10-Q 1 d613037d10q.htm AB PRIVATE CREDIT INVESTORS CORPORATION AB Private Credit Investors Corporation

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

 

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

COMMISSION FILE NUMBER: 814-01196

 

 

AB Private Credit Investors Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   47-5049745
(State of incorporation)  

(I.R.S. Employer

Identification No.)

1345 Avenues of the Americas

New York, NY 10105

(Address of principal executive offices)

(212) 969-1000

(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, a 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 issuer had 5,071,409 shares of common stock, $0.01 par value per share, outstanding as of November 14, 2018.

 

 

 


AB PRIVATE CREDIT INVESTORS CORPORATION

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

Table of Contents

 

   

INDEX

   PAGE
NO.
 

PART I.

  FINANCIAL INFORMATION   

Item 1.

  Financial Statements      3  

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      23  

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      38  

Item 4.

  Controls and Procedures      39  

PART II.

  OTHER INFORMATION      39  

Item 1.

  Legal Proceedings      39  

Item 1A.

  Risk Factors      39  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      40  

Item 3.

  Defaults Upon Senior Securities      40  

Item 4.

  Mine Safety Disclosures      40  

Item 5.

  Other Information      40  

Item 6.

  Exhibits      41  

SIGNATURES

  


Item 1. Financial Statements

AB Private Credit Investors Corporation

 

Statements of Assets and Liabilities

 

     As of
September 30,
2018
(Unaudited)
    As of
December 31,
2017
 

Assets

 

Investments, at fair value (amortized cost of $85,453,778 and $23,877,276, respectively)

   $ 85,428,763     $ 23,873,030  

Cash and cash equivalents

     2,466,694       17,139,858  

Receivable from Adviser

     629,186       2,210  

Interest receivable

     456,847       69,773  

Prepaid expenses

     164,774       102,390  

Deferred financing costs

     130,511       238,984  

Receivable for investments sold

     5,633       —    

Deferred offering costs

     —         156,089  

Receivable for fund shares sold

     —         6,457,252  
  

 

 

   

 

 

 

Total assets

   $ 89,282,408     $ 48,039,586  
  

 

 

   

 

 

 

Liabilities

 

Credit facility payable

   $ 36,250,000     $ 23,500,000  

Professional fees payable

     947,589       158,954  

Management fees payable

     483,562       —    

Distribution payable

     277,657       —    

Administrator and custodian fees payable

     184,196       28,692  

Accrued expenses and other liabilities

     98,402       6,292  

Interest and credit facility expense payable

     82,826       20,434  

Incentive fee payable

     33,904       —    

Transfer agent fees payable

     6,855       —    

Excise tax payable

     —         2,336  

Directors’ fees payable

     —         187  

Accrued organization and offering costs

     —         90,308  
  

 

 

   

 

 

 

Total liabilities

   $ 38,364,991     $ 23,807,203  
  

 

 

   

 

 

 

Commitments and Contingencies (Note 7)

 

Net Assets

 

Common stock, par value $0.01 per share (200,000,000 shares authorized, 5,071,409 and 2,417,371 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)

     50,714       24,174  

Paid-in capital in excess of par value

     50,879,175       24,152,786  

Distributable earnings (accumulated loss)

     (12,472     55,423  
  

 

 

   

 

 

 

Total net assets

   $ 50,917,417     $ 24,232,383  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 89,282,408     $ 48,039,586  
  

 

 

   

 

 

 

Net asset value per share

   $ 10.04     $ 10.02  
  

 

 

   

 

 

 

See Notes to Financial Statements

 

3


AB Private Credit Investors Corporation

 

 

Unaudited Statements of Operations

 

     For the three months ended
September 30,
    For the nine months ended
September 30,
 
     2018     2017     2018     2017  

Investment Income:

 

Interest income, net of amortization/accretion

   $ 1,581,876     $ —       $ 3,189,114     $ —    

Other fee income

     2,479       —         2,479       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment income

     1,584,355       —         3,191,593       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

 

Professional fees

     379,861       385,500       1,624,403       385,500  

Interest and credit facility expenses

     494,991       —         927,005       —    

Management fees

     281,892       —         560,765       —    

Insurance expenses

     62,383       —         185,116       —    

Organizational expenses and offering costs

     52,221       467,647       156,089       467,647  

Administration and custodian fees

     39,546       —         155,504       —    

Directors’ fees

     37,223       149,000       108,346       149,000  

Income-based incentive fee

     66,206       —         66,206       —    

Transfer agent fees

     561       —         561       —    

Other expenses

     78,595       —         231,873       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     1,493,479       1,002,147       4,015,868       1,002,147  

Expense reimbursement from Adviser

     (462,465     (1,002,147     (2,052,539     (1,002,147

Waived management fees

     (39,913     —         (77,203     —    

Waived incentive fees

     (32,302     —         (32,302     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net expenses

     958,799       —         1,853,824       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income before taxes

     625,556       —         1,337,769       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Excise tax expense

     —         —         3       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     625,556       —         1,337,766       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses) on investment transactions:

 

Net realized gain (loss) from investments

     —         —         —         —    

Net change in unrealized appreciation (depreciation) from investments

     25,402       —         (20,769     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized and unrealized gains (losses)

     25,402       —         (20,769     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 650,958     $ —       $ 1,316,997     $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income per share (basic and diluted):

 

Net investment income per share (basic and diluted):

   $ 0.15     $ —       $ 0.41     $ —    

Earnings per share (basic and diluted):

   $ 0.16     $ —       $ 0.40     $ —    

Weighted average shares outstanding:

     4,168,629       2,500       3,258,111       1,300  

Distributions declared per share:

   $ 0.12     $ —       $ 0.37     $ —    

See Notes to Financial Statements

 

4


AB Private Credit Investors Corporation

 

 

Unaudited Statements of Changes in Net Assets

 

     Nine Months
Ended
September 30,
2018
    Nine Months
Ended
September 30,
2017
 

Increase (decrease) in net assets resulting from operations:

 

Net investment income

   $ 1,337,766     $ —    

Net realized gain on investments

     —         —    

Net change in unrealized appreciation (depreciation) on investments

     (20,769     —    
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     1,316,997       —    
  

 

 

   

 

 

 

Distributions to shareholders

     (1,384,892     —    

Capital transactions:

 

Issuance of common stock (2,576,996 and 2,400 shares, respectively)

     25,980,591       24,000  

Issuance of common shares pursuant to distribution reinvestment plan (77,042 and 0 shares, respectively)

     772,338       —    
  

 

 

   

 

 

 

Net increase in net assets resulting from capital transactions

     26,752,929       24,000  
  

 

 

   

 

 

 

Total increase in net assets

     26,685,034       24,000  

Net assets at beginning of period

     24,232,383       1,000  
  

 

 

   

 

 

 

Net assets at end of period

   $ 50,917,417     $ 25,000  
  

 

 

   

 

 

 

See Notes to Financial Statements

 

5


AB Private Credit Investors Corporation

Unaudited Statements of Cash Flows

 

     Nine Months
Ended
September 30,
2018
    Nine Months
Ended
September 30,
2017
 

Cash flows from operating activities

 

Net increase (decrease) in net assets resulting from operations

   $ 1,316,997     $ —    

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

 

Purchases of investments

     (67,235,166     —    

Proceeds from sales of investments and principal repayments

     5,780,804       —    

Net change in unrealized (appreciation) depreciation on investments

     20,769       —    

Amortization of premium and accretion of discount, net

     (122,140     —    

Amortization of deferred financing costs

     288,965       —    

Amortization of deferred offering costs

     156,089       —    

Increase (decrease) in operating assets and liabilities:

 

(Increase) decrease in receivable for investments sold

     (5,633     —    

(Increase) decrease in interest receivable

     (387,074     —    

(Increase) decrease in receivable from Adviser

     (626,976     —    

(Increase) decrease in prepaid expenses

     (62,384     —    

Increase (decrease) in management fees payable

     483,562       —    

Increase (decrease) in administrator and custodian fees payable

     155,504       —    

Increase (decrease) in professional fees payable

     788,635       —    

Increase (decrease) in excise tax payable

     (2,336     —    

Increase (decrease) in incentive fees payable

     33,904       —    

Increase (decrease) in directors’ fees payable

     (187     —    

Increase (decrease) in transfer agent fees payable

     6,855       —    

Increase (decrease) in interest and credit facility expense payable

     62,392       —    

Increase (decrease) in accrued organization costs

     (90,308     —    

Increase (decrease) in accrued expenses and other liabilities

     92,110       —    
  

 

 

   

 

 

 

Net cash provided by (used for) operating activities

     (59,345,618     —    
  

 

 

   

 

 

 

Cash flows from financing activities

 

Issuance of common stock

     32,437,843       24,000  

Distributions paid

     (334,897     —    

Financing costs paid

     (180,492     —    

Borrowings on debt

     77,750,000       —    

Repayments of debt

     (65,000,000     —    
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     44,672,454       24,000  
  

 

 

   

 

 

 

Net increase (decrease) in cash

     (14,673,164     24,000  

Cash, beginning of period

     17,139,858       1,000  
  

 

 

   

 

 

 

Cash, end of period

   $ 2,466,694     $ 25,000  
  

 

 

   

 

 

 

Supplemental and non-cash financing activities

 

Cash paid during the period for interest

   $ 531,923     $ —    

Issuance of common shares pursuant to distribution reinvestment plan

   $ 772,338     $ —    

Excise taxes paid

   $ 2,339     $ —    

See Notes to Financial Statements

 

6


AB Private Credit Investors Corporation

Schedule of Investments as of September 30, 2018

(Unaudited)

 

Portfolio Company

  Industry  

Facility Type

 

Interest

  Maturity   Funded
Par Amount
    Cost     Fair
Value
 

Investments at Fair Value - 167.78% + * # ^

 

U.S. Corporate Debt - 167.16%

 

1st Lien/Senior Secured Debt - 167.16%

 

Pivotal Payments Direct Corp.

  Business Services   Initial Canadian Term Loan Commitment   8.75% (P + 3.50%; 1.00% Floor)   09/28/2025   $ 1,008,833     $ 998,745     $ 998,745  

Pivotal Payments, Inc.

  Business Services   Initial U.S. Term Loan Commitment   8.75% (P + 3.50%; 1.00% Floor)   09/28/2025     672,556       665,830       665,830  

Pivotal Payments, Inc.(1) (2)

  Business Services   Delayed Draw Term Loan   8.75% (P + 3.50%; 1.00% Floor)   09/28/2025     —         (4,857     (4,857

InSite Wireless Group, LLC(1)

  Communications & IT
Infrastructure
  Revolver   7.72% (L + 5.55%; 0.50% Floor)   03/01/2023     98,615       95,976       95,657  

InSite Wireless Group, LLC(1)

  Communications & IT
Infrastructure
  Term Loan   7.72% (L + 5.55%; 0.50% Floor)   07/10/2020     3,116,250       3,066,355       3,062,997  

Maintech, Incorporated

  Communications & IT
Infrastructure
  Term Loan   9.24% (L + 7.00%; 1.00% Floor)   12/28/2022     2,921,875       2,879,833       2,878,047  

Maintech, Incorporated(1)

  Communications & IT
Infrastructure
  Revolver   11.25% (P + 6.00%; 1.00% Floor)   12/28/2022     192,500       188,894       188,375  

Captain D’s, Inc.

  Consumer Non-Cyclical   Term Loan   6.71% (L + 4.50%; 1.00% Floor)   12/15/2023     2,062,395       2,043,702       2,041,771  

Captain D’s, Inc.(1)

  Consumer Non-Cyclical   Revolver   8.75% (P + 3.50%; 1.00% Floor)   12/15/2023     78,671       76,929       76,721  

Tropical Smoothie Café, LLC

  Consumer Non-Cyclical   Term Loan   7.71% (L + 5.50%; 1.00% Floor)   09/24/2023     1,350,089       1,336,632       1,336,588  

Tropical Smoothie Café, LLC(1)

  Consumer Non-Cyclical   Revolver   7.71% (L + 5.50%; 1.00% Floor)   09/24/2023     38,574       37,228       37,224  

AEG Holding Company, Inc.

  Education   Term Loan   8.25% (L + 6.00%; 1.00% Floor)   11/20/2023     6,184,136       6,075,030       6,060,454  

AEG Holding Company, Inc.(1)

  Education   Revolver   8.16% (L + 6.00%; 1.00% Floor)   11/20/2023     541,815       527,474       525,560  

AEG Holding Company, Inc.(1) (2)

  Education   Delayed Draw Term Loan   8.25% (L + 6.00%; 1.00% Floor)   11/20/2023     —         (18,657     (21,673

Brazos Delaware II, LLC(3)

  Energy   Term Loan B   6.17% (L + 4.00%)   05/21/2025     2,247,533       2,236,743       2,243,936  

Analogic Corporation

  Healthcare & HCIT   Term Loan   8.21% (L + 6.00%; 1.00% Floor)   06/22/2024     3,013,043       2,954,964       2,952,783  

Analogic Corporation(1) (2)

  Healthcare & HCIT   Revolver   8.21% (L + 6.00%; 1.00% Floor)   06/22/2023     —         (5,481     (5,739

Pinnacle Dermatology Management, LLC

  Healthcare & HCIT   Term Loan   6.42% (L + 4.25%; 1.00% Floor)   05/18/2023     1,869,010       1,834,003       1,831,630  

Pinnacle Dermatology Management, LLC(1) (2)

  Healthcare & HCIT   Revolver   6.42% (L + 4.25%; 1.00% Floor)   05/18/2023     —         (8,690     (9,368

Pinnacle Dermatology Management, LLC(1) (2)

  Healthcare & HCIT   Delayed Draw Term Loan   6.42% (L + 4.25%; 1.00% Floor)   05/18/2023     —         (86,978     (93,685

Platinum Dermatology Partners, LLC

  Healthcare & HCIT   Term Loan   8.58% (L + 6.25%; 1.00% Floor)   01/03/2023     3,174,532       3,113,676       3,111,042  

Platinum Dermatology Partners, LLC

  Healthcare & HCIT   Specified Delayed Draw Term Loan Commitment   8.57% (L + 6.25%; 1.00% Floor)   01/03/2023     1,984,394       1,949,634       1,944,706  

Platinum Dermatology Partners, LLC(1)

  Healthcare & HCIT   General Delayed Draw Term Loan Commitment   8.64% (L + 6.25%; 1.00% Floor)   01/03/2023     1,425,972       1,391,037       1,386,084  

Platinum Dermatology Partners, LLC(1) (2)

  Healthcare & HCIT   Revolver   8.58% (L + 6.25%; 1.00% Floor)   01/03/2023     —         (8,515     (9,972

Qualifacts Corporation

  Healthcare & HCIT   Term Loan   9.33% (L + 7.00%; 1.00% Floor)   12/12/2022     2,820,000       2,771,090       2,763,600  

Qualifacts Corporation(1) (2)

  Healthcare & HCIT   Revolver   9.33% (L + 7.00%; 1.00% Floor)   12/12/2022     —         (5,054     (6,000

Theranest, LLC

  Healthcare & HCIT   Term Loan   7.34% (L + 5.00%; 1.00% Floor)   07/23/2023     3,000,000       2,941,908       2,940,000  

Theranest, LLC(1) (2)

  Healthcare & HCIT   Revolver   7.34% (L + 5.00%; 1.00% Floor)   07/23/2023     —         (8,252     (8,571

Theranest, LLC(1) (2)

  Healthcare & HCIT   Delayed Draw Term Loan   7.34% (L + 5.00%; 1.00% Floor)   07/23/2023     —         (43,319     (45,000

Avetta, LLC

  Software & Services   Term Loan   7.40% (L + 5.25%; 1.00% Floor)   04/10/2024     3,328,833       3,266,517       3,262,256  

Avetta, LLC(1) (2)

  Software & Services   Revolver   7.40% (L + 5.25%; 1.00% Floor)   04/10/2024     —         (8,967     (9,888

Avetta, LLC(1) (2)

  Software & Services   Delayed Draw Term Loan   7.40% (L + 5.25%; 1.00% Floor)   04/10/2024     —         (14,266     (15,450

BeyondTrust Software, Inc.

