UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

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

For the quarterly period ended September 30, 2015

 

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

For the transition period from          to          

 

Commission File No. 814-00735

 

KCAP Financial, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Delaware   20-5951150
(State or other jurisdiction of   (I.R.S. Employer
Incorporation or organization)   Identification Number)

 

295 Madison Avenue, 6th Floor

New York, New York 10017

(Address of principal executive offices)

 

(212) 455-8300

(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 x No ¨

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

The number of outstanding shares of common stock of the registrant as of November 2, 2015 was 37,100,825.

 

 

 

   

 

 

TABLE OF CONTENTS

 

    Page
     
  Part I. Financial Information  
     
Item 1. Consolidated Financial Statements  
     
  Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014 1
     
  Consolidated Statements of Operations (unaudited) for the three and nine months ended September 30, 2015 and 2014 2
     
  Consolidated Statements of Changes in Net Assets (unaudited) for the nine months ended September 30, 2015 and 2014 3
     
  Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2015 and 2014 4
     
  Consolidated Schedules of Investments as of September 30, 2015 (unaudited) and December 31, 2014 5
   
  Consolidated Financial Highlights (unaudited) for the nine months ended September 30, 2015 and 2014 33
     
  Notes to Consolidated Financial Statements (unaudited) 34
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 61
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 79
     
Item 4. Controls and Procedures 80
     
  Part II. Other Information  
     
Item 1. Legal Proceedings 81
     
Item 1A. Risk Factors 81
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 81
     
Item 3. Defaults Upon Senior Securities 81
     
Item 4. Mine Safety Disclosures 81
     
Item 5. Other Information 81
     
Item 6. Exhibits 81
   
Signatures 82

 

   

 

 

KCAP FINANCIAL, INC.

 

CONSOLIDATED BALANCE SHEETS

 

   As of
September 30, 2015
   As of
December 31, 2014
 
   (unaudited)     
ASSETS          
Investments at fair value:          
Money market accounts (cost: 2015 - $3,345,723; 2014 - $1,602,741)  $3,345,723   $1,602,741 
Debt securities (cost: 2015 - $306,613,274; 2014 - $322,884,934)   296,284,441    320,143,170 
CLO Fund securities managed by affiliates (cost: 2015 - $80,790,584; 2014 - $85,355,897)   63,682,491    74,139,696 
CLO Fund securities managed by non-affiliates (cost: 2015 - $5,497,863; 2014 - $5,533,293)   3,038,291    3,375,206 
Equity securities (cost: 2015 - $8,514,487; 2014 - $8,828,812)   6,936,653    8,119,681 
Asset Manager Affiliates (cost: 2015 - $57,189,159; 2014 - $60,292,677)   64,121,000    72,326,000 
Total Investments at Fair Value (cost: 2015 - $461,951,090; 2014 - $484,498,354)   437,408,599    479,706,494 
Cash   1,566,274    1,220,798 
Restricted cash   8,334,124    19,325,550 
Interest receivable   2,229,547    1,748,821 
Due from affiliates   2,634,589    3,027,409 
Other assets   4,735,669    5,417,725 
Total Assets  $456,908,802   $510,446,797 
           
LIABILITIES          
Convertible Notes  $33,647,000   $38,647,000 
7.375% Notes Due 2019   41,400,000    41,400,000 
Notes issued by KCAP Senior Funding I, LLC (net of discount: 2015 - $3,060,315; 2014 - $3,512,407)   144,289,685    143,837,593 
Payable for open trades       18,293,725 
Accounts payable and accrued expenses   1,797,885    2,166,400 
Accrued interest payable   860,939    1,566,255 
Payable to officers and directors       107,750 
Due to affiliates   313,411    31,000 
Shareholder distribution payable       9,080,373 
           
Total Liabilities   222,308,920    255,130,096 
           
COMMITMENTS AND CONTINGENCIES (Note 8)          
           
STOCKHOLDERS' EQUITY          
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,088,923 issued, and 37,052,575 outstanding at September 30, 2015, and 36,775,127 common shares issued and outstanding at December 31, 2014   370,526    367,751 
Capital in excess of par value   364,371,732    362,411,830 
Excess distribution of net investment income   (22,013,276)   (25,579,865)
Accumulated net realized losses   (81,788,040)   (75,512,134)
Net unrealized depreciation on investments   (26,121,123)   (6,370,881)
Treasury stock at cost   (219,937)    
Total Stockholders' Equity   234,599,882    255,316,701 
Total Liabilities and Stockholders' Equity  $456,908,802   $510,446,797 
NET ASSET VALUE PER COMMON SHARE  $6.33   $6.94 

 

See accompanying notes to consolidated financial statements.

 

 1 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2015   2014   2015   2014 
                 
Investment Income:                    
Interest from investments in debt securities  $6,302,777   $5,391,997   $18,380,536   $15,812,747 
Interest from cash and time deposits   2,726    831    7,084    2,341 
Investment income on CLO Fund Securities managed by affiliates   3,684,802    3,374,704    11,624,644    9,013,831 
Investment income on CLO Fund Securities managed by non-affiliates   196,965    230,529    821,042    829,203 
Dividends from Asset Manager Affiliates   1,547,069    1,424,415    4,196,483    4,181,347 
Capital structuring service fees   45,009    412,772    263,074    764,971 
Total investment income   11,779,348    10,835,248    35,292,863    30,604,440 
                     
Expenses:                    
Interest and amortization of debt issuance costs   3,007,283    2,891,724    8,965,252    8,775,697 
Compensation   892,119    1,431,825    3,022,393    3,921,913 
Professional fees   762,357    566,320    2,638,931    1,783,443 
Insurance   107,028    112,109    326,561    359,576 
Administrative and other   469,481    315,769    1,459,447    1,183,367 
Total expenses   5,238,268    5,317,747    16,412,584    16,023,996 
                     
Net Investment Income   6,541,080    5,517,501    18,880,279    14,580,444 
Realized And Unrealized Gains (Losses) On Investments:                    
Net realized (losses) from investment transactions   (6,231,759)   (2,141,591)   (6,133,352)   (1,896,806)
Net change in unrealized (depreciation) appreciation on:                    
Debt securities   (6,334,456)   7,420,256    (7,587,070)   7,919,575 
Equity securities   (605,432)   1,215,992    (868,703)   1,435,014 
CLO Fund securities managed by affiliates   (261,695)   (11,986,471)   (5,891,498)   (8,402,287)
CLO Fund securities managed by non-affiliates   (152,980)   3,100,201    (301,488)   3,333,111 
Asset Manager Affiliates investments   (8,863,069)   5,110,585    (5,101,483)   6,961,675 
Total net change in unrealized appreciation (depreciation)   (16,217,632)   4,860,563    (19,750,242)   11,247,088 
Net realized and unrealized appreciation (depreciation) on investments   (22,449,391)   2,718,972    (25,883,594)   9,350,282 
                     
Realized losses on extinguishments of debt   (142,554)       (142,554)    
Net (Decrease) Increase In Stockholders’ Equity Resulting From Operations  $(16,050,865)  $8,236,473   $(7,145,869)  $23,930,726 
Net (Decrease) Increase In Stockholders' Equity Resulting from Operations per Common Share:                    
Basic:  $(0.43)  $0.24   $(0.19)  $0.71 
Diluted:  $(0.43)  $0.23   $(0.19)  $0.68 
Net Investment Income Per Common Share:                    
Basic:  $0.18   $0.16   $0.51   $0.44 
Diluted:  $0.18   $0.16   $0.51   $0.43 
                     
Weighted Average Shares of Common Stock Outstanding—Basic   37,046,906    33,746,159    36,923,212    33,497,934 
Weighted Average Shares of Common Stock Outstanding—Diluted   37,046,906    40,125,660    36,923,212    39,877,326 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

(unaudited)

 

   Nine Months Ended
September 30,
 
   2015   2014 
         
Operations:          
Net investment income  $18,880,279   $14,580,444 
Net realized losses from investment transactions   (6,133,352)   (1,896,806)
Realized losses from extinguishments of debt   (142,554)    
Net change in unrealized (depreciation) appreciation on investments   (19,750,242)   11,247,088 
Net (decrease) increase in net assets resulting from operations   (7,145,869)   23,930,726 
           
Stockholder distributions:          
Distribution of ordinary income   (15,313,691)   (16,603,434)
Return of capital   -    - 
Net decrease in net assets resulting from stockholder distributions   (15,313,691)   (16,603,434)
           
Capital transactions:          
(Repurchase) issuance of common stock for:          
Common stock withheld for payroll taxes upon vesting of restricted stock   (220,301)    
Dividend reinvestment plan   811,517    561,662 
Stock based compensation   1,151,525    768,427 
           
Net increase in net assets resulting from capital transactions   1,742,741    1,330,089 
           
Net assets at beginning of period   255,316,701    250,369,693 
           
Net assets at end of period (including undistributed net investment income of $0 in 2015 and $0 in 2014)  $234,599,882   $259,027,074 
           
Net asset value per common share  $6.33   $7.67 
Common shares outstanding at end of period   37,052,575    33,753,672 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Nine Months Ended
September 30,
 
   2015   2014 
         
OPERATING ACTIVITIES:          
Net (decrease) increase in stockholder's equity resulting from operations  $(7,145,869)  $23,930,726 
Adjustments to reconcile net (decrease) increase in stockholder’s equity resulting from operations to net cash provided by in operating activities:          
Net realized losses on investment transactions   6,133,352    1,896,806 
Net change in unrealized depreciation (appreciation) on investments   19,750,242    (11,247,086)
Purchases of investments   (100,476,581)   (165,876,071)
Proceeds from sales and redemptions of investments   111,864,151    169,182,675 
Net (accretion) amortization on investments   6,123,977    4,311,245 
Amortization of original issue discount on indebtedness   452,092    328,838 
Amortization of debt issuance costs   897,566    838,726 
Realized losses on extinguishments of debt   142,554     
Payment-in-kind interest income   (1,097,244)   (132,622)
Stock-based compensation    1,151,525    767,101 
Changes in operating assets and liabilities:          
(Decrease) increase in payable for open trades   (18,293,725)   4,282,000 
Increase in interest and dividends receivable   (480,726)   (76,286)
Increase in other assets   (358,065)   (519,467)
Decrease (increase) in due from affiliates   392,820    (24,683)
Increase in due to affiliates   282,411     
(Decrease) in accounts payable and accrued expenses   (1,181,580)   (1,421,978)
Net cash provided by operating activities   18,156,900    26,239,924 
           
FINANCING ACTIVITIES:          
Issuance of restricted shares   1,820    1,326 
Distributions to stockholders   (23,584,369)   (24,374,804)
Repurchase of Convertible Notes   (5,000,000)    
Common Stock withheld for payroll taxes upon vesting of restricted stock   (220,301)    
Decrease (increase) in restricted cash   10,991,426    (1,364,637)
Net cash used in financing activities   (17,811,424)   (25,738,115)
           
CHANGE IN CASH   345,476    501,809 
CASH, BEGINNING OF PERIOD   1,220,798    3,433,675 
CASH, END OF PERIOD  $1,566,274   $3,935,484 
           
Supplemental Information:          
Interest paid during the period  $8,320,809   $8,547,252 
Dividends paid during the period under the dividend reinvestment plan  $811,517   $561,662 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED SCHEDULE OF INVESTMENTS

As of September 30, 2015

 

(unaudited)

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business 

Investment
Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

1A Smart Start LLC9, 10

 Consumer goods: Non-durable

  Senior Secured Loan — Term Loan 5.8% Cash, 1.0% Libor Floor, Due 2/22    $3,000,000   $2,970,355   $2,970,000 
                   

4L Technologies Inc. (fka Clover Holdings, Inc.)9, 10

 Consumer goods: Non-durable

  Senior Secured Loan — Term Loan 5.5% Cash, 1.0% Libor Floor, Due 5/20     2,772,000    2,750,704    2,661,673 
                   

Advanced Lighting Technologies, Inc.9, 10

 Consumer goods: Durable

  First Lien Bond — 10.5% - 06/2019 - 00753CAE2 10.5% Cash, Due 6/19     3,000,000    2,976,651    2,317,500 
                   

Advantage Sales & Marketing Inc.9

 Services: Business

  Junior Secured Loan — Term Loan (Second Lien) 7.5% Cash, 1.0% Libor Floor, Due 7/22     1,000,000    1,002,149    960,000 
                   

Alere Inc. (fka IM US Holdings, LLC)10

 Healthcare & Pharmaceuticals

  Senior Secured Loan — B Term Loan  4.3% Cash, 1.0% Libor Floor, Due 6/22     1,246,875    1,243,869    1,248,627 
                   

American Seafoods Group LLC9, 10

 Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan (First Lien) 6.0% Cash, 1.0% Libor Floor, Due 8/21     4,000,000    3,980,330    3,980,000 
                   

Anaren, Inc.9, 10

 Aerospace and Defense

  Senior Secured Loan — Term Loan (First Lien) 5.5% Cash, 1.0% Libor Floor, Due 2/21     1,965,000    1,949,825    1,931,006 
                   

Aristotle Corporation, The9, 10

 Consumer goods: Non-durable

  Senior Secured Loan — Term Loan 5.5% Cash, 1.0% Libor Floor, Due 6/21     3,990,000    3,970,809    3,970,050 
                   

Asurion, LLC (fka Asurion Corporation)9, 10

 Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Incremental Tranche B-1 Term Loan 5.0% Cash, 1.3% Libor Floor, Due 5/19     941,254    945,393    900,310 
                   

Asurion, LLC (fka Asurion Corporation)9, 10

 Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Incremental Tranche B-4 Term Loan 5.0% Cash, 1.0% Libor Floor, Due 8/22     898,299    893,894    851,561 

 

 5 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

Avalign Technologies, Inc.9

 Healthcare & Pharmaceuticals

 

Junior Secured Loan — Initial Term Loan (Second Lien)

9.3% Cash, 1.0% Libor Floor, Due 7/22  

  $1,000,000   $990,282   $990,000 
                   

Avalign Technologies, Inc.9, 10

 Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.5% Cash, 1.0% Libor Floor, Due 7/21  

   3,000,000    2,985,494    2,985,000 
                   

Bankruptcy Management Solutions, Inc.9

 Services: Business

 

Senior Secured Loan — Term B Loan

7.0% Cash, 1.0% Libor Floor, Due 6/18  

   687,043    687,043    670,485 
                   

BarBri, Inc. (Gemini Holdings, Inc.)9, 10

 Services: Consumer

 

Senior Secured Loan — Term Loan

4.5% Cash, 1.0% Libor Floor, Due 7/19  

   2,731,875    2,723,181    2,714,664 
                   

BBB Industries US Holdings, Inc.9, 10

 Automotive

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 11/21  

   2,985,000    2,932,990    2,992,433 
                   

Bellisio Foods, Inc. 9, 10

 Beverage, Food and Tobacco

 

