UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended June 30, 2019

 

OR

 

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

 

COMMISSION FILE NUMBER: 1-36447

 

ALCENTRA CAPITAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Maryland 46-2961489
(State or other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

 

200 Park Avenue, 7 th Floor  
New York, NY 10166
(Address of Principal Executive Offices) (Zip Code)

 

(212) 922-8240

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, par value $0.001 per share ABDC The NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No ¨

 

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

 

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

 

Large accelerated filer ¨ Accelerated filer x
       
Non-accelerated filer ¨ Smaller reporting company ¨
       
Emerging growth company x    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   x

 

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

 

There were 12,875,566 shares of the Registrant’s common stock outstanding as of August 7, 2019.

 

 

 

     

 

  

ALCENTRA CAPITAL CORPORATION

TABLE OF CONTENTS

 

  Page
   
PART I. FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
   
Consolidated Financial Statements of Alcentra Capital Corporation:  
   
Consolidated Statements of Assets and Liabilities as of June 30, 2019 (unaudited) and December 31, 2018 3
   
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2019 (unaudited) and 2018 (unaudited) 4
   
Consolidated Statements of Changes in Net Assets for the Three and Six Months Ended June 30, 2019 (unaudited) and 2018 (unaudited) 5
   
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 (unaudited) and 2018 (unaudited) 7
   
Consolidated Schedule of Investments as of June 30, 2019 (unaudited) and December 31, 2018 8
   
Notes to Unaudited Consolidated Financial Statements 16
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 41
   
Item 4. Controls and Procedures 41
   
PART II. OTHER INFORMATION 42
   
Item 1. Legal Proceedings 42
   
Item 1A. Risk Factors 42
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 43
   
Item 3. Defaults Upon Senior Securities 44
   
Item 4. Mine Safety Disclosures 44
   
Item 5. Other Information 44
   
Item 6. Exhibits 44
   
SIGNATURES 45

 

  2  

 

 

Alcentra Capital Corporation and Subsidiary 

Consolidated Statements of Assets and Liabilities

 

    As of
June 30, 2019
(Unaudited)
    As of
December 31,
2018
 
Assets                
Portfolio investments, at fair value                
Non-controlled, non-affiliated investments, at fair value (cost of $213,022,113 and $212,280,172, respectively)   $ 204,633,762     $ 205,411,779  
Non-controlled, affiliated investments, at fair value (cost of $26,581,387 and $26,385,612, respectively)     14,573,438       12,980,016  
Controlled, affiliated investments, at fair value (cost $0 and $15,212,562, respectively)           16,406,021  
Cash     7,796,536       11,049,499  
Dividends and interest receivable     1,404,187       454,883  
Receivable for investments sold     2,674,457       644,733  
Deferred financing costs     1,066,348       1,366,393  
Deferred tax asset     4,263,462       5,385,694  
Prepaid expenses and other assets     354,583       79,410  
Total Assets   $ 236,766,773     $ 253,778,428  
                 
Liabilities                
Credit facility payable   $ 26,565,008     $ 28,536,441  
Notes payable (net of deferred note offering costs of $642,731 and $855,433, respectively)     54,357,269       54,144,567  
Payable for investments purchased     5,925,000       18,550,000  
Other accrued expenses and liabilities     251,183       535,096  
Directors’ fees payable     197,154       36,125  
Professional fees payable     886,641       554,173  
Interest and credit facility expense payable     1,176,846       1,069,139  
Management fee payable     701,305       765,659  
Income-based incentive fees payable     198,805       890,796  
Distributions payable     4,248,937       2,433,102  
Unearned structuring fee revenue           81,643  
Income tax liability     320,630       379,155  
Total Liabilities     94,828,778       107,975,896  
                 
Commitments and Contingencies (Note 12)                
                 
Net Assets                
Common stock, par value $0.001 per share (100,000,000 shares authorized, 12,875,566 and 13,105,295 shares issued and outstanding, respectively)     12,876       13,105  
Additional paid-in capital     197,118,476       198,594,662  
Distributable earnings (accumulated loss)     (55,193,357 )     (52,805,235 )
Total Net Assets     141,937,995       145,802,532  
Total Liabilities and Net Assets   $ 236,766,773     $ 253,778,428  
                 
Net Asset Value Per Share   $ 11.02     $ 11.13  

 

See notes to unaudited consolidated financial statements 

 

  3  

 

 

Alcentra Capital Corporation and Subsidiary  

Consolidated Statements of Operations

 

    For the three months
ended
June 30, 2019
(Unaudited)
    For the three months
ended
June 30, 2018
(Unaudited)
    For the six months
ended
June 30, 2019
(Unaudited)
    For the six months
ended
June 30, 2018
(Unaudited)
 
Investment Income:                                
From non-controlled, non-affiliated investments:                                
Interest income from portfolio investments   $ 5,753,089     $ 5,865,711     $ 11,559,398     $ 11,608,097  
Paid-in-kind interest income from portfolio investments     28,797       45,481       113,301       245,131  
Other income from portfolio investments     177,118       611,812       284,875       2,119,116  
Dividend income from portfolio investments           30,756             61,512  
From non-controlled, affiliated investments:                                
Interest income from portfolio investments     41,762       129,080       78,241       206,533  
Paid in-kind income from portfolio investments     93,190       90,004       189,603       213,130  
Other income from portfolio investments                        
From controlled, affiliated investments:                                
Interest income from portfolio investments           481,106       208,538       981,996  
Paid in-kind income from portfolio investments                        
Other income from portfolio investments     45,979             133,095        
Total investment income     6,139,935       7,253,950       12,567,051       15,435,515  
                                 
Expenses:                                
Management fees     841,566       1,036,122       1,707,184       2,270,985  
Income-based incentive fees/(reversal of accruals)     (204,867 )           (691,991 )      
Professional fees     774,386       379,082       1,399,615       733,152  
Valuation services     86,250       (10,038 )     157,500       53,933  
Interest and credit facility expense     1,322,878       1,745,485       2,740,328       3,440,372  
Amortization of deferred financing costs     206,429       103,570       412,545       207,551  
Directors’ fees     215,000       116,826       374,676       213,028  
Insurance expense     91,492       56,519       147,327       112,507  
Amortization of deferred note offering costs     109,340       119,267       242,703       245,961  
Consulting fees     133,315       176,702       244,916       481,740  
Excise tax     (78,019 )     365,308       390,413       365,308  
Other expenses     251,851       (209,200 )     314,299       160,511  
Total expenses     3,749,621       3,879,643       7,439,515       8,285,048  
Waiver of management fees     (140,261 )     (109,281 )     (284,531 )     (109,281 )
Net expenses     3,609,360       3,770,362       7,154,984       8,175,767  
Net investment income and foreign currency transactions     2,530,575       3,483,588       5,412,067       7,259,748  
                                 
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) From Portfolio Investments                                
Net realized gain (loss) on:                                
Non-controlled, non-affiliated investments     1,604,042       (10,108,277 )     (111,717 )     (10,123,092 )
Non-controlled, affiliated investments           (10,167,517 )           (10,167,517 )
Controlled, affiliated investments                 1,193,459        
Foreign currency transactions     25,078             65,494        
Net realized gain (loss) from portfolio investments and foreign currency transactions     1,629,120       (20,275,794 )     1,147,236       (20,290,609 )
Net change in unrealized appreciation (depreciation) on:                                
Non-controlled, non-affiliated investments     (1,339,551 )     4,213,571       (1,519,958 )     3,880,145  
Non-controlled, affiliated investments     324,231       9,319,907       1,397,647       9,212,533  
Controlled, affiliated investments                 (1,193,459 )     220,904  
Foreign currency translation     (127,563 )           (11,628 )      
Net change in unrealized appreciation (depreciation) from portfolio investments and foreign currency translation     (1,142,883 )     13,533,478       (1,327,398 )     13,313,582  
Benefit (Provision) for income taxes on unrealized gain (loss) on investments     (871,877 )     1,019,717       (1,124,675 )     1,017,228  
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments     (385,640 )     (5,722,599 )     (1,304,837 )     (5,959,799 )
Net Increase (Decrease) in Net Assets Resulting from Operations   $ 2,144,935     $ (2,239,011 )   $ 4,107,230     $ 1,299,949  
                                 
Basic and diluted:                                
Net investment income per share   $ 0.20     $ 0.25     $ 0.42     $ 0.52  
Earnings (loss) per share   $ 0.17     $ (0.16 )   $ 0.32     $ 0.09  
Weighted Average Shares of Common Stock Outstanding     12,875,566       13,725,423       12,890,887       13,960,729  

 

See notes to unaudited consolidated financial statements 

 

  4  

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

(Unaudited)

 

    Common Stock                    
    Shares     Par Amount     Paid in Capital
in
Excess of Par
    Distributable
Earnings
    Total
Net Assets
 
Balance at March 31, 2018     14,010,374     $ 14,010     $ 205,060,309     $ (47,891,919 )   $ 157,182,400  
Increase (decrease) in net assets resulting from operations                                        
Net investment income                       3,483,588       3,483,588  
Net realized gain (loss) on investments and foreign currency transactions                       (20,275,794 )     (20,275,794 )
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation                       13,533,478       13,533,478  
Benefit (Provision) for income taxes on unrealized gain (loss) on investments                       1,019,717       1,019,717  
Shareholder distributions:                                        
Repurchase of common stock     (427,623 )     (427 )     (2,898,627 )           (2,899,054 )
Distributions to shareholders                       (2,449,591 )     (2,449,591 )
Total increase (decrease) for the three months ended June 30, 2018     (427,623 )     (427 )     (2,898,627 )     (4,688,602 )     (7,587,656 )
Balance at June 30, 2018     13,582,751     $ 13,583     $ 202,161,682     $ (52,580,521 )   $ 149,594,744  
Dividends declared per common share         $     $     $ 0.18     $ 0.18  
                                         
