10-Q 1 d576741d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2013

OR

 

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

For the transition period from                      to                     

Commission file number 814-00789

 

 

THL CREDIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   27-0344947

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

100 Federal St., 31st Floor, Boston, MA   02110
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: 800-454-4424

 

 

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, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

 

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

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

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at August 6, 2013 was 33,905,202.

 

 

 


Table of Contents

THL CREDIT, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2013

Table of Contents

 

   

INDEX

   PAGE
NO.
 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Consolidated Statements of Assets and Liabilities as of June 30, 2013 (unaudited) and December 31, 2012      2   
  Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012 (unaudited)      3   
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2013 and 2012 (unaudited)      4   
  Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)      5   
  Consolidated Schedules of Investments as of June 30, 2013 (unaudited) and December 31, 2012      6   
  Notes to Consolidated Financial Statements (unaudited)      19   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      60   

Item 4.

  Controls and Procedures      60   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      61   

Item 1A.

  Risk Factors      61   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      64   

Item 3.

  Defaults Upon Senior Securities      64   

Item 4.

  Mine Safety Disclosures      64   

Item 5.

  Other Information      64   

Item 6.

  Exhibits      64   

SIGNATURES 

       65   


Table of Contents

PART 1. FINANCIAL INFORMATION

In this Quarterly Report, “Company”, “we”, “us” and “our” refer to THL Credit, Inc. and its wholly owned subsidiaries unless the context states otherwise.

 

Item 1. Financial Statements

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Assets and Liabilities

(in thousands, except per share data)

 

     June  30,
2013

(unaudited)
    December 31,
2012
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $503,479 and $391,699, respectively)

   $ 507,137      $ 394,339   

Non-controlled, affiliated investments (cost of $10 and $10, respectively)

     10        10   
  

 

 

   

 

 

 

Total investments at fair value (cost of $503,489 and $391,709, respectively)

     507,147        394,349   

Cash

     34,377        4,819   

Deferred financing costs

     4,543        3,817   

Interest receivable

     7,905        2,594   

Due from affiliate

     543        420   

Receivable for paydown of investment

     392        125   

Prepaid expenses and other assets

     134        134   
  

 

 

   

 

 

 

Total assets

   $ 555,041      $ 406,258   
  

 

 

   

 

 

 

Liabilities:

    

Loans payable

   $ 70,000      $ 50,000   

Payable for investments purchased

     14,850        —    

Accrued incentive fees

     5,193        3,279   

Base management fees payable

     1,673        1,514   

Income taxes payable

     1,548        —    

Accrued expenses

     773        739   

Deferred tax liability

     386        454   

Due to affiliate

     180        —    

Interest rate derivative

     66        1,053   

Accrued credit facility fees and interest

     57        115   

Accrued administrator expenses

     20        304   

Dividends payable

     —         1,316   
  

 

 

   

 

 

 

Total liabilities

     94,746        58,774   

Commitments and contingencies (Note 8)

    

Net Assets:

    

Preferred stock, par value $.001 per share, 100,000 preferred shares authorized, no preferred shares issued and outstanding

     —         —    

Common stock, par value $.001 per share, 100,000 common shares authorized, 33,905 and 26,315 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively.

     34        26   

Paid-in capital in excess of par

     449,928        343,723   

Net unrealized appreciation on investments, net of provision for taxes of $386 and $454, respectively

     3,272        2,187   

Net unrealized depreciation on interest rate derivative

     (66     (1,053

Interest rate derivative periodic interest payments, net

     (388     (180

Accumulated undistributed net realized gains, net of provision for taxes of $1,097 and $0, respectively

     2,034        348   

Accumulated undistributed net investment income

     5,481        2,433   
  

 

 

   

 

 

 

Total net assets

     460,295        347,484   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 555,041      $ 406,258   
  

 

 

   

 

 

 

Net asset value per share

   $ 13.58      $ 13.20   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

2


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

(in thousands, except per share data)

 

     Three months ended June 30,     Six months ended June 30,  
     2013     2012     2013     2012  

Investment Income:

        

From non-controlled, non-affiliated investments:

        

Interest income

   $ 16,888      $ 11,003      $ 30,779      $ 21,153   

Dividend income

     4,527        —         4,527        —    

Other income

     510        62        545        131   

From non-controlled, affiliated investment:

        

Other income

     747        694        1,244        1,224   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     22,672        11,759        37,095        22,508   

Expenses:

        

Incentive fees

     3,728        1,635        6,040        3,062   

Base management fees

     1,673        1,107        3,196        2,147   

Credit facility interest and fees

     1,401        760        2,495        1,213   

Administrator expenses

     761        677        1,650        1,501   

Other general and administrative expenses

     497        337        847        619   

Professional fees

     415        357        641        562   

Amortization of deferred financing costs

     269        237        765        449   

Directors’ fees

     159        135        286        269   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     8,903        5,245        15,920        9,822   

Income tax provision

     496        —         496        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     13,273        6,514        20,679        12,686   

Realized and Unrealized Gain on Investments:

        

Net realized gain on non-controlled, non-affiliated investments

     2,782        —         2,782        —    

Income tax provision, realized gain

     (1,097     —         (1,097     —    

Net change in unrealized appreciation on investments:

        

Non-controlled, non-affiliated investments

     (681     27        1,018        (438

Non-controlled, affiliated investments

     —         —         —         (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation on investments

     (681     27        1,018        (439
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefit for taxes on unrealized appreciation on investments

     596        —         67        —    

Interest rate derivative periodic interest payments, net

     (104     —         (208     —    

Unrealized appreciation (depreciation) on interest rate derivative

     846        (574     988        (574
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 15,615      $ 5,967      $ 24,229      $ 11,673   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share:

        

Basic and diluted

   $ 0.49      $ 0.32      $ 0.78      $ 0.63   

Net increase in net assets resulting from operations per common share:

        

Basic and diluted

   $ 0.58      $ 0.30      $ 0.91      $ 0.58   

Weighted average shares of common stock outstanding:

        

Basic and diluted

     26,899        20,220        26,609        20,220   

See accompanying notes to these consolidated financial statements.

 

3


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Changes in Net Assets (unaudited)

(in thousands, except per share data)

 

     For the six months ended June 30,  
     2013     2012  

Increase in net assets from operations:

    

Net investment income

   $ 20,679      $ 12,686   

Interest rate derivative periodic interest payments, net

     (208     —    

Realized gain on investments

     2,782        —    

Income tax provision, realized gain

     (1,097  

Net change in unrealized appreciation on investments

     1,018        (439

Benefit for taxes on unrealized appreciation on investments

     67        —    

Net change in unrealized depreciation on interest rate derivative

     988        (574
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     24,229        11,673   

Distributions to stockholders

     (17,631     (12,941

Capital share transactions:

    

Issuance of common stock

     110,966        —    

Less offering costs

     (4,753     —    
  

 

 

   

 

 

 

Net increase in net assets from capital share transactions

     106,213        —     
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     112,811        (1,268

Net assets at beginning of period

     347,484        267,617   
  

 

 

   

 

 

 

Net assets at end of period

   $ 460,295      $ 266,349   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     33,905        20,220   
  

 

 

   

 

 

 

Capital share activity:

    

Shares sold

     7,590        —    

Shares issued from reinvestment of dividends

     —         2   
  

 

 

   

 

 

 
     7,590        2   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

4


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(in thousands)

 

     For the six months ended June 30,  
     2013     2012  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 24,229      $ 11,673   

Adjustments to reconcile net increase in net assets resulting from operations to net cash used for operating activities:

    

