Notes to Consolidated Financial Statements
September 30, 2020
(unaudited)
Note 1. Organization
Sierra Income Corporation (the “Company”) was incorporated under the general corporation laws of the State of Maryland on June 13, 2011 and formally commenced operations on April 17, 2012. The Company is an externally managed, non-diversified closed-end management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the "1940 Act"). The Company is externally managed by SIC Advisors LLC (“SIC Advisors”), an investment adviser registered with the Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). SIC Advisors is a wholly owned subsidiary of Medley LLC, which is controlled by Medley Management Inc., a publicly traded asset management firm (NYSE: MDLY), which in turn is controlled by Medley Group LLC, an entity wholly-owned by the senior professionals of Medley LLC. The term “Medley” refers to the collective activities of Medley Capital LLC, Medley LLC, Medley Management Inc.("MDLY"), Medley Group LLC, SIC Advisors, associated investment funds and their respective affiliates. The Company has elected, and intends to qualify annually, to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s fiscal year-end is December 31.
On April 17, 2012, the Company successfully reached its minimum escrow requirement and officially commenced operations by issuing 1,108,033 shares of common stock to SIC Advisors for gross proceeds of $10,000,000. On July 2, 2018, the Company’s board of directors determined to terminate the Company’s offering effective as of July 31, 2018. The Company sold a total of 108,727,717 shares of common stock, which includes shares issued as part of the distribution reinvestment plan (see Note 13), for total gross proceeds of $1.0 billion, which includes the shares sold to SIC Advisors. The proceeds from the issuance of common stock are presented in the Company’s Consolidated Statements of Changes in Net Assets and Consolidated Statements of Cash Flows and are presented net of selling commissions and dealer manager fees.
On August 15, 2013, the Company formed Arbor Funding LLC ("Arbor"), a wholly-owned financing subsidiary.
On June 18, 2014, the Company formed Alpine Funding LLC ("Alpine"), a wholly-owned financing subsidiary.
On July 2, 2020, the Company purchased STRF Holdings LLC ("STRF"), a wholly-owned subsidiary.
The Company has formed and expects to continue to form certain taxable subsidiaries (the “Taxable Subsidiaries”), which are taxed as corporations for U.S. federal income tax purposes. Taxable Subsidiaries allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code.
The Company’s investment objective is to generate current income, and to a lesser extent, long-term capital appreciation. The Company intends to meet its investment objective by investing primarily in the debt of privately owned U.S. companies with a focus on senior secured debt, second lien debt and, to a lesser extent, subordinated debt. The Company will originate transactions sourced through SIC Advisors’ direct origination network, and also expects to acquire debt securities through the secondary market. The Company may make equity investments in companies that it believes will generate appropriate risk adjusted returns, although it does not expect such investments to be a substantial portion of the portfolio.
Termination of the Agreements and Plan of Mergers
On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between Medley Capital Corporation (“MCC”) and the Company, pursuant to which MCC would, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into the Company, with the Company as the surviving company in the merger (the “MCC Merger”). In addition, on July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, the Company, and Sierra Management, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), MDLY would, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the merger (the “MDLY Merger” together with the MCC Merger, the “Proposed Mergers”).
Section 9.1(c) of the Amended MCC Merger Agreement and Section 9.1(c) of the Amended MDLY Merger Agreement each permits the Company and either MCC or MDLY, as applicable, to terminate the Amended MCC Merger Agreement and the
Amended MDLY Merger Agreement, respectively, if the MCC Merger or the MDLY Merger, as applicable, has not been consummated on or before March 31, 2020 (the “Outside Date”). On May 1, 2020, the Company terminated both the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement effective as of May 1, 2020 as the Outside Date had passed and neither the MCC Merger or the MDLY Merger had been consummated. In determining to terminate the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement, the Company considered a number of factors, including, among other factors, changes in the relative valuations of the Company, MCC, and MDLY, the changed circumstances and the unpredictable economic conditions resulting from the global health crisis caused by the coronavirus (COVID-19) pandemic, and the uncertainty regarding the parties’ ability to satisfy the conditions to closing in a timely manner. See Note 2 for more information.
Note 2. Significant Accounting Policies
Basis of Presentation
The Company follows the accounting and reporting guidance in the Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 946 - Financial Services, Investment Companies ("ASC 946"). The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles ("GAAP") and include the accounts of the Company and its wholly-owned subsidiaries, Alpine, Arbor, and the Taxable Subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. All references made to the "Company," "we," and "us" herein include Sierra Income Corporation and its consolidated subsidiaries, except as stated otherwise. Additionally, the accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited interim financial results contain all adjustments and reclassifications, which are of a normal recurring nature, that are necessary for the fair presentation of financial statements for the periods presented. Therefore, this Form 10-Q should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 20, 2020. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2020.
Cash and Cash Equivalents
The Company considers cash equivalents to be highly liquid investments or investments with original maturities of three months or less. Cash and cash equivalents include deposits in money market mutual funds. The Company deposits its cash in major U.S. financial institutions which, at times, may be in excess of the Federal Deposit Insurance Corporation insurance limits.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Deferred Financing Costs
Financing costs, incurred in connection with the Company’s credit facilities (see Note 6), are deferred and amortized over the life of each corresponding facility.
Deferred Transaction Costs
Transaction costs incurred in connection with the Proposed Mergers (see Note 1), were deferred until the closing or termination of the Proposed Mergers. On May 1, 2020, the Company terminated the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement. As a result of the foregoing, the deferred transaction costs were recorded as a component of professional fees and general and administrative expenses on our Consolidated Statements of Operations.
Indemnification
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.
Revenue Recognition
Interest income, adjusted for amortization of premiums and accretion of discounts, is recorded on an accrual basis. The Company records amortized or accreted discounts or premiums as interest income using the effective interest method. Dividend income, which represents dividends from equity investments and distributions from subsidiaries, if any, is recognized on an accrual basis to the extent that the Company expects to collect such amount.
Fee income associated with investments in portfolio companies is recognized as income in the period that the Company becomes entitled to such fees. Other fees related to loan administration requirements are capitalized as deferred revenue and recorded into income over the respective period.
Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.
The Company holds equity investments that distribute dividends. For the three and nine months ended September 30, 2020, the Company earned dividend income of $2,148,747 and $497,778, respectively. For the three and nine months ended September 30, 2019, the Company earned dividend income of $2,556,207 and $8,022,460, respectively.
The Company holds debt investments that contain a payment-in-kind (PIK) interest provision. PIK interest, which represents contractually deferred interest added to the investment balance that is generally due at maturity, is recorded on an accrual basis to the extent such amounts are expected to be collected. PIK interest is not accrued if the Company does not expect the issuer to be able to pay all principal and interest when due. For the three and nine months ended September 30, 2020, the Company earned PIK interest of $194,969 and $1,435,249, respectively. For the three and nine months ended September 30, 2019, the Company earned PIK interest of $1,817,434 and $4,137,513, respectively.
Investment transactions are accounted for on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the amortized cost basis of investment, without regard to unrealized gains or losses previously recognized. For the three and nine months ended September 30, 2020 the Company recognized realized losses on investments of $1,244,758 related to certain non-cash restructuring transactions, which are recorded on the Consolidated Statements of Operations as a component of net realized gain/(loss) from non-controlled/non-affiliated investments and/or net realized gain/(loss) from controlled/affiliated investments. For the three and nine months ended September 30, 2019, the Company recognized realized losses on investments of $10,680,838 and $23,052,565, respectively, related to certain non-cash restructuring transactions, which are recorded on the Consolidated Statements of Operations as a component of net realized gain/(loss) from non-controlled/non-affiliated investments and/or net realized gain/(loss) from controlled/affiliated investments. The Company reports changes in fair value of investments that are measured at fair value as a component of the net change in unrealized appreciation/(depreciation) on investments in the Consolidated Statements of Operations. For total return swap transactions (see Note 5), periodic payments were received or made at the end of each settlement period, but prior to settlement were recorded as realized gains or losses on total return swap in the Consolidated Statements of Operations.
Management reviews all loans that become 90 days or more past due on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on management's designation of non-accrual status. Accrued interest is generally reserved when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment regarding collectability. Loans on non-accrual status are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current, although the Company may make exceptions to this general rule if the loan has sufficient collateral value and is in the process of collection. As of September 30, 2020, certain investments in fourteen portfolio companies were on non-accrual status with a combined cost of $107,750,374, or 14.8% of the cost of the Company's portfolio, and a combined fair value of $50,838,081, or 8.5% of the fair value of the Company's portfolio. As of December 31, 2019, ten portfolio companies were on non-accrual status with a combined cost of $92,443,091, or 11.6% of the cost of the Company's portfolio, and a combined fair value of $17,447,291, or 2.6% of the fair value of the Company's portfolio.
Interest income from investments in the “equity” class of a collateralized loan obligation ("CLO") security (typically subordinated notes) is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financial Assets. The Company monitors the expected cash flows from these investments, including the expected residual payments, and the effective yield is determined and updated periodically. Any difference between the cash distribution received and the amount calculated pursuant to the effective interest method is recorded as an adjustment to the cost basis of such investments.
Investment Classification
The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, the Company would be deemed to “control” a portfolio company if it owns more than 25% of its outstanding voting securities and/or had the power to exercise control over the management or policies of such portfolio company. The Company refers to such investments in portfolio companies that it “controls” as “Controlled Investments.” Under the 1940 Act, the Company would be deemed to be an “Affiliated Person” of a portfolio company if it owns at least 5%, but no more than 25%, of the portfolio company’s outstanding voting securities or if it is under common control with such portfolio company. The Company refers to such investments in Affiliated Persons as “Affiliated Investments.”
Valuation of Investments
The Company applies fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 - Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, the Company has categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 4. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. The Company weighs the use of third-party broker quotations, if any, in determining fair value based on management's understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the Company’s board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.
Investments in investment companies are valued at fair value. Fair values are generally determined utilizing the net asset value ("NAV") supplied by, or on behalf of, management of each investment company, which is net of management and incentive fees or allocations charged by the investment company and is in accordance with the "practical expedient", as defined by ASC 820. NAVs received by, or on behalf of, management of each investment company are based on the fair value of the investment company's underlying investments in accordance with policies established by management of each investment company, as described in each of their financial statements and offering memorandum.
The methodologies utilized by the Company in estimating the fair value of its investments categorized as Level 3 generally fall into the following two categories:
•The “Market Approach” uses prices and other relevant information generated by market transactions involving identical or comparable assets, liabilities, or a group of assets and liabilities, such as a business.
•The “Income Approach” converts future amounts (for example, cash flows or income and expenses) to a single current (that is, discounted) amount. When the Income Approach is used, the fair value measurement reflects current market expectations about those future amounts.
The Company uses third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, the Company uses a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of the Company’s loans is determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, the Company uses a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, the Company weighs some or all of the traditional market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value.
The methodologies and information that the Company utilizes when applying the Market Approach for performing investments includes, among other things:
•valuations of comparable public companies (“Guideline Comparable Approach”);
•recent sales of private and public comparable companies (“Guideline Comparable Approach”);
•recent acquisition prices of the company, debt securities or equity securities (“Recent Arms-length Transaction”);
•external valuations of the portfolio company, offers from third parties to buy the company (“Estimated Sales Proceeds Approach”);
•subsequent sales made by the company of its investments (“Expected Sales Proceeds Approach”); and
•estimating the value to potential buyers.
The methodologies and information that the Company utilizes when applying the Income Approach for performing investments includes:
•discounting the forecasted cash flows of the portfolio company or securities (“Discounted Cash Flow” or “DCF” Approach); and
•Black-Scholes model or simulation models or a combination thereof (Income Approach – Option Model) with respect to the valuation of warrants.
For non-performing investments, the Company may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model. The Company may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.
Over-the-counter derivative contracts, such as total return swaps (see Note 5), are fair valued using models that measure the change in fair value of reference assets underlying the swaps offset against any fees payable to the swap counterparty. The fair values of the reference assets underlying the swaps are determined using similar methods as described above for debt and equity investments where the Company also invests directly in such assets.
The Company undertakes a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
•the quarterly valuation process begins with each portfolio investment being initially valued by the Company's valuation professionals;
•preliminary valuation conclusions are then documented and discussed with senior management; and
•an independent valuation firm engaged by the Company’s board of directors prepares an independent valuation report for approximately one-third of the portfolio investments each quarter on a rotating quarterly basis on non-fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms.
In addition, all of the Company’s investments are subject to the following valuation process:
•management reviews preliminary valuations and its own independent assessment;
•the independent audit committee of the Company’s board of directors reviews the preliminary valuations of senior management and independent valuation firms; and
•the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of SIC Advisors, the respective independent valuation firms and the audit committee.
The Company’s investments in subordinated notes are carried at fair value, which is based on a discounted cash flow model. The discounted cash flow model models both the underlying collateral (assets) and the liabilities of the CLO capital structure. The discounted cash flow model uses a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated cash flows of the assets. The discounted cash flow model distributes the asset cash flows to the liability structure based on the payment priorities and discounts them back using appropriate market discount rates based on discount rates for comparable CLOs. The assumptions are based on available market data as well as management estimates. Additional data is used to validate the results from the discounted cash flow method, such as analysis of relevant data
observed in the CLO market, review of quotes, where available, recent acquisitions and observable transactions in the subordinated notes, among other factors.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company’s financial instruments, including cash and accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of the Company’s long-term obligations are discussed in Note 4.
U.S. Federal Income Taxes
The Company has elected, and intends to qualify annually, to be treated as a RIC under Subchapter M of the Code. In order to continue to qualify as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute to its stockholders at least 90% of the sum of its investment company taxable income ("ICTI") including PIK, as defined by the Code, and net tax-exempt interest income (which is the excess of the Company’s gross tax-exempt interest income over certain disallowed deductions) for each taxable year in order to be eligible for tax treatment under Subchapter M of the Code. Depending on the level of ICTI earned in a tax year, the Company may choose to carry forward ICTI in excess of current year dividend distributions into the next tax year. Any such carryover ICTI must be distributed before the end of that next tax year through a dividend declared prior to filing the final tax return related to the year which generated such ICTI.
The Company will be subject to a nondeductible U.S. federal excise tax of 4% on undistributed income if it does not distribute at least 98% of its ordinary income in any calendar year and 98.2% of its capital gain net income for each one-year period ending on October 31 of such calendar year. To the extent the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions for U.S. federal excise tax purposes, the Company accrues U.S. federal excise tax, if any, on estimated excess taxable income as taxable income is earned.
For the year ended December 31, 2019, the Company distributed at least 98% of its ordinary income and 98.2% of its capital gains, and as such, there was no excise tax accrual or expense recorded.
The Taxable Subsidiaries accrue income taxes payable based on the applicable corporate rates on the unrealized gains generated by the investments held by the Taxable Subsidiaries. As of September 30, 2020 and December 31, 2019, the Company recorded a deferred tax liability of $1,043,072 and $240,935, respectively, on the Consolidated Statements of Assets and Liabilities. The change in deferred tax liabilities is included as a component of net realized and unrealized gain/(loss) on investments on the Consolidated Statements of Operations.
ICTI generally differs from net investment income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses. The Company may be required to recognize ICTI in certain circumstances in which it does not receive cash. For example, if the Company holds debt obligations that are treated under applicable tax rules as having original issue discount ("OID"), the Company must include in ICTI each year a portion of the OID that accrues over the life of the obligation, regardless of whether cash representing such income is received by the Company in the same taxable year. The Company may also have to include in ICTI other amounts that it has not yet received in cash, such as PIK interest income. Because any OID or other amounts accrued will be included in the Company’s ICTI for the year of accrual, the Company may be required to make a distribution to its stockholders in order to satisfy the minimum distribution requirements, even though the Company will not have received and may not ever receive any corresponding cash amount. ICTI also excludes net unrealized appreciation or depreciation, as investment gains or losses are not included in taxable income until they are realized.
Although the Company files federal and state tax returns, the Company's major tax jurisdiction is the United States federal jurisdiction. The Company’s federal and state tax returns for the prior three fiscal years remain open, subject to examination by the Internal Revenue Service.
The Company accounts for income taxes in conformity with ASC Topic 740 - Income Taxes (“ASC 740”). ASC 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax positions
deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current period. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Operations. There were no interest or penalties due to material uncertain income tax positions at September 30, 2020 and December 31, 2019.
As of September 30, 2020, for U.S. federal income tax purposes, the aggregate gross unrealized appreciation and the aggregate gross unrealized depreciation are $25,005,872 and $147,828,139, respectively. As of September 30, 2020, net unrealized depreciation is $122,822,267 based on a tax basis cost of $717,454,077.
As of December 31, 2019, for federal income tax purposes, the aggregate gross unrealized appreciation and the aggregate gross unrealized depreciation are $13,220,556 and $132,732,759, respectively. As of December 31, 2019, net unrealized depreciation is $119,512,203 based on a tax basis cost of $795,136,133.
Segments
The Company invests in various industries. The Company separately evaluates the performance of each of its investment relationships. However, because each of these investment relationships has similar business and economic characteristics, they have been aggregated into a single investment segment.
Company Investment Risk, Concentration of Credit Risk, and Liquidity Risk
SIC Advisors has broad discretion in making investments for the Company. Investments generally consist of debt instruments that may be affected by business, financial market or legal uncertainties. Prices of investments may be volatile, and a variety of factors that are inherently difficult to predict, such as domestic or international economic and political developments, may significantly affect the results of the Company’s activities and the value of its investments. In addition, the value of the Company’s portfolio may fluctuate as the general level of interest rates fluctuates.
The value of the Company’s investments in loans and bonds may be detrimentally affected to the extent, among other things, that a borrower defaults on its obligations, there is insufficient collateral and/or there are extensive legal and other costs incurred in collecting on a defaulted loan, observable secondary or primary market yields for similar instruments issued by comparable companies increase materially or risk premiums required in the market between smaller companies, such as the Company’s borrowers, and those for which market yields are observable, increase materially.
The Company’s assets may, at any time, include securities and other financial instruments or obligations that are illiquid or thinly traded, making purchase or sale of such securities and financial instruments at desired prices or in desired quantities difficult. Furthermore, the sale of any such investments may be possible only at substantial discounts, and it may be extremely difficult to value any such investments accurately.
Subsequent to quarter ended September 30, 2020, the global outbreak of the coronavirus (“COVID-19”) pandemic continues to have adverse consequences on the U.S. and global economies. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual portfolio companies, remains uncertain. As of the filing date of this quarterly report, there is no indication of a reportable subsequent event impacting the Company’s financial statements for the quarter ended September 30, 2020. The Company cannot predict the extent to which its financial condition and results of operations will be affected at this time. The potential impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19. The Company continues to observe and respond to the evolving COVID-19 environment and its potential impact on areas across its business.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, "Reference rate reform (Topic 848)—Facilitation of the effects of reference rate reform on financial reporting." The amendments in this update provide optional expedients and exceptions for applying U.S. GAAP to certain contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform and became effective upon issuance for all entities. The Company has agreements that have LIBOR as a reference rate with certain portfolio companies and also with certain lenders. Many of these agreements include language for choosing an alternative successor rate if LIBOR reference is no longer considered to be appropriate. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. The standard is effective as of March 12, 2020 through December 31, 2022 and the Company plans to apply the amendments in this update to account for contract modifications due to changes in reference rates. The Company does not believe that it will have a material impact on its consolidated financial statements and disclosures.
