THL Credit
THL Credit, Inc. (Form: 10-Q, Received: 05/04/2017 16:28:08)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     

Commission file number 814-00789

 

 

THL CREDIT, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   27-0344947

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

100 Federal St., 31 st Floor, Boston, MA   02110
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: 800-450-4424

Securities registered pursuant to 12(b) of the Act:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☐    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes  ☐    No  ☒

The number of shares of the registrant’s common stock, $0.001 par value per share, outstanding at May 4, 2017 was 32,925,671.

 

 

 


Table of Contents

THL CREDIT, INC.

FORM 10-Q FOR THE QUARTER ENDED March 31, 2017

Table of Contents

 

      

INDEX

   PAGE
NO.
 

PART I.

   FINANCIAL INFORMATION   

Item 1.

   Financial Statements   
   Consolidated Statements of Assets and Liabilities as of March 31, 2017 (unaudited) and December 31, 2016      3  
   Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016 (unaudited)      4  
   Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2017 and 2016 (unaudited)      5  
   Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited)      6  
   Consolidated Schedules of Investments as of March 31, 2017 (unaudited) and December 31, 2016      7  
   Notes to Consolidated Financial Statements (unaudited)      17  

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      55  

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      91  

Item 4.

   Controls and Procedures      91  

PART II.

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      92  

Item 1A.

   Risk Factors      92  

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      92  

Item 3.

   Defaults Upon Senior Securities      93  

Item 4.

   Mine Safety Disclosures      93  

Item 5.

   Other Information      93  

Item 6.

   Exhibits      93  

SIGNATURES

        94  

 

2


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Assets and Liabilities

(in thousands, except per share data)

(unaudited)

 

     March 31,
2017
    December 31,
2016
 

Assets:

    

Investments at fair value:

    

Non-controlled, non-affiliated investments (cost of $539,973 and $519,837, respectively)

   $ 519,799     $ 501,992  

Controlled investments (cost of $158,273 and $150,765, respectively)

     173,319       167,207  

Non-controlled, affiliated investments (cost of $4 and $4, respectively)

     4       4  
  

 

 

   

 

 

 

Total investments at fair value (cost of $698,250 and $670,606, respectively)

   $ 693,122     $ 669,203  

Cash

     2,494       6,376  

Interest, dividends, and fees receivable

     9,477       9,041  

Deferred financing costs

     2,355       2,527  

Deferred tax assets

     2,855       2,442  

Prepaid expenses and other assets

     1,108       1,225  

Due from affiliate

     501       590  
  

 

 

   

 

 

 

Total assets

   $ 711,912     $ 691,404  
  

 

 

   

 

 

 

Liabilities:

    

Loans payable ($207,647 and $182,862 face amounts, respectively, reported net of deferred financing costs of $1,142 and $1,207, respectively. See Note 7)

   $ 206,505     $ 181,655  

Notes payable ($110,000 and $110,000 face amounts, respectively, reported net of deferred financing costs of $3,489 and $3,653, respectively. See Note 7)

     106,511       106,347  

Deferred tax liability

     4,732       4,518  

Accrued incentive fees

     2,308       3,243  

Base management fees payable

     2,555       2,608  

Accrued expenses and other payables

     1,722       1,701  

Accrued interest and fees

     985       961  

Other deferred liabilities

     409       501  

Interest rate derivative

     13       50  
  

 

 

   

 

 

 

Total liabilities

     325,740       301,584  

Commitments and contingencies (Notes 3 and 9)

    

Net Assets:

    

Common stock, par value $.001 per share, 100,000 common shares authorized, 32,926 and 32,925 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively

     33       33  

Paid-in capital in excess of par

     437,460       437,623  

Net unrealized depreciation on investments, net of provision for taxes of $4,732 and $3,656, respectively

     (8,756     (5,197

Net unrealized depreciation on interest rate derivative

     (13     (50

Accumulated net realized losses

     (52,671     (51,732

Accumulated undistributed net investment income

     9,343       8,428  
  

 

 

   

 

 

 

Total net assets attributable to THL Credit, Inc.

     385,396       389,105  

Net assets attributable to non-controlling interest

     776       715  
  

 

 

   

 

 

 

Total net assets

   $ 386,172     $ 389,820  
  

 

 

   

 

 

 

Total liabilities and net assets

   $ 711,912     $ 691,404  
  

 

 

   

 

 

 

Net asset value per share attributable to THL Credit, Inc.

   $ 11.71     $ 11.82  
  

 

 

   

 

 

 

See accompanying notes to these consolidated financial statements.

 

3


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

     For the three months ended
March 31,
 
     2017     2016  

Investment Income:

    

From non-controlled, non-affiliated investments:

    

Interest income

   $ 13,932     $ 19,007  

Other income

     466       291  

From non-controlled, affiliated investments:

    

Other income

     255       485  

From controlled investments:

    

Interest income

     1,879       333  

Dividend income

     3,131       2,418  

Other income

     141       38  
  

 

 

   

 

 

 

Total investment income

     19,804       22,572  

Expenses:

    

Interest and fees on borrowings

     3,872       3,515  

Base management fees

     2,555       2,903  

Incentive fees

     1,314       30  

Administrator expenses

     827       927  

Other general and administrative expenses

     506       575  

Amortization of deferred financing costs

     400       385  

Professional fees

     275       458  

Directors’ fees

     181       210  
  

 

 

   

 

 

 

Total expenses

     9,930       9,003  

Income tax provision, excise and other taxes

     188       171  
  

 

 

   

 

 

 

Net investment income

     9,686       13,398  

Realized Gain and Change in Unrealized Appreciation on Investments:

    

Net realized (loss) gain on investments:

    

Non-controlled, non-affiliated investments

     (865     (5,619

Controlled investments

     —         (10,914

Foreign currency transactions

     (74     —    
  

 

 

   

 

 

 

Net realized (loss) gain on investments

     (939     (16,533
  

 

 

   

 

 

 

Net change in unrealized (depreciation) appreciation on investments:

    

Non-controlled, non-affiliated investments

     (3,307     (7,729

Controlled investments

     (477     11,126  

Translation of assets and liabilities in foreign currencies

     74       —    
  

 

 

   

 

 

 

Net change in unrealized (depreciation) appreciation on investments

     (3,710     3,397  

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

     60       —    
  

 

 

   

 

 

 

Net realized and unrealized loss from investments

     (4,589     (13,136

Benefit (provision) for taxes on realized and unrealized gain on investments

     153       (107

Interest rate derivative periodic interest payments, net

     (33     (102

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

     36       (52
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

   $ 5,253     $ 1  
  

 

 

   

 

 

 

Net investment income per common share:

    

Basic and diluted

   $ 0.29     $ 0.40  

Net increase in net assets resulting from operations per common share:

    

Basic and diluted

   $ 0.16     $ —    

Dividends declared and paid

   $ 0.27     $ 0.34  

Weighted average shares of common stock outstanding:

    

Basic and diluted

     32,925       33,303  

See accompanying notes to these consolidated financial statements.

 

4


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Changes in Net Assets

(in thousands)

(unaudited)

 

     For the three months ended
March 31,
 
     2017     2016  

Increase in net assets from operations:

    

Net investment income

   $ 9,686     $ 13,398  

Net realized loss on investments

     (939     (16,533

Net change in unrealized (depreciation) appreciation on investments

     (3,710     3,397  

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

     60       —    

Benefit (provision) for taxes on unrealized (gain) loss on investments

     153       (107

Interest rate derivative periodic interest payments, net

     (33     (102

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

     36       (52
  

 

 

   

 

 

 

Net increase in net assets resulting from operations

     5,253       1  

Distributions to stockholders:

    

Distributions to stockholders from net investment income

     (8,904     (11,321

Distributions to stockholders from net realized gain

     —         —    
  

 

 

   

 

 

 

Total distributions to stockholders

     (8,904     (11,321

Capital share transactions:

    

Issuance of common stock from reinvestment of dividend

     3       —    

Repurchase of common stock

     —         (537
  

 

 

   

 

 

 

Net increase (decrease) in net assets from capital share transactions

     3       (537
  

 

 

   

 

 

 

Total decrease in net assets, before non-controlling interest

     (3,648     (11,857

Increase in non-controlling interest

     —         —    
  

 

 

   

 

 

 

Total decrease in net assets

     (3,648     (11,857

Net assets at beginning of period

     389,820       418,899  
  

 

 

   

 

 

 

Net assets at end of period

   $ 386,172     $ 407,042  
  

 

 

   

 

 

 

Common shares outstanding at end of period

     32,926       33,260  
  

 

 

   

 

 

 

Capital share activity:

    

Shares issued from reinvestment of dividend

     0.3       —    

Shares repurchased

     —         (51

See accompanying notes to these consolidated financial statements.