Increase in payable for investments purchased

     14,850        —    

Net change in unrealized appreciation on investments

     (1,018     439   

Unrealized (appreciation) depreciation on interest rate derivative

     (988     574  

Purchases of investments

     (200,059     (101,811

Proceeds from sale and paydown of investments

     91,893        41,025   

Increase in investments due to PIK

     (1,874     (1,816

Amortization of deferred financing costs

     765        449   

Accretion of discounts on investments and other fees

     (2,007     (1,182

Increase in interest receivable

     (5,311     (1,939

Increase in due from affiliate

     (123     (173

Increase in prepaid expenses and other assets

     —         (50

(Decrease) increase in accrued expenses

     (63     29   

(Decrease) increase in accrued credit facility fees and interest

     (58     473   

Increase in income taxes payable

     1,548        —    

Decrease in deferred tax liability

     (67     —    

Increase in base management fees payable

     159        94   

Decrease in accrued administrator expenses

     (284     (339

Increase (decrease) in incentive fees payable

     1,915        (21

Decrease in dividends payable

     (1,316     —    

Increase (decrease) in due to affiliate

     180        (21
  

 

 

   

 

 

 

Net cash used for operating activities

     (77,629     (52,596

Cash flows from financing activities:

    

Borrowings under credit facility

     228,700        117,800   

Repayments under credit facility

     (208,700     (52,600

Issuance of shares of common stock

     110,966        —    

Offering costs paid

     (4,657     (90

Distributions paid to stockholders

     (17,631     (12,941

Increase in deferred financing costs

     (1,491     (2,924
  

 

 

   

 

 

 

Net cash provided by financing activities

     107,187        49,245   
  

 

 

   

 

 

 

Net increase (decrease) in cash

     29,558        (3,351

Cash, beginning of period

     4,819        5,573   
  

 

 

   

 

 

 

Cash, end of period

   $ 34,377      $ 2,222   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash interest paid

   $ 1,609      $ 366   

See accompanying notes to these consolidated financial statements.

 

5


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited)

June 30, 2013

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(3)
No. of Shares /
No. of Units
    Cost     Fair Value  

Non-controlled/non-affiliated investments—110.18% of net asset value

             

20-20 Technologies Inc.

             

Senior Secured
Term Loan
(4)

  Business services  

13.3%(5)

    9/12/12        9/12/17      $ 13,825      $ 13,521      $ 13,652   
           

 

 

   

 

 

 
              13,521        13,652   

Adirondack Park CLO Ltd.

             

Subordinated Notes,
Residual Interest
(4)(18)

  Financial services   13.7%(19)     3/27/13        4/15/24      $ 10,000        9,318        9,318   
           

 

 

   

 

 

 
              9,318        9,318   

AIM Media Texas Operating, LLC

             

Second Lien Loan

  Media  

16.0%(6) (13.0%

Cash and 3.0%

PIK)

    6/21/12        6/21/17      $ 6,395        6,258        6,395   

Member interest(7)(8)

        6/21/12        —          0.763636        764        1,000   
           

 

 

   

 

 

 
              7,022        7,395   

Airborne Tactical Advantage
Company, LLC

             

Senior Secured Note

  Aerospace &   11.0%     9/7/11        3/7/16      $ 4,000        3,873        3,920   

Class A Warrants(9)

  defense       9/7/11        —          512        113        120   
           

 

 

   

 

 

 
              3,986        4,040   

Blue Coat Systems, Inc.

             

Second Lien Term Loan

  Business services  

9.5% (LIBOR

+ 8.5%)

    6/27/13        6/27/20      $ 15,000        14,850        14,850   
           

 

 

   

 

 

 
              14,850        14,850   

C&K Market, Inc.

             

Senior Subordinated Note

  Retail & grocery  

18.0%

    11/3/10        11/3/15      $ 13,650        13,302        12,831   

Warrant for Class B

        11/3/10       —          157        349        —     
           

 

 

   

 

 

 
              13,651        12,831   

Connecture, Inc.

             

Second Lien Term Loan

  Business services  

12.5% (LIBOR

+ 11.0%)

    3/18/13        7/15/18      $ 7,000        6,866        6,866   
           

 

 

   

 

 

 
              6,866        6,866   

Country Pure Foods, LLC

             

Subordinated Term Loan

  Food & beverage   13.0%     8/13/10        2/13/17      $ 16,181        16,181        16,019   
           

 

 

   

 

 

 
              16,181        16,019   

CRS Reprocessing, LLC

             

Senior Secured Term Loan

  Manufacturing  

10.5% (LIBOR

+ 9.5%)

    6/16/11        6/16/15      $ 18,302        18,217        18,302   
           

 

 

   

 

 

 
              18,217        18,302   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

6


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

June 30, 2013

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(3)
No. of Shares /
No. of Units
    Cost     Fair Value  

Cydcor LLC

             

Senior Secured Term Loan

  Business services  

9.8% (LIBOR

+7.3%)

    6/17/13        6/12/17      $ 14,013        14,013        14,013   
           

 

 

   

 

 

 
              14,013        14,013   

Dr. Fresh, LLC

             

Subordinated Term Loan

  Consumer products  

14.0%(6)

(12.0% Cash

and 2.0% PIK)

    5/15/12        11/15/17      $ 14,301        14,055        14,229   
           

 

 

   

 

 

 
              14,055        14,229   

Duff & Phelps Corporation

             

Tax Receivable Agreement
Payment Rights
(11)

  Financial services   17.0%(12)     6/1/12        12/31/29        —         12,262        13,828   

Senior Secured Term Loan(11)

   

4.5% (LIBOR

+ 3.5%)

    5/15/13        4/23/20      $ 250        254        254   
           

 

 

   

 

 

 
              12,516        14,082   

Embarcadero Technologies, Inc.

             

First Lien Term Loan

  Business services  

10.2%(5)

    2/15/13        12/28/17      $ 10,075        9,933        9,949   
           

 

 

   

 

 

 
              9,933        9,949   

Expert Global Solutions, Inc.

             

Second Lien Term Loan

  Business services  

12.50% (LIBOR

+ 10.25% and

0.75% PIK)

    6/21/13        10/3/18      $ 18,727        19,007        19,007   
           

 

 

   

 

 

 
              19,007        19,007   

Express Courier International, Inc.

             

Secured Subordinated Term Loan

  Business services   15.0%(13) (PIK)     1/17/12        7/17/16      $ 7,766        7,652        6,368   
           

 

 

   

 

 

 
              7,652        6,368   

Firebirds International, LLC

             

Common stock(9)

  Restaurants       5/17/11        —          2        191        260   
           

 

 

   

 

 

 
              191        260   

Food Processing Holdings, LLC

             

Senior Subordinated Note (16)

  Food & beverage  

15.0%(6)

(12.0% Cash

and 3.0% PIK)

    2/28/12        8/28/17      $ 14,058        13,947        13,847   

Class A Units(9)

        4/20/10       —          162.44        163        198   

Class B Units(9)

        4/20/10       —          406.09        408        150   
           

 

 

   

 

 

 
              14,518        14,195   

Freeport Financial SBIC Fund LP

             

Member interest(18)

  Financial services       6/14/13        —          —          147        147   
           

 

 

   

 

 

 
              147        147   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

7


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

June 30, 2013

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)    Industry    Interest Rate(2)    Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No. of Shares /
No. of Units
     Cost     Fair Value  

Gold, Inc.

                   

Subordinated Term Loan

   Consumer products   

15.0%(6)

(13.0% Cash

and 2.0% PIK)

     12/31/12         12/31/17       $ 16,555         16,247        16,555   
                 

 

 

   

 

 

 
                    16,247        16,555   

Gryphon Partners 3.5, L.P.

                   

Partnership interest(18)

   Financial services    —        11/20/12         12/21/18       $ 1,195         311        836   
                 

 

 

   

 

 

 
                    311        836   

Harrison Gypsum, LLC

                   

Senior Secured Term Loan

   Industrials   

10.5%(6)

(LIBOR +

8.5% and 0.5%

PIK)

     12/21/12         12/21/17       $ 24,876         24,535        24,628   
                 

 

 

   

 

 

 
                    24,535        24,628   

Hart InterCivic, Inc.

                   

Senior Secured Term Loan

   Election services   

10.5% (LIBOR

+ 9.0%)

     7/1/11         7/1/16       $ 8,775         8,658        8,643   

Senior Secured Revolving Loan(10)(15)

     

10.5% (LIBOR

+ 9.0%)

     7/1/11         7/1/16         —           (36     —    
                 

 

 

   

 

 

 
                    8,622        8,643   

HEALTHCAREfirst, Inc.

