KCAP Financial, Inc. Announces Full Year 2018 Financial Results

KCAP Financial, Inc. (Nasdaq GS: KCAP) (“KCAP” or the “Company”) announces its full year 2018 financial results.

Recent Developments

As previously announced, the Company has entered into a stock purchase and transaction agreement (the “Externalization Agreement”) with BC Partners Advisors L.P., an affiliate of BC Partners LLP (“BC Partners”), pursuant to which the Company’s management function would be externalized (the “Externalization”). At a special meeting of the Company’s stockholders held on February 19, 2019, the Company’s stockholders approved an investment advisory agreement between the Company and Sierra Crest Investment Management LLC, an affiliate of BC Partners (the “Adviser”). If the transactions contemplated by the Externalization Agreement are completed and closing conditions are satisfied or appropriately waived, upon closing of the Externalization, the Company will commence operations as an externally managed BDC managed by the Adviser.

On November 8, 2018, we entered into an agreement with LibreMax Intermediate Holdings, LP (“LibreMax”) under which our wholly-owned subsidiary Commodore Holdings, LLC (“Commodore”) agreed to sell Katonah Debt Advisors, L.L.C. (“Katonah Debt Advisors”), Trimaran Advisors, L.L.C. (“Trimaran Advisors”), and Trimaran Advisors Management, L.L.C. (“Trimaran Advisors Management” and, together with Katonah Debt Advisors and Trimaran Advisors, the “Disposed Manager Affiliates”) to LibreMax for a cash purchase price of approximately $37.9 million (the “LibreMax Transaction”). In connection with the closing of the LibreMax Transaction on December 31, 2018, Commodore sold the Disposed Manager Affiliates, which manage collateralized loan obligation funds (“CLO Funds”) to LibreMax for a cash purchase price of approximately $37.9 million.

Financial Highlights

Net investment income for the year ended December 31, 2018 was approximately $10.0 million, or $0.27 per basic share, compared with $11.0 million, $0.30 per basic share in 2017.
Taxable distributable income for the year was $0.25 per basic share.
KCAP declared a fourth quarter shareholder distribution of $0.10 per share.
At December 31, 2018, the fair value of KCAP's investments totaled approximately $273.3 million.
Net asset value per share of $4.23 as of December 31, 2018, compared with $4.87 at December 31, 2017.

Dayl Pearson, President and Chief Executive Officer of KCAP Financial, Inc., noted, “We executed on two significant strategic initiatives during the fourth quarter of 2018, with the successful completion of the sale of substantially all of our Asset Manager Affiliates, and our shareholders have recently approved the externalization of the management of KCAP which we expect will close towards the end of the first quarter of 2019.”

Operating Results

For the year ended December 31, 2018, we reported total investment income of approximately $27.1 million as compared to approximately $28.3 million in the prior year, a decrease of 4%. Investment income from debt securities increased 6% to approximately $16.0 million from approximately $15.1 million in 2017. Investment income from investments in CLO fund securities in 2018 decreased 43% to $6.4 million from $11.2 million in 2017, and investment income from our joint venture investment increased to $3.1 million from just under $1.0 million in 2017.

For the year ended December 31, 2018, total expenses were relatively flat as compared to the same period in 2017, with lower compensation expenses offset by higher professional fees.

Net investment income for the years ended 2018 and 2017 was approximately $10.0 million and $11.0 million, or $0.27 and $0.30 per share, respectively. Net realized and unrealized depreciation on investments for the year ended 2018 was approximately $19.4 million, compared to net realized and unrealized depreciation on investments of $3.5 million for the same period in 2017.

Portfolio and Investment Activity

The fair value of our portfolio was approximately $273.3 million as of December 31, 2018. The composition of our investment portfolio at December 31, 2018 and December 31, 2017, at cost and fair value, was as follows:

	December 31, 2018						December 31, 2017
Security Type	Cost/Amortized Cost		Fair Value		%¹		Cost/Amortized Cost		Fair Value		%¹
Short-term investments²	$	44,756,478	$	44,756,478	17		$	77,300,320	$	77,300,320	26	%
Senior Secured Loan		86,040,921		77,616,209	28			48,337,900		44,960,146	14
Junior Secured Loan		76,223,561		70,245,535	26			62,561,913		58,941,300	19
Senior Unsecured Loan		—		—	-			12,777,283		12,777,283	4
Senior Secured Bond		—		—	-			1,502,374		1,518,750	-
CLO Fund Securities		55,480,626		44,325,000	16			72,339,032		51,678,673	17
Equity Securities		21,944,430		14,504,687	5			10,571,007		4,414,684	1
Asset Manager Affiliates³		17,791,230		3,470,000	1			52,591,230		38,849,000	12
Joint Venture		24,914,858		18,390,440	7			24,914,858		21,516,000	7
Total	$	327,152,104	$	273,308,349	100	%	$	362,895,917	$	311,956,156	100	%


¹ Represents percentage of total portfolio at fair value.
² Includes money market accounts and U.S. treasury bills.
³ Represents the equity investment in the Asset Manager Affiliates.

