Item 2.
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Managements Discussion and Analysis of Financial Condition and Results of Operations
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The information contained in this section should be read in conjunction with our financial statements and notes thereto appearing
elsewhere in this report.
Some of the statements in this report constitute forward-looking statements, which relate to
future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:
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our future operating results;
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our business prospects and the prospects of our portfolio companies;
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the impact of investments that we expect to make;
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our contractual arrangements and relationships with third parties;
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the dependence of our future success on the general economy and its impact on the industries in which we invest;
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the ability of our portfolio companies to achieve their objectives;
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our expected financings and investments;
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the adequacy of our cash resources and working capital; and
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the timing of cash flows, if any, from the operations of our portfolio companies.
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We generally use words such as anticipates, believes, expects, intends and similar
expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in Risk Factors and elsewhere in this
report.
We have based the forward-looking statements included in this report on information available to us on the date of
this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you
are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K.
Overview
Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007 with
initial capital of $1.2 billion of which 47.04% was funded by affiliated parties.
Immediately prior to the initial public
offering, through a series of transactions Solar Capital Ltd. merged with Solar Capital LLC, leaving Solar Capital Ltd. as the surviving entity (the Merger). Solar Capital Ltd. issued an aggregate of approximately 26.65 million
shares of common stock and $125 million in senior unsecured notes (the Senior Unsecured Notes) to the existing Solar Capital LLC unit holders in connection with the Merger. Solar Capital Ltd. had no assets or operations prior to
completion of the Merger and as a result, the historical books and records of Solar Capital LLC have become the books and records of the surviving entity. The number of shares used to calculate weighted average shares for use in computations on a
per share basis have been decreased retroactively by a factor of approximately 0.4022 for all periods prior to February 9, 2010. This factor represents the effective impact of the reduction in shares resulting from the Merger. As of
December 17, 2010, the Senior Unsecured Notes have been repaid from proceeds of a private placement transaction that we completed on November 30, 2010 and from borrowings under a credit facility established in December 2010.
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Solar Capital Ltd. (Solar Capital, the Company or we), a
Maryland corporation formed in November 2007, is a closed-end, externally managed, non-diversified management investment company that has elected to be treated as a business development company (BDC) under the Investment Company Act of
1940, as amended (the 1940 Act). In addition, for tax purposes the Company has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the
Code).
On February 9, 2010, we priced our initial public offering, selling 5.68 million shares of our
common stock. Concurrent with our initial public offering, Michael S. Gross, our chairman and chief executive officer, and Bruce Spohler, our chief operating officer, collectively purchased an additional 0.6 million shares of our common stock
through a private placement transaction exempt from registration under the Securities Act (the Concurrent Private Placement).
We invest primarily in U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. Our investment objective is to generate
both current income and capital appreciation through debt and equity investments. We invest primarily in leveraged middle-market companies in the form of senior secured loans, mezzanine loans and equity securities. From time to time, we may also
invest in public companies that are thinly traded. Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our investments generally range between $20 million and $100
million each, although we expect that this investment size will vary proportionately with the size of our capital base. We are managed by Solar Capital Partners. Solar Capital Management provides the administrative services necessary for us to
operate.
In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as
opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of
leveraged companies located in select countries outside of the United States.
As of September 30, 2013, our adviser
Solar Capital Partners has invested approximately $3.8 billion in more than 135 different portfolio companies since it was founded in 2006. Over the same period, Solar Capital Partners completed transactions with more than 95 different financial
sponsors.
Recent Developments
On October 30, 2013, our Board declared a quarterly dividend of $0.40 per share payable on January 3, 2014 to holders of record as of December 19, 2013.
The Company repurchased an additional 50,664 shares for $1.1 million in the month of October, 2013. $83.1 million remains available for
future program purchases as of October 30, 2013.
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of
debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we must
not acquire any assets other than qualifying assets specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets
include investments in eligible portfolio companies. The definition of eligible portfolio company includes certain public companies that do not have any securities listed on a national securities exchange and companies whose
securities are listed on a national securities exchange but whose market capitalization is less than $250 million.