  Software & Services   Term Loan   8.60% (L + 6.25%; 1.00% Floor)   11/21/2023     3,226,506       3,183,772       3,258,771  

Businesssolver.com, Inc.

  Software & Services   Term Loan   9.81% (L + 7.50%; 1.00% Floor)   05/15/2023     2,588,235       2,539,630       2,536,471  

Businesssolver.com, Inc.(1)

  Software & Services   Delayed Draw Term Loan   9.81% (L + 7.50%; 1.00% Floor)   05/15/2023     64,706       61,115       56,941  

Businesssolver.com, Inc.(1) (2)

  Software & Services   Revolver   9.81% (L + 7.50%; 1.00% Floor)   05/15/2023     —         (5,982     (6,471

Drilling Info Holdings, Inc.

  Software & Services   Term Loan   6.54% (L + 4.25%)   07/30/2025     2,872,464       2,858,333       2,858,102  

Drilling Info Holdings, Inc.(1) (2)

  Software & Services   Delayed Draw Term Loan   6.54% (L + 4.25%)   07/30/2025     —         (2,086     (2,138

Engage2Excel, Inc

  Software & Services   Term Loan   8.85% (L + 6.50%; 1.00% Floor)   03/07/2023     3,007,979       2,951,463       2,947,820  

Engage2Excel, Inc(1)

  Software & Services   Revolver   10.75% (P + 5.50%; 1.00% Floor)   03/07/2023     12,564       5,456       5,025  

Exterro, Inc.

  Software & Services   Initial Term Loan   7.83% (L + 5.50%; 1.00% Floor)   05/31/2024     2,962,575       2,907,604       2,903,323  

Exterro, Inc.(1) (2)

  Software & Services   Revolver   7.83% (L + 5.50%; 1.00% Floor)   05/31/2024     —         (6,060     (6,600

Finalsite Holdings, Inc.

  Software & Services   Term Loan   7.72% (L + 5.50%; 1.00% Floor)   09/25/2024     6,750,444       6,632,571       6,632,311  

Finalsite Holdings, Inc.(1) (2)

  Software & Services   Revolver   7.72% (L + 5.50%; 1.00% Floor)   09/25/2024     —         (8,836     (8,860

Genesis Acquisition Co.

  Software & Services   Term Loan   6.24% (L + 4.00%; 1.00% Floor)   07/31/2024     1,376,466       1,349,581       1,348,936  

Genesis Acquisition Co.(1) (2)

  Software & Services   Delayed Draw Term Loan   6.24% (L + 4.00%; 1.00% Floor)   07/31/2024     —         (3,546     (3,645

Genesis Acquisition Co.(1) (2)

  Software & Services   Revolver   6.24% (L + 4.00%; 1.00% Floor)   07/31/2024     —         (3,937     (4,048

Ministry Brands, LLC

  Software & Services   1st Lien Term Loan   6.24% (L + 4.00%; 1.00% Floor)   12/02/2022     3,184,209       3,169,610       3,168,288  

 

7


Portfolio Company

   Industry     

Facility Type

  

Interest

   Maturity      Funded
Par Amount
     Cost     Fair Value  

Ministry Brands, LLC(1)

     Software & Services      Delayed Draw Term Loan    6.24% (L + 4.00%; 1.00% Floor)      12/02/2022      $ 226,301      $ 219,932     $ 219,316  

Perforce Intermediate Holdings, LLC

     Software & Services      Term Loan    6.49% (L + 4.25%; 1.00% Floor)      12/27/2024        2,892,429        2,815,250       2,812,887  

Perforce Intermediate Holdings, LLC(1)

     Software & Services      Revolver    6.49% (L + 4.25%; 1.00% Floor)      12/28/2022        474,057        462,470       460,700  

Sugarcrm, Inc.

     Software & Services      Term Loan    8.99% (L + 6.75%; 1.00% Floor)      07/31/2024        3,235,401        3,180,008       3,178,782  

Sugarcrm, Inc.(1) (2)

     Software & Services      Revolver    8.99% (L + 6.75%; 1.00% Floor)      07/31/2024        —          (5,280     (5,429

Swiftpage, Inc.

     Software & Services      Term Loan    7.65% (L + 5.50%; 1.00% Floor)      06/13/2023        2,528,474        2,480,434       2,477,905  

Swiftpage, Inc.(1) (2)

     Software & Services      Revolver    7.65% (L + 5.50%; 1.00% Floor)      06/13/2023        —          (4,241     (4,506

Velocity Purchaser Corporation

     Software & Services      Term Loan    8.25% (L + 6.00%; 1.00% Floor)      12/01/2022        2,950,386        2,899,726       2,891,379  

Velocity Purchaser Corporation

     Software & Services      Term Loan    8.14% (L + 6.00%; 1.00% Floor)      12/01/2022        733,333        718,890       718,666  

Velocity Purchaser Corporation(1) (2)

     Software & Services      Revolver    8.25% (L + 6.00%; 1.00% Floor)      12/01/2022        —          (3,340     (3,865

Veriforce Holdings, LLC

     Software & Services      Term Loan    8.84% (L + 6.50%; 1.00% Floor)      07/13/2023        3,090,357        3,038,177       3,036,276  

Veriforce Holdings, LLC(1)

     Software & Services      Revolver    8.84% (L + 6.50%; 1.00% Floor)      07/13/2023        225,317        220,561       220,388  

Watermark Insights, LLC

     Software & Services      Term Loan    6.88% (L + 4.75%; 1.00% Floor)      06/07/2024        2,920,328        2,892,393       2,891,125  

Watermark Insights, LLC

     Software & Services      Delayed Draw Term Loan    6.88% (L + 4.75%; 1.00% Floor)      06/07/2024        365,554        362,474       361,899  

Watermark Insights, LLC(1) (2)

     Software & Services      Revolver    6.88% (L + 4.75%; 1.00% Floor)      06/07/2024        —          (2,928     (2,059
                 

 

 

   

 

 

 

Total 1st Lien/Senior Secured Debt

        85,142,378       85,111,493  
                 

 

 

   

 

 

 

Total U.S. Corporate Debt

                 85,142,378       85,111,493  

Portfolio Company

    

Industry

  

Coupon

          Shares      Cost     Fair Value  

U.S. Common Stock - 0.62%

          

Leeds FEG Investors, LLC(4)

 

   Education            311      $ 311,400     $ 317,270  
                 

 

 

   

 

 

 

Total U.S. Common Stock

                 311,400       317,270  

TOTAL INVESTMENTS - 167.78%(5)

 

   $ 85,453,778     $ 85,428,763  
                 

 

 

   

 

 

 

LIABILITIES IN EXCESS OF OTHER ASSETS - (67.78%)

 

  $ (34,511,346
                   

 

 

 

NET ASSETS - 100.00%

 

  $ 50,917,417  
                   

 

 

 

 

+

As of September 30, 2018, qualifying assets represented 96.59% of total assets. Under the 1940 Act we may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of our total assets.

*

Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy.

#

Percentages are based on net assets.

^

Generally, the interest rate on floating interest rate investments is at benchmark rate plus spread. The borrower has an option to choose the benchmark rate, such as the London Interbank Offered Rate (“LIBOR”) or the U.S. Prime rate. The spread may change based on the type of rate used. The terms in the Schedule of Investments disclose the actual interest rate in effect as of the reporting period. LIBOR loans are typically indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates (1M L, 3M L or 6M L, respectively) at the borrower’s option. LIBOR loans may be subject to interest floors. As of September 30, 2018, rates for 1M L, 2M L, 3M L and 6M L are 2.26%, 2.31%, 2.40% and 2.60%, respectively. As of September 30, 2018, the U.S. Prime rate was 5.25%.

(1)

Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion. The unfunded loan commitment may be subject to a commitment termination date, that may expire prior to the maturity date stated. See Note 7 “Commitments and Contingencies”.

(2)

The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value is the result of the capitalized discount on the loan.

(3)

Categorized as Level 2 assets under the definition of ASC 820 fair value hierarchy.

(4)

Non-income producing security.

(5)

Aggregate gross unrealized appreciation for federal income tax purposes is $88,931; aggregate gross unrealized depreciation for federal income tax purposes is $113,946. Net unrealized depreciation is $25,015 based upon a tax cost basis of $85,453,778.

L - LIBOR

P - Prime

See Notes to Financial Statements

 

8


AB Private Credit Investors Corporation

Schedule of Investments as of December 31, 2017

 

Portfolio Company

  

Industry

  

Interest

   Maturity      Funded
Par Amount
     Cost     Fair Value  

Investments at Fair Value - 98.52% + * # ^

          

U.S. Corporate Debt - 97.23%

          

1st Lien/Senior Secured Debt - 97.23%

          

Captain D’s, Inc.

   Consumer Non- Cyclical    5.98% (L + 4.50%; 1.00% Floor)      12/15/2023      $ 2,080,568      $ 2,059,862     $ 2,059,762  

Captain D’s, Inc.(1)

   Consumer Non- Cyclical    6.01% (L + 4.50%; 1.00% Floor)      12/15/2023        106,727        104,787       104,777  

AEG Holding Company, Inc.(1)

   Education    7.56% (L + 6.00%;1.00% Floor)      11/20/2023        379,270        363,268       363,015  

AEG Holding Company, Inc.

   Education    7.59% (L + 6.00%;1.00% Floor)      11/20/2023        6,230,868        6,108,099       6,106,251  

AEG Holding Company, Inc.(1) (2)

   Education    7.59% (L + 6.00%;1.00% Floor)      11/20/2023        —          (21,672     (21,672

D1MT Holdings LLC

   IT Infrastructure    8.69% (L + 7.00%;1.00% Floor)      12/28/2022        3,025,000        2,979,625       2,979,625  

D1MT Holdings LLC(1)

   IT Infrastructure    8.69% (L + 7.00%;1.00% Floor)      12/28/2022        55,000        50,875       50,875  

BeyondTrust Software, Inc.

   Software & Services    7.89% (L + 6.25%;1.00% Floor)      11/21/2023        3,250,888        3,202,826       3,202,124  

Perforce Intermediate Holdings, LLC

   Software & Services    5.81% (L + 4.25%;1.00% Floor)      12/27/2024        2,914,286        2,834,143       2,834,143  

Perforce Intermediate Holdings, LLC(1) (2)

   Software & Services    5.81% (L + 4.25%;1.00% Floor)      12/28/2022        —          (13,357     (13,357

Qualifacts Corporation(1) (2)

   Software & Services    8.55% (L + 7.00%;1.00% Floor)      12/12/2022        —          (6,000     (6,000

Qualifacts Corporation

   Software & Services    8.55% (L + 7.00%;1.00% Floor)      12/12/2022        3,000,000        2,940,482       2,940,000  

Velocity Purchaser Corporation

   Software & Services    7.37% (L + 6.00%;1.00% Floor)      12/01/2022        3,006,763        2,947,429       2,946,628  

Velocity Purchaser Corporation(1)

   Software & Services    7.57% (L + 6.00%;1.00% Floor)      12/01/2022        19,324        15,509       15,459  
              

 

 

   

 

 

 

Total 1st Lien/Senior Secured Debt

           23,565,876       23,561,630  
        

 

 

   

 

 

 

Total U.S. Corporate Debt

           23,565,876       23,561,630  

 

Portfolio Company

  

Industry

  

Coupon

   Shares      Cost      Fair Value  

U.S. Common Stock - 1.29%

              

Leeds FEG Investors, LLC(3)

   Education         311      $ 311,400      $ 311,400  
           

 

 

    

 

 

 

Total U.S. Common Stock

              311,400        311,400  

TOTAL INVESTMENTS - 98.52%(4)

            $ 23,877,276      $ 23,873,030  
           

 

 

    

 

 

 

OTHER ASSETS IN EXCESS OF LIABILITIES - 1.48%

            $ 359,353  
              

 

 

 

NET ASSETS - 100.00%

               $ 24,232,383  
              

 

 

 

 

+ 

As of December 31, 2017, qualifying assets represented 86.32% of total assets. Under the 1940 Act, we may not acquire any non-qualifying assets unless, at the time the acquisition is made, qualifying assets represent at least 70% of our total assets.

*

Unless otherwise indicated, all securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy.

# 

Percentages are based on net assets.

^ 

Generally, the interest rate on floating interest rate investments is at benchmark rate plus spread. The borrower has an option to choose the benchmark rate, such as LIBOR. The spread may change based on the type of rate used. The terms in the Schedule of Investments disclose the actual interest rate in effect as of the reporting period. LIBOR loans are typically indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates (1M L, 3M L or 6M L, respectively) at the borrower’s option. LIBOR loans may be subject to interest floors. As of December 31, 2017, rates for 1M L, 2M L, 3M L and 6M L were 1.56%, 1.62%, 1.69% and 1.84%, respectively.

(1) 

Position or portion thereof is an unfunded loan commitment, and no interest is being earned on the unfunded portion. The unfunded loan commitment may be subject to a commitment termination date, that may expire prior to the maturity date stated. See Note 7 “Commitments and Contingencies.”

(2) 

The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan. The negative fair value is the result of the capitalized discount on the loan.

(3) 

Non-income producing security.

(4) 

Aggregate gross unrealized appreciation for federal income tax purposes is $0; aggregate gross unrealized depreciation for federal income tax purposes is $4,246. Net unrealized depreciation is $4,246 based upon a tax cost basis of $23,877,276.

L - LIBOR

See Notes to Financial Statements

 

9


AB Private Credit Investors Corporation

Notes to Financial Statements (Unaudited)

September 30, 2018

1. Organization

AB Private Credit Investors Corporation (the “Fund,” “we,” “our,” and “us”), an externally managed, non-diversified, closed-end, management investment company that elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), was incorporated under the laws of the state of Maryland on February 6, 2015. The Fund was formed to invest in primary-issue middle-market credit opportunities that are directly sourced and privately negotiated. AB Private Credit Investors LLC serves as the Fund’s external investment adviser (the “Adviser”).

Prior to 2017, there were no significant operations other than the sale and issuance of 100 shares of common stock, par value $0.01, on June 27, 2016, at an aggregate purchase price of $1,000 ($10.00 per share) to the Adviser. The sale of common shares was approved by the unanimous consent of the Fund’s Board of Directors (the “Board”). In addition, prior to commencing operations in 2017, on May 26, 2017, the Fund issued and sold an additional 2,400 shares of common stock, par value $0.01 at an aggregate purchase price of $24,000 ($10.00 per share) to the Adviser. That sale was also approved by the unanimous consent of the Fund’s Board.

The Fund is conducting private offerings (each a “Private Offering”) of its common stock to investors in reliance on an exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). At the closing of any Private Offering, each investor will make a capital commitment (a “Capital Commitment”) to purchase shares of the Fund’s common stock pursuant to a subscription agreement entered into with the Fund. Investors will be required to fund drawdowns to purchase shares of the Fund’s common stock up to the amount of their respective Capital Commitment on an as-needed basis each time the Fund delivers a capital draw-down notice to its investors.

