10-Q 1 d627092d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarter Ended September 30, 2018

 

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

Commission File Number: 814-00849

 

 

SOLAR SENIOR CAPITAL LTD.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-4288022
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

500 Park Avenue

New York, N.Y.

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

(212) 993-1670

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer      Accelerated filer  

Non-accelerated filer      Smaller Reporting company  
Emerging growth company       

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

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

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of November 1, 2018 was 16,040,485.

 

 

 


Table of Contents

SOLAR SENIOR CAPITAL LTD.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

 

     PAGE  

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
  

Consolidated Statements of Assets and Liabilities as of September  30, 2018 (unaudited) and December 31, 2017

     3  
  

Consolidated Statements of Operations for the three and nine months ended September 30, 2018 (unaudited) and the three and nine months ended September 30, 2017 (unaudited)

     4  
  

Consolidated Statements of Changes in Net Assets for the nine months ended September 30, 2018 (unaudited) and the year ended December 31, 2017

     5  
  

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 (unaudited) and the nine months ended September 30, 2017 (unaudited)

     6  
  

Consolidated Schedule of Investments as of September  30, 2018 (unaudited)

     7  
  

Consolidated Schedule of Investments as of December 31, 2017

     12  
  

Notes to Consolidated Financial Statements (unaudited)

     17  
  

Report of Independent Registered Public Accounting Firm

     39  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      40  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      61  

Item 4.

   Controls and Procedures      62  

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      62  

Item 1A.

   Risk Factors      62  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      66  

Item 3.

   Defaults Upon Senior Securities      66  

Item 4.

   Mine Safety Disclosures      66  

Item 5.

   Other Information      66  

Item 6.

   Exhibits      67  
   Signatures      69  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

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

 

Item 1.

Financial Statements

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share amounts)

 

    September 30, 2018
(unaudited)
    December 31, 2017  

Assets

   

Investments at fair value:

   

Companies less than 5% owned (cost: $372,779 and $289,848, respectively)

  $ 369,138     $ 283,983  

Companies 5% to 25% owned (cost: $3,835 and $3,625, respectively)

    2,711       2,213  

Companies more than 25% owned (cost: $87,439 and $121,298, respectively)

    93,350       121,885  

Cash

    4,759       3,726  

Cash equivalents (cost: $0 and $104,874, respectively)

    —         104,874  

Receivable for investments sold

    9,642       508  

Dividends receivable

    1,927       2,723  

Interest receivable

    1,978       1,732  

Other receivable

    103       20  

Prepaid expenses and other assets

    229       277  
 

 

 

   

 

 

 

Total assets

  $ 483,837     $ 521,941  
 

 

 

   

 

 

 

Liabilities

   

Credit facility ($148,600 and $124,200 face amounts, respectively, reported net of unamortized debt issuance costs of $1,738 and $0, respectively. See notes 6 and 7)

  $ 146,862     $ 124,200  

FLLP 2015-1, LLC revolving credit facility (the “FLLP Facility”) (see notes 6 and 7)

    44,784       —    

Payable for investments and cash equivalents purchased

    14,610       122,110  

Distributions payable

    1,976       1,884  

Management fee payable (see note 3)

    1,222       999  

Performance-based incentive fee payable (see note 3)

    1,344       374  

Interest payable (see note 7)

    1,394       401  

Administrative services expense payable (see note 3)

    708       944  

Other liabilities and accrued expenses

    1,261       898  
 

 

 

   

 

 

 

Total liabilities

  $ 214,161     $ 251,810  
 

 

 

   

 

 

 

Commitments and contingencies (see notes 10, 11 and 12)

   

Net Assets

   

Common stock, par value $0.01 per share, 200,000,000 and 200,000,000 common shares authorized, respectively, and 16,040,485 and 16,036,730 issued and outstanding, respectively

  $ 160     $ 160  

Paid-in capital in excess of par

    287,906       287,841  

Distributions in excess of net investment income

    (5,228     (5,336

Accumulated net realized loss

    (11,099     (5,844

Net unrealized appreciation (depreciation) (see note 11)

    (2,063     (6,690
 

 

 

   

 

 

 

Total net assets

  $ 269,676     $ 270,131  
 

 

 

   

 

 

 

Net Asset Value Per Share

  $ 16.81     $ 16.84  
 

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except share amounts)

 

    Three months ended     Nine months ended  
    September 30, 2018     September 30, 2017     September 30, 2018     September 30, 2017  

INVESTMENT INCOME:

       

Interest:

       

Companies less than 5% owned

  $ 7,734     $ 5,946     $ 19,563     $ 16,812  

Companies 5% to 25% owned

    117       51       258       152  

Dividends:

       

Companies more than 25% owned

    3,138       1,924       9,775       5,771  

Other income:

       

Companies less than 5% owned

    11       25       156       326  

Companies 5% to 25% owned

    —         —         23       —    

Companies more than 25% owned

    13       20       50       59  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

    11,013       7,966       29,825       23,120  
 

 

 

   

 

 

   

 

 

   

 

 

 

EXPENSES:

       

Management fees (see note 3)

  $ 1,222     $ 955     $ 3,415     $ 2,862  

Performance-based incentive fees (see note 3)

    1,344       231       2,453       428  

Interest and other credit facility expenses (see note 7)

    2,034       977       5,202       2,717  

Administrative services expense (see note 3)

    390       372       1,159       1,107  

Other general and administrative expenses

    261       491       1,271       1,444  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    5,251       3,026       13,500       8,558  
 

 

 

   

 

 

   

 

 

   

 

 

 

Management fees waived (see note 3)

    —         (481     —         (1,962

Performance-based incentive fees waived (see note 3)

    —         (231     (745     (428
 

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

    5,251       2,314       12,755       6,168  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

  $ 5,762     $ 5,652     $ 17,070     $ 16,952  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Net realized gain (loss) on investments and cash equivalents (companies less than 5% owned)

  $ (4   $ 52     $ (5,255   $ 193  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Companies less than 5% owned

    (282     (457     2,224       (478

Companies 5% to 25% owned

    14       281       288       351  

Companies more than 25% owned

    (84     484       2,115       134  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    (352     308       4,627       7  
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    (356     360       (628     200  
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS

  $ 5,406     $ 6,012     $ 16,442     $ 17,152  
 

 

 

   

 

 

   

 

 

   

 

 

 

EARNINGS PER SHARE (see note 5)

  $ 0.34     $ 0.37     $ 1.03     $ 1.07  
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(in thousands, except share amounts)

 

     Nine months ended
September 30, 2018
(unaudited)
    Year ended
December 31, 2017
 

Increase in net assets resulting from operations:

    

Net investment income

   $ 17,070     $ 22,604  

Net realized gain (loss)

     (5,255     233  

Net change in unrealized gain (loss)

     4,627       549  
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     16,442       23,386  
  

 

 

   

 

 

 

Distributions to stockholders:

    

From net investment income

     (16,442     (22,604
  

 

 

   

 

 

 

Capital transactions (see note 14):

    

Reinvestment of distributions

     65       204  
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     65       204  
  

 

 

   

 

 

 

Total increase (decrease) in net assets

     (455     986  

Net assets at beginning of period

     270,131       269,145  
  

 

 

   

 

 

 

Net assets at end of period(1)

   $ 269,676     $ 270,131  
  

 

 

   

 

 

 

Capital share activity (see note 14):

    

Common stock issued from reinvestment of distributions

     3,755       11,719  
  

 

 

   

 

 

 

Net increase from capital share activity

     3,755       11,719  
  

 

 

   

 

 

 

 

(1)

Includes overdistributed net investment income of ($5,228) and ($5,336), respectively.

See notes to consolidated financial statements.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)

 

     Nine months ended  
     September 30,
2018
    September 30,
2017
 

Cash Flows from Operating Activities:

    

Net increase in net assets resulting from operations

   $ 16,442     $ 17,152  

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

    

Net realized (gain) loss on investments and cash equivalents

     5,255       (193

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

     (4,627     (7

Effect of consolidation of First Lien Loan Program LLC (“FLLP”) (see note 11)

     (3,210     —    

(Increase) decrease in operating assets:

    

Purchase of investments

     (188,062     (113,348

Proceeds from disposition of investments

     134,263       111,452  

Capitalization of payment-in-kind interest

     (771     (378

Collection of payment-in-kind interest

     34       —    

Receivable for investments sold

     (9,134     642  

Interest receivable

     (246     351  

Dividends receivable

     796       (130

Other receivable

     (83     (1

Prepaid expenses and other assets

     48       (52

Increase (decrease) in operating liabilities:

    

Payable for investments and cash equivalents purchased

     (107,500     (15,369

Management fee payable

     223       370  

Performance-based incentive fees payable

     970       —    

Administrative services expense payable

     (236     39  

Interest payable

     993       60  

Other liabilities and accrued expenses

     363       209  
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

     (154,482     797  
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash distributions paid

     (16,805     (16,800

Deferred financing costs

     123       —    

Consolidation of FLLP Facility

     49,796       —    

Proceeds from borrowings

     132,340       84,200  

Repayments of borrowings

     (114,813     (91,500
  

 

 

   

 

 

 

Net Cash Provided by (Used in) Financing Activities

     50,641       (24,100
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (103,841     (23,303

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

     108,600       151,828  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 4,759     $ 128,525  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 4,209     $ 2,657  
  

 

 

   

 

 

 

Non-cash financing activities consist of the reinvestment of dividends of $65 and $151 for the nine months ended September 30, 2018 and September 30, 2017, respectively.

See notes to consolidated financial statements.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)

September 30, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Spread
above
Index (3)
    Libor
Floor
    Interest
Rate (1)
    Acquisition
Date
    Maturity
Date
    Par
Amount
    Cost     Fair
Value
 

Bank Debt/Senior Secured Loans —137.8%

                 

1A Smart Start LLC(2)(13)

  Electrical Equipment, Instruments & Components     L+450       1.00     6.74     12/21/2017       2/21/2022     $ 6,077     $ 6,064     $ 6,077  

1A Smart Start LLC(13)(16)

  Electrical Equipment, Instruments & Components     L+475       1.00     6.99     9/18/2018       2/21/2022       6,805       6,766       6,805  

Acrisure, LLC(2)

  Insurance     L+425       1.00     6.59     5/3/2017       11/22/2023       7,390       7,376       7,430  

Advantage Sales and Marketing, Inc.(2)(13)

  Professional Services     L+325       1.00     5.49     2/14/2018       7/25/2021       4,962       4,879       4,962  

Advantage Sales and Marketing, Inc.(13)

  Professional Services     L+650       1.00     8.74     2/14/2013       7/25/2022       8,000       7,967       8,000  

Aegis Toxicology Sciences Corporation(2)(13)

  Health Care Providers & Services     L+550       1.00     7.84     5/7/2018       5/9/2025       11,000       10,815       11,000  

Alera Group Intermediate Holdings, Inc.(2)(13)

  Insurance     L+450       —         6.74     7/27/2018       8/1/2025       2,993       2,985       3,037  

Alimera Sciences, Inc.(2)(13)

  Pharmaceuticals     L+765       —         9.77     1/5/2018       7/1/2022       5,000       4,994       5,000  

Alteon Health, LLC (fka Island Medical)(2)(13)(16)

  Health Care Providers & Services     L+650       1.00     8.74     3/31/2017       9/1/2022       7,490       7,432       7,153  

American Teleconferencing Services, Ltd. (PGI) (2)(13)

  Communications Equipment     L+650       1.00     8.84     5/5/2016       12/8/2021       14,318       13,800       14,318  

AQA Acquisition Holding, Inc. (2)(13)

  Software     L+425       1.00     6.64     9/7/2018       5/24/2023       5,690       5,633       5,633  

Capstone Logistics Acquisition, Inc.(2)(13)(16)

  Professional Services     L+450       1.00     6.74     10/3/2014       10/7/2021       12,358       12,297       12,404  

Confie Seguros Holding II Co.(2)(13)(16)

  Insurance     L+525       1.00     7.49     10/13/2016       4/19/2022       14,552       14,452       14,242  

DISA Holdings Acquisition Subsidiary Corp.(2)(13)

  Professional Services     L+400       1.00     6.10     6/14/2018       6/30/2022       4,963       4,940       4,963  

Edgewood Partners Holdings, LLC(2)(13)(16)

  Insurance     L+425       1.00     6.49     3/28/2018       9/8/2024       13,305       13,288       13,305  

Empower Payments Acquisition, Inc. (RevSpring).(2)(13)(16)

  Professional Services     L+450       1.00     6.74     11/28/2016       11/30/2023       14,886       14,745       14,886  

Engineering Solutions & Products,
LLC(6)(13)

  Aerospace & Defense     L+600       2.00     8.35     11/5/2013       5/5/2019       134       134       134  

Engineering Solutions & Products,
LLC(6)(13)

  Aerospace & Defense     L+600       2.00     8.34     11/5/2013       11/5/2019       2,509       2,334       2,509  

Falmouth Group Holdings Corp.
(AMPAC) (2)(13)(16)

  Chemicals     L+675       1.00     8.99     12/15/2016       12/14/2021       12,462       12,462       12,462  

GenMark Diagnostics, Inc(2)(4)(13)

  Health Care Providers & Services     —         —         6.90     4/22/2016       1/1/2021       7,633       8,458       8,458  

Global Holdings LLC & Payment Concepts LLC(2)(13)

  Consumer Finance     L+750       1.00     9.83     3/31/2017       5/5/2022       11,550       11,379       11,550  

Global Tel*Link Corporation(2)

  Communications Equipment     L+400       1.25     6.39     11/6/2015       5/23/2020       3,315       3,144       3,340  

Global Tel*Link Corporation

  Communications Equipment     L+825       1.25     10.64     5/21/2013       11/23/2020       3,000       2,978       3,017  

Hostway Corporation(2)(13)††

  Internet Software & Services     L+575 (8)       1.25     8.09     6/27/2014       12/13/2019       7,814       7,805       7,658  

Kellermeyer Bergensons Services, LLC (KBS)(2)(13)(16)

  Commercial Services & Supplies     L+500       1.00     7.32     10/31/2014       10/29/2021       8,644       8,596       8,644  

LegalZoom.com, Inc.(2)(13)

  Internet Software & Services     L+425       1.00     6.46     11/17/2017       11/21/2024       4,962       4,917       4,993  

Logix Holding Company, LLC(2)(13)

  Communications Equipment     L+575       1.00     7.99     8/11/2017       12/22/2024       10,716       10,617       10,716  

Mavenir Systems, Inc.(2)(13)

  Software     L+600       1.00     8.14     5/1/2018       5/8/2025       9,975       9,784       9,825  

MHE Intermediate Holdings, LLC (TFS-Miner)(2)(13)

  Air Freight & Logistics     L+500       1.00     7.39     3/8/2017       3/10/2024       5,589       5,544       5,534  

Ministry Brands, LLC(2)(13)(16)

  Software     L+400       1.00     6.24     11/21/2016       12/2/2022       14,357       14,254       14,357  

MRI Software LLC(2)(13)

  Software     L+550       1.00     7.65     6/7/2017       6/30/2023       8,408       8,338       8,366  

MSHC, Inc. (Service Logic) (2)(13)(16)

  Commercial Services & Supplies     L+425       1.00     6.56     7/12/2018       7/31/2023       2,726       2,712       2,712  

 

See notes to consolidated financial statements.