 

5


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

     For the three months ended
March 31,
 
     2017     2016  

Cash flows from operating activities:

    

Net increase in net assets resulting from operations

   $ 5,253     $ 1  

Adjustments to reconcile net increase in net assets resulting from operations to net cash (used in) provided by operating activities:

    

Net change in unrealized (appreciation) depreciation on investments

     3,724       (3,397

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

     (37     52  

Net realized loss on foreign exchange currency transactions

     (74     —    

Net realized loss on investments

     1,454       16,533  

Increase in investments due to PIK

     (868     (578

Amortization of deferred financing costs

     400       385  

Accretion of discounts on investments and other fees

     (1,154     (1,022

Changes in operating assets and liabilities:

    

Purchases of investments

     (38,688     (52,838

Proceeds from sale and paydown of investments

     11,752       64,072  

Increase in interest, dividends and fees receivable

     (436     (1,190

Decrease in income tax receivable

     —         160  

Decrease (increase) in due from affiliate

     89       (17

Increase in prepaid expenses and other assets

     (22     (94

(Decrease) increase in deferred tax asset

     (413     4  

Increase in accrued expenses and other payables

     21       922  

Increase (decrease) in accrued credit facility fees and interest

     24       (54

Increase in deferred tax liability

     214       19  

Decrease in base management fees payable

     (53     (41

Decrease in other deferred liabilities

     (92     (99

Decrease in accrued incentive fees payable

     (935     (2,873
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (19,841     19,945  

Cash flows from financing activities:

    

Repurchase of common stock

     —         (537

Borrowings under credit facility

     39,360       40,500  

Repayments under credit facility

     (14,500     (46,750

Issuance of shares of common stock from dividend reinvestment

     3       —    

Distributions paid to stockholders

     (8,904     (11,321

Financing and offering costs paid

     —         (65
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     15,959       (18,173
  

 

 

   

 

 

 

Net (decrease) increase in cash

     (3,882     1,772  

Cash, beginning of year

     6,376       3,850  
  

 

 

   

 

 

 

Cash, end of year

   $ 2,494     $ 5,622  
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash interest paid

     3,403       3,382  

Income taxes paid

     2       1  

PIK income earned

     918       625  

Non-cash Operating Activities:

See Note 5 in the notes to consolidated financial statements for non-cash restructurings.

See accompanying notes to these consolidated financial statements.

 

6


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company  (1)(2)(3)

 

Industry

 

Interest Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Non-controlled/non-affiliated investments — 134.60% of net asset value

             

First lien senior secured debt

             

Aerogroup International Inc.

  Consumer products and services   9.6% (LIBOR + 8.5%)     6/9/2014       12/9/2019     $ 13,239     $ 13,102     $ 12,576  

Allied Wireline Services, LLC

  Energy / utilities   11.0% (LIBOR + 9.5%) (5.5% Cash and 5.5% PIK) (11)     2/28/2014       2/28/2019       10,355       10,355       9,527  

BeneSys Inc.

  Business services   11.3% (LIBOR + 10.3%)     3/31/2014       3/31/2019       10,967       10,885       10,912  

BeneSys Inc. (8)

  Business services   11.3% (LIBOR + 10.3%)     8/1/2014       3/31/2019       436       432       434  

Charming Charlie, LLC.

  Retail & grocery   9.2% (LIBOR + 8%)     12/18/2013       12/24/2019       23,542       22,288       18,362  

Constructive Media, LLC

  Media, entertainment and leisure   11.1% (LIBOR + 10%)     11/23/2015       11/23/2020       13,566       13,367       12,888  

CRS Reprocessing, LLC

  Industrials and manufacturing   8.0%     6/16/2011       6/30/2017       15,185       15,185       12,831  

Dodge Data & Analytics LLC

  IT services   9.9% (LIBOR + 8.8%)     11/20/2014       10/31/2019       11,009       10,891       10,954  

Duff & Phelps Corporation (10)

  Financial services   4.9% (LIBOR + 3.8%)     5/15/2013       4/23/2020       241       242       243  

Fairstone Financial Inc. (6)(30)

  Financial services   12% (CDOR + 11%)     3/31/2017       3/31/2023       22,495       22,045       22,045  

Food Processing Holdings, LLC

  Food & beverage   10.6% (LIBOR + 9.5%)     10/31/2013       10/31/2018       20,040       19,903       20,040  

Hart InterCivic, Inc.

  IT services   11.5% (LIBOR + 10.5%)     3/31/2016       3/31/2019       25,600       25,256       25,728  

HEALTHCAREfirst, Inc.

  Healthcare   13.3% (7)     8/31/2012       8/30/2017       8,321       8,295       8,321  

HealthDrive Corporation

  Healthcare   9.1% (LIBOR + 8.1%)     11/21/2016       11/21/2021       9,975       9,812       9,875  

HealthDrive Corporation (8) (9)

  Healthcare   9.1% (LIBOR + 8.1%)     11/21/2016       11/21/2021       900       876       900  

Holland Intermediate Acquisition Corp.

  Energy / utilities   10.1% (LIBOR + 9%)     5/29/2013       5/29/2018       21,880       21,758       19,473  

Holland Intermediate Acquisition Corp. (8)

  Energy / utilities   10.1% (LIBOR + 9%)     5/29/2013       5/29/2018       —         —         —    

Home Partners of America, Inc.

  Consumer products and services   8.0% (LIBOR + 7.0%)     10/13/2016       10/13/2022       13,669       13,416       13,600  

Igloo Products Corp.

  Consumer products and services   11.8% (LIBOR+ 10.3%)     3/28/2014       3/28/2020       24,636       24,326       24,082  

It’s Just Lunch International LLC

  Media, entertainment and leisure   9.5% (LIBOR + 8.5%)     7/28/2016       7/28/2021       5,500       5,404       5,473  

The John Gore Organization, Inc. (23)

  Media, entertainment and leisure   9.6% (LIBOR + 8.5%)     8/8/2013       6/28/2021       14,734       14,500       14,844  

The John Gore Organization, Inc. (8) (9) (23)

  Media, entertainment and leisure   9.6% (LIBOR + 8.5%)     8/8/2013       6/28/2021       —         (14     —    

LAI International, Inc.

  Industrials and manufacturing   10.4% (7)     10/22/2014       10/22/2019       21,921       21,655       21,921  

LAI International, Inc. (8)

  Industrials and manufacturing   8.3% (7)     10/22/2014       10/22/2019       4,511       4,511       4,511  

MeriCal, LLC

  Consumer products and services   10.0% (LIBOR + 9.0%)     9/30/2016       9/30/2021       12,700       12,403       12,541  

RealD Inc.

  Media, entertainment and leisure   8.5% (LIBOR + 7.5%)     3/22/2016       3/22/2021       14,850       14,732       14,850  

Sciens Building Solutions, LLC

  Business services   8.3% (LIBOR + 7.3%)     2/2/2017       2/2/2022       5,757       5,646       5,646  

Sciens Building Solutions, LLC (8)

  Business services   8.3% (LIBOR + 7.3%)     2/2/2017       2/2/2022       245       212       245  

Virtus Pharmaceuticals, LLC

  Healthcare   10.3% (7)     7/17/2014       7/17/2019       24,013       23,697       23,653  

Wheels Up Partners, LLC

  Transportation   9.6% (LIBOR + 8.6%)     1/31/2014       10/15/2021       7,831       7,769       7,831  

Wheels Up Partners, LLC

  Transportation   9.6% (LIBOR + 8.6%)     8/27/2014       7/15/2022       8,736       8,736       8,736  
         

 

 

   

 

 

   

 

 

 

Subtotal first lien senior secured debt

    $ 366,854     $ 361,685     $ 353,042  

See accompanying notes to these consolidated financial statements.

 

 

7


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company  (1)(2)(3)

 

Industry

 

Interest Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Second lien debt

             

Alex Toys, LLC

  Consumer products and services   11.6% (LIBOR + 10.5%)     6/30/2014       12/30/2019     $ 30,202     $ 29,863     $ 29,597  

Gold, Inc.

  Consumer products and services   10.0%     12/31/2012       6/30/2022       9,666       9,666       8,700  

Hostway Corporation

  IT services   10.0% (LIBOR + 8.8%)     12/27/2013       12/13/2020       17,500       17,329       14,700  

Merchants Capital Access, LLC

  Financial services   11.6% (LIBOR + 10.5%)     4/20/2015       4/20/2021       12,500       12,329       12,438  

MB Medical Operations LLC

  Healthcare   10.0% (LIBOR + 9.0%)     12/7/2016       6/7/2022       9,131       8,959       9,063  

Specialty Brands Holdings, LLC

  Restaurants   10.7% PIK (11)     7/16/2013       12/1/2017       21,539       21,462       20,677  

Washington Inventory Service (25)

  Business services   13.8% (ABR + 10.0%)     12/27/2012       6/20/2019       11,000       10,929       825  
         

 

 

   

 

 

   

 

 

 

Subtotal second lien debt

          $ 111,538     $ 110,537     $ 96,000  

Subordinated debt

             

A10 Capital, LLC (8)

  Financial services   12.0%     8/25/2014       2/25/2021     $ 12,303     $ 12,214     $ 12,425  

Aerogroup International Inc.

  Consumer products and services   12.0% PIK     8/5/2015       3/9/2020       296       296       —    

Aerogroup International Inc.

  Consumer products and services   10.0% PIK (11)     1/27/2016       3/9/2020       839       839       537  

Martex Fiber Southern Corp.

