Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in connection with our Consolidated Financial Statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
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•
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our future operating results and dividend projections;
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•
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our business prospects and the prospects of our portfolio companies;
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•
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the impact of the investments that we expect to make;
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•
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the ability of our portfolio companies to achieve their objectives;
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•
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our expected financings and investments;
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•
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the adequacy of our cash resources and working capital; and
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•
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the timing of cash flows, if any, from the operations of our portfolio companies.
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In addition, words such as "anticipate," "believe," "expect," "seek," "plan," "should," "estimate," "project" and "intend" indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in "Item 1A. Risk Factors" and elsewhere in this quarterly report on Form 10-Q. Other factors that could cause actual results to differ materially include:
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•
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changes in the economy and the financial markets;
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•
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risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters;
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•
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future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies or RICs; and
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•
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other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.
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We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Except as otherwise specified, references to the "Company," "we," "us," and "our," refer to Fifth Street Senior Floating Rate Corp. and its consolidated subsidiaries.
All amounts are in dollars, except share amounts, percentages and as otherwise indicated.
Overview
We are a specialty finance company that is a closed-end, non-diversified management investment company and have elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or 1940 Act. We have qualified and elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code, for tax purposes.
Our investment objective is to maximize our portfolio's total return by generating current income from our debt investments while seeking to preserve our capital. We invest primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, that pay interest at rates which are determined periodically on the basis of a floating base lending rate, made to private middle market companies whose debt is rated below investment grade. We may also invest in senior unsecured loans issued by private middle market companies and, to a lesser extent, subordinated loans issued by private middle market companies and senior and subordinated loans issued by public companies.
We are externally managed by Fifth Street Management LLC, or the Investment Adviser, a subsidiary of Fifth Street Asset Management Inc., or FSAM, a publicly traded alternative asset manager, pursuant to an investment advisory agreement.
FSC CT LLC, a subsidiary of our Investment Adviser, also provides certain administrative and other services necessary for us to operate.
Critical Accounting Policies
Basis of Presentation
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, requires management to make certain estimates and assumptions affecting amounts reported in the consolidated financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. We continuously evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows.
Investment Valuation
We are required to report our investments that are not publicly traded or for which current market values are not readily available at fair value. The fair value is deemed to be 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.
We value our investments in accordance with FASB ASC 820
Fair Value Measurements and Disclosures
, or ASC 820, which defines fair value as the amount 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. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. ASC 820 prioritizes the use of observable market prices derived from such prices over entity-specific inputs. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Generally, it is expected that all of our investment securities will be valued using Level 3 inputs. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. These investments are generally classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustments for investment-specific factors or restrictions.
Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, we obtain and analyzes readily available market quotations provided by independent pricing services for all of our senior secured debt investments for which quotations are available. In determining the fair value of a particular investment, pricing services use observable market information, including both binding and non-binding indicative quotations. We evaluate the prices obtained from independent pricing services based on available market information and company specific data that could affect the credit quality and/or fair value of the investment. Investments for which market quotations are readily available may be valued at such market quotations. In order to validate market quotations, we look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. Our Investment Adviser does not adjust the prices unless it has a reason to believe any such market quotations are not reflective of the fair value of an investment. Examples of these events could include cases when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a "fire sale" by a distressed seller. In these instances, we value such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available (as discussed below).
If the quotation provided by the pricing service is based on only one or two market sources, we perform additional procedures to corroborate such information, generally including, but not limited to, the bond yield approach discussed below and a quantitative and qualitative assessment of the credit quality and market trends affecting the portfolio company.
We perform detailed valuations of its debt and equity investments for which market quotations are not readily available or are deemed not to represent fair value of the investments. We typically use two different valuation techniques. The first valuation technique is an analysis of the enterprise value, or EV, of the portfolio company. EV means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The primary method for determining EV uses a multiple analysis whereby appropriate multiples
are applied to the portfolio company's EBITDA (generally defined as earnings before net interest expense, income tax expense, depreciation and amortization). EBITDA multiples are typically determined based upon review of market comparable transactions and publicly traded comparable companies, if any. We may also employ other valuation multiples to determine EV, such as revenues. The second method for determining EV uses a discounted cash flow analysis whereby future expected cash flows of the portfolio company are discounted to determine a present value using estimated discount rates (typically a weighted average cost of capital based on costs of debt and equity consistent with current market conditions). The EV analysis is typically performed to determine the value of equity investments and to determine if there is credit impairment for debt investments. If debt investments are credit impaired, an EV analysis may be used to value such debt investments; however, in addition to the methods outlined above, other alternative methods such as an asset liquidation model, expected recovery model or a recent observable or pending transaction may be utilized to estimate EV. The second valuation technique is a bond yield approach, which is typically performed for non-credit impaired debt investments. To determine fair value using a bond yield approach, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk. In the bond yield approach, we consider the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by us are substantially illiquid with no active transaction market, we depend on primary market data, including newly funded transactions and industry specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable.
We estimate the fair value of privately held warrants using a Black Scholes pricing model, which includes an analysis of various factors and subjective assumptions including, but not limited to, the current stock price (by analyzing the portfolio company's operating performance and financial condition and general market conditions), the expected period until exercise, expected volatility of the underlying stock price, expected dividends and the risk free rate. Changes in the subjective input assumptions can materially affect the fair value estimates.
Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:
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The quarterly valuation process begins with each portfolio company or investment being initially valued by our Investment Adviser's valuation team in conjunction with the Investment Adviser's portfolio management and capital markets teams;
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Preliminary valuations are then reviewed and discussed with principals of our Investment Adviser;
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Separately, independent valuation firms engaged by our Board of Directors prepare valuations of our investments, on a selected basis, for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment, and submit the reports to us and provide such reports to our Investment Adviser and the Audit Committee of our Board of Directors;
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The Investment Adviser compares and contrasts its preliminary valuations to the valuations of the independent valuation firms and prepares a valuation report for the Audit Committee of our Board of Directors;
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The Audit Committee of our Board of Directors reviews the preliminary valuations with the portfolio managers of the Investment Adviser and, the Investment Adviser responds and supplements the preliminary valuations to reflect any discussion between the Investment Adviser and the Audit Committee;
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•
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The Audit Committee of our Board of Directors makes a recommendation to our Board of Directors regarding the fair value of the investments in our portfolio for which market quotations are not readily available; and
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•
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Our Board of Directors discusses valuations and determines the fair value of each investment in our portfolio for which market quotations are not readily available in good faith.
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The fair value of all of our investments at
March 31, 2016
and
September 30, 2015
, was determined in good faith by our Board of Directors. In addition, we have independent valuation firms provide us with valuation assistance on a portion of our portfolio on a quarterly basis and a substantial portion of our portfolio over the course of each fiscal year. We will continue to utilize independent valuation firms to provide us with assistance regarding our determination of the fair value of selected portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter; however, our Board of Directors is ultimately and solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process. As of
March 31, 2016
,
25.0%
of our portfolio at fair value was valued by independent valuation firms. However, our Board of Directors is ultimately and solely responsible for the valuation of the portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process.
The percentages of our portfolio, at fair value, valued by independent valuation firms each period during the current and preceding fiscal years are presented in the following table. The percentage of our portfolio valued by independent valuation firms may vary from period to period based on the availability of market quotations for our portfolio investments during the respective periods.
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For the quarter ended December 31, 2013
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34.1
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%
|
For the quarter ended March 31, 2014
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30.5
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%
|
For the quarter ended June 30, 2014
|
56.6
|
%
|
For the quarter ended September 30, 2014
|
44.3
|
%
|
For the quarter ended December 31, 2014
|
54.1
|
%
|
For the quarter ended March 31, 2015 (1)
|
32.1
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%
|
For the quarter ended June 30, 2015
|
23.8
|
%
|
For the quarter ended September 30, 2015 (2)
|
76.5
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%
|
For the quarter ended December 31, 2015
|
29.3
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%
|
For the quarter ended March 31, 2016
|
25.0
|
%
|
__________
(1) The decrease from prior quarters is primarily related to the increased use of market quotations to value certain of our portfolio investments beginning in the quarter ended March 31, 2015.
(2) This quarter is higher primarily due to additional year-end procedures related to portfolio investments that were valued using market quotations based on only one source.
As of
March 31, 2016
and
September 30, 2015
, approximately
91.5%
and 89.4%, respectively, of our total assets represented investments in portfolio companies valued at fair value.
Revenue Recognition
Interest and Dividend Income
Interest income, adjusted for accretion of original issue discount, or OID, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Distributions of income from portfolio companies are generally recorded as dividend income on the ex-dividend date.
Fee Income
We receive a variety of fees in the ordinary course of business including servicing, advisory, amendment, structuring and prepayment fees which are classified as fee income and recognized as they are earned.
Payment-in-Kind (PIK) Interest
Although our loans typically do not contain contractual payment in kind, or PIK, interest provisions, a portion of our loans may contain contractual PIK interest provisions now and in the future. The PIK interest, which represents contractually deferred interest, will be added to the loan balance that is generally due at the end of the loan term, and would generally be recorded on the accrual basis to the extent such amounts are expected to be collected. We would generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest would involve subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; monthly and quarterly financial statements and financial projections for the portfolio company; our assessment of the portfolio company's business development success, including product development, profitability and the portfolio company's overall adherence to its business plan; information obtained by us in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, we would determine whether to cease accruing PIK interest on a loan or debt security. Our determination to cease accruing PIK interest on a loan or debt security would generally be made well before our full write-down of such loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of our loans or debt securities would decline by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost basis of these investments in our Consolidated Financial Statements and, as a result, increases the cost basis of these investments for purposes of computing the capital gains incentive fee payable by us to our Investment Adviser.
For a discussion of risks we are subject to if we were to acquire loans that bear PIK interest, see "Risk Factors — Risks Relating to Our Business and Structure — We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income," "— We may in the future choose to pay distributions in our own stock, in which case you may be required to pay tax in excess of the cash you receive" and "— Our incentive fee may induce our investment adviser to make speculative investments" in our annual report on Form 10-K for the year ended September 30, 2015.
To maintain our status as a RIC, PIK income must be paid out to our stockholders in the form of distributions even though we have not yet collected the cash and may never collect the cash relating to the PIK interest. Accumulated PIK interest was $41,032 as of
March 31, 2016
. We did not have any accumulated PIK interest as of
September 30, 2015
. The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.
Portfolio Composition
Our investments principally consist of senior secured loans in privately-held companies. Our loans are typically secured by a first or second lien on the assets of the portfolio company and generally have terms of up to seven years (but an expected average life of between three and four years). We are currently focusing our origination efforts on a prudent mix of first lien and second lien loans which we believe will provide superior risk-adjusted returns while maintaining adequate credit protection. The mix may change over time based on market conditions and management's view of where the best risk-adjusted returns are available.