 

7


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share/unit amounts)

 

Description

 

Industry

  Spread
above
Index (3)
    Libor
Floor
    Interest
Rate (1)
    Acquisition
Date
    Maturity
Date
    Par
Amount
    Cost     Fair
Value
 

MYI Acquiror Corp. (McLarens Young)(2)(13)

  Insurance     L+450       1.25     6.84     5/21/2014       5/28/2019     $ 3,322     $ 3,317     $ 3,322  

MYI Acquiror Ltd. (McLarens Young)(2)(4)(13)

  Insurance     L+450       1.25     6.84     5/21/2014       5/28/2019       4,238       4,232       4,238  

National Spine and Pain Centers,
LLC (13)(16)

  Health Care Providers & Services     L+450       1.00     6.74     9/18/2018       6/2/2024       2,591       2,580       2,565  

On Location Events, LLC & PrimeSport Holdings Inc. (2)(13)

  Media     L+550       1.00     7.83     12/7/2017       9/29/2021       14,521       14,374       14,412  

Pet Holdings ULC & Pet Supermarket, Inc. (4)(13)(16)

  Specialty Retail     L+550       1.00     7.84     9/18/2018       7/5/2022       4,600       4,552       4,600  

PPT Management Holdings,
LLC(2)(13) ††

  Health Care Providers & Services     L+750 PIK       1.00     9.69     12/15/2016       12/16/2022       8,321       8,259       7,073  

Pre-Paid Legal Services, Inc.(2)(13)

  Diversified Consumer Services     L+325       —         5.49     4/13/2018       5/1/2025       2,783       2,769       2,807  

PSP Group, LLC (Pet Supplies Plus)(2)(7)(13)(16)

  Specialty Retail     L+475       1.00     7.00     4/2/2015       4/6/2021       5,076       5,055       5,076  

Radiology Partners, Inc.(2)(13)

  Health Care Providers & Services     L+425       —         6.59     6/28/2018       7/9/2025       7,500       7,427       7,556  

Restoration Robotics, Inc. (2)(13)

  Health Care Equipment & Supplies     L+795       —         10.07     5/10/2018       5/1/2022       2,000       1,967       1,990  

SHO Holding I Corporation (Shoes for Crews)(2)(13)

  Footwear     L+500       1.00     7.34     11/20/2015       10/27/2022       5,835       5,800       5,675  

Solara Medical Supplies, Inc.(2)(13)

  Health Care Providers & Services     L+600       1.00     8.39     5/31/2018       5/31/2023       8,740       8,616       8,653  

Telular Corporation(13)(16)

  Wireless Telecommunication Services     L+425       1.00     6.64     9/18/2018       6/24/2019       4,784       4,778       4,784  

The Hilb Group, LLC & Gencorp Insurance Group, Inc.(2)(13)(16)

  Insurance     L+475       1.00     7.14     3/16/2016       6/24/2021       8,863       8,769       8,863  

Trident USA Health
Services (2)(13) ††

  Health Care Providers & Services     L+600 (15)       1.25     8.24     7/29/2013       7/31/2019       7,068       7,058       5,796  

TwentyEighty, Inc.(13)

  Professional Services     L+800       1.00     10.39     1/31/2017       3/31/2020       107       105       107  

TwentyEighty, Inc.(13) ††

  Professional Services     —         —         8.00 %(9)      1/31/2017       3/31/2020       2,045       1,983       2,045  

TwentyEighty, Inc.(13) ††

  Professional Services     —         —         9.00 %(10)      1/31/2017       3/31/2020       1,937       1,881       1,918  

U.S. Acute Care Solutions, LLC(2)(13)

  Health Care Providers & Services     L+500       1.00     7.24     12/22/2016       5/15/2021       6,379       6,338       6,379  

Web.com Group, Inc.(2)(13)

  Software     L+375       —         6.17     9/17/2018       10/10/2025       9,000       8,977       8,977  

WIRB-Copernicus Group, Inc.(2)(13)(16)

  Professional Services     L+425       1.00     6.49     3/27/2017       8/15/2022       11,369       11,313       11,369  
               

 

 

   

 

 

 

Total Bank Debt/Senior Secured Loans

 

  $ 372,039     $ 371,695  
               

 

 

   

 

 

 
                                      Shares/Units              

Common Equity/Equity Interests/Warrants — 34.7%

               

Engineering Solutions & Products, LLC(6)(11)(13)

  Aerospace & Defense           11/5/2013         133,668     $ 1,367     $ 68  

Essence Group Holdings Corporation (Lumeris) Warrants(13)

  Health Care Technology           3/22/2017         52,000       16       77  

Gemino Healthcare Finance, LLC(4)(5)(13)

  Diversified Financial Services           9/30/2013         32,839       31,439       34,150  

North Mill Capital LLC(4)(5)(13)(14)

  Diversified Financial Services           10/20/2017         109       56,000       59,200  

Restoration Robotics, Inc. Warrants(13)

  Health Care Equipment & Supplies           5/10/2018         16,173       25       9  

TwentyEighty Investors, LLC(13)

  Professional Services           1/31/2017         17,214       3,167       —    
               

 

 

   

 

 

 

Total Common Equity/Equity Interests/Warrants

 

  $ 92,014     $ 93,504  
               

 

 

   

 

 

 

Total Investments(12) — 172.5%

 

  $ 464,053     $ 465,199  

Liabilities in Excess of Other Assets — (72.5%)

 

    (195,523  
               

 

 

   

Net Assets — 100.0%

 

  $ 269,676    
               

 

 

   

 

See notes to consolidated financial statements.

 

8


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

September 30, 2018

(in thousands)

 

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2018.

(2)

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

(3)

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

(4)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of September 30, 2018, on a fair value basis, non-qualifying assets in the portfolio represented 22.9% of the total assets of the Company.

(5)

Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2018 in these controlled investments are as follows:

 

Name of Issuer

  Fair Value at
December 31, 2017
    Gross
Additions
    Gross
Reductions
    Realized
Gain

(Loss)
    Change in
Unrealized
Gain (Loss)
    Dividend
/Other
Income
    Fair Value at
September 30, 2018
 

First Lien Loan Program LLC (17)

  $ 35,835     $ 5,521     $ 42,980     $ —       $ (1,585   $ 2,889   $ —    

Gemino Healthcare Finance, LLC

    35,050       —         1,400       —         500       2,633     34,150  

North Mill Capital LLC

    51,000       5,000       —         —         3,200       4,303     59,200  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 121,885     $  10,521     $  44,380     $  —       $  2,115     $  9,825     $ 93,350  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes to consolidated financial statements.

 

  9  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

September 30, 2018

(in thousands)

 

(6)

Denotes investments in which we are an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2018 in these affiliated investments are as follows:

 

Name of Issuer

  Fair Value at
December 31, 2017
    Gross
Additions
    Gross
Reductions
    Realized
Gain (Loss)
    Change in
Unrealized
Gain (Loss)
    Interest/
Dividend/
Other Income
    Fair Value at
September 30,
2018
 

Engineering Solutions & Products, LLC (1st lien)

    —         602       468     —         —         54       134  

Engineering Solutions & Products, LLC (2nd lien)

    2,145       76       —         —         288       227       2,509  

Engineering Solutions & Products, LLC (equity interests)

    68     —         —         —         —         —         68
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $  2,213     $  678     $  468     $  —       $  288     $  281     $  2,711  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(7)

PSP Group, LLC, PSP Service Newco, Inc., PSP Subco, LLC, PSP Stores, LLC, and PSP Distribution, LLC are co-borrowers.

(8)

Spread is 5.25% Cash / 0.50% PIK.

(9)

Coupon is 4.00% Cash / 4.00% PIK.

(10)

Coupon is 0.25% Cash / 8.75% PIK.

(11)

Our equity investment in Engineering Solutions & Products, LLC is held through ESP SSC Corporation, a taxable consolidated subsidiary.

(12)

Aggregate net unrealized depreciation for federal income tax purposes is $2,048; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $6,499 and $8,547, respectively, based on a tax cost of $467,247. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act.

(13)

Level 3 investment valued using significant unobservable inputs.

(14)

Our equity investment in North Mill Capital LLC is partially held through ESP SSC Corporation, a taxable consolidated subsidiary.

(15)

Spread is 3.00% Cash / 3.00% PIK.

(16)

Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary FLLP 2015-1 LLC (the “FLLP SPV”). Such investments are pledged as collateral under the FLLP 2015-1, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of Solar Senior Capital Ltd.

(17)

On September 18, 2018, the Company acquired 100% of the equity of FLLP and as such is consolidating this investment as of this date.

Non-income producing security.

††

Investment contains a payment-in-kind (“PIK”) feature.

 

See notes to consolidated financial statements.

 

  10  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

September 30, 2018

 

Industry Classification

  Percentage of Total
Investments (at
fair value) as of
September 30, 2018
 

Diversified Financial Services (includes Gemino Healthcare Finance, LLC and North Mill Capital LLC)

    20.1

Health Care Providers & Services

    13.9

Professional Services

    13.0

Insurance

    11.7

Software

    10.1

Communications Equipment

    6.7

Media

    3.1

Electronic Equipment, Instruments & Components

    2.8

Internet Services & Infrastructure

    2.7

Chemicals

    2.7

Consumer Finance

    2.5

Commercial Services & Supplies

    2.5

Specialty Retail

    2.1

Footwear

    1.2

Air Freight & Logistics

    1.2

Pharmaceuticals

    1.1

Wireless Telecommunication Services

    1.0

Diversified Consumer Services

    0.6

Aerospace & Defense

    0.6

Health Care Equipment & Supplies

    0.4

Health Care Technology

    0.0
 

 

 

 

Total Investments

    100.0
 

 

 

 

See notes to consolidated financial statements.

 

  11  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2017

(in thousands, except share/unit amounts)

 

Description 

  Industry      Spread
above
Index (3)
    Libor
Floor 
    Interest
Rate (1)
    Acquisition
Date
     Maturity
Date
     Par
Amount
     Cost      Fair
Value
 

Bank Debt/Senior Secured
Loans — 105.9%

                      

1A Smart Start LLC(2)(14)

   


Electrical
Equipment,
Instruments &

Components

 
 
 

 

     L+450       1.00     6.19     12/21/2017        2/21/2022      $ 6,105      $ 6,089      $ 6,089  

Acrisure, LLC(2)

    Insurance        L+425       1.00     5.65     5/3/2017        11/22/2023        7,446        7,429        7,531  

Advantage Sales and Marketing, Inc.

   
Professional
Services
 
 
     L+650       1.00     7.88     2/14/2013        7/25/2022        8,000        7,961        7,520  

Aegis Toxicology Sciences Corporation(14)

   

Health Care
Providers &
Services
 
 
 
     L+850       1.00     10.17     2/20/2014        8/24/2021        4,000        3,965        3,880  

Alera Group Intermediate Holdings, Inc.(2)(14).