  Industrials and manufacturing   16.5% (12.0% Cash and 4.5% PIK) (11)     4/30/2012       12/31/2017       8,439       8,423       8,018  
         

 

 

   

 

 

   

 

 

 

Subtotal subordinated debt

          $ 21,877     $ 21,772     $ 20,980  

Equity investments

             

A10 Capital, LLC (12)(14)(21)

  Financial services       8/25/2014         5,609.53     $ 19,322     $ 19,445  

Aerogroup International Inc. (22)

  Consumer products and services       6/9/2014         253,616       11       —    

Aerogroup International Inc. (21)

  Consumer products and services       6/9/2014         28,180       1,108       —    

Alex Toys, LLC (12)(13)(15)(22)

  Consumer products and services       5/22/2015         153.85       1,000       651  

Alex Toys, LLC (12)(13)(15)(21)(24)

  Consumer products and services       6/22/2016         121.18       788       863  

Allied Wireline Services, LLC (12)(15)(22)

  Energy / utilities       2/28/2014         618,867.92       619       —    

Constructive Media, LLC (12)

  Media, entertainment and leisure       11/23/2015         750,000       750       215  

Dimont & Associates, Inc. (22)

  Financial services       3/14/2016         312.51       129       86  

Firebirds International, LLC (12)(22)

  Restaurants       5/17/2011         1,906       191       375  

Food Processing Holdings, LLC (12)(22)

  Food & beverage       4/20/2010         162.44       163       270  

Food Processing Holdings, LLC (12)(22)

  Food & beverage       4/20/2010         406.09       408       1,161  

Hostway Corporation (22)

  IT services       12/27/2013         20,000       200       —    

Hostway Corporation (21)

  IT services       12/27/2013         1,800       1,800       196  

Igloo Products Corp. (22)

  Consumer products and services       4/30/2014         1,902.04       1,716       1,212  

MeriCal, LLC (12)(13)(22)

  Consumer products and services       9/30/2016         5,000       5       5  

MeriCal, LLC (12)(13)(21)

  Consumer products and services       9/30/2016         495       495       515  

Virtus Pharmaceuticals, LLC (12)(15)(22)

  Healthcare       3/31/2015         7,720.86       127       —    

Virtus Pharmaceuticals, LLC (12)(15)(22)

  Healthcare       3/31/2015         231.82       244       321  

Virtus Pharmaceuticals, LLC (12)(15)(22)

  Healthcare       3/31/2015         589.76       590       261  

Wheels Up Partners, LLC (12)(15)(22)

  Transportation       1/31/2014         1,000,000       1,000       2,840  

See accompanying notes to these consolidated financial statements.

 

 

8


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company  (1)(2)(3)

 

Industry

 

Interest Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

YP Equity Investors, LLC (29)

  Media, entertainment and leisure       1/6/2017         129,222       375       375  

YP Equity Investors, LLC

  Media, entertainment and leisure       5/8/2012         158       —         4,005  
           

 

 

   

 

 

 

Subtotal equity

            $ 31,041     $ 32,796  

Warrants

             

Allied Wireline Services, LLC (15)

  Energy / utilities       2/28/2014         501,159.24     $ 175     $ —    
           

 

 

   

 

 

 

Subtotal warrants

            $ 175     $ —    

Investment in payment rights

             

Duff & Phelps Corporation (10) (16)

  Financial services   18.3%     6/1/2012         $ 10,979     $ 13,288  
           

 

 

   

 

 

 

Subtotal investment in payment rights

          $ 10,979     $ 13,288  

Investments in funds (17)

             

Freeport Financial SBIC Fund LP

  Financial services       6/14/2013         $ 2,957     $ 2,846  

Gryphon Partners 3.5, L.P.

  Financial services       11/20/2012           827       847  
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 3,784     $ 3,693  

Total non-controlled/non-affiliated investments

             
           

 

 

   

 

 

 

—134.60% of net asset value

            $ 539,973     $ 519,799  
           

 

 

   

 

 

 

Controlled investments

             

—44.88% of net asset value

             

First lien senior secured debt

             

Loadmaster Derrick & Equipment, Inc. (18)

  Energy / utilities   11.3% (LIBOR + 10.3%) (5.65% Cash and 5.65% PIK)     7/1/2016       12/31/2020     $ 7,310     $ 7,205     $ 5,117  

Loadmaster Derrick & Equipment, Inc. (25)(18)

  Energy / utilities   13% PIK (LIBOR + 12% PIK)     7/1/2016       12/31/2020       1,550       1,053       —    

Loadmaster Derrick & Equipment, Inc. (18)

  Energy / utilities   11.3% (LIBOR+ 10.3%)     1/17/2017       12/31/2020       2,300       2,300       2,300  

OEM Group, LLC (18)

  Industrials and manufacturing   10.5% (LIBOR + 9.5%)     3/16/2016       2/15/2019       18,703       18,703       18,703  

OEM Group, LLC (18)

  Industrials and manufacturing   10.5% (LIBOR + 9.5%)     3/16/2016       6/30/2017       6,510       6,510       6,510  

Thibaut, Inc (18)

  Consumer products and services   14.0%     6/20/2014       6/19/2019       6,375       6,338       6,375  

Tri Starr Management Services, Inc. (18)(26)

  Business services   7.8% (ABR + 3.8%)     7/22/2016       9/30/2017       155       155       155  

Tri Starr Management Services, Inc. (18)(27)

  Business services   5.8% (LIBOR + 4.8%)     7/22/2016       9/30/2017       669       435       669  

Tri Starr Management Services, Inc. (18)

  Business services   5.8% (LIBOR + 4.8%)     7/22/2016       9/30/2017       291       172       291  

Tri Starr Management Services, Inc. (18)

  Business services   5.8% (LIBOR + 4.8%)     7/22/2016       9/30/2017       2,545       1,505       2,545  

Tri Starr Management Services, Inc. (18)

  Business services   10.0% PIK     7/22/2016       9/30/2017       1,460       678       1,460  

Tri Starr Management Services, Inc. (18)(25)

  Business services   10.0% PIK     7/22/2016       9/30/2017       974       320       —    

Tri Starr Management Services, Inc. (18)(25)

  Business services   5.0% PIK     7/22/2016       9/30/2017       3,122       1,062       —    
         

 

 

   

 

 

   

 

 

 

Subtotal first lien senior secured debt

          $ 51,964     $ 46,436     $ 44,125  

Second lien debt

             

Copperweld Bimetallics LLC (18)

  Industrials and manufacturing   12.0%     10/5/2016       10/5/2021     $ 5,415     $ 5,415     $ 5,415  
         

 

 

   

 

 

   

 

 

 

Subtotal second lien debt

          $ 5,415     $ 5,415     $ 5,415  

See accompanying notes to these consolidated financial statements.

 

 

9


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

March 31, 2017

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/Portfolio company  (1)(2)(3)

 

Industry

 

Interest Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of  Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Equity investments

             

C&K Market, Inc. (18)(22)

  Retail & grocery       11/3/2010         1,992,365     $ 2,271     $ 12,018  

C&K Market, Inc. (18)(21)

  Retail & grocery       11/3/2010         1,992,365       10,956       9,963  

Copperweld Bimetallics LLC (18)(21)

  Industrials and manufacturing       10/5/2016         676.93       3,385       3,584  

Copperweld Bimetallics LLC (18)(22)

  Industrials and manufacturing       10/5/2016         609,230       8,950       10,208  

Loadmaster Derrick & Equipment, Inc. (18)(21)

  Energy / utilities       7/1/2016         2,702.434       1,114       —    

Loadmaster Derrick & Equipment, Inc. (18)(22)

  Energy / utilities       12/21/2016         10,930.508       —         —    

OEM Group, LLC (12)(13)(18)(21)(28)

  Industrials and manufacturing       3/16/2016         10,000       8,890       11,965  

Thibaut, Inc (13) (18) (19) (21)

  Consumer products and services       6/20/2014         4,747       4,720       5,753  

Thibaut, Inc (13)(18)(22)

  Consumer products and services       6/20/2014         20,639       —         1,472  

Tri Starr Management Services, Inc. (18)(22)

  Business services       7/22/2016         716.772       3,136       4,666  
           

 

 

   

 

 

 

Subtotal equity

            $ 43,422     $ 59,629  

Investments in funds

             

THL Credit Logan JV LLC (12)(17)(18)(20)(22)

  Investment funds and vehicles       12/3/2014         —       $ 63,000     $ 64,150  
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 63,000     $ 64,150  

Total controlled investments

             
           

 

 

   

 

 

 

—44.88% of net asset value

            $ 158,273     $ 173,319  
           

 

 

   

 

 

 

Non-controlled/affiliated investments

             

—0.00% of net asset value

             

Investments in funds

             

THL Credit Greenway Fund LLC (12)(17)(22)

  Financial services       1/27/2011         $ 1     $ 1  

THL Credit Greenway Fund II LLC (12)(17)(22)

  Financial services       3/1/2013           3       3  
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 4     $ 4  

Total non-controlled/affiliated investments

             
           

 

 

   

 

 

 

—0.00% of net asset value

            $ 4     $ 4  
           

 

 

   

 

 

 

Total investments—179.49% of net asset value

            $ 698,250     $ 693,122  
           

 

 

   

 

 

 
Derivative Instruments                                      
Counterparty   Instrument   Interest Rate   Expiration
Date
    # of Contracts     Notional     Cost     Fair Value  

ING Capital Markets, LLC

  Interest Rate Swap – Pay Fixed/Receive Floating   1.1425%/LIBOR     05/10/17       1     $ 50,000     $ —       $ (13
         

 

 

   

 

 

   

 

 

 

Total derivative instruments—0 % of net asset value

      $ 50,000     $ —       $ (13
         

 

 

   

 

 

   

 

 

 

 

(1) All debt investments are income-producing, unless otherwise noted. Equity and member interests are non-income-producing unless otherwise noted.
(2) All investments are pledged as collateral under the Revolving Facility and Term Loan Facility.
(3) As of March 31, 2017, 14.3% and 14.9% of the Company’s total investments on a cost and fair value basis, respectively, are in non-qualifying assets.
(4) Variable interest rate investments bear interest in reference to London Interbank offer rate, or LIBOR, or Alternate Base Rate, or ABR, which are effective as of March 31, 2017. LIBOR loans are typically indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates, at the borrower’s option, and ABR rates are typically indexed to the current prime rate or federal funds rate. Both LIBOR and ABR rates may be subject to interest floors.
(5) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.

