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). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification (ASC) Topic 946. In addition, for tax purposes, the Company
has elected to be treated as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended (the Code).
On February 9, 2010, 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 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, LLC (the Investment Adviser). Solar Capital Management, LLC (the Administrator) 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 June 30, 2014, the Investment Adviser has invested approximately
$4.2 billion in more than 160 different portfolio companies since it was founded in 2006. Over the same period, the Investment Adviser completed transactions with more than 100 different financial sponsors.
Recent Developments
On
July 31, 2014, the Companys stock repurchase program expired.
On August 4, 2014, our Board declared a
quarterly distribution of $0.40 per share payable on October 1, 2014 to holders of record as of September 18, 2014.
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 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 the Investment Adviser. 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 the Investment Adviser 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 June 30, 2014, we invested approximately $89.4 million across 9 portfolio companies. This compares
to investing approximately $101.3 million in 5 portfolio companies for the three months ended June 30, 2013. Investments sold or prepaid during the three months ended June 30, 2014 totaled approximately $137.8 million versus approximately
$72.8 million for the three months ended June 30, 2013.
At June 30, 2014, our portfolio consisted of 43 portfolio
companies and was invested 57.9% in senior secured loans, 18.3% in subordinated debt, 2.3% in preferred equity and 21.5% in common equity and warrants measured at fair value versus 41 portfolio companies invested 37.9% in senior secured loans, 28.3%
in subordinated debt, 10.1% in preferred equity and 23.7% in common equity and warrants measured at fair value at June 30, 2013.
The weighted average yields on our portfolio of income producing investments were 10.5% and 12.1%, respectively, at June 30, 2014 and 2013, measured at fair value.
At June 30, 2014, 71.0% or $663.1 million of our income producing investment portfolio* is floating rate and 29.0% or $271.1 million
is fixed rate, measured at fair value. At June 30, 2013, 51.5% or $634.9 million of our income producing investment portfolio* was floating rate and 48.5% or $599.1 million was fixed rate, measured at fair value. As of June 30, 2014 and
2013, we had one and two issuers on non-accrual status, respectively.
Since inception, Solar Capital Ltd. and its predecessor
companies have invested approximately $3.5 billion in 112 portfolio companies. Over the same period, Solar Capital Ltd. has completed transactions with more than 80 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. Crystal Financial owns approximately 98% of the outstanding ownership interest in Crystal Financial LLC. The remaining financial interest is held by various employees of Crystal Financial LLC, through their
investment in Crystal Management LP. Crystal Financial LLC had a diversified portfolio of 23 loans having a total par value of approximately $400 million at November 30, 2012 and a $275 million committed revolving credit facility. On January
27, 2014 the revolving credit facility was expanded to $300 million.
As of June 30, 2014, Crystal Financial had 28
funded commitments to 24 different issuers with a total par value of approximately $351.0 million on total assets of $431.1 million. As of June 30, 2013, total par value and total assets were $364.1 million and $434.4 million, respectively. All
loans were floating rate with the largest loan outstanding totaling $29.1 million. The average exposure per issuer was $14.6 million. Crystal Financials credit facility, which is non-recourse to Solar Capital, had approximately $150.0
million of borrowings outstanding at June 30, 2014. For the three and six months ended June 30, 2014, Crystal Financial had net income of $1.8 million and $9.6 million on gross income of $12.6 million and $14.0 million,
respectively. For
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We have included Crystal Capital Financial Holdings LLC as 100% floating rate.
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the three and six months ended June 30, 2013, Crystal Financial had net income of $9.4 million and $15.9 million on gross income of $26.8 million and $26.4 million, respectively. Due to
timing and non-cash items, there may be material differences between GAAP net income and available cash distributions.
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 the Companys 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. On
December 5, 2013, the Companys board of directors extended the repurchase program to be in place until the earlier of July 31, 2014 or until $100 million of the Companys outstanding shares of common stock have been repurchased.
During the six months ended June 30, 2014, the Company repurchased 1,779,033 shares at an average price of approximately $21.97 per share, inclusive of commissions. This represented a discount of approximately 2.1% of the net asset value per
share at June 30, 2014. The total dollar amount of shares repurchased in this period is $39.1 million, leaving a maximum of $43.4 million available if the program is extended. During the year ended December 31, 2013, the Company
repurchased 796,418 shares at an average price of approximately $21.98 per share, inclusive of commissions, for a total dollar amount of $17.5 million. This represented a discount of approximately 2.3% of the net asset value per share at
December 31, 2013.
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.
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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 six months ended June 30, 2014, 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)
Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1
: Quoted prices
in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2
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Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3
: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value
measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of
the asset class and our prior experience.
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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 Credit Facility and its 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.
Revenue Recognition
The Company records dividend income and interest, 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 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.