Senior Secured Loan — U.S. Term B Loans

5.3% Cash, 1.0% Libor Floor, Due 8/19  

   1,941,681    1,935,177    1,858,965 
                   

Bestop, Inc.9, 10

 Automotive

 

Senior Secured Loan — Revolving Loan

6.3% Cash, 1.0% Libor Floor, Due 7/20  

   40,000    34,207    39,400 
                   

Bestop, Inc.9, 10

  Automotive

 

Senior Secured Loan — Term Loan

6.3% Cash, 1.0% Libor Floor, Due 7/21  

   1,600,000    1,576,690    1,576,000 
                   

Carolina Beverage Group LLC9

Beverage, Food and Tobacco

 

Senior Secured Bond — 10.625% - 08/2018 - 143818AA0 144A

10.6% Cash, Due 8/18  

   1,500,000    1,511,590    1,481,250 
                   

CCS Intermediate Holdings, LLC9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.0% Cash, 1.0% Libor Floor, Due 7/21  

   2,970,000    2,957,569    2,782,890 
                   

Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)9, 10

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Term Loan

7.0% Cash, 1.0% Libor Floor, Due 3/20  

   2,979,950    2,974,213    2,961,325 
                   

Checkout Holding Corp. (fka Catalina Marketing)9, 10

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Term B Loan (First Lien)

4.5% Cash, 1.0% Libor Floor, Due 4/21  

   987,500    983,596    849,250 

 

 6 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

Consolidated Communications, Inc.10

Telecommunications

 

Senior Secured Loan — Initial Term Loan

4.3% Cash, 1.0% Libor Floor, Due 12/20  

  $2,969,773   $2,979,451   $2,969,179 
                   

CRGT Inc.9, 10

High Tech Industries

 

Senior Secured Loan — Term Loan

7.5% Cash, 1.0% Libor Floor, Due 12/20  

   3,937,421    3,883,316    3,927,577 
                   

Crowley Holdings Preferred, LLC9

Transportation: Cargo

 

Preferred Stock — 12.000% - 12/2049 - Series A Income Preferred Securities

10.0% Cash, 2.0% PIK, Due 12/49  

   10,359,873    10,359,873    10,681,029 
                   

Crowne Group, LLC9, 10

Automotive

 

Senior Secured Loan — Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 9/20  

   3,960,000    3,910,360    3,813,876 
                   

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9

Beverage, Food and Tobacco

 

Junior Secured Loan — Term Loan (Second Lien)

8.8% Cash, 1.0% Libor Floor, Due 7/21  

   3,000,000    3,014,477    2,857,500 
                   

CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.) (aka HealthPort)9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan

5.3% Cash, 1.0% Libor Floor, Due 11/21  

   2,977,538    2,948,937    2,972,580 
                   

DBI Holding LLC9

Services: Business

 

Senior Unsecured Bond — 13% - 09/2019 – PIK Note

0.0% Cash, 16.0% PIK, Due 9/19  

   3,884,871    3,688,411    3,657,995 
                   

DBI Holding LLC9

Services: Business

 

Senior Subordinated Bond — 13% - 09/2019 - Senior Subordinated Note

12.0% Cash, 4.0% PIK, Due 9/19  

   4,435,792    4,420,467    4,221,543 
                   
Drew Marine Group Inc.9

Transportation: Cargo

 

Junior Secured Loan — Term Loan (Second Lien)

8.0% Cash, 1.0% Libor Floor, Due 5/21  

   2,500,000    2,495,280    2,445,500 
                   

ELO Touch Solutions, Inc.9, 10

High Tech Industries

 

Senior Secured Loan — Term Loan (First Lien)

8.0% Cash, 1.5% Libor Floor, Due 6/18  

   1,586,611    1,545,105    1,582,328 
                   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)9

Environmental Industries

 

Junior Secured Loan — Term Loan (Second Lien)

8.5% Cash, 1.0% Libor Floor, Due 1/22  

   4,000,000    3,984,260    3,798,800 
                   

Fender Musical Instruments Corporation9, 10

Consumer goods: Durable

 

Senior Secured Loan — Initial Loan

5.8% Cash, 1.3% Libor Floor, Due 4/19  

   1,630,443    1,639,197    1,630,443 

 

 7 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

FHC Health Systems, Inc.9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Initial Term Loan

5.0% Cash, 1.0% Libor Floor, Due 12/21  

  $3,887,607   $3,852,677   $3,841,461 
                   

First American Payment Systems, L.P.9

Banking, Finance, Insurance & Real Estate

 

Junior Secured Loan — Term Loan (Second Lien)

10.8% Cash, 1.3% Libor Floor, Due 4/19  

   2,796,448    2,766,004    2,715,351 
                   

Getty Images, Inc.9, 10

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Initial Term Loan

4.8% Cash, 1.3% Libor Floor, Due 10/19  

   2,168,441    2,174,087    1,420,784 
                   

GK Holdings, Inc. (aka Global Knowledge)9

Services: Business

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.5% Cash, 1.0% Libor Floor, Due 1/22  

   1,500,000    1,472,798    1,477,500 
                   

GK Holdings, Inc. (aka Global Knowledge)9, 10

Services: Business

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.5% Cash, 1.0% Libor Floor, Due 1/21  

   2,481,250    2,459,141    2,434,603 
                   

Global Tel*Link Corporation9

Telecommunications

 

Junior Secured Loan — Term Loan (Second Lien)

9.0% Cash, 1.3% Libor Floor, Due 11/20  

   4,000,000    3,943,818    3,768,000 
                   

Gold Standard Baking, Inc.9, 10

Beverage, Food and Tobacco

 

Senior Secured Loan — Term Loan

5.5% Cash, 1.0% Libor Floor, Due 4/21  

   2,493,750    2,482,053    2,469,561 
                   

Grande Communications Networks LLC9, 10

Telecommunications

 

Senior Secured Loan — Initial Term Loan

4.5% Cash, 1.0% Libor Floor, Due 5/20  

   3,910,079    3,914,563    3,909,688 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term B Loan (First Lien)

8.5% Cash, 1.5% Libor Floor, Due 1/18  

   2,925,000    2,897,657    2,866,500 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

13.8% Cash, Due 7/18  

   7,000,000    6,916,737    6,650,000 
                   

Gymboree Corporation., The9, 10

Retail

 

Senior Secured Loan — Term Loan

5.0% Cash, 1.5% Libor Floor, Due 2/18  

   1,421,105    1,402,760    941,305 
                   

Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 10

Media: Broadcasting & Subscription

 

Senior Secured Loan — Initial Term Loan

5.3% Cash, 1.0% Libor Floor, Due 6/19  

   2,927,271    2,908,947    2,928,442 

 

 8 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 10

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Tranche B-3 Term Loan

7.0% Cash, 1.5% Libor Floor, Due 5/18  

  $3,303,125   $3,282,743   $3,302,464 
                   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 10

Media: Advertising, Printing & Publishing

 

Senior Secured Loan — Tranche B-4 Term Loan

6.0% Cash, 1.0% Libor Floor, Due 8/19  

   1,434,375    1,429,354    1,431,506 
                   

Hoffmaster Group, Inc.9

Forest Products & Paper

 

Junior Secured Loan — Initial Term Loan (Second Lien)

10.0% Cash, 1.0% Libor Floor, Due 5/21  

   2,000,000    1,975,937    1,998,600 
                   

Hoffmaster Group, Inc.9, 10

Forest Products & Paper

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.3% Cash, 1.0% Libor Floor, Due 5/20  

   3,950,000    3,919,537    3,946,307 
                   

Hunter Defense Technologies, Inc.9, 10

Aerospace and Defense

 

Senior Secured Loan — Term Loan (First Lien)

6.5% Cash, 1.0% Libor Floor, Due 8/19  

   2,850,000    2,827,819    2,722,605 
                   

Integra Telecom Holdings, Inc.9, 10

Telecommunications

 

Senior Secured Loan — Term B-1 Loan

5.3% Cash, 1.0% Libor Floor, Due 8/20  

   2,969,848    2,959,523    2,967,769 
                   

International Architectural Products, Inc.7, 9

Metals & Mining

 

Senior Secured Loan — Term Loan

0.0% Cash, 3.3% PIK, 2.5% Libor Floor, Due 5/15  

   247,636    228,563    1,000 
                   

Kellermeyer Bergensons Services, LLC9, 10

Services: Business

 

Senior Secured Loan — Initial Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 10/21  

   1,985,000    1,967,713    1,960,188 
                   

Key Safety Systems, Inc.9, 10

Automotive

 

Senior Secured Loan — Initial Term Loan

4.8% Cash, 1.0% Libor Floor, Due 8/21  

   1,485,000    1,478,731    1,454,506 
                   

Kinetic Concepts, Inc.9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Dollar Term E-1 Loan

4.5% Cash, 1.0% Libor Floor, Due 5/18  

   2,969,773    2,963,987    2,966,372 
                   

Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 10

High Tech Industries

 

Senior Secured Loan — New Term Loan (First Lien)

5.0% Cash, 1.0% Libor Floor, Due 2/20  

   3,430,263    3,437,455    3,313,291 
                   

MB Aerospace ACP Holdings III Corp.9, 10

Aerospace and Defense

 

Senior Secured Loan — Dollar Term Loan

5.0% Cash, 1.0% Libor Floor, Due 5/19  

   3,642,024    3,619,743    3,642,024 

 

 9 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

Medical Specialties Distributors, LLC9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan

6.5% Cash, 1.0% Libor Floor, Due 12/19  

  $3,930,000   $3,902,594   $3,823,104 
                   

MGOC, Inc. (fka Media General, Inc.)10

Media: Broadcasting & Subscription

 

Senior Secured Loan — Term B Loan

4.0% Cash, 1.0% Libor Floor, Due 7/20  

   2,717,813    2,720,774    2,700,555 
                   

Millennium Health, LLC (fka Millennium Laboratories, LLC)9

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Tranche B Term Loan

5.3% Cash, 1.0% Libor Floor, Due 4/21  

   2,969,925    2,969,925    954,088 
                   

Nellson Nutraceutical, LLC9, 10

Beverage, Food and Tobacco

 

Senior Secured Loan — Term A-1 Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 12/21  

   2,380,576    2,361,697    2,333,441 
                   

Nellson Nutraceutical, LLC9, 10

Beverage, Food and Tobacco

 

Senior Secured Loan — Term A-2 Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 12/21  

   2,098,176    2,080,808    2,056,633 
                   

Nielsen & Bainbrige, LLC9

Consumer goods: Durable

 

Senior Secured Loan — Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 8/20  

   992,502    984,316    961,635 
                   

Nielsen & Bainbrige, LLC9

Consumer goods: Durable

 

Junior Secured Loan — Term Loan (Second Lien)

10.3% Cash, 1.0% Libor Floor, Due 8/21  

   2,091,954    2,064,716    1,924,598 
                   

Nielsen & Bainbrige, LLC9, 10

Consumer goods: Durable

 

Senior Secured Loan — Term Loan (First Lien)

6.0% Cash, 1.0% Libor Floor, Due 8/20  

   3,795,448    3,763,274    3,677,409 
                   
NM Z Parent Inc. (aka Zep, Inc.)9, 10

Chemicals, Plastics and Rubber

 

Senior Secured Loan — Initial Term Loan

5.8% Cash, 1.0% Libor Floor, Due 6/22  

   3,491,250    3,503,317    3,463,669 
                   

Novetta, LLC9

Services: Business

 

Senior Secured Loan — Initial Term Loan

6.0% Cash, 1.0% Libor Floor, Due 10/20  

   2,722,500    2,699,157    2,722,500 
                   

Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)9, 10

Services: Business

 

Senior Secured Loan — Tranche B-2 Term Loan (First Lien)

7.5% Cash, 1.3% Libor Floor, Due 7/20  

   978,853    971,079    902,698 

 

 10 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

Onex Carestream Finance LP9

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

9.5% Cash, 1.0% Libor Floor, Due 12/19  

  $1,932,311   $1,932,311   $1,901,201 
                   

Onex Carestream Finance LP9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan (First Lien 2013)

5.0% Cash, 1.0% Libor Floor, Due 6/19  

   1,882,721    1,888,026    1,809,765 
                   

Otter Products, LLC (OtterBox Holdings, Inc.)9, 10

Consumer goods: Durable

 

Senior Secured Loan — Term B Loan

5.8% Cash, 1.0% Libor Floor, Due 6/20  

   2,754,168    2,735,107    2,663,280 
                   

Ozburn-Hessey Holding Company LLC9, 10

Transportation: Cargo

 

Senior Secured Loan — Term Loan

6.8% Cash, 1.3% Libor Floor, Due 5/19  

   3,485,681    3,479,849    3,477,316 
                   

PGX Holdings, Inc.9, 10

Services: Consumer

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.8% Cash, 1.0% Libor Floor, Due 9/20  

   3,828,571    3,796,579    3,724,051 
                   

Playpower, Inc.9, 10

Construction & Building

 

Senior Secured Loan — Initial Term Loan (First Lien)

5.8% Cash, 1.0% Libor Floor, Due 6/21  

   1,995,000    1,980,681    1,982,831 
                   

PSC Industrial Holdings Corp.9, 10

Environmental Industries

 

Senior Secured Loan — Term Loan (First Lien)

5.8% Cash, 1.0% Libor Floor, Due 12/20  

   1,985,000    1,967,757    1,928,825 
                   

Quad-C JH Holdings Inc. (aka Joerns Healthcare)9, 10

Healthcare & Pharmaceuticals

 

Senior Secured Loan — Term Loan A

6.2% Cash, 1.0% Libor Floor, Due 5/20  

   3,950,013    3,927,029    3,859,558 
                   

Ravn Air Group, Inc.9, 10

Transportation: Consumer

 

Senior Secured Loan — Initial Term Loan

5.5% Cash, 1.0% Libor Floor, Due 7/21  

   2,500,000    2,487,820    2,487,500 
                   

Reynolds Group Holdings Inc.9, 10

Containers, Packaging and Glass

 

Senior Secured Loan — Incremental U.S. Term Loan

4.5% Cash, 1.0% Libor Floor, Due 12/18  

   2,916,649    2,916,649    2,921,622 
                   

Roscoe Medical, Inc.9

Healthcare & Pharmaceuticals

 

Junior Secured Loan — Term Loan (Second Lien)

11.3% Cash, Due 9/19  

   6,700,000    6,651,467    6,391,130 

 

 11 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

Rovi Solutions Corporation / Rovi Guides, Inc.10

High Tech Industries

 

Senior Secured Loan — Term B Loan

3.8% Cash, 0.8% Libor Floor, Due 7/21  

  $2,969,925   $2,936,592   $2,829,447 
                   

Sandy Creek Energy Associates, L.P.9, 10

Utilities: Electric

 

Senior Secured Loan — Term Loan

5.0% Cash, 1.0% Libor Floor, Due 11/20  

   2,729,107    2,719,110    2,415,260 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9