See accompanying notes to these consolidated financial statements.

 

10


Table of Contents
(6) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(7) Unitranche investment; interest rate reflected represents the implied interest rate earned on the investment for the most recent quarter.
(8) Issuer pays 0.50% unfunded commitment fee on delayed draw term loan and/or revolving loan facilities.
(9) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(10) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(11) At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the company.
(12) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(13) Equity ownership may be held in shares or units of companies related to the portfolio company.
(14) Preferred stock investment return is income-producing with a stated rate of 12.8% cash and 2% PIK due on a monthly basis
(15) Interest held by a substantially owned subsidiary of THL Credit, Inc.
(16) Income-producing security with no stated coupon; interest rate reflects an estimation of the effective yield to expected maturity as of March 31, 2017.
(17) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(18) As defined in Section 2(a)(9) of the 1940 Act, the Company is deemed to control this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities. See Schedule 12-14 in the accompanying notes to the consolidated financial statements for transactions for the quarter ended March 31, 2017 in which the issuer was a portfolio company that the Company is deemed to control.
(19) Part of our preferred stock return is income-producing with a stated rate of 3% due on a quarterly basis.
(20) On December 3, 2014, the Company entered into an agreement with 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 the Company and Perspecta. Although the Company owns more than 25% of the voting securities of Logan JV, the Company does not believe that it has control over Logan JV (other than for purposes of the 1940 Act or otherwise).
(21) Preferred stock
(22) Common stock and member interest.
(23) Investment formerly known as Key Brand Entertainment, Inc. The name change was effective May 16, 2016.
(24) Preferred stock investment return is income-producing with a stated rate of 12.5% PIK capitalized annually.
(25) Loan was on non-accrual as of March 31, 2017.
(26) Issuer pays 3.0% weighted average unfunded commitment fee on the revolving loan facility.
(27) Issuer pays 4.75% unfunded commitment fee on the revolving loan facility.
(28) Includes $577 of cost and $776 of fair value related to a non-controlling interest as a result of consolidating a blocker corporation that holds equity in OEM Group, LLC.
(29) Preferred stock investment return is income-producing with a stated rate of 18.0% PIK capitalized quarterly.
(30) Canadian denominated investment with a par and fair market value of CAD $30,000,000 and CAD $29,400,000, respectively.

See accompanying notes to these consolidated financial statements.

 

11


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

December 31, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/

Portfolio company   (1)(2)(3)

 

Industry

 

Interest

Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Non-controlled/non-affiliated investments — 128.78% of net asset value

             

First lien senior secured debt

             

Aerogroup International Inc.

  Consumer products and services   9.5% (LIBOR + 8.5%)     6/9/2014       12/9/2019     $ 13,308     $ 13,159     $ 12,773  

Allied Wireline Services, LLC

  Energy / utilities   11.0% (LIBOR + 9.5%) (5.5% Cash and 5.5% PIK) (11)     2/28/2014       2/28/2019       10,214       10,213       9,191  

BeneSys Inc.

  Business services   11.3% (LIBOR + 10.3%)     3/31/2014       3/31/2019       11,023       10,931       10,831  

BeneSys Inc. (8)

  Business services   11.3% (LIBOR + 10.3%)     8/1/2014       3/31/2019       436       431       429  

Charming Charlie, LLC.

  Retail & grocery   9.0% (LIBOR + 8.0%)     12/18/2013       12/24/2019       23,541       22,186       17,950  

Constructive Media, LLC

  Media, entertainment and leisure   11.0% (LIBOR+10.0%)     11/23/2015       11/23/2020       13,954       13,735       13,779  

CRS Reprocessing, LLC

  Industrials and manufacturing   8.0%     6/16/2011       6/30/2017       15,185       15,185       12,831  

Dodge Data & Analytics LLC

  IT services   9.8% (LIBOR + 8.8%)     11/20/2014       10/31/2019       11,171       11,040       11,116  

Duff & Phelps Corporation (10)

  Financial services   4.8% (LIBOR + 3.8%)     5/15/2013       4/23/2020       241       243       244  

Food Processing Holdings, LLC

  Food & beverage   10.5% (LIBOR + 9.5%)     10/31/2013       10/31/2018       20,179       20,019       20,179  

Hart InterCivic, Inc.

  IT services   11.3% (LIBOR + 10.5%)     3/31/2016       3/31/2019       25,600       25,215       25,664  

HEALTHCAREfirst, Inc.

  Healthcare   13.6% (7)     8/31/2012       8/30/2017       8,460       8,417       8,334  

HealthDrive Corporation

  Healthcare   9.1% (LIBOR + 8.1%)     11/21/2016       11/21/2021       10,000       9,828       9,828  

HealthDrive Corporation (8) (9)

  Healthcare   9.1% (LIBOR + 8.1%)     11/21/2016       11/21/2021       —         (26     —    

Holland Intermediate Acquisition Corp.

  Energy / utilities   10.0% (LIBOR + 9.0%)     5/29/2013       5/29/2018       21,880       21,732       19,145  

Holland Intermediate Acquisition Corp. (8)

  Energy / utilities   10.0% (LIBOR + 9.0%)     5/29/2013       5/29/2018       —         —         —    

Home Partners of America, Inc.

  Consumer products and services   8.0% (LIBOR + 7.0%)     10/13/2016       10/13/2022       13,668       13,405       13,531  

Igloo Products Corp.

  Consumer products and services   11.5% (ABR+ 7.8%)     3/28/2014       3/28/2020       24,636       24,301       24,144  

It’s Just Lunch International LLC

  Media, entertainment and leisure   9.5% (LIBOR + 8.5%)     7/28/2016       7/28/2021       5,500       5,399       5,445  

The John Gore Organization, Inc. (23)

  Media, entertainment and leisure   9.0% (LIBOR + 8.0%)     8/8/2013       6/28/2021       14,734       14,486       14,734  

The John Gore Organization, Inc.  (8) (9) (23)

  Media, entertainment and leisure   9.0% (LIBOR + 8.0%)     8/8/2013       6/28/2021       —         (14     —    

LAI International, Inc.

  Industrials and manufacturing   10.4% (7)     10/22/2014       10/22/2019       21,976       21,680       21,976  

LAI International, Inc. (8)

  Industrials and manufacturing   8.2% (7)     10/22/2014       10/22/2019       4,526       4,526       4,526  

MeriCal, LLC

  Consumer products and services   10.0% (LIBOR + 9.0%)     9/30/2016       9/30/2021       14,950       14,582       14,614  

RealD Inc.

  Media, entertainment and leisure   8.5% (LIBOR + 7.5%)     3/22/2016       3/22/2021       14,888       14,762       14,888  

Virtus Pharmaceuticals, LLC

  Healthcare   10.8% (7)     7/17/2014       7/17/2019       24,013       23,663       24,013  

Wheels Up Partners, LLC

  Transportation   9.6% (LIBOR + 8.6%)     1/31/2014       10/15/2021       8,069       8,000       8,149  

Wheels Up Partners, LLC

  Transportation   9.6% (LIBOR + 8.6%)     8/27/2014       7/15/2022       8,934       8,934       9,023  
         

 

 

   

 

 

   

 

 

 

Subtotal first lien senior secured debt

          $ 341,086     $ 336,032     $ 327,337  

See accompanying notes to these consolidated financial statements.

 

 

12


Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

December 31, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/

Portfolio company   (1)(2)(3)

 

Industry

 

Interest

Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Second lien debt

             

Alex Toys, LLC

  Consumer products and services   11.5% (LIBOR + 10.5%)     6/30/2014       12/30/2019     $ 30,202     $ 29,834     $ 29,068  

Hostway Corporation

  IT services   10.0% (LIBOR + 8.8%)     12/27/2013       12/13/2020       17,500       17,317       13,825  

Merchants Capital Access, LLC

  Financial services   11.5% (LIBOR + 10.5%)     4/20/2015       4/20/2021       12,500       12,319       12,438  

MB Medical Operations LLC

  Healthcare   10.0% (LIBOR + 9.0%)     12/7/2016       6/7/2022       9,131       8,951       8,951  

Specialty Brands Holdings, LLC

  Restaurants   10.5% (LIBOR + 8.8%) (9.5% Cash and 1.0% PIK)     7/16/2013       12/1/2017       21,153       21,048       20,307  

Washington Inventory Service (25)

  Business services   13.8% (ABR + 10.0%)     12/27/2012       6/20/2019       11,000       10,928       5,280  
         

 

 

   

 

 

   

 

 

 

Subtotal second lien debt

          $ 101,486     $ 100,397     $ 89,869  

Subordinated debt

             

A10 Capital, LLC (8)

  Financial services   12.0%     8/25/2014       2/25/2021     $ 10,636     $ 10,556     $ 10,635  

Aerogroup International Inc.