A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:
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|
March 31, 2016
|
|
September 30, 2015
|
Cost:
|
|
|
|
|
Senior secured debt
|
|
88.90
|
%
|
|
90.61
|
%
|
Subordinated notes of FSFR Glick JV
|
|
9.85
|
|
|
8.38
|
|
LLC equity interests of FSFR Glick JV
|
|
1.09
|
|
|
0.93
|
|
Purchased equity
|
|
0.16
|
|
|
0.08
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
September 30, 2015
|
Fair value:
|
|
|
|
|
Senior secured debt
|
|
89.30
|
%
|
|
90.68
|
%
|
Subordinated notes of FSFR Glick JV
|
|
9.79
|
|
|
8.43
|
|
LLC equity interests of FSFR Glick JV
|
|
0.67
|
|
|
0.73
|
|
Purchased equity
|
|
0.22
|
|
|
0.13
|
|
Equity grants
|
|
0.02
|
|
|
0.03
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
The industry composition of our portfolio at cost and fair value, respectively, as a percentage of total investments was as follows:
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|
|
|
|
|
|
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|
March 31, 2016
|
|
September 30, 2015
|
Cost:
|
|
|
|
|
Internet software & services
|
|
22.78
|
%
|
|
22.79
|
%
|
Healthcare services
|
|
12.90
|
|
|
14.13
|
|
Multi-sector holdings
|
|
10.94
|
|
|
9.31
|
|
Advertising
|
|
8.98
|
|
|
6.86
|
|
Integrated telecommunication services
|
|
4.87
|
|
|
6.01
|
|
Specialized consumer services
|
|
3.68
|
|
|
4.53
|
|
Diversified support services
|
|
3.38
|
|
|
4.67
|
|
Application software
|
|
3.32
|
|
|
3.37
|
|
Education services
|
|
2.58
|
|
|
3.43
|
|
Research & consulting services
|
|
3.26
|
|
|
1.47
|
|
Security & alarm services
|
|
2.90
|
|
|
2.80
|
|
Electronic equipment & instruments
|
|
2.21
|
|
|
2.17
|
|
Food retail
|
|
1.68
|
|
|
1.63
|
|
Data processing & outsourced services
|
|
1.62
|
|
|
2.14
|
|
Personal products
|
|
1.62
|
|
|
1.70
|
|
Pharmaceuticals
|
|
1.61
|
|
|
1.55
|
|
Food distributors
|
|
1.46
|
|
|
1.41
|
|
Diversified capital markets
|
|
1.44
|
|
|
1.38
|
|
IT consulting & other services
|
|
1.30
|
|
|
1.89
|
|
Environmental & facilities services
|
|
1.03
|
|
|
1.58
|
|
Construction and engineering
|
|
0.98
|
|
|
0.94
|
|
Wireless telecommunication services
|
|
0.94
|
|
|
0.91
|
|
Specialty chemicals
|
|
0.81
|
|
|
—
|
|
Healthcare technology
|
|
0.80
|
|
|
0.78
|
|
Oil & gas equipment & services
|
|
0.71
|
|
|
0.70
|
|
Industrial machinery
|
|
0.65
|
|
|
0.63
|
|
Computer hardware
|
|
0.62
|
|
|
0.65
|
|
Fertilizers & agricultural chemicals
|
|
0.61
|
|
|
0.57
|
|
Auto parts & equipment
|
|
0.32
|
|
|
—
|
|
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
Fair value:
|
|
March 31, 2016
|
|
September 30, 2015
|
Internet software & services
|
|
22.11
|
%
|
|
22.34
|
%
|
Healthcare services
|
|
11.93
|
|
|
13.79
|
|
Multi-sector holdings
|
|
10.46
|
|
|
9.16
|
|
Advertising
|
|
9.52
|
|
|
6.99
|
|
Integrated telecommunication services
|
|
5.06
|
|
|
6.14
|
|
Specialized consumer services
|
|
3.80
|
|
|
4.62
|
|
Application software
|
|
3.57
|
|
|
3.51
|
|
Diversified support services
|
|
3.51
|
|
|
4.73
|
|
Research & consulting services
|
|
3.42
|
|
|
1.49
|
|
Education services
|
|
2.73
|
|
|
3.43
|
|
Security & alarm services
|
|
2.99
|
|
|
2.85
|
|
Electronic equipment & instruments
|
|
2.30
|
|
|
2.20
|
|
Food retail
|
|
1.72
|
|
|
1.67
|
|
Personal products
|
|
1.71
|
|
|
1.73
|
|
Data processing & outsourced services
|
|
1.70
|
|
|
2.19
|
|
Pharmaceuticals
|
|
1.62
|
|
|
1.57
|
|
Food distributors
|
|
1.52
|
|
|
1.44
|
|
Diversified capital markets
|
|
1.52
|
|
|
1.42
|
|
IT consulting & other services
|
|
1.39
|
|
|
1.94
|
|
Environmental & facilities services
|
|
1.09
|
|
|
1.60
|
|
Construction and engineering
|
|
1.02
|
|
|
0.95
|
|
Wireless telecommunication services
|
|
0.84
|
|
|
0.87
|
|
Specialty chemicals
|
|
0.86
|
|
|
—
|
|
Healthcare technology
|
|
0.75
|
|
|
0.78
|
|
Oil & gas equipment & services
|
|
0.63
|
|
|
0.70
|
|
Industrial machinery
|
|
0.65
|
|
|
0.62
|
|
Computer hardware
|
|
0.65
|
|
|
0.66
|
|
Fertilizers & agricultural chemicals
|
|
0.60
|
|
|
0.61
|
|
Auto parts & equipment
|
|
0.33
|
|
|
—
|
|
|
|
100.00
|
%
|
|
100.00
|
%
|
Portfolio Asset Quality
We employ a ranking system to assess and monitor the credit risk of our investment portfolio. We rank all investments on a scale from 1 to 4. The system is intended to reflect the performance of the borrower's business, the collateral coverage of the loan, and other factors considered relevant to making a credit judgment. We have determined that there should be an individual ranking assigned to each tranche of securities in the same portfolio company where appropriate. This may arise when the perceived risk of loss on the investment varies significantly between tranches due to their respective seniority in the capital structure.
|
|
•
|
Investment Ranking 1 is used for investments that are performing above expectations and/or capital gains are expected.
|
|
|
•
|
Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.
|
|
|
•
|
Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with a ranking of 3 are generally those on which we are not accruing PIK interest.
|
|
|
•
|
Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.
|
The following table shows the distribution of our investments on the 1 to 4 investment ranking scale at fair value as of
March 31, 2016
and
September 30, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Ranking
|
|
March 31, 2016
|
|
September 30, 2015
|
|
Fair Value
|
|
% of Portfolio
|
|
Leverage Ratio
|
|
Fair Value
|
|
% of Portfolio
|
|
Leverage Ratio
|
1
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
2
|
|
$
|
560,589,543
|
|
|
97.43
|
%
|
|
4.55
|
|
|
$
|
596,955,786
|
|
|
95.72
|
%
|
|
4.71
|
|
3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,691,688
|
|
|
4.28
|
|
|
5.87
|
|
4
|
|
14,799,548
|
|
|
2.57
|
|
|
NM
|
|
(1)
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
575,389,091
|
|
|
100.00
|
%
|
|
4.55
|
|
|
$
|
623,647,474
|
|
|
100.00
|
%
|
|
4.76
|
|
________________
|
|
(1)
|
Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.
|
We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. Any modifications to our loan agreements may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders. As of
March 31, 2016
, we had modified the payment terms of our investments in four portfolio companies. As of
September 30, 2015
, we had modified the payment terms of our investment in two portfolio companies.
Loans and Debt Securities on Non-Accrual Status
As of
March 31, 2016
, there were
two
investments on which we stopped accruing cash and/or PIK interest or OID income. As of
September 30, 2015
, there was one investment on which we stopped accruing cash and/or PIK interest or OID income. As of
March 31, 2015
, there were no investments on which we had stopped accruing cash and/or PIK interest or OID income.
The percentages of our debt investments at cost and fair value by accrual status as of
March 31, 2016
and
September 30, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
September 30, 2015
|
|
|
Cost
|
|
% of Debt
Portfolio
|
|
Fair
Value
|
|
% of Debt
Portfolio
|
|
Cost
|
|
% of Debt
Portfolio
|
|
Fair
Value
|
|
% of Debt
Portfolio
|
Accrual
|
|
$
|
578,262,310
|
|
|
95.24
|
%
|
|
$
|
560,589,543
|
|
|
97.43
|
%
|
|
$
|
625,911,700
|
|
|
98.80
|
%
|
|
$
|
619,219,635
|
|
|
99.29
|
%
|
PIK non-accrual (paying) (1)
|
|
7,605,257
|
|
|
1.25
|
|
|
2,305,872
|
|
|
0.40
|
|
|
7,605,257
|
|
|
1.20
|
|
|
4,427,839
|
|
|
0.71
|
|
Cash non-accrual (non-paying) (1)
|
|
21,291,019
|
|
|
3.51
|
|
|
12,493,676
|
|
|
2.17
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
607,158,586
|
|
|
100.00
|
%
|
|
$
|
575,389,091
|
|
|
100.00
|
%
|
|
$
|
633,516,957
|
|
|
100.00
|
%
|
|
$
|
623,647,474
|
|
|
100.00
|
%
|
__________________
|
|
(1)
|
PIK non-accrual status is inclusive of other noncash income, where applicable. Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.
|
The non-accrual status of our portfolio investments as of
March 31, 2016
and
September 30, 2015
was as follows:
|
|
|
|
|
|
|
|
March 31, 2016
|
|
September 30, 2015
|
Answers Corporation - second lien term loan
|
|
PIK non-accrual (1)
|
|
PIK non-accrual (1)
|
Ameritox Ltd.
|
|
Cash non-accrual (1)
|
|
—
|
__________________
|
|
(1)
|
PIK non-accrual status is inclusive of other noncash income, where applicable. Cash non-accrual status is inclusive of PIK and other noncash income, where applicable.
|
Income non-accrual amount for
the three and six months ended
March 31, 2016
is presented in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2016
|
|
Six months ended
March 31, 2016
|
Cash interest income
|
|
$
|
451.931
|
|
|
$
|
903.863
|
|
OID income
|
|
13,816
|
|
|
27,632
|
|
Total
|
|
$
|
465,747
|
|
|
$
|
931,495
|
|
FSFR Glick JV LLC
In October 2014, we entered into a limited liability company, or LLC, agreement with GF Equity Funding 2014 LLC, or GF Equity Funding, to form FSFR Glick JV LLC, or FSFR Glick JV. On April 21, 2015, FSFR Glick JV began investing in senior secured loans of middle market companies. We co-invest in these securities with GF Equity Funding through our investment in FSFR Glick JV. FSFR Glick JV is managed by a four person Board of Directors, two of whom are selected by us and two of whom are selected by GF Equity Funding. FSFR Glick JV is capitalized as transactions are completed, and portfolio decisions and investment decisions in respect of FSFR Glick JV must be approved by an investment committee of FSFR Glick JV consisting of one representative of us and one representative of GF Equity Funding (with approval of each required). The members provide capital to FSFR Glick JV in exchange for LLC equity interests, and we and GF Debt Funding 2014 LLC, or GF Debt Funding, an entity advised by affiliates of GF Equity Funding, provide capital to the FSFR Glick JV in exchange for subordinated notes, or the Subordinated Notes. As of
March 31, 2016
, we and GF Equity Funding owned
87.5%
and
12.5%
, respectively, of the outstanding LLC interests, and we and GF Debt Funding owned 87.5% and 12.5% respectively, of the Subordinated Notes. FSFR Glick JV is not an "eligible portfolio company" as defined in section 2(a)(46) of the 1940 Act.
We have determined that FSFR Glick JV is an investment company under ASC 946; however, in accordance with such guidance, we will generally not consolidate our investment in a company other than a wholly-owned investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we do not consolidate our noncontrolling interest in FSFR Glick JV.
