CORPORATE LOANS AND ALLOWANCE FOR LOAN LOSSES

In connection with the Merger Transaction and as of the Effective Date, the Company accounts for all of its corporate loans at estimated fair value. Prior to the Effective Date, the Company accounted for loans based on the following categories: (i) corporate loans held for investment, which were measured based on their principal plus or minus unaccreted purchase discounts and unamortized purchase premiums, net of an allowance for loan losses; (ii) corporate loans held for sale, which were measured at lower of cost or estimated fair value; and (iii) corporate loans, at estimated fair value, which were measured at fair value.

Successor Company

The following table summarizes the Company’s corporate loans, at estimated fair value as of June 30, 2015 and December 31, 2014 (amounts in thousands):



	June 30, 2015						December 31, 2014
	Par		Amortized Cost		Estimated Fair Value		Par		Amortized Cost		Estimated Fair Value
Corporate loans, at estimated fair value	$	6,148,925	$	6,015,611	$	5,865,885	$	6,907,373	$	6,710,570	$	6,506,564
Total	$	6,148,925	$	6,015,611	$	5,865,885	$	6,907,373	$	6,710,570	$	6,506,564

Net Realized and Unrealized Gains (Losses)

Realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the asset without regard to unrealized gains or losses previously recognized. Unrealized gains or losses are computed as the difference between the estimated fair value of the asset and the amortized cost basis of such asset. Unrealized gains or losses primarily reflect the change in asset values, including the reversal of previously recorded unrealized gains or losses when gains or losses are realized. The following tables present the Company’s realized and unrealized gains (losses) from corporate loans (amounts in thousands):



	Three months ended June 30, 2015			Six months ended June 30, 2015			Two months ended June 30, 2014
Net realized gains (losses)	$	(6,079	)	$	(22,261	)	$	(4,716	)
Net (increase) decrease in unrealized losses	(27,450		)	54,824			25,861
Net realized and unrealized gains (losses)	$	(33,529	)	$	32,563		$	21,145

For the corporate loans measured at estimated fair value under the fair value option of accounting, $27.5 million and $14.3 million of net losses were attributable to changes in instrument specific credit risk for the three and six months ended June 30, 2015, respectively. For the two months ended June 30, 2014, $15.7 million of net gains were attributable to changes in instrument specific credit risk. Gains and losses attributable to changes in instrument specific credit risk were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates and general market conditions. In addition, gains and losses attributable to those loans on non-accrual status or specifically identified as more volatile based on financial or operating performance, restructuring or other factors, were considered instrument specific.

Non-Accrual Loans

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. A loan may be placed on non-accrual status regardless of whether or not such loan is considered past due. As of June 30, 2015, the Company held a total par value and estimated fair value of $399.7 million and $216.5 million, respectively, of non-accrual loans carried at estimated fair value. As of June 30, 2015, the Company held a total par value and estimated fair value of $362.2 million and $209.5 million, respectively, of 90 or more days past due loans carried at estimated fair value, all of which were on non-accrual status and in default as of June 30, 2015. As of December 31, 2014, the Company held a total par value and estimated fair value of $580.1 million and $342.1 million, respectively, of non-accrual loans. As of December 31, 2014, the Company held a total par value and estimated fair value of $410.2 million and $266.9 million, respectively, of 90 or more days past due loans, all of which were on non‑ accrual status and in default as of December 31, 2014.

Defaulted Loans

As of June 30, 2015, the Company held one corporate loan that was in default with a total estimated fair value of $209.5 million from one issuer. As of December 31, 2014, the Company held four corporate loans that were in default with a total estimated fair value of $266.9 million from two issuers.

Concentration Risk

The Company’s corporate loan portfolio has certain credit risk concentrated in a limited number of issuers. As of June 30, 2015 under the Successor Company where all corporate loans are carried at estimated fair value, approximately 34% of the total estimated fair value of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foods Inc., Texas Competitive Electric Holdings Company LLC (“TXU”), and Univar Inc., which combined represented $599.3 million, or approximately 10% of the aggregate estimated fair value of the Company’s corporate loans. As of December 31, 2014 under the Successor Company where all corporate loans are carried at estimated fair value, approximately 38% of the total estimated fair value of the Company’s corporate loan portfolio was concentrated in twenty issuers, with the three largest concentrations of corporate loans in loans issued by U.S. Foods Inc., TXU and First Data Corp., which combined represented $700.4 million, or approximately 11% of the aggregate estimated fair value of the Company’s corporate loans.

