10-Q 1 d232771d10q.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, 2016

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: 800-450-4424

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

 

 

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 4, 2016 was 33,169,376.

 

 

 


Table of Contents

THL CREDIT, INC.

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2016

Table of Contents

 

    

INDEX

   PAGE
NO.
 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Consolidated Statements of Assets and Liabilities as of June 30, 2016 (unaudited) and December 31, 2015      3   
  Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (unaudited)      4   
  Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2016 and 2015 (unaudited)      5   
  Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)      6   
  Consolidated Schedules of Investments as of June 30, 2016 (unaudited) and December 31, 2015      7   
  Notes to Consolidated Financial Statements (unaudited)      19   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      56   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      92   

Item 4.

  Controls and Procedures      93   

PART II.

  OTHER INFORMATION   

Item 1.

  Legal Proceedings      93   

Item 1A.

  Risk Factors      93   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      97   

Item 3.

  Defaults Upon Senior Securities      97   

Item 4.

  Mine Safety Disclosures      97   

Item 5.

  Other Information      97   

Item 6.

  Exhibits      97   

SIGNATURES

       98   

 

2


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Assets and Liabilities

(in thousands, except per share data)

(unaudited)

 

     June 30,
2016
    December 31,
2015
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $599,965 and $682,065, respectively)

   $ 563,445      $ 672,333   

Controlled investments (cost of $116,837 and $84,773, respectively)

     128,219        81,823   

Non-controlled, affiliated investments (cost of $5 and $7, respectively)

     5        7   
  

 

 

   

 

 

 

Total investments at fair value (cost of $716,807 and $766,845, respectively)

   $ 691,669      $ 754,163   

Cash

     4,013        3,850   

Interest, dividends, and fees receivable

     7,020        7,060   

Deferred financing costs

     2,877        3,224   

Deferred tax assets

     1,257        1,118   

Due from affiliate

     612        686   

Prepaid expenses and other assets

     477        485   

Other deferred assets

     263        375   

Deferred offering costs

     93        —     

Receivable for paydown of investments

     55        330   
  

 

 

   

 

 

 

Total assets

   $ 708,336      $ 771,291   
  

 

 

   

 

 

 

Liabilities:

    

Loans payable ($223,401 and $258,651 face amounts, respectively, reported net of unamortized debt issuance costs of $1,735 and $1,902, respectively. See Note 7)

   $ 221,666      $ 256,749   

Notes payable ($85,000 and $85,000 face amounts, respectively, reported net of unamortized debt issuance costs of $2,961 and $3,191, respectively. See Note 7)

     82,039        81,809   

Accrued incentive fees

     1,294        4,243   

Deferred tax liability

     3,999        3,881   

Base management fees payable

     2,809        2,944   

Accrued expenses and other payables

     1,528        1,665   

Accrued interest and fees

     375        485   

Other deferred liabilities

     277        410   

Interest rate derivative

     246        206   
  

 

 

   

 

 

 

Total liabilities

     314,233        352,392   

Commitments and contingencies (Notes 3 and 9)

    

Net Assets:

    

Common stock, par value $.001 per share, 100,000 common shares authorized, 33,169 and 33,311 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively

     33        33   

Paid-in capital in excess of par

     440,013        441,742   

Net unrealized (depreciation) appreciation on investments, net of provision for taxes of $3,999 and $3,791, respectively

     (29,137     (16,473

Net unrealized depreciation on interest rate derivative

     (246     (206

Accumulated undistributed net realized losses

     (25,133     (14,349

Accumulated undistributed net investment income

     8,573        8,152   
  

 

 

   

 

 

 

Total net assets

     394,103        418,899   
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 708,336      $ 771,291   
  

 

 

   

 

 

 

Net asset value per share

   $ 11.88      $ 12.58   
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

3


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

     For the three months ended
June 30,
    For the six months ended
June 30,
 
     2016     2015     2016     2015  

Investment Income:

        

From non-controlled, non-affiliated investments:

        

Interest income

   $ 15,845      $ 20,872      $ 34,852      $ 41,781   

Dividend income

     74        293        74        293   

Other income

     765        847        1,057        2,501   

From non-controlled, affiliated investments:

        

Other income

     380        650        865        1,245   

From controlled investments:

        

Interest income

     839        238        1,172        476   

Dividend income

     2,539        776        4,956        1,104   

Other income

     38        75        75        113   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     20,480        23,751        43,051        47,513   

Expenses:

        

Interest and fees on borrowings

     3,489        3,159        7,004        6,240   

Base management fees

     2,809        2,889        5,712        5,894   

Administrator expenses

     893        923        1,820        1,870   

Other general and administrative expenses

     606        743        1,179        1,429   

Amortization of deferred financing costs

     384        398        769        825   

Professional fees

     372        463        830        797   

Directors’ fees

     200        236        410        436   

Incentive fees

     —          2,983        30        5,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     8,753        11,794        17,754        23,452   

Income tax provision, excise and other taxes

     65        23        236        218   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     11,662        11,934        25,061        23,843   

Realized Gain and Change in Unrealized Appreciation on Investments:

        

Net realized gain (loss) on investments:

        

Non-controlled, non-affiliated investments

     3,655        46        (1,964     77   

Controlled investments

     26        —          (10,887     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gain (loss) on investments

     3,681        46        (12,851     77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized (depreciation) appreciation on investments:

        

Non-controlled, non-affiliated investments

     (19,057     (881     (26,786     1,004   

Controlled investments

     3,206        3,420        14,330        5,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized (depreciation) appreciation on investments

     (15,851     2,539        (12,456     6,286   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) from investments

     (12,170     2,585        (25,307     6,363   

Provision for taxes on unrealized gain on investments

     (99     (388     (207     (216

Interest rate derivative periodic interest payments, net

     (65     (111     (167     (227

Net change in unrealized appreciation (depreciation) on interest rate derivative

     12        39        (40     (143
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

   $ (660   $ 14,059      $ (660   $ 29,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per common share:

        

Basic and diluted

   $ 0.35      $ 0.35      $ 0.75      $ 0.70   

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

        

Basic and diluted

   $ (0.02   $ 0.42      $ (0.02   $ 0.87   

Dividends declared and paid

   $ 0.34      $ 0.34      $ 0.68      $ 0.68   

Weighted average shares of common stock outstanding:

        

Basic and diluted

     33,234        33,810        33,290        33,857   

See accompanying notes to these consolidated financial statements.

 

4


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Changes in Net Assets

(in thousands)

(unaudited)

 

     For the six months ended
June 30,
 
     2016     2015  

Increase in net assets from operations:

    

Net investment income

   $ 25,061      $ 23,843   

Interest rate derivative periodic interest payments, net

     (167     (227

Net realized gain (loss) on investments

     (12,851     77   

Net change in unrealized (depreciation) appreciation on investments

     (12,456     6,286   

Provision for taxes on unrealized gain (loss) on investments

     (207     (216

Net change in unrealized appreciation (depreciation) on interest rate derivative

     (40     (143
  

 

 

   

 

 

 

Net (decrease) increase in net assets resulting from operations

     (660     29,620   

Distributions to stockholders:

    

Distributions to stockholders from net investment income

     (22,599     (22,981
  

 

 

   

 

 

 

Total distributions to stockholders

     (22,599     (22,981

Capital share transactions:

    

Repurchase of common stock

     (1,537     (3,765
  

 

 

   

 

 

 

Net decrease in net assets from capital share transactions

     (1,537     (3,765
  

 

 

   

 

 

 

Total (decrease) increase in net assets

     (24,796     2,874   

Net assets at beginning of period

     418,899        443,621   
  

 

 

   

 

 

 

Net assets at end of period

   $ 394,103      $ 446,495   
  

 

 

   

 

 

 

Common shares outstanding at end of period

     33,169        33,601   
  

 

 

   

 

 

 

Capital share activity:

    

Shares repurchased

     142        304   

See accompanying notes to these consolidated financial statements.