  Consumer products and services   12.0% PIK     8/5/2015       3/9/2020       296       296       —    

Aerogroup International Inc.

  Consumer products and services   10.0% PIK (11)     1/27/2016       3/9/2020       839       839       579  

Gold, Inc.

  Consumer products and services   10.0%     12/31/2012       6/30/2019       9,666       9,666       8,700  

Martex Fiber Southern Corp.

  Industrials and manufacturing   15.5% (12.0% Cash and 3.5% PIK) (11)     4/30/2012       9/30/2017       8,345       8,294       8,178  
         

 

 

   

 

 

   

 

 

 

Subtotal subordinated debt

          $ 29,782     $ 29,651     $ 28,092  

Equity investments

             

A10 Capital, LLC (12)(14)(21)

  Financial services       8/25/2014         5,109.53     $ 18,395     $ 18,519  

Aerogroup International Inc. (22)

  Consumer products and services       6/9/2014         253,616       11       —    

Aerogroup International Inc. (21)

  Consumer products and services       6/9/2014         28,180       1,108       —    

Alex Toys, LLC (12)(13)(15)(22)

  Consumer products and services       5/22/2015         153.85       1,000       634  

Alex Toys, LLC (12)(13)(15)(21)(24)

  Consumer products and services       6/22/2016         121.18       788       838  

Allied Wireline Services, LLC (12)(15)(22)

  Energy / utilities       2/28/2014         618,867.92       619       —    

Constructive Media, LLC (12)

  Media, entertainment and leisure       11/23/2015         750,000       750       436  

Dimont & Associates, Inc. (22)

  Financial services       3/14/2016         312.51       129       90  

Firebirds International, LLC  (12)(22)

  Restaurants       5/17/2011         1,906       191       344  

Food Processing Holdings, LLC  (12)(22)

  Food & beverage       4/20/2010         162.44       163       264  

Food Processing Holdings, LLC  (12)(22)

  Food & beverage       4/20/2010         406.09       408       772  

Hostway Corporation (22)

  IT services       12/27/2013         20,000       200       —    

Hostway Corporation (21)

  IT services       12/27/2013         1,800       1,800       —    

Igloo Products Corp. (22)

  Consumer products and services       4/30/2014         1,902.04       1,716       1,670  

MeriCal, LLC (12)(13)(22)

  Consumer products and services       9/30/2016         5,000       5       5  

MeriCal, LLC (12)(13)(21)

  Consumer products and services       9/30/2016         495       495       505  

Virtus Pharmaceuticals, LLC (12)(15)(22)

  Healthcare       3/31/2015         7,720.86       127       —    

Virtus Pharmaceuticals, LLC (12)(15)(22)

  Healthcare       3/31/2015         231.82       244       306  

Virtus Pharmaceuticals, LLC (12)(15)(22)

  Healthcare       3/31/2015         589.76       590       411  

Wheels Up Partners, LLC (12)(15)(22)

  Transportation       1/31/2014         1,000,000       1,000       2,840  
           

 

 

   

 

 

 

Subtotal equity

            $ 29,739     $ 27,634  

See accompanying notes to these consolidated financial statements.

 

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

December 31, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/

Portfolio company   (1)(2)(3)

 

Industry

 

Interest

Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Warrants

             

Allied Wireline Services, LLC  (15)

  Energy / utilities       2/28/2014         501,159.24     $ 175     $ —    

YP Equity Investors, LLC (15)

  Media, entertainment and leisure       5/8/2012         —         —         4,151  
           

 

 

   

 

 

 

Subtotal warrants

            $ 175     $ 4,151  

CLO residual interests

             

Flagship VII, Ltd. (6)(16)

  Structured products   12.8%     12/18/2013         $ 2,961     $ 2,154  

Flagship VIII, Ltd. (6)(16)

  Structured products   14.8%     10/3/2014           5,720       5,071  
           

 

 

   

 

 

 

Subtotal CLO residual interests

            $ 8,681     $ 7,225  

Investment in payment rights

             

Duff & Phelps Corporation (10) (16)

  Financial services   18.3%     6/1/2012         $ 10,979     $ 13,289  
           

 

 

   

 

 

 

Subtotal investment in payment rights

            $ 10,979     $ 13,289  

Investments in funds (17)

             

Freeport Financial SBIC Fund LP

  Financial services       6/14/2013         $ 2,957     $ 2,837  

Gryphon Partners 3.5, L.P.

  Financial services       11/20/2012           1,226       1,558  
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 4,183     $ 4,395  

Total non-controlled/non-affiliated investments

             
           

 

 

   

 

 

 

—128.78% of net asset value

            $ 519,837     $ 501,992  
           

 

 

   

 

 

 

Controlled investments

             

—42.89% of net asset value

             

First lien senior secured debt

             

Loadmaster Derrick & Equipment, Inc. (18)

 

Energy / utilities

  11.3% (LIBOR + 10.3%) (5.65% Cash and 5.65% PIK)     7/1/2016       12/31/2020     $ 7,208     $ 7,103     $ 7,208  

Loadmaster Derrick & Equipment, Inc. (25)(18)

 

Energy / utilities

  13% PIK     7/1/2016       12/31/2020       1,550       1,054       249  

OEM Group, LLC (18)

 

Industrials and manufacturing

  10.3% (LIBOR + 9.5%)     3/16/2016       2/15/2019       18,703       18,703       18,703  

OEM Group, LLC (18)

 

Industrials and manufacturing

  10.3% (LIBOR + 9.5%)     3/16/2016       6/30/2017       6,010       6,010       6,010  

Thibaut, Inc (18)

 

Consumer products and services

  14.0%     6/20/2014       6/19/2019       6,391       6,349       6,391  

Tri Starr Management Services, Inc.  (18)(26)

 

Business services

  7.5% (ABR + 3.8%)     7/22/2016       9/30/2017       98       98       98  

Tri Starr Management Services, Inc.  (18)(27)

 

Business services

  5.8% (LIBOR + 4.8%)     7/22/2016       9/30/2017       667       372       667  

Tri Starr Management Services, Inc.  (18)

 

Business services

  5.8% (LIBOR + 4.8%)     7/22/2016       9/30/2017       291       142       291  

Tri Starr Management Services, Inc.  (18)

 

Business services

  5.8% (LIBOR + 4.8%)     7/22/2016       9/30/2017       2,545       1,238       2,545  

Tri Starr Management Services, Inc.  (18)(25)

 

Business services

  10.0% PIK     7/22/2016       9/30/2017       1,364       480       1,364  

Tri Starr Management Services, Inc.  (18)(25)

 

Business services

  10.0% PIK     7/22/2016       9/30/2017       909       320       —    

Tri Starr Management Services, Inc.  (18)(25)

 

Business services

  5.0% PIK     7/22/2016       9/30/2017       3,016       1,062       —    
         

 

 

   

 

 

   

 

 

 

Subtotal first lien senior secured debt

          $ 48,752     $ 42,931     $ 43,526  

Second lien debt

             

Copperweld Bimetallics LLC (18)

 

Industrials and manufacturing

  12.0%     10/5/2016       10/5/2021     $ 5,415     $ 5,415     $ 5,415  
         

 

 

   

 

 

   

 

 

 

Subtotal second lien debt

          $ 5,415     $ 5,415     $ 5,415  

See accompanying notes to these consolidated financial statements.