Note 3. Investments
The following table shows the amortized cost and the fair value of the Company’s portfolio investments as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
Senior secured first lien term loans
|
$
|
381,595,466
|
|
|
52.4
|
%
|
|
$
|
318,936,542
|
|
|
53.7
|
%
|
|
Senior secured second lien term loans
|
94,244,293
|
|
|
13.0
|
|
|
81,120,746
|
|
|
13.6
|
|
|
Senior secured first lien notes
|
8,473,750
|
|
|
1.2
|
|
|
8,306,054
|
|
|
1.4
|
|
|
Subordinated notes
|
66,463,686
|
|
|
9.2
|
|
|
44,535,807
|
|
|
7.5
|
|
|
Sierra Senior Loan Strategy JV I LLC
|
110,050,000
|
|
|
15.2
|
|
|
73,819,863
|
|
|
12.4
|
|
|
Equity/warrants
|
65,251,030
|
|
|
9.0
|
|
|
67,912,798
|
|
|
11.4
|
|
|
Total
|
$
|
726,078,225
|
|
|
100.0
|
%
|
|
$
|
594,631,810
|
|
|
100.0
|
%
|
The following table shows the amortized cost and the fair value of the Company’s portfolio investments as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
Senior secured first lien term loans
|
$
|
382,580,269
|
|
|
48.0
|
%
|
|
$
|
328,816,197
|
|
|
48.7
|
%
|
|
Senior secured second lien term loans
|
157,794,323
|
|
|
19.8
|
|
|
122,817,885
|
|
|
18.2
|
|
|
Senior secured first lien notes
|
15,217,625
|
|
|
1.9
|
|
|
14,354,825
|
|
|
2.1
|
|
|
Subordinated notes
|
70,422,851
|
|
|
8.8
|
|
|
63,021,420
|
|
|
9.3
|
|
|
Sierra Senior Loan Strategy JV I LLC
|
92,050,000
|
|
|
11.5
|
|
|
68,434,389
|
|
|
10.1
|
|
|
Equity/warrants
|
79,968,093
|
|
|
10.0
|
|
|
78,179,214
|
|
|
11.6
|
|
|
Total
|
$
|
798,033,161
|
|
|
100.0
|
%
|
|
$
|
675,623,930
|
|
|
100.0
|
%
|
The following table shows the composition of the Company’s portfolio investments by industry classification at amortized cost and fair value as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Amortized Cost
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
Multi-Sector Holdings
|
|
$
|
175,317,094
|
|
|
24.1
|
%
|
|
$
|
118,280,932
|
|
|
20.0
|
%
|
|
High Tech Industries
|
|
79,283,556
|
|
|
10.9
|
|
|
72,846,899
|
|
|
12.3
|
|
|
Services: Business
|
|
91,362,452
|
|
|
12.6
|
|
|
73,101,069
|
|
|
12.3
|
|
|
Healthcare & Pharmaceuticals
|
|
61,430,239
|
|
|
8.5
|
|
|
57,293,321
|
|
|
9.6
|
|
|
Banking, Finance, Insurance & Real Estate
|
|
34,471,747
|
|
|
4.7
|
|
|
42,764,191
|
|
|
7.2
|
|
|
Construction & Building
|
|
40,476,947
|
|
|
5.6
|
|
|
35,539,333
|
|
|
6.0
|
|
|
Aerospace & Defense
|
|
33,558,035
|
|
|
4.6
|
|
|
29,800,155
|
|
|
5.0
|
|
|
Consumer Goods: Durable
|
|
32,392,637
|
|
|
4.5
|
|
|
38,269,699
|
|
|
6.4
|
|
|
Wholesale
|
|
20,779,106
|
|
|
2.9
|
|
|
25,354,244
|
|
|
4.3
|
|
|
Automotive
|
|
19,026,168
|
|
|
2.6
|
|
|
17,268,511
|
|
|
2.9
|
|
|
Containers, Packaging & Glass
|
|
15,386,831
|
|
|
2.1
|
|
|
15,235,296
|
|
|
2.6
|
|
|
Hotel, Gaming & Leisure
|
|
23,271,150
|
|
|
3.2
|
|
|
14,516,215
|
|
|
2.4
|
|
|
Chemicals, Plastics & Rubber
|
|
10,067,964
|
|
|
1.4
|
|
|
8,148,058
|
|
|
1.4
|
|
|
Forest Products & Paper
|
|
6,470,709
|
|
|
0.9
|
|
|
7,355,937
|
|
|
1.2
|
|
|
Environmental Industries
|
|
5,100,136
|
|
|
0.7
|
|
|
7,417,142
|
|
|
1.2
|
|
|
Media: Diversified & Production
|
|
15,538,849
|
|
|
2.1
|
|
|
6,761,379
|
|
|
1.1
|
|
|
Transportation: Consumer
|
|
8,122,488
|
|
|
1.1
|
|
|
5,975,742
|
|
|
1.0
|
|
|
Transportation: Cargo
|
|
6,027,472
|
|
|
0.8
|
|
|
5,941,090
|
|
|
1.0
|
|
|
Consumer Goods: Non-durable
|
|
4,875,000
|
|
|
0.7
|
|
|
4,674,151
|
|
|
0.8
|
|
|
Metals & Mining
|
|
3,530,120
|
|
|
0.5
|
|
|
3,530,163
|
|
|
0.6
|
|
|
Energy: Oil & Gas
|
|
20,880,592
|
|
|
2.9
|
|
|
2,592,607
|
|
|
0.4
|
|
|
Retail
|
|
8,253,909
|
|
|
1.1
|
|
|
1,045,311
|
|
|
0.2
|
|
|
Media: Broadcasting & Subscription
|
|
10,408,142
|
|
|
1.4
|
|
|
872,593
|
|
|
0.1
|
|
|
Beverage & Food
|
|
46,882
|
|
|
—
|
|
|
47,772
|
|
|
—
|
|
|
Total
|
|
$
|
726,078,225
|
|
|
100.0
|
%
|
|
$
|
594,631,810
|
|
|
100.0
|
%
|
The following table shows the composition of the Company’s portfolio investments by industry classification at amortized cost and fair value as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Amortized Cost
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
Multi-Sector Holdings
|
|
$
|
161,308,341
|
|
|
20.2
|
%
|
|
$
|
130,278,650
|
|
|
19.2
|
%
|
|
High Tech Industries
|
|
86,735,849
|
|
|
10.8
|
|
|
81,531,661
|
|
|
12.1
|
|
|
Services: Business
|
|
131,560,449
|
|
|
16.5
|
|
|
81,285,736
|
|
|
12.0
|
|
|
Healthcare & Pharmaceuticals
|
|
59,511,718
|
|
|
7.5
|
|
|
57,374,851
|
|
|
8.5
|
|
|
Banking, Finance, Insurance & Real Estate
|
|
45,286,982
|
|
|
5.7
|
|
|
52,049,297
|
|
|
7.7
|
|
|
Construction & Building
|
|
42,797,402
|
|
|
5.4
|
|
|
39,865,739
|
|
|
5.9
|
|
|
Wholesale
|
|
34,519,910
|
|
|
4.3
|
|
|
35,186,289
|
|
|
5.2
|
|
|
Aerospace & Defense
|
|
34,876,226
|
|
|
4.4
|
|
|
34,475,020
|
|
|
5.1
|
|
|
Consumer Goods: Durable
|
|
21,962,500
|
|
|
2.8
|
|
|
24,214,089
|
|
|
3.6
|
|
|
Hotel, Gaming & Leisure
|
|
21,373,829
|
|
|
2.7
|
|
|
21,365,163
|
|
|
3.2
|
|
|
Automotive
|
|
22,312,149
|
|
|
2.8
|
|
|
19,861,655
|
|
|
2.9
|
|
|
Containers, Packaging & Glass
|
|
16,263,768
|
|
|
2.0
|
|
|
15,655,179
|
|
|
2.3
|
|
|
Transportation: Cargo
|
|
12,734,167
|
|
|
1.6
|
|
|
12,771,231
|
|
|
1.9
|
|
|
Energy: Oil & Gas
|
|
21,692,260
|
|
|
2.7
|
|
|
10,007,469
|
|
|
1.5
|
|
|
Chemicals, Plastics & Rubber
|
|
10,090,722
|
|
|
1.3
|
|
|
9,505,614
|
|
|
1.4
|
|
|
Media: Diversified & Production
|
|
14,279,258
|
|
|
1.8
|
|
|
9,493,583
|
|
|
1.4
|
|
|
Forest Products & Paper
|
|
6,455,137
|
|
|
0.8
|
|
|
7,182,914
|
|
|
1.1
|
|
|
Transportation: Consumer
|
|
6,966,133
|
|
|
0.9
|
|
|
6,877,180
|
|
|
1.0
|
|
|
Capital Equipment
|
|
6,778,258
|
|
|
0.8
|
|
|
6,537,927
|
|
|
1.0
|
|
|
Environmental Industries
|
|
5,021,241
|
|
|
0.6
|
|
|
6,414,400
|
|
|
0.9
|
|
|
Consumer Goods: Non-durable
|
|
4,912,500
|
|
|
0.6
|
|
|
4,721,895
|
|
|
0.7
|
|
|
Metals & Mining
|
|
3,257,979
|
|
|
0.4
|
|
|
3,258,022
|
|
|
0.5
|
|
|
Media: Broadcasting & Subscription
|
|
10,408,142
|
|
|
1.3
|
|
|
2,163,218
|
|
|
0.3
|
|
|
Retail
|
|
8,304,830
|
|
|
1.0
|
|
|
1,846,648
|
|
|
0.3
|
|
|
Media: Advertising, Printing & Publishing
|
|
8,623,411
|
|
|
1.1
|
|
|
1,700,500
|
|
|
0.3
|
|
|
Total
|
|
$
|
798,033,161
|
|
|
100.0
|
%
|
|
$
|
675,623,930
|
|
|
100.0
|
%
|
The following table shows the composition of the Company’s portfolio investments by geography classification at fair value as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Geography
|
|
Fair Value
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
United States
|
|
$
|
550,170,740
|
|
|
92.5
|
%
|
|
$
|
613,779,669
|
|
|
90.8
|
%
|
|
Cayman Islands
|
|
44,461,070
|
|
|
7.5
|
|
|
61,844,261
|
|
|
9.2
|
|
|
Total
|
|
$
|
594,631,810
|
|
|
100.0
|
%
|
|
$
|
675,623,930
|
|
|
100.0
|
%
|
Transactions with Controlled/Affiliated Companies
During the nine months ended September 30, 2020 and 2019, the Company had investments in portfolio companies designated as controlled/affiliated investments under the 1940 Act. Transactions with controlled/affiliated investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Investment(3)
|
|
Type of Investment
|
|
Fair Value at December 31, 2019
|
|
Purchases/
(Sales)
of Investments
|
|
Transfers
In/(Out)
of Investments
|
|
Net change in
unrealized
appreciation/
(depreciation)
|
|
Realized Gain/(Loss)(4)
|
|
Fair Value at September 30, 2020
|
|
Income
Earned
|
|
1888 Industrial Services, LLC
|
|
Revolving Credit Facility
|
|
$
|
1,183,094
|
|
|
$
|
60,349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,243,443
|
|
|
$
|
60,605
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
3,315,574
|
|
|
—
|
|
|
—
|
|
|
(3,315,574)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
2,113,617
|
|
|
—
|
|
|
—
|
|
|
(2,113,617)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
416,940
|
|
|
—
|
|
|
—
|
|
|
(2,312)
|
|
|
—
|
|
|
414,628
|
|
|
20,913
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
79,986
|
|
|
(79,986)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,860
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
288,300
|
|
|
(288,300)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,913
|
|
|
|
|
Membership Units
|
|
—
|
|
|
(35,600)
|
|
|
—
|
|
|
—
|
|
|
35,600
|
|
|
—
|
|
|
—
|
|
|
Access Media Holdings, LLC
|
|
Senior Secured First Lien Term Loan
|
|
2,251,418
|
|
|
—
|
|
|
—
|
|
|
(1,290,625)
|
|
|
—
|
|
|
960,793
|
|
|
—
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Preferred Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Preferred Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Preferred Equity
|
|
(88,200)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(88,200)
|
|
|
—
|
|
|
Black Angus Steakhouses, LLC
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
(334,822)
|
|
|
2,232,143
|
|
|
—
|
|
|
—
|
|
|
1,897,321
|
|
|
44,984
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
2,232,143
|
|
|
18,225,446
|
|
|
(7,838,695)
|
|
|
|
|
12,618,894
|
|
|
1,270,505
|
|
|
|
|
Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Caddo Investors Holdings 1 LLC
|
|
Equity
|
|
5,765,253
|
|
|
33,606
|
|
|
—
|
|
|
182,698
|
|
|
—
|
|
|
5,981,557
|
|
|
—
|
|
|
Charming Charlie LLC
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
112,981
|
|
|
(12,125)
|
|
|
—
|
|
|
(29,575)
|
|
|
—
|
|
|
71,281
|
|
|
6,437
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
628,025
|
|
|
(67,400)
|
|
|
—
|
|
|
(164,400)
|
|
|
—
|
|
|
396,225
|
|
|
35,782
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Dynamic Energy Services International LLC
|
|
Revolving Credit Facility
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
692,431
|
|
|
—
|
|
|
—
|
|
|
(216,054)
|
|
|
—
|
|
|
476,377
|
|
|
—
|
|
|
|
|
Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Kemmerer Operations, LLC
|
|
Senior Secured First Lien Term Loan
|
|
1,834,227
|
|
|
217,478
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,051,705
|
|
|
217,568
|
|
|
|
|
Senior Secured First Lien Delayed Draw Term Loan
|
|
461,035
|
|
|
54,663
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
515,698
|
|
|
54,686
|
|
|
|
|
Equity
|
|
962,760
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
962,760
|
|
|
—
|
|
|
MCM 500 East Pratt Holdings, LLC
|
|
Equity
|
|
7,350,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,350,000
|
|
|
298,813
|
|
|
MCM Capital Office Park Holdings LLC
|
|
Equity
|
|
11,775,000
|
|
|
—
|
|
|
—
|
|
|
2,850,000
|
|
|
—
|
|
|
14,625,000
|
|
|
666,419
|
|
|
Sierra Senior Loan Strategy JV I LLC(2)
|
|
Equity
|
|
68,434,389
|
|
|
18,000,000
|
|
|
—
|
|
|
(12,614,526)
|
|
|
—
|
|
|
73,819,863
|
|
|
2,957,672
|
|
|
TwentyEighty, Inc.
|
|
Common Units
|
|
644,597
|
|
|
(621,650)
|
|
|
—
|
|
|
(644,597)
|
|
|
621,650
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
|
$
|
108,221,427
|
|
|
$
|
19,158,356
|
|
|
$
|
20,457,589
|
|
|
$
|
(25,197,277)
|
|
|
$
|
657,250
|
|
|
$
|
123,297,345
|
|
|
$
|
5,652,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Investment(3)
|
|
Type of Investment
|
|
Fair Value at December 31, 2018
|
|
Purchases/
(Sales)
of Investments
|
|
Transfers
In/(Out)
of Investments
|
|
Net change in
unrealized
appreciation/
(depreciation)
|
|
Realized Gain/(Loss)
|
|
Fair Value at September 30, 2019
|
|
Income
Earned
|
|
1888 Industrial Services, LLC
|
|
Revolving Credit Facility
|
|
$
|
943,344
|
|
|
$
|
566,007
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,509,351
|
|
|
$
|
66,903
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
3,144,481
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,144,481
|
|
|
180,516
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
6,005,623
|
|
|
(159,607)
|
|
|
—
|
|
|
(3,892,078)
|
|
|
—
|
|
|
1,953,938
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
401,814
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
401,814
|
|
|
7,769
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
78,384
|
|
|
|
|
|
|
|
|
78,384
|
|
|
187
|
|
|
|
|
Membership Units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Access Media Holdings, LLC
|
|
Senior Secured First Lien Term Loan
|
|
5,141,747
|
|
|
35,935
|
|
|
—
|
|
|
(2,982,229)
|
|
|
—
|
|
|
2,195,453
|
|
|
—
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Preferred Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Preferred Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Preferred Equity
|
|
(88,200)
|
|
|
88,200
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Caddo Investors Holdings 1 LLC
|
|
Equity
|
|
5,186,935
|
|
|
54,619
|
|
|
—
|
|
|
390,246
|
|
|
—
|
|
|
5,631,800
|
|
|
—
|
|
|
Capstone Nutrition, Inc.
|
|
Senior Secured First Lien Term Loan
|
|
9,524,176
|
|
|
(1,413,538)
|
|
|
|
|
6,128,103
|
|
|
(14,238,741)
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Delayed Draw Term Loan
|
|
4,282,981
|
|
|
(635,662)
|
|
|
—
|
|
|
2,985,858
|
|
|
(6,633,177)
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Incremental Delayed Draw Term Loan
|
|
1,745,510
|
|
|
(1,745,510)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
319,581
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
(9)
|
|
|
—
|
|
|
—
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
300,002
|
|
|
(300,002)
|
|
|
—
|
|
|
—
|
|
|
Charming Charlie LLC
|
|
Senior Secured First Lien Term Loan
|
|
3,121,470
|
|
|
—
|
|
|
—
|
|
|
(3,380,178)
|
|
|
—
|
|
|
(258,708)
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
1,515,547
|
|
|
(115,404)
|
|
|
—
|
|
|
(1,400,143)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
182,617
|
|
|
—
|
|
|
—
|
|
|
(45,654)
|
|
|
—
|
|
|
136,963
|
|
|
27,697
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
1,034,831
|
|
|
—
|
|
|
(304,362)
|
|
|
—
|
|
|
730,469
|
|
|
91,608
|
|
|
|
|
Common Stock
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Dynamic Energy Services International LLC
|
|
Revolving Credit Facility
|
|
—
|
|
|
40,219
|
|
|
246,677
|
|
|
|
|
|
|
286,896
|
|
|
54,451
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
—
|
|
|
9,828,831
|
|
|
(3,783,319)
|
|
|
(5,379,806)
|
|
|
665,706
|
|
|
—
|
|
|
|
|
Equity
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Kemmerer Operations, LLC
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
1,694,915
|
|
|
—
|
|
|
71,596
|
|
|
—
|
|
|
1,766,511
|
|
|
72,332
|
|
|
|
|
Senior Secured First Lien Delayed Draw Term Loan
|
|
—
|
|
|
706,604
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
706,604
|
|
|
28,933
|
|
|
|
|
Equity
|
|
—
|
|
|
962,717
|
|
|
—
|
|
|
31,283
|
|
|
—
|
|
|
994,000
|
|
|
—
|
|
|
MCM 500 East Pratt Holdings, LLC
|
|
Equity
|
|
5,000,000
|
|
|
—
|
|
|
—
|
|
|
2,100,000
|
|
|
—
|
|
|
7,100,000
|
|
|
367,254
|
|
|
MCM Capital Office Park Holdings LLC
|
|
Equity
|
|
12,499,125
|
|
|
—
|
|
|
—
|
|
|
(724,125)
|
|
|
—
|
|
|
11,775,000
|
|
|
294,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Investment(3)
|
|
Type of Investment
|
|
Fair Value at December 31, 2018
|
|
Purchases/
(Sales)
of Investments
|
|
Transfers
In/(Out)
of Investments
|
|
Net change in
unrealized
appreciation/
(depreciation)
|
|
Realized Gain/(Loss)
|
|
Fair Value at September 30, 2019
|
|
Income
Earned
|
|
Medley Chiller Holdings LLC
|
|
Equity
|
|
9,098,157
|
|
|
(20,531,808)
|
|
|
—
|
|
|
(470,657)
|
|
|
11,904,308
|
|
|
—
|
|
|
557,697
|
|
|
Nomida LLC(1)
|
|
Equity
|
|
989,820
|
|
|
(771,420)
|
|
|
—
|
|
|
1,299,940
|
|
|
(1,518,340)
|
|
|
—
|
|
|
—
|
|
|
Sierra Senior Loan Strategy JV I LLC(2)
|
|
Equity
|
|
82,515,860
|
|
|
—
|
|
|
—
|
|
|
(9,106,501)
|
|
|
—
|
|
|
73,409,359
|
|
|
6,037,500
|
|
|
TwentyEighty, Inc.
|
|
Senior Secured First Lien Term Loan
|
|
6,975,035
|
|
|
(6,975,035)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
427,674
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
6,497,461
|
|
|
(6,521,105)
|
|
|
—
|
|
|
(91,097)
|
|
|
114,741
|
|
|
—
|
|
|
631,186
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
319,870
|
|
|
(322,723)
|
|
|
—
|
|
|
2,102
|
|
|
751
|
|
|
—
|
|
|
18,846
|
|
|
|
|
Senior Secured First Lien Term Loan
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
Equity
|
|
404,943
|
|
|
—
|
|
|
—
|
|
|
5,889,975
|
|
|
—
|
|
|
6,294,918
|
|
|
—
|
|
|
Total
|
|
|
|
$
|
165,006,502
|
|
|
$
|
(33,527,567)
|
|
|
$
|
10,075,508
|
|
|
$
|
(6,981,229)
|
|
|
$
|
(16,050,275)
|
|
|
$
|
118,522,939
|
|
|
$
|
9,185,069
|
|
(1)Nomida, LLC ("Nomida") was a non-public real estate investment formed by the Company to purchase and develop a residential property. The Company was the sole equity shareholder of Nomida and provided 100% of the debt financing to the entity. The Company was Nomida’s sole member responsible for Nomida’s daily operations. In addition, the Chief Financial Officer and Secretary of the Company also served as President of Nomida. The assets of Nomida were comprised of a residential development property in the city of Chicago, IL and the proceeds of the loan from the Company; the liabilities of Nomida consisted of the loan payable to the Company. As of June 30, 2019, the investment was realized.
(2)The Company and Great American Life Insurance Company ("GALIC") are the members of Sierra Senior Loan Strategy JV I LLC ("Sierra JV"), a joint venture formed as a Delaware limited liability company that is not consolidated by either member for financial reporting purposes. The members of Sierra JV make capital contributions as investments by Sierra JV are completed, and all portfolio and other material decisions regarding Sierra JV must be submitted to Sierra JV’s board of managers, which is comprised of an equal number of members appointed by each of the Company and GALIC. Approval of Sierra JV’s board of managers requires the unanimous approval of a quorum of the board of managers, with a quorum consisting of equal representation of members appointed by each of the Company and GALIC. Because management of Sierra JV is shared equally between the Company and GALIC, the Company does not have operational control over the Sierra JV for purposes of the 1940 Act or otherwise.
(3)The par amount and additional detail are shown in the consolidated schedule of investments
(4)There were realizable events that occurred in the nine months ended September 30, 2020 from previously owned controlled/affiliated investments that resulted in an additional $722,786 of realized gain/(loss) in the controlled/affiliated category.
Purchases/(sales) of investments in controlled/affiliated investments are included in the purchases and sales presented on the Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019. Transfers in/(out) of controlled/affiliated represents the fair value for the month an investment became or was removed as a controlled/affiliates investment. Income received from controlled/affiliated investments is included in total investment income on the Consolidated Statements of Operations for the nine months ended September 30, 2020 and 2019.
In connection with certain of the Company’s investments, the Company receives warrants that are obtained for the objective of increasing the total investment returns and are not held for hedging purposes. As of September 30, 2020 and December 31, 2019, the total fair value of warrants were $13,195 and $21,469, respectively, and were included in investments at fair value on the Consolidated Statements of Assets and Liabilities. Total realized and change in unrealized gains (losses) related to warrants for the three and nine months ended September 30, 2020 were $13,195 and $(8,274). There were no realized and change in unrealized gains (losses) related to warrants for the three and nine months ended September 30, 2019. The Company receives warrants in connection with individual investments and are not subject to master netting arrangements.
As of September 30, 2020, the Company held loans it has made directly to 62 investee companies with aggregate principal amounts of $631.0 million. As of December 31, 2019, the Company held loans it has made directly to 62 investee companies with aggregate principal amounts of $643.5 million. During the three and nine months ended September 30, 2020, the Company made 7 and 38 loans to investee companies, respectively, with aggregate principal amounts of $21.3 million and $90.5 million, respectively. During the three and nine months ended September 30, 2019, the Company made 26 and 54 loans to investee companies, respectively, with aggregate principal amounts of $67.0 million and $121.6 million, respectively.
In addition to the loans that the Company has provided, the Company has unfunded commitments to provide additional financings through undrawn term loans or revolving lines of credit. The details of such arrangements are disclosed in Note 11.
Sierra Senior Loan Strategy JV I LLC
On March 27, 2015, the Company and GALIC entered into a limited liability company operating agreement to co-manage Sierra JV. All portfolio and other material decisions regarding Sierra JV must be submitted to Sierra JV's board of managers, which is comprised of four members, two of whom are selected by the Company and the other two are selected by GALIC. The Company has concluded that it does not operationally control Sierra JV. As the Company does not operationally control Sierra JV, it does not consolidate the operations of Sierra JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the fair value of its investment in Sierra JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4).
As of September 30, 2020 Sierra JV had total capital commitments of $124.6 million, with the Company providing $110.1 million and GALIC providing $14.5 million. As of December 31, 2019 Sierra JV had total capital commitments of $116.0 million, with the Company providing $101.5 million and GALIC providing $14.5 million. As of September 30, 2020 approximately $124.5 million was funded relating to these commitments of which $110.1 million was from the Company. As of December 31, 2019 approximately $105.2 million was funded relating to these commitments of which $92.1 million was from the Company. The Company does not have the right to withdraw any of their respective capital commitment, unless in connection with a transfer of its membership interests. The Company may transfer full membership interests as long as it is approved by all members and transferred in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, or applicable state securities laws.
Sierra JV entered into a Senior Secured Revolving Credit Facility Agreement, as amended (the "JV Facility") with Deutsche Bank, AG, New York Branch ("DB").
On March 29, 2019, the JV Facility reinvestment period was extended from March 30, 2019 to June 28, 2019.
On June 28, 2019, the JV Facility reinvestment period was further extended from June 28, 2019 to October 28, 2019.
On October 28, 2019, the JV Facility reinvestment period was further extended from October 28, 2019 to March 31, 2020 and the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.50% per annum to LIBOR (with a 0.00% floor) + 2.75% per annum.
On March 31, 2020, the total commitment under the JV Facility was reduced to $240.0 million from $250.0 million and the reinvestment period was extended from March 31, 2020 to April 30, 2020.
On April 30, 2020, the total commitment under the JV Facility was reduced to $200.0 million from $240.0 million, the reinvestment period was extended from April 30, 2020 to July 31, 2020, the maturity date was extended to July 31, 2023 and the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.75% per annum to LIBOR (with a 0.50% floor) + 3.15% per annum.
On July 29, 2020, the total commitment under the JV Facility was reduced to $175.0 million from $200.0 million, the reinvestment period was extended from July 31, 2020 to April 30, 2021 and the maturity date was extended to April 30, 2024. Additionally, the interest rate was modified from bearing an interest rate of LIBOR (with a 0.50% floor) + 3.15% per annum to LIBOR (with a 0.50% floor) + 3.25% per annum.
The JV Facility is secured substantially by all of Sierra JV's assets, subject to certain exclusions set forth in the JV Facility. As of September 30, 2020 and December 31, 2019, there was $124.7 million and $204.9 million outstanding under the JV Facility, respectively.
The following table shows a summary of Sierra JV's portfolio as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
(unaudited)
|
|
|
|
Investments at par value
|
$
|
212,832,281
|
|
|
$
|
255,853,296
|
|
|
Weighted average current interest rate on senior secured loans(2)
|
5.90
|
%
|
|
6.86
|
%
|
|
Number of borrowers in the Sierra JV
|
54
|
|
|
60
|
|
|
Investments at fair value
|
$
|
190,958,188
|
|
|
$
|
238,316,936
|
|
|
Largest loan to a single borrower(1)
|
$
|
10,653,501
|
|
|
$
|
10,826,856
|
|
|
Total of five largest loans to borrowers(1)
|
$
|
40,649,060
|
|
|
$
|
43,344,178
|
|
(1)At par value.
(2)Computed as the (a) annual stated interest rate on accruing senior secured loans, divided by (b) total senior secured loans at principal amount.
