10-Q 1 d730624d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended March 31, 2019

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 814-00754

 

 

SOLAR CAPITAL LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   26-1381340
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

500 Park Avenue

New York, N.Y.

  10022
(Address of principal executive offices)   (Zip Code)

(212) 993-1670

(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  ☒    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, 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  
Non-accelerated filer      Smaller Reporting company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

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   SLRC   The NASDAQ Global Select Market

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of May 3, 2019 was 42,260,826.

 

 

 


Table of Contents

SOLAR CAPITAL LTD.

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2019

TABLE OF CONTENTS

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Consolidated Statements of Assets and Liabilities as of March 31, 2019 (unaudited) and December 31, 2018      3  
   Consolidated Statements of Operations for the three months ended March 31, 2019 (unaudited) and the three months ended March 31, 2018 (unaudited)      4  
   Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2019 (unaudited) and the three months ended March 31, 2018 (unaudited)      5  
   Consolidated Statements of Cash Flows for the three months ended March 31, 2019 (unaudited) and the three months ended March 31, 2018 (unaudited)      6  
   Consolidated Schedule of Investments as of March 31, 2019 (unaudited)      7  
   Consolidated Schedule of Investments as of December 31, 2018      14  
   Notes to Consolidated Financial Statements (unaudited)      22  
   Report of Independent Registered Public Accounting Firm      41  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      42  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      59  

Item 4.

   Controls and Procedures      59  

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      60  

Item 1A.

   Risk Factors      60  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      60  

Item 3.

   Defaults Upon Senior Securities      60  

Item 4.

   Mine Safety Disclosures      60  

Item 5.

   Other Information      60  

Item 6.

   Exhibits      61  
   Signatures      63  


Table of Contents

PART I. FINANCIAL INFORMATION

In this Quarterly Report, “Solar Capital”, “Company”, “Fund”, “we”, “us”, and “our” refer to Solar Capital Ltd. unless the context states otherwise.

 

Item 1.

Financial Statements

SOLAR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share amounts)

 

    March 31, 2019
(unaudited)
    December 31,
2018
 

Assets

   

Investments at fair value:

   

Companies less than 5% owned (cost: $983,114 and $948,478, respectively)

  $ 979,273     $ 944,597  

Companies more than 25% owned (cost: $503,898 and $500,792, respectively)

    521,451       511,483  

Cash

    9,242       7,570  

Cash equivalents (cost: $249,523 and $199,646, respectively)

    249,523       199,646  

Dividends receivable

    9,917       9,065  

Interest receivable

    8,421       7,619  

Receivable for investments sold

    27,663       2,073  

Other receivable

    823       593  

Prepaid expenses and other assets

    917       783  
 

 

 

   

 

 

 

Total assets

  $ 1,807,230     $ 1,683,429  
 

 

 

   

 

 

 

Liabilities

   

Debt ($595,785 and $476,185 face amounts, respectively, reported net of unamortized debt issuance costs of $2,514 and $2,647, respectively. See notes 6 and 7)

  $ 593,271     $ 473,538  

Payable for investments and cash equivalents purchased

    249,523       251,391  

Distributions payable

    17,327       17,327  

Management fee payable (see note 3)

    6,562       6,504  

Performance-based incentive fee payable (see note 3)

    4,616       4,613  

Interest payable (see note 7)

    5,407       4,714  

Administrative services expense payable (see note 3)

    323       2,716  

Other liabilities and accrued expenses

    3,525       3,455  
 

 

 

   

 

 

 

Total liabilities

  $ 880,554     $ 764,258  
 

 

 

   

 

 

 

Commitments and contingencies (see note 10)

   

Net Assets

   

Common stock, par value $0.01 per share, 200,000,000 and 200,000,000 common shares authorized, respectively, and 42,260,826 and 42,260,826 shares issued and outstanding, respectively

  $ 423     $ 423  

Paid-in capital in excess of par

    992,438       992,438  

Accumulated distributable net loss

    (66,185     (73,690
 

 

 

   

 

 

 

Total net assets

  $ 926,676     $ 919,171  
 

 

 

   

 

 

 

Net Asset Value Per Share

  $ 21.93     $ 21.75  
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except share amounts)

 

     Three months ended  
     March 31, 2019     March 31, 2018  

INVESTMENT INCOME:

    

Interest:

    

Companies less than 5% owned

   $ 28,143     $ 24,181  

Companies more than 25% owned

     1,063       285  

Dividends:

    

Companies less than 5% owned

     3       6  

Companies more than 25% owned

     9,952       14,363  

Other income:

    

Companies less than 5% owned

     93       62  

Companies more than 25% owned

     5       63  
  

 

 

   

 

 

 

Total investment income

     39,259       38,960  
  

 

 

   

 

 

 

EXPENSES:

    

Management fees (see note 3)

   $ 6,562     $ 6,473  

Performance-based incentive fees (see note 3)

     4,616       4,714  

Interest and other credit facility expenses (see note 7)

     7,328       5,909  

Administrative services expense (see note 3)

     1,368       1,286  

Other general and administrative expenses

     921       1,721  
  

 

 

   

 

 

 

Total expenses

     20,795       20,103  
  

 

 

   

 

 

 

Net investment income

   $ 18,464     $ 18,857  
  

 

 

   

 

 

 

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND CASH EQUIVALENTS:

    

Net realized gain (loss) on investments and cash equivalents:

    

Companies less than 5% owned

   $ 29     $ 197  

Companies 5% to 25% owned

     —         175  

Companies more than 25% owned

     (563     (5
  

 

 

   

 

 

 

Net realized gain (loss) on investments and cash equivalents

     (534     367  
  

 

 

   

 

 

 

Net change in unrealized gain (loss) on investments and cash equivalents:

    

Companies less than 5% owned

     39       2,648  

Companies more than 25% owned

     6,863       (1,824
  

 

 

   

 

 

 

Net change in unrealized gain on investments and cash equivalents

     6,902       824  
  

 

 

   

 

 

 

Net realized and unrealized gain on investments and cash equivalents

     6,368       1,191  
  

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

   $ 24,832     $ 20,048  
  

 

 

   

 

 

 

EARNINGS PER SHARE (see note 5)

   $ 0.59     $ 0.47  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

(in thousands, except share amounts)

 

     Three months ended  
     March 31, 2019     March 31, 2018  

Increase in net assets resulting from operations:

    

Net investment income

   $ 18,464     $ 18,857  

Net realized gain (loss)

     (534     367  

Net change in unrealized gain

     6,902       824  
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     24,832       20,048  
  

 

 

   

 

 

 

Distributions to stockholders:

    

From net investment income

     (17,327     (17,327
  

 

 

   

 

 

 

Capital transactions (see note 12):

    

Reinvestment of distributions

     —         —    
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     —         —    
  

 

 

   

 

 

 

Total increase in net assets

     7,505       2,721  

Net assets at beginning of period

     919,171       921,605  
  

 

 

   

 

 

 

Net assets at end of period

   $ 926,676     $ 924,326  
  

 

 

   

 

 

 

Capital stock activity (see note 12):

    

Common stock issued from reinvestment of distributions

     —         —    
  

 

 

   

 

 

 

Net increase from capital stock activity

     —         —    
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

     Three months ended  
     March 31, 2019     March 31, 2018  

Cash Flows from Operating Activities:

    

Net increase in net assets resulting from operations

   $ 24,832     $ 20,048  

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

    

Net realized (gain) loss on investments and cash equivalents

     534       (367

Net change in unrealized gain on investments and cash equivalents

     (6,902     (824

(Increase) decrease in operating assets:

    

Purchase of investments

     (109,705     (153,103

Proceeds from disposition of investments

     71,454       142,856  

Capitalization of payment-in-kind interest

     (230     (49

Collections of payment-in-kind interest

     205       740  

Receivable for investments sold

     (25,590     1,324  

Interest receivable

     (802     666  

Dividends receivable

     (852     704  

Other receivable

     (230     —    

Prepaid expenses and other assets

     (134     199  

Increase (decrease) in operating liabilities:

    

Payable for investments and cash equivalents purchased

     (1,868     (4,873

Management fee payable

     58       (900

Performance-based incentive fee payable

     3       54  

Administrative services expense payable

     (2,393     (2,460

Interest payable

     693       2,026  

Other liabilities and accrued expenses

     70       782  
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     (50,857     6,823  
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash distributions paid

     (17,327     (16,904

Deferred financing costs

     133       92  

Proceeds from secured borrowings

     296,400       130,700  

Repayment of secured borrowings

     (176,800     (126,800
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     102,406       (12,912
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     51,549       (6,089

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     207,216       150,789  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 258,765     $ 144,700  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 6,635     $ 3,883  
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

6


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)

March 31, 2019

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Spread
Above
Index(7)
    LIBOR
Floor
    Interest
Rate(1)
    Acquisition
Date
    Maturity
Date
    Par
Amount
    Cost     Fair
Value
 

Senior Secured Loans — 92.0%

                 

Bank Debt/Senior Secured Loans

                 

Aegis Toxicology Sciences Corporation (8)(14)

  Health Care Providers & Services     L+550       1.00     8.24     5/7/2018       5/9/2025     $ 17,172     $ 16,901     $ 17,172  

Alteon Health, LLC (8)(14)

  Health Care Providers & Services     L+650       1.00     9.00     9/14/2018       9/1/2022       15,227       15,122       14,617  

American Teleconferencing Services, Ltd. (PGI) (8)(14)

  Communications Equipment     L+650       1.00     9.24     5/5/2016       12/8/2021       30,515       29,647       30,133  

Amerilife Group, LLC (8)

  Insurance     L+875       1.00     11.25     7/9/2015       1/10/2023       15,000       14,821       15,000  

Associated Pathologists, LLC (8)(14)

  Health Care Providers & Services     L+500       1.00     7.80     9/14/2018       8/1/2021       3,612       3,595       3,612  

Atria Wealth Solutions, Inc. (8)(14)

  Diversified Financial Services     L+600       1.00     8.60     9/14/2018       11/30/2022       3,349       3,320       3,333  

AviatorCap SII, LLC (2)(8)

  Aerospace & Defense     L+700       —         9.59     12/27/2018       10/30/2020       2,933       2,933       2,933  

AviatorCap SII, LLC (2)(8)

  Aerospace & Defense     L+700       —         9.59     3/19/2019       1/29/2021       2,975       2,975       2,975  

BAM Capital, LLC (8)

  Diversified Financial Services     L+900       —         11.49     12/26/2018       1/23/2023       14,986       14,770       14,761  

BAM Capital, LLC (8)

  Diversified Financial Services     L+1200       —         14.49     12/26/2018       1/23/2023       4,700       4,634       4,630  

Bishop Lifting Products, Inc. (5)(8)

  Trading Companies & Distributors     L+800       1.00     10.50     3/24/2014       3/27/2022       24,985       24,881       24,610  

Falmouth Group Holdings Corp. (AMPAC) (8)(14)

  Chemicals     L+675       1.00     9.25     12/7/2015       12/14/2021       40,887       40,675       40,887  

Global Holdings LLC & Payment Concepts LLC (8)(14)

  Consumer Finance     L+650       1.00     9.13     9/14/2018       5/5/2022       6,973       6,879       6,973  

Greystone Select Holdings LLC & Greystone & Co., Inc. (8)

  Thrifts & Mortgage Finance     L+800       1.00     10.56     3/29/2017       4/17/2024       19,850       19,695       19,850  

iCIMS, Inc. (8)

  Software     L+650       1.00     8.99     9/7/2018       9/12/2024       12,670       12,434       12,606  

IHS Intermediate, Inc. (8)

  Health Care Providers & Services     L+825       1.00     11.02     6/19/2015       7/20/2022       25,000       24,723       22,500  

Kingsbridge Holdings, LLC (8)

  Multi-Sector Holdings     L+700       1.00     9.81     12/21/2018       12/21/2024       28,973       28,553       28,683  

KORE Wireless Group, Inc. (8)(14)

  Wireless Telecommunication Services     L+550       —         8.10     12/21/2018       12/21/2024       37,129       36,407       36,758  

Logix Holding Company, LLC (8)(14)

  Communications Equipment     L+575       1.00     8.25     9/14/2018       12/22/2024       7,159       7,098       7,159  

On Location Events, LLC & PrimeSport Holdings Inc. (8)(14)

  Media     L+550       1.00     8.10     12/7/2017       9/29/2021       24,261       24,060       24,261  

Pet Holdings ULC & Pet Supermarket, Inc. (3)(8)(14)

  Specialty Retail     L+550       1.00     8.30     9/14/2018       7/5/2022       29,270       28,999       28,977  

PhyMed Management LLC (8)

  Health Care Providers & Services     L+875       1.00     11.38     12/18/2015       5/18/2021       32,321       31,723       32,160  

PhyNet Dermatology LLC (8)(14)

  Health Care Providers & Services     L+550       1.00     7.99     9/5/2018       8/16/2024       10,572       10,479       10,467  

PPT Management Holdings, LLC (8)

  Health Care Providers & Services     L+750(16)       1.00     9.99     9/14/2018       12/16/2022       20,133       20,012       17,113  

PSKW, LLC & PDR, LLC (8)(14)

  Health Care Providers & Services     L+425       1.00     6.85     9/14/2018       11/25/2021       1,940       1,933       1,940  

PSKW, LLC & PDR, LLC (8)(14)

  Health Care Providers & Services     L+826       1.00     10.87     10/24/2017       11/25/2021       26,647       26,370       26,647  

 

See notes to consolidated financial statements.