Balance at December 31, 2017     14,222,945     $ 14,223     $ 206,570,701     $ (48,870,749 )   $ 157,714,175  
Increase (decrease) in net assets resulting from operations                                        
Net investment income                       7,259,748       7,259,748  
Net realized gain (loss) on investments and foreign currency transactions                       (20,290,609 )     (20,290,609 )
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation                       13,313,582       13,313,582  
Benefit (Provision) for income taxes on unrealized gain (loss) on investments                       1,017,228       1,017,228  
Shareholder distributions:                                        
Repurchase of common stock     (640,194 )     (640 )     (4,409,019 )           (4,409,659 )
Distributions to shareholders                       (5,009,721 )     (5,009,721 )
Total increase (decrease) for the six months ended  June 30, 2018     (640,194 )     (640 )     (4,409,019 )     (3,709,772 )     (8,119,431 )
Balance at June 30, 2018     13,582,751     $ 13,583     $ 202,161,682     $ (52,580,521 )   $ 149,594,744  
Dividends declared per common share         $     $     $ 0.36     $ 0.36  

  

See notes to unaudited consolidated financial statements 

 

  5  

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Statements of Changes in Net Assets

(Unaudited)

 

    Common Stock                    
    Shares     Par Amount     Paid in Capital
in
Excess of Par
    Distributable
Earnings
    Total
Net Assets
 
Balance at March 31, 2019     12,875,566     $ 12,876     $ 197,118,476     $ (53,276,042 )   $ 143,855,310  
Increase (decrease) in net assets resulting from operations                                        
Net investment income                       2,530,575       2,530,575  
Net realized gain (loss) on investments and foreign currency transactions                       1,629,120       1,629,120  
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation                       (1,142,883 )     (1,142,883 )
Benefit (Provision) for income taxes on unrealized gain (loss) on investments                       (871,877 )     (871,877 )
Shareholder distributions:                                        
Repurchase of common stock                              
Distributions to shareholders                       (4,062,250 )     (4,062,250 )
Total increase (decrease) for the three months ended June 30, 2019                       (1,917,315 )     (1,917,315 )
Balance at June 30, 2019     12,875,566     $ 12,876     $ 197,118,476     $ (55,193,357 )   $ 141,937,995  
Dividends declared per common share         $     $     $ 0.33     $ 0.33  
                                         
Balance at December 31, 2018     13,105,295     $ 13,105     $ 198,594,662     $ (52,805,235 )   $ 145,802,532  
Increase (decrease) in net assets resulting from operations                                        
Net investment income                       5,412,067       5,412,067  
Net realized gain (loss) on investments and foreign currency transactions                       1,147,236       1,147,236  
Net change in unrealized appreciation/(depreciation) on investments and foreign currency translation                       (1,327,398 )     (1,327,398 )
Benefit (Provision) for income taxes on unrealized gain (loss) on investments                       (1,124,675 )     (1,124,675 )
Shareholder distributions:                                        
Repurchase of common stock     (229,729 )     (229 )     (1,476,186 )           (1,476,415 )
Distributions to shareholders                       (6,495,352 )     (6,495,352 )
Total increase (decrease) for the six months ended  June 30, 2019     (229,729 )     (229 )     (1,476,186 )     (2,388,122 )     (3,864,537 )
Balance at June 30, 2019     12,875,566     $ 12,876     $ 197,118,476     $ (55,193,357 )   $ 141,937,995  
Dividends declared per common share         $     $     $ 0.51     $ 0.51  

  

See notes to unaudited consolidated financial statements 

 

  6  

 

 

Alcentra Capital Corporation and Subsidiary 

Consolidated Statements of Cash Flows

 

    For the six months
ended June 30, 2019
(Unaudited)
    For the six months
ended June 30, 2018
(Unaudited)
 
Cash Flows from Operating Activities                
Net increase/(decrease) in net assets resulting from operations   $ 4,107,230     $ 1,299,949  
                 
Adjustments to reconcile net increase/(decrease) in net assets resulting from operations to net cash provided by (used in) operating activities:                
Net realized (gain) loss from portfolio investments     (1,081,742 )     20,290,609  
Net change in unrealized (appreciation) depreciation of portfolio investments     1,315,770       (13,313,582 )
Deferred tax asset     1,122,232       (1,020,150 )
Paid in-kind interest income from portfolio investments     (302,904 )     (458,261 )
Accretion of discount on debt securities     (998,069 )     (342,245 )
Purchases of portfolio investments     (58,735,969 )     (44,048,803 )
Net proceeds from sales/return of capital of portfolio investments     75,393,530       79,266,967  
Amortization of deferred financing costs     412,545       207,551  
Amortization of deferred note offering costs     242,703       245,961  
(Increase) decrease in operating assets:                
Dividends and interest receivable     (949,304 )     (772,871 )
Receivable for investments sold     (2,029,724 )      
Income tax asset           104,089  
Prepaid expenses and other assets     (275,173 )     (129,557 )
Increase (decrease) in operating liabilities:                
Payable for investments purchased     (12,625,000 )      
Other accrued expenses and liabilities     (283,913 )     76,131  
Directors' fees payable     161,029       (32,792 )
Professional fees payable     332,468       94,867  
Interest and credit facility expense payable     107,707       (90,618 )
Management fee payable     (64,354 )     (338,331 )
Income-based incentive fees payable     (691,991 )      
Unearned structuring fee revenue     (81,643 )     (393,973 )
Income tax liability     (58,525 )      
Net cash provided by (used in) operating activities     5,016,903       40,644,941  
                 
Cash Flows from Financing Activities                
Financing costs paid     (112,500 )     (112,501 )
Offering costs paid     (30,001 )     (30,001 )
Proceeds from credit facility payable     51,606,335       21,350,000  
Repayments of credit facility payable     (53,564,218 )     (52,500,000 )
Distributions paid to shareholders     (4,679,517 )     (6,121,435 )
Repurchase of common stock     (1,476,415 )     (4,409,659 )
Net cash provided by (used in) financing activities     (8,256,316 )     (41,823,596 )
Effect of exchange rate changes on cash denominated in foreign currency     (13,550 )      
Increase (decrease) in cash and cash equivalents     (3,252,963 )     (1,178,655 )
Cash at beginning of period     11,049,499       13,882,956  
Cash and Cash Equivalents at End of Period   $ 7,796,536     $ 12,704,301  
                 
Supplemental and non-cash financing activities:                
Cash paid during the period for interest   $ 2,632,621     $ 3,530,990  
Accrued offering costs   $ 2,485     $ 2,485  
Accrued distributions payable   $ 4,248,937     $ 2,449,591  

 

See notes to unaudited consolidated financial statements 

 

  7  

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of June 30, 2019

(Unaudited)

 

Company(+) ***   Industry   Spread
Above
Index
  Base Rate
Floor
    Interest
Rate
    Maturity
Date
  No. Shares/
Principal
 Amount
    Cost (1)     Fair Value     % of Net
Assets
 
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 144.17%
Senior Secured - First Lien — 95.48%                              
Aegis Sciences Corporation (2),(3)   Consumer Services   LIBOR + 5.50%     1.00 %     8.24 %   5/9/2025     7,441,263     $ 7,280,818     $ 7,162,215       5.05 %
Black Diamond Oilfield Rentals, LLC (2),(4)   Oil & Gas Services   LIBOR + 6.50%     1.00 %     9.09 %   12/17/2020     10,955,419       10,955,419       10,955,419       7.72 %
Cambium Learning Group, Inc. (2),(4)   Technology & Telecom   LIBOR + 4.50%             7.08 %   12/18/2025     1,985,013       1,891,781       1,957,718       1.38 %
CGGR Operations Holdings Corporation (2),(4),(11)   Business Services   LIBOR + 7.0%     1.00 %     9.59 %   9/30/2022     3,136,418       3,108,892       3,136,418       2.21 %
Clanwilliam Group Ltd. (2),(4),(5)   Technology & Telecom   Euribor + 7.00%             7.00 %   11/8/2025   5,922,000       6,570,730       6,559,381       4.62 %
Digital Room Holdings, Inc. (2),(4)   Business Services   LIBOR + 5.00%             7.52 %   5/21/2026     7,000,000       6,895,000       6,895,950       4.86 %
Envocore Holding, LLC (2),(4),(6)   Industrial Services   LIBOR + 10.25%     1.00 %     12.85 %   6/30/2022     17,694,444       17,656,113       16,101,944       11.34 %
Epic Healthcare Staffing Intermediate Holdco, LLC (2),(4),(5),(7)   Business Services   LIBOR + 8.25%     1.00 %     10.84 %   10/19/2022     10,840,396       10,807,734       10,840,395       7.64 %
GGC Aperio Holdings, L.P. (2),(4)   Financial Services   LIBOR + 5.00%             7.59 %   10/26/2024     8,662,500       8,244,193       8,619,188       6.07 %
Healthcare Associates of Texas, LLC (2),(4),(5)   Healthcare Services   LIBOR + 8.25%     1.00 %     10.84 %   11/8/2022     20,445,329       20,445,328       20,445,329       14.40 %
Impact Group, LLC (2),(4)   Consumer Services   LIBOR + 6.50%     1.00 %     9.10 %   6/27/2023     13,905,486       13,858,297       13,523,085       9.53 %
Institutional Shareholder Services, Inc. (2),(4)   Business Services   LIBOR + 4.50%             7.10 %   3/5/2026     2,992,500       2,963,796       2,963,809       2.09 %
Manna Pro Products, LLC (2),(4),(5)   Consumer Services   LIBOR + 6.00%     1.00 %     8.44 %   12/8/2023     7,404,645       7,328,732       7,330,600       5.16 %
Palmetto Moon LLC (4)   Retail   11.5% Cash, 2.5% PIK             14.00 %   10/31/2021     4,397,117       4,382,769       4,265,203       3.00 %
Perforce Software Inc. (2),(4)   High Tech Industries   LIBOR + 4.50%             6.82 %   7/1/2026     5,000,000       4,975,000       4,975,000       3.51 %
Pinstripe Holdings, LLC (2),(4)   Business Services   LIBOR + 6.00%             8.44 %   1/17/2025     9,975,000       9,789,167       9,792,500       6.90 %
Total Senior Secured - First Lien                                 137,153,769       135,524,154       95.48 %
                                                             
Senior Secured - Second Lien — 45.96%                                                  
                                                             
BayMark Health Services, Inc. (2),(4),(5)   Healthcare Services   LIBOR + 8.25%     1.00 %     10.77 %   3/1/2025     8,000,000     $ 7,893,042     $ 8,000,000       5.64 %