 

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Consolidated Schedules of Investments

December 31, 2016

(dollar amounts in thousands)

(unaudited)

 

Type of Investment/

Portfolio company   (1)(2)(3)

 

Industry

 

Interest

Rate (4)

  Initial
Acquisition
Date
    Maturity/
Dissolution
Date
    Principal (5)
No. of Shares /
No. of Units
    Amortized
Cost
    Fair Value  

Equity investments

             

C&K Market, Inc. (18)(22)

  Retail & grocery       11/3/2010         1,992,365     $ 2,271     $ 12,480  

C&K Market, Inc. (18)(21)

  Retail & grocery       11/3/2010         1,992,365       10,956       9,962  

Copperweld Bimetallics LLC (18)(21)

  Industrials and manufacturing       10/5/2016         676.93       3,385       3,385  

Copperweld Bimetallics LLC (18)(22)

  Industrials and manufacturing       10/5/2016         609,230       8,950       10,104  

Loadmaster Derrick & Equipment, Inc. (18)(21)

  Energy / utilities       7/1/2016         2,702.434       1,114       —    

Loadmaster Derrick & Equipment, Inc. (18)(22)

  Energy / utilities       12/21/2016         10,930.508       —         —    

OEM Group, LLC (12)(13)(18)(21)(28)

  Industrials and manufacturing       3/16/2016         10,000       8,890       11,046  

Thibaut, Inc (13) (18) (19) (21)

  Consumer products and services       6/20/2014         4,747       4,717       5,644  

Thibaut, Inc (13)(18)(22)

  Consumer products and services       6/20/2014         20,639       —         1,472  

Tri Starr Management Services, Inc. (18)(22)

  Business services       7/22/2016         716.772       3,136       4,436  
           

 

 

   

 

 

 

Subtotal equity

            $ 43,419     $ 58,529  

Investments in funds

             

THL Credit Logan JV LLC (12)(17)(18)(20)(22)

  Investment funds and vehicles       12/3/2014         —       $ 59,000     $ 59,737  
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 59,000     $ 59,737  
           

 

 

   

 

 

 

Total controlled investments —42.89% of net asset value

            $ 150,765     $ 167,207  
           

 

 

   

 

 

 

Non-controlled/affiliated investments —0.00% of net asset value

             

Investments in funds

             

THL Credit Greenway Fund LLC (12)(17)(22)

  Financial services       1/27/2011         $ 1     $ 1  

THL Credit Greenway Fund II LLC (12)(17)(22)

  Financial services       3/1/2013           3       3  
           

 

 

   

 

 

 

Subtotal investments in funds

            $ 4     $ 4  
           

 

 

   

 

 

 

Total non-controlled/affiliated investments —0.00% of net asset value

            $ 4     $ 4  
           

 

 

   

 

 

 

Total investments—171.67% of net asset value

            $ 670,606     $ 669,203  
           

 

 

   

 

 

 
Derivative Instruments                                      

Counterparty

 

Instrument

 

Interest Rate

  Expiration
Date
    # of Contracts     Notional     Cost     Fair Value  

ING Capital Markets, LLC

  Interest Rate Swap – Pay Fixed/Receive Floating   1.1425%/LIBOR     05/10/17       1     $ 50,000     $ —       $ (50
         

 

 

   

 

 

   

 

 

 

Total derivative instruments—0.01 % of net asset value

 

    $ 50,000     $ —       $ (50
         

 

 

   

 

 

   

 

 

 

 

(1) All debt investments are income-producing, unless otherwise noted. Equity and member interests are non-income-producing unless otherwise noted.
(2) All investments are pledged as collateral under the Revolving Facility and Term Loan Facility.
(3) As of December 31 2016, 12.4% and 12.7% of the Company’s total investments on a cost and fair value basis, respectively, are in non-qualifying assets.
(4) Variable interest rate investments bear interest in reference to London Interbank offer rate, or LIBOR, or ABR, which are effective as of December 31, 2016. LIBOR loans are typically indexed to 30-day, 60-day, 90-day or 180-day LIBOR rates, at the borrower’s option, and ABR rates are typically indexed to the current prime rate or federal funds rate. Both LIBOR and ABR rates may be subject to interest floors.

See accompanying notes to these consolidated financial statements.

 

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Table of Contents
(5) Principal includes accumulated PIK, or paid-in-kind, interest and is net of repayments.
(6) Foreign company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(7) Unitranche investment; interest rate reflected represents the implied interest rate earned on the investment for the most recent quarter.
(8) Issuer pays 0.50% unfunded commitment fee on delayed draw term loan and/or revolving loan facilities.
(9) The negative cost is the result of the capitalized discount being greater than the principal amount outstanding on the loan.
(10) Publicly-traded company with a market capitalization in excess of $250 million at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the Investment Company Act of 1940.
(11) At the option of the issuer, interest can be paid in cash or cash and PIK. The percentage of PIK shown is the maximum PIK that can be elected by the company.
(12) Member interests of limited liability companies are the equity equivalents of the stock of corporations.
(13) Equity ownership may be held in shares or units of companies related to the portfolio company.
(14) Preferred stock investment return is income-producing with a stated rate of 12.8% cash and 2% PIK due on a monthly basis
(15) Interest held by a substantially owned subsidiary of THL Credit, Inc.
(16) Income-producing security with no stated coupon; interest rate reflects an estimation of the effective yield to expected maturity as of December 31, 2016.
(17) Non-registered investment company at the time of investment and, as a result, is not a qualifying asset under Section 55(a) of the 1940 Act.
(18) As defined in Section 2(a)(9) of the 1940 Act, the Company is deemed to control this portfolio company because it owns more than 25% of the portfolio company’s outstanding voting securities. See Schedule 12-14 in the accompanying notes to the consolidated financial statements for transactions for the quarter ended December 31, 2016 in which the issuer was a portfolio company that the Company is deemed to control.
(19) Part of our preferred stock return is income-producing with a stated rate of 3% due on a quarterly basis.
(20) On December 3, 2014, the Company entered into an agreement with 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 the Company and Perspecta. Although the Company owns more than 25% of the voting securities of Logan JV, the Company does not believe that it has control over Logan JV (other than for purposes of the 1940 Act or otherwise).
(21) Preferred stock
(22) Common stock and member interest.
(23) Investment formerly known as Key Brand Entertainment, Inc. The name change was effective May 16, 2016.
(24) Preferred stock investment return is income-producing with a stated rate of 12.5% PIK capitalized annually.
(25) Loan was on non-accrual as of December 31, 2016.
(26) Issuer pays 3.0% weighted average unfunded commitment fee on the revolving loan facility.
(27) Issuer pays 4.75% unfunded commitment fee on the revolving loan facility.
(28) Includes $577 of cost and $716 of fair value related to a non-controlling interest as a result of consolidating a blocker corporation that holds equity in OEM Group, LLC.

See accompanying notes to these consolidated financial statements.

 

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Table of Contents

THL Credit, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2017

(in thousands, except per share data)

(unaudited)

1. Organization

THL Credit, Inc., or the Company, was organized as a Delaware corporation on May 26, 2009. The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or 1940 Act. The Company has elected to be treated for tax purposes as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, or as amended, the Code. In 2009, the Company was treated for tax purposes as a corporation. The Company’s investment objective is to generate both current income and capital appreciation, primarily through privately negotiated investments in debt and equity securities of lower middle market companies.

In December 2015 and November 2016, the Company completed public debt offerings selling $35,000 and $25,000, respectively, of 6.75% Notes due 2022, or the 2022 Notes, including the exercise of the overallotment option, through a group of underwriters, less an underwriting discount, and received net proceeds of $33,950 and $24,250, respectively.

The Company has established wholly owned subsidiaries, THL Credit AIM Media Holdings Inc., THL Credit Holdings, Inc. and THL Credit YP Holdings Inc. The Company also established another subsidiary, THL Credit OEMG Investor Inc., to hold its equity interest in OEM Group, LLC, where it holds a majority interest. These subsidiaries are structured as Delaware entities, or tax blockers, to hold equity or equity-like investments in portfolio companies organized as limited liability companies, or LLCs (or other forms of pass-through entities). Corporate subsidiaries are not consolidated for income tax purposes and may incur income tax expense as a result of their ownership of portfolio companies.

The Company has a wholly owned subsidiary, THL Corporate Finance, Inc. and THL Corporate Finance, LLC, its wholly owned subsidiary, serves as the administrative agent on certain investment transactions.

2. Significant Accounting Policies and Recent Accounting Updates

Basis of Presentation

The Company is an investment company following the accounting and reporting guidance under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946, Financial Services Investment Companies .

The consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation. In accordance with Article 6 of Regulation S-X under the Securities Act of 1933, as amended, and the Securities and Exchange Act of 1934, as amended, the Company generally will not consolidate its interest in any company other than in investment company subsidiaries and controlled operating companies substantially all of whose business consists of providing services to the Company. The Company has made changes to the presentation of prior year information to comply with current year presentation.

The accompanying consolidated financial statements of the Company have been presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with GAAP are omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments, consisting solely of normal accruals, considered necessary for the fair statement of financial statements for the interim period included herein. The current period’s results of operations are not necessarily indicative of the operating results to be expected for the period ending December 31, 2017.

The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 9, 2017. The financial results of the Company’s portfolio companies are not consolidated in the financial statements.

The accounting records of the Company are maintained in U.S. dollars.

Consolidation

The Company follows the guidance in ASC Topic 946 Financial Services—Investment Companies and will not generally consolidate its investment in a company other than substantially owned investment company subsidiaries or a controlled operating company whose business consists of providing services to the Company. The Company consolidated the results of its substantially owned subsidiaries in its consolidated financial statements. In conjunction with the consolidation of subsidiaries,

 

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Table of Contents

the Company recognizes the non-controlling interest in THL Credit OEMG Investor, Inc. in its consolidated financial statements. The Company does not consolidate its non-controlling interest in THL Credit Logan JV LLC, or Logan JV. See also the disclosure under the heading, Significant Accounting Policies—THL Credit Logan JV LLC.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts and disclosures in the financial statements. Changes in the economic environment, financial markets, creditworthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ and these differences could be material.

Cash

Cash consists of funds held in demand deposit accounts at several financial institutions and, at certain times, balances may exceed the Federal Deposit Insurance Corporation insured limit and is therefore subject to credit risk. There were no cash equivalents as of March 31, 2017 and December 31, 2016.