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Revenue
We generate revenue primarily in the form of interest income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated
term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmark London interbank offered rate (LIBOR), commercial paper rate, or the prime rate. Interest on our debt investments
is generally payable quarterly but may be monthly or semi-annually. In addition, our investments may provide payment-in-kind (PIK) interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective
capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial
assistance and, if applicable, consulting fees, etc.
Expenses
All investment professionals of Solar Capital Partners, LLC (the Investment Adviser) and their staff, when and to the extent
engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of that personnel which is allocable to those services are provided and paid for by Solar Capital Partners. We bear all other
costs and expenses of our operations and transactions, including those relating to:
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investment advisory and management fees;
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expenses incurred by Solar Capital Partners payable to third parties, including agents, consultants or other advisors, in monitoring our financial and
legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies;
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calculation of our net asset value (including the cost and expenses of any independent valuation firm utilized);
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direct costs and expenses of administration, including independent registered public accounting and legal costs;
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costs of preparing and filing reports or other documents with the SEC;
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interest payable on debt, if any, incurred to finance our investments;
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offerings of our common stock and other securities;
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registration and listing fees;
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fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments;
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transfer agent and custodial fees;
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independent directors fees and expenses;
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marketing and distribution-related expenses;
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the costs of any reports, proxy statements or other notices to stockholders, including printing and postage costs;
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our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
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organizational costs; and
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all other expenses incurred by us or the Administrator in connection with administering our business, such as our allocable portion of overhead under
the administration agreement, including rent and our allocable portion of the cost of our chief financial officer and chief compliance officer and their respective staffs.
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We expect our general and administrative operating expenses related to our ongoing
operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines.
Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities
relative to comparative periods, among other factors.
Portfolio and Investment Activity
During the three months ended September 30, 2013, we invested $66.3 million across 5 portfolio companies. This compares to investing
$27.4 million in 3 portfolio companies for the three months ended September 30, 2012. Investment sales and prepayments during the three months ended September 30, 2013 totaled $349.8 million versus $71.5 million for the three months ended
September 30, 2012.
At September 30, 2013, our portfolio consisted of 40 portfolio companies and was invested 42.6%
in senior secured loans, 25.8% in subordinated debt, 2.3% in preferred equity and 29.3% in common equity and warrants measured at fair value versus 41 portfolio companies invested 40.7% in senior secured loans, 42.3% in subordinated debt, 12.6% in
preferred equity and 4.4% in common equity and warrants measured at fair value at September 30, 2012.
The weighted
average yields on our portfolio of income producing investments were 11.6% and 13.9%, respectively, at September 30, 2013 and September 30, 2012 measured at fair value.
At September 30, 2013, 56.1% or $601.1 million of our income-producing investment portfolio
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is floating rate and 43.9% or $470.6 million is fixed rate, measured
at fair value. At September 30, 2012, 29.1% or $319.7 million of our income-producing investment portfolio was floating rate and 70.9% or $778.5 million was fixed rate, measured at fair value. As of September 30, 2013, we had one issuer on
non-accrual status. As of September 30, 2012, we had two issuers on non-accrual status.
Solar Capital Ltd. and its
predecessor companies have invested approximately $3.2 billion in 93 portfolio companies. Over the same period, Solar Capital Ltd. has completed transactions with more than 75 different financial sponsors.
Crystal Capital Financial Holdings LLC
On December 28, 2012, we completed the acquisition of Crystal Capital Financial Holdings LLC (Crystal Financial), a
commercial finance company focused on providing asset-based and other secured financing solutions, from SSP Energy Ltd., Quartz Managers LLC and Quantum Strategic Partners Ltd. (the Crystal Acquisition) pursuant to a definitive agreement
entered into on December 17, 2012. We invested $275 million in cash to effect the Crystal Acquisition using our available liquidity, including operating cash and borrowings under our existing credit facilities. Crystal Financial had a
diversified portfolio of 23 loans having a total par value of approximately $400 million at November 30, 2012 and a $275 million revolving credit facility.