 

7


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2019

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Spread
Above
Index(7)
  LIBOR
Floor
    Interest
Rate(1)
    Acquisition
Date
    Maturity
Date
    Par
Amount
    Cost     Fair
Value
 

RS Energy Group U.S., Inc. (8)(14)

  Software   L+475     —         7.35     10/26/2018       10/6/2023     $ 15,800     $ 15,505     $ 15,484  

Rug Doctor LLC (2)(8)

  Diversified Consumer Services   L+975     1.50     12.43     12/23/2013       10/31/2019       9,111       9,069       9,111  

Solara Medical Supplies, Inc. (8)(14)

  Health Care Providers & Services   L+600     1.00     8.50     5/31/2018       2/27/2024       9,316       9,154       9,316  

SOINT, LLC (2)(8)

  Aerospace & Defense   L+900     —         11.70     2/28/2019       4/30/2024       2,188       2,144       2,144  

Southern Auto Finance Company (3)(8)

  Consumer Finance   —       —         11.15     10/19/2011       12/4/2019       25,000       24,941       25,000  

The Octave Music Group, Inc. (fka TouchTunes) (8)

  Media   L+825     1.00     10.73     5/28/2015       5/27/2022       14,000       13,888       14,000  

Varilease Finance, Inc. (8)

  Multi-Sector Holdings   L+775     1.00     10.56     8/22/2014       8/24/2020       33,000       32,822       33,000  
               

 

 

   

 

 

 

Total Bank Debt/Senior Secured Loans

 

  $ 561,162     $ 558,812  
 

 

 

   

 

 

 

Life Science Senior Secured Loans

                 

Alimera Sciences, Inc. (8)

  Pharmaceuticals   L+765     —         10.13     1/5/2018       7/1/2022     $ 25,000     $ 25,118     $ 25,125  

Apollo Endosurgery, Inc. (8)

  Health Care Equipment & Supplies   L+750     —         10.00     3/15/2019       9/1/2023       20,492       20,349       20,338  

Ardelyx, Inc. (8)

  Pharmaceuticals   L+745     —         9.93     5/10/2018       11/1/2022       24,500       24,484       24,439  

aTyr Pharma, Inc. (8)

  Pharmaceuticals   P+410     —         9.60     11/18/2016       11/18/2020       6,667       7,068       6,833  

Axcella Health Inc. (8)

  Pharmaceuticals   L+850     —         10.99     1/9/2018       7/1/2022       26,000       26,328       26,260  

BioElectron Technology Corporation (8)

  Pharmaceuticals   L+750     —         9.98     8/9/2018       8/10/2022       10,500       10,497       10,500  

Breathe Technologies, Inc. (8)

  Health Care Equipment & Supplies   L+850     —         10.99     1/5/2018       1/5/2022       22,000       22,373       22,220  

Cardiva Medical, Inc. (8)

  Health Care Equipment & Supplies   L+795     0.63     10.43     9/24/2018       9/1/2022       12,000       12,129       12,060  

Cerapedics, Inc. (8)

  Health Care Equipment & Supplies   L+695     2.50     9.45     3/22/2019       3/1/2024       18,803       18,715       18,709  

Corindus Vascular Robotics, Inc. (3)(8)

  Health Care Equipment & Supplies   L+725     —         9.74     3/9/2018       3/1/2022       8,337       8,249       8,399  

Delphinus Medical Technologies, Inc. (8)

  Health Care Equipment & Supplies   L+850     —         10.98     8/18/2017       9/1/2021       5,444       5,444       5,444  

GenMark Diagnostics, Inc. (3)(8)

  Health Care Providers & Services   L+590     2.51     8.41     2/1/2019       2/1/2023       35,373       35,354       35,373  

OmniGuide Holdings, Inc. (8)(13)

  Health Care Equipment & Supplies   L+805     —         10.53     7/30/2018       7/29/2023       10,500       10,537       10,500  

PQ Bypass, Inc. (8)

  Health Care Equipment & Supplies   L+795     1.00     10.44     12/20/2018       12/19/2022       5,200       5,141       5,200  

Restoration Robotics, Inc. (8)

  Health Care Equipment & Supplies   L+795     —         10.43     5/10/2018       5/1/2022       9,000       8,934       9,270  

Rubius Therapeutics, Inc. (3)(8)

  Pharmaceuticals   L+550     —         7.98     12/21/2018       12/21/2023       13,430       13,428       13,464  

scPharmaceuticals, Inc. (8)

  Pharmaceuticals   L+845     —         10.93     5/23/2017       5/1/2021       5,000       5,034       5,025  

SentreHeart, Inc. (8)

  Health Care Equipment & Supplies   L+885     —         11.34     11/15/2016       11/15/2020       10,000       10,245       10,450  

Sunesis Pharmaceuticals, Inc. (8)

  Pharmaceuticals   L+854     —         11.02     3/31/2016       4/1/2020       3,047       3,152       3,138  

Tetraphase Pharmaceuticals, Inc. (8)

  Pharmaceuticals   L+725     —         9.73     10/30/2018       5/2/2023       20,600       20,235       20,394  
               

 

 

   

 

 

 

Total Life Science Senior Secured Loans

 

  $ 292,814     $ 293,141  
 

 

 

   

 

 

 

Total Senior Secured Loans

 

  $ 853,976     $ 851,953  
 

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

8


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2019

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Interest
Rate(1)
  Acquisition
Date
  Maturity
Date
  Par Amount     Cost     Fair
Value
 

Equipment Financing — 34.7%

             

Althoff Crane Service, Inc. (8)(15)

  Commercial Services & Supplies   10.55%   7/31/2017   6/8/2022   $ 1,318     $ 1,318     $ 1,315  

AmeraMex International, Inc. (8)(10)

  Commercial Services & Supplies   10.00%   3/29/2019   3/28/2022     5,548       5,368       5,548  

B&W Resources, Inc. (8)(10)

  Oil, Gas & Consumable Fuels   21.63%   8/17/2018   3/27/2020     244       239       250  

BB578, LLC (8)(10)

  Media   10.00%   7/31/2017   11/1/2021     634       634       624  

Beverly Hills Limo and Corporate Coach, Inc. (8)(15)

  Road & Rail   10.57%   3/19/2018   9/9/2019     243       249       241  

Blackhawk Mining, LLC (8)(15)

  Oil, Gas & Consumable Fuels   10.99-11.17%   2/16/2018   3/1/2022-11/1/2022     5,894       5,554       5,894  

C5 Transport, LLC (8)(10)

  Road & Rail   17.71%   1/9/2019   2/1/2024     1,764       1,852       1,764  

C&H Paving, Inc. (8)(15)

  Construction & Engineering   9.94-10.57%   12/26/2018   1/1/2024-2/1/2024     3,421       3,472       3,421  

Capital City Jet Center, Inc. (8)(10)

  Airlines   10.00%   4/4/2018   10/4/2023     2,086       2,086       2,059  

Central Freight Lines, Inc. (8)(10)

  Road & Rail   7.16%   7/31/2017   1/14/2024     1,640       1,640       1,615  

Cfactor Leasing Corp. & CZM USA, Corp. (8)(15)

  Machinery   12.00-14.11%   7/31/2017   5/27/2020-8/3/2022     2,568       2,554       2,591  

Champion Air, LLC (8)(10)

  Airlines   10.00%   3/19/2018   1/1/2023     3,125       3,110       3,075  

Delicate Productions, Inc. (8)(10)

  Commercial Services & Supplies   13.30%   5/3/2018   5/15/2022     2,155       2,149       2,174  

Easton Sales and Rentals, LLC (8)(10)

  Commercial Services & Supplies   10.00%   9/18/2018   10/1/2021     1,820       1,779       1,820  

Equipment Operating Leases, LLC (2)(8)(12)

  Multi-Sector Holdings   7.53-8.37%   4/27/2018   8/1/22-4/27/2025     32,119       32,119       32,119  

Falcon Transport Company (8)(10)

  Road & Rail   10.96%   10/24/2018   7/1/2024     12,170       12,005       12,170  

Family First Freight, LLC (8)(10)

  Road & Rail   9.29-11.52%   7/31/2017   7/2/2019-1/22/2022     790       788       776  

Garda CL Technical Services, Inc. (8)(15)

  Commercial Services & Supplies   8.31-8.77%   3/22/2018   7/13/2023-10/5/2023     2,719       2,719       2,719  

Georgia Jet, Inc. (8)(10)

  Airlines   8.00%   12/4/2017   12/4/2021     2,229       2,229       2,229  

Globecomm Systems Inc. (8)(15)

  Wireless Telecommunication Services   13.18%   5/10/2018   7/1/2021     1,477       1,477       1,508  

GMT Corporation (8)(10)

  Machinery   12.46%   10/23/2018   10/23/2023     7,291       7,221       7,291  

Great Plains Gas Compression Holdings, LLC (8)(10)

  Oil, Gas & Consumable Fuels   9.37-9.93%   3/19/2018   8/1/2019-9/7/19     8,298       8,286       8,350  

Haljoe Coaches USA, LLC (8)(15)

  Road & Rail   8.15-9.90%   7/31/2017   7/1/2022-11/17/2022     5,042       5,042       4,999  

Hawkeye Contracting Company, LLC (8)(10)(11)

  Oil, Gas & Consumable Fuels   10.00%   11/15/2017   11/15/2020     3,210       3,210       3,181  

HTI Logistics Corporation (8)(10)

  Commercial Services & Supplies   9.69-9.80%   11/15/2018   12/1/2023-4/1/2024     330       330       330  

Interstate NDT, Inc. (8)(15)

  Road & Rail   11.32-13.94%   6/11/2018   7/1/2023-10/1/2023     2,331       2,331       2,362  

JP Motorsports, Inc. (8)(15)

  Road & Rail   13.96%   8/17/2018   1/25/2022     370       367       375  

Knight Transfer Services, Inc. & Dumpstr Xpress, Inc. (8)(15)

  Commercial Services & Supplies   12.05-12.76%   7/31/2017   4/11/2020-4/30/2020     427       427       426  

Kool Pak, LLC (8)(15)

  Road & Rail   8.58%   2/5/2018   3/1/2024     700       700       700  

Lineal Industries, Inc. (8)(10)

  Construction & Engineering   8.00%   12/21/2018   12/21/2021     101       101       101  

Marcal Manufacturing, LLC dba Soundview Paper Company, LLC (8)(15)

  Paper & Forest Products   12.91-12.98%   7/31/2017   7/30/2022-10/25/2022     1,292       1,292       1,331  

Meridian Consulting I Corp, Inc. (8)(10)

  Hotels, Restaurants & Leisure   10.72%   7/31/2017   12/4/2021     2,108       2,108       2,152  

Mountain Air Helicopters, Inc. (8)(10)

  Commercial Services & Supplies   10.00%   7/31/2017   4/30/2022     1,601       1,601       1,587  

Mulholland Energy Services Equipment Leasing, LLC (8)(15).

  Commercial Services & Supplies   8.89%   8/17/2018   10/30/2019     545       544       543  

OKK Equipment, LLC (8)(10)

  Commercial Services & Supplies   10.15%   7/31/2017   8/27/2023     586       586       591  

 

See notes to consolidated financial statements.

 

9


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2019

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Interest
Rate(1)
  Acquisition
Date
  Maturity
Date
  Par Amount     Cost     Fair
Value
 

Reston Limousine & Travel Service, Inc. (8)(15)

  Road & Rail   11.82%   9/13/2017   10/1/2021   $ 1,329     $ 1,343     $ 1,340  

Rossco Crane & Rigging, Inc. (8)(15)

  Commercial Services & Supplies   11.13-11.53%   8/25/2017   4/1/2021-9/1/2022     745       745       741  

Royal Express Inc. (8)(10)

  Road & Rail   9.64%   1/17/2019   2/1/2024     1,206       1,229       1,206  

RVR Air Charter, LLC & RVR Aviation, LLC (8)(10)

  Airlines   12.00%   7/31/2017   8/1/2020-1/1/2022     2,463       2,463       2,506  

Santek Environmental, LLC (8)(15)

  Commercial Services & Supplies   10.00%   7/31/2017   3/1/2021     89       89       90  

Santek Environmental of Alabama, LLC (8)(15)

  Commercial Services & Supplies   8.95-10.00%   7/31/2017   12/18/2020-11/29/2021     159       159       157  

Sidelines Tree Service LLC (8)(15)

  Diversified Consumer Services   10.31-10.52%   7/31/2017   8/1/2022-10/1/2022     406       407       410  

South Texas Oilfield Solutions, LLC (8)(15)

  Energy Equipment & Services   12.52-13.76%   3/29/2018   9/1/2022-7/1/2023     3,256       3,256       3,280  

Southern Nevada Oral & Maxillofacial Surgery, LLC (8)(10)

  Health Care Providers & Services   12.00%   7/31/2017   3/1/2024     1,373       1,373       1,407  

Southwest Traders, Inc. (8)(15)

  Road & Rail   9.13%   11/21/2017   11/1/2020     122       122       120  

Spartan Education, LLC (8)(10)

  Diversified Consumer Services   10.26%   3/28/2019   6/1/2022-6/28/2022     3,224       3,287       3,224  

ST Coaches, LLC (8)(15)

  Road & Rail   8.21-8.59%   7/31/2017   10/1/2022-10/1/2023     4,287       4,287       4,280  

Star Coaches Inc. (8)(15)

  Road & Rail   8.42%   3/9/2018   4/1/2025     3,669       3,669       3,669  

Sturgeon Services International Inc. (8)(10)

  Energy Equipment & Services   17.88%   7/31/2017   2/28/2022     1,658       1,658       1,683  

Sun-Tech Leasing of Texas, L.P. (8)(15)

  Road & Rail   8.68-9.44%   7/31/2017   6/25/2020-7/25/2021     358       358       351  

Superior Transportation, Inc. (8)(15)

  Road & Rail   9.31-10.26%   7/31/2017   4/23/2022-4/1/2024     6,475       6,451       6,411  

The Smedley Company & Smedley Services, Inc. (8)(10)

  Commercial Services & Supplies   9.92-14.75%   7/31/2017   10/29/2023-2/10/2024     5,940       5,973       6,011  

Tornado Bus Company (8)(15)

  Road & Rail   10.78%   7/31/2017   9/1/2021     1,997       1,997       1,988  

Trinity Equipment Rentals, Inc. (8)(10)

  Commercial Services & Supplies   11.02%   9/13/2018   10/1/2022     884       884       884  

Trolleys, Inc. (8)(15)

  Road & Rail   9.81%   7/18/2018   8/1/2022     2,860       2,860       2,860  

Up Trucking Services, LLC (8)(15)

  Road & Rail   11.91%   3/23/2018   4/1/2022     1,870       1,897       1,898  

Waste Services of Alabama, LLC (8)(15)

  Commercial Services & Supplies   10.24%   8/17/2018   11/27/2020     1,411       1,414       1,408  

Waste Services of Tennessee, LLC (8)(15)

  Commercial Services & Supplies   8.95-10.15%   7/31/2017   2/7/2021-11/29/2021     678       678       671  

Waste Services of Texas, LLC (8)(15)

  Commercial Services & Supplies   8.95%   7/31/2017   12/6/2021     136       136       133  

WJV658, LLC (8)(10)

  Airlines   8.50%   7/31/2017   7/1/2022     7,734       7,734       7,734  

W.P.M., Inc., WPM-Southern, LLC, WPM Construction Services, Inc. (8)(10)

  Construction & Engineering   7.50%   7/31/2017   10/1/2022     2,377       2,377       2,330  
                    Shares/Units              

NEF Holdings, LLC Equity Interests (2)(8)(9)

