THL Credit
THL Credit, Inc. (Form: N-2, Received: 04/07/2017 17:19:09)
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As filed with the Securities and Exchange Commission on April 7, 2017

Securities Act File No. 333-            

 

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM N-2

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

(Check appropriate box or boxes)

Pre-Effective Amendment No.

Post-Effective Amendment No.   

 

 

THL CREDIT, INC.

(Exact name of Registrant as specified in charter)

 

 

100 Federal Street, 31st Floor

Boston, MA 02110

(Address of Principal Executive Offices)

Registrant’s Telephone Number, including Area Code: (800) 450-4424

Sam W. Tillinghast/Christopher J. Flynn

THL Credit, Inc.

100 Federal Street, 31st Floor

Boston, MA 02110

(Name and address of agent for service)

 

 

COPIES TO:

Cynthia M. Krus

Lisa A. Morgan

Eversheds Sutherland (US) LLP

700 Sixth Street, NW Suite 700

Washington, DC 20001

 

 

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:

From time to time after the effective date of this Registration Statement.

 

 

If any securities being registered on this form will be offered on a delayed or continuous basis in reliance on Rule 415 under the Securities Act of 1933, other than securities offered in connection with a dividend reinvestment plan, check the following box.  ☒

It is proposed that this filing will become effective (check appropriate box):

 

  when declared effective pursuant to section 8(c)

 

 

CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

 

 

Title of Securities Being Registered  

Amount

Being Registered

 

Proposed

Maximum

Aggregate

Offering Price(1)

 

Amount of

Registration Fee(1)

Common Stock, $0.001 par value per share(2)

           

Preferred Stock, $0.001 par value per share(2)

           

Warrants(2)

           

Subscription Rights(3)

           

Debt Securities(4)

           

TOTAL

      $300,000,000 (5)   $12,749 (6)

 

 

(1) Estimated pursuant to Rule 457 solely for the purposes of determining the registration fee. The proposed maximum offering price per security will be determined, from time to time, by the Registrant in connection with the sale by the Registrant of the securities registered under this registration statement.
(2) Subject to Note 5 below, there is being registered hereunder an indeterminate number of shares of common stock, preferred stock, or warrants as may be sold, from time to time. Warrants represent rights to purchase common stock, preferred stock or debt securities.
(3) Subject to Note 5 below, there is being registered hereunder an indeterminate number of subscription rights as may be sold, from time to time, representing rights to purchase common stock.
(4) Subject to Note 5 below, there is being registered hereunder an indeterminate principal amount of debt securities as may be sold, from time to time. If any debt securities are issued at an original issue discount, then the offering price shall be in such greater principal amount as shall result in an aggregate price to investors not to exceed $300.0 million.
(5) In no event will the aggregate offering price of all securities issued from time to time pursuant to this registration statement exceed $300.0 million.
(6) In accordance with Rule 415(a)(6) under the Securities Act of 1933, the securities registered pursuant to this registration statement include $190,000,000 of unsold securities that previously were registered pursuant to the registration statement on Form N-2 (File No. 333-195070), initially filed on April 4, 2014 and first declared effective on September 9, 2014. Pursuant to Rule 415(a)(6), the registration fees in the amount of $13,133.43 previously paid with respect to such unsold securities will continue to be applied to such unsold securities. The filing fee attributable to the additional $110,000,000 of securities is being paid herewith. Pursuant to Rule 415(a)(6), the offering of the unsold securities registered under the prior registration statement will be deemed terminated as of the effective date of this Registration Statement.

 

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT OF SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

April 7, 2017

$300,000,000

THL Credit, Inc.

Common Stock

Preferred Stock

Warrants

Subscription Rights

Debt Securities

 

 

This prospectus relates to the offer, from time to time, up to $300,000,000 of shares of our common stock, par value $0.001 per share, preferred stock, par value $0.001 per share, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, subscription rights or debt securities, which we refer to, collectively, as the “securities.” We may sell our common stock directly or through underwriters or dealers, “at-the-market” to or through a market maker into an existing trading market or otherwise directly to one or more purchasers or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms to be described in one or more supplements to this prospectus.

We may offer shares of common stock at a discount to net asset value per share in certain circumstances. On June 2, 2016, our common stockholders voted to allow us to issue up to 25% of our outstanding common stock at a price below net asset value per share for a period ending on June 2, 2017. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. For offerings of common stock made pursuant to this authorization, the offering price per share will not be less than the net asset value per share of our common stock at the time we make the offering except (1) in connection with a rights offering to our existing stockholders, (2) with the approval of our board of directors including a majority of the independent directors, or (3) under such circumstances as the Securities and Exchange Commission may permit. Sales of common stock below net asset value per share are at the discretion of management with the approval of our board of directors but there is no maximum discount on the amount of dilution of existing stockholders. See “Risks” for more information.

We are an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended. We are managed by our investment adviser, THL Credit Advisors LLC, which also provides the administrative services necessary for us to operate.

Our investment objective is to generate both current income and capital appreciation, primarily through investments in privately negotiated debt and equity securities of lower middle market companies. We are a direct lender to lower middle market companies and invest primarily in directly originated first lien senior secured loans, including unitranche investments. In certain instances, we may also make second lien secured loans and subordinated, or mezzanine, debt investments, which may include an associated equity component such as warrants, preferred stock or other similar securities and direct equity investments. Our first lien senior secured loans may be structured as traditional first lien senior secured loans or as unitranche loans. Unitranche structures may combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans and our unitranche loans will expose us to the risks associated with second lien and/or subordinated loans to the extent we invest in the “last-out” tranche or subordinated tranche (or piece) of the unitranche loan. We also may provide advisory services to managed funds.

Substantially all of the debt securities in which the Company invests are below investment grade debt securities and are often referred to as “high yield” or “junk” securities. Exposure to below investment grade securities involves certain risk, and those securities are viewed as having predominately speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. A material amount of our debt investments contain interest reset provisions that may make it more difficult for the borrowers to make debt repayments. Further, our debt investments generally will not pay down principal during their term which could result in a substantial loss to us if the portfolio company is unable to refinance or repay the debt at maturity.

Our common stock is traded on the NASDAQ Global Select Market under the symbol “TCRD.” On April 6, 2017, the last reported sale price of a share of our common stock on the NASDAQ Global Select Market was $9.80. The net asset value per share of our common stock at December 31, 2016 (the last date prior to the date of this prospectus on which we determined net asset value) was $11.82.

Please read this prospectus before investing and keep it for future reference. It contains important information about us that a prospective investor ought to know before investing in our securities. We file annual, quarterly and current reports, proxy statements and other information about us with the Securities and Exchange Commission. The information is available free of charge by contacting us THL Credit, Inc., 100 Federal Street, 31st floor, Boston, MA 02110, or by calling us at (800) 450-4424 or on our website at www.THLCreditBDC.com. The Securities and Exchange Commission maintains a website at www.sec.gov where such information is available without charge upon request. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus.

Investing in our securities involves a high degree of risk, including credit risk and the risk of the use of leverage. Before buying any securities, you should read the discussion of the material risks of investing in our common stock in “ Risks ” beginning on page 17 of this prospectus.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

This prospectus may not be used to consummate sales of securities unless accompanied by a prospectus supplement.

 

 

 

The date of this prospectus is                     , 2017.


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1  

Fees and Expenses

     11  

Selected Consolidated Financial Data

     15  

Risks

     17  

Special Note Regarding Forward-Looking Statements

     48  

Use of Proceeds

     49  

Price Range of Common Stock and Distributions

     50  

Ratio of Earnings to Fixed Charges

     53  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54  

Senior Securities

     106  

Portfolio Companies

     108  

The Company

     116  

Management of the Company

     130  

Certain Relationships

     141  

Control Persons and Principal Stockholders

     145  

The Advisor

     148  

Determination of Net Asset Value

     161  

Sales of Common Stock Below Net Asset Value

     164  

Dividend Reinvestment Plan

     169  

Description of Our Capital Stock

     171  

Description of Our Preferred Stock

     174  

Description of Our Subscription Rights

     176  

Description of Warrants

     178  

Description of Our Debt Securities

     180  

Regulation

     194  

Tax Matters

     200  

Plan of Distribution

     207  

Custodian

     209  

Transfer Agent

     209  

Brokerage Allocations and Other Practices

     209  

Legal Matters

     209  

Experts

     209  

Additional Information

     210  

Management’s Report on Internal Control Over Financial Reporting

     210  

Index to Financial Statements

     F-1  

 

 

You should rely only on the information contained in this prospectus and any prospectus supplement to this prospectus. We have not authorized any dealer, salesperson or other person to provide you with different information or to make representations as to matters not stated in this prospectus or any accompanying prospectus supplement. If anyone provides you with different or inconsistent information, you should not rely on it. This prospectus and any such supplement do not constitute an offer to sell, or a solicitation of an offer to buy, any securities by any person in any jurisdiction where it is unlawful for that person to make such an offer or solicitation or to any person in any jurisdiction to whom it is unlawful to make such an offer or solicitation. The information in this prospectus and any such supplement is accurate only as of its date, and under no circumstances should the delivery of this prospectus and any such supplement or the sale of any common stock imply that the information in this prospectus is accurate as of any later date or that the affairs of THL Credit, Inc. have not changed since such date. This prospectus and any accompanying prospectus supplement will be updated to reflect material changes.

 

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ABOUT THIS PROSPECTUS

This prospectus and any accompanying prospectus supplement is part of a registration statement that we have filed with the Securities and Exchange Commission using the “shelf” registration process. Under the shelf registration process, which constitutes a delayed offering in reliance on Rule 415 under the Securities Act of 1933, as amended, we may offer, from time to time, up to $300,000,000 of our common stock, preferred stock, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities, subscription rights or debt securities on the terms to be determined at the time of the offering. We may sell our securities through underwriters or dealers, “at-the-market” to or through a market maker, into an existing trading market or otherwise directly to one or more purchasers or through agents or through a combination of methods of sale. The identities of such underwriters, dealers, market makers or agents, as the case may be, will be described in one or more supplements to this prospectus. The securities may be offered at prices and on terms described in one or more supplements to this prospectus. This prospectus and any accompanying prospectus supplement provides you with a general description of the securities that we may offer. Each time we use this prospectus to offer securities, we will provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement may also add, update or change information contained in this prospectus. Please carefully read this prospectus and any such supplements together with the additional information described under “Additional Information” and “Risks” sections before you make an investment decision.

A prospectus supplement may also add to, update or change information contained in this prospectus.

 

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PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is not complete and may not contain all of the information that you may want to consider before investing in our securities. You should read the entire prospectus carefully, including “Risks.” Throughout this prospectus, we refer to THL Credit, Inc. and its consolidated subsidiaries as the “Company,” “we,” “us” or “our;” THL Credit Advisors LLC as “THL Credit Advisors,” the “Advisor” or the “Administrator”, Thomas H. Lee Partners, L.P. as “THL Partners”, THL Credit Greenway Fund LLC as “Greenway”, THL Credit Greenway Fund II LLC and related investment vehicle as “Greenway II”, THL Credit Opportunities, L.P. as “THL Credit Opportunities”, THL Credit Partners BDC Holdings, L.P. as “BDC Holdings”, and THL Credit Logan JV LLC as “Logan JV”.

THL Credit, Inc.

We are an externally managed, non-diversified closed-end management investment company incorporated in Delaware on May 26, 2009, that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, we have elected to be treated for tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. Our investment activities are managed by THL Credit Advisors and supervised by our board of directors, a majority of whom are independent of THL Credit Advisors and its affiliates. As a BDC, we are required to comply with certain regulatory requirements. See “Regulation” for discussion of BDC regulation and other regulatory considerations. We are also registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act.

Our investment objective is to generate both current income and capital appreciation, primarily through investments in privately negotiated debt and equity securities of lower middle market companies. We are a direct lender to lower middle market companies and invest primarily in directly originated first lien senior secured loans, including unitranche investments. In certain instances, we also make second lien secured loans and subordinated, or mezzanine, debt investments, which may include an associated equity component such as warrants, preferred stock or similar securities, and direct equity co-investments. Our first lien senior secured loans may be structured as traditional first lien senior secured loans or as unitranche loans. Unitranche structures may combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans and our unitranche loans will expose us to the risks associated with second lien and /or subordinated loans to the extent we invest in the “last-out” tranche or subordinated tranche (or piece) of the unitranche loan. We also may provide advisory services to managed funds.

We intend to co-invest, subject to the conditions included in the exemptive order we received from the SEC, with certain of our affiliates. See “Certain Relationships” in this prospectus. We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification.

We define lower middle market companies to mean both public and privately-held companies with annual earnings before interest, taxes, depreciation and amortization, or EBITDA, generally of between $5 million and $25 million. We expect to generate returns primarily through a combination of contractual interest payments on debt investments, equity appreciation and origination and similar fees. We can offer no assurances that we will achieve our investment objective.

Since April 2010, after we completed our initial public offering and commenced principal operations, through December 31, 2016 we have been responsible for making, on behalf of ourselves, managed funds and separately managed account, over approximately an aggregate of $1,829 million in commitments to 92 separate portfolio companies through a combination of both initial and follow-on investments. Since April 2010 through December 31, 2016, we, along with our managed funds and separately managed account, have received $1,152 million of proceeds from the realization of investments. The Company alone has received $945 million of proceeds from the realization of its investments.

 



 

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As a BDC, we are generally required to invest at least 70% of our total assets primarily in securities of private and certain U.S. public companies (other than certain financial institutions), cash, cash equivalents and U.S. government securities and other high quality debt investments that mature in one year or less.

We are permitted to borrow money from time to time within the levels permitted by the 1940 Act (which generally allows us to incur leverage for up to one half of our assets). We have used, and expect to continue to use, our credit facilities and other borrowings, along with proceeds from the rotation of our portfolio and proceeds from public and private offerings of securities to finance our investment objectives. See “Regulation” for discussion of BDC regulation and other regulatory considerations.

Organizational Overview

The Company was organized as a Delaware corporation on May 26, 2009 and initially funded on July 23, 2009. We commenced principal operations on April 21, 2010. The Company has formed substantially owned subsidiaries which serve as tax blockers, including THL Credit Holdings, Inc., THL Credit AIM Media Holdings, Inc., THL Credit YP Holdings, Inc. and THL Credit OEMG Investor, Inc., and hold equity or equity-like investments in portfolio companies organized as limited liability companies or other forms of pass-through entities. The Company also has formed substantially owned subsidiaries which serve as the administrative agents on certain investment transactions, including THL Corporate Finance, Inc. and THL Corporate Finance, LLC.

 

LOGO

 

(1)   THL Credit Advisors LLC is owned and controlled by certain employees of THL Credit Advisors and THL Credit Senior Loan Strategies LLC, or SLS, and a partnership consisting of certain of the partners of THL Partners (defined below).
(2)   SLS is a wholly owned subsidiary of THL Credit Advisors that focuses principally on investing in broadly syndicated senior loans.
(3)   Greenway I is an investment fund with $150.0 million of capital committed by affiliates of a single institutional investor, together with a nominal amount committed by the Company, all of which has been paid in and invested by Greenway I, which is managed by us.
(4)   Greenway II is an investment fund and, together with a related vehicle, has $187.0 million of capital committed by third party investors, all of which has been paid in and invested by Greenway II, together with a nominal amount committed by the Company, which is managed by us.

 



 

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(5)   Logan JV is a joint venture entered into between the Company and Perspecta Trident LLC, or Perspecta, an affiliate of Perspecta Trust LLC, which invests primarily in senior secured first lien term loans. Logan JV has $250 million of capital commitments, of which the Company committed $200 million and Perspecta committed $50 million.

THL Credit Advisors LLC

Our investment activities are managed by our investment adviser, THL Credit Advisors. THL Credit Advisors is responsible for sourcing potential investments, conducting research on prospective investments, analyzing investment opportunities, structuring our investments, and monitoring our investments and portfolio companies on an ongoing basis. We pay THL Credit Advisors a management fee as a percentage of our gross assets and may pay incentive fees as a percentage of our ordinary income and capital gains.

THL Credit Advisors was formed as a Delaware limited liability company on June 26, 2009 and is registered as an investment adviser under the Advisers Act. THL Credit Advisors is an alternative credit investment manager for both direct lending and broadly syndicated investments through public and private vehicles, collateralized loan obligations, separately managed accounts and co-mingled funds. THL Credit Advisors and its credit-focused affiliates managed assets of $8.7 billion as of December 31, 2016 across its two primary investment platforms: Direct Lending and Tradable Credit.

THL Credit Advisors benefits from a scaled and integrated business that draws on a diverse resource base and the credit and industry expertise of the entire platform. Fundamental credit analysis, rigorous and disciplined underwriting, well-structured investments and ongoing monitoring are the hallmarks of its credit culture.

THL Credit Advisors’ Direct Lending platform invests primarily in secured loans, consisting of first lien senior secured loans including unitranche investments and to a lesser extent, second lien facilities. In certain instances, THL Credit Advisors’ Direct Lending platform also makes subordinated debt investments and equity investments such as warrants, preferred stock or other similar securities.

THL Credit Advisors’ Tradable Credit platform manages investments in secured broadly syndicated, bank loans, BSLs, structured credit and high-yield securities through CLOs, separately-managed accounts, subadvisory and various fund formats, including THL Credit Senior Loan Fund (NYSE: TSLF) (“TSLF”), a nondiversified, closed-end management investment company. The Advisor maintains a variety of advisory or subadvisory relationships across its investment platform. For example the Advisor presently serves as an investment adviser to private funds and to certain CLOs, and is a subadviser to a closed-end fund, THL Credit Senior Loan Fund (NYSE: TSLF). The Advisor may serve as investment advisor to additional private funds, registered closed-end funds and CLOs in the future. See “Certain Relationships” for information regarding the allocation of investment opportunities.

THL Credit Advisors is headquartered in Boston, with additional investment teams in Chicago, Dallas, Los Angeles and New York, allowing it to be close to its portfolio companies as well as its origination and syndication sources. Over the years, THL Credit Advisors has developed deep and diverse national relationships that it leverages to maximize investment opportunities across its platforms.

THL Credit Advisor’s Direct Lending investment committee, which serves as our investment committee, is comprised of Sam W. Tillinghast, Christopher S. Flynn, Terrence W. Olson, W. Montgomery Cook, James R. Fellows and Howard H. Wu (the “Investment Committee Members”).

THL Credit Advisors has received an exemptive order from the SEC permitting it to negotiate, subject to the conditions of the order, co-investments among us and certain of its other investment advisory clients. See “Certain Relationships” in this prospectus.

 



 

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THL Credit Advisors also serves as our Administrator and leases office space to us and provides us with equipment and office services. The tasks of the Administrator include overseeing our financial records, preparing reports to our stockholders and reports filed with the SEC and generally monitoring the payment of our expenses and the performance of administrative and professional services rendered to us by others.

Relationship with Thomas H. Lee Partners, L.P. (“THL Partners”)

The Advisor is owned in part by a partnership consisting of certain partners of THL Partners. THL Partners is one of the world’s oldest and most experienced private equity firms. Since its founding in 1974, the firm has raised over $20 billion of equity capital and invested in more than 130 portfolio companies with an aggregate value of over $150 billion. THL Partners invests in growth-oriented businesses, headquartered primarily in North America, across three sectors: Business & Financial Services, Consumer & Healthcare, and Media, Information Services & Technology. The firm partners with portfolio company management to identify and implement operational and strategic improvements to accelerate sustainable revenue and profit growth. THL Partners strives to build great companies of lasting value and generate superior investment returns. We believe we benefit from THL Credit Advisors’ relationship with THL Partners. THL Credit Advisors has access to the industry knowledge of THL Partners’ investment team to consult with the THL Partners team on specific industry issues, trends and other complementary matters.

Investment Approach

Our investment approach consists of the following four separate and distinct phases: (1) sourcing; (2) selecting; (3) structuring; and (4) supervising investments. Sourcing involves our efforts to generate as vast a universe of relevant and actionable investment opportunities as possible. Selecting represents our decision-making process regarding which of those investments to pursue. Structuring summarizes our creative approach to deploying capital on a case by case basis in a way that maximizes value. Supervising is a reference to our ongoing rigorous credit monitoring.

Sourcing

The elements of our sourcing efforts will include: (i) determining the market in which we intend to participate; (ii) identifying the opportunities within that market; (iii) having a clear strategy; (iv) knowing the competition; and (v) distinguishing our competitive advantages.

Determining the Market

We invest primarily in debt securities of sponsored issuers based in the lower middle market mainly in the United States. Our debt investments are composed of directly originated first lien senior secured loans, secured loans, including unitranche investments. In certain instances, we also may make second lien secured loans and subordinated or mezzanine debt investments, which may include an associated equity component such as warrants, preferred stock and other similar securities, and direct equity co-investments. Our first lien senior secured loans may be structured as traditional first lien senior secured loans or as unitranche loans. Unitranche structures may combine characteristics of traditional first lien senior secured as well as second lien and/or subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche. We also may provide advisory services to managed funds.

 



 

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Market opportunity

We believe the environment for investing in lower middle market companies is attractive for several reasons, including:

Banks and traditional lenders have in recent years pulled back from the middle market creating an opportunity for alternative lenders like us. Increased lending regulation has limited the ability or willingness of traditional lenders to provide capital to lower middle market companies . Heightened scrutiny of large bank institutions by regulatory bodies has prompted lending guidelines that have sought to limit leverage, deter banks from lengthening payment timelines and restrict banks from holding certain CLO securities. Consolidation among commercial banks has reduced their focus on lower middle market business. We believe that many senior lenders have de-emphasized their service and product offerings to lower middle market companies in favor of lending to large corporate clients, managing capital markets transactions and providing other non-credit services to their customers.

Meaningful availability of investable capital at private equity firms. Recent private equity data show over $340 billion of unused commitments to private equity funds that private equity fund managers are actively looking to allocate to transactions involving new or existing portfolio companies.

In our experience, the “one-stop” debt financing solution provided by alternative lenders like us, either as the sole lender or in small club executions, is attractive to certain middle market borrowers and sponsors. “One-stop” solutions seek to provide certainty, ease and speed of closing and result in a less complicated capital structure that gives the requisite lender greater control of its investment through smaller transactions with one or few lenders.

The large yet fragmented lower middle market may offer lenders more attractive economic terms compared to the more efficient, syndicated markets. Investing in debt securities in the lower middle market may offer more favorable returns relative to their investment risk, when compared to investments in public high yield or syndicated bank loan securities. Furthermore, private equity sponsors focused on the middle market seek lenders with domain expertise and certainty of closing rather than running a fully efficient arranger process. Directly originated investments in the middle market may, in our experience, permit higher yields on investments and may also benefit from other more favorable terms relative to the broadly syndicated market, including lower leverage, tighter covenant packages, stronger call protection, and greater control of a work-out process in the case of a default.

