NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
September 30, 2016
(in thousands, except share amounts)
Note 1. Organization
Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007 with
initial capital of $1,200,000 of which 47.04% was funded by affiliated parties.
Immediately prior to our initial public
offering, through a series of transactions, Solar Capital Ltd. merged with Solar Capital LLC, leaving Solar Capital Ltd. as the surviving entity (the “Merger”). Solar Capital Ltd. issued an aggregate of approximately 26.65 million
shares of common stock and $125,000 in senior unsecured notes to the existing Solar Capital LLC unit holders in connection with the Merger. Solar Capital Ltd. had no assets or operations prior to completion of the Merger and as a result, the
historical books and records of Solar Capital LLC have become the books and records of the surviving entity. The number of shares used to calculate weighted average shares for use in computations on a per share basis have been decreased
retroactively by a factor of approximately 0.4022 for all periods prior to February 9, 2010. This factor represents the effective impact of the reduction in shares resulting from the Merger.
Solar Capital Ltd. (“Solar Capital”, the “Company”, “we”, “us” or “our”), a Maryland
corporation formed in November 2007, is a closed-end, externally managed, non-diversified 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”). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, the Company has
elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
On February 9, 2010, Solar Capital priced its initial public offering, selling 5.68 million shares, including the underwriters’ over-allotment, at a price of $18.50 per share. Concurrent
with this offering, the Company’s senior management purchased an additional 600,000 shares through a private placement, also at $18.50 per share.
The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in leveraged middle market companies
in the form of senior secured loans, unitranche loans, mezzanine loans and equity securities. From time to time, we may also invest in public companies that are thinly traded.
Note 2. Significant Accounting Policies
The accompanying consolidated
financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of the Company and its wholly-owned subsidiaries. The
consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All
significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to the current period presentation.
Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as
appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of income and
13
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ
materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2016.
In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of
financial statements, have been included.
The significant accounting policies consistently followed by the Company are:
|
|
(a)
|
Investment transactions are accounted for on the trade date;
|
|
|
(b)
|
Under procedures established by our board of directors (the “Board”), we value investments, including certain senior secured debt, subordinated debt and other
debt securities with maturities greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers
or dealers (if available, otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is
more representative. If and when market quotations are deemed not to represent fair value, we typically utilize independent third-party valuation firms to assist us in determining fair value. Accordingly, such investments go through our multi-step
valuation process as described below. In each case, independent valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations. Debt investments with maturities of 60
days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (the “Investment Adviser”),
does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of our Board. Investments that are not publicly traded or whose market quotations are not readily
available are valued at fair value as determined in good faith by or under the direction of our Board. Such determination of fair values involves subjective judgments and estimates.
|
With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to
represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:
|
|
(1)
|
our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Investment Adviser
responsible for the portfolio investment;
|
|
|
(2)
|
preliminary valuation conclusions are then documented and discussed with senior management of the Investment Adviser;
|
|
|
(3)
|
independent valuation firms engaged by our Board conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own
independent assessment for all material assets;
|
|
|
(4)
|
the audit committee of the Board reviews the preliminary valuation of the Investment Adviser and that of the independent valuation firm and responds to the valuation
recommendation of the independent valuation firm to reflect any comments; and
|
|
|
(5)
|
the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the
respective independent valuation firm and the audit committee.
|
14
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Investments in all asset classes are valued utilizing a market approach, an income
approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value.
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts
(for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may
take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants,
call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of
financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are
considered as an input in the valuation process. Escrow receivables, if any, included in the receivables for investments sold in the Consolidated Statements of Assets and Liabilities are reviewed quarterly and the value of the receivable is adjusted
as necessary. For the nine months ended September 30, 2016, there has been no change to the Company’s valuation techniques and the nature of the related inputs considered in the valuation process.
ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1
: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2
: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar
assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3
:
Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair
value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
|
|
(c)
|
Gains or losses on investments are calculated by using the specific identification method.
|
|
|
(d)
|
The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original
issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method or on a straight-line basis, as applicable. Upon the prepayment of a loan, any unamortized loan origination fees are
recorded as interest income. We record call premiums received on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee
and other fee income for services rendered, if any, are recorded as other income when earned.
|
|
|
(e)
|
The Company intends to comply with the applicable provisions of the Internal Revenue Code pertaining to regulated investment companies to make
distributions of taxable income sufficient to
|
15
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
|
|
relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on
this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate.
|
|
|
(f)
|
Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are typically reclassified among the Company’s
capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
|
|
|
(g)
|
Distributions to common stockholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital
gains, if any, are generally distributed or deemed distributed at least annually.
|
|
|
(h)
|
In accordance with Regulation S-X and ASC Topic 810—
Consolidation
, the Company consolidates its interest in investment company subsidiaries, financing
subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of
providing services to the Company.
|
|
|
(i)
|
The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars
based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company’s investments in foreign securities, if any, may involve certain
risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the
relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.
|
|
|
(j)
|
The Company has made an irrevocable election to apply the fair value option of accounting to its senior secured credit facility (the “Credit Facility”) and
its senior secured notes (the “Senior Secured Notes”) (see notes 6 and 8), in accordance with ASC 825-10. The Company uses an independent third-party valuation firm to assist in measuring their fair value.
|
|
|
(k)
|
In accordance with ASC 835-30, the Company records origination and other expenses related to certain debt issuances as a direct deduction from the carrying amount of
the debt liability. These expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and when it approximates the
effective yield method.
|
|
|
(l)
|
The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the
difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.
|
|
|
(m)
|
The Company records expenses related to shelf registration statements and applicable equity offering costs as prepaid assets. These expenses are typically charged as a
reduction of capital upon utilization, in accordance with ASC 946-20-25. Certain subsequent costs are expensed per the AICPA Audit & Accounting Guide for Investment Companies.
|
16
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
|
|
(n)
|
Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past
due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in
management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on investments may be recognized as income or applied to principal depending on
management’s judgment.
|
|
|
(o)
|
The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements
and other high-quality, short-term debt securities would qualify as cash equivalents.
|
Recent Accounting
Pronouncements
In February 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic
810)—Amendments to the Consolidation Analysis. The update changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Public companies are required to apply ASU 2015-02
for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-02 on its consolidated financial statements and determined that the adoption of ASU 2015-02 has not had a
material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, Interest—Imputation
of Interest (Subtopic 835-30)—Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated
the impact of ASU 2015-03 on its consolidated financial statements and determined that the adoption of ASU 2015-03 has not had a material impact on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB’s fair
value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its
consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.
Note 3. Agreements
Solar Capital has an Advisory Agreement with the
Investment Adviser, under which the Investment Adviser will manage the day-to-day operations of, and provide investment advisory services to, Solar Capital. For providing these services, the Investment Adviser receives a fee from Solar Capital,
consisting of two components—a base management fee and an incentive fee. The base management fee is determined by taking the average value of Solar Capital’s gross assets at the end of the two most recently completed calendar quarters
17
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
calculated at an annual rate of 2.00%. For purposes of computing the base management fee, gross assets exclude temporary assets acquired at the end of each fiscal quarter for purposes of
preserving investment flexibility in the next fiscal quarter. Temporary assets include, but are not limited to, U.S. treasury bills, other short-term U.S. government or government agency securities, repurchase agreements or cash borrowings.