  Multi-Sector Holdings     7/31/2017       200       145,000       146,500  
           

 

 

   

 

 

 

Total Equipment Financing

 

    $319,333       $321,523  
           

 

 

   

 

 

 

Preferred Equity — 1.6%

             

SOAGG LLC (2)(3)(4)(8)

  Aerospace & Defense   8.00%   12/14/2010   6/30/2020     2,130     $ 2,130     $ 9,313  

SOINT, LLC (2)(3)(4)(8)

  Aerospace & Defense   15.00%   6/8/2012   6/30/2020     55,109       5,511       5,806  
           

 

 

   

 

 

 

Total Preferred Equity

 

  $ 7,641     $ 15,119  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

10


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2019

(in thousands, except share/unit amounts)

 

Description

  

Industry

   Acquisition
Date
     Shares/
Units
     Cost      Fair
Value
 

Common Equity/Equity Interests/Warrants — 33.7%

           

aTyr Pharma, Inc. Warrants (8)*

   Pharmaceuticals      11/18/2016        88,792      $ 106      $ —    

B Riley Financial Inc. (3)

   Research & Consulting Services      3/16/2007        38,015        2,684        634  

CardioFocus, Inc. Warrants (8)*

   Health Care Equipment & Supplies      3/31/2017        440,816        50        54  

CAS Medical Systems, Inc. Warrants (8)*

   Health Care Equipment & Supplies      6/30/2016        48,491        38        29  

Conventus Orthopaedics, Inc. Warrants (8)*

   Health Care Equipment & Supplies      6/15/2016        157,500        65        25  

Corindus Vascular Robotics, Inc. Warrants (3)(8)*

   Health Care Equipment & Supplies      3/9/2018        249,420        166        205  

Crystal Financial LLC (2)(3)(8)

   Diversified Financial Services      12/28/2012        280,303        280,737        298,000  

Delphinus Medical Technologies, Inc. Warrants (8)*

   Health Care Equipment & Supplies      8/18/2017        380,904        74        78  

Essence Group Holdings Corporation (Lumeris) Warrants (8)*

   Health Care Technology      3/22/2017        208,000        63        315  

PQ Bypass, Inc. Warrants (8)*

   Health Care Equipment & Supplies      12/20/2018        156,000        70        59  

RD Holdco Inc. (Rug Doctor) (2)(8)*

   Diversified Consumer Services      12/23/2013        231,177        15,683        7,334  

RD Holdco Inc. (Rug Doctor) Class B (2)(8)*

   Diversified Consumer Services      12/23/2013        522        5,216        5,216  

RD Holdco Inc. (Rug Doctor) Warrants (2)(8)*

   Diversified Consumer Services      12/23/2013        30,370        381        —    

Restoration Robotics, Inc. Warrants (8)*

   Health Care Equipment & Supplies      5/10/2018        72,776        111        3  

Scynexis, Inc. Warrants (8)*

   Pharmaceuticals      9/30/2016        122,435        105        —    

SentreHeart, Inc. Warrants (8)*

   Health Care Equipment & Supplies      11/15/2016        261,825        126        99  

Sunesis Pharmaceuticals, Inc. Warrants (8)*

   Pharmaceuticals      3/31/2016        104,001        118        —    

Tetraphase Pharmaceuticals, Inc. Warrants (8)*

   Pharmaceuticals      10/30/2018        284,530        269        78  
           

 

 

    

 

 

 

Total Common Equity/Equity Interests/Warrants

 

   $ 306,062      $ 312,129  
  

 

 

    

 

 

 

Total Investments (6) — 162.0%

 

   $ 1,487,012      $ 1,500,724  
           

 

 

    

 

 

 

 

Description

 

Industry

  Acquisition
Date
    Maturity
Date
    Par Amount                

Cash Equivalents — 26.9%

          

U.S. Treasury Bill

  Government     3/29/2019       4/30/2019     $ 250,000      $ 249,523      $ 249,523  
          

 

 

    

 

 

 

Total Investments & Cash Equivalents — 188.9%

 

   $ 1,736,535      $ 1,750,247  

Liabilities in Excess of Other Assets — (88.9%)

 

        (823,571
             

 

 

 

Net Assets — 100.0%

 

      $ 926,676  
             

 

 

 

 

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to the London Interbank Offered Rate (“LIBOR”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current rate of interest, or in the case of leases the current implied yield, in effect as of March 31, 2019.

 

See notes to consolidated financial statements.

 

11


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2019

(in thousands)

 

(2)

Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, as defined in the Investment Company Act of 1940 (“1940 Act”), due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the three months ended March 31, 2019 in these controlled investments are as follows:

 

Name of Issuer

  Fair Value at
December 31, 2018
    Gross
Additions
    Gross
Reductions
    Realized
Gain
(Loss)
    Change in
Unrealized
Gain
(Loss)
    Interest/Dividend
/Other Income
    Fair Value at
March 31, 2019
 

Ark Real Estate Partners LP

  $ 39     $ —     $ —     $ (526   $ 487     $ —     $ —  

Ark Real Estate Partners II LP

    1       —         —         (37 )†      11       —         —    

AviatorCap SII, LLC

    2,975       —         42     —         —         71       2,933  

AviatorCap SII, LLC

    —         2,975       —         —         —         10       2,975  

Crystal Financial LLC

    293,000       —         —         —         5,000       7,500       298,000  

Equipment Operating Leases, LLC

    32,882       —         763     —         —         660       32,119  

NEF Holdings, LLC

    145,000       —         —         —         1,500       1,200       146,500  

RD Holdco Inc. (Rug Doctor, common equity)

    7,732       —         —         —         (398     —         7,334  

RD Holdco Inc. (Rug Doctor, class B)

    5,216       —         —         —         —         —         5,216  

RD Holdco Inc. (Rug Doctor, warrants)

    —         —         —         —         —         —         —    

Rug Doctor LLC

    9,111       —         —         —         (18     304       9,111  

SOAGG LLC

    9,113       —         363       —         563       1,045       9,313  

SOINT, LLC

    —         2,144       —         —         —         23       2,144  

SOINT, LLC (preferred equity)

    6,414       —         326       —         (282     207       5,806  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 511,483     $ 5,119     $ 1,494     $ (563   $ 6,863     $ 11,020     $ 521,451  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(3)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of March 31, 2019, on a fair value basis, non-qualifying assets in the portfolio represented 23.4% of the total assets of the Company.

(4)

Solar Capital Ltd.’s investments in SOAGG, LLC and SOINT, LLC include a two and one dollar investment in common shares, respectively.

(5)

Bishop Lifting Products, Inc., SEI Holding I Corporation, Singer Equities, Inc. & Hampton Rubber Company are co-borrowers.

(6)

Aggregate net unrealized appreciation for U.S. federal income tax purposes is $8,271; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $29,052 and $20,781, respectively, based on a tax cost of $1,492,453. Unless otherwise noted, all of the Company’s investments are pledged as collateral against the borrowings outstanding on the senior secured credit facility. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act.

(7)

Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.

(8)

Level 3 investment valued using significant unobservable inputs.

(9)

NEF Holdings, LLC is held through NEFCORP LLC, a wholly-owned consolidated taxable subsidiary and NEFPASS LLC, a wholly-owned consolidated subsidiary.

(10)

Indicates an investment that is wholly held by Solar Capital Ltd. through NEFPASS LLC.

(11)

Hawkeye Contracting Company, LLC, Eagle Creek Mining, LLC & Falcon Ridge Leasing, LLC are co-borrowers.

(12)

Equipment Operating Leases, LLC is a subsidiary of NEF Holdings, LLC.

(13)

OmniGuide Holdings, Inc., Domain Surgical, Inc. and OmniGuide, Inc. are co-borrowers.

(14)

Indicates an investment that is wholly or partially held by the Company through its wholly-owned consolidated financing subsidiary SSLP 2016-1, LLC (the “SSLP SPV”). Such investments are pledged as collateral under the SSLP 2016-1, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(15)

Indicates an investment that is held by the Company through its wholly-owned consolidated financing subsidiary NEFPASS SPV, LLC (the “NEFPASS SPV”). Such investments are pledged as collateral under the NEFPASS SPV, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(16)

Spread is 1.00% Cash / 6.50% PIK.

*

Non-income producing security.

Represents estimated change in receivable balance.

 

See notes to consolidated financial statements.

 

12


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

March 31, 2019

(in thousands)

 

Industry Classification

   Percentage of Total
Investments (at fair value) as
of March 31, 2019
 

Diversified Financial Services (Crystal Financial LLC)

     21.4

Multi-Sector Holdings (includes NEF Holdings, LLC and Equipment Operating Leases, LLC)

     16.0

Health Care Providers & Services

     12.8

Pharmaceuticals

     9.0

Health Care Equipment & Supplies

     8.2

Road & Rail

     3.3

Chemicals

     2.7

Media

     2.6

Wireless Telecommunication Services

     2.6

Communications Equipment

     2.5

Consumer Finance.

     2.1

Specialty Retail

     1.9

Software

     1.9

Commercial Services & Supplies

     1.8

Diversified Consumer Services

     1.7

Trading Companies & Distributors

     1.6

Aerospace & Defense

     1.6

Thrifts & Mortgage Finance

     1.3

Oil, Gas & Consumable Fuels

     1.2

Airlines

     1.2

Insurance

     1.0

Machinery

     0.7

Construction & Engineering

     0.4

Energy Equipment & Services.

     0.3

Hotels, Restaurants & Leisure.

     0.1

Paper & Forest Products

     0.1

Research & Consulting Services

     0.0

Health Care Technology

     0.0
  

 

 

 

Total Investments

     100.0
  

 

 

 

 

See notes to consolidated financial statements.

 

13


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Spread
Above
Index(9)
    LIBOR
Floor
    Interest
Rate(1)
    Acquisition
Date
    Maturity
Date
    Par Amount     Cost     Fair
Value
 

Senior Secured Loans — 89.1%

                 

Bank Debt/Senior Secured Loans

                 

Aegis Toxicology Sciences Corporation (10)

  Health Care Providers & Services     L+550       1.00     8.10     5/7/2018       5/9/2025     $ 17,215     $ 16,935     $ 17,215  

Alteon Health, LLC (10)(16)

  Health Care Providers & Services     L+650       1.00     9.02     9/14/2018       9/1/2022       15,271       15,159       14,507  

American Teleconferencing Services, Ltd. (PGI) (10)(16)

  Communications Equipment     L+650       1.00     9.09     5/5/2016       12/8/2021       30,965       30,001       30,578  

Amerilife Group, LLC (10)

  Insurance     L+875       1.00     11.27     7/9/2015       1/10/2023       15,000       14,811       14,963  

Associated Pathologists, LLC (10)(16)

  Health Care Providers & Services     L+500       1.00     7.38     9/14/2018       8/1/2021       3,718       3,699       3,718  

Atria Wealth Solutions, Inc. (10)(16)

  Diversified Financial Services     L+600       1.00     8.61     9/14/2018       11/30/2022       3,358       3,326       3,324  

AviatorCap SII, LLC (3)(10)

  Aerospace & Defense     L+700       —         9.80     12/27/2018       10/30/2020       2,975       2,975       2,975  

BAM Capital, LLC (10)

  Diversified Financial Services     L+800       —         11.52     12/26/2018       1/23/2023       15,500       15,268       15,268  

Bishop Lifting Products, Inc. (7)(10)

  Trading Companies & Distributors     L+800       1.00     10.52     3/24/2014       3/27/2022       24,985       24,873       24,235  

Datto, Inc. (10)

  IT Services     L+800       1.00     10.46     12/6/2017       12/7/2022       25,000       24,587       25,000  

Falmouth Group Holdings Corp. (AMPAC) (10)(16)

  Chemicals     L+675       1.00     9.27     12/7/2015       12/14/2021       40,887       40,658       40,887  

Global Holdings LLC & Payment Concepts LLC (10)(16)

  Consumer Finance     L+750       1.00     10.24     9/14/2018       5/5/2022       7,066       6,964       7,066  

Greystone Select Holdings LLC & Greystone & Co., Inc. (10)

  Thrifts & Mortgage Finance     L+800       1.00     10.51     3/29/2017       4/17/2024       19,900       19,739       19,850  

iCIMS, Inc. (10)

  Software     L+650       1.00     8.94     9/7/2018       9/12/2024       12,670       12,426       12,480  

IHS Intermediate, Inc. (10)

  Health Care Providers & Services     L+825       1.00     10.74     6/19/2015       7/20/2022       25,000       24,705       24,000  

Kingsbridge Holdings, LLC (10)

  Multi-Sector Holdings     L+700       1.00     9.82     12/21/2018       12/21/2024       28,973       28,540       28,538  

KORE Wireless Group, Inc. (10)

  Wireless Telecommunication Services     L+550       1.00     8.29     12/21/2018       12/21/2024       37,222       36,478       36,850  

Logix Holding Company, LLC (10)(16)

  Communications Equipment     L+575       1.00     8.27     9/14/2018       12/22/2024       7,178       7,115       7,178  

On Location Events, LLC & PrimeSport Holdings Inc. (10)(16)

  Media     L+550       1.00     7.90     12/7/2017       9/29/2021       24,506       24,284       24,322  

Pet Holdings ULC & Pet Supermarket, Inc. (5)(10)(16)

  Specialty Retail     L+550       1.00     7.90     9/14/2018       7/5/2022       29,344       29,054       29,197  

PhyMed Management LLC (10)

  Health Care Providers & Services     L+875       1.00     11.46     12/18/2015       5/18/2021       32,321       31,662       32,160  

PhyNet Dermatology LLC (10)

  Health Care Providers & Services     L+550       1.00     8.02     9/5/2018       8/16/2024       9,644       9,551       9,547  

PPT Management Holdings, LLC (10)

  Health Care Providers & Services     L+750  PIK      1.00     9.85     9/14/2018       12/16/2022       19,969       19,841       16,973  

PSKW, LLC & PDR, LLC (10)(16)

  Health Care Providers & Services     L+425       1.00     7.05     9/14/2018       11/25/2021       2,024       2,016       2,024  

PSKW, LLC & PDR, LLC (10)(16)

  Health Care Providers & Services     L+825       1.00     11.05     10/24/2017       11/25/2021       26,647       26,348       26,647  

 

See notes to consolidated financial statements.