 

5


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     For the six months ended
June 30,
 
     2016     2015  

Cash flows from operating activities

    

Net (decrease) increase in net assets resulting from operations

   $ (660   $ 29,620   

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

    

Net change in unrealized (depreciation) appreciation on investments

     12,456        (6,286

Net change in unrealized depreciation on interest rate derivative

     40        143   

Net realized loss on investments

     12,877        8   

Increase in investments due to PIK

     (1,032     (2,369

Amortization of deferred financing costs

     769        825   

Net accretion of (discounts) premiums on investments and other fees

     (1,793     (1,577

Changes in operating assets and liabilities:

    

Purchases of investments

     (70,057     (79,825

Proceeds from sale and paydown of investments

     110,131        106,789   

Decrease (increase) in interest, dividends and fees receivable

     40        (2,971

Decrease in income tax receivable

     235        —     

Decrease in other deferred assets

     112        113   

Decrease in due from affiliate

     74        494   

(Increase) decrease in prepaid expenses and other assets

     (58     263   

Increase in deferred tax asset

     (139     (376

Decrease in accrued expenses and other payables

     (137     (804

Decrease in accrued credit facility fees and interest

     (110     (93

Increase in income taxes payable

     —          40   

Increase in deferred tax liability

     118        216   

(Decrease) increase in base management fees payable

     (135     79   

Decrease in other deferred liabilities

     (133     (113

Decrease in accrued incentive fees payable

     (2,949     (169
  

 

 

   

 

 

 

Net cash provided by operating activities

     59,649        44,007   

Cash flows from financing activities

    

Repurchase of common stock

     (1,537     (3,765

Borrowings under credit facility

     65,000        76,000   

Repayments under credit facility

     (100,250     (88,000

Distributions paid to stockholders

     (22,599     (22,981

Financing and offering costs paid

     (100     (119
  

 

 

   

 

 

 

Net cash used in financing activities

     (59,486     (38,865
  

 

 

   

 

 

 

Net increase in cash

     163        5,142   

Cash, beginning of period

     3,850        2,656   
  

 

 

   

 

 

 

Cash, end of period

   $ 4,013      $ 7,798   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash interest paid

   $ 6,691      $ 5,934   

Income taxes paid

   $ 1      $ 66   

Non-cash Operating Activities:

On March 17, 2016, THL Credit restructured its investment in OEM Group, Inc. As part of the restructuring, THL Credit exchanged the cost basis of its first lien loans totaling $33,242 for a new first lien senior secured term loan in OEM Group, LLC of $18,703 and a controlled equity position valued at $8,313 in a related entity. In connection with the restructuring, the Company recognized a loss in the amount of $6,226.

On March 14, 2016, THL Credit further restructured its investment in Dimont & Associates, Inc. and affiliated entities. As part of the restructuring, THL Credit exchanged the cost basis of its equity interest totaling $6,569 and a subordinated term loan totaling $4,474 for an equity interest in an affiliated entity valued at $129. In connection with the restructuring, the Company recognized a loss in the amount of $10,914.

For the six months ended June 30, 2016 and 2015, THL Credit recognized PIK income of $1,092 and $2,380, respectively.

See accompanying notes to these consolidated financial statements.

 

6


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

June 30, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company(1)(2)(3)

  Industry    

Interest Rate(4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Non-controlled/non-affiliated investments —142.97% of net asset value

             

First lien secured debt

             

Aerogroup International Inc.

   
 
Consumer
products
  
  
  9.5% (LIBOR
+ 8.5%)
    6/9/2014        12/9/2019        13,443        13,269       12,905   

Allied Wireline Services, LLC

   
 
Energy /
Utilities
  
  
  11.0% (LIBOR
+ 9.5%) (5.5% Cash and 5.5% PIK)
(11)
    2/28/2014        2/28/2019        9,934        9,680       8,345   

American Achievement Corporation

   
 
Consumer
products
  
  
  8.3% (LIBOR
+ 7.3%)
    10/30/2015        9/30/2020        9,848        9,720       9,701   

BeneSys Inc.

   
 
Business
services
  
  
  10.8% (LIBOR
+ 9.8%)
    3/31/2014        3/31/2019        10,086        9,988       9,910   

BeneSys Inc.(8)

   
 
Business
services
  
  
  10.8% (LIBOR
+ 9.8%)
    8/1/2014        3/31/2019        218        212       214   

Charming Charlie, LLC.

   
 
Retail &
grocery
  
  
  9.0% (LIBOR + 8.0%)     12/18/2013        12/24/2019        24,436        22,871       17,899   

Constructive Media, LLC

   
 
Consumer
products
  
  
  10.5% (LIBOR
+10.0%)
    11/23/2015        11/23/2020        14,535        14,279       14,281   

Copperweld Bimetallics LLC(29)

    Industrials      18.0% (12.0%
Cash + 6.0% PIK)
(11)
    12/11/2013        12/11/2018        19,722        19,265       17,356   

CRS Reprocessing, LLC

    Manufacturing      10.5% (LIBOR + 9.5%)     6/16/2011        12/31/2016        14,935        14,935       14,636   

Dodge Data & Analytics LLC

    IT services      9.8% (LIBOR + 8.8%)     11/20/2014        10/31/2019        11,334        11,177       11,164   

Duff & Phelps Corporation(10)

   
 
Financial
services
  
  
  4.8% (LIBOR + 3.8%)     5/15/2013        4/23/2020        243        245       241   

Food Processing Holdings, LLC

   
 
Food &
beverage
  
  
  10.5% (LIBOR + 9.5%)     10/31/2013        10/31/2018        20,457        20,250       20,559   

Hart InterCivic, Inc.

    IT services      11.0% (LIBOR + 10.5% Cash)     3/31/2016        3/31/2019        25,600        25,130       25,344   

HEALTHCAREfirst, Inc.

    Healthcare      13.4% (7)     8/31/2012        8/30/2017        8,738        8,661       8,258   

Holland Intermediate Acquisition Corp.

   
 
Energy /
Utilities
  
  
  10.0% (LIBOR + 9.0%)     5/29/2013        5/29/2018        21,880        21,680       18,817   

Holland Intermediate Acquisition Corp.(8)

   
 
Energy /
Utilities
  
  
  10.0% (LIBOR + 9.0%)     5/29/2013        5/29/2018        —          —         —     

Igloo Products Corp.

   
 
Consumer
products
  
  
  11.3% (LIBOR + 9.8%)     3/28/2014        3/28/2020        24,636        24,251       23,897   

The John Gore Organization, Inc.(26)

   
 
 
Media,
entertainment
and leisure
  
  
  
  9.0% (LIBOR + 8.0%)     8/8/2013        6/28/2021        14,734        14,459       14,660   

The John Gore Organization, Inc.(8)(9)(26)

   
 
 
Media,
entertainment
and leisure
  
  
  
  9.0% (LIBOR + 8.0%)     8/8/2013        6/28/2021        —          (15     —     

LAI International, Inc.

    Manufacturing      8.1%(7)     10/22/2014        10/22/2019        17,513        17,241       17,513   

LAI International, Inc.(8)

    Manufacturing      8.1%(7)     10/22/2014        10/22/2019        4,535        4,535       4,535   

Loadmaster Derrick & Equipment, Inc.(28)

   
 
Energy /
Utilities
  
  
  11.3% (LIBOR + 10.3%)     9/28/2012        9/28/2017        7,997        7,925        5,198   

Loadmaster Derrick & Equipment, Inc.(8)(28)

   
 
Energy /
Utilities
  
  
  11.3% (LIBOR + 10.3%)     9/28/2012        9/28/2017        3,623        3,623       2,355   

Loadmaster Derrick & Equipment, Inc.(8)(28)

   
 
Energy /
Utilities
  
  
  11.3% (LIBOR
+ 10.3%)
    7/16/2014        9/28/2017        3,170        3,140        2,061   

RealD Inc.

   
 
 
Media,
entertainment
and leisure
  
  
  
  8.5% (LIBOR + 7.5%)     3/22/2016        3/22/2021        14,963        14,821       14,888   

Virtus Pharmaceuticals, LLC

    Healthcare      10.7%(7)     7/17/2014        7/17/2019        24,330        23,907       24,330   

Wheels Up Partners, LLC

    Transportation      9.6% (LIBOR + 8.6%)     1/31/2014        10/15/2021        8,520        8,438       8,605   

Wheels Up Partners, LLC

    Transportation      9.6% (LIBOR + 8.6%)     8/27/2014        7/15/2022        9,300        9,300       9,393   
         

 

 

   

 

 

   

 

 

 

Subtotal first lien secured debt

          $ 338,730      $ 332,987     $ 317,065   

Second lien debt

             

Alex Toys, LLC

   
 
Consumer
products
  
  
  11.5% (LIBOR + 10.5%)     6/30/2014        12/30/2019        30,201        29,772       28,992   

American Covers, Inc.