The incentive fee has two parts, as follows: one part is calculated and payable quarterly in arrears based on Solar
Capital’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees
(other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus Solar
Capital’s operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and distributions paid on any issued and outstanding preferred stock, but
excluding the incentive fee). Pre-incentive fee net investment income does not include any realized capital gains or losses, or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return
on the value of Solar Capital’s net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7% annualized). Solar Capital pays the Investment Adviser an incentive fee with
respect to Solar Capital’s pre-incentive fee net investment income in each calendar quarter as follows: (1) no incentive fee in any calendar quarter in which Solar Capital’s pre-incentive fee net investment income does not exceed the
hurdle rate; (2) 100% of Solar Capital’s pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar
quarter; and (3) 20% of the amount of Solar Capital’s pre-incentive fee net investment income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are appropriately pro-rated for any period of less than three months.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon
termination of the Advisory Agreement, as of the termination date), and will equal 20% of Solar Capital’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a
gross investment-by-investment basis at the end of each calendar year) and all net capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement
purposes, the second part of the incentive fee is accrued based upon 20% of cumulative net realized gains and net unrealized capital appreciation. No accrual was required for the three and nine months ended September 30, 2016 and 2015.
For the three and nine months ended September 30, 2016, the Company recognized $7,318 and $21,245, respectively, in base management fees
and $4,251 and $13,363, respectively, in performance-based incentive fees. For the three and nine months ended September 30, 2015, the Company recognized $6,254 and $18,155, respectively, in base management fees and $1,971 and $1,971, respectively,
in performance-based incentive fees. For the three and nine months ended September 30, 2015, $700 and $700, respectively, of such performance-based incentive fees were waived.
Solar Capital has also entered into an Administration Agreement with Solar Capital Management, LLC (the “Administrator”) under which the Administrator provides administrative services to Solar
Capital. For providing these services, facilities and personnel, Solar Capital reimburses the Administrator for Solar Capital’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under
the Administration Agreement, including rent. The Administrator will also provide, on Solar Capital’s behalf, managerial assistance to those portfolio companies to which Solar Capital is required to provide such assistance.
18
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
For the three and nine months ended September 30, 2016, the Company recognized expenses
under the Administration Agreement of $1,617 and $4,417, respectively. For the three and nine months ended September 30, 2015, the Company recognized expenses under the Administration Agreement of $1,245 and $3,844, respectively. No managerial
assistance fees were accrued or collected for the three and nine months ended September 30, 2016 and 2015.
Note 4. Net Asset Value
Per Share
At September 30, 2016, the Company’s total net assets and net asset value per share were $917,563 and
$21.72, respectively. This compares to total net assets and net asset value per share at December 31, 2015 of $882,698 and $20.79, respectively.
Note 5. Earnings Per Share
The following table sets forth the
computation of basic and diluted net increase in net assets per share resulting from operations, pursuant to ASC 260-10, for the three and nine months ended September 30, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
Earnings per share (basic & diluted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator—net increase in net assets resulting from operations:
|
|
$
|
25,619
|
|
|
$
|
86
|
|
|
$
|
88,971
|
|
|
$
|
28,261
|
|
|
Denominator—weighted average shares:
|
|
|
42,248,525
|
|
|
|
42,465,162
|
|
|
|
42,261,372
|
|
|
|
42,465,162
|
|
|
Earnings per share:
|
|
$
|
0.61
|
|
|
$
|
0.00
|
|
|
$
|
2.11
|
|
|
$
|
0.67
|
|
Note 6. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a
framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair
value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level
1.
Financial assets and liabilities whose values are based on unadjusted quoted prices for identical
assets or liabilities in an active market that the Company has the ability to access.
Level
2.
Financial assets and liabilities whose values are based on quoted prices in markets that are not
active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
|
|
a)
|
Quoted prices for similar assets or liabilities in active markets;
|
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets;
|
|
|
c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
|
19
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
|
|
d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of
the asset or liability.
|
Level
3.
Financial assets and liabilities whose values are
based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s
own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used
to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example,
a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).
Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3).
A review of fair value hierarchy classifications is conducted on a quarterly basis.
Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications are reported as transfers in/out of the appropriate category as of the end of the quarter in which
the reclassifications occur.
The following tables present the balances of assets and liabilities measured at fair value on a
recurring basis, as of September 30, 2016 and December 31, 2015:
Fair Value Measurements
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measured at
Net Asset
Value*
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/Senior Secured Loans
|
|
$
|
—
|
|
|
$
|
33,684
|
|
|
$
|
828,390
|
|
|
$
|
—
|
|
|
$
|
862,074
|
|
|
Subordinated Debt/Corporate Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
27,918
|
|
|
|
—
|
|
|
|
27,918
|
|
|
Preferred Equity
|
|
|
—
|
|
|
|
—
|
|
|
|
15,594
|
|
|
|
—
|
|
|
|
15,594
|
|
|
Common Equity/Equity Interests/Warrants
|
|
|
508
|
|
|
|
—
|
|
|
|
325,771
|
|
|
|
129,962
|
|
|
|
456,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
508
|
|
|
$
|
33,684
|
|
|
$
|
1,197,673
|
|
|
$
|
129,962
|
|
|
$
|
1,361,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
342,700
|
|
|
$
|
—
|
|
|
$
|
342,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value
have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.
|
20
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Fair Value Measurements
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measured at
Net Asset Value*
|
|
|
Total
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/Senior Secured Loans
|
|
$
|
—
|
|
|
$
|
35,745
|
|
|
$
|
800,291
|
|
|
$
|
—
|
|
|
$
|
836,036
|
|
|
Subordinated Debt/Corporate Notes
|
|
|
—
|
|
|
|
—
|
|
|
|
67,314
|
|
|
|
—
|
|
|
|
67,314
|
|
|
Preferred Equity
|
|
|
—
|
|
|
|
—
|
|
|
|
17,948
|
|
|
|
—
|
|
|
|
17,948
|
|
|
Common Equity/Equity Interests/Warrants
|
|
|
377
|
|
|
|
—
|
|
|
|
310,239
|
|
|
|
80,677
|
|
|
|
391,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
377
|
|
|
$
|
35,745
|
|
|
$
|
1,195,792
|
|
|
$
|
80,677
|
|
|
$
|
1,312,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
332,900
|
|
|
$
|
—
|
|
|
$
|
332,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value
have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.