 

See notes to unaudited consolidated financial statements

 

  8  

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of June 30, 2019

(Unaudited)

 

Company(+) ***   Industry   Spread
Above
Index
  Base Rate
Floor
    Interest
Rate
    Maturity
Date
  No. Shares/
Principal 
Amount
    Cost (1)     Fair Value     % of Net
Assets
 
Cambium Learning Group, Inc. (2),(4)   Technology & Telecom   LIBOR + 8.50%             11.08 %   12/18/2026     5,000,000     $ 4,710,240     $ 4,716,118       3.32 %
CGGR Operations Holdings Corporation (2),(4),(11)   Business Services   LIBOR + 11.5%     1.00 %     14.09 %   9/30/2023     11,431,579       11,349,077       11,431,578       8.05 %
Institutional Shareholder Services, Inc. (2),(4)   Business Services   LIBOR + 8.50%             11.12 %   3/5/2027     2,000,000       1,942,261       1,942,302       1.37 %
Medsurant Holdings, LLC (4)   High Tech Industries   13.00% Cash             13.00 %   6/30/2020     8,729,396       8,710,483       8,729,396       6.15 %
Perforce Software Inc. (2),(4)   High Tech Industries   LIBOR + 8.00%             10.32 %   7/1/2027     5,000,000       4,850,000       4,950,000       3.49 %
Pharmalogic Holdings Corp. (2),(4)   Healthcare Services   LIBOR + 8.0%             10.44 %   12/11/2023     16,100,000       16,034,637       16,100,000       11.34 %
Sandvine Corporation (2),(4)   Telecommunications   LIBOR + 8.00%             10.44 %   11/2/2026     4,500,000       4,414,967       4,417,330       3.11 %
WeddingWire, Inc. (2),(4)   Consumer Services   LIBOR + 8.25%             10.69 %   12/21/2026     5,000,000       4,952,134       4,952,896       3.49 %
Total Senior Secured - Second Lien           64,856,841       65,239,620       45.96 %
CLO/Structured Credit — 1.29%                              
Goldentree Loan Management US CLO 2 Ltd. (2),(3)   USD CLO   LIBOR + 4.70%             7.06 %   11/28/2030     2,000,000     $ 1,949,886     $ 1,828,490       1.29 %
Total CLO/Structured Credit           1,949,886       1,828,490       1.29 %
Equity/Other — 1.44%                              
                                                             
Envocore Holding, LLC, Preferred Shares (4),(6),(8)   Industrial Services                             1,139,725     $ 1,160,360     $        
IGT,
 Preferred Shares (4),(8)
  Industrial Services   11% PIK             11.00 %   12/10/2024     1,110,922       1,110,922              
 Common Shares (4),(8)                                 44,000       44,000              
 Preferred AA Shares (4),(8)       15% PIK             15.00 %   12/10/2024     326,789       326,790       270,734       0.19 %
                                          1,481,712       270,734       0.19 %
Metal Powder Products, LLC, Common Shares (4),(8)   Industrial Manufacturing                             500,000       500,000       665,961       0.47 %
My Alarm Center, LLC, Common Shares (4),(8)   Security                             129,582       256,793              
 Junior Preferred Shares (4),(8)                                 2,420       2,366,548              

 

See notes to unaudited consolidated financial statements

 

  9  

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of June 30, 2019

(Unaudited)

 

Company(+) ***   Industry   Spread
Above
Index
  Base Rate
Floor
    Interest
Rate
    Maturity
Date
  No. Shares/
Principal
 Amount
    Cost (1)     Fair Value     % of Net
Assets
 
Senior Preferred Shares (4),(8)     8% PIK           8.00 %   7/14/2022     2,998     $ 2,862,059     $ 1,023,603       0.72 %
                                          5,485,400       1,023,603       0.72 %
Palmetto Moon LLC, Common Shares (4),(8)   Retail                             61       434,145       81,200       0.06 %
Total Equity/Other                                     9,061,617       2,041,498       1.44 %
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies             213,022,113       204,633,762       144.17 %
Investments in Non-Controlled, Affiliated Portfolio Companies — 10.27% *                                
                                                             
Senior Subordinated — 0.86%                                                  
                                                             
Battery Solutions, Inc. (4)   Environmental/Recycling Services   12% Cash, 2% PIK             14.00 %   11/6/2021     1,225,019     $ 1,225,019     $ 1,225,020       0.86 %
Southern Technical Institute, Inc. (4),(8)   Education   6% PIK             6.00 %   12/31/2021     3,528,988       3,528,988              
Total Senior Subordinated                               4,754,007       1,225,020       0.86 %
Equity/Other — 9.41%                                                  
                                                             
Battery Solutions, Inc.,
 Class A Units (4),(8),(9)
  Environmental/Recycling Services                             5,000,000     $ 1,058,000     $        
Class E Units (4)         8% PIK             8.00 %   11/6/2021     4,670,546       4,670,546       3,873,517       2.73 %
Class F Units (4),(8)                                   3,333,333                    
                                          5,728,546       3,873,517       2.73 %
Conisus, LLC, Common Shares (4),(8)   Media: Advertising, Printing & Publishing                             4,914,556                    
Preferred Equity (4)         12% PIK             12.00 %         12,677,834       12,677,834       8,679,689       6.12 %
                                          12,677,834       8,679,689       6.12 %
Southern Technical Institute, Inc.,
 Class A Units (4),(8)
  Education                             3,164,063       2,167,000              
Class A1 Units (4),(8),(10)                                   6,000,000                    
                                          2,167,000              
Xpress Global Systems, LLC, Class B Units (4),(8)   Transportation Logistics                             12,544       1,254,000       795,212       0.56 %
Total Equity/Other                               21,827,380       13,348,418       9.41 %
Total Investments in Non-Controlled, Affiliated Portfolio Companies           26,581,387       14,573,438       10.27 %
Total Investments                                   239,603,500       219,207,200       154.44 %
Liabilities In Excess Of Other Assets                             (77,269,205 )     (54.44 ) %
Net Assets                                               $ 141,937,995       100.00 %

 

See notes to unaudited consolidated financial statements

 

  10  

 

 

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of June 30, 2019

(Unaudited)

 

(+) All investments are qualifying assets under Section 55(a) of the 1940 Act, with the exception of the Company’s investments in Goldentree Loan Management US CLO 2 Ltd., Clanwilliam Group Ltd., and CGGR Operations Holdings Corporation. As of June 30, 2019, non-qualifying assets represented 10.5% of the Company’s total assets, at fair value.
* Denotes investments in connection with which the Company is deemed to be an “Affiliated Person” under the 1940 Act because it owns 5% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the six months ended June 30, 2019 in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to Control) are as follows:

 

Name of Issuers   Fair Value at
December 31,
2018
    Gross
Additions/
(Gross
Reductions)
    Transfers
In/Out
    Change in
Unrealized
Appreciation
(Depreciation)
    Realized
Gain (Loss)
    Fair Value at
June 30,
2019
    Interest/
Dividend/
Other Income
 
Battery Solutions, Inc.   $ 5,699,791     $ 195,775     $ -     $ (797,029 )   $ -     $ 5,098,537     $ 267,844  
Conisus, LLC     6,554,225       -       -       2,125,464       -       8,679,689       -  
Southern Technical Institute, Inc.     -       -       -       -       -       -       -  
Xpress Global Systems, LLC     726,000       -       -       69,212       -       795,212       -  
    $ 12,980,016     $ 195,775     $ -     $ 1,397,647     $ -     $ 14,573,438     $ 267,844  

 

** Denotes investments in connection with which the Company is deemed, under the 1940 Act, to be both an “Affiliated Person” and “Control” this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the six months ended June 30, 2019 in which the issuer was both an Affiliated Person of, and deemed to be Controlled by, the Company are as follows:

 

Name of Issuers   Fair Value at
December 31,
2018
    Gross
Additions/
(Gross
Reductions)
    Transfers
In/Out
    Change in
Unrealized
Appreciation
(Depreciation)
    Realized
Gain (Loss)
    Fair Value at
June 30,
2019
    Interest/
Dividend/
Other Income
 
FST Technical Services, LLC (12)   $ 16,406,021     $ (16,406,021 )   $ -     $ (1,193,459 )   $ 1,193,459     $ -     $ 341,633  
    $ 16,406,021     $ (16,406,021 )   $ -     $ (1,193,459 )   $ 1,193,459     $ -     $ 341,633  

 

*** Pledged as collateral under the Credit Facility with ING Capital LLC.
(1) The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.
(2) The principal balance outstanding for all floating rate loans is indexed to LIBOR, Euribor or 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, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.
(3) Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3).
(4) Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3).
(5) The investment has an unfunded commitment as of June 30, 2019 which is excluded from the presentation (see Note 12).
(6) The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC.
(7) The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC.
(8) Non-income producing security.
(9) The Company has represented its ownership in Class A units in 919 BSI SPV, LLC (70.7% of that entity), which in turn owns 70,700 Class A Shares of Battery Solutions, LLC (representing 18.16% of ownership of Battery Solutions, LLC).
(10) Class A1 units of 1,764,720 are subject to a deferred purchase agreement equal to 95% of future proceeds less $1.00.
(11) CGGR Holdings’ Tranche B Loan was reclassified to a second lien investment as a result of a sale of a portion of the Tranche A Loan to an unaffiliated third party.
(12) FST Technical Services, LLC was sold on February 8, 2019.

