10,888,431    9,831,391    3 
Chemicals, Plastics and Rubber   4,846,678    4,745,681    2    4,862,063    4,801,645    1 
CLO Fund Securities   54,299,958    45,605,015    16    55,480,626    44,325,000    16 
Construction & Building   1,529,905    1,524,392    1    1,400,223    1,394,163    1 
Consumer goods: Durable   1,189,062    4,474        1,140,499    364,239     
Consumer goods: Non-durable               1,434,568    1,440,525    1 
Electronics   6,633,298    6,566,000    2    3,007,500    3,007,500    1 
Energy: Oil & Gas   9,363,046    2,535,933    1    16,827,204    8,946,568    3 
Environmental Industries   8,373,619    5,840,004    2    8,371,180    6,939,794    3 
Forest Products & Paper   1,566,064    1,554,077    1    1,564,583    1,553,920    1 
Healthcare & Pharmaceuticals   47,334,370    37,115,328    13    38,638,822    32,287,288    12 
High Tech Industries   24,470,324    24,193,533    9    23,971,434    23,662,459    9 
Hotel, Gaming & Leisure               400,000    1,000     
Joint Venture   24,914,858    23,707,969    8    24,914,858    18,390,440    7 
Limited Partnership   15,185,556    14,966,706    5    12,466,667    12,466,667    5 
Media: Advertising, Printing & Publishing   3,152,760    2,647,664    1    6,113,852    5,590,863    2 
Services: Business   10,325,983    9,119,357    2    10,398,713    9,213,417    3 
Services: Consumer   10,605,382    10,603,568    4             
Telecommunications   8,351,914    8,322,151    3    8,351,775    8,343,919    3 
Textiles and Leather   10,143,234    9,938,322    4    10,140,662    9,940,294    4 
Money Market Accounts   24,121,903    24,121,903    9    34,757,129    34,757,129    13 
Transportation: Cargo   4,000,568    4,000,400    1    4,000,634    4,000,400    1 
U.S. Government Obligations   19,998,746    19,998,746    7    9,999,349    9,999,349    4 
                               
Total  $335,152,064   $282,465,354    100%  $327,152,104   $273,308,349    100%

 

 

1Calculated as a percentage of total portfolio at fair value.
2Represents the equity investment in the Asset Manager Affiliates.

 

The Company may invest up to 30% of the investment portfolio in “non-qualifying” opportunistic investments, including investments in debt and equity securities of CLO Funds, distressed debt or debt and equity securities of large cap public companies. Within this 30% of the portfolio, the Company also may invest in debt of middle market companies located outside of the United States.

 

At March 31, 2019 and December 31, 2018, the total amount of non-qualifying assets was approximately 29.7% and 28.0% of total assets, respectively. The majority of non-qualifying assets were foreign investments which were approximately 16.5% and 16.5%, respectively, of the Company’s total assets (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 15.6% and 15.5% of its total assets on such dates, respectively).

 

43

 

 

Investments in CLO Fund Securities

 

The Company has made minority investments in the most junior class of securities (typically preferred shares or subordinated securities) of CLO Funds. These securities also are entitled to recurring distributions which generally equal the net remaining cash flow of the payments made by the underlying CLO Fund’s securities less contractual payments to senior bond holders, management fees and CLO Fund expenses. CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured corporate debt. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares.

 

On October 31, 2017, the Company purchased an additional $4.3 million of notional amount of Subordinated Notes issued by Catamaran CLO 2014-1 at a cost of $5.4 million.

 

In December 2017, the Company purchased an additional $201,000 of notional amount of Subordinated Notes issued by Catamaran CLO 2013-1 at a cost of $201,000.

 

In December 2017, the Company sold $5.0 million par value of the Subordinated Notes of Catamaran CLO 2014-1 for $3.0 million.

 

In September 2018, the Company purchased $10 million par value of the Subordinated Notes of Catamaran CLO 2018-1 at a cost of approximately $9.5 million.