 

14


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Spread
Above
Index(9)
  LIBOR
Floor
    Interest
Rate(1)
    Acquisition
Date
    Maturity
Date
    Par Amount     Cost     Fair
Value
 

RS Energy Group U.S., Inc. (10)

  Software   L+475     1.00     7.55     10/26/2018       10/6/2023     $ 15,249     $ 14,951     $ 14,944  

Rug Doctor LLC (3)(10)

  Diversified Consumer Services   L+975     1.50     12.33     12/23/2013       10/31/2019       9,111       9,050       9,111  

Solara Medical Supplies, Inc. (10)(16)

  Health Care Providers & Services   L+600     1.00     8.52     5/31/2018       5/31/2023       3,418       3,371       3,418  

Southern Auto Finance Company (5)(10)

  Consumer Finance   —       —         11.15     10/19/2011       12/4/2019       25,000       24,920       25,000  

The Octave Music Group, Inc. (fka TouchTunes) (10)

  Media   L+825     1.00     10.63     5/28/2015       5/27/2022       14,000       13,880       13,930  

Varilease Finance, Inc. (10)

  Multi-Sector Holdings   L+825     1.00     10.65     8/22/2014       8/24/2020       33,000       32,793       33,000  
               

 

 

   

 

 

 

Total Bank Debt/Senior Secured Loans

 

  $ 569,980     $ 568,905  
               

 

 

   

 

 

 

Life Science Senior Secured Loans

                 

Alimera Sciences, Inc. (10)

  Pharmaceuticals   L+765     —         10.03     1/5/2018       7/1/2022     $ 25,000     $ 25,044     $ 25,125  

Ardelyx, Inc. (5)(10)

  Pharmaceuticals   L+745     —         9.83     5/10/2018       11/1/2022       24,500       24,400       24,377  

aTyr Pharma, Inc. (10)

  Pharmaceuticals   P+410     —         9.35     11/18/2016       11/18/2020       7,667       7,985       7,782  

Axcella Health Inc. (10)

  Pharmaceuticals   L+850     —         10.84     1/9/2018       7/1/2022       26,000       26,247       26,000  

BioElectron Technology Corporation (10)

  Pharmaceuticals   L+750     —         9.88     8/9/2018       8/10/2022       10,500       10,458       10,447  

Breathe Technologies, Inc. (10)

  Health Care Equipment & Supplies   L+850     —         10.84     1/5/2018       1/5/2022       22,000       22,298       22,000  

Cardiva Medical, Inc. (10)

  Health Care Equipment & Supplies   L+795     0.63     10.33     9/24/2018       9/1/2022       12,000       12,067       12,030  

Corindus Vascular Robotics, Inc. (5)(10)

  Health Care Equipment & Supplies   L+725     —         9.60     3/9/2018       3/1/2022       6,783       6,787       6,817  

Delphinus Medical Technologies, Inc. (10)

  Health Care Equipment & Supplies   L+850     —         10.88     8/18/2017       9/1/2021       5,625       5,594       5,513  

GenMark Diagnostics, Inc. (5)(10)

  Health Care Providers & Services   —       —         6.90     11/8/2018       1/1/2021       17,473       17,531       17,531  

OmniGuide Holdings, Inc. (10)(15)

  Health Care Equipment & Supplies   L+805     —         10.43     7/30/2018       7/29/2023       10,500       10,504       10,474  

PQ Bypass, Inc. (10)

  Health Care Equipment & Supplies   L+795     1.00     10.42     12/20/2018       12/20/2022       5,200       5,119       5,117  

Restoration Robotics, Inc. (10)

  Health Care Equipment & Supplies   L+795     —         10.33     5/10/2018       5/1/2022       9,000       8,887       8,977  

Rubius Therapeutics, Inc. (5)(10)

  Pharmaceuticals   L+550     —         7.97     12/21/2018       12/21/2023       13,430       13,400       13,397  

scPharmaceuticals, Inc. (10)

  Pharmaceuticals   L+845     —         10.83     5/23/2017       5/1/2021       5,000       5,019       5,025  

Scynexis, Inc. (10)

  Pharmaceuticals   L+849     —         10.87     9/30/2016       9/30/2020       15,000       15,379       15,300  

SentreHeart, Inc. (10)

  Health Care Equipment & Supplies   L+885     —         11.19     11/15/2016       11/15/2020       10,000       10,193       10,150  

Sunesis Pharmaceuticals, Inc. (10)

  Pharmaceuticals   L+854     —         10.92     3/31/2016       4/1/2020       3,750       3,833       3,769  

Tetraphase Pharmaceuticals, Inc. (10)

  Pharmaceuticals   L+725     —         9.63     10/30/2018       5/2/2023       20,600       20,169       20,125  
               

 

 

   

 

 

 

Total Life Science Senior Secured Loans

 

  $ 250,914     $ 249,956  
               

 

 

   

 

 

 

Total Senior Secured Loans

 

  $ 820,894     $ 818,861  
               

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

15


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Interest
Rate(1)
    Acquisition
Date
    Maturity
Date
    Par Amount     Cost     Fair
Value
 

Equipment Financing — 34.2%

             

Althoff Crane Service, Inc. (10)(17)

  Commercial Services & Supplies     10.55%       7/31/2017       6/8/2022     $ 1,362     $ 1,362     $ 1,357  

B&W Resources, Inc. (10)(12)

  Oil, Gas & Consumable Fuels     21.57%       8/17/2018       3/27/2020       297       291       305  

BB578, LLC (10)(12)

  Media     10.00%       7/31/2017       11/1/2021       669       669       667  

Beverly Hills Limo and Corporate Coach, Inc. (10)(17)

  Road & Rail     10.57%       3/19/2018       9/9/2019       366       379       363  

Blackhawk Mining, LLC (10)(17)

  Oil, Gas & Consumable Fuels     10.99-11.17%       2/16/2018       3/1/2022-11/1/2022       6,270       5,890       6,270  

Brightwater R&B Acquisition, LLC (10)(17)

  Machinery     12.24%       8/17/2018       4/20/2019       76       76       76  

C&H Paving, Inc. (10)(12)

  Construction & Engineering     9.94%       12/26/2018       1/1/2024       3,393       3,444       3,393  

Capital City Jet Center, Inc. (10)(12)

  Airlines     10.00%       4/4/2018       10/4/2023       2,174       2,174       2,184  

Central Freight Lines, Inc. (10)(12)

  Road & Rail     7.16%       7/31/2017       1/14/2024       1,710       1,710       1,710  

Cfactor Leasing Corp. & CZM USA, Corp. (10)(17)

  Machinery     12.00-14.11%       7/31/2017       5/27/2020-8/3/2022       3,162       3,143       3,173  

Champion Air, LLC (10)(12)

  Airlines     10.00%       3/19/2018       1/1/2023       3,200       3,181       3,200  

Delicate Productions, Inc. (10)(12)

  Commercial Services & Supplies     13.30%       5/3/2018       5/15/2022       2,023       2,010       2,023  

Easton Sales and Rentals, LLC (10)(12)

  Commercial Services & Supplies     10.00%       9/18/2018       10/1/2021       2,034       1,981       2,034  

Equipment Operating Leases, LLC (3)(10)(14)

  Multi-Sector Holdings     7.53-8.37%       4/27/2018       8/1/22-4/27/2025       32,882       32,882       32,882  

Falcon Transport Company (10)(12)

  Road & Rail     10.96%       10/24/2018       7/1/2024       12,443       12,271       12,443  

Family First Freight, LLC (10)(12)

  Road & Rail     9.29-11.52%       7/31/2017       7/2/2019-1/22/2022       881       879       870  

Garda CL Technical Services, Inc. (10)(17)

  Commercial Services & Supplies     8.31-8.77%       3/22/2018       7/13/2023-10/5/2023       2,847       2,847       2,847  

Georgia Jet, Inc. (10)(12)

  Airlines     8.00%       12/4/2017       12/4/2021       2,373       2,373       2,373  

Globecomm Systems Inc. (10)(17)

  Wireless Telecommunication Services     13.18%       5/10/2018       7/1/2021       1,610       1,610       1,610  

GMT Corporation (10)(12)

  Machinery     12.46%       10/23/2018       10/23/2023       7,582       7,506       7,582  

Great Plains Gas Compression Holdings, LLC (10)(12)

  Oil, Gas & Consumable Fuels     9.37-9.93%       3/19/2018       8/1/2019-9/7/19       8,775       8,754       8,792  

Haljoe Coaches USA, LLC (10)(17)

  Road & Rail     8.15-9.90%       7/31/2017       7/1/2022-11/17/2022       5,180       5,180       5,137  

Hawkeye Contracting Company, LLC (10)(12)(13)

  Oil, Gas & Consumable Fuels     10.00%       11/15/2017       11/15/2020       3,648       3,648       3,620  

HTI Logistics Corporation (10)(12)

  Commercial Services & Supplies     9.80%       11/15/2018       12/1/2023       274       274       274  

Interstate NDT, Inc. (10)(17)

  Road & Rail     11.32-13.94%       6/11/2018       7/1/2023-10/1/2023       2,429       2,429       2,429  

JP Motorsports, Inc. (10)(17)

  Road & Rail     13.96%       8/17/2018       1/25/2022       397       394       405  

Knight Transfer Services, Inc. & Dumpstr Xpress, Inc. (10)(17)

  Commercial Services & Supplies     12.05-12.76%       7/31/2017       4/11/2020-4/30/2020       518       518       519  

Kool Pak, LLC (10)(17)

  Road & Rail     8.58%       2/5/2018       3/1/2024       729       729       722  

Lineal Industries, Inc. (10)(12)

  Construction & Engineering     8.00%       12/21/2018       12/21/2021       107       107       107  

Marcal Manufacturing, LLC dba Soundview Paper Company, LLC (10)(17)

  Paper & Forest Products     12.91-12.98%       7/31/2017       7/30/2022-10/25/2022       1,365       1,365       1,386  

Meridian Consulting I Corp, Inc. (10)(12)

  Hotels, Restaurants & Leisure     10.72%       7/31/2017       12/4/2021       2,145       2,145       2,156  

Mountain Air Helicopters, Inc. (10)(12)

  Commercial Services & Supplies     10.00%       7/31/2017       4/30/2022       1,668       1,668       1,651  

Mulholland Energy Services Equipment Leasing, LLC (10)(17).

  Commercial Services & Supplies     8.89%       8/17/2018       10/30/2019       809       807       804  

OKK Equipment, LLC (10)(12)

  Commercial Services & Supplies     10.15%       7/31/2017       8/27/2023       612       612       601  

 

See notes to consolidated financial statements.

 

16


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Interest
Rate(1)
  Acquisition
Date
  Maturity
Date
  Par
Amount
    Cost     Fair
Value
 

Reston Limousine & Travel Service, Inc. (10)(17)

  Road & Rail   11.82%   9/13/2017   10/1/2021   $ 1,454     $ 1,471     $ 1,460  

Rossco Crane & Rigging, Inc. (10)(17)

  Commercial Services & Supplies   11.13-11.53%   8/25/2017   4/1/2021-9/1/2022     797       797       798  

RVR Air Charter, LLC & RVR Aviation, LLC (10)(12)

  Airlines   12.00%   7/31/2017   8/1/2020-1/1/2022     2,692       2,692       2,727  

Santek Environmental, LLC (10)(17)

  Commercial Services & Supplies   10.00%   7/31/2017   3/1/2021     98       98       99  

Santek Environmental of Alabama, LLC (10)(17)

  Commercial Services & Supplies   8.95-10.00%   7/31/2017   12/18/2020-11/29/2021     179       179       176  

Sidelines Tree Service LLC (10)(17)

  Diversified Consumer Services   10.31-10.52%   7/31/2017   8/1/2022-10/1/2022     431       432       427  

South Texas Oilfield Solutions, LLC (10)(17)

  Energy Equipment & Services   12.52-13.76%   3/29/2018   9/1/2022-7/1/2023     3,413       3,413       3,413  

Southern Nevada Oral & Maxillofacial Surgery, LLC (10)(12)

  Health Care Providers & Services   12.00%   7/31/2017   3/1/2024     1,404       1,404       1,425  

Southwest Traders, Inc. (10)(17)

  Road & Rail   9.13%   11/21/2017   11/1/2020     139       139       138  

ST Coaches, LLC (10)(17)

  Road & Rail   8.21-8.59%   7/31/2017   10/1/2022-10/1/2023     4,396       4,396       4,396  

Star Coaches Inc. (10)(17)

  Road & Rail   8.42%   3/9/2018   4/1/2025     3,785       3,785       3,785  

Sturgeon Services International Inc. (10)(12)

  Energy Equipment & Services   17.88%   7/31/2017   2/28/2022     1,763       1,763       1,789  

Sun-Tech Leasing of Texas, L.P. (10)(17)

  Road & Rail   8.68-8.83%   7/31/2017   6/25/2020-7/25/2021     424       424       416  

Superior Transportation, Inc. (10)(17)

  Road & Rail   9.77-10.26%   7/31/2017   4/23/2022-12/1/2023     4,500       4,499       4,460  

The Smedley Company & Smedley Services, Inc. (10)(12)

  Commercial Services & Supplies   9.92-14.68%   7/31/2017   10/29/2023-2/10/2024     6,273       6,315       6,361  

Tornado Bus Company (10)(17)

  Road & Rail   10.78%   7/31/2017   9/1/2021     2,151       2,151       2,141  

Trinity Equipment Rentals, Inc. (10)(12)

  Commercial Services & Supplies   11.02%   9/13/2018   10/1/2022     935       935       935  

Trolleys, Inc. (10)(17)

  Road & Rail   9.81%   7/18/2018   8/1/2022     3,039       3,039       3,039  

Up Trucking Services, LLC (10)(17)

  Road & Rail   11.91%   3/23/2018   4/1/2022     2,226       2,261       2,263  

Waste Services of Alabama, LLC (10)(17)

  Commercial Services & Supplies   10.24%   8/17/2018   11/27/2020     1,692       1,696       1,687  

Waste Services of Tennessee, LLC (10)(17)

  Commercial Services & Supplies   8.95-10.15%   7/31/2017   2/7/2021-11/29/2021     742       742       727  

Waste Services of Texas, LLC (10)(17)

  Commercial Services & Supplies   8.95%   7/31/2017   12/6/2021     147       147       145  

WJV658, LLC (10)(12)

  Airlines   8.50%   7/31/2017   7/1/2022     7,884       7,884       7,879  

W.P.M., Inc., WPM-Southern, LLC, WPM Construction Services, Inc.(10)(12)

  Construction & Engineering   7.50%   7/31/2017   10/1/2022     2,601       2,601       2,575  
                    Shares/Units              

NEF Holdings, LLC Equity Interests (3)(10)(11)

  Multi-Sector Holdings     7/31/2017       200       145,000       145,000  
           

 

 

   

 