   
 
Consumer
products
  
  
  9.5% (LIBOR + 8.5%)     9/1/2015        2/25/2021        10,000        9,871       10,200   

Granicus, Inc

    IT services      10.5% (LIBOR + 9.5%)     12/18/2015        12/18/2020        17,000        16,697       17,170   

Hostway Corporation

    IT services      10.0% (LIBOR + 8.8%)     12/27/2013        12/13/2020        17,500        17,295       13,650   

Merchants Capital Access, LLC

   
 
Financial
services
  
  
  11.5% (LIBOR + 10.5%)     4/20/2015        4/20/2021        12,500        12,298       12,313   

Oasis Legal Finance Holding Company LLC

   
 
Financial
services
  
  
  10.5%     9/30/2013        9/30/2018        12,549        12,426       12,675   

Specialty Brands Holdings, LLC

    Restaurants      9.8% (8.8% Cash and 1.0% PIK)     7/16/2013        7/16/2018        21,046        20,857       20,415   

Synarc-Biocore Holdings, LLC

    Healthcare      9.3% (LIBOR + 8.3%)     3/13/2014        3/10/2022        11,000        10,918       10,450   

Washington Inventory Service

   
 
Business
services
  
  
  10.3% (LIBOR + 9.0%)     12/27/2012        6/20/2019        11,000        10,923       8,910   
         

 

 

   

 

 

   

 

 

 

Subtotal second lien debt

          $ 142,796      $ 141,057     $ 134,775   

Subordinated debt

             

A10 Capital, LLC(8)

   
 
Financial
services
  
  
  12.0%     8/25/2014        2/25/2021      $ 10,635      $ 10,547     $ 10,555   

Aerogroup International Inc.

   
 
Consumer
products
  
  
  12.0% PIK     8/5/2015        3/9/2020        264        264       140   

Aerogroup International Inc.

   
 
Consumer
products
  
  
  10.0% PIK     1/27/2016        3/9/2020        768        768       599   

Dr. Fresh, LLC

   
 
Consumer
products
  
  
  14.0% (12.0% Cash and 2.0% PIK)(11)     5/15/2012        11/15/2017        15,349        15,263       15,349   

Gold, Inc.

   
 
Consumer
products
  
  
  10.0%     12/31/2012        6/30/2019        9,666        9,666       9,666   

Martex Fiber Southern Corp.

    Industrials      15.5% (12.0% Cash and 3.5% PIK)(11)     4/30/2012        9/30/2017        8,199        8,139       8,117   

Tri Starr Management Services, Inc.(23)

   
 
Business
services
  
  
  15.8% (2.1% Cash and 13.7% PIK)(11)     3/4/2013        3/4/2019        20,906        20,558       3,136   
         

 

 

   

 

 

   

 

 

 

Subtotal subordinated debt

          $ 65,787      $ 65,205     $ 47,562   

 

(Continued on next page)

See accompanying notes to these consolidated financial statements

 

7


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

June 30, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company(1)(2)(3)

  Industry  

Interest
Rate(4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
  Principal(5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Equity investments (12)

             

A10 Capital, LLC(12)(14)(21)

  Financial
services
      8/25/2014          17,531.75      $ 18,194     $ 18,332   

Aerogroup International Inc. 

  Consumer
products
      6/9/2014          253,616        11       —     

Aerogroup International Inc.(21)

  Consumer
products
      6/9/2014          28,180        1,108       —     

Alex Toys, LLC(12)(13)(15)(22)

  Consumer
products
      5/22/2015          153.85        1,000       767   

Alex Toys, LLC(12)(13)(15)(21)(27)

  Consumer
products
      6/22/2016          121.18        788       790   

Allied Wireline Services, LLC(12)(15)(22)

  Energy /
Utilities
      2/28/2014          618,867.92        619       —     

Constructive Media, LLC

  Consumer
products
      11/23/2015          750,000        750       690   

Dimont & Associates, Inc.(22), (25)

  Financial
services
      3/14/2016          312.51        129       124   

Firebirds International, LLC(22)

  Restaurants       5/17/2011          1,906        191       383   

Food Processing Holdings, LLC(22)

  Food &
beverage
      4/20/2010          162.44        163       254   

Food Processing Holdings, LLC(22)

  Food &
beverage
      4/20/2010          406.09        408       1,006   

Hostway Corporation(22)

  IT services       12/27/2013          20,000        200       —     

Hostway Corporation(21)

  IT services       12/27/2013          1,800        1,800       171   

Igloo Products Corp.(12)(22)

  Consumer
products
      4/30/2014          1,902.04        1,716       1,557   

Virtus Pharmaceuticals, LLC(15)(22)

  Healthcare       3/31/2015          7,720.86        127       24   

Virtus Pharmaceuticals, LLC(15)(22)

  Healthcare       3/31/2015          231.82        244       277   

Virtus Pharmaceuticals, LLC(15)(22)

  Healthcare       3/31/2015          589.76        590       651   

Wheels Up Partners, LLC(12)(15)(22)

  Transportation       1/31/2014          1,000,000        1,000       2,840   
           

 

 

   

 

 

 

Subtotal equity

            $ 29,038     $ 27,866   

Warrants

             

Allied Wireline Services, LLC(15)

  Energy /
Utilities
      2/28/2014          501,159.24      $ 175     $ —     

YP Equity Investors, LLC(15)

  Media,
entertainment
and leisure
      5/8/2012          —          —         5,423   
           

 

 

   

 

 

 

Subtotal warrants

            $ 175     $ 5,423   

CLO residual interests

             

Dryden CLO, Ltd.(6)(16)

  Structured
Products
  17.3%     9/12/2013            6,266       5,510   

Flagship VII, Ltd.(6)(16)

  Structured
Products
  12.3%     12/18/2013            3,303       2,232   

Flagship VIII, Ltd.(6)(16)

  Structured
Products
  12.3%     10/3/2014            6,362       5,217   
           

 

 

   

 

 

 

Subtotal CLO residual interests

            $ 15,931     $ 12,959   

Investment in payment rights

             

Duff & Phelps Corporation(10) (16)

  Financial
services
  17.6%     6/1/2012          $ 11,482     $ 13,311   
           

 

 

   

 

 

 

Subtotal investment in payment rights

            $ 11,482     $ 13,311   

Investments in funds(17)

             

Freeport Financial SBIC Fund LP

  Financial
services
      6/14/2013          $ 2,957     $ 2,823   

Gryphon Partners 3.5, L.P.

  Financial
services
      11/20/2012            1,133       1,661   
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 4,090     $ 4,484   
           

 

 

   

 

 

 

Total non-controlled/non-affiliated investments —142.97% of net asset value

            $ 599,965     $ 563,445   
           

 

 

   

 

 

 

 

(continued on next page)

 

See accompanying notes to these consolidated financial statements.

 

8


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

June 30, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company(1)(2)(3)

  Industry  

Interest Rate(4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Controlled investments —32.53% of net asset value

             

First lien secured debt

             

OEM Group, LLC(18)(24)

  Manufacturing   10.0% (LIBOR + 9.5%)     3/16/2016        2/15/2019      $ 18,703      $ 18,703     $ 18,703   

OEM Group, LLC(18)(24)

  Manufacturing   10.0% (LIBOR + 9.5%)     3/16/2016        6/30/2017        6,510        6,510       6,510   

Thibaut, Inc(18)

  Consumer
products
  14.0%     6/20/2014        6/19/2019        6,423        6,372       6,423   
         

 

 

   

 

 

   

 

 

 

Subtotal first lien secured debt

          $ 31,636      $ 31,585     $ 31,636   

Equity investments

             

C&K Market, Inc.(18)(22)

  Retail &
grocery
      11/3/2010          1,992,365      $ 2,271     $ 16,175   

C&K Market, Inc.(18)(21)

  Retail &
grocery
      11/3/2010          1,992,365        10,956       9,962   

OEM Group, Inc.(13)(18)(21)(24)

  Manufacturing       3/16/2016          93.51        8,314       8,199   

Thibaut, Inc(12) (13)(18)(19)(21)

  Consumer
products
      6/20/2014          4,747        4,711       5,431   

Thibaut, Inc(12)(13)(18)(22)

  Consumer
products
      6/20/2014          20,639        —         1,100   
           

 

 

   

 

 

 

Subtotal equity

            $ 26,252     $ 40,867   

Investments in funds

             

THL Credit Logan JV LLC(12)(17)(18)(20)(22)

  Financial
services
      12/3/2014          —        $ 59,000     $ 55,716   
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 59,000     $ 55,716   

Total controlled investments

             
           

 

 

   

 

 

 

—32.53% of net asset value

            $ 116,837     $ 128,219   
           

 

 

   

 

 

 

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

             

Investments in funds

             

THL Credit Greenway Fund LLC(12)(17)(22)