Investment strategy

We believe a strategy focused primarily on debt securities in lower middle market companies has a number of compelling attributes. First, the market for these instruments is relatively inefficient, allowing an experienced investor an opportunity to produce high risk-adjusted returns. Second, downside risk can be managed through an extensive credit-oriented underwriting process, creative structuring techniques and intensive portfolio monitoring. We believe private debt investments generally require the highest level of credit and legal due diligence among debt or credit asset classes. Lastly, compared with equity investments, returns on debt investments tend to be less volatile given the substantial current return component and seniority in the capital structure relative to equity. Though it is not part of our investment strategy, we currently have, and may acquire in the future, control investments in portfolio companies. See “Risk Factors—Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment may be limited.”

We will consider opportunities within all industries and do not have fixed guidelines for industry concentration. As of December 31, 2016, our portfolio investments spanned several industries and the largest

 



 

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industries represented and the percentage of our investment portfolio at fair value were as follows: (i) consumer products and services at 18.01%; (ii) industrials and manufacturing at 15.26%; (iii) financial services at 8.91%; (iv) media, entertainment and leisure at 7.98%; and (v) healthcare at 7.75%

Competition

Our primary competitors to providing financing to lower middle market companies will include other BDCs, public and private funds, commercial and investment banks, CLO funds, commercial finance companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial and marketing resources than we do. For example, some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us.

Competitive advantages

We believe that we possess the following competitive advantages over many other capital providers to lower middle market companies:

Experienced management team. As stated above, the Investment Committee Members are experienced and many have worked together extensively and together with their past investment experiences have invested through multiple business and credit cycles in a variety of credit products with the objective of generating attractive, long-term, risk-adjusted returns. Each of the Investment Committee Members brings a unique investment perspective and skill-set by virtue of their complementary collective experiences as both debt and equity investors.

Proactive Sourcing Platform. We take a proactive, hands-on, and creative approach to investment sourcing. Our disciplined origination process includes proprietary tools and resources and employs a national platform with a regional focus. With offices in Boston, Chicago, Dallas, Los Angeles and New York, the Investment Committee Members have a deep and diverse relationship network in the debt capital and private equity markets. These activities and relationships provide an important channel through which we generate investment opportunities consistent with our investment strategy.

Significant institutional expertise and brand recognition gained from investing over $1.9 billion in 94 companies between June 2009 and December 31,2016 across our direct lending credit platform . We have developed the institutional knowledge and operational infrastructure required to successfully achieve our investment objectives. We benefit from proprietary deal flow from strong relationships with sponsors cultivated over seven years of doing business in the lower middle market. Our comprehensive underwriting methodology and monitoring processes have been implemented across all five regional offices. Additionally, the Investment Committee Members are supported by an experienced operational and administrative team.

Relationship with THL Partners. We are managed by THL Credit Advisors, the credit affiliate of THL Partners. As such, we have access to the relationship network and industry knowledge of THL Partners to enhance transaction sourcing capabilities. This also provides us with the opportunity to consult with investment team from THL Partners on specific industry issues, trends and other complementary matters.

Investments teams with a regional focus set up in Industry Verticals. We take a proactive, hands-on, and creative approach to investment sourcing, underwriting and portfolio management. Our disciplined origination process includes proprietary tools and resources and employs a national platform with a regional focus. With offices in Boston, Chicago, Dallas, New York and Los Angeles, we have a deep and diverse relationship network. Each of our five offices maintain a fully functional deal team (i.e., origination, underwriting and

 



 

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portfolio management). Given our five-office footprint, we are closer to smaller, regional sponsors and have cultivated deep relationships with these private equity firms. In many cases, regional sponsors prefer to partner with local lenders. Once an investment opportunity is sourced by one of our fives offices, the opportunity is transitioned to our lead underwriter who is responsible for the respective industry vertical while the individual who originated the opportunity remains closely involved in a relationship management capacity. We cover three primary industry verticals: Business & Financial Services (New York), Consumer & Healthcare (Boston, Dallas, Chicago and Los Angeles) and Information Services & Media (Los Angeles). Given our emphasis on three primary industry verticals, we have a strong preference for industry or sector-focused funds and/or sponsors who specialize in only several sectors as opposed to generalist private equity firms. Many lower middle market sponsors do not staff an internal capital markets resource (i.e., one who maintains a database and network of debt financing partners/arrangers); as such, a sponsor’s deal team leader without this resource is directly responsible for arranging debt financing as part of his/her deal process on a case-by-case basis. Lower middle market sponsors with this profile appreciate the value proposition of partnering with a trusted, local relationship and respected lender with deep domain expertise.

Selecting

Selecting investments to pursue requires us to have an employable investment philosophy, know our key metrics, have a process to consistently measure those metrics, and implement a repeatable underwriting process that enables our investment committee to make well-reasoned decisions.

Investment Philosophy

Our investment philosophy focuses on capital preservation, relative value, and establishing close relationships with portfolio companies. It is our expectation that this multifaceted focus should generate consistent, attractive, risk-adjusted returns coupled with low volatility.

Key Investment Metrics

Our value-oriented investment philosophy is primarily focused on maximizing yield relative to risk. Upon identifying a potential opportunity, we perform an initial screen to determine whether pursuing intensive due diligence is merited. As part of this process, we have identified several criteria we believe are important in evaluating and investing in prospective portfolio companies, which include, among other things: (i) value orientation/positive cash flow; (ii) seasoned management with significant equity ownership; (iii) strong competitive position; and (iv) exit strategy.

Due Diligence and Investment Process

We employ a rigorous and disciplined underwriting and due diligence process. Our process includes a comprehensive understanding of a portfolio company’s industry, market, operational, financial, organizational and legal position and prospects.

Investment Committee

The purpose of the investment committee is to evaluate and approve, as deemed appropriate, all investments by us. The committee process is intended to bring the diverse experience and perspectives of the committee’s members to the analysis and consideration of every investment. The committee also serves to provide investment consistency and adherence to THL Credit Advisors’ investment philosophies and policies. The investment committee also determines appropriate investment sizing and suggests ongoing monitoring requirements.

 



 

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Structuring

Our approach to structuring involves us choosing the most appropriate variety of securities for each particular investment; and negotiating the best and most favorable terms.

Investment Structure

In order to achieve our investment objective, we invest primarily in directly originated first lien senior secured loans, including unitranche investments. In certain instances, we also make second lien loans and subordinated or mezzanine debt investments, which may include an associated equity component such as warrants, preferred stock or similar securities and direct equity investments. Typically, our investments will be approximately $10 million to $35 million of capital per transaction and have maturities of five to seven years. In determining whether a prospective investment satisfies our investment criteria, we generally seek a high total return potential on a risk-adjusted basis, although there can be no assurance we will find investments satisfying that criterion or that any such investments will perform in accordance with expectations.

Investment Terms

We tailor the terms of each investment to the facts and circumstances of the transaction and the prospective portfolio company, negotiating a structure that protects our rights and manages our risk while creating incentives for the company to achieve its business plan and improve its profitability.

Supervising

Successful supervision of our investments involves employing active monitoring methods; and developing strong underlying management teams at each portfolio company.

Monitoring

We employ the use of board observation and information rights, regular dialogue with company management and sponsors, and detailed internally generated monitoring reports to actively monitor performance. Additionally, we have developed a monitoring template that promotes compliance with these standards and that is used as a tool to assess investment performance relative to plan.

Dividend Reinvestment Plan

We have adopted a dividend reinvestment plan for our stockholders. This is an “opt in” dividend reinvestment plan. As a result, if we declare a cash dividend or other distribution, each stockholder that has not “opted in” to our dividend reinvestment plan will receive cash dividends, rather than having their dividends automatically reinvested in additional shares of our common stock. Stockholders who receive distributions in the form of shares of common stock will be subject to the same federal, state and local tax consequences as if they received their distributions in cash. See “Dividend Reinvestment Plan.”

Taxation

We have elected to be treated as a regulated investment company, or “RIC”, under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level federal income taxes on any income that we distribute to our stockholders from our tax earnings and profits. To maintain our qualification as a RIC, we must, among other things, meet certain source of income and asset diversification requirements (as described below). In addition, in order maintain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”). See “Tax Matters”.

 



 

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Use of Proceeds

We intend to use the net proceeds from selling our securities for investing in debt and equity securities, repayment of any outstanding indebtedness and other general corporate purposes. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such offering.

Leverage

We borrow funds to make additional investments, and we have granted, and may in the future grant, a security interest in our assets to lenders in connection with any such borrowings, including any borrowings by any of our subsidiaries. We use this practice, which is known as “leverage,” to attempt to increase returns to our common stockholders. However, leverage involves significant risks. See “Risks.” With certain limited exceptions, we are only allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowing. As of December 31, 2016, we had $292.9 million of borrowings outstanding. The amount of leverage that we employ will depend on our assessment of market and other factors at the time of any proposed borrowing.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital Resources.”

Distributions

As a RIC, we are required to distribute annually to our stockholders at least 90% of the sum of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. We are not subject to corporate level income taxation on income we timely distribute (or are deemed to distribute) to our stockholders. See “Tax Matters.” We intend to continue to make quarterly distributions to our common stockholders, however, we may not be able to maintain the current level of distribution payments. Our quarterly distributions, if any, will be determined by our board of directors. We pay regular quarterly distributions based upon an estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year.

We may issue preferred stock from time to time, although we have no immediate intention to do so. If we issue shares of preferred stock, holders of such preferred stock will be entitled to receive cash dividends at an annual rate that will be fixed or will vary for the successive dividend periods for each series. In general, the dividend periods for fixed rate preferred stock will be quarterly. To the extent we issue preferred stock, the payment of dividends to holders of our preferred stock will take priority over payment of distributions to our common stockholders. See “Description of Our Preferred Stock.”

Risks

Investing in our common stock may be speculative and involves certain risks relating to our structure and our investment objective that you should consider before deciding whether to invest. Certain of these risks are referenced below:

Capital markets are currently functional, but may experience periods of disruption and instability, which could have a negative impact on our business and operations.

There are numerous risks relating to our business, including credit losses on our investments, the risk of loss associated with leverage, illiquidity and valuation uncertainties in our investments, possible lack of appropriate investments, the lack of experience of our investment adviser and our dependence on such investment adviser.

 



 

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There are also numerous risks relating to our investments, including the risky nature of the securities in which we invest, the subordinated nature of select investments, our potential lack of control over our portfolio companies, our limited ability to invest in public or foreign companies and the potential incentives in our investment adviser to invest more speculatively than it would if it did not have an opportunity to earn incentive fees. The inability of our portfolio companies to pay interest and principal when due may contribute to a reduction in the net value per share of our common stock, affect our ability to make distributions and service our contractual obligations, and may negatively impact the market price of shares of our common stock.

We also have various risks relating to our status as a BDC, including limitations on raising additional capital, failure to qualify as a BDC and loss of tax treatment as a RIC.

There are also risks relating to this offering, including volatility in our stock price and the anti-takeover effect of certain provisions in our certificate of incorporation. You may lose all or part of your investment in our securities.

See “Risks” beginning on page 17 of this prospectus for a more detailed discussion of these and other material risks you should carefully consider before deciding to invest in our common stock.

Certain Anti-Takeover Provisions

Our certificate of incorporation and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock. See “Description of Our Capital Stock.”

General Information

Our principal executive offices are located at 100 Federal Street, 31st floor, Boston, MA 02110, and we can be reached by telephone at (800) 450-4424. We maintain a website on the Internet at www.THLCreditBDC.com. Information contained in our website is not incorporated by reference into this prospectus, and you should not consider that information to be part of this prospectus.

We file annual, quarterly and current periodic reports, proxy statements and other information with the SEC under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. This information is available at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the SEC’s public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website, at www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, including us, who file documents electronically with the SEC.

 



 

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FEES AND EXPENSES

The following table is intended to assist you in understanding the various costs and expenses of the Company and its consolidated subsidiaries that an investor in our common stock will bear directly or indirectly. However, we caution you that some of the percentages indicated in the table below are estimates and may vary. The following table and example should not be considered a representation of our future expenses. Actual expenses may be greater or less than shown. Except where the context suggests otherwise, whenever this prospectus contains a reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, stockholders will indirectly bear such fees or expenses as investors in the Company. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate the information included in this table and example to reflect the applicable sales load and applicable fees and expenses.

 

Stockholder Transaction Expenses

  

Sales Load (as a percentage of offering price)

     —   % (1)  

Offering Expenses (as a percentage of offering price)

     —   % (2)  

Dividend Reinvestment Plan Fees

     —   % (3)  

Debt Securities and/or Preferred Stock Offering Expenses Borne by Holders of Common Stock

     —   % (4)  
  

 

 

 

Total Stockholder Transaction Expenses (as a percentage of offering price)

     —   % (4)  
  

 

 

 

Annual Expenses (as a Percentage of Net Assets Attributable to Common Shares) (5)

  

Base Management Fees

     2.83 % (6)  

Incentive Fees Payable Under the Investment Management Agreement (20% of ordinary income and capital gains)

     1.15 % (7)  

Interest Payments on Borrowed Funds (including Cost of Servicing Debt Securities and/or Preferred Stock)

     4.11 % (8)  

Other Expenses

     2.11 % (9)  

Acquired Fund Fees and Expenses

     1.26 % (10)  
  

 

 

 

Total Annual Expenses

     11.46 % (11)  
  

 

 

 

 

(1) In the event that the securities to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will disclose the applicable sales load and the Example will be updated accordingly.
(2) The related prospectus supplement will disclose the applicable offering expenses and total stockholder transaction expenses.
(3) The expenses of the dividend reinvestment plan are included in “Other Expenses.” See “Dividend Reinvestment Plan.”
(4) The prospectus supplement corresponding to each offering will disclose the applicable offering expenses and total stockholder transaction expenses. Although we have no definitive plans to do so at this time, we could determine, if market conditions are favorable and our board of directors determined that it was in the best interests of the Company and our stockholders, to issue debt securities. Accordingly, we have estimated debt securities offering expenses, based on our most recent debt financing, which are included in the “Interest Payment on Borrowed Funds (including Cost of Servicing Debt Securities and/or Preferred Stock)” line item.
(5) The consolidated net assets attributable to common shares used to calculate the percentages in this table is our net assets of $389.1 million as of December 31, 2016.
(6)

Our base management fee under the investment management agreement is based on our gross assets without deduction for any liabilities and is payable quarterly in arrears. See “The Advisor—Investment Management Agreement.” The management fee referenced in the table above is based upon the actual amounts incurred during the year ended December 31, 2016. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial condition, liquidity and capital

 



 

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  resources” and footnote 7 below. We do not expect to have significant expense accruals at the end of each quarter and accordingly do not expect our other liabilities will have an impact on our base management fee rate in relation to net assets attributable to our common stock.
(7) Assumes incentive fees that would have been earned by the Advisor, excluding the impact of realized and unrealized losses in the portfolio, remain consistent for the year ended December 31, 2016. For more detailed information about incentive fees related to capital gains incurred by us that are not payable to the Advisor under the terms of the Investment Management Agreement, please see Note 4 to our consolidated financial statements for the year ended December 31, 2016.

The incentive fee consists of two components, ordinary income and capital gains:

The ordinary income component, which is payable quarterly in arrears, will equal 20.0% of the excess, if any, of our “Preincentive Fee Net Investment Income” over a 2.0% quarterly (8.0% annualized) hurdle rate, expressed as a rate of return on the value of our net assets attributable to our common stock, and a “catch-up” provision, measured as of the beginning of each calendar quarter. Under this provision, in any calendar quarter, our investment adviser receives no incentive fee until our net investment income equals the hurdle rate of 2.0% but then receives, as a “catch-up,” 100% of our preincentive fee net investment income with respect to that portion of such preincentive fee net investment income, if any, that exceeds the hurdle rate but is less than 2.5% subject to a total return requirement and deferral of non-cash amounts. The effect of the “catch-up” provision is that, subject to the total return and deferral provisions discussed below, if preincentive fee net investment income exceeds 2.5% in any calendar quarter, our investment adviser will receive 20.0% of our preincentive fee net investment income as if a hurdle rate did not apply. The ordinary income component of the incentive fee will be computed on income that may include interest that is accrued but not yet received in cash. The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of the Company’s preincentive fee net investment income will be payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter will be limited to the lesser of (i) 20% of the amount by which our preincentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of preincentive fee net investment income, base management fees, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (sometimes referred to as payment-in-kind interest, or PIK, or original issue discount, or OID) will be paid to THL Credit Advisors, together with interest thereon from the date of deferral to the date of payment, only if and to the extent we actually receive such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. There is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle rate and there is no delay of payment if prior quarters are below the quarterly hurdle rate.

The capital gains component of the incentive fee will equal 20.0% of our “Incentive Fee Capital Gains,” if any, which will equal our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation, less the aggregate amount of any previously paid capital gain incentive fees. The second component of the incentive fee will be payable, in arrears, at the end of each calendar year (or upon termination of the investment management agreement, as of the termination date). For a more detailed discussion of the calculation of this fee, see “The Advisor—Investment Management Agreement.”

 



 

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(8) We may borrow funds from time to time to make investments to the extent that the economic situation is conducive to doing so. The costs associated with our borrowings are indirectly borne by our common stockholders. Interest payments on borrowed funds represents interest expense, non-use commitment fees related to our revolving credit facility and amortization of deferred financing costs. Interest expense is calculated based upon the amounts outstanding on our credit facility at a weighted average interest rate of 3.23% and amounts outstanding on our notes payable at an interest rate of 6.75% as of December 31, 2016. Non-use commitment fees related to our revolving credit facility is based upon unused commitments as of December 31, 2016. Amortization of deferred financing costs is based upon actual amounts incurred during the year ended December 31, 2016, excluding one time changes of $0.4 million related to the partial paydown of our term loan facility.
(9) Other expenses include overhead expenses for the current fiscal year based on amounts incurred during the year ended December 31, 2016, including payments under the administration agreement based on our allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement. Other expenses also include income tax provision, excise and other taxes incurred during the year ended December 31, 2016. The Administrator performs services under the Administration Agreement at cost. See “The Advisor—Administration Agreement.”
(10) Our stockholders indirectly bear the expenses of underlying funds or other investment vehicles in which we invest that (1) are investment companies or (2) would be investment companies under section 3(a) of the Investment Company Act but for the exceptions to that definition provided for in sections 3(c)(1) and 3(c)(7) of the Investment Company Act (“Acquired Funds”). This amount includes the estimated annual fees and expenses of Gryphon Partners 3.5, L.P., Freeport Financial SBIC Fund LP and THL Credit Logan JV LLC, which are our only Acquired Funds as of December 31, 2016. Such fees and expenses are netted against distributions received by the Company. The Total Annual Expenses presented in this table do not correlate to the Ratio of Expenses to Average Net Assets provided in the Financial Highlights section of the notes to financial statements contained elsewhere in this Prospectus, which reflects our operating expenses and does not include Acquired Fund Fees and Expenses.
(11) Total annual expenses as a percentage of consolidated net assets attributable to common stock are higher than the total annual expenses would be for a company that is not leveraged.

Example

The following example demonstrates the projected dollar amount of total cumulative expenses that would be incurred over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed that our annual operating expenses would remain at the levels set forth in the table above and have excluded performance-based incentive fees. See Note 8 above for additional information regarding certain assumptions regarding our level of leverage. In the event that shares to which this prospectus relates are sold to or through underwriters, a corresponding prospectus supplement will restate this example to reflect the applicable sales load.

 

     1 Year    3 Years    5 Years    10 Years

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (none of which is subject to a capital gains incentive fee)

   $108    $306    $482    $839

The example and the expenses in the tables above should not be considered a representation of our future expenses, and actual expenses may be greater or less than those shown. While the example assumes, as required by the SEC, a 5% annual return, our performance will vary and may result in a return greater or less than 5%. The incentive fee under the investment management agreement, which, assuming a 5% annual return, would either not be payable or would have a de minimis effect, is not included in the example. If we achieve sufficient returns on our investments, including through the realization of capital gains, to trigger an incentive fee

 



 

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of a material amount, our expenses and returns to our investors would be higher. For example, if we assumed that we received our 5.0% annual return completely in the form of net realized capital gains on our investments, which results in a capital gains incentive fee earned, the projected dollar amount of total cumulative expenses set forth in the above illustration and the capital gains incentive fee would be as follows:

 

     1 Year    3 Years    5 Years    10 Years

You would pay the following expenses on a $1,000 investment, assuming a 5% annual return (all of which is subject to a capital gains incentive fee)

   $118    $331    $516    $878

In addition, the example assumes no sales load. Also, while the example assumes reinvestment of all dividends at net asset value, participants in our dividend reinvestment plan will receive a number of shares of our common stock, determined by dividing the total dollar amount of the dividend payable to a participant by the market price per share of our common stock at the close of trading on the dividend payment date, which may be at, above or below net asset value. See “Dividend Reinvestment Plan” for additional information regarding our dividend reinvestment plan.

 



 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Senior Securities,” and the consolidated financial statements and related notes included elsewhere herein. Financial information is presented for the years ended December 31, 2016, 2015, 2014, 2013, and 2012 in thousands, except per share data. The Consolidated Statement of Operations, Per share and the Consolidated Statement of Assets and Liabilities data for the years ending 2016, 2015, 2014, 2013, and 2012 have been derived from our financial statements that were audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm. The historical data are not necessarily indicative of results to be expected for any future period.