On September 29, 2017, the Fund completed the initial closing (“Initial Closing”) of its Private Offering after entering into subscription agreements (collectively, the “Subscription Agreements”) with several investors, providing for the private placement of the Fund’s common shares. At September 30, 2018, the Fund had total Capital Commitments of $253,296,218, of which 80% is unfunded. Capital Commitments may be drawn down by the Fund on a pro rata basis, as needed (including follow-on investments), for paying the Fund’s expenses, including fees under the Advisory Agreement, and/or maintaining a reserve account for the payment of future expenses or liabilities.

There were no operating activities from February 6, 2015 to November 15, 2017. As described above, the Fund completed its Initial Closing on September 29, 2017, and commenced operations on November 15, 2017. The Fund’s fiscal year ends on December 31.

2. Significant Accounting Policies

The Fund is an investment company under accounting principles generally accepted in the United States of America (“GAAP”) and follows the accounting and reporting guidance applicable to investment companies in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 946, Financial Services – Investment Companies. The Fund has prepared the financial statements and related financial information pursuant to the requirements for reporting on Form 10-Q and Articles 6 and 10 of Regulation S-X. Accordingly, we have not included in this quarterly report all of the information and notes required by GAAP for annual financial statements. In the opinion of management, the unaudited financial information for the interim period presented in this report reflects all normal and recurring adjustments necessary for a fair statement of financial position and results from operations. Operating results for interim periods are not necessarily indicative of operating results for an entire year. The functional currency of the Fund is U.S. dollars and these financial statements have been prepared in that currency.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation, with no effect on our financial condition, results of operations or cash flows.

The following is a summary of significant accounting policies followed by the Fund.

 

10


Cash and Cash Equivalents

Cash consists of demand deposits. Cash is carried at cost, which approximates fair value. The Fund maintains deposits of its cash with financial institutions, and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation insured limit. The Fund considers all highly liquid investments, with original maturities of less than ninety days, as cash equivalents.

Revenue Recognition

Investment transactions are recorded on a trade-date basis. Interest income is recognized on an accrual basis. Interest income on debt instruments is accrued and recognized for those issuers who are currently paying in full or expected to pay in full. For those issuers who are in default or expected to default, interest is not accrued and is only recognized when received. Interest income and expense include discounts accreted and premiums amortized on certain debt instruments as determined in good faith by the Adviser and calculated using the effective interest method. Loan origination fees, original issue discounts and market discounts or premiums are capitalized as part of the underlying cost of the investments and accreted or amortized over the life of the investment as interest income.

Realized gains and losses on investment transactions are determined on the specific identification method.

Certain investments in debt securities may contain a contractual payment-in-kind (“PIK”) interest provision. The PIK provisions generally feature the obligation, or the option, at each interest payment date of making interest payments in (i) cash, (ii) additional debt or (iii) a combination of cash and additional debt. PIK interest, computed at the contractual rate specified in the investment’s credit agreement, is accrued as interest income and recorded as interest receivable up to the interest payment date. On the interest payment date, the accrued interest receivable attributable to PIK is added to the principal balance of the investment. When additional debt is received on the interest payment date, it typically has the same terms, including maturity dates and interest rates, as the original loan. PIK interest generally becomes due on the investment’s maturity date or call date.

The Fund may earn various fees during the life of the loans. Such fees include, but are not limited to, syndication, commitment, administration, prepayment and amendment fees, some of which are paid to the Fund on an ongoing basis. These fees and any other income are recognized as earned.

Credit Facility Related Costs, Expenses and Deferred Financing Costs

Interest expense and unused commitment fees on the Credit Facility (as defined below) are recorded on an accrual basis. Unused commitment fees are included in interest and credit facility expenses in the statement of operations. Deferred financing costs include capitalized expenses related to the closing of the Credit Facility. Amortization of deferred financing costs is computed on the straight-line basis over the contractual term. The amortization of such costs is included in interest and credit facility expenses in the statement of operations.

Income Taxes

ASC 740, “Accounting for Uncertainty in Income Taxes” (“ASC 740”) provides guidance on the accounting for and disclosure of uncertainty in tax position. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Based on its analysis of its tax position for all open tax years (the current and prior year), the Fund has concluded that it does not have any uncertain tax positions that met the recognition or measurement criteria of ASC 740. Such open tax years remain subject to examination and adjustment by tax authorities.

The Fund has elected to be treated and intends to continue to be treated for federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). So long as the Fund is able to maintain its status as a RIC, it intends not to be subject to U.S. federal income tax on the portion of its taxable income and gains distributed to stockholders, if any. To qualify for RIC tax treatment, the Fund is required to distribute at least 90% of its investment company taxable income annually, meet diversification and income requirements quarterly, meet gross income requirements annually and file Form 1120-RIC, as provided by the Code. In order for the Fund not to be subject to U.S. federal excise taxes, it must distribute annually an amount at least equal to the sum of (i) 98% of its net ordinary income (taking into account certain deferrals and elections) for the calendar year, (ii) 98.2% of its capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year and (iii) any net ordinary income and capital gains in excess of capital losses for preceding years that were not distributed during such years. The Fund, at its discretion, may carry forward taxable income in excess of calendar year dividends and pay a 4% nondeductible U.S. federal excise tax on this income. If the Fund chooses to do so, this generally would increase expenses and reduce the amount available to be distributed to stockholders. The Fund will accrue excise tax on estimated undistributed taxable income as required. For the three and nine months ended September 30, 2018, the Fund accrued excise taxes of $0 and $3, respectively. As of September 30, 2018, and December 31, 2017, $0 and $2,336, respectively, of accrued excise taxes remained payable.

 

11


The Fund may be subject to taxes imposed by countries in which the Fund invests. Such taxes are generally based on income and/or capital gains earned or repatriated. Taxes are accrued and applied to net investment income, net realized gains and net unrealized gain (loss) as such income and/or gains are earned.

The Fund remains subject to examination by U.S. federal and state jurisdictions, as well as international jurisdictions, and upon completion of these examinations (if undertaken by the taxing jurisdiction) tax adjustments may be necessary and retroactive to all open tax years.

Use of Estimates

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, if any, at the date of the financial statements, and the reported amounts of revenues and expenses recorded during the reporting period. Actual results could differ from those estimates and such differences could be material.

Distributions

Distributions from net investment income and net realized capital gains are determined in accordance with U.S. federal income tax regulations, which may differ from those amounts determined in accordance with GAAP. The Fund may pay distributions in excess of its taxable net investment income. This excess would be a tax-free return of capital in the period and reduce the stockholder’s tax basis in its shares. These book/tax differences are either temporary or permanent in nature. To the extent these differences are permanent they are charged or credited to paid-in capital in excess of par, accumulated undistributed net investment income or accumulated net realized gain (loss), as appropriate, in the period that the differences arise. Temporary and permanent differences are primarily attributable to differences in the tax treatment of certain loans and the tax characterization of income and non-deductible expenses. These differences are generally determined in conjunction with the preparation of the Fund’s annual RIC tax return. Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a distribution is determined by the Board each quarter and is generally based upon the earnings estimated by the Adviser. The Fund may pay distributions to its stockholders in a year in excess of its net ordinary income and capital gains for that year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes. The Fund intends to timely distribute to its stockholders substantially all of its annual taxable income for each year, except that the Fund may retain certain net capital gains for reinvestment and, depending upon the level of the Fund’s taxable income earned in a year, the Fund may choose to carry forward taxable income for distribution in the following year and pay any applicable U.S. federal excise tax. The specific tax characteristics of the Fund’s distributions will be reported to stockholders after the end of the calendar year. All distributions will be subject to available funds, and no assurance can be given that the Fund will be able to declare such distributions in future periods.

The Fund has adopted a dividend reinvestment plan that provides for stockholders to receive dividends or other distributions declared by the Board in cash unless a stockholder elects to “opt in” to the dividend reinvestment plan. As a result, if the Board declares a cash distribution, then the stockholders who have “opted in” to the dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of common stock, rather than receiving the cash distribution.

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board issued an Accounting Standards Update, ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement which removes, modifies and adds disclosures to Topic 820. The amendments in ASU 2018-13 apply to all entities that are required, under existing U.S. GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in ASU 2018-13 are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any interim or annual period. The adoption of this guidance is not expected to have a material effect on the Fund’s financial statements.

In October 2018, the U.S. Securities and Exchange Commission adopted amendments to certain disclosure requirements included in Regulation S-X that had become “redundant, duplicative, overlapping, outdated or superseded, in light of the other Commission disclosure requirements, GAAP or changes in the information environment.” The compliance date for the amendments to Regulation S-X was November 5, 2018 (for reporting period end dates of September 30, 2018 or after). Management has evaluated the impact of the amendments and determined the effect of the adoption of the rules will simplify certain disclosure requirements on the financial statements.

 

12


3. Agreements and Related Party Transactions

Advisory Agreement

On July 5, 2017, the Board approved the investment advisory agreement with the Adviser (the “Advisory Agreement”), pursuant to which the Fund will pay the Adviser, quarterly in arrears, a base management fee calculated at an annual rate of 1.50%. The base management fee is calculated based on a percentage of the average outstanding assets of the Fund (which equals the gross value of equity and debt instruments, including investments made utilizing leverage), excluding cash and cash equivalents, during such fiscal quarter. The average outstanding assets will be calculated by taking the average of the amount of assets of the Fund at the beginning and end of each month that occurs during the calculation period. The base management fee will be calculated and paid quarterly in arrears but will be accrued monthly by the Fund over the fiscal quarter for which such base management fee is paid. The base management fee for any partial month or quarter will be appropriately prorated. For the three and nine months ended September 30, 2018, the Fund incurred a management fee of $281,892 and $560,765, respectively, of which $39,913 and $77,203, respectively, was voluntarily waived by the Adviser. As of September 30, 2018, $483,562 remained payable. No management fees were incurred or were payable as of and for the three and nine months ended September 30, 2017.

The Fund will also pay the Adviser an incentive fee that provides the Adviser with a share of the income that the Adviser generates for the Fund. The incentive fee will consist of an income-based incentive fee component and a capital-gains component, which are largely independent of each other, with the result that one component may be payable even if the other is not.

Income-Based Incentive Fee: The income-based incentive fee is calculated and payable quarterly in arrears based on the Fund’s net investment income prior to any deductions with respect to such income-based incentive fees and capital gains incentive fees (“Pre-incentive Fee Net Investment Income”) for the quarter, as further described below. Pre-incentive Fee Net Investment Income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial and consulting fees or other fees the Fund receives from portfolio companies) that the Fund accrues during the fiscal quarter, minus the Fund’s operating expenses for the quarter (including the base management fee, expenses payable under the administration agreement (the “Administration Agreement”) we have entered into with State Street Bank and Trust Fund (the “Administrator”), and any interest expense and dividends paid on any issued and outstanding indebtedness or preferred stock, respectively, but excluding, for avoidance of doubt, the income-based incentive fee accrued under GAAP). Pre-incentive Fee Net Investment Income also includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with pay in kind interest and zero-coupon securities), accrued income that the Fund has not yet received in cash. The Adviser is not under any obligation to reimburse the Fund for any part of the income-based incentive fees it received that was based on accrued interest that the Fund never actually received.

Pre-incentive Fee Net Investment Income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the income-based incentive fee, it is possible that the Fund may accrue such income-based incentive fee in a quarter where the Fund incurs a net loss. For example, if the Fund receives Pre-incentive Fee Net Investment Income in excess of a hurdle rate (as defined below) for a quarter, the Fund will accrue the applicable income-based incentive fee even if the Fund has incurred a realized and/or unrealized capital loss in that quarter. However, cash payment of the income-based incentive fee may be deferred in this situation, subject to the restrictions detailed at the end of this section.

Pre-incentive Fee Net Investment Income, expressed as a rate of return on the value of net assets (defined as total assets, less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding fiscal quarter, will be compared to various “hurdle rates,” with the income-based incentive fee rate of return increasing at each hurdle rate.

Description of Quarterly Incentive Fee Calculations

We pay the Adviser an income-based incentive fee with respect to Pre-incentive Fee Net Investment Income in each calendar quarter as follows:

 

   

No income-based incentive fee in any calendar quarter in which Pre-incentive Fee Net Investment Income does not exceed 1.5% per quarter (6% per annum), the “6% Hurdle Rate”;

 

13


   

100% 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 6% Hurdle Rate but is less than 1.67% in any calendar quarter (the “6% Catch-up Cap”), approximately 6.67% per annum. This portion of Pre-incentive Fee Net Investment Income (which exceeds the 6% Hurdle Rate but is less than the 6% Catch-up Cap) is referred to as the “6% Catch-up.” The 6% Catch-up is meant to provide the Adviser with 10.0% of the Pre-incentive Fee Net Investment Income as if hurdle rate did not apply if this net investment income exceeded 1.67% but was less than 1.94% in any calendar quarter; and

 

   

10.0% of the amount of Pre-incentive Fee Net Investment Income, if any, that exceeds the 6% Catch-up Cap, but is less than 1.94% (the “7% Hurdle Rate”), approximately 7.78% per annum. The 7% Hurdle Rate is meant to limit the Adviser to 10% of the Pre-incentive Fee Net Investment Income until the amount of Pre-incentive Fee Net Investment Income exceeds 1.94%, approximately 7.78% per annum; and

 

   

100% 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 7% Hurdle Rate but is less than 2.06% in any calendar quarter (the “7% Catch-up Cap”), 8.24% per annum. This portion of Pre-incentive Fee Net Investment Income (which exceeds the 7% Hurdle Rate but is less than the 7% Catch-up Cap) is referred to as the “7% Catch-up.” The 7% Catch-up is meant to provide the Adviser with 15.0% of the Pre-incentive Fee Net Investment Income as if a hurdle rate did not apply if this net investment income exceeded 2.06% but was less than 2.35% in any calendar quarter; and

 

   

15.0% of the amount of Pre-incentive Fee Net Investment Income, if any, that exceeds the 7% Catch-up Cap, but is less than 2.35% (the “8% Hurdle Rate”, approximately 9.41% per annum). The 8% Hurdle Rate is meant to limit the Adviser to 15% of the Pre-incentive Fee Net Investment Income until the amount of Pre-incentive Fee Net Investment Income exceeds 2.06%, approximately 9.41% per annum; and

 

   

100% 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 8% Hurdle Rate but is less than 2.50% in any calendar quarter (the “8% Catch-up Cap”), approximately 10% per annum. This portion of Pre-incentive Fee Net Investment Income (which exceeds the 8% Hurdle Rate but is less than the 8% Catch-up cap) is referred to as the “8% Catch-up”. The 8% Catch-up is meant to provide the Adviser with 20.0% of the Pre-incentive Fee Net Investment Income as if a hurdle rate did not apply if this net investment income exceeded 2.50% in any calendar quarter; and

 

   

20.0% of the amount of Pre-incentive Fee Net Investment Income, if any, that exceeds 2.50% in any calendar quarter.

For the three and nine months ended September 30, 2018, the Fund incurred incentive fees of $66,206 and $66,206, respectively, of which $32,302 and $32,302, respectively, was voluntarily waived by the Adviser. As of September 30, 2018, $33,904 remained payable.

No incentive fees were incurred or were payable as of and for the three and nine months ended September 30, 2017.