    Insurance        L+550       1.00     6.85     11/28/2016        12/30/2022        4,279        4,241        4,257  

American Teleconferencing Services, Ltd. (PGI) (2)(14)

   
Communications
Equipment
 
 
     L+650       1.00     7.90     5/5/2016        12/8/2021        14,933        14,269        14,710  

Anesthesia Consulting & Management, LP (2)(14)

   

Health Care
Providers &
Services
 
 
 
     L+625       1.00     7.94     10/20/2016        10/31/2022        4,530        4,492        4,258  

Capstone Logistics Acquisition, Inc.(2)(14)

   
Professional
Services
 
 
     L+450       1.00     6.07     10/3/2014        10/7/2021        8,159        8,111        8,078  

Confie Seguros Holding II Co.(2)(14)

    Insurance        L+525       1.00     6.73     10/13/2016        4/19/2022        9,900        9,820        9,909  

Empower Payments Acquisition, Inc. (RevSpring).(2)(14)

   
Professional
Services
 
 
     L+550       1.00     7.19     11/28/2016        11/30/2023        4,579        4,499        4,579  

Engineering Solutions & Products, LLC(6)(14)

   
Aerospace &
Defense
 
 
     L+600       2.00     8.00     11/5/2013        11/5/2018        2,258        2,258        2,145  

Falmouth Group Holdings Corp. (AMPAC) (2)(14)

    Chemicals        L+675       1.00     8.44     12/15/2016        12/14/2021        8,668        8,668        8,668  

GenMark Diagnostics, Inc(2)(4)(14)

   

Health Care
Providers &
Services
 
 
 
     —         —         6.90     4/22/2016        10/12/2019        7,633        8,040        8,039  

Global Holdings LLC & Payment Concepts
LLC(2)(14)

   
Consumer
Finance
 
 
     L+650       1.00     7.99     3/31/2017        5/5/2022        9,341        9,173        9,341  

Global Tel*Link Corporation(2)

   
Communications
Equipment
 
 
     L+400       1.25     5.69     11/6/2015        5/23/2020        3,364        3,118        3,381  

Global Tel*Link Corporation

   
Communications
Equipment
 
 
     L+825       1.25     9.94     5/21/2013        11/23/2020        3,000        2,972        3,007  

Hostway Corporation(2)(14)

   

Internet
Software &
Services
 
 
 
     L+475       1.25     8.44     6/27/2014        12/13/2019        8,526        8,511        8,185  

Island Medical Management Holdings, LLC(2)(14)

   

Health Care
Providers &
Services
 
 
 
     L+550       1.00     7.00     3/31/2017        9/1/2022        4,570        4,528        4,432  

Kellermeyer Bergensons Services, LLC (KBS)(2)(14)

   

Commercial
Services &
Supplies
 
 
 
     L+500       1.00     6.48     10/31/2014        10/29/2021        4,850        4,821        4,850  

LegalZoom.com, Inc.(2)(14)

   

Internet
Software &
Services
 
 
 
     L+450       1.00     5.94     11/17/2017        11/21/2024        5,000        4,950        4,950  

Logix Holding Company, LLC(2)(14)

   
Communications
Equipment
 
 
     L+575       1.00     7.28     8/11/2017        12/22/2024        10,800        10,692        10,692  

Lumeris Solutions Company, LLC(2)(14)

   
Health Care
Technology
 
 
     L+860       0.25     9.98     3/22/2017        2/1/2020        4,000        4,037        4,040  

Metamorph US 3, LLC (Metalogix)(2)(14) ††

    Software        L+750 (7)       1.00     9.07     12/1/2014        12/1/2020        7,953        7,848        5,805  

 

See notes to consolidated financial statements.

 

12


Table of Contents

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2017

(in thousands, except share/unit amounts)

 

Description 

   Industry    Spread
above
Index (3)
    Libor
Floor 
    Interest
Rate (1)
    Acquisition
Date
     Maturity
Date
     Par
Amount
     Cost      Fair
Value
 

Meter Readings Holding, LLC (Aclara)(2)(14)

   Electronic
Equipment,
Instruments &
Components
     L+575       1.00     7.23     6/15/2017        8/29/2023      $ 7,940      $ 7,921      $ 7,940  

MHE Intermediate Holdings, LLC (TFS-Miner)(2)(14)

   Air Freight &
Logistics
     L+500       1.00     6.69     3/8/2017        3/10/2024        5,460        5,410        5,405  

Ministry Brands, LLC(2)(14)

   Software      L+500       1.00     6.38     11/21/2016        12/2/2022        9,636        9,557        9,636  

MRI Software LLC(2)(14)

   Software      L+625       1.00     7.83     6/7/2017        6/30/2023        8,224        8,147        8,183  

MYI Acquiror Corp. (McLarens Young)(2)(14)

   Insurance      L+450       1.25     5.83     5/21/2014        5/28/2019        3,348        3,337        3,348  

MYI Acquiror Ltd. (McLarens Young)(2)(4)(14)

   Insurance      L+450       1.25     5.84     5/21/2014        5/28/2019        4,271        4,258        4,271  

On Location Events, LLC & PrimeSport Holdings Inc. (2)(14)

   Media      L+550       1.00     7.04     12/7/2017        9/29/2021        15,000        14,815        14,812  

PetVet Care Centers, LLC (2)(14)

   Health Care
Facilities
     L+600       1.00     7.35     6/1/2017        6/8/2023        10,332        10,235        10,435  

Polycom, Inc. (2)(14)

   Communications
Equipment
     L+525       1.00     6.72     9/29/2016        9/27/2023        11,811        11,411        11,933  

PPT Management Holdings,
LLC(2)(14)

   Health Care
Providers &
Services
     L+600       1.00     9.50     12/15/2016        12/16/2022        7,920        7,854        7,603  

PSP Group, LLC (Pet Supplies Plus)(2)(8)(14)

   Specialty Retail      L+475       1.00     6.32     4/2/2015        4/6/2021        482        479        482  

QBS Holding Company, Inc. (Quorum)(2)(14)

   Software      L+475       1.00     6.13     8/1/2014        8/7/2021        6,059        6,025        6,014  

Salient Partners, L.P.(2)(14)

   Asset Management      L+850       1.00     9.85     6/10/2015        6/9/2021        3,932        3,882        3,932  

SHO Holding I Corporation (Shoes for Crews)(2)(14)

   Footwear      L+500       1.00     6.42     11/20/2015        10/27/2022        5,880        5,839        5,762  

Suburban Broadband, LLC
(Jab Wireless, Inc.)(2)(14)††

   Wireless
Telecommunication
Services
     L+650 (15)       1.00     8.19     11/29/2016        3/26/2019        4,938        4,911        4,938  

The Hilb Group, LLC & Gencorp Insurance Group, Inc.(2)(14)

   Insurance      L+475       1.00     6.44     3/16/2016        6/24/2021        4,436        4,377        4,436  

Trident USA Health Services (2)(14)

   Health Care
Providers &
Services
     L+575       1.25     7.44     7/29/2013        7/31/2019        8,693        8,670        7,389  

TwentyEighty, Inc.(14) ††

   Professional
Services
     L+800 (9)       1.00     9.42     1/31/2017        3/31/2020        918        887        918  

TwentyEighty, Inc.(14) ††

   Professional
Services
     —         —         8.00 %(10)      1/31/2017        3/31/2020        1,984        1,894        1,865  

TwentyEighty, Inc.(14) ††

   Professional
Services
     —         —         9.00 %(11)      1/31/2017        3/31/2020        1,814        1,733        1,651  

U.S. Acute Care Solutions, LLC(2)(14)

   Health Care
Providers &
Services
     L+500       1.00     6.69     12/22/2016        5/15/2021        6,435        6,384        6,371  

VT Buyer Acquisition Corp. (Veritext)(2)(14)

   Professional
Services
     L+475       1.00     6.44     2/17/2017        1/29/2022        5,983        5,957        5,953  

WIRB-Copernicus Group, Inc.(2)(14)

   Professional
Services
     L+500       1.00     6.69     3/27/2017        8/15/2022        4,466        4,447        4,466  
                    

 

 

    

 

 

 

Total Bank Debt/Senior Secured Loans

 

   $ 288,923      $ 286,089  
                    

 

 

    

 

 

 

 

See notes to consolidated financial statements.

 

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SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2017

(in thousands, except share/unit amounts)

 

Description 

 

Industry

  Spread
above
Index (3)
    Libor
Floor 
    Interest
Rate (1)
    Acquisition
Date
    Maturity
Date
    Shares/Units     Cost     Fair
Value
 

Common Equity/Equity Interests/Warrants — 45.2%

 

         

Engineering Solutions & Products, LLC(6)(12)(14)

  Aerospace & Defense           11/5/2013         133,668     $ 1,367     $ 68  

Essence Group Holdings Corporation (Lumeris) Warrants(14)†.

  Health Care Technology           3/22/2017         52,000       16       39  

First Lien Loan Program LLC(4)(5)(14)

  Asset Management           2/13/2015         —         37,459       35,835  

Gemino Healthcare Finance, LLC(4)(5)(14)

  Diversified Financial Services           9/30/2013         32,839       32,839       35,050  

NorthMill LLC(4)(5)(14)(16)

  Diversified Financial Services           10/20/2017         100       51,000       51,000  

TwentyEighty Investors, LLC(14)†.

  Professional Services           1/31/2017         17,214       3,167       —    
               

 

 

   

 

 

 

Total Common Equity/Equity Interests/Warrants

 

  $ 125,848     $ 121,992  
               

 

 

   

 

 

 

Total Investments(13) — 151.1%

 

  $ 414,771     $ 408,081  

Cash Equivalents — 38.8%

 

    Par Amount      

U.S. Treasury Bill

  Government           12/28/2017       2/8/2018       105,000     $ 104,874     $ 104,874  
               

 

 

   

 

 

 

Total Investments & Cash Equivalents —189.9%

 

  $ 519,645     $ 512,955  

Liabilities in Excess of Other Assets (89.9%)

 

    (242,824)  
                 

 

 

 

Net Assets — 100.0%

 

    $ 270,131  
                 

 

 

 

 

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2017.

(2)

Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary SUNS SPV LLC (the “SPV”). Such investments are pledged as collateral under the Senior Secured Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of Solar Senior Capital Ltd. The respective par amount for the investment partially held through the SPV is $3,673 for Genmark Diagnostics, Inc. The par balance in excess of this stated amount is held directly by Solar Senior Capital Ltd.

(3)

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

(4)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of December 31, 2017, on a fair value basis, non-qualifying assets in the portfolio represented 25.7% of the total assets of the Company.

 

See notes to consolidated financial statements.

 

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SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2017

(in thousands)

 

(5)

Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2017 in these controlled investments are as follows:

 

Name of Issuer

  Fair Value at
December 31, 2016
    Gross
Additions
    Gross
Reductions
    Realized
Gain
(Loss)
    Change in
Unrealized
Gain (Loss)
    Dividend
/Other
Income
    Fair Value at
December 31, 2017
 

FLLP

  $ 38,810     $ 2,835     $ 6,563     $ —       $ 753     $ 4,129   $ 35,835  

Gemino Healthcare Finance, LLC

    35,500       —         —         —         (450     3,694     35,050  

NorthMill LLC

    —         51,000     —         —         —         1,122     51,000  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 74,310     $ 53,835     $ 6,563     $ —       $ 303     $ 8,945     $ 121,885  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(6)

Denotes investments in which we are an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2017 in these affiliated investments are as follows:

 

Name of Issuer

  Fair Value at
December 31, 2016
    Gross
Additions
    Gross
Reductions
    Realized
Gain
(Loss)
    Change in
Unrealized
Gain (Loss)
    Interest/
Dividend
Income
    Fair Value at
December 31, 2017
 

Engineering Solutions & Products, LLC (1st lien)

    —         2,257       2,257     —         —         11       —    

Engineering Solutions & Products, LLC (2nd lien)

    1,757       —         —         —         473       190       2,145  

Engineering Solutions & Products, LLC (equity interests)

    68     —         —         —         —         —         68
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 1,825     $ —       $ —       $ —       $ 473     $ 201     $ 2,213  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(7)

Spread is 5.50% Cash / 2.00% PIK.

(8)

PSP Group, LLC, PSP Service Newco, Inc., PSP Subco, LLC, PSP Stores, LLC, and PSP Distribution, LLC are co-borrowers.

(9)

Spread is 3.50% Cash / 4.50% PIK.

(10)

Coupon is 1.00% Cash / 7.00% PIK.

(11)

Coupon is 0.25% Cash / 8.75% PIK.

(12)

Our equity investment in Engineering Solutions & Products, LLC is held through ESP SSC Corporation, a taxable consolidated subsidiary.

(13)

Aggregate net unrealized depreciation for federal income tax purposes is $9,267; aggregate gross unrealized appreciation and depreciation for federal tax purposes is $3,219 and $12,486, respectively, based on a tax cost of $417,348.

 

See notes to consolidated financial statements.

 

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SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2017

 

(14)

Investment valued using significant unobservable inputs.

(15)

Spread is 4.50% Cash / 2.00% PIK.

(16)

Our equity investment in NorthMill LLC is partially held through ESP SSC Corporation, a taxable consolidated subsidiary.

Non-income producing security.

††

Investment contains a payment-in-kind (“PIK”) feature.

 

Industry Classification

  Percentage of Total
Investments (at
fair value) as of
December 31, 2017
 

Diversified Financial Services (includes Gemino Healthcare Finance, LLC and NorthMill LLC)

    21.1

Communications Equipment

    10.7

Health Care Providers & Services

    10.3

Asset Management (includes FLLP)

    9.8

Professional Services

    8.6

Insurance

    8.3

Software

    7.3

Media

    3.6

Electronic Equipment, Instruments & Components

    3.4

Internet Software & Services

    3.2

Health Care Facilities

    2.6

Consumer Finance

    2.3

Chemicals

    2.1

Footwear

    1.4

Air Freight & Logistics

    1.3

Wireless Telecommunication Services

    1.2

Commercial Services & Supplies

    1.2

Health Care Technology

    1.0

Aerospace & Defense

    0.5

Specialty Retail

    0.1
 

 

 

 

Total Investments

    100.0
 

 

 

 

See notes to consolidated financial statements.

 

16


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2018

(in thousands, except share amounts)

Note 1. Organization

Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, “SUNS”, “we”, “us”, or “our”), a Maryland corporation formed on December 16, 2010, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, we have elected to be treated, and intend to qualify annually, as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (“the Code”).

On January 28, 2011, Solar Senior was capitalized with initial equity of $2 and commenced operations. On February 24, 2011, Solar Senior priced its initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, raising approximately $168,000 of net proceeds. Concurrent with this offering, our senior management team purchased an additional 500,000 shares through a private placement, raising another $10,000.