As of September 30, 2013, Crystal Financial had 23 funded commitments to 19 different borrowers with a total par value of approximately $351.5 million. All loans were floating rate with the largest
loan outstanding totaling $34.1 million. The average exposure per issuer was $18.5 million and none of the loans were on non-accrual status. Crystal Financials credit facility, which is non-recourse to Solar Capital, had approximately $87.0
million of borrowings outstanding. For the three months ended September 30, 2013, Crystal Financial had net income of $6.9 million on gross income of $11.1 million. For the nine months ended September 30, 2013, Crystal Financial had net
income of $22.7 million on gross income of $33.9 million. Due to the timing of non-cash items, there may be material differences between GAAP net income and distributions to shareholders.
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We have included Crystal Capital Financial Holdings LLC as 100% floating rate at September 30, 2013.
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Stock Repurchase Program
On July 31, 2013, the Companys board of directors authorized a program for the purpose of repurchasing up to $100 million of its common stock. Under the repurchase program, the Company may, but
is not obligated to, repurchase its outstanding common stock in the open market from time to time provided that the Company complies with the prohibitions under its Insider Trading Policies and Procedures and the guidelines specified in Rule 10b-18
and 10b-5 of the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. Unless extended by the Companys board of directors, the Company expects the repurchase program to be in place until
the earlier of January 31, 2014 or until $100 million of the Companys outstanding shares of common stock have been repurchased. During the three months ended September 30, 2013, the Company repurchased 717,031 shares at an average
price of approximately $21.99 per share, inclusive of commissions. This represents a discount of approximately 1.8% of the last reported net asset value per share at the time of the purchases. The total dollar amount of shares repurchased in this
period is $15.8 million, leaving a maximum of $84.2 million available for future program purchases.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the
periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Valuation of Portfolio Investments
We conduct the valuation of our
assets, pursuant to which our net asset value is determined, at all times consistent with GAAP, and the 1940 Act. Our valuation procedures are set forth in more detail below:
Under procedures established by our board of directors (the Board), we value investments, including certain senior secured debt, subordinated debt and other debt securities with maturities
greater than 60 days, for which market quotations are readily available, at such market quotations (unless they are deemed not to represent fair value). We attempt to obtain market quotations from at least two brokers or dealers (if available,
otherwise from a principal market maker or a primary market dealer or other independent pricing service). We utilize mid-market pricing as a practical expedient for fair value unless a different point within the range is more representative. If and
when market quotations are deemed not to represent fair value, we typically utilize independent third party valuation firms to assist us in determining fair value. Accordingly, such investments go through our multi-step valuation process as
described below. In each case, our independent valuation firms consider observable market inputs together with significant unobservable inputs in arriving at their valuation recommendations. Debt investments with remaining maturities of 60 days or
less shall each be valued at cost with interest accrued or discount amortized to the date of maturity, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at
fair value as determined in good faith by or under the direction of our Board. Investments that are not publicly traded or whose market quotations are not readily available are valued at fair value as determined in good faith by or under the
direction of our Board. Such determination of fair values involves subjective judgments and estimates.
With respect to
investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board has approved a multi-step valuation process each quarter, as described below:
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our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Investment Adviser
responsible for the portfolio investment;
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preliminary valuation conclusions are then documented and discussed with senior management of the Investment Adviser;
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independent valuation firms engaged by our Board conduct independent appraisals and review the Investment Advisers preliminary valuations and make their own
independent assessment;
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the audit committee of the Board reviews the preliminary valuation of the Investment Adviser and that of the independent valuation firm and responds to the valuation
recommendation of the independent valuation firm to reflect any comments; and
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the Board discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the
respective independent valuation firm and the audit committee.
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Investments in all asset classes are valued
utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a
business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about
those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and
transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio companys ability to make payments, its earnings and discounted
cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, our principal market (as the reporting entity) and enterprise values, among other factors.
When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the nine months ended September 30, 2013, there has been no change to the Companys valuation
techniques and the nature of the related inputs considered in the valuation process.
Accounting Standards Codification
(ASC) 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1
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Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2
: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or
liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3
: Unobservable
inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to each investment.
Determination of fair value involves subjective judgments and
estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.