Beverage, Food and Tobacco

 

Senior Secured Loan — Term Loan

6.5% Cash, 1.0% Libor Floor, Due 3/19  

   2,174,827    2,162,053    2,174,827 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9, 10

Beverage, Food and Tobacco

 

Senior Secured Loan — Term Loan

6.5% Cash, 1.0% Libor Floor, Due 3/19  

   4,907,181    4,910,983    4,907,181 
                   

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 10

Environmental Industries

 

Senior Secured Loan — Term Loan

7.5% Cash, 1.3% Libor Floor, Due 6/19  

   2,861,935    2,844,078    2,833,316 
                   

Sun Products Corporation, The (fka Huish Detergents Inc.)9, 10

Consumer goods: Non-durable

 

Senior Secured Loan — Tranche B Term Loan

5.5% Cash, 1.3% Libor Floor, Due 3/20  

   3,882,654    3,862,633    3,672,350 
                   

Tank Partners Holdings, LLC9

Energy: Oil & Gas

 

Senior Secured Loan — Loan

6.6% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19  

   10,665,282    10,520,547    8,939,640 
                   

TPF II Power, LLC (TPF II Covert Midco, LLC)9, 10

Utilities: Electric

 

Senior Secured Loan — Term Loan

5.5% Cash, 1.0% Libor Floor, Due 10/21  

   2,958,405    2,982,024    2,931,483 
                   

Trimaran Advisors, L.L.C.9

Related Party Loan

 

Senior Unsecured Loan — Revolving Credit Facility

9.0% Cash, Due 11/17  

   23,000,000    23,000,000    23,000,000 
                   

TRSO I, Inc.9

Energy: Oil & Gas

 

Junior Secured Loan — Term Loan (Second Lien)

11.0% Cash, 1.0% Libor Floor, Due 12/17  

   1,000,000    991,092    961,500 
                   

TWCC Holding Corp.9

Media: Broadcasting & Subscription

 

Junior Secured Loan — Term Loan (Second Lien)

7.0% Cash, 1.0% Libor Floor, Due 6/20  

   1,000,000    1,003,459    956,300 

 

 12 

 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Fair Value2 

TWCC Holding Corp.9, 10

Media: Broadcasting & Subscription

 

Senior Secured Loan — Term B-1 Loan

5.8% Cash, 0.8% Libor Floor, Due 2/20  

  $824,541   $826,440   $814,317 
                   

U.S. Shipping Corp (fka U.S. Shipping Partners LP)9, 10

Transportation: Cargo

 

Senior Secured Loan — Tranche B-2 Term Loan

5.3% Cash, 1.0% Libor Floor, Due 6/21  

   1,496,250    1,495,078    1,496,699 
                   

USJ-IMECO Holding Company, LLC9, 10

Transportation: Cargo

 

Senior Secured Loan — Term Loan

7.0% Cash, 1.0% Libor Floor, Due 4/20  

   3,940,000    3,924,953    3,940,000 
                   

Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)10

Banking, Finance, Insurance & Real Estate

 

Senior Secured Loan — Term B Loan

3.8% Cash, 0.8% Libor Floor, Due 6/21  

   1,693,520    1,697,226    1,698,456 
                   

Verdesian Life Sciences, LLC9

Environmental Industries

 

Senior Secured Loan — Initial Term Loan

6.0% Cash, 1.0% Libor Floor, Due 7/20  

   937,550    926,367    909,329 
                   

Verdesian Life Sciences, LLC9, 10

Environmental Industries

 

Senior Secured Loan — Initial Term Loan

6.0% Cash, 1.0% Libor Floor, Due 7/20  

   3,097,474    3,061,567    3,004,240 
                   

Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 10

Retail

 

Senior Secured Loan — Term Loan

5.3% Cash, 1.0% Libor Floor, Due 9/21  

   2,997,400    2,987,671    2,929,359 
                   

Weiman Products, LLC9

Consumer goods: Non-durable

 

Senior Secured Loan — Term Loan

6.3% Cash, 1.0% Libor Floor, Due 11/18  

   2,949,755    2,930,768    2,949,755 

 

Portfolio Company / Principal Business  Investment
Interest Rate¹ / Maturity
  Principal   Amortized Cost   Value2 

Weiman Products, LLC9, 10

Consumer goods: Non-durable

 

Senior Secured Loan — Term Loan

6.3% Cash, 1.0% Libor Floor, Due 11/18  

  $3,933,007    3,908,280    3,933,007 
                   

WireCo WorldGroup Inc. 9

Capital Equipment

 

Senior Unsecured Bond — 9.000% - 05/2017

9.0% Cash, Due 5/17  

   5,000,000    5,006,206    4,337,500 
                   

WireCo WorldGroup Inc. 9, 10

Capital Equipment

 

Senior Unsecured Bond — 9.000% - 05/2017

9.0% Cash, Due 5/17  

   3,000,000    3,003,723    2,602,500 
                   
Total Investment in Debt Securities
(126% of net asset value at fair value)
     $308,374,718   $306,613,274   $296,284,441 

 

 13 

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business  Investment  Percentage
Ownership/Shares
   Amortized Cost   Fair Value2 

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Partnership Interests     1.2%  $1,000,000   $1,000 
                   

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Series A Preferred Interests     1.2%   250,960    772,631 
                   

Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9

Media: Advertising, Printing & Publishing

  Common     1.3%   359,765    609,478 
                   

DBI Holding LLC5, 9

Services: Business

  Class A Warrants     3.2%   258,940    1,504,844 
                   

eInstruction Acquisition, LLC5, 9

Services: Business

  Membership Units     1.1%   1,079,617    1,000 
                   

FP WRCA Coinvestment Fund VII, Ltd.3, 5,

Capital Equipment

  Class A Shares     1,500    1,500,000    1,497,999 
                   

Perseus Holding Corp.5, 9

Hotel, Gaming & Leisure

  Common     0.2%   400,000    1,000 
                   

Roscoe Investors, LLC5, 9

Healthcare & Pharmaceuticals

  Class A Units     1.6%   1,000,000    940,700 
                   

Tank Partners Holdings, LLC5, 9, 12

Energy: Oil & Gas

  Unit     5.8%   980,000    300,976 
                   

Tank Partners Holdings, LLC5, 9

Energy: Oil & Gas

  Warrants     1.3%   185,205    89,462 
                   

TRSO II, Inc.5, 9, 12

Energy: Oil & Gas

  Common Stock     5.4%   1,500,000    1,217,563 
                   
Total Investment in Equity Securities                  
 (3% of net asset value at fair value)          $8,514,487   $6,936,653 

 

 14 

 

 

CLO Fund Securities

 

CLO Subordinated Investments

 

Portfolio Company  Investment14  Percentage
Ownership
   Amortized Cost   Fair Value2 
Grant Grove CLO, Ltd.3  Subordinated Securities, effective interest 12.0%, 1/21 maturity     22.2%  $2,488,323   $362,691 
Katonah III, Ltd.3,14  Preferred Shares, effective interest N/M, 5/15 maturity     23.1%   1,366,357    385,000 
Katonah IX CLO Ltd3, 6, 14  Preferred Shares, effective interest 2.2%, 1/19 maturity     6.9%   1,172,498    100,000 
Katonah X CLO Ltd 3, 6, 14  Subordinated Securities, effective interest 17.7%, 4/20 maturity     33.3%   9,074,951    2,600,000 
Katonah 2007-I CLO Ltd.3, 6  Preferred Shares, effective interest 27.5%, 4/22 maturity     100.0%   23,975,870    23,233,837 
Trimaran CLO VII, Ltd.3, 6  Income Notes, effective interest 46.0%, 6/21 maturity     10.5%   1,349,606    2,024,945 
Catamaran CLO 2012-1 Ltd.3, 6  Subordinated Notes, effective interest 4.0%, 12/23 maturity     24.9%   7,154,268    4,295,666 
Catamaran CLO 2013- 1 Ltd.3, 6  Subordinated Notes, effective interest 12.9%, 1/25 maturity     23.5%   6,559,985    6,561,900 
Catamaran CLO 2014-1 Ltd.3, 6  Subordinated Notes, effective interest 7.6%, 4/26 maturity     24.9%   9,264,284    7,251,390 
Dryden 30 Senior Loan Fund3  Subordinated Notes, effective interest 28.7.%, 11/25 maturity     7.5%   1,643,183    2,290,600 
Catamaran CLO 2014-2 Ltd.3, 6  Subordinated Notes, effective interest 5.9%, 10/26 maturity     24.9%   8,374,214    6,932,673 
Catamaran CLO 2015-1 Ltd.3, 6  Subordinated Notes, effective interest 9.9%, 4/27 maturity     24.0%   12,439,015    9,442,080 
                   
Total Investment in CLO Subordinated Securities          $84,862,554   $65,480,782 

 

 15 

 

 

CLO Rated-Note Investment

 

Portfolio Company   Investment   Percentage
Ownership
   Amortized Cost   Fair Value2 
Catamaran CLO 2014-1 Ltd.3, 6 

Float - 04/2026 - E - 14889FAC7

Par Value of $1,525,000

Due 4/26  

   15.1%   1,425,893    1,240,000 
                   
Total Investment in CLO Rated-Note          $1,425,893   $1,240,000 
                   
Total Investment in CLO Fund Securities   
(28% of net asset value at fair value)
          $86,288,447   $66,720,782 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business   Investment   Percentage
Ownership
   Cost   Fair Value2 
Asset Manager Affiliates9, 11  Asset Management Company     100.0%  $57,189,159   $64,121,000 
                   
Total Investment in Asset Manager Affiliates   
(27% of net asset value at fair value)
          $57,189,159   $64,121,000 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts   Investment   Yield   Par /Amortized Cost   Fair Value2 
JP Morgan Business Money Market
Account8, 9
  Money Market Account     0.10%  $249,216   $249,216 
                   
US Bank Money Market Account9  Money Market Account     0.02%   3,096,507    3,096,507 
                   
Total Investment in Time Deposit and Money Market Accounts   
(1% of net asset value at fair value)
          $3,345,723   $3,345,723 
                   
Total Investments4
(186% of net asset value at fair value)
          $461,951,090   $437,408,599 

 

See accompanying notes to consolidated financial statements.

 

 16 

 

 

1

 

A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at September 30, 2015. As noted in the table above, 78% (based on par) of debt securities contain LIBOR floors which range between .75% and 3.00%.
2 Reflects the fair market value of all investments as of September 30, 2015, as determined by the Company’s Board of Directors.
3 Non-U.S. company or principal place of business outside the U.S.
4 The aggregate cost of investments for federal income tax purposes is approximately $480 million. The aggregate gross unrealized appreciation is approximately $9.7 million, the aggregate gross unrealized depreciation is approximately $52.7 million, and the net unrealized depreciation is approximately $43.0 million.
5 Non-income producing.
6 An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
7 Loan or debt security is on non-accrual status and therefore is considered non-income producing.
8 Money market account holding restricted cash and security deposits for employee benefit plans.
9 Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
10 As of September 30, 2015, this investment is owned by KCAP Senior Funding I, LLC and was pledged to secure KCAP Senior Funding I, LLC’s obligation.
11 Other than the Asset Manager Affiliate, which we are deemed to “control”, we do not “control” and are not an “affiliate” of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the “1940 Act”). In general, under the 1940 Act, we would be presumed to “control” a portfolio company if we owned 25% or more of its voting securities and would be an “affiliate” of a portfolio company if we owned 5% or more of its voting securities.
12 Non-voting.
13 CLO Subordinated Investments are entitled to periodic distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund’s investments less contractual payments to debt holders and fund expenses. The estimated annualized effective yield indicated is based upon a current projection of the amount and timing of these distributions. Such projections are updated on a quarterly basis and the estimated effective yield is adjusted prospectively.
14 Notice of redemption has been received for this transaction.

 

 17 

 

KCAP FINANCIAL, INC.

SCHEDULE OF INVESTMENTS

As of December 31, 2014

 

Debt Securities Portfolio

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

4L Technologies Inc. (fka Clover Holdings, Inc.)9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 5/20
  $2,793,000   $2,768,057   $2,723,175 
                   

Advanced Lighting Technologies, Inc.9, 11

Consumer goods: Durable

  First Lien Bond —
10.5% Cash, Due 6/19
   3,000,000    2,962,507    2,580,000 
                    

Advantage Sales & Marketing Inc.9

Services: Business

  Junior Secured Loan — Term Loan (Second Lien)
7.5% Cash, 1.0% Libor Floor, Due 7/22
   1,000,000    1,002,384    992,000 
                   

Alaska Communications Systems Holdings, Inc.9, 11

Telecommunications

  Senior Secured Loan — Term Loan
6.3% Cash, 1.5% Libor Floor, Due 10/16
   5,200,227    5,193,935    5,200,227 
                   

Alere Inc. (fka IM US Holdings, LLC)11

Healthcare & Pharmaceuticals

  Senior Secured Loan — B Term Loan
4.3% Cash, 1.0% Libor Floor, Due 6/17
   2,992,277    2,988,629    2,972,947 
                   

AmSurg Corp.11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
3.8% Cash, 0.8% Libor Floor, Due 7/21
   2,992,481    2,992,481    2,975,020 
                   

Anaren, Inc.9, 11

Aerospace and Defense

  Senior Secured Loan — Term Loan (First Lien)
5.5% Cash, 1.0% Libor Floor, Due 2/21
   1,980,000    1,962,587    1,955,250 
                   

Asurion, LLC (fka Asurion Corporation)9, 11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Incremental Tranche B-1 Term Loan
5.0% Cash, 1.3% Libor Floor, Due 5/19
   1,917,430    1,932,331    1,896,549 
                   

AZ Chem US Inc.9, 11

Chemicals, Plastics and Rubber

  Senior Secured Loan — Initial Term Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 6/21
   467,123    464,966    457,977 
                   

Bankruptcy Management Solutions, Inc.9

Services: Business

  Senior Secured Loan — Term B Loan
7.0% Cash, 1.0% Libor Floor, Due 6/18
   700,227    700,227    624,463 

 

 18 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

BarBri, Inc. (Gemini Holdings, Inc.)9, 11

Services: Consumer

  Senior Secured Loan — Term Loan
4.5% Cash, 1.0% Libor Floor, Due 7/19
  $2,872,500   $2,861,557   $2,835,158 
                   

BBB Industries US Holdings, Inc.9, 11

Automotive

  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 11/21
   3,000,000    2,941,316    2,985,000 
                   

Bellisio Foods, Inc. 9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — U.S. Term B Loans
5.3% Cash, 1.0% Libor Floor, Due 8/19
   2,239,551    2,230,586    2,235,071 
                   

Blue Coat Systems, Inc.9, 11

High Tech Industries

  Senior Secured Loan — New Term Loan
4.0% Cash, 1.0% Libor Floor, Due 5/19
   467,636    468,971    456,530 
                   