 

 

Total Equipment Financing

 

  $ 313,571     $ 314,226  
           

 

 

   

 

 

 

Preferred Equity — 1.7%

             

SOAGG LLC (3)(5)(6)(10)

  Aerospace & Defense   8.00%   12/14/2010   6/30/2020     2,493     $ 2,493     $ 9,113  

SOINT, LLC (3)(5)(6)(10)

  Aerospace & Defense   15.00%   6/8/2012   6/30/2020     58,361       5,836       6,414  
           

 

 

   

 

 

 

Total Preferred Equity

 

  $ 8,329     $ 15,527  
           

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

17


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SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

 

Acquisition
Date

      Shares/Units      Cost     Fair
Value
 

Common Equity/Equity Interests/Warrants — 33.4%

 

Ark Real Estate Partners LP (2)(3)(10)*

  Diversified Real Estate Activities   3/12/2007       —        $ 527     $ 39  

Ark Real Estate Partners II LP (2)(3)(10)*

  Diversified Real Estate Activities   10/23/2012       —          12       1  

aTyr Pharma, Inc. Warrants (10)*

  Pharmaceuticals   11/18/2016       88,792        106       —    

B Riley Financial Inc. (5)

  Research & Consulting Services   3/16/2007       38,015        2,684       540  

CardioFocus, Inc. Warrants (10)*

  Health Care Equipment & Supplies   3/31/2017       440,816        51       69  

CAS Medical Systems, Inc. Warrants (10)*

  Health Care Equipment & Supplies   6/30/2016       48,491        38       28  

Conventus Orthopaedics, Inc. Warrants (10)*

  Health Care Equipment & Supplies   6/15/2016       157,500        65       68  

Corindus Vascular Robotics, Inc. Warrants (5)(10)*

  Health Care Equipment & Supplies   3/9/2018       79,855        40       22  

Crystal Financial LLC (3)(5)(10)

  Diversified Financial Services   12/28/2012       280,303        280,737       293,000  

Delphinus Medical Technologies, Inc. Warrants (10)*

  Health Care Equipment & Supplies   8/18/2017       380,904        74       99  

Essence Group Holdings Corporation (Lumeris) Warrants (10)*

  Health Care Technology   3/22/2017       208,000        63       358  

PQ Bypass, Inc. Warrants (10)*

  Health Care Equipment & Supplies   12/20/2018       156,000        70       75  

RD Holdco Inc. (Rug Doctor) (3)(10)*

  Diversified Consumer Services   12/23/2013       231,177        15,683       7,732  

RD Holdco Inc. (Rug Doctor) Class B (3)(10)*

  Diversified Consumer Services   12/23/2013       522        5,216       5,216  

RD Holdco Inc. (Rug Doctor) Warrants (3)(10)*

  Diversified Consumer Services   12/23/2013       30,370        381       —    

Restoration Robotics, Inc. Warrants (10)*

  Health Care Equipment & Supplies   5/10/2018       72,776        111       3  

Scynexis, Inc. Warrants (10)*

  Pharmaceuticals   9/30/2016       122,435        105       —    

SentreHeart, Inc. Warrants (10)*

  Health Care Equipment & Supplies   11/15/2016       261,825        126       127  

Sunesis Pharmaceuticals, Inc. Warrants (10)*

  Pharmaceuticals   3/31/2016       104,001        118       —    

Tetraphase Pharmaceuticals, Inc. Warrants (10)*

  Pharmaceuticals   10/30/2018       284,530        269       89  
          

 

 

   

 

 

 

Total Common Equity/Equity Interests/Warrants

 

   $ 306,476     $ 307,466  
          

 

 

   

 

 

 

Total Investments (8) — 158.4%

 

   $ 1,449,270     $ 1,456,080  
          

 

 

   

 

 

 

Description

 

Industry

 

Acquisition
Date

 

Maturity

Date

  Par Amount               

Cash Equivalents — 21.7%

U.S. Treasury Bill

  Government   12/31/2018   1/29/2019   $ 200,000      $ 199,646     $ 199,646  
          

 

 

   

 

 

 

Total Investments & Cash Equivalents —180.1%

 

   $ 1,648,916     $ 1,655,726  

Liabilities in Excess of Other Assets — (80.1%)

 

       (736,555
            

 

 

 

Net Assets — 100.0%

 

     $ 919,171  
            

 

 

 

 

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to the London Interbank Offered Rate (“LIBOR”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current rate of interest, or in the case of leases the current implied yield, in effect as of December 31, 2018.

(2)

Ark Real Estate Partners is held through SLRC ADI Corp., a wholly-owned taxable subsidiary.

 

See notes to consolidated financial statements.

 

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SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands, except share/unit amounts)

 

(3)

Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, as defined in the Investment Company Act of 1940 (“1940 Act”), due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2018 in these controlled investments are as follows:

 

Name of Issuer

   Fair Value at
December 31,
2017
     Gross
Additions
     Gross
Reductions
     Realized
Gain
(Loss)
    Change in
Unrealized
Gain
(Loss)
    Interest/
Dividend/
Other
Income
     Fair Value at
December 31,
2018
 

Ark Real Estate Partners LP

   $ 263      $ —      $ —      $ 376 †    $ (224   $ —      $ 39  

Ark Real Estate Partners II LP

     6        —          —          —         (5     —          1  

AviatorCap SII, LLC I

     10        —          10      —         —         —          —    

AviatorCap SII, LLC

     —          2,975        —          —         —         4        2,975  

Crystal Financial LLC

     303,200        —          —          —         (10,200     30,220        293,000  

Equipment Operating Leases, LLC

     —          34,511        1,629      —         —         1,677        32,882  

NEF Holdings, LLC

     145,500        —          —          —         (500     8,332        145,000  

RD Holdco Inc. (Rug Doctor, common equity)

     10,102        —          —          —         (2,369     —          7,732  

RD Holdco Inc. (Rug Doctor, class B)..

     5,216        —          —          —         —         —          5,216  

RD Holdco Inc. (Rug Doctor, warrants)..

     35        —          —          —         (35     —          —    

Rug Doctor LLC

     9,111        —          —          —         (32     1,164        9,111  

SSLP(18)

     88,736        25,322        115,038        (354     626       6,289        —    

SSLP II(18)

     51,744        21,781        72,858        (47     (758     4,628        —    

SOAGG LLC

     4,537        —          1,654        —         6,230       663        9,113  

SOINT, LLC (preferred equity)

     8,300        —          1,865        —         (21     982        6,414  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 
   $ 626,760      $ 84,589      $ 193,054      $ (25)     $ (7,288   $ 53,959      $ 511,483  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(4)

Denotes investments in which we are an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2018 in these affiliated investments are as follows:

 

Name of Issuer

   Fair Value at
December 31,
2017
     Gross
Additions
     Gross
Reductions
     Realized
Gain
(Loss)
    Change in
Unrealized
Gain
(Loss)
     Interest/
Dividend
Income
     Fair Value at
December 31,
2018
 

DSW Group Holdings LLC

   $ —        $ —        $ —        $ 246   $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(5)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of December 31, 2018, on a fair value basis, non-qualifying assets in the portfolio represented 23.3% of the total assets of the Company.

(6)

Solar Capital Ltd.’s investments in SOAGG, LLC and SOINT, LLC include a two and one dollar investment in common shares, respectively.

(7)

Bishop Lifting Products, Inc., SEI Holding I Corporation, Singer Equities, Inc. & Hampton Rubber Company are co-borrowers.

(8)

Aggregate net unrealized appreciation for U.S. federal income tax purposes is $853; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $21,655 and $20,802, respectively, based on a tax cost of $1,455,227. All of the Company’s investments are pledged as collateral against the borrowings outstanding on the revolving credit facility. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act.

(9)

Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to a LIBOR or PRIME rate floor.

(10)

Level 3 investment valued using significant unobservable inputs.

(11)

NEF Holdings, LLC is held through NEFCORP LLC, a wholly-owned consolidated taxable subsidiary and NEFPASS LLC, a wholly-owned consolidated subsidiary.

(12)

Indicates an investment that is wholly held by Solar Capital Ltd. through NEFPASS LLC.

 

See notes to consolidated financial statements.

 

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SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands)

 

(13)

Hawkeye Contracting Company, LLC, Eagle Creek Mining, LLC & Falcon Ridge Leasing, LLC are co-borrowers.

(14)

Equipment Operating Leases, LLC is a subsidiary of NEF Holdings, LLC.

(15)

OmniGuide Holdings, Inc., Domain Surgical, Inc. and OmniGuide, Inc. are co-borrowers.

(16)

Indicates an investment that is wholly or partially held by the Company through its wholly-owned consolidated financing subsidiary SSLP 2016-1, LLC (the “SSLP SPV”). Such investments are pledged as collateral under the SSLP 2016-1, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(17)

Indicates an investment that is held by the Company through its wholly-owned consolidated financing subsidiary NEFPASS SPV, LLC (the “NEFPASS SPV”). Such investments are pledged as collateral under the NEFPASS SPV, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(18)

On September 14, 2018 and September 18, 2018, the Company acquired 100% of the equity of SSLP II and SSLP, respectively, and as such consolidated these investments as of this date. On December 19, 2018, SSLP and SSLP II were merged into the Company.

*

Non-income producing security.

Represents estimated change in receivable balance.

 

See notes to consolidated financial statements.

 

20


Table of Contents

SOLAR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2018

(in thousands)

 

Industry Classification

   Percentage of Total
Investments (at fair value) as
of December 31, 2018
 

Diversified Financial Services (Crystal Financial LLC)

     21.4

Multi-Sector Holdings (includes NEF Holdings, LLC and Equipment Operating Leases, LLC)

     16.4

Health Care Providers & Services

     11.6

Pharmaceuticals

     10.4

Health Care Equipment & Supplies

     5.6

Road & Rail

     3.2

Chemicals

     2.8

Media

     2.7

Wireless Telecommunication Services

     2.6

Communications Equipment

     2.6

Consumer Finance

     2.2

Specialty Retail

     2.0

Software

     1.9

IT Services

     1.7

Trading Companies & Distributors

     1.7

Diversified Consumer Services

     1.6

Commercial Services & Supplies

     1.5

Thrifts & Mortgage Finance

     1.4

Oil, Gas & Consumable Fuels

     1.3

Aerospace & Defense

     1.3

Airlines

     1.3

Insurance

     1.0

Machinery

     0.7

Energy Equipment & Services

     0.4

Construction & Engineering

     0.4

Hotels, Restaurants & Leisure

     0.2

Paper & Forest Products

     0.1

Research & Consulting Services

     0.0

Health Care Technology

     0.0

Diversified Real Estate Activities

         0.0
  

 

 

 

Total Investments

     100.0
  

 

 

 

 

See notes to consolidated financial statements.

 

21


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

March 31, 2019

(in thousands, except share amounts)

Note 1. Organization

Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007 with initial capital of $1,200,000 of which 47.04% was funded by affiliated parties.

Immediately prior to our initial public offering, through a series of transactions, Solar Capital Ltd. merged with Solar Capital LLC, leaving Solar Capital Ltd. as the surviving entity (the “Merger”). Solar Capital Ltd. issued an aggregate of approximately 26.65 million shares of common stock and $125,000 in senior unsecured notes to the existing Solar Capital LLC unit holders in connection with the Merger. Solar Capital Ltd. had no assets or operations prior to completion of the Merger and as a result, the historical books and records of Solar Capital LLC have become the books and records of the surviving entity. The number of shares used to calculate weighted average shares for use in computations on a per share basis have been decreased retroactively by a factor of approximately 0.4022 for all periods prior to February 9, 2010. This factor represents the effective impact of the reduction in shares resulting from the Merger.

Solar Capital Ltd. (“Solar Capital”, the “Company”, “we”, “us” or “our”), a Maryland corporation formed in November 2007, is a closed-end, externally managed, non-diversified management 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”). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, the Company has elected to be treated, and intend to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

On February 9, 2010, Solar Capital priced its initial public offering, selling 5.68 million shares, including the underwriters’ over-allotment, at a price of $18.50 per share. Concurrent with this offering, the Company’s senior management purchased an additional 600,000 shares through a private placement, also at $18.50 per share.

The Company’s investment objective is to maximize both current income and capital appreciation through debt and equity investments. The Company directly and indirectly invests primarily in leveraged middle market companies in the form of senior secured loans, stretch-senior loans, unitranche loans, leases and to a lesser extent, unsecured loans and equity securities. From time to time, we may also invest in public companies that are thinly traded.

Note 2. Significant Accounting Policies

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of the Company and certain wholly-owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to the current period presentation.

Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported

 

22


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2019.

In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements, have been included.

The significant accounting policies consistently followed by the Company are:

 

  (a)

Investment transactions are accounted for on the trade date;

 

  (b)

Under procedures established by our board of directors (the “Board”), we value investments, including certain senior secured debt, subordinated debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and when market quotations are deemed not to represent fair value, we may utilize independent third-party valuation firms to assist us in determining the fair value of material assets. Accordingly, such investments go through our multi-step valuation process as described below. In each such case, independent valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (the “Investment Adviser”), does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of our Board. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of our Board. Such determination of fair values involves subjective judgments and estimates.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:

 

  (1)

our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Investment Adviser responsible for the portfolio investment;

 

  (2)

preliminary valuation conclusions are then documented and discussed with senior management of the Investment Adviser;

 

  (3)

independent valuation firms engaged by our Board conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for all material assets;

 

  (4)

the audit committee of the Board reviews the preliminary valuation of the Investment Adviser and that of the independent valuation firm and responds to the valuation recommendation of the independent valuation firm, if any, to reflect any comments; and

 

23


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

  (5)

the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm, if any, and the audit committee.

Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the three months ended March 31, 2019, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.

ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.

 

  (c)

Gains or losses on investments are calculated by using the specific identification method.

 

  (d)

The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record call premiums received on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee and other fee income for services rendered, if any, are recorded as other income when earned.

 

24


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SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

  (e)

The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate.

 

  (f)

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

 

  (g)

Distributions to common stockholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.

 

  (h)

In accordance with Regulation S-X and ASC Topic 810—Consolidation, the Company consolidates its interest in controlled investment company subsidiaries, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company.

 

  (i)

The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company’s investments in foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.

 

  (j)

The Company has made irrevocable elections to apply the fair value option of accounting to the senior secured credit facility (the “Credit Facility”), the unsecured senior notes due 2022 (the “2022 Unsecured Notes”), and the SSLP 2016-1, LLC revolving credit facility (the “SSLP Facility”) (see notes 6 and 7), in accordance with ASC 825-10.