 

Abbreviation Legend

LIBOR - London Inter-bank Offered Rate
PIK - Payment-In-Kind

 

See notes to unaudited consolidated financial statements

 

  11  

 

   

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments

As of December 31, 2018

 

Company (+)***   Industry   Spread
Above
Index
  Base Rate
Floor
    Interest
Rate
    Maturity
Date
  No. Shares/
Principal
Amount
    Cost (1)     Fair Value     % of Net
Assets
 
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 140.89%
Senior Secured – First Lien — 106.14%                                                
Black Diamond Oilfield Rentals, LLC (2),(3),(15)   Oil & Gas Services   LIBOR +
6.50%
    1.00 %     8.90 %   12/17/2020     11,385,109     $ 11,385,109     $ 11,382,254       7.81 %
Cambium Learning Group,
Inc. (3),(10)
  Technology &
Telecom
  LIBOR +
4.50%
            7.31 %   12/18/2025     4,000,000       3,800,000       3,800,000       2.61 %
CGGR Operations Holdings Corporation (2),(3),(8)   Business Services   LIBOR +
11.5%
    1.00 %     13.90 %   9/30/2023     13,431,579       13,324,053       13,431,579       9.21 %
        LIBOR +
7.0%
    1.00 %     9.40 %   9/30/2022     9,468,421       9,397,345       9,468,421       6.49 %
                                          22,721,398       22,900,000       15.70 %
Champion ONE (2),(3)   Technology &
Telecom
  LIBOR +
10.5%
    1.00 %     12.90 %   3/17/2022     5,884,230       5,842,683       5,884,230       4.04 %
Clanwilliam Group Ltd. (2),(3),(8)   Technology &
Telecom
  Euribor +
7.00%
            7.00 %   11/8/2025   5,724,000       6,344,310       6,347,088       4.35 %
Envocore Holding, LLC (2),(3),(7)   Industrial Services   LIBOR +
9.25%
    1.00 %     11.65 %   6/30/2022     18,500,000       18,453,344       18,500,000       12.69 %
Epic Healthcare Staffing Intermediate Holdco, LLC (2),(3),(8),(9)   Business Services   LIBOR +
8.25%
    1.00 %     10.65 %   10/19/2022     13,430,114       13,392,406       13,430,114       9.21 %
Healthcare Associates of Texas, LLC (2),(3),(8)   Healthcare Services   LIBOR +
8.0%
    1.00 %     10.40 %   11/8/2022     20,578,816       20,578,816       20,578,816       14.11 %
Impact Group, LLC (2),(3)   Consumer Services   LIBOR +
6.50%
    1.00 %     9.21 %   6/27/2023     19,965,214       19,965,214       19,965,214       13.69 %
Lugano Diamonds & Jewelry, Inc. (2),(3)   Retail   LIBOR +
10.00%
    0.75 %     12.40 %   10/24/2021     6,750,000       6,229,503       6,365,358       4.37 %
Manna Pro Products,
LLC (2),(3),(8)
  Consumer Services   LIBOR +
6.0%
    1.00 %     8.31 %   12/8/2023     1,322,485       1,316,153       1,322,485       0.91 %
Palmetto Moon LLC (2)   Retail   11.5%
Cash, 1.0%
PIK
            12.50 %   10/31/2021     4,737,622       4,720,936       4,648,350       3.19 %
Pinstripe Holdings, LLC (2),(3)   Business Services   LIBOR +
6.00%
            8.81 %   1/17/2025     10,000,000       9,800,000       9,800,000       6.72 %
Superior Controls, Inc. (2),(3),(8)   Wholesale/
Distribution
  LIBOR +
7.25%
    1.00 %     9.65 %   3/22/2021     9,825,000       9,789,394       9,825,000       6.74 %
Total Senior Secured – First Lien                                   154,339,266       154,748,909       106.14 %
Senior Secured – Second Lien — 29.18%                                                    
BayMark Health Services,
Inc. (2),(3)
  Healthcare Services   LIBOR +
8.25%
    1.00 %     10.60 %   3/1/2025     7,000,000       6,938,172       7,000,000       4.80 %
Medsurant Holdings, LLC (2)   High Tech Industries   13.00% Cash             13.00 %   6/30/2020     8,729,396       8,701,223       8,729,396       5.99 %
Pharmalogic Holdings
Corp. (2),(3),(8)
  Healthcare Services   LIBOR +
8.0%
            10.34 %   12/11/2023     11,340,000       11,267,485       11,340,000       7.77 %
Sandvine Corporation (2),(3)   Telecommunications   LIBOR +
8.00%
            10.35 %   11/2/2026     4,500,000       4,410,000       4,410,000       3.02 %
VVC Holding Corp. (2),(3),(5)   Healthcare Services   LIBOR +
8.13%
    1.00 %     10.56 %   7/9/2026     6,000,000       5,943,433       6,120,000       4.20 %
WeddingWire, Inc. (2),(3)   Consumer Services   LIBOR +
8.25%
            11.06 %   12/21/2026     5,000,000       4,950,000       4,950,000       3.40 %
Total Senior Secured – Second Lien                                 42,210,313       42,549,396       29.18 %
CLO/Structured Credit — 1.20%                                                      
Goldentree Loan Management US
CLO 2 Ltd. (3),(10)
  USD CLO   LIBOR +
4.70%
            7.06 %   11/28/2030     2,000,000     $ 1,948,058     $ 1,739,600       1.20 %
Total CLO/Structured Credit                                   1,948,058       1,739,600       1.20 %

 

See notes to consolidated financial statements

 

  12  

 

   

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of December 31, 2018

Company (+)***   Industry   Spread
Above
Index
  Base Rate
Floor
    Interest
Rate
    Maturity
Date
    No. Shares/
Principal
Amount
    Cost (1)     Fair Value     % of Net
Assets
 
Equity/Other — 4.37%                                                            
Champion ONE, Common Shares (2),(4)   Technology &
Telecom
                      11,250     $ 1,125,000     $ 908,410       0.62 %
Envocore Holding, LLC, Preferred
Shares (2),(4),(6),(7)
  Industrial Services                                 1,139,725       1,160,360       788,000       0.54 %
IGT, Preferred Shares (2),(4)   Industrial Services   11% PIK             11.00 %     12/10/2024       1,110,922       1,110,922              
Common Shares (2),(4)                                     44,000       44,000              
Preferred AA Shares (2),(4)       15% PIK             15.00 %     12/10/2024       326,789       326,789       271,789       0.19 %
                                              1,481,711       271,789       0.19 %
Lugano Diamonds & Jewelry, Inc.,
Warrants (2),(4)
  Retail                                 666,615       666,615       1,000,000       0.69 %
Metal Powder Products, LLC, Common Shares (2),(4)   Industrial
Manufacturing
                                500,000       500,000       666,047       0.46 %
My Alarm Center, LLC, Common
Shares (2),(4)
  Security                                 129,582       256,793              
Junior Preferred Shares (2),(4)                                     2,420       2,366,549              
Senior Preferred Shares (2),(4)       8% PIK             8.00 %     7/14/2022       2,998       2,862,059       1,023,999       0.70 %
                                              5,485,401       1,023,999       0.70 %
Palmetto Moon LLC, Common Shares (2),(4)   Retail                                 61       434,145       106,000       0.07 %
Superior Controls, Inc., Preferred Shares (2),(4)   Wholesale/
Distribution
                                400,000       400,000       789,192       0.54 %
Tunnel Hill, Class B Common Units (2),(4),(11),(14)   Waste Services                                 98,418       2,529,303       820,437       0.56 %
Total Equity/Other                                             13,782,535       6,373,874       4.37 %
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies               212,280,172       205,411,779       140.89 %
Investments in Non-Controlled, Affiliated Portfolio Companies — 8.90%*                        
Senior Subordinated — 0.83%                                                          
Battery Solutions, Inc. (2)   Environmental/
Recycling Services
  12% Cash,
2% PIK
            14.00 %     11/6/2021       1,212,773     $ 1,212,773     $ 1,212,774       0.83 %
Southern Technical Institute, Inc. (2),(4)   Education   6% PIK             6.00 %     12/31/2021       3,528,988       3,528,988              
Total Senior Subordinated                                     4,741,761       1,212,774       0.83 %
Equity/Other — 8.07%                                                                
Battery Solutions, Inc., Class A Units (2),(4),(12)   Environmental/
Recycling Services
                                5,000,000     $ 1,058,000     $        
Class E Units (2)       8% PIK             8.00 %     11/6/2021       4,487,017       4,487,017       4,487,017       3.08 %
Class F Units (2),(4)                                     3,333,333                    
                                              5,545,017       4,487,017       3.08 %
Conisus, LLC, Common Shares (2),(4)   Media: Advertising,
Printing &
Publishing
                                4,914,556                    
Preferred Equity (2)       12% PIK             12.00 %             12,677,834       12,677,834       6,554,225       4.49 %
                                              12,677,834       6,554,225       4.49 %
Southern Technical Institute, Inc., Class A Units (2),(4)   Education                                 3,164,063       2,167,000              
Class A1 Units (2),(4),(13)                                     6,000,000                    
                                              2,167,000              
Xpress Global Systems, LLC, Class B Units (2),(4)   Transportation Logistics                                 12,544       1,254,000       726,000       0.50 %
Total Equity/Other                                             21,643,851       11,767,242       8.07 %
Total Investments in Non-Controlled, Affiliated Portfolio Companies                 26,385,612       12,980,016       8.90 %

 

See notes to consolidated financial statements

 

  13  

 

  

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of December 31, 2018

Company (+)***   Industry   Spread
Above
Index
  Base Rate
Floor
    Interest
Rate
    Maturity
Date
  No. Shares/
Principal
Amount
    Cost (1)     Fair Value     % of Net
Assets
 
Investments in Controlled, Affiliated Portfolio Companies — 11.25%**                              
Senior Secured – First Lien — 9.19%                                                
FST Technical Services, LLC (2)   Technology &
Telecom
  14% Cash           14.00 %   6/30/2019     13,406,020     $ 13,406,020     $ 13,406,020       9.19 %
Total Senior Secured – First Lien                                     13,406,020       13,406,020       9.19 %
Equity/Other — 2.06%                                                            
FST Technical Services, LLC, Class B Units (2),(4)   Technology &
Telecom
  9% PIK             9.00 %         1,750,000     $ 1,806,542     $ 3,000,001       2.06 %
Total Equity/Other                                         1,806,542       3,000,001       2.06 %
Total Investments in Controlled, Affiliated Portfolio Companies                   15,212,562       16,406,021       11.25 %
Total Investments                                         253,878,346       234,797,816       161.04 %
Liabilities In Excess Of Other Assets                                   (88,802,284 )     (61.04 )%
Net Assets                                               $ 145,802,532       100.00 %

 

 

 

(+) All investments are qualifying assets under Section 55(a) of the 1940 Act, with the exception of the Company’s investments in Goldentree Loan Management US CLO 2 Ltd., Clanwilliam Group Ltd., and CGGR Operations Holdings Corporation. As of December 31, 2018, non-qualifying assets represented 13.2 % of the Company’s total assets, at fair value.

