NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
March 31, 2016
(in thousands, except share amounts)
Note 1. Organization
Solar Capital LLC, a Maryland limited liability company, was formed in February 2007 and commenced operations on March 13, 2007 with
initial capital of $1,200,000 of which 47.04% was funded by affiliated parties.
Immediately prior to our 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 $125,000 in 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.
Solar Capital Ltd. (Solar Capital, the Company, we, us or our), 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, Solar Capital priced its initial public offering, selling 5.68 million shares, including the underwriters over-allotment, at a price of $18.50 per share. Concurrent
with this offering, the Companys senior management purchased an additional 600,000 shares through a private placement, also at $18.50 per share.
The Companys investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in leveraged middle market companies
in the form of senior secured loans, unitranche loans, mezzanine loans and equity securities. From time to time, we may also invest in public companies that are thinly traded.
Note 2. Significant Accounting Policies
The accompanying consolidated
financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (GAAP), and include the accounts of the Company and its wholly-owned subsidiaries. The
consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All
significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to the current period presentation.
Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as
appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other
13
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
parameters used in determining these estimates could cause actual results to differ materially. The current periods results of operations will not necessarily be indicative of results that
ultimately may be achieved for the fiscal year ending on December 31, 2016.
In the opinion of management, all
adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements, have been included.
The significant accounting policies consistently followed by the Company are:
|
(a)
|
Investment transactions are accounted for on the trade date;
|
|
(b)
|
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 maturities of
60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (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:
|
(1)
|
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;
|
|
(2)
|
preliminary valuation conclusions are then documented and discussed with senior management of the Investment Adviser;
|
|
(3)
|
independent valuation firms engaged by our Board conduct independent appraisals and review the Investment Advisers preliminary valuations and make their own
independent assessment for all material assets;
|
|
(4)
|
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
|
|
(5)
|
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.
|
14
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
Investments are valued utilizing a market approach, an income approach, or both
approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient as fair value. 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 three months ended March 31, 2016, there has been no change to the Companys valuation techniques and the nature of the related inputs considered in the valuation process.
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
: 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.
|
(c)
|
Gains or losses on investments are calculated by using the specific identification method.
|
|
(d)
|
The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original
issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method or on a straight-line basis, as applicable. Upon the prepayment of a loan, any unamortized loan origination fees are
recorded as interest income. We record call premiums received on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee
and other fee income for services rendered, if any, are recorded as other income when earned.
|
|
(e)
|
The Company intends to comply with the applicable provisions of the Internal Revenue Code pertaining to regulated investment companies to make distributions of taxable
income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue
excise tax on such estimated excess taxable income as appropriate.
|
15
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
|
(f)
|
Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are typically reclassified among the Companys
capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.
|
|
(g)
|
Distributions to common stockholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital
gains, if any, are generally distributed or deemed distributed at least annually.
|
|
(h)
|
In accordance with Regulation S-X and ASC Topic 810
Consolidation
, the Company consolidates its interest in investment company subsidiaries, financing
subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of
providing services to the Company.
|
|
(i)
|
The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars
based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Companys investments in foreign securities, if any, may involve certain
risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the
relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.
|
|
(j)
|
The Company has made an irrevocable election to apply the fair value option of accounting to its senior secured credit facility (the Credit Facility) and
its senior secured notes (the Senior Secured Notes) (see note 6 and 8), in accordance with ASC 825-10. The Company uses an independent third-party valuation firm to assist in measuring their fair value.
|
|
(k)
|
In accordance with ASC 835-30, the Company records origination and other expenses related to certain debt issuances as a direct deduction from the carrying amount of
the debt liability. These expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and when it approximates the
effective yield method.
|
|
(l)
|
The Company may enter into forward exchange contracts in order to hedge against foreign currency risk. These contracts are marked-to-market by recognizing the
difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled.
|
|
(m)
|
The Company records expenses related to shelf filings and applicable equity offering costs as prepaid assets. These expenses are typically charged as a reduction of
capital upon utilization, in accordance with ASC 946-20-25 or expensed per the AICPA Audit & Accounting Guide for Investment Companies.
|
|
(n)
|
Investments that are expected to pay regularly scheduled interest in cash are generally placed on
non-accrual
status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due
principal and interest are paid in cash, and in
|
16
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
|
managements judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on investments may be recognized as income
or applied to principal depending on managements judgment.
|
|
(o)
|
The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements
and other high-quality, short-term debt securities would qualify as cash equivalents.
|
Recent Accounting
Pronouncements
In February 2015, the FASB issued Accounting Standards Update (ASU) 2015-02, Consolidation (Topic
810)Amendments to the Consolidation Analysis. The update changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Public companies are required to apply ASU 2015-02
for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-02 on its consolidated financial statements and determined that the adoption of ASU 2015-02 has not had a
material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, InterestImputation
of Interest (Subtopic 835-30)Simplifying the Presentation of Debt Issuance Costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying
amount of that debt liability, consistent with debt discounts. Public companies are required to apply ASU 2015-03 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated
the impact of ASU 2015-03 on its consolidated financial statements and determined that the adoption of ASU 2015-03 has not had a material impact on our consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its
Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASBs fair
value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its
consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.