The following is a listing of the individual investments in Sierra JV's portfolio as of September 30, 2020 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(2)
|
|
4Over International, LLC
|
|
Media: Advertising, Printing & Publishing
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%)(1)
|
|
6/7/2022
|
|
$
|
10,653,501
|
|
|
$
|
10,653,501
|
|
|
$
|
9,995,115
|
|
|
Callaway Golf Company
|
|
Consumer Goods: Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
1/4/2026
|
|
1,510,438
|
|
|
1,488,582
|
|
|
1,511,798
|
|
|
Cardenas Markets LLC
|
|
Retail
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
|
|
11/29/2023
|
|
7,868,032
|
|
|
7,740,594
|
|
|
7,858,591
|
|
|
CHA Consulting, Inc.
|
|
Construction & Building
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
4/10/2025
|
|
1,340,389
|
|
|
1,336,070
|
|
|
1,274,308
|
|
|
CHA Consulting, Inc.
|
|
Construction & Building
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
4/10/2025
|
|
592,500
|
|
|
592,500
|
|
|
563,290
|
|
|
Covenant Surgical Partners, Inc.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%)(1)
|
|
7/1/2026
|
|
4,950,187
|
|
|
4,909,435
|
|
|
4,435,496
|
|
|
CT Technologies Intermediate Holdings, Inc.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
|
|
12/1/2021
|
|
5,086,116
|
|
|
4,997,546
|
|
|
4,875,042
|
|
|
Directbuy Home Improvement, Inc.
|
|
Retail
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)(3)
|
|
6/20/2022
|
|
274,413
|
|
|
274,413
|
|
|
41,162
|
|
|
Directbuy Home Improvement, Inc.
|
|
Retail
|
|
Common Stock - 201,591 shares
|
|
|
|
—
|
|
|
79,237
|
|
|
—
|
|
|
Envision Healthcare Corporation
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
|
|
10/10/2025
|
|
1,940,437
|
|
|
1,890,936
|
|
|
1,397,502
|
|
|
GC EOS Buyer, Inc.
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
8/1/2025
|
|
3,410,287
|
|
|
3,372,857
|
|
|
3,132,008
|
|
|
GK Holdings, Inc.
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 8.00%, 1.00% LIBOR Floor)(1)
|
|
1/20/2021
|
|
3,875,116
|
|
|
3,873,686
|
|
|
2,885,411
|
|
|
Glass Mountain Pipeline Holdings, LLC
|
|
Energy: Oil & Gas
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
12/23/2024
|
|
4,850,625
|
|
|
4,839,587
|
|
|
2,601,390
|
|
|
Golden West Packaging Group LLC
|
|
Forest Products & Paper
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%)(1)
|
|
6/20/2023
|
|
4,069,771
|
|
|
4,069,771
|
|
|
3,968,027
|
|
|
High Ridge Brands Co.
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 7.00%, 1.00% LIBOR Floor)(1)(3)
|
|
6/30/2022
|
|
2,887,398
|
|
|
2,874,283
|
|
|
988,645
|
|
|
Highline Aftermarket Acquisitions, LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)(1)
|
|
4/26/2025
|
|
4,025,000
|
|
|
3,956,275
|
|
|
3,597,545
|
|
|
Highline Aftermarket Acquisitions, LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 7.00%, 1.00% LIBOR Floor)(1)
|
|
4/26/2025
|
|
2,992,500
|
|
|
2,992,500
|
|
|
2,992,500
|
|
|
Infogroup, Inc.
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
|
|
4/3/2023
|
|
4,825,000
|
|
|
4,804,692
|
|
|
4,224,770
|
|
|
Intermediate LLC
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)(1)
|
|
7/1/2026
|
|
2,722,500
|
|
|
2,708,089
|
|
|
2,513,684
|
|
|
Isagenix International, LLC
|
|
Wholesale
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)(1)
|
|
6/16/2025
|
|
2,626,629
|
|
|
2,616,612
|
|
|
1,337,742
|
|
|
IXS Holdings, Inc.
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
|
|
3/5/2027
|
|
2,984,622
|
|
|
2,957,141
|
|
|
2,944,628
|
|
|
Keystone Acquisition Corp.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
|
|
5/1/2024
|
|
6,099,815
|
|
|
6,040,757
|
|
|
5,505,083
|
|
|
KNB Holdings Corporation
|
|
Consumer Goods: Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
|
|
4/26/2024
|
|
4,743,170
|
|
|
4,694,697
|
|
|
1,992,131
|
|
|
Liaison Acquisition, LLC
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
12/20/2026
|
|
6,451,250
|
|
|
6,436,903
|
|
|
6,276,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(2)
|
|
LifeMiles Ltd.
|
|
Services: Consumer
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
|
|
8/18/2022
|
|
4,229,263
|
|
|
4,220,573
|
|
|
3,880,349
|
|
|
Logmein, Inc.
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%)(1)
|
|
8/31/2027
|
|
3,000,000
|
|
|
2,940,109
|
|
|
2,896,500
|
|
|
Manna Pro Products, LLC
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
|
|
12/8/2023
|
|
2,998,542
|
|
|
2,998,542
|
|
|
2,875,002
|
|
|
Manna Pro Products, LLC
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(1)
|
|
12/8/2023
|
|
608,958
|
|
|
608,958
|
|
|
583,869
|
|
|
Mileage Plus Holdings, LLC
|
|
Transportation: Consumer
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
|
|
6/21/2027
|
|
5,098,181
|
|
|
5,093,765
|
|
|
5,183,831
|
|
|
NGS US Finco, LLC
|
|
Capital Equipment
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
|
|
10/1/2025
|
|
2,943,223
|
|
|
2,933,335
|
|
|
2,755,445
|
|
|
Northern Star Industries, Inc.
|
|
Capital Equipment
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
|
|
3/28/2025
|
|
4,143,750
|
|
|
4,130,394
|
|
|
3,630,754
|
|
|
Nuvei Technologies Corp.
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
|
|
9/29/2025
|
|
442,220
|
|
|
442,220
|
|
|
442,220
|
|
|
Offen, Inc.
|
|
Transportation: Cargo
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%)(1)
|
|
6/22/2026
|
|
3,626,659
|
|
|
3,596,900
|
|
|
3,494,880
|
|
|
Patriot Rail Company LLC
|
|
Transportation: Cargo
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%)(1)
|
|
10/19/2026
|
|
1,741,250
|
|
|
1,711,104
|
|
|
1,730,454
|
|
|
Peraton Corp.
|
|
Aerospace and Defense
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
|
|
4/29/2024
|
|
3,371,591
|
|
|
3,362,944
|
|
|
3,293,033
|
|
|
PetroChoice Holdings, Inc.
|
|
Chemicals, Plastics and Rubber
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
|
|
8/19/2022
|
|
6,769,540
|
|
|
6,756,432
|
|
|
5,841,436
|
|
|
Phoenix Guarantor Inc.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.25%)(1)
|
|
3/5/2026
|
|
1,960,175
|
|
|
1,936,514
|
|
|
1,906,074
|
|
|
Plaskolite PPC Intermediate II LLC
|
|
Chemicals, Plastics and Rubber
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
|
|
12/15/2025
|
|
3,193,125
|
|
|
3,148,547
|
|
|
3,137,245
|
|
|
Port Townsend Holdings Company, Inc.
|
|
Forest Products & Paper
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
|
|
4/3/2024
|
|
2,945,599
|
|
|
2,928,226
|
|
|
2,632,777
|
|
|
PT Network, LLC
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor, 2% PIK)(1)(4)
|
|
11/30/2023
|
|
4,485,131
|
|
|
4,293,878
|
|
|
4,036,618
|
|
|
PT Network, LLC
|
|
Healthcare & Pharmaceuticals
|
|
Class C Common Stock
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
PVHC Holding Corp
|
|
Containers, Packaging and Glass
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(1)
|
|
8/5/2024
|
|
1,952,427
|
|
|
1,946,104
|
|
|
1,850,511
|
|
|
Quartz Holding Company
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%)(1)
|
|
4/2/2026
|
|
951,470
|
|
|
950,913
|
|
|
930,062
|
|
|
RB Media, Inc.
|
|
Media: Diversified & Production
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)(1)
|
|
8/29/2025
|
|
5,647,732
|
|
|
5,610,641
|
|
|
5,601,986
|
|
|
Rough Country, LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)(1)
|
|
5/25/2023
|
|
2,698,652
|
|
|
2,692,258
|
|
|
2,583,959
|
|
|
Salient CRGT Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)
|
|
2/28/2022
|
|
4,221,726
|
|
|
4,197,669
|
|
|
3,905,097
|
|
|
Shift4 Payments, LLC
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(1)
|
|
11/29/2024
|
|
7,304,819
|
|
|
7,283,042
|
|
|
7,255,877
|
|
|
Sierra Enterprises, LLC
|
|
Beverage & Food
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
|
|
11/11/2024
|
|
3,879,206
|
|
|
3,871,808
|
|
|
3,355,513
|
|
|
Simplified Logistics, LLC
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(1)
|
|
2/27/2022
|
|
3,447,500
|
|
|
3,386,241
|
|
|
3,358,899
|
|
|
Syniverse Holdings, Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)(1)
|
|
3/9/2023
|
|
2,905,253
|
|
|
2,891,007
|
|
|
2,229,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(2)
|
|
T-Mobile USA, Inc.
|
|
Telecommunications
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.00%)(1)
|
|
4/1/2027
|
|
1,995,000
|
|
|
1,966,651
|
|
|
1,992,207
|
|
|
The Octave Music Group, Inc.
|
|
Media: Diversified & Production
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
|
|
5/29/2025
|
|
5,896,552
|
|
|
5,844,063
|
|
|
5,071,034
|
|
|
ThoughtWorks, Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)(1)
|
|
10/11/2024
|
|
4,617,527
|
|
|
4,605,553
|
|
|
4,542,723
|
|
|
Vero Parent, Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)(1)
|
|
8/16/2024
|
|
3,875,925
|
|
|
3,856,982
|
|
|
3,813,522
|
|
|
Wawona Delaware Holdings, LLC
|
|
Beverage & Food
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%)(1)
|
|
9/11/2026
|
|
945,351
|
|
|
937,295
|
|
|
912,358
|
|
|
Wok Holdings Inc.
|
|
Retail
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%)(1)
|
|
3/1/2026
|
|
6,550,250
|
|
|
6,506,810
|
|
|
4,864,216
|
|
|
Wrench Group LLC
|
|
Services: Consumer
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(1)
|
|
4/30/2026
|
|
2,942,820
|
|
|
2,920,336
|
|
|
2,834,230
|
|
|
Xebec Global Holdings, LLC
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)(1)
|
|
2/12/2024
|
|
8,053,168
|
|
|
8,053,168
|
|
|
8,053,168
|
|
|
Z Medica, LLC
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)(1)
|
|
9/29/2022
|
|
2,610,000
|
|
|
2,610,000
|
|
|
2,570,850
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
212,832,281
|
|
|
$
|
211,433,646
|
|
|
$
|
190,958,188
|
|
(1)Represents the weighted average annual current interest rate as of September 30, 2020. All interest rates are payable in cash, unless otherwise noted.
(2)Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Company’s board of directors’ valuation process described elsewhere herein.
(3)The investment was on non-accrual status as of September 30, 2020.
(4)Par amount includes accumulated paid-in-kind ("PIK") interest and is net of repayments.
The following is a listing of the individual investments in Sierra JV's portfolio as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(1)
|
|
4Over International, LLC
|
|
Media: Advertising, Printing & Publishing
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)
|
|
6/7/2022
|
|
$
|
10,826,856
|
|
|
$
|
10,826,856
|
|
|
$
|
10,648,215
|
|
|
Acrisure, LLC
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)
|
|
11/22/2023
|
|
3,182,966
|
|
|
3,183,838
|
|
|
3,187,103
|
|
|
Brightspring Health Services
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%)
|
|
3/5/2026
|
|
3,980,000
|
|
|
3,933,275
|
|
|
3,998,905
|
|
|
Callaway Golf Company
|
|
Consumer Goods: Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
1/4/2026
|
|
2,766,749
|
|
|
2,720,217
|
|
|
2,794,418
|
|
|
Cambrex Corporation
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
12/4/2026
|
|
4,000,000
|
|
|
3,920,721
|
|
|
3,920,000
|
|
|
Cardenas Markets LLC
|
|
Retail
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)
|
|
11/29/2023
|
|
6,305,000
|
|
|
6,269,750
|
|
|
6,195,293
|
|
|
CHA Consulting, Inc.
|
|
Construction & Building
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
4/10/2025
|
|
1,350,672
|
|
|
1,345,582
|
|
|
1,347,565
|
|
|
CHA Consulting, Inc.
|
|
Construction & Building
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(2)
|
|
4/10/2025
|
|
597,000
|
|
|
597,000
|
|
|
595,627
|
|
|
Covenant Surgical Partners, Inc.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%)(2)
|
|
7/1/2026
|
|
4,987,500
|
|
|
4,941,073
|
|
|
4,942,594
|
|
|
CT Technologies Intermediate Holdings, Inc.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)
|
|
12/1/2021
|
|
4,121,112
|
|
|
4,064,756
|
|
|
3,878,791
|
|
|
Directbuy Home Improvement, Inc.
|
|
Retail
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)(2)
|
|
6/20/2022
|
|
274,413
|
|
|
274,413
|
|
|
274,413
|
|
|
Directbuy Home Improvement, Inc.
|
|
Retail
|
|
Common Stock - 201,591 shares(3)
|
|
|
|
—
|
|
|
79,237
|
|
|
64,509
|
|
|
Envision Healthcare Corporation
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)
|
|
10/10/2025
|
|
1,955,250
|
|
|
1,896,560
|
|
|
1,666,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(1)
|
|
GC EOS Buyer, Inc.
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
8/1/2025
|
|
3,436,387
|
|
|
3,392,804
|
|
|
3,340,511
|
|
|
GK Holdings, Inc.
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)
|
|
1/20/2021
|
|
3,905,952
|
|
|
3,900,993
|
|
|
3,241,940
|
|
|
Glass Mountain Pipeline Holdings, LLC
|
|
Energy: Oil & Gas
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
12/23/2024
|
|
4,887,938
|
|
|
4,874,842
|
|
|
4,286,232
|
|
|
Golden West Packaging Group LLC
|
|
Forest Products & Paper
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)
|
|
6/20/2023
|
|
4,121,837
|
|
|
4,121,837
|
|
|
4,092,984
|
|
|
High Ridge (DIP Term Loan)
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 7.00%, 1.00% LIBOR Floor)(3)(4)
|
|
4/18/2020
|
|
143,852
|
|
|
139,187
|
|
|
143,852
|
|
|
High Ridge Brands Co.
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 7.00%, 1.00% LIBOR Floor)
|
|
6/30/2022
|
|
3,031,250
|
|
|
3,011,569
|
|
|
1,312,531
|
|
|
Highline Aftermarket Acquisitions, LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)
|
|
4/26/2025
|
|
4,055,882
|
|
|
4,045,615
|
|
|
3,660,434
|
|
|
Infogroup, Inc.
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
4/3/2023
|
|
4,862,500
|
|
|
4,835,906
|
|
|
4,704,955
|
|
|
Intermediate LLC
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)
|
|
7/1/2026
|
|
2,743,125
|
|
|
2,726,710
|
|
|
2,729,409
|
|
|
Isagenix International, LLC
|
|
Wholesale
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)
|
|
6/16/2025
|
|
2,750,063
|
|
|
2,737,896
|
|
|
1,924,494
|
|
|
Jordan Health Products I, Inc.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
5/15/2025
|
|
5,168,658
|
|
|
5,107,272
|
|
|
3,721,434
|
|
|
Keystone Acquisition Corp.
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)
|
|
5/1/2024
|
|
6,146,978
|
|
|
6,075,006
|
|
|
5,993,304
|
|
|
KNB Holdings Corporation
|
|
Consumer Goods: Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)
|
|
4/26/2024
|
|
4,839,315
|
|
|
4,779,469
|
|
|
3,629,970
|
|
|
Liaison Acquisition, LLC
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
12/20/2026
|
|
6,500,000
|
|
|
6,483,801
|
|
|
6,483,750
|
|
|
LifeMiles Ltd.
|
|
Services: Consumer
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)
|
|
8/18/2022
|
|
4,684,602
|
|
|
4,671,137
|
|
|
4,614,801
|
|
|
Manna Pro Products, LLC
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)(2)
|
|
12/8/2023
|
|
3,021,667
|
|
|
3,021,667
|
|
|
2,904,426
|
|
|
Manna Pro Products, LLC
|
|
Consumer Goods: Non-Durable
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.00%, 1.00% LIBOR Floor)
|
|
12/8/2023
|
|
613,583
|
|
|
613,583
|
|
|
589,776
|
|
|
MediaOcean
|
|
Media: Advertising, Printing & Publishing
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)(2)
|
|
8/18/2025
|
|
1,750,000
|
|
|
1,745,688
|
|
|
1,745,625
|
|
|
NGS US Finco, LLC
|
|
Capital Equipment
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)
|
|
10/1/2025
|
|
2,970,000
|
|
|
2,958,188
|
|
|
2,968,218
|
|
|
Northern Star Industries, Inc.
|
|
Capital Equipment
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)(4)
|
|
3/28/2025
|
|
4,175,625
|
|
|
4,159,917
|
|
|
4,049,521
|
|
|
Nuvei Technologies Corp.
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
9/29/2025
|
|
975,269
|
|
|
975,269
|
|
|
980,145
|
|
|
Nuvei Technologies Corp.
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
9/29/2025
|
|
4,826,747
|
|
|
4,785,934
|
|
|
4,850,881
|
|
|
Nuvei Technologies Corp.
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
9/29/2025
|
|
707,074
|
|
|
707,074
|
|
|
710,609
|
|
|
Offen, Inc.
|
|
Transportation: Cargo
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%)(2)
|
|
6/22/2026
|
|
3,654,204
|
|
|
3,620,287
|
|
|
3,654,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(1)
|
|
Patriot Rail Company LLC
|
|
Transportation: Cargo
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)
|
|
10/19/2026
|
|
1,750,000
|
|
|
1,715,946
|
|
|
1,715,000
|
|
|
Peraton Corp.
|
|
Aerospace and Defense
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)
|
|
4/29/2024
|
|
3,397,727
|
|
|
3,387,186
|
|
|
3,380,739
|
|
|
PetroChoice Holdings, Inc.
|
|
Chemicals, Plastics and Rubber
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
8/19/2022
|
|
6,822,978
|
|
|
6,807,103
|
|
|
6,473,642
|
|
|
Plaskolite PPC Intermediate II LLC
|
|
Chemicals, Plastics and Rubber
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)
|
|
12/15/2025
|
|
3,217,500
|
|
|
3,164,435
|
|
|
2,984,231
|
|
|
Port Townsend Holdings Company, Inc.
|
|
Forest Products & Paper
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)
|
|
4/3/2024
|
|
3,034,160
|
|
|
3,012,438
|
|
|
2,883,970
|
|
|
PT Network, LLC
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor, 2% PIK)(4)
|
|
11/30/2023
|
|
4,439,284
|
|
|
4,198,393
|
|
|
4,150,286
|
|
|
PT Network, LLC
|
|
Healthcare & Pharmaceuticals
|
|
Class C Common Stock(3)
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
PVHC Holding Corp
|
|
Containers, Packaging and Glass
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)(2)
|
|
8/5/2024
|
|
1,967,369
|
|
|
1,959,755
|
|
|
1,816,508
|
|
|
Quartz Holding Company
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)
|
|
4/2/2026
|
|
6,466,253
|
|
|
6,444,757
|
|
|
6,433,922
|
|
|
RB Media, Inc.
|
|
Media: Diversified & Production
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
8/29/2025
|
|
5,431,250
|
|
|
5,387,100
|
|
|
5,431,250
|
|
|
Rough Country, LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)
|
|
5/25/2023
|
|
4,698,652
|
|
|
4,684,364
|
|
|
4,651,666
|
|
|
Safe Fleet Holdings LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.00%, 1.00% LIBOR Floor)
|
|
2/3/2025
|
|
3,414,188
|
|
|
3,407,774
|
|
|
3,254,233
|
|
|
Safe Fleet Holdings LLC
|
|
Automotive
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.75%, 1.00% LIBOR Floor)
|
|
2/3/2025
|
|
1,332,506
|
|
|
1,291,776
|
|
|
1,271,344
|
|
|
Salient CRGT Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)
|
|
2/28/2022
|
|
4,377,976
|
|
|
4,339,781
|
|
|
3,983,958
|
|
|
SCS Holdings I Inc.
|
|
Wholesale
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)
|
|
7/1/2026
|
|
2,238,750
|
|
|
2,233,552
|
|
|
2,247,257
|
|
|
Shift4 Payments, LLC
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.50%, 1.00% LIBOR Floor)
|
|
11/29/2024
|
|
9,800,000
|
|
|
9,765,521
|
|
|
9,831,360
|
|
|
Sierra Enterprises, LLC
|
|
Beverage & Food
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)
|
|
11/11/2024
|
|
3,909,046
|
|
|
3,900,184
|
|
|
3,889,501
|
|
|
Simplified Logistics, LLC
|
|
Services: Business
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)
|
|
2/27/2022
|
|
3,473,750
|
|
|
3,401,169
|
|
|
3,473,750
|
|
|
SMB Shipping Logistics, LLC
|
|
Transportation: Cargo
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)
|
|
2/5/2024
|
|
1,462,048
|
|
|
1,451,196
|
|
|
1,451,521
|
|
|
Syniverse Holdings, Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.00%, 1.00% LIBOR Floor)
|
|
3/9/2023
|
|
2,927,601
|
|
|
2,908,826
|
|
|
2,762,191
|
|
|
The Imagine Group, LLC
|
|
Media: Advertising, Printing & Publishing
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)
|
|
6/21/2022
|
|
7,780,000
|
|
|
7,740,720
|
|
|
2,650,646
|
|
|
The Octave Music Group, Inc.
|
|
Media: Diversified & Production
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)
|
|
5/28/2021
|
|
4,337,289
|
|
|
4,337,289
|
|
|
4,332,085
|
|
|
ThoughtWorks, Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.00%, 1.00% LIBOR Floor)
|
|
10/11/2024
|
|
6,658,045
|
|
|
6,643,269
|
|
|
6,674,690
|
|
|
Tortoise Borrower LLC
|
|
Banking, Finance, Insurance & Real Estate
|
|
Senior Secured First Lien Term Loan (LIBOR + 3.50%, 1.00% LIBOR Floor)
|
|
1/31/2025
|
|
2,431,688
|
|
|
2,422,832
|
|
|
2,416,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Industry
|
|
Type of Investment
|
|
Maturity
|
|
Par Amount
|
|
Cost
|
|
Fair Value(1)
|
|
United Road Services, Inc.
|
|
Transportation: Cargo
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.75%, 1.00% LIBOR Floor)
|
|
9/2/2024
|
|
3,729,999
|
|
|
3,717,259
|
|
|
3,468,899
|
|
|
Vero Parent, Inc.
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.25%, 1.00% LIBOR Floor)
|
|
8/16/2024
|
|
3,905,587
|
|
|
3,882,806
|
|
|
3,739,600
|
|
|
Wawona Delaware Holdings, LLC
|
|
Beverage & Food
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.75%, 1.00% LIBOR Floor)
|
|
9/11/2026
|
|
4,962,563
|
|
|
4,914,942
|
|
|
4,912,937
|
|
|
Wok Holdings Inc.
|
|
Retail
|
|
Senior Secured First Lien Term Loan (LIBOR + 6.50%, 1.00% LIBOR Floor)
|
|
3/1/2026
|
|
6,600,125
|
|
|
6,549,669
|
|
|
5,321,681
|
|
|
Wrench Group LLC
|
|
Services: Consumer
|
|
Senior Secured First Lien Term Loan (LIBOR + 4.25%, 1.00% LIBOR Floor)
|
|
4/30/2026
|
|
2,220,094
|
|
|
2,203,372
|
|
|
2,205,275
|
|
|
Xebec Global Holdings, LLC
|
|
High Tech Industries
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.25%, 1.00% LIBOR Floor)
|
|
2/12/2024
|
|
8,114,342
|
|
|
8,114,342
|
|
|
8,094,056
|
|
|
Z Medica, LLC
|
|
Healthcare & Pharmaceuticals
|
|
Senior Secured First Lien Term Loan (LIBOR + 5.50%, 1.00% LIBOR Floor)
|
|
9/29/2022
|
|
2,632,500
|
|
|
2,632,500
|
|
|
2,566,424
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
255,853,296
|
|
|
$
|
254,165,185
|
|
|
$
|
238,316,936
|
|
(1) All securities are valued using significant unobservable inputs, which are categorized as Level 3 assets under the definition of ASC 820 fair value hierarchy.
(2) Includes an analysis of the value of any unfunded loan commitments.
(3) Security is non-income producing.
(4) The investment was on non-accrual status as of December 31, 2019.
(5) Par amount includes accumulated paid-in-kind ("PIK") interest and is net of repayments.