 

* Denotes investments in connection with which the Company is deemed to be an “Affiliated Person” under the 1940 Act because it owns 5% or more of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the year ended December 31, 2018 in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to Control) are as follows:

  

Name of Issuers   Fair Value at
December 31,
2017
    Gross Additions/
(Gross Reductions)
    Transfers
In/Out
    Change in
Unrealized
Appreciation
(Depreciation)
    Realized
Gain (Loss)
    Fair Value at
December 31
2018
    Interest/
Dividend/
Other Income
 
Battery Solutions, Inc.   $ 7,820,167     $ (843,377 )   $     $ (1,276,999 )   $     $ 5,699,791     $ 550,223  
Conisus, LLC     6,678,442                   (124,217 )           6,554,225        
Show Media, Inc.     1                       7,900,820       (7,900,821 )              
Southern Technical Institute, Inc.     1                   10,167,528       (10,167,529 )            
Xpress Global Systems, LLC     5,474,294       38,166             1,689,002       (6,475,462 )     726,000       162,603  
    $ 19,972,905     $ (805,211 )   $     $ 18,356,134     $ (24,543,812 )   $ 12,980,016     $ 712,826  

 

** Denotes investments in connection with which the Company is deemed, under the 1940 Act, to be both an “Affiliated Person” and “Control” this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities or it has the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Transactions as of and during the year ended December 31, 2018 in which the issuer was both an Affiliated Person of, and deemed to be Controlled by, the Company are as follows:

 

Name of Issuers   Fair value at
December 31,
2017
    Gross Additions/
(Gross Reductions)
    Transfers
In/Out
    Change in
Unrealized
Appreciation
(Depreciation)
    Realized
Gain (Loss)
    Fair Value at
December 31
2018
    Interest/
Dividend/
Other Income
 
FST Technical Services, LLC   $ 15,256,237     $ (593,739 )   $     $ 1,743,523     $     $ 16,406,021     $ 1,940,389  
    $ 15,256,237     $ (593,739 )   $     $ 1,743,523     $     $ 16,406,021     $ 1,940,389  

 

*** Pledged as collateral under the Credit Facility with ING Capital LLC.

 

(1) The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities.

 

(2) Security is classified as Level 3 in the Company’s fair value hierarchy (see Note 3).

 

See notes to consolidated financial statements

 

  14  

 

   

Alcentra Capital Corporation and Subsidiary

Consolidated Schedule of Investments (continued)

As of December 31, 2018

 

(3) The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate or Euribor), 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, the Company has provided the applicable margin over LIBOR based on each respective credit agreement.

 

(4) Non-income producing security.

 

(5) The investment is also known as Value-Based Care Solutions Group, or VBC Technologies, or VVC Holding Corp.

 

(6) The investment represents three classes of preferred equity.

 

(7) The investment was formerly known as LRI Holding, Inc. and Integrated Efficiency Solutions, Inc. On March 16, 2018, the name was changed to Envocore Holding, LLC.

 

(8) The investment has an unfunded commitment as of December 31, 2018 which is excluded from the presentation (see Note 12).

 

(9) The investment was formerly known as Cirrus Medical Staffing, Inc. On May 25, 2018, the name was changed to Epic Healthcare Staffing Intermediate Holdco, LLC.

 

(10) Security is classified as Level 2 in the Company’s fair value hierarchy (see Note 3).

 

(11) The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P.

 

(12) The Company has represented its ownership in Class A units in 919 BSI SPV, LLC (70.7% of that entity), which in turn owns 70,700 Class A Shares of Battery Solutions, LLC (representing 18.16% of ownership of Battery Solutions, LLC).

 

(13) Class A1 units of 1,764,720 are subject to a deferred purchase agreement equal to 95% of future proceeds less $1.00.

 

(14) There is a possible escrow receivable up to a maximum of  $2.4 million, which is excluded from the presentation.

 

(15) Includes $2,855 of residual cost from previous tranche of debt, which will roll off in the first quarter of 2019.

 

Abbreviation Legend

 

PIK —  Payment-In-Kind

 

See notes to consolidated financial statements

 

  15  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2019

(Unaudited)

 

1. Organization and Purpose

 

Alcentra Capital Corporation (the “Company” or “Alcentra”) was formed as a Maryland corporation on June 6, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company is an investment company following the accounting and reporting guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services – Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). Alcentra NY, together with certain of its affiliated companies (the "Alcentra Group"), is an indirect, majority owned subsidiary of The Bank of New York Mellon Corporation.

 

The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY and an affiliate of the General Partner, manages the investment activities of the Partnership.

 

On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital provided by Alcentra NY in exchange for 100 shares of Alcentra's common stock, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.

 

On May 14, 2014, Alcentra completed its initial public offering (the “IPO”), at a price of $15.00 per share. Through the IPO the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the IPO to fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.

 

On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes (the “Taxable Subsidiary”). The Taxable Subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.

 

On May 22, 2017, Alcentra Capital Corporation completed an underwritten primary offering of 808,161 shares of its common stock at a public offering price of $13.68 per share for proceeds of approximately $10,853,602, after paying the sales load and offering expenses.

 

The Company’s investment objective is to generate both current income and, to a lesser extent, capital appreciation primarily by making direct investments in middle-market companies, which the Company defines as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA of between $15 million and $75 million, although the Company may make investments in larger or smaller companies and other types of investments. These investments are in the form of first lien, second lien, unitranche and, to a lesser extent given the current credit environment, mezzanine debt. The Company expects to source investments primarily through the network of relationships that the principals of our investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.

 

Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Administration Agreement”) with State Street Bank and Trust Company (the “Administrator”) to provide the Company with financial reporting, post-trade compliance and treasury services.

 

  16  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation – The accompanying financial statements of the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Articles 10 and 12 of Regulation S-X. Accordingly, certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2019.

 

The accounting records of the Company are maintained in United States dollars.

 

Use of Estimates The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.

 

Consolidation In accordance with ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.

 

Portfolio Investment Classification The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation. Under the 1940 Act, “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation. “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.

 

Cash At June 30, 2019, cash balances totaling $7.6 million exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that the risk of loss associated with any uninsured balance is remote.

 

Deferred Financing Costs Deferred financing costs consist of fees and expenses paid in connection with the Credit Facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Credit Facility.

 

Deferred Note Offering Costs Deferred note offering costs consist of fees and expenses paid in connection with the Notes (as defined in Note 9) and are capitalized at the time these fees and expenses are incurred before the issuance commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Notes.

 

Valuation of Portfolio Investments – Portfolio investments are carried at fair value as determined by the Board of Directors (the ‘‘Board’’) of Alcentra .

 

The methodologies used in determining these valuations include:

 

(1) Preferred shares/membership units and common shares/membership units

 

In determining estimated fair value for common shares/membership units and preferred shares, the Company makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Company’s own assumptions and taking into account all material events and circumstances which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:

 

  17  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment;

(ii) pending disposition by the Company of the major portfolio investment; and

(iii) sales prices of recent public or private transactions in identical or comparable investments.

 

One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).

 

(2) Debt

 

The fair value of performing debt investments is typically derived utilizing a market yield analysis. In a market yield analysis, a price is ascribed to each debt investment based upon an assessment of current and expected market yields for similar debt investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with a debt investment. 

 

The Company considers many factors in evaluating the most suitable point within the range of fair values, including, but not limited to, the following:

 

· the portfolio company’s underlying operating performance and any related trends;

 

· the improvement or decline in the underlying credit quality measured on the basis of a loan-to-enterprise value ratio and total outstanding debt to EBITDA ratio; and

 

· changes or issues related to the portfolio company’s customer/supplier concentration, regulatory developments and other portfolio company specific considerations.

 

(3) Warrants

 

Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.

 

Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value.

 

With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter in connection with determining the fair value of the Company's investments for which no market quotation is readily available, as described below:

 

· Alcentra’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment;

 

· preliminary valuation conclusions will then be documented and discussed with the investment committee of the Adviser;

 

· Independent valuation firms engaged by the valuation committee of the Board prepare preliminary valuations on a select portion of the Company's investment portfolio on a quarterly basis and submit the reports to the Board; and

 

· the valuation committee of the Board then reviews these preliminary valuations and makes a recommendation to the Board with respect thereto; and

 

· the Board then discusses valuations and approves the fair value of each such investment in good faith, based on the input of the Adviser, the independent valuation firms and the valuation committee.

 

The valuation committee of the Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board does not have de minimis investments of less than 1% of the Company’s gross assets (up to an aggregate of 10% of the Company’s gross assets) independently reviewed. The Board is ultimately responsible for the valuation of portfolio investments at fair value as approved in good faith pursuant to Alcentra’s valuation policy and a consistently applied valuation process.

 

  18  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company's investments, as determined by the Board, may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the valuations previously assigned.

 

Offering Costs Offering expenses are expensed on the Company’s Consolidated Statements of Operations. Offering expenses consist principally of underwriter’s fee, legal, accounting, printing fees and other related expenses associated with the filing of a registration statement.

 

Paid-In-Capital The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions.

 

Earnings and Net Asset Value Per Share – Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period. Net Asset Value per share is calculated using the number of shares outstanding as of the end of the period.

 

Investments – Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the accretion of original issue discounts. Fees may be charged to the issuer by the Company in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.

 

Original Issue Discount – When the Company receives warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.

 

Interest and Dividend Income – Interest is recorded on the accrual basis to the extent that the Company expects to collect such amounts. The Company accrues paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as an increase in cost basis of investments and as income.

 

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There was one non-accrual investment as of each of June 30, 2019 and December 31, 2018.

 

Other Income – The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment. These fees are non-recurring in nature.

 

Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.

 

Income Taxes – The Company has elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code, and to operate in a manner to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification for taxation as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to its stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.