As of
March 31, 2016
and
September 30, 2015
, FSFR Glick JV had total assets of
$211.4 million
and $190.4, respectively. Our investment in FSFR Glick JV consisted of LLC equity interests of
$3.8 million
and Subordinated Notes of
$56.3 million
, at fair value as of
March 31, 2016
. As of
September 30, 2015
, our investment consisted of LLC equity interests of $4.6 million and Subordinated Notes of $52.6 million, at fair value. The Subordinated Notes are junior in right of payment to the repayment of temporary contributions made by us to fund investments of FSFR Glick JV. FSFR Glick JV's portfolio consisted of middle market and other corporate debt securities of
33
and 29 "eligible portfolio companies" (as defined in section 2(a)(46) of the 1940 Act) as of
March 31, 2016
and
September 30, 2015
, respectively. The portfolio companies in FSFR Glick JV are in industries similar to those in which we may invest directly.
As of
March 31, 2016
and
September 30, 2015
, FSFR Glick JV had total capital commitments of
$100.0 million
,
$87.5 million
of which was from us and the remaining
$12.5 million
from GF Equity Funding and GF Debt Funding. Approximately
$75.9 million
and $67.4 million in aggregate commitments were funded as of
March 31, 2016
and
September 30, 2015
, respectively, of which
$66.4 million
and $59.0 million, respectively, was from us. As of
March 31, 2016
, we had commitments to fund Subordinated Notes to FSFR Glick JV of
$78.8 million
, of which
$19.0 million
was unfunded. As of
March 31, 2016
, we had commitments to fund LLC equity interests in FSFR Glick JV of
$8.7 million
, of which
$2.1 million
was unfunded. As of
September 30, 2015
, we had commitments to fund Subordinated Notes to FSFR Glick JV of $78.8 million, of which $25.7 million was unfunded. As of
September 30, 2015
, we had commitments to fund LLC equity interests in FSFR Glick JV of $8.7 million, of which $2.9 million was unfunded.
Additionally, FSFR Glick JV has a senior revolving credit facility with Credit Suisse AG, Cayman Island Branch, or the Credit Suisse facility, with a stated maturity date of April 17, 2023, which permitted up to
$200.0 million
of borrowings as of both
March 31, 2016
and
September 30, 2015
. Borrowings under the Credit Suisse facility are secured by all of the assets of
FSFR Glick JV and all of the equity interests in FSFR Glick JV and bore interest at a rate equal to the 3-month LIBOR plus 2.5% per annum with no LIBOR floor as of
March 31, 2016
and
September 30, 2015
. Under the Credit Suisse facility,
$136.3 million
and $122.4 million in borrowings were outstanding as of
March 31, 2016
and
September 30, 2015
, respectively.
Below is a summary of FSFR Glick JV's portfolio, followed by a listing of the individual loans in FSFR Glick JV's portfolio as of
March 31, 2016
and
September 30, 2015
:
|
|
|
|
|
|
|
|
March 31, 2016
|
|
September 30, 2015
|
Senior secured loans (1)
|
|
$209,608,226
|
|
$186,764,451
|
Weighted average current interest rate on senior secured loans (2)
|
|
6.82%
|
|
6.93%
|
Number of borrowers in FSFR Glick JV
|
|
33
|
|
29
|
Largest loan exposure to a single borrower (1)
|
|
$14,703,297
|
|
$14,777,933
|
Total of five largest loan exposures to borrowers (1)
|
|
$56,359,663
|
|
$58,331,216
|
__________
(1) At principal amount.
(2) Computed using the annual interest rate on accruing senior secured loans.
FSFR Glick JV Loan Portfolio as of
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company (4)
|
|
Business Description
|
|
Investment Type
|
|
Maturity Date
|
|
Stated Interest Rate (1)
|
|
Principal
|
|
Cost
|
|
Fair Value (2)
|
Accruent, LLC (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
11/25/2019
|
|
LIBOR +6.25% (1% floor) cash
|
|
$
|
14,703,297
|
|
|
$
|
14,526,936
|
|
|
$
|
14,661,953
|
|
Ameritox Ltd. (3) (5)
|
|
Healthcare services
|
|
First Lien Term Loan
|
|
6/23/2019
|
|
LIBOR+7.5% (1% floor) cash
|
|
7,794,458
|
|
|
7,661,251
|
|
|
4,575,947
|
|
Answers Corporation (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
10/1/2021
|
|
LIBOR+5.25% (1% floor) cash
|
|
7,919,799
|
|
|
7,644,031
|
|
|
5,299,692
|
|
Beyond Trust Software, Inc. (3)
|
|
Application software
|
|
First Lien Term Loan
|
|
9/25/2019
|
|
LIBOR+7% (1% floor) cash
|
|
12,852,892
|
|
|
12,751,636
|
|
|
12,687,906
|
|
Compuware Corporation (3)
|
|
Internet software & services
|
|
First Lien Term Loan B1
|
|
12/15/2019
|
|
LIBOR+5.25% (1% floor) cash
|
|
7,594,937
|
|
|
7,495,402
|
|
|
7,355,241
|
|
Metamorph US 3, LLC (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
12/1/2020
|
|
LIBOR+5.5% (1% floor) cash
|
|
7,007,264
|
|
|
6,903,691
|
|
|
6,816,916
|
|
Motion Recruitment Partners LLC (3)
|
|
Diversified support services
|
|
First Lien Term Loan
|
|
2/13/2020
|
|
LIBOR+6% (1% floor) cash
|
|
9,250,000
|
|
|
9,250,000
|
|
|
9,149,439
|
|
NAVEX Global, Inc. (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
11/19/2021
|
|
LIBOR+4.75% (1% floor) cash
|
|
3,517,632
|
|
|
3,502,346
|
|
|
3,420,897
|
|
Teaching Strategies, LLC (3)
|
|
Education services
|
|
First Lien Term Loan
|
|
10/1/2019
|
|
LIBOR+5.5% (0.5% floor) cash
|
|
2,627,641
|
|
|
2,624,249
|
|
|
2,586,461
|
|
|
|
Education services
|
|
First Lien Delayed Draw Term Loan
|
|
10/1/2019
|
|
LIBOR+5.5% (0.5% floor) cash
|
|
6,930,000
|
|
|
6,921,467
|
|
|
6,821,067
|
|
Total Teaching Strategies, LLC
|
|
|
|
|
|
|
|
|
|
9,557,641
|
|
|
9,545,716
|
|
|
9,407,528
|
|
TrialCard Incorporated (3)
|
|
Healthcare services
|
|
First Lien Term Loan
|
|
12/31/2019
|
|
LIBOR+5% (1% floor) cash
|
|
7,332,387
|
|
|
7,292,206
|
|
|
7,371,882
|
|
Air Newco LLC
|
|
IT consulting & other services
|
|
First Lien Term Loan B
|
|
3/20/2022
|
|
LIBOR+5.5% (1% floor) cash
|
|
8,333,955
|
|
|
8,308,135
|
|
|
8,042,266
|
|
Fineline Technologies, Inc. (3)
|
|
Electronic equipment & instruments
|
|
First Lien Term Loan
|
|
5/5/2017
|
|
LIBOR+5.5% (1% floor) cash
|
|
8,640,000
|
|
|
8,593,043
|
|
|
8,489,898
|
|
LegalZoom.com, Inc. (3)
|
|
Specialized consumer services
|
|
First Lien Term Loan
|
|
5/13/2020
|
|
LIBOR+7% (1% floor) cash
|
|
9,900,000
|
|
|
9,696,610
|
|
|
9,677,250
|
|
GK Holdings, Inc.
|
|
IT consulting & other services
|
|
First Lien Term Loan
|
|
1/20/2021
|
|
LIBOR+5.5% (1% floor) cash
|
|
3,456,250
|
|
|
3,471,101
|
|
|
3,434,648
|
|
Vitera Healthcare Solutions, LLC
|
|
Healthcare technology
|
|
Second Lien Term Loan
|
|
11/4/2021
|
|
LIBOR+8.25% (1% floor) cash
|
|
3,000,000
|
|
|
2,954,318
|
|
|
2,355,000
|
|
TIBCO Software, Inc. (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
12/4/2020
|
|
LIBOR+5.5% (1% floor) cash
|
|
2,316,600
|
|
|
2,320,985
|
|
|
2,090,732
|
|
CM Delaware LLC
|
|
Advertising
|
|
First Lien Term Loan
|
|
3/18/2021
|
|
LIBOR+5.25% (1% floor) cash
|
|
2,141,117
|
|
|
2,138,882
|
|
|
2,071,531
|
|
New Trident Holdcorp, Inc. (3)
|
|
Healthcare services
|
|
First Lien Term Loan B
|
|
7/31/2019
|
|
LIBOR+5.25% (1.25% floor) cash
|
|
2,052,933
|
|
|
2,020,876
|
|
|
1,972,868
|
|
Central Security Group, Inc. (3)
|
|
Specialized consumer services
|
|
First Lien Term Loan
|
|
10/6/2020
|
|
LIBOR+5.25% (1% floor) cash
|
|
5,939,850
|
|
|
5,946,433
|
|
|
5,783,929
|
|
Language Line, LLC (3)
|
|
Integrated telecommunication services
|
|
First Lien Term Loan
|
|
7/7/2021
|
|
LIBOR+5.5% (1% floor) cash
|
|
9,345,833
|
|
|
9,358,060
|
|
|
9,322,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction.com, LLC
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
5/12/2019
|
|
LIBOR+5% (1% floor) cash
|
|
3,960,000
|
|
|
3,944,040
|
|
|
3,925,350
|
|
Aptos, Inc. (3)
|
|
Data processing & outsourced services
|
|
First Lien Term Loan B
|
|
6/23/2022
|
|
LIBOR+5.25% (0.75% floor) cash
|
|
7,940,000
|
|
|
7,957,831
|
|
|
7,900,300
|
|
Vubiquity, Inc.
|
|
Application software
|
|
First Lien Term Loan
|
|
8/12/2021
|
|
LIBOR+5.5% (1% floor) cash
|
|
4,189,500
|
|
|
4,151,100
|
|
|
4,168,553
|
|
Too Faced Cosmetics, LLC (3)
|
|
Personal products
|
|
First Lien Term Loan B
|
|
7/7/2021
|
|
LIBOR+5% (1% floor) cash
|
|
2,955,000
|
|
|
2,887,500
|
|
|
2,978,329
|
|
American Seafoods Group LLC (3)
|
|
Food distributors
|
|
First Lien Term Loan
|
|
8/19/2021
|
|
LIBOR+5% (1% floor) cash
|
|
3,950,000
|
|
|
3,931,972
|
|
|
3,846,313
|
|
Worley Claims Services, LLC
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
10/31/2020
|
|
LIBOR+8% (1% floor) cash
|
|
5,760,015
|
|
|
5,733,662
|
|
|
5,731,216
|
|
Poseidon Merger Sub, Inc. (3)
|
|
Advertising
|
|
Second Lien Term Loan
|
|
8/15/2023
|
|
LIBOR+8.5% (1% floor) cash
|
|
3,000,000
|
|
|
2,916,632
|
|
|
2,986,851
|
|
AccentCare, Inc.