Note 3. Agreements
Solar Capital has an Advisory Agreement with the
Investment Adviser, under which the Investment Adviser will manage the day-to-day operations of, and provide investment advisory services to, Solar Capital. For providing these services, the Investment Adviser receives a fee from Solar Capital,
consisting of two componentsa base management fee and an incentive fee. The base management fee is determined by taking the average value of Solar Capitals gross assets at the end of the two most recently completed calendar quarters
calculated at an annual rate of 2.00%. From time-to-time we may purchase U.S. Treasury bills or other
high-quality,
short-term debt securities at or near 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
17
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
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.
The incentive fee has two parts, as
follows: one part is calculated and payable quarterly in arrears based on Solar Capitals pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means
interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from
portfolio companies) accrued during the calendar quarter, minus Solar Capitals operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement, and any interest expense and
distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income does not include any realized capital gains or losses, or unrealized capital appreciation or depreciation.
Pre-incentive fee net investment income, expressed as a rate of return on the value of Solar Capitals net assets at the end of the immediately preceding calendar quarter, is compared to the hurdle rate of 1.75% per quarter (7%
annualized). Solar Capital pays the Investment Adviser an incentive fee with respect to Solar Capitals
pre-incentive
fee net investment income in each calendar quarter as follows: (1) no incentive
fee in any calendar quarter in which Solar Capitals pre-incentive fee net investment income does not exceed the hurdle rate; (2) 100% of Solar Capitals pre-incentive fee net investment income with respect to that portion of such
pre-incentive
fee net investment income, if any, that exceeds the hurdle rate but is less than 2.1875% in any calendar quarter; and (3) 20% of the amount of Solar Capitals pre-incentive fee net investment
income, if any, that exceeds 2.1875% in any calendar quarter. These calculations are appropriately pro-rated for any period of less than three months.
The second part of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Advisory Agreement, as of the termination date), and will equal
20% of Solar Capitals cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all net
capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement purposes, the second part of the incentive fee is accrued based upon 20% of cumulative net
realized gains and net unrealized capital appreciation. No accrual was required for the three months ended March 31, 2016 and 2015.
For the three months ended March 31, 2016 and 2015, the Company recognized $6,748 and $5,865, respectively, in base management fees and $4,030 and $0, respectively, in performance-based incentive
fees. For the three months ended March 31, 2016 and 2015, $795 and $0, respectively, of such performance-based incentive fees were waived. The voluntary fee waiver for the three months ended March 31, 2016 was made at the Investment
Advisers discretion and is subject to recapture by the Investment Adviser and reimbursement by the Company should net investment income during and/or for fiscal 2016 equal or exceed distributions declared in fiscal 2016.
Solar Capital has also entered into an Administration Agreement with Solar Capital Management, LLC (the Administrator) under
which the Administrator provides administrative services to Solar Capital. For providing these services, facilities and personnel, Solar Capital reimburses the Administrator for Solar Capitals allocable portion of overhead and other expenses
incurred by the Administrator in performing its obligations under the Administration Agreement, including rent. The Administrator will also provide, on Solar Capitals behalf, managerial assistance to those portfolio companies to which Solar
Capital is required to provide such assistance.
18
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
For the three months ended March 31, 2016 and 2015, the Company recognized expenses
under the Administration Agreement of $1,319 and $1,039, respectively. No managerial assistance fees were accrued or collected for the three months ended March 31, 2016 and 2015.
Note 4. Net Asset Value Per Share
At March 31, 2016, the
Companys total net assets and net asset value per share were $890,567 and $21.08, respectively. This compares to total net assets and net asset value per share at December 31, 2015 of $882,698 and $20.79, respectively.
Note 5. Earnings Per Share
The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations, pursuant to ASC 260-10, for the three months ended March 31, 2016
and 2015:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Earnings per share (basic & diluted)
|
|
|
|
|
|
|
|
|
Numeratornet increase in net assets resulting from operations:
|
|
$
|
28,177
|
|
|
$
|
10,899
|
|
Denominatorweighted average shares:
|
|
|
42,287,207
|
|
|
|
42,465,162
|
|
Earnings per share:
|
|
$
|
0.67
|
|
|
$
|
0.26
|
|
Note 6. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a
framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair
value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1.
Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities
in an active market that the Company has the ability to access.
Level 2.
Financial assets and liabilities whose values
are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
|
a)
|
Quoted prices for similar assets or liabilities in active markets;
|
|
b)
|
Quoted prices for identical or similar assets or liabilities in non-active markets;
|
|
c)
|
Pricing models whose inputs are observable for substantially the full term of the asset or liability; and
|
|
d)
|
Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of
the asset or liability.
|
Level 3.
Financial assets and liabilities whose values are based on prices or
valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect managements and, if applicable, an independent third-party valuation firms own assumptions
about the assumptions a market participant would use in pricing the asset or liability.
19
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
When the inputs used to measure fair value fall within different levels of the
hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that
are observable (Levels 1 and 2) and unobservable (Level 3).
Gains and losses for assets and liabilities categorized within
the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or
liabilities. Such reclassifications are reported as transfers in/out of the appropriate category as of the end of the quarter in which the reclassifications occur.