 

  19  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable Subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements. The Taxable Subsidiary uses the asset and liability method of accounting for income taxes. This method requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between financial accounting bases and tax bases of assets and liabilities. The tax benefits of tax loss carryforwards and other deferred taxes are recorded as an asset to the extent that management assesses the utilization of such assets to be more likely than not. Management routinely assesses the realizability of the deferred income tax assets, and a valuation allowance is recognized if it is determined that deferred income tax assets may not be fully utilized in future periods. Management considers future taxable earnings in making such assessments. Numerous judgments and assumptions are inherent in the determination of future taxable earnings, including such factors as future operating conditions. When the future utilization of some portion of the deferred tax asset is determined not to be more likely than not, a valuation allowance is provided to reduce the recorded deferred tax asset. When management can project that a portion of the deferred tax asset can be realized through application of a portion of tax loss carryforward, management will record that utilization as a deferred tax benefit and recognize a deferred tax asset in the same amount. There can be no assurance that facts and circumstances will not materially change and require the recording of any deferred tax asset valuation allowance in future periods. For the three and six months ended June 30, 2019, the Company recognized a provision for income tax on unrealized gain on investments of $0.9 million and $1.1 million, respectively, for the Taxable Subsidiary. For the three and six months ended June 30, 2018, the Company recognized a benefit for income taxes on unrealized loss on investments of $1.0 million and $1.0 million, respectively, for the Taxable Subsidiary. As of June 30, 2019 and December 31, 2018, the Company had a deferred tax asset in the amount of $4.3 million and $5.4 million, respectively, primarily relating to tax loss carryforwards. The decrease in the deferred tax asset resulted from a valuation allowance recorded during the quarter.

 

The deferred tax asset of $4.3 million (after a 21% tax rate) is comprised of the following: (1) $1.0 million of NOL’s; (2) $0.7 million of capital losses; (3) $3.4 million of partnership losses, offset by (4) $0.8 of a valuation allowance. GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s financial statements to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for tax years that may be open for the quarter ended June 30, 2019. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.

 

Indemnification – In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.

 

Recently Issued Accounting Standards – In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amended FASB ASC 310-20. The amendments in ASU 2017-08 shortened the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments became effective for fiscal years beginning after December 15, 2018, as well as for interim periods within those fiscal years. The Company adopted ASU 2017-08 in connection with its quarterly report on Form 10-Q for the three months ended March 31, 2019. Such adoption did not have a material impact on the Company’s financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify the disclosure requirements on fair value measurement in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 in its consolidated financial statements and disclosures with no material impact.

 

In August 2018, the U.S. Securities and Exchange Commission adopted final rules to eliminate redundant, duplicative, overlapping, outdated or superseded disclosure requirements in light of other disclosure requirements, GAAP or changes in the information environment. These rules amend certain provisions of Regulation S-X and Regulation S-K, certain rules promulgated under the Securities Act of 1933 and the Securities Exchange Act of 1934 and certain related forms. The Company has adopted these changes in its consolidated financial statements and disclosures with no material impact.

 

  20  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

In May 2014, the FASB issued ASC 606, Revenue From Contracts With Customers, originally effective for public business entities with annual reporting periods beginning after December 15, 2016. On August 12, 2015, the FASB issued an ASU, Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASC 606 for one year. ASC 606 provides accounting guidance related to revenue from contracts with customers. For public business entities, ASC 606 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has evaluated the impact of ASC 606 and determined that it will not have a material impact on its consolidated financial statements and disclosures.

 

3. Fair Value of Portfolio Investments

 

The Company accounts for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”), Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.

 

Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

 

Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

 

Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company holds a large position and a sale could reasonably impact the quoted price.

 

Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair Value is based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

 

Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.

 

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of June 30, 2019 are as follows:

 

    Level 1     Level 2     Level 3     Total  
Senior Secured - First Lien   $     $ 7,162,215     $ 128,361,939     $ 135,524,154  
Senior Secured - Second Lien                 65,239,620       65,239,620  
Subordinated Debt                 1,225,020       1,225,020  
CLO/Structured Credit           1,828,490             1,828,490  
Equity/Other                 15,389,916       15,389,916  
Total Investments   $     $ 8,990,705     $ 210,216,495     $ 219,207,200  

 

The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2018 are as follows:

 

    Level 1     Level 2     Level 3     Total  
Senior Secured – First Lien   $ -     $ 3,800,000     $ 164,354,929     $ 168,154,929  
Senior Secured – Second Lien     -       -       42,549,396       42,549,396  
Subordinated Debt     -       -       1,212,774       1,212,774  
CLO/Structured Credit     -       1,739,600       -       1,739,600  
Equity/Other     -       -       21,141,117       21,141,117  
Total investments   $ -     $ 5,539,600     $ 229,258,216     $ 234,797,816  

 

  21  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The changes in investments classified as Level 3 are as follows for the six months ended June 30, 2019 and June 30, 2018.

 

As of June 30, 2019:

 

    Senior     Senior                    
    Secured -     Secured -     Senior     Equity/        
    First Lien     Second Lien     Subordinated     Other     Total  
Balance as of January 1, 2019   $ 164,354,929     $ 42,549,396     $ 1,212,774     $ 21,141,117     $ 229,258,216  
Amortized discounts/premiums     745,945       242,474       -       -       988,419  
Paid in-kind interest     113,301       -       6,074       183,529       302,904  
Net realized gain (loss)     68,711       -       -       1,013,030       1,081,741  
Net change in unrealized appreciation (depreciation)     (1,920,653 )     43,697       -       592,730       (1,284,226 )
Purchases     33,819,312       17,200,000       6,172       400,000       51,425,484  
Sales/Return of capital     (59,295,553 )     (8,120,000 )     -       (7,940,490 )     (75,356,043 )
Lien status change     (13,324,053 )     13,324,053       -       -       -  
Transfers in     3,800,000       -       -       -       3,800,000  
Transfers out     -       -       -       -       -  
Balance as of June 30, 2019   $ 128,361,939     $ 65,239,620     $ 1,225,020     $ 15,389,916     $ 210,216,495  
                                         
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2019   $ (1,522,345 )   $ 128,749     $ -     $ 583,310     $ (810,286 )

 

As of June 30, 2018:

 

    Senior     Senior                    
    Secured -     Secured -     Senior     Equity/        
    First Lien     Second Lien     Subordinated     Other     Total  
Balance as of January 1, 2018   $ 177,340,027     $ 14,203,691     $ 66,884,849     $ 29,125,978     $ 287,554,545  
Amortized discounts/premiums     165,255       24,736       155,059       -       345,050  
Paid in-kind interest     81,763       -       207,222       169,276       458,261  
Net realized gain (loss)     (24,418 )     (4,922,041 )     (10,098,674 )     (5,245,476 )     (20,290,609 )
Net change in unrealized appreciation (depreciation)     (163,436 )     7,750,383       5,280,892       565,315       13,433,154  
Purchases     10,880,846       18,189,499       2,277,803       -       31,348,148  
Sales/Return of capital     (37,984,277 )     (3,529,000 )     (41,252,701 )     -       (82,765,978 )
Transfers in     -       -       -       -       -  
Transfers out     -       -       -       -       -  
Balance as of June 30, 2018   $ 150,295,760     $ 31,717,268     $ 23,454,450     $ 24,615,093     $ 230,082,571  
                                         
Net change in unrealized appreciation (depreciation) from investments still held as of June 30, 2018   $ (60,534 )   $ (700,657 )   $ (5,373,294 )   $ (4,680,161 )   $ (10,814,646 )

 

  22  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of June 30, 2019 and December 31, 2018, respectively.

 

As of June 30, 2019:

 

    Fair Value at                    
Assets at Fair Value  

June 30,

2019

   

Valuation

Technique

 

Unobservable

Input

 

Range of

Inputs

 

Weighted

Average

 
                         
Senior Secured - First Lien   $ 128,361,939     Yield to Maturity   Comparable Market Rate   6.8% - 17.1%     10.1 %
                             
Senior Secured - Second Lien     65,239,620     Yield to Maturity   Comparable Market Rate   10.3% - 14.3%     10.5 %
                             
Senior Subordinated     1,225,020     Yield to Maturity   Comparable Market Rate   14.0% - 14.2%     14.1 %
                             
Preferred Ownership     13,847,543     Market Approach   Enterprise Value / LTM EBITDA Multiple / Transaction price   6.0x - 10.5x     8.2 x
                             
Common Ownership/ Common Warrants     1,542,373     Market Approach   Enterprise Value / LTM EBITDA Multiple / Transaction price   4.5x - 10.5x     6.5 x
                             
Total   $ 210,216,495                      

 

As of December 31, 2018:

 

    Fair Value at                    
Assets at Fair Value  

December 31,

2018

   

Valuation

Technique

 

Unobservable

Input

 

Range of

Inputs

 

Weighted

Average

 
                         
Senior Secured - First Lien   $ 164,354,929     Yield to Maturity   Comparable Market Rate   7.0% - 14.0%     10.7 %
                             
Senior Secured - Second Lien     42,549,396     Yield to Maturity   Comparable Market Rate   10.3% - 13.0%     11.0 %
                             
Senior Subordinated     1,212,774     Yield to Maturity   Comparable Market Rate   14.0%     14.0 %
                             
Preferred Ownership     16,914,223     Market Approach   Enterprise Value / LTM EBITDA Multiple / Transaction price   5.5x - 12.0x     7.4 x
                             
Common Ownership/ Common Warrants     4,226,894     Market Approach   Enterprise Value / LTM EBITDA Multiple / Transaction price   4.5x - 12.0x     8.1 x
                             
Total   $ 229,258,216                      

 

4. Share Transactions

 

On November 2, 2017, the Board approved a $2.5 million open market stock repurchase program. Pursuant to the program, the Company was authorized to repurchase up to $2.5 million in aggregate of our common stock in the open market. The timing, manner, price and amount of any share repurchases were determined by our management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements and other factors. Repurchases under the program were authorized through November 2, 2018.

 

On November 16, 2017, the Board approved expansion of the open market stock repurchase program to $5.0 million and extension of the length of the program to January 31, 2019.

 

As of August 8, 2018, the Company repurchased an aggregate of $5.0 million shares of our common stock under the discretionary open-market share repurchase program and, as a result, the program terminated on such date in accordance with its terms. Subsequently, pursuant to the Board authorization on November 5, 2018, the Company adopted a trading plan on December 10, 2018 for the purpose of repurchasing shares of its common stock in the open market (the "Plan"). Under the Plan, the Company may repurchase up to the lesser of (1) 5.0% of the amount of shares of the Company's common stock outstanding as of the date of the Plan, December 10, 2018 and (2) $10.0 million in aggregate amount of the Company's common stock.