|
|
Healthcare services
|
|
First Lien Term Loan
|
|
9/3/2021
|
|
LIBOR+5.75% (1% floor) cash
|
|
7,950,000
|
|
|
7,865,594
|
|
|
7,810,875
|
|
Novetta Solutions, LLC
|
|
Diversified support services
|
|
First Lien Term Loan
|
|
9/3/2021
|
|
LIBOR+5.75% (1% floor) cash
|
|
7,980,000
|
|
|
7,887,098
|
|
|
7,820,400
|
|
SHO Holding I Corporation
|
|
Footwear
|
|
First Lien Term Loan
|
|
10/27/2022
|
|
LIBOR+5% (1% floor) cash
|
|
6,483,750
|
|
|
6,421,157
|
|
|
6,451,331
|
|
Valet Merger Sub, Inc. (3)
|
|
Environmental & facilities services
|
|
First Lien Term Loan
|
|
9/24/2021
|
|
LIBOR+7% (1% floor) cash
|
|
3,980,000
|
|
|
3,921,057
|
|
|
3,964,826
|
|
RSC Acquisition, Inc.
|
|
Insurance brokers
|
|
First Lien Term Loan
|
|
11/30/2022
|
|
LIBOR+5.25% (1% floor) cash
|
|
3,814,829
|
|
|
3,791,414
|
|
|
3,790,987
|
|
|
|
|
|
Delayed Draw Term Loan
|
|
11/30/2022
|
|
LIBOR+5.25% (1% floor) cash
|
|
—
|
|
|
(1,075
|
)
|
|
—
|
|
Total RSC Acquisition, Inc.
|
|
|
|
|
|
|
|
|
|
3,814,829
|
|
|
3,790,339
|
|
|
3,790,987
|
|
Integro Parent Inc.
|
|
Insurance brokers
|
|
First Lien Term Loan
|
|
10/31/2022
|
|
LIBOR+5.75% (1% floor) cash
|
|
4,673,472
|
|
|
4,511,593
|
|
|
4,509,901
|
|
|
|
|
|
Delayed Draw Term Loan
|
|
10/31/2022
|
|
LIBOR+5.75% (1% floor) cash
|
|
314,815
|
|
|
303,938
|
|
|
303,796
|
|
Total Integro Parent Inc.
|
|
|
|
|
|
|
|
|
|
4,988,287
|
|
|
4,815,531
|
|
|
4,813,697
|
|
Total Portfolio Investments
|
|
|
|
|
|
|
|
|
|
$
|
209,608,226
|
|
|
$
|
207,605,171
|
|
|
$
|
200,177,020
|
|
__________
(1) Represents the current interest rate as of
March 31, 2016
. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the current determination of fair value as of
March 31, 2016
utilizing a similar process as us in accordance with ASC 820. However, the determination of such fair value is not included in our Board of Directors' valuation process described elsewhere herein.
(3) This investment is held by both us and FSFR Glick JV at
March 31, 2016
.
(4) The principal balance outstanding for all floating rate loans is indexed to LIBOR and an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, we have provided the applicable margin over LIBOR based on each respective credit agreement.
(5) This investment is on cash non-accrual status as of
March 31, 2016
.
FSFR Glick JV Loan Portfolio as of
September 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Company (4)
|
|
Business Description
|
|
Investment Type
|
|
Maturity Date
|
|
Stated Interest Rate (1)
|
|
Principal
|
|
Cost
|
|
Fair Value (2)
|
Accruent, LLC (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
11/25/2019
|
|
LIBOR +6.25% (1% floor) cash
|
|
$
|
14,777,933
|
|
|
$
|
14,576,963
|
|
|
$
|
14,853,895
|
|
Ameritox Ltd. (3)
|
|
Healthcare services
|
|
First Lien Term Loan
|
|
6/23/2019
|
|
LIBOR+7.5% (1% floor) cash
|
|
7,794,458
|
|
|
7,661,251
|
|
|
7,048,923
|
|
Answers Corporation (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
10/1/2021
|
|
LIBOR+5.25% (1% floor) cash
|
|
7,959,900
|
|
|
7,658,675
|
|
|
5,857,173
|
|
Beyond Trust Software, Inc. (3)
|
|
Application software
|
|
First Lien Term Loan
|
|
9/25/2019
|
|
LIBOR+7% (1% floor) cash
|
|
13,665,783
|
|
|
13,549,710
|
|
|
13,549,671
|
|
Compuware Corporation (3)
|
|
Internet software & services
|
|
First Lien Term Loan B1
|
|
12/15/2019
|
|
LIBOR+5.25% (1% floor) cash
|
|
7,797,468
|
|
|
7,684,361
|
|
|
7,551,848
|
|
Idera, Inc. (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
11/5/2020
|
|
LIBOR+5.5% (0.5% floor) cash
|
|
3,160,000
|
|
|
3,134,841
|
|
|
3,160,000
|
|
Metamorph US 3, LLC (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
12/1/2020
|
|
LIBOR+5.5% (1% floor) cash
|
|
8,398,019
|
|
|
8,283,147
|
|
|
8,310,898
|
|
Motion Recruitment Partners LLC (3)
|
|
Diversified support services
|
|
First Lien Term Loan
|
|
2/13/2020
|
|
LIBOR+6% (1% floor) cash
|
|
9,562,500
|
|
|
9,562,500
|
|
|
9,459,652
|
|
NAVEX Global, Inc. (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
11/19/2021
|
|
LIBOR+4.75% (1% floor) cash
|
|
2,435,442
|
|
|
2,429,788
|
|
|
2,423,265
|
|
Teaching Strategies, LLC (3)
|
|
Education services
|
|
First Lien Term Loan
|
|
10/1/2019
|
|
LIBOR+5.5% (0.5% floor) cash
|
|
2,695,442
|
|
|
2,691,552
|
|
|
2,673,135
|
|
Teaching Strategies, LLC
|
|
Education services
|
|
First Lien Delayed Draw Term Loan
|
|
10/1/2019
|
|
LIBOR+5.5% (0.5% floor) cash
|
|
7,020,000
|
|
|
7,010,218
|
|
|
6,961,725
|
|
TrialCard Incorporated (3)
|
|
Healthcare services
|
|
First Lien Term Loan
|
|
12/31/2019
|
|
LIBOR+5% (1% floor) cash
|
|
7,332,387
|
|
|
7,286,727
|
|
|
7,232,017
|
|
Air Newco LLC
|
|
IT consulting & other services
|
|
First Lien Term Loan B
|
|
3/20/2022
|
|
LIBOR+5.5% (1% floor) cash
|
|
5,970,000
|
|
|
6,004,722
|
|
|
5,977,463
|
|
Fineline Technologies, Inc. (3)
|
|
Electronic equipment & instruments
|
|
First Lien Term Loan
|
|
5/5/2017
|
|
LIBOR+5.5% (1% floor) cash
|
|
8,820,000
|
|
|
8,749,565
|
|
|
8,818,256
|
|
LegalZoom.com, Inc. (3)
|
|
Specialized consumer services
|
|
First Lien Term Loan
|
|
5/13/2020
|
|
LIBOR+7% (1% floor) cash
|
|
9,950,000
|
|
|
9,721,186
|
|
|
9,882,838
|
|
GK Holdings, Inc.
|
|
IT consulting & other services
|
|
First Lien Term Loan
|
|
1/20/2021
|
|
LIBOR+5.5% (1% floor) cash
|
|
3,473,750
|
|
|
3,490,164
|
|
|
3,460,723
|
|
Vitera Healthcare Solutions, LLC
|
|
Healthcare technology
|
|
Second Lien Term Loan
|
|
11/4/2021
|
|
LIBOR+8.25% (1% floor) cash
|
|
3,000,000
|
|
|
2,950,227
|
|
|
2,925,000
|
|
TIBCO Software, Inc. (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
12/4/2020
|
|
LIBOR+5.5% (1% floor) cash
|
|
2,328,300
|
|
|
2,333,155
|
|
|
2,310,838
|
|
CM Delaware LLC
|
|
Advertising
|
|
First Lien Term Loan
|
|
3/18/2021
|
|
LIBOR+5.25% (1% floor) cash
|
|
2,152,041
|
|
|
2,149,579
|
|
|
2,143,971
|
|
New Trident Holdcorp, Inc. (3)
|
|
Healthcare services
|
|
First Lien Term Loan B
|
|
7/31/2019
|
|
LIBOR+5.25% (1.25% floor) cash
|
|
2,064,508
|
|
|
2,027,520
|
|
|
2,000,003
|
|
Central Security Group, Inc. (3)
|
|
Specialized consumer services
|
|
First Lien Term Loan
|
|
10/6/2020
|
|
LIBOR+5.25% (1% floor) cash
|
|
5,969,925
|
|
|
5,977,239
|
|
|
5,910,225
|
|
Language Line, LLC (3)
|
|
Integrated telecommunication services
|
|
First Lien Term Loan
|
|
7/7/2021
|
|
LIBOR+5.5% (1% floor) cash
|
|
10,000,000
|
|
|
10,013,409
|
|
|
10,020,850
|
|
All Web Leads, Inc. (3)
|
|
Advertising
|
|
First Lien Term Loan
|
|
6/30/2020
|
|
LIBOR+6.5% (1% floor) cash
|
|
9,937,500
|
|
|
9,700,212
|
|
|
9,884,905
|
|
Auction.com, LLC
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
5/12/2019
|
|
LIBOR+5% (1% floor) cash
|
|
3,980,000
|
|
|
3,961,380
|
|
|
3,970,050
|
|
Aptos, Inc. (3)
|
|
Data processing & outsourced services
|
|
First Lien Term Loan B
|
|
6/23/2022
|
|
LIBOR+5.25% (0.75% floor) cash
|
|
7,980,000
|
|
|
7,999,277
|
|
|
7,960,050
|
|
Vubiquity, Inc.
|
|
Application software
|
|
First Lien Term Loan
|
|
8/12/2021
|
|
LIBOR+5.5% (1% floor) cash
|
|
4,200,000
|
|
|
4,158,000
|
|
|
4,179,000
|
|
Too Faced Cosmetics, LLC (3)
|
|
Personal products
|
|
First Lien Term Loan B
|
|
7/7/2021
|
|
LIBOR+5% (1% floor) cash
|
|
3,000,000
|
|
|
2,926,072
|
|
|
3,000,000
|
|
American Seafoods Group LLC (3)
|
|
Food distributors
|
|
First Lien Term Loan
|
|
8/19/2021
|
|
LIBOR+5% (1% floor) cash
|
|
4,000,000
|
|
|
3,980,282
|
|
|
3,980,000
|
|
Worley Claims Services, LLC (3)
|
|
Internet software & services
|
|
First Lien Term Loan
|
|
10/31/2020
|
|
LIBOR+8% (1% floor) cash
|
|
4,339,095
|
|
|
4,317,702
|
|
|
4,317,400
|
|
Poseidon Merger Sub, Inc. (3)
|
|
Advertising
|
|
Second Lien Term Loan
|
|
8/15/2023
|
|
LIBOR+8.5% (1% floor) cash
|
|
3,000,000
|
|
|
2,910,947
|
|
|
3,000,000
|
|
Total Portfolio Investments
|
|
|
|
|
|
|
|
|
|
$
|
186,764,451
|
|
|
$
|
184,900,371
|
|
|
$
|
182,823,774
|
|
__________
(1) Represents the current interest rate as of
September 30, 2015
. All interest rates are payable in cash, unless otherwise noted.
(2) Represents the fair value determined utilizing a similar process as us in accordance with ASC 820. However, the determination of such fair value is not included in our Board of Directors' valuation process described elsewhere herein.
(3) This investment is held by both us and FSFR Glick JV at
September 30, 2015
.
(4) The principal balance outstanding for all floating rate loans is indexed to LIBOR and an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, we have provided the applicable margin over LIBOR based on each respective credit agreement.