The following tables present the balances of assets and liabilities measured at fair value on a recurring basis, as of March 31, 2016 and December 31, 2015:
Fair Value Measurements
As of March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measured at
Net Asset Value*
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/Senior Secured Loans
|
|
$
|
|
|
|
$
|
39,468
|
|
|
$
|
808,584
|
|
|
$
|
|
|
|
$
|
848,052
|
|
Subordinated Debt/Corporate Notes
|
|
|
|
|
|
|
|
|
|
|
72,876
|
|
|
|
|
|
|
|
72,876
|
|
Preferred Equity
|
|
|
|
|
|
|
|
|
|
|
17,625
|
|
|
|
|
|
|
|
17,625
|
|
Common Equity/Equity Interests/Warrants
|
|
|
399
|
|
|
|
|
|
|
|
317,920
|
|
|
|
80,980
|
|
|
|
399,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
399
|
|
|
$
|
39,468
|
|
|
$
|
1,217,005
|
|
|
$
|
80,980
|
|
|
$
|
1,337,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
347,400
|
|
|
$
|
|
|
|
$
|
347,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient as fair value have
not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.
|
Fair Value Measurements
As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Measured at
Net Asset Value*
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/Senior Secured Loans
|
|
$
|
|
|
|
$
|
35,745
|
|
|
$
|
800,291
|
|
|
$
|
|
|
|
$
|
836,036
|
|
Subordinated Debt/Corporate Notes
|
|
|
|
|
|
|
|
|
|
|
67,314
|
|
|
|
|
|
|
|
67,314
|
|
Preferred Equity
|
|
|
|
|
|
|
|
|
|
|
17,948
|
|
|
|
|
|
|
|
17,948
|
|
Common Equity/Equity Interests/Warrants
|
|
|
377
|
|
|
|
|
|
|
|
310,239
|
|
|
|
80,677
|
|
|
|
391,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
377
|
|
|
$
|
35,745
|
|
|
$
|
1,195,792
|
|
|
$
|
80,677
|
|
|
$
|
1,312,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
332,900
|
|
|
$
|
|
|
|
$
|
332,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
*
|
In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient as fair value have
not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities.
|
The following tables provide a summary of the changes in fair value of Level 3 assets and liabilities for the
three months ended March 31, 2016 and the year ended December 31, 2015 as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at
March 31, 2016 and December 31, 2015:
Fair Value Measurements Using Level 3 Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/
Senior Secured
Loans
|
|
|
Subordinated Debt/
Corporate Notes
|
|
|
Preferred Equity
|
|
|
Common Equity/
Equity
Interests/
Warrants
|
|
Fair value, December 31, 2015
|
|
$
|
800,291
|
|
|
$
|
67,314
|
|
|
$
|
17,948
|
|
|
$
|
310,239
|
|
Total gains or losses included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss)
|
|
|
(4,167
|
)
|
|
|
5,510
|
|
|
|
(160
|
)
|
|
|
7,518
|
|
Purchase of investment securities
|
|
|
42,138
|
|
|
|
52
|
|
|
|
|
|
|
|
163
|
|
Proceeds from dispositions of investment securities
|
|
|
(29,678
|
)
|
|
|
|
|
|
|
(163
|
)
|
|
|
|
|
Transfers in/out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, March 31, 2016
|
|
$
|
808,584
|
|
|
$
|
72,876
|
|
|
$
|
17,625
|
|
|
$
|
317,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss)
|
|
$
|
(4,164
|
)
|
|
$
|
5,510
|
|
|
$
|
(160
|
)
|
|
$
|
7,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2016, there were no transfers in and out of Levels 1 and 2.
The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using
significant unobservable inputs (Level 3) for the three months ended March 31, 2016:
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
For the three months ended
March 31, 2016
|
|
Beginning fair value
|
|
$
|
332,900
|
|
Net realized (gain) loss
|
|
|
|
|
Net change in unrealized (gain) loss
|
|
|
|
|
Borrowings
|
|
|
114,000
|
|
Repayments
|
|
|
(99,500
|
)
|
Transfers in/out of Level 3
|
|
|
|
|
|
|
|
|
|
Ending fair value
|
|
$
|
347,400
|
|
|
|
|
|
|
21
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
The Company has made an irrevocable election to apply the fair value option of
accounting to the Credit Facility and the Senior Secured Notes, in accordance with ASC 825-10. On March 31, 2016, there were borrowings of $272,400 and $75,000, respectively, on the Credit Facility and the Senior Secured Notes. The Company used
an independent third-party valuation firm to assist in measuring the fair value of the Credit Facility and Senior Secured Notes.