Pledged Assets

Note 8 to these condensed consolidated financial statements describes the Company’s borrowings under which the Company has pledged loans for borrowings. The following table summarizes the corporate loans, at estimated fair value, pledged as collateral as of June 30, 2015 and December 31, 2014 (amounts in thousands):



	June 30, 2015		December 31, 2014
Pledged as collateral for collateralized loan obligation secured debt	$	5,428,388	$	6,205,292
Total	$	5,428,388	$	6,205,292

Predecessor Company

Allowance for Loan Losses

As discussed above in Note 2 to these condensed consolidated financial statements, beginning the Effective Date, the new basis of accounting for corporate loans at estimated fair value eliminated the need for an allowance for loan losses. Accordingly, disclosure related to allowance for loan losses pertains to the Predecessor Company. As described in Note 2 to these condensed consolidated financial statements, the allowance for loan losses represented the Company’s estimate of probable credit losses inherent in its loan portfolio as of the balance sheet date. The Company’s allowance for loan losses consisted of two components, an allocated component and an unallocated component. The allocated component of the allowance for loan losses consisted of individual loans that were impaired. The unallocated component of the allowance for loan losses represented the Company’s estimate of losses inherent, but not identified, in its portfolio as of the balance sheet date.

The following table summarizes the changes in the allowance for loan losses for the Company’s corporate loan portfolio (amounts in thousands):



	For the one month ended April 30, 2014		For the four months ended April 30, 2014
Allowance for loan losses:
Beginning balance	$	223,541	224,999
Provision for loan losses	—		—
Charge-offs	—		(1,458		)
Ending balance	$	223,541	$	223,541

The charge-offs recorded during the four months ended April 30, 2014 were comprised primarily of loans modified in TDRs.

The Company recognized $1.0 million and $4.5 million of interest income related to impaired loans with a related allowance recorded for the one and four months ended April 30, 2014, respectively.

While all of the Company’s impaired loans were typically on non-accrual status, the Company’s non-accrual loans also included (i) other loans held for investment, (ii) corporate loans held for sale and (iii) loans carried at estimated fair value, which were not reflected in the table above. Any of these three classifications may have included those loans modified in a TDR, which were typically designated as being non-accrual (see “Troubled Debt Restructurings” section below).

For the one month ended April 30, 2014, the amount of interest income recognized using the cash-basis method during the time within the period that the loans were on non-accrual status was $1.1 million, which included $1.0 million for non-accrual loans that were held for investment and $0.1 million for non-accrual loans held for sale. For the four months ended April 30, 2014, the amount of interest income recognized using the cash-basis method during the time within the period that the loans were on nonaccrual status was $5.3 million, which included $4.5 million for non-accrual loans that were held for investment, $0.7 million for non-accrual loans held for sale and $0.1 million for non-accrual loans carried at estimated fair value.

As described in Note 2 to these condensed consolidated financial statements, the Company estimated the unallocated components of the allowance for loan losses through a comprehensive review of its loan portfolio and identified certain loans that demonstrated possible indicators of impairments, including credit quality indicators.

Loans at Estimated Fair Value

For the corporate loans measured at estimated fair value under the fair value option of accounting, $0.6 million and $2.8 million of net gains were attributable to changes in instrument specific credit risk for the one and four months ended April 30, 2014, respectively. Gains and losses attributable to changes in instrument specific credit risk were determined by excluding the non-credit components of gains and losses, such as those due to changes in interest rates and general market conditions. In addition, gains and losses attributable to those loans on non-accrual status or specifically identified as more volatile based on financial or operating performance, restructuring or other factors, were considered instrument specific.

Loans Held For Sale and the Lower of Cost or Fair Value Adjustment

As discussed above in Note 2 to these condensed consolidated financial statements, beginning the Effective Date, the new basis of accounting for corporate loans at estimated fair value eliminated the need for the bifurcation between corporate loans held for investment and loans held for sale. Accordingly, related disclosure pertains to the Predecessor Company.