 

In December 2018, the Company received $2.5 million of notional amount of subordinated notes of Catamaran 2013-1 with a fair value of $1.4 million and $3.4 million of notional amount of subordinated notes of Catamaran 2014-1 with a fair value of $1.9 million, as consideration for the repayment of a portion of the loans to Trimaran Advisors.

 

On February 29, 2016, Katonah X CLO Ltd. was fully liquidated and all of its outstanding obligations were satisfied. The Company received approximately $1.0 million in connection therewith related to its investment in the subordinated securities issued by Katonah X CLO Ltd. Accordingly, the Company recorded a realized loss during the first quarter of 2016 of approximately $6.6 million on its investment in Katonah X CLO Ltd. and a corresponding unrealized gain of the same amount in order to reverse the approximately $6.6 million of previously recorded unrealized depreciation with respect to the investment.

 

On December 19, 2017, the Company, in its capacity as the holder of all of the outstanding preferred shares of Katonah 2007-1 CLO Ltd. (“Katonah 2007-1”), exercised its right to cause Katonah 2007-1 to redeem all of its outstanding indebtedness through the sale of its investments and otherwise wind up its business.  Katonah 2007-1 was fully liquidated and dissolved in the fourth quarter of 2018. Accordingly, the Company recorded a realized loss during the fourth quarter of 2018 of approximately $10.1 million on its investment in Katonah 2007-1 and a corresponding unrealized gain of the same amount in order to reverse the previously recorded unrealized depreciation with respect to the investment.

 

Similarly, during the fourth quarter of 2018, each of Grant Grove CLO, Ltd., Trimaran CLO VII, Ltd., and Catamaran CLO 2012-1 Ltd. were fully liquidated and dissolved, and the Company recorded a realized loss of approximately $6.4 million and a corresponding unrealized gain of the same amount in order to revere the previously recorded unrealized depreciation with respect to these investments.

 

In the first quarter of 2019, the Company sold $2.0 million notional amount of subordinated notes of Catamaran CLO 2014-1 for $800,000.

 

With the exception of Katonah III, Ltd., as of December 31, 2018 all of the Company’s investments in CLO Fund securities were making distributions to the Company.

 

44

 

 

Affiliate Investments

 

The following table details investments in affiliates at March 31, 2019 (unaudited):

 

   Industry Classification  Fair Value at
of December 
31, 2018
   Purchases/
(Sales) of or
Advances/
(Distributions)
   Net
Accretion
   Transfers
In/(Out) of
Affiliates
   Unrealized
Gain/(Loss)
   Realized
Gain/(Loss)
   Fair Value at
of March 31, 
2019
   Interest
Income
   Dividend
Income
 
                                        
Asset Manager Affiliates(4)(5)(7)  Asset Management Company  $3,470,000   $-    -    -    -   $(3,470,000)  $-   $    $- 
Great Lakes KCAP F3C Senior, LLC Rated Notes(2)(4)  CLO Fund Securities   4,473,840    -    8,942    -    (82,569)   -    4,400,213    123,249      
BCP Great Lakes Fund LP(7)  Limited Partnership   12,466,667    2,718,889    .    -    (218,850)   -    14,966,706    .    - 
KCAP Freedom 3, LLC (4)(6)  Joint Venture   18,390,440    -    -    -    5,317,529         23,707,969    -    950,000 
Tank Partners Holdings, LLC(4)(5)  Energy: Oil & Gas   1,000    6,228,000    -    -    (4,495,095)   (1,165,000)   568,905    -    - 
                                                 
Total Affiliated Investments     $38,801,947   $8,946,889   $8,942   $-   $521,015   $(4,635,000)  $43,643,793   $123,249   $950,000 

 

The following table details investments in affiliates at December 31, 2018:

 

   Industry Classification  Fair Value at 
of December 
31, 2017
   Purchases/
(Sales) of or
Advances/
(Distributions)
   Net 
Accretion
   Transfers 
In/(Out) of 
Affiliates
   Unrealized
Gain/(Loss)
   Realized
Gain/(Loss)
   Fair Value at 
of December 
31, 2018
   Interest 
Income
   Dividend
Income
 