 

  23  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The following tables set forth the number of shares of common stock repurchased by the Company under its share repurchase programs for the six months ended June 30, 2019 and June 30, 2018:

 

Six months ended June 30, 2019:

 

Month Ended   Shares Repurchased     Repurchase Price Per Share   Aggregate Consideration for
Repurchased Shares
 
January 2019     207,220     $6.50 - $6.99   $ 1,318,920  
February 2019     22,509     $6.95 - $7.00     157,495  
Total     229,729         $ 1,476,415  

 

Six months ended June 30, 2018:

 

Month Ended   Shares Repurchased     Repurchase Price Per Share   Aggregate Consideration for
Repurchased Shares
 
January 2018     16,786     $8.01 - $8.22   $ 136,949  
March 2018     195,785     $6.05 - $7.24     1,373,656  
April 2018     231,343     $6.12 - $7.20     1,599,304  
May 2018     136,819     $6.18 - $6.85     901,837  
June 2018     59,461     $6.30 - $6.80     397,913  
Total     640,194         $ 4,409,659  

 

5. Distributions

 

The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually. If the Company does not distribute (or are not deemed to have distributed) at least (i) 98% of the Company's annual ordinary income in the calendar year earned (the “required distribution”), (ii) 98.2% of capital gain net income (adjusted for certain ordinary losses) for the one-year period ending October 31 of that calendar year, and (iii) any income or capital gains recognized, but not distributed, in preceding calendar years and on which the Company incurred no federal income tax, the Company will generally be required to pay an excise tax equal to 4% of the amount by which the required distribution exceeds the distributions from such taxable income for the year. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes, if any, on estimated excess taxable income. As of June 30, 2019 and December 31, 2018, the Company accrued $392,007 and $435,797, respectively, for any unpaid potential excise tax liability and have included these amounts within income tax asset or liability on the accompanying Consolidated Statements of Assets and Liabilities.

 

The following table reflects the dividends on the Company’s common stock declared by the Board and paid for the six months ended June 30, 2019:

 

Date Declared   Record Date   Payment Date   Amount Per Share  
March 11, 2019   March 29, 2019   April 4, 2019   $ 0.18  
May 3, 2019   June 28, 2019   July 3, 2019   $ 0.33  

 

The following table reflects the dividends on the Company’s common stock declared by the Board and paid for the six months ended June 30, 2018:

 

Date Declared   Record Date   Payment Date   Amount Per Share  
March 8, 2018   March 30, 2018   April 4, 2018   $ 0.18  
May 4, 2018   June 29, 2018   July 5, 2018   $ 0.18  

 

  24  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the plan administrator, before any associated brokerage or other costs.

 

6. Related Party Transactions

 

Management Fee

 

Under the Investment Advisory Agreement, the Company has agreed to pay Alcentra NY an annual base management fee, which is calculated at an annual rate as follows: 1.50% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are less than or equal to $625,000,000; 1.40% if its gross assets are greater than or equal to $625,000,001 but less than or equal to $750,000,000; and 1.25% if its gross assets are greater than or equal to $750,000,001. The various management fee percentages (i.e. 1.50%, 1.40% and 1.25%) would apply to the Company’s entire gross assets in the event its gross assets exceed the various gross asset thresholds. The base management fee is payable quarterly in arrears and is calculated based on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters.  

 

On May 4, 2018, the Adviser agreed to a temporary voluntary 25 basis point reduction, from May 1, 2018 to April 30, 2019, across all of these base management fee breakpoints. On May 3, 2019, the Adviser agreed to a continuation of the temporary 25 basis point reduction across all of the base management fee breakpoints under the Investment Advisory Agreement, effective from May 1, 2019 to April 30, 2020.

  

The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the Company's ‘‘pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a ‘‘catch-up’’ feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s “pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds 2.5% in any quarter.

 

The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for our then current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (such as PIK interest or OID) is paid to the Adviser, together with interest thereon from the date of deferral to the date of payment, only if and to the extent that the Company actually receives such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such accounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. There is no accumulation of amounts on the hurdle rate from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters are below the quarterly hurdle. The Adviser has agreed to permanently waive any interest accrued on the portion of the incentive fee attributable to deferred interest (such as PIK interest or OID).

 

The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Investment Advisory Agreement, as of the termination date) and equals 20% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until the Company has received such income in cash.

 

  25  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

For the three and six months ended June 30, 2019, the Company recorded expenses for base management fees of $841,566 and $1,707,184, respectively, of which $140,261 and $284,531, respectively, was waived by the Adviser pursuant to the voluntary waiver as part of the Investment Advisory Agreement and $701,305 was payable at June 30, 2019. For the three and six months ended June 30, 2018, the Company recorded expenses for base management fees of $1,036,122 and $2,270,985, respectively, of which $109,281 and $109,281, respectively, was waived by the Adviser and $926,841 was payable at June 30, 2018.

 

For the three and six months ended June 30, 2019, the Company reversed $204,867 and $691,991, respectively, in previously accrued income-based incentive fees. For the three and six months ended June 30, 2018, the Company incurred no incentive fees. As of June 30, 2019 and June 30, 2018, $198,805 and $1,294,985 in income-based incentive fees, respectively, was payable by the Company. For each of the three and six months ended June 30, 2019 and June 30, 2018, the Company incurred capital gains incentive fees of $0.

 

The Company’s officers are employees of the Adviser and the Company may pay the allocable portion of the compensation of the Company’s Chief Financial Officer and Chief Compliance Officer and their staffs pursuant to the Investment Advisory Agreement.

 

7. Directors' Fees

 

The Company’s independent directors each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in-person each Board meeting and $1,000 for each Board meeting they participate in telephonically. In addition, each independent director receives $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each audit committee, compensation committee, nominating and corporate governance committee, and valuation committee meeting attended in person or telephonically. The chair of the audit committee receives an annual fee of $10,000, and the respective chairs of the compensation committee, the nominating and corporate governance committee and the valuation committee each receives an annual fee of $5,000. The lead independent director also receives an annual fee of $15,000. The Board may establish ad hoc committees or working groups from time to time to assist the Board in fulfilling its oversight responsibilities, and the independent directors may receive fees and be reimbursed for reasonable out-of-pocket expenses incurred in connection therewith.

 

In connection with the Board’s review of strategic alternatives, the Board established a Committee of Independent Directors during 2018, which is comprised of each of the Board’s independent directors and met throughout 2018 on a periodic basis. Effective April 2018, each member of the Committee of Independent Directors received a monthly fee of $1,000, and the chair of the Committee of Independent Directors received an additional monthly retainer of $5,000 for his services as chair and the increased responsibilities associated therewith. Effective November 2018, each member of the Committee of Independent Directors received $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each meeting of the committee attended in person or telephonically. In addition, the chair of the Committee of Independent Directors receives a monthly retainer of $4,000 for his services as chair and the increased responsibilities associated therewith. Effective May 1, 2019, each member of the Committee of the Independent Directors receives a $10,000 monthly retainer in lieu of the $1,000 per meeting fee that was effective starting in November 2018. In addition, the chair of the Committee of Independent Directors receives an additional $5,000 monthly retainer in lieu of the previous $4,000 monthly retainer.

 

The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.

 

For the three and six months ended June 30, 2019, the Company recorded directors' fee expense of $215,000 and $374,676, respectively, of which $197,154 was payable at June 30, 2019. For the three and six months ended June 30, 2018, the Company recorded directors' fee expense of $116,826 and $213,028, respectively, of which $36,125 was payable at June 30, 2018.

 

8. Purchases and Sales (Investment Transactions)

 

Investment purchases, sales and principal payments/paydowns are summarized below for the six months ended June 30, 2019 and June 30, 2018.

 

    For the six months ended June 30,  
    2019     2018  
Investment purchases, at cost (including PIK interest and dividends)   $ 59,038,873     $ 44,507,064  
Investment sales, proceeds (including principal payments/paydown proceeds)     75,393,530       79,266,967  

 

  26  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

9. Alcentra Capital InterNotes®

 

On January 30, 2015, the Company entered into a Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company's issuance of $40.0 million of Alcentra Capital InterNotes®. On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.

 

These notes (the "Notes") are direct unsecured obligations and each series of notes has been issued by a separate trust (administered by U.S. Bank). The notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.

 

During each of the six months ended June 30, 2019 and June 30, 2018, the Company did not issue any Alcentra Capital InterNotes®. For the three and six months ended June 30, 2019, the Company had average Notes outstanding of $55.0 million and $55.0 million (principal amount), respectively, with a weighted average interest rate of 6.40% and 6.44%, respectively. For the three and six months ended June 30, 2018, the Company borrowed an average of $55.0 million and $55.0 million, respectively, with a weighted average interest rate of 6.40% and 6.44%, respectively.

 

The following table summarizes the Alcentra Capital InterNotes® issued and outstanding as of June 30, 2019.

 

Tenor at   Principal     Interest   Weighted      
Origination   Amount     Rate   Average      
(in years)   (000’s omitted)     Range   Interest Rate     Maturity Date Range
5   $ 53,582     6.25% - 6.50%     6.38 %   February 15, 2020 - June 15, 2021
7     1,418     6.50% - 6.75%     6.63 %   January 15, 2022 - April 15, 2022
    $ 55,000                  

 

In connection with the issuance of the Alcentra Capital InterNotes®, the Company incurred $1.196 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of June 30, 2019. During the six months ended June 30, 2019 and June 30, 2018, the Company recorded $0.243 million and $0.246 million of amortization of deferred note offering costs on the Alcentra Capital InterNotes®.

 

10. Credit Facility/Line of Credit

 

On May 8, 2014, the Company entered into a senior secured revolving credit agreement (as amended and restated from time to time, the “Credit Facility”) with ING Capital LLC (“ING”), as administrative agent, collateral agent and lender, and the lenders from time to time party thereto, to provide liquidity in support of its investment and operational activities. The Credit Facility had an initial commitment of $80 million with an accordion feature that allowed for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility was amended on August 11, 2015 to increase the commitments and the accordion feature. The total commitments and accordion feature were $135 million and up to $250 million, respectively, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility had a maturity date of August 11, 2020 and bore interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.25% plus the one, three or six month LIBOR rate, as applicable.   