Below is certain summarized financial information for the Sierra JV as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
(unaudited)
|
|
|
|
Selected Consolidated Statement of Assets and Liabilities Information:
|
|
|
|
|
Investments in loans at fair value (cost: of $211,433,646 and $254,165,185, respectively)
|
$
|
190,958,188
|
|
|
$
|
238,316,936
|
|
|
Cash and cash equivalents
|
13,713,625
|
|
|
44,019,523
|
|
|
Other assets
|
1,273,693
|
|
|
943,994
|
|
|
Total assets
|
$
|
205,945,506
|
|
|
$
|
283,280,453
|
|
|
|
|
|
|
|
Line of credit (net of debt issuance costs of $2,892,400 and $2,355,405, respectively)
|
121,810,545
|
|
|
202,544,595
|
|
|
Interest payable
|
445,999
|
|
|
852,009
|
|
|
Other liabilities
|
754,429
|
|
|
501,316
|
|
|
Total liabilities
|
123,010,973
|
|
|
203,897,920
|
|
|
Members’ capital
|
82,934,533
|
|
|
79,382,533
|
|
|
Total liabilities and members' capital
|
$
|
205,945,506
|
|
|
$
|
283,280,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
(unaudited)
|
|
Selected Consolidated Statement of Operations Information:
|
|
|
|
|
|
|
|
|
Total investment income
|
$
|
3,245,938
|
|
|
$
|
5,280,076
|
|
|
$
|
11,402,684
|
|
|
$
|
16,305,521
|
|
|
Total expenses
|
(1,945,450)
|
|
|
(3,168,637)
|
|
|
(7,504,395)
|
|
|
(9,581,333)
|
|
|
Net change in unrealized appreciation/(depreciation) of investments
|
7,669,339
|
|
|
(3,584,545)
|
|
|
(4,627,209)
|
|
|
(5,139,832)
|
|
|
Net realized gain/(loss) on investments
|
(868,215)
|
|
|
134,566
|
|
|
(11,619,079)
|
|
|
(4,637,590)
|
|
|
Net income/(loss)
|
$
|
8,101,612
|
|
|
$
|
(1,338,540)
|
|
|
$
|
(12,347,999)
|
|
|
$
|
(3,053,234)
|
|
In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, the Company must determine if any of its portfolio companies, if any, is considered a “significant subsidiary.” Pursuant to the SEC’s recently adopted amendments to Rule 1-02(w) of Regulation S-X, in evaluating these portfolio companies, there are two tests utilized to determine if any a portfolio company is considered a significant subsidiary: the investment test and the income test.
After performing the analysis for the nine months ended September 30, 2020, excluding Sierra JV, the Company determined that no portfolio company would be deemed to be a significant subsidiary pursuant to Rule 10-01(b)(1) of Regulation S-X.
The Company also determined that the fair value of the Sierra JV exceeded 10% of the Company's total investments as of the end of the most recently completed fiscal year. Accordingly, the related summary financial information is presented in the “Sierra Senior Loan Strategy JV I LLC” heading above.
Note 4. Fair Value Measurements
The Company follows ASC 820 for measuring the fair value of portfolio investments. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in the consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy:
•Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.
•Level 2 — Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.
•Level 3 — Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and is based upon management’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the Market or Income Approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.
In addition to using the above inputs in investment valuations, the Company employs the valuation policy approved by the board of directors that is consistent with ASC 820 (see Note 2). Consistent with the Company’s valuation policy, the Company evaluates the source of inputs, including any markets in which the Company’s investments are trading, in determining fair value.
The following table presents the fair value measurements of the Company’s total investments, by major class according to the fair value hierarchy, as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Asset
|
|
|
|
|
|
|
|
|
|
Senior secured first lien term loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
318,936,542
|
|
|
$
|
318,936,542
|
|
|
Senior secured first lien notes
|
|
—
|
|
|
—
|
|
|
8,306,054
|
|
|
8,306,054
|
|
|
Senior secured second lien term loans
|
|
—
|
|
|
—
|
|
|
81,120,746
|
|
|
81,120,746
|
|
|
Subordinated notes
|
|
—
|
|
|
—
|
|
|
44,535,807
|
|
|
44,535,807
|
|
|
Equity/warrants
|
|
24,432,439
|
|
|
—
|
|
|
37,498,802
|
|
|
61,931,241
|
|
|
Total
|
|
$
|
24,432,439
|
|
|
$
|
—
|
|
|
$
|
490,397,951
|
|
|
$
|
514,830,390
|
|
|
Investments measured at net asset value(1)
|
|
|
|
|
|
|
|
$
|
79,801,420
|
|
|
Total Investments, at fair value
|
|
|
|
|
|
|
|
$
|
594,631,810
|
|
(1)Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in
the table are intended to permit reconciliation of the fair value hierarchy to the amount presented in the Consolidated Statements of Assets and Liabilities.
The following table presents the fair value measurements of the Company’s total investments, by major class according to the fair value hierarchy, as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Asset
|
|
|
|
|
|
|
|
|
|
Senior secured first lien term loans
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
328,816,197
|
|
|
$
|
328,816,197
|
|
|
Senior secured first lien notes
|
|
—
|
|
|
—
|
|
|
14,354,825
|
|
|
14,354,825
|
|
|
Senior secured second lien term loans
|
|
—
|
|
|
—
|
|
|
122,817,885
|
|
|
122,817,885
|
|
|
Subordinated notes
|
|
—
|
|
|
—
|
|
|
63,021,420
|
|
|
63,021,420
|
|
|
Equity/warrants
|
|
33,892,511
|
|
|
—
|
|
|
38,521,450
|
|
|
72,413,961
|
|
|
Total
|
|
$
|
33,892,511
|
|
|
$
|
—
|
|
|
$
|
567,531,777
|
|
|
$
|
601,424,288
|
|
|
Investments measured at net asset value(1)
|
|
|
|
|
|
|
|
$
|
74,199,642
|
|
|
Total Investments, at fair value
|
|
|
|
|
|
|
|
$
|
675,623,930
|
|
(1)Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in
the table are intended to permit reconciliation of the fair value hierarchy to the amount presented in the Consolidated Statements of Assets and Liabilities.
The following table provides a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the nine months ended September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured
First Lien
Term Loans
|
|
Senior
Secured
First Lien
Notes
|
|
Senior
Secured
Second Lien
Term Loans
|
|
Subordinated Notes
|
|
Equity/Warrants
|
|
Total
|
|
Balance, December 31, 2019
|
$
|
328,816,197
|
|
|
$
|
14,354,825
|
|
|
$
|
122,817,885
|
|
|
$
|
63,021,420
|
|
|
$
|
38,521,450
|
|
|
$
|
567,531,777
|
|
|
Purchases
|
52,326,722
|
|
|
1,000,000
|
|
|
989,526
|
|
|
35,599
|
|
|
446,272
|
|
|
54,798,119
|
|
|
Sales
|
(30,275,038)
|
|
|
(2,613,875)
|
|
|
(30,741,097)
|
|
|
(3,994,765)
|
|
|
(2,096,407)
|
|
|
(69,721,182)
|
|
|
Transfers in
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Transfers out
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of discount/(premium)
|
870,213
|
|
|
—
|
|
|
(393,435)
|
|
|
—
|
|
|
—
|
|
|
476,778
|
|
|
Paid-in-kind interest income
|
|
|
|
|
|
|
|
|
28,530
|
|
|
28,530
|
|
|
Net realized gains/(losses)
|
(23,906,698)
|
|
|
(5,130,000)
|
|
|
(33,405,025)
|
|
|
—
|
|
|
547,948
|
|
|
(61,893,775)
|
|
|
Net change in unrealized appreciation/(depreciation)
|
(8,894,854)
|
|
|
695,104
|
|
|
21,852,892
|
|
|
(14,526,447)
|
|
|
51,009
|
|
|
(822,296)
|
|
|
Balance, September 30, 2020
|
$
|
318,936,542
|
|
|
$
|
8,306,054
|
|
|
$
|
81,120,746
|
|
|
$
|
44,535,807
|
|
|
$
|
37,498,802
|
|
|
$
|
490,397,951
|
|
|
Change in net unrealized appreciation/ (depreciation) in investments held as of September 30, 2020
|
$
|
(21,639,540)
|
|
|
$
|
(157,696)
|
|
|
$
|
(5,733,639)
|
|
|
$
|
(14,526,447)
|
|
|
$
|
656,243
|
|
|
$
|
(41,401,079)
|
|
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the nine months ended September 30, 2020, the Company recorded no transfers from Level 3 to Level 2 and no transfers from Level 2 to Level 3. The Company recorded no other transfers between levels.
The following table provides a reconciliation of the beginning and ending balances for total investments that use Level 3 inputs for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Secured
First Lien
Term Loans
|
|
Senior
Secured
First Lien
Notes
|
|
Senior
Secured
Second Lien
Term Loans
|
|
Subordinated Notes
|
|
Equity/Warrants
|
|
Total
Return
Swap
|
|
Total
|
|
Balance, December 31, 2018
|
$
|
479,593,279
|
|
|
$
|
30,752,993
|
|
|
$
|
169,923,547
|
|
|
$
|
66,187,857
|
|
|
$
|
75,480,034
|
|
|
$
|
(6,524,904)
|
|
|
$
|
815,412,806
|
|
|
Purchases
|
96,284,986
|
|
|
-
|
|
9,687,252
|
|
|
7,400,227
|
|
|
(7,115,943)
|
|
|
-
|
|
106,256,522
|
|
|
Sales
|
(165,383,818)
|
|
|
(15,271,250)
|
|
|
(27,327,760)
|
|
|
(11,290,388)
|
|
|
(43,626,923)
|
|
|
-
|
|
(262,900,139)
|
|
|
Transfers in
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
—
|
|
|
Transfers out
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
-
|
|
—
|
|
|
Amortization of discount/(premium)
|
670,606
|
|
|
-
|
|
509,528
|
|
|
-
|
|
-
|
|
-
|
|
1,180,134
|
|
|
Paid-in-kind interest income
|
3,311,294
|
|
|
-
|
|
826,220
|
|
|
-
|
|
-
|
|
-
|
|
4,137,514
|
|
|
Net realized gains/(losses)
|
(47,855,463)
|
|
|
(1,728,750)
|
|
|
84,328
|
|
|
(1,981,643)
|
|
|
15,610,206
|
|
|
-
|
|
(35,871,322)
|
|
|
Net change in unrealized appreciation/(depreciation)
|
(1,156,852)
|
|
|
1,342,007
|
|
|
(10,986,305)
|
|
|
2,161,986
|
|
|
4,358,110
|
|
|
6,524,904
|
|
|
2,243,850
|
|
|
Balance, September 30, 2019
|
$
|
365,464,032
|
|
|
$
|
15,095,000
|
|
|
$
|
142,716,810
|
|
|
$
|
62,478,039
|
|
|
$
|
44,705,484
|
|
|
$
|
—
|
|
|
$
|
630,459,365
|
|
|
Change in net unrealized appreciation/(depreciation) in investments held as of September 30, 2019
|
$
|
(29,669,966)
|
|
|
$
|
54,808
|
|
|
$
|
(11,610,130)
|
|
|
$
|
(716,706)
|
|
|
$
|
14,153
|
|
|
$
|
—
|
|
|
$
|
(41,927,841)
|
|
Transfers between levels of the fair value hierarchy are reported at the beginning of the reporting period in which they occur. During the nine months ended September 30, 2019, the Company recorded no transfers from Level 3 to Level 2 and no transfers from Level 2 to Level 3 due to availability of market data and observable valuation inputs to support the valuation. The Company recorded no other transfers between levels.
The following table presents the quantitative information about Level 3 fair value measurements of the Company’s total investments, as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value
|
|
Valuation techniques
|
|
Unobservable input(1)
|
|
Range (weighted average)
|
|
Senior Secured First Lien Term Loans
|
|
$
|
209,151,629
|
|
|
Income Approach (DCF)
|
|
Market Yield
|
|
4.83% - 97.07% (14.15%)
|
|
Senior Secured First Lien Term Loans
|
|
83,230,973
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)/ Enterprise Value Analysis
|
|
EBITDA Multiple
Discount Rate
Expected Proceeds
|
|
2.00x - 9.00x (6.37x)
16.90% - 18.90% (17.90%)
$48.00 - $115.00 ($63.03)
|
|
Senior Secured First Lien Term Loans
|
|
26,553,940
|
|
|
Recent Arms-Length Transaction
|
|
Recent Arms-Length Transaction
|
|
N/A
|
|
Senior Secured First Lien Notes
|
|
990,000
|
|
|
Recent Arms-Length Transaction
|
|
Recent Arms-Length Transaction
|
|
N/A
|
|
Senior Secured First Lien Notes
|
|
7,316,054
|
|
|
Income Approach (DCF)
|
|
Market Yield
|
|
12.78% - 12.78% (12.78%)
|
|
Senior Secured Second Lien Term Loan
|
|
42,007,655
|
|
|
Income Approach (DCF)
|
|
Market Yield
|
|
7.43% - 22.00% (12.57%)
|
|
Senior Secured Second Lien Term Loans
|
|
39,113,091
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)
|
|
EBITDA Multiple
Discount Rate
Expected Proceeds
|
|
5.00x - 8.50x (6.83x)
20.00% - 22.50% (21.21%)
$172.00 - $233.00 ($202.50)
|
|
Subordinated Notes
|
|
39,138
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)
|
|
EBITDA Multiple
|
|
3.00x - 5.00x (3.50x)
|
|
Subordinated Notes
|
|
44,461,069
|
|
|
Income Approach (DCF)
|
|
Discount Rate
Projected Default rates
Recovery Rates
Reinvestment Rates
Prepayment Rates
|
|
12.15% - 39.00% (21.43%)
2.00% - 3.00% (2.29%)
60.00% - 65.00% (62.06%)
97.00% - 99.50% (97.74%)
15.00% - 25.00% (20.00%)
|
|
Subordinated Notes
|
|
35,600
|
|
|
Recent Arms-Length Transaction
|
|
Recent Arms-Length Transaction
|
|
N/A
|
|
Equity
|
|
36,801,963
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)/Enterprise Value Analysis
|
|
Book Value Multiple
EBITDA Multiple
Capitalization Rate
Expected Proceeds
|
|
0.75x - 1.00 (0.88x)
0.50x - 10.00x (8.13x)
7.50% - 9.00% (8.33%)
$0.10 - $66.20 ($1.37)
|
|
Equity
|
|
696,839
|
|
|
Recent Arms-Length Transaction
|
|
Recent Arms-Length Transaction
|
|
N/A
|
|
Total
|
|
$
|
490,397,951
|
|
|
|
|
|
|
|
(1)Represents the method used when the Company has determined that market participants would use such inputs when measuring the fair value of these investments.
The following table presents the quantitative information about Level 3 fair value measurements of the Company’s total investments, as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of Investment
|
|
Fair Value
|
|
Valuation techniques
|
|
Unobservable input(1)
|
|
Range (weighted average)
|
|
Senior Secured First Lien Term Loans
|
|
$
|
265,263,318
|
|
|
Income Approach (DCF)
|
|
Market Yield
|
|
6.11% - 19.47% (9.82%)
|
|
Senior Secured First Lien Term Loans
|
|
36,067,276
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)/ Enterprise Value Analysis
|
|
EBITDA Multiple Discount Rate
Expected Proceeds
|
|
3.50x - 8.50x (6.28x)
17.75% - 19.50% (18.63%)
$9.0M - $65.0M ($9.0M)
|
|
Senior Secured First Lien Term Loans
|
|
27,485,603
|
|
|
Recent Arms-Length Transaction
|
|
Recent Arms-Length Transaction
|
|
N/A
|
|
Senior Secured First Lien Notes
|
|
14,354,825
|
|
|
Income Approach (DCF)
|
|
Market Yield
|
|
10.94% - 65.06% (30.31%)
|
|
Senior Secured Second Lien Term Loan
|
|
112,179,645
|
|
|
Income Approach (DCF)
|
|
Market Yield
|
|
8.98% - 31.18% (11.67%)
|
|
Senior Secured Second Lien Term Loans
|
|
10,638,240
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)
|
|
EBITDA Multiple
Expected Proceeds
|
|
4.50x - 123.75x (25.47x)
$123.75 - $123.75 ($123.75)
|
|
Subordinated Notes
|
|
1,177,159
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF) / Recent Arms-length transaction
|
|
EBITDA Multiple
Discount Rate
Recent Arms-length transaction
|
|
7.50x - 7.50x (7.50x)
13.00% - 13.00% (13.00%)
|
|
Subordinated Notes
|
|
61,844,261
|
|
|
Income Approach (DCF)
|
|
Discount Rate
|
|
9.40% - 23.00% (17.32%)
|
|
Equity
|
|
35,575,070
|
|
|
Market Approach (Guideline Comparable)/Income Approach (DCF)/Enterprise Value Analysis
|
|
Book Value Multiple
EBITDA Multiple
Capitalization Rate
Discount Rate
Expected Proceeds
|
|
$1.25x - $1.25 ($1.25)
3.50x - 10.00x (7.92x)
7.63% - 8.50% (8.16%)
9.90% - 21.25% (18.30%)
$2.60M - $65.00M ($11.45M)
|
|
Equity
|
|
2,946,380
|
|
|
Recent Arms-Length Transaction
|
|
Recent Arms-Length Transaction
|
|
N/A
|
|
Total
|
|
$
|
567,531,777
|
|
|
|
|
|
|
|
(1)Represents the method used when the Company has determined that market participants would use such inputs when measuring the fair value of these investments.
The significant unobservable inputs used in the fair value measurement of the Company’s debt and derivative investments are market yields. Increases in market yields would result in lower fair value measurements.
The significant unobservable inputs used in the fair value measurement of the Company’s equity/warrants investments are comparable company multiples of revenue or EBITDA for the latest twelve months (“LTM”), next twelve months (“NTM”) or a reasonable period a market participant would consider. Increases in EBITDA multiples in isolation would result in higher fair value measurement.
Note 5. Total Return Swap
On August 27, 2013, the Company, through its wholly-owned financing subsidiary, Arbor, entered into a Total Return Swap ("TRS") with Citibank, N.A. (“Citibank”) that is indexed to a basket of loans.
The TRS with Citibank enabled Arbor to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans were not directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank.
SIC Advisors acted as the investment manager of Arbor and had discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS were governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively established the TRS, and are collectively referred to herein as the “TRS Agreement”.
On July 22, 2019, the TRS with Citibank was terminated, and the TRS was fully wound down during the quarter ended September 30, 2019.
Arbor was required to pay a minimum usage fee in connection with the TRS of 1.60% on the amount equal to 85% of the average daily unused portion of the maximum amount permitted under the TRS. Such minimum usage fee did not apply during the first 365 days and last 60 days of the term of the TRS. Arbor also paid Citibank customary fees in connection with the establishment and maintenance of the TRS. During the three and nine months ended September 30, 2019, Arbor paid no minimum usage fees.
Arbor was required to initially cash collateralize a specified percentage of each loan (generally 20% to 30% of the market value of such loan) included under the TRS in accordance with margin requirements described in the TRS Agreement. Arbor was restricted from removing the cash collateral posted to Citibank and was required to post additional collateral from time to time as a result of a decline in the mark-to-market value of the portfolio of loans subject to the TRS. The obligations of Arbor under the TRS Agreement were non-recourse to the Company and the Company’s exposure under the TRS Agreement was limited to the value of the Company’s investment in Arbor, which generally equaled the value of cash collateral provided by Arbor under the TRS Agreement.
Transactions in TRS contracts during the three and nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest income and settlement from TRS portfolio
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
309,388
|
|
|
Traded gains/(loss) on TRS loan sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,632,904)
|
|
|
Net realized gains/(loss) on TRS portfolio
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(9,323,516)
|
|
|
Net change in unrealized appreciation/(depreciation) on TRS portfolio
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,524,904
|
|
The volume of the Company’s derivative transactions for the three and nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Average notional amount of contracts(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,225,430
|
|
(1)Average notional amount is based on the average month end balances for the three and nine months ended September 30, 2020 and 2019, which is representative of the volume of notional contract amounts held during each year.
Note 6. Borrowings
The following table shows the Company's outstanding debt as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Total
Commitment
|
|
Balance
Outstanding
|
|
Unused
Commitment
|
|
Total
Commitment
|
|
Balance
Outstanding
|
|
Unused
Commitment
|
|
ING Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
215,000,000
|
|
|
$
|
88,100,000
|
|
|
$
|
126,900,000
|
|
|
Alpine Credit Facility
|
300,000,000
|
|
|
180,000,000
|
|
|
120,000,000
|
|
|
300,000,000
|
|
|
240,000,000
|
|
|
60,000,000
|
|
|
Total before deferred financing costs
|
300,000,000
|
|
|
180,000,000
|
|
|
120,000,000
|
|
|
515,000,000
|
|
|
328,100,000
|
|
|
186,900,000
|
|
|
Unamortized deferred financing costs
|
—
|
|
|
(347,588)
|
|
|
—
|
|
|
—
|
|
|
(2,235,279)
|
|
|
—
|
|
|
Total borrowings outstanding, net of deferred financing costs
|
$
|
300,000,000
|
|
|
$
|
179,652,412
|
|
|
$
|
120,000,000
|
|
|
$
|
515,000,000
|
|
|
$
|
325,864,721
|
|
|
$
|
186,900,000
|
|
As a BDC, the Company is generally allowed to employ leverage to the extent that its asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met) after giving effect to such leverage. The amount of leverage that the Company employs at any time depends on its assessment of the market and other factors at the time of any proposed borrowing.
The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s margin borrowings are estimated based upon market interest rates for its own borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. The Company’s debt obligation is recorded at its carrying value, which approximates fair value.
ING Credit Facility
On August 12, 2016, the Company amended its existing senior secured syndicated revolving credit facility (the “ING Credit Facility” as amended from time to time as described below) pursuant to a Senior Secured Revolving Credit Agreement (the “Revolving Credit Agreement” as amended from time to time as described below) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING Credit Facility was secured by substantially all of the Company’s assets, subject to certain exclusions as further set forth in an Amended and Restated Guarantee, Pledge and Security Agreement (the “Security Agreement”) entered into in connection with the Revolving Credit Agreement, among the Company, the subsidiary guarantors party thereto, ING Capital LLC, as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto and ING Capital LLC, as Collateral Agent. The ING Credit Facility also included usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature.
On May 15, 2020, the Company entered into Amendment No. 4 to the Revolving Credit Agreement to among other things, (i) shorten the maturity date from March 31, 2021 to September 30, 2020, (ii) accelerate the amortization of the Revolving Credit Agreement, and (iii) provide for the prepayment of the outstanding loans under the Revolving Credit Agreement in an aggregate principal amount of not less than $20 million. On July 22, 2020, the Company paid all remaining outstanding obligations under the Revolving Credit Agreement. On July 31, 2020 (the “Termination Date”), the Company terminated the commitments on the Credit Agreement. The repayment of the outstanding obligations under the Revolving Credit Agreement was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to a realized loss of $217,950 and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
The ING Credit Facility allowed for the Company, at its option, to borrow money at a rate of either (i) an alternate base rate plus 1.50% per annum or (ii) LIBOR plus 2.50% per annum. The interest rate margins were subject to certain step-downs upon the satisfaction of certain conditions described in the Revolving Credit Agreement. The alternate base rate was the greatest of (i) the U.S. Prime Rate set forth in the Wall Street Journal, (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) three month LIBOR plus 1.00%. As of September 30, 2020 and December 31, 2019, the commitment under the ING Credit Facility was $0 and $215,000,000, respectively. Availability of loans under the ING Credit Facility was linked to the valuation of the collateral pursuant to a borrowing base mechanism.
The Company was also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Credit Facility. The commitment fee was (i) 1.50% if the used portion of the aggregate commitments is less than or equal to 40%, (ii) 0.75% if the used portion of the aggregate commitments is greater than 40% and less than or equal to 65% or (iii) 0.50% if the used portion of the aggregate commitments is greater than 65%. The ING Credit Facility provided that the Company may use the proceeds of the ING Credit Facility for general corporate purposes, including making investments in accordance with the Company’s investment objective and strategy.