The higher yields and interest rates on PIK securities reflects
the payment deferral and increased credit risk associated with such instruments and that such investments may represent a significantly higher credit risk than coupon loans. PIK securities may have unreliable valuations because their continuing
accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a
compounding rate. In addition, the deferral of PIK interest also increases the loan-to-value ratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Adviser based on non-cash accruals that ultimately may
not be realized, but the Adviser will be under no obligation to reimburse the Company for these fees.
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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 and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in
materially different amounts being reported.
Income Taxes
Solar Capital Ltd., a U.S. corporation, has elected to be treated as a RIC under Subchapter M of the Code, as amended. In order to qualify
as a RIC, among other things, the Company is required to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax
year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual
taxable income will be in excess of estimated current year distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income. As of June 30, 2014, the accrual for excise tax was $0.
RESULTS OF OPERATIONS
Results comparisons are for the three and six months ended June 30, 2014 and 2013:
Investment Income
For
the three and six months ended June 30, 2014, gross investment income totaled $28.0 million and $60.6 million, respectively. For the three and six months ended June 30, 2013, gross investment income totaled $39.1 million and
$85.2 million, respectively. The decrease in gross investment income year over year was primarily due to a smaller income producing portfolio from the net effect of portfolio repayments, as well as portfolio yield compression.
Expenses
Expenses
totaled $11.9 million and $27.1 million, respectively, for the three and six months ended June 30, 2014, of which $6.2 million and $15.6 million, respectively, were base management fees and performance-based incentive fees and $3.6 million and
$7.2 million, respectively, were interest and other credit facility expenses. Administrative services and other general and administrative expenses totaled $2.1 million and $4.3 million, respectively, for the three and six months ended June 30,
2014. Expenses totaled $19.9 million and $40.5 million, respectively, for the three and six months ended June 30, 2013, of which $12.1 million and $25.6 million, respectively, were base management fees and performance-based incentive fees and
$4.8 million and $9.6 million, respectively, were interest and other credit facility expenses. Administrative services and other general and administrative expenses totaled $3.0 million and $5.2 million, respectively, for the three and six months
ended June 30, 2013. Operating expenses generally consist of base management and performance-based incentive fees, administrative services fees, insurance expenses, legal fees, directors fees, transfer agency fees, printing and proxy
expenses, audit and tax services expenses, and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, among others. The decrease in
expenses year over year was primarily due to a decrease in management and performance-based incentive fees on lower investment income and portfolio size, as well as decreases in debt expenses due to lower average borrowings.
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Net Investment Income
The Companys net investment income totaled $16.1 million and $33.6 million, or $0.38 and $0.77, per average share, respectively, for the three and six months ended June 30, 2014. The
Companys net investment income totaled $19.3 million and $44.8 million, or $0.43 and $1.00, per average share, respectively, for the three and six months ended June 30, 2013.
Net Realized Loss
The Company had investment sales and prepayments
totaling approximately $138 million and $346 million, respectively, for the three and six months ended June 30, 2014. Net realized losses over the same periods were $0.7 million and $27.1 million, respectively. The Company had investment sales
and prepayments totaling approximately $73 million and $142 million, respectively, for the three and six months ended June 30, 2013. Net realized losses over the same periods were $1.9 million and $1.2 million, respectively. Net realized losses
for the three months ended June 30, 2014 were primarily related to the expiration of an interest rate cap. Net realized losses for the six months ended June 30, 2014 were primarily related to the partial realization of previously
recognized unrealized losses on our investment in ARK Real Estate, L.P. Net realized loss for the three and six months ended June 30, 2013 was primarily related to sales of selected assets.
Net Change in Unrealized Gain (Loss)
For the three and six months ended June 30, 2014, net change in unrealized gain (loss) on the Companys assets and liabilities totaled $1.7 million and $24.4 million, respectively. For the three
and six months ended June 30, 2013, net change in unrealized loss on the Companys assets and liabilities totaled $17.4 million and $7.8 million, respectively. Net unrealized gain for the three months ended June 30, 2014 is primarily
due to the reversal of unrealized depreciation on an expired interest rate cap. Net unrealized gain for the six months ended June 30, 2014 is primarily due to the reversal of unrealized depreciation on our investment in Ark Real Estate, L.P.
Net unrealized loss for the three and six months ended June 30, 2013 was primarily attributable to the decline in value of two of our investments, DS Waters and Rug Doctor, along with modest yield widening in the overall portfolio.
Net Increase (Decrease) in Net Assets From Operations
For the three and six months ended June 30, 2014, the Company had a net increase in net assets resulting from operations of $17.1 million and $30.8 million, respectively. For the same periods,
earnings per average share were $0.40 and $0.71, respectively. For the three and six months ended June 30, 2013, the Company had a net increase (decrease) in net assets resulting from operations of ($0.0) million and $35.8 million,
respectively. For the same periods, earnings (loss) per average share were ($0.00) and $0.80, 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
June 30, 2014, we had a total of $490.0 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 uses 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.
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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 uses 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
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 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.