 

     For the years ended  
     2016     2015     2014     2013     2012  

Statement of Operations data:

          

Total investment income

   $ 84,585     $ 94,195     $ 91,928     $ 74,650     $ 53,125  

Incentive fees

     4,461       11,894       11,184       10,682       7,017  

Base management fees

     10,998       11,825       11,142       7,521       4,943  

All other expenses

     24,271       23,147       20,372       14,547       10,392  

Income tax (benefit) provision and excise tax

     155       (243     1,040       511       581  

Net investment income

     44,700       47,572       48,190       41,389       30,192  

Net realized (loss) gain on investments

     (38,849 )     190       (12,855 )     2,604       353  

Net change in unrealized appreciation (depreciation) on investments

     11,141       (17,875     2,243       309       (1,241 )

Net change in unrealized appreciation (depreciation) attributable to non-controlling interests

     140       —         —         —         —    

Provision for taxes on realized gain on investments

     —         (8     (249 )     —         —    

Benefit (provision) for taxes on unrealized gain on investments

     137       (1,226     (151 )     (1,960 )     (454 )

Interest rate derivative periodic interest payments, net

     (276 )     (443     (458 )     (433 )     (180 )

Net change in unrealized appreciation (depreciation) on interest rate derivative

     156       7       71       769       (1,053 )

Net increase in net assets resulting from operations

     17,149       28,217       36,791       42,678       27,617  

Per share data:

          

Net asset value per common share attributable to THL Credit, Inc. at year end

   $ 11.82     $ 12.58     $ 13.08     $ 13.36     $ 13.20  

Market price at year end

     10.01       10.70       11.76       16.49       14.79  

Net investment income

     1.35       1.41       1.42       1.37       1.38  

Net realized (loss) gain on investments

     (1.17 )     0.01       (0.38 )     0.09       0.01  

Provision for taxes on realized gain on investments

     —         —         (0.01 )     —         —    

Net change in unrealized appreciation (depreciation) on investments

     0.33       (0.53     0.06       0.01       (0.06 )

Net change in unrealized appreciation (depreciation) on interest rate derivative

     —         —         —         0.01       (0.06 )

Provision for taxes on unrealized gain on investments

     0.01       (0.04     —         (0.07 )     (0.02 )

Interest rate derivative periodic interest payments, net

     (0.01 )     (0.01     (0.01 )     (0.01 )     —    

Net increase in net assets resulting from operations

     0.51       0.84       1.08       1.41       1.26  

Distributions declared

     1.29       1.36       1.36       1.43       1.34  

 



 

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     As of December 31,  
     2016     2015     2014     2013     2012  

Consolidated Statement of Assets and Liabilities data at period end:

          

Total investments at fair value

   $ 669,203     $ 754,163     $ 784,220     $ 648,867     $ 394,349  

Cash

     6,376       3,850       2,656       7,829       4,819  

Other assets

     15,825       13,278       21,713       14,365       5,517  

Total assets

     691,404       771,291       808,589       671,061       404,685  

Loans payable, net

     181,655       256,749       293,028       202,470       48,427  

Notes payable, net

     106,347       81,809       47,927       —         —    

Other liabilities

     13,582       13,834       24,013       15,649       8,774  

Total liabilities

     301,584       352,392       364,968       218,119       57,201  

Total net assets attributable to THL Credit, Inc.

     389,105       418,899       443,621       452,942       347,484  

Net assets attributable to non-controlling interest

     715       —         —         —         —    

Total net assets

     389,820       418,899       443,621       452,942       347,484  

Other data:

          

Weighted average annual yield on debt and income-producing investments (1)

     10.9 %     11.2 %     11.7 %     11.7 %     13.9 %

Weighted average annual yield on debt and income-producing investments including Logan JV (2)

     11.2 %     11.3 %     11.7 %     11.7 %     13.9 %

Number of portfolio investments at year end

     47       55       60       54       34  

 

(1)   Excludes yield on the Logan JV.
(2) Not relevant to the years ending December 31, 2014, 2013, or 2012 as Logan JV commenced operations on December 3, 2014.

Selected Quarterly Financial Data (Unaudited):

The tables below present selected financial data for the quarters within the last two fiscal years. The quarterly financial data presented has been derived from unaudited financial data which, in the opinion of management, presents fairly, in all material respects, the financial positions and results of operations of the Fund.

 

Quarter Ended

  Investment
Income
    Net Investment
Income
    Net Change in
Unrealized
Appreciation
(Depreciation)

on Investments
    Net Realized
Gain (Loss) on
Investments, net

of taxes
    Net Realized/
Unrealized Gain
(Loss) on

Interest Rate
Derivative
    Provision for
taxes (benefit)
on unrealized
gain on
investments
    Net Increase
In Net
Assets From
Operations
 
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
 

December 31, 2016

  $ 19,970     $ 0.61     $ 9,139     $ 0.28     $ (939 )   $ (0.04 )   $ (1,018 )   $ (0.02 )   $ 10     $ 0.00     $ 724     $ 0.02     $ 7,916     $ 0.24  

September 30, 2016

    21,565       0.65       10,495       0.32       24,674       0.75       (24,980 )     (0.76 )     78       —       (381 )     (0.01 )     9,886       0.30  

June 30, 2016

    20,478       0.62       11,663       0.35       (15,852 )     (0.48 )     3,681       0.11       (53 )     —       (99 )     —       (660 )     (0.02 )

March 31, 2016

    22,572       0.69       13,402       0.40       3,398       0.10       (16,532 )     (0.50 )     (155 )     —       (107 )     —       6       0.00  

Quarter Ended

  Investment
Income
    Net Investment
Income
    Net Change in
Unrealized
Appreciation
(Depreciation)

on Investments
    Net Realized
Gain (Loss) on
Investments, net
of taxes
    Net Realized/
Unrealized Gain

(Loss) on
Interest Rate
Derivative
    Provision for
taxes (benefit)
on unrealized

gain on
investments
    Net Increase
In Net
Assets From
Operations
 
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
    Total     Per
Share
 

December 31, 2015

  $ 23,565     $ 0.71     $ 12,079     $ 0.36     $ (15,566   ($ 0.46   $ (101     —       $ 157       —       $ (567   ($ 0.02   $ (3,998   ($ 0.12

September 30, 2015

    23,117       0.69       11,649       0.35       (8,595     (0.27     207       0.01       (223     —         (444     (0.01     2,594       0.08  

June 30, 2015

    23,751       0.71       11,934       0.35       2,539       0.08       46       —         (72     —         (388     (0.01     14,059       0.42  

March 31, 2015

    23,762       0.71       11,910       0.35       3,747       0.12       30       —         (298     (0.01     173       —         15,562       0.46  

 



 

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RISKS

Before you invest in our securities, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this prospectus, and any prospectus supplement accompanying this prospectus, before you decide whether to make an investment in our securities. The risks set out below are not the only risks we face, but they are the principal risks associated with an investment in us. If any of the following events occur, our business, financial condition and results of operations could be materially adversely affected. In such case, our net asset value and the trading price of our common stock could decline, and you may lose all or part of your investment. The risk factors described below, together with those set forth in any prospectus supplement accompanying this prospectus, are the principal risk factors associated with an investment in our securities, as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.

R ISKS RELATED TO OUR BUSINESS

We may suffer credit losses.

Investment in lower middle market companies is highly speculative and involves a high degree of risk of credit loss, and therefore our securities may not be suitable for someone with a low tolerance for risk. These risks are likely to increase during an economic recession.

The lack of liquidity in our investments may adversely affect our business.

Our investments generally are made in private companies. Substantially all of these securities are subject to legal and other restrictions on resale or will be otherwise less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in a portfolio company to the extent that we or an affiliated manager have material non-public information regarding such portfolio company.

There will be uncertainty as to the value of our portfolio investments.

A large percentage of our portfolio investments are in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded may not be readily determinable. We value these securities on a quarterly basis in accordance with our valuation policy, which is at all times consistent with U.S. generally accepted accounting policies (“GAAP”). Our board of directors utilizes the services of third-party valuation firms to aid it in determining the fair value of these securities. The board of directors discusses valuations and determines the fair value in good faith based on the input of our investment adviser and the respective third-party valuation firms. The factors that may be considered in fair value pricing our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparisons to publicly traded companies, discounted cash flow and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.

Our financial condition and results of operations depend on our ability to manage future growth effectively.

Our ability to achieve our investment objective depends on our ability to acquire suitable investments and monitor and administer those investments, which depends, in turn, on THL Credit Advisors ability to identify, invest in and monitor companies that meet our investment criteria.

 

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Accomplishing this result on a cost-effective basis is largely a function of the structuring of our investment process and the ability of our investment adviser to provide competent, attentive and efficient services to us. Our executive officers and the members of our investment adviser’s investment committee have substantial responsibilities in connection with their roles at THL Credit and with the other THL Credit funds, as well as responsibilities under the investment advisory and management agreement. They may also be called upon to provide significant managerial assistance to certain of our portfolio companies. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate of investment. In order to grow, THL Credit Advisors will need to hire, train, supervise, manage and retain new employees. However, we cannot assure you that we will be able to do so effectively. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

In addition, as we grow, we may open up new offices in new geographic regions that may increase our direct operating expenses without corresponding revenue growth.

We may experience fluctuations in our periodic operating results.

We could experience fluctuations in our periodic operating results due to a number of factors, including the interest rates payable on the debt securities we acquire, the default rates on such securities, the level of our expenses (including the interest rates payable on our borrowings), the dividend rates payable on preferred stock we issue, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.

We are exposed to risks associated with changes in interest rates, including fluctuations in interest rates which could adversely affect our profitability.

General interest rate fluctuations may have a substantial negative impact on our investments and investment opportunities, and, accordingly, may have a material adverse effect on our investment objective and rate of return on investment capital. A portion of our income will depend upon the difference between the rate at which we borrow funds and the interest rate on the debt securities in which we invest. Because we will borrow money to make investments and may issue debt securities, preferred stock or other securities, our net investment income is dependent upon the difference between the rate at which we borrow funds or pay interest or dividends on such debt securities, preferred stock or other securities and the rate at which we invest these funds. Typically, we anticipate that our interest earning investments will accrue and pay interest at both variable and fixed rates, and that our interest-bearing liabilities will accrue interest at variable rates. The benchmarks used to determine the floating rates earned on our interest earning investments are London Interbank Offered Rate, or LIBOR, with maturities that range between one and twelve months and alternate base rate, or ABR, (commonly based on the Prime Rate or the Federal Funds Rate), with no fixed maturity date. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. We use a combination of equity and long-term and short-term borrowings to finance our investment activities.

A significant increase in market interest rates could harm our ability to attract new portfolio companies and originate new loans and investments. We expect that a portion of our investments in debt will be at floating rates with a floor. However, in the event that we make investments in debt at variable rates, a significant increase in market interest rates could also result in therefore, an increase in our non-performing assets and a decrease in the value of our portfolio because our floating-rate loan portfolio companies may be unable to meet higher payment obligations. In periods of rising interest rates, our cost of funds would increase, resulting in a decrease in our net investment income. In addition, a decrease in interest rates may reduce net income, because new investments may be made at lower rates despite the increased demand for our capital that the decrease in interest rates may produce. We may, but will not be required to, hedge against the risk of adverse movement in interest rates in our short-term and long-term

 

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borrowings relative to our portfolio of assets. If we engage in hedging activities, it may limit our ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition, and results of operations.

Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited.

The SEC has proposed a new rule under the Investment Company Act that would govern the use of derivatives (defined to include any swap, security-based swap, futures contract, forward contract, option or any similar instrument) as well as financial commitment transactions (defined to include reverse repurchase agreements, short sale borrowings and any firm or standby commitment agreement or similar agreement) by BDCs. Under the proposed rule, a BDC would be required to comply with one of two alternative portfolio limitations and manage the risks associated with derivatives transactions and financial commitment transactions by segregating certain assets. Furthermore, a BDC that engages in more than a limited amount of derivatives transactions or that uses complex derivatives would be required to establish a formalized derivatives risk management program. If the SEC adopts this rule in the form proposed, our ability to enter into transactions involving such instruments may be hindered, which could have an adverse effect on our business, financial condition and results of operations.

Any failure on our part to maintain our status as a BDC would reduce our operating flexibility.

If we fail to continue to qualify as a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility and could significantly increase our costs of doing business. Furthermore, any failure to comply with the requirements imposed on BDCs by the 1940 Act could cause the SEC to bring an enforcement action against us.

To the extent we use debt or preferred stock to finance our investments, changes in interest rates will affect our cost of capital and net investment income.

To the extent we borrow money, or issue preferred stock, to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds or pay dividends on preferred stock and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, except to the extent we issue fixed rate debt or preferred stock, which could reduce our net investment income. We expect that our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act.

A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payable to our investment adviser with respect to our pre-incentive fee net investment income.

 

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Because we have substantial indebtedness, there could be increased risk in investing in our company.

Lenders have fixed dollar claims on our assets that are superior to the claims of stockholders, and we have granted, and may in the future grant, lenders a security interest in our assets in connection with borrowings. In the case of a liquidation event, those lenders would receive proceeds before our stockholders. In addition, borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Leverage is generally considered a speculative investment technique. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more than it otherwise would have had we not leveraged.

Conversely, if the value of our assets decreases, leveraging would cause the net asset value attributable to our common stock to decline more than it otherwise would have had we not leveraged. Similarly, any increase in our revenue in excess of interest expense on our borrowed funds would cause our net income to increase more than it would without the leverage. Any decrease in our revenue would cause our net income to decline more than it would have had we not borrowed funds and could negatively affect our ability to make distributions on common stock. Our ability to service any debt that we incur will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. We and, indirectly, our stockholders will bear the cost associated with our leverage activity.

As of December 31, 2016, there was $303.5 million of commitments under our revolving credit agreement, or Revolving Facility, of which $107.9 million was funded, and $75.0 million of commitments, which was fully funded, under our term loan agreement, or Term Loan Facility.

The Revolving Facility has a maturity date of August 2020 (with a one year term out period beginning in August 2019). The one year term out period is the one year period between the revolver termination date, or the end of the availability period, and the maturity date. During this time, we are required to make mandatory prepayments on our loans from the proceeds we receive from the sale of assets, extraordinary receipts, returns of capital or the issuances of equity or debt. The Term Loan Facility has a maturity date of April 2021. Each of the Revolving Facility and Term Loan Facility (together the “Facilities”), includes an accordion feature permitting us to expand the Facilities, if certain conditions are satisfied; provided, however, that the aggregate amount of the Facilities, collectively, is capped at $600.0 million. ING serves as administrative agent, lead arranger and bookrunner under each of the Facilities.

On November 18, 2014, we closed a public offering of $50.0 million in aggregate principal amount of 6.75% notes, or the 2021 Notes, which included the subsequent exercise of an overallotment. The 2021 Notes mature on November 15, 2021, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after November 15, 2017. The 2021 Notes bear interest at a rate of 6.75% per year.

On December 14, 2015 and November 21, 2016, we closed public offerings of $35.0 million and $25.0 million, respectively, in aggregate principal amount of 6.75% notes, or the 2022 Notes, which included the subsequent exercise of an overallotment. The 2022 Notes mature on December 30, 2022, and may be redeemed in whole or in part at any time or from time to time at the Company’s option on or after December 30, 2018. The 2022 Notes bear interest at a rate of 6.75% per year.

Collectively, the 2021 Notes and the 2022 Notes are referred to as the “Notes”.

As a BDC, generally we are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). In addition, we may not be permitted to declare any cash dividend or other distribution on our outstanding common shares, or purchase any such shares, unless, at the time of such declaration or purchase, we have asset coverage of at least 200% after deducting the amount of such dividend, distribution, or purchase price. If this ratio declines below 200%, we may not be able to incur additional debt and may need to sell a portion of our investments to repay some debt when it is disadvantageous to do so, and we may not be able

 

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to make distributions. As of December 31, 2016, there was $182.9 million of borrowings outstanding under the Facilities and $110.0 million outstanding on the Notes at a weighted average interest rate of 4.55% per annum. As of December 31, 2016, our asset coverage ratio was over 200%.

The following table is designed to illustrate the effect on the return to a holder of our common stock on the leverage created by our use of borrowing at December 31, 2016 of $292.9 million at an average interest rate at the time of 4.55%, and assuming hypothetical annual returns on our portfolio of minus 10 to plus 10 percent. The table also assumes that we maintain a constant level of leverage and a constant weighted average interest rate. The amount of leverage we use will vary from time to time. As can be seen, leverage generally increases the return to stockholders when the portfolio return is positive and decreases return to stockholders when the portfolio return is negative. Actual returns may be greater or less than those appearing in the table below.

 

Assumed return on portfolio (net of expenses) (1)

     (10.00%)        (5.00%)        0.00%        5.00     10.00

Corresponding return to common stockholders (2)

     (23.20%)        (13.31%)        (3.42%)        6.47     16.37

 

(1)   The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance.
(2)   In order to compute the “corresponding return to common stockholders”, the “assumed return on portfolio” is multiplied by the total value of our assets at the beginning of the period ($771.3 million as of December 31, 2015) to obtain an assumed return to us. From this amount, all interest expense expected to be accrued during the period ($13.3 million) is subtracted to determine the return available to stockholders. The return available to stockholders is then divided by the total value of our net assets as of the end of the period ($389.8 million) to determine the “corresponding return to common stockholders.”

This example is for illustrative purposes only, and actual interest rates on our Facility borrowing are likely to fluctuate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital resources—Credit Facility” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition, Liquidity and Capital resources—Notes” for additional information about the Facilities and Notes.

The Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.

The Notes are obligations exclusively of THL Credit, Inc. and not of any of our subsidiaries. None of our subsidiaries are a guarantor of the Notes and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.

The indenture under which our Notes were issued contains limited protection for holders of our Notes.

The indenture under which the Notes were issued contain limited protection for holders of our Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:

 

   

issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any

 

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indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in our subsidiaries and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by Section 61(a)(1) of the 1940 Act or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in either case, to any exemptive relief granted to us by the SEC (these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 200% after such borrowings);

 

    pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes;

 

    sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets);

 

    enter into transactions with affiliates;

 

    create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions;

 

    make investments; or

 

    create restrictions on the payment of dividends or other amounts to us from our subsidiaries.

In addition, the indenture will not require us to offer to purchase the Notes in connection with a change of control or any other event.

Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.

Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.

Certain of our current debt instruments include more protections for their holders than the indenture and the Notes. In addition, other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial condition, liquidity and capital resources—Credit Facility.” The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.

If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the Notes.

Any default under the agreements governing our indebtedness, including a default under the Revolving Facility, the Term Loan Facility or other indebtedness to which we may be a party that is not waived by the required lenders or holders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we

 

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are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness, we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Revolving Facility or the Term Loan Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to seek to obtain waivers from the required lenders under the Revolving Facility or the Term Loan Facility or other debt that we may incur in the future to avoid being in default. If we breach our covenants under the Revolving Facility or the Term Loan Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders. If this occurs, we would be in default under the Revolving Facility or the Term Loan Facility or other debt, the lenders or holders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations, including the lenders under the Revolving Facility and the Term Loan Facility, could proceed against the collateral securing the debt. Because the Revolving Facility and the Term Loan Facility have, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes, the Revolving Facility or the Term Loan Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.

We may default under the Facilities or any future borrowing facility we enter into or be unable to amend, repay or refinance any such facility on commercially reasonable terms, or at all, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

As of December 31, 2016, all of our assets were pledged as collateral under the Facilities. In the event we default under the Facilities or any other future borrowing facility, our business could be adversely affected as we may be forced to sell all or a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support working capital requirements under the Facilities or such future borrowing facility, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, following any such default, the agent for the lenders under the Facilities or such future borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.

Substantially all of our assets are subject to security interests under the Facilities and if we default on our obligations under the Facilities we may suffer adverse consequences, including foreclosure on our assets.

As of December 31, 2016, all of our assets were pledged as collateral under the Facilities. If we default on our obligations under the Facilities, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or their superior claim. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate the distributions that we have historically made to our stockholders.

In addition, if the lenders exercise their right to sell the assets pledged under the Facilities, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the Facilities.

 

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Because we use debt to finance our investments and have issued senior securities, and, in the future, may issue additional senior securities, including preferred stock and debt securities, if market interest rates were to increase, our cost of capital could increase, which could reduce our net investment income.

Because we borrow money to make investments and have issued senior securities and, in the future, may issue additional senior securities, including preferred stock and debt securities, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates to the extent permitted by the 1940 Act. In addition, a rise in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of our pre-incentive fee net investment income and, as a result, an increase in incentive fees payable to THL Credit Advisors. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.

We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of investing in us in the same way as our borrowings.

Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.

Our use of borrowed funds to make investments exposes us to risks typically associated with leverage.

We borrow money and may issue additional debt securities or preferred stock to leverage our capital structure. As a result:

 

    our common shares would be exposed to incremental risk of loss; therefore, a decrease in the value of our investments would have a greater negative impact on the value of our common shares than if we did not use leverage;

 

    any depreciation in the value of our assets may magnify losses associated with an investment and could totally eliminate the value of an asset to us;

 

    if we do not appropriately match the assets and liabilities of our business and interest or dividend rates on such assets and liabilities, adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage;

 

    our ability to make distributions on our common stock may be restricted if our asset coverage ratio, as provided in the 1940 Act, is not at least 200%, and any amounts used to service indebtedness or preferred stock would not be available for such distributions;

 

    any credit facility would be subject to periodic renewal by our lenders, whose continued participation cannot be guaranteed;

 

    such securities would be governed by an indenture or other instrument containing covenants restricting our operating flexibility or affecting our investment or operating policies, and may require us to pledge assets or provide other security for such indebtedness;

 

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    we, and indirectly our common stockholders, bear the entire cost of issuing and paying interest or any distributions on such securities;

 

    if we issue preferred stock, the special voting rights and preferences of preferred stockholders may result in such stockholders’ having interests that are not aligned with the interests of our common stockholders, and the rights of our preferred stockholders to dividends and liquidation preferences will be senior to the rights of our common stockholders;

 

    any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our common shares; and

 

    any custodial relationships associated with our use of leverage would conform to the requirements of the 1940 Act, and no creditor would have veto power over our investment policies, strategies, objectives or decisions except in an event of default or if our asset coverage was less than 200%.

Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities only in amounts such that our asset coverage ratio equals at least 200% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test and we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our senior securities at a time when such sales may be disadvantageous.

To the extent original issue discount and PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income.

Our investments may include original issue discount, or OID, instruments and contractual PIK, interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash. Such risks include:

 

    The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans.

 

    Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation.

 

    OID and PIK instruments 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. OID and PIK income may also create uncertainty about the source of our cash distributions.

 

    For accounting purposes, any cash distributions to shareholders representing OID and PIK income are not treated as coming from paid-in capital, even though the cash to pay them comes from the offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.

 

    PIK interest has the effect of generating investment income at a compounding rate, thereby further increasing the incentive fees payable to the Advisor. Similarly, all things being equal, the deferral associated with PIK interest also decreases the loan-to-value ratio at a compounding rate.

We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.

For federal income tax purposes, we generally must include in income certain amounts that we have not yet received in cash, such as original issue discount, which may arise if we receive warrants in connection with making a loan, or possibly in other circumstances, or PIK interest, which represents contractual interest added to

 

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the loan balance and due at the end of the loan term. Such original issue discount, which could be significant relative to our overall investment activities, or increases in loan balances as a result of PIK arrangements are included in income before we receive any corresponding cash payments. In addition, the PIK interest of many subordinated loans effectively operates as negative amortization of loan principal, thereby increasing credit risk exposure over the life of the loan because more will be owed at the end of the term of the loan than was owed when the loan was initially originated. We also may be required to include in income certain other amounts that we do not receive in cash.

Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the tax requirement to distribute at least 90% of our investment company taxable income to maintain our tax treatment as a RIC. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements.

We may pay an incentive fee on income we do not receive in cash.