Liquidity and Capital Resources

At December 31, 2018, we had unrestricted cash and short-term investments of approximately $50.2 million, total assets of approximately $285.5 million and stockholders' equity of approximately $158.0 million, and our net asset value per common share was $4.23. As of December 31, 2018, we had $103.8 million of borrowings outstanding ($100.4 million net of discount) with a weighted average interest rate of approximately 6.0%. At December 31, 2018, we had approximately $23.6 million of available capacity under our Revolving Credit Facility.

Distributions

Generally, we seek to fund distributions to shareholders from current distributable earnings, primarily from net interest and dividend income generated by our investment portfolio. However, a portion of distributions paid to shareholders may be a return of capital. We announced a regular quarterly distribution of $0.10 per share for the quarter ended December 31, 2018. The record date for this distribution was January 7, 2019 and the distribution was paid on January 31, 2019. Tax characteristics of all distributions paid by us in 2018 have been reported to stockholders on Form 1099-DIV after the end of the calendar year.

We have adopted a dividend reinvestment plan that provides for reinvestment of distributions in shares of our common stock, unless a stockholder elects to receive cash. As a result, if we declare a cash distribution, shareholders who have not "opted out" of our dividend reinvestment plan will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving cash. Please contact your broker or other financial intermediary for more information regarding the dividend reinvestment plan.

Conference Call and Webcast

We will hold a conference call on Wednesday, February 27, 2019 at 9:00 a.m. Eastern Time to discuss our full year 2018 financial results. Shareholders, prospective shareholders and analysts are welcome to listen to the call or attend the webcast.

The conference call dial-in number is (866) 757-5630. No password is required. A live audio webcast of the conference call can be accessed via the Internet, on a listen-only basis on our Company's website www.kcapfinancial.com in the Investor Relations section under Events. The online archive of the webcast will be available after 7:00 p.m. Eastern Time for approximately 90 days.

A replay of this conference call will be available from 12:00 p.m. on February 27, 2019 until 12:00 p.m. Eastern time on March 7, 2019. The dial in number for the replay is 855-859-2056 and the conference ID is 1725119.

About KCAP Financial, Inc.

KCAP Financial, Inc. is a publicly traded, internally managed business development company (“BDC”). The Company's middle market investment business originates, structures, finances and manages a portfolio of term loans, mezzanine investments and selected equity securities in middle market companies.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The matters discussed in this press release, as well as in future oral and written statements by management of KCAP Financial, Inc., that are forward-looking statements are based on current management expectations that involve substantial risks and uncertainties which could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements.

Forward-looking statements relate to future events or our future financial performance. We generally identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other similar words. Forward-looking statements are based upon current plans, estimates and expectations that are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove to be incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements.

Important assumptions include our ability to originate new investments, and achieve certain margins and levels of profitability, the availability of additional capital, and the ability to maintain certain debt to asset ratios. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this press release should not be regarded as a representation by us that such plans, estimates, expectations or our plans or objectives will be achieved. Important factors that could cause actual results to differ materially from such plans, estimates or expectations include, among others, (1) that one or more closing conditions to the externalization may not be satisfied or waived, on a timely basis or otherwise, including that a governmental entity may prohibit, delay or refuse to grant approval for the consummation of the externalization, may require conditions, limitations or restrictions in connection with such approvals; (2) the risk that the externalization contemplated by the stock purchase and transaction agreement may not be completed in the time frame expected by parties, or at all; (3) unexpected costs, charges or expenses resulting from the externalization; (4) uncertainty of the expected financial performance of the Company following completion of the externalization; (5) failure to realize the anticipated benefits of the externalization, including as a result of delay in completing the externalization; (6) the ability of the Company and/or BC Partners to implement its business strategy; (7) the occurrence of any event that could give rise to termination of the agreement; (8) the risk that stockholder litigation in connection with the externalization may affect the timing or occurrence of the contemplated externalization or result in significant costs of defense, indemnification and liability; (9) evolving legal, regulatory and tax regimes; and (10) changes in general economic and/or industry specific conditions. Further information about factors that could affect our financial and other results is included in our filings with the Securities and Exchange Commission. We do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required to be reported under the rules and regulations of the Securities and Exchange Commission.

This press release does not constitute an offer to sell or the solicitation of an offer to buy the securities of any CLO fund. Such securities have not been, and will not be, registered under the Securities Act of 1933 and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act of 1933

KCAP FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS

	As ofDecember 31, 2018			As ofDecember 31, 2017

ASSETS
Investments at fair value:
Short-term investments (cost: 2018 - $44,756,478; 2017 - $77,300,320)	$	44,756,478		$	77,300,320
Debt securities (amortized cost: 2018 - $162,264,482; 2017 - $125,179,470)		147,861,744			118,197,479
CLO Fund Securities managed by affiliates (amortized cost: 2018 - $4,407,106; 2017 - $67,212,139)		4,473,840			49,488,393
CLO Fund Securities managed by non-affiliates (amortized cost: 2018 - $51,073,520; 2017 - $5,126,893)		39,851,160			2,190,280
Equity securities (cost: 2018 - $21,944,430; 2017 - $10,571,007)		14,504,687			4,414,684
Asset Manager Affiliates (cost: 2018 - $17,791,230; 2017 - $52,591,230)		3,470,000			38,849,000
Joint Venture (cost: 2018 - $24,914,858; 2017 - $24,914,858)		18,390,440			21,516,000