|
The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the
nine months ended September 30, 2016 and the year ended December 31, 2015 as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at September
30, 2016 and December 31, 2015:
Fair Value Measurements Using Level 3 Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/
Senior Secured
Loans
|
|
|
Subordinated Debt/
Corporate Notes
|
|
|
Preferred Equity
|
|
|
Common Equity/
Equity
Interests/
Warrants
|
|
|
Fair value, December 31, 2015
|
|
$
|
800,291
|
|
|
$
|
67,314
|
|
|
$
|
17,948
|
|
|
$
|
310,239
|
|
|
Total gains or losses included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss)
|
|
|
381
|
|
|
|
77
|
|
|
|
—
|
|
|
|
—
|
|
|
Net change in unrealized gain (loss)
|
|
|
9,472
|
|
|
|
8,365
|
|
|
|
(206
|
)
|
|
|
9,317
|
|
|
Purchase of investment securities
|
|
|
287,090
|
|
|
|
162
|
|
|
|
—
|
|
|
|
6,215
|
|
|
Proceeds from dispositions of investment securities
|
|
|
(268,844
|
)
|
|
|
(48,000
|
)
|
|
|
(2,148
|
)
|
|
|
—
|
|
|
Transfers in/out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, September 30, 2016
|
|
$
|
828,390
|
|
|
$
|
27,918
|
|
|
$
|
15,594
|
|
|
$
|
325,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss)
|
|
$
|
7,454
|
|
|
$
|
488
|
|
|
$
|
(206
|
)
|
|
$
|
9,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2016, there were no transfers in and out of Levels 1 and 2.
21
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
The following table shows a reconciliation of the beginning and ending balances for fair
valued liabilities measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2016:
|
|
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
For the nine months
ended
September 30, 2016
|
|
|
Beginning fair value
|
|
$
|
332,900
|
|
|
Net realized (gain) loss
|
|
|
—
|
|
|
Net change in unrealized (gain) loss
|
|
|
—
|
|
|
Borrowings
|
|
|
570,000
|
|
|
Repayments
|
|
|
(560,200
|
)
|
|
Transfers in/out of Level 3
|
|
|
—
|
|
|
|
|
|
|
|
|
Ending fair value
|
|
$
|
342,700
|
|
|
|
|
|
|
|
The Company has made an irrevocable election to apply the fair value option of accounting to the Credit
Facility and the Senior Secured Notes, in accordance with ASC 825-10. On September 30, 2016, there were borrowings of $267,700 and $75,000, respectively, on the Credit Facility and the Senior Secured Notes. The Company used an independent
third-party valuation firm to assist in measuring the fair value of the Credit Facility and Senior Secured Notes.
Fair
Value Measurements Using Level 3 Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/
Senior Secured
Loans
|
|
|
Subordinated Debt/
Corporate Notes
|
|
|
Preferred Equity
|
|
|
Common Equity/
Equity
Interests/
Warrants
|
|
|
Fair value, December 31, 2014
|
|
$
|
521,791
|
|
|
$
|
76,140
|
|
|
$
|
23,097
|
|
|
$
|
320,424
|
|
|
Total gains or losses included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss)
|
|
|
(4,823
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(415
|
)
|
|
Net change in unrealized gain (loss)
|
|
|
(18,805
|
)
|
|
|
(9,021
|
)
|
|
|
(457
|
)
|
|
|
(9,418
|
)
|
|
Purchase of investment securities
|
|
|
418,759
|
|
|
|
195
|
|
|
|
469
|
|
|
|
229
|
|
|
Proceeds from dispositions of investment securities
|
|
|
(116,631
|
)
|
|
|
—
|
|
|
|
(5,161
|
)
|
|
|
(581
|
)
|
|
Transfers in/out of Level 3
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2015
|
|
$
|
800,291
|
|
|
$
|
67,314
|
|
|
$
|
17,948
|
|
|
$
|
310,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss)
|
|
$
|
(23,917
|
)
|
|
$
|
(9,021
|
)
|
|
$
|
(457
|
)
|
|
$
|
(9,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2015, there were no transfers in and out of Levels 1 and 2.
22
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
The following table shows a reconciliation of the beginning and ending balances for fair
valued liabilities measured using significant unobservable inputs (Level 3) for the year ended December 31, 2015:
|
|
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
For the year ended
December 31, 2015
|
|
|
Beginning fair value
|
|
$
|
125,000
|
|
|
Net realized (gain) loss
|
|
|
—
|
|
|
Net change in unrealized (gain) loss
|
|
|
—
|
|
|
Borrowings
|
|
|
418,800
|
|
|
Repayments
|
|
|
(210,900
|
)
|
|
Transfers in/out of Level 3
|
|
|
—
|
|
|
|
|
|
|
|
|
Ending fair value
|
|
$
|
332,900
|
|
|
|
|
|
|
|
The Company has made an irrevocable election to apply the fair value option of accounting to the Credit
Facility and the Senior Secured Notes, in accordance with ASC 825-10. On December 31, 2015, there were borrowings of $257,900 and $75,000, respectively, on the Credit Facility and the Senior Secured Notes. The Company used an independent third-party
valuation firm to assist in measuring the fair value of the Credit Facility and Senior Secured Notes.
Quantitative
Information about Level 3 Fair Value Measurements
The Company typically determines the fair value of its performing
debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to
current contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total
enterprise value of the company, and the rights and remedies of our investment within each portfolio company.
Significant
unobservable quantitative inputs typically used in the fair value measurement of the Company’s Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and
pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (“EBITDA”) multiples of similar companies, and comparable
market transactions for equity securities.