The Company’s investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by investing directly or indirectly in senior secured loans, including first lien and second lien debt instruments, made primarily to leveraged private middle-market companies whose debt is rated below investment grade, which the Company refers to collectively as “senior loans.” From time to time, we may also invest in public companies that are thinly traded. Under normal market conditions, at least 80% of the value of the Company’s net assets (including the amount of any borrowings for investment purposes) will be invested in senior loans.

Note 2. Significant Accounting Policies

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of the Company and its wholly-owned subsidiaries, including FLLP effective September 2018. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current period presentation.

Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2018.

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

The significant accounting policies consistently followed by the Company are:

 

  (a)

Investment transactions are accounted for on the trade date;

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

  (b)

The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on a quarterly basis, or more frequently if required. Investments for which market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (the “Investment Adviser”), does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company’s board of directors (the “Board”).

Investments for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology or provide a valuation or methodology that, in the judgment of the Investment Adviser or the Board does not represent fair value, shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default and the Investment Adviser does not expect to reach an agreement with the portfolio company in the subsequent quarter; (iv) the Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm.

The recommendation of fair value generally considers the following factors among others, as relevant: applicable market yields; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flow; the markets in which the issuer does business; and comparisons to publicly traded securities, among others.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. 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 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.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the nine months ended September 30, 2018, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.

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

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

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

Level 3: Unobservable inputs for the asset or liability.

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

 

  (c)

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

 

  (d)

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

 

  (e)

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

 

  (f)

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

 

  (g)

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

 

  (h)

In accordance with Regulation S-X and ASC Topic 810—Consolidation, the Company consolidates its interest in controlled investment company subsidiaries, including FLLP, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company (see note 11).

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

  (i)

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

 

  (j)

At December 31, 2017, the Company had made an irrevocable election to apply the fair value option of accounting to its senior secured revolving credit facility (the “Credit Facility”), in accordance with ASC 825-10. As of June 1, 2018, the Company’s new Credit Facility did not make this election.The Company’s wholly owned investment subsidiary FLLP made an irrevocable election to apply the fair value option of accounting to the “FLLP Facility, in accordance with ASC 825-10.

 

  (k)

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

 

  (l)

The Company records expenses related to shelf registration statements and applicable equity offering costs as prepaid assets. These expenses are typically charged as a reduction of capital upon utilization, in accordance with ASC 946-20-25. Certain subsequent costs are expensed per the AICPA Audit & Accounting Guide for Investment Companies.

 

  (m)

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

 

  (n)

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

Recent Accounting Pronouncements

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

 

  20  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

In August 2018, the US Securities and Exchange Commission adopted final rules to eliminate redundant, duplicative, overlapping, outdated or superseded disclosure requirements in light of other disclosure requirements, GAAP or changes in the information environment. These rules amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and certain related forms. These changes become effective thirty days after the date of publication in the Federal Register. The Company is evaluating the impact of these changes on its consolidated financial statements and disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which amends FASB ASC 230. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. For public business entities, the amendments were effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has adopted ASU 2016-18 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which will amend FASB ASC 310-20. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of ASU 2017-08 on its consolidated financial statements and disclosures.

In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has adopted ASC 606 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

Note 3. Agreements

Solar Senior has an Advisory Agreement with the Investment Adviser, under which the Investment Adviser manages the day-to-day operations of, and provides investment advisory services to, Solar Senior. For providing these services, the Investment Adviser receives a fee from Solar Senior, consisting of two components—a base management fee and a performance-based incentive fee. The base management fee is calculated at an annual rate of 1.00% of gross assets. For services rendered under the Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters. Base management fees for any partial month or quarter will be appropriately pro-rated. For purposes of computing the base management fee, gross assets exclude temporary assets acquired at the end of each fiscal quarter for purposes of preserving investment flexibility in the next fiscal quarter. Temporary assets include, but are not limited to, U.S. treasury bills, other short-term U.S. government or government agency securities, repurchase agreements or cash borrowings.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

The performance-based incentive fee has two parts, as follows: one is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (other than fees for providing managerial assistance) accrued during the calendar quarter, minus our operating expenses for the quarter (excluding the performance-based incentive fee). Pre-incentive fee net investment income includes, in the case of investments, if any, with a deferred interest feature (such as original issue discount, debt instruments with pay-in-kind interest and zero-coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains or losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). The Company pays the Investment Adviser a performance-based incentive fee with respect to pre-incentive fee net investment income for each calendar quarter as follows:

 

   

no performance-based incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%;

 

   

50% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.9167% in any calendar quarter (11.67% annualized);

and

 

   

20% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.9167% in any calendar quarter (11.67% annualized) will be payable to the Investment Adviser.

The second part of the performance-based incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date) and will equal 20% of the Company’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all net capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement purposes, the second part of the performance-based incentive fee is accrued based upon 20% of cumulative net realized gains and net unrealized capital appreciation. No accrual was required for the three and nine months ended September 30, 2018 and 2017.

For the three and nine months ended September 30, 2018 the Company recognized $1,222 and $3,415, respectively, in gross base management fees and $1,344 and $2,453, respectively, in gross performance-based incentive fees. For the three and nine months ended September 30, 2018, no base management fees were waived. For the three and nine months ended September 30, 2018, $0 and $745, respectively, of such performance-based incentive fees were waived. For the three and nine months ended September 30, 2017, the Company recognized $955 and $2,862, respectively, in gross base management fees and $231 and $428, respectively, in gross performance-based incentive fees. For the three and nine months ended September 30, 2017, $481 and $1,962, respectively, of such base management fees were waived. For the three and nine months ended September 30, 2017, $231 and $428, respectively, of such performance-based incentive fees were waived. For the three and nine months ended September 30, 2018, $153 and $153, respectively, of performance-based incentive fees were recaptured. For the three and nine months ended September 30, 2017, there were no fees recaptured by the Investment Adviser. Any fee waivers prior to July 1, 2017 are not subject to recapture. Subsequent voluntary fee waivers were made at the Investment Adviser’s discretion and are subject to recapture by the Investment Adviser and reimbursement by the company under the conditions noted below. No fees will be recouped by the Investment Adviser if (i) for the period in which recoupment occurs, the ratio of operating expenses to average net assets, when considering the reimbursement, exceeds the same ratio for the period in which the waiver

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

occurred; (ii) for the period in which recoupment occurs, the annualized distribution rate cannot fall below the annualized distribution rate for the period in which the waiver occurred; and (iii) recoupment can only occur within three years from the date of the waiver. The table below presents a summary of fees waived that may be subject to recoupment:

 

Three Months
Ended

  Management
and
Performance
-Based
Incentive
Fees Waived
    Management
and
Performance-
Based
Incentive
Fees
Recouped
    Unreimbursed
Management and
Performance-Based
Incentive Fees
    Ratio of
Operating
Expense
to
Average
Net Assets
for the
Period(1)
    Annualized
Distribution
Rate for the
Period(2)
   

Eligible for
Recoupment
Through

September 30, 2017

  $ 712     $ —       $ 712       0.32     8.40   June 30, 2019

December 31, 2017

    281       —         281       0.33     8.39   September 30, 2019

March 31, 2018

    308       —         308       0.28     8.37   December 31, 2019

June 30, 2018

    437       153       284       0.30     8.37   March 31, 2020
 

 

 

   

 

 

   

 

 

       

Total

  $ 1,738     $ 153     $ 1,585        
 

 

 

   

 

 

   

 

 

       

 

(1)

Operating expense includes all expenses borne by the Company, except for organizational and offering costs, base management fees, performance-based incentive fees and interest expense.

(2)

Annualized distribution rate equals the annualized rate of distributions paid to shareholders based on the amount of the distributions declared prior to the date that the waivers of expenses related to management and performance-based incentive fees were incurred.

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

For the three and nine months ended September 30, 2018, the Company recognized expenses under the Administration Agreement of $390 and $1,159, respectively. For the three and nine months ended September 30, 2017, the Company recognized expenses under the Administration Agreement of $372 and $1,107, respectively. No managerial assistance fees were accrued or collected for the three and nine months ended September 30, 2018 and 2017.

Note 4. Net Asset Value Per Share

At September 30, 2018, the Company’s total net assets and net asset value per share were $269,676 and $16.81, respectively. This compares to total net assets and net asset value per share at December 31, 2017 of $270,131 and $16.84, respectively.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

Note 5. Earnings Per Share

The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations, pursuant to ASC 260-10, for the three and nine months ended September 30, 2018 and 2017:

 

     Three months ended September 30,      Nine months ended September 30,  
               2018                          2017                          2018                          2017            

Earnings per share (basic & diluted)

           

Numerator—net increase in net assets resulting from operations:

   $ 5,406      $ 6,012      $ 16,442      $ 17,152  

Denominator—weighted average shares:

     16,040,485        16,033,270        16,039,917        16,029,844  

Earnings per share:

   $ 0.34      $ 0.37      $ 1.03      $ 1.07  

Note 6. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

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

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

 

  a)

Quoted prices for similar assets or liabilities in active markets;

 

  b)

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

 

  c)

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

 

  d)

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

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

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

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

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

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, as of September 30, 2018 and December 31, 2017:

Fair Value Measurements

As of September 30, 2018

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Bank Debt/Senior Secured Loans

   $ —      $ 13,787      $ 357,908      $ 371,695  

Common Equity/Equity Interests/Warrants

     —          —          93,504        93,504  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Investments

   $ —        $ 13,787      $ 451,412      $ 465,199  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

FLLP Facility

   $ —      $ —      $ 44,784      $ 44,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Measurements

As of December 31, 2017

 

    Level 1     Level 2     Level 3     Measured at
Net Asset Value*
    Total  

Assets:

         

Bank Debt/Senior Secured Loans

  $ —     $ 21,439     $ 264,650     $ —       $ 286,089  

Common Equity/Equity Interests/Warrants

    —         —         86,157       35,835       121,992  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ —     $ 21,439     $ 350,807     $ 35,835     $ 408,081  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Credit Facility

  $ —     $ —     $ 124,200     $ —     $ 124,200  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

*

In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified 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. The portfolio investment in this category is FLLP. See Note 11 for more information on this investment, including its investment strategy and the Company’s unfunded equity commitment to FLLP. This investment is not redeemable by the Company absent an election by the members of the entity to liquidate all investments and distribute the proceeds to the members.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the nine months ended September 30, 2018, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at September 30, 2018:

Fair Value Measurements Using Level 3 Inputs

 

    Bank Debt/Senior
Secured Loans
    Common
Equity/Equity
Interests/Warrants
    Total  

Fair value, December 31, 2017

  $ 264,650     $ 86,157     $ 350,807  

Total gains or losses included in earnings:

     

Net realized gain (loss)

    (5,455     —         (5,455

Net change in unrealized gain (loss)

    2,001       3,722       5,723  

Purchase of investment securities

    131,767       5,025       136,792  

Proceeds from dispositions of investment securities

    (126,203     (1,400     (127,603

Transfers in/out of Level 3

    91,148       —         91,148
 

 

 

   

 

 

   

 

 

 

Fair value, September 30, 2018

  $ 357,908     $ 93,504     $ 451,412  
 

 

 

   

 

 

   

 

 

 

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

     

Net change in unrealized gain (loss):

  $ 2,001     $ 3,722     $ 5,723  
 

 

 

   

 

 

   

 

 

 

During the quarter ended June 30, 2018, Advantage Sales and Marketing Inc. was transferred from Level 2 to Level 3. At June 30, 2018, the Investment Adviser believed that the available quote for Advantage Sales and Marketing Inc. was no longer representative of fair value. However, the quote was still considered as an input to the fair value determination. As such, Advantage Sales and Marketing Inc. was transferred from Level 2 to Level 3 as the Investment Adviser could no longer rely on the available quote from a third-party source and was using additional assumptions in fair valuing the investment. During the quarter ended September 30, 2018, the Company’s investment in FLLP was consolidated, and as such the Level 3 assets held by FLLP are reflected as transfers into Level 3.

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2018:

 

Beginning fair value at December 31, 2017

   $ 124,200  

Borrowings

     —    

Repayments

     (5,013

Transfers in/out of Level 3

     (74,403
  

 

 

 

Ending fair value at September 30, 2018

   $ 44,784  
  

 

 

 

The Company’s wholly owned investment subsidiary FLLP made an irrevocable election to apply the fair value option of accounting to the FLLP Facility, in accordance with ASC 825-10. On September 30, 2018, there were borrowings of $44,784 on the FLLP Facility. For the nine months ended September 30, 2018, the FLLP Facility had no net change in unrealized (appreciation) depreciation. As a result of the consolidation of FLLP, the FLLP Facility is shown as a transfer into Level 3.

The Company did not elect to apply the fair value option of accounting to the Credit Facility, which was refinanced by way of amendment on June 1, 2018. As this refinancing was deemed to be a significant

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

modification of debt, per ASC 825-10-25, a new election date was triggered. As such the Credit Facility is shown as a transfer out of Level 3.