That part of the incentive fee payable by us that relates to our net investment income is computed and paid on income that may include interest that has been accrued but not yet received in cash. If a portfolio company defaults on a loan, it is possible that accrued interest previously used in the calculation of the incentive fee will become uncollectible. Consequently, while we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a formal clawback right against our investment adviser per se, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and thereby reduce such period’s incentive fee payment, but only to the extent that such an incentive fee is payable for that period because the write-off will not be carried forward to reduce any incentive fee payable in subsequent quarters.

The highly competitive market in which we operate may limit our investment opportunities.

A number of entities compete with us to make the types of investments that we make. We compete with other BDCs, public and private funds, commercial and investment banks, CLO funds, commercial finance companies, and, to the extent they provide an alternative form of financing, private equity and hedge funds. Additionally, because competition for investment opportunities generally has increased among alternative investment vehicles such as hedge funds, entities have begun to invest in areas in which they had not traditionally invested. As a result of these new entrants, competition for investment opportunities intensified in recent years and may intensify further in the future. Some of our existing and potential competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC and that the Code imposes on us as a RIC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this existing and potentially increasing competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

With respect to the investments we make, we do not seek to compete based primarily on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that are lower than the rates we offer. With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss. We

 

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may also compete for investment opportunities with investment funds, accounts and investment vehicles managed by THL Credit Advisors. Although THL Credit Advisors will allocate opportunities in accordance with its policies and procedures, allocations to such investment funds, accounts and investment vehicles will reduce the amount and frequency of opportunities available to us and may not be in the best interests of us and our stockholders.

We are dependent upon senior management personnel of our investment adviser for our future success, and if our investment adviser is unable to retain qualified personnel or if our investment adviser loses any member of its senior management team, our ability to achieve our investment objective could be significantly harmed.

We depend on the members of senior management of THL Credit Advisors, particularly the members of the investment committee of THL Credit Advisors’ direct lending platform, or the Investment Committee Members. The Investment Committee Members and other investment professionals make up our investment team and are responsible for the identification, final selection, structuring, closing and monitoring of our investments. These Investment Committee Members have critical industry experience and relationships that we will rely on to implement our business plan. Our future success depends on the continued service of the Advisor’s senior management team. The departure of any of the members of Advisor’s senior management or a significant number of the Investment Committee Members could have a material adverse effect on our ability to achieve our investment objective. As a result, we may not be able to operate our business as we expect, and our ability to compete could be harmed, which could cause our operating results to suffer. In addition, we can offer no assurance that THL Credit Advisors will remain our investment adviser or our administrator.

Our investment adviser has the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, financial condition and results of operations.

THL Credit Advisors has the right, under our investment management agreement, to resign at any time upon not more than 60 days’ written notice, whether we have found a new replacement or not. If our investment adviser resigns, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our investment adviser and its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition and results of operations.

Because we expect to distribute substantially all of our net investment income and net realized capital gains to our stockholders, we will need additional capital to finance our growth and such capital may not be available on favorable terms or at all.

We have elected to be taxed, for federal income tax purposes, as a RIC under Subchapter M of the Code. If we meet certain requirements, including source of income, asset diversification and distribution requirements, and if we continue to qualify as a BDC, we will continue to qualify for tax treatment as a RIC under the Code and will not have to pay corporate-level income taxes on income we make distributions to our stockholders, which allows us to substantially reduce or eliminate our corporate-level income tax liability. As a BDC, we are generally required to meet a coverage ratio of total assets to total senior securities, which includes all of our borrowings and any preferred stock we may issue in the future, of at least 200% at the time we issue any debt or preferred stock. This requirement limits the amount that we may borrow. Because we will continue to need

 

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capital to grow our investment portfolio, this limitation may prevent us from incurring debt or issuing preferred stock and require us to raise additional equity at a time when it may be disadvantageous to do so. We cannot assure you that debt and equity financing will be available to us on favorable terms, or at all, and debt financings may be restricted by the terms of any of our outstanding borrowings. In addition, as a BDC, we are generally not permitted to issue common stock priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new lending and investment activities, and our net asset value could decline.

Our board of directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval.

Our board of directors has the authority to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval (except as required by the 1940 Act). However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results or value of our stock. Nevertheless, the effects could adversely affect our business and impact our ability to make distributions and cause you to lose all or part of your investment.

Our investment adviser and its affiliates, senior management and employees have certain conflicts of interest.

Our investment adviser, its senior management and employees serve or may serve as investment advisers, officers, directors or principals of entities that operate in the same or a related line of business. For example, THL Credit Advisors serves as investment adviser to one or more private funds and registered closed-end funds. In addition, our officers may serve in similar capacities for one or more registered closed-end funds. Accordingly, these individuals may have obligations to investors in those entities or funds, the fulfillment of which might not be in our best interests or the best interests of our stockholders. In addition, certain of the personnel employed by our investment adviser or focused on our business may change in ways that are detrimental to our business. Any affiliated investment vehicle formed in the future and managed by THL Credit Advisors or its affiliates may invest in asset classes similar to those targeted by us. As a result, THL Credit Advisors may face conflicts in allocating investment opportunities between us and such other entities. Although THL Credit Advisors will endeavor to allocate investment opportunities in a fair and equitable manner, it is possible that we may not be given the opportunity to participate in such investments. In certain circumstances, negotiated co-investments may be made only if we receive an order from the SEC permitting us to do so. The SEC has granted us relief sought in an exemptive application that expands our ability to co-invest in portfolio companies with other funds managed by the Adviser or its affiliates (“Affiliated Funds”) in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions (the “Order”). Pursuant to the Order, we are permitted to co-invest with Affiliated Funds if among other things a “required majority” (as defined in Section 57(o) of the 1940 Act) or our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transactions, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.

There are potential conflicts of interest between us and the funds managed by us which could impact our investment returns.

THL Credit Greenway Fund LLC, or Greenway LLC, and THL Credit Greenway Fund II LLC, or Greenway II LLC, are portfolio companies and are managed by us. As contemplated in the Greenway II LLC limited liability agreement, we established a related investment vehicle and entered into an investment management agreement with an account set up by an unaffiliated third party investor to invest alongside

 

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Greenway II LLC pursuant to similar economic terms. The account is also managed by us. References to “Greenway II” herein include Greenway II LLC and the accounts of related investment vehicles.

Certain of our officers serve or may serve in an investment management capacity to Greenway and Greenway II. As a result, investment professionals may allocate such time and attention as is deemed appropriate and necessary to carry out operations of Greenway and Greenway II. In this respect, they may experience diversions of their attention from us and potential conflicts of interest between their work for us and their work for Greenway and Greenway II in the event that the interests of Greenway and Greenway II run counter to our interests.

Greenway and Greenway II invests in the same or similar asset classes that we target. These investments may be made at the direction of the same individuals acting in their capacity on behalf of us, Greenway and Greenway II. As a result, there may be conflicts in the allocation of investment opportunities between us, Greenway and Greenway II. We may or may not participate in investments made by funds managed by us or one of our affiliates.

We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to make distributions.

Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:

 

    sudden electrical or telecommunications outages;

 

    natural disasters such as earthquakes, tornadoes and hurricanes;

 

    disease pandemics;

 

    events arising from local or larger scale political or social matters, including terrorist acts; and

 

    cyber-attacks.

These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to make distributions to our stockholders.

The failure in cyber security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning could impair our ability to conduct business effectively.

The occurrence of a disaster such as a cyber attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.

We depend heavily upon computer systems to perform necessary business functions. Despite our implementation of a variety of security measures, our computer systems could be subject to cyber attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized

 

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access, system failures and disruptions. If one or more of these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.

Our base management fee may induce our investment adviser to incur leverage.

Our base management fee is calculated on the basis of our total assets, including assets acquired with the proceeds of leverage. This may encourage the Advisor to use leverage to increase the aggregate amount of and the return on our investments, even when it may not be appropriate to do so, and to refrain from delivering when it would otherwise be appropriate to do so. Under certain circumstances, the use of increased leverage may increase the likelihood of default, which would impair the value of our common stock. Given the subjective nature of the investment decisions made by our investment adviser on our behalf, we will not be able to monitor this conflict of interest.

Our incentive fee may induce our investment adviser to make certain investments, including speculative investments.

The incentive fee payable by us to THL Credit Advisors may create an incentive for THL Credit Advisors to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to THL Credit Advisors is determined, which is calculated separately in two components as a percentage of the interest and other ordinary income in excess of a quarterly minimum hurdle rate and as a percentage of the realized gain on invested capital, may encourage our THL Credit Advisors to use leverage or take additional risk to increase the return on our investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock, or of securities convertible into our common stock or warrants representing rights to purchase our common stock or securities convertible into our common stock. In addition, THL Credit Advisors receives the incentive fee based, in part, upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on ordinary income, there is no minimum level of gain applicable to the portion of the incentive fee based on net capital gains. As a result, THL Credit Advisors may have an incentive to invest more in investments that are likely to result in capital gains as compared to income producing securities or to advance or delay realizing a gain in order to enhance its incentive fee. This practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to certain of our debt investments and may accordingly result in a substantial increase of the amount of incentive fees payable to our investment adviser with respect to our pre-incentive fee net investment income.

We may invest, to the extent permitted by law, in the securities and instruments of other investment companies, including private funds, and, to the extent we so invest, we will bear our ratable share of any such investment company’s expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to THL Credit Advisors with respect to the assets invested in the securities and instruments of other investment companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the management and incentive fee of THL Credit Advisors as well as indirectly bear the management and performance fees and other expenses of any investment companies in which we invest.

 

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We may be obligated to pay our investment adviser incentive compensation payments even if we have incurred unrecovered cumulative losses from more than three years prior to such payments and may pay more than 20% of our net capital gains as incentive compensation payments because we cannot recover payments made in previous years.

Our investment adviser will be entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation) above a threshold return for that quarter and subject to a total return requirement. The general effect of this total return requirement is to prevent payment of the foregoing incentive compensation except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. Consequently, we may pay an incentive fee if we incurred losses more than three years prior to the current calendar quarter even if such losses have not yet been recovered in full. Thus, we may be required to pay our investment adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. If we pay an incentive fee of 20.0% of our realized capital gains (net of all realized capital losses and unrealized capital depreciation on a cumulative basis) and thereafter experience additional realized capital losses or unrealized capital depreciation, we will not be able to recover any portion of the incentive fee previously paid.

R ISKS RELATED TO OUR INVESTMENTS

We invest primarily in debt and equity securities of lower middle market companies and we may not realize gains from our equity investments.

Our investment objective is to generate both current income and capital appreciation, primarily through investments in privately negotiated debt and equity securities of lower middle market companies. We are a direct lender to lower middle market companies that invests primarily in directly originated first lien senior secured and second lien loans, including unitranche investments. In certain instances, we make subordinated debt investments, which may include an associated equity component such as warrants, preferred stock or similar securities, and direct equity co-investments. We may also provide advisory services to managed funds. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.

Our investments in prospective private and lower middle market portfolio companies are risky, and we could lose all or part of our investment.

Investment in private and lower middle market companies involves a number of significant risks. Generally, little public information exists about these companies, and we are required to rely on the ability of THL Credit Advisors’ investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Lower middle market companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment. In addition, they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, lower middle market companies are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us. Lower middle market companies also generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses

 

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with products subject to a substantial risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position. In addition, our executive officers, directors and our investment adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in the portfolio companies.

Our investments in lower credit quality obligations are risky and highly speculative, and we could lose all or part of our investment.

Most of our debt investments are likely to be in lower grade obligations. The lower grade investments in which we invest may be rated below investment grade by one or more nationally-recognized statistical rating agencies at the time of investment or may be unrated but determined by the Advisor to be of comparable quality. Debt securities rated below investment grade are commonly referred to as “junk bonds” and are considered speculative with respect to the issuer’s capacity to pay interest and repay principal. The debt in which we invest typically is not rated by any rating agency, but we believe that if such investments were rated, they would be below investment grade (rated lower than “Baa3” by Moody’s Investors Service, lower than “BBB-” by Fitch Ratings or lower than “BBB-” by Standard & Poor’s). We may invest without limit in debt of any rating, as well as debt that has not been rated by any nationally recognized statistical rating organization.

Investment in lower grade investments involves a substantial risk of loss. Lower grade securities or comparable unrated securities are considered predominantly speculative with respect to the issuer’s ability to pay interest and principal and are susceptible to default or decline in market value due to adverse economic and business developments. The market values for lower grade debt tend to be very volatile and are less liquid than investment grade securities. For these reasons, your investment in our company is subject to the following specific risks: increased price sensitivity to a deteriorating economic environment; greater risk of loss due to default or declining credit quality; adverse company specific events are more likely to render the issuer unable to make interest and/or principal payments; and if a negative perception of the lower grade debt market develops, the price and liquidity of lower grade securities may be depressed. This negative perception could last for a significant period of time.

We may not be in a position to exercise control over our portfolio companies or to prevent decisions by management of our portfolio companies that could decrease the value of our investments.

We do not generally intend to take controlling equity positions in our portfolio companies. To the extent that we do not hold a controlling equity interest in a portfolio company, we are subject to the risk that such portfolio company may make business decisions with which we disagree, and the stockholders and management of such portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity for the debt and equity investments that we typically hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company, and may therefore suffer a decrease in the value of our investments.

In addition, we may not be in a position to control any portfolio company by investing in its debt securities. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as debt investors.

Our portfolio companies may be highly leveraged.

Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

 

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Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.

We have invested a portion of our capital in second lien and subordinated loans and the “last-out” tranche of unitranche loans issued by our portfolio companies and intend to continue to do so in the future. The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt securities in which we invest. Such subordinated investments are subject to greater risk of default than senior obligations as a result of adverse changes in the financial condition of the obligor or in general economic conditions. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the debt securities in which we invest. These debt instruments would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under the debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt securities in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

Certain loans that we make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. In addition, we have made in the past, and may make in the future, unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on a portfolio company’s collateral, if any, will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.

The rights we may have with respect to the collateral securing certain loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements or agreements among lenders. Under these agreements, we may forfeit certain rights with respect to the collateral to holders with prior claims. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of those enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and certain rights to receive interest and certain amortization payments that would be allocated to other lenders under the credit facility. We may not have the ability to control or direct such actions, even if as a result our rights as lenders are adversely affected.

Economic downturns or recessions could impair the value of the collateral for our loans to our portfolio companies and consequently increase the possibility of an adverse effect on our financial condition and results of operations.

Many of our portfolio companies are susceptible to economic recessions and may be unable to repay our loans during such periods. Therefore, our non-performing assets are likely to increase and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may also decrease the value of collateral securing some of our loans and the value of our equity investments.

 

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Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us.

A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of the portfolio company’s loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize the portfolio company’s ability to meet its obligations under the debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, if a portfolio company goes bankrupt, even though we may have structured our investment as mezzanine debt, or senior secured debt, depending on the facts and circumstances, including the extent to which we actually provided significant “managerial assistance,” if any, to that portfolio company, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to that of other creditors. These events could harm our financial condition and operating results.

We may suffer a loss if a portfolio company defaults on a loan and the underlying collateral is not sufficient.

In the event of a default by a portfolio company on a secured loan, we will only have recourse to the assets collateralizing the loan. If the underlying collateral value is less than the loan amount, we will suffer a loss. In addition, we sometimes make loans that are unsecured, where other lenders may be directly secured by the assets of the same portfolio company. In the event of a default or an enforcement action against the assets of the portfolio company that constitute collateral for such other lenders, those collateralized lenders would have priority over us with respect to the proceeds of a sale of such underlying assets. In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the portfolio company prior to a default, and as a result the value of the collateral may be reduced by acts or omissions by owners or managers of the assets.

In the event of bankruptcy of a portfolio company, we may not have full recourse to its assets in order to satisfy our loan, or our loan may be subject to equitable subordination. In addition, certain of our loans are subordinate to other debt of the portfolio company. If a portfolio company defaults on our loan or on debt senior to our loan, or in the event of a portfolio company bankruptcy, our loan will be satisfied only after the senior debt receives payment in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans to affiliates of the portfolio company, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to the portfolio company. Bankruptcy and portfolio company litigation can significantly increase collection losses and the time needed for us to acquire the underlying collateral in the event of a default, during which time the collateral may decline in value, causing us to suffer losses.

If the value of collateral underlying our loan declines or interest rates increase during the term of our loan, a portfolio company may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Decreasing collateral value and/or increasing interest rates may hinder a portfolio company’s ability to refinance our loan because the underlying collateral cannot satisfy the debt service coverage requirements necessary to obtain new financing. If a borrower is unable to repay our loan at maturity, we could suffer a loss which may adversely impact our financial performance.

We may be exposed to special risks associated with bankruptcy cases.

One or more of our portfolio companies may be involved in bankruptcy or other reorganization or liquidation proceedings. Many of the events within a bankruptcy case are adversarial and often beyond the control of the creditors. While creditors generally are afforded an opportunity to object to significant actions, we cannot assure you that a bankruptcy court would not approve actions that may be contrary to our interests. There also are instances where creditors can lose their ranking and priority if they are considered to have taken over management of a borrower.

 

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To the extent that portfolio companies in which we have invested through a unitranche facility are involved in bankruptcy proceedings, the outcome of such proceedings may be uncertain. For example, it is unclear whether a bankruptcy court would enforce an agreement among lenders which sets the priority of payments among unitranche lenders. In such a case, the “first out” lenders in the unitranche facility may not receive the same degree of protection as they would if the agreement among lenders was enforced.

The reorganization of a company can involve substantial legal, professional and administrative costs to a lender and the borrower. It is subject to unpredictable and lengthy delays and during the process a company’s competitive position may erode, key management may depart and a company may not be able to invest adequately. In some cases, the debtor company may not be able to reorganize and may be required to liquidate assets. The debt of companies in financial reorganization will, in most cases, not pay current interest, may not accrue interest during reorganization and may be adversely affected by an erosion of the issuer’s fundamental value.

In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. For example, we could become subject to a lender liability claim (alleging that we misused our influence on the borrower for the benefit of its lenders), if, among other things, the borrower requests significant managerial assistance from us and we provide that assistance. To the extent we and an affiliate both hold investments in the same portfolio company that are of a different character, we may also face restrictions on our ability to become actively involved in the event that such portfolio company becomes distressed as a result of the restrictions imposed on transactions involving affiliates under the 1940 Act. In such cases, we may be unable to exercise rights we may otherwise have to protect our interests as security holders in such portfolio company.

Our loans could be subject to equitable subordination by a court which would increase our risk of loss with respect to such loans.

Courts may apply the doctrine of equitable subordination to subordinate the claim or lien of a lender against a borrower to claims or liens of other creditors of the borrower, when the lender or its affiliates is found to have engaged in unfair, inequitable or fraudulent conduct. The courts have also applied the doctrine of equitable subordination when a lender or its affiliates is found to have exerted inappropriate control over a client, including control resulting from the ownership of equity interests in a client. We have made direct equity investments or received warrants in connection with loans representing approximately 10.9% of the aggregate amortized cost basis of our portfolio as of December 31, 2016. Payments on one or more of our loans, particularly a loan to a client in which we also hold an equity interest, may be subject to claims of equitable subordination. If we were deemed to have the ability to control or otherwise exercise influence over the business and affairs of one or more of our portfolio companies resulting in economic hardship to other creditors of that company, this control or influence may constitute grounds for equitable subordination and a court may treat one or more of our loans as if it were unsecured or common equity in the portfolio company. In that case, if the portfolio company were to liquidate, we would be entitled to repayment of our loan on a pro-rata basis with other unsecured debt or, if the effect of subordination was to place us at the level of common equity, then on an equal basis with other holders of the portfolio company’s common equity only after all of its obligations relating to its debt and preferred securities had been satisfied.

Our failure to make follow-on investments in our portfolio companies could impair the value of our portfolio.

Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; (3) attempt to preserve or enhance the value of our initial investment; or (4) to finance an acquisition or other material transaction. We have the discretion to make any follow-on investments, subject to the availability of capital resources. We may elect not to make follow-on investments or otherwise lack sufficient funds to make those investments. Our failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we

 

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may elect not to make such follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, because we are inhibited by compliance with BDC requirements or because we desire to maintain our tax status. In addition, our ability to make follow-on investments may also be limited by THL Credit Advisors’ allocation policy.

Our ability to invest in public companies may be limited in certain circumstances.

To maintain our status as a BDC, we are not permitted to 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). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as a qualifying asset only if such issuer has a market capitalization that is less than $250 million at the time of such investment and meets the other specified requirements.

Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.

Our investment strategy contemplates that a portion of our investments may be in securities of foreign companies in order to provide diversification or to complement our U.S. investments although we are required generally to invest at least 70% of our assets in companies organized and having their principal place of business within the U.S. and its possessions. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. These risks many be more pronounced for portfolio companies located or operating primarily in emerging markets, whose economies, markets and legal systems may be less developed.

Although it is anticipated that most of our investments will be denominated in U.S. dollars, our investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency may change in relation to the U.S. dollar. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. We may employ hedging techniques to minimize these risks, but we can offer no assurance that we will, in fact, hedge currency risk or, that if we do, such strategies will be effective. As a result, a change in currency exchange rates may adversely affect our profitability.

Hedging transactions may expose us to additional risks.

While we may enter into transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek or be able to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations. On May 10, 2012, we entered into a five-year interest rate swap agreement, or swap agreement, with ING Capital Markets, LLC. Under the swap agreement, with a notional value of $50.0 million, we pay a fixed rate of 1.1425% and receive a floating rate based upon the current three-month LIBOR rate. We entered into the swap agreement to manage interest rate risk and not for speculative purposes.

 

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We may incur greater risk with respect to investments we acquire through assignments or participations of interests.

Although we originate a substantial portion of our loans, we may acquire loans through assignments or participations of interests in such loans. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to such debt obligation. However, the purchaser’s rights can be more restricted than those of the assigning institution, and we may not be able to unilaterally enforce all rights and remedies under an assigned debt obligation and with regard to any associated collateral. A participation typically results in a contractual relationship only with the institution participating out the interest and not directly with the borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. In purchasing participations, we generally will have no right to enforce compliance by the borrower with the terms of the loan agreement against the borrower, and we may not directly benefit from the collateral supporting the debt obligation in which we have purchased the participation. As a result, we will be exposed to the credit risk of both the borrower and the institution selling the participation. In addition, to the extent that the lead institution fails and any borrower collateral is used to reduce the balance of a participated loan, we will be regarded as a creditor of the lead institution and will not benefit from the exercise of any set-off rights by the lead institution or its receiver. Further, in purchasing participations in lending syndicates, we will not be able to conduct the same level of due diligence on a borrower or the quality of the loan with respect to which we are buying a participation as we would conduct if we were investing directly in the loan. This difference may result in us being exposed to greater credit or fraud risk with respect to such loans than we expected when initially purchasing the participation.