Quantitative information about the Company’s Level 3 asset and liability fair
value measurements as of September 30, 2016 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset or
Liability
|
|
Fair Value at
September 30, 2016
|
|
|
Principal
Valuation
Technique/Methodology
|
|
Unobservable Input
|
|
Range (Weighted
Average)
|
|
Bank Debt/Senior Secured Loans
|
|
Asset
|
|
$
$
|
827,096
1,294
|
|
|
Yield Analysis
Enterprise Value
|
|
Market Yield
EBITDA Multiple
|
|
5.3% – 20.9% (11.0%)
4.0x – 5.0x (4.5x)
|
|
Subordinated Debt/Corporate Note
|
|
Asset
|
|
$
|
27,918
|
|
|
Yield Analysis
|
|
Market Yield
|
|
14.9% – 14.9% (14.9%)
|
|
Preferred Equity
|
|
Asset
|
|
$
|
15,594
|
|
|
Yield Analysis
|
|
Market Yield
|
|
8.0% – 11.5% (10.1%)
|
|
Common Equity/Equity Interests/Warrants
|
|
Asset
|
|
$
$
|
22,771
303,000
|
|
|
Enterprise Value
Enterprise Value
|
|
EBITDA Multiple
Return on Equity
|
|
5.5x – 6.5x (6.3x)
7.7% – 13.0% (10.3%)
|
|
Credit Facility
|
|
Liability
|
|
$
|
267,700
|
|
|
Yield Analysis
|
|
Market Yield
|
|
L+1.8% – L+4.8%
(L+2.3%)
|
|
Senior Secured Notes
|
|
Liability
|
|
$
|
75,000
|
|
|
Yield Analysis
|
|
Market Yield
|
|
5.6% – 6.1% (5.9%)
|
23
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Quantitative information about the Company’s Level 3 asset and liability fair value
measurements as of December 31, 2015 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset or
Liability
|
|
Fair Value at
December 31, 2015
|
|
|
Principal Valuation
Technique/Methodology
|
|
Unobservable Input
|
|
Range (Weighted
Average)
|
|
Bank Debt/Senior Secured Loans
|
|
Asset
|
|
$
$
|
799,058
1,233
|
|
|
Yield Analysis
Enterprise Value
|
|
Market Yield
EBITDA Multiple
|
|
5.5% – 19.5% (11.0%)
4.5x – 5.0x (4.5x)
|
|
Subordinated Debt/Corporate Note
|
|
Asset
|
|
$
|
67,314
|
|
|
Yield Analysis
|
|
Market Yield
|
|
13.2% – 26.1% (20.8%)
|
|
Preferred Equity
|
|
Asset
|
|
$
|
17,948
|
|
|
Yield Analysis
|
|
Market Yield
|
|
8.0% – 11.5% (9.8%)
|
|
Common Equity/Equity Interests/Warrants
|
|
Asset
|
|
$
$
|
20,239
290,000
|
|
|
Enterprise Value
Enterprise Value
|
|
EBITDA Multiple
Return on Equity
|
|
5.6x – 6.8x (6.1x)
7.0% – 13.8% (11.0%)
|
|
Credit Facility
|
|
Liability
|
|
$
|
257,900
|
|
|
Yield Analysis
|
|
Market Yield
|
|
L+0.5% – L+4.8%
(L+2.3%)
|
|
Senior Secured Notes
|
|
Liability
|
|
$
|
75,000
|
|
|
Yield Analysis
|
|
Market Yield
|
|
5.6% – 6.1% (5.9%)
|
Significant increases or decreases in any of the above unobservable inputs in isolation, including
unobservable inputs used in deriving bid-ask spreads, if applicable, could result in significantly lower or higher fair value measurements for such assets and liabilities.
Note 7. Derivatives
The Company is exposed to foreign exchange risk
through its investments denominated in foreign currencies. The Company may mitigate this risk through the use of foreign currency forward contracts, borrowing in local currency under its Credit Facility, or similar. As an investment company, all
changes in the fair value of assets, including changes caused by foreign currency fluctuation, flow through current earnings.
As of September 30, 2016 and December 31, 2015, there were no open forward foreign currency contracts outstanding. The Company also had
no derivatives designated as hedging instruments at September 30, 2016 and December 31, 2015.
Note 8. Debt
Unsecured Senior Notes
On November 16, 2012, the Company and U.S. Bank National Association entered into an Indenture and a First Supplemental Indenture
relating to the Company’s issuance, offer and sale of $100,000 aggregate principal amount of its 6.75% Unsecured Senior Notes due 2042 (the “Unsecured Notes”). The Unsecured Notes will mature on November 15, 2042 and may be
redeemed in whole or in part at the Company’s option at any time or from time to time on or after November 15, 2017 at a redemption price of $25 per security plus accrued and unpaid interest. The Unsecured Notes bear interest at a rate of
6.75% per year payable quarterly on February 15, May 15, August 15 and November 15 of each year. The Unsecured Notes are direct senior unsecured obligations of the Company.
Revolving and Term Loan Facility
On September 30, 2016, the Company entered into a second Credit Facility amendment. The Credit Facility is composed of $505,000 of revolving credit and $50,000 of term loans. Borrowings generally bear
interest at a rate per annum equal to the base rate plus a range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures in September 2021 and includes
24
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
ratable amortization in the final year. The Credit Facility may be increased up to $800,000 with additional new lenders or an increase in commitments from current lenders. The Credit Facility
contains certain customary affirmative and negative covenants and events of default. In addition, the Credit Facility contains certain financial covenants that among other things, requires the Company to maintain a minimum shareholder’s equity
and a minimum asset coverage ratio. The Company also pays issuers of funded term loans quarterly in arrears a commitment fee at the rate of 0.25% per annum on the average daily outstanding balance. At September 30, 2016, outstanding USD
equivalent borrowings under the Credit Facility totaled $267,700.
Senior Secured Notes
On May 10, 2012, the Company closed a private offering of $75,000 of Senior Secured Notes with a fixed interest rate of 5.875% and a
maturity date of May 10, 2017. Interest on the Senior Secured Notes is due semi-annually on May 10 and November 10. The Senior Secured Notes were issued in a private placement only to qualified institutional buyers pursuant to Rule
144A under the Securities Act of 1933, as amended.
Certain covenants on our issued debt may restrict our business activities,
including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code.
The Company has made an irrevocable election to apply the fair value option of accounting to its Credit Facility and Senior Secured
Notes, in accordance with ASC 825-10. We believe accounting for the Credit Facility and Senior Secured Notes at fair value better aligns the measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility. ASC
825-10 requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the Credit Facility are reported in the Consolidated
Statements of Operations.
The average annualized interest cost for all borrowings for the nine months ended September 30,
2016 and the year ended December 31, 2015 was 4.03% and 5.13%, respectively. These costs are exclusive of other credit facility expenses such as unused fees, agency fees and other prepaid expenses related to establishing and/or amending the Credit
Facility, the Unsecured Notes, and the Senior Secured Notes (collectively the “Credit Facilities”), if any. During the three and nine months ended September 30, 2016, the Company expensed $2,664 in conjunction with the September 2016
amendment to the Credit Facility. The maximum amounts borrowed on the Credit Facilities during the nine months ended September 30, 2016 and the year ended December 31, 2015 were $610,900 and $434,900, respectively.
25
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Note 9. Financial Highlights and Senior Securities Table
The following is a schedule of financial highlights for the nine months ended September 30, 2016 and for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months
ended
September 30, 2016
(unaudited)
|
|
|
Year ended
December 31,
2015
|
|
|
Per Share Data:
(a)
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
20.79
|
|
|
$
|
22.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.26
|
|
|
|
1.52
|
|
|
Net realized and unrealized gain (loss)
|
|
|
0.84
|
|
|
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
2.10
|
|
|
|
0.34
|
|
|
Distributions to stockholders:
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(1.20
|
)
|
|
|
(1.60
|
)
|
|
Anti-dilution
|
|
|
0.03
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
21.72
|
|
|
$
|
20.79
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share market value, end of period
|
|
$
|
20.52
|
|
|
$
|
16.43
|
|
|
Total Return
(b)
|
|
|
32.97
|
%
|
|
|
(0.29
|
)%
|
|
Net assets, end of period
|
|
$
|
917,563
|
|
|
$
|
882,698
|
|
|
Shares outstanding, end of period
|
|
|
42,248,525
|
|
|
|
42,464,762
|
|
|
Ratios to average net assets
(c)
:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
5.98
|
%
|
|
|
6.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
4.77
|
%
|
|
|
3.84
|
%*
|
|
Interest and other credit facility expenses
|
|
|
2.14
|
%
|
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
6.91
|
%
|
|
|
5.52
|
%*
|
|
|
|
|
|
|
|
|
|
|
|
Average debt outstanding
|
|
$
|
518,545
|
|
|
$
|
262,341
|
|
|
Portfolio turnover ratio
|
|
|
26.0
|
%
|
|
|
13.0
|
%
|
|
(a)
|
Calculated using the average shares outstanding method.