The primary uses 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 temporary investment strategies for our business. One strategy includes
taking proactive steps by utilizing cash equivalents with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other
high-quality, short-term debt securities at the end of the quarter and typically close out the position on a net cash basis 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. We held
$490 million in cash equivalents as of June 30, 2014.
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 Unsecured Notes. 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.
Subsequently, in December 2013, a commitment increase was executed providing an additional $50 million of revolving credit, bringing the total revolving credit capacity to $490 million. Borrowings generally bear interest at a rate per annum equal to
the base rate plus 2.25% or the alternate base rate
38
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 Credit 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. Expenses associated with the July 2013 amendment of the Credit Facility, the retirement of our $100 million revolving credit facility with Wells Fargo Securities, LLC as well as the
subsequent December 2013 commitment increase totaled $2.5 million. At June 30, 2014, outstanding USD equivalent borrowings under the Credit Facility totaled $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 June 30, 2014, the Company was in compliance with all financial and operational covenants required by the Credit Facilities.
Contractual Obligations
A summary of our significant contractual payment obligations is as follows as of June 30, 2014:
Payments Due by Period (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
|
|
|
|
|
|
As of June 30, 2014, we had a total of $490.0 million of unused borrowing capacity under our revolving credit facilities, subject to borrowing base limits.
39
Information about our senior securities is shown in the following table as of each year
ended December 31 since the Company commenced operations, unless otherwise noted. The indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class and Year
|
|
Total Amount
Outstanding
(1)
|
|
|
Asset
Coverage
Per Unit
(2)
|
|
|
Involuntary
Liquidating
Preference
Per Unit
(3)
|
|
|
Average
Market
Value
Per Unit
(4)
|
|
Revolving Credit Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014 (through June 30, 2014)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2013
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
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 2014 (through June 30, 2014)
|
|
$
|
100,000
|
|
|
$
|
2,327
|
|
|
|
|
|
|
$
|
918
|
|
Fiscal 2013
|
|
|
100,000
|
|
|
|
2,411
|
|
|
|
|
|
|
|
934
|
|
Fiscal 2012
|
|
|
100,000
|
|
|
|
571
|
|
|
|
|
|
|
|
923
|
|
Senior Secured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014 (through June 30, 2014)
|
|
$
|
75,000
|
|
|
$
|
1,745
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2013
|
|
|
75,000
|
|
|
|
1,808
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
75,000
|
|
|
|
428
|
|
|
|
|
|
|
|
N/A
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2014 (through June 30, 2014)
|
|
$
|
50,000
|
|
|
$
|
1,163
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2013
|
|
|
50,000
|
|
|
|
1,206
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
50,000
|
|
|
|
285
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2011
|
|
|
35,000
|
|
|
|
653
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2010
|
|
|
35,000
|
|
|
|
233
|
|
|
|
|
|
|
|
N/A
|
|
(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.
|
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, LLC has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which the Administrator 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 the Administrators overhead in
performing its obligations under the Administration Agreement, including rent, technology systems,
40
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
The Company had unfunded commitments
to various revolving and delayed draw loans. The total amount of these unfunded commitments as of June 30, 2014 and December 31, 2013 is $95.4 million and $15.0 million, respectively.
In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment
activities with off-balance sheet risk, which may 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.
Distributions
The following table reflects the cash distributions per share on our common stock since our initial public offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Declared
|
|
Record Date
|
|
|
Payment Date
|
|
|
Amount
|
|
Fiscal 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
August 4, 2014
|
|
|
September 18, 2014
|
|
|
|
October 1, 2014
|
|
|
$
|
0.40
|
|
May 5, 2014
|
|
|
June 19, 2014
|
|
|
|
July 1, 2014
|
|
|
|
0.40
|
|
February 25, 2014
|
|
|
March 20, 2014
|
|
|
|
April 1, 2014
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2014
|
|
|
|
|
|
|
|
|
|
$
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
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 distribution 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 distributions will be reported to shareholders on Form 1099 after the end of the
calendar year. Future quarterly distributions, if any, will be determined by our Board. We expect that our distributions to stockholders will generally be from accumulated net investment income, from net realized capital gains or non-taxable return
of capital, 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 distribution, then stockholders cash distributions 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 distributions.
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 distributions 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 distributions 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.
42
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 the Investment Adviser. Mr. Gross, our chairman and chief executive
officer, is a managing member and a senior investment professional of, and has financial and controlling interests in, the Investment Adviser. In addition, Mr. Spohler, our chief operating officer is a managing member and a senior investment
professional of, and has financial interests in, the Investment Adviser.
|
|
|
|
The Administrator provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our
Administration Agreement. We reimburse the Administrator 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. The Investment Adviser is the sole member of and controls the Administrator.
|
|
|
|
We have entered into a license agreement with the Investment Adviser, pursuant to which the Investment Adviser has granted us a non-exclusive,
royalty-free license to use the name Solar Capital.
|
The Investment Adviser 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, the Investment Adviser 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 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. The Investment Adviser 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, the Investment Adviser 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 the Investment Advisers 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.