 

  (k)

In accordance with ASC 835-30, the Company reports origination and other expenses related to certain debt issuances as a direct deduction from the carrying amount of the debt liability. Applicable expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and/or when it approximates the effective yield method.

 

  (l)

The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.

 

  (m)

The Company records expenses related to shelf registration statements and applicable equity offering costs as prepaid assets. These expenses are typically charged as a reduction of capital upon utilization,

 

25


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SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

  in accordance with ASC 946-20-25. Certain subsequent costs are expensed per the AICPA Audit & Accounting Guide for Investment Companies.

 

  (n)

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more (90 days or more for equipment financing) and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on such investments may be recognized as income or applied to principal depending on management’s judgment.

 

  (o)

The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents.

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact of ASU 2018-13 on its consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which will amend FASB ASC 310-20. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company has adopted ASU 2017-08 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

Note 3. Agreements

Solar Capital has an Advisory Agreement with the Investment Adviser, under which the Investment Adviser will manage the day-to-day operations of, and provide investment advisory services to, Solar Capital. For providing these services, the Investment Adviser receives a fee from Solar Capital, consisting of two components—a base management fee and a performance-based incentive fee. The base management fee is determined by taking the average value of Solar Capital’s gross assets at the end of the two most recently completed calendar quarters calculated at an annual rate of 1.75% on gross assets up to 200% of the Company’s total net assets as of the immediately preceding quarter end and 1.00% on gross assets that exceed 200% of the Company’s total net assets as of the immediately preceding quarter end. For purposes of computing the base management fee, gross assets exclude temporary assets acquired at the end of each fiscal quarter for purposes of preserving investment flexibility in the next fiscal quarter. Temporary assets include, but are not limited to, U.S. treasury bills, other short-term U.S. government or government agency securities, repurchase agreements or cash borrowings.

 

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SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

The performance-based incentive fee has two parts, as follows: one part is calculated and payable quarterly in arrears based on Solar Capital’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus Solar Capital’s operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but excluding the performance-based incentive fee). Pre-incentive fee net investment income does not include any realized capital gains or losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of Solar Capital’s net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7% annualized). Solar Capital pays the Investment Adviser a performance-based incentive fee with respect to Solar Capital’s pre-incentive fee net investment income in each calendar quarter as follows: (1) no performance-based incentive fee in any calendar quarter in which Solar Capital’s pre-incentive fee net investment income does not exceed the hurdle rate; (2) 100% of Solar Capital’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter; and (3) 20% of the amount of Solar Capital’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are appropriately pro-rated for any period of less than three months.

The second part of the performance-based incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), and will equal 20% of Solar Capital’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all net capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement purposes, the second part of the performance-based incentive fee is accrued based upon 20% of cumulative net realized gains and net unrealized capital appreciation. No accrual was required for the three months ended March 31, 2019 and 2018.

For the three months ended March 31, 2019 and 2018, the Company recognized $6,562 and $6,473, respectively, in base management fees and $4,616 and $4,714, respectively, in performance-based incentive fees.

Solar Capital has also entered into an Administration Agreement with Solar Capital Management, LLC (the “Administrator”) under which the Administrator provides administrative services to Solar Capital. For providing these services, facilities and personnel, Solar Capital reimburses the Administrator for Solar Capital’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent. The Administrator will also provide, on Solar Capital’s behalf, managerial assistance to those portfolio companies to which Solar Capital is required to provide such assistance. The Company typically reimburses the Administrator on a quarterly basis.

For the three months ended March 31, 2019 and 2018, the Company recognized expenses under the Administration Agreement of $1,368 and $1,286, respectively. No managerial assistance fees were accrued or collected for the three months ended March 31, 2019 and 2018.

 

27


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

Note 4. Net Asset Value Per Share

At March 31, 2019, the Company’s total net assets and net asset value per share were $926,676 and $21.93, respectively. This compares to total net assets and net asset value per share at December 31, 2018 of $919,171 and $21.75, respectively.

Note 5. Earnings Per Share

The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations, pursuant to ASC 260-10, for the three months ended March 31, 2019 and 2018:

 

     Three months ended March 31,  
             2019                      2018          

Earnings per share (basic & diluted)

     

Numerator - net increase in net assets resulting from operations:

   $ 24,832      $ 20,048  

Denominator - weighted average shares:

     42,260,826        42,260,826  

Earnings per share:

   $ 0.59      $ 0.47  

Note 6. Fair Value

Fair value is defined 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. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuations used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

  a)

Quoted prices for similar assets or liabilities in active markets;

 

  b)

Quoted prices for identical or similar assets or liabilities in non-active markets;

 

  c)

Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

 

  d)

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair

 

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Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).

Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of the appropriate category as of the end of the quarter in which the reclassifications occur.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, as of March 31, 2019 and December 31, 2018:

Fair Value Measurements

As of March 31, 2019

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Senior Secured Loans

   $ —      $ —        $ 851,953      $ 851,953  

Equipment Financing

     —          —          321,523        321,523  

Preferred Equity

     —          —          15,119        15,119  

Common Equity/Equity Interests/Warrants

     634        —          311,495        312,129  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 634    $ —        $ 1,500,090      $ 1,500,724  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Credit Facility, 2022 Unsecured Notes and SSLP Facility

   $ —      $ —      $ 469,785      $ 469,785  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Measurements

As of December 31, 2018

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Senior Secured Loans

   $ —        $ —        $ 818,861      $ 818,861  

Equipment Financing

     —          —          314,226        314,226  

Preferred Equity

     —          —          15,527        15,527  

Common Equity/Equity Interests/Warrants

     540        —          306,926        307,466  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ 540    $ —        $ 1,455,540      $ 1,456,080  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Credit Facility, 2022 Unsecured Notes and SSLP Facility

   $ —        $ —        $ 350,185      $ 350,185  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the three months ended March 31, 2019 and the year ended December 31, 2018 as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at March 31, 2019 and December 31, 2018:

Fair Value Measurements Using Level 3 Inputs

 

     Senior Secured
Loans
    Equipment
Financing
    Preferred Equity     Common Equity/
Equity
Interests/
Warrants
    Total  

Fair value, December 31, 2018

   $ 818,861     $ 314,226     $ 15,527     $ 306,926     $ 1,455,540  

Total gains or losses included in earnings:

          

Net realized gain (loss)

     —         —         —         (538     (538

Net change in unrealized gain (loss)

     11       1,535       281       4,981       6,808  

Purchase of investment securities

     95,022       14,786       —         126       109,934  

Proceeds from dispositions of investment securities.

     (61,941     (9,024     (689     —         (71,654

Transfers in/out of Level 3

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, March 31, 2019

   $ 851,953     $ 321,523     $ 15,119     $ 311,495     $ 1,500,090  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

          

Net change in unrealized gain (loss)

   $ 345     $ 1,535     $ 281     $ 4,482     $ 6,643  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the three months ended March 31, 2019:

 

Credit Facility, 2022 Unsecured Notes and SSLP Facility

   For the three
months ended
March 31,
2019
 

Beginning fair value

   $ 350,185  

Net realized (gain) loss

     —    

Net change in unrealized (gain) loss

     —    

Borrowings

     296,400  

Repayments

     (176,800

Transfers in/out of Level 3

     —    
  

 

 

 

Ending fair value

   $ 469,785  
  

 

 

 

 

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Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

The Company made irrevocable elections to apply the fair value option of accounting to the Credit Facility, the 2022 Unsecured Notes and the SSLP Facility, in accordance with ASC 825-10. On March 31, 2019, there were borrowings of $214,300, $150,000, and $105,485, respectively, on the Credit Facility, the 2022 Unsecured Notes and the SSLP Facility.

Fair Value Measurements Using Level 3 Inputs

 

     Senior Secured
Loans
    Equipment
Financing
    Preferred Equity     Common Equity/
Equity
Interests/
Warrants
    Total  

Fair value, December 31, 2017

   $ 743,331     $ 218,583     $ 12,837     $ 319,481     $ 1,294,232  

Total gains or losses included in earnings:

          

Net realized gain (loss)

     470       17       —         367       854  

Net change in unrealized gain (loss)

     (1,263     5       6,209       (12,756     (7,805

Purchase of investment securities

     413,106       132,879       —         548       546,533  

Proceeds from dispositions of investment securities.

     (563,251     (37,258     (3,519     (714     (604,742

Transfers in/out of Level 3

     226,468       —         —         —         226,468  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, December 31, 2018

   $ 818,861     $ 314,226     $ 15,527     $ 306,926     $ 1,455,540  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period:

          

Net change in unrealized gain (loss)

   $ 657     $ 68     $ 6,209     $ (12,925   $ (5,991
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

During the year ended December 31, 2018, the Company’s investments in SSLP and SSLP II were consolidated, and as such the Level 3 assets held by SSLP and SSLP II are reflected as transfers into Level 3.

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the year ended December 31, 2018:

 

Credit Facility, 2022 Unsecured Notes, SSLP Facility and
SSLP II Facility

   For the year ended
December 31, 2018
 

Beginning fair value

   $ 445,600  

Net realized (gain) loss

     —    

Net change in unrealized (gain) loss

     —    

Borrowings

     529,499  

Repayments

     (685,980

Transfers in/out of Level 3

     61,066  
  

 

 

 

Ending fair value

   $ 350,185  
  

 

 

 

The Company made irrevocable elections to apply the fair value option of accounting to the Credit Facility, the 2022 Unsecured Notes, the SSLP Facility and the SSLP II Facility, in accordance with ASC 825-10. On

 

31


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

December 31, 2018, there were borrowings of $146,400, $150,000, $53,785 and $0, respectively, on the Credit Facility, the 2022 Unsecured Notes, the SSLP Facility and the SSLP II Facility. As a result of the consolidation of SSLP and SSLP II, the SSLP Facility and the SSLP II Facility are shown as transfers into Level 3.

Quantitative Information about Level 3 Fair Value Measurements

The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of our investment within each portfolio company.

Significant unobservable quantitative inputs typically used in the fair value measurement of the Company’s Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (“EBITDA”) multiples of similar companies, and comparable market transactions for equity securities.

Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of March 31, 2019 is summarized in the table below:

 

    Asset or
Liability
  Fair Value at
March 31, 2019
    Principal Valuation
Technique/
Methodology
  Unobservable Input   Range (Weighted
Average)

Senior Secured Loans

  Asset   $ 851,953     Income Approach   Market Yield   6.9% – 14.4% (10.6%)

Equipment Financing

  Asset   $

$

175,023

146,500

 

 

  Income Approach

Market Approach

  Market Yield

Return on Equity

  7.5% – 19.8% (10.1%)

9.1% – 9.1% (9.1%)

Preferred Equity

  Asset   $ 15,119     Income Approach   Market Yield   8.0% – 13.9% (10.3%)

Common Equity/Equity Interests/Warrants

  Asset   $

$

13,495

298,000

 

 

  Market Approach

Market Approach

  EBITDA Multiple

Return on Equity

  6.0x – 7.0x (6.3x)

8.0% – 17.5% (14.4%)

Credit Facility and SSLP Facility

  Liability   $ 319,785     Income Approach   Market Yield   L+1.8% – L+2.3%

(L+2.2%)

2022 Unsecured Notes

  Liability   $ 150,000     Income Approach   Market Yield   3.8% – 6.0% (4.5%)

Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of December 31, 2018 is summarized in the table below:

 

    Asset or
Liability
  Fair Value at
December 31, 2018
    Principal Valuation
Technique/
Methodology
  Unobservable Input   Range (Weighted
Average)

Senior Secured Loans

  Asset   $ 818,861     Income Approach   Market Yield   7.1% – 13.6% (10.7%)

Equipment Financing

  Asset   $

$

169,226

145,000

 

 

  Income Approach

Market Approach

  Market Yield

Return on Equity

  7.2% – 19.8% (10.1%)

9.1% – 9.1% (9.1%)

Preferred Equity

  Asset   $ 15,527     Income Approach   Market Yield   8.0% – 13.0% (10.1%)

Common Equity/Equity Interests/Warrants

  Asset   $

$

13,926

293,000

 

 

  Market Approach

Market Approach

  EBITDA Multiple

Return on Equity

  6.0x – 7.0x (6.3x)

7.9% – 17.5% (17.4%)

Credit Facility and SSLP Facility

  Liability   $ 200,185     Income Approach   Market Yield   L+1.4% – L+4.8%

(L+2.1%)

2022 Unsecured Notes

  Liability   $ 150,000     Income Approach   Market Yield   4.5% – 4.9% (4.5%)

 

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SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, could result in significantly lower or higher fair value measurements for such assets and liabilities. Generally, an increase in market yields or decrease in EBITDA multiples may result in a decrease in the fair value of certain of the Company’s investments.

Note 7. Debt

Our debt obligations consisted of the following as of March 31, 2019 and December 31, 2018:

 

     March 31, 2019     December 31, 2018  

Facility

   Face Amount      Carrying Value     Face Amount      Carrying Value  

Credit Facility

   $ 214,300    $ 214,300   $ 146,400    $ 146,400

SSLP Facility

     105,485      105,485     53,785      53,785

NEFPASS Facility

     30,000      28,978 (1)      30,000      28,933 (1) 

2022 Notes

     150,000        150,000       150,000        150,000  

2022 Tranche C Notes

     21,000        20,884 (2)      21,000        20,877 (2) 

2023 Notes

     75,000        73,624 (3)      75,000        73,543 (3) 
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 595,785      $ 593,271     $ 476,185      $ 473,538  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

Carrying Value equals the Face Amount net of unamortized debt issuance costs of $1,022 and $1,067, respectively, as of March 31, 2019 and December 31, 2018.

(2)

Carrying Value equals the Face Amount net of unamortized debt issuance costs of $116 and $123, respectively, as of March 31, 2019 and December 31, 2018.

(3)

Carrying Value equals the Face Amount net of unamortized debt issuance costs of $1,376 and $1,457, respectively, as of March 31, 2019 and December 31, 2018.

Unsecured Notes

On December 28, 2017, the Company closed a private offering of $21,000 of unsecured tranche c notes due 2022 (the “2022 Tranche C Notes”) with a fixed interest rate of 4.50% and a maturity date of December 28, 2022. Interest on the 2022 Tranche C Notes is due semi-annually on June 28 and December 28. The 2022 Tranche C Notes were issued in a private placement only to qualified institutional buyers.

On November 22, 2017, we issued $75,000 in aggregate principal amount of publicly registered unsecured senior notes due 2023 (the “2023 Unsecured Notes”) for net proceeds of $73,846. Interest on the 2023 Unsecured Notes is paid semi-annually on January 20 and July 20, at a fixed rate of 4.50% per year, commencing on January 20, 2018. The 2023 Unsecured Notes mature on January 20, 2023.