|
|
(b)
|
Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend
reinvestment plan. Total return does not include a sales load.
|
|
(c)
|
Not annualized for periods less than one year.
|
|
*
|
The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets is shown net of a voluntary incentive fee waiver (see note
3). For the year ended December 31, 2015, the ratios of operating expenses to average net assets and total expenses to average net assets would be 4.02% and 5.70%, respectively, without the voluntary incentive fee waiver.
|
26
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Information about our senior securities is shown in the following table as of each year
ended December 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class and Year
|
|
Total
Amount
Outstanding
(1)
|
|
|
Asset
Coverage
Per
Unit
(2)
|
|
|
Involuntary
Liquidating
Preference
Per Unit
(3)
|
|
|
Average
Market Value
Per
Unit
(4)
|
|
|
Revolving Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through September 30, 2016)
|
|
$
|
217,700
|
|
|
$
|
1,511
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2015
|
|
|
207,900
|
|
|
|
1,459
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2013
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2012
|
|
|
264,452
|
|
|
|
1,510
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2011
|
|
|
201,355
|
|
|
|
3,757
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2010
|
|
|
400,000
|
|
|
|
2,668
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2009
|
|
|
88,114
|
|
|
|
8,920
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Unsecured Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through September 30, 2016)
|
|
$
|
100,000
|
|
|
$
|
694
|
|
|
|
—
|
|
|
$
|
1,001
|
|
|
Fiscal 2015
|
|
|
100,000
|
|
|
|
702
|
|
|
|
—
|
|
|
|
982
|
|
|
Fiscal 2014
|
|
|
100,000
|
|
|
|
2,294
|
|
|
|
—
|
|
|
|
943
|
|
|
Fiscal 2013
|
|
|
100,000
|
|
|
|
2,411
|
|
|
|
—
|
|
|
|
934
|
|
|
Fiscal 2012
|
|
|
100,000
|
|
|
|
571
|
|
|
|
—
|
|
|
|
923
|
|
|
Senior Secured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through September 30, 2016)
|
|
$
|
75,000
|
|
|
$
|
521
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2015
|
|
|
75,000
|
|
|
|
527
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2014
|
|
|
75,000
|
|
|
|
1,721
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2013
|
|
|
75,000
|
|
|
|
1,808
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2012
|
|
|
75,000
|
|
|
|
428
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through September 30, 2016)
|
|
$
|
50,000
|
|
|
$
|
347
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2015
|
|
|
50,000
|
|
|
|
351
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2014
|
|
|
50,000
|
|
|
|
1,147
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2013
|
|
|
50,000
|
|
|
|
1,206
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2012
|
|
|
50,000
|
|
|
|
285
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2011
|
|
|
35,000
|
|
|
|
653
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2010
|
|
|
35,000
|
|
|
|
233
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Total Senior Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through September 30, 2016)
|
|
$
|
442,700
|
|
|
$
|
3,073
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2015
|
|
|
432,900
|
|
|
|
3,039
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2014
|
|
|
225,000
|
|
|
|
5,162
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2013
|
|
|
225,000
|
|
|
|
5,425
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2012
|
|
|
489,452
|
|
|
|
2,794
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2011
|
|
|
236,355
|
|
|
|
4,410
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2010
|
|
|
435,000
|
|
|
|
2,901
|
|
|
|
—
|
|
|
|
N/A
|
|
|
Fiscal 2009
|
|
|
88,114
|
|
|
|
8,920
|
|
|
|
—
|
|
|
|
N/A
|
|
|
(1)
|
Total amount of each class of senior securities outstanding at the end of the period presented.
|
27
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
|
(2)
|
The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and
indebtedness not represented by senior securities, divided by all senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset
Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit is allocated based on the amount outstanding in each class of debt at the end of the period. As of September 30, 2016, asset coverage was 307.3%.
|
|
(3)
|
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
|
|
(4)
|
Not applicable except for the Unsecured Senior Notes which are publicly traded. The Average Market Value Per Unit is calculated by taking the daily average closing
price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit. The average market value for the fiscal 2016, 2015,
2014, 2013 and 2012 periods was $100,073, $98,196, $94,301, $93,392, and $92,302, respectively.
|
Note 10. Crystal Financial
LLC
On December 28, 2012, we completed the acquisition of Crystal Capital Financial Holdings LLC (“Crystal
Financial”), a commercial finance company focused on providing asset-based and other secured financing solutions (the “Crystal Acquisition”). We invested $275,000 in cash to effect the Crystal Acquisition. Crystal Financial owned
approximately 98% of the outstanding ownership interest in Crystal Financial LLC. The remaining financial interest was held by various employees of Crystal Financial LLC, through their investment in Crystal Management LP. Crystal Financial LLC had a
diversified portfolio of 23 loans having a total par value of approximately $400,000 at November 30, 2012 and a $275,000 committed revolving credit facility. On January 27, 2014, the revolving credit facility was expanded to $300,000. On
March 31, 2014, we exchanged $137,500 of our equity interest in Crystal Financial in exchange for $137,500 in floating rate senior secured notes in Crystal Financial bearing interest at LIBOR plus 9.50%, maturing on March 31, 2019. On May
18, 2015, the revolving credit facility was expanded to $350,000. Our financial statements, including our schedule of investments, reflected our investments in Crystal Financial on a consolidated basis. On July 28, 2016, the Company purchased
Crystal Management LP’s approximately 2% equity interest in Crystal Financial LLC for approximately $5,737. Upon the closing of this transaction, the Company holds 100% of the equity interest in Crystal Financial LLC. On September 30,
2016, Crystal Capital Financial Holdings LLC was dissolved.
As of September 30, 2016 Crystal Financial LLC had 31 funded
commitments to 29 different issuers with a total par value of approximately $481,440 on total assets of $553,169. As of December 31, 2015, Crystal Financial LLC had 28 funded commitments to 26 different issuers with a total par value of
approximately $465,128 on total assets of $518,288. As of September 30, 2016 and December 31, 2015, the largest loan outstanding totaling $36,139 and $34,250, respectively. For the same periods, the average exposure per issuer was $16,601 and
$17,890, respectively. Crystal Financial LLC’s credit facility, which is non-recourse to Solar Capital, had approximately $264,914 and $232,922 of borrowings outstanding at September 30, 2016 and December 31, 2015, respectively. For
the three months ended September 30, 2016 and 2015, Crystal Financial LLC had net income of $4,720 and $3,896, respectively, on gross income of $15,941 and $14,593, respectively. For the nine months ended September 30, 2016 and 2015, Crystal
Financial LLC had net income of $22,384 and $21,223, respectively, on gross income of $49,004 and $42,963, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for
distributions.