Capital Gains Incentive Fee: The capital gains incentive fee is determined and payable at the end of each fiscal year as 20% of aggregate cumulative realized capital gains from the date of the Fund’s election to be regulated as a BDC through the end of that year, computed net of all aggregate cumulative realized capital losses and aggregate cumulative unrealized depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. For the foregoing purpose, “aggregate cumulative realized capital gains” will not include any unrealized appreciation. For accounting purposes only, we are required under GAAP to accrue a hypothetical capital gains incentive fee based upon net realized gains and unrealized depreciation for that calendar year (in accordance with the terms of the Advisory Agreement), plus unrealized appreciation on investments held at the end of the period. The accrual of this hypothetical capital gains incentive fee assumes all unrealized capital gain and loss is realized in order to reflect a hypothetical capital gains incentive fee that would be payable to the Adviser at each measurement date. The capital gains incentive fee is not subject to any minimum return to stockholders. If such amount is negative, then no capital gains incentive fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.

Since inception, no capital gains incentive fees have been incurred or are payable as of and for the three and nine months ended September 30, 2018.

The amount of capital gains incentive fee expense related to a hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to the Adviser in the event of a complete liquidation of the Fund’s portfolio as of period end and the termination of the Advisory Agreement on such date. Also, it should be noted that the capital gains incentive fee expense fluctuates with the Fund’s overall investment results.

 

14


The Fund will defer cash payment of any income-based incentive fee and/or any capital gains incentive fee otherwise earned by the Adviser if during the most recent four full fiscal quarter periods ending on or prior to the date such payment is to be made, the sum of (a) the Pre-incentive Fee Net Investment Income, and (b) the realized capital gain / loss and (c) unrealized capital appreciation/ depreciation expressed as a rate of return on the value of our net assets, is less than 6.0%. Any such deferred fees are carried over for payment in subsequent calculation periods to the extent such payment is payable under the Advisory Agreement.

Administration Agreement and Expense Reimbursement Agreement

We have entered into the Administration Agreement with the Administrator and a separate expense reimbursement agreement with the Adviser (the “Expense Reimbursement Agreement”) under which any allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs will be reimbursed by the Fund. Under the Administration Agreement, the Administrator will be responsible for providing us with clerical, bookkeeping, recordkeeping and other administrative services. We will reimburse the Adviser an amount equal to our allocable portion (subject to the review of our Board) of its overhead resulting from its obligations under the Expense Reimbursement Agreement, including the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.

Expense Support and Conditional Reimbursement Agreement

On September 29, 2017, the Fund and the Adviser entered into an agreement (the “Expense Support and Conditional Reimbursement Agreement”) to limit certain of the Fund’s Operating Expenses, as defined in the Expense Support and Conditional Reimbursement Agreement, to no more than 1.5% of the Fund’s average quarterly gross assets. To achieve this percentage limitation, the Adviser has agreed to reimburse the Fund for certain Operating Expenses on a quarterly basis (any such payment by the Adviser, an “Expense Payment” and the Fund has agreed to later repay such amounts (any such payment by the Fund, a “Reimbursement Payment”), pursuant to the terms of the Expense Support and Conditional Reimbursement Agreement. The actual percentage of Operating Expenses paid by the Fund in any quarter after deducting any Expense Payment, as a percentage of the Fund’s average quarterly gross assets, is referred to as the “Percentage Limit.”

Any Expense Payment by the Adviser pursuant to the Expense Support and Conditional Reimbursement Agreement will be subject to repayment by the Fund on a quarterly basis within the three years following the fiscal quarter of the Fund in which the Operating Expenses were paid or absorbed, if the total Operating Expenses for the current quarter, including Reimbursement Payments, expressed as a percentage of the Fund’s average gross assets during such quarter is less than the then-current Percentage Limit, if any, and the Percentage Limit that was in effect at the time when the Adviser reimbursed the Operating Expenses that are the subject of the repayment, subject to certain provisions of the Expense Support and Conditional Reimbursement Agreement, as described below. For purposes of the Expense Support and Conditional Reimbursement Agreement, “Operating Expenses” means the Fund’s Total Operating Expenses (as defined below), excluding base management fees, incentive fees, distribution and shareholder servicing fees, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses and “Total Operating Expenses” means all of the Fund’s operating costs and expenses incurred, as determined in accordance with generally accepted accounting principles for investment companies. The calculation of average net assets will be consistent with such periodic calculations of average net assets in the Fund’s financial statements.

However, no Reimbursement Payment for any quarter will be made if: (1) the Effective Rate of Distributions Per Share (as defined below) declared by the Fund at the time of such Reimbursement Payment is less than or equal to the Effective Rate of Distributions Per Share at the time the Expense Payment was made to which such Reimbursement Payment relates, or (2) the Fund’s Operating Expense Ratio at the time of such Reimbursement Payment is greater than or equal to the Operating Expense Ratio (as defined below) at the time the Expense Payment was made to which such Reimbursement Payment relates. For purposes of the Expense Support and Conditional Reimbursement Agreement, “Effective Rate of Distributions Per Share” means the annualized rate (based on a 365- day year) of regular cash distributions per share exclusive of returns of capital, distribution rate reductions due to distribution and shareholder fees, and declared special dividends or special distributions, if any. The “Operating Expense Ratio” is calculated by dividing Operating Expenses in any quarter by the Fund’s average net assets in such quarter.

The specific amount of expenses paid by the Adviser, if any, will be determined at the end of each quarter. The Fund or the Adviser may terminate the Expense Support and Conditional Reimbursement Agreement at any time, with or without notice. The Expense Support and Conditional Reimbursement Agreement will automatically terminate in the event of (a) the termination of the Advisory Agreement, or (b) the Board of the Fund makes a determination to dissolve or liquidate the Fund. Upon termination of the Expense Support and Conditional Reimbursement Agreement, the Fund will be required to fund any Expense Payments, subject to the aforementioned requirements per the Expense Support and Conditional Reimbursement Agreement that have not been reimbursed by the Fund to the Adviser.

 

 

15


As of September 30, 2018, the amount of Expense Payments provided by the Adviser since inception is $4,082,084. Management believes that Reimbursement Payments by the Fund to the Adviser were not probable under the terms of the Expense Support Agreement as of September 30, 2018, and therefore have not been accrued. The following table reflects the Expense Payments that may be subject to reimbursement pursuant to the Expense Agreement:

 

For the Quarters Ended

   Amount of
Expense Support
     Effective Rate of
Distribution per Share (1)
    Reimbursement
Eligibility Expiration
     Percentage
Limit (2)
 

September 30, 2017

   $ 1,002,147        n/a       September 30, 2020        1.5

December 31, 2017

     1,027,398        n/a       December 31, 2020        1.5

March 31, 2018

     503,592        n/a       March 31, 2021        1.5

June 30, 2018

     1,086,482        4.787     June 30, 2021        1.0

September 30, 2018

     462,465        4.715     September 30, 2021        1.0
  

 

 

         

Total

   $ 4,082,084          
  

 

 

         

 

 

(1)

The effective rate of distribution per share is expressed as a percentage equal to the projected annualized distribution amount as of the end of the applicable period (which is calculated by annualizing the regular quarterly cash distributions per share as of such date without compounding), divided by the Fund’s gross offering price per share as of such date.

(2)

Represents the actual percentage of Operating Expenses paid by the Fund in any quarter after deducting any Expense Payment, as a percentage of the Fund’s average quarterly gross assets.

Transfer Agency Agreement

On September 26, 2017, the Fund and AllianceBernstein Investor Services, Inc. (“ABIS”), an affiliate of the Fund, entered into an agreement pursuant to which ABIS will provide transfer agent services to the Fund. The Fund bears the expenses related to the agreement with ABIS.

4. Credit Facility

On November 15, 2017, the Fund entered into a credit agreement (the “Credit Agreement”) to establish a revolving credit facility (the “Revolving Credit Facility”) with HSBC Bank USA, National Association (“HSBC”). The initial maximum commitment amount (the “Maximum Commitment”) under the Revolving Credit Facility was $30 million and may be increased in a minimum amount of $10 million and in $5 million increments thereof with the consent of HSBC or reduced upon request of the Fund. As of September 30, 2018, the Fund has increased the Maximum Commitment to $75 million. So long as no request for borrowing is outstanding, the Fund may terminate the Commitments or reduce the Maximum Commitments by giving prior irrevocable written notice to the Administrative Agent. Any reduction of the Maximum Commitments shall be in an amount equal to $10 million or multiples thereof; and in no event, shall a reduction by the Fund reduce the Commitments to $35 million or less (in each case, except for a termination of all the Commitments). Proceeds under the Credit Agreement may be used for any purpose permitted under our organizational documents, including general corporate purposes such as the making of investments. The Credit Agreement contains certain customary covenants and events of default, with customary cure and notice provisions. As of September 30, 2018, the Fund is in compliance with these covenants. The Fund’s obligations under the Credit Agreement are secured by the Capital Commitments and capital contributions to the Fund.

Borrowings under the Credit Agreement bear interest, at the Fund’s election at the time of drawdown, at a rate per annum equal to (i) with respect to LIBOR Rate Loans, Adjusted LIBOR (as defined in the Credit Agreement) for the applicable Interest Period; and (ii) with respect to Reference Rate Loans (as defined in the Credit Agreement), the greatest of: (i) the rate of interest per annum publicly announced from time to time by HSBC as its prime rate, (ii) the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, plus two hundred basis points (2.00%), provided that if such rate is not so published for any day that is a Business Day (as defined in the credit agreement), the average of the quotation for such day on such transactions received by the Administrative Agent (as defined in the credit agreement), from three (3) Federal funds brokers of recognized standing selected by the Administrative Agent and, upon request of Borrowers (as defined in the Credit Agreement), with notice of such quotations to the Borrowers and (iii) except during any period of time during which LIBOR is unavailable, one-month Adjusted LIBOR plus two hundred basis points (2.00%). The Fund will also pay an unused commitment fee of 35 basis points (0.35%) on any unused commitments.

 

16


The Credit Facility will mature on November 14, 2018, subject to the Fund’s option to extend the maturity date for up to one additional term not longer than 364 days, subject to the following conditions: (i) each of the Lenders and the Administrative Agent consents to the extension in their sole discretion; (ii) the Fund has paid an extension fee to the Administrative Agent for the benefit of the extending Lenders consenting to such extension in an amount agreed to by the Administrative Agent and the Borrowers at the time of the extension and as set forth in the applicable extension request; (iii) no potential default or event of default has occurred and is continuing on the date on which notice is given in accordance with the following clause (iv) or on November 14, 2018; and (v) the Fund has delivered an extension request to the Administrative Agent not more than one hundred twenty (120) days or less than forty-five (45) days prior to November 14, 2018.

The Fund’s outstanding debt as of September 30, 2018 was as follows:

 

     Aggregate Borrowing
Amount Committed
     Outstanding
Borrowing
     Amount
Available
     Carrying
Value
 

Credit Agreement

   $ 75,000,000      $ 36,250,000      $ 38,750,000      $ 36,250,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 75,000,000      $ 36,250,000      $ 38,750,000      $ 36,250,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Fund’s outstanding debt as of December 31, 2017 was as follows:

 

     Aggregate Borrowing
Amount Committed
     Outstanding
Borrowing
     Amount
Available
     Carrying
Value
 

Credit Agreement

   $ 30,000,000      $ 23,500,000      $ 6,500,000      $ 23,500,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,000,000      $ 23,500,000      $ 6,500,000      $ 23,500,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the three and nine months ended September 30, 2018, the Fund incurred $340,405 and $585,832, respectively, interest expense on the facilities which is included in interest and credit facility expenses in the statement of operations, of which $74,343 was payable at September 30, 2018.

As of September 30, 2018, the Fund incurred $180,492 of deferred financing costs on the facilities.

For the three and nine months ended September 30, 2018, the Fund amortized $136,369 and $288,965 of deferred financing costs, respectively, which is included in interest and credit facility expenses in the statement of operations.

For the three and nine months ended September 30, 2018, the Fund also incurred $18,217 and $52,208, respectively, of commitment fees on the facilities which is included in interest and credit facility expenses in the statement of operations, of which $8,483 was payable at September 30, 2018.

For the three and nine months ended September 30, 2018, the average outstanding balance and weighted average interest rate for the Credit Agreement was $32,350,000 and 4.17% and $19,157,509 and 4.09%, respectively.

There were no borrowings for the three and nine months ended September 30, 2017.

5. Fair Value Measurement

In accordance with ASC 820, fair value is defined as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a framework for measuring fair value and a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability.

Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. Each investment is assigned a level based upon the observability of the inputs which are significant to the overall valuation.

The three-tier hierarchy of inputs is summarized below:

 

   

Level 1 – Quoted prices in active markets for identical investments.

 

   

Level 2 – Other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).

 

17


   

Level 3 – Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).

The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The determination of what constitutes “observable” requires significant judgment by the Fund. The Fund considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

Valuation of Investments

Investments are valued at fair value as determined in good faith by our Board, based on input of management, the audit committee and independent valuation firms that have been engaged to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is conducted at the end of each fiscal quarter.

The fair values of loan investments based upon price data vendors or observable market price quotations are generally categorized as Level 2; however, those priced using models with significant unobservable inputs are categorized as Level 3.

In determining the fair value of the Fund’s Level 3 debt and equity positions the Adviser uses the following factors, where relevant: loan to value (“LTV”) based on an enterprise value determined using the original purchase price, public equity comparable, recent M&A transaction, and a discounted cash flow (“DCF”) analysis, and yields from comparable loans, comparable high yield bonds, high yield indexes and loan indexes (“comparable yields”).

Due to the inherent uncertainty of valuations, however, estimated fair values may differ from the values that would have been used had a readily available market for the securities existed and the differences could be material.

The following table summarizes the valuation of the Fund’s investments as of September 30, 2018:

 

Assets *

   Level 1      Level 2      Level 3      Total  

1st Lien/Senior Secured Debt

   $ —        $ 2,243,936      $ 82,867,557      $ 85,111,493  

Common Stock

     —          —          317,270        317,270  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —        $ 2,243,936      $ 83,184,827      $ 85,428,763  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

See schedule of investments for industry classifications.

The following table summarizes the valuation of the Fund’s investments as of December 31, 2017:

 

Assets *

   Level 1      Level 2      Level 3      Total  

1st Lien/Senior Secured Debt

   $ —        $ —        $ 23,561,630      $ 23,561,630  

Common Stock

     —          —          311,400        311,400  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —        $ —        $ 23,873,030      $ 23,873,030  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

*

See schedule of investments for industry classifications.

The following is a reconciliation of Level 3 assets for the nine months ended September 30, 2018:

 

     1st Lien/Senior
Secured Debt
     Common
Stock
     Total  

Balance as of January 1, 2018

   $ 23,561,630      $ 311,400      $ 23,873,030  

Purchases

     64,993,266        —          64,993,266  

Sales and principal payments

     (5,775,171      —          (5,775,171

Realized Gain (Loss)

     —          —          —    

Net Amortization of Premium/Discount

     121,664        —          121,664  

Transfers In

     —          —          —    

Transfers Out

     —          —          —    

Net Change in Unrealized Appreciation (Depreciation)

     (33,832      5,870        (27,962
  

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2018

   $ 82,867,557      $ 317,270      $ 83,184,827  
  

 

 

    

 

 

    

 

 

 

Change in Unrealized Appreciation (Depreciation) for Investments Still Held

   $ (33,896    $ 5,870      $ (28,027

 

18


Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. For the nine months ended September 30, 2018, there were no transfers between levels.