 

On September 21, 2018, the Company amended certain provisions of the Credit Facility. Under the Amended Credit Agreement, (i) revolving commitments by lenders were reduced from $135 million to $115 million, with an accordion feature that allows for an increase in total commitments up to $180 million, subject to satisfaction of certain conditions at the time of any such future increase, (ii) the maturity date of the Credit Facility was extended to September 21, 2022 and the revolving period was extended to September 21, 2021, and (iii) borrowings under the Credit Facility bear interest, at the Company’s election, at a rate per annum equal to (a) 2.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 2.75% if such contribution is less than 70%) plus the one, three or six month LIBOR rate, as applicable, or (b) 1.50% if the contribution to the borrowing base of eligible portfolio investments that are long-term U.S. government securities and first lien bank loans is greater than or equal to 70% (or 1.75% if such contribution is less than 70%) plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5%, (C) three month LIBOR plus 1.0%, and (D) zero.

 

  27  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The Amended Credit Agreement also modifies certain covenants in the Credit Facility, including to provide for a minimum asset coverage ratio of 2.00 to 1, a minimum interest coverage ratio of 2.00 to 1 as of the last day of any fiscal quarter, and a requirement to maintain stockholder’s equity as of the last day of any fiscal quarter to be no less than the greater of (i) 45% of the total assets of the Company and its subsidiaries as at the last day of such fiscal quarter and (ii) the sum of (x) $120,000,000 plus (y) 65% of the aggregate net proceeds of all sales of equity interests by the Company and its subsidiaries after the closing date of the Amended Credit Agreement. In addition, the Amended Credit Agreement requires payment of a commitment fee ranging from 0.5% to 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s Consolidated Statements of Operations. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of our direct and indirect subsidiaries, and substantially all of our other assets.

 

The Credit Facility agreement also contains customary terms and conditions, including, without limitation, affirmative and negative covenants, including, without limitation, information reporting requirements, a minimum liquidity test, and maintenance of RIC and BDC status. The Credit Facility agreement also contains customary events of default, including, without limitation, nonpayment, misrepresentation of representations and warranties in a material respect, breach of covenant, cross-default to other indebtedness, bankruptcy, and certain change in control events. As of June 30, 2019, the Company was in compliance in all material respects with the terms of the Credit Facility.

 

As of June 30, 2019 and December 31, 2018, the Company had United States dollar borrowings of $26.6 million and $28.5 million outstanding under the Credit Facility, respectively. For the three and six months ended June 30, 2019, the Company had average borrowings under the Credit Facility of $18.9 million and $24.6 million, respectively, with a weighted average interest rate of 4.29% and 4.58%, respectively. For the three and six months ended June 30, 2018, the Company had average borrowings under the Credit Facility of $58.4 million and $57.4 million, respectively, with a weighted average interest rate of 5.29% and 5.11%, respectively.

 

In accordance with the 1940 Act, during the three months ended March 31, 2019, the Company was allowed to borrow amounts such that its asset coverage, calculated pursuant to the 1940 Act, was at least 200% after such borrowing. On May 4, 2018, the Board, including a “required majority” (as such term is defined in Section 57(o) of the 1940 Act) of the Board, approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the Small Business Credit Availability Act. As a result, effective on May 4, 2019, the Company’s asset coverage requirement applicable to senior securities, under the 1940 Act, was reduced to 150%; however, the Company remains subject to a 200% minimum asset coverage ratio covenant under the Credit Facility and thus will not be able to take advantage of the reduced asset coverage requirement under the 1940 Act unless and until it negotiates revised terms and conditions with the lenders under the Credit Facility. As of June 30, 2019, the aggregate amount outstanding of the senior securities issued by the Company was $26.6 million under The Credit Facility (also outstanding are the Alcentra Capital InterNotes® of $55.0 million) and the Company’s asset coverage was 274%.

 

11. Market and Other Risk Factors

 

At June 30, 2019, a significant portion of the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is comprised of investments in the 17 industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.

 

The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.

 

Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.

 

The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.

 

12. Commitments and Contingencies

 

In the normal course of business, the Company enters into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.

 

  28  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2019 and December 31, 2018, the Company had $14.4 million and $15.0 million in unfunded commitments under loan and financing agreements, respectively. The Company’s unfunded commitment under loan and financing agreements as of June 30, 2019 and December 31, 2018 are presented below.

 

    As of  
    June 30, 2019     December 31, 2018  
             
BayMark Health Services, Inc.   $ 4,000,000     $ -  
Clanwilliam Group Ltd.     3,505,227       3,753,476  
Epic Healthcare Staffing Intermediate Holdco, LLC     2,836,363       363,637  
Manna Pro Products, LLC     2,589,092       92,764  
Healthcare Associates of Texas, LLC     1,454,003       1,572,225  
Pharmalogic Holdings Corp.     -       4,760,000  
Superior Controls, Inc.     -       2,500,000  
CGGR Operations Holding Corporation     -       2,000,000  
Total   $ 14,384,685     $ 15,042,102  

 

13. Classification of Portfolio Investments

 

As of June 30, 2019, the Company’s portfolio investments were categorized as follows:

 

Investment Type   Cost     Fair Value     % of
Net
Assets*
 
Senior Secured - First Lien   $ 137,153,769     $ 135,524,154       95.48 %
Senior Secured - Second Lien     64,856,841       65,239,620       45.97 %
Equity/Other     30,888,997       15,389,916       10.84 %
CLO/Structured Credit     1,949,886       1,828,490       1.29 %
Senior Subordinated     4,754,007       1,225,020       0.86 %
Total   $ 239,603,500     $ 219,207,200       154.44 %
                         
Geographic Region                        
South   $ 47,377,522     $ 46,345,318       32.65 %
West     33,412,457       33,455,553       23.57 %
Midwest     33,896,464       32,146,637       22.65 %
Southeast     42,533,288       31,823,914       22.42 %
Northeast     30,730,520       26,518,960       18.68 %
Mid-Atlantic     28,674,664       25,960,951       18.29 %
Canada     14,457,969       14,567,996       10.27 %
Ireland     6,570,730       6,559,381       4.62 %
US (CLO)     1,949,886       1,828,490       1.29 %
Total   $ 239,603,500     $ 219,207,200       154.44 %
                         
Industry                        
Business Services   $ 46,855,927     $ 47,002,952       33.12 %
Healthcare Services     44,373,007       44,545,329       31.38 %
Consumer Services     33,419,981       32,968,796       23.23 %
High Tech Industries     18,535,483       18,654,396       13.14 %
Industrial Services     20,298,185       16,372,678       11.54 %
Technology & Telecom     13,172,751       13,233,217       9.32 %
Oil & Gas Services     10,955,419       10,955,419       7.72 %
Media: Advertising, Printing & Publishing     12,677,834       8,679,689       6.12 %
Financial Services     8,244,193       8,619,188       6.07 %
Environmental/Recycling Services     6,953,565       5,098,537       3.59 %
Telecommunications     4,414,967       4,417,330       3.11 %
Retail     4,816,914       4,346,403       3.06 %
USD CLO     1,949,886       1,828,490       1.29 %
Security     5,485,400       1,023,603       0.72 %
Transportation Logistics     1,254,000       795,212       0.56 %
Industrial Manufacturing     500,000       665,961       0.47 %
Education     5,695,988             0.00 %
Total   $ 239,603,500     $ 219,207,200       154.44 %

 

*Fair value as a percentage of Net Assets

 

  29  

 

 

ALCENTRA CAPITAL CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2019

(Unaudited)

 

As of December 31, 2018, the Company’s portfolio investments were categorized as follows:

 

Investment Type   Cost     Fair Value     % of
Net
Assets*
 
Senior Secured - First Lien   $ 167,745,286     $ 168,154,929       115.33 %
Senior Secured - Second Lien     42,210,313       42,549,396       29.18 %
Equity/Other     37,232,929       21,141,117       14.50 %
CLO/Structured Credit     1,948,058       1,739,600       1.20 %
Senior Subordinated     4,741,760       1,212,774       0.83 %
Total   $ 253,878,346     $ 234,797,816       161.04 %
                         
Geographic Region                        
West   $ 52,427,327     $ 54,266,593       37.22 %
Southeast     56,535,014       44,026,689       30.20 %
South     45,437,808       43,758,859       30.01 %
Northeast     43,622,806       38,144,071       26.16 %
Midwest     24,841,625       23,614,916       16.20 %
Canada     22,721,398       22,900,000       15.71 %
Ireland     6,344,310       6,347,088       4.35 %
US     1,948,058       1,739,600       1.19 %
Total   $ 253,878,346     $ 234,797,816       161.04 %
                         
Industry                  
Business Services   $ 45,913,805     $ 46,130,114       31.64 %
Healthcare Services     44,727,905       45,038,816       30.89 %
Technology & Telecom     32,324,555       33,345,749       22.87 %
Consumer Services     26,231,367       26,237,699       17.99 %
Industrial Services     21,095,416       19,559,789       13.42 %
Retail     12,051,199       12,119,708       8.31 %
Oil & Gas Services     11,385,108       11,382,254       7.81 %
Wholesale/Distribution     10,189,394       10,614,192       7.28 %
High Tech Industries     8,701,223       8,729,396       5.99 %
Media: Advertising, Printing & Publishing     12,677,834       6,554,225       4.50 %
Environmental/Recycling Services     6,757,790       5,699,791       3.91 %
Telecommunications     4,410,000       4,410,000       3.02 %
USD CLO     1,948,058       1,739,600       1.19 %
Security     5,485,401       1,023,999       0.70 %
Waste Services     2,529,303       820,437       0.56 %
Transportation Logistics     1,254,000       726,000       0.50 %
Industrial Manufacturing     500,000       666,047       0.46 %
Education     5,695,988       -       0.00 %
Total   $ 253,878,346     $ 234,797,816       161.04 %

 

*Fair value as a percentage of Net Assets

 

  30 &nb