Fair Value Measurements Using Level 3 Inputs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Debt/
Senior Secured
Loans
|
|
|
Subordinated Debt/
Corporate Notes
|
|
|
Preferred Equity
|
|
|
Common Equity/
Equity
Interests/
Warrants
|
|
Fair value, December 31, 2014
|
|
$
|
521,791
|
|
|
$
|
76,140
|
|
|
$
|
23,097
|
|
|
$
|
320,424
|
|
Total gains or losses included in earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gain (loss)
|
|
|
(4,823
|
)
|
|
|
|
|
|
|
|
|
|
|
(415
|
)
|
Net change in unrealized gain (loss)
|
|
|
(18,805
|
)
|
|
|
(9,021
|
)
|
|
|
(457
|
)
|
|
|
(9,418
|
)
|
Purchase of investment securities
|
|
|
418,759
|
|
|
|
195
|
|
|
|
469
|
|
|
|
229
|
|
Proceeds from dispositions of investment securities
|
|
|
(116,631
|
)
|
|
|
|
|
|
|
(5,161
|
)
|
|
|
(581
|
)
|
Transfers in/out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, December 31, 2015
|
|
$
|
800,291
|
|
|
$
|
67,314
|
|
|
$
|
17,948
|
|
|
$
|
310,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gain (loss)
|
|
$
|
(23,917
|
)
|
|
$
|
(9,021
|
)
|
|
$
|
(457
|
)
|
|
$
|
(9,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2015, there were no transfers in and out of Levels 1 and 2.
The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using
significant unobservable inputs (Level 3) for the year ended December 31, 2015:
|
|
|
|
|
Credit Facility and Senior Secured Notes
|
|
For the year ended
December 31, 2015
|
|
Beginning fair value
|
|
$
|
125,000
|
|
Net realized (gain) loss
|
|
|
|
|
Net change in unrealized (gain) loss
|
|
|
|
|
Borrowings
|
|
|
418,800
|
|
Repayments
|
|
|
(210,900
|
)
|
Transfers in/out of Level 3
|
|
|
|
|
|
|
|
|
|
Ending fair value
|
|
$
|
332,900
|
|
|
|
|
|
|
The Company has made an irrevocable election to apply the fair value option of accounting to the Credit
Facility and the Senior Secured Notes, in accordance with ASC 825-10. On December 31, 2015, there were borrowings of $257,900 and $75,000, respectively, on the Credit Facility and the Senior Secured Notes. The Company used an independent
third-party valuation firm to assist in measuring the fair value of the Credit Facility and Senior Secured Notes.
22
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
Quantitative Information about Level 3 Fair Value Measurements
The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a
price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other
key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of
our investment within each portfolio company.
Significant unobservable quantitative inputs typically used in the fair value
measurement of the Companys Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities,
as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (EBITDA) multiples of similar companies, and comparable market transactions for equity securities.
Quantitative information about the Companys Level 3 asset and liability fair value measurements as of March 31, 2016 is
summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset or
Liability
|
|
Fair Value at
March 31, 2016
|
|
|
Principal Valuation
Technique/Methodology
|
|
Unobservable Input
|
|
Range (Weighted
Average)
|
Bank Debt/Senior Secured Loans
|
|
Asset
|
|
$
$
|
808,076
508
|
|
|
Yield Analysis
Enterprise Value
|
|
Market Yield
EBITDA Multiple
|
|
5.7% 19.8% (10.9%)
4.5x 5.0x (4.5x)
|
Subordinated Debt/Corporate Note
|
|
Asset
|
|
$
|
72,876
|
|
|
Yield Analysis
|
|
Market Yield
|
|
12.8% 15.5% (14.5%)
|
Preferred Equity
|
|
Asset
|
|
$
|
17,625
|
|
|
Yield Analysis
|
|
Market Yield
|
|
8.0% 11.5% (9.9%)
|
Common Equity/Equity Interests/Warrants
|
|
Asset
|
|
$
$
|
24,420
293,500
|
|
|
Enterprise Value
Enterprise Value
|
|
EBITDA Multiple
Return on Equity
|
|
5.5x 6.5x (6.3x)
7.3% 14.0% (10.1%)
|
Credit Facility
|
|
Liability
|
|
$
|
272,400
|
|
|
Yield Analysis
|
|
Market Yield
|
|
L+1.5% L+4.8%
(L+2.3%)
|
Senior Secured Notes
|
|
Liability
|
|
$
|
75,000
|
|
|
Yield Analysis
|
|
Market Yield
|
|
5.6% 6.4% (5.9%)
|
Quantitative information about the Companys Level 3 asset and liability fair value measurements as
of December 31, 2015 is summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset or
Liability
|
|
Fair Value at
December 31, 2015
|
|
|
Principal Valuation
Technique/Methodology
|
|
Unobservable Input
|
|
Range (Weighted
Average)
|
Bank Debt/Senior Secured Loans
|
|
Asset
|
|
$
$
|
799,058
1,233
|
|
|
Yield Analysis
Enterprise Value
|
|
Market Yield
EBITDA Multiple
|
|
5.5% 19.5% (11.0%)
4.5x 5.0x (4.5x)
|
Subordinated Debt/Corporate Note
|
|
Asset
|
|
$
|
67,314
|
|
|
Yield Analysis
|
|
Market Yield
|
|
13.2% 26.1% (20.8%)
|
Preferred Equity
|
|
Asset
|
|
$
|
17,948
|
|
|
Yield Analysis
|
|
Market Yield
|
|
8.0% 11.5% (9.8%)
|
Common Equity/Equity Interests/Warrants
|
|
Asset
|
|
$
$
|
20,239
290,000
|
|
|
Enterprise Value
Enterprise Value
|
|
EBITDA Multiple
Return on Equity
|
|
5.6x 6.8x (6.1x)
7.0% 13.8% (11.0%)
|
Credit Facility
|
|
Liability
|
|
$
|
257,900
|
|
|
Yield Analysis
|
|
Market Yield
|
|
L+0.5% L+4.8%
(L+2.3%)
|
Senior Secured Notes
|
|
Liability
|
|
$
|
75,000
|
|
|
Yield Analysis
|
|
Market Yield
|
|
5.6% 6.1% (5.9%)
|
Significant increases or decreases in any of the above unobservable inputs in isolation, including
unobservable inputs used in deriving bid-ask spreads, if applicable, could result in significantly lower or higher fair value measurements for such assets and liabilities.