Valuation of Senior Secured Credit Facility and Senior Secured Notes
The Company has made an irrevocable election to apply the fair value option of accounting to its senior secured credit facility led by
Citibank (the Credit Facility) and its senior secured notes (the Senior Secured Notes), in accordance with ASC 825-10. We believe accounting for the Credit Facility and Senior Secured Notes at fair value will better align the
measurement methodologies of assets and liabilities, which may mitigate certain earnings volatility. As a result of this election, approximately $5.0 million of costs related solely to the establishment of the Credit Facility and Senior Secured
Notes were expensed during the year ended December 31, 2012, rather than being deferred and amortized over their stated or expected life. Concurrent with the election, the Company also accelerated approximately $2.3 million of unamortized costs
from the prior Citibank led credit facility.
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Revenue Recognition
The Company records interest and dividend income, adjusted for amortization of premium and accretion of discount, on an accrual basis. Investments that are expected to pay regularly scheduled interest
and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividend cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest/dividend cash payments will be
collected. Such non-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in managements judgment, are likely to continue timely payment of their remaining interest or dividend
obligations. Interest or dividend cash payments received on non-accrual designated investments may be recognized as income or applied to principal depending upon managements judgment. Some of our investments may have contractual PIK interest
or dividends. PIK interest and dividends computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or
in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, the Company capitalizes the accrued
interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes due at the maturity of the investment or upon the investment being called by the issuer. At the point the Company
believes PIK is not expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends is reversed from the related receivable
through interest or dividend income, respectively. The Company does not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK
investments on non-accrual status are restored to accrual status if the Company again believes that PIK is expected to be realized. Loan origination fees, original issue discount, and market discounts are capitalized and amortized into income using
the interest method or straight-line, as applicable. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and other investments as interest income when we
receive such amounts. Capital structuring fees are recorded as other income when earned.
Net Realized Gain or Loss and Net Change in
Unrealized Gain or Loss
We generally measure realized gain or loss by the difference between the net proceeds from the
repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in
unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized.
Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances
that would result in materially different amounts being reported.
RESULTS OF OPERATIONS
Results comparisons are for three and nine months ended September 30, 2013 and September 30, 2012:
Investment Income
For
the three and nine months ended September 30, 2013, gross investment income totaled $43.0 million and $128.2 million, respectively. For the three and nine months ended September 30, 2012, gross investment income totaled $40.6 million and
$111.8 million, respectively. The increase in gross investment income from the three months ended September 30, 2012 as compared to the three months ended September 30, 2013 was primarily due to an increase in the receipt of prepayment fees and
accelerated amortization of upfront fees resulting from higher portfolio repayments, partially offset by a lower weighted average portfolio yield. The increase in gross investment income from the nine months ended September 30, 2012 as compared to
the nine months ended September 30, 2013 was due to two major factors: an increase in the average size of the income-producing portfolio as well as an increase in the receipt of prepayment fees and accelerated amortization of upfront fees resulting
from higher portfolio repayments. These two factors were partially offset by a lower weighted average portfolio yield.
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Expenses
Expenses totaled $21.4 million and $61.8 million, respectively, for the three and nine months ended September 30, 2013, of which $12.0 million and $37.6 million, respectively, were base management
fees and performance-based incentive fees and $6.8 million and $16.4 million, respectively, were interest and other debt related expenses. Administrative services, insurance and other general and administrative expenses totaled $2.6 million and $7.8
million, respectively, for the three and nine months ended September 30, 2013. This compares to expenses totaling $18.4 million and $54.1 million, respectively, for the three and nine months ended September 30, 2012, of which $11.6 million
and $31.5 million, respectively, were base management fees and performance-based incentive fees and $3.5 million and $15.2 million, respectively, were interest and other debt related expenses. Administrative services, insurance and other general and
administrative expenses totaled $3.2 million and $7.0 million, respectively, for the three and nine months ended September 30, 2012. In addition, income tax expense totaled $0.1 and $0.3 million, respectively, for the three and nine months
ended September 30, 2012. Operating expenses consist of base management and incentive fees, administrative services fees, insurance expenses, legal fees, directors fees, audit and tax services expenses, transfer agent fees, and other
general and administrative expenses. The increase in expenses for the three month period ended September 30, 2012 compared to the three month period ended September 30, 2013 was primarily due to $2.6 million of expenses resulting from the
amendment of our Credit Facility and extinguishment of our revolving credit facility with Wells Fargo. For the comparative nine month periods, the increase in expenses was primarily due to growth in the average size of our portfolio of assets and
our business in general.