On February 15, 2017, the Company closed a private offering of $100,000 of additional 2022 Unsecured Notes with a fixed interest rate of 4.60% and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers.

On November 8, 2016, the Company closed a private offering of $50,000 of the 2022 Unsecured Notes with a fixed interest rate of 4.40% and a maturity date of May 8, 2022. Interest on the 2022 Unsecured Notes is due semi-annually on May 8 and November 8. The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers.

 

33


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

Revolving and Term Loan Facilities

On September 30, 2016, the Company entered into a second Credit Facility amendment. Post amendment, the Credit Facility was composed of $505,000 of revolving credit and $50,000 of term loans. Borrowings generally bear interest at a rate per annum equal to the base rate plus a range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures in September 2021 and includes ratable amortization in the final year. The Credit Facility may be increased up to $800,000 with additional new lenders or an increase in commitments from current lenders. The Credit Facility contains certain customary affirmative and negative covenants and events of default. In addition, the Credit Facility contains certain financial covenants that among other things, requires the Company to maintain a minimum shareholder’s equity and a minimum asset coverage ratio. The Company also pays issuers of funded term loans quarterly in arrears a commitment fee at the rate of 0.25% per annum on the average daily outstanding balance. On February 23, 2017, the Company prepaid its two non-extending lenders and terminated their commitments, reducing total outstanding revolving credit commitments by $110,000 to $395,000. On April 30, 2018, the revolving credit commitments under the Company’s Credit Facility were expanded by $50,000 from $395,000 to $445,000 and on July 13, 2018, revolving credit commitments were further expanded by $35,000 to $480,000. On November 21, 2018, we entered into Amendment No. 3 to the Credit Facility which, among other things, reduced the asset coverage covenant in the Credit Facility from 200% to 150% and made certain related changes to the borrowing base calculations. At March 31, 2019, outstanding USD equivalent borrowings under the Credit Facility totaled $214,300, composed of $164,300 of revolving credit and $50,000 of term loans.

On June 30, 2016, SSLP as transferor and SSLP 2016-1, LLC, a newly formed wholly-owned subsidiary of SSLP, as borrower entered into the $200,000 SSLP Facility with Wells Fargo Bank, NA acting as administrative agent. Solar Capital Ltd. acts as servicer under the SSLP Facility. On December 19, 2018, the SSLP Facility was amended and Solar Capital Ltd. now serves as transferor in addition to its role as servicer. The SSLP Facility is scheduled to mature on June 30, 2021. The SSLP Facility generally bears interest at a rate of LIBOR plus 2.50%. The Company and SSLP 2016-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SSLP Facility also includes usual and customary events of default for credit facilities of this nature. There were $105,485 of borrowings outstanding as of March 31, 2019.

On September 26, 2018, NEFPASS SPV LLC, a newly formed wholly-owned subsidiary of NEFPASS LLC, as borrower entered into a $50,000 senior secured revolving credit facility (the “NEFPASS Facility”) with Keybank acting as administrative agent. The Company acts as servicer under the NEFPASS Facility. The NEFPASS Facility is scheduled to mature on September 26, 2023. The NEFPASS Facility generally bears interest at a rate of LIBOR plus 2.15%. NEFPASS and NEFPASS SPV LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The NEFPASS Facility also includes usual and customary events of default for credit facilities of this nature. There were $30,000 of borrowings outstanding as of March 31, 2019.

Certain covenants on our issued debt may restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code.

The Company has made irrevocable elections to apply the fair value option of accounting to the Credit Facility, the 2022 Unsecured Notes and the SSLP Facility, in accordance with ASC 825-10. We believe

 

34


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

accounting for these facilities at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility. ASC 825-10 requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statement of Assets and Liabilities and changes in fair value of the above facilities are reported in the Consolidated Statement of Operations.

The average annualized interest cost for all borrowings for the three months ended March 31, 2019 and the year ended December 31, 2018 was 4.72% and 4.33%, respectively. These costs are exclusive of other credit facility expenses such as unused fees, agency fees and other prepaid expenses related to establishing and/or amending the Credit Facility, the 2022 Unsecured Notes, the 2022 Tranche C Notes, the NEFPASS Facility, the SSLP Facility and the 2023 Unsecured Notes (collectively the “Credit Facilities”), if any. The maximum amounts borrowed on the Credit Facilities during the three months ended March 31, 2019 and the year ended December 31, 2018 were $595,785 and $592,600, respectively.

Note 8. Financial Highlights and Senior Securities Table

The following is a schedule of financial highlights for the three months ended March 31, 2019 and 2018:

 

     Three months ended
March 31, 2019
    Three months ended
March 31, 2018
 

Per Share Data: (a)

    

Net asset value, beginning of year

   $ 21.75     $ 21.81  
  

 

 

   

 

 

 

Net investment income

     0.44       0.45  

Net realized and unrealized gain

     0.15       0.02  
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     0.59       0.47  

Distributions to stockholders:

    

From net investment income

     (0.41     (0.41
  

 

 

   

 

 

 

Net asset value, end of period

   $ 21.93     $ 21.87  
  

 

 

   

 

 

 

Per share market value, end of period

   $ 20.84     $ 20.31  

Total Return (b)

     10.73     2.52

Net assets, end of period

   $ 926,676     $ 924,326  

Shares outstanding, end of period

     42,260,826       42,260,826  

Ratios to average net assets (c):

    

Net investment income

     2.01     2.05
  

 

 

   

 

 

 

Operating expenses

     1.47     1.54

Interest and other credit facility expenses

     0.79     0.64
  

 

 

   

 

 

 

Total expenses

     2.26     2.18
  

 

 

   

 

 

 

Average debt outstanding

   $ 546,376     $ 556,286  

Portfolio turnover ratio

     4.9     9.6

 

(a)

Calculated using the average shares outstanding method.

(b)

Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend reinvestment plan. The market price per share as of December 31, 2018 and December 31, 2017 was $19.19 and $20.21, respectively. Total return does not include a sales load.

(c)

Not annualized for periods less than one year.

 

35


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)

March 31, 2019

(in thousands, except share amounts)

 

 

Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. Our stockholders approved being subject to a 150% asset coverage ratio effective October 12, 2018.

Information about our senior securities is shown in the following table as of each year ended December 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.

 

Class and Year

   Total Amount
Outstanding(1)
     Asset
Coverage
Per Unit(2)
     Involuntary
Liquidating
Preference
Per Unit(3)
     Average
Market Value
Per Unit(4)
 

Revolving Credit Facility

           

Fiscal 2019 (through March 31, 2019)

   $ 164,300      $ 705        —          N/A  

Fiscal 2018

     96,400        593        —          N/A  

Fiscal 2017

     245,600        1,225        —          N/A  

Fiscal 2016

     115,200        990        —          N/A  

Fiscal 2015

     207,900        1,459        —          N/A  

Fiscal 2014

     —          —          —          N/A  

Fiscal 2013

     —          —          —          N/A  

Fiscal 2012

     264,452        1,510        —          N/A  

Fiscal 2011

     201,355        3,757        —          N/A  

Fiscal 2010

     400,000        2,668        —          N/A  

Fiscal 2009

     88,114        8,920        —          N/A  

2022 Unsecured Notes

           

Fiscal 2019 (through March 31, 2019)

     150,000        643        —          N/A  

Fiscal 2018

     150,000        923        —          N/A  

Fiscal 2017

     150,000        748        —          N/A  

Fiscal 2016

     50,000        430        —          N/A  

2022 Tranche C Notes

           

Fiscal 2019 (through March 31, 2019)

     21,000        90        —          N/A  

Fiscal 2018

     21,000        129        —          N/A  

Fiscal 2017

     21,000        105        —          N/A  

2023 Unsecured Notes

           

Fiscal 2019 (through March 31, 2019)

     75,000        322        —          N/A  

Fiscal 2018

     75,000        461        —          N/A  

Fiscal 2017

     75,000        374        —          N/A  

2042 Unsecured Notes

           

Fiscal 2017

     —          —          —          N/A  

Fiscal 2016

     100,000        859        —        $ 1,002  

Fiscal 2015

     100,000        702        —          982  

Fiscal 2014

     100,000        2,294        —          943  

Fiscal 2013

     100,000        2,411        —          934  

Fiscal 2012

     100,000        571        —          923  

 

36


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

March 31, 2019

(in thousands, except share amounts)

 

Class and Year

   Total Amount
Outstanding(1)
     Asset
Coverage
Per Unit(2)
     Involuntary
Liquidating
Preference
Per Unit(3)
     Average
Market Value
Per Unit(4)
 

Senior Secured Notes

           

Fiscal 2017

   $ —        $ —          —        $ N/A  

Fiscal 2016

     75,000        645        —          N/A  

Fiscal 2015

     75,000        527        —          N/A  

Fiscal 2014

     75,000        1,721        —          N/A  

Fiscal 2013

     75,000        1,808        —          N/A  

Fiscal 2012

     75,000        428        —          N/A  

Term Loans

           

Fiscal 2019 (through March 31, 2019)

     50,000        214        —          N/A  

Fiscal 2018

     50,000        308        —          N/A  

Fiscal 2017

     50,000        250        —          N/A  

Fiscal 2016

     50,000        430        —          N/A  

Fiscal 2015

     50,000        351        —          N/A  

Fiscal 2014

     50,000        1,147        —          N/A  

Fiscal 2013

     50,000        1,206        —          N/A  

Fiscal 2012

     50,000        285        —          N/A  

Fiscal 2011

     35,000        653        —          N/A  

Fiscal 2010

     35,000        233        —          N/A  

NEFPASS Facility

           

Fiscal 2019 (through March 31, 2019)

   $ 30,000        129        —        N/A  

Fiscal 2018

     30,000        185        —        N/A  

SSLP Facility

           

Fiscal 2019 (through March 31, 2019)

     105,485        452        —        N/A  

Fiscal 2018

     53,785        331        —        N/A  

Total Senior Securities

                                   

Fiscal 2019 (through March 31, 2019)

   $ 595,785      $ 2,555        —          N/A  

Fiscal 2018

     476,185        2,930        —          N/A  

Fiscal 2017

     541,600        2,702        —          N/A  

Fiscal 2016

     390,200        3,354        —          N/A  

Fiscal 2015

     432,900        3,039        —          N/A  

Fiscal 2014

     225,000        5,162        —          N/A  

Fiscal 2013

     225,000        5,425        —          N/A  

Fiscal 2012

     489,452        2,794        —          N/A  

Fiscal 2011

     236,355        4,410        —          N/A  

Fiscal 2010

     435,000        2,901        —          N/A  

Fiscal 2009

     88,114        8,920        —          N/A  

 

(1)

Total amount of each class of senior securities outstanding at the end of the period presented.

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by all senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit is allocated based on the amount outstanding in each class of debt at the end of the period. As of March 31, 2019, asset coverage was 255.5%.

(3)

The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.

 

37


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

March 31, 2019

(in thousands, except share amounts)

 

(4)

Not applicable except for the 2042 Unsecured Notes which were publicly traded. The Average Market Value Per Unit is calculated by taking the daily average closing price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit. The average market value for the fiscal 2016, 2015, 2014, 2013 and 2012 periods was $100,175, $98,196, $94,301, $93,392, and $92,302, respectively.

Note 9. Crystal Financial LLC

On December 28, 2012, we completed the acquisition of Crystal Capital Financial Holdings LLC (“Crystal Financial”), a commercial finance company focused on providing asset-based and other secured financing solutions (the “Crystal Acquisition”). We invested $275,000 in cash to effect the Crystal Acquisition. Crystal Financial owned approximately 98% of the outstanding ownership interest in Crystal Financial LLC. The remaining financial interest was held by various employees of Crystal Financial LLC, through their investment in Crystal Management LP. Crystal Financial LLC had a diversified portfolio of 23 loans having a total par value of approximately $400,000 at November 30, 2012 and a $275,000 committed revolving credit facility. On July 28, 2016, the Company purchased Crystal Management LP’s approximately 2% equity interest in Crystal Financial LLC for approximately $5,737. Upon the closing of this transaction, the Company holds 100% of the equity interest in Crystal Financial LLC. On September 30, 2016, Crystal Capital Financial Holdings LLC was dissolved. On December 20, 2018, the revolving credit facility was expanded to $330,000.

As of March 31, 2019 Crystal Financial LLC had 31 funded commitments to 26 different issuers with a total par value of approximately $460,149 on total assets of $508,498. As of December 31, 2018 Crystal Financial LLC had 31 funded commitments to 26 different issuers with a total par value of approximately $418,680 on total assets of $486,420. As of March 31, 2019 and December 31, 2018, the largest loan outstanding totaled $37,500 and $37,500, respectively. For the same periods, the average exposure per issuer was $17,698 and $16,103, respectively. Crystal Financial LLC’s credit facility, which is non-recourse to Solar Capital, had approximately $234,661 and $205,990 of borrowings outstanding at March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and 2018, Crystal Financial LLC had net income of $5,448 and $4,480, respectively, on gross income of $12,146 and $9,388, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.

 

38


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

March 31, 2019

(in thousands, except share amounts)

 

Note 10. Commitments and Contingencies

The Company had unfunded debt and equity commitments to various revolving and delayed draw loans as well as to Crystal Financial LLC. The total amount of these unfunded commitments as of March 31, 2019 and December 31, 2018 is $161,307 and $169,667, respectively, comprised of the following:

 

     March 31,
2019
     December 31,
2018
 

Crystal Financial LLC*

   $ 44,263      $ 44,263  

Rubius Therapeutics, Inc.**

     26,861        26,861  

Tetraphase Pharmaceuticals, Inc.**

     13,800        13,800  

Phynet Dermatology LLC

     11,432        12,385  

GenMark Diagnostics, Inc.**

     10,612        3,010  

BioElectron Technology Corporation**

     10,500        17,500  

BAM Capital, LLC

     10,300        15,000  

Cardiva Medical, Inc.**

     9,000        9,000  

Cerapedics, Inc.**

     5,372        —    

PQ Bypass, Inc.**

     4,800        4,800  

Kingsbridge Holdings, LLC

     4,139        4,139  

Breathe Technologies, Inc.**

     4,000        4,000  

Solara Medical Supplies, Inc

     3,458        1,184  

Atria Wealth Solutions, Inc

     1,473        1,473  

iCIMS, Inc

     792        792  

RS Energy Group U.S., Inc

     505        1,685  

Corindus Vascular Robotics, Inc.**

     —          6,217  

Delphinus Medical Technologies, Inc.**

     —          1,875  

Datto, Inc

     —          1,683  
  

 

 

    

 

 

 

Total Commitments

   $ 161,307      $ 169,667  
  

 

 

    

 

 

 

 

*

The Company controls the funding of the Crystal Financial LLC commitment and may cancel it at its discretion.

