UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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| | þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | For the fiscal year ended September 30, 20172018 |
OR
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 1-35999
Oaktree Strategic Income Corporation
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE (State or jurisdiction of
incorporation or organization) | | 61-1713295 (I.R.S. Employer
Identification No.) |
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333 South Grand Avenue, 28th Floor Los Angeles, CA (Address of principal executive office) | | 90071 (Zip Code) |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:
(213) 830-6300
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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| Title of Each Class | | Name of Each Exchange on Which Registered |
| Common Stock, par value $0.01 per share | | The NASDAQNasdaq Global Select Market |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
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 during the preceding 12 months (or for such shorter periods as the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer þ | | Non-accelerated filer o | | Smaller reporting company o |
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Emerging growth company þo
| | 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 þo
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No þ
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant as of March 31, 2017 is2018 was $190,396,952.165,997,158. For the purposes of calculating the aggregate market value of common stock held by non-affiliates, the registrant has excluded (1) shares held by its current directors and officers and (2) those reported to be held by Fifth Street Holdings L.P. and Leonard M. Tannenbaum and his other affiliates. The registrant had 29,466,768 shares of common stock outstanding as of December 7, 2017.November 28, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement relating to the registrant’s 20182019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, or the SEC, within 120 days following the end of the Company’s fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.
OAKTREE STRATEGIC INCOME CORPORATION
FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 2017
2018
TABLE OF CONTENTS
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| | PART I | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| | PART II | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| | PART III | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
| | PART IV | |
| Item 15. | | |
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PART I — FINANCIAL INFORMATION
PART I
Item 1. Business
General
Oaktree Strategic Income Corporation, (formerly known as Fifth Street Senior Floating Rate Corp. through October 17, 2017), a Delaware corporation, or together with its subsidiaries, where applicable, the Company, which may also be referred to as "we", "us" or "our", is a specialty finance company dedicated to providing customized capital solutions for middle-market companies in both the syndicated and private placement markets. We were formed in May 2013, as a Delaware corporation, commenced operations on June 29, 2013, and currently operate as a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development companyBusiness Development Company under the Investment Company Act of 1940, as amended, or the 1940Investment Company Act. In addition, we have qualified and elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986, as amended, or the Code, for tax purposes. See “Taxation“Election to be Taxed as a Regulated Investment Company.” As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any net ordinary income or net realized capital gains that we distribute to our stockholders if we meet certain source-of-income, income distribution and asset diversification requirements. Also, we are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act, and take advantage of the exemption for emerging growth companies allowing us to temporarily forgo the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act. We do not take advantage of other disclosure or reporting exemptions for emerging growth companies under the JOBS Act.
As of October 17, 2017, we are externally managed by Oaktree Capital Management, L.P., which we also refer to as “Oaktree” or our “Investment Adviser,“Adviser,” pursuant to an Investment Advisory Agreement, dated October 17, 2017, or the New Investment Advisory Agreement, between the Company and Oaktree. Oaktree is a subsidiary of Oaktree Capital Group, LLC, or OCG, a global investment manager specializing in alternative investments.publicly traded Delaware limited liability company listed on the New York Stock Exchange under the ticker symbol "OAK". Oaktree Fund Administration, LLC, which we refer to as “Oaktree Administrator” or “OFA”, a subsidiary of our Investment Adviser, also provides certain administrative and other services necessary for us to operate. Prior to October 17, 2017, we were externally managed and advised by Fifth Street Management LLC, which we refer to as our “Former Adviser” or “FifthAdviser,” and we were named Fifth Street Management.” For more information about the New Investment Advisory Agreement and Oaktree see “-The Investment Adviser” below.Senior Floating Rate Corp.