                                        
Asset Manager Affiliates(4)(5)(7)  Asset Management Company  $38,849,000   $(34,800,000)   -    -    (579,000)  $-   $3,470,000   $    $1,246,510 
Trimaran Advisors, LLC Revolving Credit Facility(4)(5)  Related Party Loans   -    -    -    -    -    -    -    1,170,825    - 
Trimaran Advisors, LLC Related Party Loan (4)(5)  Related Party Loans   8,359,051    (8,359,051)   -    -    -    -    -    765,963      
Trimaran Advisors, LLC Related Party Loan (4)(5)  Related Party Loans   4,418,232    (4,418,232)   -    -    -    -    -    229,380      
Katonah 2007-I CLO, Ltd. (1)(2)(3)(4)  CLO Fund Securities   10,770,486    (10,676,556)   271,658    -    9,754,423    (10,120,011)   -    271,658    - 
Trimaran CLO VII, Ltd. (1)(2)(3)(4)  CLO Fund Securities   10,000         (6,725)   -    369,831    (373,105)   -    (6,725)   - 
Catamaran CLO 2012-1, Ltd. (1)(2)(3)(4)  CLO Fund Securities   2,320,783    (2,596,571)   264,746    -    3,527,018    (3,515,976)   -    264,746    - 
Catamaran CLO 2013-1, Ltd. (1)(2)(4)  CLO Fund Securities   6,923,699    147,497    1,213,807    (7,016,734)   (1,268,269)   -    -    1,213,807    - 
Catamaran CLO 2014-1, Ltd. (1)(2)(4)  CLO Fund Securities   8,230,178    535,309    1,347,240    (9,777,251)   (335,476)   -    -    1,347,240    - 
Catamaran CLO 2014-2, Ltd. (1)(2)(4)  CLO Fund Securities   4,500,962    (985,241)   656,919    (2,158,200)   (2,014,440)   -    -    656,919    - 
Catamaran CLO 2015-1, Ltd. (1)(2)(4)  CLO Fund Securities   3,569,600    (573,089)   507,789    (3,048,696)   (455,604)   -    -    507,789    - 
Catamaran CLO 2016-1, Ltd. (1)(2)(4)  CLO Fund Securities   8,530,685    (1,282,923)   913,272    (7,067,073)   (1,093,961)   -    -    913,272    - 
Catamaran CLO 2018-1, Ltd. (1)(2)(4)  CLO Fund Securities   -    9,500,000    343,450    (8,500,000)   (1,343,450)   -    -    343,450    - 
KCAP F3C Senior Funding Rated Notes(2)(4)  CLO Fund Securities   4,632,000    -    37,298    -    (195,458)   -    4,473,840    468,755      
BCP Great Lakes Fund LP(7)  Limited Partnership   -    12,466,667    -    -    -    -    12,466,667    -    - 
KCAP Freedom 3, LLC (4)(6)  Joint Venture   21,516,000    -    -    -    (3,125,560)   -    18,390,440    -    3,100,000 
Tank Partners Holdings, LLC(4)(5)  Unit   -    -    -    980,000    (979,000)   -    1,000    -    - 
                                                 
Total Affiliated Investments     $122,630,676   $(41,042,190)  $5,549,454   $(36,587,954)  $2,261,054   $(14,009,092)  $38,801,947   $8,147,079   $4,346,510 

 

1Non-U.S. company or principal place of business outside the U.S.
2An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
3Notice of redemption has been received for this security.
4Fair value of this investment was determined using significant unobservable inputs.
5Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
6As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). Other than for purposes of the 1940 Act, the Company does not believe that it has control over this portfolio company.
7As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” and has “Control” of this portfolio company as the Company owns more than 25% of the portfolio company’s outstanding voting securities or has the power to exercise control over management or policies of such portfolio company.