Cyclicality within the energy sector may adversely affect some of our portfolio companies.

Industries within the energy sector are cyclical with fluctuations in commodity prices and demand for, and production of commodities driven by a variety of factors. The highly cyclical nature of the industries within the energy sector may lead to volatile changes in commodity prices, which may adversely affect the earnings of energy companies in which we may invest and the performance and valuation of our portfolio.

Changes in healthcare laws and other regulations applicable to some of our portfolio companies’ businesses may constrain their ability to offer their products and services.

Changes in healthcare or other laws and regulations applicable to the businesses of some of our portfolio companies may occur that could increase their compliance and other costs of doing business, require significant systems enhancements, or render their products or services less profitable or obsolete, any of which could have a material adverse effect on their results of operations. There has also been an increased political and regulatory focus on healthcare laws in recent years, and new legislation could have a material effect on the business and operations of some of our portfolio companies.

Our investments in the consumer products and services sector are subject to various risks including cyclical risks associated with the overall economy.

General risks of companies in the consumer products and services sector include cyclicality of revenues and earnings, economic recession, currency fluctuations, changing consumer tastes, extensive competition, product liability litigation and increased government regulation. Generally, spending on consumer products and services is affected by the health of consumers. Companies in the consumer products sectors are subject to government regulation affecting the permissibility of using various food additives and production methods, which regulations could affect company profitability. A weak economy and its effect on consumer spending and services would adversely affect companies in the consumer products and services sector.

Our investments in the financial services sector are subject to various risks including volatility and extensive government regulation.

These risks include the effects of changes in interest rates on the profitability of financial services companies, the rate of corporate and consumer debt defaults, price competition, governmental limitations on a company’s loans, other

 

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financial commitments, product lines and other operations and recent ongoing changes in the financial services industry (including consolidations, development of new products and changes to the industry’s regulatory framework). The deterioration of the credit markets starting in late 2007 generally has caused an adverse impact in a broad range of markets, including U.S. and international credit and interbank money markets generally, thereby affecting a wide range of financial institutions and markets. In particular, events in the financial sector in late 2008 resulted, and may continue to result, in an unusually high degree of volatility in the financial markets, both domestic and foreign. This situation has created instability in the financial markets and caused certain financial services companies to incur large losses. Insurance companies have additional risks, such as heavy price competition, claims activity and marketing competition, and can be particularly sensitive to specific events such as man-made and natural disasters (including weather catastrophes), terrorism, mortality risks and morbidity rates.

Our investments in technology companies are subject to many risks, including volatility, intense competition, shortened product life cycles, litigation risk and periodic downturn.

We have invested and will continue investing in technology companies, many of which may have narrow product lines and small market shares, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as to general economic downturns. The revenues, income (or losses), and valuations of technology-related companies can and often do fluctuate suddenly and dramatically. In addition, technology-related markets are generally characterized by abrupt business cycles and intense competition, where the leading companies in any particular category may hold a highly concentrated percentage of the overall market share. Therefore, our portfolio companies may face considerably more risk of loss than do companies in other industry sectors.

Because of rapid technological change, the selling prices of products and services provided by technology-related companies have historically decreased over their productive lives. As a result, the selling prices of products and services offered by technology-related companies may decrease over time, which could adversely affect their operating results, their ability to meet obligations under their debt securities and the value of their equity securities. This could, in turn, materially adversely affect the value of the technology-related companies in our portfolio.

Our equity ownership in a portfolio company may represent a control investment. Our ability to exit a control investment may be limited.

We currently have, and may acquire in the future, control investments in portfolio companies. Our ability to divest ourselves from a debt or equity investment in a controlled portfolio company could be restricted due to illiquidity in a private stock, limited trading volume on a public company’s stock, inside information on a company’s performance, insider blackout periods, or other factors that could prohibit us from disposing of the investment as we would if it were not a control investment. Additionally, we may choose not to take certain actions to protect a debt investment in a control investment portfolio company. As a result, we could be limited in our ability to exit a control investment at an ideal time, which could diminish the value we are able to receive upon exiting such control investment.

R ISKS IN THE CURRENT ENVIRONMENT

Capital markets may experience periods of disruption and instability and we cannot predict when these conditions will occur. Such market conditions could materially and adversely affect debt and equity capital markets in the United States and abroad, which could have a negative impact on our business, financial condition and results of operations.

The U.S. and global capital markets experienced extreme volatility and disruption during the economic downturn that began in mid-2007, and the U.S. economy was in a recession for several consecutive calendar quarters during the same period. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt, which created concerns about the ability of certain nations to continue to

 

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service their sovereign debt obligations. Risks resulting from such debt crisis and any future debt crisis in Europe or any similar crisis elsewhere could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in certain countries and the financial condition of financial institutions generally. In July and August 2015, Greece reached agreements with its creditors for bailouts that provide aid in exchange for certain austerity measures. These and similar austerity measures may adversely affect world economic conditions and have an adverse impact on our business and that of our portfolio companies. In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from continued sell-off of shares trading in Chinese markets. In August 2015, Chinese authorities sharply devalued China’s currency. In June 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, and the implications of the United Kingdom’s pending withdrawal from the European Union are unclear at present. In November 2016, voters in the United States elected a new president and the implications of a new presidential administration are unclear at present. These market and economic disruptions affected, and these and other similar market and economic disruptions may in the future affect, the U.S. capital markets, which could adversely affect our business and that of our portfolio companies and the broader financial and credit markets and has reduced the availability of debt and equity capital for the market as a whole and to financial firms, in particular. At various times, these disruptions resulted in, and may in the future result, a lack of liquidity in parts of the debt capital markets, significant write-offs in the financial services sector and the repricing of credit risk. These conditions may reoccur for a prolonged period of time again or materially worsen in the future, including as a result of U.S. Government shutdowns or further downgrades to the U.S. government’s sovereign credit rating or the perceived credit worthiness of the United States or other large global economies. Unfavorable economic conditions, including future recessions, also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. We may in the future have difficulty accessing debt and equity capital on attractive terms, or at all, and a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions may cause us to reduce the volume of loans we originate and/or fund, adversely affect the value of our portfolio investments or otherwise have a material adverse effect on our business, financial condition, results of operations and cash flows.

As a result of the 2016 U.S. election, the Republican Party currently controls both the executive and legislative branches of government, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations.

The new Republican Administration may make substantial changes to fiscal and tax policies that may adversely affect our business.

The Republican Administration has called for substantial change to fiscal and tax policies, which may include comprehensive tax reform. According to publicly released statements, a top legislative priority of the Republican Administration and the next Congress may be significant reform of the Code, including significant changes to taxation of business entities and the deductibility of interest expense. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and we cannot predict the impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business. If implemented, some policies adopted by the new administration may benefit us while others may negatively affect us. Until we know what changes are going to be enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes.

 

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R ISKS RELATED TO OUR OPERATIONS AS A BDC

Our ability to enter into transactions with our affiliates will be restricted.

Because we have elected to be treated as a BDC under the 1940 Act, we are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior approval of our independent directors and, in some cases, of the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities will be our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any security from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, of the SEC. The SEC has granted us relief pursuant to the Order. Pursuant to the Order, we are permitted to co-invest with Affiliated Funds if a “required majority” (as defined in Section 57(o) of the 1940 Act) or our independent directors make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. We intend to co-invest, subject to the conditions included in the Order. We believe that such co-investments may afford us additional investment opportunities and an ability to achieve greater diversification. We are prohibited from buying or selling any security from or to any person who owns more than 25% of our voting securities or certain of that person’s affiliates, entering into prohibited joint transactions with such persons, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates.

Regulations governing our operation as a BDC may limit our ability to, and the way in which we raise additional capital, which could have a material adverse impact on our liquidity, financial condition and results of operations.

Our business may in the future require a substantial amount of capital. We may acquire additional capital from the issuance of senior securities (including debt and preferred stock) or the issuance of additional shares of our common stock. However, we may not be able to raise additional capital in the future on favorable terms or at all. Additionally, we may only issue senior securities up to the maximum amount permitted by the 1940 Act. The 1940 Act permits us to issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after such issuance or incurrence. If our assets decline in value and we fail to satisfy this test, we may be required to liquidate a portion of our investments and repay a portion of our indebtedness at a time when such sales or repayment may be disadvantageous, which could have a material adverse impact on our liquidity, financial condition and results of operations.

 

    Senior Securities (including debt and preferred stock) . As a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. If we issue preferred securities, such securities would rank “senior” to common stock in our capital structure, resulting in preferred stockholders having separate voting rights, dividend and liquidation rights, and possibly other rights, preferences or privileges more favorable than those granted to holders of our common stock. Furthermore, the issuance of preferred securities could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for our common stockholders or otherwise be in your best interest.

 

   

Additional Common Stock . Our board of directors may decide to issue common stock to finance our operations rather than issuing debt or other senior securities. As a BDC, we are generally not able to issue our common stock at a price below net asset value without first obtaining required approvals from our stockholders and our independent directors. At our Annual Meeting of Stockholders on June 2, 2016, our stockholders approved a proposal authorizing us to sell up to 25% of our common stock at a price below the Company’s net asset value per share, subject to approval by our board of directors of

 

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the offering. Except in connection with the exercise of warrants or the conversion of convertible securities, in any such case the price at which our securities are to be issued and sold may not be less than a price, that in the determination of our board of directors, closely approximates the market value of such securities at the relevant time. We may also make subscription rights offerings or warrants representing rights to purchase shares of our securities to our stockholders at prices per share less than the net asset value per share, subject to the requirements of the 1940 Act. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders at that time would decrease, and such stockholders may experience dilution.

Additionally, if we do raise additional capital in one or more subsequent financings, until we are able to invest the net proceeds of such any financing in suitable investments, we will invest in temporary investments, such as cash, cash equivalents, U.S. government securities and other high-quality debt investments that mature in one year or less, which we expect will earn yields lower than the interest, dividend or other income that we anticipate receiving in respect of investments in debt and equity securities of our target portfolio companies. As a result, our ability to make distributions in the years of operation during which we have such net proceeds available to invest will be based on our ability to invest our capital in suitable portfolio companies in a timely manner. Further, the management fee payable to our investment adviser, THL Credit Advisors, will not be reduced while our assets are invested in such temporary investments.

Changes in the laws or regulations governing our business, or changes in the interpretations thereof, and any failure by us to comply with these laws or regulations, could have a material adverse effect on our business, results of operations or financial condition.

Changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and may be subject to civil fines and criminal penalties.

If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy, which would have a material adverse effect on our business, financial condition and results of operations.

As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Regulation.” We believe that most of the investments that we may acquire in the future will constitute qualifying assets. However, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could be found to be in violation of the 1940 Act provisions applicable to BDCs and possibly lose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inopportune times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it may be difficult to dispose of such investments on favorable terms. For example, we may have difficulty in finding a buyer and, even if we do find a buyer, we may have to sell the investments at a substantial loss.

 

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There is a risk that we may not make distributions or that our distributions may not grow over time.

We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or periodically increase our distribution rate.

As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of our board of directors. Decreases in the market values or fair values of our investments will be recorded as unrealized depreciation. Any unrealized depreciation in our investment portfolio could be an indication of a portfolio company’s potential inability to meet its repayment obligations to us. This could result in realized losses in the future and ultimately in reductions of our income available for distribution in future periods.

If we are unable to qualify for tax treatment as a RIC, we will be subject to corporate-level income tax, which would have a material adverse effect on our results of operations and financial condition.

We intend to continue to qualify for tax treatment as a RIC under the Code. As a RIC we do not have to to pay federal income taxes on our income (including realized net capital gains) that is distributed (or deemed distributed) to our stockholders, provided that we satisfy certain distribution and other requirements. Accordingly, we are not permitted under accounting rules to establish reserves for taxes on our unrealized capital gains. If we fail to qualify for RIC tax treatment in any year, to the extent that we had unrealized gains, we would have to establish reserves for taxes, which would reduce our net asset value and the amount potentially available for distribution. In addition, if we, as a RIC, were to decide to make a deemed distribution of net realized capital gains and retain the net realized capital gains, we would have to establish appropriate reserves for taxes that we would have to pay on behalf of stockholders. It is possible that establishing reserves for taxes could have a material adverse effect on the value of our common stock.

To maintain our tax treatment as a RIC under the Code, which is required in order for us to distribute our income without being taxed at the corporate level, we must maintain our status as a BDC and meet certain requirements, including:

 

    The Annual Distribution Requirement, which is satisfied if we distribute to our stockholders at least 90% of our investment Company taxable income on an annual basis. Because we may use debt financing, we are subject to an asset coverage ratio requirement under the 1940 Act and we may be subject to certain financial covenants under our debt arrangements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and, thus, become subject to corporate-level income tax.

 

    The income source requirement, which will be satisfied if we obtain at least 90% of our income for each year from dividends, interest, gains from the sale of stock or securities or similar sources.

 

    The asset diversification requirement, which will be satisfied if we meet certain asset diversification requirements at the end of each quarter of our taxable year. To satisfy these requirements, at least 50% of the value of our assets must consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Internal Revenue Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in private companies, and, therefore, will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.

 

 

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Satisfying these requirements may require us to take actions we would not otherwise take, such as selling investments at unattractive prices to satisfy the diversification, distribution or source of income requirements. In addition, while we are authorized to borrow funds in order to make distributions, under the 1940 Act we are not permitted to make distributions to stockholders while we have debt obligations or other senior securities outstanding unless certain “asset coverage” tests are met. If we fail to qualify for tax treatment as a RIC for any reason and become or remain subject to corporate-level income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions. Such a failure would have a material adverse effect on our results of operations and financial conditions, and thus, our stockholders.

R ISKS RELATED TO AN INVESTMENT IN OUR SECURITIES

Our common stock price may be volatile and may fluctuate substantially.

As with any stock, the price of our common stock will fluctuate with market conditions and other factors. Our common stock is intended for long-term investors and should not be treated as a trading vehicle. Shares of closed-end management investment companies, which are structured similarly to us, frequently trade at a discount from their net asset value. Our shares may trade at a price that is less than the offering price. This risk may be greater for investors who sell their shares in a relatively short period of time after completion of the offering.

The market price and liquidity of the market for our common shares may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:

 

    significant volatility in the market price and trading volume of securities of BDCs or other companies in the sector in which we operate, which are not necessarily related to the operating performance of these companies;

 

    changes in regulatory policies or tax guidelines, particularly with respect to RICs or BDCs;

 

    loss of RIC status;

 

    changes in earnings or variations in operating results;

 

    changes in the value of our portfolio of investments;

 

    any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

    departure of key personnel from our investment adviser;

 

    operating performance of companies comparable to us;

 

    general economic trends and other external factors; and

 

    loss of a major funding source.

Certain provisions of the General Corporation Law of the State of Delaware and our certificate of incorporation could deter takeover attempts and have an adverse effect on the price of our common stock.

The General Corporation Law of the State of Delaware and our certificate of incorporation contain provisions that may discourage, delay or make more difficult a change in control of us or the removal of our directors. Among other provisions, our directors may be removed for cause by the affirmative vote of 75% of the holders of our outstanding capital stock and removed with or without cause by the approval of 66.7% of the remaining directors. Our board of directors also is authorized to issue preferred stock in one or more series. In addition, our certificate of incorporation requires the favorable vote of a majority of our board of directors followed by the favorable vote of the holders of at least 75% of our outstanding shares of common stock, to

 

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approve, adopt or authorize certain transactions, including mergers and the sale, lease or exchange of all or any substantial part of our assets with 10% or greater holders of our outstanding common stock and their affiliates or associates, unless the transaction has been approved by at least 80% of our board of directors, in which case approval by “a majority of the outstanding voting securities” (as defined in the 1940 Act) will be required. These measures may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interests of our stockholders and could have the effect of depriving stockholders of an opportunity to sell their shares at a premium over prevailing market prices. See “Description of Our Capital Stock—Anti-takeover provisions.”

Our common stock may trade below its net asset value per share, which limits our ability to raise additional equity capital.

If our common stock is trading below its net asset value per share, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. Shares of BDCs, including shares of our common stock, have traded at discounts to their net asset values. As of December 31, 2016, our net asset value per share was $11.82. The last reported sale price of a share of our common stock on the NASDAQ Global Select Market on April 6, 2017 was $9.80. At our Annual Meeting of Stockholders on June 2, 2016, our stockholders approved a proposal authorizing us to sell up to 25% of our common stock at a price below our then-current net asset value per share, subject to approval by our board of directors for the offering. The authorization expires on the earlier of June 2, 2017, and the date of our 2017 Annual Meeting of Stockholders. Our stockholders also approved a proposal to authorize us to offer and issue debt with warrants or debt convertible into shares of our common stock at an exercise or conversion price that, at the time such warrants or convertible debt are issued, will not be less than the market value per share but may be below our then-current net asset value per share. If our common stock trades below net asset value, the higher the cost of equity capital may result in it being unattractive to raise new equity, which may limit our ability to grow. The risk of trading below net asset value is separate and distinct from the risk that our net asset value per share may decline. We cannot predict whether shares of our common stock will trade above, at or below our net asset value.

Our Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have currently incurred or may incur in the future.

The Notes are not secured by any of our assets or any of the assets of our subsidiaries. As a result, the Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently incurred and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. As of December 31, 2016, we had $107.9 million outstanding under the Revolving Facility and $75.0 million outstanding under the Term Loan Facility. The indebtedness under the Revolving Facility and the Term Loan Facility is effectively senior to the Notes to the extent of the value of the assets securing such indebtedness.

The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock or securities to subscribe for or convertible into shares of our common stock.

At our Annual Meeting of Stockholders on June 2, 2016, our stockholders approved a proposal authorizing us to sell up to 25% of our common stock at a price below the Company’s net asset value per share, subject to approval by our board of directors of the offering. Although any such sale must be approved by our board of directors, there is no limit on the amount of dilution that may occur as a result of such sale. If we were to issue

 

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shares at a price below net asset value, such sales would result in an immediate dilution to existing common stockholders, which would include a reduction in the net asset value per share as a result of the issuance. This dilution would also include a proportionately greater decrease in a stockholder’s interest in our earnings and assets and voting interest in us than the increase in our assets resulting from such issuance.

In addition, at our 2016 Annual Meeting of Stockholders, our stockholders authorized us to offer and issue debt with warrants or debt convertible into shares of our common stock at an exercise or conversion price that, at the time such warrants or convertible debt are issued, will not be less than the market value per share but may be below our then current net asset value.

Any decision to sell shares of our common stock below its then current net asset value per share or securities to subscribe for or convert into shares of our common stock would be subject to the determination by our board of directors that such issuance is in our and our stockholders’ best interests.

If we were to sell shares of our common stock below its then current net asset value per share, such sales would result in an immediate dilution to the net asset value per share of our common stock. This dilution would occur as a result of the sale of shares at a price below the then current net asset value per share of our common stock and a proportionately greater decrease in the stockholders’ interest in our earnings and assets and their voting interest in us than the increase in our assets resulting from such issuance. Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted.

In addition, if we issue warrants or securities to subscribe for or convert into shares of our common stock, subject to certain limitations, the exercise or conversion price per share could be less than net asset value per share at the time of exercise or conversion (including through the operation of anti-dilution protections). Because we would incur expenses in connection with any issuance of such securities, such issuance could result in a dilution of the net asset value per share at the time of exercise or conversion. This dilution would include reduction in net asset value per share as a result of the proportionately greater decrease in the stockholders’ interest in our earnings and assets and their voting interest than the increase in our assets resulting from such issuance.

Further, if our current stockholders do not purchase any shares to maintain their percentage interest, regardless of whether such offering is above or below the then current net asset value per share, their voting power will be diluted. For example, if we sell an additional 10% of our common shares at a 10% discount from net asset value, a stockholder who does not participate in that offering for its proportionate interest will suffer net asset value dilution of up to 0.9% or $9 per $1000 of net asset value. For additional information and hypothetical examples of these risks, see “Sale of Common Stock Below Net Asset Value” and the prospectus supplement pursuant to which such sale is made.

We incur significant costs as a result of being a publicly traded company.

As a publicly traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002, and other rules implemented by the SEC.

The trading market or market value of our publicly issued debt securities may fluctuate.

Our publicly issued debt securities may or may not have an established trading market. We cannot assure you that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following:

 

 

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    the time remaining to the maturity of these debt securities;

 

    the outstanding principal amount of debt securities with terms identical to these debt securities;

 

    the ratings assigned by national statistical ratings agencies;

 

    the general economic environment;
    the supply of debt securities trading in the secondary market, if any;

 

    the redemption or repayment features, if any, of these debt securities;

 

    the level, direction and volatility of market interest rates generally; and

 

    market rates of interest higher or lower than rates borne by the debt securities.

You should also be aware that there may be a limited number of buyers when you decide to sell your debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.

Terms relating to redemption may materially adversely affect your return on any debt securities that we may issue.

If your debt securities are redeemable at our option, we may choose to redeem your debt securities at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In addition, if your debt securities are subject to mandatory redemption, we may be required to redeem your debt securities also at times when prevailing interest rates are lower than the interest rate paid on your debt securities. In this circumstance, you may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as your debt securities being redeemed.

If we issue preferred stock, debt securities or convertible debt securities, the net asset value and market value of our common stock may become more volatile.

We cannot assure you that the issuance of preferred stock and/or debt securities would result in a higher yield or return to the holders of our common stock. The issuance of preferred stock, debt securities or convertible debt would likely cause the net asset value and market value of our common stock to become more volatile. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to approach the net rate of return on our investment portfolio, the benefit of leverage to the holders of our common stock would be reduced. If the dividend rate on the preferred stock, or the interest rate on the debt securities, were to exceed the net rate of return on our portfolio, the use of leverage would result in a lower rate of return to the holders of common stock than if we had not issued the preferred stock or debt securities. Any decline in the net asset value of our investment would be borne entirely by the holders of our common stock. Therefore, if the market value of our portfolio were to decline, the leverage would result in a greater decrease in net asset value to the holders of our common stock than if we were not leveraged through the issuance of preferred stock. This decline in net asset value would also tend to cause a greater decline in the market price for our common stock.

There is also a risk that, in the event of a sharp decline in the value of our net assets, we would be in danger of failing to maintain required asset coverage ratios which may be required by the preferred stock, debt securities, convertible debt or units or of a downgrade in the ratings of the preferred stock, debt securities, convertible debt or units or our current investment income might not be sufficient to meet the dividend requirements on the preferred stock or the interest payments on the debt securities. If we do not maintain our required asset coverage ratios, we may not be permitted to declare dividends. In order to counteract such an event, we might need to liquidate investments in order to fund redemption of some or all of the preferred stock, debt securities or convertible debt. In addition, we would pay (and the holders of our common stock would bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred stock, debt securities, convertible debt or any combination of these securities. Holders of preferred stock, debt securities or convertible debt may have different interests than holders of common stock and may at times have disproportionate influence over our affairs.