Net Investment Income
The Companys net investment income totaled $21.6 million and $66.4 million or $0.48 and $1.49 per average share, for the three and nine months ended September 30, 2013, respectively. The
Companys net investment income totaled $22.3 million and $57.7 million or $0.60 and $1.57 per average share, for the three and nine months ended September 30, 2012, respectively.
Net Realized Gain (Loss)
The Company had investment sales and prepayments
totaling $349.8 million and $491.9 million, for the three and nine months ended September 30, 2013, respectively. Net realized loss for the three and nine months ended September 30, 2013 totaled $15.7 million and $16.9 million,
respectively. The Company had investment sales and prepayments totaling $71.5 million and $213.1 million, for the three and nine months ended September 30, 2012, respectively. Net realized gain (loss) for the three and nine months ended
September 30, 2012 totaled $0.4 million and ($9.6) million, respectively. Net realized loss for the three and nine months ended September 30, 2013 was primarily related to the exit of our investment in DSW Group, Inc. Net realized gain for
the three months ended September 30, 2012 was not significant. Net realized loss for the nine months ended September 30, 2012 was primarily related to the restructuring of our investment in DSW Group, Inc. partially offset by sales of
selected other assets.
Net Change in Unrealized Gain (Loss)
For the three and nine months ended September 30, 2013, net change in unrealized gain (loss) on the Companys assets and liabilities totaled $4.6 million and ($3.2) million, respectively. For
the three and nine months ended September 30, 2012, net change in unrealized gain on the Companys assets and liabilities totaled $7.6 million and $44.4 million, respectively. Net unrealized gain for the three months ended
September 30, 2013 was primarily attributable to the realization of previously recognized unrealized losses on exited investments. During the nine months ended September 30, 2013, net unrealized losses stemmed from depreciation in the
value of investments in ARK Real Estate Partners and Rug Doctor, Inc. as well as modest yield widening on our portfolio, partially offset by the realization of previously recognized unrealized losses on exited investments. During the three and nine
months ended September 30, 2012, unrealized gain was primarily derived from a general tightening of credit spreads and modestly improved overall health of the investment portfolio.
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Net Increase in Net Assets from Operations
For the three and nine months ended September 30, 2013, the Company had a net increase in net assets resulting from operations of
$10.6 million and $46.4 million, respectively. For the three and nine months ended September 30, 2012, the Company had a net increase in net assets resulting from operations of $30.2 million and $92.5 million, respectively. For the three and
nine months ended September 30, 2013, basic and diluted earnings per average share were $0.24 and $1.04, respectively. For the three and nine months ended September 30, 2012, basic and diluted earnings per average share were $0.82 and
$2.52, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Companys liquidity and capital resources are generated and generally available through its Credit Facility maturing in June 2018, through cash flows from operations, investment sales,
prepayments of senior and subordinated loans, income earned on investments and cash equivalents, and periodic follow-on equity and/or debt offerings. As of September 30, 2013, we had a total of $440.0 million of unused borrowing capacity under
our Credit Facility, subject to borrowing base limits.
We may from time to time issue equity and/or debt securities in either
public or private offerings. The issuance of such securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. The primary use of existing funds
and any funds raised in the future is expected to be for investments in portfolio companies, repayment of indebtedness, cash distributions to our shareholders, or for other general corporate purposes.
On January 11, 2013, the Company closed its most recent follow-on public equity offering of 6.3 million shares of common stock
at $24.40 per share raising approximately $146.9 million in net proceeds. The primary use of the funds raised were for investments in portfolio companies, reductions in revolving debt outstanding and for other general corporate purposes.
On November 16, 2012, we issued $100 million in aggregate principal amount of 6.75% unsecured senior notes due 2042 (the
Unsecured Notes) for net proceeds of $96.9 million. Interest on the Unsecured Notes is paid quarterly on February 15, May 15, August 15 and November 15, at a rate of 6.75% per year, commencing on
February 15, 2013. The Unsecured Notes mature on November 15, 2042. The Company may redeem the Unsecured Notes in whole or in part at any time or from time to time on or after November 15, 2017.
On August 23, 2012, the Company closed a follow-on public equity offering of 2.0 million shares of common stock at $22.51 per
share raising approximately $45 million in proceeds. In the future, the Company may raise additional equity or debt capital, among other considerations.