The amortized cost and fair value of the Subordinated Notes held by us was
$59.8 million
and
$56.3 million
, respectively, as of
March 31, 2016
and $53.1 million and $52.6 million, respectively, as of
September 30, 2015
. The Subordinated Notes pay a weighted average interest rate of LIBOR plus 8.0% per annum.
For the three and six months ended
March 31, 2016
, we earned interest income of
$1.2 million
and
$2.3 million
, respectively, on our investment in the Subordinated Notes. The cost and fair value of the LLC equity interests held by us was
$6.6 million
and
$3.8 million
as of
March 31, 2016
, respectively and $5.9 million and $4.6 million, respectively, as of
September 30, 2015
. We earned dividend income of
$0.9 million
and
$1.3 million
, respectively,
for the three and six months ended
March 31, 2016
, respectively, with respect to our LLC equity interests. The LLC equity interests are dividend producing to the extent there is residual income to be distributed on a quarterly basis. The total investment income earned on FSFR Glick JV represented a 14.0% and 12.4% weighted average annualized return on our total investment as of
March 31, 2016
and
September 30, 2015
, respectively.
Below is certain summarized financial information for FSFR Glick JV as of
March 31, 2016
and
September 30, 2015
and
for the three and six months ended
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
September 30, 2015
|
Selected Balance Sheet Information:
|
|
|
|
|
Investments in loans at fair value (cost March 31, 2016: $207,605,171; cost September 30, 2015: $184,900,371)
|
|
$
|
200,177,020
|
|
|
$
|
182,823,774
|
|
Cash and cash equivalents
|
|
5,797,225
|
|
|
3,127,824
|
|
Restricted cash
|
|
2,929,990
|
|
|
2,188,133
|
|
Other assets
|
|
2,450,049
|
|
|
2,253,143
|
|
Total assets
|
|
$
|
211,354,284
|
|
|
$
|
190,392,874
|
|
|
|
|
|
|
Senior credit facility payable
|
|
$
|
136,315,636
|
|
|
$
|
122,380,636
|
|
Subordinated notes payable at fair value (proceeds March 31, 2016: $68,330,682; proceeds September 30, 2015: $60,680,682)
|
|
64,374,362
|
|
|
60,118,109
|
|
Other liabilities
|
|
6,264,892
|
|
|
2,690,043
|
|
Total liabilities
|
|
$
|
206,954,890
|
|
|
$
|
185,188,788
|
|
Members' equity
|
|
4,399,394
|
|
|
5,204,086
|
|
Total liabilities and members' equity
|
|
$
|
211,354,284
|
|
|
$
|
190,392,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
Six months ended March 31, 2016
|
Selected Statement of Operations Information:
|
|
|
|
|
Interest income
|
|
$
|
3,185,495
|
|
|
$
|
6,874,084
|
|
Fee income
|
|
83,174
|
|
|
87,340
|
|
Total investment income
|
|
3,268,669
|
|
|
6,961,424
|
|
Interest expense
|
|
2,630,208
|
|
|
5,044,654
|
|
Other expenses
|
|
59,885
|
|
|
123,577
|
|
Total expenses (1)
|
|
2,690,093
|
|
|
5,168,231
|
|
Net unrealized appreciation (depreciation)
|
|
2,208,938
|
|
|
(1,860,169
|
)
|
Net income (loss)
|
|
$
|
2,787,514
|
|
|
$
|
(66,976
|
)
|
__________
(1) There are no management fees or incentive fees charged at FSFR Glick JV.
FSFR Glick JV has elected to fair value the Subordinated Notes issued to us and GF Debt Funding under ASC 825 —
Financial Instruments
, or ASC 825. The Subordinated Notes are valued by calculating the net present value of the future expected cash flow streams using an appropriate risk-adjusted discount rate model.
During the three months ended
March 31, 2016
, we sold $14.0 million of senior secured debt investments at fair value to FSFR Glick JV in exchange for $12.8 million cash consideration, $1.1 million of subordinated notes and $0.1 million of LLC equity interests. We realized a loss of $0.3 million on these transactions.
Discussion and Analysis of Results and Operations
Revisions to Prior Period Financial Information
We previously identified accounting errors from the commencement of operations through September 30, 2015 related to revenue recognition. The revenue recognition errors were the result of certain fees which were historically recognized on the deal closing date, but should have been amortized over the life of the loan since the fees did not represent a separately identifiable revenue contract. These errors were partially offset by the overpayment of Part I and Part II Incentive Fees paid to the Investment Adviser. We assessed the materiality of the errors on our prior quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively, in accordance with the SEC’s Staff Accounting Bulletin, or SAB, No. 99 and SAB 108, and concluded that the errors were not material to any of the previously issued financial statements. However, we concluded the cumulative corrections of these errors would be qualitatively material to our quarterly financial statements within in any quarter during the September 30, 2015 fiscal year end. Accordingly, all prior period financial statements since the commencement of operations have been revised in Note 2 and Note 14 to the Consolidated Financial Statements for the year ended September 30, 2015 contained in the Form 10-K. These errors did not impact the financial information
for the three and six months ended
March 31, 2016
. See Note 2 to the Consolidated Financial Statements for detail on the revisions
for the three and six months ended
March 31, 2015
.
Results of Operations
The principal measure of our financial performance is the net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and total expenses. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment portfolio.
Comparison of
the three and six months ended
March 31, 2016
and
March 31, 2015
Total Investment Income
Total investment income includes interest income on our investments, fee income and other investment income. Fee income consists principally of servicing, advisory, structuring, amendment and prepayment fees.
Total investment income
for the three months ended
March 31, 2016 and March 31, 2015
was
$13.2 million
and
$11.3 million
, respectively.
For the three months ended
March 31, 2016
, this amount primarily consisted of
$11.6 million
of interest income from portfolio investments,
$0.7 million
of fee income and
$0.9 million
of dividend and other income.
For the three months ended
March 31, 2015
, this amount primarily consisted of
$9.9 million
of interest income from portfolio investments and
$1.5 million
of fee income.
Total investment income for the six months ended
March 31, 2016 and March 31, 2015
was
$27.1 million
and
$23.3 million
, respectively.
For the six months ended
March 31, 2016
, this amount primarily consisted of
$23.7 million
of interest income from portfolio investments,
$2.1 million
of fee income and
$1.3 million
of dividend and other income.
For the six months ended
March 31, 2015
, this amount primarily consisted of
$18.2 million
of interest income from portfolio investments and
$5.1 million
of fee income.
The increase in our total investment income
for the three and six months ended
March 31, 2016
, as
compared to the three and six months ended
March 31, 2015
, was primarily attributable to higher average levels of outstanding debt investments.
Expenses
Total expenses
for the three months ended
March 31, 2016 and March 31, 2015
were
$7.4 million
and
$5.0 million
, respectively. Total expenses increased
for the three months ended
March 31, 2016
as
compared to the three months ended
March 31, 2015
by
$2.4 million
. This was due primarily to a $0.6 million increase in interest expense due to a higher level of borrowings and a $1.7 million increase in professional fees.
Total expenses
for the six months ended
March 31, 2016 and March 31, 2015
were
$14.3 million
and
$9.5 million
, respectively. Total expenses increased
for the six months ended
March 31, 2016
as
compared to the six months ended
March 31, 2015
by
$4.8 million
. This was due primarily to a $2.0 million increase in interest expense due to a higher level of borrowings and a $2.1 million increase in professional fees.
Net Investment Income
As a result of the
$2.4 million
increase in total expenses, as compared to the
$1.9 million
increase in total investment income, net investment income
for the three months ended
March 31, 2016
reflected an approximate
$0.5 million
decrease, as
compared to the three months ended
March 31, 2015
.
As a result of the
$4.8 million
increase in total expenses, as compared to the
$3.8 million
increase in total investment income, net investment income
for the six months ended
March 31, 2016
reflected an approximate
$1.0 million
decrease, as
compared to the six months ended
March 31, 2015
.
Realized Gain (Loss) on Investments
During the six months ended
March 31, 2016
, we recorded investment realization events, including the following:
|
|
•
|
In October 2015, we received a cash payment of $7.4 million from Reliant Hospital Partners, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
|
|
|
•
|
In October 2015, we received a cash payment of $16.8 million from Idera, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
|
|
|
•
|
In October 2015, we received a cash payment of $5.7 million from Novetta Solutions, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
|
|
|
•
|
In December 2015, we received a cash payment of $17.6 million from All Web Leads, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
|
|
|
•
|
In January 2016, we received a cash payment of $6.4 million from TWCC Holding Corp. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction;
|
|
|
•
|
In February 2016, we received a cash payment of $1.4 million from B&H Education Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited and a realized loss of $4.3 million was recorded on the transaction;
|
|
|
•
|
In March 2016, we received a cash payment of $3.4 million from Pacific Architects and Engineers Incorporated in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction; and
|
|
|
•
|
During the six months ended
March 31, 2016
, we received cash payments of
$98.4 million
in connection with syndications and sales of debt investments and recorded a net realized loss of
$4.8 million
.
|
During the six months ended
March 31, 2015
, we recorded investment realization events, including the following:
|
|
•
|
In October 2014, we received a cash payment of $6.8 million from Answers Corporation in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par (plus additional fees) and no realized gain or loss was recorded on the transaction;
|
|
|
•
|
In December 2014, we received a cash payment of $4.9 million from Survey Sampling International, LLC in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par and no realized gain or loss was recorded on the transaction; and
|
|
|
•
|
During the six months ended
March 31, 2015
, we received cash payments of $246.9 million in connection with full or partial sales of debt investments and recorded a net realized gain of
$0.9 million
.
|
Net Unrealized Appreciation (Depreciation) on Investments
Net unrealized appreciation or depreciation is the net change in the fair value of our investments during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
During the three and six months ended
March 31, 2016
, we recorded net unrealized
depreciation
of
$1.6 million
and
$21.9 million
, respectively.
During the three and six months ended
March 31, 2015
, we recorded net unrealized depreciation of
$0.1 million
and
$1.6 million
, respectively.
For the three months ended
March 31, 2016
this consisted of $5.0 million of net unrealized depreciation on debt investments offset by $1.5 million of net unrealized appreciation on equity investments and $1.9 million of net reclassifications to realized loss (resulting in unrealized appreciation).
For the six months ended
March 31, 2016
this consisted of $21.9 million of net unrealized depreciation on debt investments and $1.5 million of net unrealized depreciation on equity investments, offset by $1.4 million of net reclassifications to realized loss (resulting in unrealized appreciation).
For the three months ended
March 31, 2015
, our net unrealized depreciation consisted of $62,904 of net unrealized depreciation on debt investments and $110,816 of net reclassifications to realized gains on debt and equity investments (resulting in unrealized appreciation), offset by $48,210 of net unrealized appreciation on equity investments.
For the six months ended
March 31, 2015
, our net unrealized depreciation consisted of $1,199,689 of net unrealized depreciation on debt investments and $385,773 of net reclassifications to realized gains on debt and equity investments (resulting in unrealized depreciation), offset by $20,376 of net unrealized appreciation on equity investments.
Financial Condition, Liquidity and Capital Resources
Cash Flows
We have a number of alternatives available to fund the growth of our investment portfolio and our operations, including, but not limited to, raising equity, increasing debt and funding from operational cash flow. Additionally, we may reduce investment size by syndicating a portion of any given transaction. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or as we deem appropriate.