Carolina Beverage Group LLC9

Beverage, Food and Tobacco

  Senior Secured Bond —
10.6% Cash, Due 8/18
   1,500,000    1,515,584    1,552,500 
                   

CCS Intermediate Holdings, LLC9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 7/21
   2,992,500    2,978,364    2,940,131 
                   

Cengage Learning Acquisitions, Inc. (fka TL Acquisitions, Inc.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 3/20
   2,987,475    2,980,768    2,963,829 
                   

Charter Communications Operating, LLC (aka CCO Safari LLC)11

Media: Broadcasting & Subscription

  Senior Secured Loan — Term G Loan
4.3% Cash, 0.8% Libor Floor, Due 9/21
   3,000,000    3,022,408    3,022,980 
                   

Checkout Holding Corp.9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Term B Loan (First Lien)
4.5% Cash, 1.0% Libor Floor, Due 4/21
   995,000    990,534    951,474 
                   

Consolidated Communications, Inc.11

Telecommunications

  Senior Secured Loan — Initial Term Loan
4.3% Cash, 1.0% Libor Floor, Due 12/20
   2,992,443    3,003,588    2,976,538 
                   

CRGT Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan
7.5% Cash, 1.0% Libor Floor, Due 12/20
   3,000,000    2,940,000    2,955,000 
                   

Crowley Holdings Preferred, LLC9

Transportation: Cargo

  Preferred Stock —
10.0% Cash, 2.0% PIK, Due 12/49
   10,206,016    10,206,016    10,418,302 

 

 19 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Crowne Group, LLC9, 11

Automotive

  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 9/20
  $3,990,000   $3,932,506   $3,838,779 
                   

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9

Beverage, Food and Tobacco

  Junior Secured Loan — Term Loan (Second Lien)
8.8% Cash, 1.0% Libor Floor, Due 7/21
   3,000,000    3,016,357    2,910,000 
                   

CSM Bakery Solutions Limited (fka CSM Bakery Supplies Limited)9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 7/20
   2,623,371    2,622,454    2,570,903 
                   

CT Technologies Intermediate Holdings, Inc. (Smart Holdings Corp.)9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 12/21
   3,000,000    2,970,271    2,988,750 
                   

DBI Holding LLC9

Services: Business

  Senior Unsecured Bond —
13.0% PIK, Due 9/19
   3,457,795    3,221,771    3,386,218 
                   

DBI Holding LLC9

Services: Business

  Senior Subordinated Bond —
12.0% Cash, 1.0% PIK, Due 9/19
   4,314,949    4,295,544    4,240,301 
                   

DJO Finance LLC (ReAble Therapeutics Fin LLC)9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — New Tranche B Term Loan
4.3% Cash, 1.0% Libor Floor, Due 9/17
   2,063,574    2,063,574    2,022,303 
                   

Drew Marine Group Inc.9

Transportation: Cargo

  Junior Secured Loan — Term Loan (Second Lien)
8.0% Cash, 1.0% Libor Floor, Due 5/21
   2,500,000    2,494,654    2,523,250 
                   

ELO Touch Solutions, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Term Loan (First Lien)
8.0% Cash, 1.5% Libor Floor, Due 6/18
   1,726,036    1,677,698    1,642,496 
                   

EWT Holdings III Corp. (fka WTG Holdings III Corp.)9

Environmental Industries

  Junior Secured Loan — Term Loan (Second Lien)
8.5% Cash, 1.0% Libor Floor, Due 1/22
   4,000,000    3,982,390    4,033,200 
                   

Fender Musical Instruments Corporation9, 11

Consumer goods: Durable

  Senior Secured Loan — Initial Loan
5.8% Cash, 1.3% Libor Floor, Due 4/19
   2,002,536    2,012,321    1,982,110 
                   

FHC Health Systems, Inc.9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Initial Term Loan
5.0% Cash, 1.0% Libor Floor, Due 12/21
   3,407,143    3,373,191    3,381,589 

 

 20 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

First American Payment Systems, L.P.9

Banking, Finance, Insurance & Real Estate

  Junior Secured Loan — Term Loan (Second Lien)
10.8% Cash, 1.3% Libor Floor, Due 4/19
  $2,796,448   $2,759,556   $2,782,466 
                   

First Data Corporation9, 11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — 2018 New Dollar Term Loan
3.7% Cash, Due 3/18
   1,000,000    968,906    982,190 
                   

Getty Images, Inc.9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.3% Libor Floor, Due 10/19
   2,185,164    2,187,551    2,012,165 
                   

Global Tel*Link Corporation9

Telecommunications

  Junior Secured Loan — Term Loan (Second Lien)
9.0% Cash, 1.3% Libor Floor, Due 11/20
   4,000,000    3,935,659    3,889,200 
                   

Grande Communications Networks LLC9, 11

Telecommunications

  Senior Secured Loan — Initial Term Loan
4.5% Cash, 1.0% Libor Floor, Due 5/20
   3,940,040    3,944,690    3,938,464 
                   

Grifols Worldwide Operations Limited11

Healthcare & Pharmaceuticals

  Senior Secured Loan — U.S. Tranche B Term Loam
3.2% Cash, Due 2/21
   2,992,462    2,970,236    2,956,298 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term B Loan (First Lien)
8.5% Cash, 1.5% Libor Floor, Due 1/18
   2,947,500    2,911,129    2,947,500 
                   

Grupo HIMA San Pablo, Inc.9

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
13.8% Cash, Due 7/18
   7,000,000    6,894,754    7,105,000 
                   

Gymboree Corporation., The9, 11

Retail

  Senior Secured Loan — Term Loan
5.0% Cash, 1.5% Libor Floor, Due 2/18
   1,421,105    1,390,786    935,563 
                   

Hargray Communications Group, Inc. (HCP Acquisition LLC)9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.3% Cash, 1.0% Libor Floor, Due 6/19
   2,930,662    2,908,645    2,928,611 
                   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-3 Term Loan
7.0% Cash, 1.5% Libor Floor, Due 5/18
   3,368,750    3,343,813    3,385,594 
                   

Harland Clarke Holdings Corp. (fka Clarke American Corp.)9, 11

Media: Advertising, Printing & Publishing

  Senior Secured Loan — Tranche B-4 Term Loan
6.0% Cash, 1.0% Libor Floor, Due 8/19
   1,462,500    1,456,384    1,458,661 

 

 21 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Hoffmaster Group, Inc.9

Forest Products & Paper

  Junior Secured Loan — Initial Term Loan (Second Lien)
10.0% Cash, 1.0% Libor Floor, Due 5/21
  $2,000,000   $1,972,727   $1,999,000 
                   

Hoffmaster Group, Inc.9, 11

Forest Products & Paper

  Senior Secured Loan — Initial Term Loan (First Lien)
5.3% Cash, 1.0% Libor Floor, Due 5/20
   3,980,000    3,944,324    3,943,523 
                   

Hunter Defense Technologies, Inc.9, 11

Aerospace and Defense

  Senior Secured Loan — Term Loan (First Lien)
6.5% Cash, 1.0% Libor Floor, Due 8/19
   2,962,500    2,934,961    2,988,866 
                   

Integra Telecom Holdings, Inc.9, 11

Telecommunications

  Senior Secured Loan — Term B Loan
5.3% Cash, 1.3% Libor Floor, Due 2/19
   2,992,386    2,981,164    2,919,461 
                   

International Architectural Products, Inc.7, 9

Metals & Mining

  Senior Secured Loan — Term Loan
Due 5/15
   247,636    228,563    1,000 
                   

Kellermeyer Bergensons Services, LLC9

Services: Business

  Senior Secured Loan — Initial Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 10/21
   2,000,000    1,980,432    1,990,000 
                   

Key Safety Systems, Inc.9, 11

Automotive

  Senior Secured Loan — Initial Term Loan
4.8% Cash, 1.0% Libor Floor, Due 8/21
   1,496,250    1,489,134    1,488,769 
                   

Kinetic Concepts, Inc.9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Dollar Term E-1 Loan
4.0% Cash, 1.0% Libor Floor, Due 5/18
   2,992,443    2,984,962    2,956,279 
                   

Landslide Holdings, Inc. (Crimson Acquisition Corp.)9, 11

High Tech Industries

  Senior Secured Loan — New Term Loan (First Lien)
5.0% Cash, 1.0% Libor Floor, Due 2/20
   3,456,381    3,464,859    3,451,197 
                   

MB Aerospace ACP Holdings III Corp.9, 11

Aerospace and Defense

  Senior Secured Loan — Dollar Term Loan
5.0% Cash, 1.0% Libor Floor, Due 5/19
   3,940,000    3,910,979    3,939,212 
                   

Media General, Inc.11

Media: Broadcasting & Subscription

  Senior Secured Loan — Term B Loan
4.3% Cash, 1.0% Libor Floor, Due 7/20
   3,000,000    3,003,750    2,972,805 
                   

Medical Specialties Distributors, LLC9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
6.5% Cash, 1.0% Libor Floor, Due 12/19
   3,960,000    3,927,435    3,804,372 

 

 22 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Millennium Health, LLC (fka Millennium Laboratories, LLC)9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Tranche B Term Loan
5.3% Cash, 1.0% Libor Floor, Due 4/21
  $2,992,481   $2,992,481   $2,985,000 
                   

Nielsen & Bainbrige, LLC9

Consumer goods: Durable

  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 8/20
   1,000,000    990,487    963,200 
                   

Nielsen & Bainbrige, LLC9

Consumer goods: Durable

  Junior Secured Loan — Term Loan (Second Lien)
10.3% Cash, 1.0% Libor Floor, Due 8/21
   2,000,000    1,971,249    1,920,000 
                   

Nielsen & Bainbrige, LLC9, 11

Consumer goods: Durable

  Senior Secured Loan — Term Loan (First Lien)
6.0% Cash, 1.0% Libor Floor, Due 8/20
   3,000,000    2,971,460    2,889,600 
                   

Novetta, LLC9

Services: Business

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 10/20
   2,743,125    2,716,093    2,743,125 
                   

Novitex Acquisition, LLC (fka ARSloane Acquisition, LLC)9, 11

Services: Business

  Senior Secured Loan — Tranche B-2 Term Loan (First Lien)
7.5% Cash, 1.3% Libor Floor, Due 7/20
   990,019    980,923    950,418 
                   

Onex Carestream Finance LP9

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
9.5% Cash, 1.0% Libor Floor, Due 12/19
   2,000,000    2,000,000    1,992,920 
                   

Onex Carestream Finance LP9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan (First Lien 2013)
5.0% Cash, 1.0% Libor Floor, Due 6/19
   1,973,333    1,980,022    1,969,219 
                   

Orbitz Worldwide, Inc.11

Hotel, Gaming & Leisure

  Senior Secured Loan — Tranche C Term Loan
4.5% Cash, 1.0% Libor Floor, Due 4/21
   2,992,481    2,992,481    2,961,315 
                   

Otter Products, LLC (OtterBox Holdings, Inc.)9, 11

Consumer goods: Durable

  Senior Secured Loan — Term B Loan
5.8% Cash, 1.0% Libor Floor, Due 6/20
   2,992,481    2,968,458    2,966,297 
                   

Ozburn-Hessey Holding Company LLC9, 11

Transportation: Cargo

  Senior Secured Loan — Term Loan
6.8% Cash, 1.3% Libor Floor, Due 5/19
   3,512,426    3,503,687    3,544,389 

 

 23 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

PGX Holdings, Inc.9, 11

Services: Consumer

  Senior Secured Loan — Initial Term Loan (First Lien)
6.3% Cash, 1.0% Libor Floor, Due 9/20
  $3,975,000    3,936,815    3,917,363 
                   

Post Holdings, Inc.11

Beverage, Food and Tobacco

  Senior Secured Loan — Series A Incremental Term Loan
3.8% Cash, 0.8% Libor Floor, Due 6/21
   2,992,481    2,985,129    2,983,130 
                   

PQ Corporation9, 11

Chemicals, Plastics and Rubber

  Senior Secured Loan — 2014 Term Loan
4.0% Cash, 1.0% Libor Floor, Due 8/17
   2,992,366    2,992,366    2,943,740 
                   

PSC Industrial Holdings Corp.9, 11

Environmental Industries

  Senior Secured Loan — Term Loan (First Lien)
7.0% Cash, 1.0% Libor Floor, Due 12/20
   2,000,000    1,980,119    1,980,000 
                   

Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)9

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/18
   909,069    910,287    909,069 
                   

Puerto Rico Cable Acquisition Company Inc. (D/B/A Choice TV)9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Initial Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/18
   2,727,206    2,717,359    2,727,206 
                   

QoL Meds, LLC9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 7/20
   498,750    496,449    480,296 
                   

Quad-C JH Holdings Inc. (aka Joerns Healthcare)9, 11

Healthcare & Pharmaceuticals

  Senior Secured Loan — Term Loan A
6.0% Cash, 1.0% Libor Floor, Due 5/20
   3,980,000    3,953,083    3,786,174 
                   

Restorix Health, Inc.9

Healthcare & Pharmaceuticals

  Senior Unsecured Loan — Delayed Draw
10.0% Cash, 1.5% PIK, Due 6/18
   2,003,587    2,003,587    2,003,587 
                   

Restorix Health, Inc.9

Healthcare & Pharmaceuticals

  Senior Unsecured Loan — Subordinated Term Loan
10.0% Cash, 1.5% PIK, Due 6/18
   8,063,397    8,063,397    8,063,397 
                   

Reynolds Group Holdings Inc.9, 11

Containers, Packaging and Glass

  Senior Secured Loan — Incremental U.S. Term Loan
4.0% Cash, 1.0% Libor Floor, Due 12/18
   2,992,443    2,992,443    2,946,734 

 

 24 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Roscoe Medical, Inc.9

Healthcare & Pharmaceuticals

  Junior Secured Loan — Term Loan (Second Lien)
11.3% Cash, Due 9/19
  $6,700,000    6,642,367    6,499,000 
                   

Rovi Solutions Corporation / Rovi Guides, Inc.11

High Tech Industries

  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor, Due 7/21
   2,992,481    2,954,531    2,936,387 
                   

Safenet, Inc.9, 11

High Tech Industries

  Senior Secured Loan — Initial Term Loan (First Lien)
6.8% Cash, 1.0% Libor Floor, Due 3/20
   2,977,500    2,951,435    2,977,500 
                   

Sandy Creek Energy Associates, L.P.9, 11

Utilities: Electric

  Senior Secured Loan — Term Loan
5.0% Cash, 1.0% Libor Floor, Due 11/20
   2,844,544    2,832,599    2,794,053 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 3/19
   2,191,289    2,175,642    2,191,289 
                   

SGF Produce Holding Corp.(Frozsun, Inc.)9, 11

Beverage, Food and Tobacco

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 3/19
   3,440,528    3,429,224    3,440,528 
                   

Stafford Logistics, Inc.(dba Custom Ecology, Inc.)9, 11

Environmental Industries

  Senior Secured Loan — Term Loan
6.8% Cash, 1.3% Libor Floor, Due 6/19
   2,861,935    2,840,504    2,858,501 
                   