  Financial
services
      1/27/2011          $ 1     $ 1   

THL Credit Greenway Fund II LLC(12)(17)(22)

  Financial
services
      3/1/2013            4       4   
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 5     $ 5   

Total non-controlled/affiliated investments

             
           

 

 

   

 

 

 

—0.00% of net asset value

            $ 5     $ 5   
           

 

 

   

 

 

 
             
           

 

 

   

 

 

 

Total investments

            $ 716,807     $ 691,669   
           

 

 

   

 

 

 

—175.50% of net asset value

             
             

 

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     05/10/17       1    $ 50,000       $ —         $ (246
             

 

 

    

 

 

    

 

 

 

Total derivative instruments—% of net asset value

        $ 50,000       $ —         $ (246
             

 

 

    

 

 

    

 

 

 

 

(1) All debt investments are income-producing, unless otherwise noted. Equity and member interests are non-income-producing unless otherwise noted.
(2) All investments are pledged as collateral under the Revolving Facility and Term Loan Facility.
(3) As of June 30, 2016, 12.7% and 12.5% of the Company’s total investments on a cost and fair value basis, respectively, are in non-qualifying assets.
(4) Variable interest rate investments bear interest in reference to London Interbank offer rate, or LIBOR, or ABR, which are effective as of June 30, 2016. LIBOR loans are typically indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates, at the borrower’s option, and ABR rates are typically indexed to the current prime rate or federal funds rate. Both LIBOR and ABR rates may be subject to interest floors.
(5) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(6) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(7) Unitranche investment; interest rate reflected represents the implied interest rate earned on the investment for the most recent quarter.
(8) Issuer pays 0.50% unfunded commitment fee on delayed draw term loan and revolving loan facility.
(9) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(10) 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.

(Continued on next page)

See accompanying notes to these consolidated financial statements.

 

 

9


Table of Contents
(11) 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.
(12) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(13) Equity ownership may be held in shares or units of companies related to the portfolio company.
(14) Preferred stock investment return is income-producing with a stated rate of 12.3% cash and 2% PIK due on a monthly basis
(15) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(16) Income-producing security with no stated coupon; interest rate reflects an estimation of the effective yield to expected maturity as of June 30, 2016.
(17) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(18) As defined in Section 2(a)(9) of the 1940 Act, the Company is deemed to control this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities. See Schedule 12-14 in the accompanying notes to the consolidated financial statements for transactions for the quarter ended June 30, 2016 in which the issuer was a portfolio company that the Company is deemed to control.
(19) Part of our preferred stock investment return is income-producing with a stated rate of 3% due on a quarterly basis.
(20) On December 3, 2014, the Company entered into an agreement with Perspecta to create THL Credit Logan JV LLC, or Logan JV, a joint venture, which invests primarily in senior secured first lien term loans. All Logan JV investment decisions must be unanimously approved by the Logan JV investment committee consisting of one representative from each of the Company and Perspecta. Although the Company owns more than 25% of the voting securities of Logan JV, the Company does not believe that it has control over Logan JV (other than for purposes of the 1940 Act or otherwise). Funding to Logan JV will only be made pursuant to unanimous approval from the Company and Perspecta.
(21) Preferred stock
(22) Common stock and member interest.
(23) Loan was on non-accrual as of June 30, 2016. On July 22, 2016, the Company restructured its investment in Tri-Starr Management Services, Inc. As part of the restructuring, the Company exchanged the cost basis of its subordinated debt totaling $20,558 for a controlled equity position of an affiliate of Tri-Starr Management Services, Inc. valued at $3,136. As result of the restructuring, the Company recognized a $17,422 loss on conversion of its subordinated debt investment to common equity. Additionally, the Company made a $3,135 investment to acquire a first lien senior secured term loan position in the company.
(24) On March 17, 2016, THL Credit restructured its investment in OEM Group, Inc., or OEM. As part of the restructuring, THL Credit exchanged the cost basis of its first lien loans totaling $33,242 for a new first lien senior secured term loan in OEM Group, LLC of $18,703 and a controlled equity position valued at $8,313 in a related entity. In connection with the restructuring, the Company recognized a loss in the amount of $6,226. In addition, the Company invested $4,660 in a first lien senior secured revolver in OEM Group, LLC.
(25) On March 14, 2016, THL Credit further restructured its investment in Dimont & Associates, Inc. and affiliated entities. As part of the restructuring, THL Credit exchanged the cost basis of its equity interest totaling $6,569 and a subordinated term loan totaling $4,474 for an equity interest valued at $129 in an affiliated entity. In connection with the restructuring, the Company recognized a loss in the amount of $10,914.
(26) Investment formerly known as Key Brand Entertainment, Inc. The name change was effective May 16, 2016.
(27) Preferred stock investment return is income-producing with a stated rate of 12.5% PIK capitalized annually.
(28) Loan was on non-accrual as of June 30, 2016. On July 1, 2016, THL Credit restructured its investment in Loadmaster Derrick & Equipment, Inc., or Loadmaster. As part of the restructuring, THL Credit exchanged the cost basis of its senior secured loans totaling $14,705 for a new senior secured term loan of $7,000 and an income producing debt-like preferred equity position, valued at $1,114. As result of the restructuring, the Company recognized a $6,591 loss on conversion to preferred equity. Additionally, the Company made a $1,500 investment in a first lien senior secured term loan.
(29) Loan was on non-accrual as of June 30, 2016.

See accompanying notes to these consolidated financial statements.

 

10


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

December 31, 2015

(dollar amounts in thousands)

 

Type of Investment/ Portfolio company(1)(2)

 

Industry

 

Interest Rate(3)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Non-controlled/non-affiliated investments—160.50% of net
asset value

             

First lien secured debt

             

20-20 Technologies Inc.(5)

  IT services   9.8%(6)     9/12/2012        3/29/2019      $ 29,437      $ 29,183      $ 29,436   

Aerogroup International Inc.

 

Consumer

products

  9.5% (LIBOR + 8.5%)     6/9/2014        12/9/2019        13,580        13,377        12,629   

Airborne Tactical Advantage Company, LLC

 

Aerospace &

defense

  11.0%     9/7/2011        3/7/2016        2,583        2,577        2,583   

Airborne Tactical Advantage Company, LLC

 

Aerospace &

defense

  11.0%     6/24/2014        3/7/2016        1,679        1,675        1,696   

Allied Wireline Services, LLC

 

Energy /

Utilities

 

11.0% (LIBOR

+ 9.5%) (5.5%

Cash + 5.5%

PIK)(10)

    2/28/2014        2/28/2019        9,664        9,363        8,408   

American Achievement Corporation

 

Consumer

products

  8.3% (LIBOR + 7.3%)     10/30/2015        9/30/2020        10,000        9,855        9,855   

BeneSys Inc.

 

Business

services

 

10.8% (LIBOR

+ 9.8%)

    3/31/2014        3/31/2019        10,196        10,079        10,145   

BeneSys Inc.(7)

 

Business

services

 

10.8% (LIBOR

+ 9.8%)

    8/1/2014        3/31/2019        218        210        217   

Charming Charlie, LLC.

 

Retail &

grocery

  9.0% (LIBOR + 8.0%)     12/18/2013        12/24/2019        21,870        21,339        20,339   

Constructive Media, LLC

 

Consumer

products

 

10.5%

(LIBOR+

10.0%)

    11/23/2015        11/23/2020        15,500        15,196        15,196   

Copperweld Bimetallics LLC

  Industrials  

16.0% (12.0%

Cash + 4.0%

PIK)(10)

    12/11/2013        12/11/2018        19,525        19,026        18,354   

CRS Reprocessing, LLC

  Manufacturing  

10.5% (LIBOR

+ 9.5%)

    6/16/2011        6/16/2016        14,935        14,935        14,487   

Dodge Data & Analytics LLC

  IT services   9.8% (LIBOR + 8.8%)     11/20/2014        10/31/2019        11,496        11,315        11,324   

Duff & Phelps Corporation(9)

 

Financial

services

  4.8% (LIBOR + 3.8%)     5/15/2013        4/23/2020        244        246        239   

Food Processing Holdings, LLC

 

Food &

beverage

 

10.5% (LIBOR

+ 9.5%)

    10/31/2013        10/31/2018        22,063        21,794        22,173   

Hart InterCivic, Inc.

  IT services  

13.0% (LIBOR

+ 10.5% Cash + 1.5% PIK)(10)

    7/1/2011        7/1/2016        8,661        8,640        8,661   

Hart InterCivic, Inc.(7)

  IT services  

11.5% (LIBOR

+ 10.0% Cash)

    7/1/2011        7/1/2016        6,000        5,984        6,000   

HEALTHCAREfirst, Inc.