The following table provides a summary of the changes in fair value of Level 3 assets and liabilities for the year ended December 31, 2017, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at December 31, 2017:

Fair Value Measurements Using Level 3 Inputs

 

    Bank Debt/Senior
Secured Loans
    Common
Equity/Equity
Interests/Warrants
 

Fair value, December 31, 2016

  $ 250,268     $ 35,568  

Total gains or losses included in earnings:

   

Net realized gain (loss)

    129       —    

Net change in unrealized gain (loss)

    3,436       (3,593

Purchase of investment securities

    132,045       54,182  

Proceeds from dispositions of investment securities

    (137,054     —    

Transfers in/out of Level 3

    15,826       —    
 

 

 

   

 

 

 

Fair value, December 31, 2017

  $ 264,650     $ 86,157  
 

 

 

   

 

 

 

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

   

Net change in unrealized gain (loss):

  $ 3,436     $ (3,593
 

 

 

   

 

 

 

During the fiscal year ended December 31, 2017, Securus Technologies, Inc. and nThrive, Inc. were transferred from Level 2 to Level 3. At June 30, 2017, the Investment Adviser believed that Securus Technologies, Inc. was likely going to be prepaid at par in the near future. As such, the Investment Adviser, in its recommendation to the Board, provided that it was more representative of fair value to price the position at par, matching the price we would receive if the investment was prepaid. Securus Technologies, Inc. was repaid at par in the quarter ended December 31, 2017. At March 31, 2017, the Investment Adviser also believed that nThrive, Inc. was likely going to be prepaid in the near future. As such, the Investment Adviser, in its recommendation to the Board, provided that it was more representative of fair value to price the position at par, matching the price we would receive if the investment was prepaid. nThrive, Inc. was repaid in the quarter ended June 30, 2017.

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the year ended December 31, 2017:

 

Beginning fair value at December 31, 2016

   $ 98,300  

Borrowings

     162,000  

Repayments

     (136,100

Transfers in/out of Level 3

     —    
  

 

 

 

Ending fair value at December 31, 2017

   $ 124,200  
  

 

 

 

The Company has made an irrevocable election to apply the fair value option of accounting to the Credit Facility, in accordance with ASC 825-10. On December 31, 2017, there were borrowings of $124,200 on the Credit Facility. For the year ended December 31, 2017, the Credit Facility had no net change in unrealized

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

(appreciation) depreciation. The Company used an independent third-party valuation firm to assist in measuring the fair value of the Credit Facility.

Quantitative Information about Level 3 Fair Value Measurements

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

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

Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of September 30, 2018 is summarized in the table below:

 

    Asset or
Liability
    Fair Value at
September 30,
2018
    Principal Valuation
Technique/
Methodology
    Unobservable Input     Range (Weighted
Average)

Bank Debt / Senior Secured Loans

    Asset     $ 357,908       Income Approach       Market Yield     5.6% – 15.0% (8.1%)
 

 

 

   

 

 

   

 

 

   

 

 

   

 

    $ 154       Market Approach       EBITDA Multiple     5.8x-14.4x (14.4x)

Common Equity/Equity Interests/Warrants

    Asset     $ 93,350       Market Approach       Return on Equity     6.9% - 28.0% (14.7%)
 

 

 

   

 

 

   

 

 

   

 

 

   

 

FLLP Facility

    Liability     $ 44,784       Yield Analysis       Market Yield     L+1.4% – L+4.8%

(L+2.3%)

 

 

 

   

 

 

   

 

 

   

 

 

   

 

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets and liabilities.

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

Quantitative information about the Company’s Level 3 asset and liability fair value measurements as of December 31, 2017 is summarized in the table below:

 

     Asset or
Liability
     Fair Value at
December 31,
2017
     Principal Valuation
Technique/
Methodology
     Unobservable Input      Range (Weighted
Average)

Bank Debt / Senior Secured Loans

     Asset      $ 264,650        Yield Analysis        Market Yield      6.1% – 21.6% (8.6%)
  

 

 

    

 

 

    

 

 

    

 

 

    

 

      $ 107        Enterprise Value        EBITDA Multiple      5.5x-16.0x (16.0x)

Common Equity/Equity Interests/Warrants

     Asset      $ 86,050        Enterprise Value        Return on Equity      5.9% - 24.4% (13.4%)
  

 

 

    

 

 

    

 

 

    

 

 

    

 

               L+1.4% – L+4.8%

Credit Facility

     Liability      $ 124,200        Yield Analysis        Market Yield      (L+2.0%)
  

 

 

    

 

 

    

 

 

    

 

 

    

 

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets and liabilities.

Note 7. Debt

Credit Facility—On August 26, 2011, the Company established our wholly-owned subsidiary, SUNS SPV LLC (the “SUNS SPV”) which entered into the Credit Facility with Citigroup Global Markets Inc. acting as administrative agent. On January 10, 2017, commitments to the Credit Facility, as amended, were increased from $175,000 to $200,000 by utilizing the accordion feature. The commitment can also be expanded up to $600,000. The stated interest rate on the Credit Facility is LIBOR plus 2.00% with no LIBOR floor requirement and the current final maturity date is June 1, 2023. The Credit Facility is secured by all of the assets held by SUNS SPV. Under the terms of the Credit Facility, Solar Senior and SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature. The Credit Facility was amended on November 7, 2012, June 30, 2014, May 29, 2015 to extend maturities and add greater investment flexibility, among other changes. On June 1, 2018, the Credit Facility was refinanced by way of amendment, allowing for greater investment flexibility and the extension of the maturity date, among other changes. On July 13, 2018, commitments to the Credit Facility, as amended, were increased from $200,000 to $225,000 by utilizing the accordion feature.

FLLP Facility—On February 13, 2015, FLLP as transferor and FLLP 2015-1, LLC, a newly formed wholly owned subsidiary of FLLP, as borrower entered into a $75,000 FLLP Facility with Wells Fargo Securities, LLC acting as administrative agent. Solar Senior Capital Ltd. acts as servicer under the FLLP Facility. The FLLP Facility was scheduled to mature on February 13, 2020. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.25%-2.50%. FLLP and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. On August 15, 2016, the FLLP Facility was amended, expanding commitments to $100,000 and extending the maturity date to August 16, 2021. There were $44,784 of borrowings outstanding as of September 30, 2018.

The Company’s wholly owned investment subsidiary FLLP made an irrevocable election to apply the fair value option of accounting to the FLLP Facility, in accordance with ASC 825-10. We believe accounting for this

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

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

The average annualized interest cost for all borrowings for the nine months ended September 30, 2018 and the year ended December 31, 2017 was 4.01% and 3.16%, respectively. These costs are exclusive of other credit facility expenses such as unused fees and fees paid to the back-up servicer, if any. The maximum amount borrowed on the revolving credit facilities during the nine months ended September 30, 2018 and the year ended December 31, 2017, was $214,296 and $136,000, respectively.

Note 8. Financial Highlights and Senior Securities Table

The following is a schedule of financial highlights for the nine months ended September 30, 2018 and for the year ended December 31, 2017:

 

    Nine months ended
September 30, 2018
    Year ended
December 31, 2017
(audited)
 

Per Share Data: (a)

   

Net asset value, beginning of year

  $ 16.84     $ 16.80  
 

 

 

   

 

 

 

Net investment income

    1.06       1.41  

Net realized and unrealized gain (loss)

    (0.03     0.04  
 

 

 

   

 

 

 

Net increase in net assets resulting from operations

    1.03       1.45  

Distributions to stockholders:

   

From net investment income

    (1.06     (1.41
 

 

 

   

 

 

 

Net asset value, end of period

  $ 16.81     $ 16.84  
 

 

 

   

 

 

 

Per share market value, end of period

  $ 16.71     $ 17.76  

Total Return (b)

    0.18     17.11

Net assets, end of period

  $ 269,676     $ 270,131  

Shares outstanding, end of period

    16,040,485       16,036,730  
 

 

 

   

 

 

 

Ratios to average net assets (c):

   

Net investment income

    6.32     8.39
 

 

 

   

 

 

 

Operating expenses

    2.80 %*      2.12 %* 

Interest and other credit facility expenses

    1.92     1.43
 

 

 

   

 

 

 

Total expenses

    4.72 %*      3.55 %* 
 

 

 

   

 

 

 

Average debt outstanding

  $ 162,208     $ 100,700  

Portfolio turnover ratio

    34.4     41.4

 

(a)

Calculated using the average shares outstanding method.

(b)

Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend reinvestment plan. Total return does not include a sales load.

(c)

Not annualized for periods less than one year.

*

The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets is shown net of voluntary management and incentive fee waivers (see note 3). For the nine months ended

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

  September 30, 2018, the ratios of operating expenses to average net assets and total expenses to average net assets would be 3.07% and 5.00%, respectively, without the voluntary incentive fee waiver. For the year ended December 31, 2017, the ratios of operating expenses to average net assets and total expenses to average net assets would be 3.11% and 4.54%, respectively, without the voluntary management and incentive fee waivers.

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

 

Class and Year

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

Credit Facility

       

Fiscal 2018 (through September 30, 2018)

  $ 148,600     $ 1,840     $ —       N/A  

Fiscal 2017

    124,200       3,175       —         N/A  

Fiscal 2016

    98,300       3,738       —         N/A  

Fiscal 2015

    116,200       2,621       —         N/A  

Fiscal 2014

    143,200       2,421       —         N/A  

Fiscal 2013

    61,400       4,388       —         N/A  

Fiscal 2012

    39,100       5,453       —         N/A  

Fiscal 2011

    8,600       21,051       —         N/A  

FLLP Facility

       

Fiscal 2018 (through September 30, 2018)

    44,784       555       —         N/A  

Total Senior Securities

       

Fiscal 2018 (through September 30, 2018)

  $ 193,384     $ 2,395     $ —       N/A  

Fiscal 2017

    124,200       3,175       —         N/A  

Fiscal 2016

    98,300       3,738       —         N/A  

Fiscal 2015

    116,200       2,621       —         N/A  

Fiscal 2014

    143,200       2,421       —         N/A  

Fiscal 2013

    61,400       4,388       —         N/A  

Fiscal 2012

    39,100       5,453       —         N/A  

Fiscal 2011

    8,600       21,051       —         N/A  

 

(1)

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

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit was divided based on the amount outstanding at the end of the period for each. As of September 30, 2018, asset coverage was 239.5%.

(3)

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

(4)

Not applicable, we do not have senior securities that are registered for public trading.

Note 9. Gemino Healthcare Finance, LLC

We acquired Gemino Healthcare Finance, LLC (d/b/a Gemino Senior Secured Healthcare Finance) (“Gemino”) on September 30, 2013. Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare

 

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Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

industry. Our initial investment in Gemino was $32,839. The management team of Gemino co-invested in the transaction and continues to lead Gemino. As of September 30, 2018, Gemino’s management team and Solar Senior own approximately 7% and 93% of the equity in Gemino, respectively.

Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse, $100,000 credit facility with non-affiliates, which was expandable to $150,000 under its accordion feature. Effective March 31, 2014, the credit facility was expanded to $105,000 and again on June 27, 2014 to $110,000. On May 27, 2016, Gemino entered into a new $125,000 credit facility which replaced the previously existing facility. The new facility has similar terms as compared to the previous facility and includes an accordion feature increase to $200,000 and has a maturity date of May 27, 2020.

Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2018, the portfolio totaled approximately $169,192 of commitments, of which $108,080 were funded, on total assets of $97,685. As of December 31, 2017, the portfolio totaled approximately $176,332 of commitments, of which $106,620 were funded, on total assets of $110,584. At September 30, 2018, the portfolio consisted of 33 issuers with an average balance of approximately $3,275 versus 29 issuers with an average balance of approximately $3,677 at December 31, 2017. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $64,000 and $75,000 of borrowings outstanding at September 30, 2018 and December 31, 2017, respectively. For the three months ended September 30, 2018 and 2017, Gemino had net income of $1,129 and $1,139, respectively, on gross income of $2,950 and $3,111, respectively. For the nine months ended September 30, 2018 and 2017, Gemino had net income of $2,509 and $2,562, respectively, on gross income of $8,414 and $8,723, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.

Note 10. Commitments and Contingencies

The Company had unfunded debt and equity commitments to various revolving and delayed draw loans as well as to Gemino Healthcare Finance, LLC. The total amount of these unfunded commitments as of September 30, 2018 and December 31, 2017 is $22,533 and $27,472, respectively, comprised of the following:

 

    September 30,
2018
    December 31,
2017
 

DISA Holdings Acquisition Corp.

  $ 5,365     $ —    

The Hilb Group, LLC & Gencorp Insurance Group, Inc.

    5,313     332

Solara Medical Supplies, Inc.

    2,990       —    

WIRB-Copernicus Group, Inc.

    2,833       —    

MRI Software LLC

    2,706     2,361

Gemino Healthcare Finance, LLC*

    1,400     5,000

MSHC, Inc.

    1,243       —    

Engineering Solutions & Products, LLC

    401     1,736

AQA Acquisition Holding, Inc.

    142       —    

TwentyEighty, Inc.

    140     140

VetCor Professional Practices LLC

    —         6,721  

Edgewood Partners Holdings, LLC

    —         —    

Alera Group Intermediate Holdings, Inc.

    —         4,695

VT Buyer Acquisition Corp. (Veritext)

    —         3,450

MHE Intermediate Holdings, LLC

    —         983

PetVet Care Centers, LLC

    —         1,627

Ministry Brands, LLC

    —         427
 

 

 

   

 

 

 

Total Commitments

  $ 22,533     $ 27,472  
 

 

 

   

 

 

 

 

*

The Company controls the funding of the Gemino commitment and may cancel it at its discretion.

 

  32  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

As of September 30, 2018 and December 31, 2017, the Company had sufficient cash available and/or liquid securities available to fund its commitments.