 

45

 

 

Investment in Joint Venture:

 

During the third quarter of 2017, the Company and Freedom 3 Opportunities LLC (“Freedom 3 Opportunities”), an affiliate of Freedom 3 Capital LLC, entered into an agreement to create KCAP Freedom 3 LLC (the “Joint Venture”). The Company and Freedom 3 Opportunities contributed approximately $37 million and $25 million, respectively, in assets to the Joint Venture, which in turn used the assets to capitalize a new fund, Great Lakes KCAP F3C Senior Funding, L.L.C. (formerly known as KCAP F3C Senior Funding, L.L.C.) (the “Fund”) managed by KCAP Management, LLC, one of the Asset Manager Affiliates. In addition, the Fund used cash on hand and borrowings under a credit facility to purchase approximately $184 million of primarily middle-market loans from the Company and the Company used the proceeds from such sale to redeem approximately $147 million in debt issued by KCAP Senior Funding I, LLC (“KCAP Senior Funding”). The Fund invests primarily in middle-market loans and the Joint Venture partners may source middle-market loans from time-to-time for the Fund.

 

During the fourth quarter of 2017, the Fund was refinanced through the issuance of senior and subordinated notes. The Joint Venture purchased 100% of the subordinated notes issued by the Fund. In connection with the refinancing, the Joint Venture made a cash distribution to the Company of approximately $12.6 million. $11.8 million of this distribution was a return of capital, reducing the cost basis of its investment in the Joint Venture by that amount. The final determination of the tax attributes of distributions from the Joint Venture is made on an annual (full calendar year) basis at the end of the year, therefore, any estimate of tax attributes of distributions made on an interim basis may not be representative of the actual tax attributes of distributions for the full year.

 

The Company owns a 60% equity investment in the Joint Venture. The Joint Venture is structured as an unconsolidated Delaware limited liability company. All portfolio and other material decisions regarding the Joint Venture must be submitted to its board of managers, which is comprised of four members, two of whom were selected by the Company and two of whom were selected by Freedom 3 Opportunities, and must be approved by at least one member appointed by the Company and one appointed by Freedom 3 Opportunities. In addition, certain matters may be approved by the Joint Venture’s investment committee, which is comprised of one member appointed by the Company and one member appointed by Freedom 3 Opportunities.

 

In connection with the Externalization, during the first quarter of 2019, KCAP Management agreed to waive management fees it is otherwise entitled to receive for managing the Fund. In addition, the Joint Venture was restructured such that the Company is now entitled to receive a preferred distribution in an amount equal to the fees waived by KCAP Management. The impact of these transactions is a reduction in the fair value of the Asset Manager Affiliates and increase the fair value of the Company’s investment in the Joint Venture. The reduction in the fair value of the Asset Manager Affiliates was recognized as a realized loss on the Statement of Operations. The increase in the fair value of the Company’s investment in the Joint Venture was recognized as an unrealized gain in the Statement of Operations.

 

The Company has determined that the Joint Venture is an investment company under Accounting Standards Codification (“ASC”), Financial Services — Investment Companies (“ASC 946”), however, in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. The Company does not consolidate its interest in the Joint Venture because the Company does not control the Joint Venture due to allocation of the voting rights among the Joint Venture partners.

 

46

 

 

KCAP Freedom 3 LLC

Summarized Statement of Financial Condition

 

   As of   As of 
   March 31, 2019   December 31, 2018 
Investment at fair value  $37,519,094   $32,621,188 
Total Assets  $37,519,094   $32,621,188 
           
Total Liabilities  $1,541,539   $1,970,455 
Total Equity   35,977,555    30,650,733 
Total Liabilities and Equity  $37,519,094   $32,621,188 

 

KCAP Freedom 3 LLC

Summarized Statement of Operations

 

   For the three months
ended March 31, 2019
   For the three months
ended March 31, 2018
 
Investment income  $1,151,386   $1,195,818 
Operating expenses   17,512    21,763 
Net investment income   1,133,874    1,174,055 
Unrealized appreciation on investments   5,326,822    503,920 
Net income  $6,460,696   $1,677,975 

 

47

 

 

KCAP Freedom 3 LLC

Schedule of Investments

March 31, 2019

 

Portfolio Company  Investment  Percentage
Ownership
by Joint 
Venture
   Amortized Cost   Fair Value 
Great Lakes KCAP F3C Senior, LLC(1)(2)(3)  Subordinated Securities, effective interest 11.4%, 12/29 maturity     100.0%  $42,207,464   $37,519,094