Deferred Financing Costs

Deferred financing costs consist of fees and expenses paid in connection with the closing of the Credit Facilities (as defined in Note 7 hereto) and public debt offering of Notes (as defined in Note 7 hereto). These costs are capitalized at the time of payment and are amortized using the straight line and effective yield methods over the term of the Credit Facilities and Notes, respectively. Capitalized deferred financing costs related to the Term Loan Facility (as defined in Note 7 hereto) and Notes are presented net against the respective balances outstanding on the Consolidated Statement of Assets and Liabilities. Capitalized deferred financing costs related to the Revolving Facility are presented separately on the Company’s Consolidated Statement of Assets and Liabilities. See also the disclosure in Note 7, Borrowings.

Deferred Offering Costs

Deferred offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company’s common stock, including legal, accounting, printing fees and other related expenses, as well as costs incurred in connection with the filing of a shelf registration statement. These amounts are capitalized when incurred and recognized as a reduction of offering proceeds when the offering becomes effective or expensed upon expiration of the registration statement.

Deferred Revenue

Deferred revenues consist of proceeds received for interest and other fees for which the earnings process is not yet complete. Such amounts will be recognized into income over such time that the income is earned.

Interest Rate Derivative

The Company recognizes derivatives as either interest rate derivative assets or liabilities at fair value on its Consolidated Statements of Assets and Liabilities with valuation changes and interest rate payments recorded as net change in unrealized appreciation (depreciation) on interest rate derivative and interest rate derivative periodic interest payments, net, respectively, on the Consolidated Statements of Operations. See also the disclosure in Note 8, Interest Rate Derivative.

Fair Value of Financial Instruments

The carrying amounts of the Company’s financial instruments, including cash, accounts payable and accrued expenses, approximate fair value due to their short-term nature. The carrying amounts and fair values of the Company’s long-term obligations are disclosed in Note 7, Borrowings.

Valuation of Investments

Investments, for which market quotations are readily available, are valued using market quotations, which are generally obtained from an independent pricing service or broker-dealers or market makers. Debt and equity securities, for which market quotations are not readily available or are not considered to be the best estimate of fair value, are valued at fair value as determined in good faith by the Company’s board of directors. Because the Company expects that there will not be a readily available market value for many of the investments in the Company’s portfolio, it is expected that many of the Company’s portfolio investments’ values will be determined in good faith by the Company’s board of directors in accordance with a documented valuation policy that has been reviewed and approved by our board of directors and in accordance with GAAP. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Company’s investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.

 

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Table of Contents

With respect to investments for which market quotations are not readily available, the Company’s board of directors undertakes a multi- step valuation process each quarter, as described below:

 

   

the Company’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals responsible for the portfolio investment;

 

   

preliminary valuation conclusions are then documented and discussed with senior management of THL Credit Advisors LLC, or the Advisor;

 

   

to the extent determined by the audit committee of the Company’s board of directors, independent valuation firms are used to conduct independent appraisals and review the Advisor’s preliminary valuations in light of their own independent assessment;

 

   

the audit committee of the Company’s board of directors reviews the preliminary valuations of the Advisor and independent valuation firms and, if necessary, responds and supplements the valuation recommendation of the independent valuation firms to reflect any comments; and

 

   

the Company’s board of directors discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee.

The types of factors that the Company may take into account in fair value pricing its investments include, as relevant, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. The Company generally utilizes an income approach to value its debt investments and a combination of income and market approaches to value its equity investments. With respect to unquoted securities, the Advisor and the Company’s board of directors, in consultation with the Company’s independent third party valuation firms, values each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies that are public and other factors, which valuation is then approved by the board of directors.

Debt Investments

For debt investments, the Company generally determines the fair value primarily using an income, or yield, approach that analyzes the discounted cash flows of interest and principal for the debt security, as set forth in the associated loan agreements, as well as the financial position and credit risk of each portfolio investments. The Company’s estimate of the expected repayment date is generally the legal maturity date of the instrument. The yield analysis considers changes in leverage levels, credit quality, portfolio company performance and other factors. The enterprise value, a market approach, is used to determine the value of equity and debt investments that are credit impaired, close to maturity or where the Company also holds a controlling equity interest. The method for determining enterprise value uses a multiple analysis, whereby appropriate multiples are applied to the portfolio company’s net income before net interest expense, income tax expense, depreciation and amortization, or EBITDA.

Interest Rate Derivative

The Company values its interest rate derivative agreement using an income approach that analyzes the discounted cash flows associated with the interest rate derivative agreement. Significant inputs to the discounted cash flows methodology include the forward interest rate yield curves in effect as of the end of the measurement period and an evaluation of the counterparty’s credit risk.

Collateralized Loan Obligations

The Company values its residual interest investments in collateralized loan obligations, or CLOs, using an income approach that analyzes the discounted cash flows of its residual interest. The discounted cash flows model utilizes prepayment, re-investment and loss assumptions based on historical experience and projected performance, economic factors, the characteristics of the underlying cash flow, and comparable yields for similar collateralized loan obligation fund subordinated notes or equity, when available. Specifically, the Company uses Intex cash flow models, or an appropriate substitute to form the basis for the valuation of the Company’s residual interest. The models use a set of assumptions including projected default rates, recovery rates, re-investment rates and prepayment rates in order to arrive at estimated cash flows. The assumptions are based on available market data and projections provided by third parties as well as management estimates.

Payment Rights

The Company values its investment in payment rights using an income approach that analyzes the discounted projected future cash flow streams assuming an appropriate discount rate, which will among other things consider other transactions in the market, the current credit environment, performance of the underlying portfolio company and the length of the remaining payment stream.

 

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Equity

The Company generally uses the market approach to value its equity investments. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in fair value pricing the Company’s investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, the current investment performance rating, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, transaction comparables, the Company’s principal market as the reporting entity and enterprise values, among other factors.

Investment in Funds

In circumstances in which net asset value per share of an investment is determinative of fair value, the Company estimates the fair value of an investment in an investment company using the net asset value per share of the investment (or its equivalent) without further adjustment if the net asset value per share of the investment is determined in accordance with the specialized accounting guidance for investment companies as of the reporting entity’s measurement date.

Investment Risk

The value of 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, the Company’s ability to dispose of investments at a price and time that the Company deems advantageous may be impaired. The extent of this exposure is reflected in the carrying value of these financial assets and recorded in the Consolidated Statements of Assets and Liabilities.

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.

Foreign Currency

Foreign currency amounts are translated into U.S. dollars on the following basis:

 

   

cash and cash equivalents, market value of investments, outstanding debt on revolving credit facilities, other assets and liabilities: at the spot exchange rate on the last business day of the period; and

 

   

purchases and sales of investments, borrowings and repayments of such borrowings, income and expenses: at the rates of exchange prevailing on the respective dates of such transactions.

Although net assets and fair values are presented based on the applicable foreign exchange rates described above, the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Fluctuations arising from the translation of foreign currency borrowings are included with the net change in unrealized gains (losses) on translation of assets and liabilities in foreign currencies on the consolidated statements of operations.

Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.

The Company’s current approach to hedging the foreign currency exposure in its non-U.S. dollar denominated investments is primarily to borrow the necessary local currency under the Company’s Revolving Credit Facility to fund these investments.

 

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Security Transactions, Payment-in-Kind, Income Recognition, Realized/Unrealized Gains or Losses

Security transactions are recorded on a trade-date basis. The Company measures realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method. Net realized gains and losses reflects the impact of investments written off during the period, if any. The Company reports changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation on investments in the Consolidated Statements of Operations. The Company reports changes in fair value of the interest rate derivative that is measured at fair value as a component of net change in unrealized appreciation or depreciation on interest rate derivative in the Consolidated Statements of Operations.

Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis to the extent that the Company expects to collect such amounts. Dividend income is recognized on the ex-dividend date. Original issue discount, representing the estimated fair value of detachable equity or warrants obtained in conjunction with the acquisition of debt securities and market discount or premium are capitalized and accreted or amortized into interest income over the life of the respective security using the effective yield method. The amortized cost of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees.

Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more and/or when it is no longer probable that principal or interest will be collected. However, the Company may make exceptions to this policy if the loan has sufficient collateral value and is in the process of collection. The Company records the reversal of any previously accrued income against the same income category reflected in the Consolidated Statement of Operations. As of March 31, 2017, the Company had four loans from three issuers on non-accrual status with an amortized cost basis of $13,364 and fair value of $825. As of March 31, 2016, the Company had one loan on non-accrual with an amortized cost basis of $20,558 and fair value of $11,498.

The Company has investments in its portfolio which contain a contractual paid-in-kind, or PIK, interest provision. PIK interest is computed at the contractual rate specified in each investment agreement, is added to the principal balance of the investment, and is recorded as income. The Company will cease accruing PIK interest if there is insufficient value to support the accrual or if the Company does not expect amounts to be collectible and will generally only begin to recognize PIK income again when all principal and interest have been paid or upon the restructuring of the investment where the interest is deemed collectable. To maintain the Company’s status as a RIC, PIK interest income, which is considered investment company taxable income, must be paid out to stockholders in the form of dividends even though the Company has not yet collected the cash. Amounts necessary to pay these dividends may come from available cash.