                   

Senior Secured Term Loan

   Business services   

11.5%(5)

     8/31/12         8/30/17       $ 9,550         9,300        9,216   
                 

 

 

   

 

 

 
                    9,300        9,216   

Holland Intermediate Acquisition Corp.

                   

Senior Secured Term Loan

   Energy / Utilities   

10.0%

(LIBOR +

9.0%)

     5/29/13         5/29/18       $ 29,227         28,602        28,602   
                 

 

 

   

 

 

 
                    28,602        28,602   

IMDS Corporation

                   

Subordinated Term Loan

   Healthcare, device manufacturing   

15.5%(6)

(12.5% Cash

and 3.0% PIK)

     5/2/12         11/2/17       $ 13,467         13,190        12,726   
                 

 

 

   

 

 

 
                    13,190        12,726   

Ingenio Acquisition, LLC

                   

Senior Secured Term Loan

   Media   

12.75%(6)

(11.25% Cash

and 1.5% PIK)

     5/10/13         5/10/18       $ 9,667         9,477        9,477   
                 

 

 

   

 

 

 
                    9,477        9,477   

Jefferson Management Holdings, LLC

                   

Member interest(7)(8)

   Healthcare, dental services         4/20/10         —           1,393         1,393        1,043   
                 

 

 

   

 

 

 
                    1,393        1,043   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

8


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

June 30, 2013

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(3)
No. of Shares /
No. of Units
    Cost     Fair Value  

LCP Capital Fund LLC

             

Member interest(8)(17)(18)

  Financial services   12.5%(20)     4/20/10        2/15/15      $ 8,354        8,354        8,354   
           

 

 

   

 

 

 
              8,354        8,354   

Loadmaster Derrick & Equipment, Inc.

             

Senior Secured Term Loan

 

Energy /

Utilities

 

9.25% (LIBOR

+ 8.25%)

    9/28/12        9/28/17      $ 9,709        9,482        9,515   
           

 

 

   

 

 

 
              9,482        9,515   

Martex Fiber Southern Corp.

             

Subordinated Term Loan

  Textiles  

13.5%(6)

(12.0% Cash

and 1.5% PIK)

    4/30/12        10/31/19      $ 8,822        8,704        8,469   
           

 

 

   

 

 

 
              8,704        8,469   

Octagon Income Note XIV, Ltd.

             

Income Notes, Residual Interest(4)(18)

  Financial Services   15.5%(19)     12/19/12        1/15/24      $ 10,000        9,442        9,442   
           

 

 

   

 

 

 
              9,442        9,442   

OEM Group, Inc.

             

Senior Secured Note

  Manufacturing  

15.0%(6)

(12.5% Cash

and 2.5%

PIK)

    10/7/10        10/7/15      $ 14,970        14,737        14,072   

Warrant for Common

              —         —    
           

 

 

   

 

 

 
              14,737        14,072   

Pinnacle Operating Corporation

             

Senior Secured Term Loan

  Chemicals  

11.5%

(LIBOR +

10.3%)

    11/26/12        5/15/19      $ 10,000        9,546        10,050   
           

 

 

   

 

 

 
              9,546        10,050   

SeaStar Solutions (f.k.a. Marine
Acquisition Corp)

             

Senior Subordinated Note

  Manufacturing  

13.5%(6)

(11.5% Cash

and 2.0%

PIK)

    9/18/12        5/18/17      $ 16,500        16,176        16,418   
           

 

 

   

 

 

 
              16,176        16,418   

Sheplers, Inc.

             

Senior Secured (2nd lien) Term Loan(7)

 

Retail &

grocery

 

13.2%

(LIBOR +

11.7%)

    12/20/11        12/20/16      $ 11,426        11,206        11,198   

Mezzanine Loan(7)

   

17.0%(21)

(10.0% Cash

and 7.0%

PIK)

    12/20/11        12/20/17      $ 1,839        1,812        1,812   
           

 

 

   

 

 

 
              13,018        13,010   

Sheridan Square CLO, Ltd

             

Income Notes, Residual Interest(4)(18)

  Financial Services   13.2%(19)     3/12/13        4/15/25      $ 6,723        6,596        6,596   
           

 

 

   

 

 

 
              6,596        6,596   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

9


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

June 30, 2013

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)    Industry    Interest Rate(2)    Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(3)
No. of Shares /
No. of Units
     Cost      Fair Value  

Surgery Center Holdings, Inc.

                    

Second Lien Term Loan

  

Healthcare,

ambulatory surgery centers

  

9.75%

(LIBOR +

8.5%)

     4/19/13         4/11/20       $ 15,000         14,633         15,000   

Member interest(8)(9)

           4/20/10            470         470         1,900   
                 

 

 

    

 

 

 
                    15,103         16,900   

The Studer Group, L.L.C.

                    

Senior Subordinated Note

   Healthcare, consulting   

14.0%(6)

(12.0% Cash

and 2.0%

PIK)

     9/29/11         3/29/17       $ 12,581         12,396         12,581   
                 

 

 

    

 

 

 
                    12,396         12,581   

Trinity Services Group, Inc.

                    

Senior Subordinated Note

   Food & beverage   

13.5%(6)

(12.0% Cash

and 1.5%

PIK)

     3/29/12         9/29/17       $ 14,250         14,076         13,965   
                 

 

 

    

 

 

 
                    14,076         13,965   

Tri Starr Management Services, Inc.

                    

Senior Subordinated Note

   Business services   

15.0%(6)

(12.5% Cash

and 2.5%

PIK)

     3/4/13         3/4/19       $ 18,068         17,722         17,722   
                 

 

 

    

 

 

 
                    17,722         17,722   

Vision Solutions, Inc.

                    

Second Lien Term Loan

   Business services   

9.5% (LIBOR

+ 8.0%)

     3/31/11         7/23/17       $ 11,625         11,554         11,625   
                 

 

 

    

 

 

 
                    11,554         11,625   

Washington Inventory Service

                    

Senior Secured Term Loan

   Business services   

10.3% (LIBOR

+ 9.0%)

     12/27/12         6/20/19       $ 11,000         10,848         11,165   
                 

 

 

    

 

 

 
                    10,848         11,165   

Wingspan Portfolio Holdings, Inc.

                    

Subordinated Term Loan

   Financial Services   

13.5% (6)

(12.0% Cash

and 1.5%

PIK)

     5/21/13         11/21/16       $ 18,768         18,404         18,404   
                 

 

 

    

 

 

 
                    18,404         18,404   

YP Equity Investors, LLC

                    

Member interest(7)(8)

   Media, advertising         5/18/12         —              —           1,600   
                 

 

 

    

 

 

 
                    —           1,600   
                 

 

 

    

 

 

 

Non-controlled/non-affiliated investments—110.18% of net asset value

                  $ 503,479       $ 507,137   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

10


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

June 30, 2013

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)    Industry    Interest Rate(2)    Initial
Acquisition
Date
     Maturity/
Dissolution
Date
     Principal(2)
No. of Shares /
No. of Units
     Cost      Fair Value  

Non-controlled/affiliated investments—0.00% of net asset value

                    

THL Credit Greenway Fund LLC

                    

Member interest(8)(18)

   Financial services         1/27/11         1/14/21         —           7         7   
                 

 

 

    

 

 

 
                    7         7   

THL Credit Greenway Fund II LLC

                    

Member interest(8)(18)

   Financial services         3/1/13            —           3         3   
                 

 

 

    

 

 

 
                    3         3   
                 

 

 

    

 

 

 

Total investments—110.18% of net asset value

                  $ 503,489       $ 507,147   

 

Derivative Instruments  
Counterparty    Instrument    Interest Rate    Expiration
Date
     # of Contracts    Notional      Cost      Fair Value  

ING Capital Markets, LLC

  

Interest Rate Swap –

Pay Fixed/Receive

Floating

   1.1425%/LIBOR      5/10/17       1    $ 50,000       $ —         $ (66
                 

 