The following tables present the ranges of significant unobservable inputs used to value the Fund’s Level 3 investments as of September 30, 2018 and December 31, 2017, respectively. These ranges represent the significant unobservable inputs that were used in the valuation of each type of investment. These inputs are not representative of the inputs that could have been used in the valuation of any one investment. Accordingly, the ranges of inputs presented below do not represent uncertainty in, or possible ranges of, fair value measurements of the Fund’s Level 3 investments.

 

     Fair Value
as of
September 30. 2018
     Valuation
Techniques
     Unobservable
Input
     Range
(Weighted
Average) (1)
    Impact to
Valuation from
an Increase in
Input
 

Assets:

             

1st Lien/Senior Secured Debt

   $ 37,188,752       
Market Yield
Analysis
 
 
     Market Yield        6.6% - 9.6% (9.32%)       Decrease  

1st Lien/Senior Secured Debt—Recent Transactions

     45,678,805       
Recent
Purchases
 
 
     Purchase Price        N/A       N/A  

Common Stock

     317,270       
Market
Approach
 
 
    
EBITDA
Multiple
 
 
     12.5x       Increase  
  

 

 

            

Total Assets

   $ 83,184,827             

 

(1)

Weighted averages are calculated based on fair value of investments.

 

     Fair Value
as of
December 31. 2017
     Valuation
Techniques
     Unobservable
Input
     Range
(Weighted
Average)
     Impact to
Valuation
from an
Increase
in Input
 

Assets:

              

1st Lien/Senior Secured Debt

   $ 23,561,630        Recent Purchase        Purchase Price        N/A        N/A  

Common Stock

     311,400        Recent Purchase        Purchase Price        N/A        N/A  
  

 

 

             

Total Assets

   $ 23,873,030              

6. Organizational and Offering Expenses

Organization costs include, among other things, the cost of organizing as a Maryland corporation, including the cost of legal services and other fees pertaining to the Fund’s organization, all of which are expensed as incurred. Offering costs include, among other things, legal fees and other costs pertaining to the preparation of the Fund’s private placement memorandum and other offering documents, including travel-related expenses. For the period ended September 30, 2018, total organization expenses incurred amounted to $0. Offering expenses, which are being deferred, totaled $209,458, are amortized on a straight-line basis over a one year period starting from September 29, 2017. As of September 30, 2018, all offering costs have been amortized.

For the three and nine months ended September 30, 2018, the aforementioned organization expenses incurred and the portion of the offering expenses amortized to expenses were reimbursed by the Adviser as part of its Expense Payment disclosed in Note 3.

 

19


7. Commitments & Contingencies

Commitments

The Fund may enter into commitments to fund investments. As of September 30, 2018, the Fund believed that it had adequate financial resources to satisfy its unfunded commitments. The amounts associated with unfunded commitments to provide funds to portfolio companies are not recorded in the Fund’s statements of assets and liabilities. Since these commitments and the associated amounts may expire without being drawn upon, the total commitment amount does not necessarily represent a future cash requirement. The Fund had the following unfunded commitments by investment types as of September 30, 2018:

 

Investment

Type

   Facility
Type
     Commitment
Expiration
Date (1)
     Unfunded
Commitment (2)
     Fair
Value (3)
 

1st Lien/Senior Secured Debt

           

AEG Holding Company, Inc.

     Delayed Draw Term Loan        11/20/2019      $ 1,083,629      $ (21,673

AEG Holding Company, Inc.

     Revolver        11/20/2023      $ 270,907      $ (5,418

Analogic Corporation

     Revolver        06/22/2023      $ 286,957      $ (5,739

Avetta, LLC

     Delayed Draw Term Loan        04/11/2020      $ 1,235,991      $ (15,450

Avetta, LLC

     Revolver        04/10/2024      $ 494,396      $ (9,888

Businesssolver.com, Inc.

     Revolver        05/15/2020      $ 323,529      $ (6,471

Businesssolver.com, Inc.

     Delayed Draw Term Loan        05/15/2023      $ 323,529      $ (6,471

Captain D’s, Inc.

     Revolver        12/15/2023      $ 116,382      $ (1,164

Drilling Info Holdings, Inc.

     Delayed Draw Term Loan        07/30/2020      $ 427,533      $ (2,138

Engage2Excel, Inc

     Revolver        03/07/2023      $ 364,342      $ (7,287

Exterro, Inc.

     Revolver        05/31/2024      $ 330,000      $ (6,600

Finalsite Holdings, Inc.

     Revolver        09/25/2024      $ 506,283      $ (8,860

Genesis Acquisition Co.

     Delayed Draw Term Loan        07/31/2024      $ 364,466      $ (3,645

Genesis Acquisition Co.

     Revolver        07/31/2020      $ 202,400      $ (4,048

InSite Wireless Group, LLC

     Revolver        07/10/2020      $ 98,615      $ (1,479

InSite Wireless Group, LLC

     Term Loan        07/10/2020      $ 433,908      $ (6,509

Maintech, Incorporated

     Revolver        12/28/2022      $ 82,500      $ (1,238

Ministry Brands, LLC

     Delayed Draw Term Loan        12/02/2022      $ 1,170,618      $ (5,853

Perforce Intermediate Holdings, LLC

     Revolver        12/28/2022      $ 11,657      $ (321

Pinnacle Dermatology Management, LLC

     Delayed Draw Term Loan        05/18/2020      $ 4,684,236      $ (93,685

Pinnacle Dermatology Management, LLC

     Revolver        05/18/2023      $ 468,424      $ (9,368

Pivotal Payments Direct Corp.

     Delayed Draw Term Loan        03/28/2020      $ 485,735      $ (4,857

Platinum Dermatology Partners, LLC

    
General Delayed Draw
Term Loan Commitment
 
 
     07/03/2019      $ 568,394      $ (11,368

Platinum Dermatology Partners, LLC

     Revolver        01/03/2023      $ 498,592      $ (9,972

Qualifacts Corporation

     Revolver        12/12/2022      $ 300,000      $ (6,000

Sugarcrm, Inc.

     Revolver        07/31/2024      $ 310,244      $ (5,429

Swiftpage, Inc.

     Revolver        06/13/2023      $ 225,317      $ (4,506

Theranest, LLC

     Delayed Draw Term Loan        07/23/2023      $ 3,000,000      $ (45,000

Theranest, LLC

     Revolver        07/23/2023      $ 428,571      $ (8,571

Tropical Smoothie Café, LLC

     Revolver        09/24/2023      $ 96,435      $ (964

Velocity Purchaser Corporation

     Revolver        12/01/2022      $ 193,237      $ (3,865

Veriforce Holdings, LLC

     Revolver        07/13/2023      $ 56,329      $ (986

Watermark Insights, LLC

     Revolver        06/07/2024      $ 205,882      $ (2,059
        

 

 

    

 

 

 

Total 1st Lien/Senior Secured Debt

         $ 19,649,038      $ (326,882
        

 

 

    

 

 

 

Total

         $ 19,649,038      $ (326,882
        

 

 

    

 

 

 

 

20


The Fund had the following unfunded commitments by investment types as of December 31, 2017:

 

Investment Type

   Commitment Expiration Date (1)      Unfunded Commitment (2)      Fair Value (3)  

1st Lien/Senior Secured Debt

        

AEG Holding Company, Inc.

     11/20/2019      $ 1,083,629      $ (21,672

AEG Holding Company, Inc.

     11/20/2023      $ 433,452      $ (8,669

Captain D’s, Inc.

     12/15/2023      $ 88,326      $ (883

D1MT Holdings LLC

     12/28/2022      $ 220,000      $ (3,300

Perforce Intermediate Holdings, LLC

     12/28/2022      $ 485,714      $ (13,357

Qualifacts Corporation

     12/12/2022      $ 300,000      $ (6,000

Velocity Purchaser Corporation

     12/01/2022      $ 173,913      $ (3,478
     

 

 

    

 

 

 

Total 1st Lien/Senior Secured Debt

      $ 2,785,034      $ (57,359
     

 

 

    

 

 

 

Total

      $ 2,785,034      $ (57,359
     

 

 

    

 

 

 

 

(1)

Commitments are generally subject to borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. These amounts may remain outstanding until the commitment period of an applicable loan expires, which may be shorter than its maturity.

(2)

Net of capitalized fees, expenses and original issue discount (“OID”).

(3)

A negative fair value was reflected as investments, at fair value in the Statements of Assets and Liabilities. The negative fair value is the result of the capitalized discount on the loan.

Contingencies

In the normal course of business, the Fund enters into contracts that provide a variety of general indemnifications. Any exposure to the Fund under these arrangements could involve future claims that may be made against the Fund. Currently, no such claims exist or are expected to arise and, accordingly, the Fund has not accrued any liability in connection with such indemnifications.

8. Net Assets

Equity Issuance

In connection with its formation, the Fund has the authority to issue 200,000,000 shares of the Fund’s common stock, par value $0.01 per share.

On September 29, 2017, the Fund completed its Initial Closing after entering into Subscription Agreements with several investors, including the Adviser, providing for the private placement of the Fund’s common shares. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase the Fund’s common shares up to the amount of their respective Capital Commitments on an as-needed basis upon the issuance of a capital draw-down notice. At September 30, 2018 the Fund had total Capital Commitments of $253,296,218, of which 80% is unfunded. The minimum Capital Commitment of an investor is $50,000. The Adviser, however, may waive the minimum Capital Commitment at its discretion.

Capital Commitments may be drawn down by the Fund on a pro rata basis, as needed (including follow-on investments), for paying the Fund’s expenses, including fees under the Advisory Agreement, and/or maintaining a reserve account for the payment of future expenses or liabilities.

The following table summarizes the total shares issued and amount received related to capital drawdowns delivered pursuant to the Subscription Agreements during the nine months ended September 30, 2018 and 2017:

 

     For the nine months ended
September 30, 2018
     For
the nine months
ended

September 30,
2017
 

Quarter Ended

   Shares      Amount      Shares      Amount  

March 31

     599,421      $ 6,066,799        0      $ 0  

June 30

     399,596      $ 4,001,001        2,400      $ 24,000  

September 30

     1,577,979      $ 15,912,791        0      $ 0  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital drawdowns

     2,576,996      $ 25,980,591        2,400      $ 24,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Distributions

The following table reflects the distributions declared on shares of the Fund’s common stock during the nine months ended September 30, 2018:

 

Date Declared

   Record Date      Payment Date      Amount Per Share      Dollar Amount  

6/28/2018

     6/28/2018        6/29/2018      $ 0.25      $ 759,327  

09/27/2018

     09/27/2018        09/28/2018      $ 0.12      $ 625,565  

There were no distributions declared on shares of the Fund’s common stock during the nine months ended September 30, 2017.

Distribution Reinvestment Plan

On September 26, 2017, the Fund adopted a dividend reinvestment plan, which was amended and restated on August 6, 2018 (the “DRIP”). Pursuant to the DRIP (both before and after it was amended), stockholders receive dividends or other distributions in cash unless a stockholder elects to reinvest his or her dividends and other distributions. As a result of adopting the DRIP, if the Board authorizes, and the Fund declares, a cash dividend or distribution, stockholders who have opted into the DRIP will have their cash dividends or distributions automatically reinvested in additional shares of common stock, rather than receiving cash.

The following table summarizes shares distributed pursuant to the DRIP during the nine months ended September 30, 2018 to stockholders who opted into the DRIP:

 

Date Declared

   Record Date      Payment Date      Shares      Dollar Amount  

6/28/2018

     6/28/2018        6/29/2018        42,390      $ 424,430  

09/27/2018

     09/27/2018        09/28/2018        34,652      $ 347,908  

There were no shares distributed pursuant to the DRIP during the nine months ended September 30, 2017 to stockholders who had opted into the DRIP.

9. Earnings Per Share

The following information sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2018:

 

     For the three
months ended
September 30, 2018
     For the nine
months ended
September 30, 2018
 

Net increase (decrease) in net assets from operations

   $ 650,958      $ 1,316,997  

Weighted average common shares outstanding

     4,168,629        3,258,111  

Earnings per common share-basic and diluted

   $ 0.16      $ 0.40  

10. Financial Highlights

Below is the schedule of financial highlights of the Fund for the nine months ended September 30, 2018 and September 30, 2017:

 

     For the nine
months ended
    For the nine
months ended
 
     September 30, 2018     September 30, 2017  

Per Share Data:(1)

 

Net asset value, beginning of period

   $ 10.02     $ 10.00  

Net investment income (loss)

     0.41       0.00  

Net realized and unrealized gains (losses) on investments

     (0.02     0.00  
  

 

 

   

 

 

 

Net increase (decrease) in net assets resulting from operations

     0.39       0.00  
  

 

 

   

 

 

 

Distributions to shareholders(2)

     (0.37     0.00  
  

 

 

   

 

 

 

Net asset value, end of period

   $ 10.04     $ 10.00  

Shares outstanding, end of period

     5,071,409       2,500  

Total return at net asset value before incentive fees(3)(4)

     3.97     0.00

Total return at net asset value after incentive fees(3)(4)

     3.91     0.00

Ratio/Supplemental Data:

 

Net assets, end of period

   $ 50,917,417     $ 25,000  

Ratio of total expenses to weighted average net assets(5)

     13.73     —  

Ratio of net expenses to weighted average net assets(5)

     6.34     —  

Ratio of net investment income (loss) before waiver to weighted average net assets(5)

     (1.29 )%      —  

Ratio of net investment income (loss) after waiver to weighted average net assets(5)

     6.10     —  

Ratio of interest and credit facility expenses to weighted average net assets(5)

     3.61     —  

Ratio of incentive fees to weighted average net assets(4)

     0.19     —  

Portfolio turnover rate(4)

     11.55     —  

Asset coverage ratio(6)

     2.40       0.00  

 

(1)

The per share data was derived by using the weighted average shares outstanding during the applicable period.

 

22


(2)

The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period.

(3)

Total return based on NAV is calculated as the change in NAV per share during the respective periods, assuming dividends and distributions, if any, are reinvested in accordance with the Fund’s dividend reinvestment plan.

(4)

Not annualized.

(5)

Annualized, except for professional fees, directors’ fees, incentive fees and organizational and offering costs.

(6)

Asset coverage ratio is equal to (i) the sum of (A) net assets at end of period and (B) debt outstanding at end of period, divided by (ii) total debt outstanding at the end of the period.

11. Subsequent Events

Subsequent events after the statements of assets and liabilities date have been evaluated through the date the financial statements were issued. Other than the items discussed below, the Fund has concluded that there is no impact requiring adjustment or disclosure in the financial statements.

Effective November 14, 2018, the Fund has exercised its option to extend the maturity date of the Credit Facility to November 13, 2019. In addition, effective as of November 14, 2018, the Fund has increased the Maximum Commitment to $100 million.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

 

   

an economic downturn could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

 

   

such an economic downturn could disproportionately impact the companies that we intend to target for investment, potentially causing us to experience a decrease in investment opportunities and diminished demand for capital from these companies;

 

   

a contraction of available credit and/or an inability to access the equity markets could impair our lending and investment activities;

 

23


   

interest rate volatility could adversely affect our results, particularly if we elect to use leverage as part of our investment strategy;

 

   

our future operating results;

 

   

our business prospects and the prospects of our portfolio companies;

 

   

our contractual arrangements and relationships with third parties;

 

   

the ability of our portfolio companies to achieve their objectives;

 

   

competition with other entities and our affiliates for investment opportunities;

 

   

the speculative and illiquid nature of our investments;

 

   

the use of borrowed money to finance a portion of our investments;

 

   

the adequacy of our financing sources and working capital;

 

   

the loss of key personnel;

 

   

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

 

   

the ability of the Adviser to locate suitable investments for us and to monitor and administer our investments;

 

   

the ability of the Adviser to attract and retain highly talented professionals;

 

   

our ability to qualify and maintain our qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and as a business development company (“BDC”);

 

   

the effect of legal, tax and regulatory changes, including the Small Business Credit Availability Act (the “SBCAA”); and

 

   

the other risks, uncertainties and other factors we identify under “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.

Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Item 1A. Risk Factors” of Annual Report on Form 10-K for the fiscal year ended December 31, 2017, our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and elsewhere in this report. These forward-looking statements apply only as of the date of this report. Moreover, we assume no duty and do not undertake to update the forward-looking statements. The forward-looking statements and projections contained in this Annual Report are excluded from the safe harbor protection provided by Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) because we are an investment company.

The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report.

Overview

We were formed on February 6, 2015 as a corporation under the laws of the State of Maryland. We are structured as an externally managed, non-diversified, closed-end management investment company. We were formed to invest primarily in primary-issue middle-market credit opportunities that are directly sourced and privately negotiated. We commenced investment operations on November 15, 2017 (“Commencement”). We are advised by AB Private Credit Investors LLC (the “Adviser”), which is registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Adviser is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. State Street Bank and Trust Company (the “Administrator”) provides the administrative services necessary for the Fund to operate.

On October 6, 2016, we filed with the SEC an election to be treated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, the Fund has elected to be treated as a RIC under Subchapter M of the Code for U.S. federal income tax purposes. To the extent that we have net taxable income prior to our qualification as a RIC, we will be subject to U.S. federal income tax on such income. As a BDC and a RIC, respectively, we are and will be required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax exempt interest.

 

24


We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We will remain an emerging growth company for up to five years following our initial public offering, if any, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any June 30 before that time, we would cease to be an emerging growth company as of the following December 31. For so long as we remain an emerging growth company under the JOBS Act, we will be subject to reduced public company reporting requirements.

The Private Offering

We enter into separate subscription agreements with investors providing for the private placement of our common stock (the “Shares”) in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act,” and such offering, the “Private Offering”). Each investor makes a capital commitment (a “Capital Commitment”) to purchase Shares pursuant to a subscription agreement. Investors are required to make capital contributions to purchase Shares each time we deliver a capital call notice, which is issued based on our anticipated investment activities and capital needs, delivered at least 10 business days prior to the required funding date, provided that investors may fund such requirements sooner than the deadline as agreed between the Fund and the investor. Generally, purchases of our Shares are made pro rata in accordance with each investor’s Capital Commitment, in an amount not to exceed each investor’s remaining capital commitment (“Remaining Commitment”), at a per-Share price equal to the net asset value per share of our common stock subject to any adjustments.

We may accept additional Capital Commitments quarterly (“Subsequent Closings”) from new investors as well as existing investors that wish to increase their commitment and shareholding in the Fund. These Subsequent Closings are expected to occur on a calendar-quarter end based on investor interest as well as the state of the market and our capacity to invest the additional capital in a reasonable period. Each Capital Commitment is for the life of the Fund or for a shorter period based on the investor’s liquidation election, subject to the Fund’s receipt of exemptive relief that would permit stockholders to liquidate their investments pursuant to transactions that are currently prohibited by the 1940 Act and would require an SEC order in order to be established.

Revenues

Our investment objective is to generate current income and prioritize capital preservation through a portfolio that primarily invests in directly-sourced, privately-negotiated, secured, middle market loans. We intend to primarily invest in middle market businesses based in the United States. We expect that the primary use of proceeds by the companies in which we invest will be for leveraged buyouts, recapitalizations, mergers and acquisitions and growth capital.

We will seek to build the Fund’s portfolio in a defensive manner that minimizes cyclical and correlated risks across individual names and sector verticals by targeting companies with strong underlying business models and durable intrinsic value.

We will primarily hold secured loans, which encompass traditional first lien, unitranche and second lien loans, but may also invest in mezzanine, structured preferred stock and non-control equity co-investment opportunities. We will seek to deliver attractive risk adjusted returns with lower volatility and low correlation relative to the public credit markets. The Adviser believes our flexibility to invest across the capital structure and liquidity spectrum will allow us to optimize investor risk-adjusted returns.

Expenses

Under the Advisory Agreement, our primary operating expenses will include the payment of fees to the Adviser our allocable portion of overhead expenses under the Expense Reimbursement Agreement and other operating costs described below. We bear all other out-of-pocket costs and expenses of our operations and transactions, including those relating to:

 

   

reasonable and documented organization and offering expenses to the extent reimbursement of such expenses is included in any future agreement with the Adviser;

 

   

calculating our net asset value (including the cost and expenses of any independent valuation firm);

 

   

fees and expenses payable to third parties, including agents, consultants or other advisers, in connection with monitoring financial (including advising with respect to our financing strategy) and legal affairs for us and in providing administrative services, monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments;

 

   

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

 

25


   

sales and purchases of our common stock and other securities;

 

   

base management fees and incentive fees payable to the Adviser;

 

   

transfer agent and custodial fees;

 

   

federal and state registration fees;

 

   

all costs of registration and listing our securities on any securities exchange;

 

   

U.S. federal, state and local taxes;

 

   

independent directors’ fees and expenses;

 

   

costs of preparing and filing reports or other documents required by the SEC, the Financial Industry Regulatory Authority or other regulators;

 

   

costs of any reports, proxy statements or other notices to stockholders, including printing costs;

 

   

our allocable portion of any fidelity bond, directors’ and officers’ errors and omissions liability insurance, and any other insurance premiums;

 

   

direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs; and

 

   

all other expenses incurred by us, the Administrator or the Adviser in connection with administering our business, including payments under the Administration Agreement and payments under the Expense Reimbursement Agreement based on our allocable portion of the Adviser’s overhead in performing its obligations under the Expense Reimbursement Agreement, including the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs.

Portfolio and Investment Activity

We commenced investment operations on November 15, 2017. During the three months ended September 30, 2018, we invested $23,840,581 in 9 portfolio companies, $1,383,962 was drawn down against the revolvers and delayed draw term loans, and we had $907,626 in aggregate amount of principal repayments, which includes $563,856 in revolver and delayed draw term loan paydowns, and $0 in sales, resulting in net investments of $24,316,917 for the period.

During the nine months ended September 30, 2018, we invested $59,776,931 in 21 portfolio companies, $7,458,235 was drawn down against the revolvers and delayed draw term loans, and we had $1,847,318 in aggregate amount of principal repayments, which includes $1,290,748 in revolver and delayed draw term loan paydowns, and $3,933,486 in sales, resulting in net investments of $61,454,362 for the period.

The following table shows the composition of the investment portfolio and associated yield data as of September 30, 2018:

 

     As of September 30, 2018  
     Amortized Cost      Percentage of
Total Portfolio
    Fair Value      Percentage of
Total Portfolio
    Weighted
Average
Yield(1)
 

First Lien Senior Secured Debt

   $ 85,142,378        99.6   $ 85,111,493        99.6     8.93

Common Stock

     311,400        0.4       317,270        0.4       0.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 85,453,778        100   $ 85,428,763        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

(1) 

Based upon the par value of our debt investments.

 

26


The following table shows the composition of the investment portfolio and associated yield data as of December 31, 2017:

 

     As of December 31, 2017  
     Amortized Cost      Percentage of
Total Portfolio
    Fair Value      Percentage of
Total Portfolio
    Weighted
Average
Yield(1)
 

First Lien Senior Secured Debt

   $ 23,565,876        98.7   $ 23,561,630        98.7     8.3

Common Stock

     311,400        1.3       311,400        1.3       0.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

   $ 23,877,276        100   $ 23,873,030        100  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) 

Based upon the par value of our debt investments.

The following table presents certain selected financial information regarding our investment portfolio:

 

     As of
September 30, 2018
    As of
December 31, 2017
 

Number of portfolio companies

     27       8  

Percentage of debt bearing a floating rate(1)

     100     100

Percentage of debt bearing a fixed rate(1)

     0     —  

 

(1) 

Measured on a fair value basis, and excludes equity securities.

 

27


The following table shows the amortized cost and fair value of our performing and non-accrual debt investments as of September 30, 2018:

 

     As of September 30, 2018  
     Amortized Cost      Percentage at
Amortized Cost
    Fair Value      Percentage at
Fair Value
 

Performing

   $ 85,142,378        100   $ 85,111,493        100

Non-accrual

     0      0     0      0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 85,142,378        100   $ 85,111,493        100

The following table shows the amortized cost and fair value of our performing and non-accrual debt investments as of December 31, 2017:

 

     As of December 31, 2017  
     Amortized Cost      Percentage at
Amortized Cost
    Fair Value      Percentage at
Fair Value
 

Performing

   $ 23,565,876        100   $ 23,561,630        100

Non-accrual

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 23,565,876        100   $ 23,561,630        100
  

 

 

    

 

 

   

 

 

    

 

 

 

Generally, when interest and/or principal payments on a loan become past due, or if the Fund otherwise does not expect the borrower to be able to service its debt and other obligations, the Fund will place the loan on non-accrual status and will cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to restructuring such that the interest income is deemed to be collectible. The Fund generally restores non-accrual loans to accrual status when past due principal and interest is paid and, in the management’s judgment, is likely to remain current. As of September 30, 2018, and as of December 31, 2017, the Fund had no investments that were on non-accrual status.

The following table shows the amortized cost and fair value of the investment portfolio and cash as of September 30, 2018:

 

     As of September 30, 2018  
     Amortized Cost      Percentage of
Total
    Fair Value      Percentage of
Total
 

First Lien Senior Secured Debt

   $ 85,142,378        96.8   $ 85,111,493        96.8

Common Stock

     311,400        0.4       317,270        0.4  

Cash

     2,466,694        2.8       2,466,694        2.8  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $  87,920,472        100   $  87,895,457        100
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the amortized cost and fair value of the investment portfolio and cash as of December 31, 2017:

 

     As of December 31, 2017  
     Amortized Cost      Percentage of
Total
    Fair Value      Percentage of
Total
 

First Lien Senior Secured Debt

   $ 23,565,876        57.45   $ 23,561,630        57.45

Common Stock

     311,400        0.76       311,400        0.76  

Cash

     17,139,858        41.79       17,139,858        41.79  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 41,017,134        100.00   $ 41,012,888        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

 

28


The following table shows the composition of the investment portfolio by industry, at amortized cost and fair value as of September 30, 2018 (with corresponding percentage of total portfolio investments):

 

     As of September 30, 2018  
   Amortized Cost      Percentage of
Total Portfolio
    Fair Value      Percentage of
Total Portfolio
 

Consumer Non-Cyclical

   $ 3,494,491        4.09   $ 3,492,304        4.09

Education

     6,895,247        8.07       6,881,611        8.05  

Healthcare & HCIT

     16,790,023        19.65       16,751,510        19.61  

Communications & IT Infrastructure

     6,231,058        7.29       6,225,076        7.29  

Energy

     2,236,743        2.62       2,243,936        2.63  

Software & Services

     48,146,498        56.34       48,174,608        56.39  

Business Services

     1,659,718        1.94       1,659,718        1.94  
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 85,453,778        100   $ 85,428,763        100
  

 

 

    

 

 

   

 

 

    

 

 

 

The following table shows the composition of the investment portfolio by industry, at amortized cost and fair value as of December 31, 2017 (with corresponding percentage of total portfolio investments):

 

     As of December 31, 2017  
   Amortized Cost      Percentage of
Total Portfolio
    Fair Value      Percentage of
Total Portfolio
 

Consumer Non-Cyclical

   $ 2,164,649        9.06   $ 2,164,539        9.06

Education

     6,761,095        28.32       6,758,994        28.32  

Communications & IT Infrastructure

     3,030,500        12.69       3,030,500        12.69  

Software & Services

     11,921,032        49.93       11,918,997        49.93  
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 23,877,276        100.00   $ 23,873,030        100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

The Adviser monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if they are meeting their respective business plans and to assess the appropriate course of action for each company. The Adviser has several methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:

 

   

assessment of success in adhering to the portfolio company’s business plan and compliance with covenants;

 

   

periodic or regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor to discuss financial position, requirements and accomplishments;

 

   

comparisons to our other portfolio companies in the industry, if any;

 

   

attendance at and participation in board meetings or presentations by portfolio companies; and

 

   

review of monthly and quarterly financial statements and financial projections of portfolio companies.

 

29


Results of Operations

Operating results for the three and nine months ended September 30, 2018, were as follows:

 

     For the Three Months Ended
September 30,
2018
     For the Nine Months Ended
September 30,
2018
 

Total investment income

   $ 1,584,355      $ 3,191,593  

Total expenses

     1,493,479        4,015,868  
  

 

 

    

 

 

 

Expense Reimbursement from Adviser

     462,465        2,052,539  

Waived Management Fees

     39,913        77,203  

Waived Incentive Fees

     32,302        32,302  

Excise Tax Expense

     0      3  
  

 

 

    

 

 

 

Net investment income

     625,556        1,337,766  

Net change in unrealized appreciation (depreciation) on investments

     25,402        (20,769
  

 

 

    

 

 

 

Net increase in net assets resulting from operations

   $ 650,958      $ 1,316,997  
  

 

 

    

 

 

 

Investment Income

During the three months ended September 30, 2018, the Fund’s investment income was comprised of $1,581,876 of interest income, which includes $60,967 from the accretion of discounts, and $2,479 in other fee income.

During the nine months ended September 30, 2018, the Fund’s investment income was comprised of $3,189,114 of interest income, which includes $122,140 from the accretion of discounts, and $2,479 in other fee income.

Operating Expenses

The composition of our operating expenses for the three and nine months ended September 30, 2018 was as follows:

 

     For the Three Months Ended
September 30, 2018
     For the Nine Months Ended
September 30, 2018
 

Professional fees and other expenses

     458,456        1,856,276  

Interest and credit facility expenses

     494,991        927,005  

Management fees

     281,892        560,765  

Insurance Expenses

   $ 62,383      $ 185,116  

Organizational Expense and Offering costs

     52,221        156,089  

Administration and custodian fees

     39,546        155,504  

Directors’ fees

     37,223        108,346  

Incentive fees

     66,206        66,206  

Transfer Agent Fee

     561        561  

Expense Reimbursement from Adviser

     (462,465      (2,052,539

Waived Management Fee

     (39,913      (77,203

Waived Incentive Fee

     (32,302      (32,302
  

 

 

    

 

 

 

Total net expenses

   $ 958,799      $ 1,853,824  
  

 

 

    

 

 

 

 

30


Interest and debt financing expenses

Interest and debt financing expenses includes interest, amortization of deferred financing costs, upfront commitment fees and unused fees on the unused portion of the Revolving Credit Facility with HSBC. The Fund first drew on the Revolving Credit Facility on November 15, 2017. As of September 30, 2018, there was an outstanding balance of $36,250,000 on the Revolving Credit Facility. As of December 31, 2017, the Revolving Credit Facility had an outstanding balance of $23,500,000. Interest and debt financing expenses for the three and nine months ended September 30, 2018, were approximately $494,991 and $927,005, respectively. The weighted average interest rate (excluding deferred upfront financing costs and unused fees) on our debt outstanding was 4.09% and 3.94% for the period ending September 30, 2018 and December 31, 2017, respectively.