We seek to generate a stable source of current income while minimizing the risk of principal loss and, to a lesser extent, capital appreciation by providing middle-marketinnovative first-lien financing solutions to companies with primarily first lien secured debt financings that pay us interest at rates which are determined periodically on the basisacross a wide variety of a floating base lending rate.industries. We invest in companies across a variety of industries that typically possess business models we expect to be resilient in the future with underlying fundamentals that will provide strength in future downturns. We intend to deploy capital across credit and economic cycles with a focus on long-term results, which we believe will enable us to build lasting partnerships with financial sponsors and management teams. UnderTo a lesser extent, we may also invest in unsecured loans, including subordinated loans, issued by private middle-market companies, senior and subordinated loans issued by public companies and equity investments. Prior to January 18, 2018, under normal market conditions, through January 18, 2018,we were required to invest at least 80% of the value of our net assets plus borrowings for investment purposes will be invested in floating rate senior loans, which include both first and second lien secured debt financings. We may also invest in unsecured loans, including subordinated loans, issued by private middle-market companies and,are no longer subject to a lesser extent, senior and subordinated loans issued by public companies and equity investments.such requirement.
We have invested primarily in senior secured loans, including first lien, unitranche and second lien debt instruments, that pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarily the London-Interbank Offered Rate, or LIBOR, plus a premium. The senior loans in which we invest are typically made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities in the middle-market which operate in various industries and geographical regions.
Our Adviser intends to continue to reposition our portfolio in order to (1) rotate out of a small number of investments that it views as challenged, (2) focus on increasing the size of our core private investments and (3) supplement the portfolio with broadly syndicated and select privately placed loans. Our Adviser is generally focused on middle-market companies, which we define as companies with enterprise values of between $100 million and $750 million. Going forward, we expect our portfolio to include primarily first lien floating rate senior secured financings although we may also make other investments. We generally target investments of $10 million to $20 million, on average, although we may invest more or less in certain portfolio companies. We generally invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” and “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. Our Former Adviser targeted middle-market companies with approximately $20 million to $120 million of EBITDA (generally defined as Earnings before Interest, Taxes, Depreciation and Amortization).
Our Investment Adviser intends to reposition our portfolio in the near-term in order to (1) rotate out of a small number of investments that it views as challenged, (2) focus on increasing the size of our core private investments and (3) supplement the portfolio with broadly syndicated and select privately placed loans. We expect that our Investment Adviser will focus on middle-market companies, which we define as companies with enterprise values of between $100 and $750 million. Going forward, we expect our portfolio to include primarily first lien floating rate senior secured financings.
From inception through September 30, 2017, we originated over $2.0 billion of funded debt investments. Our portfolio totaled $560.4$556.8 million at fair value as of September 30, 20172018 and was comprised of 6775 portfolio companies, including our investment in subordinated notes and limited liability company, or LLC, equity interests in FSFROCSI Glick JV LLC, or FSFRthe OCSI Glick JV. At fair value as of September 30, 2017, 89.5%2018, 89.1% of our portfolio consisted of senior secured floating rate debt investments, 10.3%10.5% of the portfolio consisted of investments in the subordinated notes and LLC equity interests of FSFRthe OCSI Glick JV and 0.2%0.4% consisted of equity investments in other portfolio companies. The weighted average annual yield of our debt investments at fair value as of September 30, 2017,2018, including the return on our subordinated
note investment in FSFRthe OCSI Glick JV, was approximately 7.5%7.7%, including 7.3%7.6% representing cash payments. The weighted average annual yield of our debt investments is determined before the payment of, and therefore does not take into account, our (and our consolidated subsidiaries’) expenses and the payment by an investor of any stockholder transaction expenses, and does not represent the return on investment for our stockholders.
We are permitted to, and expect to continue to, finance our investments through borrowings. However, as a business development company,Business Development Company, subject to certain limited exceptions, we are generallycurrently only allowed to borrow amounts such that ourin accordance with the asset coverage as definedrequirements in the 1940Investment Company Act. On March 23, 2018, the Small Business Credit Availability Act, equalsor the SBCAA, was enacted into law. The SBCAA, among other things, amended Section 61(a) of the Investment Company Act to add a new Section 61(a)(2) that reduces the asset coverage requirements applicable to Business Development Companies from 200% to 150% so long as the Business Development Company meets certain disclosure requirements and obtains certain approvals. On July 10, 2018, we held a special meeting of stockholders at leastwhich our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to us effective as of July 11, 2018. The reduced asset coverage requirements permit us to double the maximum amount of leverage that we are permitted to incur by reducing the asset coverage requirements applicable to us from 200% after such borrowing.to 150%. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing. As of September 30, 2017,2018, we had a debt to equity ratio of 0.90x0.93x (i.e., one dollar of equity for each $0.90$0.93 of debt outstanding).