Note 11. First Lien Loan Program LLC

On September 10, 2014, the Company entered into a limited liability company agreement to create FLLP with Voya Investment Management LLC (“Voya”). Voya acts as the investment advisor for several wholly-owned insurance subsidiaries of Voya Financial, Inc. (NYSE: VOYA). The joint venture vehicle, structured as an unconsolidated Delaware limited liability company, is expected to invest primarily in senior secured floating rate term loans to middle market companies predominantly owned by private equity sponsors or entrepreneurs. Solar Senior and Voya have committed to provide $50,750 and $7,250, respectively, of capital to the joint venture. All portfolio decisions and generally all other decisions in respect of the FLLP must be approved by an investment committee of the FLLP consisting of representatives of the Company and Voya (with approval from a representative of each required). On February 13, 2015, FLLP commenced operations. On February 13, 2015, FLLP as transferor and FLLP 2015-1, LLC, a newly formed wholly owned subsidiary of FLLP, as borrower entered into a $75,000 senior secured revolving credit facility (the “FLLP Facility”) with Wells Fargo Securities, LLC acting as administrative agent. Solar Senior Capital Ltd. acts as servicer under the FLLP Facility. The FLLP Facility was scheduled to mature on February 13, 2020. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.25%-2.50%. FLLP and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. On August 15, 2016, the FLLP Facility was amended, expanding commitments to $100,000 and extending the maturity date to August 16, 2021. There were $44,784 and $78,644 of borrowings outstanding as of September 30, 2018 and December 31, 2017, respectively. On September 18, 2018, the Company acquired Voya’s share of the equity in FLLP and now holds 100% of the equity in FLLP. As such, the Company is consolidating FLLP as of this date. For financial reporting purposes, assets consolidated were recorded at fair value and the cost basis of the assets consolidated were carried forward to align with the ongoing reporting of the Company’s realized and unrealized gains and losses. Also due to the consolidation, the current $3,210 in unrealized depreciation on the Company’s equity investment in FLLP is being reflected in unrealized depreciation in our consolidated assets and liabilities as well as an adjustment to net increase in net assets resulting from operations on the Company’s consolidated statement of cash flows. The effect of consolidation did not affect the Company’s net assets at September 30, 2018.

As of September 30, 2018 and December 31, 2017, FLLP had total assets of $80,305 and $121,791, respectively. For the same periods, FLLP’s portfolio consisted of first lien floating rate senior secured loans to 16 and 23 different borrowers, respectively. For the three months ended September 30, 2018, FLLP invested $1,601 across 3 portfolio companies. For the three months ended September 30, 2017, FLLP invested $7,186 across 7 portfolio companies. Investments sold or prepaid totaled $30,695 for the three months ended September 30, 2018 and $4,672 for the three months ended September 30, 2017. At September 30, 2018 and December 31, 2017, the weighted average yield of FLLP’s portfolio was 7.2% and 7.3%, respectively, measured at fair value and 7.3% and 7.2%, respectively, measured at cost.

 

  33  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

FLLP Portfolio as of September 30, 2018

 

Description

 

Industry

  Spread
Above
Index(1)
    LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
    Par
Amount
    Cost     Fair
Value(3)
 

1A Smart Start LLC

  Electronic Equipment, Instruments & Components     L+475       1.00     6.99     2/21/22     $ 6,805     $ 6,766     $ 6,805  

Alteon Health, LLC (fka Island Medical)

  Health Care Providers & Services     L+650       1.00     8.74     9/1/22       3,495       3,468       3,337  

Capstone Logistics Acquisition, Inc.

  Professional Services     L+450       1.00     6.74     10/7/21       4,470       4,447       4,487  

Confie Seguros Holding II Co.

  Insurance     L+525       1.00     7.49     4/19/22       4,727       4,694       4,626  

Edgewood Partners Holdings, LLC (Epic)

  Insurance     L+425       1.00     6.49     9/8/24       4,344       4,327       4,344  

Empower Payments Acquisition, Inc. (RevSpring)

  Professional Services     L+450       1.00     6.74     11/30/23       5,955       5,884       5,955  

Falmouth Group Holdings Corp. (AMPAC)

  Chemicals     L+675       1.00     8.99     12/14/21       4,172       4,172       4,172  

Kellermeyer Bergensons Services, LLC (KBS)

  Commercial Services & Supplies     L+500       1.00     7.32     10/29/21       3,832       3,807       3,832  

Ministry Brands, LLC

  Software     L+400       1.00     6.24     12/2/22       4,368       4,336       4,368  

MSHC, Inc. (Service Logic)

  Commercial Services & Supplies     L+425       1.00     6.56     7/31/23       916       912       912  

National Spine and Pain Centers, LLC

  Health Care Providers & Services     L+450       1.00     6.74     6/2/24       2,591       2,580       2,565  

Pet Holdings ULC & Pet Supermarket, Inc.

  Specialty Retail     L+550       1.00     7.84     7/5/22       4,600       4,552       4,600  

PSP Group, LLC (Pet Supplies Plus)

  Specialty Retail     L+475       1.00     7.00     4/6/21       4,598       4,578       4,598  

Telular Corporation

  Wireless Telecommunication Services     L+425       1.25     6.64     6/24/19       4,784       4,778       4,784  

The Hilb Group, LLC & Gencorp Insurance Group, Inc.

  Insurance     L+475       1.00     7.14     6/24/21       4,191       4,147       4,191  

Wirb-Copernicus Group, Inc.

  Professional Services     L+425       1.00     6.49     8/15/22       5,146       5,114       5,146  
             

 

 

   

 

 

 
              $ 68,562     $ 68,722  
             

 

 

   

 

 

 

 

(1)

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

(2)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2018.

(3)

Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described elsewhere herein.

FLLP Portfolio as of December 31, 2017 (audited)

 

Description

 

Industry

  Spread
Above
Index(1)
    LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
    Par
Amount
    Cost     Fair
Value(3)
 

1A Smart Start LLC(4)

  Electronic Equipment, Instruments & Components     L+475       1.00     6.44     2/21/22     $ 7,840     $ 7,787     $ 7,820  

Alera Group Intermediate Holdings, Inc.(4)

  Insurance     L+550       1.00     6.85     12/30/22       4,279       4,241       4,257  

Anesthesia Consulting & Management, LP(4)

  Health Care Providers & Services     L+625       1.00     7.94     10/31/22       4,530       4,493       4,258  

Capstone Logistics Acquisition, Inc.(4)

  Professional Services     L+450       1.00     6.07     10/7/21       5,284       5,252       5,231  

 

  34  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

Description

 

Industry

  Spread
Above
Index(1)
    LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
    Par
Amount
    Cost     Fair
Value(3)
 

Confie Seguros Holding II Co.(4)

  Insurance     L+525       1.00     6.73     4/19/22       5,445       5,401       5,450  

Edgewood Partners Holdings, LLC (Epic)

  Insurance     L+475       1.00     6.14     9/8/24       4,467       4,447       4,444  

Empower Payments Acquisition, Inc. (RevSpring)(4)

  Professional Services     L+550       1.00     7.19     11/30/23       4,579       4,499       4,579  

Falmouth Group Holdings Corp. (AMPAC)(4)

  Chemicals     L+675       1.00     8.44     12/14/21       5,018       5,018       5,018  

Island Medical Management Holdings, LLC(4)

  Health Care Providers & Services     L+550       1.00     7.00     9/1/22       4,570       4,528       4,432  

Kellermeyer Bergensons Services, LLC (KBS)(4)

  Commercial Services & Supplies     L+500       1.00     6.48     10/29/21       4,415       4,381       4,415  

Metamorph US 3, LLC (Metalogix)(4)

  Software     L+750 (5)       1.00     9.07     12/1/20       3,976       3,922       2,903  

Ministry Brands, LLC(4)

  Software     L+500       1.00     6.38     12/2/22       4,818       4,777       4,818  

National Spine and Pain Centers, LLC

  Health Care Providers & Services     L+450       1.00     6.19     6/2/24       2,985       2,971       2,963  

Pet Holdings ULC & Pet Supermarket, Inc.

  Specialty Retail     L+550       1.00     6.84     7/5/22       5,111       5,050       5,086  

PSP Group, LLC (Pet Supplies Plus)(4)

  Specialty Retail     L+475       1.00     6.32     4/6/21       5,298       5,269       5,298  

QBS Holding Company, Inc. (Quorum)(4)

  Software     L+475       1.00     6.13     8/7/21       3,263       3,243       3,238  

Salient Partners, L.P.(4)

  Asset Management     L+850       1.00     9.85     6/9/21       4,806       4,745       4,806  

Sarnova HC, LLC

  Trading Companies and Distributors     L+475       1.00     6.32     1/28/22       4,913       4,877       4,913  

Suburban Broadband, LLC (Jab Wireless, Inc.) (4)

  Wireless Telecommunication Services     L+650 (6)       1.00     8.19     3/26/19       8,067       8,007       8,067  

Telular Corporation

  Wireless Telecommunication Services     L+425       1.25     5.94     6/24/19       5,743       5,729       5,728  

The Hilb Group, LLC & Gencorp Insurance Group, Inc.(4)

  Insurance     L+475       1.00     6.44     6/24/21       4,519       4,459       4,519  

VT Buyer Acquisition Corp. (Veritext)(4)

  Professional Services     L+475       1.00     6.44     1/29/22       5,926       5,901       5,897  

Wirb-Copernicus Group, Inc.(4)

  Professional Services     L+500       1.00     6.69     8/15/22       5,928       5,882       5,928  
             

 

 

   

 

 

 
              $ 114,879     $ 114,068  
             

 

 

   

 

 

 

 

(1)

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

(2)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2017.

(3)

Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described elsewhere herein.

(4)

The Company also holds this security on its Consolidated Statements of Assets and Liabilities.

(5)

Spread is 5.50% Cash / 2.0% PIK.

(6)

Spread is 4.50% Cash / 2.0% PIK.

 

  35  


Table of Contents

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

Below is certain summarized financial information for FLLP as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017:

 

    September 30,
2018
    December 31,
2017
 

Selected Balance Sheet Information for FLLP:

   

Investments at fair value (cost $68,562 and $114,879, respectively)

  $ 68,722     $ 114,068  

Cash and other assets.

    11,583       7,723  
 

 

 

   

 

 

 

Total assets

  $ 80,305     $ 121,791  
 

 

 

   

 

 

 

Debt outstanding

  $ 44,784     $ 78,644  

Distributions payable

    930       1,180  

Interest payable and other credit facility related expenses

    898       843  

Accrued expenses and other payables

    149       170  
 

 

 

   

 

 

 

Total liabilities

  $ 46,761     $ 80,837  
 

 

 

   

 

 

 

Members’ equity

  $ 33,544     $ 40,954  
 

 

 

   

 

 

 

Total liabilities and members’ equity

  $ 80,305     $ 121,791  
 

 

 

   

 

 

 

 

    Three months ended
September 30, 2018
    Three months ended
September 30, 2017
    Nine months ended
September 30, 2018
    Nine months ended
September 30, 2017
 

Selected Income Statement Information for FLLP:

       

Interest income

  $ 1,809     $ 2,160     $ 5,992     $ 6,260  
 

 

 

   

 

 

   

 

 

   

 

 

 

Service fees*

  $ 13     $ 20     $ 50     $ 59  

Interest and other credit facility expenses

    835       786       2,623       2,229  

Other general and administrative expenses

    18       49       108       89  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    866       855       2,781       2,377  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

  $ 943     $ 1,305     $ 3,211     $ 3,883  
 

 

 

   

 

 

   

 

 

   

 

 

 

Realized gain (loss) on investments

    6             (2,613     69  

Net change in unrealized gain (loss) on investments

    (142     486       971       (30
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) on investments

    (136     486       (1,642     39  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 807     $ 1,791     $ 1,569     $ 3,922  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Service fees are included within the Company’s Consolidated Statements of Operations as other income.

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

Note 12. Solar Life Science Program LLC

On February 22, 2017, the Company and Solar Capital Ltd. formed LSJV with an affiliate of Deerfield Management. The Company committed $75,000 to LSJV. On August 16, 2018, the LSJV was dissolved, without commencing operations.

Note 13. North Mill Capital LLC

We acquired 100% of the equity interests of North Mill Capital LLC (“NMC”) on October 20, 2017. NMC is a leading asset-backed lending commercial finance company that provides senior secured asset-backed financings to U.S. based small-to-medium-sized businesses primarily in the manufacturing, services and distribution industries. We invested approximately $51,000 to effect the transaction. Subsequently, the Company contributed 1% of its equity interest in NMC to ESP SSC Corporation. Immediately thereafter, the Company and ESP SSC Corporation contributed their equity interests to NorthMill LLC (“NorthMill”). On May 1, 2018, NorthMill merged with and into NMC, with NMC being the surviving company. The Company and ESP SSC Corporation own 99% and 1% of the equity interests of NMC, respectively. The management team of NMC continues to lead NMC.

NMC currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2018, the portfolio totaled approximately $272,476 of commitments, of which $145,953 were funded, on total assets of $167,812. As of December 31, 2017, the portfolio totaled approximately $283,461 of commitments, of which $151,604 were funded, on total assets of $176,354. At September 30, 2018, the portfolio consisted of 87 issuers with an average balance of approximately $1,677 versus 92 issuers with an average balance of approximately $1,600 at December 31, 2017. NMC has a senior credit facility with a bank lending group for $160,000 which expires on October 20, 2020. Borrowings are secured by substantially all of NMC’s assets. NMC’s credit facility, which is non-recourse to us, had approximately $104,340 and $116,574 of borrowings outstanding at September 30, 2018 and December 31, 2017, respectively. For the three months ended September 30, 2018, NMC had net income of $895 on gross income of $5,649. For the nine months ended September 30, 2018, NMC had net income of $2,425 on gross income of $15,902. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NMC’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NMC will be able to maintain consistent dividend payments to us.

Note 14. Capital Share Transactions

As of September 30, 2018 and December 31, 2017, 200,000,000 shares of $0.01 par value capital stock were authorized.