On May 10, 2012, the Company closed a private offering of $75 million of Senior Secured Notes (the Senior Secured Notes) with a fixed interest rate of 5.875% and a maturity date of
May 10, 2017. Interest on the Senior Secured Notes is due semi-annually on May 10 and November 10. The Senior Secured Notes were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933, as amended.
The primary use of existing funds and any funds raised in the future is expected to be
for repayment of indebtedness, investments in portfolio companies, cash distributions to our shareholders or for other general corporate purposes.
Cash Equivalents
We deem certain U.S. Treasury bills, repurchase
agreements and other high-quality, short-term debt securities as cash equivalents. From time to time, including at the end of each fiscal quarter, we consider using various treasury strategies for our business. One strategy includes taking proactive
steps by utilizing cash
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equivalents with the objective of enhancing our investment flexibility during the following quarter pursuant to Section 55 of the 1940 Act. More specifically, we may purchase U.S. Treasury
bills from time-to-time on the last business day of the quarter and typically close out that position on the following business day, settling the sale transaction on a net cash basis with the purchase, subsequent to quarter end. We may also utilize
repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of
computing the asset base upon which the management fee is determined. There were no cash equivalents held as of September 30, 2013.
Debt
Unsecured Senior Notes
On November 16, 2012, the Company and U.S. Bank National Association entered into an Indenture and a First
Supplemental Indenture relating to the Companys issuance, offer and sale of $100 million aggregate principal amount of its 6.75% Unsecured Senior Notes due 2042. The Unsecured Notes will mature on November 15, 2042 and may be redeemed in
whole or in part at the Companys option at any time or from time to time on or after November 15, 2017 at a redemption price of $25 per security plus accrued and unpaid interest. The Unsecured Notes bear interest at a rate of
6.75% per year payable quarterly on February 15, May 15, August 15 and November 15 of each year, commencing on February 15, 2013. The Unsecured Notes are direct senior unsecured obligations of the Company.
Revolving & Term Loan Facility
In July 2013, the Company amended its Credit Facility, composed of $440 million of revolving credit and $50 million in term loans. Expenses totaling $2.6 million were incurred during the quarter ended
September 30, 2013 as a result of this amendment and the retirement of our $100 million revolving credit facility with Wells Fargo Securities, LLC. Borrowings generally bear interest at a rate per annum equal to the base rate plus 2.25% or the
alternate base rate plus 1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures in June 2018 and includes ratable amortization in the final year. The Credit Facility may be increased up to $800 million with additional
new lenders or an increase in commitments from current lenders. The Credit Facility contains certain customary affirmative and negative covenants and events of default. In addition, the Credit Facility contains certain financial covenants that among
other things, requires the Company to maintain a minimum shareholders equity and a minimum asset coverage ratio. The Company also pays issuers of funded term loans quarterly in arrears a commitment fee at the rate of 0.25% per annum on
the average daily outstanding balance. In conjunction with the establishment of the Facility, the predecessor facility and a term loan were retired, resulting in $2.3 million of non-recurring charges to expense unamortized costs in the year ended
December 31, 2012. At September 30, 2013, total outstanding USD equivalent borrowings under the Credit Facility were the $50 million in term loans.
Senior Secured Notes
On May 10, 2012, the Company closed a private
offering of $75 million of Senior Secured Notes with a fixed interest rate of 5.875% and a maturity date of May 10, 2017. Interest on the Senior Secured Notes is due semi-annually on May 10 and November 10. The Senior Secured Notes
were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended.
Certain covenants on our issued debt may restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions
required to maintain our status as a RIC under Subchapter M of the Code. At September 30, 2013, the Company was in compliance with all financial and operational covenants required by the Credit Facilities.