The following shows a rollforward of PIK income activity for the three months ended March 31, 2017 and 2016:

 

     Three months ended March 31,  
     2017      2016  

Accumulated PIK balance, beginning of period

   $ 3,086      $ 9,302  

PIK income capitalized/receivable

     918        625  

PIK received in cash from repayments

     —          (256

PIK reduced through restructurings (1)

     —          (140
  

 

 

    

 

 

 

Accumulated PIK balance, end of period

   $ 4,004      $ 9,531  
  

 

 

    

 

 

 

 

(1) Related to the restructuring of the Company’s investment in Dimont & Associates, Inc. PIK income accrued in connection with the existing loan was completely reduced and is no longer receivable and was removed from the rollforward of PIK activity.

Interest income from the Company’s TRA and CLO residual interests is recorded based upon an estimation of an effective yield to expected maturity using anticipated cash flows. Amounts in excess of income recognized are recorded as a reduction to the cost basis of the investment. The Company monitors the anticipated cash flows from its TRA and CLO residual interests and will adjust its effective yield periodically as needed.

The Company capitalizes and amortizes upfront loan origination fees received in connection with the closing of investments. The unearned income from such fees is accreted into interest income over the contractual life of the loan based on the effective interest method. Upon prepayment of a loan or debt security, any prepayment premiums, unamortized upfront loan origination fees, and unamortized discounts are recorded as interest income.

The Company will recognize any earned exit or back-end fees into income when it believes the amounts will ultimately become collected by using either the beneficial interest model or other appropriate income recognition frameworks.

In certain investment transactions, the Company may provide advisory services. For services that are separately identifiable and external evidence exists to substantiate fair value, income is recognized as earned. The Company had no income from advisory services related to portfolio companies for the three months ended March 31, 2017 and 2016.

The Company may also generate revenue in the form of fees from the management of Greenway and Greenway II, prepayment premiums, commitment, loan origination, structuring or due diligence fees, exit fees, portfolio company administration fees, fees for providing significant managerial assistance and consulting fees.

 

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U.S. Federal Income Taxes, Including Excise Tax

The Company has elected to be taxed as a RIC under Subchapter M of the Code and currently qualifies, and intends to continue to qualify each year, as a RIC under the Code. Accordingly, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed to stockholders.

In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of its investment company taxable income, as defined by the Code. To avoid a 4% U.S. federal excise tax on undistributed earnings, the Company is required to distribute each calendar year the sum of (i) 98% of its ordinary income for such calendar year (ii) 98.2% of its 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 the Company paid no U.S. federal income tax. The Company, at its discretion, may choose not to distribute all of its taxable income for the calendar year and pay a non-deductible 4% excise tax on this income. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, the Company accrues excise taxes on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate.

The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income. See also the disclosure in Note 10, Distributions, for a summary of the dividends paid. For the three months ended March 31, 2017 and 2016, the Company incurred U.S. federal excise tax and other tax expenses of $133 and $92, respectively.

Certain consolidated subsidiaries of the Company are subject to U.S. federal and state income taxes. These taxable entities are not consolidated for income tax purposes and may generate income tax liabilities or assets from permanent and temporary differences in the recognition of items for financial reporting and income tax purposes at the subsidiaries.

The following shows the breakdown of current and deferred income tax provisions for the three months ended March 31, 2017 and 2016:

 

     For the three months ended
March 31,
 
     2017      2016  

Current income tax provision:

     

Current income tax provision

   $ (104    $ (162

Deferred income tax benefit:

     

Deferred income tax benefit

     49        83  

Benefit (provision) for taxes on unrealized gain on investments

     153        (107

These current and deferred income taxes are determined from taxable income estimates provided by portfolio companies where the Company holds equity or equity-like investments organized as pass-through entities in its corporate subsidiaries. These tax estimates may be subject to further change once tax information is finalized for the year. As of March 31, 2017 and December 31, 2016, $12 and $112, respectively, of income tax receivable was included in prepaid expenses and other assets on the Consolidated Statements of Assets and Liabilities. As of March 31, 2017 and December 31, 2016, $4,732 and $4,518, respectively, were included in deferred tax liability on the Consolidated Statements of Assets and Liabilities primarily relating to deferred taxes on unrealized gains on investments and other temporary book to tax differences held in its corporate subsidiaries. As of March 31, 2017 and December 31, 2016, $2,855 (net of $1,743 allowance) and $2,442 (net of $2,115 allowance), respectively of deferred tax assets were included in deferred tax assets on the Consolidated Statements of Assets and Liabilities relating to net operating loss carryforwards and unrealized losses on investments and other temporary book to tax differences that are expected to be used in future periods.

Under the RIC Modernization Act (the “RIC Act”), we are permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010, for an unlimited period. However, any losses incurred during post-enactment taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under the rules applicable to pre-enactment capital losses.

Because U.S. federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the consolidated financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

The Company follows the provisions under the authoritative guidance on accounting for and disclosure of uncertainty in tax positions. The provisions require management to determine whether a tax position of the Company is more likely than not to be

 

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sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. For tax positions not meeting the more likely than not threshold, the tax amount recognized in the consolidated financial statements is reduced by the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant taxing authority. There are no unrecognized tax benefits or obligations in the accompanying consolidated financial statements. Although the Company files U.S. federal and state tax returns, the Company’s major tax jurisdiction is U.S. federal. The Company’s inception-to-date U.S. federal tax years remain subject to examination by taxing authorities.

Dividends

Dividends and distributions to stockholders are recorded on the applicable record date. The amount to be paid out as a dividend is determined by the Company’s board of directors on a quarterly basis. Net realized capital gains, if any, are generally distributed at least annually out of assets legally available for such distributions, although the Company may decide to retain such capital gains for investment.

Capital transactions in connection with the Company’s dividend reinvestment plan are recorded when shares are issued.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall”, which makes limited amendments to the guidance in U.S. GAAP on the classification and measurement of financial instruments. The new standard significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. It also amends certain disclosure requirements associated with the fair value of financial instruments. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods therein. Early adoption is permitted specifically for the amendments pertaining to the presentation of certain fair value changes for financial liabilities measured at fair value. Early adoption of all other amendments is not permitted. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.

In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606),” which amends the criteria for revenue recognition where an entity enters into contracts with customers to transfer goods or services or where there is a transfer of nonfinancial assets. Under ASU 2016-10, an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2016-10 will be effective for annual and interim reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230)”, which seeks to reduce diversity in how certain cash payments are presented in the Statement of Cash Flows. Under ASU 2016-15, an entity will need to conform to the presentation as prescribed for eight specific cash flow issues. ASU 2016-15 will be effective for annual and interim reporting periods after December 15, 2017. The Company is currently assessing the impact of adopting this standard on its consolidated financial statements.

In December 2016, the FASB issued ASU 2016-19, “Technical Corrections and Improvements (Topic 820)”, which includes minor corrections and clarifications that affect a wide variety of topics in the Accounting Standards Codification, including an amendment to Topic 820, “Fair Value Measurement”, which clarifies the difference between a valuation approach and a valuation technique when applying the guidance of that Topic. The amendment also requires an entity to disclose when there has been a change in either or both a valuation approach and/or a valuation technique. The transition guidance for the Topic 820 amendment must be applied prospectively because it could potentially involve the use of hindsight that includes fair value measurements. The guidance is effective for fiscal years, and interim periods within those fiscal years, for all entities beginning after December 15, 2016. The Company adopted this standard effective January 1, 2017, and any further required disclosures surrounding changes to valuation approach and/or a valuation technique will be disclosed in the Company’s consolidated financial statements.

 

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3. Investments

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of March 31, 2017:

 

Description

   Fair Value      Level 1      Level 2      Level 3  

First lien senior secured debt

   $ 397,167      $ —        $ —        $ 397,167  

Second lien debt

     101,415        —          —          101,415  

Subordinated debt

     20,980        —          —          20,980  

Equity investments

     92,425        —          —          92,425  

Warrants

     —          —          —          —    

Investment in Logan JV (1)

     64,150        —          —          —    

Investment in payment rights

     13,288        —          —          13,288  

Investments in funds (1)

     3,697        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 693,122      $ —        $ —        $ 625,275  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate derivative

     (13      —          (13      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability at fair value

   $ (13    $ —        $ (13    $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of the levels within the fair value hierarchy in which the Company invests as of December 31, 2016:

 

Description

   Fair Value      Level 1      Level 2      Level 3  

First lien senior secured debt

   $ 370,863      $ —        $ —        $ 370,863  

Second lien debt

     95,284        —          —          95,284  

Subordinated debt

     28,092        —          —          28,092  

Equity investments

     86,163        —          —          86,163  

Warrants

     4,151        —          —          4,151  

CLO residual interests

     7,225        —          —          7,225  

Investment in Logan JV (1)

     59,737        —          —          —    

Investment in payment rights

     13,289        —          —          13,289  

Investments in funds (1)

     4,399        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 669,203      $ —        $ —        $ 605,067  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest rate derivative

     (50      —          (50      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liability at fair value

   $ (50    $ —        $ (50    $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
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