Sun Products Corporation, The (fka Huish Detergents Inc.)9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Tranche B Term Loan
5.5% Cash, 1.3% Libor Floor, Due 3/20
   3,910,711    3,887,178    3,656,515 

 

 25 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Tank Partners Holdings, LLC9

Energy: Oil & Gas

  Senior Secured Loan — Loan
9.8% Cash, 3.5% PIK, 3.0% Libor Floor, Due 8/19
  $10,385,331    10,212,907    9,866,065 
                   

TPF II Power, LLC (TPF II Covert Midco, LLC)9, 11

Utilities: Electric

  Senior Secured Loan — Term Loan
5.5% Cash, 1.0% Libor Floor, Due 10/21
   3,000,000    3,026,933    3,009,375 
                   

Trimaran Advisors, L.L.C.9, 12

Portfolio Company Loan

  Senior Unsecured Loan — Revolving Credit Facility
9.0% Cash, Due 11/17
   23,000,000    23,000,000    23,000,000 
                   

TRSO I, Inc.9

Energy: Oil & Gas

  Junior Secured Loan — Term Loan (Second Lien)
11.0% Cash, 1.0% Libor Floor, Due 12/17
   1,000,000    988,097    961,300 
                   

TWCC Holding Corp.9

Media: Broadcasting & Subscription

  Junior Secured Loan — Term Loan (Second Lien)
7.0% Cash, 1.0% Libor Floor, Due 6/20
   1,000,000    1,004,005    961,670 
                   

TWCC Holding Corp.9, 11

Media: Broadcasting & Subscription

  Senior Secured Loan — Term Loan
3.5% Cash, 0.8% Libor Floor, Due 2/17
   906,653    910,624    887,060 
                   

Univar Inc.9, 11

Chemicals, Plastics and Rubber

  Senior Secured Loan — Term B Loan
5.0% Cash, 1.5% Libor Floor, Due 6/17
   2,894,577    2,890,893    2,808,536 
                   

USJ-IMECO Holding Company, LLC9, 11

Transportation: Cargo

  Senior Secured Loan — Term Loan
7.0% Cash, 1.0% Libor Floor, Due 4/20
   3,970,000    3,952,343    3,970,000 

 

 26 

 

 

Portfolio Company / Principal Business 

Investment

Interest Rate¹ / Maturity

  Principal   Amortized Cost   Fair Value2 

Vantiv, LLC (fka Fifth Third Processing Solutions, LLC)11

Banking, Finance, Insurance & Real Estate

  Senior Secured Loan — Term B Loan
3.8% Cash, 0.8% Libor Floor, Due 6/21
  $1,994,987    1,999,927    1,978,160 
                   

Verdesian Life Sciences, LLC9

Environmental Industries

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 7/20
   975,012    961,553    938,547 
                   

Verdesian Life Sciences, LLC9, 11

Environmental Industries

  Senior Secured Loan — Initial Term Loan
6.0% Cash, 1.0% Libor Floor, Due 7/20
   3,221,243    3,178,026    3,100,769 
                   

Vestcom International, Inc. (fka Vector Investment Holdings, Inc.)9, 11

Retail

  Senior Secured Loan — Term Loan
5.3% Cash, 1.0% Libor Floor, Due 9/21
   2,866,953    2,843,300    2,838,284 
                   

Weiman Products, LLC9

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 11/18
   2,972,255    2,948,574    2,972,255 
                   

Weiman Products, LLC9, 11

Consumer goods: Non-durable

  Senior Secured Loan — Term Loan
6.3% Cash, 1.0% Libor Floor, Due 11/18
   3,963,007    3,932,167    3,963,007 
                   

WideOpenWest Finance, LLC9

Telecommunications

  Senior Secured Loan — Term B Loan
4.8% Cash, 1.0% Libor Floor, Due 4/19
   2,954,887    2,971,397    2,941,974 
                   

WireCo WorldGroup Inc. 9

Capital Equipment

  Senior Unsecured Bond —
9.0% Cash, Due 5/17
   5,000,000    4,991,504    5,000,000 
                   

WireCo WorldGroup Inc. 9, 11

Capital Equipment

  Senior Unsecured Bond —
9.0% Cash, Due 5/17
   3,000,000    2,994,903    3,000,000 
                   

Total Investment in Debt Securities

(125% of net asset value at fair value)

  $324,808,055   $322,884,934   $320,143,170 

 

 27 

 

 

Equity Securities Portfolio

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership/Shares

   Amortized Cost   Fair Value2 

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Partnership Interests   1.2%  $1,000,000   $1,000 
                   

Aerostructures Holdings L.P.5, 9

Aerospace and Defense

  Series A Preferred Interests   1.2%   250,961    648,764 
                   

Bankruptcy Management Solutions, Inc.5, 9

Services: Business

  Class A Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

Services: Business

  Class B Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

Services: Business

  Class C Warrants   1.7%   -    - 
                   

Bankruptcy Management Solutions, Inc.5, 9

Services: Business

  Common Stock 2013   0.8%   314,325    391,932 
                   

Caribe Media Inc. (fka Caribe Information Investments Incorporated)5, 9

Media: Advertising, Printing & Publishing

  Common   1.3%   359,765    624,304 
                   

DBI Holding LLC5, 9

Services: Business

  Class A Warrants   3.2%   258,940    746,964 
                   

eInstruction Acquisition, LLC5, 9

Services: Business

  Membership Units   1.1%   1,079,617    1,000 
                   

FP WRCA Coinvestment Fund VII, Ltd.3, 5,

Capital Equipment

  Class A Shares   1,500    1,500,000    2,351,329 
                   

Perseus Holding Corp.5, 9

Hotel, Gaming & Leisure

  Common   0.2%   400,000    1,000 

 

 28 

 

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership/Shares

   Amortized Cost   Fair Value2 

Roscoe Investors, LLC5, 9

Healthcare & Pharmaceuticals

  Class A Units   1.6%  $1,000,000   $891,000 
                   

Tank Partners Holdings, LLC5, 9

Energy: Oil & Gas

  Unit   5.8%   980,000    573,750 
                   

Tank Partners Holdings, LLC5, 9

Energy: Oil & Gas

  Warrants   1.3%   185,204    99,752 
                   

TRSO II, Inc.5, 9

Energy: Oil & Gas

  Common Stock   5.4%   1,500,000    1,788,886 
                   

Total Investment in Equity Securities

(3% of net asset value at fair value)

          $8,828,812   $8,119,681 

 

 29 

 

 

CLO Fund Securities

 

CLO Subordinated Securities, Preferred

Shares and Income Notes Investments

 

Portfolio Company  Investment 

Percentage

Ownership

   Amortized Cost   Fair Value2 
Grant Grove CLO, Ltd.3  Subordinated Securities   22.2%  $2,254,638   $469,131 
Katonah III, Ltd.3, 10  Preferred Shares   23.1%   1,015,334    400,000 
Katonah VII CLO Ltd.3, 6  Subordinated Securities   16.4%   3,563,252    1,000 
Katonah VIII CLO Ltd3, 6  Subordinated Securities   10.3%   2,755,267    100,000 
Katonah IX CLO Ltd3, 6  Preferred Shares   6.9%   1,262,496    594,989 
Katonah X CLO Ltd 3, 6  Subordinated Securities   33.3%   8,910,471    4,863,001 
Katonah 2007-I CLO Ltd.3, 6  Preferred Shares   100.0%   23,471,779    25,191,782 
Trimaran CLO IV, Ltd.3, 6  Preferred Shares   19.0%   11,094    900,000 
Trimaran CLO V, Ltd.3, 6  Subordinated Notes   20.8%   1,292,698    1,657,020 
Trimaran CLO VI, Ltd.3, 6  Income Notes   16.2%   1,531,142    1,950,000 
Trimaran CLO VII, Ltd.3, 6  Income Notes   10.5%   1,399,074    2,084,394 
Catamaran CLO 2012-1 Ltd.3, 6  Subordinated Notes   24.9%   7,994,677    5,793,924 
Catamaran CLO 2013- 1 Ltd.3, 6  Subordinated Notes   23.5%   7,492,702    7,874,910 
Catamaran CLO 2014-1 Ltd.3, 6  Subordinated Notes   24.9%   10,473,628    8,867,176 
Dryden 30 Senior Loan Fund3  Subordinated Notes   7.5%   2,263,321    2,506,075 
Catamaran CLO 2014-2 Ltd.3, 6  Subordinated Notes   24.9%   9,862,799    8,761,500 
                    
Total Investment in CLO Subordinated Securities, Preferred Shares and Income Notes       $85,554,372   $72,014,902 

 

 30 

 

 

CLO Rated-Note Investments

 

Portfolio Company  Investment 

Percentage

Ownership

   Amortized Cost   Fair Value2 
Catamaran CLO 2012-1 Ltd.3, 6  Class F Notes
Par Value of $4,500,000
Due 12/23
   42.9%  $3,917,442   $4,160,000 
Catamaran CLO 2014-1 Ltd.3, 6  Class E Notes
Par Value of $1,525,000
Due 4/26
   15.1%   1,417,376    1,340,000 
                    
Total Investment in CLO Rated-Note       $5,334,818   $5,500,000 
                    
Total Investment in CLO Fund Securities
(30% of net asset value at fair value)
       $90,889,190   $77,514,902 

 

Asset Manager Affiliates

 

Portfolio Company / Principal Business  Investment 

Percentage

Ownership

   Cost   Fair Value2 
Asset Manager Affiliates9  Asset Management Company   100.0%  $60,292,677   $72,326,000 
                    
Total Investment in Asset Manager Affiliates
(28% of net asset value at fair value)
       $60,292,677   $72,326,000 

 

Time Deposits and Money Market Account

 

Time Deposit and Money Market Accounts  Investment  Yield   Par / Amortized
Cost
   Fair Value2 
JP Morgan Business Money Market Account8, 9  Money Market Account   0.10%  $249,105   $249,105 
US Bank Money Market Account9  Money Market Account   0.02%   1,353,636    1,353,636 
                   
Total Investment in Time Deposit and Money Market Accounts
(1% of net asset value at fair value)
       $1,602,741   $1,602,741 
                   
Total Investments4
(188% of net asset value at fair value)
       $484,498,354   $479,706,494 

 

See accompanying notes to financial statements.

 

 31 

 

 

1A majority of the variable rate loans in the Company’s investment portfolio bear interest at a rate that may be determined by reference to either LIBOR or an alternate Base Rate (commonly based on the Federal Funds Rate or the Prime Rate), which typically resets semi-annually, quarterly, or monthly at the borrower’s option. The Borrower may also elect to have multiple interest reset periods for each loan. For each such loan, the Company has provided the weighted average annual stated interest rate in effect at December 31, 2014. As noted in the table above, 75% (based on par) of debt securities contain LIBOR floors which range between 0.75% and 3.00%.
2Reflects the fair market value of all investments as of December 31, 2014, as determined by the Company’s Board of Directors.
3Non-U.S. company or principal place of business outside the U.S.
4The aggregate cost of investments for federal income tax purposes is approximately $502 million. The aggregate gross unrealized appreciation is approximately $15.7 million, the aggregate gross unrealized depreciation is approximately $37.7 million, and the net unrealized depreciation is approximately $22 million.
5Non-income producing.
6An affiliate CLO Fund managed by an Asset Manager Affiliate (as such term is defined in the notes to the consolidated financial statements).
7Loan or debt security is on non-accrual status and therefore is considered non-income producing.
8Money market account holding restricted cash and security deposits for employee benefit plans.
9Qualified asset for purposes of section 55(a) of the Investment Company Act of 1940.
10As of December 31, 2014, this CLO Fund Security was not providing a taxable distribution.
11As of December 31, 2014, investment was owned by KCAP Senior Funding I, LLC and has been pledged to secure KCAP Senior Funding I, LLC’s obligations.

 

 32 

 

 

KCAP FINANCIAL, INC.

CONSOLIDATED FINANCIAL HIGHLIGHTS

(unaudited)

 

  

Nine Months Ended

September 30,

 
   2015   2014 
         
Per Share Data:          
Net asset value, at beginning of period  $6.94   $7.51 
Net investment income1   0.51    0.44 
Net realized (losses) from investments1   (0.17)   (0.06)
Net change in unrealized (depreciation) appreciation on investments1   (0.53)   0.33 
Net (decrease) increase in net assets resulting from operations   (0.19)   0.71 
Net decrease in net assets resulting from distributions:          
Distribution of ordinary income   (0.41)   (0.50)
Return of capital   -    - 
Net decrease in net assets resulting from distributions   (0.41)   (0.50)
Net (decrease) in net assets relating to stock-based transactions:          
Stock based compensation   (0.01)   (0.05)
Net decrease in net assets relating to stock-based transactions   (0.01)   (0.05)
           
Net asset value, end of period  $6.33   $7.67 
Total net asset value return2   (2.8)%   8.8%
           
Ratio/Supplemental Data:          
Per share market value at beginning of period  $6.82   $8.07 
Per share market value at end of period  $4.51   $8.31 
Total market return3   (27.8)%   9.2%
Shares outstanding at end of period   37,052,575    33,753,672 
Net assets at end of period  $234,599,882   $259,027,074 
Portfolio turnover rate4   24.0%   37.4%
Average par debt outstanding  $227,250,480   $195,658,000 
Asset coverage ratio   205%   231%
Ratio of net investment income to average net assets5   9.9%   7.6%
Ratio of total expenses to average net assets5   8.6%   8.4%
Ratio of interest expense to average net assets5   4.7%   4.6%
Ratio of non-interest expenses to average net assets5   3.9%   3.8%

 

 

1Based on weighted average number of common shares outstanding-basic for the period.
2Total net asset value return (not annualized) equals the change in the net asset value per share over the beginning of period net asset value per share plus distributions (including any return of capital), divided by the beginning net asset value per share.
3Total market return equals the change in the ending market price over the beginning of period price per share plus distributions (including any return of capital), divided by the beginning price.
4Not annualized. Portfolio turnover rate equals the year-to-date sales and paydowns over the average of the invested assets at fair value.
5Annualized

 

See accompanying notes to consolidated financial statements.

 

 33 

 

 

KCAP FINANCIAL, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. ORGANIZATION

 

KCAP Financial, Inc. (“KCAP” or the “Company”) is an internally managed, non-diversified closed-end investment company that is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). The Company was formed as a Delaware limited liability company on August 8, 2006 and, prior to the issuance of shares of the Company’s common stock in its initial public offering (“IPO”), converted to a corporation incorporated in Delaware on December 11, 2006. Prior to its IPO, the Company did not have material operations. The Company’s IPO of 14,462,000 shares of common stock raised net proceeds of approximately $200 million. Prior to the IPO, the Company issued 3,484,333 shares to affiliates of Kohlberg & Co., L.L.C., a leading middle market private equity firm, in exchange for the contribution to the Company of their ownership interests in Katonah Debt Advisors, L.L.C., and related affiliates controlled by the Company (collectively, “Katonah Debt Advisors”) and in securities issued by collateralized loan obligation funds (“CLO Funds”) managed by Katonah Debt Advisors and two other asset managers.