 

    

 

 

 

Total derivative instruments—0.00% of net asset value

            $ —         $ (66

 

(1) All debt investments are income-producing. Equity and member interests are non-income-producing unless otherwise noted.
(2) Variable interest rate investments bear interest in reference to LIBOR or ABR, which are effective as of June 30, 2013. These variable rates reset monthly or quarterly, subject to interest rate floors.
(3) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(4) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(5) Unitranche investment; interest rate reflected represents the effective yield earned on the investment for the most recent quarter.
(6) At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the company.
(7) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(8) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(9) Equity ownership may be held in shares or units of companies related to the portfolio company.
(10) Issuer pays 0.50% unfunded commitment fee on revolving loan facility.
(11) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(12) Income-producing security with no stated coupon; yield from initial investment through June 30, 2013 was approximately 17.0%.
(13) Loan was on non-accrual status as of June 30, 2013. Issuer’s contractual rate is 15.0% PIK until July 31, 2013 and then 13.0% cash thereafter.
(14) Issuer pays 0.25% unfunded commitment fee on revolving loan facility.
(15) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(16) Interest held in companies related to the portfolio company.
(17) The Company’s investment in LCP Capital Fund LLC is in the form of membership interests and its contributed capital is for the most recent quarter maintained in a collateral account held by a custodian and acts as collateral for certain credit default swaps for the Series 2005-1 equity interest. See Note 2 in the Notes to the Consolidated Financial Statements.

 

11


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments (unaudited) – (Continued)

June 30, 2013

(dollar amounts in thousands)

 

(18) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(19) Income producing security with no stated coupon; cash interest yield for the three months ended June 30, 2013 was in the range of 13.2% and 15.5%.
(20) Income producing security with no stated coupon; cash interest yield from initial investment through June 30, 2013 was approximately 12.5%
(21) Issuer has the option to increase its aggregate interest rate to 18.5% all PIK for a period of time under certain conditions in the credit agreement.

See accompanying notes to these consolidated financial statements.

 

12


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments

December 31, 2012

(dollar amounts in thousands)

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(3)
No. of Shares /
No. of Units
    Cost     Fair Value  

Non-controlled/non-affiliated investments—113.49% of net asset value

             

20-20 Technologies Inc.

             

Senior Secured Term Loan(4)

  Business services  

13.2%(5)

(LIBOR

+ 11.00%)

    9/12/12        9/12/17      $ 14,000      $ 13,666      $ 13,666   
           

 

 

   

 

 

 
              13,666        13,666   

AIM Media Texas Operating, LLC

             

Second Lien Loan

  Media   16.0%(6)     6/21/12        6/21/17      $ 9,9757        9,743        9,775   

Member interest(7)(8)

        6/21/12        —          0.763636        764        764   
           

 

 

   

 

 

 
              10,507        10,539   

Airborne Tactical Advantage
Company, LLC

             

Senior Secured Note

 

Aerospace &

defense

  11.0%     9/7/11        3/7/16      $ 4,000        3,854        3,900   

Class A Warrants(9)

        9/7/11        —          512        113        120   

Senior Secured Delayed Draw
Term Loans
(10)

    11.0%     9/7/11        3/7/13        —          —         —    
           

 

 

   

 

 

 
              3,967        4,020   

C&K Market, Inc.

             

Senior Subordinated Note

  Retail & grocery  

16.0%

(14.0% Cash

and 2.0%

PIK)

    11/3/10        11/3/15      $ 13,582        13,176        13,480   

Warrant for Class B

        11/3/10       —          156,552        349        350   
           

 

 

   

 

 

 
              13,525        13,830   

Country Pure Foods, LLC

             

Subordinated Term Loan

  Food & beverage  

15.0%

(12.5% Cash

and 2.5%

PIK)

    8/13/10        2/13/16      $ 16,079        15,871        15,758   
           

 

 

   

 

 

 
              15,871        15,758   

CRS Reprocessing, LLC

             

Senior Secured Term Loan

  Manufacturing  

10.3%

(LIBOR +

9.3%)

    6/16/11        6/16/15      $ 8,438        8,327        8,375   
           

 

 

   

 

 

 
              8,327        8,375   

Cydcor LLC

             

Senior Secured Term Loan

  Business services  

12.3%

(LIBOR +

9.8%)

    9/18/12        9/17/16      $ 14,649        14,270        14,270   
           

 

 

   

 

 

 
              14,270        14,270   

Dr. Fresh, LLC

             

Subordinated Term Loan

  Consumer products  

14.0%(6)

(12.0% Cash

and 2.0%

PIK)

    5/15/12        11/15/17      $ 14,158        13,893        13,946   
           

 

 

   

 

 

 
              13,893        13,946   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

13


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(2)
No. of Shares /
No. of Units
    Cost     Fair Value  

Duff & Phelps Corporation

             

Tax Receivable Agreement
Payment Rights
(11)

  Financial services   16.4%(12)     6/1/12        12/31/29        —         12,262        12,262   
           

 

 

   

 

 

 
              12,262        12,262   

Express Courier International, Inc.

             

Secured Subordinated Term Loan

  Business services  

15.0%

(PIK)  (13)

    1/17/12        7/17/16      $ 7,479        7,358        6,357   
           

 

 

   

 

 

 
              7,358        6,357   

Firebirds International, LLC

             

Senior Secured Term Loan

  Restaurants  

10.5%

(LIBOR +

9.0%)

    5/17/11        5/17/16      $ 8,200        8,080        8,200   

Senior Secured Revolving
Loan
(14) (15)

   

10.5%

(LIBOR +

9.0%)

    5/17/11        5/17/16        —         (67     —    

Common stock(9)

        5/17/11        —          1,906        191        215   
           

 

 

   

 

 

 
              8,204        8,415   

Food Processing Holdings, LLC

             

Senior Subordinated Note(6)(16)

  Food & beverage  

15.0%

(12.0% Cash

and 3.0%

PIK)

    2/28/12        8/28/17      $ 13,847        13,727        13,397   

Class A Units(9)

        4/20/10       —          162.44        163        181   

Class B Units(9)

        4/20/10       —          406.09        408        150   
           

 

 

   

 

 

 
              14,298        13,728   

Gold, Inc.

             

Subordinated Term Loan

  Consumer products  

15.0%(6)

(13.0% Cash

and 2.0%

PIK)

    12/31/12        12/31/17      $ 36,800        36,064        36,064   
           

 

 

   

 

 

 
              36,064        36,064   

Gryphon Partners 3.5, L.P.

             

Partnership interest

  Financial services       11/20/12        12/21/18        —         1,195        1,895   
           

 

 

   

 

 

 
              1,195        1,895   

Harrison Gypsum, LLC

             

Senior Secured Term Loan

  Industrials  

10.5%(6)(LIBOR

+ 8.5% and

0.5% PIK)

    12/21/12        12/21/17      $ 25,380        25,001        25,001   
           

 

 

   

 

 

 
              25,001        25,001   

Hart InterCivic, Inc.

             

Senior Secured Term Loan

  Election services  

10.5%

(LIBOR +

9.0%)

    7/1/11        7/1/16      $ 9,594        9,450        9,499   

Senior Secured Revolving
Loan
(10)(15)

   

10.5%

(LIBOR +

9.0%)

    7/1/11        7/1/16        —         (42     —    
           

 

 

   

 

 

 
              9,408        9,499   

HEALTHCAREfirst, Inc.

             

Senior Secured Term Loan

  Business services  

11.5%(5)

(LIBOR  +

10.0%)

    8/31/12        8/30/17      $ 9,875        9,594        9,594   
           

 

 

   

 

 

 
              9,594        9,594   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

14


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(2)
No. of Shares /
No. of Units
    Cost     Fair Value  

IMDS Corporation

             

Subordinated Term Loan

  Healthcare, device manufacturing  

15.5%(6)) (12.5%

Cash and 3.0%

PIK)

    5/2/12        11/2/17      $ 13,266        12,967        12,404   
           

 

 

   

 

 

 
              12,967        12,404   

Jefferson Management
Holdings, LLC

             

Member interest(7)(8)

  Healthcare, dental services   N/A     4/20/10        —         1,393        1,393        1,388   
           

 

 

   

 

 

 
              1,393        1,388   

LCP Capital Fund LLC

             

Member interest(8)(17)(18)

  Financial services   16.2%(19)     4/20/10        2/15/15      $ 8,354        8,354        8,354   
           

 

 

   

 

 

 
              8,354        8,354   

Loadmaster Derrick & Equipment, Inc.