  Healthcare   13.5%(6)     8/31/2012        8/30/2017        9,016        8,903        8,588   

Holland Intermediate Acquisition Corp.

 

Energy /

Utilities

 

10.0% (LIBOR

+ 9.0%)

    5/29/2013        5/29/2018        22,050        21,797        20,286   

Holland Intermediate Acquisition Corp.(7)

 

Energy /

Utilities

 

10.0% (LIBOR

+ 9.0%)

    5/29/2013        5/29/2018        —         —         —    

 

11


Table of Contents

Type of Investment/ Portfolio company(1)(2)

 

Industry

 

Interest Rate(3)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Igloo Products Corp.

 

Consumer

products

 

11.3% (LIBOR

+ 9.8%)

    3/28/2014        3/28/2020        24,636        24,201        24,144   

Key Brand Entertainment, Inc.

 

Media,

entertainment

and leisure

 

8.8% (LIBOR

+7.5%)

    8/8/2013        8/8/2018        12,025        11,889        12,085   

Key Brand Entertainment, Inc.

 

Media,

entertainment

and leisure

 

12.5% (LIBOR

+11.3%)

    5/29/2014        8/8/2018        2,874        2,836        2,931   

Key Brand Entertainment, Inc.(7)(8)

 

Media,

entertainment

and leisure

 

8.8% (LIBOR

+7.5%)

    8/8/2013        8/8/2018        —         (16     —    

Key Brand Entertainment, Inc.(8)

 

Media,

entertainment

and leisure

 

12.5% (LIBOR

+11.3%)

    5/29/2014        8/8/2018        —         (39     —    

LAI International, Inc.

  Manufacturing   10.6%(6)     10/22/2014        10/22/2019        17,553        17,241        17,202   

LAI International, Inc.(7)

  Manufacturing   9.0%(6)     10/22/2014        10/22/2019        4,546        4,546        4,455   

Loadmaster Derrick &
Equipment, Inc.

 

Energy /

Utilities

 

11.3% (LIBOR

+10.3%)

    9/28/2012        9/28/2017        7,997        7,913        7,037   

Loadmaster Derrick &
Equipment, Inc.
(7)

 

Energy /

Utilities

 

11.3% (LIBOR

+10.3%)

    9/28/2012        9/28/2017        3,623        3,623        3,188   

 

(continued on next page)

 

12


Table of Contents

Type of Investment/Portfolio company(1)(2)

 

Industry

  Interest Rate(3)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Loadmaster Derrick & Equipment, Inc.(7)

 

Energy /

Utilities

  11.3% (LIBOR

+10.3%)

    7/16/2014        9/28/2017        3,170        3,135        2,790   

OEM Group, Inc.

  Manufacturing   15.0%(7.5%

Cash + 7.5%

PIK)(10)

    10/7/2010        2/15/2016        29,638        29,638        24,600   

OEM Group, Inc.

  Manufacturing   15.0%(7.5%

Cash + 7.5%

PIK)(10)

    6/6/2014        2/15/2016        3,158        3,158        2,621   

Virtus Pharmaceuticals, LLC

  Healthcare   10.7%(6)     7/17/2014        7/17/2019        19,615        19,263        19,615   

Wheels Up Partners, LLC

  Transportation   9.6% (LIBOR

+8.6%)

    1/31/2014        10/15/2021        8,929        8,833        9,018   

Wheels Up Partners, LLC

  Transportation   9.6% (LIBOR

+8.6%)

    8/27/2014        7/15/2022        9,633        9,633        9,730   
         

 

 

   

 

 

   

 

 

 

Subtotal first lien secured debt

        $ 376,114      $ 371,348      $ 360,032   

Second lien debt

             

Alex Toys, LLC

 

Consumer

products

  11.0% (LIBOR

+10.0%)

    6/30/2014        12/30/2019        30,201        29,714        28,993   

Allen Edmonds Corporation

 

Consumer

products

  10.0% (LIBOR

+9.0%)

    11/26/2013        5/27/2019        7,333        7,233        7,260   

American Covers, Inc.

 

Consumer

products

  9.5% (LIBOR

+8.5%)

    9/1/2015        2/25/2021        10,000        9,859        9,859   

Connecture, Inc.

  Healthcare   12.0% (LIBOR

+11.0%)

    3/18/2013        7/15/2018        21,831        21,668        22,049   

Granicus, Inc

  IT services   10.5% (LIBOR

+9.5%)

    12/18/2015        12/18/2020        17,000        16,663        16,663   

Hostway Corporation

  IT services   10.0% (LIBOR

+8.8%)

    12/27/2013        12/13/2020        17,500        17,273        16,625   

Merchants Capital Access, LLC

 

Financial

services

  11.5% (LIBOR

+10.5%)

    4/20/2015        4/20/2021        12,500        12,278        12,250   

Oasis Legal Finance Holding Company LLC

 

Financial

services

  10.5%     9/30/2013        9/30/2018        12,549        12,400        12,675   

Specialty Brands Holdings, LLC

  Restaurants   11.3% (LIBOR

+9.8%)

    7/16/2013        7/16/2018        20,977        20,743        20,558   

Synarc-Biocore Holdings, LLC

  Healthcare   9.3% (LIBOR

+8.3%)

    3/13/2014        3/10/2022        11,000        10,911        10,230   

Vision Solutions, Inc.

  IT services   9.5% (LIBOR

+8.0%)

    3/31/2011        7/23/2017        9,625        9,601        9,144   

Washington Inventory Service

 

Business

services

  10.3% (LIBOR

+9.0%)

    12/27/2012        6/20/2019        11,000        10,910        10,780   
         

 

 

   

 

 

   

 

 

 

Subtotal second lien debt

          $ 181,516      $ 179,253      $ 177,086   

Subordinated debt

             

A10 Capital, LLC(7)

 

Financial

services

  12.0%     8/25/2014        2/25/2021      $ 8,968      $ 8,889      $ 8,879   

Aerogroup International Inc.

 

Consumer

products

  12.0% PIK     8/5/2015        3/9/2020        264        264        185   

Dr. Fresh, LLC

 

Consumer

products

  14.0%(12.0%

Cash + 2.0%

PIK)(10)

    5/15/2012        11/15/2017        15,195        15,078        15,043   

Gold, Inc.

 

Consumer

products

  11.0%     12/31/2012        6/30/2019        16,788        16,788        16,788   

Martex Fiber Southern Corp.

  Industrials   15.5%(12.0%

Cash + 3.5%

PIK)(10)

    4/30/2012        6/30/2016        9,217        9,137        9,032   

 

13


Table of Contents

Type of Investment/Portfolio company(1)(2)

 

Industry

  Interest Rate(3)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Tri Starr Management Services, Inc.(23)

 

Business

services

  15.8% (2.1%

Cash and

13.7% PIK)

    3/4/2013        3/4/2019        20,906        20,558        13,589   
         

 

 

   

 

 

   

 

 

 

Subtotal subordinated debt

          $ 71,338      $ 70,714      $ 63,516   

Equity investments(11)

             

A10 Capital, LLC(11)(13)(20)

 

Financial

services

      8/25/2014          5,109.53      $ 17,178      $ 17,322   

Aerogroup International Inc.(22)

 

Consumer

products

      6/9/2014          253,616        11        —    

Aerogroup International Inc.(20)

 

Consumer

products

      6/9/2014          28,180        1,108        —     

AIM Media Texas Operating, LLC(11)(14)(21)

 

Media,

entertainment

and leisure

      6/21/2012          0.763636        764        727   

Airborne Tactical Advantage Company, LLC(21)

 

Aerospace &

defense

      9/7/2011          511,812        113        657   

Airborne Tactical Advantage Company, LLC(20)

 

Aerospace &

defense

      9/17/2013          225,000        169        489   

Alex Toys, LLC(11)(12)(14)(21)

 

Consumer

products

      5/22/2015          153.85        1,000        771   

Allied Wireline Services, LLC(11)(14)(21)

 

Energy /

Utilities

      2/28/2014          618,867.92        619        —     

Allied Wireline Services, LLC(11)(14)(21)

 

Energy /

Utilities

      2/28/2014          501,159.24        175        —     

Constructive Media, LLC

 

Consumer

products

      11/23/2015          750,000        750        750   

Firebirds International, LLC(21)

  Restaurants       5/17/2011          1,906        191        310   

Food Processing Holdings, LLC(21)

 