Transactions in capital stock were as follows:

 

    Shares     Amount  
    Nine months ended
September 30, 2018
    Year ended
December 31, 2017
    Nine months ended
September 30, 2018
    Year ended
December 31, 2017
 

Shares issued in reinvestment of distributions

    3,755       11,719     $ 65     $ 204  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase

    3,755       11,719     $ 65     $ 204  
 

 

 

   

 

 

   

 

 

   

 

 

 

Note 15. Subsequent Events

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

 

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SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2018

(in thousands, except share amounts)

 

On October 4, 2018, the Board declared a monthly distribution of $0.1175 per share payable on November 1, 2018 to holders of record as of October 24, 2018.

The Small Business Credit Availability Act permits BDCs to reduce the required minimum asset coverage ratio applicable to a BDC from 200% to 150%, subject to certain requirements described therein. At the Company’s Annual Stockholder Meeting held on October 11, 2018, the Company’s stockholders approved the proposal to authorize the Company to become subject to a minimum asset coverage ratio of at least 150% effective as of October 12, 2018.

On November 5, 2018, the Board declared a monthly distribution of $0.1175 per share payable on December 4, 2018 to holders of record as of November 21, 2018.

 

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Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Solar Senior Capital Ltd.:

Results of Review of Interim Financial Information

We have reviewed the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of Solar Senior Capital Ltd. (the Company) as of September 30, 2018, the related consolidated statements of operations for the three-month and nine-month periods ended September 30, 2018 and 2017, the related consolidated statement of changes in net assets for the nine-month period ended September 30, 2018, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2018 and 2017, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the Company as of December 31, 2017, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated February 22, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.

Basis for Review Results

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

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

/s/ KPMG LLP

New York, New York

November 5, 2018

 

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Item 2.

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

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

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

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

the impact of investments that we expect to make;

 

   

our contractual arrangements and relationships with third parties;

 

   

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

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

our expected financings and investments;

 

   

the adequacy of our cash resources and working capital; and

 

   

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

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

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

Overview

Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, “we” or “our”), a Maryland corporation formed in December 2010, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, the Company has elected to be treated, and intend to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

On February 24, 2011, we priced our initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, raising approximately $168 million in net proceeds. Concurrent with this offering, Solar Senior Capital Investors LLC, an entity controlled by Michael S. Gross, our Chairman and Chief Executive Officer, and Bruce Spohler, our Chief Operating Officer, purchased an additional 500,000 shares through a concurrent private placement, raising another $10 million.

 

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We invest primarily in privately held U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. We define “middle market” to refer to companies with annual revenues between $50 million and $1 billion. Our investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by directly and indirectly investing in senior loans, including first lien, stretch first lien, and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of public companies that are thinly traded or in equity securities. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will be invested in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarily LIBOR, plus a premium. Senior loans in which we invest are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans,” “high yield” or “junk” securities, and may be considered “high risk” compared to debt instruments that are rated investment grade. In addition, some of our debt investments are not scheduled to fully amortize over their stated terms, which could cause us to suffer losses if the respective issuer of such debt investment is unable to refinance or repay their remaining indebtedness at maturity. While the Company does not typically seek to invest in traditional equity securities as part of its investment objective, the Company may occasionally acquire some equity securities in connection with senior loan investments and in certain other unique circumstances, such as the Company’s equity investments in Gemino Healthcare Finance, LLC (“Gemino”) and North Mill Capital LLC (“NMC”).

We invest in senior loans made primarily to private, leveraged middle-market companies with approximately $20 million to $100 million of earnings before income taxes, depreciation and amortization (“EBITDA”). Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our direct investments in individual securities will generally range between $5 million and $30 million each, although we expect that this investment size will vary proportionately with the size of our capital base and/or strategic initiatives. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of the United States. We may invest up to 30% of our total assets in such opportunistic investments, including loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the 1940 Act. Our investment activities are managed by Solar Capital Partners, LLC (“Solar Capital Partners” or “Investment Adviser”) and supervised by our board of directors, a majority of whom are non-interested, as such term is defined in the 1940 Act. Solar Capital Management, LLC (“Solar Capital Management” or “Administrator”) provides the administrative services necessary for us to operate.

As of September 30, 2018, the Investment Adviser has directly invested over $7.5 billion in more than 350 different portfolio companies since 2006. Over the same period, the Investment Adviser completed transactions with more than 190 different financial sponsors.

Recent Developments

On October 4, 2018, the Board declared a monthly distribution of $0.1175 per share payable on November 1, 2018 to holders of record as of October 24, 2018.

The Small Business Credit Availability Act permits BDCs to reduce the required minimum asset coverage ratio applicable to a BDC from 200% to 150%, subject to certain requirements described therein. At the Company’s Annual Stockholder Meeting held on October 11, 2018, the Company’s stockholders approved the proposal to authorize the Company to become subject to a minimum asset coverage ratio of at least 150% effective as of October 12, 2018.

 

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On November 5, 2018, the Board declared a monthly distribution of $0.1175 per share payable on December 4, 2018 to holders of record as of November 21, 2018.

Investments

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

Revenue

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

Expenses

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

 

   

the cost of our organization and public offerings;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

transfer agent and custodial fees;

 

   

fees and expenses associated with marketing efforts;

 

   

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

 

   

federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

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brokerage commissions;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

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

Portfolio and Investment Activity

During the three months ended September 30, 2018, we invested $28.3 million across 8 portfolio companies. This compares to investing $31.5 million in 11 portfolio companies for the three months ended September 30, 2017. Investments sold or prepaid during the three months ended September 30, 2018 totaled $84.2 million versus $29.6 million for the three months ended September 30, 2017.

At September 30, 2018, our portfolio consisted of 49 portfolio companies and was invested 79.9% directly in senior secured loans and 20.1% in common equity/equity interests/warrants (of which 7.3% is Gemino and 12.7% is NMC, through which the Company indirectly invests in senior secured loans) measured at fair value versus 46 portfolio companies invested 80.2% in senior secured loans and 19.8% in common equity/equity interests (of which 9.6% is Gemino and 10.2% is FLLP) at September 30, 2017. As of September 30, 2018 and December 31, 2017, we have zero issuers on non-accrual status.

At September 30, 2018, 94.3% or $438.4 million of our income producing investment portfolio* was floating rate and 5.7% or $26.6 million was fixed rate, measured at fair value. At September 30, 2017, 96.8% or $356.1 million of our income producing investment portfolio* was floating rate and 3.2% or $11.8 million was fixed rate, measured at fair value.

Since the initial public offering of Solar Senior on February 24, 2011 and through September 30, 2018, invested capital totaled approximately $1.4 billion in over 130 portfolio companies. Over the same period, Solar Senior completed transactions with more than 75 different financial sponsors.

 

*

We have included First Lien Loan Program LLC, Gemino Healthcare Finance, LLC and North Mill Capital LLC within our income producing investment portfolio.

 

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Gemino Healthcare Finance, LLC

We acquired Gemino (d/b/a Gemino Senior Secured Healthcare Finance) on September 30, 2013. Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare industry. Our initial investment in Gemino was $32.8 million. The management team of Gemino co-invested in the transaction and continues to lead Gemino. As of September 30, 2018, Gemino’s management team and Solar Senior own approximately 7% and 93% of the equity in Gemino, respectively.

Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse, $100.0 million credit facility with non-affiliates, which was expandable to $150.0 million under its accordion feature. Effective March 31, 2014, the credit facility was expanded to $105.0 million and again on June 27, 2014 to $110.0 million. On May 27, 2016, Gemino entered into a new $125.0 million credit facility which replaced the previously existing facility. The new facility has similar terms as compared to the previous facility and includes an accordion feature increase to $200.0 million and has a maturity date of May 27, 2020.

Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2018, the portfolio totaled approximately $169.2 million of commitments, of which $108.1 million were funded, on total assets of $97.7 million. As of December 31, 2017, the portfolio totaled approximately $176.3 million of commitments, of which $106.6 million were funded, on total assets of $110.6 million. At September 30, 2018, the portfolio consisted of 33 issuers with an average balance of approximately $3.7 million versus 29 issuers with an average balance of approximately $3.7 million at December 31, 2017. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $64.0 million and $75.0 million of borrowings outstanding at September 30, 2018 and December 31, 2017, respectively. For the three months ended September 30, 2018 and 2017, Gemino had net income of $1.1 million and $1.1 million, respectively, on gross income of $3.0 million and $3.1 million, respectively. For the nine months ended September 30, 2018 and 2017, Gemino had net income of $2.5 million and $2.6 million, respectively, on gross income of $8.4 million and $8.7 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in Gemino’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that Gemino will be able to maintain consistent dividend payments to us.

First Lien Loan Program LLC

On September 10, 2014, the Company entered into a limited liability company agreement to create FLLP with Voya Investment Management LLC (“Voya”). Voya acts as the investment advisor for several wholly-owned insurance subsidiaries of Voya Financial, Inc. (NYSE: VOYA). The joint venture vehicle, structured as an unconsolidated Delaware limited liability company, is expected to invest primarily in senior secured floating rate term loans to middle market companies predominantly owned by private equity sponsors or entrepreneurs. Solar Senior and Voya have committed to provide $50.75 million and $7.25 million, respectively, of capital to the joint venture. All portfolio decisions and generally all other decisions in respect of the FLLP must be approved by an investment committee of the FLLP consisting of representatives of the Company and Voya (with approval from a representative of each required). On February 13, 2015, FLLP commenced operations. On February 13, 2015, FLLP as transferor and FLLP 2015-1, LLC, a newly formed wholly owned subsidiary of FLLP, as borrower entered into a $75.0 million senior secured revolving credit facility (the “FLLP Facility”) with Wells Fargo Securities, LLC acting as administrative agent. Solar Senior acts as servicer under the FLLP Facility. The FLLP Facility was scheduled to mature on February 13, 2020. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.25%-2.50%. FLLP and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. On August 15, 2016, the FLLP Facility was amended, expanding commitments to $100.0 million and extending the maturity

 

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date to August 16, 2021. There were $44.8 million and $78.6 million of borrowings outstanding as of June 30, 2018 and December 31, 2017, respectively. On September 18, 2018, the Company acquired Voya’s share of the equity in FLLP and now holds 100% of the equity in FLLP. As such, the Company is consolidating FLLP as of this date. For financial reporting purposes, assets consolidated were recorded at fair value and the cost basis of the assets consolidated were carried forward to align with the ongoing reporting of the Company’s realized and unrealized gains and losses. Also due to the consolidation, the current $3.2 million in unrealized depreciation on the Company’s equity investment in FLLP is being reflected in unrealized depreciation in our consolidated assets and liabilities as well as an adjustment to net increase in net assets resulting from operations on the Company’s consolidated statement of cash flows. The effect of consolidation did not affect the Company’s net assets at September 30, 2018.

As of September 30, 2018 and December 31, 2017, FLLP had total assets of $80.3 million and $121.8 million, respectively. For the same periods, FLLP’s portfolio consisted of first lien floating rate senior secured loans to 16 and 23 different borrowers, respectively. For the three months ended September 30, 2018, FLLP invested $1.6 million across 3 portfolio companies. For the three months ended September 30, 2017, FLLP invested $7.2 million across 7 portfolio companies. Investments sold or prepaid totaled $30.7 million for the three months ended September 30, 2018 and $4.7 million for the three months ended September 30, 2017. At September 30, 2018 and December 31, 2017, the weighted average yield of FLLP’s portfolio was 7.2% and 7.3%, respectively, measured at fair value and 7.3% and 7.2%, respectively, measured at cost.

FLLP Portfolio as of September 30, 2018 (in thousands)

 

Description

  

Industry

   Spread
Above
Index(1)
     LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
     Par
Amount
     Cost      Fair
Value(3)
 

1A Smart Start LLC

   Electronic Equipment, Instruments & Components      L+475        1.00     6.99     2/21/22      $ 6,805      $ 6,766      $ 6,805  

Alteon Health, LLC (fka Island Medical)

   Health Care Providers & Services      L+650        1.00     8.74     9/1/22        3,495        3,468        3,337  

Capstone Logistics Acquisition, Inc.

   Professional Services      L+450        1.00     6.74     10/7/21        4,470        4,447        4,487  

Confie Seguros Holding II Co.

   Insurance      L+525        1.00     7.49     4/19/22        4,727        4,694        4,626  

Edgewood Partners Holdings, LLC (Epic)

   Insurance      L+425        1.00     6.49     9/8/24        4,344        4,327        4,344  

Empower Payments Acquisition, Inc. (RevSpring)

   Professional Services      L+450        1.00     6.74     11/30/23        5,955        5,884        5,955  

Falmouth Group Holdings Corp. (AMPAC)

   Chemicals      L+675        1.00     8.99     12/14/21        4,172        4,172        4,172  

Kellermeyer Bergensons Services, LLC (KBS)

   Commercial Services & Supplies      L+500        1.00     7.32     10/29/21        3,832        3,807        3,832  

Ministry Brands, LLC

   Software      L+400        1.00     6.24     12/2/22        4,368        4,336        4,368  

 

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Description

  

Industry

   Spread
Above
Index(1)
     LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
     Par
Amount
     Cost      Fair
Value(3)
 

MSHC, Inc. (Service Logic)

   Commercial Services & Supplies      L+425        1.00     6.56     7/31/23      $ 916      $ 912      $ 912  

National Spine and Pain Centers, LLC

   Health Care Providers & Services      L+450        1.00     6.74     6/2/24        2,591        2,580        2,565  

Pet Holdings ULC & Pet Supermarket, Inc.