41
Contractual Obligations
A summary of our significant contractual payment obligations is as follows as of September 30, 2013:
Payments Due by Period
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Total
|
|
|
Less than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More Than
5 Years
|
|
Revolving credit facility
(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Unsecured senior notes
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
|
Senior secured notes
|
|
|
75.0
|
|
|
|
|
|
|
|
|
|
|
|
75.0
|
|
|
|
|
|
Term Loans
|
|
|
50.0
|
|
|
|
|
|
|
|
|
|
|
|
50.0
|
|
|
|
|
|
(1)
|
As of September 30, 2013, we had a total of $440.0 million of unused borrowing capacity under our revolving credit facilities, subject to borrowing base limits.
|
Information about our senior securities is shown in the following table as of each year ended December 31
since the Company commenced operations, unless otherwise noted. The indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
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|
|
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|
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Class and Year
|
|
Total
Amount
Outstanding
(1)
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|
|
Asset
Coverage
Per
Unit
(2)
|
|
|
Involuntary
Liquidating
Preference
Per Unit
(3)
|
|
|
Average
Market Value
Per Unit
(4)
|
|
Revolving Credit Facilities
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2013 (through September 30, 2013)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
264,452
|
|
|
|
1,510
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2011
|
|
|
201,355
|
|
|
|
3,757
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2010
|
|
|
400,000
|
|
|
|
2,668
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2009
|
|
|
88,114
|
|
|
|
8,920
|
|
|
|
|
|
|
|
N/A
|
|
Unsecured Senior Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2013 (through September 30, 2013)
|
|
$
|
100,000
|
|
|
$
|
2,393
|
|
|
|
|
|
|
$
|
965
|
|
Fiscal 2012
|
|
|
100,000
|
|
|
|
571
|
|
|
|
|
|
|
|
923
|
|
Senior Secured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2013 (through September 30, 2013)
|
|
$
|
75,000
|
|
|
$
|
1,794
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
75,000
|
|
|
|
428
|
|
|
|
|
|
|
|
N/A
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2013 (through September 30, 2013)
|
|
$
|
50,000
|
|
|
$
|
1,196
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
50,000
|
|
|
|
285
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2011
|
|
|
35,000
|
|
|
|
653
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2010
|
|
|
35,000
|
|
|
|
233
|
|
|
|
|
|
|
|
N/A
|
|
(1)
|
Total amount of each class of senior securities outstanding at the end of the period presented.
|
(2)
|
The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and
indebtedness not represented by senior securities, divided by all senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset
Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit is allocated based on the amount outstanding in each class of debt at the end of the period.
|
(3)
|
The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.
|
(4)
|
Not applicable except for the Unsecured Senior Notes which are publicly traded. The Average Market Value Per Unit is calculated by taking the daily average closing
price during the period and dividing it by twenty-five dollars per share and multiplying the result by one thousand to determine a unit price per thousand consistent with Asset Coverage Per Unit.
|
42
We have also entered into two contracts under which we have future commitments: the
Investment Advisory and Management Agreement, pursuant to which Solar Capital Partners has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which Solar Capital Management has agreed to furnish us with the
facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the Investment
Advisory and Management Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the Administration Agreement are equal to an amount based upon our allocable
portion of Solar Capital Managements overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chief
compliance officer and their respective staffs. Either party may terminate each of the investment advisory and management agreement and administration agreement without penalty upon 60 days written notice to the other. See note 3 to our
Consolidated Financial Statements.
Off-Balance Sheet Arrangements
In the normal course of its business, we trade various financial instruments and may enter into various investment activities with
off-balance sheet risk, which include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial
instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Statement of Assets and Liabilities.