Food &

beverage

      4/20/2010          162.44        163        244   

Food Processing Holdings, LLC(21)

 

Food &

beverage

      4/20/2010          406.09        408        1,006   

Hostway Corporation(21)

  IT services       12/27/2013          20,000        200        —     

Hostway Corporation(20)

  IT services       12/27/2013          1,800        1,800        1,254   

Igloo Products Corp.(11)(21)

 

Consumer

products

      4/30/2014          1,902.04        1,716        1,625   

OEM Group, Inc.(21)(22)

  Manufacturing       10/7/2010          —          —          —     

Surgery Center Holdings, Inc.(11)(21)

  Healthcare       4/20/2013          264,068        —          5,411   

Virtus Pharmaceuticals, LLC(14)(21)

  Healthcare       3/31/2015          6,796.47        127        263   

Virtus Pharmaceuticals, LLC(14)(21)

  Healthcare       3/31/2015          83.92        94        109   

Virtus Pharmaceuticals, LLC(14)(21)

  Healthcare       3/31/2015          589.76        590        626   

Wheels Up Partners, LLC(11)(14)(21)

  Transportation       1/31/2014          1,000,000        1,000        2,840   

YP Equity Investors, LLC(11)(14)(21)

 

Media,

entertainment

and leisure

      5/8/2012          —          —          5,000   
           

 

 

   

 

 

 

Subtotal equity

            $ 28,176      $ 39,404   

 

14


Table of Contents

Type of Investment/Portfolio company(1)(2)

 

Industry

  Interest Rate(3)   Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

CLO residual interests

             

Dryden CLO, Ltd.(5)(15)

 

Structured

Products

  15.8%     9/12/2013          —          6,845        6,205   

Flagship VII, Ltd.(5)(15)

 

Structured

Products

  15.8%     12/18/2013          —          3,517        3,110   

Flagship VIII, Ltd.(5)(15)

 

Structured

Products

  13.3%     10/3/2014          —          6,743        5,687   
           

 

 

   

 

 

 

Subtotal CLO residual interests

            $ 17,105      $ 15,002   

Investment in payment rights

             

Duff & Phelps Corporation(9)(15)

 

Financial

services

  17.6%     6/1/2012          —        $ 11,482      $ 13,307   
           

 

 

   

 

 

 

Subtotal investment in payment rights

            $ 11,482      $ 13,307   

Investments in funds(16)

             

Freeport Financial SBIC Fund LP

 

Financial

services

      6/14/2013          $ 2,957      $ 2,987   

Gryphon Partners 3.5, L.P.

 

Financial

services

      11/20/2012            1,030        999   
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 3,987      $ 3,986   
           

 

 

   

 

 

 

Total non-controlled/non-affiliated investments—160.50% of net asset value

            $ 682,065      $ 672,333   
           

 

 

   

 

 

 

Controlled investments—19.53% of net asset value

             

First lien secured debt

             

Thibaut, Inc(17)

 

Consumer

products

  14.0%     6/19/2014        6/19/2019      $ 6,455      $ 6,397      $ 6,455   
         

 

 

   

 

 

   

 

 

 

Subtotal first lien secured debt

             
          $ 6,455      $ 6,397      $ 6,455   

 

15


Table of Contents

Type of Investment/Portfolio company(1)(2)

 

Industry

  Interest  Rate(3)     Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Subordinated debt

             

Dimont & Associates, Inc.(17)(23)

 

Financial

services

    11.0% PIK(10)        10/20/2014        4/20/2018      $ 4,556      $ 4,474      $ 265   
         

 

 

   

 

 

   

 

 

 

Subtotal subordinated debt

          $ 4,556      $ 4,474      $ 265   

Equity investments

             

C&K Market, Inc.(17)(21)

 

Retail &

grocery

      11/3/2010          1,992,365      $ 2,271      $ 14,168   

C&K Market, Inc.(17)(20)

 

Retail &

grocery

      11/3/2010          1,992,365        10,956        9,962   

Dimont & Associates, Inc.(17)(21)

 

Financial

services

      10/20/2014          50,004        6,569        —    

Thibaut, Inc(11)(12)(17)(18)(20)

 

Consumer

products

      6/19/2014          4,747        4,706        5,227   

Thibaut, Inc(11)(12)(17)(21)

 

Consumer

products

      6/19/2014          20,639        —         964   
           

 

 

   

 

 

 

Subtotal equity

            $ 24,502      $ 30,321   

(continued on next page)

 

16


Table of Contents

Type of Investment/

Portfolio  company(1)(2)

 

Industry

  Interest  Rate(3)     Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal(4)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Investments in funds

             

THL Credit Logan JV LLC(11)(16)(17)(19)(21)

 

Financial

services

      12/3/2014          —       $ 49,400      $ 44,782   
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 49,400      $ 44,782   
           

 

 

   

 

 

 

Total controlled investments—19.53% of net asset value

            $ 84,773      $ 81,823   
           

 

 

   

 

 

 

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

             

Investments in funds

             

THL Credit Greenway Fund LLC(11)(16)(21)

 

Financial

services

      1/27/2011          $ 3      $ 3   

THL Credit Greenway Fund II LLC(11)(16)(21)

 

Financial

services

      3/1/2013            4        4   
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 7      $ 7   
           

 

 

   

 

 

 

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

            $ 7      $ 7   
           

 

 

   

 

 

 

Total investments—180.03% of net asset value

            $ 766,845      $ 754,163   
           

 

 

   

 

 

 

 

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     05/10/17        1      $ 50,000      $ —       $ (206
         

 

 

   

 

 

   

 

 

 

Total derivative instruments—0.05% of net asset value

  

    $ 50,000      $ —       $ (206
         

 

 

   

 

 

   

 

 

 

 

(1) All debt investments are income-producing, unless otherwise noted. Equity and member interests are non-income-producing unless otherwise noted.
(2) All investments are pledged as collateral under the Revolving Facility and Term Loan Facility.
(3) Variable interest rate investments bear interest in reference to LIBOR or ABR, which are effective as of December 31, 2015. LIBOR loans are typically indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates, at the borrower’s option, and ABR rates are typically indexed to the current prime rate or federal funds rate. Both LIBOR and ABR rates are subject to interest floors.
(4) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(5) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(6) Unitranche investment; interest rate reflected represents the implied interest rate earned on the investment for the most recent quarter.
(7) Issuer pays 0.50% unfunded commitment fee on delayed draw term loan and revolving loan facility.
(8) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(9) 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.
(10) 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.
(11) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(12) Equity ownership may be held in shares or units of companies related to the portfolio company.
(13) Preferred stock investment return is income-producing with a stated rate of 12% cash and 2% PIK due on a monthly basis
(14) Interest held by a wholly owned subsidiary of THL Credit, Inc.
(15) Income-producing security with no stated coupon; interest rate reflects an estimation of the effective yield to expected maturity as of December 31, 2015.

 

17


Table of Contents
(16) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(17) As defined in Section 2(a)(9) of the 1940 Act, the Company is deemed to control this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities. See Schedule 12-14 in the accompanying notes to the consolidated financial statements for transactions during the year ended December 31, 2015 in which the issuer was a portfolio company that the Company is deemed to control.
(18) Part of our preferred stock investment return is income-producing with a stated rate of 3% due on a quarterly basis.
(19) On December 3, 2014, the Company entered into an agreement with Perspecta to create THL Credit Logan JV LLC, or Logan JV, a joint venture, which invests primarily in senior secured first lien term loans. All Logan JV investment decisions must be unanimously approved by the Logan JV investment committee consisting of one representative from each of the Company and Perspecta. Although the Company owns more than 25% of the voting securities of Logan JV, the Company does not believe that it has control over Logan JV (other than for purposes of the 1940 Act or otherwise). Funding to Logan JV will only be made pursuant to unanimous approval from the Company and Perspecta.
(20) Preferred stock
(21) Common stock, member interest, and warrants
(22) Warrants received at initial acquisition date at no cost to the Company
(23) Loan was on non-accrual as of December 31, 2015.

 

18


Table of Contents

THL Credit, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2016

(in thousands, except per share data)

(unaudited)

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 as amended, the Code. 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 lower middle market companies.

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.

In December 2015, the Company completed a public debt offering selling $35,000 of 6.75% Notes due 2022, or the 2022 Notes, including the exercise of the overallotment option, through a group of underwriters, less an underwriting discount, and received net proceeds of $33,950.

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). Corporate subsidiaries 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. and THL Corporate Finance, LLC, its wholly owned subsidiary, serves as the administrative agent on certain investment transactions.