 

On April 28, 2008, the Company completed a rights offering that resulted in the issuance of 3.1 million shares of our common stock, and net proceeds of $27 million.

 

On February 29, 2012, the Company purchased Trimaran Advisors, L.L.C. (“Trimaran Advisors”), a CLO manager similar to Katonah Debt Advisors with assets under management of approximately $1.5 billion, for total consideration of $13.0 million in cash and 3,600,000 shares of the Company’s common stock. Contemporaneously with the acquisition of Trimaran Advisors, the Company acquired from Trimaran Advisors equity interests in certain CLO Funds managed by Trimaran Advisors for an aggregate purchase price of $12.0 million in cash.

 

On February 14, 2013, the Company completed a public offering of 5,232,500 shares of common stock, which included the underwriters’ full exercise of their option to purchase up to 682,500 shares of common stock, at a price of $9.75 per share, raising approximately $51.0 million in gross proceeds. In conjunction with this offering, the Company also sold 200,000 shares of common stock to a member of its Board of Directors, at a price of $9.31 per share, raising approximately $1.9 million in gross proceeds.

 

On October 6, 2014, the Company completed a follow-on public offering of 3.0 million shares of its common stock at a price of $8.02 per share. The offering raised net proceeds of approximately $23.8 million, after deducting underwriting discounts and offering expenses.

 

As of September 30, 2015, Katonah Debt Advisors and Trimaran Advisors, as well as affiliated management companies Katonah 2007-1 Management, L.L.C., Katonah X Management, L.L.C. and Trimaran Advisors Management, L.L.C. (collectively the “Asset Manager Affiliates”), had approximately $2.7 billion of par value assets under management. The Asset Manager Affiliates are each managed independently from KCAP by a separate management team (however, certain of the Company’s executive officers also act in similar capacities for one or both of the Asset Manager Affiliates). The Asset Manager Affiliates provide investment management services to CLO Funds, making day-to-day investment decisions concerning the assets of the CLO Funds. The Asset Manager Affiliates do not have an investment interest in the CLO Funds they manage; however, KCAP holds investments in a portion of the securities issued by the CLO Funds managed by the Asset Manager Affiliates.

 

The Company has three principal areas of investment:

 

First, the Company originates, structures, and invests in senior secured term loans and mezzanine debt primarily in privately-held middle market companies (the “Debt Securities Portfolio”). In addition, from time to time the Company may invest in the equity securities of privately held middle market companies.

 

 34 

 

 

Second, the Company has invested in the Asset Manager Affiliates, which manage CLO Funds.

 

Third, the Company invests in debt and subordinated securities issued by CLOs (“CLO Fund Securities”). These CLO Fund Securities are primarily managed by our Asset Manager Affiliates, but from time-to-time the Company makes investments in CLO Fund Securities managed by other asset managers. The CLO Funds typically invest in broadly syndicated loans, high-yield bonds and other credit instruments.

 

The Company may also invest in other investments such as loans to larger, publicly-traded companies, high-yield bonds and distressed debt securities. The Company may also receive warrants or options to purchase common stock in connection with its debt investments.

 

The Company has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a RIC, the Company must, among other things, meet certain source-of-income, and asset diversification and annual distribution requirements. As a RIC, the Company generally will not have to pay corporate-level U.S. federal income taxes on any income that it distributes in a timely manner to its stockholders.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required for annual consolidated financial statements. The unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto in the Company’s Form 10-K for the year ended December 31, 2014, as filed with the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”).

 

The consolidated financial statements reflect all adjustments, both normal and recurring which, in the opinion of management, are necessary for the fair presentation of the Company’s results of operations and financial condition for the periods presented. Furthermore, the preparation of the consolidated financial statements requires the Company to make significant estimates and assumptions including with respect to the fair value of investments that do not have a readily available market value. Actual results could differ from those estimates, and the differences could be material. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for the full year. Certain prior period amounts have been reclassified to conform to the current year presentation.

 

The Company consolidates the financial statements of its wholly-owned special purpose financing subsidiaries KCAP Funding, Kolhberg Capital Funding LLC I, KCAP Senior Funding I, LLC and KCAP Senior Funding I Holdings, LLC in its consolidated financial statements as they are operated solely for investment activities of the Company. The creditors of KCAP Senior Funding I, LLC have received security interests in the assets owned by KCAP Senior Funding I, LLC and such assets are not intended to be available to the creditors of KCAP Financial, Inc., or any other affiliate.

 

In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company does not consolidate portfolio company investments, including those in which it has a controlling interest (e.g., the Asset Manager Affiliates), unless the portfolio company is another investment company.

 

The Asset Manager Affiliates are subject to Accounting Standards Codification Topic 810, “Consolidation” and although the Company cannot consolidate the financial statements of portfolio company investments, this guidance impacts the required disclosures relating to the Asset Manager Affiliates, as it requires the Asset Manager Affiliates to consolidate the financial statements of managed CLO Funds. As a result of the consolidation of the financial statements of the CLOs into the financial statements of the Asset Manager Affiliates, the Asset Manager Affiliates qualify as a “significant subsidiary” and, as a result, the Company is required to include additional financial information regarding the Asset Manager Affiliates in its filings with the SEC. This additional financial information regarding the Asset Manager Affiliates does not directly impact the financial position or results of operations of the Company.

 

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In addition, in accordance with Rule 3-09 of Regulation S-X promulgated by the SEC, additional financial information with respect to one of the CLO Funds in which the Company has an investment, Katonah 2007-I CLO Ltd. (“Katonah 2007-I CLO”), is required to be included in the Company’s SEC filings. The additional financial information regarding the Asset Manager Affiliates and Katonah 2007-I CLO (pursuant to Rule 3-09) is set forth in Note 5 to these consolidated financial statements.

 

Stockholder distributions on the Statement of Changes in Net Assets reflect the estimated allocation, between net investment income and return of capital, of distributions made during the reporting period, excluding the distribution declared in a quarter with a record date occurring after the quarter-end. The determination of the tax character of distributions is made on an annual (full calendar-year) basis at the end of the year based upon our taxable income for the full year and the distributions paid during the full year. Therefore, an estimate of tax attributes made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

It is the Company’s primary investment objective to generate current income and capital appreciation by lending directly to privately-held middle market companies. During the nine months ended September 30, 2015, the Company provided $69 million to portfolio companies to support their growth objectives. None of this support was contractually obligated. See also Note 8 – Commitments and Contingencies. As of September 30, 2015, the Company holds loans it has made to 80 investee companies with aggregate principal amounts of $277 million. The details of such loans have been disclosed on the consolidated schedule of investments as well as in Note 4 – Investments. In addition to providing loans to investee companies, from time to time the Company assists investee companies in securing financing from other sources by introducing such investee companies to sponsors or by leading a syndicate of lenders to provide the investee companies with financing. During the nine-month-period ended September 30, 2015, the Company did not make any such introductions or lead any syndicates.

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014- 15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014- 15 is effective for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. We do not expect to adopt ASU 2014-15 early, and we do not believe the standard will have a material impact on our financial statements, when adopted.

 

In February 2015, the FASB issued Accounting Standards Update 2015-2, which updated consolidation standards under ASC Topic 810, “Consolidation”. Under this update, a new consolidation analysis is required for variable interest entities (“VIEs”) and will limit the circumstances in which investment managers and similar entities are required to consolidate the entities that they manage. The FASB decided to eliminate some of the criteria under which their fees are considered a variable interest and limit the circumstances in which variable interests in a VIE held by related parties of a reporting enterprise require the reporting enterprise to consolidate the VIE. The guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. We do not expect the adoption of ASU 2015-2 to have a material impact to the Company’s financial statements.

 

In April 2015, the FASB issued Accounting Standards Update 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. Under this guidance, debt issuance costs related to a recognized debt liability are to be presented as a direct deduction from the debt liability rather than as an asset on the balance sheet, consistent with debt discounts. For public business entities, the final guidance will be effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company intends to adopt the new guidance beginning the first quarter of 2016.

 

Investments

 

Investment transactions are recorded on the applicable trade date. Realized gains or losses are determined using the specific identification method.

 

Valuation of Portfolio Investments. The Company’s Board of Directors is ultimately and solely responsible for making a good faith determination of the fair value of portfolio investments on a quarterly basis. Debt and equity securities for which market quotations are readily available are generally valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available are valued by the Board of Directors based on detailed analyses prepared by management, the Valuation Committee of the Board of Directors, and, in certain circumstances, third parties with valuation expertise. Valuations are conducted by management on 100% of the investment portfolio at the end of each quarter. The Company follows the provisions of ASC 820: Fair Value Measurements and Disclosures (“ASC 820: Fair Value”). This standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard as noted below.

 

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The FASB issued guidance that clarified and required disclosures about fair value measurements. These include requirements to disclose the amounts and reasons for significant transfers between Level I and Level II, as well as significant transfers in and out of Level III of the fair value hierarchy (see Note 4 – “Investments – Fair Value Measurements” for further information relating to Level I, Level II and Level III). The guidance also required that purchases, sales, issuances and settlements be presented gross in the Level III reconciliation.

 

ASC 820: Fair Value requires the disclosure in interim and annual periods of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period.

 

The Company utilizes an independent valuation firm to provide an annual third-party review of the Company’s CLO fair value model relative to its functionality, model inputs and calculations as a reasonable method to determine CLO fair values, in the absence of Level I or Level II trading activity or observable market inputs. The independent valuation firm’s 2014 annual review concluded that the Company’s CLO model appropriately factors in all the necessary inputs required to build a CLO equity cash flow model for fair value purposes and that the inputs were being employed correctly.

 

The Company utilizes an independent valuation firm to provide third party valuation consulting services. Each quarter the independent valuation firm will perform third party valuations of the Company’s investments in material illiquid securities such that they are reviewed at least once during a trailing 12-month period. These third party valuation estimates are considered as one of the relevant data points in the Company’s determination of fair value. The Company intends to continue to engage an independent valuation firm in the future to provide certain valuation services, including the review of certain portfolio assets, as part of the quarterly and annual year-end valuation process.

 

The Board of Directors may consider other methods of valuation than those set forth below to determine the fair value of Level III investments as appropriate in conformity with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ materially from the values that would have been used had a readily available market existed for such investments. Further, such investments may be generally subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities. In addition, changes in the market environment and other events may occur over the life of the investments that may cause the value realized on such investments to be different from the currently assigned valuations.

 

The majority of the Company’s investment portfolio is composed of debt and equity securities with unique contract terms and conditions and/or complexity that requires a valuation of each individual investment that considers multiple levels of market and asset specific inputs, which may include historical and forecasted financial and operational performance of the individual investment, projected cash flows, market multiples, comparable market transactions, the priority of the security compared with those of other securities for such issuers, credit risk, interest rates, and independent valuations and reviews.

 

Debt Securities. To the extent that the Company’s investments are exchange traded and are priced or have sufficient price indications from normal course trading at or around the valuation date (financial reporting date), such pricing will determine fair value. Valuations from third party pricing services may be used as an indication of fair value, depending on the volume and reliability of the valuation, sufficient and reasonable correlation of bid and ask quotes, and, most importantly, the level of actual trading activity. However, if the Company has been unable to identify directly comparable market indices or other market guidance that correlate directly to the types of investments the Company owns, the Company will determine fair value using alternative methodologies such as available market data, as adjusted, to reflect the types of assets the Company owns, their structure, qualitative and credit attributes and other asset-specific characteristics.

 

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The Company derives fair value for its illiquid investments that do not have indicative fair values based upon active trades primarily by using a present value technique that discounts the estimated contractual cash flows for the subject assets with discount rates imputed by broad market indices, bond spreads and yields for comparable issuers relative to the subject assets (the “Income Approach”). The Company also considers, among other things, recent loan amendments or other activity specific to the subject asset. Discount rates applied to estimated contractual cash flows for an underlying asset vary by specific investment, industry, priority and nature of the debt security (such as the seniority or security interest of the debt security) and are assessed relative to two indices, a leveraged loan index and a high-yield bond index, at the valuation date. The Company has identified these two indices as benchmarks for broad market information related to its loan and debt securities. Because the Company has not identified any market index that directly correlates to the loan and debt securities held by the Company and therefore uses these benchmark indices, these market indices may require significant adjustment to better correlate such market data for the calculation of fair value of the investment under the Income Approach. Such adjustments require judgment and may be material to the calculation of fair value. Further adjustments to the discount rate may be applied to reflect other market conditions or the perceived credit risk of the borrower. When broad market indices are used as part of the valuation methodology, their use is subject to adjustment for many factors, including priority, collateral used as security, structure, performance and other quantitative and qualitative attributes of the asset being valued. The resulting present value determination is then weighted along with any quotes from observable transactions and broker/pricing quotes. If such quotes are indicative of actual transactions with reasonable trading volume at or near the valuation date that are not liquidation or distressed sales, relatively more reliance will be put on such quotes to determine fair value. If such quotes are not indicative of market transactions or are insufficient as to volume, reliability, consistency or other relevant factors, such quotes will be compared with other fair value indications and given relatively less weight based on their relevancy. Other significant assumptions, such as coupon and maturity, are asset-specific and are noted for each investment in the Schedules of Investments.

 

Equity Securities. The Company’s equity securities in portfolio companies for which there is no liquid public market are carried at fair value based on the Enterprise Value of the portfolio company, which is determined using various factors, including EBITDA (earnings before interest, taxes, depreciation and amortization) and discounted cash flows from operations, less capital expenditures and other pertinent factors, such as recent offers to purchase a portfolio company’s securities or other liquidation events. The determined fair values are generally discounted to account for restrictions on resale and minority ownership positions. In the event market quotations are readily available for the Company’s equity securities in public companies, those investments may be valued using the Market Approach. In cases where the Company receives warrants to purchase equity securities, a market standard Black-Scholes model is utilized.

 

The significant inputs used to determine the fair value of equity securities include prices, EBITDA and cash flows after capital expenditures for similar peer comparables and the investment entity itself. Equity securities are classified as Level III, when there is limited activity or less transparency around inputs to the valuation given the lack of information related to such equity investments held in nonpublic companies. Significant assumptions observed for comparable companies are applied to relevant financial data for the specific investment. Such assumptions, such as model discount rates or price/earnings multiples, vary by the specific investment, equity position and industry and incorporate adjustments for risk premiums, liquidity and company specific attributes. Such adjustments require judgment and may be material to the calculation of fair value.