23
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
Note 7. Derivatives
The Company is exposed to foreign exchange risk through its investments denominated in foreign currencies. The Company may mitigate this risk through the use of foreign currency forward contracts,
borrowing in local currency under its Credit Facility, or similar. As an investment company, all changes in the fair value of assets, including changes caused by foreign currency fluctuation, flow through current earnings.
As of March 31, 2016 and December 31, 2015, there were no open forward foreign currency contracts outstanding. The Company also
had no derivatives designated as hedging instruments at March 31, 2016 and December 31, 2015.
Note 8. 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 $100,000 aggregate principal amount of its 6.75% Unsecured Senior Notes due 2042 (the 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. The Unsecured Notes are direct senior unsecured obligations of the Company.
Revolving and Term Loan Facility
In July 2013, the Company amended its Credit Facility, composed of $440,000 of revolving credit and $50,000 in term loans. Subsequently, in December 2013, a commitment increase was executed providing an
additional $50,000 of revolving credit, bringing the total revolving credit capacity to $490,000. 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 $800,000 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. At
March 31, 2016, outstanding USD equivalent borrowings under the Credit Facility totaled $272,400.
Senior Secured Notes
On May 10, 2012, the Company closed a private offering of $75,000 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.
24
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
The Company has made an irrevocable election to apply the fair value option of
accounting to its Credit Facility and Senior Secured Notes, in accordance with ASC 825-10. We believe accounting for the Credit Facility and Senior Secured Notes at fair value better aligns the measurement methodologies of assets and liabilities,
which may mitigate certain earnings volatility. ASC 825-10 requires entities to display the fair value of the selected assets and liabilities on the face of the Consolidated Statements of Assets and Liabilities and changes in fair value of the
Credit Facility are reported in the Consolidated Statements of Operations.
The average annualized interest cost for all
borrowings for the three months ended March 31, 2016 and the year ended December 31, 2015 was 4.20% and 5.13%, respectively. These costs are exclusive of other credit facility expenses such as unused fees, agency fees and other prepaid
expenses related to establishing and/or amending the Credit Facility, the Unsecured Notes, and the Senior Secured Notes (collectively the Credit Facilities), if any. The maximum amounts borrowed on the Credit Facilities during the three
months ended March 31, 2016 and the year ended December 31, 2015 were $472,900 and $434,900, respectively.
Note 9. Financial
Highlights and Senior Securities Table
The following is a schedule of financial highlights for the three months ended
March 31, 2016 and for the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2016
(unaudited)
|
|
|
Year ended
December 31,
2015
|
|
Per Share Data:
(a)
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
20.79
|
|
|
$
|
22.05
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.40
|
|
|
|
1.52
|
|
Net realized and unrealized gain (loss)
|
|
|
0.26
|
|
|
|
(1.18
|
)
|
|
|
|
|
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
|
0.66
|
|
|
|
0.34
|
|
Distributions to stockholders:
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.40
|
)
|
|
|
(1.60
|
)
|
Anti-dilution
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
$
|
21.08
|
|
|
$
|
20.79
|
|
|
|
|
|
|
|
|
|
|
Per share market value, end of period
|
|
$
|
17.28
|
|
|
$
|
16.43
|
|
Total Return
(b)
|
|
|
7.61
|
%
|
|
|
(0.29
|
)%
|
Net assets, end of period
|
|
$
|
890,567
|
|
|
$
|
882,698
|
|
Shares outstanding, end of period
|
|
|
42,248,525
|
|
|
|
42,464,762
|
|
Ratios to average net assets
(c)
:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
1.92
|
%
|
|
|
6.94
|
%
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1.38
|
%*
|
|
|
3.84
|
%*
|
Interest and other credit facility expenses
|
|
|
0.57
|
%
|
|
|
1.68
|
%
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.95
|
%*
|
|
|
5.52
|
%*
|
|
|
|
|
|
|
|
|
|
Average debt outstanding
|
|
$
|
450,241
|
|
|
$
|
262,341
|
|
Portfolio turnover ratio
|
|
|
2.3
|
%
|
|
|
13.0
|
%
|
(a)
|
Calculated using the average shares outstanding method.
|
25
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
(b)
|
Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend
reinvestment plan.
|
(c)
|
Not annualized for periods less than one year.
|
*
|
The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets is shown net of a voluntary incentive fee waiver (see note
3). For the three months ended March 31, 2016, the ratios of operating expenses to average net assets and total expenses to average net assets would be 1.47% and 2.04%, respectively, without the voluntary incentive fee waiver. For the year
ended December 31, 2015, the ratios of operating expenses to average net assets and total expenses to average net assets would be 4.02% and 5.70%, respectively, without the voluntary incentive fee waiver.