Net Realized Gain (Loss) on Investments

During the three months ended September 30, 2018, we had principal repayments of $907,626, which includes $563,856 of revolver and delayed draw term loan paydowns, and $0 in sales, resulting in $0 of net realized gain/loss.

During the nine months ended September 30, 2018, we had principal repayments of $1,847,318, which includes $1,290,748 of revolver and delayed draw term loan paydowns, and $3,933,486 in sales, resulting in $0 of net realized gain/loss.

Net Change in Unrealized Appreciation (Depreciation) on Investments

During the three months ended September 30, 2018, we had $25,402 in net change in unrealized appreciation on $85,453,778 of investments in 27 portfolio companies.

During the nine months ended September 30, 2018, we had $20,769 in net change in unrealized depreciation on $85,453,778 of investments in 27 portfolio companies.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three and nine months ended September 30, 2018, the net increase in net assets resulting from operations was $650,958 and $1,316,997, respectively. Based on the weighted average shares of common stock outstanding for the three and nine months ended September 30, 2018, our per share net increase in net assets resulting from operations was $0.16 and $0.40, respectively.

Cash Flows

For the nine months ended September 30, 2018, cash decreased by $14,673,164. During the same period, we used $59,345,618 in operating activities, primarily as a result of purchases of investments. During the nine months ended September 30, 2018, we generated $44,672,454 from financing activities, primarily from issuance of common stock and borrowings on our Revolving Credit Facility.

Hedging

The Fund may enter into currency hedging contracts, interest rate hedging agreements such as futures, options, swaps and forward contracts, and credit hedging contracts, such as credit default swaps. However, no assurance can be given that such hedging transactions will be entered into or, if they are, that they will be effective. For the nine months ended September 30, 2018, the Fund did not enter into any hedging contracts.

Financial Condition, Liquidity and Capital Resources

At September 30, 2018, and December 31, 2017, we had $2,466,694 and $17,139,858 in cash on hand, respectively. We expect to generate cash primarily from (i) the net proceeds of the Private Offering, (ii) cash flows from our operations, (iii) any financing arrangements we may enter into in the future and (iv) any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks, or other large global institutions such as insurance companies, and issuances of senior securities.

Our primary use of funds from a credit facility will be investments in portfolio companies, cash distributions to holders of our common stock and the payment of operating expenses.

 

31


In the future, we may also securitize or finance a portion of our investments with a special purpose vehicle. If we undertake a securitization transaction, we will consolidate our allocable portion of the debt of any securitization subsidiary on our financial statements, and include such debt in our calculation of the asset coverage test, if and to the extent required pursuant to the guidance of the staff of the SEC.

Cash and cash equivalents as of September 30, 2018, taken together with our uncalled Capital Commitments of $203,126,360, is expected to be sufficient for our investing activities and to conduct our operations in the near term. As of September 30, 2018, we had $2,466,694 in cash and cash equivalents. During the nine months ended September 30, 2018, we used $59,345,618 for operating activities.

Equity Activity

We have the authority to issue 200,000,000 shares of common stock at a $0.01 per share par value.

We have entered into Subscription Agreements with investors providing for the private placement of our common shares. Under the terms of the Subscription Agreements, investors are required to fund drawdowns to purchase the Fund’s common shares up to the amount of their respective Capital Commitments on an as-needed basis upon the issuance of a capital draw down notice. As of September 30, 2018, we received capital commitments of $253,296,218. As of September 30, 2018, we received capital contributions to the Fund of $50,169,858 and $772,338 of dividend reinvestments. As of December 31, 2017, we received capital contributions totaling $24,189,367.

During the nine months ended September 30, 2018, the Fund received additional capital commitments to the Fund of $131,960,240. In addition, two capital commitments of $95,000 and $150,000, originally committed during the year ended December 31, 2017 and quarter ended June 30, 2018, respectively, were subsequently cancelled before any capital was called. Pursuant to the Subscription Agreements, we have delivered capital drawdown notices to our investors relating to the issuance of 2,576,996 of our common shares for an aggregate offering of $25,980,591. Proceeds from the issuance were used for investing activities and for other general corporate purposes.

During the nine months ended September 30, 2018, we issued 77,042 shares of our common stock to investors who have opted into our dividend reinvestment plan.

Contractual Obligations

We have entered into certain contracts under which we have future commitments. Payments under the Advisory Agreement with the Adviser consist of (i) a base management fee equal to a percentage of the average outstanding assets of the Fund (which equals the gross value of equity and debt instruments, including investments made utilizing leverage), excluding cash and cash equivalents, during such fiscal quarter and (ii) an incentive fee based on our performance. The cost of both the base management fee and the incentive fee will ultimately be borne by our stockholders. Under the Administration Agreement, we will reimburse the Adviser an amount equal to our allocable portion (subject to the review of our Board) of its overhead resulting from its obligations under the Expense Reimbursement Agreement, including the allocable portion of the cost of our Chief Compliance Officer and Chief Financial Officer and their respective staffs. Stockholder approval is not required to amend the Administration Agreement or Expense Reimbursement Agreement. Any new investment advisory agreement would be subject to approval by our stockholders.

The following table shows our contractual obligations as of September 30, 2018:

 

     Payments Due by Period (Millions)  
     Total      Less Than
1 Year
     1 – 3 Years      3 – 5 Years      More Than
5 Years
 

Credit Agreement

   $  36.3      $  36.3      $  —      $  —      $  —  

See Notes to Financial Statements – Note 4. Credit Facility,” for a discussion of the terms of the Credit Agreement.

Distribution Policy

To the extent that we have funds available, we intend to make quarterly distributions of current income to our stockholders. Our stockholder distributions, if any, will be determined by our Board. Any distribution to our stockholders will be declared out of assets legally available for distribution. We anticipate that distributions will be paid from income primarily generated by interest and dividend income earned on investments we make subsequent to the Initial Closing. We will not be able to determine whether any specific distribution will be treated as made out of our taxable earnings or as a return of capital until after the end of our taxable year. The amount treated as a tax-free return of capital will reduce a stockholder’s adjusted basis in his or her common stock, thereby increasing his or her potential gain or reducing his or her potential loss on the subsequent sale or other disposition of his or her common stock. At no time will such quarterly distributions of current income be added to a stockholder’s outstanding but undrawn capital commitments.

 

32


From time to time our Board, in its sole discretion, also may determine to issue special distributions returning all or a portion of stockholders’ previous capital contributions (each, a “Return of Capital”). The amount of any Return of Capital received by a stockholder will be added to such stockholder’s outstanding but undrawn capital commitments. Accordingly, we may deliver a capital call notice which includes the amount of a stockholder’s Return of Capital. If we receive exemptive relief allowing us to create a Liquidating Share Class (as such term is defined in our Annual Report on Form 10-K for the year ended December 31, 2017), eligible stockholders may have the right as part of the process for electing (or declining) to exchange Shares for Liquidation Shares, to cancel, in whole or in part, any outstanding but undrawn capital commitments, including any undrawn amounts resulting from the receipt of a Return of Capital.

We have elected to be treated as a RIC under Subchapter M of the Code. To maintain RIC tax treatment, we must distribute at least 90% of our net ordinary income and net realized short-term capital gains in excess of our net realized long-term capital losses, if any, to our stockholders. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal to the sum of: (a) 98% of our ordinary income (not taking into account any capital gains or losses) for such calendar year; (b) 98.2% of the amount by which our capital gains exceed our capital losses (adjusted for certain ordinary losses) for a one-year period ending on October 31 of the calendar year; and (c) certain undistributed amounts from previous years on which we paid no U.S. federal income tax.

We currently intend to distribute net long-term capital gains if any, at least annually out of the assets legally available for such distributions. However, we may in the future decide to retain some or all of our long-term capital gains but designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, each U.S. stockholder will be required to include their share of the deemed distribution in income as if it had been distributed to the U.S. stockholder, and the U.S. stockholder will be entitled to claim a credit equal to their allocable share of the tax paid on the deemed distribution by us. The amount of the deemed distribution net of such tax will be added to such stockholder’s tax basis in such stockholder’s common stock. Since we expect to pay tax on any retained capital gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against such individual stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds such individual stockholder’s liability for U.S. federal income tax. We cannot assure any stockholder that we will achieve results that will permit us to pay any cash distributions, and if we issue senior securities, we may be prohibited from making distributions if doing so would cause us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if such distributions are limited by the terms of any of our borrowings.

Unless a stockholder elects to reinvest distributions in shares of our common stock under our dividend reinvestment plan, we intend to make such distributions in cash. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our dividend reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes. If a stockholder holds shares of our common stock in the name of a broker or financial intermediary, such stockholder should contact such broker or financial intermediary regarding the election to receive distributions in shares of our common stock in lieu of cash. Any distributions reinvested through the issuance of shares through our dividend reinvestment plan will increase our assets on which the base management fee and incentive fee is determined and paid to the Adviser.

 

33


Off-Balance Sheet Arrangements

As of September 30, 2018, and December 31, 2017, the Fund had unfunded Capital Commitments related to Subscription Agreements of $203,126,360 and $97,241,711, respectively.

We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to fund investments and to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the statements of assets and liabilities. As of September 30, 2018, our off-balance sheet arrangements consisted of the following:

 

Investment

Type

  

Facility

Type

   Commitment
Expiration Date (1)
     Unfunded
Commitment (2)
     Fair
Value (3)
 

1st Lien/Senior Secured Debt

           

AEG Holding Company, Inc.

   Delayed Draw Term Loan      11/20/2019      $ 1,083,629      $ (21,673

AEG Holding Company, Inc.

   Revolver      11/20/2023      $ 270,907      $ (5,418

Analogic Corporation

   Revolver      06/22/2023      $ 286,957      $ (5,739

Avetta, LLC

   Delayed Draw Term Loan      04/11/2020      $ 1,235,991      $ (15,450

Avetta, LLC

   Revolver      04/10/2024      $ 494,396      $ (9,888

Businesssolver.com, Inc.

   Revolver      05/15/2020      $ 323,529      $ (6,471

Businesssolver.com, Inc.

   Delayed Draw Term Loan      05/15/2023      $ 323,529      $ (6,471

Captain D’s, Inc.

   Revolver      12/15/2023      $ 116,382      $ (1,164

Drilling Info Holdings, Inc.

   Delayed Draw Term Loan      07/30/2020      $ 427,533      $ (2,138

Engage2Excel, Inc

   Revolver      03/07/2023      $ 364,342      $ (7,287

Exterro, Inc.

   Revolver      05/31/2024      $ 330,000      $ (6,600

Finalsite Holdings, Inc.

   Revolver      09/25/2024      $ 506,283      $ (8,860

Genesis Acquisition Co.

   Delayed Draw Term Loan      07/31/2024      $ 364,466      $ (3,645

Genesis Acquisition Co.

   Revolver      07/31/2020      $ 202,400      $ (4,048

InSite Wireless Group, LLC

   Revolver      07/10/2020      $ 98,615      $ (1,479

InSite Wireless Group, LLC

   Term Loan      07/10/2020      $ 433,908      $ (6,509

Maintech, Incorporated

   Revolver      12/28/2022      $ 82,500      $ (1,238

Ministry Brands, LLC

   Delayed Draw Term Loan      12/02/2022      $ 1,170,618      $ (5,853

Perforce Intermediate Holdings, LLC

   Revolver      12/28/2022      $ 11,657      $ (321

Pinnacle Dermatology Management, LLC

   Delayed Draw Term Loan      05/18/2020      $ 4,684,236      $ (93,685

Pinnacle Dermatology Management, LLC

   Revolver      05/18/2023      $ 468,424      $ (9,368

Pivotal Payments Direct Corp.

   Delayed Draw Term Loan      03/28/2020      $ 485,735      $ (4,857

Platinum Dermatology Partners, LLC

   General Delayed Draw Term Loan Commitment      07/03/2019      $ 568,394      $ (11,368

Platinum Dermatology Partners, LLC

   Revolver      01/03/2023      $ 498,592      $ (9,972

Qualifacts Corporation

   Revolver      12/12/2022      $ 300,000      $ (6,000

Sugarcrm, Inc.

   Revolver      07/31/2024      $ 310,244      $ (5,429

Swiftpage, Inc.

   Revolver      06/13/2023      $ 225,317      $ (4,506

Theranest, LLC

   Delayed Draw Term Loan      07/23/2023      $ 3,000,000      $ (45,000

Theranest, LLC

   Revolver      07/23/2023      $ 428,571      $ (8,571

Tropical Smoothie Café, LLC

   Revolver      09/24/2023      $ 96,435      $ (964

Velocity Purchaser Corporation

   Revolver      12/01/2022      $ 193,237      $ (3,865

Veriforce Holdings, LLC

   Revolver      07/13/2023      $ 56,329      $ (986

Watermark Insights, LLC

   Revolver      06/07/2024      $ 205,882      $ (2,059
        

 

 

    

 

 

 

Total 1st Lien/Senior Secured Debt

         $ 19,649,038      $ (326,882
        

 

 

    

 

 

 

Total

         $ 19,649,038      $ (326,882
        

 

 

    

 

 

 

 

34


As of December 31, 2017, our off-balance sheet arrangements consisted of the following:

 

Investment Type

   Commitment
Expiration Date (1)
     Unfunded
Commitment (2)
     Fair
Value (3)
 

1st Lien/Senior Secured Debt

        

AEG Holding Company, Inc.

     11/20/2019      $  1,083,629      $  (21,672

AEG Holding Company, Inc.

     11/20/2023      $ 433,452      $  (8,669

Captain D’s, Inc.

     12/15/2023      $ 88,326      $  (883

D1MT Holdings LLC

     12/28/2022      $ 220,000      $  (3,300

Perforce Intermediate Holdings, LLC

     12/28/2022      $ 485,714      $  (13,357

Qualifacts Corporation

     12/12/2022      $ 300,000      $  (6,000

Velocity Purchaser Corporation

     12/01/2022      $ 173,913      $  (3,478
     

 

 

    

 

 

 

Total 1st Lien/Senior Secured Debt

      $ 2,785,034      $  (57,359
     

 

 

    

 

 

 

Total

      $ 2,785,034      $  (57,359
     

 

 

    

 

 

 

 

(1)

Commitments are generally subject to borrowers meeting certain criteria such as compliance with covenants and certain operational metrics. These amounts may remain outstanding until the commitment period of an applicable loan expires, which may be shorter than its maturity.

(2)

Net of capitalized fees, expenses and original issue discount (“OID”).

(3)

A negative fair value was reflected as investments, at fair value in the Statements of Assets and Liabilities. The negative fair value is the result of the capitalized discount on the loan.

Co-investment Exemptive Order

On August 6, 2018, the SEC granted us relief sought in a new exemptive application that expands the co-investment exemptive relief previously granted to us in October 2016 to allow us to co-invest in portfolio companies with Affiliated Funds in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with the Order. Pursuant to the Order, we are permitted to co-invest with Affiliated Funds, which the new exemptive relief defines to include affiliated managed accounts, if, among other things, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching in respect of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. We intend to co-invest with Affiliated Funds, subject to the conditions included in the Order.

Credit Facility Agreement

On November 15, 2017, the Fund entered into a credit agreement (the “Credit Agreement”) to establish a revolving credit facility (the “Revolving Credit Facility”) with HSBC Bank USA, National Association (“HSBC”) as administrative agent (the “Administrative Agent”) and any other lender that becomes a party to the Credit Facility in accordance with the terms of the Credit Facility, as lenders.