For the six months ended
March 31, 2016
, we experienced a net
decrease
in cash and cash equivalents of
$12.6 million
. During that period,
$31.2 million
of cash was provided by operating activities, primarily consisting of
$175.5 million
of principal payments and proceeds from the sale of investments and cash activities related to
$12.8 million
of net investment income, partially offset by cash used to fund
$153.0 million
of investments and net revolvers. During the same period, cash used by financing activities was
$43.8 million
, primarily consisting of $23.7 million of net repayments under our credit facilities, $6.4 million of net repayments under our $309.0 million term debt securitization, or the 2015 Debt Securitization, and
$12.8 million
of cash distributions paid to our shareholders.
For the six months ended
March 31, 2015
, we experienced a net
decrease
in cash and cash equivalents of
$35.1 million
. During that period, we used
$294.3 million
of cash in operating activities, primarily for the funding of
$554.6 million
of investments and net revolvers, partially offset by
$271.0 million
of amortization payments and proceeds from the sale of investments and cash activities related to
$13.8 million
of net investment income. During the same period, cash provided by financing activities was
$259.2 million
, primarily consisting of $280.1 million net borrowings under credit facilities, partially offset by $17.2 million of cash distributions paid to our shareholders and $3.2 million of deferred financing costs paid.
At
March 31, 2016
, we had
$36.7 million
of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of
$575.4 million
, interest, dividends and fees receivable of $4.1 million, receivables from unsettled transactions of
$7.3 million
,
$112.9 million
of borrowings outstanding under our revolving credit facilities,
$180.0 million
of borrowings outstanding under our 2015 Debt Securitization and
$67.8 million
of unfunded commitments. Pursuant to the terms of our Citibank facility (as defined below) and 2015 Debt Securitization, we are restricted in terms of access to $3.8 million of restricted cash until such time as we submit required monthly reporting schedules. As of
March 31, 2016
,
$4.1 million
of restricted cash could be used only for the payment of interest expense on the notes issued in the 2015 Debt Securitization, which is described in further detail in Note 7 to our Consolidated Financial Statements.
At September 30, 2015, we had $52.7 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $623.6 million, interest, dividends and fees receivable of $2.8 million, receivables from unsettled transactions of $13.5 million, payables from unsettled transactions of $11.8 million, $136.7 million of borrowings outstanding under our revolving credit facility, $186.4 million of borrowings outstanding under our 2015 Debt Securitization and $76.8 million of unfunded commitments. Pursuant to the terms of our Citibank facility and 2015 Debt Securitization, we are restricted in terms of access to $4.2 million of restricted cash until such time as we submit required monthly reporting schedules. As of September 30, 2015, $7.1 million of restricted cash could be used only for the payment of interest expense on the notes issued in the 2015 Debt Securitization.
Other Sources of Liquidity
We intend to continue to generate cash primarily from cash flows from operations, including interest earned, future borrowings and future offerings of our securities. We generally maintain a universal shelf registration statement that allows for
the public offering and sale of our common stock, debt securities and warrants to purchase such securities. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. In the future, we may also securitize a portion of our investments in first and second lien senior loans or unsecured debt or other assets. To securitize loans, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary. Our primary use of funds is investments in our targeted asset classes and cash distributions to holders of our common stock.
Although we expect to fund the growth of our investment portfolio through the net proceeds from future equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share and we are limited in our ability to sell our common stock at a price below net asset value per share, we may be limited in our ability to raise equity capital.
In addition, we intend to distribute between 90% and 100% of our taxable income each taxable year as dividends to our stockholders in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. See "Regulated Investment Company Status and Distributions" below. Consequently, we may not have the funds or the ability to fund new investments, to make additional investments in our portfolio companies, to fund our unfunded commitments to portfolio companies or to repay borrowings. In addition, the illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
Also, as a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. This requirement limits the amount that we may borrow. As of
March 31, 2016
, we were in compliance with this requirement. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
Significant Capital Transactions
The following table reflects the dividend distributions per share that our Board of Directors has declared, including shares issued under our DRIP, on our common stock from inception through
March 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequency
|
|
Date Declared
|
|
Record Date
|
|
Payment Date
|
|
Amount
per Share
|
|
Total Distribution
|
|
DRIP Shares Issued (1)
|
|
DRIP Shares Value
|
Quarterly
|
|
October 8, 2013
|
|
October 21, 2013
|
|
October 31, 2013
|
|
$0.01
|
|
$66,668
|
|
—
|
|
—
|
Quarterly
|
|
October 8, 2013
|
|
December 16, 2013
|
|
January 31, 2014
|
|
0.20
|
|
1,333,354
|
|
606
|
|
$8,288
|
Quarterly
|
|
January 3, 2014
|
|
March 31, 2014
|
|
April 15, 2014
|
|
0.23
|
|
1,533,357
|
|
469
|
|
6,734
|
Quarterly
|
|
February 11, 2014
|
|
June 30, 2014
|
|
July 15, 2014
|
|
0.27
|
|
1,800,027
|
|
1,279
|
|
17,924
|
Quarterly
|
|
May 12, 2014
|
|
September 15, 2014
|
|
October 15, 2014
|
|
0.30
|
|
8,840,030
|
|
17,127
|
|
191,093
|
Quarterly
|
|
September 9, 2014
|
|
December 15, 2014
|
|
January 15, 2015
|
|
0.30
|
|
8,840,030
|
|
23,183
|
|
242,678
|
Quarterly
|
|
November 20, 2014
|
|
April 2, 2015
|
|
April 15, 2015
|
|
0.30
|
|
8,840,030
|
|
28,296
|
|
307,794
|
Monthly
|
|
February 4, 2015
|
|
May 1, 2015
|
|
May 15, 2015
|
|
0.10
|
|
2,946,677
|
|
5,045
|
|
50,830
|
Monthly
|
|
February 4, 2015
|
|
June 1, 2015
|
|
June 15, 2015
|
|
0.10
|
|
2,946,677
|
|
5,296
|
|
53,237
|
Monthly
|
|
February 4, 2015
|
|
July 1, 2015
|
|
July 15, 2015
|
|
0.10
|
|
2,946,677
|
|
14,572
|
|
137,464
|
Monthly
|
|
February 4, 2015
|
|
August 3, 2015
|
|
August 17, 2015
|
|
0.10
|
|
2,946,677
|
|
6,174
|
|
56,388
|
Monthly
|
|
July 10, 2015
|
|
September 4, 2015
|
|
September 15, 2015
|
|
0.075
|
|
2,210,007
|
|
4,575
|
|
41,121
|
Monthly
|
|
July 10, 2015
|
|
October 6, 2015
|
|
October 15, 2015
|
|
0.075
|
|
2,210,008
|
|
12,080
|
|
108,563
|
Monthly
|
|
July 10, 2015
|
|
November 5, 2015
|
|
November 16, 2015
|
|
0.075
|
|
2,210,008
|
|
13,269
|
|
116,730
|
Monthly
|
|
November 30, 2015
|
|
December 11, 2015
|
|
December 22, 2015
|
|
0.075
|
|
2,210,007
|
|
11,103
|
|
94,563
|
Monthly
|
|
November 30, 2015
|
|
January 4, 2016
|
|
January 15, 2016
|
|
0.075
|
|
2,210,007
|
|
8,627
|
|
61,079
|
Monthly
|
|
November 30, 2015
|
|
February 5, 2016
|
|
February 16, 2016
|
|
0.075
|
|
2,210,008
|
|
4,542
|
|
32,923
|
Monthly
|
|
February 8, 2016
|
|
March 15, 2016
|
|
March 31, 2016
|
|
0.075
|
|
2,210,008
|
|
4,383
|
|
34,577
|
Monthly
|
|
February 8, 2016
|
|
April 15, 2016
|
|
April 29, 2016
|
|
0.075
|
|
2,210,008
|
|
4,452
|
|
35,033
|
Monthly
|
|
February 8, 2016
|
|
May 13, 2016
|
|
May 31, 2016
|
|
0.075
|
|
|
|
|
|
|
______________
(1) Shares were purchased on the open market and distributed.
On July 17, 2013, we completed an initial public offering of 6,666,668 shares of our common stock at the public offering price of $15.00 per share. The proceeds totaled $100.0 million and all offering costs were borne by our Investment Adviser, including $5.3 million of underwriting commissions and $0.4 million of other offering related expenses.
On August 19, 2014, we completed a follow-on public offering of 22,800,000 shares of our common stock at the public offering price of $12.91. The net proceeds totaled $276.2 million after deducting underwriting commissions of $17.7 million and offering costs of $0.5 million.
Borrowings
Natixis Facility
On November 1, 2013, FS Senior Funding LLC, our wholly-owned, special purpose financing subsidiary entered into the $100 million revolving credit facility, or the Natixis facility, with the lenders referred to therein, Natixis, New York Branch, as administrative agent, and U.S. Bank National Association, as collateral agent and custodian.
Borrowings under the Natixis facility were subject to certain customary advance rates and accrued interest at a rate equal to either the applicable commercial paper rate (subject to an overall cap) plus 1.90% in the case of a lender that is a commercial paper conduit or otherwise the three-month LIBOR plus 2.00% per annum. In addition, there was a commitment fee payable on the undrawn amount under the credit facility equal to 1.00% (or 0.50% for the first six months after the closing date) of such undrawn amount. Interest and commitment fees were payable quarterly in arrears. The reinvestment period under the credit facility ended 18 months after the closing date and the credit facility was scheduled to mature on November 1, 2021.
On October 16, 2014, we entered into agreements to expand the Natixis facility from $100 million to $200 million, including a $100 million term loan and a $100 million revolving credit facility. Fifth Third Bank, or Fifth Third, also joined the facility as a term loan lender. The $50 million term loan provided by Fifth Third is priced at LIBOR plus 2% per annum, and the $100 million revolving credit facility and $50 million term loan provided by Natixis, New York Branch, are priced at the applicable commercial paper rate plus 1.9% per annum. The facility maturity date remained unchanged.
Borrowings under the Natixis facility, were secured by all of the assets of FS Senior Funding LLC and all of our equity interest in FS Senior Funding LLC. We used the Natixis facility to fund a portion of FS Senior Funding LLC's loan origination activities and for general corporate purposes. Each loan origination under the Natixis facility was subject to the satisfaction of certain conditions. Our borrowings under the Natixis facility bore interest at a weighted average interest rate of 2.242%
for the six months ended
March 31, 2015
.
For the three and six months ended
March 31, 2015
, we recorded interest expense of $1.1 million and $2.0 million, respectively, related to the Natixis facility.
On May 28, 2015, we completed the 2015 Debt Securitization, a $309.0 million debt securitization transaction, the proceeds of which were used to repay the entire amount outstanding under the Natixis facility. In connection therewith, the Amended and Restated Loan and Servicing Agreement and other related documents governing the Natixis facility were also terminated. As such, we had no borrowings outstanding or capacity available under the Natixis facility as of
March 31, 2016
.
Citibank Facility
On January 15, 2015, FS Senior Funding II LLC, our wholly-owned, special purpose financing subsidiary, entered into a $175 million revolving credit facility, or the Citibank facility, with the lenders referred to therein, Citibank, N.A., as administrative agent, and Wells Fargo Bank, N. A., as collateral agent and custodian.