             

Senior Secured Term Loan

  Energy / Utilities  

9.3% (LIBOR +

8.3%)

    9/28/12        9/28/17      $ 9,709        9,462        9,462   

Senior Secured Revolving
Loan
(10)

   

9.3% (LIBOR +

8.3%)

    9/28/12        9/28/17      $ 290        290        290   

Senior Secured Delayed Draw Term Loans

   

9.3% (LIBOR +

8.3%)

    9/28/12        9/28/17        —         —         —    
           

 

 

   

 

 

 
              9,752        9,752   

Marine Acquisition Corp. (Teleflex Marine)

             

Senior Subordinated Note

  Manufacturing   13.5%(6)     9/18/12        5/18/17      $ 16,500        16,146        16,170   
           

 

 

   

 

 

 
              16,146        16,170   

Martex Fiber Southern Corp.

             

Subordinated Term Loan

  Textiles  

13.5%(6) (12.0%

Cash and 1.5%

PIK)

    4/30/12        10/31/19      $ 8,756        8,632        8,580   
           

 

 

   

 

 

 
              8,632        8,580   

Octagon Income Note XIV, Ltd.

             

Income Notes, Residual
Interest
(4)

  Financial Services   15.5%(20)     12/19/12        1/15/24     $ 10,000        9,400        9,400   
           

 

 

   

 

 

 
              9,400        9,400   

OEM Group, Inc.

             

Senior Secured Note

  Manufacturing  

15.0%(6) (12.5%

Cash and 2.5%

PIK)

    10/7/10        10/7/15      $ 14,784        14,510        13,601   

Warrant for Common

              —         —    
           

 

 

   

 

 

 
              14,510        13,601   

Pinnacle Operating Corporation

             

Senior Secured Term Loan

  Chemicals  

11.5% (LIBOR +

10.3%)

    11/26/12        5/15/19      $ 10,000        9,508        9,508   
           

 

 

   

 

 

 
              9,508        9,508   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

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THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)   Industry   Interest Rate(2)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(2)
No. of Shares /
No. of Units
    Cost     Fair Value  

Sheplers, Inc.

             

Senior Secured (2nd lien) Term
Loan
(7)

 

Retail &

grocery

 

13.2% (LIBOR

+ 11.65%)

    12/20/11        12/20/16      $ 11,426        11,182        11,369   

Mezzanine Loan(7)

   

17.0%(21)(10.0%

Cash and 7.0%

PIK)

    12/20/11        12/20/17      $ 1,776        1,747        1,768   
           

 

 

   

 

 

 
              12,929        13,137   

Surgery Center Holdings, Inc.

             

Senior Subordinated Note

  Healthcare,   15.0%     4/20/10        8/4/17      $ 18,773        18,405        18,960   

Member interest(8)(9)

  ambulatory surgery centers           470        470        1,850   
           

 

 

   

 

 

 
              18,875        20,810   

The Studer Group, L.L.C.

             

Senior Subordinated Note

  Healthcare, consulting  

14.0% (12.0%

Cash and 2.0%

PIK)

    9/29/11        3/29/17      $ 12,454        12,251        12,361   
           

 

 

   

 

 

 
              12,251        12,361   

Trinity Services Group, Inc.

             

Senior Subordinated Note

  Food & beverage  

13.5%(6)

(12.0% Cash

and 1.5%

PIK)

    3/29/12        9/29/17      $ 14,143        13,954        14,073   
           

 

 

   

 

 

 
              13,954        14,073   

Vision Solutions, Inc.

             

Second Lien Term Loan

  Business services  

9.5% (LIBOR

+ 8.0%)

    3/31/11        7/23/17      $ 11,625        11,547        11,625   
           

 

 

   

 

 

 
              11,547        11,625   

Washington Inventory Service

             

Senior Secured Term Loan

  Business services  

10.3% (LIBOR

+ 9.0%)

    12/27/12        6/20/19      $ 11,000        10,835        10,835   
           

 

 

   

 

 

 
              10,835        10,835   

YP Equity Investors, LLC.

             

Senior Secured Term Loan

  Media, advertising  

15.0% (12.0%

Cash and 3.0%

PIK)

    5/8/12        5/8/17      $ 3,322        3,236        3,322   

Warrant for Member interest(7)(8)

              0        1,800   
           

 

 

   

 

 

 
              3,236        5,122   
           

 

 

   

 

 

 

Non-controlled/non-affiliated investments—113.49% of net asset value

            $ 391,699      $ 394,339   

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

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THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments – (Continued)

December 31, 2012

(dollar amounts in thousands)

 

 

Portfolio company/Type of Investment(1)   Industry     Interest
Rate (2)
  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(2)
No. of Shares /
No. of Units
    Cost     Fair Value  

Non-controlled/affiliated investment—0.00% of net asset value

             

THL Credit Greenway Fund LLC

             

Member interest(8)(18)

    Financial services          1/27/11        1/14/21        —          10        10   
           

 

 

   

 

 

 
              10        10   
           

 

 

   

 

 

 

Total investments—113.49% of net asset value

            $ 391,709      $ 394,349   
           

 

 

   

 

 

 

 

Derivative Instruments  
Counterparty   Instrument   Interest Rate  

Expiration

Date

    # of Contracts   Notional     Cost     Fair Value  

ING Capital Markets, LLC

  Interest Rate Swap – Pay Fixed/Receive Floating   1.1425%/LIBOR     5/10/17      1   $ 50,000      $ —       $ (1,053
           

 

 

   

 

 

 

Total derivative instruments—(0.30)% of net asset value

        $ —       $ (1,053
           

 

 

   

 

 

 

 

(1) All debt investments are income-producing. Equity and member interests are non-income-producing unless otherwise noted.
(2) Variable interest rate investments bear interest in reference to LIBOR or ABR, which reset monthly or quarterly, subject to interest rate floors. Unless otherwise noted, for each debt investment we have provided the interest rate in effect as of December 31, 2012.
(3) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(4) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(5) Unitranche investment; yield reflected represents the effective yield earned on the investment.
(6) At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the company.
(7) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(8) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(9) Equity ownership may be held in shares or units of companies related to the portfolio company.
(10) Issuer pays 0.5% unfunded commitment fee on facility.
(11) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(12) Income-producing security with no stated coupon; yield from initial investment through December 31, 2012 was approximately 16.4%.
(13) Issuer will pay 15% PIK until April 1, 2013, 13.0% cash interest thereafter.
(14) Issuer pays 0.25% unfunded commitment fee on revolving loan quarterly.
(15) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(16) Interest held in companies related to the portfolio company.
(17) The Company’s investment in LCP Capital Fund LLC is in the form of membership interests and its contributed capital is maintained in a collateral account held by a custodian and acts as collateral for certain credit default swaps for the Series 2005-1 equity interest. See Note 2 in the Notes to the Consolidated Financial Statements.
(18) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.

 

(Continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

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THL Credit, Inc. and Subsidiaries

Consolidated Schedule of Investments

December 31, 2012

(dollar amounts in thousands)

 

(19) Income producing security with no stated coupon; cash yield for the three months ended December 31, 2012 was approximately 16.2%.
(20) Income producing security with no stated coupon; cash yield for the three months ended December 31, 2012 was approximately 15.5%.
(21) Issuer has the option to increase its aggregate interest rate to 18.5% all PIK for a period of time under certain conditions in the credit agreement.

See accompanying notes to these consolidated financial statements.