2. Significant Accounting Policies and Recent Accounting Updates

Basis of Presentation

The Company is an investment company following the accounting and reporting guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies.

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All inter- company accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period financial statements to conform to current period presentation. 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 ending December 31, 2016.

The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 10, 2016. The financial results of the Company’s portfolio companies are not consolidated in the financial statements.

The accounting records of the Company are maintained in U.S. dollars.

 

19


Table of Contents

Consolidation

The Company follows the guidance in ASC Topic 946 Financial Services—Investment Companies and will not generally consolidate its investment in a company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. The Company consolidated the results of its wholly owned subsidiaries in its consolidated financial statements. The Company does not consolidate its non-controlling interest in THL Credit Logan JV LLC, or Logan JV. See also the disclosure under the heading, Significant Accounting Policies—THL Credit Logan JV LLC.

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, creditworthiness 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, 2016 and December 31, 2015.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of credit facilities and public debt offering of Notes. These costs are capitalized at the time of payment and are amortized using the straight line and effective yield methods over the term of the credit facilities and Notes, respectively. Capitalized deferred financing costs related to the Term Loan Facility and Notes, as defined in Note 7, Borrowings, are presented net against the respective balances outstanding on the Consolidated Statement of Assets and Liabilities. Capitalized deferred financing costs related to the Revolving Facility, as defined in Note 7, Borrowings, are presented separately on the Company’s Consolidated Statement of Assets and Liabilities. See also the disclosure in Note 7, Borrowings.

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.

Deferred Revenue

Deferred revenues consist of proceeds received for interest and other fees for which the earnings process is not yet complete. Such amounts will be recognized into income over such time that the income is earned.

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 8, Interest Rate Derivative.

Partial Loan Sales

The Company follows the guidance in ASC Topic 860 Transfers and Servicing when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest”, as defined in the guidance as a pro-rata ownership interest in an entire financial asset, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s Consolidated Statements of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met.

 

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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 7, Borrowings.

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 or are not considered to be the best estimate of fair value, are valued at fair value as determined in good faith by the Company’s board of directors. Because the Company expects 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 and in accordance with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ 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 THL Credit Advisors LLC, or the Advisor;

 

   

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

 

   

the audit committee of the Company’s 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 firms to reflect any comments; and

 

   

the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

The types of factors that the Company may take into account in fair value pricing its 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 generally 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 firms, 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.

Debt Investments

For debt investments, the Company generally 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 enterprise value, a market approach, is used to determine the value of equity and debt investments that are credit impaired, close to maturity or where the Company also holds a controlling equity interest. The method for determining enterprise value uses a multiple analysis, whereby appropriate multiples are applied to the portfolio company’s net income before net interest expense, income tax expense, depreciation and amortization, or EBITDA.

 

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Interest Rate Derivative

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.

Collateralized Loan Obligations

The Company values its residual interest investments in collateralized loan obligations using an income approach that analyzes the discounted cash flows of its 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, re-investment rates 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.

Payment Rights

The Company values its investment in payment rights using an income approach that analyzes the discounted 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 the underlying portfolio company and the length of the remaining payment stream.

Equity

The company uses a combination of the income and market approaches to value its equity investments. 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, the Company’s 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;

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.

 

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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. Redemptions are not generally permitted in the Company’s investments in funds. The remaining term of the Company’s investments in funds is expected to be four to eight years.

The following provides quantitative information about Level 3 fair value measurements as of June 30, 2016:

 

Description

   Fair Value     

Valuation Technique

  

Unobservable Inputs

   Range (Average)(1)

First lien secured debt

   $ 298,961      Discounted cash flows (income approach)   

Weighted average cost of

capital (WACC)

   12% - 15% (13%)
     49,740      Market comparable companies (market approach)    EBITDA Multiple    5.0x - 6.0x (5.5x)

Second lien debt

     134,775      Discounted cash flows (income approach)   

Weighted average cost of

capital (WACC)

   12% - 14% (13%)

Subordinated debt

     44,426      Discounted cash flows (income approach)   

Weighted average cost of

capital (WACC)

   13% - 14% (14%)
     3,136      Market comparable companies (market approach)    EBITDA Multiple    8.0x - 9.4x (8.7x)

Equity investments

     50,401      Market comparable companies (market approach)    EBITDA Multiple    5.8x - 6.5x (6.1x)
     18,332      Discounted cash flows (income approach)   

Weighted average cost of

capital (WACC)

   15% - 15% (15%)

Warrants

     5,423      Market comparable companies (market approach)   

EBITDA Multiple

   3.5x - 4.0x (3.8x)

Investment in payment rights

     13,311      Discounted cash flows (income approach)   

Weighted average cost of

capital (WACC)

   15% - 16% (15%)
         Federal Tax Rates    35% - 40% (38%)

CLO residual interests

     12,959      Discounted cash flows (income approach)   

Weighted average cost of

capital (WACC)

   20%
        

Weighted average prepayment

rate

   25%
         Weighted average default rate    1% - 2%
  

 

 

          

Total Level 3 Investments

   $ 631,464           
  

 

 

          

 

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The following provides quantitative information about Level 3 fair value measurements as of December 31, 2015:

 

Description

   Fair Value     

Valuation Technique

  

Unobservable Inputs

   Range  (Average)(1)  

First lien secured debt

   $ 332,810       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)      12% - 14% (13%)   
     33,677       Market comparable companies (market approach)    EBITDA Multiple      4.7x - 5.7x (5.2x)   

Second lien debt

     177,086       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)      12% - 13% (12%)   

Subordinated debt

     49,927       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)      15% - 16% (16%)   
     13,854       Market comparable companies (market approach)    EBITDA Multiple      6.6x - 7.8x (7.1x)   
         Revenue Multiple      0.3x - 0.5x (0.4x)   

Equity investments

     46,992       Market comparable companies (market approach)    EBITDA Multiple      5.4x - 6.4x (5.9x)   
     17,322       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)      16% - 18% (17%)   

Investment in payment rights

     13,307       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)      15% - 16% (15%)   
         Federal Tax Rates      35% - 40% (38%)   

CLO residual interests

     15,002       Discounted cash flows (income approach)    Weighted average cost of capital (WACC)      20% - 25% (23%)   
         Weighted average prepayment rate      25%   
         Weighted average default rate      2%   
  

 

 

          

Total Level 3 Investments

   $ 699,977            
  

 

 

          

 

(1) Averages were determined using a weighted average based upon the fair value of the investments in each investment category.

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 and income producing securities, 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 U.S. 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 structured products. In the case of the tax receivable agreement (“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 adjusted by management for differences between the investment and referenced comparables, 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 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.

 

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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.

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, the Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The Company records the reversal of any previously accrued income against the same income category reflected in the Consolidated Statement of Operations. As of June 30, 2016, the Company had three loans on non-accrual status with an amortized cost basis of $54,511 and fair value of $30,105. As of December 31, 2015, the Company had two loans on non-accrual with an amortized cost basis of $25,032 and fair value of $13,854.

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 if the Company does not expect amounts to be collectible and will generally only begin to recognize PIK income again when all principal and interest have been paid or upon the restructuring of the investment where the interest is deemed collectable. 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 three and six months ended June 30, 2016 and 2015:

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Accumulated PIK balance, beginning of period

   $ 9,531       $ 6,245       $ 9,302       $ 7,041   

PIK income capitalized/receivable

     466         1,786         1,092         2,380   

PIK received in cash from repayments

     —           (464      (256      (1,854

PIK recognized through restructuring

     —           —           (141      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated PIK balance, end of period

   $ 9,997       $ 7,567       $ 9,997       $ 7,567   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

The Company will recognize any earned exit or back-end fees into income when it believes the amounts will ultimately become collected by using either the beneficial interest model or other appropriate income recognition frameworks.

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, 2016 and 2015.

 

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The Company may also generate revenue in the form of fees from the management of Greenway and Greenway II, prepayment premiums, commitment, loan origination, structuring or due diligence fees, exit fees, portfolio company administration fees, fees for providing significant managerial assistance and consulting fees.

U.S. Federal Income Taxes, Including Excise Tax

The Company has elected to be taxed as a RIC under Subchapter M of the Code and currently qualifies, and intends to continue to qualify each year, as a RIC under the Code. Accordingly, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed to stockholders.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid a 4% U.S. federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its net capital gains for the one-year period ending October 31 of that calendar year (iii) any income recognized, but not distributed, in preceding years and on which the Company paid no U.S. federal income tax. The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate.