 

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Holders of any preferred stock that we may issue will have the right to elect members of the board of directors and have class voting rights on certain matters.

The 1940 Act requires that holders of shares of preferred stock must be entitled as a class to elect two directors at all times and to elect a majority of the directors if dividends on such preferred stock are in arrears by two years or more, until such arrearage is eliminated. In addition, certain matters under the 1940 Act require the separate vote of the holders of any issued and outstanding preferred stock, including changes in fundamental investment restrictions and conversion to open-end status and, accordingly, preferred stockholders could veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies, might impair our ability to maintain our tax treatment as a RIC for U.S. federal income tax purposes.

Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares.

In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering.

In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In addition to factors previously identified elsewhere in this prospectus, including the “Risks” section of this prospectus, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

    the introduction, withdrawal, success and timing of business initiatives and strategies;

 

    changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

    the relative and absolute investment performance and operations of our investment adviser;

 

    the impact of increased competition;

 

    the impact of future acquisitions and divestitures;

 

    the unfavorable resolution of legal proceedings;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

 

    the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or THL Credit Advisors;

 

    the ability of THL Credit Advisors to identify suitable investments for us and to monitor and administer our investments;

 

    our contractual arrangements and relationships with third parties;

 

    any future financings by us;

 

    the ability of THL Credit Advisors to attract and retain highly talented professionals;

 

    fluctuations in foreign currency exchange rates;

 

    the impact of changes to tax legislation and, generally, our tax position;

 

    our ability to exit a controlled investment in a timely manner; and

 

    the ability to fund Logan JV’s unfunded commitments to the extent approved by each member of the Logan JV investment committee.

This prospectus and any prospectus supplement, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. These forward-looking statements do not meet the safe harbor for forward-looking statements pursuant to Section 27A of the Securities Act or Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

 

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USE OF PROCEEDS

We intend to use the net proceeds from the sale of our securities for general corporate purposes, which include investing in debt and equity securities, repayment of any outstanding indebtedness, acquisitions and other general corporate purposes. The supplement to this prospectus relating to an offering will more fully identify the use of proceeds from such offering.

We anticipate that substantially all of the net proceeds from any offering of our securities will be used as described above within twelve months, but in no event longer than two years, depending on the availability of attractive opportunities and market conditions. However, there can be no assurance that we will be able to achieve this goal.

Pending such uses and investments, we will invest the net proceeds primarily in cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment. The management fee payable by us to our investment adviser will not be reduced while our assets are invested in such securities. Our ability to achieve our investment objective may be limited to the extent that the net proceeds of any offering, pending full investment, are held in lower yielding short-term instruments.

 

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PRICE RANGE OF COMMON STOCK AND DISTRIBUTIONS

Our common stock is traded on the NASDAQ Global Select Market under the symbol “TCRD.” The following table sets forth the range of high and low sales prices of our common stock as reported on the NASDAQ Global Select Market, the sales price as a percentage of net asset value for each fiscal quarter. The stock quotations are interdealer quotations and do not include markups, markdowns or commissions.

 

            Sales Price      Premium/
Discount of
High
Sales Price to
NAV (2)
    Premium/
Discount of
Low
Sales Price to
NAV (2)
 
     NAV (1)      High      Low       

Year Ended December 31, 2015

             

First Quarter

   $ 13.20      $ 12.64      $ 10.71        -4     -19

Second Quarter

   $ 13.29      $ 12.70      $ 11.54        -4     -13

Third Quarter

   $ 13.03      $ 12.51      $ 10.77        -4     -17 %

Fourth Quarter

   $ 12.58      $ 12.22      $ 9.97        -3     -21

Year Ending December 31, 2016

             

First Quarter

   $ 12.24      $ 10.89      $ 8.67        -11     -29

Second Quarter

   $ 11.88      $ 11.34      $ 10.12        -5     -15

Third Quarter

   $ 11.84      $ 11.80      $ 9.51        0     -20

Fourth Quarter

   $ 11.82      $ 10.41      $ 8.99        -12     -24

Year Ending December 31, 2017

             

First Quarter

     *      $ 10.56      $ 9.49        *       *  

Second Quarter (through April 6, 2017)

     *      $ 9.89      $ 9.76        *       *  

 

(1) NAV per share is determined as of the last day in the relevant quarter and therefore may not reflect the NAV per share on the date of the high and low sales prices. The NAVs shown are based on outstanding shares at the end of each period and are attributable to THL Credit, Inc. and exclude the consolidated non-controlling interest.
(2) Calculated as of the respective high or low sales price premium or discount divided by NAV.
* NAV for this period has not been determined.

The last reported price for our common stock on April 6, 2017 was $9.80 per share.

Shares of business development companies may trade at a market price that is less than the value of the net assets attributable to those shares. The possibility that our shares of common stock will trade at a discount from net asset value or at premiums that are unsustainable over the long term is separate and distinct from the risk that our net asset value will decrease. At times, our shares of common stock have traded at a premium to net asset value and at times our shares of common stock have traded at a discount to the net assets attributable to those shares. It is not possible to predict whether the shares offered hereby will trade at, above, or below net asset value.

Distributions

We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain our tax treatment as a RIC, we are required to distribute at least 90% of our investment company taxable income. To avoid a 4% excise tax on undistributed earnings, we are required to distribute each calendar year the sum of (i) 98% of our ordinary income for such calendar year (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. We intend to make distributions to stockholders on a quarterly basis of substantially all of our net investment income. Although we intend to make distributions of net realized capital

 

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gains, if any, at least annually, out of assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. In addition, the extent and timing of special distributions, if any, will be determined by our board of directors and will largely be driven by portfolio specific events and tax considerations at the time.

In addition, we may be limited in our ability to make distributions due to the BDC asset coverage test for borrowings applicable to us as a BDC under the 1940 Act.

The following table summarizes our distributions declared and paid or to be paid on all shares including dividends reinvested, if any:

 

Date Declared

   Record Date    Payment Date    Amount Per Share  

August 5, 2010

   September 2, 2010    September 30, 2010    $ 0.05  

November 4, 2010

   November 30, 2010    December 28, 2010    $ 0.10  

December 14, 2010

   December 31, 2010    January 28, 2011    $ 0.15  

March 10, 2011

   March 25, 2011    March 31, 2011    $ 0.23  

May 5, 2011

   June 15, 2011    June 30, 2011    $ 0.25  

July 28, 2011

   September 15, 2011    September 30, 2011    $ 0.26  

October 27, 2011

   December 15, 2011    December 30, 2011    $ 0.28  

March 6, 2012

   March 20, 2012    March 30, 2012    $ 0.29  

March 6, 2012

   March 20, 2012    March 30, 2012    $ 0.05  

May 2, 2012

   June 15, 2012    June 29, 2012    $ 0.30  

July 26, 2012

   September 14, 2012    September 28, 2012    $ 0.32  

November 2, 2012

   December 14, 2012    December 28, 2012    $ 0.33  

December 20, 2012

   December 31, 2012    January 28, 2013    $ 0.05  

February 27, 2013

   March 15, 2013    March 29, 2013    $ 0.33  

May 2, 2013

   June 14, 2013    June 28, 2013    $ 0.34  

August 2, 2013

   September 16, 2013    September 30, 2013    $ 0.34  

August 2, 2013

   September 16, 2013    September 30, 2013    $ 0.08  

October 30, 2013

   December 16, 2013    December 31, 2013    $ 0.34  

March 4, 2014

   March 17, 2014    March 31, 2014    $ 0.34  

May 7, 2014

   June 16, 2014    June 30, 2014    $ 0.34  

August 7, 2014

   September 15, 2014    September 30, 2014    $ 0.34  

November 4, 2014

   December 15, 2014    December 31, 2014    $ 0.34  

March 6, 2015

   March 20, 2015    March 31, 2015    $ 0.34  

May 5, 2015

   June 15, 2015    June 30, 2015    $ 0.34  

August 4, 2015

   September 15, 2015    September 30, 2015    $ 0.34  

November 3, 2015

   December 15, 2015    December 31, 2015    $ 0.34  

March 8, 2016

   March 21, 2016    March 31, 2016    $ 0.34  

May 3, 2016

   June 15, 2016    June 30, 2016    $ 0.34  

August 2, 2016

   September 15, 2016    September 30, 2016    $ 0.34  

November 8, 2016

   December 15, 2016    December 30, 2016    $ 0.27  

March 7, 2017

   March 20, 2017    March 31, 2017    $ 0.27  

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. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of our status as a regulated investment company. We cannot assure stockholders that they will receive any distributions at a particular level. We maintain an “opt in” dividend reinvestment plan for our common stockholders. As a result, unless stockholders specifically elect to have their dividends automatically reinvested in additional shares of common stock, stockholders will receive all such dividends in cash. Under the terms of our dividend reinvestment plan, dividends will primarily be paid in newly issued shares of common stock. However, we reserve the right to purchase shares in the open market in connection with the implementation of the plan. This feature of the plan

 

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means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.

Distributions in excess of our current and accumulated profits and earnings would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. The determination of the tax attributes of our distributions will be made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. Each year, a statement on Form 1099-DIV identifying the source of the distribution will be sent to our U.S. stockholders of record. Our board of directors presently intends to declare and pay quarterly distributions. Our ability to make distributions could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

The tax character of distributions declared and paid in 2016 represented $42.8 million from ordinary income, $0 from capital gains and $0 from tax return of capital. The tax character of distributions declared and paid in 2015 represented $45.6 million from ordinary income, $0 from capital gains and $0 from tax return of capital. Generally accepted accounting principles require adjustments to certain components of net assets to reflect permanent differences between financial and tax reporting. These adjustments have no effect on net asset value per share. Permanent differences between financial and tax reporting at December 31, 2016 and 2015 were ($0.1) million and $0.3 million, respectively.

 

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RATIO OF EARNINGS TO FIXED CHARGES

The following table contains our ratio of earnings to fixed charges for the periods indicated, computed as set forth below. You should read these ratios of earnings to fixed charges in connection with our consolidated financial statements, including the notes to those statements, included in this prospectus.

 

    For the Year Ended
December 31, 2016
    For the Year Ended
December 31, 2015
    For theYear Ended
December 31, 2014
    For the YearEnded
December 31, 2013
    For the Year Ended
December 31, 2012
 

Earnings to Fixed
Charges (1)

    2.1:1       3.0:1       4.4:1       7.4:1       8.0:1  

 

For purposes of computing the ratios of earnings to fixed charges, earnings represent net increase in stockholders’ equity resulting from operations plus (or minus) income tax expense (benefit), including excise and other tax expenses, plus fixed charges. Fixed charges include interest and credit facility fees expense and amortization of deferred financing costs.

 

(1) Earnings include net realized and unrealized gains or losses. Net realized and unrealized gains or losses can vary substantially from period to period.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this prospectus. In addition to historical information, the following discussion and other parts of this prospectus contain forward-looking information that involves risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking information due to the factors discussed under “Risks” and “Special Note Regarding Forward-Looking Statements” appearing elsewhere herein.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “potential,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve” and similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.

Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.

In addition to factors previously identified elsewhere in this filing, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:

 

    the introduction, withdrawal, success and timing of business initiatives and strategies;

 

    changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets;

 

    the relative and absolute investment performance and operations of our investment adviser;

 

    the impact of increased competition;

 

    the impact of future acquisitions and divestitures;

 

    the unfavorable resolution of legal proceedings;

 

    our business prospects and the prospects of our portfolio companies;

 

    the impact, extent and timing of technological changes and the adequacy of intellectual property protection;

 

    the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or THL Credit Advisors LLC, the Advisor;

 

    the ability of the Advisor to identify suitable investments for us and to monitor and administer our investments;

 

    our contractual arrangements and relationships with third parties;

 

    any future financings by us;

 

    the ability of the Advisor to attract and retain highly talented professionals;

 

    fluctuations in foreign currency exchange rates; and

 

    the impact of changes to tax legislation and, generally, our tax position.

 

    our ability to exit a control investment in a timely manner

 

    the ability to fund Logan JV’s unfunded commitments to the extent approved by each member of the Logan JV investment committee.

 

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Overview

THL Credit, Inc., or we, us, our or the Company, was organized as a Delaware corporation on May 26, 2009 and initially funded on July 23, 2009. We commenced principal operations on April 21, 2010. Our investment objective is to generate both current income and capital appreciation, primarily through investments in privately negotiated investments in debt and equity securities of lower middle market companies.

As of December 31, 2016, we, together with our credit-focused affiliates, collectively had $8,736 million of assets under management. This amount included our assets, assets of the managed funds and a separate account managed by us, and assets of the collateralized loan obligations (CLOs), separate accounts and various fund formats, including any uncalled commitments of private funds, as managed by the investment professionals of the Advisor or its consolidated subsidiary.

We are a direct lender to lower middle market companies and invest primarily in directly originated first lien senior secured loans, including unitranche investments. In certain instances, we also make second lien, subordinated, or mezzanine, debt investments, which may include an associated equity component such as warrants, preferred stock or other similar securities and direct equity investments. Our first lien senior secured loans may be structured as traditional first lien senior secured loans or as unitranche loans. Unitranche structures combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans and our unitranche loans will expose us to the risks associated with second lien and subordinated loans to the extent we invest in the “last-out” tranche or subordinated tranche (or piece) of the unitranche loan. We may also provide advisory services to managed funds.

We are an externally managed, non-diversified, closed-end investment company that has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940 Act, as amended, or the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in “qualifying assets,” including securities of private or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.

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.” Under the relevant U.S. Securities and Exchange Commission, or SEC, rules the term “eligible portfolio company” includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized in the United States.

We are also registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act.

Since April 2010, after we completed our initial public offering and commenced principal operations, through December 31, 2016, we have been responsible for making, on behalf of ourselves, managed funds and separately managed account, over approximately $1,829 million in aggregate commitments into 92 separate portfolio investments through a combination of both initial and follow-on investments. Since April 2010 through December 31, 2016, we, along with our managed funds and separately managed account, have received $1,152 million of proceeds from the realization of investments. The Company alone has received $945 million of proceeds from the realization of its investments during this same time period.

We have elected to be treated for tax purposes as a regulated investment company, or RIC, under Subchapter M of the Code. To qualify as a RIC, we must, among other things, meet certain source of income and asset diversification requirements. Pursuant to these elections, we generally will not have to pay corporate-level income taxes on any income we distribute to our stockholders.

 

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Portfolio Composition and Investment Activity

Portfolio Composition

As of December 31, 2016, we had $669.2 million of portfolio investments (at fair value), which represents an $85.0 million, or 11.3% decrease from the $754.2 million (at fair value) as of December 31, 2015. The decrease in the size of our portfolios reflects recent restructurings and a decrease to the fair value of our portfolio investments. Our portfolio consisted of 47 investments, including THL Credit Greenway Fund LLC, or Greenway, and THL Credit Greenway Fund II LLC, or Greenway II, as of December 31, 2016, compared to 55 portfolio investments, including Greenway and Greenway II, as of December 31, 2015. As of December 31, 2016, we had $167.2 of controlled portfolio investments (at fair value), which represents an $85.4, or 104.4% increase from $81.8 million (at fair value) as of December 31, 2015. The increase was the result of restructuring certain investments in the portfolio.

At December 31, 2016, our average portfolio company investment, excluding Greenway, Greenway II, Logan JV, portfolio investments where we only have an equity or fund investment and restructured investments where we converted debt to a controlling equity interest, at amortized cost and fair value, was approximately $16.0 million and $15.4 million, respectively. Including investments in funds, investments where we hold equity only positions or investments where we converted debt to a controlling equity position would not be representative of our typical portfolio investment size and were therefore excluded from the calculation. Our largest portfolio company investment, excluding the Logan JV, by cost was approximately $31.6 million and by fair value was $30.5 million. At December 31, 2015, our average portfolio company investment at both amortized cost and fair value was approximately $15.5 million and $15.1 million, respectively, and our largest portfolio company investment by both amortized cost and fair value was approximately $32.8 million and $29.8 million, respectively.

At December 31, 2016, based upon fair value, 89.1% of our debt investments bore interest based on floating rates, which may be subject to interest rate floors, such as the London Interbank offer rate, or LIBOR, and 10.9% bore interest at fixed rates. At December 31, 2015, 78.1% of our debt investments bore interest based on floating rates, which may be subject to interest rate floors, such as LIBOR, and 21.9% bore interest at fixed rates.

The following table shows the weighted average yield by investment category at their current cost.

 

     As of  

Description:

   December 31, 2016     December 31, 2015  

First lien senior secured debt

     10.6     11.5

Second lien debt

     10.2     11.0

Subordinated debt

     12.4     8.7

Investments in payment rights (1)

     18.3     17.6

CLO residual interests (1)

     14.1     14.8

Income-producing equity securities

     12.0     11.4
  

 

 

   

 

 

 

Debt and income-producing investments (2)

     10.9     11.2

Logan JV (3)

     14.1     12.8

Debt and income-producing investments including

    

Logan JV (3)

     11.2     11.3

 

(1)   Yields from investments in payment rights and CLO residual interests represent an effective yield expected from anticipated cash flows. Our two remaining investments in CLO residual interests as of December 31, 2016 were sold in January 2017.
(2)   Excludes yield on the Logan JV.

 

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(3)   As of December 31, 2016 and December 31, 2015, dividends declared and earned of $2.1 million and $1.5 million for the three months ended December 31, 2016 and December 31, 2015, respectively, represented a yield to us of 14.1% and 12.8%, respectively, based on average capital invested. We expect the dividend yield to fluctuate as a result of the timing of additional capital invested, the changes in asset yields in the underlying portfolio and the overall performance of the Logan JV investment portfolio.

As of December 31, 2016 and December 31, 2015, portfolio investments, in which we have debt investments, had a median earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $12 million and $16 million, respectively, based on the latest available financial information provided by the portfolio companies for each of these periods. As of December 31, 2016 and December 31, 2015, leverage through our debt investment in the capital structure of our portfolio companies is approximately 4.3 times and 4.3 times the portfolio company’s EBITDA, respectively, based on our latest available financial information for each of these periods.

As of December 31, 2016, excluding nominal investments made in Greenway and Greenway II as well as the Logan JV, 84.1% of our portfolio investments are in sponsored investments and 15.9% of our portfolio investments are in unsponsored investments. As of December 31, 2016, we have closed portfolio investments with 56 different sponsors since inception. We expect the percent of our portfolio investments in unsponsored investments to decrease significantly over time as we work through restructurings, and ultimately exit our unsponsored investments. Going forward we expect unsponsored investments we make, if any, would only be in first lien senior secured investments. As of December 31, 2016, our portfolio of unsponsored investments included seven investments. Four are performing at or above our expectations and have an Investment Score of 1 or 2. Three other unsponsored investments, Copperweld Bimetallics, OEM Group and Tri-Starr Management, were recently restructured into controlled equity investments and have Investment Scores ranging from 3 to 5.

As of December 31, 2015, excluding nominal investments made in Greenway and Greenway II as well as the Logan JV, 79.2% of our portfolio investments are in sponsored investments and 20.8% of our portfolio investments are in unsponsored investments. As of December 31, 2015, we have closed portfolio investments with 49 different sponsors since inception.

The following table summarizes the amortized cost and fair value of investments as of December 31, 2016 (in millions).

 

Description

   Amortized
Cost
     Percentage of
Total
    Fair Value (1)      Percentage of
Total
 

First lien senior secured debt

   $ 378.9        56.6   $ 370.8        55.4

Second lien debt

     105.7        15.8     95.3        14.2

Equity investments

     73.2        10.9     86.2        12.9

Investment in Logan JV

     59.0        8.8     59.7        8.9

Subordinated debt

     29.7        4.4     28.1        4.2

Investment in payment rights

     11.0        1.6     13.3        2.0

CLO residual interests

     8.7        1.3     7.2        1.1

Investments in funds

     4.2        0.6     4.4        0.7

Warrants

     0.2        0.0     4.2        0.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 670.6        100.0   $ 669.2        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)   All investments are categorized as Level 3 in the fair value hierarchy, except for investments in funds and the Logan JV, which are excluded from the fair value hierarchy in accordance with ASU 2015-07. These assets are valued at net asset value.

 

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The following table summarizes the amortized cost and fair value of investments as of December 31, 2015 (in millions).

 

Description

   Amortized
Cost
     Percentage of
Total
    Fair Value (1)      Percentage of
Total
 

First lien senior secured debt

   $ 377.6        49.3   $ 366.5        48.6

Second lien debt

     179.3        23.4     177.1        23.5

Equity investments

     52.7        6.9     69.7        9.2

Subordinated debt

     75.2        9.8     63.8        8.5

Investment in Logan JV

     49.4        6.4     44.8        5.9

CLO residual interests

     17.1        2.2     15.0        2.0

Investment in payment rights

     11.5        1.5     13.3        1.8

Investments in funds

     4.0        0.5     4.0        0.5
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 766.8        100.0   $ 754.2        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)   All investments are categorized as Level 3 in the fair value hierarchy, except for an equity investment in Surgery Center Holdings, Inc., which was a publicly traded company under Level 1, and investments in funds and the Logan JV, which are excluded from the fair value hierarchy in accordance with ASU 2015-07. These assets are valued at net asset value.

We expect the percent of first lien senior secured loans to continue to increase as a percent of total investments as we are repaid or liquidate our second lien debt, subordinated debt and other equity holdings over time and redeploy these proceeds. In January 2017, we used $4.0 million from the sale of our remaining CLO residual interests to reinvest in the Logan JV (See Recent Developments). We intend to continue our efforts to reposition the portfolio towards more senior secured floating rate investments, which we believe will reduce our exposure to portfolio company risks and potential changes in interest rates.

The percent of our portfolio invested in first lien senior secured debt increased during 2016, which was consistent with our investment strategy. Our equity interests increased as well during the year as a result of restructuring certain investments to better reposition the portfolio. We expect equity interests to decrease as we begin to exit certain of these positions in 2017.

The following is a summary of the industry classification in which the Company invests as of December 31, 2016 (in millions).

 

Industry

   Amortized Cost      Fair Value      % of Total Portfolio  

Consumer products and services

   $ 122.4      $ 120.7        18.01

Industrials and manufacturing

     101.0        102.2        15.26

Investment funds and vehicles

     59.0        59.7        8.93

Financial services

     56.8        59.6        8.91

Media, entertainment and leisure

     49.1        53.4        7.98

Healthcare

     51.8        51.8        7.75

IT services

     55.6        50.6        7.56

Retail & grocery

     35.4        40.4        6.04

Energy / utilities

     42.0        35.8        5.35

Business services

     29.1        25.9        3.88

Food & beverage

     20.6        21.2        3.17

Restaurants

     21.2        20.7        3.09

Transportation

     17.9        20.0        2.99

Structured products

     8.7        7.2        1.08
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 670.6      $ 669.2        100.00
  

 

 

    

 

 

    

 

 

 

 

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The following is a summary of the industry classification in which the Company invests as of December 31, 2015 (in millions) (1) .