During the one and four months ended April 30, 2014, the Company transferred $110.7 million and $348.8 million amortized cost amount of loans from held for investment to held for sale, respectively. The transfers of certain loans to held for sale were due to the Company’s determination that credit quality of a loan in relation to its expected risk-adjusted return no longer met the Company’s investment objective and the determination by the Company to reduce or eliminate the exposure for certain loans as part of its portfolio risk management practices. During the one and four months ended April 30, 2014, the Company did not transfer any loans held for sale back to loans held for investment. Transfers back to held for investment may have occurred as the circumstances that led to the initial transfer to held for sale were no longer present. Such circumstances may have included deteriorated market conditions often resulting in price depreciation or assets becoming illiquid, changes in restrictions on sales and certain loans amending their terms to extend the maturity, whereby the Company determined that selling the asset no longer met its investment objective and strategy.

The Company recorded a $3.3 million net charge to earnings for the lower of cost or estimated fair value adjustment for the one month ended April 30, 2014 and a $5.0 million reduction to the lower of cost or estimated fair value adjustment for the four months ended April 30, 2014 for certain loans held for sale, which had a carrying value of $546.1 million as of April 30, 2014.

Troubled Debt Restructurings

As discussed above in Note 2 to these condensed consolidated financial statements, as of the Effective Date, the Company accounts for all of its corporate loans at estimated fair value. Accordingly, required disclosure related to TDRs pertains to the Predecessor Company. Loans whose terms have been modified in a TDR were considered impaired, unless accounted for at fair value or the lower of cost or estimated fair value, and were typically placed on non-accrual status, but could have been moved to accrual status when, among other criteria, payment in full of all amounts due under the restructured terms was expected and the borrower had demonstrated a sustained period of repayment performance, typically 6 months.

The following table presents the aggregate balance of loans whose terms had been modified in a TDR (dollar amounts in thousands):



	One month ended April 30, 2014					Four months ended April 30, 2014
	Number of TDRs	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)		Number of TDRs	Pre-modification outstanding recorded investment(1)		Post-modification outstanding recorded investment(1)(2)
Troubled debt restructurings:
Loans held for investment	—	—		—		1	$	154,075	$	—
Loans at estimated fair value	—	—		—		2	41,347		24,571
Total		$	—	$	—		$	195,422	$	24,571


(1)	Recorded investment is defined as amortized cost plus accrued interest.


(2)	Excludes equity securities received from the loans held for investment and/or loans at estimated fair value TDRs with an estimated fair value of $92.0 million and $12.3 million, from the two issuers, respectively.

During the four months ended April 30, 2014, the Company modified an aggregate recorded investment of $195.4 million related to two issuers in restructurings which qualified as TDRs. These restructurings involved conversions of the loans into one of the following: (i) a combination of equity carried at estimated fair value and cash, or (ii) a combination of equity and loans carried at estimated fair value with extended maturities ranging from an additional three to five-year period and a higher spread of 4.0%. Prior to the restructurings, one of the TDRs described above was already identified as impaired and had specific allocated reserves, while the other two were loans carried at estimated fair value. Upon restructuring the impaired loans held for investment, the difference between the recorded investment of the pre-modified loans and the estimated fair value of the new assets plus cash received was charged-off against the allowance for loan losses. The TDRs resulted in $1.1 million of charge-offs, or 76% of the total $1.5 million of charge-offs recorded during the four months ended April 30, 2014.

As of April 30, 2014, there were no commitments to lend additional funds to the issuers whose loans had been modified in a TDR and no loans modified as TDRs were in default within a twelve month period subsequent to their original restructuring.

During the one and four months ended April 30, 2014, the Company modified $135.2 million and $1.1 billion amortized cost of corporate loans that did not qualify as TDRs. These modifications involved changes in existing rates and maturities to prevailing market rates/maturities for similar instruments and did not qualify as TDRs as the respective borrowers were not experiencing financial difficulty or seeking (or granted) a concession as part of the modification. In addition, these modifications of non-troubled debt holdings were accomplished with modified loans that were not substantially different from the loans prior to modification.