Borrowings under the Revolving Credit Agreement were subject to, among other things, a minimum borrowing base. Substantially all of the Company’s assets were pledged as collateral under the Revolving Credit Agreement. The ING Credit Facility required the Company to, among other things (i) make representations and warranties regarding the collateral as well the Company’s business and operations, (ii) agree to certain indemnification obligations, and (iii) agree to comply with various affirmative and negative covenants. The documents for the Revolving Credit Agreement also included default provisions, such as the failure to make timely payments under the Revolving Credit Agreement, the occurrence of a change in control, and the failure by the Company to materially perform under the operative agreements governing the Revolving Credit Agreement, which, if not complied with, could have accelerated repayment under the Revolving Credit Agreement, thereby materially and adversely affecting the Company’s liquidity, financial condition and results of operations.
In connection with the security interest established under the Security Agreement, the Company, ING Capital LLC, in its capacity as collateral agent, and State Street Bank and Trust Company, in its capacity as the Company’s custodian, entered into a control agreement dated as of December 4, 2013, in order to, among other things, perfect the security interest granted pursuant to the Security Agreement in, and provide for control over, the related collateral. As a result of the termination of the Revolving Credit Agreement, the Security Agreement was terminated effective as of the Termination Date.
As of December 31, 2019, the carrying amount of the Company’s borrowings under the ING Credit Facility approximated their fair value. The fair value of the Company’s debt obligation was determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s borrowings under the ING Credit Facility was estimated based upon market interest rates of the Company’s borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. As of December 31, 2019, certain unobservable inputs used to value the ING Credit Facility were deemed to be Level 3, as defined in Note 4.
As of December 31, 2019, the financing costs of $1,164,341 related to the ING Credit Facility were capitalized and were being amortized over its term. The following table shows additional information about the interest and financing costs related to the ING Credit Facility for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, (unaudited)
|
|
For the Nine Months Ended
September 30, (unaudited)
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest expense related to the ING Credit Facility
|
$
|
18,023
|
|
|
$
|
1,322,880
|
|
|
$
|
1,729,272
|
|
|
$
|
4,279,682
|
|
|
Financing expenses related to the ING Credit Facility
|
144,911
|
|
|
233,388
|
|
|
1,238,677
|
|
|
721,574
|
|
|
Total interest and financing expenses related to the ING Credit Facility
|
$
|
162,934
|
|
|
$
|
1,556,268
|
|
|
$
|
2,967,949
|
|
|
$
|
5,001,256
|
|
|
Weighted average outstanding debt balance of the ING Credit Facility
|
$
|
2,624,148
|
|
|
$
|
88,100,000
|
|
|
$
|
49,254,498
|
|
|
$
|
95,194,505
|
|
|
Weighted average interest rate of the ING Credit Facility (annualized)
|
2.9
|
%
|
|
5.9
|
%
|
|
4.6
|
%
|
|
5.9
|
%
|
Alpine Credit Facility
On September 29, 2017, the Company’s wholly-owned, special purpose financing subsidiary, Alpine, amended its existing revolving credit facility (the “Alpine Credit Facility”) pursuant to an Amended and Restated Loan Agreement (the “Amendment”) with JPMorgan Chase Bank, National Association (“JPMorgan”), as administrative agent and lender, the Financing Providers from time to time party thereto, SIC Advisors, as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto (the “Loan Agreement”). The Loan Agreement was amended to, among other things, (i) extend the reinvestment period until December 29, 2020, (ii) extend the scheduled termination date until March 29, 2022, (iii) decrease the applicable margin for advances to 2.85% per annum and (iv) increase the compliance condition for net advances to 55% of net asset value. Alpine’s obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in substantially all of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company.
The Alpine Credit Facility provides for borrowings in an aggregate principal amount up to $300,000,000 on a committed basis. Borrowings under the Alpine Credit Facility are subject to compliance with a NAV coverage ratio with respect to the current value of Alpine’s portfolio and various eligibility criteria must be satisfied with respect to the initial acquisition of each loan in Alpine’s portfolio. Any amounts borrowed under the Alpine Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 29, 2022.
Pricing under the Alpine Credit Facility for each one month calculation period is based on LIBOR for an interest period of one month, plus a spread of 2.85% per annum. If LIBOR is unavailable, pricing will be determined at the prime rate offered by JPMorgan or the federal funds effective rate, plus a spread of 2.85% per annum. Interest is payable monthly in arrears. Alpine is also required to pay a commitment fee of 1.00% on the average daily unused amount of the financing commitments to the extent that $300,000,000 has not been borrowed.
Borrowings of Alpine are considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act, applicable to BDCs.
Pursuant to a Sale and Contribution Agreement entered into between the Company and Alpine (the “Sale Agreement”) in connection with the Alpine Credit Facility, the Company may sell loans or contribute cash or loans to Alpine from time to time and will retain a residual interest in any assets contributed through its ownership of Alpine or will receive fair market value for any assets sold to Alpine. In certain circumstances the Company may be required to repurchase certain loans sold to Alpine. In addition to the acquisition of loans pursuant to the Sale Agreement, Alpine may purchase additional assets from various sources. Alpine has appointed SIC Advisors to manage its portfolio of assets pursuant to the terms of a Portfolio Management Agreement between SIC Advisors and Alpine.
As of September 30, 2020 and December 31, 2019, the carrying amount of the Company’s borrowings under the Alpine Credit Facility approximated the fair value of the Company’s debt obligation. The fair value of the Company’s debt obligation is determined in accordance with ASC 820, which defines fair value in terms of the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The fair value of the Company’s borrowings under the Alpine Credit Facility is estimated based upon market interest rates of the Company’s borrowings or entities with similar credit risk, adjusted for nonperformance risk, if any. As of September 30, 2020 and December 31, 2019, certain unobservable inputs used to value the Alpine Credit Facility would be deemed to be Level 3, as defined in Note 4.
As of September 30, 2020 and December 31, 2019, the financing costs of $597,263 and $1,070,938 related to the Alpine Credit Facility has been capitalized and are being amortized over the respective terms. The following table shows additional information about the interest and financing costs related to the Alpine Credit Facility for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, (unaudited)
|
|
For the Nine Months Ended
September 30, (unaudited)
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Interest expense related to the Alpine Credit Facility
|
$
|
1,693,497
|
|
|
$
|
3,277,956
|
|
|
$
|
6,145,062
|
|
|
$
|
10,017,294.54
|
|
|
Financing expenses related to the Alpine Credit Facility
|
249,674
|
|
|
244,557
|
|
|
735,697
|
|
|
725,697
|
|
|
Total Interest and financing expenses related to the Alpine Credit Facility
|
$
|
1,943,171
|
|
|
$
|
3,522,513
|
|
|
$
|
6,880,759
|
|
|
$
|
10,742,992
|
|
|
Weighted average outstanding debt balance of the Alpine Credit Facility
|
$
|
180,000,000
|
|
|
$
|
240,000,000
|
|
|
$
|
189,416,058
|
|
|
$
|
240,000,000
|
|
|
Weighted average interest rate of the Alpine Credit Facility (annualized)
|
3.7
|
%
|
|
5.3
|
%
|
|
4.3
|
%
|
|
5.5
|
%
|
Note 7. Agreements
Investment Advisory Agreement
On April 5, 2012, the Company entered into an investment advisory agreement (the “Investment Advisory Agreement”) with SIC Advisors to manage the Company’s investment activities. The Investment Advisory Agreement became effective as of April 17, 2012, the date that the Company met its minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date. Unless earlier terminated pursuant to its terms, the Investment Advisory Agreement will remain in effect from year-to-year thereafter if approved annually at an in-person meeting of the Company’s board of directors by a majority of the directors who are not "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Company or the Adviser, and either the Company’s board of directors or the holders of a majority of the Company’s outstanding voting securities. Most recently, on April 3, 2020, the Company’s board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term, which will expire on April 17, 2021.
Pursuant to the Investment Advisory Agreement, SIC Advisors implements the Company’s business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company’s board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the Investment Advisory Agreement, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of the Company’s gross assets payable quarterly in arrears. For purposes of calculating the base management fee, the term “gross assets” includes any assets acquired with the proceeds of leverage. “Gross assets” also includes any cash collateral that was posted with respect to the TRS, adjusted for realized and unrealized appreciation. For the first quarter of the Company’s operations, the base management fee was calculated based on the initial value of the Company’s gross assets. Subsequently, the base management fee is calculated based on the gross assets at the end of each completed calendar quarter. Base management fees for any partial quarter are appropriately pro-rated. For the three and nine months ended September 30, 2020, the Company recorded an expense for base management fees of $3,021,491 and $9,217,687, respectively. For the three and nine months ended September 30, 2019, the Company recorded an expense for base management fees of $4,180,333 and $12,957,961, respectively. As of September 30, 2020 and December 31, 2019, the Company recorded a base management fee payable of $3,021,491 and $4,060,518, respectively.
The incentive fee consists of the following two parts:
An incentive fee on net investment income (“Subordinated Incentive Fee on Income”) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No Subordinated Incentive Fee on Income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to stockholders of 1.75% per quarter on the Company’s net assets at the end of the immediately preceding fiscal quarter (the “Preferred Quarterly Return”). All pre-incentive fee net investment income, if any, that exceeds the Preferred Quarterly Return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. The Company refers to this portion of its Subordinated Incentive Fee on Income as the “Catch Up”. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which the Company’s pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the Subordinated Incentive Fee on Income shall equal 20% of the amount of pre-incentive fee net
investment income, because the Preferred Quarterly Return and Catch Up will have been achieved. There was no incentive fee on net investment income that was earned on the TRS.
For the three and nine months ended September 30, 2020 the Company recorded no incentive fees. For the three and nine months ended September 30, 2019 the Company recorded $176,061 in incentive fees. As of September 30, 2020 and December 31, 2019, the Company recorded no incentive fees payable.
A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the Investment Advisory Agreement is in effect. If the Investment Advisory Agreement is terminated, the incentive fee will also become payable as of the effective date of such termination. The incentive fee equals 20% of the realized capital gains, less the aggregate amount of any previously paid capital gains incentive fees. The incentive fee on capital gains is equal to realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis.
Under GAAP, the Company calculates capital gains incentive fees as if the Company had realized all assets at their fair values and liabilities at their settlement amounts as of the reporting date. GAAP requires that the capital gains incentive fee accrual assume the cumulative aggregate unrealized capital appreciation is realized, even though such unrealized capital appreciation is not payable under the Investment Advisory Agreement. Accordingly, the Company accrues a provisional capital gains incentive fee taking into account any unrealized gains or losses. There can be no assurance that such unrealized capital appreciation will be realized in the future and that the provisional capital gains incentive fee will become payable.
For the three and nine months ended September 30, 2020 and 2019, the Company recorded no capital gains incentive fees. As of September 30, 2020 and December 31, 2019, the Company recorded no capital gains incentive fees payable.
Administration Agreement
On April 5, 2012, the Company entered into an administration agreement (the “Administration Agreement”) with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes the Company with administrative services necessary to conduct its day-to-day operations. Pursuant to the 1940 Act, the Administration Agreement remained in effect for an initial period of two years from its effective date. The Administration Agreement became effective on April 17, 2012, the date that we met our minimum offering requirement. Pursuant to its terms, and unless earlier terminated as described below, the Administration Agreement will remain in effect from year-to-year if approved annually by a majority of our directors who are not "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Company or Medley Capital LLC, and either the holders of a majority of our outstanding voting securities or our board of directors. Most recently, on April 3, 2020, the Company’s board of directors approved the renewal of the Administration Agreement for an additional one-year term, which will expire on April 17, 2021. Medley Capital LLC is reimbursed for administrative expenses it incurs on the Company’s behalf in performing its obligations. Such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. The Company does not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. On February 28, 2013, Medley Capital LLC entered into a Sub-Administration Agreement with State Street Bank Global Fund Accounting and Custody to perform certain financial, accounting, administrative and other services on behalf of the Company. For the three and nine months ended September 30, 2020, the Company recorded administrator expenses of $431,598 and $1,822,255, respectively. For the three and nine months ended September 30, 2019, the Company recorded administrator expenses of $998,134 and $2,156,557, respectively. As of September 30, 2020 and December 31, 2019, the Company had administrator fees payable of $431,598 and $381,923, respectively.
Note 8. Related Party Transactions
We have entered into an Investment Advisory Agreement with SIC Advisors in which our senior management holds an equity interest and were party to the Expense Support Agreement through December 31, 2016 the date on which such agreement expired. Members of our senior management also serve as principals of other investment managers affiliated with SIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.
We have entered into an Administration Agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors.
We have entered into a license agreement with SIC Advisors under which SIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Sierra” for specified purposes in our business. Under this license agreement, we will have a right to use the “Sierra” name, subject to certain conditions, for so long as SIC Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the “Sierra” name.
Opportunities for co-investments may arise when SIC Advisors or an affiliated adviser becomes aware of investment opportunities that may be appropriate for the Company and other clients or affiliated funds. The Company obtained an exemptive order from the SEC on November 25, 2013 (the “Prior Exemptive Order”). On March 29, 2017, the Company, SIC Advisors and certain other affiliated funds and investment advisers received an exemptive order (the "Exemptive Order") that supersedes the Prior Exemptive Order and allows affiliated registered investment companies to participate in co-investment transactions with us that would otherwise have been prohibited under Section 17(d) and 57(a)(4) and Rule 17d-1. On October 4, 2017, the Company, SIC Advisors and certain of our affiliates received an exemptive order that supersedes the Exemptive Order (the “Current Exemptive Order”) and allows, in addition to the entities already covered by the Exemptive Order, Medley LLC and its subsidiary, Medley Capital LLC, to the extent they hold financial assets in a principal capacity, and any direct or indirect, wholly- or majority-owned subsidiary of Medley LLC that is formed in the future, to participate in co-investment transactions with us that would otherwise be prohibited by either or both of Sections 17(d) and 57(a)(4) of the 1940 Act.
Note 9. Directors Fees
For the three and nine months ended September 30, 2020, the Company recorded directors' fees expenses in General and Administrative expenses on the Consolidated Statement of Operations of $216,000 and $755,375, respectively. For the three and nine months ended September 30, 2019, the Company recorded directors' fees expenses in General and Administrative expenses on the Consolidated Statement of Operations of $246,750 and $783,750, respectively.
Note 10. Earnings Per Share
In accordance with the provisions of ASC Topic 260 - Earnings per Share, basic earnings per share is computed by dividing earnings available to common stockholders 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 table sets forth the computation of the weighted average basic and diluted net increase in net assets per share from operations for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net increase/(decrease) in net assets from operations
|
$
|
32,120,421
|
|
|
$
|
(18,812,388)
|
|
|
$
|
(78,443,683)
|
|
|
$
|
(20,953,094)
|
|
|
Weighted average common shares outstanding
|
102,742,489
|
|
|
101,035,420
|
|
|
102,771,213
|
|
|
100,116,493
|
|
|
Weighted average basic and diluted earnings/(loss) per common share
|
$
|
0.31
|
|
|
$
|
(0.19)
|
|
|
$
|
(0.76)
|
|
|
$
|
(0.21)
|
|
Note 11. Commitments
As of September 30, 2020 and December 31, 2019, the Company had $22,117,410 and $32,654,545, respectively, of unfunded commitments under loan and financing agreements. These amounts are primarily composed of commitments for senior secured term loans, revolvers, and additional capital contributions for the Sierra JV. The unrealized gain or loss associated with unfunded commitments is recorded in the financial statements and reflected as an adjustment to the valuation of the related security in the Consolidated Schedule of Investments. The par amount of the unfunded commitments are not recognized by the Company until the commitment is funded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
1888 Industrial Services, LLC
|
$
|
358,560
|
|
|
$
|
424,422
|
|
|
AAAHI Acquisition Corporation
|
—
|
|
|
1,586,982
|
|
|
Access Media Holdings, LLC
|
88,200
|
|
|
88,200
|
|
|
Alpine SG, LLC
|
—
|
|
|
1,000,000
|
|
|
Black Angus Steakhouses, LLC
|
—
|
|
|
2,232,143
|
|
|
DataOnline Corp.
|
535,714
|
|
|
2,142,857
|
|
|
Isola USA Corp.
|
1,138,277
|
|
|
1,138,277
|
|
|
Kemmerer Operations, LLC
|
908,475
|
|
|
908,475
|
|
|
Offen, Inc.
|
1,061,947
|
|
|
1,061,947
|
|
|
Redwood Services Group, LLC
|
1,725,000
|
|
|
1,725,000
|
|
|
RTIC Subsidiary Holdings, LLC
|
3,174,603
|
|
|
—
|
|
|
SFP Holding, Inc.
|
5,459,025
|
|
|
10,151,775
|
|
|
Sierra Senior Loan Strategy JV I LLC
|
—
|
|
|
4,200,000
|
|
|
Simplified Logistics, LLC
|
1,466,667
|
|
|
5,000,000
|
|
|
Smile Doctors, LLC
|
280,612
|
|
|
994,467
|
|
|
Sungard AS New Holdings, LLC
|
500,441
|
|
|
—
|
|
|
West Dermatology, LLC
|
5,419,889
|
|
|
—
|
|
|
Total Commitments
|
$
|
22,117,410
|
|
|
$
|
32,654,545
|
|
Insurance Reimbursements
In September 2020, the Company received confirmation from its insurance carriers that a portion of expenses related to the purported stockholder class action, captioned FrontFour Capital Group LLC et. al. v. Brook Taube et. al., Case No. 2019-0100, were covered under the Company's insurance policy and that the insurance carriers would reimburse the Company for $1.2 million. Accordingly, as of September 30, 2020, the Company recorded a $1.2 million receivable, which is included on the Consolidated Statement of Assets and Liabilities in prepaid expenses and other assets and resulted in a corresponding offset or reduction in professional fees on the Consolidated Statements of Operations. On October 2, 2020, the Company received the insurance reimbursement of $1.2 million.
Note 12. Fee Income
Fee income consists of origination fees, amendment fees, prepayment fees, administrative agent fees and other miscellaneous fees. Origination fees, prepayment fees, amendment fees, and other similar fees are non-recurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income. The following table shows the Company’s fee income for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Origination fees
|
$
|
167,218
|
|
|
$
|
4,703
|
|
|
$
|
329,554
|
|
|
$
|
52,793
|
|
|
Prepayment fees
|
—
|
|
|
192,215
|
|
|
—
|
|
|
2,704,751
|
|
|
Amendment fees
|
14,599
|
|
|
110,580
|
|
|
250,030
|
|
|
420,435
|
|
|
Administrative agent fees
|
4,888
|
|
|
24,337
|
|
|
27,401
|
|
|
82,927
|
|
|
Other fees
|
924
|
|
|
7,786
|
|
|
15,277
|
|
|
8,601
|
|
|
Fee income
|
$
|
187,629
|
|
|
$
|
339,621
|
|
|
$
|
622,262
|
|
|
$
|
3,269,507
|
|
Note 13. Distributions and Share Repurchase Program
Distributions to common stockholders are recorded on the ex-dividend date. The amount to be paid out as a distribution is determined by the Company’s board of directors.
The Company has adopted an “opt in” distribution reinvestment plan (“DRIP”) pursuant to which the Company’s stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of the Company’s common stock. On June 30, 2017, the Board approved an amendment to the DRIP, pursuant to which the number of newly-issued shares of the Company’s common stock to be issued to a participating stockholder shall be determined by dividing the total dollar amount of the distribution payable to such stockholder by a price equal to 94.5%, rather than 90%, of the Company’s then current offering price. The Company amended the DRIP as a result of the Company’s revised fee structure, which went into effect on June 16, 2017. Under the Company’s revised fee structure the upfront selling commission was reduced from 7.00% of gross proceeds to up
to 3.00% of gross proceeds and the dealer manager fee was reduced from 2.75% of gross proceeds to up to 2.50% of gross proceeds. If the Company declares a cash dividend or other distribution, each stockholder that has “opted in” to the DRIP will have their distributions automatically reinvested in additional shares of the Company’s common stock rather than receiving cash distributions. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions. For the nine months ended September 30, 2020, the Company distributed a total of $10,760,287, of which $6,917,156 was in cash and $3,843,131 was in the form of common stock associated with the DRIP. For the nine months ended September 30, 2019, the Company distributed a total of $47,902,108, of which $29,596,806, was in cash and $18,305,302 was in the form of common stock issued under the DRIP.
The following table reflects the cash distributions per share that the Company has declared or paid to its stockholders during 2020 and 2019. Stockholders of record as of each respective record date were entitled to receive the distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Amount per share
|
|
January 25, 2019
|
|
January 31, 2019
|
|
$
|
0.05334
|
|
|
February 11, 2019
|
|
February 28, 2019
|
|
0.05334
|
|
|
March 11, 2019
|
|
March 29, 2019
|
|
0.05334
|
|
|
April 29, 2019
|
|
April 30, 2019
|
|
0.05334
|
|
|
May 30, 2019
|
|
May 31, 2019
|
|
0.05334
|
|
|
June 27, 2019
|
|
June 28, 2019
|
|
0.05334
|
|
|
July 30, 2019
|
|
July 31, 2019
|
|
0.05334
|
|
|
August 29, 2019
|
|
August 30, 2019
|
|
0.05334
|
|
|
September 27, 2019
|
|
September 30, 2019
|
|
0.05334
|
|
|
October 30, 2019
|
|
October 31, 2019
|
|
0.05334
|
|
|
November 28, 2019
|
|
November 29, 2019
|
|
0.05334
|
|
|
December 30, 2019
|
|
December 31, 2019
|
|
0.05334
|
|
|
January 30, 2020
|
|
January 31, 2020
|
|
0.03500
|
|
|
February 27, 2020
|
|
February 28, 2020
|
|
0.03500
|
|
|
March 30, 2020
|
|
March 31, 2020
|
|
0.03500
|
|
The Company’s distributions may be funded from offering proceeds or borrowings, which may constitute a return of capital and reduce the amount of capital available to the Company for investment. Any capital returned to stockholders through distributions will be distributed after payment of fees and expenses. On July 31, 2020, our board of directors temporarily suspended the monthly distributions on the shares of the Company’s common stock. On October 22, 2020, our board of directors determined to reinstate the monthly distributions on the shares of the Company’s common stock. See Note 15 for more information.
During the term of the Expense Support and Reimbursement Agreement with SIC Advisors (which expired on December 31, 2016), SIC Advisors reimbursed the Company for operating expenses in an amount equal to the difference between the Company’s distributions paid to its stockholders in each month, less the sum of the Company’s net investment income, net realized capital gains and dividends paid to the Company from its portfolio companies, not included in net income and net realized capital gains, during such period (“Expense Support Reimbursement”). The Company’s previous distributions to stockholders may have been funded from temporary Expense Support Reimbursements that may have been subject to repayment to SIC Advisors. The portion of these distributions derived from temporary Expense Support Reimbursements were not based on the Company's investment performance and may not continue in the future. If SIC Advisors had not agreed to make Expense Support Reimbursements, these distributions would have come from paid-in-capital. The Company's contingent obligation to repay eligible reimbursements to SIC Advisors expired on September 30, 2019.
The determination of the tax attributes (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of paid-in-capital surplus which is a nontaxable distribution) of distributions is made annually as of the end of the Company’s fiscal year based upon its taxable income earned and distributions paid during the fiscal year.
Share Repurchase Program
In June 2013, the Company commenced a share repurchase program pursuant to which it conducted quarterly share repurchases of up to 2.5% of the weighted average number of outstanding shares of its common stock in the prior four calendar quarters or 10% of the weighted average number of outstanding shares in the prior 12-month period. In connection with the Proposed Mergers, the Company suspended the Share Repurchase Program. The purpose of the share repurchase program was to allow stockholders to sell their shares back to the Company at a price equal to the most recently disclosed NAV per share of the Company's common stock immediately prior to the date of repurchase. Shares were purchased from stockholders participating in the program on a pro-rata basis. Unless the Company's board of directors determined otherwise, the number of shares repurchased during any calendar year were limited to the proceeds received in association with the sale of shares of common stock under the distribution reinvestment plan.
Notwithstanding the suspension of the share repurchase program our board of directors approved the repurchase of shares of our common stock from our stockholders who have requested repurchases in connection with such stockholder’s death or disability. In the event of the death or disability of a stockholder, the Company will repurchase the shares held by such stockholder at a price equal to the NAV per share of our shares as disclosed in the periodic report the Company files with the SEC immediately following the date of the death or disability of such stockholder. The Company's board of directors has the right to suspend or terminate repurchases due to death or disability to the extent that it determines that it is in the Company's best interest to do so. During the three and nine months ended September 30, 2020, the Company repurchased 324,136 and 483,083 shares, respectively, of certain shareholders due to death or disability. During the three and nine months ended September 30, 2019, the Company repurchased 144,356 shares of certain shareholders due to death or disability.