The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income. See also the disclosure in Note 10, Dividends, for a summary of the dividends paid. For the three months ended June 30, 2016 and 2015, the Company incurred U.S. federal excise tax and other tax expenses of $134 and $248, respectively. For the six months ended June 30, 2016 and 2015, the Company incurred U.S. federal excise tax and other tax expenses of $226 and $327, respectively.

Certain consolidated subsidiaries of the Company are subject to U.S. federal and state income taxes. These taxable entities are not consolidated for income tax purposes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries.

The following shows the breakdown of current and deferred income tax provisions for the three and six months ended June 30, 2016 and 2015:

 

     For the three months ended      For the six months ended  
     June 30,      June 30,  
     2016      2015      2016      2015  

Current income tax provision:

           

Current income tax benefit (provision)

   $ (74    $ (122    $ (236    $ (266

Deferred income tax provision:

           

Deferred income tax benefit

     143         347         226         375   

(Provision) benefit for taxes on unrealized gain on investments

     (99      (388      (207      (216

These current and deferred income taxes are determined from taxable income estimates provided by portfolio companies where the Company holds equity or equity-like investments organized as pass-through entities in its corporate subsidiaries. These tax estimates may be subject to further change once tax information is finalized for the year. As of June 30, 2016 and December 31, 2015, $162 and $396, respectively, of income tax receivable was included in prepaid expenses and other assets on the Consolidated Statements of Assets and Liabilities. As of June 30, 2016 and December 31, 2015, $3,999 and $3,881, respectively, were included in deferred tax liability on the Consolidated Statements of Assets and Liabilities primarily relating to deferred taxes on unrealized gains on investments and other temporary book to tax differences held in its corporate subsidiaries. As of June 30, 2016 and December 31, 2015, $1,257 and $1,118, respectively of deferred tax assets were included in deferred tax assets on the Consolidated Statements of Assets and Liabilities relating to net operating loss carryforwards and unrealized losses on investments and other temporary book to tax differences that are expected to be used in future periods.

 

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Under the RIC Modernization Act (the “RIC Act”), we are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010, for an unlimited period. However, any losses incurred during post-enactment taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under the rules applicable to pre-enactment capital losses.

Because U.S. federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

The Company follows the provisions under the authoritative guidance on accounting for and disclosure of uncertainty in tax positions. The provisions require management to determine whether a tax position of the Company is more likely than not to be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions not meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. There are no unrecognized tax benefits or obligations in the accompanying consolidated financial statements. Although the Company files U.S. federal and state tax returns, the Company’s major tax jurisdiction is U.S. federal. The Company’s inception-to-date U.S. federal tax years remain subject to examination by taxing authorities.

Dividends

Dividends and distributions to stockholders are recorded on the applicable record date. The amount to be paid out as a dividend is determined by the Company’s board of directors on a quarterly basis. Net realized capital gains, if any, are generally distributed at least annually out of assets legally available for such distributions, although the Company may decide to retain such capital gains for investment.

Capital transactions in connection with the Company’s dividend reinvestment plan are recorded when shares are issued.

Recent Accounting Pronouncements

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810) – Amendments to the Consolidation Analysis,” which amends the current consolidation guidance and ends the deferral granted to investment companies from applying the VIE guidance. ASU 2015-02 changes the manner in which a reporting entity assesses one of the five characteristics that determine if an entity is a variable interest entity. ASU 2015-2 will be effective for annual reporting periods in fiscal years and interim reporting periods beginning after December 15, 2015. The Company adopted this standard effective January 1, 2016. The adoption did not have an impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs (Topic 835),” which amends the presentation of debt issuance costs on an entity’s balance sheet. Under ASU 2015-03, an entity would present debt issuance costs as a direct deduction from the carrying value of the associated liability instead of a separate deferred asset. ASU 2015-03 will be effective for annual and interim reporting periods beginning after December 15, 2015. The Company has adopted this standard effective January 1, 2016. The adoption resulted in a change in the presentation and disclosure of deferred financing costs, loans payable and notes payable to the Consolidated Statements of Assets and Liabilities.

In May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its Equivalent),” which amends the presentation of investments measured at net asset value, as a practical expedient for fair value, from the fair value hierarchy. Under ASU 2015-07, an entity would remove investments measured using the practical expedient from the fair value hierarchy. ASU 2015-07 is effective for annual and interim reporting periods beginning after December 15, 2015 and early adoption is permitted. The Company adopted the ASU during the quarter ended March 31, 2016, which did not have an impact on the Company’s consolidated financial statements other than updating the required disclosures around fair value measurements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall”, which makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods therein. Early adoption is permitted specifically for the amendments pertaining to the presentation of certain fair value changes for financial liabilities measured at fair value. Early adoption of all other amendments is not permitted. The Company is currently evaluating the impact of the adoption of ASU 2016-01 on its consolidated financial statements.

 

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In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606),” which amends the criteria for revenue recognition where an entity enters into contracts with customers to transfer goods or services or where there is a transfer of nonfinancial assets. Under ASU 2016-10, an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2016-10 will be effective for annual and interim reporting periods after December 15, 2018. The application of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

3. Investments

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of June 30, 2016:

 

Description

   Fair Value      Level 1      Level 2      Level 3  

First lien secured debt

   $ 348,701      $ —         $ —        $ 348,701   

Second lien debt

     134,775        —           —          134,775   

Subordinated debt

     47,562        —           —          47,562   

Equity investments

     68,733        —           —          68,733   

Warrants

     5,423        —           —          5,423   

CLO residual interests

     12,959        —           —          12,959   

Investment in Logan JV (1)

     55,716         —           —          —     

Investment in payment rights

     13,311        —           —          13,311   

Investments in funds (1)

     4,489         —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 691,669      $ —         $ —        $ 631,464   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate derivative

     (246      —           (246      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability at fair value

   $ (246    $ —         $ (246    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of December 31, 2015:

 

Description

   Fair Value      Level 1      Level 2      Level 3  

First lien secured debt

   $ 366,487       $ —        $ —        $ 366,487   

Second lien debt

     177,086         —          —          177,086   

Subordinated debt

     63,781         —          —          63,781   

Equity investments

     69,725         5,411         —          64,314   

CLO residual interests

     15,002         —          —          15,002   

Investment in Logan JV(1)

     44,782         —          —          —    

Investment in payment rights

     13,307         —          —          13,307   

Investments in funds(1)

     3,993         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 754,163       $ 5,411       $ —        $ 699,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate derivative

     (206      —          (206      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability at fair value

   $ (206    $ —        $ (206    $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Certain investments that are measured at fair value using net asset value have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.

 

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The following is a summary of the industry classification in which the Company invests as of June 30, 2016:

 

Industry

   Amortized
Cost
     Fair Value      % of
Net  Assets
 

Consumer products

   $ 143,579       $ 142,488         36.14

Financial services

     128,416         127,756         32.42

Manufacturing

     70,238         70,096         17.79

IT services

     72,299         67,499         17.13

Retail & grocery

     36,098         44,036         11.17

Healthcare

     44,447         43,990         11.16

Energy / utilities

     46,842         36,776         9.33

Media, entertainment and leisure

     29,265         34,971         8.87

Industrials

     27,404         25,473         6.46

Business Services

     41,681         22,170         5.63

Food & beverage

     20,821         21,819         5.54

Transportation

     18,738         20,838         5.29

Restaurants

     21,048         20,798         5.28

Structured products

     15,931         12,959         3.29
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 716,807       $ 691,669         175.50
  

 

 

    

 

 

    

 

 

 

The following is a summary of the industry classification in which the Company invests as of December 31, 2015:

 

Industry

   Amortized
Cost
     Fair Value      % of
Net  Assets
 

Consumer products

   $ 157,253       $ 155,744         37.16

Financial services

     126,910         113,712         27.15

IT services

     100,659         99,107         23.66

Healthcare

     61,556         66,891         15.97

Manufacturing

     69,518         63,365         15.13

Retail & grocery

     34,566         44,469         10.62

Energy / utilities

     46,625         41,709         9.96

Business services

     41,757         34,731         8.29

Industrials

     28,163         27,386         6.54

Food & beverage

     22,365         23,423         5.59

Transportation

     19,466         21,588         5.15

Restaurants

     20,934         20,868         4.98

Media, entertainment and leisure

     15,434         20,743         4.95

Structured products

     17,105         15,002         3.58

Aerospace & defense

     4,534         5,425         1.30
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 766,845       $ 754,163         180.03
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is a summary of the geographical concentration of our investment portfolio as of June 30, 2016:

 

Region

   Amortized
Cost
     Fair Value