The initial Maximum Commitment of the Credit Facility was $30 million. The Maximum Commitment amount may be increased upon request of the Fund to an amount agreed upon by the Fund and the Administrative Agent. As of September 30, 2018, the Fund has increased the Maximum Commitment to $75 million. Effective as of November 13, 2018, the Fund has further increased the Maximum Commitment to $100 million. Such increase may be done in one or more requested increases, each in a minimum amount of $10 million and in $5 million increments thereof, or such lesser amount to be determined by the Administrative Agent, subject to certain terms and conditions. So long as no request for borrowing is outstanding, the Fund may terminate the Lenders’ commitments (the “Commitments”) or reduce the Maximum Commitments by giving prior irrevocable written notice to the Administrative Agent. Any reduction of the Maximum Commitments shall be in an amount equal to $10 million or multiples thereof; and in no event shall a reduction by the Fund reduce the Commitments to $35 million or less (in each case, except for a termination of all the Commitments).

Borrowings under the Credit Facility bear interest, at the Fund’s election at the time of drawdown, at a rate per annum equal to (i) with respect to LIBOR Rate Loans, Adjusted LIBOR (as defined in the Credit Agreement) for the applicable Interest Period; and (ii) with respect to Reference Rate Loans (as defined in the Credit Agreement), the greatest of: (i) the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate, (ii) the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, plus two hundred basis points (2.00%), provided that if such rate is not so published for any day that is a Business Day, the average of the quotation for such day on such transactions received by the Administrative Agent from three (3) Federal funds brokers of recognized standing selected by the Administrative Agent and, upon request of Borrowers, with notice of such quotations to the Borrowers and (iii) except during any period of time during which LIBOR is unavailable, one-month Adjusted LIBOR plus two hundred basis points (2.00%). The Fund will also pay an unused commitment fee of 35 basis points (0.35%) on any unused commitments.

 

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The Credit Facility will mature on November 14, 2018, subject to the Fund’s option to extend the maturity date for up to one additional term not longer than 364 days, subject to the following conditions: (i) each of the Lenders and the Administrative Agent consents to the extension in their sole discretion; (ii) the Fund has paid an extension fee to the Administrative Agent for the benefit of the extending Lenders consenting to such extension in an amount agreed to by the Administrative Agent and the Borrowers at the time of the extension and as set forth in the applicable extension request; (iii) no potential default or event of default has occurred and is continuing on the date on which notice is given in accordance with the following clause (iv) or on November 14, 2018; and (iv) the Fund has delivered an extension request to the Administrative Agent not more than one hundred twenty (120) days or less than forty-five (45) days prior to November 14, 2018. The Fund has exercised its option to extend the maturity date to November 13, 2019.

Subject to certain terms and conditions, the Credit Facility is secured by a first priority, exclusive, perfected security interest and lien in and on all of the Fund’s right, title and interest, in, to and under, whether now existing or hereafter acquired or arising and wherever located (a) all of the Fund’s rights, titles, interests and privileges in and to the Capital Commitments, and the Capital Contributions made by its Investors, and all other rights, titles, interests, powers and privileges related to, appurtenant to or arising out of the Capital Commitments; (b) all of the Fund’s rights, titles, interests, remedies, and privileges under the Constituent Documents (i) to issue and enforce Capital Calls and Pending Capital Calls, (ii) to receive and enforce Capital Contributions and (iii) relating to Capital Calls, Pending Capital Calls, Capital Commitments or Capital Contributions; (c) all proceeds of any and all of the foregoing.

The Credit Facility contains customary covenants and events of default (with customary cure and notice provisions).

Asset Coverage

In accordance with the 1940 Act, the Fund has historically only been allowed to borrow amounts such that its “asset coverage,” as defined in the 1940 Act, is at least 200% after such borrowing, permitting the Fund to borrow up to one dollar for investment purposes for every one dollar of investor equity. “Asset coverage” generally refers to a company’s total assets, less all liabilities and indebtedness not represented by “senior securities,” as defined in the 1940 Act, divided by total senior securities representing indebtedness and, if applicable, preferred stock. “Senior securities” for this purpose includes borrowings from banks or other lenders, debt securities and preferred stock.

On March 23, 2018, the SBCAA was signed into law. The SBCAA, among other things, modifies the applicable provisions of the 1940 Act to reduce the required asset coverage ratio applicable to BDCs from 200% to 150% subject to certain approval, time and disclosure requirements (including either stockholder approval or approval of a majority of the directors who are not interested persons of the BDC and who have no financial interest in the proposal). On July 5, 2018, the Board voted to approve the adoption of the reduced asset coverage ratio and separately recommended that Investors approve the reduced asset coverage requirements at the 2018 annual meeting of stockholders. On September 26, 2018, at the Fund’s 2018 annual meeting of stockholders, the Fund’s stockholders approved the reduction of the required minimum asset coverage ratio applicable to the Fund from 200% to 150%, which took effect on September 27, 2018. This reduction in the required minimum asset coverage ratio increases the amount of debt that the Fund is permitted to incur, permitting the Fund to borrow up to two dollars for investment purposes for every one dollar of investor equity.

As of September 30, 2018, and December 31, 2017, the Fund had total senior securities of $36,250,000 and $23,500,000, respectively, consisting of borrowings under the Credit Facility, and had asset coverage ratios of 240% and 203.1%, respectively. For a discussion of certain risks associated with the reduction of the required minimum asset coverage ratio applicable to the Fund, see Part II, Item 1A of this Form 10-Q.

Critical Accounting Policies

Valuation of Investments

We measure the value of our investments at fair value accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or “ASC Topic 820,” issued by the Financial Accounting Standards Board, or “FASB.” Fair value is 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.

The audit committee of our Board (the “Audit Committee”) is also responsible for assisting our Board in valuing investments that are not publicly traded or for which current market values are not readily available. Investments for which market quotations are

 

36


readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to portfolio investments for which market quotations are not readily available, our Board, with the assistance of the Adviser and its senior investment team and independent valuation firms, is responsible for determining in good faith the fair value in accordance with the valuation policy approved by our Board. If more than one valuation method is used to measure fair value, the results are evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. We consider a range of fair values based upon the valuation techniques utilized and select the value within that range that was most representative of fair value based on current market conditions as well as other factors the Adviser’s senior investment team considers relevant.

ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. ASC Topic 820 also provides guidance regarding a fair value hierarchy, which prioritizes information used to measure fair value and the effect of fair value measurements on earnings and provides for enhanced disclosures determined by the level within the hierarchy of information used in the valuation. In accordance with ASC Topic 820, these inputs are summarized in the three levels listed below:

 

   

Level 1 – Quoted prices in active markets for identical investments.

 

   

Level 2 – Other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.).

 

   

Level 3 – Significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).

The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement. If a fair value measurement uses price data vendors or observable market price quotations, that measurement is a Level 2 measurement. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The determination of what constitutes “observable” requires significant judgment by the Fund. The Fund considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

Because of the inherent uncertainty of valuation for all fair value investments and interests, the Board’s determination of fair value may differ from the values that would have been used had a ready market existed, or that could have been (or will be) realized in an actual sale, and such differences could be material.

The value of any investment on any valuation date is intended to represent the fair value of such investment on such date based upon the amount at which the investment could be exchanged between willing parties, other than in a forced liquidation sale, and reflects the Board’s determination of fair value using the methodology described herein. Any valuation of an investment may not reflect the actual amount received by the Fund upon the liquidation of such investment.

Our investments will be primarily loans made to middle-market companies. These investments are mostly considered Level 3 assets under ASC Topic 820 because there is not usually a known or accessible market or market indices for these types of debt instruments and, thus, the Adviser’s senior investment team must estimate the fair value of these investment securities based on models utilizing unobservable inputs.

Investment Transactions, Realized/Unrealized Gains or Losses, and Income Recognition

Investment transactions are recorded on a trade-date basis. We measure realized gains or losses from the repayment or sale of investments using the identified cost method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. We report changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in the statement of operations.

 

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Interest income, adjusted for amortization of market premium and accretion of market discount, is recorded on an accrual basis to the extent that we expect to collect such amounts. Interest income on debt instruments is accrued and recognized for those issuers who are currently paying in full or expected to pay in full. For those issuers who are in default or expected to default, interest is not accrued and is only recognized when received. Interest income and expense include discounts accreted and premiums amortized on certain debt instruments as determined in good faith by the Adviser and calculated using the effective interest method. Loan origination fees, original issue discounts and market discounts or premiums are capitalized as part of the underlying cost of the investments and accreted or amortized over the life of the investment as interest income.

Management and Incentive Fees

We will accrue for the base management fee and incentive fee. The accrual for incentive fee includes the recognition of incentive fee on unrealized capital gains, even though such incentive fee is neither earned nor payable to the Adviser until the gains are both realized and in excess of unrealized depreciation on investments. The amount of capital gains incentive fee expense related to the hypothetical liquidation of the portfolio (and assuming no other changes in realized or unrealized gains and losses) would only become payable to the Adviser in the event of a complete liquidation of the Fund’s portfolio as of period end and the termination of the Advisory Agreement on such date. Also, it should be noted that the capital gains incentive fee expense fluctuates with the Fund’s overall investment results.

Fund Expenses

For the nine months ended September 30, 2018, the Fund incurred $4,015,868 of expenses in relation to professional fees, directors’ fees, management fees, incentive fees, insurance expenses, interest and credit facility expenses, offering costs and administration and custodian fees, of which $2,052,539 was reimbursed by the Adviser and its affiliates on behalf of the Fund, and $77,203 of management fees and $32,302 of incentive fees were waived by the Adviser.

Federal Income Taxes

We have elected to be treated as a RIC under Subchapter M of the Code. Generally, a RIC is not subject to federal income taxes on distributed income and gains if it distributes at least 90% of its net ordinary income and net short-term capital gains in excess of its net long-term capital losses, if any, to its stockholders. We intend to distribute sufficient dividends to maintain our RIC status each year and we do not anticipate paying any material federal income taxes in the future.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income is dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. In periods of rising interest rates, our cost of funds would increase, which may reduce our net investment income. Because we expect that most of our investments will bear interest at floating rates, we anticipate that an increase in interest rates would have a corresponding increase in our interest income that would likely offset any increase in our cost of funds and, thus, net investment income would not be reduced. However, there can be no assurance that a significant change in market interest rates will not have an adverse effect on our net investment income.

We will generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Because we expect that there will not be a readily available market for many of the investments in our portfolio, we expect to value many of our portfolio investments at fair value as determined in good faith by the Board using a documented valuation policy and a consistently applied valuation process. 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 our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

Assuming that the statement of assets and liabilities as of September 30, 2018, were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.

 

Change in Interest Rates

   Increase (Decrease) in
Interest Income
     Increase (Decrease) in
Interest Expense
     Net Increase (Decrease) in
Net Investment Income
 

Down 25 basis points

   $  (217,169    $ (90,625    $  (126,544

Up 100 basis points

     868,676        362,500        501,176  

Up 200 basis points

     1,737,353        725,000        1,012,353  

Up 300 basis points

     2,606,029        1,087,500        1,518,529  

 

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In addition, although we do not currently intend to make investments that are denominated in a foreign currency, to the extent we do, we will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.

We may hedge against interest rate and currency exchange rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in benefits of lower interest rates with respect to our portfolio of investments with fixed interest rates.

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Exchange Act). Based on that evaluation, our President and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Exchange Act.

There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factor discussed below and the risk factors described in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, and in Part II, “Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, each of which could materially adversely affect our business, financial condition and results of operations. The risks described in our Annual Report on Form 10-K and discussed below are not the only risks we face. We may face other risks that we have not yet identified, which we do not currently deem material or which are not yet predictable, which could materially adversely affect our business, financial condition and results of operations. In such case, our net asset value and the price of our common stock could decline, and you may lose all or part of your investment.

The Small Business Credit Availability Act allows us to incur additional leverage, which may increase the risk of investing with us.

On March 23, 2018, the SBCAA was signed into law. The SBCAA, among other things, modifies the applicable provisions of the 1940 Act to reduce the required asset coverage ratio applicable to BDCs from 200% to 150% subject to certain approval, time and disclosure requirements (including either stockholder approval or approval of a majority of the directors who are not interested persons of the BDC and who have no financial interest in the proposal). On July 5, 2018, the Board voted to approve the adoption of the reduced asset coverage ratio and separately recommended that Investors approve the reduced asset coverage requirements at the 2018 annual meeting of stockholders. On September 26, 2018, the Fund’s stockholders voted to approve the adoption of the reduced asset coverage ratio, effective September 27, 2018.

Increased leverage could increase the risks associated with investing in the Fund. For example, if the value of the Fund’s assets decreases, although the asset base and expected revenues would be larger because increased leverage would permit the Fund to acquire additional assets, leverage will cause the Fund’s net asset value to decline more sharply than it otherwise would have without leverage or with lower leverage. Similarly, any decrease in the Fund’s revenue would cause its net income to decline more sharply, on a relative basis, than it would have if the Fund had not borrowed or had borrowed less (although, as noted above, the Fund’s asset base and expected revenues would likely be larger). However, since the Fund already uses leverage in optimizing its investment portfolio, there are no material new risks associated with increased leverage other than the amount of the leverage.

 

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If the Fund’s asset coverage ratio falls below the required limit, the Fund will not be able to incur additional debt until it is able to comply with the asset coverage ratio. This could have a material adverse effect on the Fund’s operations, and the Fund may not be able to make distributions to stockholders. The actual amount of leverage that the Fund employs will depend on the Board’s and the Adviser’s assessment of market and other factors at the time of any proposed borrowing. The Fund currently anticipates being able to obtain sufficient credit on acceptable terms, although the Fund can make no assurance that this will be the case or that it will remain such in the future.

The following table illustrates the effect of leverage on returns from an investment in the shares of common stock assuming that we employ leverage such that our asset coverage equals (1) our actual asset coverage as of September 30, 2018 and (2) 150%, each at various annual returns, net of expenses and as of September 30, 2018.

The calculations in the tables below are hypothetical, and are provided for illustrative purposes only. Actual returns may be higher or lower than those appearing below.

 

Assumed Return on Our Portfolio (net of expenses)

     (10.00 )%      (5.00 )%      0.00     5.00     10.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Corresponding net return to holders of common stock assuming actual asset coverage as of September 30, 2018(1)

     (21.7 )%      (12.9 )%      (4.1 )%      4.6     13.4

Corresponding net return to holders of common stock assuming 150% asset coverage(2)

     (41.0 )%      (26.0 )%      (11.0 )%      4.0     19.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Assumes $89.3 million in total portfolio assets, $38.4 million in senior securities outstanding, $50.9 million in net assets, and an average cost of funds of 5.5%. Actual interest payments may be different.

(2)

Assumes $89.3 million in total portfolio assets, $59.5 million in senior securities outstanding, $29.8 million in net assets, and an average cost of funds of 5.5%. Actual interest payments may be different.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Except as previously reported by the Fund on its current reports on Form 8-K, we did not sell any securities during the period covered by this Quarterly Report that were not registered under the Securities Act.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:

 

31.1    Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
31.2    Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*
32.1    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as amended.

 

*

Filed herewith

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

      AB PRIVATE CREDIT INVESTORS CORPORATION
Date: November 14, 2018     By:  

/s/ J. Brent Humphries

      J. Brent Humphries
      President and Chief Executive Officer
      (Principal Executive Officer)
Date: November 14, 2018     By:  

/s/ Wesley Raper

      Wesley Raper
      Chief Financial Officer and Treasurer
      (Principal Financial and Accounting Officer)