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2013

(in thousands, except per share data)

1. Organization

THL Credit, Inc., or the Company, was organized as a Delaware corporation on May 26, 2009. The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or 1940 Act. The Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, or the Code, as amended. In 2009, the Company was treated for tax purposes as a corporation. The Company’s investment objective is to generate both current income and capital appreciation, primarily through privately negotiated investments in debt and equity securities of middle-market companies.

The Company was initially funded on July 23, 2009, issuing 7 shares of common stock at an aggregate purchase price of $101 to THL Credit Opportunities, L.P., an affiliate of THL Credit Advisors LLC, or the Advisor. While the Company incurred certain costs in connection with an anticipated initial public offering, which ultimately would have been borne by the Advisor had the offering not closed; the Company did not formally commence principal operations until the completion of the offering on April 21, 2010, as described below.

On April 20, 2010, in anticipation of completing an initial public offering and formally commencing principal operations, the Company entered into a purchase and sale agreement with THL Credit Opportunities, L.P. and THL Credit Partners BDC Holdings, L.P., or BDC Holdings, an affiliate of the Company, to effectuate the sale by THL Credit Opportunities, L.P. to the Company of certain securities valued at $62,107, as determined by the Company’s board of directors, and on the same day issued 4,140 shares of common stock to BDC Holdings valued at $15.00 per share, pursuant to such agreement, in exchange for the aforementioned securities. Subsequently, the Company filed an election to be regulated as a BDC.

On April 21, 2010, the Company completed its initial public offering, formally commencing principal operations, and sold 9,000 shares of its common stock through a group of underwriters at a price of $13.00 per share, less an underwriting discount and commissions totaling $0.8125 per share. Concurrently, the Company sold 6,308 shares of its common stock to BDC Holdings at $13.00 per share, the sale of which was not subject to an underwriting discount and commission. On April 27, 2010, the Company closed the sale of the aforementioned 15,308 shares and received $190,684 of net proceeds, which includes an underwriting discount and offering expenses.

On May 26, 2010, the underwriters exercised their over-allotment option under the underwriting agreement and elected to purchase an additional 337 shares of common stock at $13.00 per share resulting in additional net proceeds of $3,892, which includes an underwriting discount and offering expenses.

On September 25, 2012, the Company closed a public equity offering selling 6,095 shares of its common stock through a group of underwriters at a price of $14.09 per share, less an underwriting discount and offering expenses, and received $81,657 in net proceeds.

On June 24, 2013, the Company closed a public equity offering selling 7,590 shares of its common stock through a group of underwriters at a price of $14.62 per share, less an underwriting discount and offering expenses, and received $106,205 in net proceeds.

The Company has established wholly owned subsidiaries, THL Credit AIM Media Holdings Inc., THL Credit Holdings, Inc. and THL Credit YP Holdings Inc, which are structured as Delaware entities, or tax blockers, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). Tax blockers are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

The Company has a wholly owned subsidiary, THL Corporate Finance, Inc., which serves as the administrative agent on certain investment transactions.

THL Credit SBIC, LP, or SBIC LP, and its general partner, THL Credit SBIC GP, LLC, or SBIC GP, were organized in Delaware on August 25, 2011 as a limited partnership and limited liability company, respectively. On January 16, 2013, the Company withdrew its application with the Investment Division of the U.S. Small Business Administration, or SBA, to license a small business investment company, or SBIC. Both the SBIC LP and SBIC GP remain consolidated wholly owned subsidiaries of the Company.

 

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Table of Contents

2. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended, and the Securities and Exchange Act of 1934, as amended, the Company generally will not consolidate its interest in any company other than in investment company subsidiaries and controlled operating companies substantially all of whose business consists of providing services to the Company.

The accompanying consolidated financial statements of the Company have been presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal accruals, considered necessary for the fair statement of financial statements for the interim period included herein. The current period’s results of operations are not necessarily indicative of the operating results to be expected for the period ended December 31, 2013. The financial results of our portfolio companies are not consolidated in the financial statements. The accounting records of the Company are maintained in U.S. dollars.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Changes in the economic environment, financial markets, credit worthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ and these differences could be material.

Cash

Cash consists of funds held in demand deposit accounts at several financial institutions and, at certain times, balances may exceed the Federal Deposit Insurance Corporation insured limit and is therefore subject to credit risk. There were no cash equivalents as of June 30, 2013 and December 31, 2012.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and are capitalized at the time of payment. Deferred financing costs are amortized using the straight line method over the term of the credit facilities.

Deferred Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These costs are capitalized when incurred and recognized as a reduction of offering proceeds when the offering becomes effective.

Interest Rate Derivative

The Company recognizes derivatives as either interest rate derivative assets or liabilities at fair value on its Consolidated Statements of Assets and Liabilities with valuation changes and interest rate payments recorded as net change in unrealized appreciation (depreciation) on interest rate derivative and interest rate derivative periodic interest payments, net, respectively, on the Consolidated Statements of Operations. See also the disclosure in Note 7, Interest Rate Derivative.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of the Company’s long-term obligations are disclosed in Note 6, Credit Facility.

Valuation of Investments

Investments, for which market quotations are readily available, are valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers or market makers. Debt and equity securities, for which market quotations are not readily available, are valued at fair value as determined in good faith by the Company’s board of directors. Because we expect that there will not be a readily available market value for many of the investments in the Company’s portfolio, it is expected that many of the Company’s portfolio investments’ values will be determined in good faith by the Company’s board of directors in accordance with a documented valuation policy that has been reviewed and approved by our board of directors. Due to the inherent uncertainty of

 

20


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determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

With respect to investments for which market quotations are not readily available, the Company’s board of directors undertakes a multi-step valuation process each quarter, as described below:

 

   

the Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

 

   

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

 

   

to the extent determined by the audit committee of the Company’s board of directors, independent valuation firms engaged by the Company conduct independent appraisals and review the Advisor’s preliminary valuations in light of their own independent assessment;

 

   

the audit committee of our board of directors reviews the preliminary valuations of the Advisor and independent valuation firms and, if necessary, responds and supplements the valuation recommendation of the independent valuation firm to reflect any comments; and

 

   

our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Advisor and the respective independent valuation firms.

The types of factors that the Company may take into account in fair value pricing our investments include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. The Company utilizes an income approach to value its debt investments and a combination of income and market approaches to value its equity investments. With respect to unquoted securities, the Advisor and the Company’s board of directors, in consultation with the Company’s independent third party valuation firm, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors, which valuation is then approved by the board of directors. For debt investments, the Company determines the fair value primarily using an income, or yield, approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each portfolio investments. The Company’s estimate of the expected repayment date is generally the legal maturity date of the instrument. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors.

The Company values its interest rate derivative agreement using an income approach that analyzes the discounted cash flows associated with the interest rate derivative agreement. Significant inputs to the discounted cash flows methodology include the forward interest rate yield curves in effect as of the end of the measurement period and an evaluation of the counterparty’s credit risk.

The Company values its residual interest investments in collateralized loan obligations using an income approach that analyzes the discounted cash flows of our residual interest. The discounted cash flows model utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available. Specifically, the Company uses Intex cash flow models, or an appropriate substitute to form the basis for the valuation of the Company’s residual interest. The models use a set of assumptions including projected default rates, recovery rates, reinvestment rate and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market data and projections provided by third parties as well as management estimates.

The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future cash flows or earnings to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in fair value pricing the Company’s investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, the current investment performance rating, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, transaction comparables, our principal market as the reporting entity and enterprise values, among other factors.

In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Company discloses the fair value of its investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

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Level 2—Quoted prices in markets that are not considered to be active or financial instruments for which significant inputs are observable, either directly or indirectly;

Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes “observable” requires significant judgment by management.

The Company considers whether the volume and level of activity for the asset or liability have significantly decreased and identifies transactions that are not orderly in determining fair value. Accordingly, if the Company determines that either the volume and/or level of activity for an asset or liability has significantly decreased (from normal conditions for that asset or liability) or price quotations or observable inputs are not associated with orderly transactions, increased analysis and management judgment will be required to estimate fair value. Valuation techniques such as an income approach might be appropriate to supplement or replace a market approach in those circumstances.