Dividends and Distributions
The following table reflects the cash dividends and distributions per share on our common stock since our initial public offering:
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|
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount
|
|
Fiscal 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30, 2013
|
|
|
December 19, 2013
|
|
|
|
January 3, 2014
|
|
|
$
|
0.40
|
|
July 24, 2013
|
|
|
September 19, 2013
|
|
|
|
October 2, 2013
|
|
|
|
0.40
|
|
May 7, 2013
|
|
|
June 20, 2013
|
|
|
|
July 1, 2013
|
|
|
|
0.60
|
|
February 25, 2013
|
|
|
March 21, 2013
|
|
|
|
April 2, 2013
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2013
|
|
|
|
|
|
|
|
|
|
$
|
2.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2012
|
|
|
December 20, 2012
|
|
|
|
January 3, 2013
|
|
|
$
|
0.60
|
|
July 31, 2012
|
|
|
September 20,2012
|
|
|
|
October 2, 2012
|
|
|
|
0.60
|
|
May 1, 2012
|
|
|
June 19, 2012
|
|
|
|
July 3, 2012
|
|
|
|
0.60
|
|
February 22, 2012
|
|
|
March 20, 2012
|
|
|
|
April 3, 2012
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2012
|
|
|
|
|
|
|
|
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
November 1, 2011
|
|
|
December 15, 2011
|
|
|
|
December 29, 2011
|
|
|
$
|
0.60
|
|
August 2, 2011
|
|
|
September 20, 2011
|
|
|
|
October 4, 2011
|
|
|
|
0.60
|
|
May 2, 2011
|
|
|
June 17, 2011
|
|
|
|
July 5, 2011
|
|
|
|
0.60
|
|
March 1, 2011
|
|
|
March 17, 2011
|
|
|
|
April 4, 2011
|
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2011
|
|
|
|
|
|
|
|
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2, 2010
|
|
|
December 17, 2010
|
|
|
|
December 30, 2010
|
|
|
$
|
0.60
|
|
August 3, 2010
|
|
|
September 17, 2010
|
|
|
|
October 4, 2010
|
|
|
|
0.60
|
|
May 4, 2010
|
|
|
June 17, 2010
|
|
|
|
July 2, 2010
|
|
|
|
0.60
|
|
January 26, 2010
|
|
|
March 18, 2010
|
|
|
|
April 1, 2010
|
|
|
|
0.34
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2010
|
|
|
|
|
|
|
|
|
|
$
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Partial period dividend of $0.60 per share pro-rated for the number of days that remained in the quarter after our initial public offering.
|
Tax characteristics of all dividends will be reported to shareholders on Form 1099 after the end of the calendar year. Future quarterly
dividends, if any, will be determined by our Board. We expect that our dividends and distributions to stockholders will generally be from accumulated net investment income and from net realized capital gains, if any, as applicable.
We have elected to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC status, we must distribute at least 90% of our
ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital
gains (
i.e.
, net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.
We maintain an opt out dividend reinvestment plan for our common stockholders. As a result, if we declare a
dividend, then stockholders cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so as to receive cash dividends.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of
these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may
limit our ability to declare dividends if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us
as a regulated investment company. In addition, in accordance with U.S. generally accepted accounting principles and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind
interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing
such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company.
With respect to the dividends to stockholders, income from origination, structuring, closing, commitment and certain other upfront fees
associated with investments in portfolio companies are treated as taxable income and accordingly, distributed to stockholders.
44
Related Parties
We have entered into a number of business relationships with affiliated or related parties, including the following:
|
|
|
We have entered into an Investment Advisory and Management Agreement with Solar Capital Partners. Mr. Gross, our chairman and chief executive
officer, is the managing member and a senior investment professional of, and has financial and controlling interests in, Solar Capital Partners. In addition, Mr. Spohler, our chief operating officer is a partner and a senior investment
professional of, and has financial interests in, Solar Capital Partners.
|
|
|
|
Solar Capital Management provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our
Administration Agreement. We reimburse Solar Capital Management for the allocable portion of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses
associated with performing compliance functions, and the compensation of our chief compliance officer, our chief financial officer and any administrative support staff. Solar Capital Partners, our investment adviser, is the sole member of and
controls Solar Capital Management.
|
|
|
|
We have entered into a license agreement with Solar Capital Partners, pursuant to which Solar Capital Partners has granted us a non-exclusive,
royalty-free license to use the name Solar Capital.
|
Solar Capital Partners and its affiliates
may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, Solar Capital Partners presently serves as investment adviser to Solar Senior Capital Ltd., a publicly traded
BDC, which focuses on investing primarily in senior secured loans, including first lien, uni-tranche and second lien debt instruments. In addition, Michael S. Gross, our chairman and chief executive officer, Bruce Spohler, our chief operating
officer, and Richard L. Peteka, our chief financial officer, serve in similar capacities for Solar Senior Capital Ltd. Solar Capital Partners and its affiliates may determine that an investment is appropriate for us and for one or more of those
other funds. In such event, depending on the availability of such investment and other appropriate factors, Solar Capital Partners or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments
will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with Solar Capital Partners allocation procedures.
In addition, we have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors
also remain subject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law.