Note 14. Financial Highlights
The following is a schedule of financial highlights of the Company for the nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Per Share Data:(1)
|
|
Net asset value at beginning of period
|
$
|
5.78
|
|
|
$
|
6.72
|
|
|
Net investment income/(loss)
|
(0.08)
|
|
|
0.26
|
|
|
Net realized gains/(losses) on investments and total return swap
|
(0.59)
|
|
|
(0.35)
|
|
|
Net unrealized appreciation/(depreciation) on investments and total return swap
|
(0.09)
|
|
|
(0.12)
|
|
|
Net increase/(decrease) in net assets
|
$
|
(0.76)
|
|
|
$
|
(0.21)
|
|
|
Distributions declared from net investment income(2)
|
(0.11)
|
|
|
(0.48)
|
|
|
Total distributions to shareholders
|
$
|
(0.11)
|
|
|
$
|
(0.48)
|
|
|
Net asset value at end of period
|
$
|
4.91
|
|
|
$
|
6.03
|
|
|
Total return based on net asset value(4)(5)
|
(13.44)
|
%
|
|
(3.11)
|
%
|
|
Portfolio turnover rate(5)
|
14.77
|
%
|
|
22.82
|
%
|
|
Shares outstanding at end of period
|
102,571,371
|
|
|
101,330,757
|
|
|
Net assets at end of period
|
$
|
503,255,139
|
|
|
$
|
610,610,747
|
|
|
Ratio/Supplemental Data (annualized):
|
|
|
|
|
Ratio of net investment income/(loss) to average net assets
|
(2.11)
|
%
|
|
5.45
|
%
|
|
Ratio of net expenses (including incentive fees) to average net assets
|
11.78
|
%
|
|
7.54
|
%
|
|
Ratio of incentive fees to average net assets (5)
|
—
|
%
|
|
0.03
|
%
|
|
Supplemental Data (annualized):
|
|
|
|
|
Asset coverage ratio per unit(6)
|
$
|
3,796
|
|
|
$
|
2,861
|
|
|
Percentage of non-recurring fee income(7)
|
2.22
|
%
|
|
6.76
|
%
|
|
Ratio of net expenses (excluding incentive fees) to average net assets
|
11.78
|
%
|
|
7.52
|
%
|
|
Ratio of interest and financing related expenses to average net assets
|
2.66
|
%
|
|
3.25
|
%
|
|
Total Debt Outstanding:(8)(9)
|
|
|
|
|
Revolving Credit Facility
|
$
|
180,000,000
|
|
|
$
|
328,100,000
|
|
(1)The per share data was derived by using the weighted average shares outstanding during the nine months ended September 30, 2020 and 2019, which were 102,771,213 and 100,116,493 respectively. Table may not foot due to rounding.
(2)The per share data for distributions is the actual amount of paid distributions per share during the period.
(3)Shares issued under the DRIP (see Note 13) as well as the continuous issuance of common shares may cause on incremental increase/decrease in NAV per share due to the effect of issuing shares at amounts that differ from the prevailing NAV at each issuance.
(4)Total annual returns are historical and assume reinvestments of all dividends and distributions at prices obtained under the Company’s DRIP, and no sales charge.
(5)Not annualized.
(6)Asset coverage per unit is the ratio of the carrying value of the Company's total consolidated assets for regulatory purposes, less all liabilities and indebtedness not represented by senior securities to the aggregate amount of Senior Securities representing indebtedness. Asset coverage per unit is expressed in terms of dollars per $1,000 of indebtedness. As of September 30, 2020 and 2019, the Company's Asset Coverage Per Unit including unfunded commitments was $3,380 and $2,645, respectively.
(7)Represents the impact of non-recurring fees over total investment income.
(8)Total amount of each class of senior securities outstanding at the end of the period excluding debt issuance costs.
(9)Average market value per unit is not applicable as these classes of securities are not registered for public trading.
Note 15. Subsequent Events
Management has evaluated subsequent events through the date of issuance of the consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the consolidated financial statements as of and for the nine months ended September 30, 2020, except as disclosed below.
On October 22, 2020, our board of directors declared a series of monthly distributions for October, November and December 2020 in the amount of $0.01 per share. Stockholders of record as of each respective monthly record date will be entitled to receive the distribution. Below are the details for each respective distribution:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
Payment Date
|
Amount per share
|
|
October 29, 2020
|
October 30, 2020
|
$0.01
|
|
November 27, 2020
|
November 30, 2020
|
0.01
|
|
December 30, 2020
|
December 31, 2020
|
0.01
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this annual report on Form 10-K.
Except as otherwise specified, references to “we,” “us,” “our,” or the “Company,” refers to Sierra Income Corporation. “SIC Advisors” or “Adviser” refers to SIC Advisors LLC, our investment adviser. SIC Advisors is a wholly owned subsidiary of Medley LLC, which is controlled by Medley Management Inc., a publicly traded asset management firm ("MDLY"), which in turn is controlled by Medley Group LLC, an entity wholly-owned by the senior professionals of Medley LLC. “Medley” refers, collectively, to the activities and operations of Medley Capital LLC, Medley LLC, Medley Management Inc., Medley Group LLC, SIC Advisors, associated investment funds and their respective affiliates.
Some of the statements in this annual report on Form 10-K constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties, including, but not limited to, statements as to:
•our future operating results;
•our business prospects and the prospects of our portfolio companies;
•changes in political, economic, or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, which could result in changes in the value of our assets;
•risks associated with possible disruptions in our operations or the economy generally;
•the risk that, if the current period of capital markets disruption and instability continues for an extended period of time, that our stockholders may not receive distributions, if any, or at historical levels and that a portion of our distribution in the future may be a return of capital;
•the effect of investments that we expect to make;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with SIC Advisors and its affiliates;
•the dependence of our future success on the general economy and its effect on the industries in which we invest;
•the ability of our portfolio companies to achieve their objectives;
•the use of borrowed money to finance a portion of our investments;
•the adequacy of our financing sources and working capital;
•the timing of cash flows, if any, from the operations of our portfolio companies;
•the ability of SIC Advisors to locate suitable investments for us and to monitor and administer our investments;
•the ability of SIC Advisors and its affiliates to attract and retain highly talented professionals;
•our ability to maintain our qualification as a RIC and as a BDC;
•the effect of changes in laws or regulations affecting our operations;
•uncertainties associated with the impact from the COVID-19 pandemic, including: its impact on the global and U.S. capital markets, and the global and U.S. economy; the length and duration of the COVID-19 outbreak in the United States as well as worldwide and the magnitude of the economic impact of that outbreak; the effect of the COVID-19 pandemic on our business prospects and the operational and financial performance of our portfolio companies, including our and their ability to achieve their respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business and our use of borrowed money to finance a portion of our investments; and
•the impact of the termination of the Amended MCC Merger Agreement (as defined below) and the Amended MDLY Merger Agreement (as defined below) on our business, financial results, and ability to pay dividends and distributions, if any, to our stockholders.
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may,” or similar expressions. The forward-looking statements contained in this quarterly report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including due to the factors set forth in “Risk Factors” in this quarterly report on Form 10-Q and in Item 1A “Risk Factors” in Part 1 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. Although we
undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with the SEC, including quarterly reports on Form 10-Q, annual reports on Form 10-K, and current reports on Form 8-K.
COVID-19 Developments
On March 11, 2020, the World Health Organization declared the novel coronavirus (“COVID-19”) as a pandemic, and, on March 13, 2020, the United States declared a national emergency with respect to COVID-19. The outbreak of COVID-19 has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, restricting travel, and temporarily closing or limiting operations at many corporate offices, retail stores, restaurants, fitness clubs and manufacturing facilities and factories in affected jurisdictions. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.
We are closely monitoring the impact of the outbreak of COVID-19 on all aspects of our business, including how it will impact our portfolio companies, employees, due diligence and underwriting processes, and financial markets. Given the rapid development and fluidity of this situation, we cannot estimate the long-term impact of COVID-19 on our business, future results of operations, financial position or cash flows at this time. Further, the operational and financial performance of the portfolio companies in which we make investments may be significantly impacted by COVID-19, which may in turn impact the valuation of our investments. We believe our portfolio companies have taken immediate actions to effectively and efficiently respond to the challenges posed by COVID-19 and related orders imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, shareholder support, and, as appropriate, accessing their ability to participate in the recently enacted government Paycheck Protection Program. The extent to which our operations may be impacted by the COVID-19 pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information which may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact. Furthermore, the impacts of a potential worsening of global economic conditions and the continued disruptions to and volatility in the financial markets remain unknown. COVID-19 presents material uncertainty and risks with respect to the underlying value of the Company’s portfolio companies, the Company’s business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy.
We have evaluated subsequent events from September 30, 2020 through the filing date of this quarterly report on Form 10-Q. However, as the discussion in this Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to the Company’s financial statements for the quarterly period end September 30, 2020, the analysis contained herein may not fully account for impacts relating to the COVID-19 pandemic. In that regard, for example, as of September 30, 2020, the Company valued its portfolio investments in conformity with U.S. GAAP based on the facts and circumstances known by the Company at that time, or reasonably expected to be known at that time. Due to the overall volatility that the COVID-19 pandemic has caused during the months that followed our September 30, 2020 valuation, any valuations conducted now or in the future in conformity with U.S. GAAP could result in a lower fair value of our portfolio. The impact to our results going forward will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. Accordingly, the Company cannot predict the extent to which its financial condition and results of operations will be affected at this time.
Overview
We are an externally managed non-diversified closed-end management investment company that has elected to be treated as a BDC under the 1940 Act. We are externally managed by SIC Advisors, which is an investment adviser registered with the SEC under the Advisers Act. SIC Advisors is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments and monitoring our portfolio on an ongoing basis. In addition, we have elected, and intend to qualify annually to be treated, for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code.
Under our Investment Advisory Agreement, we pay SIC Advisors a base management fee as well as an incentive fee based on our investment performance. Also, under the Administration Agreement, we reimburse Medley for the allocable portion of overhead and other expenses incurred by Medley Capital LLC in performing its obligations under the Administration Agreement, including
our allocable portion of the costs of compensation and related expenses of our Chief Compliance Officer, Chief Financial Officer and their respective staffs.
We intend to meet our investment objective by primarily lending to, and investing in, the debt of privately owned U.S. middle market companies, which we define as companies with annual revenue between $50 million and $1 billion. We intend to focus primarily on making investments in first lien senior secured debt, second lien secured debt, and to a lesser extent, subordinated debt, of middle market companies in a broad range of industries. We expect that the majority of our debt investments will bear interest at floating interest rates, but our portfolio may also include fixed-rate investments. We will originate transactions sourced through SIC Advisors’ existing network, and, to a lesser extent, expect to acquire debt securities through the secondary market. We may make equity investments in companies that we believe will generate appropriate risk adjusted returns, although we do not expect such investments to be a substantial portion of our portfolio.
The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such portfolio companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make. The precise timing of our investment activity will depend on the availability of investment opportunities that are consistent with our investment objectives and strategies.
As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. government securities and high-quality debt investments that mature in one year or less. In addition, we are only allowed to borrow money such that our asset coverage, as defined in the 1940 Act, equals at least 200% (or 150% if certain requirements under the 1940 Act are met) after such borrowing, with certain limited exceptions. To maintain our RIC tax treatment, we must meet specified source-of-income and asset diversification requirements. To be eligible for RIC tax treatment under Subchapter M for U.S. federal income tax purposes, we must distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, for the taxable year.
Termination of the Agreements and Plan of Mergers
On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between Medley Capital Corporation (“MCC”) and the Company, pursuant to which MCC would, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merge with and into the Company, with the Company as the surviving company in the merger (the “MCC Merger”). In addition, on July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, the Company, and Sierra Management, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), MDLY would, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merge with and into Merger Sub, with Merger Sub as the surviving company in the merger (the “MDLY Merger” together with the MCC Merger, the “Proposed Mergers”).
Section 9.1(c) of the Amended MCC Merger Agreement and Section 9.1(c) of the Amended MDLY Merger Agreement each permits the Company and either MCC or MDLY, as applicable, to terminate the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement, respectively, if the MCC Merger or the MDLY Merger, as applicable, has not been consummated on or before March 31, 2020 (the “Outside Date”). On May 1, 2020, the Company terminated both the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement effective as of May 1, 2020 as the Outside Date had passed and neither the MCC Merger or the MDLY Merger had been consummated. In determining to terminate the Amended MCC Merger Agreement and the Amended MDLY Merger Agreement, the Company considered a number of factors, including, among other factors, changes in the relative valuations of the Company, MCC, and MDLY, the changed circumstances and the unpredictable economic conditions resulting from the global health crisis caused by the coronavirus (COVID-19) pandemic, and the uncertainty regarding the parties’ ability to satisfy the conditions to closing in a timely manner. See Note 2 for more information.
Revenues
We generate revenue in the form of interest on the debt securities that we hold and distributions and capital gains on other interests that we acquire in our portfolio companies. We expect that the senior debt we invest in will generally have stated terms of three to ten years and that the subordinated debt we invest in will generally have stated terms of five to ten years. Our senior and subordinated debt investments bear interest at a fixed or floating rate. Interest on debt securities is generally payable monthly, quarterly or semiannually. In addition, some of our investments provide for deferred interest payments or PIK interest. The principal amount of the debt securities and any accrued but unpaid interest generally will become due at the maturity date. In
addition, we may generate revenue in the form of commitment and other fees in connection with transactions. OIDs and market discounts or premiums will be capitalized, and we will accrete or amortize such amounts as interest income. We will record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, will be recognized on an accrual basis to the extent that we expect to collect such amounts.
Expenses
Our primary annual operating expenses consist of the payment of advisory fees and the reimbursement of expenses under our Investment Advisory Agreement with SIC Advisors and our Administration Agreement with Medley Capital LLC. We bear other expenses, which include, among other things:
•corporate, organizational and offering expenses relating to offerings of our common stock, subject to limitations included in our Investment Advisory Agreement;
•the cost of calculating our NAV, including the related fees and cost of any third-party valuation services;
•the cost of effecting sales and repurchases of shares of our common stock and other securities;
•fees payable to third parties relating to, or associated with, monitoring our financial and legal affairs, making investments, and valuing investments, including fees and expenses associated with performing due diligence reviews of prospective investments;
•interest payable on debt, if any, incurred to finance our investments;
•transfer agent and custodial fees;
•fees and expenses associated with marketing efforts subject to limitations included in the Investment Advisory Agreement;
•federal and state registration fees and any stock exchange listing fees;
•federal, state and local taxes;
•independent directors’ fees and expenses, including travel expenses;
•costs of director and stockholder meetings, proxy statements, stockholders’ reports and notices;
•costs of fidelity bonds, directors and officers/errors and omissions liability insurance and other types of insurance;
•direct costs, including those relating to printing of stockholder reports and advertising or sales materials, mailing, long distance telephone and staff subject to limitations included in the Investment Advisory Agreement;
•fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley Act of 2002, the 1940 Act and applicable federal and state securities laws;
•brokerage commissions for our investments;
•all other expenses incurred by us or SIC Advisors in connection with administering our investment portfolio, including expenses incurred by SIC Advisors in performing certain of its obligations under the Investment Advisory Agreement; and
•the reimbursement of the compensation of our Chief Financial Officer and Chief Compliance Officer and their respective staffs, whose compensation is paid by Medley Capital LLC, to the extent that each such reimbursement amount is annually approved by our independent director committee and subject to the limitations included in our Administration Agreement.
Administrative Services
We reimburse Medley Capital LLC for the administrative expenses necessary for its performance of services to us. However, such reimbursement is made at an amount equal to the lower of Medley Capital LLC’s actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location. Also, such costs will be reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We will not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.
Portfolio and Investment Activity
The following table shows the amortized cost and the fair value of our investment portfolio as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
Senior secured first lien term loans
|
$
|
381,595,466
|
|
|
52.4
|
%
|
|
$
|
318,936,542
|
|
|
53.7
|
%
|
|
Senior secured second lien term loans
|
94,244,293
|
|
|
13.0
|
|
|
81,120,746
|
|
|
13.6
|
|
|
Senior secured first lien notes
|
8,473,750
|
|
|
1.2
|
|
|
8,306,054
|
|
|
1.4
|
|
|
Subordinated notes
|
66,463,686
|
|
|
9.2
|
|
|
44,535,807
|
|
|
7.5
|
|
|
Sierra Senior Loan Strategy JV I LLC
|
110,050,000
|
|
|
15.2
|
|
|
73,819,863
|
|
|
12.4
|
|
|
Equity/warrants
|
65,251,030
|
|
|
9.0
|
|
|
67,912,798
|
|
|
11.4
|
|
|
Total
|
$
|
726,078,225
|
|
|
100.0
|
%
|
|
$
|
594,631,810
|
|
|
100.0
|
%
|
As of September 30, 2020, our income-bearing investment portfolio, which represented 82.6% of our total portfolio, had a weighted average yield based upon the cost of our investment portfolio of 7.9%, and 3.7% of our income-bearing portfolio bore interest based on fixed rates, while 96.3% of our income-bearing portfolio bore interest at floating rates, such as LIBOR.
As of September 30, 2020, the Company held loans it has made directly to 62 investee companies with aggregate principal amounts of $631.0 million. As of December 31, 2019, the Company held loans it has made directly to 62 investee companies with aggregate principal amounts of $643.5 million. During the three and nine months ended September 30, 2020, the Company made 7 and 38 loans to investee companies, respectively, with aggregate principal amounts of $21.3 million and $90.5 million, respectively. During the three and nine months ended September 30, 2019, the Company made 26 and 54 loans to investee companies, respectively, with aggregate principal amounts of $67.0 million and $121.6 million, respectively.
The following table shows the amortized cost and the fair value of our investment portfolio as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Percentage
|
|
Fair Value
|
|
Percentage
|
|
Senior secured first lien term loans
|
$
|
382,580,269
|
|
|
48.0
|
%
|
|
$
|
328,816,197
|
|
|
48.7
|
%
|
|
Senior secured second lien term loans
|
157,794,323
|
|
|
19.8
|
|
|
122,817,885
|
|
|
18.2
|
|
|
Senior secured first lien notes
|
15,217,625
|
|
|
1.9
|
|
|
14,354,825
|
|
|
2.1
|
|
|
Subordinated notes
|
70,422,851
|
|
|
8.8
|
|
|
63,021,420
|
|
|
9.3
|
|
|
Sierra Senior Loan Strategy JV I LLC
|
92,050,000
|
|
|
11.5
|
|
|
68,434,389
|
|
|
10.1
|
|
|
Equity/warrants
|
79,968,093
|
|
|
10.0
|
|
|
78,179,214
|
|
|
11.6
|
|
|
Total
|
$
|
798,033,161
|
|
|
100.0
|
%
|
|
$
|
675,623,930
|
|
|
100.0
|
%
|
As of December 31, 2019, our income-bearing investment portfolio, which represented 87.2% of our total portfolio, had a weighted average yield based upon the cost of our investment portfolio of approximately 9.6%, and 4.5% of our income-bearing portfolio bore interest based on fixed rates, while 95.5% of our income-bearing portfolio bore interest at floating rates, such as LIBOR.
The following table shows weighted average current yield to maturity based on fair value as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Percentage
of Total
Investments
|
|
Weighted Average
Current
Yield for Total
Investments(1)
|
|
Percentage
of Total
Investments
|
|
Weighted
Average
Current
Yield for Total
Investments(1)
|
|
Senior secured first lien term loans
|
53.7
|
%
|
|
8.8
|
%
|
|
48.7
|
%
|
|
10.4
|
%
|
|
Senior secured second lien term loans
|
13.6
|
|
|
11.7
|
|
|
18.2
|
|
|
11.0
|
|
|
Senior secured first lien notes
|
1.4
|
|
|
12.3
|
|
|
2.1
|
|
|
29.6
|
|
|
Subordinated notes
|
7.5
|
|
|
9.0
|
|
|
9.3
|
|
|
10.8
|
|
|
Sierra Senior Loan Strategy JV I LLC
|
12.4
|
|
|
9.0
|
|
|
10.1
|
|
|
9.6
|
|
|
Equity/warrants
|
11.4
|
|
|
6.0
|
|
|
11.6
|
|
|
9.7
|
|
|
Total
|
100.0
|
%
|
|
9.4
|
%
|
|
100.0
|
%
|
|
10.9
|
%
|
(1)The weighted average current yield for total investments does not represent the total return to our stockholders.