The Company has adopted the authoritative guidance under GAAP for estimating the fair value of investments in investment companies that have calculated net asset value per share in accordance with the specialized accounting guidance for Investment Companies. Accordingly, in circumstances in which net asset value per share of an investment is determinative of fair value, the Company estimates the fair value of an investment in an investment company using the net asset value per share of the investment (or its equivalent) without further adjustment, if the net asset value per share of the investment is determined in accordance with the specialized accounting guidance for investment companies as of the reporting entity’s measurement date.

Investment Risk

The value of investments will generally fluctuate with, among other things, changes in prevailing interest rates, federal tax rates, counterparty risk, general economic conditions, the condition of certain financial markets, developments or trends in any particular industry and the financial condition of the issuer. During periods of limited liquidity and higher price volatility, the Company’s ability to dispose of investments at a price and time that the Company deems advantageous may be impaired. The extent of this exposure is reflected in the carrying value of these financial assets and recorded in the Consolidated Statements of Assets and Liabilities.

Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. The value of lower-quality debt securities often fluctuates in response to company, political, or economic developments and can decline significantly over short periods of time or during periods of general or regional economic difficulty. Lower-quality debt securities can be thinly traded or have restrictions on resale, making them difficult to sell at an acceptable price. The default rate for lower-quality debt securities is likely to be higher during economic recessions or periods of high interest rates.

As of June 30, 2013, we had one loan on non-accrual with an amortized cost basis of 7,652 and fair value of $6,368. As of December 31, 2012, we had no loans on non-accrual.

Security Transactions, Payment-in-Kind, Income Recognition, Realized/Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method. The Company reports changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation on investments in the Consolidated Statements of Operations. The Company reports changes in fair value of the interest rate derivative that is measured at fair value as a component of net change in unrealized appreciation or depreciation on interest rate derivative in the Consolidated Statements of Operations.

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that the Company expects to collect such amounts. Dividend income is recognized on the ex-dividend date. Original issue discount, principally representing the estimated fair value of detachable equity or warrants obtained in conjunction with the acquisition of debt securities, and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when it is no longer probable that principal or interest will be collected. However, we may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection.

The Company has investments in its portfolio which contain a contractual paid-in-kind, or PIK, interest provision. PIK interest is computed at the contractual rate specified in each investment agreement, is added to the principal balance of the investment, and is recorded as income. The Company will cease accruing PIK interest if there is insufficient value to support the accrual or

 

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if it does not expect amounts to be collectible. To maintain the Company’s status as a RIC, PIK interest income, which is considered investment company taxable income, must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash.

The following shows a rollforward of PIK income activity for the six months ended June 30, 2013 and for the year ended December 31, 2012:

 

Accumulated PIK balance at December 31, 2011

   $ 3,488   

PIK income capitalized/receivable

     4,124   

PIK received in cash from repayments

     (1,805
  

 

 

 

Accumulated PIK balance at December 31, 2012

   $ 5,807   

PIK income capitalized/receivable

     1,951   

PIK received in cash from repayments

     (1,784
  

 

 

 

Accumulated PIK balance at June 30, 2013

   $ 5,974   
  

 

 

 

Interest income from the Company’s TRA and CLO residual interests is recorded based upon an estimation of an effective yield to expected maturity using anticipated cash flows. Amounts in excess of income recognized are recorded as a reduction to the cost basis of the investment. The Company monitors the anticipated cash flows from its TRA and CLO residual interests and will adjust its effective yield periodically as needed.

The Company capitalizes and amortizes upfront loan origination fees received in connection with the closing of investments. The unearned income from such fees is accreted into interest income over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees, and unamortized discounts are recorded as interest income.

In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned. The Company had no income from advisory services related to portfolio companies for the three and six months ended June 30, 2013 and 2012, respectively.

Other income includes commitment fees, fees related to the management of Greenway and Greenway II, structuring fees, amendment fees and unused commitment fees associated with investments in portfolio companies. Expenses are recorded on an accrual basis.

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of June 30, 2013:

 

Description:

   Fair Value         Level 1          Level 2     Level 3  

First lien secured debt

   $ 150,171      $ —        $ —       $ 150,171   

Second lien debt

     120,228        —          —         120,228   

Subordinated debt

     181,945        —          —         181,945   

Investments in funds

     9,347        —          —         9,347   

Equity investments

     6,271        —          —         6,271   

Investment in payment rights

     13,828        —          —         13,828   

CLO residual interests

     25,357             25,357   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investments

   $ 507,147      $ —        $ —       $ 507,147   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate derivative

     (66     —          (66     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liability at fair value

   $ (66   $ —        $ (66   $ —    
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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The following is a summary of the levels within the fair value hierarchy in which the Company invests as of December 31, 2012:

 

Description:

   Fair Value         Level 1          Level 2     Level 3  

First lien secured debt

   $ 102,256      $ —        $ —        $ 102,256   

Second lien debt

     70,035        —           —          70,035   

Subordinated debt

     183,319        —           —          183,319   

Investments in funds

     10,259        —           —          10,259   

Equity investments

     6,818        —           —          6,818   

Investment in payment rights

     12,262        —           —          12,262   

CLO residual interest

     9,400             9,400   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total investments

   $ 394,349      $ —         $ —        $ 394,349   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest rate derivative

     (1,053     —           (1,053     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total liability at fair value

   $ (1,053   $ —         $ (1,053   $ —     
  

 

 

   

 

 

    

 

 

   

 

 

 

The following is a summary of the industry classification in which the Company invests as of June 30, 2013:

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Business services

   $ 135,267       $ 134,432         29.20

Financial services

     65,098         67,189         14.60

Manufacturing

     49,130         48,792         10.60

Food & beverage

     44,775         44,180         9.60

Energy / utilities

     38,084         38,117         8.28

Consumer products

     30,302         30,784         6.69

Retail & grocery

     26,669         25,840         5.61

Industrials

     24,535         24,628         5.35

Healthcare, ambulatory surgery centers

     15,102         16,900         3.67

Media

     16,499         16,873         3.67

Healthcare, device manufacturing

     13,190         12,726         2.76

Healthcare, consulting

     12,396         12,581         2.73

Chemicals

     9,546         10,050         2.18

Election services

     8,622         8,643         1.88

Textiles

     8,704         8,469         1.84

Aerospace & defense

     3,986         4,040         0.88

Media, advertising

     —           1,600         0.35

Healthcare, dental services

     1,393         1,043         0.23

Restaurants

     191         260         0.06
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 503,489       $ 507,147         110.18
  

 

 

    

 

 

    

 

 

 

The following is a summary of the geographical concentration of our investment portfolio as of June 30, 2013:

 

Region:    Cost      Fair Value      % of
Net Assets
 

Southwest

   $ 116,505       $ 115,512         25.09

West

     101,288         102,699         22.31

Northeast

     91,670         93,001         20.20

Southeast

     86,948         89,475         19.44

Midwest

     79,905         79,977         17.38

International

     13,522         13,652         2.97

Northwest

     13,651         12,831         2.79
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 503,489       $ 507,147         110.18
  

 

 

    

 

 

    

 

 

 

 

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The following is a summary of the industry classification in which the Company invests as of December 31, 2012.