   Specialty Retail      L+550        1.00     7.84     7/5/22        4,600        4,552        4,600  

PSP Group, LLC (Pet Supplies Plus)

   Specialty Retail      L+475        1.00     7.00     4/6/21        4,598        4,578        4,598  

Telular Corporation

   Wireless Telecommunication Services      L+425        1.25     6.64     6/24/19        4,784        4,778        4,784  

The Hilb Group, LLC & Gencorp Insurance Group, Inc.

   Insurance      L+475        1.00     7.14     6/24/21        4,191        4,147        4,191  

Wirb-Copernicus Group, Inc.

   Professional Services      L+425        1.00     6.49     8/15/22        5,146        5,114        5,146  
                  

 

 

    

 

 

 
                   $ 68,562      $ 68,722  
                  

 

 

    

 

 

 

 

(1)

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

(2)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2018.

(3)

Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described elsewhere herein.

FLLP Portfolio as of December 31, 2017 (audited) (in thousands)

 

Description

  

Industry

   Spread
Above
Index(1)
     LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
     Par
Amount
     Cost      Fair
Value(3)
 

1A Smart Start LLC(4)

   Electronic Equipment, Instruments & Components      L+475        1.00     6.44     2/21/22      $ 7,840      $ 7,787      $ 7,820  

Alera Group Intermediate Holdings, Inc.(4)

   Insurance      L+550        1.00     6.85     12/30/22        4,279        4,241        4,257  

Anesthesia Consulting & Management, LP(4)

   Health Care Providers & Services      L+625        1.00     7.94     10/31/22        4,530        4,493        4,258  

 

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Description

  

Industry

   Spread
Above
Index(1)
    LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
     Par
Amount
     Cost      Fair
Value(3)
 

Capstone Logistics Acquisition, Inc.(4)

   Professional Services      L+450       1.00     6.07     10/7/21      $ 5,284      $ 5,252      $ 5,231  

Confie Seguros Holding II Co.(4)

   Insurance      L+525       1.00     6.73     4/19/22        5,445        5,401        5,450  

Edgewood Partners Holdings, LLC (Epic)

   Insurance      L+475       1.00     6.14     9/8/24        4,467        4,447        4,444  

Empower Payments Acquisition, Inc. (RevSpring)(4)

   Professional Services      L+550       1.00     7.19     11/30/23        4,579        4,499        4,579  

Falmouth Group Holdings Corp. (AMPAC)(4)

   Chemicals      L+675       1.00     8.44     12/14/21        5,018        5,018        5,018  

Island Medical Management Holdings, LLC(4)

   Health Care Providers & Services      L+550       1.00     7.00     9/1/22        4,570        4,528        4,432  

Kellermeyer Bergensons Services, LLC (KBS)(4)

   Commercial Services & Supplies      L+500       1.00     6.48     10/29/21        4,415        4,381        4,415  

Metamorph US 3, LLC (Metalogix)(4)

   Software      L+750 (5)       1.00     9.07     12/1/20        3,976        3,922        2,903  

Ministry Brands, LLC(4)

   Software      L+500       1.00     6.38     12/2/22        4,818        4,777        4,818  

National Spine and Pain Centers, LLC

   Health Care Providers & Services      L+450       1.00     6.19     6/2/24        2,985        2,971        2,963  

Pet Holdings ULC & Pet Supermarket, Inc.

   Specialty Retail      L+550       1.00     6.84     7/5/22        5,111        5,050        5,086  

PSP Group, LLC (Pet Supplies Plus)(4)

   Specialty Retail      L+475       1.00     6.32     4/6/21        5,298        5,269        5,298  

QBS Holding Company, Inc. (Quorum)(4)

   Software      L+475       1.00     6.13     8/7/21        3,263        3,243        3,238  

Salient Partners, L.P.(4)

   Asset Management      L+850       1.00     9.85     6/9/21        4,806        4,745        4,806  

Sarnova HC, LLC

   Trading Companies and Distributors      L+475       1.00     6.32     1/28/22        4,913        4,877        4,913  

Suburban Broadband, LLC (Jab Wireless, Inc.) (4)

   Wireless Telecommunication Services      L+650 (6)       1.00     8.19     3/26/19        8,067        8,007        8,067  

Telular Corporation

   Wireless Telecommunication Services      L+425       1.25     5.94     6/24/19        5,743        5,729        5,728  

The Hilb Group, LLC & Gencorp Insurance Group, Inc.(4)

   Insurance      L+475       1.00     6.44     6/24/21        4,519        4,459        4,519  

 

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Description

   Industry      Spread
Above
Index(1)
     LIBOR
Floor
    Interest
Rate(2)
    Maturity
Date
     Par
Amount
     Cost      Fair
Value(3)
 

VT Buyer Acquisition Corp. (Veritext)(4)

    
Professional
Services
 
 
     L+475        1.00     6.44     1/29/22      $ 5,926      $ 5,901      $ 5,897  

Wirb-Copernicus Group, Inc.(4)

    
Professional
Services
 
 
     L+500        1.00     6.69     8/15/22        5,928        5,882        5,928  
                  

 

 

    

 

 

 
                   $ 114,879      $ 114,068  
                  

 

 

    

 

 

 

 

(1)

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

(2)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2017.

(3)

Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described elsewhere herein.

(4)

The Company also holds this security on its Consolidated Statements of Assets and Liabilities.

(5)

Spread is 5.50% Cash / 2.0% PIK.

(6)

Spread is 4.50% Cash / 2.0% PIK.

Below is certain summarized financial information for FLLP as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017:

 

     September 30,
2018
     December 31,
2017
 

Selected Balance Sheet Information for FLLP (in thousands):

     

Investments at fair value (cost $68,562 and $114,879, respectively)

   $ 68,722      $ 114,068  

Cash and other assets.

     11,583        7,723  
  

 

 

    

 

 

 

Total assets

   $ 80,305      $ 121,791  
  

 

 

    

 

 

 

Debt outstanding

   $ 44,784      $ 78,644  

Distributions payable

     930        1,180  

Interest payable and other credit facility related expenses

     898        843  

Accrued expenses and other payables

     149        170  
  

 

 

    

 

 

 

Total liabilities

   $ 46,761      $ 80,837  
  

 

 

    

 

 

 

Members’ equity

   $ 33,544      $ 40,954  
  

 

 

    

 

 

 

Total liabilities and members’ equity

   $ 80,305      $ 121,791  
  

 

 

    

 

 

 

 

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    Three months ended
September 30, 2018
    Three months ended
September 30, 2017
    Nine months ended
September 30, 2018
    Nine months ended
September 30, 2017
 

Selected Income Statement Information for FLLP (in thousands):

       

Interest income

  $ 1,809     $ 2,160     $ 5,992     $ 6,260  
 

 

 

   

 

 

   

 

 

   

 

 

 

Service fees*

  $ 13     $ 20     $ 50     $ 59  

Interest and other credit facility expenses

    835       786       2,623       2,229  

Other general and administrative expenses

    18       49       108       89  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

    866       855       2,781       2,377  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

  $ 943     $ 1,305     $ 3,211     $ 3,883  
 

 

 

   

 

 

   

 

 

   

 

 

 

Realized gain (loss) on investments

    6             (2,613     69  

Net change in unrealized gain (loss) on investments

    (142     486       971       (30
 

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gain (loss) on investments

    (136     486       (1,642     39  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 807     $ 1,791     $ 1,569     $ 3,922  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

*

Service fees are included within the Company’s Consolidated Statements of Operations as other income.

North Mill Capital LLC

We acquired 100% of the equity interests of North Mill Capital LLC (“NMC”) on October 20, 2017. NMC is a leading asset-backed lending commercial finance company that provides senior secured asset-backed financings to U.S. based small-to-medium-sized businesses primarily in the manufacturing, services and distribution industries. We invested approximately $51 million to effect the transaction. Subsequently, the Company contributed 1% of its equity interest in NMC to ESP SSC Corporation. Immediately thereafter, the Company and ESP SSC Corporation contributed their equity interests to NorthMill. On May 1, 2018, NorthMill merged with and into NMC, with NMC being the surviving company. The Company and ESP SSC Corporation own 99% and 1% of the equity interests of NMC, respectively. The management team of NMC continues to lead NMC.

NMC currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2018, the portfolio totaled approximately $272.5 million of commitments, of which $146.0 million were funded, on total assets of $167.8 million. As of December 31, 2017, the portfolio totaled approximately $283.5 million of commitments, of which $151.6 million were funded, on total assets of $176.4 million. At September 30, 2018, the portfolio consisted of 87 issuers with an average balance of approximately $1.7 million versus 92 issuers with an average balance of approximately $1.6 million at December 31, 2017. NMC has a senior credit facility with a bank lending group for $160.0 million which expires on October 20, 2020. Borrowings are secured by substantially all of NMC’s assets. NMC’s credit facility, which is non-recourse to us, had approximately $104.3 million and $116.6 million of borrowings outstanding at

 

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September 30, 2018 and December 31, 2017, respectively. For the three months ended September 30, 2018, NMC had net income of $0.9 million on gross income of $5.6 million. For the nine months ended September 30, 2018, NMC had net income of $2.4 million on gross income of $15.9 million. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NMC’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NMC will be able to maintain consistent dividend payments to us.

Solar Life Science Program LLC

On February 22, 2017, the Company and Solar Capital Ltd. formed LSJV with an affiliate of Deerfield Management. The Company committed $75.0 million to LSJV. On August 16, 2018, the LSJV was dissolved, without commencing operations

Critical Accounting Policies

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

Valuation of Portfolio Investments

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

The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on a quarterly basis, or more frequently if required. Investments for which market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company’s board of directors (the “Board”).

Investments for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology or provide a valuation or methodology that, in the judgment of the Investment Adviser or the Board does not represent fair value, each shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default and the Investment Adviser does not expect to reach an agreement with the portfolio company in the subsequent quarter; (iv) the Board will

 

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discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm.

The recommendation of fair value generally considers the following factors among others, as relevant: applicable market yields; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flow; the markets in which the issuer does business; and comparisons to publicly traded securities, among others.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. 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 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.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the nine months ended September 30, 2018, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.

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

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

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

Level 3: Unobservable inputs for the asset or liability.

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

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

 

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Valuation of FLLP Facility

The Company’s wholly owned investment subsidiary FLLP made an irrevocable election to apply the fair value option of accounting to the FLLP Facility, in accordance with ASC 825-10. We believe accounting for this facility at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility.

Revenue Recognition

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

The typically higher yields and interest rates on PIK securities, to the extent we invested, reflects the payment deferral and increased credit risk associated with such instruments and that such investments may represent a significantly higher credit risk than coupon loans. PIK securities may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the deferral of PIK interest also increases the loan-to-value ratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Investment Adviser based on non-cash accruals that ultimately may not be realized, but the Investment Adviser will be under no obligation to reimburse the Company for these fees. For the three and nine months ended September 30, 2018, capitalized PIK income totaled $0.5 million and $0.8 million, respectively. For the three and nine months ended September 30, 2017, capitalized PIK income totaled $0.1 million and $0.4 million, respectively.

Net Realized Gain or Loss and Net Change in Unrealized Gain or Loss

We generally measure realized gain or loss by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation

 

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previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized. Gains or losses on investments are calculated by using the specific identification method.

Income Taxes

Solar Senior Capital, a U.S. corporation, has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify for taxation as a RIC, the Company is required, among other things, to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income.

Recent Accounting Pronouncements

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

In August 2018, the US Securities and Exchange Commission adopted final rules to eliminate redundant, duplicative, overlapping, outdated or superseded disclosure requirements in light of other disclosure requirements, GAAP or changes in the information environment. These rules amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and certain related forms. These changes become effective thirty days after the date of publication in the Federal Register. The Company is evaluating the impact of these changes on its consolidated financial statements and disclosures.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows, which amends FASB ASC 230. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this Update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. For public business entities, the amendments were effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has adopted ASU 2016-18 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which will amend FASB ASC 310-20. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company is evaluating the impact of ASU 2017-08 on its consolidated financial statements and disclosures.

 

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In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 was effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has adopted ASC 606 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

RESULTS OF OPERATIONS

Results comparisons are for the three and nine months ended September 30, 2018 and 2017:

Investment Income

For the three and nine months ended September 30, 2018, gross investment income totaled $11.0 million and $29.8 million, respectively. For the three and nine months ended September 30, 2017, gross investment income totaled $8.0 million and $23.1 million, respectively. The increase in gross investment income for the year over year three and nine month periods was primarily due to average portfolio growth, including from our investment in NMC, as well as our portfolio yield increasing year over year.

Expenses

Net expenses totaled $5.3 million and $12.8 million, respectively, for the three and nine months ended September 30, 2018, of which $2.6 million and $5.9 million, respectively, were gross base management fees and gross performance-based incentive fees and $2.0 million and $5.2 million, respectively, were interest and other credit facility expenses. Over the same periods, $0.0 million and $0.7 million, respectively, of performance-based incentive fees were waived. Administrative services and other general and administrative expenses totaled $0.7 million and $2.4 million, respectively, for the three and nine months ended September 30, 2018. Net expenses totaled $2.3 million and $6.2 million, respectively, for the three and nine months ended September 30, 2017, of which $1.2 million and $3.3 million, respectively, were gross base management fees and gross performance-based incentive fees and $1.0 million and $2.7 million, respectively, were interest and other credit facility expenses. Over the same periods, $0.5 million and $2.0 million, respectively, of base management fees were waived and $0.2 million and $0.4 million, respectively, of performance-based incentive fees were waived. Administrative services and other general and administrative expenses totaled $0.9 million and $2.6 million, respectively, for the three and nine months ended September 30, 2017. Expenses generally consist of management fees, performance-based incentive fees, administrative services expenses, insurance, legal expenses, directors’ expenses, audit and tax