Note 11. Stock Repurchase Programs
On July 31, 2013, the Board authorized a program for the purpose of repurchasing up to $100,000 of the Company’s common stock. Under the repurchase program, the Company could have, but was not
obligated to,
28
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
repurchase its outstanding common stock in the open market from time to time provided that the Company complied with the prohibitions under its Insider Trading Policies and Procedures and the
guidelines specified in Rules 10b-18 and 10b-5 under the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. On December 5, 2013, the Board extended the repurchase program to be in place until
the earlier of July 31, 2014 or until $100,000 of the Company’s outstanding shares of common stock had been repurchased. On July 31, 2014, the Company’s stock repurchase program expired. During the fiscal year ended December 31, 2014, the
Company repurchased 1,779,033 shares at an average price of approximately $21.97 per share, inclusive of commissions. The total dollar amount of shares repurchased in that period was $39,078. During the year ended December 31, 2013, the Company
repurchased 796,418 shares at an average price of approximately $21.98 per share, inclusive of commissions, for a total dollar amount of $17,508.
On October 7, 2015, the Board authorized a new share repurchase program to purchase common stock in the open market in an amount up to $30,000. Under the repurchase program, the Company may, but is not
obligated to, repurchase its outstanding common stock in the open market from time to time provided that the Company complies with the prohibitions under its Insider Trading Policies and Procedures and the guidelines specified in Rules 10b-18 and
10b-5 under the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. Unless amended or extended by the Board, the Company expects the repurchase program to be in place until the earlier of
October 7, 2016 or until $30,000 of the Company’s outstanding shares of common stock have been repurchased. During the three months ended March 31, 2016, the Company repurchased 216,237 shares at an average price of $15.76 per share, inclusive
of commissions. This represented a discount of approximately 25.2% from the net asset value per share at March 31, 2016. No shares were repurchased in the three months ended June 30, 2016 or September 30, 2016. The total dollar amount of shares
repurchased in the nine months ended September 30, 2016 is $3,408, leaving a maximum of $26,586 available for future program purchases. During the year ended December 31, 2015, the Company repurchased 400 shares at an average price of $15.98 per
share, inclusive of commissions, for a total dollar amount of $6.
Note 12. Commitments and Contingencies
The Company had unfunded debt and equity commitments to various revolving and delayed draw loans as well as to Crystal Financial LLC. The
total amount of these unfunded commitments as of September 30, 2016 and December 31, 2015 is $46,513 and $65,833, respectively, comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Crystal Financial LLC
|
|
$
|
44,263
|
|
|
$
|
50,000
|
|
|
Conventus Orthopaedics, Inc.
|
|
|
2,250
|
|
|
|
—
|
|
|
Achaogen, Inc.
|
|
|
—
|
|
|
|
10,000
|
|
|
AgaMatrix, Inc.
|
|
|
—
|
|
|
|
3,333
|
|
|
CardioDx, Inc.
|
|
|
—
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments*
|
|
$
|
46,513
|
|
|
$
|
65,833
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
The Company controls the funding of the Crystal Financial LLC commitment and may cancel it at its discretion.
|
As of September 30, 2016 and December 31, 2015, the Company had sufficient cash available and/or liquid securities available to fund its
commitments as well as the commitments to SSLP disclosed in Note 13 and SSLP II disclosed in Note 14.
29
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Note 13. Senior Secured Unitranche Loan Program LLC
On September 2, 2014, the Company entered into a limited liability company agreement with an affiliate (the “Investor”) of
a fund managed by Pacific Investment Management Company LLC (“PIMCO”) to co-invest in middle market senior secured unitranche loans sourced by the same origination platform used by the Company. Initial funding commitments to the unitranche
strategy total $600,000, consisting of direct equity investments and co-investment commitments as described below. The joint venture vehicle known as the Senior Secured Unitranche Loan Program LLC (“SSLP”) is structured as an
unconsolidated Delaware limited liability company. The Company and the Investor initially made equity commitments to the SSLP of $300,000 and $43,250, respectively. All portfolio decisions and generally all other decisions in respect of the SSLP
must be approved by an investment committee of the SSLP consisting of representatives of the Company and PIMCO (with approval from a representative of each required).
On October 15, 2015, the Company entered into an amended and restated limited liability company agreement for its SSLP to add Voya Investment Management LLC (“Voya”), part of Voya Financial,
Inc. (NYSE: VOYA), as a partner in SSLP in place of the investor that was previously the Company’s partner in SSLP, though this investor may still co-invest up to $300,000 of equity in unitranche loans alongside SSLP. This joint venture is
expected to invest primarily in senior secured unitranche loans to middle market companies predominantly owned by private equity sponsors or entrepreneurs, consistent with the Company’s core origination and underwriting mandate. In addition to
the Company’s prior equity commitment of $300,000 to SSLP, Voya has made an initial equity commitment of $25,000 to SSLP, with the ability to upsize.
On November 2, 2015, the Company assigned $125,000 of its $300,000 commitment to SSLP to Senior Secured Unitranche Loan Program II LLC (“SSLP II”), a Delaware limited liability
company.
On November 25, 2015, SSLP commenced operations. On June 30, 2016, SSLP as transferor and SSLP 2016-1, LLC, a newly
formed wholly owned subsidiary of SSLP, as borrower entered into a $200,000 senior secured revolving credit facility (the “SSLP Facility”) with Wells Fargo Bank, NA acting as administrative agent. Solar Capital Ltd. acts as servicer under
the SSLP Facility. The SSLP Facility is scheduled to mature on June 30, 2021. The SSLP Facility generally bears interest at a rate of LIBOR plus 2.50%. SSLP and SSLP 2016-1, LLC, as applicable, have made certain customary representations and
warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SSLP Facility also includes usual and customary events of
default for credit facilities of this nature. There were $42,550 of borrowings outstanding as of September 30, 2016. During the three months ended September 30, 2016, using proceeds from the SSLP Facility, SSLP returned capital totaling $28,875 and
$4,125 to the Company and Voya, respectively. As of September 30, 2016 and December 31, 2015, the Company and Voya had contributed combined equity capital in the amount of $98,871 and $92,183, respectively. Of the $98,871 of contributed equity
capital at September 30, 2016, the Company contributed $29,884 in the form of investments and $56,628 in the form of cash and Voya contributed $12,359 in the form of cash. As of September 30, 2016, the Company and Voya’s remaining commitments
to SSLP totaled $88,488 and $12,641, respectively. The Company, along with Voya, controls the funding of SSLP and SSLP may not call the unfunded commitments without approval of both the Company and Voya.
As of September 30, 2016 and December 31, 2015, SSLP had total assets of $141,924 and $92,528, respectively. For the same periods,
SSLP’s portfolio consisted of floating rate senior secured loans to 8 and 4 different borrowers, respectively. For the three months ended September 30, 2016, SSLP invested $5,194 in 2 portfolio companies. Investments prepaid totaled $364 for
the three months ended September 30, 2016. At
30
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
September 30, 2016 and December 31, 2015, the weighted average yield of SSLP’s portfolio was 7.6% and 8.5%, respectively, measured at fair value and 7.6% and 8.5%, respectively, measured at
cost.