 

Asset Manager Affiliates. The Company’s investments in its wholly-owned asset management companies, the Asset Manager Affiliates, are carried at fair value, which is primarily determined utilizing the Discounted Cash Flow approach, which incorporates different levels of discount rates depending on the hierarchy of fees earned (including the likelihood of realization of senior, subordinate and incentive fees) and prospective modeled performance. Such valuation takes into consideration an analysis of comparable asset management companies and a percentage of assets under management. The Asset Manager Affiliates are classified as a Level III investment. Any change in value from period to period is recognized as net change in unrealized appreciation or depreciation.

 

CLO Fund Securities. The Company typically makes a minority investment in the most junior class of securities of CLO Funds raised and managed by the Asset Manager Affiliates and may selectively invest in securities issued by funds managed by other asset management companies. The investments held by CLO Funds generally relate to non-investment grade credit instruments issued by corporations.

 

The Company’s investments in CLO Fund securities are carried at fair value, which is based either on (i) the present value of the net expected cash inflows for interest income and principal repayments from underlying assets and cash outflows for interest expense, debt pay-down and other fund costs for the CLO Funds that are approaching or past the end of their reinvestment period and therefore are selling assets and/or using principal repayments to pay down CLO Fund debt (or will begin to do so shortly), and for which there continue to be net cash distributions to the class of securities owned by the Company, a Discounted Cash Flow approach, (ii) a discounted cash flow model that utilizes prepayment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow and comparable yields for similar securities or preferred shares to those in which the Company has invested, or (iii) indicative prices provided by the underwriters or brokers who arrange CLO Funds, a Market Approach. The Company recognizes unrealized appreciation or depreciation on the Company’s investments in CLO Fund securities as comparable yields in the market change and/or based on changes in net asset values or estimated cash flows resulting from changes in prepayment or loss assumptions in the underlying collateral pool. As each investment in CLO Fund securities ages, the expected amount of losses and the expected timing of recognition of such losses in the underlying collateral pool are updated and the revised cash flows are used in determining the fair value of the CLO Fund investment. The Company determines the fair value of its investments in CLO Fund securities on a security-by-security basis.

 

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Due to the individual attributes of each CLO Fund security, they are classified as a Level III investment unless specific trading activity can be identified at or near the valuation date. When available, observable market information will be identified, evaluated and weighted accordingly in the application of such data to the present value models and fair value determination. Significant assumptions to the present value calculations include default rates, recovery rates, prepayment rates, investment/reinvestment rates and spreads and the discount rate by which to value the resulting underlying cash flows. Such assumptions can vary significantly, depending on market data sources which often vary in depth and level of analysis, understanding of the CLO market, detailed or broad characterization of the CLO market and the application of such data to an appropriate framework for analysis. The application of data points are based on the specific attributes of each individual CLO Fund security’s underlying assets, historic, current and prospective performance, vintage, and other quantitative and qualitative factors that would be evaluated by market participants. The Company evaluates the source of market data for reliability as an indicative market input, consistency amongst other inputs and results and also the context in which such data is presented.

 

For rated note tranches of CLO Fund securities (those above the junior class) without transactions to support a fair value for the specific CLO Fund and tranche, fair value is based on discounting estimated bond payments at current market yields, which may reflect the adjusted yield on the leveraged loan index for similarly rated tranches, as well as prices for similar tranches for other CLO Funds and also other factors such as indicative prices provided by underwriters or brokers who arrange CLO Funds, and the default and recovery rates of underlying assets in the CLO Fund, as may be applicable. Such model assumptions may vary and incorporate adjustments for risk premiums and CLO Fund specific attributes.

 

Cash. The Company defines cash as demand deposits. The Company places its cash with financial institutions and, at times, cash held in checking accounts may exceed the Federal Deposit Insurance Corporation insured limit.

 

Restricted Cash. Restricted cash and cash equivalents (e.g., money market funds) consists of cash held for reinvestment, quarterly interest and principal distribution (if any) to holders of notes issued by KCAP Senior Funding I, LLC.

 

Time Deposits and Money Market Accounts. Time deposits primarily represent investments of cash held in demand deposit accounts. Money market accounts primarily represent short term interest-bearing deposit accounts. Also includes restricted cash held under employee benefit plans.

 

Interest Income. Interest income, including the amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. The Company generally places a loan or security on non-accrual status and ceases recognizing cash interest income on such loan or security when a loan or security becomes 90 days or more past due or if the Company otherwise does not expect the debtor to be able to service its debt obligations. Non-accrual loans remain in such status until the borrower has demonstrated the ability and intent to pay contractual amounts due or such loans become current. As of September 30, 2015, one issuer representing less than 1% of the Company’s total investments at fair value was on a non-accrual status.

 

Distributions from Asset Manager Affiliates. The Company records distributions from our Asset Manager Affiliates on the declaration date, which represents the ex-dividend date. Distributions in excess of tax-basis earnings and profits of the distributing affiliate company are recognized as tax-basis return of capital. For interim periods, the Company estimates the tax attributes of any distributions as being either tax-basis earnings and profits (i.e., dividend income) or return of capital (i.e., adjustment to the Company’s cost basis in the Asset Manager Affiliates). The final determination of the tax attributes of distributions from our Asset Manager Affiliates is made on an annual (full calendar year) basis at the end of the year based upon taxable income and distributions for the full-year. Therefore, any estimate of tax attributes of distributions made on a quarterly basis may not be representative of the actual tax attributes of distributions for a full year.

 

Investment Income on CLO Fund Securities. The Company generates investment income from its investments in the most junior class of securities of CLO Funds (typically preferred shares or subordinated securities) managed by the Asset Manager Affiliates and selective investments in securities issued by funds managed by other asset management companies. The Company’s CLO Fund junior class securities are subordinated to senior note holders who typically receive a stated interest rate of return based on a floating rate index, such as the London Interbank Offered Rate (“LIBOR”) on their investment. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior note holders and less fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares.

 

GAAP-basis investment income on CLO equity investments is recorded using the effective interest method in accordance with the provisions of ASC 325-40, based on the anticipated yield and the estimated cash flows over the projected life of the investment. Yields are revised when there are changes in actual or estimated projected future cash flows due to changes in prepayments and/or re-investments, credit losses or asset pricing. Changes in estimated yield are recognized as an adjustment to the estimated yield prospectively over the remaining life of the investment from the date the estimated yield was changed. Accordingly, investment income recognized on CLO equity securities in the GAAP statement of operations differs from both the tax–basis investment income and from the cash distributions actually received by the Company during the period.

 

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For non-junior class CLO Fund securities, such as the Company’s investment in the Class E Notes of the Catamaran 2014-1 CLO, interest is earned at a fixed spread relative to the LIBOR index.

 

Capital Structuring Service Fees. The Company may earn ancillary structuring and other fees related to the origination, investment, disposition or liquidation of debt and investment securities. Generally, the Company will capitalize loan origination fees, then amortize these fees into interest income over the term of the loan using the effective interest rate method, recognize prepayment and liquidation fees upon receipt and equity structuring fees as earned, which generally occurs when an investment transaction closes.

 

Debt Issuance Costs. Debt issuance costs represent fees and other direct costs incurred in connection with the Company’s borrowings. These amounts are capitalized and amortized using the effective interest method over the contractual term of the borrowing.

 

Extinguishment of debt. The Company must derecognize a liability if and only if it has been extinguished through delivery of cash, delivery of other financial assets, delivery of goods or services, or reacquisition by the Company of its outstanding debt securities whether the securities are cancelled or held. If the debt contains a cash conversion option, the Company must allocate the consideration transferred and transaction costs incurred to the extinguishment of the liability component and the reacquisition of the equity component and recognize a gain or loss in the statement of operations.

 

Expenses. The Company is internally managed and expenses costs, as incurred, with regard to the running of its operations. Primary operating expenses include employee salaries and benefits, the costs of identifying, evaluating, negotiating, closing, monitoring and servicing the Company’s investments and related overhead charges and expenses, including rental expense, and any interest expense incurred in connection with borrowings. The Company and the Asset Manager Affiliates share office space and certain other operating expenses. The Company has entered into an Overhead Allocation Agreement with the Asset Manager Affiliates which provides for the sharing of such expenses based on an allocation of office lease costs and the ratable usage of other shared resources.

 

Shareholder Distributions. Distributions to common stockholders are recorded on the ex-dividend date. The amount of distributions, if any, is determined by the Board of Directors each quarter.

 

The Company has adopted a dividend reinvestment plan that provides for reinvestment of its distributions on behalf of its stockholders, unless a stockholder “opts out” of the plan to receive cash in lieu of having their cash distributions automatically reinvested in additional shares of the Company’s common stock.

 

3. EARNINGS PER SHARE

 

In accordance with the provisions of ASC 260,“Earnings per Share” (“ASC 260”), basic earnings per share is computed by dividing earnings available to common shareholders by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis.

 

The following information sets forth the computation of basic and diluted net (decrease) increase in stockholders’ equity per share for the three and nine months ended September 30, 2015 and 2014 (unaudited):

 

   (unaudited)   (unaudited) 
         
   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
                 
Net (decrease) increase in net assets resulting from operations  $(16,050,865)  $8,236,473   $(7,145,869)  $23,930,726 
Net decrease (increase) in net assets allocated to unvested share awards   303,869    (151,517)   125,136    (288,671)
Interest on Convertible Notes       1,072,050        3,216,150 
Amortization of Capitalized Costs on Convertible Notes       106,460        313,327 
                      
Net (decrease) increase in net assets available to common stockholders  $(15,746,996)  $9,263,466   $(7,020,733)  $27,171,532 
Weighted average number of common shares outstanding for basic shares computation   37,046,906    33,746,159    36,923,212    33,497,934 
Effect of dilutive securities – stock options       12,058        11,949 
Effect of dilutive Convertible Notes       6,367,443        6,367,443 
                      
Weighted average number of common and common stock equivalent shares outstanding for diluted shares computation   37,046,906    40,125,660    36,923,212    39,877,326 
                      
Net (decrease) increase in net assets per basic common shares:                    
Net (decrease) increase in net assets from operations  $(0.43)  $0.24   $(0.19)  $0.71 
Net (decrease) increase in net assets per diluted shares:                    
Net (decrease) increase in net assets from operations  $(0.43)  $0.23   $(0.19)  $0.68 

 

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Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Grants of restricted stock awards to the Company’s employees and directors are considered participating securities when there are earnings in the period and the earnings per share calculations include outstanding unvested restricted stock awards in the basic weighted average shares outstanding calculation.

 

There were 50,000 options to purchase shares of common stock outstanding for the three months ended September 30, 2015 and 2014. For the nine months ended September 30, 2015, the company purchased 36,348 shares of common stock in connection with the vesting of employee’s restricted stock, such shares are treated as treasury shares and reduce the weighted average shares outstanding in the computation of earnings per share.

 

The Company’s Convertible Notes are included in the computation of the diluted net increase or decrease in net assets resulting from operations per share by application of the “if-converted method.” Under the if-converted method, interest charges applicable to the convertible notes for the period are added to reported net increase or decrease in net assets resulting from operations and the full amount of shares (pro-rata if not outstanding for the full period) that would be issued are added to weighted average basic shares. Convertible notes are considered anti-dilutive only when its interest per share upon conversion exceeds the basic net increase or decrease in net assets resulting from operations per share. For the three months and nine months ended September 30, 2015, the effects of the convertible notes are anti-dilutive.

 

The if-converted method of computing the dilutive effects on convertible notes assumes a conversion even if the contracted conversion price exceeds the market value of the shares. As of September 30, 2015, the current conversion rate of the Convertible Notes is approximately 134.51 shares of our common stock per $1,000 principal amount of the Convertible Notes, equivalent to a conversion price of approximately $7.43 per share of the Company’s common stock. Upon conversion, the Company may issue the full amount of common stock and retire the full amount of debt outstanding or, at its option, settle the conversion in cash.

 

4. INVESTMENTS

 

The following table shows the Company’s portfolio by security type at September 30, 2015 and December 31, 2014:

 

   September 30, 2015 (unaudited)   December 31, 2014 
Security Type  Cost   Fair Value      Cost   Fair Value    
Money Market Accounts³  $3,345,723   $3,345,723    1   $1,602,741   $1,602,741    1 
Senior Secured Loan   211,441,566    204,189,144    86    220,965,922    218,329,860    86 
Junior Secured Loan   41,204,786    39,795,980    17    38,664,199    38,569,006    15 
Senior Unsecured Loan   23,000,000    23,000,000    10    33,066,984    33,066,984    13 
First Lien Bond   2,976,651    2,317,500    1    2,962,507    2,580,000    1 
Senior Subordinated Bond   4,420,467    4,221,543    2    4,295,544    4,240,301    2 
Senior Unsecured Bond   11,698,340    10,597,995    5    11,208,178    11,386,218    4 
Senior Secured Bond   1,511,590    1,481,250    1    1,515,584    1,552,500    1 
CLO Fund Securities   86,288,448    66,720,782    28    90,889,190    77,514,901    30 
Equity Securities   8,514,487    6,936,653    3    8,828,812    8,119,681    3 
Preferred Securities   10,359,873    10,681,029    5    10,206,016    10,418,302    4 
Asset Manager Affiliates²   57,189,159    64,121,000    27    60,292,677    72,326,000    28 
                               
Total  $461,951,090   $437,408,599    186%  $484,498,354   $479,706,494    188%

 

 

¹Represents percentage of Net Asset Value.
²Represents the equity investment in the Asset Manager Affiliates.
³Includes restricted cash held under employee benefit plans.