|
26
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
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 2016 (through March 31, 2016)
|
|
$
|
222,400
|
|
|
$
|
1,487
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2015
|
|
|
207,900
|
|
|
|
1,459
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 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 2016 (through March 31, 2016)
|
|
$
|
100,000
|
|
|
$
|
669
|
|
|
|
|
|
|
$
|
978
|
|
Fiscal 2015
|
|
|
100,000
|
|
|
|
702
|
|
|
|
|
|
|
|
982
|
|
Fiscal 2014
|
|
|
100,000
|
|
|
|
2,294
|
|
|
|
|
|
|
|
943
|
|
Fiscal 2013
|
|
|
100,000
|
|
|
|
2,411
|
|
|
|
|
|
|
|
934
|
|
Fiscal 2012
|
|
|
100,000
|
|
|
|
571
|
|
|
|
|
|
|
|
923
|
|
Senior Secured Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through March 31, 2016)
|
|
$
|
75,000
|
|
|
$
|
501
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2015
|
|
|
75,000
|
|
|
|
527
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2014
|
|
|
75,000
|
|
|
|
1,721
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2013
|
|
|
75,000
|
|
|
|
1,808
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
75,000
|
|
|
|
428
|
|
|
|
|
|
|
|
N/A
|
|
Term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through March 31, 2016)
|
|
$
|
50,000
|
|
|
$
|
334
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2015
|
|
|
50,000
|
|
|
|
351
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2014
|
|
|
50,000
|
|
|
|
1,147
|
|
|
|
|
|
|
|
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
|
|
Total Senior Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2016 (through March 31, 2016)
|
|
$
|
447,400
|
|
|
$
|
2,991
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2015
|
|
|
432,900
|
|
|
|
3,039
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2014
|
|
|
225,000
|
|
|
|
5,162
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2013
|
|
|
225,000
|
|
|
|
5,425
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2012
|
|
|
489,452
|
|
|
|
2,794
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2011
|
|
|
236,355
|
|
|
|
4,410
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2010
|
|
|
435,000
|
|
|
|
2,901
|
|
|
|
|
|
|
|
N/A
|
|
Fiscal 2009
|
|
|
88,114
|
|
|
|
8,920
|
|
|
|
|
|
|
|
N/A
|
|
(1)
|
Total amount of each class of senior securities outstanding at the end of the period presented.
|
27
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
(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. As of March 31, 2016, asset coverage was 299.1%.
|
(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. The average
market value for the fiscal 2016, 2015, 2014, 2013 and 2012 periods was $97,772, $98,196, $94,301, $93,392, and $92,302, respectively.
|
Note 10. Crystal Financial 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 (the Crystal Acquisition). We invested $275,000 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 $400,000 at November 30, 2012 and a $275,000 committed revolving credit facility. On January 27,
2014, the revolving credit facility was expanded to $300,000. On March 31, 2014, we exchanged $137,500 of our equity interest in Crystal Financial in exchange for $137,500 in floating rate senior secured notes in Crystal Financial bearing
interest at LIBOR plus 9.50%, maturing on March 31, 2019. On May 18, 2015, the revolving credit facility was expanded to $350,000. Our financial statements, including our schedule of investments, reflect our investments in Crystal
Financial on a consolidated basis.
As of March 31, 2016 Crystal Financial LLC had 32 funded commitments to 29 different
issuers with a total par value of approximately $502,243 on total assets of $540,009. As of December 31, 2015, Crystal Financial LLC had 28 funded commitments to 26 different issuers with a total par value of approximately $465,128 on total
assets of $518,288. As of March 31, 2016 and December 31, 2015, all loans were floating rate with the largest loan outstanding totaling $34,698 and $34,250, respectively. For the same periods, the average exposure per issuer was $17,319
and $17,890, respectively. Crystal Financial LLCs credit facility, which is non-recourse to Solar Capital, had approximately $261,188 and $232,922 of borrowings outstanding at March 31, 2016 and December 31, 2015, respectively. For
the three months ended March 31, 2016 and 2015, Crystal Financial LLC had net income of $9,199 and $7,952, respectively, on gross income of $15,211 and $12,939, respectively. Due to timing and non-cash items, there may be material differences
between GAAP net income and cash available for distributions.
Note 11. Stock Repurchase Programs
On July 31, 2013, the Board authorized a program for the purpose of repurchasing up to $100,000 of the Companys common stock.
Under the repurchase program, the Company could have, but was not obligated to, repurchase its outstanding common stock in the open market from time to time provided that the Company complied with the prohibitions under its Insider Trading Policies
and Procedures and the guidelines specified in
28
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
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 Board extended the
repurchase program to be in place until the earlier of July 31, 2014 or until $100,000 of the Companys outstanding shares of common stock had been repurchased. On July 31, 2014, the Companys stock repurchase program expired.
During the fiscal year ended December 31, 2014, the Company repurchased 1,779,033 shares at an average price of approximately $21.97 per share, inclusive of commissions. The total dollar amount of shares repurchased in that period was $39,078.
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 $17,508.