SSLP Portfolio as of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Industry
|
|
Spread
Above
Index
(1)
|
|
|
LIBOR
Floor
|
|
|
Interest
Rate
(2)
|
|
|
Maturity
Date
|
|
|
Par
Amount
|
|
|
Cost
|
|
|
Fair
Value
(3)
|
|
|
AccentCare, Inc.
|
|
Health Care Providers & Services
|
|
|
L+575
|
|
|
|
1.00
|
%
|
|
|
6.75
|
%
|
|
|
9/3/21
|
|
|
$
|
4,906
|
|
|
$
|
4,906
|
|
|
$
|
4,906
|
|
|
Associated Pathologists, LLC
|
|
Health Care Providers & Services
|
|
|
L+500
|
|
|
|
1.00
|
%
|
|
|
6.00
|
%
|
|
|
8/1/21
|
|
|
|
3,333
|
|
|
|
3,301
|
|
|
|
3,300
|
|
|
CIBT Holdings, Inc.
|
|
Professional Services
|
|
|
L+525
|
|
|
|
1.00
|
%
|
|
|
6.25
|
%
|
|
|
6/28/22
|
|
|
|
13,102
|
|
|
|
12,975
|
|
|
|
12,971
|
|
|
Falmouth Group Holdings Corp.
(AMPAC)
(4)
|
|
Chemicals
|
|
|
L+675
|
|
|
|
1.00
|
%
|
|
|
7.75
|
%
|
|
|
12/14/21
|
|
|
|
34,737
|
|
|
|
34,270
|
|
|
|
34,737
|
|
|
Pet Holdings ULC & Pet Supermarket, Inc.
|
|
Specialty Retail
|
|
|
L+550
|
|
|
|
1.00
|
%
|
|
|
6.50
|
%
|
|
|
7/5/22
|
|
|
|
20,677
|
|
|
|
20,377
|
|
|
|
20,367
|
|
|
PSKW, LLC & PDR, LLC
(4)
|
|
Health Care Providers & Services
|
|
|
L+425
|
|
|
|
1.00
|
%
|
|
|
5.25
|
%
|
|
|
11/25/21
|
|
|
|
2,544
|
|
|
|
2,521
|
|
|
|
2,544
|
|
|
PSKW, LLC & PDR, LLC
(4)
|
|
Health Care Providers & Services
|
|
|
L+839
|
|
|
|
1.00
|
%
|
|
|
9.39
|
%
|
|
|
11/25/21
|
|
|
|
22,250
|
|
|
|
21,852
|
|
|
|
21,861
|
|
|
U.S. Anesthesia Partners Inc.
|
|
Health Care Providers & Services
|
|
|
L+500
|
|
|
|
1.00
|
%
|
|
|
6.00
|
%
|
|
|
12/31/19
|
|
|
|
19,607
|
|
|
|
19,446
|
|
|
|
19,411
|
|
|
VetCor Professional Practices LLC
|
|
Health Care Facilities
|
|
|
L+625
|
|
|
|
1.00
|
%
|
|
|
7.25
|
%
|
|
|
4/20/21
|
|
|
|
19,267
|
|
|
|
19,181
|
|
|
|
18,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
138,829
|
|
|
$
|
138,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to
a LIBOR or PRIME rate floor.
|
|
(2)
|
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or
“L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2016.
|
|
(3)
|
Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described
elsewhere herein.
|
|
(4)
|
The Company also holds this security on its Consolidated Statements of Assets and Liabilities.
|
SSLP Portfolio as of December 31, 2015 (audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Industry
|
|
|
Interest
Rate
(1)
|
|
|
Maturity
Date
|
|
|
Par
Amount
|
|
|
Cost
|
|
|
Fair
Value
(2)
|
|
|
Falmouth Group Holdings Corp. (AMPAC)
(3)
|
|
|
Chemicals
|
|
|
|
9.25
|
%
|
|
|
12/14/21
|
|
|
$
|
35,000
|
|
|
$
|
34,478
|
|
|
$
|
34,475
|
|
|
PSKW, LLC & PDR, LLC
(3)
|
|
|
Health Care Providers & Services
|
|
|
|
5.25
|
%
|
|
|
11/25/21
|
|
|
|
2,750
|
|
|
|
2,723
|
|
|
|
2,723
|
|
|
PSKW, LLC & PDR, LLC
(3)
|
|
|
Health Care Providers & Services
|
|
|
|
9.42
|
%
|
|
|
11/25/21
|
|
|
|
22,250
|
|
|
|
21,810
|
|
|
|
21,805
|
|
|
U.S. Anesthesia Partners Inc.
|
|
|
Health Care Providers & Services
|
|
|
|
6.00
|
%
|
|
|
12/31/19
|
|
|
|
19,757
|
|
|
|
19,561
|
|
|
|
19,559
|
|
|
VetCor Professional Practices LLC
|
|
|
Health Care Facilities
|
|
|
|
7.00
|
%
|
|
|
4/20/21
|
|
|
|
13,197
|
|
|
|
13,197
|
|
|
|
13,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,769
|
|
|
$
|
91,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or
“L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2015.
|
|
(2)
|
Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described
elsewhere herein.
|
|
(3)
|
The Company also holds a portion of this position on its Consolidated Statements of Assets and Liabilities.
|
31
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Below is certain summarized financial information for SSLP as of September 30, 2016 and
December 31, 2015 and for the three and nine months ended September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31,
2015 (audited)
|
|
|
Selected Balance Sheet Information for SSLP:
|
|
|
|
|
|
|
|
|
|
Investments at fair value (cost $138,829 and $91,769, respectively)
|
|
$
|
138,978
|
|
|
$
|
91,759
|
|
|
Cash and other assets
|
|
|
2,946
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
141,924
|
|
|
$
|
92,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt outstanding
|
|
$
|
42,550
|
|
|
$
|
—
|
|
|
Distributions payable
|
|
|
1,691
|
|
|
|
253
|
|
|
Interest payable
|
|
|
445
|
|
|
|
—
|
|
|
Accrued expenses and other payables
|
|
|
293
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
44,979
|
|
|
$
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
Members’ equity
|
|
$
|
96,945
|
|
|
$
|
92,203
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members’ equity
|
|
$
|
141,924
|
|
|
$
|
92,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
September 30, 2016
|
|
|
Nine
months
ended
September 30, 2016
|
|
|
Selected Income Statement Information for SSLP:
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,615
|
|
|
$
|
6,374
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees*
|
|
$
|
23
|
|
|
$
|
58
|
|
|
Interest and other credit facility expenses**
|
|
|
582
|
|
|
|
3,233
|
|
|
Other general and administrative expenses
|
|
|
37
|
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
642
|
|
|
$
|
3,393
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,973
|
|
|
$
|
2,981
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain on investments
|
|
|
251
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,224
|
|
|
$
|
3,140
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Service fees are included within the Company’s Consolidated Statements of Operations as other income.