 

Industry

   Amortized
Cost
     Fair Value      % of Total Portfolio  

Consumer products

   $ 141.3      $ 139.8        18.53

IT services

     100.6        99.1        13.14

Industrials

     97.7        90.8        12.03

Financial services

     77.5        68.9        9.14

Healthcare

     61.5        66.9        8.87

Investment funds and vehicles

     49.4        44.8        5.94

Retail & grocery

     34.6        44.5        5.90

Energy / utilities

     46.6        41.7        5.53

Media, entertainment and leisure

     31.4        36.7        4.86

Business services

     41.8        34.7        4.61

Food & beverage

     22.4        23.4        3.11

Transportation

     19.5        21.6        2.86

Restaurants

     20.9        20.9        2.77

Structured products

     17.1        15.0        1.99

Aerospace & defense

     4.5        5.4        0.72
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 766.8      $ 754.2        100.00
  

 

 

    

 

 

    

 

 

 

 

(1) Certain portfolio companies were reclassified to conform to current year presentation.

As required by the 1940 Act, we classify our investments by level of control. “Control investments” are defined in the 1940 Act as investments in those companies that we are deemed to “control”, which, in general, includes a company in which we own 25% or more of the voting securities of such company or have greater than 50% representation on its board. “Affiliate investments” are investments in those companies that are “affiliated companies” of ours, as defined in the 1940 Act, which are not control investments. We are deemed to be an “affiliate” of a company in which we have invested if we own 5% or more, but less than 25%, of the voting securities of such company. “Non-control/non-affiliate investments” are investments that are neither control investments nor affiliate investments.

 

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The following table summarizes our realized gains (losses) and changes in our unrealized appreciation and depreciation on control and affiliate investments for the years ended December 31, 2016 and December 31, 2015 (in millions):

 

     Year Ended December 31, 2016  

Type of Investment/Portfolio company (1)

   Fair Value at
December 31,
2016
     Investment
Income (2)
     Change in
Unrealized
Appreciation/
(Depreciation)
    Reversal of
Change in
Unrealized
Appreciation/
(Depreciation)
     Realized
Gains/
(Losses)
 

Control Investments

             

C&K Market, Inc.

             

1,992,365 shares of common stock

   $ 12.5      $ 3.8      $ (1.7   $ —        $ —    

1,992,365 shares of preferred stock

     10.0        —          —         —          —    

Copperweld Bimetallics LLC (3)

             

Second lien term loan 12% cash due 10/5/2021

     5.4        0.2        —         —          —    

676.93 shares of preferred stock

     3.4        —          —         —          —    

609,230 shares of common stock

     10.1        —          1.2       —          —    

Dimont & Associates, Inc. (4)

             

Subordinated term loan 11.0% PIK due 4/16/2018

     —          —          —         4.2        (4.5

50,004 shares of common stock

     —          —          —         6.5        (6.4

Loadmaster Derrick & Equipment, Inc. (5)

             

Senior secured term loan 11.3% (LIBOR + 10.3%) (5.65% cash and 5.65% PIK) due 12/31/2020

     7.2        —          0.1       —          —    

Senior secured last-out term loan 13% PIK due 12/31/2020

     0.2        —          (0.8     —          —    

2,702.434 shares of preferred stock

     —          —          (1.1     —          —    

10,930.508 shares of common stock

     —          —          —         —          —    

OEM Group, LLC (6)

             

Senior secured term loan 10.3% (LIBOR+9.5%) cash due 2/15/2019

     18.8        1.5        —         —          —    

Senior secured revolving term loan 10.3% (LIBOR+9.5%) cash due 6/30/2017

     6.0        0.5        —         —          —    

100.00 shares of common stock

     11.0        —          2.2       —          —    

Thibaut, Inc

             

Senior secured term loan 14.0% cash due 6/19/19

     6.4        0.9        —         —          —    

4,747 shares of series A preferred stock

     5.6        —          0.4       —          —    

20,639 shares of common stock

     1.5        —          0.5       —          —    

THL Credit Logan JV LLC (7)

             

80% economic interest

     59.7        7.4        5.4       —          —    

Tri Starr Management Services, Inc. (8)

             

LIFO revolving loan 7.5% (ABR+3.8%) due 9/30/2017

     0.1        0.1        —         —          —    

Non LIFO revolving loan 5.8% (LIBOR + 4.8%) cash due 9/30/2017

     0.7        0.1        0.3       —          —    

Tranche 1-A term loan 5.8% (LIBOR + 4.8%) cash due 9/30/2017

     0.3        —          0.1       —          —    

Tranche 1-B term loan 5.8% (LIBOR + 4.8%) cash due 9/30/2017

     2.5        0.4        1.3       —          —    

 

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     Year Ended December 31, 2016  

Type of Investment/Portfolio company (1)

   Fair Value at
December 31,
2016
     Investment
Income (2)
     Change in
Unrealized
Appreciation/
(Depreciation)
    Reversal of
Change in
Unrealized
Appreciation/
(Depreciation)
     Realized
Gains/
(Losses)
 

Tranche 2 term loan 10% PIK due 9/30/2017

     1.4        —          0.9       —          —    

Tranche 3 term loan 10% PIK due 9/30/2017

     —          —          (0.3     —          —    

Tranche 4 term loan 5% PIK due 9/30/2017

     —          —          (1.1     —          —    

716.772 shares of common stock

     4.4        —          1.3       —          —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Control Investments

   $ 167.2      $ 14.9      $ 8.7     $ 10.7      $ (10.9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Affiliate Investments

             

THL Credit Greenway Fund LLC (9)

             

Investment in fund

     —          0.3        —         —          —    

THL Credit Greenway Fund II LLC (9)

             

Investment in fund

     —          1.3        —         —          —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Affiliate Investments

   $ —        $ 1.6      $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Control and Affiliate Investments

   $ 167.2      $ 16.5      $ 8.7     $ 10.7      $ (10.9
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year Ended December 31, 2015  

Type of Investment/Portfolio company (1)

   Fair Value at
December 31,
2015
     Investment
Income (2)
     Change in
Unrealized
Appreciation/
(Depreciation)
    Reversal of
Change in
Unrealized
Appreciation/
(Depreciation)
     Realized
Gains/
(Losses)
 

Control Investments

             

C&K Market, Inc.

             

1,992,365 shares of common stock

   $ 14.2      $ 0.8      $ 8.1     $ —        $ —    

1,992,365 shares of preferred stock

     9.9        —          0.1       —          —    

Dimont & Associates, Inc.

             

Subordinated term loan 11.0% PIK due 4/16/2018

     0.3        —          (4.3     —          —    

50,004 shares of common stock

     —          —          (2.0     —          —    

Thibaut, Inc

             

Senior secured term loan 14.0% cash due 6/19/19

     6.4        0.9        —         —          —    

4,747 shares of series A preferred stock

     5.2        0.1        0.3       —          —    

20,639 shares of common stock

     1.0        —          0.2       —          —    

THL Credit Logan JV LLC (7)

             

80% economic interest

     44.8        3.8        (4.6     —          —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Control Investments

   $ 81.8      $ 5.6      $ (2.2   $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Affiliate Investments

             

THL Credit Greenway Fund LLC (9)

             

Investment in fund

     —          0.6        —         —          —    

THL Credit Greenway Fund II LLC (9)

             

Investment in fund

     —          1.6        —         —          —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Affiliate Investments

   $ —        $ 2.2      $ —       $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total Control and Affiliate Investments

   $ 81.8      $ 7.8      $ (2.2   $ —        $ —    
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)   The principal amount and ownership detail is shown in the Consolidated Schedule of Investments as of December 31, 2016 and 2015. Common stock and preferred stock, in some cases, are generally non-income producing.

 

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(2)   Represents the total amount of interest, fees, and dividends credited to income for the portion of the year an investment was included in the Control and Affiliate categories
(3)   On October 5, 2016, we restructured our investment in Copperweld Bimetallics LLC, or Copperweld. As part of the restructuring, we exchanged the cost basis of our secured term loan totaling $19.3 million, for a debt-like preferred equity position of $3.4 million and a controlled equity position of an affiliate of Copperweld valued at $9.0 million, with $5.4 million remaining as a secured term loan.
(4)   On March 14, 2016, we restructured our investment in Dimont & Associates, Inc. and affiliated entities, or Dimont. As part of the restructuring, we exchanged the cost basis of our equity interest totaling $6.6 million and a subordinated term loan totaling $4.5 million for an equity interest in an affiliated entity valued at $0.1 million. As part of this transaction, Dimont was no longer a controlled investment.
(5)   In December 2016, we exercised our warrants in connection with an acquisition of common stock from the sponsor and company management to take a controlling interest in Loadmaster Derrick Equipment, Inc.
(6) On March 17, 2016, as part of a restructuring of OEM Group, the cost basis of our first lien senior loans totaling $33.2 million was converted to a new first lien senior secured term loan of $18.7 million and controlled equity interest, valued at $8.3 million.
(7) Together with Perspecta Trident LLC, or Perspecta, an affiliate of Perspecta Trust LLC, we invest in THL Credit Logan JV LLC, of Logan JV. Logan JV is capitalized through equity contributions from its members and investment decisions must be unanimously approved by the Logan JV investment committee consisting of one representative from each Perspecta and us.
(8) On July 22, 2016, as part of the restructuring, we exchanged the cost basis of its subordinated debt totaling $20.6 million for a controlled equity position of an affiliate of Tri-Starr Management Services, Inc. valued at $3.1 million. As result of the restructuring, we recognized a $17.4 million loss on conversion of our subordinated debt investment to common equity, which was offset by a $17.4 million change in unrealized appreciation.
(9)   Income includes certain fees relating to investment management services provided by the Company, including a base management fee, a performance fee and a portion of the closing fees on each investment transaction.

Investment Activity

The following is a summary of our investment activity, presented on a cost basis, for the years ended December 31, 2016 and 2015 (in millions).

 

     Year ended December 31,  
         2016             2015      

New portfolio investments (1)

   $ 92.5     $ 64.6  

Existing portfolio investments:

    

Follow-on investments

     34.1       84.9  

Delayed draw and revolver investments

     6.7       14.4  
  

 

 

   

 

 

 

Total existing portfolio investments

     40.8       99.3  
  

 

 

   

 

 

 

Total portfolio investment activity

   $ 133.3     $ 163.9  
  

 

 

   

 

 

 

Number of new portfolio investments

     7       5  

Number of existing portfolio investments

     15       16  

First lien secured debt

   $ 109.9     $ 55.6  

Second lien debt

     8.9       57.2  

Investment in Logan JV

     9.6       32.6  

Subordinated debt

     2.4       8.0  

Equity investments

     2.3       9.6  

Investments in funds

     0.2       0.9  
  

 

 

   

 

 

 

Total portfolio investments

   $ 133.3     $ 163.9  
  

 

 

   

 

 

 

Weighted average yield of new debt investments

     10.3     10.8

Weighted average yield, including all new income-producing investments

     10.3     11.0

 

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(1)   Excludes two investments in broadly syndicated term loans made for short-term investment purposes that were made and sold during the quarter ended December 31, 2015.

For the years ended December 31, 2016 and 2015, we received proceeds from prepayments and sales of our investments, including any prepayment premiums, totaling $197.5 million and $193.5 million, respectively.

The following are proceeds received from notable prepayments, sales and other activity related to our investments (in millions):

For the year ended December 31, 2016

 

    Repayment of a first lien senior secured debt investment in 20-20 Technologies Inc. at par, which resulted in proceeds of $29.0 million;

 

    Repayment of a second lien term loan in Connecture, Inc., which resulted in proceeds of $22.3 million, including a prepayment premium and other fees of $0.4 million;

 

    Repayment of a first lien senior secured term loan and revolving loan in Hart Intercivic, Inc at par, which resulted in proceeds of $14.7 million. A new investment of $25.6 million was made in the first lien senior secured term loan in connection with a refinancing of the business;

 

    Repayment of a second lien debt investment in Granicus, Inc., which resulted in proceeds of $17.3 million, including a prepayment premium of $0.3 million;

 

    Repayment of a subordinated debt investment in Dr. Fresh, LLC at par, which resulted in proceeds of $15.4 million;

 

    Repayment of a second lien term loan in Oasis Legal Finance Holding Company LLC, which resulted in proceeds of $12.7 million, including a prepayment premium of $0.1 million;

 

    Repayment of a second lien debt investment in Synarc-Biocore Holdings, LLC at par, which resulted in proceeds of $11.0 million;

 

    Repayment of a second lien debt investment in American Covers, Inc., which resulted in proceeds of $10.2 million, including a prepayment premium of $0.2 million;

 

    Sale of a first lien senior secured term loan in American Achievement Corporation, Inc. at amount nominally below our cost, which resulted in proceeds of $9.6 million;

 

    Repayment of a second lien term loan in Vision Solutions, Inc. at par, which resulted in proceeds of $9.6 million;

 

    Repayment of a second lien term loan in Allen Edmonds Corporation at par, which resulted in proceeds of $7.3 million;

 

    Repayment of a first lien senior secured term loan at par and sale of our equity investment in Airborne Tactical Advantage Company, LLC, which resulted in proceeds of $5.2 million. These proceeds included a realized gain of $0.7 million and a $0.1 million escrow related to the sale of the business;

 

    Sale of a CLO residual interest in Dryden CLO, Ltd., which resulted in proceeds of $4.9 million, of which $1.1 million was recognized as a realized loss;

 

    Sale of a common equity position in Surgery Center Holdings, Inc., which resulted in proceeds of $3.7 million, all of which was recognized as a realized gain; and

 

    Sale of an equity position in AIM Media Texas Operating, LLC, which resulted in proceeds of $0.7 million.

 

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For the year ended December 31, 2015

 

    Recognition of $0.9 million of interest income previously deferred as part of the repayment of our subordinated term loan in investment of Express Courier International, Inc. for the quarter ended December 31, 2015. Approximately $0.2 million of proceeds previously received remain in deferred revenue.

 

    Recognition of $0.7 million of dividend income from our equity investment in C&K Market, Inc. for the quarter ended December 31, 2015. We expect to recognize dividend income quarterly from this investment.

 

    Repayment of a first lien senior secured debt investment in Embarcadero Technologies, Inc., which resulted in proceeds of $9.0 million, which included a prepayment premium of $0.1 million;

 

    Sale of second lien debt investments in Expert Global Solutions, Inc., which resulted in proceeds of $12.7 million and included a nominal realized loss;

 

    Repayment of a first lien senior secured debt investment in Harrison Gypsum, LLC, which resulted in proceeds of $31.6 million, which included a prepayment premium of $0.1 million;

 

    Sale of a CLO residual interest in Adirondack Park CLO Ltd., which resulted in proceeds of $7.8 million, including a nominal realized gain;

 

    Sale of a CLO residual interest in Sheridan Square CLO, Ltd., which resulted in proceeds of $5.0 million, including a nominal realized loss;

 

    Sale of a second lien debt investment in BBB US Industries Holdings, Inc., which resulted in proceeds of $7.1 million and included a nominal realized gain;

 

    Partial sale of a first lien senior secured debt investment in Charming Charlie, LLC, which resulted in proceeds of $9.9 million and included a nominal realized gain;

 

    Repayment of a subordinated debt investment in Country Pure Foods, LLC at par, resulting in proceeds of $16.2 million;

 

    Repayment of a first lien senior secured debt investment in Ingenio Acquisition, LLC, resulting in proceeds of $9.3 million, which included a prepayment premium of $0.2 million;

 

    Repayment of a subordinated debt investment in The Studer Group, L.L.C. at par, resulting in proceeds of $16.9 million;

 

    Repayment of second lien and subordinated debt investments in Sheplers, Inc. at par, resulting in proceeds of $13.5 million;

 

    Partial sale of first lien senior secured debt and common equity investments in Igloo Products Corp., which resulted in proceeds of $14.1 million and included a nominal realized gain; and

 

    Partial sale of a second lien debt investment in Vision Solutions, Inc., which resulted in proceeds of $2.0 million.

Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to lower middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. The frequency and volume of any prepayments may fluctuate significantly from period to period.

Aggregate Cash Flow Realized Gross Internal Rate of Return

Since April 2010, after we completed our initial public offering and commenced principal operations, through December 31, 2016, our fully exited investments have resulted in an aggregate cash flow realized gross internal rate of return to us of 15.2% (based on cash invested of $797.6 million and total proceeds from these

 

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exited investments of $1,001.1 million). 93.1% of these exited investments resulted in an aggregate cash flow realized gross internal rate of return to us of 10% or greater. Internal rate of return, or IRR, is a measure of our discounted cash flows (inflows and outflows). Specifically, IRR is the discount rate at which the net present value of all cash flows is equal to zero. That is, IRR is the discount rate at which the present value of total cash invested in our investments is equal to the present value of all realized returns from the investments. Our IRR calculations are unaudited.

Cash invested, with respect to an investment, represents our aggregate cash investment in the debt or equity securities we acquire.

Realized returns, with respect to an investment, represents the total cash received with respect to each investment, including all amortization payments, interest, dividends, prepayment fees, upfront fees, original issue discount, amendment fees and other fees and proceeds.

Gross IRR, with respect to an investment, is calculated based on the dates that we invested capital and dates we received distributions, regardless of when we made distributions to our stockholders. Initial investments are assumed to occur at time zero, and all cash flows are deemed to occur on the date in which they did occur.

Gross IRR reflects historical results relating to our past performance and is not necessarily indicative of our future results. In addition, gross IRR does not reflect the effect of management fees, expenses, incentive fees or taxes borne, or to be borne, by us or our stockholders, and would be lower if it did.

Aggregate cash flow realized gross IRR on our exited investments reflects only invested and realized cash amounts as described above, and does not reflect any unrealized gains or losses in our portfolio or non-cash restructuring transactions. Cash flows exclude sales of participations if they were anticipated at the time of the initial investment.

Investment Risk

The value of our investments will generally fluctuate with, among other things, changes in prevailing interest rates, federal tax rates, counterparty risk, general economic conditions, the condition of certain financial markets, developments or trends in any particular industry and the financial condition of the issuer. During periods of limited liquidity and higher price volatility, our ability to dispose of investments at a price and time that we deem advantageous may be impaired.

Lower-quality debt securities involve greater risk of default or price changes due to changes in the credit quality of the issuer. The value of lower-quality debt securities often fluctuates in response to company, political, or economic developments and can decline significantly over short periods of time or during periods of general or regional economic difficulty. Lower-quality debt securities can be thinly traded or have restrictions on resale, making them difficult to sell at an acceptable price. The default rate for lower-quality debt securities is likely to be higher during economic recessions or periods of high interest rates.

THL Credit Logan JV LLC

On December 3, 2014, we entered into an agreement with Perspecta Trident LLC, an affiliate of Perspecta Trust LLC, or Perspecta, to create THL Credit Logan JV LLC, or Logan JV, a joint venture, which invests primarily in senior secured first lien term loans. All Logan JV investment decisions must be unanimously approved by the Logan JV investment committee consisting of one representative from each of us and Perspecta.

We have determined that Logan JV is an investment company under ASC 946, however, in accordance with such guidance, we will generally not consolidate our investment in a company other than a substantially owned investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we do not consolidate our non-controlling interest in Logan JV.

 

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Logan JV is capitalized with equity contributions which are generally called from its members, on a pro-rata basis based on their equity commitments, as transactions are completed. Any decision by the Logan JV to call down on capital commitments requires the explicit authorization of us, coupled with that of Perspecta, and we may withhold such authorization for any reason in our sole discretion.

As of December 31, 2016 and December 31, 2015, Logan JV had the following commitments, contributions and unfunded commitments from its members.

 

     As of December 31, 2016  

Member

   Total
Commitments
     Contributed
Capital
     Unfunded
Commitments
 

THL Credit, Inc.

   $ 200.0      $ 59.0      $ 141.0  

Perspecta Trident LLC

     50.0        14.7        35.3  
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 250.0      $ 73.7      $ 176.3  
  

 

 

    

 

 

    

 

 

 
     As of December 31, 2015  

Member

   Total
Commitments
     Contributed
Capital
     Unfunded
Commitments
 

THL Credit, Inc.

   $ 200.0      $ 49.4      $ 150.6  

Perspecta Trident LLC

     50.0        12.4        37.6  
  

 

 

    

 

 

    

 

 

 

Total Investments

   $ 250.0      $ 61.8      $ 188.2  
  

 

 

    

 

 

    

 

 

 

On December 17, 2014, Logan JV entered into a senior credit facility, or the Logan JV Credit Facility, with Deutsche Bank AG which initially allowed Logan JV to borrow up to $50.0 million subject to leverage and borrowing base restrictions. Throughout the course of 2016, in accordance with the terms of the Logan JV Credit Facility, Deutsche Bank AG and other banks increased the commitment amount to $135.0 million. Throughout the course of 2015, in accordance with the terms of the Logan JV Credit Facility, Deutsche Bank AG increased the commitment amount to $125.0 million. The amended revolving loan period ends on February 15, 2018 and the final maturity date is February 15, 2021. As of December 31, 2016 and December 31, 2015, Logan JV had $129.3 million and $108.1 million of outstanding borrowings under the credit facility, respectively. The Logan JV Credit Facility bears interest at three month LIBOR (with no LIBOR floor) plus 2.50%. At December 31, 2016, the effective interest rate on the Logan JV Credit Facility was 3.42% per annum. In February 2017, the Logan JV Credit Facility’s commitment amount was increased from $135.0 million to $150.0 million.

As of December 31, 2016 and December 31, 2015, Logan JV had total investments at fair value of $200.2 million and $161.9 million, respectively. As of December 31, 2016 and December 31, 2015, Logan JV’s portfolio was comprised of senior secured first lien and second lien loans to 91 and 85 different borrowers, respectively. As of December 31, 2016 and December 31, 2015, none of these loans were on non-accrual status. Additionally, as of December 31, 2016 and December 31, 2015, Logan JV had unfunded commitments to fund revolver and delayed draw loans to its portfolio companies totaling $0.4 million and $0.3 million, respectively. The portfolio companies in Logan JV are in industries similar to those in which we may invest directly.