On October 7, 2015, the Board authorized a new share repurchase program to purchase common stock in the open market in an amount up
to $30,000. 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 of the Securities Exchange Act of 1934, as amended, including certain price, market volume and timing constraints. Unless amended or extended by the Board, the Company expects the
repurchase program to be in place until the earlier of October 7, 2016 or until $30,000 of the Companys outstanding shares of common stock have been repurchased. During the three months ended March 31, 2016, the Company repurchased
216,237 shares at an average price of $15.76 per share, inclusive of commissions. This represented a discount of approximately 25.2% of the net asset value per share at March 31, 2016. The total dollar amount of shares repurchased in this
period is $3,408, leaving a maximum of $26,586 available for future program purchases. During the year ended December 31, 2015, the Company repurchased 400 shares at an average price of $15.98 per share, inclusive of commissions, for a total
dollar amount of $6.
Note 12. Commitments and Contingencies
The Company had unfunded debt and equity commitments to various delayed draw loans as well as to Crystal Financial LLC. The total amount of these unfunded commitments as of March 31, 2016 and
December 31, 2015 is $60,000 and $65,833, respectively, comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Crystal Financial LLC
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
Achaogen, Inc
|
|
|
10,000
|
|
|
|
10,000
|
|
AgaMatrix, Inc
|
|
|
|
|
|
|
3,333
|
|
CardioDx, Inc
|
|
|
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Total Commitments*
|
|
$
|
60,000
|
|
|
$
|
65,833
|
|
|
|
|
|
|
|
|
|
|
*
|
The Company controls the funding of the Crystal Financial LLC commitment and may cancel it at its discretion.
|
As of March 31, 2016 and December 31, 2015, the Company had sufficient cash available and/or liquid securities available to
fund these commitments.
Note 13. Senior Secured Unitranche Loan Program LLC
On September 2, 2014, the Company entered into a limited liability company agreement with an affiliate (the Investor) of
a fund managed by Pacific Investment Management Company LLC (PIMCO) to co-invest in middle market senior secured unitranche loans sourced by the same origination platform used by the Company. Initial funding commitments to the unitranche
strategy total $600,000, consisting of direct equity
29
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
investments and co-investment commitments as described below. The joint venture vehicle known as the Senior Secured Unitranche Loan Program LLC (SSLP) is structured as an
unconsolidated Delaware limited liability company. The Company and the Investor initially made equity commitments to the SSLP of $300,000 and $43,250, respectively. All portfolio decisions and generally all other decisions in respect of the SSLP
must be approved by an investment committee of the SSLP consisting of representatives of the Company and PIMCO (with approval from a representative of each required).
On October 15, 2015, the Company entered into an amended and restated limited liability company agreement for its SSLP to add Voya Investment Management LLC (Voya), part of Voya
Financial, Inc. (NYSE: VOYA), as a partner in SSLP in place of the investor that was previously the Companys partner in SSLP, though this investor may still co-invest up to $300,000 of equity in unitranche loans alongside SSLP. This joint
venture is expected to invest primarily in senior secured unitranche loans to middle market companies predominantly owned by private equity sponsors or entrepreneurs, consistent with the Companys core origination and underwriting mandate. In
addition to the Companys prior equity commitment of $300,000 to SSLP, Voya has made an initial equity commitment of $25,000 to SSLP, with the ability to upsize.
On November 2, 2015, the Company assigned $125,000 of its $300,000 commitment to SSLP to Senior Secured Unitranche Loan Program II LLC (SSLP II), a newly formed Delaware limited liability
company. SSLP II is currently wholly owned by Solar Capital Ltd. but may bring in unaffiliated investors at a later date.
On
November 25, 2015, SSLP commenced operations. As of March 31, 2016 and December 31, 2015, the Company and Voya contributed combined equity capital in the amount of $93,150 and $92,183, respectively. Of the $93,150 of contributed
equity capital at March 31, 2016, the Company contributed $29,884 in the form of investments and $51,622 in the form of cash and Voya contributed $11,644 in the form of cash. As of March 31, 2016, the Company and Voyas remaining
commitments to SSLP totaled $93,494 and $13,356, respectively. The Company, along with Voya, controls the funding of SSLP and SSLP may not call the unfunded commitments without approval of both the Company and Voya.
As of March 31, 2016 and December 31, 2015, SSLP had total assets of $94,426 and $92,528, respectively. For the same periods,
SSLPs portfolio consisted of floating rate senior secured loans to 4 and 4 different borrowers, respectively. For the three months ended March 31, 2016, SSLP invested $967 in 1 portfolio company. For the period from November 25, 2015
through December 31, 2015, SSLP invested $91,833 across 4 portfolio companies. Investments prepaid totaled $189 for the three months ended March 31, 2016 and $75 for the period from November 25, 2015 through December 31, 2015. At
March 31, 2016 and December 31, 2015, the weighted average yield of SSLPs portfolio was 8.1% and 8.5%, respectively, measured at fair value and 7.9% and 8.5%, respectively, measured at cost.