The following table shows the portfolio composition by industry classification based on fair value as of September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at Fair Value
|
|
Percentage of Total Portfolio
|
|
Multi-Sector Holdings
|
|
$
|
118,280,932
|
|
|
20.0
|
%
|
|
High Tech Industries
|
|
72,846,899
|
|
|
12.3
|
|
|
Services: Business
|
|
73,101,069
|
|
|
12.3
|
|
|
Healthcare & Pharmaceuticals
|
|
57,293,321
|
|
|
9.6
|
|
|
Banking, Finance, Insurance & Real Estate
|
|
42,764,191
|
|
|
7.2
|
|
|
Construction & Building
|
|
35,539,333
|
|
|
6.0
|
|
|
Aerospace & Defense
|
|
29,800,155
|
|
|
5.0
|
|
|
Consumer Goods: Durable
|
|
38,269,699
|
|
|
6.4
|
|
|
Wholesale
|
|
25,354,244
|
|
|
4.3
|
|
|
Automotive
|
|
17,268,511
|
|
|
2.9
|
|
|
Containers, Packaging & Glass
|
|
15,235,296
|
|
|
2.6
|
|
|
Hotel, Gaming & Leisure
|
|
14,516,215
|
|
|
2.4
|
|
|
Chemicals, Plastics & Rubber
|
|
8,148,058
|
|
|
1.4
|
|
|
Forest Products & Paper
|
|
7,355,937
|
|
|
1.2
|
|
|
Environmental Industries
|
|
7,417,142
|
|
|
1.2
|
|
|
Media: Diversified & Production
|
|
6,761,379
|
|
|
1.1
|
|
|
Transportation: Consumer
|
|
5,975,742
|
|
|
1.0
|
|
|
Transportation: Cargo
|
|
5,941,090
|
|
|
1.0
|
|
|
Consumer Goods: Non-durable
|
|
4,674,151
|
|
|
0.8
|
|
|
Metals & Mining
|
|
3,530,163
|
|
|
0.6
|
|
|
Energy: Oil & Gas
|
|
2,592,607
|
|
|
0.4
|
|
|
Retail
|
|
1,045,311
|
|
|
0.2
|
|
|
Media: Broadcasting & Subscription
|
|
872,593
|
|
|
0.1
|
|
|
Beverage & Food
|
|
47,772
|
|
|
0.0
|
|
|
Total
|
|
$
|
594,631,810
|
|
|
100.0
|
%
|
The following table shows the portfolio composition by industry classification based on fair value as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Classification
|
|
Investments at Fair Value
|
|
Percentage of Total Portfolio
|
|
Multi-Sector Holdings
|
|
$
|
130,278,650
|
|
|
19.2
|
%
|
|
High Tech Industries
|
|
81,531,661
|
|
|
12.1
|
|
|
Services: Business
|
|
81,285,736
|
|
|
12.0
|
|
|
Healthcare & Pharmaceuticals
|
|
57,374,851
|
|
|
8.5
|
|
|
Banking, Finance, Insurance & Real Estate
|
|
52,049,297
|
|
|
7.7
|
|
|
Construction & Building
|
|
39,865,739
|
|
|
5.9
|
|
|
Wholesale
|
|
35,186,289
|
|
|
5.2
|
|
|
Aerospace & Defense
|
|
34,475,020
|
|
|
5.1
|
|
|
Consumer Goods: Durable
|
|
24,214,089
|
|
|
3.6
|
|
|
Hotel, Gaming & Leisure
|
|
21,365,163
|
|
|
3.2
|
|
|
Automotive
|
|
19,861,655
|
|
|
2.9
|
|
|
Containers, Packaging & Glass
|
|
15,655,179
|
|
|
2.3
|
|
|
Transportation: Cargo
|
|
12,771,231
|
|
|
1.9
|
|
|
Energy: Oil & Gas
|
|
10,007,469
|
|
|
1.5
|
|
|
Chemicals, Plastics & Rubber
|
|
9,505,614
|
|
|
1.4
|
|
|
Media: Diversified & Production
|
|
9,493,583
|
|
|
1.4
|
|
|
Forest Products & Paper
|
|
7,182,914
|
|
|
1.1
|
|
|
Transportation: Consumer
|
|
6,877,180
|
|
|
1.0
|
|
|
Capital Equipment
|
|
6,537,927
|
|
|
1.0
|
|
|
Environmental Industries
|
|
6,414,400
|
|
|
0.9
|
|
|
Consumer Goods: Non-durable
|
|
4,721,895
|
|
|
0.7
|
|
|
Metals & Mining
|
|
3,258,022
|
|
|
0.5
|
|
|
Media: Broadcasting & Subscription
|
|
2,163,218
|
|
|
0.3
|
|
|
Retail
|
|
1,846,648
|
|
|
0.3
|
|
|
Media: Advertising, Printing & Publishing
|
|
1,700,500
|
|
|
0.3
|
|
|
Total
|
|
$
|
675,623,930
|
|
|
100.0
|
%
|
SIC Advisors regularly assesses the risk profile of our portfolio investments and rates each of them based on the categories set forth below, which we refer to as SIC Advisors’ investment credit rating. Investment credit ratings are assigned to each of the investments in our portfolio that are directly held by the Company, but exclude any off-balance sheet interests of the Company:
|
|
|
|
|
|
|
|
Investment
Credit Rating
|
Definition
|
|
1
|
Investments that are performing above expectations.
|
|
|
|
|
2
|
Investments that are performing within expectations, with risks that are neutral or favorable compared to risks at the time of origination or purchase. All new loans are rated ‘2’.
|
|
|
|
|
3
|
Investments that are performing below expectations and that require closer monitoring, but where no loss of interest, dividend or principal is expected. Companies rated ‘3’ may be out of compliance with financial covenants, however, loan payments are generally not past due.
|
|
|
|
|
4
|
Investments that are performing below expectations and for which risk has increased materially since origination or purchase. Some loss of interest or dividend is expected, but no loss of principal. In addition to the borrower being generally out of compliance with debt covenants, loan payments may be past due (but generally not more than 180 days past due).
|
|
|
|
|
5
|
Investments that are performing substantially below expectations and whose risks have increased substantially since origination or purchase. Most or all of the debt covenants are out of compliance and payments are substantially delinquent. Some loss of principal is expected.
|
The following table shows the distribution of our investment portfolio, not including cash and cash equivalents, on the 1 to 5 investment credit rating scale at fair value as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
Investment
Credit Rating
|
|
Investments at
Fair Value
|
|
Percentage
|
|
Investments at
Fair Value
|
|
Percentage
|
|
1
|
|
$
|
43,535,826
|
|
|
7.3
|
%
|
|
$
|
58,241,430
|
|
|
8.6
|
%
|
|
2
|
|
387,230,409
|
|
|
65.2
|
|
|
455,613,817
|
|
|
67.5
|
|
|
3
|
|
113,538,065
|
|
|
19.1
|
|
|
144,141,977
|
|
|
21.3
|
|
|
4
|
|
16,266,411
|
|
|
2.7
|
|
|
7,187,740
|
|
|
1.1
|
|
|
5
|
|
34,061,099
|
|
|
5.7
|
|
|
10,438,966
|
|
|
1.5
|
|
|
Total
|
|
$
|
594,631,810
|
|
|
100.0
|
%
|
|
$
|
675,623,930
|
|
|
100.0
|
%
|
The COVID-19 pandemic has impacted our investment ratings as of September 30, 2020, causing downgrades of certain portfolio companies. As the COVID-19 situation continues to evolve, we are maintaining close communications with our portfolio companies to proactively assess and manage potential risks across our investment portfolio. We have also increased oversight and analysis of credits in vulnerable industries in an attempt to improve loan performance and reduce credit risk.
Results of Operations
The following table shows operating results for the three and nine months ended September 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Total investment income
|
$
|
12,935,319
|
|
|
$
|
18,160,825
|
|
|
$
|
35,811,584
|
|
|
$
|
62,977,848
|
|
|
Total expenses
|
6,854,087
|
|
|
12,403,239
|
|
|
43,674,215
|
|
|
36,566,041
|
|
|
Net investment income/(loss)
|
6,081,232
|
|
|
5,757,586
|
|
|
(7,862,631)
|
|
|
26,411,807
|
|
|
Net realized gain/(loss) from investments and total return swap
|
(52,474,635)
|
|
|
(19,721,169)
|
|
|
(60,522,923)
|
|
|
(34,973,608)
|
|
|
Net change in unrealized appreciation/(depreciation) on investments and total return swap
|
79,481,063
|
|
|
(4,405,963)
|
|
|
(9,038,042)
|
|
|
(11,948,451)
|
|
|
Change in provision for deferred taxes on unrealized gain on investments
|
(749,289)
|
|
|
(442,842)
|
|
|
(802,137)
|
|
|
(442,842)
|
|
|
Loss on extinguishment of debt
|
(217,950)
|
|
|
—
|
|
|
(217,950)
|
|
|
—
|
|
|
Net increase/(decrease) in net assets resulting from operations
|
$
|
32,120,421
|
|
|
$
|
(18,812,388)
|
|
|
$
|
(78,443,683)
|
|
|
$
|
(20,953,094)
|
|
Investment Income
Total investment income decreased $5,225,506, or 28.8%, to $12,935,319 for the three months ended September 30, 2020, compared to $18,160,825 for the three months ended September 30, 2019. Total investment income consisted primarily of portfolio interest and dividends, which decreased $4,672,331, or 26.8%, to $12,737,019 for the three months ended September 30, 2020, compared to $17,409,350 for the three months ended September 30, 2019. This decrease was primarily attributable to an increase in the number of portfolio companies on non-accrual, and to a lesser extent, a decrease in the size of the underlying portfolio due to reduced leverage utilization.
Total investment income decreased $27,166,264, or 43.1%, to $35,811,584 for the nine months ended September 30, 2020, compared to $62,977,848 for the nine months ended September 30, 2019. Total investment income consisted primarily of portfolio interest and dividends, which decreased $24,859,189, or 42.4%, to $33,803,252 for the nine months ended September 30, 2020, compared to $58,662,441 for the nine months ended September 30, 2019. This decrease was primarily attributable to an increase in the number of portfolio companies on non-accrual, and to a lesser extent, a decrease in the size of the underlying portfolio due to reduced leverage utilization.
As of September 30, 2020, certain investments in fourteen portfolio companies were on non-accrual status with a combined cost of $107,750,374, or 14.8% of the cost of the Company's portfolio, and a combined fair value of $50,838,081 or 8.5% of the fair value of the Company's portfolio. As of September 30, 2019, nine portfolio companies were on non-accrual status with a cost of $76,691,668, or 9.2% of the cost of the Company's portfolio, and a fair value of $24,424,986, or 3.3% of the fair value of the Company's portfolio.
Fee income decreased $151,992, or 44.8%, to $187,629 for the three months ended September 30, 2020, compared to $339,621 for the three months ended September 30, 2019, primarily due to a decrease in fees associated with loan originations and loan prepayments.
Fee income decreased $2,647,245, or 81.0%, to $622,262 for the nine months ended September 30, 2020, compared to $3,269,507 for the nine months ended September 30, 2019, primarily due to a decrease in fees associated with loan originations and loan prepayments.
Operating Expenses
The following table shows operating expenses for the three and nine months ended September 30, 2020 and 2019 :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Base management fees
|
$
|
3,021,491
|
|
|
$
|
4,180,333
|
|
|
$
|
9,217,687
|
|
|
$
|
12,957,961
|
|
|
Interest and financing expenses
|
2,106,105
|
|
|
5,078,781
|
|
|
9,848,708
|
|
|
15,744,248
|
|
|
General and administrative expenses
|
1,680,990
|
|
|
1,556,514
|
|
|
11,959,187
|
|
|
4,076,507
|
|
|
Administrator expenses
|
431,598
|
|
|
998,134
|
|
|
1,822,255
|
|
|
2,156,557
|
|
|
Incentive Fees
|
—
|
|
|
176,061
|
|
|
—
|
|
|
176,061
|
|
|
Offering costs
|
30,816
|
|
|
6,322
|
|
|
35,973
|
|
|
42,158
|
|
|
Professional fees
|
(416,913)
|
|
|
407,094
|
|
|
10,790,405
|
|
|
1,412,549
|
|
|
Total expenses
|
$
|
6,854,087
|
|
|
$
|
12,403,239
|
|
|
$
|
43,674,215
|
|
|
$
|
36,566,041
|
|
Total expenses decreased $5,549,152, or 44.7%, to $6,854,087 for the three months ended September 30, 2020, as compared to $12,403,239 for the three months ended September 30, 2019, primarily due to a decrease in interest and financing expenses and base management fees. Total expenses increased $7,108,174, or 19.4%, to $43,674,215 for the nine months ended September 30, 2020, as compared to $36,566,041 for the nine months ended September 30, 2019, primarily due to an increase in professional fees and general and administrative expenses related to deferred transaction costs (see Note 2), partially offset by a decrease in base management fees and a decrease in interest and financing expenses.
Base management fees decreased $1,158,842, or 27.7%, to $3,021,491 for the three months ended September 30, 2020, as compared to $4,180,333 for the three months ended September 30, 2019, primarily due to a decrease in our gross assets. Base management fees decreased $3,740,274, or 28.9%, to $9,217,687 for the nine months ended September 30, 2020, as compared to $12,957,961 for the nine months ended September 30, 2019, primarily due to a decrease in our gross assets.
Interest and financing expenses decreased $2,972,676, or 58.5%, to $2,106,105 for the three months ended September 30, 2020, as compared to $5,078,781 for the three months ended September 30, 2019, primarily due to a decrease in the weighted average interest rate of our credit facilities because of a decrease in LIBOR rates of 1.8%, or a 32.7% decrease. Interest and financing expenses decreased $5,895,540, or 37.4%, to $9,848,708 for the nine months ended September 30, 2020, as compared to $15,744,248 for the nine months ended September 30, 2019, primarily due to a decrease in the weighted average interest rate of our credit facilities because of a decrease in LIBOR rates of 1.2%, or a 21.4% decrease.
General and administrative expenses increased $124,476, or 8.0%, to $1,680,990 for the three months ended September 30, 2020, as compared to $1,556,514 for the three months ended September 30, 2019, primarily due to an increase in insurance expenses. General and administrative expenses increased $7,882,680, or 193.4%, to $11,959,187 for the nine months ended September 30, 2020, as compared to $4,076,507 for the nine months ended September 30, 2019, primarily due to an increase in expenses related to deferred transaction costs (see Note 2).
Professional fees decreased $824,007, or 202.4% to ($416,913) for the three months ended September 30, 2020, as compared to $407,094 for the three months ended September 30, 2019, primarily due to a reimbursement of previously expensed deferred transaction costs (see Note 11). Professional fees increased $9,377,856, or 663.9% to $10,790,405 for the nine months ended September 30, 2020, as compared to $1,412,549 for the nine months ended September 30, 2019, primarily due to an increase in expenses related to deferred transaction costs (see Note 2).
Net Realized Gains/Losses on Investments
We measure realized gains or losses by the difference between the net proceeds from the disposition and the amortized cost basis of an investment, without regard to unrealized gains or losses previously recognized. For the three and nine months ended September 30, 2020, we recognized net realized loss on investments of $52,474,635 and $60,522,923, respectively, primarily due to the sale of investments. For the three and nine months ended September 30, 2019, we recognized net realized loss on investments of $19,721,169 and $34,973,608, respectively, primarily due to certain non-cash restructuring transactions and the wind-down of our TRS facility .
Loss on extinguishment of debt
In the event that we modify or extinguish our debt prior to maturity, we account for it in accordance with ASC 470-50, Modifications and Extinguishments, in which we measure the difference between the reacquisition price of the debt and the net carrying amount of the debt, which includes any unamortized debt issuance costs.
During the three and months ended September 30, 2020, the Company recognized a net loss on extinguishment of debt of $217,950, which was due to the repayment of the outstanding obligations under the Revolving Credit Agreement.
Net Unrealized Appreciation/Depreciation on Investments
Net change in unrealized appreciation/depreciation on investments reflects the net change in the fair value of our investments including the TRS and provision for deferred taxes. For the three and nine months ended September 30, 2020, we recorded a net change in unrealized appreciation, net of tax, of $78,731,774 and a net change in unrealized depreciation, net of tax, of $9,840,179. The unrealized appreciation for the nine months ended September 30, 2020 resulted from the reversal of previously recorded unrealized depreciation on realized investments and positive credit-related adjustments.
For the three and nine months ended September 30, 2019, we recorded a net change in unrealized depreciation, net of tax, of $4,848,805 and $12,391,293, respectively. The unrealized depreciation resulted from negative credit-related adjustments that caused a reduction in fair value of certain portfolio investments.
Changes in Net Assets from Operations
For the three and nine months ended September 30, 2020, we recorded a net increase in net assets resulting from operations of $32,120,421 and a net decrease in net assets resulting from operations of $78,443,683. Based on 102,742,489 and 102,771,213 weighted average common shares outstanding for the three and nine months ended September 30, 2020, our per share net increase in net assets resulting from operations was $0.31 and our per share net decrease in net assets resulting from operations was $0.76, respectively.
For the three and nine months ended September 30, 2019, we recorded a net decrease in net assets resulting from operations of $18,812,388 and $20,953,094, respectively, in net assets resulting from operations. Based on 101,035,420 and 100,116,493 weighted average common shares outstanding for the three and nine months ended September 30, 2019, our per share net decrease in net assets resulting from operations was $0.19 and $0.21, respectively.
Financial Condition, Liquidity and Capital Resources
As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. To fund growth, we have a number of alternatives available to increase capital, including increasing debt, and funding from operational cash flow.
Our liquidity and capital resources historically have been generated primarily from the net proceeds of our public offering of common stock, use of our credit facilities and our TRS. Currently, our primary source of liquidity is derived from the use of our credit facility.
As of September 30, 2020 and December 31, 2019, we had $85.6 million and $225.3 million, respectively, in cash and cash equivalents. In the future, we may generate cash from future offerings of securities, future borrowings and cash flows from operations, including interest earned from the temporary investment of cash in U.S. government securities and other high-quality debt investments that mature in one year or less. Our primary use of funds is to make investments in our targeted asset classes, cash distributions to our stockholders, and other general corporate purposes.
In order to satisfy the Code requirements applicable to us as a RIC, we intend to distribute to our stockholders substantially all of our taxable income, but we may also elect to periodically spillover certain excess undistributed taxable income from one tax year into the next tax year. In addition, as a BDC, we generally are required to meet a coverage ratio of total assets to total senior securities, which include borrowings and any preferred stock we may issue in the future, of at least 200% (or 150% if certain requirements under the 1940 Act are met) at the time of the borrowing or issuance of preferred stock. This requirement limits the amount that we may borrow.
The following table shows our net borrowings as of September 30, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2020
|
|
December 31, 2019
|
|
|
Total
Commitment
|
|
Balance
Outstanding
|
|
Unused
Commitment
|
|
Total
Commitment
|
|
Balance
Outstanding
|
|
Unused
Commitment
|
|
ING Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
215,000,000
|
|
|
$
|
88,100,000
|
|
|
$
|
126,900,000
|
|
|
Alpine Credit Facility
|
300,000,000
|
|
|
180,000,000
|
|
|
120,000,000
|
|
|
300,000,000
|
|
|
240,000,000
|
|
|
60,000,000
|
|
|
Total before deferred financing costs
|
300,000,000
|
|
|
180,000,000
|
|
|
120,000,000
|
|
|
515,000,000
|
|
|
328,100,000
|
|
|
186,900,000
|
|
|
Unamortized deferred financing costs
|
—
|
|
|
(347,588)
|
|
|
—
|
|
|
—
|
|
|
(2,235,279)
|
|
|
—
|
|
|
Total borrowings outstanding, net
|
$
|
300,000,000
|
|
|
$
|
179,652,412
|
|
|
$
|
120,000,000
|
|
|
$
|
515,000,000
|
|
|
$
|
325,864,721
|
|
|
$
|
186,900,000
|
|
ING Credit Facility
On August 12, 2016, the Company amended its existing senior secured syndicated revolving credit facility (the “ING Credit Facility” as amended from time to time as described below) pursuant to a Senior Secured Revolving Credit Agreement (the “Revolving Credit Agreement” as amended from time to time as described below) with certain lenders party thereto from time to time and ING Capital LLC, as administrative agent. The ING Credit Facility was secured by substantially all of the Company’s assets, subject to certain exclusions as further set forth in an Amended and Restated Guarantee, Pledge and Security Agreement (the “Security Agreement”) entered into in connection with the Revolving Credit Agreement, among the Company, the subsidiary guarantors party thereto, ING Capital LLC, as Administrative Agent, each Financial Agent and Designated Indebtedness Holder party thereto and ING Capital LLC, as Collateral Agent. The ING Credit Facility also included usual and customary representations, covenants and events of default for senior secured revolving credit facilities of this nature. On February 13, 2015, commitments to the ING Credit Facility were expanded from $150,000,000 to $170,000.000. On August 12, 2016, commitments to the ING Credit Facility were expanded from $170,000,000 to $175,000,000. On April 20, 2017, commitments to the ING Credit Facility were expanded from $175,000,000 to $220,000,000.
On February 8, 2019, the Company entered into Amendment No. 1 to the Revolving Credit Agreement that, among other things, permits the transactions contemplated by the MCC Merger Agreement and the MDLY Merger Agreement.
On July 25, 2019, the Company entered into Amendment No. 2 to the Revolving Credit Agreement that among other things, (i) reduced the size of the commitments thereunder from $220.0 million to $215.0 million, (ii) extended the Revolver Termination Date (as defined in the Revolving Credit Agreement) from August 12, 2019 to March 31, 2020 and (iii) extended the Maturity Date (as defined in the Revolving Credit Agreement) from August 12, 2020 to March 31, 2021.
On March 30, 2020, the Company entered into Amendment No. 3 to the Revolving Credit Agreement that among other things, extended the Revolver Termination Date from March 31, 2020 to April 30, 2020 after which the Revolving Credit Facility would enter amortization.
On May 15, 2020, the Company entered into Amendment No. 4 to the Revolving Credit Agreement to among other things, (i) shorten the maturity date from March 31, 2021 to September 30, 2020, (ii) accelerate the amortization of the Revolving Credit Agreement, and (iii) provide for the prepayment of the outstanding loans under the Revolving Credit Agreement in an aggregate principal amount of not less than $20 million.
On July 22, 2020, the Company paid all remaining outstanding obligations under the Revolving Credit Agreement. On July 31, 2020 (the “Termination Date”), the Company terminated the commitments on the Credit Agreement. The repayment of the outstanding obligations under the Revolving Credit Agreement was accounted for as a debt extinguishment in accordance with ASC 470-50, Modifications and Extinguishments, which attributed to a realized loss of $217,950 and was recorded on the Consolidated Statements of Operations as a loss on extinguishment of debt.
The ING Credit Facility allowed for us, at our option, to borrow money at a rate of either (i) an alternate base rate plus 1.50% per annum or (ii) LIBOR plus 2.50% per annum. The interest rate margins were subject to certain step-downs upon the satisfaction of certain conditions described in the Revolving Credit Agreement. The alternate base rate was the greatest of (i) the U.S. Prime Rate set forth in the Wall Street Journal, (ii) the federal funds effective rate plus 1/2 of 1%, and (iii) three month LIBOR plus 1%. As of September 30, 2020 and December 31, 2019, the commitment under the ING Credit Facility was $0 and $215,000,000, respectively. Availability of loans under the ING Credit Facility was linked to the valuation of the collateral pursuant to a borrowing base mechanism.
We were also required to pay a commitment fee to the lenders based on the daily unused portion of the aggregate commitments under the ING Credit Facility. The commitment fee was (i) 1.50% if the used portion of the aggregate commitments is less than or equal to 40%, (ii) 0.75% if the used portion of the aggregate commitments is greater than 40% and less than or equal to 65% or
(iii) 0.50% if the used portion of the aggregate commitments is greater than 65%. The ING Credit Facility provided that we may use the proceeds of the ING Credit Facility for general corporate purposes, including making investments in accordance with our investment objective and strategy. As of September 30, 2020 and December 31, 2019, our borrowings under the ING Facility totaled $0 and $88,100,000, respectively, and were recorded as part of revolving credit facilities payable on our Consolidated Statements of Assets and Liabilities.
Alpine Credit Facility
On September 29, 2017, the Company’s wholly-owned, special purpose financing subsidiary, Alpine, amended its existing revolving credit facility (the “Alpine Credit Facility”) pursuant to an Amended and Restated Loan Agreement (the “Amendment”) with JPMorgan Chase Bank, National Association (“JPMorgan”), as administrative agent and lender, the Financing Providers from time to time party thereto, SIC Advisors, as the portfolio manager, and the Collateral Administrator, Collateral Agent and Securities Intermediary party thereto (the “Loan Agreement”). The Loan Agreement was amended to, among other things, (i) extend the reinvestment period until December 29, 2020, (ii) extend the scheduled termination date until March 29, 2022, (iii) decrease the applicable margin for advances to 2.85% per annum and (iv) increase the compliance condition for net advances to 55% of net asset value. Alpine’s obligations to JPMorgan under the Alpine Credit Facility are secured by a first priority security interest in substantially all of the assets of Alpine, including its portfolio of loans. The obligations of Alpine under the Alpine Credit Facility are non-recourse to the Company.
Borrowings under the Alpine Credit Facility are subject to compliance with a NAV coverage ratio with respect to the current value of Alpine’s portfolio and various eligibility criteria must be satisfied with respect to the initial acquisition of each loan in Alpine’s portfolio. Any amounts borrowed under the Alpine Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on March 29, 2022. As of September 30, 2020 and December 31, 2019, Alpine’s borrowings under the Alpine Credit Facility totaled $180,000,000 and $240,000,000, respectively, and were recorded as part of revolving credit facilities payable on our Consolidated Statements of Assets and Liabilities.
Contractual Obligations
The following table shows our payment obligations for repayment of debt, which total our contractual obligations at September 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period
|
|
|
Total
|
|
Less than
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
More than
5 Years
|
|
Alpine Credit Facility
|
$
|
180,000,000
|
|
|
$
|
—
|
|
|
$
|
180,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total Contractual Obligations
|
$
|
180,000,000
|
|
|
$
|
—
|
|
|
$
|
180,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
We have entered into certain contracts under which we have material future commitments. On April 5, 2012, we entered into the Investment Advisory Agreement with SIC Advisors in accordance with the 1940 Act. The Investment Advisory Agreement became effective as of April 17, 2012, the date that we met the minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date, with one-year renewals subject to approval by our board of directors, a majority of whom must be independent directors. Most recently, on April 3, 2020, the board of directors approved the renewal of the Investment Advisory Agreement for an additional one-year term at a board meeting. SIC Advisors serves as our investment adviser in accordance with the terms of the Investment Advisory Agreement. Payments under our Investment Advisory Agreement in each reporting period consist of (i) a management fee equal to a percentage of the value of our gross assets and (ii) an incentive fee based on our performance.
On April 5, 2012, we entered into the Administration Agreement with Medley Capital LLC with an initial term of two years, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. The Administration Agreement became effective as of April 17, 2012, the date that we met the minimum offering requirement. Most recently, on April 3, 2020, the board of directors approved the renewal of the Administration Agreement for an additional one-year term at a board meeting. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf in performing its obligations. Such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC.
If any of our contractual obligations discussed above are terminated, our costs may increase under any new agreements that we enter into as replacements. We would also likely incur expenses in locating alternative parties to provide the services we expect to receive under the investment advisory agreement and administration agreement. Any new investment advisory agreement would also be subject to approval by our stockholders.
Off-Balance Sheet Arrangements
On August 27, 2013, Arbor, a wholly-owned financing subsidiary of the Company, entered into a TRS with Citibank.