Borrowings under the Citibank facility are subject to certain customary advance rates and accrued interest at a rate equal to LIBOR plus 2.00% per annum on broadly syndicated loans and LIBOR plus 2.25% per annum on all other eligible loans during the reinvestment period, and rates equal to LIBOR plus 3.50% per annum and LIBOR plus 4.00% per annum during the subsequent two years, respectively. In addition, there is a commitment fee payable on the undrawn amount under the Citibank facility of either 0.50% per annum on the unused amount of the Citibank facility (if the advances outstanding on the Citibank facility exceed 50% of the aggregate commitments by lenders to make advances on such day) or 0.75% per annum on the unused amount of the Citibank facility (if the advances outstanding on the Citibank facility do not exceed 50% of the aggregate commitments by lenders to make advances on such day) for the duration of the reinvestment period. Interest and commitment fees are payable quarterly in arrears. The reinvestment period under the Citibank facility ends January 15, 2018 and the credit facility will mature on January 15, 2020. The Citibank facility does not require us to comply with significant financial covenants.
As of
March 31, 2016
, we had
$109.2 million
outstanding under the Citibank facility. Borrowings under the Citibank facility are secured by all of the assets of FS Senior Funding II LLC and all of our equity interests in FS Senior Funding II LLC. We may use the Citibank facility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the Citibank facility is subject to the satisfaction of certain conditions. Our borrowings under the Citibank facility bore interest at a weighted average interest rate of
2.730%
and 2.511%
for the six months ended
March 31, 2016
and
March 31, 2015
, respectively.
For the three and six months ended
March 31, 2016
, we recorded interest expense of
$1.0 million
and
$2.1 million
, respectively, related to the Citibank facility.
For the three months ended
March 31, 2015
, we recorded interest expense of $0.6 million related to the Citibank facility.
East West Bank Facility
On January 6, 2016, we entered into a five-year $25 million senior secured revolving credit facility with the lenders referenced therein, U.S. Bank National Association, as Custodian, and East West Bank as Secured Lender, or the East West Bank Facility. The East West Bank Facility bears an interest rate of either (i) LIBOR plus 3.75% per annum for borrowings in year one, 3.50% per annum for borrowings in year two, 3.25% per annum for borrowings in years three and four and 3.00% per annum for borrowings in year five, or (ii) East West Bank’s prime rate plus 0.75% per annum for borrowings in year one, 0.50% per annum for borrowings in year two, 0.25% per annum for borrowings in years three and four, and 0.00% per annum for borrowings in year five. The East West Bank Facility matures on January 6, 2021.
As of
March 31, 2016
, we had
$3.7 million
outstanding under the East West Bank Facility. Borrowings under the East West Bank Facility are secured by the loans pledged as collateral thereunder from time to time as well as certain of our other assets. We may use the East West Bank Facility to fund a portion of its loan origination activities and for general corporate purposes. Our borrowings under the East West Bank facility bore interest at a weighted average interest rate of
4.315%
for the period from January 6, 2016 through March 31, 2016. For the three months ended March 31, 2016, we recorded interest expense of
$0.1 million
related to the East West Bank Facility.
Debt Securitization
On May 28, 2015, we completed our $309.0 million 2015 Debt Securitization consisting of $222.6 million in senior secured notes, or the 2015 Notes, and $86.4 million of unsecured subordinated notes, or the 2015 Subordinated Notes. The notes offered in the 2015 Debt Securitization were issued by FS Senior Funding Ltd., or the 2015 Issuer, a wholly-owned subsidiary of us, through a private placement. The 2015 Notes are secured by the assets held by the 2015 Issuer. The 2015 Debt Securitization consists of $126.0 million Class A-T Senior Secured 2015 Notes of the 2015 Issuer which bear interest at three-
month LIBOR plus 1.80%; $29.0 million Class A-S Senior Secured Notes of the 2015 Issuer which bear interest at a rate of three-month LIBOR plus 1.55%, with a step-up in spread to 2.10% to occur in October 2016; $20.0 million Class A-R Senior Secured Revolving Notes of the 2015 Issuer which bear interest at a rate of Commercial Paper, or CP, plus 1.80%, or, collectively, the Class A Notes; and $25.0 million Class B Senior Secured Notes of the 2015 Issuer which bear interest at a rate of three-month LIBOR plus 2.65% per annum. In partial consideration for the loans transferred to the 2015 Issuer as part of the 2015 Debt Securitization, we currently retain the entire $22.6 million of the Class C Senior Secured Notes (which we purchased at 98.0% of par value) and the entire $86.4 million of the 2015 Subordinated Notes. The Class A Notes and Class B Notes are included in our
March 31, 2016
Consolidated Statement of Assets and Liabilities as notes payable. As of
March 31, 2016
, the Class C Notes and the 2015 Subordinated Notes were eliminated in consolidation.
The proceeds of the private placement of the 2015 Notes, net of expenses, were used to repay the entire amount outstanding under the Natixis Facility. As part of the 2015 Debt Securitization, FS Senior Funding LLC, the borrower under the Natixis Facility, merged with and into the 2015 Issuer, with the 2015 Issuer remaining as the surviving entity. Upon completion of the 2015 Debt Securitization, our Natixis facility was paid off and terminated.
We serve as collateral manager to the 2015 Issuer under a collateral management agreement. We are entitled to a fee for our services as collateral manager. The collateral management fee is eliminated in consolidation. We have retained Fifth Street Management LLC, our Investment Adviser, to furnish collateral management sub-advisory services to us pursuant to a sub-collateral management agreement. Our Investment Adviser has waived, and intends to continue to waive, its right to such sub-collateral management fees in respect of the 2015 Debt Securitization.
The collateral management agreement does not include any incentive fee payable to us as collateral manager or payable to our Investment Adviser as sub-advisor under the sub-collateral management agreement.
Through May 28, 2019, all principal collections received on the underlying collateral may be used by the 2015 Issuer to purchase new collateral under the direction of the Investment Adviser in its capacity as collateral manager of the 2015 Issuer and in accordance with our investment strategy. All note classes are scheduled to mature on May 28, 2025.
As of
March 31, 2016
, there were
47
investments in portfolio companies with a total fair value of
$259.9 million
, securing the 2015 Notes of the 2015 Issuer. The pool of loans in the 2015 Debt Securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
The aggregate accrued interest payable on the 2015 Notes at
March 31, 2016
was approximately
$1.0 million
. Deferred debt issuance costs consist of fees and expenses incurred in connection with debt offerings. As of
March 31, 2016
, we had a deferred debt issuance costs balance of approximately
$2.7 million
associated with the 2015 Debt Securitization.
For the six months ended
March 31, 2016
, the components of interest expense, cash paid for interest, average interest rates and average outstanding balances for the 2015 Debt Securitization were as follows:
|
|
|
|
|
|
Interest expense
|
|
$
|
2,269,611
|
|
Amortization of debt issuance costs
|
|
145,052
|
|
Loan administration fees
|
|
44,453
|
|
Total interest and other debt financing expenses
|
|
$
|
2,459,116
|
|
Cash paid for interest expense
|
|
$
|
2,702,624
|
|
Annualized average interest rate
|
|
2.489
|
%
|
Average outstanding balance
|
|
$
|
182,909,087
|
|
The classes, interest rates, spread over LIBOR, cash paid for interest, stated interest expense and note discount expense of each of the Class A-T, A-S, A-R and B
the three and six months ended
March 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2016
|
|
Six months ended March 31, 2016
|
|
|
Stated Interest Rate
|
|
LIBOR Spread (basis points)
|
|
Cash Paid for Interest
|
|
Interest Expense
|
|
Cash Paid for Interest
|
|
Interest Expense
|
Class A-T Notes
|
|
2.42210%
|
|
180
|
|
$
|
682,833
|
|
|
$
|
750,255
|
|
|
$
|
1,721,781
|
|
|
$
|
1,442,887
|
|
Class A-S Notes
|
|
2.17210%
|
|
155
|
(1)
|
138,632
|
|
|
154,351
|
|
|
349,964
|
|
|
295,239
|
|
Class A-R Notes
|
|
1.99075%
|
|
180
|
(2)
|
46,835
|
|
|
75,807
|
|
|
153,492
|
|
|
137,177
|
|
Class B Notes
|
|
3.27210%
|
|
265
|
|
189,788
|
|
|
202,575
|
|
|
477,387
|
|
|
394,308
|
|
Class C Notes
|
|
3.60103%
|
|
325
|
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
|
|
$
|
1,058,088
|
|
|
$
|
1,182,988
|
|
|
$
|
2,702,624
|
|
|
$
|
2,269,611
|
|
_______________________
(1) Step-up in spread to occur in October 2016.
(2) Interest expense includes 1.0% undrawn fee. Class A-R Notes were partially undrawn
during the three and six months ended
March 31, 2016
.
(3) We hold all Class C Notes outstanding and thus have not recorded any related interest expense.
The classes, amounts, ratings and interest rates (expressed as a spread to three-month LIBOR) of the Class A, B, C and Subordinated Notes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Class A-T Notes
|
|
Class A-S Notes
|
|
Class A-R
Notes
|
|
Class B Notes
|
|
Class C Notes
|
|
Subordinated Notes
|
Type
|
|
Senior Secured Floating Rate Term Debt
|
|
Senior Secured Floating Rate Term Debt
|
|
Senior Secured Floating Rate Revolver
|
|
Senior Secured Floating Rate Term Debt
|
|
Senior Secured Floating Rate Term Debt
|
|
Subordinated Term Notes
|
Amount Outstanding
|
|
$126,000,000
|
|
$29,000,000
|
|
$—
|
|
$25,000,000
|
|
$22,575,680
|
|
$86,400,000
|
Moody's Rating
|
|
"Aaa"
|
|
"Aaa"
|
|
"Aaa"
|
|
"Aa2"
|
|
"Aa2"
|
|
NR
|
S&P Rating
|
|
"AAA"
|
|
"AAA"
|
|
"AAA"
|
|
NR
|
|
NR
|
|
NR
|
Interest Rate
|
|
LIBOR + 1.80%
|
|
LIBOR + 1.55%*
|
|
CP + 1.80% **
|
|
LIBOR + 2.65%
|
|
LIBOR + 3.25%
|
|
NA
|
Stated Maturity
|
|
May 28, 2025
|
|
May 28, 2025
|
|
May 28, 2025
|
|
May 28, 2025
|
|
May 28, 2025
|
|
May 28, 2025
|
_______________________
* Spread to step-up to 2.10% in October 2016.
** Carries a 1.0% undrawn fee.
The proceeds of the private placement of the Class A Notes and the Class B Notes of the 2015 Securitization Issuer, net of discount and debt issuance costs, may be used to fund a portion of the 2015 Issuer's loan origination activities and for general corporate purposes. The creditors of the 2015 Issuer have received security interests in the assets owned by the 2015 Issuer and such assets are not intended to be available to our creditors (or any of our other affiliates). As part of the 2015 Debt Securitization, we entered into master loan sale agreements under which we agreed to directly or indirectly sell or contribute certain senior secured debt investments (or participation interests therein) to the 2015 Issuer, and to purchase or otherwise acquire the 2015 Subordinated Notes of the 2015 Issuer, as applicable. The 2015 Notes (other than the Class C Notes) are the secured obligations of the 2015 Issuer and indentures governing the 2015 Notes include customary covenants and events of default.