**

Commitments are subject to the portfolio company achieving certain milestones. As of March 31, 2019, these milestones have not yet been achieved, and as such the portfolio company would not have been able to draw on any of the stated commitment at that time.

As of March 31, 2019 and December 31, 2018, the Company had sufficient cash available and/or liquid securities available to fund its commitments.

Note 11. NEF Holdings, LLC

On July 31, 2017, we completed the acquisition of NEF Holdings, LLC (“NEF”), which conducts its business through its wholly-owned subsidiary Nations Equipment Finance, LLC. NEF is an independent equipment finance company that provides senior secured loans and leases primarily to U.S. based companies. We invested $209,866 in cash to effect the transaction, of which $145,000 was invested in the equity of NEF through our wholly-owned consolidated taxable subsidiary NEFCORP LLC and our wholly-owned consolidated subsidiary NEFPASS LLC and $64,866 was used to purchase certain leases and loans held by NEF through NEFPASS LLC. Concurrent with the transaction, NEF refinanced its existing senior secured credit facility into a $150,000 non-recourse facility with an accordion feature to expand up to $250,000. The maturity date of the

 

39


Table of Contents

SOLAR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)—(Continued)

March 31, 2019

(in thousands, except share amounts)

 

facility is July 31, 2021. At July 31, 2017, NEF also had two securitizations outstanding, with an issued note balance of $94,587, which were later redeemed in 2018.

As of March 31, 2019, NEF had 208 funded equipment-backed leases and loans to 82 different customers with a total net investment in leases and loans of approximately $247,736 on total assets of $300,585. As of December 31, 2018, NEF had 207 funded equipment-backed leases and loans to 82 different customers with a total net investment in leases and loans of approximately $237,221 on total assets of $293,185. As of March 31, 2019 and December 31, 2018, the largest position outstanding totaled $28,032 and $28,474, respectively. For the same periods, the average exposure per customer was $3,021 and $2,893, respectively. NEF’s credit facility, which is non-recourse to Solar Capital, had approximately $129,795 and $119,316 of borrowings outstanding at March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and March 31, 2018, NEF had net income of $440 and $1,853, respectively, on gross income of $7,148 and $7,381, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.

Note 12. Capital Share Transactions

As of March 31, 2019 and March 31, 2018, 200,000,000 shares of $0.01 par value capital stock were authorized.

Transactions in capital stock were as follows:

 

    Shares     Amount  
    Three months ended
March 31, 2019
    Three months ended
March 31, 2018
    Three months ended
March 31, 2019
    Three months ended
March 31, 2018
 

Shares issued in reinvestment of distributions

    —         —       $ —       $ —    

Note 13. Subsequent Events

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.

On May 6, 2019, our Board declared a quarterly distribution of $0.41 per share payable on July 2, 2019 to holders of record as of June 20, 2019.

 

40


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Solar Capital Ltd.:

Results of Review of Interim Financial Information

We have reviewed the consolidated statement of assets and liabilities of Solar Capital Ltd. (and consolidated subsidiaries) (the Company), including the consolidated schedule of investments, as of March 31, 2019, the related consolidated statements of operations for the three-month periods ended March 31, 2019 and 2018, the related consolidated statements of changes in net assets for the three-month periods ended March 31, 2019 and 2018, the related consolidated statements of cash flows for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the Company as of December 31, 2018, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated February 21, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

New York, New York

May 6, 2019

 

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Item 2.

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

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

Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of investments that we expect to make;

 

   

our contractual arrangements and relationships with third parties;

 

   

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

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital; and

 

   

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

We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in “Risk Factors” and elsewhere in this report.

We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007 with initial capital of $1.2 billion of which 47.04% was funded by affiliated parties.

Solar Capital Ltd. (“Solar Capital”, the “Company”, “we” or “our”), a Maryland corporation formed in November 2007, is a closed-end, externally managed, non-diversified management 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”). Furthermore, as the Company is an investment company, it continues to apply the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, the Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

On February 9, 2010, we priced our initial public offering, selling 5.68 million shares of our common stock. Concurrent with our initial public offering, Michael S. Gross, our Chairman and Chief Executive Officer, and

 

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Bruce Spohler, our Chief Operating Officer, collectively purchased an additional 0.6 million shares of our common stock through a private placement transaction exempt from registration under the Securities Act (the “Concurrent Private Placement”).

We invest primarily in privately held U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in leveraged middle-market companies in the form of senior secured loans, stretch-senior loans, unitranche loans, leases and to a lesser extent, unsecured loans and equity securities. From time to time, we may also invest in public companies that are thinly traded. Our business is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our investments generally range between $5 million and $100 million each, although we expect that this investment size will vary proportionately with the size of our capital base and/or with strategic initiatives. Our investment activities are managed by Solar Capital Partners, LLC (the “Investment Adviser”) and supervised by our board of directors, a majority of whom are non-interested, as such term is defined in the 1940 Act. Solar Capital Management, LLC (the “Administrator”) provides the administrative services necessary for us to operate.

In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of the United States.

As of March 31, 2019, the Investment Adviser has directly invested approximately $8.3 billion in more than 370 different portfolio companies since 2006. Over the same period, the Investment Adviser completed transactions with approximately 200 different financial sponsors.

Recent Developments

On May 6, 2019, our Board declared a quarterly distribution of $0.41 per share payable on July 2, 2019 to holders of record as of June 20, 2019.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” The definition of “eligible portfolio company” includes certain public companies that do not have any securities listed on a national securities exchange and companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

Revenue

We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmark London interbank offered rate (“LIBOR”), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable monthly or quarterly but may be bi-monthly or semi-annually. In addition, our investments may provide payment-in-kind (“PIK”) interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the

 

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investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.

Expenses

All investment professionals of the investment adviser and their respective staffs, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by Solar Capital Partners. We bear all other costs and expenses of our operations and transactions, including (without limitation):

 

   

the cost of our organization and public offerings;

 

   

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

 

   

the cost of effecting sales and repurchases of our shares and other securities;

 

   

interest payable on debt, if any, to finance our investments;

 

   

fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and advisory fees;

 

   

transfer agent and custodial fees;

 

   

fees and expenses associated with marketing efforts;

 

   

federal and state registration fees, any stock exchange listing fees;

 

   

federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

brokerage commissions;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

all other expenses incurred by either Solar Capital Management or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by Solar Capital Management in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and their respective staffs.

We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.

 

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Portfolio and Investment Activity

During the three months ended March 31, 2019, we invested approximately $108.1 million across 19 portfolio companies. This compares to investing approximately $151.1 million in 25 portfolio companies for the three months ended March 31, 2018. Investments sold, prepaid or repaid during the three months ended March 31, 2019 totaled approximately $73.5 million versus approximately $141.5 million for the three months ended March 31, 2018.

At March 31, 2019, our portfolio consisted of 120 portfolio companies and was invested 29.2% in cash flow senior secured loans, 29.8% in asset-based senior secured loans / Crystal, 21.4% in equipment senior secured financings / NEF, and 19.6% in life science senior secured loans, in each case, measured at fair value, versus 100 portfolio companies invested 40.1% in cash flow senior secured loans, 27.2% in asset-based senior secured loans / Crystal, 16.4% in equipment senior secure financings / NEF, and 16.3% in life science senior secured loans, in each case, measured at fair value, at March 31, 2018.

At March 31, 2019, 75.7% or $1.12 billion of our income producing investment portfolio* is floating rate and 24.3% or $361.7 million is fixed rate, measured at fair value. At March 31, 2018, 80.7% or $1.17 billion of our income producing investment portfolio* is floating rate and 19.3% or $280.7 million is fixed rate, measured at fair value. As of March 31, 2019 and 2018, we had zero issuers on non-accrual status.

Since inception through March 31, 2019, Solar Capital and its predecessor companies have invested approximately $6.0 billion in more than 265 portfolio companies. Over the same period, Solar Capital has completed transactions with more than 150 different financial sponsors.

 

*

We have included Crystal Financial LLC and NEF Holdings LLC within our income producing investment portfolio.

Crystal Financial LLC

On December 28, 2012, we completed the acquisition of Crystal Capital Financial Holdings LLC (“Crystal Financial”), a commercial finance company focused on providing asset-based and other secured financing solutions (the “Crystal Acquisition”). We invested $275 million in cash to effect the Crystal Acquisition. Crystal Financial owned approximately 98% of the outstanding ownership interest in Crystal Financial LLC. The remaining financial interest was held by various employees of Crystal Financial LLC, through their investment in Crystal Management LP. Crystal Financial LLC had a diversified portfolio of 23 loans having a total par value of approximately $400 million at November 30, 2012 and a $275 million committed revolving credit facility. On July 28, 2016, the Company purchased Crystal Management LP’s approximately 2% equity interest in Crystal Financial LLC for approximately $5.7 million. Upon the closing of this transaction, the Company holds 100% of the equity interest in Crystal Financial LLC. On September 30, 2016, Crystal Capital Financial Holdings LLC was dissolved. On December 20, 2018, the revolving credit facility was expanded to $330 million.

As of March 31, 2019, Crystal Financial LLC had 31 funded commitments to 26 different issuers with a total par value of approximately $460.1 million on total assets of $508.5 million. As of December 31, 2018, Crystal Financial LLC had 31 funded commitments to 26 different issuers with a total par value of approximately $418.7 million on total assets of $486.4 million. As of March 31, 2019 and December 31, 2018, the largest loan outstanding totaled $37.5 million and $37.5 million, respectively. For the same periods, the average exposure per issuer was $17.7 million and $16.1 million, respectively. Crystal Financial LLC’s credit facility, which is non-recourse to Solar Capital, had approximately $234.7 million and $206.0 million of borrowings outstanding at March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and 2018, Crystal Financial LLC had net income of $5.4 million and $4.5 million, respectively, on gross income of $12.1 million and $9.4 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in Crystal

 

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Financial LLC’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that Crystal Financial LLC will be able to maintain consistent dividend payments to us.

NEF Holdings, LLC

On July 31, 2017, we completed the acquisition of NEF Holdings, LLC (“NEF”), which conducts its business through its wholly-owned subsidiary Nations Equipment Finance, LLC. NEF is an independent equipment finance company that provides senior secured loans and leases primarily to U.S. based companies. We invested $209.9 million in cash to effect the transaction, of which $145.0 million was invested in the equity of NEF through our wholly-owned consolidated taxable subsidiary NEFCORP LLC and our wholly-owned consolidated subsidiary NEFPASS LLC and $64.9 million was used to purchase certain leases and loans held by NEF through NEFPASS LLC. Concurrent with the transaction, NEF refinanced its existing senior secured credit facility into a $150.0 million non-recourse facility with an accordion feature to expand up to $250.0 million. The maturity date of the facility is July 31, 2021. At July 31, 2017, NEF also had two securitizations outstanding, with an issued note balance of $94.6 million, which were later redeemed in 2018.

As of March 31, 2019, NEF had 208 funded equipment-backed leases and loans to 82 different customers with a total net investment in leases and loans of approximately $247.7 million on total assets of $300.6 million. As of December 31, 2018, NEF had 207 funded equipment-backed leases and loans to 82 different customers with a total net investment in leases and loans of approximately $237.2 million on total assets of $293.2 million. As of March 31, 2019 and December 31, 2018, the largest position outstanding totaled $28.0 million and $28.5 million, respectively. For the same periods, the average exposure per customer was $3.0 million and $2.9 million, respectively. NEF’s credit facility, which is non-recourse to Solar Capital, had approximately $129.8 million and $119.3 million of borrowings outstanding at March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and 2018, NEF had net income of $0.4 million and $1.9 million, respectively, on gross income of $7.1 million and $7.4 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NEF’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NEF will be able to maintain consistent dividend payments to us.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.

Valuation of Portfolio Investments

We conduct the valuation of our assets, pursuant to which our net asset value is determined, at all times consistent with GAAP, and the 1940 Act. Our valuation procedures are set forth in more detail below:

Under procedures established by our board of directors (the “Board”), we value investments, including certain senior secured debt, subordinated debt and other debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more

 

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representative. If and when market quotations are deemed not to represent fair value, we may utilize independent third-party valuation firms to assist us in determining the fair value of material assets. Accordingly, such investments go through our multi-step valuation process as described below. In each case, independent valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of our Board. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the direction of our Board. Such determination of fair values involves subjective judgments and estimates.

With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:

 

  (1)

our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Investment Adviser responsible for the portfolio investment;

 

  (2)

preliminary valuation conclusions are then documented and discussed with senior management of the Investment Adviser;

 

  (3)

independent valuation firms engaged by our Board conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for all material assets;

 

  (4)

the audit committee of the Board reviews the preliminary valuation of the Investment Adviser and that of the independent valuation firm, if any, and responds to the valuation recommendation of the independent valuation firm to reflect any comments; and

 

  (5)

the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm, if any, and the audit committee.

Investments in all asset classes are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the three months ended March 31, 2019, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.

 

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Accounting Standards Codification (“ASC”) Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.

Valuation of Credit Facility, 2022 Unsecured Notes and SSLP Facility

The Company has made irrevocable elections to apply the fair value option of accounting to the Credit Facility, the 2022 Unsecured Notes and effectively, through the merger, the SSLP Facility, in accordance with ASC 825-10. We believe accounting for the Credit Facility, 2022 Unsecured Notes and the SSLP Facility at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility.

Revenue Recognition

The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Investments that are expected to pay regularly scheduled interest and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividend cash payments are past due 30 days or more (90 days or more for equipment financing) and/or when it is no longer probable that principal or interest/dividend cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining interest or dividend obligations. Interest or dividend cash payments received on investments may be recognized as income or applied to principal depending upon management’s judgment. Some of our investments may have contractual PIK interest or dividends. PIK interest and dividends computed at the contractual rate are accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, the Company capitalizes the accrued interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes due at the maturity of the investment or upon the investment being called by the issuer. At the point the Company believes PIK is not expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends is reversed from the related receivable through interest or dividend income, respectively. The Company does not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if the Company again believes that PIK is expected to be realized. Loan origination fees, original issue

 

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discount, and market discounts are capitalized and amortized into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and other investments as interest income when we receive such amounts. Capital structuring fees are recorded as other income when earned.