On September 29, 2017, Arbor entered into the Fifth Amended Confirmation Letter Agreement with Citibank. The Fifth Amended Confirmation Agreement reduced the maximum portfolio notional (determined at the time each such loan becomes subject to the TRS) from $300,000,000 to $180,000,000, through incremental reductions of $60,000,000 on October 3, 2017 and $20,000,000 on each of November 3, 2017, December 3, 2017 and January 3, 2018. The Fifth Amended Confirmation Agreement also decreased the interest rate payable to Citibank from LIBOR plus 1.65% per annum to LIBOR plus 1.60% per annum. Other than the foregoing, the Fifth Amended Confirmation Agreement did not change any of the other material terms of the TRS. On July 22, 2019, the TRS with Citibank was terminated, and the TRS was fully wound down during the fiscal quarter ended September 30, 2019.
The TRS with Citibank enabled Arbor to obtain the economic benefit of the loans underlying the TRS, despite the fact that such loans were not directly held or otherwise owned by Arbor, in return for an interest-type payment to Citibank. Accordingly, the TRS was analogous to Arbor utilizing leverage to acquire loans and incurring an interest expense to a lender.
SIC Advisors acted as the investment manager of Arbor and had discretion over the composition of the basket of loans underlying the TRS. The terms of the TRS were governed by an ISDA 2002 Master Agreement, the Schedule thereto and Credit Support Annex to such Schedule, and the Confirmation exchanged thereunder, between Arbor and Citibank, which collectively established the TRS, and are collectively referred to herein as the “TRS Agreement”.
There were no transactions in TRS contracts or derivative assets from Citibank during the three and nine months ended September 30, 2020 and the three months ended September 30, 2019. Transactions in TRS contracts during the nine months ended September 30, 2019 were $9,323,516 in realized losses and $6,524,904 in net unrealized appreciation, which are recorded on the Consolidated Statements of Operations.
The volume of the Company’s derivative transactions for the three and nine months ended September 30, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Average notional amount of contracts(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,225,430
|
|
(1)Average notional amount is based on the average month end balances for the three and nine months ended September 30, 2020 and 2019, which is representative of the volume of notional contract amounts held during each year.
On March 27, 2015, the Company and GALIC entered into a limited liability company operating agreement to co-manage Sierra JV. All portfolio and other material decisions regarding Sierra JV must be submitted to Sierra JV's board of managers, which is comprised of four members, two of whom are selected by the Company and the other two are selected by GALIC. The Company has concluded that it does not operationally control Sierra JV. As the Company does not operationally control Sierra JV, it does not consolidate the operations of Sierra JV within the consolidated financial statements. As a practical expedient, the Company uses NAV to determine the fair value of its investment in Sierra JV; therefore, this investment has been presented as a reconciling item within the fair value hierarchy (see Note 4).
As of September 30, 2020 Sierra JV had total capital commitments of $124.6 million, with the Company providing $110.1 million and GALIC providing $14.5 million. As of December 31, 2019 Sierra JV had total capital commitments of $116.0 million, with the Company providing $101.5 million and GALIC providing $14.5 million. As of September 30, 2020 approximately $124.5 million was funded relating to these commitments of which $110.1 million was from the Company. As of December 31, 2019 approximately $105.2 million was funded relating to these commitments of which $92.1 million was from the Company. The Company does not have the right to withdraw any of their respective capital commitment, unless in connection with a transfer of its membership interests. The Company may transfer full membership interests as long as it is approved by all members and transferred in a transaction exempt from the registration requirements of the Securities Act of 1933, as amended, or applicable state securities laws.
Sierra JV entered into a Senior Secured Revolving Credit Facility Agreement, as amended (the "JV Facility") with Deutsche Bank, AG, New York Branch ("DB").
On March 29, 2019, the JV Facility reinvestment period was extended from March 30, 2019 to June 28, 2019.
On June 28, 2019, the JV Facility reinvestment period was further extended from June 28, 2019 to October 28, 2019.
On October 28, 2019, the JV Facility reinvestment period was further extended from October 28, 2019 to March 31, 2020 and the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.50% per annum to LIBOR (with a 0.00% floor) + 2.75% per annum.
On March 31, 2020, the total commitment under the JV Facility was reduced to $240.0 million from $250.0 million and the reinvestment period was extended from March 31, 2020 to April 30, 2020.
On April 30, 2020, the total commitment under the JV Facility was reduced to $200.0 million from $240.0 million, the reinvestment period was extended from April 30, 2020 to July 31, 2020 and the maturity date was extended to July 31, 2023.
On July 29, 2020, the total commitment under the JV Facility was reduced to $175.0 million from $200.0 million, the reinvestment period was extended from July 31, 2020 to April 30, 2021 and the maturity date was extended to April 30, 2024. Additionally, the interest rate was modified from bearing an interest rate of LIBOR (with a 0.00% floor) + 2.75% per annum to LIBOR (with a 0.50% floor) + 3.25% per annum.
As of September 30, 2020, Sierra JV’s portfolio was comprised of 100.0% of senior secured first lien term loans to 54 different portfolio companies with two portfolio companies on non-accrual status. As of December 31, 2019, Sierra JV’s portfolio was comprised of 100% of senior secured first lien term loans to 60 different portfolio companies with one portfolio company on non-accrual status.
The JV Facility is secured substantially by all of Sierra JV's assets, subject to certain exclusions set forth in the JV Facility. As of September 30, 2020 and December 31, 2019, there was $124.7 million and $204.9 million outstanding under the JV Facility, respectively.
The Company has determined that Sierra JV is an investment company under ASC 946, however in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its interest in Sierra JV.
Distributions
We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes, as a RIC under Subchapter M of the Code. To maintain RIC tax treatment, we must, among others things, distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders. In order to avoid certain U.S. federal excise taxes imposed on RICs, we must distribute during each calendar year an amount at least equal to the sum of: (i) 98% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year (unless an election is made by us to use our taxable year) and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no U.S. federal income tax.
While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4% U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of the tax. In that event, we will be liable for the tax only on the amount by which we do not meet the foregoing distribution requirement.
We currently intend to distribute net capital gains (i.e., net long-term capital gains in excess of net short-term capital losses), if any, at least annually out of the assets legally available for such distributions. However, we may decide in the future to retain such capital gains for investment and elect to treat such gains as deemed distributions to you. If this happens, you will be treated for U.S. federal income tax purposes as if you had received an actual distribution of the capital gains that we retain and reinvested the net after tax proceeds in us. In this situation, you would be eligible to claim a tax credit (or, in certain circumstances, a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. We can offer no assurance that we will continue to achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
On July 31, 2020, our board of directors temporarily suspended the monthly distributions on the shares of the Company’s common stock. On October 22, 2020, our board of directors determined to reinstate the monthly distributions on the shares of the Company’s common stock. See “Recent Developments” for more information. Any distributions to our stockholders paid by the Company is subject to our board of directors’ discretion and applicable legal restrictions and take into account our results of operations, our general financial condition, general economic conditions, or other factors prohibit us from declaring a distribution. Any distributions to our stockholders will be declared out of assets legally available for distribution. From time to time, but not less than quarterly, we will review our accounts to determine whether distributions to our stockholders are appropriate. We have not established limits on the amount of funds we may use from available sources to make distributions. From the commencement of our offering through September 30, 2016, a portion of our distributions were comprised in part of expense support payments made by SIC Advisors that were subject to repayment by us within three years of the date of such support payment. The Expense Support Agreement expired on December 31, 2016 and the Company's contingent obligation to repay eligible reimbursements to SIC Advisors expired on September 30, 2019. The purpose of this arrangement was to cover distributions to stockholders so as to ensure that the distributions did not constitute a return of capital for GAAP purposes. In the future, we may have distributions which could be characterized as a return of capital. Such distributions are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods. There can be no assurance that we will achieve the performance necessary to make distributions and at historical levels in the future. SIC Advisors has no obligation to enter into a renewed expense support agreement.
Our distributions may exceed our earnings, which we refer to as a return of capital. As a result, a portion of the distributions we make may represent a return of capital. Our use of the term “return of capital” merely means distributions in excess of our earnings and as such may constitute a return on your individual investments and does not mean a return on capital. Therefore stockholders are advised that they should be aware of the differences with our use of the term “return of capital” and “return on capital.”
The following table reflects the cash distributions per share that the Company has declared or paid to its stockholders during 2020 and 2019. Stockholders of record as of each respective record date were entitled to receive the distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payment Date
|
|
Amount per share
|
|
January 25, 2019
|
|
January 31, 2019
|
|
$
|
0.05334
|
|
|
February 11, 2019
|
|
February 28, 2019
|
|
0.05334
|
|
|
March 11, 2019
|
|
March 29, 2019
|
|
0.05334
|
|
|
April 29, 2019
|
|
April 30, 2019
|
|
0.05334
|
|
|
May 30, 2019
|
|
May 31, 2019
|
|
0.05334
|
|
|
June 27, 2019
|
|
June 28, 2019
|
|
0.05334
|
|
|
July 30, 2019
|
|
July 31, 2019
|
|
0.05334
|
|
|
August 29, 2019
|
|
August 30, 2019
|
|
0.05334
|
|
|
September 27, 2019
|
|
September 30, 2019
|
|
0.05334
|
|
|
October 30, 2019
|
|
October 31, 2019
|
|
0.05334
|
|
|
November 28, 2019
|
|
November 29, 2019
|
|
0.05334
|
|
|
December 30, 2019
|
|
December 31, 2019
|
|
0.05334
|
|
|
January 30, 2020
|
|
January 31, 2020
|
|
0.03500
|
|
|
February 27, 2020
|
|
February 28, 2020
|
|
0.03500
|
|
|
March 30, 2020
|
|
March 31, 2020
|
|
0.03500
|
|
We have adopted an “opt in” distribution reinvestment plan pursuant to which common stockholders may elect to have the full amount of any cash distributions reinvested in additional shares of our common stock. As a result, if we declare a cash distribution, stockholders that have “opted in” to our distribution reinvestment plan will have their distribution automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received cash distributions.
Each year a statement on Internal Revenue Service Form 1099-DIV (or such successor form) identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gain on the sale of securities, or a return of capital) will be mailed to our stockholders. The tax basis of shares must be reduced by the amount of any return of capital distributions, which will result in an increase in the amount of any taxable gain (or a reduction in any deductible loss) on the sale of shares.
Related Party Transactions
We have entered into an Investment Advisory Agreement with SIC Advisors in which our senior management holds an equity interest and were party to the Expense Support Agreement through December 31, 2016. Members of our senior management also serve as principals of other investment managers affiliated with SIC Advisors that do, and may in the future, manage investment funds, accounts or other investment vehicles with investment objectives similar to ours.
We have entered into an Administration Agreement with Medley Capital LLC, pursuant to which Medley Capital LLC furnishes us with administrative services necessary to conduct our day-to-day operations. Medley Capital LLC is reimbursed for administrative expenses it incurs on our behalf. We do not reimburse Medley Capital LLC for any services for which it receives a separate fee or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of Medley Capital LLC. Medley Capital LLC is an affiliate of SIC Advisors.
We have entered into a license agreement with SIC Advisors under which SIC Advisors has agreed to grant us a non-exclusive, royalty-free license to use the name “Sierra” for specified purposes in our business. Under the license agreement, we will have a right to use the “Sierra” name, subject to certain conditions, for so long as SIC Advisors or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we will have no legal right to the “Sierra” name.
Management Fee
We pay SIC Advisors a fee for its services under the Investment Advisory Agreement. The fee consists of two components: a base management fee and an incentive fee.
The base management fee is calculated at an annual rate of 1.75% of our gross assets and is payable quarterly in arrears. The incentive fee consists of:
•An incentive fee on net investment income (“subordinated incentive fee on income”) is calculated and payable quarterly in arrears and is based upon pre-incentive fee net investment income for the immediately preceding quarter. No subordinated incentive fee on income is payable in any calendar quarter in which pre-incentive fee net investment income does not exceed a quarterly return to stockholders of 1.75% per quarter on our net assets at the end of the immediately preceding fiscal quarter, or the preferred quarterly return. All pre-incentive fee net investment income, if any, that exceeds the preferred quarterly return, but is less than or equal to 2.1875% of net assets at the end of the immediately preceding fiscal quarter in any quarter, will be payable to SIC Advisors. We refer to this portion of our subordinated incentive fee on income as the catch up. It is intended to provide an incentive fee of 20% on pre-incentive fee net investment income when pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter in any quarter. For any quarter in which our pre-incentive fee net investment income exceeds 2.1875% of net assets at the end of the immediately preceding quarter, the subordinated incentive fee on income shall equal 20% of the amount of pre-incentive fee net investment income, because the preferred return and catch up will have been achieved.
•A capital gains incentive fee will be earned on realized investments and shall be payable in arrears as of the end of each calendar year during which the Investment Advisory Agreement is in effect. If the Investment Advisory Agreement is terminated, the fee will become payable as of the effective date of such termination. The capital gains incentive fee is based on our realized capital gains on a cumulative basis from inception, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, which we refer to as “net realized capital gains.” The capital gains incentive fee equals 20% of net realized capital gains, less the aggregate amount of any previously paid capital gains incentive fee.
Under the terms of the Investment Advisory Agreement, SIC Advisors bears all organizational and offering expenses on our behalf. Since June 2, 2014, the date that we raised $300 million in gross proceeds in connection with the sale of shares of our common stock, SIC Advisors was no longer obligated to bear, pay or otherwise be responsible for any ongoing organizational and offering expenses on our behalf, and we were responsible for paying or otherwise incurring all such organizational and offering expenses. Pursuant to the terms of the Investment Advisory Agreement, we had agreed to reimburse SIC Advisors for any such organizational and offering expenses incurred by SIC Advisors not to exceed 1.25% of the gross subscriptions raised by us over the course of the offering period, which was initially scheduled to terminate two years from the initial offering date, unless extended. On July 2, 2018, the Company’s board of directors determined to terminate the Company’s offering effective as of July 31, 2018.
On April 5, 2012, the Company entered into an investment advisory agreement (the “Investment Advisory Agreement”) with SIC Advisors to manage the Company’s investment activities. The Investment Advisory Agreement became effective as of April 17, 2012, the date that the Company met its minimum offering requirement. Pursuant to the 1940 Act, the initial term of the Investment Advisory Agreement was for two years from its effective date. Unless earlier terminated pursuant to its terms, the Investment Advisory Agreement will remain in effect from year-to-year thereafter if approved annually at an in-person meeting of the Company’s board of directors by a majority of the directors who are not "interested persons" (as defined in Section 2(a)(19) of the 1940 Act) of the Company or the Adviser, and either the Company’s board of directors or the holders of a majority of the Company’s outstanding voting securities. Most recently, on April 3, 2020, the Company’s board of directors, approved the renewal of the Investment Advisory Agreement for an additional one-year term, which will expire on April 17, 2021.
At its meeting held on April 3, 2020, the Company’s board of directors, including all of the independent directors, considered the re-approval of the Investment Advisory Agreement. In advance of that meeting, the independent directors met separately on multiple occasions with their independent counsel. At those meetings, the independent directors reviewed a significant amount of information, which had been furnished by SIC Advisors at the request of independent counsel on behalf of the independent directors. The independent directors met on March 19, 2020 with members of SIC Advisors' senior management to review, among other things, the financial condition of SIC Advisors and its parent company, and, on March 31, 2020 with SIC Advisors' senior management and investment team to discuss, among other things, the Company's investment portfolio and its financing arrangements.
In its considerations, the Company’s board of directors focused on information it had received relating to, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to the Company by SIC Advisors; (b) the Company’s investment performance and the investment performance of the Adviser; (c) comparative data with respect to advisory fees or similar expenses paid by other BDCs with similar investment objectives and strategies; (d) the Company’s operating expenses and expense ratio compared to BDCs with similar investment objectives and strategies; (e) any existing and potential sources of indirect income to SIC Advisors and its affiliates from its relationships with the Company and the profitability of those relationships; (f) information about the services to be performed and the personnel performing such services under the Investment Advisory Agreement; (g) the organizational capability and financial condition of SIC Advisors and its affiliates; (h) possible economies of scale arising from the Company's size and/or anticipated growth; and (i) possible alternative fee structures or bases for determining fees.
As part of its review, the Company’s board of directors evaluated charts that compared the advisory fees, administrative fees and performance of many BDCs, including some BDCs that might be considered to be somewhat comparable to the Company with respect to their investment objective or strategy. The Company’s board of directors took into account that it was difficult to identify BDCs that are comparable to the Company for this purpose due to several anomalies that exist in the BDC comparison group regarding apparent loss leader pricing, post-acquisition temporary fee reductions, lower risk profiles and therefore generally lower fee structures, and the general difficulty in determining reasonable comparable peer strategies due to many variables at work in the private loan market and with private loan credits in general. Based upon this analysis, the Company’s board of directors observed that, in light of the unique circumstances applicable to the Company, it was difficult to determine which BDCs were most comparable to the Company in terms of investment objective and investment strategy. Notwithstanding that difficulty, the Company’s board of directors noted that the Company’s investment performance generally appeared to be below that of the BDCs with somewhat similar investment profiles.
The Company’s board of directors also determined that the advisory fees paid by the Company were within the range of fees paid by such BDCs but generally were higher than the median of such BDCs. The board of directors considered management’s discussion of the Company’s relative investment performance and expenses. In particular, the Company’s board of directors considered the Company’s extensive efforts with respect to the proposed mergers with Medley Management Inc. and Medley Capital Corporation, which significantly impacted the Company’s operations, both from an investment standpoint and an operational standpoint. The Company’s board of directors weighed all of these factors in its analysis and decision making.
Pursuant to the Investment Advisory Agreement, SIC Advisors implements the Company’s business strategy on a day-to-day basis and performs certain services for the Company, subject to oversight by the Company’s board of directors. SIC Advisors is responsible for, among other duties, determining investment criteria, sourcing, analyzing and executing investment transactions, asset sales, financings and performing asset management duties. Under the Investment Advisory Agreement, the Company has agreed to pay SIC Advisors a management fee for investment advisory and management services consisting of a base management fee and an incentive fee.
Critical Accounting Policies
This discussion of our expected operating plans is based upon our expected consolidated financial statements, which will be prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements will require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. In addition to the discussion below, we will describe our critical accounting policies in the notes to our future consolidated financial statements.
Valuation of Investments
We apply fair value accounting to all of its financial instruments in accordance with the 1940 Act and ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 defines fair value, establishes a framework used to measure fair value and requires disclosures for fair value measurements. In accordance with ASC 820, we have categorized its financial instruments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as identified below and discussed in Note 4.
•Level 1 — Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities and publicly listed derivatives will be included in Level 1. In addition, securities sold, but not yet purchased and call options will be included in Level 1. We will not adjust the quoted price for these investments, even in situations where we hold a large position and a sale could reasonably affect the quoted price.
•Level 2 — Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from an orderly transaction between market participants provided by reputable dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments, and various relationships between investments. Investments which are generally expected to be included in this category include corporate bonds and loans, convertible debt indexed to publicly listed securities, and certain over-the-counter derivatives.
•Level 3 — Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments that are expected to be included in this category are our private portfolio companies.
Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Therefore, when market assumptions are not readily available, our own assumptions are set to reflect those that management believes market participants would use in pricing the financial instrument at the measurement date.
Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. We weight the use of third-party broker quotes, if any, in determining fair value based on our understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by our board of directors based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time.
We use third-party valuation firms to assist the board of directors in the valuation of its portfolio investments. The valuation reports generated by the third-party valuation firms consider the evaluation of financing and sale transactions with third parties, expected cash flows and market based information, including comparable transactions, performance multiples, and movement in yields of debt instruments, among other factors. Based on market data obtained from the third-party valuation firms, we use a combined market yield analysis and an enterprise model of valuation. In applying the market yield analysis, the value of our loans are determined based upon inputs such as the coupon rate, current market yield, interest rate spreads of similar securities, the stated value of the loan, and the length to maturity. In applying the enterprise model, we use a waterfall analysis which takes into account the specific capital structure of the borrower and the related seniority of the instruments within the borrower’s capital structure into consideration. To estimate the enterprise value of the portfolio company, we weigh some or all of the traditional
market valuation methods and factors based on the individual circumstances of the portfolio company in order to estimate the enterprise value. The methodologies for performing investments may be based on, among other things: valuations of comparable public companies, recent sales of private and public comparable companies, discounting the forecasted cash flows of the portfolio company, third party valuations of the portfolio company, considering offers from third parties to buy the company, estimating the value to potential strategic buyers and considering the value of recent investments in the equity securities of the portfolio company. For non-performing investments, we may estimate the liquidation or collateral value of the portfolio company’s assets and liabilities using an expected recovery model. We may estimate the fair value of warrants based on a model such as the Black-Scholes model or simulation models or a combination thereof.
We undertake a multi-step valuation process each quarter when valuing investments for which market quotations are not readily available, as described below:
•our quarterly valuation process begins with each portfolio investment being initially valued by the valuation professionals;
•conclusions are then documented and discussed with senior management; and
•an independent valuation firm engaged by our board of directors prepares an independent valuation report for approximately one third of the portfolio investments each quarter on a rotating quarterly basis on non fiscal year-end quarters, such that each of these investments will be valued by an independent valuation firm at least twice per annum when combined with the fiscal year-end review of all the investments by independent valuation firms, exclusive of any TRS underlying portfolio.
In addition, all of our investments are subject to the following valuation process:
•management reviews preliminary valuations and their own independent assessment;
•the audit committee of our board of directors reviews the preliminary valuations of senior management and independent valuation firms; and
•our board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of SIC Advisors, the respective independent valuation firms and the audit committee.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment (including the impact of COVID-19 on the financial market), portfolio company performance, and other events may occur over the lives of the investments that may cause the gains or losses ultimately realized on these investments to be materially different than the valuations currently assigned.
Our investments in subordinated notes are carried at fair value, which is based on a discounted cash flow model. The discounted cash flow model models both the underlying collateral (“assets”) and the liabilities of the CLO capital structure. The discounted cash flow model uses a set of assumptions including projected default rates, recovery rates, reinvestment rates and prepayment rates in order to arrive at estimated cash flows of the assets. The discounted cash flow model distributes the asset cash flows to the liability structure based on the payment priorities and discounts them back using appropriate market discount rates based on discount rates for comparable CLOs. The assumptions are based on available market data as well as management estimates. Additional data is used to validate the results from the discounted cash flow method, such as analysis of relevant data observed in the CLO market, review of quotes, where available, recent acquisitions and observable transactions in the subordinated notes, among other factors.
Revenue Recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the principal balance, we generally will not accrue PIK interest for accounting purposes if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities or accounting purposes if we have reason to doubt our ability to collect such interest. Original issue discounts, market discounts, or premiums are accreted or amortized using the effective interest method as interest income. We record prepayment premiums on loans and debt securities as fee income. Dividend income, if any, is recognized on an accrual basis to the extent that we expect to collect such amount.
Net Realized Gains or Losses and Net Change in Unrealized Appreciation or Depreciation
We measure net realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized appreciation or depreciation, when gains or losses are realized.
Payment-in-Kind Interest
We have investments in our portfolio that contain a PIK interest provision. Any PIK interest is added to the principal balance of such investments and is recorded as income, if the portfolio company valuation indicates that such PIK interest is collectible. In order to maintain RIC tax treatment, substantially all of this income must be paid out to stockholders in the form of dividends, even if we have not collected any cash.
Organizational and Offering Expenses
We were responsible for all ongoing organizational and offering expenses since June 2, 2014 until the termination of the Company's offering effective as of July 31, 2018.
U.S. Federal Income Taxes
We have elected, and intend to qualify annually, to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders from our tax earnings and profits. To obtain and maintain our RIC tax treatment, we must, among other things, meet specified source-of-income and asset diversification requirements and distribute annually at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any.
Recent Developments
On October 22, 2020, our board of directors declared a series of monthly distributions for October, November and December 2020 in the amount of $0.01 per share. Stockholders of record as of each respective monthly record date will be entitled to receive the distribution. Below are the details for each respective distribution:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
Payment Date
|
Amount per share
|
|
October 29, 2020
|
October 30, 2020
|
$0.01
|
|
November 27, 2020
|
November 30, 2020
|
0.01
|
|
December 30, 2020
|
December 31, 2020
|
0.01
|