 

Industry:

   Cost      Fair Value      % of
Net Assets
 

Business services

   $ 67,270       $ 66,347         19.09

Consumer products

     49,957         50,010         14.39

Food & beverage

     44,124         43,559         12.54

Manufacturing

     38,982         38,145         10.98

Financial services

     31,221         31,921         9.19

Retail & grocery

     26,455         26,967         7.76

Industrials

     25,001         25,001         7.19

Healthcare, ambulatory surgery centers

     18,875         20,810         5.99

Healthcare, device manufacturing

     12,968         12,404         3.57

Healthcare, consulting

     12,251         12,361         3.56

Media

     10,506         10,539         3.03

Energy/utilities

     9,752         9,752         2.81

Chemicals

     9,508         9,507         2.74

Election services

     9,408         9,499         2.73

Textiles

     8,633         8,581         2.47

Restaurants

     8,203         8,415         2.42

Media, advertising

     3,236         5,122         1.47

Aerospace & defense

     3,966         4,020         1.16

Healthcare, dental services

     1,393         1,389         0.40
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 391,709       $ 394,349         113.49
  

 

 

    

 

 

    

 

 

 

The following is a summary of the geographical concentration of our investment portfolio as of December 31, 2012:

 

Region:    Cost      Fair Value      % of
Net Assets
 

Southeast

   $ 101,402       $ 104,146         29.98

West

     87,804         88,635         25.51

Southwest

     73,786         72,432         20.84

Midwest

     62,867         63,033         18.14

Northeast

     38,659         38,607         11.11

Northwest

     13,525         13,830         3.98

International

     13,666         13,666         3.93
  

 

 

    

 

 

    

 

 

 

Total investments

   $ 391,709       $ 394,349         113.49
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table rolls forward the changes in fair value during the six months ended June 30, 2013 for investments classified within Level 3:

 

    First lien
secured debt
    Second lien
debt
    Subordinated
debt
    Investments
in funds
    Equity
investments
    Investment in
payment
rights
    CLO residual
interests
    Totals  

Beginning balance, January 1, 2013

  $ 102,256      $ 70,035      $ 183,319      $ 10,259      $ 6,819      $ 12,261      $ 9,400      $ 394,349   

Purchases

    82,125        56,375        45,395        150        —          —          16,014        200,059   

Sales and repayments

    (35,052     (7,972     (48,121     (887     —          —          (128     (92,160

Unrealized appreciation (depreciation)(1)

    (31     1,248        (1,043     (175     (548     1,567        —          1,018   

Net amortization of premiums, discounts and fees

    806        317        813        —          —          —          71        2,007   

PIK

    67        225        1,582        —          —          —          —          1,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2013

  $ 150,171      $ 120,228      $ 181,945      $ 9,347      $ 6,271      $ 13,828      $ 25,357      $ 507,147   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized appreciation from investments still held as of the reporting date(1)

  $ 250      $ 1,286      $ 3,041      $ 184      $ 2,563      $ (1,567   $ —        $ 5,758   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) All unrealized appreciation (depreciation) in the table above is reflected in the accompanying Consolidated Statements of Operations.

The following table rolls forward the changes in fair value during the six months ended June 30, 2012 for investments classified within Level 3:

 

     First lien
debt
    Second lien
debt
    Subordinated
debt
    Investments
in funds
    Equity
investments
     Investment in
Payment Rights
     Totals  

Beginning balance, January 1, 2012

   $ 89,488      $ 60,125      $ 101,842      $ 12,011      $ 3,527       $ —         $ 266,993   

Purchases

     3,049        19,571        65,924        4        764         12,500         101,812   

Sales and repayments

     (13,476     (11,333     (12,569     (3,647     —           —           (41,025

Unrealized appreciation (depreciation)(1)

     246        (854     (4     —          173         —           (439

Net amortization of premiums, discounts and fees

     250        243        689        —          —           —           1,182   

PIK

     122        305        1,389        —          —           —           1,816   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance, June 30, 2012

   $ 79,679      $ 68,057      $ 157,271      $ 8,368      $ 4,464       $ 12,500       $ 330,339   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net change in unrealized appreciation from investments still held as of the reporting date(1)

   $ 246      $ (711   $ 434      $ (1   $ 173       $ —         $ 142   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) All unrealized appreciation (depreciation) in the table above is reflected in the accompanying Consolidated Statements of Operations.

 

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Table of Contents

The following provides quantitative information about Level 3 fair value measurements as of June 30, 2013:

 

Description:

   Fair Value     

Valuation Technique

  

Unobservable Inputs

  

Range (Average) (1)

First lien secured debt

   $ 150,171       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    11% - 12% (12%)

Second lien debt

     120,228       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    12% - 14% (13%)

Subordinated debt

     181,945       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    15% - 17% (16%)

Investments in funds

     8,354       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    13%
     993       Net asset value, as a practical expedient   

Net asset value

   N/A

Equity investments

     6,271       Market comparable companies (market approach)    EBITDA multiple   

5.4 - 6.2 (5.8)

Investment in payment rights(2)

     13,828       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    17%
         Federal tax rates    35% - 40% (38%)

CLO residual interests

     25,357       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)    14%
         Default rate    2%
         Prepayment rate    20%
  

 

 

          

Total investments

   $ 507,147            
  

 

 

          

 

(1) Ranges were determined using a weighted average based upon the fair value of the investments in each investment category.
(2) Investment in a tax receivable agreement, or TRA, payment rights

The primary significant unobservable input used in the fair value measurement of the Company’s debt securities (first lien secured debt, second lien debt and subordinated debt), including income-producing investments in funds, payment rights and CLO residual interests is the weighted average cost of capital, or WACC. Significant increases (decreases) in the WACC in isolation would result in a significantly lower (higher) fair value measurement. In determining the WACC, for the income, or yield, approach, the Company considers current market yields and multiples, portfolio company performance, leverage levels, credit quality, among other factors, including federal tax rates, in its analysis. In the case of CLO residual interests, the Company considers prepayment, re-investment and loss assumptions based upon historical and projected performance as well as comparable yields for other similar CLOs. In the case of the TRA, the Company considers the risks associated with changes in tax rates, the performance of the portfolio company and the expected term of the investment. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate WACC to use in the income approach.

The primary significant unobservable input used in the fair value measurement of the Company’s equity investments is the EBITDA multiple, or the Multiple. Significant increases (decreases) in the Multiple in isolation would result in a significantly higher (lower) fair value measurement. To determine the Multiple for the market approach, the Company considers current market trading and/or transaction multiples, portfolio company performance (financial ratios) relative to public and private peer companies and leverage levels, among other factors. Changes in one or more of these factors can have a similar directional change on other factors in determining the appropriate Multiple to use in the market approach.

Investment in Tax Receivable Agreement Payment Rights

In June 2012, the Company invested in a TRA that entitles it to certain payment rights, or TRA Payment Rights, from Duff & Phelps Corporation, or Duff & Phelps. The TRA transfers the economic value of certain tax deductions, or tax benefits, taken by Duff & Phelps to the Company and entitles the Company to a stream of payments to be received. The TRA payment right is, in effect, a subordinated claim on the issuing company which can be valued based on the credit risk of the issuer, which includes projected future earnings, the liquidity of the underlying payment right, risk of tax law changes, the effective tax rate and any other factors which might impact the value of the payment right.

 

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Table of Contents

Through the TRA, the Company is entitled to receive an annual tax benefit payment based upon 85% of the savings from certain deductions along with interest. The payments that the Company is entitled to receive result from cash savings, if any, in U.S. federal, state or local income tax that Duff & Phelps realizes (i) from the tax savings derived from the goodwill and other intangibles created in connection with the Duff & Phelps initial public offering and (ii) from other income tax deductions. These tax benefit payments will continue until the relevant deductions are fully utilized, which is projected to be 17 years. Pursuant to the TRA, the Company maintains the right to enforce Duff & Phelps payment obligations as a transferee of the TRA contract. If Duff & Phelps chooses to pre-pay and terminate the TRA, the Company will be entitled to the present value of the expected future TRA payments. If Duff & Phelps breaches any material obligation than all obligations are accelerated and calculated as if an early termination occurred. Failure to make a payment is a breach of a material obligation if the failure occurs for more than three months.

The projected annual tax benefit payment will be accrued on a quarterly basis and paid annually. The payment will be allocated between a reduction in the cost basis of the investment and interest income based upon an amortization schedule. Based upon the characteristics of the investment, the Company has chosen to categorize the investment in the TRA payment rights as investment in payment rights in the fair value hierarchy. The valuation will be based principally on a discounted cash flow analysis of projected future cash flow streams assuming an appropriate discount rate, which will among other things consider other transactions in the market, the current credit environment, performance of Duff & Phelps and the length of the remaining payment stream

Managed Funds

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