The 2015 Debt Securitization requires us to comply with certain monthly financial covenants, including overcollateralization and interest coverage tests. As of
March 31, 2016
, we were in compliance with all financial covenants under the Debt Securitization.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of
March 31, 2016
and
September 30, 2015
, our only off-balance sheet arrangements consisted of
$67.8 million
and
$76.8 million
, respectively, of unfunded commitments to provide debt and equity financing to certain of our portfolio companies. Such commitments are subject to our portfolio companies' satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Statements of Assets and Liabilities and are not reflected on our Consolidated Statements of Assets and Liabilities. We believe that our assets will provide adequate cover to satisfy all of our unfunded commitments as of
March 31, 2016
.
A summary of the composition of unfunded commitments (consisting of revolvers, term loans and FSFR Glick JV subordinated notes and LLC equity interests) as of
March 31, 2016
and
September 30, 2015
is shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
September 30, 2015
|
FSFR Glick JV LLC
|
|
$
|
21,084,526
|
|
|
$
|
28,522,027
|
|
TIBCO Software, Inc.
|
|
5,300,000
|
|
|
5,300,000
|
|
Landslide Holdings, Inc.
|
|
5,000,000
|
|
|
5,000,000
|
|
Triple Point Group Holdings, Inc.
|
|
4,968,590
|
|
|
4,968,590
|
|
Executive Consulting Group, Inc.
|
|
4,800,000
|
|
|
4,800,000
|
|
Legalzoom.com, Inc.
|
|
3,607,018
|
|
|
2,607,018
|
|
BeyondTrust Software, Inc.
|
|
3,605,000
|
|
|
3,605,000
|
|
All Web Leads, Inc.
|
|
3,458,537
|
|
|
2,454,572
|
|
Teaching Strategies, LLC
|
|
2,400,000
|
|
|
2,400,000
|
|
Motion Recruitment Partners LLC
|
|
2,356,250
|
|
|
2,900,000
|
|
PowerPlan, Inc.
|
|
2,100,000
|
|
|
2,100,000
|
|
Metamorph US 3, LLC
|
|
1,800,000
|
|
|
1,800,000
|
|
Dynatect Group Holdings, Inc.
|
|
1,800,000
|
|
|
1,800,000
|
|
My Alarm Center, LLC
|
|
1,415,984
|
|
|
1,287,499
|
|
Baart Programs, Inc.
|
|
1,000,000
|
|
|
—
|
|
TrialCard Incorporated
|
|
850,000
|
|
|
850,000
|
|
Internet Pipeline, Inc.
|
|
800,000
|
|
|
800,000
|
|
Valet Merger Sub, Inc.
|
|
666,667
|
|
|
1,000,000
|
|
NextCare, Inc.
|
|
420,375
|
|
|
1,221,621
|
|
Ameritox Ltd.
|
|
386,667
|
|
|
1,000,000
|
|
Idera, Inc.
|
|
—
|
|
|
2,400,000
|
|
Total
|
|
$
|
67,819,614
|
|
|
$
|
76,816,327
|
|
Contractual Obligations
The following table reflects information pertaining to our debt outstanding under the Citibank facility, the East West Bank facility and 2015 Debt Securitization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Outstanding
as of
September 30, 2015
|
|
Debt Outstanding
as of March 31,
2016
|
|
Weighted average debt
outstanding for the
six months ended
March 31, 2016
|
|
Maximum debt
outstanding
for the six months ended
March 31, 2016
|
Citibank credit facility payable
|
|
$
|
136,659,800
|
|
|
$
|
109,226,800
|
|
|
$
|
123,265,882
|
|
|
$
|
140,426,800
|
|
2015 Debt Securitization
|
|
186,366,000
|
|
|
180,000,000
|
|
|
182,909,087
|
|
|
190,966,000
|
|
East West Bank facility payable
|
|
—
|
|
|
3,720,000
|
|
|
1,511,585
|
|
|
11,720,000
|
|
Total debt
|
|
$
|
323,025,800
|
|
|
$
|
292,946,800
|
|
|
$
|
307,686,554
|
|
|
|
|
The following table reflects our contractual obligations arising from the Citibank Facility, the East West Bank facility and 2015 Debt Securitization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period as of March 31, 2016
|
|
|
Total
|
|
< 1 year
|
|
1-3 years
|
|
3-5 years
|
|
> 5 years
|
Citibank facility
|
|
$
|
109,226,800
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109,226,800
|
|
|
$
|
—
|
|
Interest due on Citibank facility
|
|
11,696,860
|
|
|
3,082,566
|
|
|
6,165,132
|
|
|
2,449,162
|
|
|
—
|
|
Notes payable
|
|
180,000,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
180,000,000
|
|
Interest due on notes payable
|
|
41,237,710
|
|
|
4,499,780
|
|
|
4,499,780
|
|
|
4,499,780
|
|
|
27,738,370
|
|
East West Bank facility
|
|
3,720,000
|
|
|
—
|
|
|
—
|
|
|
3,720,000
|
|
|
—
|
|
Interest due on East West Bank facility
|
|
743,452
|
|
|
155,775
|
|
|
311,550
|
|
|
276,127
|
|
|
—
|
|
Total
|
|
$
|
346,624,822
|
|
|
$
|
7,738,121
|
|
|
$
|
10,976,462
|
|
|
$
|
120,171,869
|
|
|
$
|
207,738,370
|
|
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. As long as we continue to qualify as a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Distributions declared and paid by us in a taxable year may differ from taxable income for that taxable year as such distributions may include the distribution of taxable income derived from the current taxable year or the distribution of taxable income derived from the prior taxable year and carried forward into and distributed in the current year. Distributions also may include returns of capital.
To maintain RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any) determined without regard to any deduction for dividends paid. As a RIC, we are also subject to a U.S. federal excise tax, based on distributive requirements of our taxable income on a calendar year basis (e.g., calendar year 2015). We anticipate timely distribution of our taxable income within the tax rules; however, we incurred a de minimis U.S. federal excise tax for calendar year 2013. We did not incur a U.S. federal excise tax for calendar year 2014 and do not expect to incur a U.S. federal excise tax for calendar year 2015. We may incur a U.S. federal excise tax in future years.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income). In addition, we may retain for investment some or all of our net taxable capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal and taxable year fall below the total amount of our dividends for that fiscal and taxable year, a portion of those dividend distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test for borrowings applicable to us as a business development company under the 1940 Act and due to provisions in our Citibank facility, the East West Bank facility and the 2015 Debt Securitization. If we do not distribute a certain percentage of our taxable income in any taxable year, we will suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
A RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to certain limitations regarding the aggregate amount of cash to be distributed to all stockholders. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been guidelines.
We may generate qualified interest income that may be exempt from United States withholding tax on foreign accounts. A regulated RIC is permitted to designate distributions of qualified interest income and short-term capital gains as exempt from U.S. withholding tax when paid to non-U.S. shareholders with proper documentation. The following table, which may be subject to change, lists the percentage of qualified interest income and qualified short-term capital gains for the three months ended December 31, 2015 and March 31, 2016.
|
|
|
|
|
|
|
Three Months Ended
|
|
Qualified Interest Income
|
Qualified Short-Term Capital Gains
|
December 31, 2015
|
|
63.47
|
%
|
30.6
|
%
|
March 31, 2016
|
|
91.46
|
%
|
—
|
|
Related Party Transactions
We have entered into an investment advisory agreement with Fifth Street Management. Messrs. Berman, Dimitrov and Owens, each an interested member of our Board of Directors, have a direct or indirect pecuniary interest in Fifth Street Management. Fifth Street Management is a registered investment adviser under the Investment Advisers Act of 1940, as amended, that is partially and indirectly owned by FSAM. Pursuant to the investment advisory agreement, fees payable to our investment adviser will be equal to (a) a base management fee of 1.0% of the average value of our gross assets at the end of the two most recently completed quarters, which includes any borrowings for investment purposes and excludes cash, cash equivalents and restricted cash and (b) an incentive fee based on our performance. The incentive fee consists of two parts. The Part I incentive fee is calculated and payable quarterly in arrears and equals 20% of our "Pre-Incentive Fee Net Investment Income" for the immediately preceding quarter, subject to a preferred return, or "hurdle," and a "catch up" feature. The Part II incentive fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement) and equals 20% of our "Incentive Fee Capital Gains," which equals our realized capital gains on a cumulative basis from inception through the end of the year, if any, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fee. The investment advisory agreement may be terminated by either party without penalty upon no fewer than 60 days' written notice to the other.
During the three and six months ended
March 31, 2016
and
March 31, 2015
, we incurred fees of
$2.3 million
and
$5.6 million
, respectively, under the investment advisory agreement.
During the three and six months ended
March 31, 2015
, we incurred fees of
$2.5 million
and
$5.2 million
, respectively, under the investment advisory agreement.
The Company serves as collateral manager to the 2015 Issuer under a collateral management agreement in connection with the 2015 Debt Securitization and will receive a fee for providing these services. We have retained Fifth Street Management LLC to furnish collateral management sub-advisory services to us pursuant to a sub-collateral management agreement. Fifth Street Management LLC will be entitled to receive 100% of the collateral management fees paid to us under the collateral management agreement, but intends to waive its right to such sub-collateral management fees in respect of the 2015 Debt Securitization.
Pursuant to the administration agreement with FSC CT LLC, or FSC CT, a wholly-owned subsidiary of our Investment Adviser, FSC CT will furnish us with the facilities, including our principal executive offices and administrative services necessary to conduct our day-to-day operations, including equipment, clerical, bookkeeping and recordkeeping services at such facilities. In addition, FSC CT assists us in connection with the determination and publishing of our net asset value, the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders. We pay FSC CT its allocable portion of overhead and other expenses incurred by FSC CT in performing its obligations under the administration agreement, including a portion of the rent at market rates and the compensation of our chief financial officer and chief compliance officer and their respective staffs. We utilize office space that is leased by our administrator from an affiliate controlled by the chief executive officer of our investment adviser and administrator, Mr. Tannenbaum. We also utilize additional office space that is leased by affiliates of our investment adviser and administrator in Chicago, IL and San Francisco, CA. Any reimbursement for a portion of the rent at these locations is at cost with no profit to, or markup by, FSC CT.
The administration agreement may be terminated by either party without penalty upon no fewer than 60 days' written notice to the other.
During the three and six months ended
March 31, 2016
and
March 31, 2015
, we incurred expenses of $0.4 million and $0.6 million, respectively, under the administration agreement.
During the three and six months ended
March 31, 2015
, we incurred expenses of $0.3 million and $0.6 million, respectively, under the administration agreement.
We have also entered into a license agreement with Fifth Street Capital LLC pursuant to which Fifth Street Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name "Fifth Street." Under this agreement, we will have a right to use the "Fifth Street" name for so long as Fifth Street Management LLC 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 "Fifth Street" name. Fifth Street Capital LLC is controlled by Mr. Tannenbaum, our Investment Adviser's chief executive officer.
Recent Developments
On May 6, 2016, our Board of Directors declared the following distributions:
|
|
•
|
$0.075 per share, payable on June 30, 2016 to stockholders of record on June 15, 2016;
|
|
|
•
|
$0.075 per share, payable on July 29, 2016 to stockholders of record on July 15, 2016; and
|
|
|
•
|
$0.075 per share, payable on August 31, 2016 to stockholders of record on August 15, 2016.
|
On April 11, 2016, we restructured our debt investment in Ameritox Ltd. As a part of the restructuring, we exchanged our debt securities for debt and equity securities in the restructured entity. The fair value of our debt securities exchanged on the restructuring date approximated their fair value as of March 31, 2016.
Recently Issued Accounting Standards
See Note 3 to the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on our consolidated financial statements.