 

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Below is a summary of Logan JV’s portfolio, followed by a listing of the individual loans in Logan JV’s portfolio as of December 31, 2016 and 2015:

 

     As of
December 31,
2016
    As of
December 31,
2015
 

First lien secured debt (1)

   $ 180,385     $ 148,463  

Second lien debt (1)

     23,564       21,976  
  

 

 

   

 

 

 

Total debt investments (1)

   $ 203,949     $ 170,439  
  

 

 

   

 

 

 

Weighted average yield on first lien secured loans (2)

     6.4     6.3

Weighted average yield on second lien loans (2)

     9.4     9.0

Weighted average yield on all loans (2)

     6.7     6.7

Number of borrowers in Logan JV

     91       85  

Largest loan to a single borrower (1)

   $ 4,975     $ 4,975  

Total of five largest loans to borrowers (1)

   $ 23,918     $ 24,748  

 

(1)   At current principal amount.
(2)   Weighted average yield at their current cost.

For the years ended December 31, 2016 and December 31, 2015, our share of income from distributions declared related to our Logan JV equity interest was $7.4 million and $3.8 million, respectively, which amounts are included in dividend income from controlled investments in the Consolidated Statement of Operations. As of December 31, 2016 and December 31, 2015, $3.4 million and $1.9 million, respectively, of income related to the Logan JV was included in Interest, dividends and fees receivable on the Consolidated Statements of Assets and Liabilities. As of December 31, 2016, dividend declared and earned of $2.1 million for the quarter ended December 31, 2016, represented a dividend yield to the Company of 14.1% based upon average capital invested. As of December 31, 2015, dividend income earned of $1.5 million for the quarter ended December 31, 2015, represented a dividend yield to the Company of 12.8% based upon average equity invested. We expect the dividend yield to fluctuate as a result of the timing of additional capital invested, the changes in asset yields in the underlying portfolio and the overall performance of the Logan JV investment portfolio.

 

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Logan JV Loan Portfolio as of December 31, 2016

(dollar amounts in thousands)

 

Type of Investment/

Portfolio company

  Industry     Interest Rate (1)     Initial
Acquisition
Date
    Maturity
Date
    Principal     Amortized
Cost
    Fair
Value (2)
 

Senior Secured First Lien Term Loans

             

Canada

             

Mood Media Corporation

    Media       7% (LIBOR + 6%)       12/05/2014       05/01/2019       2,957     $ 2,857     $ 2,858  

Parq Holdings LP

   
Hotel, Gaming &
Leisure
 
 
    8.5% (LIBOR + 7.5%)       12/05/2014       12/17/2020       1,000       989       985  
           

 

 

   

 

 

 

Total Canada

            $ 3,846     $ 3,843  
           

 

 

   

 

 

 

Cayman Islands

             

Lindblad Maritime

   
Hotel, Gaming &
Leisure
 
 
    5.8% (LIBOR + 4.5%)       06/23/2015       05/08/2021       338     $ 339     $ 339  
           

 

 

   

 

 

 

Total Cayman Islands

            $ 339     $ 339  
           

 

 

   

 

 

 

Luxembourg

             

Travelport Finance Luxembourg Sarl

    Services       5% (LIBOR + 4%)       09/04/2015       09/02/2021       2,898     $ 2,911     $ 2,932  
           

 

 

   

 

 

 

Total Luxembourg

            $ 2,911     $ 2,932  
           

 

 

   

 

 

 

United States

             

Ability Networks Inc.

    High Tech Industries       6% (LIBOR + 5%)       03/17/2015       05/14/2021       1,470     $ 1,480     $ 1,477  

Advanced Integration Technology LP

    Aerospace & Defense       6.5% (LIBOR + 5.5%)       07/15/2016       07/22/2021       1,995       1,977       2,005  

AgroFresh Inc.

    Services       5.75% (LIBOR + 4.75%)       12/01/2015       07/31/2021       1,975       1,963       1,832  

Alpha Media LLC

    Media       7% (LIBOR + 6%)       02/24/2016       02/25/2022       1,925       1,842       1,848  

American Sportsman Holdings Co

    Retail       5.75% (LIBOR + 5%)       11/22/2016       12/18/2023       3,000       2,981       2,976  

AP Gaming I LLC

   
Hotel, Gaming &
Leisure
 
 
    9.25% (LIBOR + 8.25%)       05/27/2015       12/21/2020       4,942       4,845       4,931  

Aptean, Inc.

    Services       6% (LIBOR + 5%)       12/15/2016       12/20/2022       2,000       1,980       2,020  

Arbor Pharmaceuticals, LLC

   
Healthcare &
Pharmaceuticals
 
 
    6% (LIBOR + 5%)       07/12/2016       02/01/2023       2,484       2,378       2,519  

Arctic Glacier U.S.A., Inc

   
Beverage, Food &
Tobacco
 
 
    6% (LIBOR + 5%)       02/12/2015       05/10/2019       2,015       1,984       2,012  

Aristotle Corporation

   
Healthcare &
Pharmaceuticals
 
 
   

5.50% (LIBOR + 4.5%)

7.25% (Prime +  3.5%)

 

 

    07/13/2015       06/30/2021       4,582       4,565       4,559  

Avaya Inc

    Telecommunications       6.25% (LIBOR + 5.25%)       04/30/2015       05/29/2020       979       972       854  

Avaya Inc

    Telecommunications       6.5% (LIBOR + 5.5%)       12/18/2014       03/31/2018       986       991       864  

Beasley Broadcast Group Inc.

    Media       7% (LIBOR + 6%)       10/06/2016       11/01/2023       1,950       1,912       1,955  

Bioplan USA

    Services       5.75% (LIBOR + 4.75%)       05/13/2015       09/23/2021       983       873       951  

BioScrip, Inc.

   
Healthcare &
Pharmaceuticals
 
 
    6.5% (LIBOR + 5.25%)       12/22/2014       07/31/2020       885       844       845  

BioScrip, Inc.

   
Healthcare &
Pharmaceuticals
 
 
    6.5% (LIBOR + 5.25%)       12/22/2014       07/31/2020       1,474       1,407       1,408  

Birch Communications, Inc.

    Telecommunications       8.25% (LIBOR + 7.25%)       12/05/2014       07/17/2020       1,363       1,349       1,227  

Blount International, Inc.

    Capital Equipment      

7.25% (LIBOR + 6.25%)

9.00% (Prime + 5.25%)

 

 

    04/05/2016       04/12/2023       1,696       1,650       1,719  

Blue Star Acquisition, Inc. (3)

    Media       1.00%       12/20/2016       12/20/2022       255       (3     (2

Blue Star Acquisition, Inc.

    Media       7.5% (LIBOR + 6.5%)       12/20/2016       12/20/2022       1,745       1,728       1,732  

Cabi

    Retail       5.75% (LIBOR + 4.75%)       06/19/2015       06/12/2019       1,156       1,149       1,156  

Caesars Entertainment Resort Properties, LLC

   
Hotel, Gaming &
Leisure
 
 
    7% (LIBOR + 6%)       01/15/2015       10/11/2020       2,915       2,781       2,947  

Cengage Learning Acquisitions, Inc.

    Media       5.25% (LIBOR + 4.25%)       12/15/2014       06/07/2023       2,648       2,624       2,583  

 

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Logan JV Loan Portfolio as of December 31, 2016—(Continued)

(dollar amounts in thousands)

 

Type of Investment/

Portfolio company

  Industry   Interest Rate (1)   Initial
Acquisition
Date
    Maturity
Date
    Principal     Amortized
Cost
    Fair
Value (2)
 

Clear Balance Holdings, LLC

  Banking, Finance,
Insurance & Real
Estate
  6.75% (LIBOR + 5.75%)     07/07/2015       06/30/2020       4,692       4,679       4,692  

Commercial Barge Line Co

  Transportation:
Cargo
  9.75% (LIBOR + 8.75%)     11/06/2015       11/12/2020       1,444       1,388       1,367  

Cortes NP Acquisition Corp

  Capital Equipment   6% (LIBOR + 5%)     09/30/2016       11/30/2023       2,000       1,941       2,030  

CPI Acquisition, Inc.

  Services   5.5% (LIBOR + 4.5%)     08/14/2015       08/17/2022       3,875       3,847       3,545  

Creative Artists

  Media   5% (LIBOR + 4%)     03/16/2015       12/17/2021       2,450       2,477       2,486  

CT Technologies Intermediate Holdings

  Healthcare &
Pharmaceuticals
  5.25% (LIBOR + 4.25%)     02/11/2015       12/01/2021       1,960       1,968       1,879  

Cvent Inc

  Hotel, Gaming &
Leisure
  6% (LIBOR + 5%)     06/16/2016       11/29/2023       2,000       1,980       2,025  

CWGS Group, LLC

  Automotive   4.5% (LIBOR + 3.75%)     11/03/2016       11/08/2023       1,000       995       1,017  

Cypress Semiconductor Corporation

  High Tech Industries   6.5% (LIBOR + 5.5%)     06/03/2016       07/05/2021       2,469       2,434       2,530  

Eastman Kodak Company

  High Tech Industries   7.25% (LIBOR + 6.25%)     09/09/2015       09/03/2019       1,953       1,913       1,965  

EmployBridge Holding Co.

  Services   7.5% (LIBOR + 6.5%)     02/04/2015       05/15/2020       2,942       2,935       2,667  

EnergySolutions, LLC

  Environmental
Industries
  6.75% (LIBOR + 5.75%)     03/16/2015       05/29/2020       4,543       4,457       4,588  

EVO Payments International LLC

  Services   6% (LIBOR + 5%)     12/08/2016       12/22/2023       2,640       2,614       2,660  

FullBeauty Brands LP

  Retail   5.75% (LIBOR + 4.75%)     03/08/2016       10/14/2022       3,970       3,726       3,573  

Global Healthcare Exchange LLC

  Services   5.25% (LIBOR + 4.25%)     08/12/2015       08/15/2022       988       984       997  

Gold Standard Baking Inc

  Wholesale   5.25% (LIBOR + 4.25%)

7.00% (Prime + 3.25%)

    05/19/2015       04/23/2021       2,955       2,944       2,925  

Green Plains Renewable Energy Inc

  Energy   6.5% (LIBOR + 5.5%)     06/09/2015       06/30/2020       3,783       3,637       3,769  

GTCR Valor Companies, Inc.

  Services   7% (LIBOR + 6%)     05/17/2016       06/16/2023       3,980       3,836       3,953  

Gulf Finance, LLC

  Energy   6.25% (LIBOR + 5.25%)     08/17/2016       08/25/2023       1,995       1,938       2,010  

IMG LLC

  Media   5.25% (LIBOR + 4.25%)     12/31/2014       05/06/2021       1,466       1,442       1,484  

Infoblox Inc

  High Tech Industries   6% (LIBOR + 5%)     11/03/2016       11/07/2023       2,216       2,172       2,209  

Insurance Technologies

  High Tech Industries   7.5% (LIBOR + 6.5%)     03/26/2015       12/15/2021       3,538       3,503       3,485  

Insurance Technologies (4)

  High Tech Industries   0.50%     03/26/2015       12/15/2021       137       (1     (2

J Jill

  Retail   6% (LIBOR + 5%)     05/08/2015       05/09/2022       1,037       1,033       1,038  

Jackson Hewitt Tax Service Inc

  Services   8% (LIBOR + 7%)     07/24/2015       07/30/2020       980       966       947  

Kestra Financial, Inc.

  Banking, Finance,
Insurance & Real
Estate
  6.25% (LIBOR + 5.25%)     06/10/2016       06/24/2022       3,980       3,925       3,940  

Kraton Polymers LLC

  Chemicals,
Plastics & Rubber
  6% (LIBOR + 5%)     02/18/2016       01/06/2022       2,000       1,828       2,027  

Lannett Company Inc

  Healthcare &
Pharmaceuticals
  5.75% (LIBOR + 4.75%)     11/20/2015       11/25/2020       1,425       1,341       1,386  

Lannett Company Inc

  Healthcare &
Pharmaceuticals
  6.375% (LIBOR + 5.375%)     11/20/2015       11/25/2022       1,425       1,304       1,398  

Lindblad Expeditions Inc

  Hotel, Gaming &
Leisure
  5.81767% (LIBOR + 4.5%)     06/23/2015       05/08/2021       2,617       2,630       2,630  

Margaritaville Holdings LLC

  Beverage, Food &
Tobacco
  7.26% (LIBOR + 6%)     03/12/2015       03/12/2021       4,727       4,694       4,562  

Match Group Inc

  Media   4.20083% (LIBOR + 3.25%)     11/06/2015       11/16/2022       656       664       667  

Mediware Information Systems Inc

  High Tech Industries   5.75% (LIBOR + 4.75%)     09/26/2016       09/28/2023       1,995       1,976       2,013  

 

69


Table of Contents

Logan JV Loan Portfolio as of December 31, 2016—(Continued)

(dollar amounts in thousands)

 

Type of Investment/

Portfolio company

  Industry     Interest Rate (1)     Initial
Acquisition
Date
    Maturity
Date
    Principal     Amortized
Cost
    Fair
Value (2)
 

Merrill Communications LLC

    Media       6.25% (LIBOR + 5.25%)       05/29/2015       06/01/2022       1,974       1,964       1,969  

Meter Readings Holding, LLC

    Utilities       6.75% (LIBOR + 5.75%)       08/17/2016       08/29/2023       1,995       1,966       2,037  

Moran Foods LLC

    Retail       7% (LIBOR + 6%)       12/02/2016       12/05/2023       3,000       2,911       3,000  

NextCare, Inc.

   
Healthcare &
Pharmaceuticals
 
 
    8.5% (LIBOR + 7.5%)       08/21/2015       07/31/2018       2,959       2,951       2,959  

Petrochoice Holdings Inc

   
Chemicals,
Plastics & Rubber
 
 
    6% (LIBOR + 5%)       09/02/2015       08/19/2022       988       967       997  

Pre-Paid Legal Services, Inc

    Services       6.5% (LIBOR + 5.25%)       05/21/2015       07/01/2019       897       894       901  

Quincy Newspapers Inc

    Media      

5% (LIBOR + 4%)

6.75% (Prime + 3%)

 

 

    11/23/2015       11/02/2022       2,809       2,832       2,832  

Redbox Automated Retail LLC

    Services       8.5% (LIBOR + 7.5%)       09/26/2016       09/27/2021       1,913       1,858       1,865  

RentPath, Inc.

    Media       6.25% (LIBOR + 5.25%)       12/11/2014       12/17/2021       2,450       2,430       2,413  

Riverbed Technology, Inc.

    High Tech Industries       4.25% (LIBOR + 3.25%)       02/25/2015       4/25/2022       975       971       984  

SCS Holdings Inc.

    Services       5.25% (LIBOR + 4.25%)       11/20/2015       10/30/2022       1,973       1,958       2,004  

Seahawk Holding Cayman Ltd

    High Tech Industries       7% (LIBOR + 6%)       09/27/2016       10/31/2022       2,750       2,724       2,791  

Sirva Worldwide, Inc.

   
Transportation:
Cargo
 
 
    7.5% (LIBOR + 6.5%)       11/18/2016       11/22/2022       3,000       2,926       2,948  

Smart Start, Inc.

    Services       5.75% (LIBOR + 4.75%)       08/28/2015       02/20/2022       2,475       2,455       2,469  

SolarWinds Inc

    High Tech Industries       5.5% (LIBOR + 4.5%)       02/01/2016       02/05/2023       4,975       4,852       5,045  

SourceHOV LLC

    Services       7.75% (LIBOR + 6.75%)       03/17/2015       10/31/2019       3,785       3,393       3,433  

TerraForm AP Acquisition Holdings LLC

    Energy       5.5% (LIBOR + 4.5%)       10/11/2016       06/27/2022       997       997       1,003  

TOMS Shoes LLC

    Retail       6.5% (LIBOR + 5.5%)       12/18/2014       10/31/2020       1,965       1,867       1,454  

US Renal Care Inc

   
Healthcare &
Pharmaceuticals
 
 
    5.25% (LIBOR + 4.25%)       11/17/2015       12/30/2022       1,980       1,963       1,864  

US Shipping Corp

    Utilities       5.25% (LIBOR + 4.25%)       03/09/2016       06/26/2021       232       221       225  

Verdesian Life Sciences LLC

   
Chemicals,
Plastics & Rubber
 
 
    6% (LIBOR + 5%)       12/09/2014       07/01/2020       886       885       793  

Zep Inc

   
Chemicals,
Plastics & Rubber
 
 
    5% (LIBOR + 4%)       09/14/2015       06/27/2022       2,955       2,962       2,981  
           

 

 

   

 

 

 

Total United States

            $ 169,389     $ 169,847  
           

 

 

   

 

 

 

Total Senior Secured First Lien Term Loans

            $ 176,485     $ 176,961  
           

 

 

   

 

 

 

Second Lien Term Loans

             

France

             

Linxens France SA

    Telecommunications       9.5% (LIBOR + 8.5%)       07/31/2015       10/16/2023       1,000     $ 991     $ 1,000  
           

 

 

   

 

 

 

Total France

            $ 991     $ 1,000  
           

 

 

   

 

 

 

United States of America

             

ABG Intermediate Holdings 2 LLC

    Consumer goods       9.5% (LIBOR + 8.5%)       06/19/2015       05/27/2022       2,855     $ 2,789     $ 2,883  

AssuredPartners Inc

   

Banking, Finance,
Insurance & Real
Estate
 
 
 
    10% (LIBOR + 9%)       10/16/2015       10/20/2023       1,000       966       1,008  

Cirque Du Soleil

   
Hotel, Gaming &
Leisure
 
 
    9.25% (LIBOR + 8.25%)       06/25/2015       07/08/2023       1,000       988       982  

Confie Seguros Holding II Co.

   

Banking, Finance,
Insurance & Real
Estate
 
 
 
    10.25% (LIBOR + 9%)       06/29/2015       05/09/2019       500       497       497  

 

70


Table of Contents

Logan JV Loan Portfolio as of December 31, 2016—(Continued)

(dollar amounts in thousands)

 

Type of Investment/

Portfolio company

  Industry     Interest Rate (1)     Initial
Acquisition
Date
    Maturity
Date
    Principal     Amortized
Cost
    Fair
Value (2)
 

Duke Finance LLC

   
Chemicals,
Plastics & Rubber
 
 
    10.75% (LIBOR + 9.75%)       05/17/2016       10/28/2022       2,000       1,726       1,910  

EagleView Technology Corporation

    Services       9.25% (LIBOR + 8.25%)       07/29/2015       07/14/2023       2,885       2,891       2,880  

GENEX Services, Inc.

    Services       8.75% (LIBOR + 7.75%)       06/26/2015       05/30/2022       1,000       990       965  

Gruden Acquisition Inc.

   
Transportation:
Cargo
 
 
    9.5% (LIBOR + 8.5%)       07/31/2015       08/18/2023       500       479       396  

Hyland Software, Inc.

    High Tech Industries       8.25% (LIBOR + 7.25%)       06/12/2015       07/03/2023       2,825       2,729       2,881  

Infoblox Inc

    High Tech Industries       9.75% (LIBOR + 8.75%)       11/03/2016       11/07/2024       2,000       1,961       1,968  

MRI Software LLC

    Services       9% (LIBOR + 8%)       06/19/2015       06/23/2022       1,000       988       970  

ProAmpac LLC

   
Containers,
Packaging & Glass
 
 
    9.5% (LIBOR + 8.5%)       11/18/2016       11/18/2024       2,500       2,463       2,513  

RentPath, Inc.

    Media       10% (LIBOR + 9%)       12/11/2014       12/17/2022       1,000       932       882  

Royal Adhesives and Sealants LLC

   
Chemicals,
Plastics & Rubber
 
 
    8.5% (LIBOR + 7.5%)       06/12/2015       06/19/2023       1,000       994       995  

Wash Multifamily Laundry Systems, LLC.

    Services       8% (LIBOR + 7%)       05/04/2015       05/12/2023       75       74       74  

Wash Multifamily Laundry Systems, LLC.

    Services       8% (LIBOR + 7%)       05/04/2015       05/15/2023       425       423       425  
           

 

 

   

 

 

 

Total United States of America

            $ 21,890     $ 22,229  
           

 

 

   

 

 

 

Total Second Lien Term Loans

            $ 22,881     $ 23,229  
           

 

 

   

 

 

 

Total Investments

            $ 199,366     $ 200,190  
           

 

 

   

 

 

 

Cash and cash equivalents

             

Dreyfus Government Cash Management Fund

            $ 9,064     $ 9,064  

Other cash accounts

              784       784  
           

 

 

   

 

 

 

Total Cash and cash equivalents

            $ 9,848     $ 9,848  
           

 

 

   

 

 

 

 

(1) Variable interest rates indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates, at the borrower’s option. LIBOR rates are subject to interest rate floors.
(2) Represents fair value in accordance with ASC Topic 820.
(3) Represents a delayed draw commitment of $255, which was unfunded as of December 31, 2016.
(4) Represents a delayed draw commitment of $137, which was unfunded as of December 31, 2016.

 

71


Table of Contents

Logan JV Loan Portfolio as of December 31, 2015

(dollar amounts in thousands)

 

Type of Investment/

Portfolio company

  Industry   Interest Rate (1)   Initial
Acquisition
Date
    Maturity
Date
    Principal     Amortized
Cost
    Fair
Value (2)
 

Senior Secured First Lien Term Loans

             

Canada

             

Mood Media Corporation

  Media   7% (LIBOR + 6%)     12/05/2014       05/01/2019       987     $ 976     $ 942  

Parq Holdings LP

  Hotel, gaming & leisure   8.5% (LIBOR + 7.5%)     12/05/2014       12/17/2020       1,000       986       975  
           

 

 

   

 

 

 

Total Canada

            $ 1,962     $ 1,917  
           

 

 

   

 

 

 

Cayman Islands

             

Avago Technologies Cayman Finance Ltd

  High tech industries   4.25% (LIBOR + 3.5%)     11/13/2015       2/1/2023       2,000     $ 1,980     $ 1,983  

Lindblad Maritime

  Hotel, gaming & leisure   5.5% (LIBOR + 4.5%)     06/23/2015       05/08/2021       341       343       339  
           

 

 

   

 

 

 

Total Cayman Islands

            $ 2,323     $ 2,322  
           

 

 

   

 

 

 

Luxembourg

             

Travelport Finance Luxembourg Sarl

  Services   5.75% (LIBOR + 4.75%)     09/04/2015       09/02/2021       2,992     $ 3,007     $ 2,936  

Evergreen Skills Lux S.á r.l.

  High tech industries   5.75% (LIBOR + 4.75%)     01/15/2015       04/28/2021       1,486       1,460       1,167  
           

 

 

   

 

 

 

Total Luxembourg

            $ 4,467     $ 4,103  
           

 

 

   

 

 

 

Netherlands

             

MediArena Acquisition B.V.

  Media   6.75% (LIBOR + 5.75%)     12/18/2014       08/13/2021       1,481     $ 1,462     $ 1,321