Total Investments at Fair Value (cost: 2018 - $327,152,104; 2017 - $362,895,917)		273,308,349			311,956,156
Cash		5,417,125			2,034,095
Restricted cash		3,907,341			—
Interest receivable		1,342,970			1,051,271
Receivable for open trades		—			2,993,750
Due from affiliates		1,007,631			1,243,493
Other assets		481,265			530,209
Total Assets	$	285,464,681		$	319,808,974

LIABILITIES
6.125% Notes Due 2022 (net of offering costs of: 2018 - $2,207,342; 2017 - $2,734,248)	$	75,199,858		$	74,672,952
KCAP Funding I, LLC Revolving Credit Facility (net of offering costs of: 2018 - $1,155,754)		25,200,331			—
7.375% Notes Due 2019 (net of offering costs of: 2017 - $259,635)		-			26,740,365
Payable for open trades		23,204,564			34,215,195
Accounts payable and accrued expenses		3,591,910			2,350,803
Accrued interest payable		131,182			—
Due to affiliates		115,825			25,083
Total Liabilities		127,443,670			138,004,398

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY
Common stock, par value $0.01 per share, 100,000,000 common shares authorized; 37,521,705 issued, and 37,326,846 outstanding at December 31, 2018, and 37,507,402 issued, and 37,339,224 outstanding at December 31, 2017		373,268			373,392
Capital in excess of par value		306,784,387			329,789,716
Total distributable (loss) earnings		(149,136,644	)		(148,358,532	)
Total Stockholders' Equity		158,021,011			181,804,576
Total Liabilities and Stockholders' Equity	$	285,464,681		$	319,808,974
NET ASSET VALUE PER COMMON SHARE	$	4.23		$	4.87

KCAP FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

			For the Years Ended December 31,
			2018			2017			2016
Investment Income:
	Interest from investments in debt securities		$	14,939,309		$	13,963,970		$	19,763,577
	Payment-in-kind investment income			1,066,354			1,099,223			1,065,339
	Interest from cash and time deposits			76,055			71,934			29,383
	Investment income on CLO Fund Securities managed by affiliates			6,024,935			10,807,490			12,642,625
	Investment income on CLO Fund Securities managed by non-affiliates			388,237			420,766			630,647
	Dividends from Asset Manager Affiliates			1,246,510			460,000			1,400,000
	Investment income from Joint Venture			3,100,000			949,037			—
	Capital structuring service fees			245,393			491,279			668,527
		Total investment income		27,086,793			28,263,699			36,200,098

Expenses:
	Interest and amortization of debt issuance costs			7,403,436			7,661,407			9,110,603
	Compensation			4,012,743			4,571,309			4,103,558
	Professional fees			3,470,269			2,942,059			2,391,038
	Insurance			321,268			347,175			412,764
	Administrative and other			1,874,600			1,722,618			1,692,140
		Total expenses		17,082,316			17,244,568			17,710,103

Net Investment Income				10,004,477			11,019,131			18,489,995
Realized And Unrealized Gains (Losses) On Investments:
	Net realized losses from investment transactions			(16,474,939	)		(6,899,044	)		(6,167,467	)
	Net change in unrealized (depreciation) appreciation on:
		Debt securities		(7,420,747	)		4,194,914			2,492,707
		Equity securities		(1,283,420	)		(823,671	)		(4,413,354	)
		CLO Fund Securities managed by affiliates		17,790,480			2,102,279			4,380,974
		CLO Fund Securities managed by non-affiliates		(8,285,747	)		(85,671	)		284,625
		Asset Manager Affiliates investments		(579,000	)		1,401,000			(15,933,000	)
		Joint Venture investment		(3,125,560	)		(3,398,858	)		—
	Total net (depreciation) appreciation from investment transactions			(2,903,994	)		3,389,993			(13,188,048	)
	Net realized and unrealized losses on investments			(19,378,933	)		(3,509,051	)		(19,355,515	)

	Realized losses on extinguishments of debt			(197,090	)		(4,121,998	)		(174,211	)
Net (Decrease) Increase In Stockholders’ Equity Resulting From Operations			$	(9,571,546	)	$	3,388,082		$	(1,039,731	)

	Net (Decrease) Increase in Stockholders' Equity Resulting from Operations per Common Share:
	Basic:		$	(0.26	)	$	0.09		$	(0.03	)
	Diluted:		$	(0.26	)	$	0.09		$	(0.03	)
	Net Investment Income Per Common Share:
	Basic:		$	0.27		$	0.30		$	0.50
	Diluted:		$	0.27		$	0.30		$	0.50
	Weighted Average Shares of Common Stock Outstanding—Basic			37,356,241			37,235,130			37,149,663
	Weighted Average Shares of Common Stock Outstanding—Diluted			37,356,241			37,235,130			37,149,663