 

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The industry concentrations based on the fair value of the Company’s investment portfolio as of September 30, 2015 and December 31, 2014, were as follows:

 

   September 30, 2015 (unaudited)   December 31, 2014 
Industry Classification  Cost   Fair Value   %1   Cost   Fair Value   %1 
Aerospace and Defense  $9,648,347   $9,069,264    4.0%  $10,059,487   $9,533,092    4%
Asset Management Company2   57,189,159    64,121,000    26.0    60,292,677    72,326,000    28 
Related Party Loan   23,000,000    23,000,000    10.0    23,000,000    23,000,000    9 
Automotive   9,932,977    9,876,215    4.0    8,362,956    8,312,548    3 
Banking, Finance, Insurance & Real Estate   6,302,517    6,165,678    3.0    7,660,721    7,639,366    3 
Beverage, Food and Tobacco   24,439,168    24,119,358    10.0    17,974,974    17,883,421    7 
Capital Equipment   9,509,929    8,437,999    4.0    9,486,407    10,351,329    4 
Chemicals, Plastics and Rubber   3,503,317    3,463,669    1.0    6,348,226    6,210,253    2 
CLO Fund Securities   86,288,447    66,720,782    28.0    90,889,190    77,514,901    31 
Construction & Building   1,980,681    1,982,831    1.0    -    -    - 
Consumer goods: Durable   14,163,260    13,174,865    6.0    13,876,482    13,301,207    5 
Consumer goods: Non-durable   20,393,549    20,156,836    9.0    13,535,975    13,314,952    5 
Containers, Packaging and Glass   2,916,649    2,921,622    1.0    2,992,443    2,946,734    1 
Energy: Oil & Gas   14,176,843    11,509,141    5.0    13,866,208    13,289,753    5 
Environmental Industries   12,784,029    12,474,510    5.0    12,942,593    12,911,017    5 
Forest Products & Paper   5,895,474    5,944,907    3.0    5,917,051    5,942,523    2 
Healthcare & Pharmaceuticals   50,028,563    46,982,976    20.0    66,186,412    65,720,782    27 
High Tech Industries   11,802,469    11,652,643    5.0    14,457,495    14,419,110    6 
Hotel, Gaming & Leisure   400,000    1,000    -    3,392,481    2,962,315    1 
Media: Advertising, Printing & Publishing   11,203,758    10,574,807    5.0    11,318,815    11,396,027    4 
Media: Broadcasting & Subscription   7,459,621    7,399,614    3.0    14,477,078    14,409,401    6 
Metals & Mining   228,563    1,000    -    228,563    1,000    - 
Retail   4,390,431    3,870,664    2.0    4,234,086    3,773,847    1 
Services: Business   20,706,513    20,513,356    9.0    16,550,255    16,066,421    6 
Services: Consumer   6,519,760    6,438,715    3.0    6,798,372    6,752,521    3 
Telecommunications   13,797,355    13,614,636    6.0    22,030,434    21,865,864    9 
Time Deposit and Money Market Accounts3   3,345,723    3,345,724    1.0    1,602,741    1,602,741    1 
Transportation: Cargo   21,755,034    22,040,544    9.0    20,156,700    20,455,941    8 
Transportation: Consumer   2,487,820    2,487,500    1.0    -    -    - 
Utilities: Electric   5,701,134    5,346,743    2.0    5,859,532    5,803,428    2 
                               
Total  $461,951,090   $437,408,599    186%  $484,498,354   $479,706,494    188%

 

 

1Calculated as a percentage of Net Asset Value.
2Represents the equity investment in the Asset Manager Affiliates.
3Includes restricted cash held under employee benefit plans.

 

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The Company may invest up to 30% of the investment portfolio in “non-qualifying” opportunistic investments in debt and equity securities of CLO Funds, distressed debt or debt and equity securities of public companies. The Company expects that these public companies generally will have debt that is non-investment grade. Within this 30% of the portfolio, the Company also may invest in debt of middle market companies located outside of the United States.

 

At September 30, 2015 and December 31, 2014, the total amount of non-qualifying assets was approximately 17% and 21%, respectively. The majority of non-qualifying assets were foreign investments which were approximately 15% and 16% of the Company’s total assets, respectively (including the Company’s investments in CLO Funds, which are typically domiciled outside the U.S. and represented approximately 15% and 16% of its total assets on such dates, respectively).

 

The following tables detail the ten largest portfolio investments (at fair value) as of September 30, 2015 and December 31, 2014:

 

   September 30, 2015 (unaudited) 
Investment  Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates  $57,189,159   $64,121,000    15%
Katonah 2007-I CLO Ltd.   23,975,870    23,233,837    5 
Trimaran Credit Facility   23,000,000    23,000,000    5 
Crowley Holdings Preferred, LLC   10,359,873    10,681,029    2 
Catamaran CLO 2015-1 Ltd.   12,439,015    9,442,080    2 
Tank Partners Holdings, LLC   10,520,547    8,939,640    2 
Catamaran CLO 2014-1 Ltd.   9,264,284    7,251,390    2 
Catamaran CLO 2014-2 Ltd.   8,374,214    6,932,673    2 
Grupo HIMA San Pablo, Inc.   6,916,737    6,650,000    2 
Catamaran CLO 2013- 1 Ltd.   6,559,985    6,561,900    1 
                
Total  $168,599,684   $166,813,549    38%

 

   December 31, 2014 
Investment  Cost/Amortized Cost   Fair Value   % of FMV 
Asset Manager Affiliates  $60,292,677   $72,326,000    15%
Katonah 2007-I CLO Ltd.   23,471,779    25,191,782    5 
Trimaran Credit Facility   23,000,000    23,000,000    5 
Crowley Holdings Preferred, LLC   10,206,016    10,418,302    2 
Tank Partners Holdings, LLC   10,212,907    9,866,065    2 
Catamaran CLO 2014-1 Ltd.   10,473,628    8,867,176    2 
Catamaran CLO 2014-2 Ltd.   9,862,799    8,761,500    2 
Restorix Health, Inc.   8,063,397    8,063,397    2 
Catamaran CLO 2013- 1 Ltd.   7,492,702    7,874,910    2 
Grupo HIMA San Pablo, Inc.   6,894,754    7,105,000    1 
                
Total  $169,970,659   $181,474,132    38%

 

Excluding the Asset Manager Affiliates and CLO Fund securities, the Company’s ten largest portfolio companies represented approximately 18% and 17% of the total fair value of the Company’s investments at September 30, 2015 and December 31, 2014, respectively.

 

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Investments in CLO Fund Securities

 

The Company typically makes a minority investment in the most junior class of securities (typically preferred shares or subordinated securities) of CLO Funds managed by the Asset Manager Affiliates and may selectively invest in securities issued by CLO funds managed by other asset management companies. These securities also are entitled to recurring distributions which generally equal the net remaining cash flow of the payments made by the underlying CLO Fund’s securities less contractual payments to senior bond holders, management fees and CLO Fund expenses. CLO Funds invest primarily in broadly syndicated non-investment grade loans, high-yield bonds and other credit instruments of corporate issuers. The underlying assets in each of the CLO Funds in which the Company has an investment are generally diversified secured or unsecured corporate debt. The CLO Funds are leveraged funds and any excess cash flow or “excess spread” (interest earned by the underlying securities in the fund less payments made to senior bond holders, fund expenses and management fees) is paid to the holders of the CLO Fund’s subordinated securities or preferred shares.

 

Fair Value Measurements

 

The Company follows the provisions of ASC 820: Fair Value, which among other matters, requires enhanced disclosures about investments that are measured and reported at fair value. This standard defines fair value and establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value and expands disclosures about assets and liabilities measured at fair value. ASC 820: Fair Value defines “fair value” as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. This fair value definition focuses on an exit price in the principal, or most advantageous market, and prioritizes, within a measurement of fair value, the use of market-based inputs (which may be weighted or adjusted for relevance, reliability and specific attributes relative to the subject investment) over entity-specific inputs. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value. Subsequent to the adoption of ASC 820: Fair Value, the FASB has issued various staff positions clarifying the initial standard (see Note 2 – “Significant Accounting Policies—Investments”).

 

ASC 820: Fair Value establishes the following three-level hierarchy, based upon the transparency of inputs to the fair value measurement of an asset or liability as of the measurement date:

 

Level I – Unadjusted quoted prices are available in active markets for identical investments as of the reporting date. The type of investments included in Level I include listed equities and listed securities. As required by ASC 820: Fair Value, the Company does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably affect the quoted price.

 

Level II – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date. Such inputs may be quoted prices for similar assets or liabilities, quoted markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or inputs that are derived principally from, or corroborated by, observable market information. Investments which are generally included in this category include illiquid debt securities and less liquid, privately held or restricted equity securities for which some level of recent trading activity has been observed.

 

Level III – Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs may be based on the Company’s own assumptions about how market participants would price the asset or liability or may use Level II inputs, as adjusted, to reflect specific investment attributes relative to a broader market assumption. These inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data for comparable performance or valuation measures (earnings multiples, discount rates, other financial/valuation ratios, etc.) are available, such investments are grouped as Level III if any significant data point that is not also market observable (private company earnings, cash flows, etc.) is used in the valuation methodology.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and the Company considers factors specific to the investment. A majority of the Company’s investments are classified as Level III. The Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value. Inputs that are highly correlated to the specific investment being valued and those derived from reliable or knowledgeable sources will tend to have a higher weighting in determining fair value. Ongoing reviews by the Company’s investment analysts, Chief Investment Officer, Valuation Committee and independent valuation firms (if engaged) may include factors such as an assessment of each underlying investment, its current and prospective operating and financial performance, consideration of financing and sale transactions with third parties, expected cash flows and market-based information, including comparable transactions, performance factors, and other investment or industry specific market data, among other factors.

 

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The following table summarizes the fair value of investments by the above ASC 820: Fair Value fair value hierarchy levels as of September 30, 2015 (unaudited) and December 31, 2014, respectively:

 

   As of September 30, 2015 (unaudited) 
   Level I   Level II   Level III   Total 
Money market accounts  $   $3,345,723   $   $3,345,723 
Debt securities       86,392,713    209,891,728    296,284,441 
CLO Fund securities           66,720,782    66,720,782 
Equity securities           6,936,653    6,936,653 
Asset Manager Affiliates           64,121,000    64,121,000 
Total  $   $89,738,436   $347,670,163   $437,408,599 

 

   As of December 31, 2014 
   Level I   Level II   Level III   Total 
Money market accounts  $   $1,602,741   $   $1,602,741 
Debt securities       149,124,827    171,018,343    320,143,170 
CLO Fund securities           77,514,902    77,514,902 
Equity securities           8,119,681    8,119,681 
Asset Manager Affiliates           72,326,000    72,326,000 
Total  $   $150,727,568   $328,978,926   $479,706,494 

 

As a BDC, the Company is required to invest primarily in the debt and equity of non-public companies for which there is little, if any, market-observable information. As a result a significant portion of the Company’s investments at any given time will likely be deemed Level III investments.

 

Investment values derived by a third party pricing service are generally deemed to be Level III values. For those that have observable trades, the Company considers them to be Level II.

 

Values derived for debt and equity securities using comparable public/private companies generally utilize market-observable data from such comparables and specific, non-public and non-observable financial measures (such as earnings or cash flows) for the private, underlying company/issuer. Such non-observable company/issuer data is typically provided on a monthly or quarterly basis, is certified as correct by the management of the company/issuer and/or audited by an independent accounting firm on an annual basis. Since such private company/issuer data is not publicly available it is not deemed market-observable data and, as a result, such investment values are grouped as Level III assets.

 

Values derived for the Asset Manager Affiliates using comparable public/private companies utilize market-observable data and specific, non-public and non-observable financial measures (such as assets under management, historical and prospective earnings) for the Asset Manager Affiliates. The Company recognizes that comparable asset managers may not be fully comparable to the Asset Manager Affiliates and typically identifies a range of performance measures and/or adjustments within the comparable population with which to determine value. Since any such ranges and adjustments are entity specific they are not considered market-observable data and thus require a Level III grouping. Illiquid investments that have values derived through the use of discounted cash flow models and residual enterprise value models are grouped as Level III assets.

 

The Company’s policy for determining transfers between levels is based solely on the previously defined three-level hierarchy for fair value measurement. Transfers between the levels of the fair value hierarchy are separately noted in the tables below and the reason for such transfer described in each table’s respective footnotes. Investments measured at fair value for which the Company has used unobservable inputs to determine fair value are as follows:

 

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    Nine Months Ended September 30, 2015 (unaudited)  
    Debt Securities     CLO Fund
 Securities
    Equity
Securities
    Asset Manager
Affiliate
    Total  
Balance, December 31, 2014   $ 171,018,343     $ 77,514,902     $ 8,119,681     $ 72,326,000     $ 328,978,926  
Transfers out of Level III     (9,960,953 )1                       (9,960,953 )
Transfers into Level III     42,920,972 2                       42,920,972  
Net accretion (amortization)     221,620       (6,433,551 )                 (6,211,931 )
Purchases     53,510,881       11,952,000                   65,462,881  
Sales / Paydowns     (49,362,448 )     (3,872,700 )     (317,340 )     (3,103,517 )     (56,656,005 )
Total realized gain (loss) included in earnings     24,364       (6,246,883 )     3,015             (6,219,504 )
Total unrealized gain (loss) included in earnings     1,518,949       (6,192,986 )     (868,703 )     (5,101,483 )     (10,644,223 )
Balance, September 30, 2015   $ 209,891,728     $ 66,720,782     $ 6,936,653     $ 64,121,000     $ 347,670,163  
                                         
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date   $ 1,518,949     $ (12,985,600 )   $ (868,704 )   $ (5,101,484 )   $ (17,436,839 )

¹Transfers out of Level III represent a transfer of $9,960,953 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of September 30, 2015

 

²Transfers into Level III represent a transfer of $42,920,972 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of September 30, 2015

 

   Year Ended December 31, 2014 
   Debt Securities   CLO Fund 
Securities
   Equity
Securities
   Asset Manager
Affiliate
   Total 
Balance, December 31, 2013  $198,097,374   $79,452,220   $11,006,399   $76,148,000   $364,703,993 
Transfers out of Level III   (38,990,152)1               (38,990,152)
Transfers into Level III   1,982,1102               1,982,110 
Net accretion (amortization)   198,600    (11,102,015)           (10,903,415)
Purchases   132,079,152    22,421,847    2,216,847    545,979    157,263,825 
Sales/Paydowns   (121,242,093)   (10,132,500)   (5,007,311)   (6,432,086)   (142,813,990)
Total realized gain (loss) included in earnings   (9,069,550)   5,575,498    (7,136,407)       (10,630,459)
Total unrealized gain (loss) included in earnings   7,962,902    (8,700,148)   7,040,153    2,064,107    8,367,014 
Balance, December 31, 2014  $171,018,343   $77,514,902   $8,119,681   $72,326,000   $328,978,926 
                          
Changes in unrealized gains (losses) included in earnings related to investments still held at reporting date  $(1,448,794)  $(4,908,278)  $424,306   $2,064,107   $(3,868,659)

¹Transfers out of Level III represent a transfer of $2,783,195 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were observable as of December 31, 2013

 

²Transfers into Level III represent a transfer of $34,070,557 relating to debt securities for which pricing inputs, other than their quoted prices in active markets were unobservable as of December 31, 2013.

 

As of September 30, 2015, the Company’s Level II portfolio investments were valued by a third party pricing services for which the prices are not adjusted and for which inputs are observable or can be corroborated by observable market data for substantially the full character of the financial instrument, or by inputs that are derived principally from, or corroborated by, observable market information. The fair value of the Company’s Level II portfolio investments was $89,738,436 as of September 30, 2015.

 

 46 

 

 

As of September 30, 2015, the Company’s Level III portfolio investments had the following valuation techniques and significant inputs:

 

Type  Fair Value   Primary Valuation
Methodology
  Unobservable
Inputs
  Range of Inputs
(Weighted Average)
  $25,317,500   Enterprise Value  Average EBITDA Multiple/Qualitative Inputs  7.2x
Debt Securities  $  184,573,228   Income Approach  Implied Discount Rate  2.3% - 21.2% (9.2%)
   $1,000   Options Value  Qualitative Inputs1   
Equity Securities  $6,933,653   Enterprise Value  Average EBITDA Multiple/WAAC  4.3x/6.5% - 13.