|
|
**
|
SSLP made an irrevocable election to apply the fair value option of accounting to the SSLP Facility, in accordance with ASC 825-10. As such, all expenses related
to the establishment of the SSLP Facility were expensed during the three and nine months ended September 30, 2016. These amounts totaled $140 and $2,788, respectively.
|
Note 14. Senior Secured Unitranche Loan Program II LLC
On November 2,
2015, the Company assigned $125,000 of its $300,000 commitment to SSLP to SSLP II, a Delaware limited liability company. On August 5, 2016, the Company entered into an amended and restated limited liability company agreement with WFI Loanco,
LLC (“WFI”) and SSLP II commenced operations. Also on August 5, 2016, the Company assigned $49,977 of its $125,000 commitment to SSLP II to Senior Secured Unitranche Loan Program III LLC (“SSLP III”), a newly formed Delaware
limited liability company. SSLP III is currently wholly owned by Solar Capital Ltd. but may bring in unaffiliated investors at a later date. The Company and WFI’s equity commitments to SSLP II now total $75,023 and $18,000, respectively.
32
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
As of September 30, 2016, the Company and WFI contributed combined equity capital in the
amount of $43,642 and $10,471, respectively. Of the $54,113 of contributed equity capital at September 30, 2016, the Company contributed $43,498 in the form of investments and $143 in the form of cash and WFI contributed $10,471 in the form of cash.
As of September 30, 2016, the Company and WFI’s remaining commitments to SSLP II totaled $31,381 and $7,529, respectively. The Company, along with WFI, controls the funding of SSLP II and SSLP II may not call the unfunded commitments without
approval of both the Company and WFI.
As of September 30, 2016, SSLP II had total assets of $67,572. At September 30,
2016, SSLP II’s portfolio consisted of floating rate senior secured loans to 8 different borrowers. For the period August 5, 2016 through September 30, 2016, SSLP II invested $65,630 in 8 portfolio companies. Investments prepaid totaled $266
for the same period. At September 30, 2016, the weighted average yield of SSLP II’s portfolio was 7.8%, measured at fair value and 8.1%, measured at cost.
SSLP II Portfolio as of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Industry
|
|
Spread
Above
Index
(1)
|
|
|
LIBOR
Floor
|
|
|
Interest
Rate
(2)
|
|
|
Maturity
Date
|
|
|
Par
Amount
|
|
|
Cost
|
|
|
Fair
Value
(3)
|
|
|
American Teleconferencing Services, Ltd.
(PGI)
(4)
|
|
Communications Equipment
|
|
|
L+650
|
|
|
|
1.00
|
%
|
|
|
7.50
|
%
|
|
|
12/8/21
|
|
|
$
|
14,810
|
|
|
$
|
13,362
|
|
|
$
|
14,477
|
|
|
Associated Pathologists, LLC
|
|
Health Care Providers & Services
|
|
|
L+500
|
|
|
|
1.00
|
%
|
|
|
6.00
|
%
|
|
|
8/1/21
|
|
|
|
1,667
|
|
|
|
1,650
|
|
|
|
1,650
|
|
|
CIBT Holdings, Inc.
|
|
Professional Services
|
|
|
L+525
|
|
|
|
1.00
|
%
|
|
|
6.25
|
%
|
|
|
6/28/22
|
|
|
|
5,241
|
|
|
|
5,190
|
|
|
|
5,188
|
|
|
Falmouth Group Holdings Corp.
(AMPAC)
(4)
|
|
Chemicals
|
|
|
L+675
|
|
|
|
1.00
|
%
|
|
|
7.75
|
%
|
|
|
12/14/21
|
|
|
|
10,972
|
|
|
|
10,972
|
|
|
|
10,972
|
|
|
LegalZoom.com, Inc.
(4)
|
|
Internet Software & Services
|
|
|
L+700
|
|
|
|
1.00
|
%
|
|
|
8.00
|
%
|
|
|
5/13/20
|
|
|
|
10,972
|
|
|
|
10,972
|
|
|
|
11,082
|
|
|
Pet Holdings ULC & Pet Supermarket, Inc.
|
|
Specialty Retail
|
|
|
L+550
|
|
|
|
1.00
|
%
|
|
|
6.50
|
%
|
|
|
7/5/22
|
|
|
|
9,098
|
|
|
|
8,964
|
|
|
|
8,961
|
|
|
Polycom, Inc.
|
|
Communications Equipment
|
|
|
L+650
|
|
|
|
1.00
|
%
|
|
|
7.50
|
%
|
|
|
9/27/23
|
|
|
|
12,000
|
|
|
|
11,520
|
|
|
|
11,520
|
|
|
VetCor Professional Practices LLC
|
|
Health Care Facilities
|
|
|
L+625
|
|
|
|
1.00
|
%
|
|
|
7.25
|
%
|
|
|
4/20/21
|
|
|
|
2,847
|
|
|
|
2,792
|
|
|
|
2,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
65,422
|
|
|
$
|
66,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are typically subject to
a LIBOR or PRIME rate floor.
|
|
(2)
|
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or
“L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2016.
|
|
(3)
|
Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Board’s valuation process described
elsewhere herein.
|
|
(4)
|
The Company also holds this security on its Consolidated Statements of Assets and Liabilities.
|
33
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
September 30, 2016
(in thousands, except share amounts)
Below is certain summarized financial information for SSLP II as of September 30, 2016
and for the period August 5, 2016 (commencement of operations) through September 30, 2016:
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
Selected Balance Sheet Information for SSLP II:
|
|
|
|
|
|
Investments at fair value (cost $65,422)
|
|
$
|
66,641
|
|
|
Cash and other assets
|
|
|
930
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
67,571
|
|
|
|
|
|
|
|
|
Payable for investments purchased
|
|
$
|
11,520
|
|
|
Accrued expenses and other payables
|
|
|
87
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
11,607
|
|
|
|
|
|
|
|
|
Members’ equity
|
|
$
|
55,964
|
|
|
|
|
|
|
|
|
Total liabilities and members’ equity
|
|
$
|
67,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the period
August 5, 2016
(commencement
of operations)
through
September
30,
2016
|
|
|
Selected Income Statement Information for SSLP II:
|
|
|
|
|
|
Interest income
|
|
$
|
710
|
|
|
|
|
|
|
|
|
Service fees*
|
|
$
|
9
|
|
|
Other general and administrative expenses
|
|
|
68
|
|
|
|
|
|
|
|
|
Total expenses
|
|
$
|
77
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
633
|
|
|
|
|
|
|
|
|
Net change in unrealized gain on investments
|
|
|
1,218
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,851
|
|
|
|
|
|
|
|
|
*
|
Service fees are included within the Company’s Consolidated Statements of Operations as other income.
|
Note 15. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
On November 2, 2016, our Board declared a quarterly distribution of $0.40 per share payable on January 4, 2017 to holders of record as of
December 15, 2016.
34