SSLP Portfolio as of March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Industry
|
|
Interest
Rate
(1)
|
|
|
Maturity
Date
|
|
|
Par
Amount
|
|
|
Cost
|
|
|
Fair
Value
(2)
|
|
Falmouth Group Holdings Corp. (AMPAC)
(3)
|
|
Chemicals
|
|
|
7.75
|
%
|
|
|
12/14/21
|
|
|
$
|
34,913
|
|
|
$
|
34,408
|
|
|
$
|
34,913
|
|
PSKW, LLC & PDR, LLC
(3)
|
|
Health Care Providers & Services
|
|
|
5.25
|
%
|
|
|
11/25/21
|
|
|
|
2,681
|
|
|
|
2,656
|
|
|
|
2,628
|
|
PSKW, LLC & PDR, LLC
(3)
|
|
Health Care Providers & Services
|
|
|
9.41
|
%
|
|
|
11/25/21
|
|
|
|
22,250
|
|
|
|
21,824
|
|
|
|
20,915
|
|
U.S. Anesthesia Partners Inc.
|
|
Health Care Providers & Services
|
|
|
6.00
|
%
|
|
|
12/31/19
|
|
|
|
19,757
|
|
|
|
19,572
|
|
|
|
19,559
|
|
VetCor Professional Practices LLC
|
|
Health Care Facilities
|
|
|
7.00
|
%
|
|
|
4/20/21
|
|
|
|
14,130
|
|
|
|
14,130
|
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,590
|
|
|
$
|
91,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
(1)
|
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (LIBOR or
L) index rate or the prime index rate (PRIME or P), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of March 31, 2016.
|
(2)
|
Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Boards valuation process described
elsewhere herein.
|
(3)
|
The Company also holds a portion of this position on its Consolidated Statements of Assets and Liabilities.
|
SSLP Portfolio as of December 31, 2015 (audited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Industry
|
|
Interest
Rate
(1)
|
|
|
Maturity
Date
|
|
|
Par
Amount
|
|
|
Cost
|
|
|
Fair
Value
(2)
|
|
Falmouth Group Holdings Corp. (AMPAC)
(3)
|
|
Chemicals
|
|
|
9.25
|
%
|
|
|
12/14/21
|
|
|
$
|
35,000
|
|
|
$
|
34,478
|
|
|
$
|
34,475
|
|
PSKW, LLC & PDR, LLC
(3)
|
|
Health Care Providers & Services
|
|
|
5.25
|
%
|
|
|
11/25/21
|
|
|
|
2,750
|
|
|
|
2,723
|
|
|
|
2,723
|
|
PSKW, LLC & PDR, LLC
(3)
|
|
Health Care Providers & Services
|
|
|
9.42
|
%
|
|
|
11/25/21
|
|
|
|
22,250
|
|
|
|
21,810
|
|
|
|
21,805
|
|
U.S. Anesthesia Partners Inc.
|
|
Health Care Providers & Services
|
|
|
6.00
|
%
|
|
|
12/31/19
|
|
|
|
19,757
|
|
|
|
19,561
|
|
|
|
19,559
|
|
VetCor Professional Practices LLC
|
|
Health Care Facilities
|
|
|
7.00
|
%
|
|
|
4/20/21
|
|
|
|
13,197
|
|
|
|
13,197
|
|
|
|
13,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
91,769
|
|
|
$
|
91,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (LIBOR or
L) index rate or the prime index rate (PRIME or P), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2015.
|
(2)
|
Represents the fair value in accordance with ASC Topic 820. The determination of such fair value is not included in the Boards valuation process described
elsewhere herein.
|
(3)
|
The Company also holds a portion of this position on its Consolidated Statements of Assets and Liabilities.
|
Below is certain summarized financial information for SSLP as of March 31, 2016 and December 31, 2015 and for the three months
ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
December 31,
2015 (audited)
|
|
Selected Balance Sheet Information for SSLP:
|
|
|
|
|
|
|
|
|
Investments at fair value (cost $92,590 and $91,769, respectively)
|
|
$
|
91,863
|
|
|
$
|
91,759
|
|
Cash and other assets
|
|
|
2,564
|
|
|
|
769
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
94,427
|
|
|
$
|
92,528
|
|
|
|
|
|
|
|
|
|
|
Distributions payable
|
|
$
|
1,700
|
|
|
$
|
253
|
|
Accrued expenses and other payables
|
|
|
178
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
1,878
|
|
|
$
|
325
|
|
|
|
|
|
|
|
|
|
|
Members equity
|
|
$
|
92,549
|
|
|
$
|
92,203
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and members equity
|
|
$
|
94,427
|
|
|
$
|
92,528
|
|
|
|
|
|
|
|
|
|
|
31
SOLAR CAPITAL LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
March 31, 2016
(in thousands, except share amounts)
|
|
|
|
|
|
|
For the three
months ended
March 31, 2016
|
|
Selected Income Statement Information for SSLP:
|
|
|
|
|
Interest income
|
|
$
|
1,846
|
|
|
|
|
|
|
Service fees
|
|
$
|
15
|
|
Other general and administrative expenses
|
|
|
35
|
|
|
|
|
|
|
Total expenses
|
|
$
|
50
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,796
|
|
|
|
|
|
|
Net change in unrealized gain (loss) on investments
|
|
|
(717
|
)
|
|
|
|
|
|
Net income
|
|
$
|
1,079
|
|
|
|
|
|
|
Note 14. Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
On April 28, 2016, the Company completed the purchase of senior secured first lien life sciences loans to 14 companies with an
aggregate par amount of approximately $74,377.
On May 3, 2016, our Board declared a quarterly distribution of $0.40 per
share payable on July 1, 2016 to holders of record as of June 23, 2016.
32