Joint Venture
We and GF Equity Funding 2014 LLC, or GF Equity Funding, also co-invest through the OCSI Glick JV, an unconsolidated Delaware limited liability company, FSFR Glick JV. FSFRcompany. The OCSI Glick JV was formed in October 2014 and began investing in April 2015 primarily in senior secured loans of middle market companies. We co-invest in these securities with GF Equity Funding through our investment in FSFRthe OCSI Glick JV. FSFRThe OCSI Glick JV is managed by a four person boardBoard of directors,Directors, two of whom are selected by us and two of whom are selected by GF Equity Funding. FSFRThe OCSI Glick JV is capitalized as transactions are completed, and all portfolio decisions and investment decisions in respect of FSFRthe OCSI Glick JV must be approved by its investment committee consisting of one representative selected by us and one representative selected by GF Equity Funding (with approval of each required). The members provide capital to FSFRthe OCSI Glick JV in exchange for LLC equity interests, and the Companywe and GF Debt Funding 2014 LLC, or GF Debt Funding, an entity advised by affiliates of GF Equity Funding, provide capital to FSFRthe OCSI Glick JV in exchange for subordinated notes, or the Subordinated Notes. Additionally, FSFRthe OCSI Glick JV has a senior revolving credit facility with Deutsche Bank AG, New York Branch, or the JV Deutsche Bank facility,Facility, with a stated maturity date of April 17, 2023,January 5, 2024, which, as of September 30, 2017,2018, permits up to $200.0$125.0 million of borrowings. As of September 30, 20172018 and September 30, 2016, FSFR2017, the OCSI Glick JV had total capital commitments of $100.0 million, $87.5 million of which was from the Companyus and the remaining $12.5 million from GF Equity Funding and GF Debt Funding. At September 30, 2017,2018, we had funded approximately $71.4$73.5 million of our commitment. As of September 30, 2017,2018, our investment in FSFRthe OCSI Glick JV was approximately $57.6$58.5 million at fair value. We do not consolidate FSFRthe OCSI Glick JV in our Consolidated Financial Statements.
Organizational Structure
The following diagram shows a simplified organizational structure reflecting our relationship with Oaktree and OFA, our Investment Adviser and administrator, respectively, as of October 17, 2017 and our direct and indirect ownership interest in certain of our subsidiaries as of such date:
Our principal executive office is located at 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071 and our telephone number is (213) 830-6300.
The Investment Adviser
As of October 17, 2017, weWe are externally managed and advised by Oaktree, a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. Oaktree, subject to the overall supervision of our Board of Directors, manages our day-to-day operations, and provides investment advisory services to us pursuant to the New Investment Advisory Agreement.
Our Investment Adviser was formed in April 1995 and is a premier credit manager and leader among alternativeleading global investment managersmanagement firm headquartered in Los Angeles, California. Oaktree has $99.5California, focused on less efficient markets and alternative investments. A number of our Adviser’s senior executives and investment professionals have been investing together for over 32 years and have generated impressive investment performance through multiple market cycles. As of September 30, 2018, our Adviser (together with its affiliates) had approximately $123.5 billion in assets under management as of September 30, 2017, with approximately 70% in credit strategies. The firm has an extensive global investment platform with more than 900 employees, including over 250 investment professionals who have significant origination, structuring and underwriting expertise. Oaktree’s disciplined investment philosophy and commitment to credit investing and lending have been demonstrated across market cycles for more than 20 years. Oaktree1. Our Adviser emphasizes an opportunistic, value-oriented and risk-controlled approach to investments in distressed debt, corporate debt (including mezzanine finance, high yieldhigh-yield debt and senior loans), control investing, real estate, convertible securities and listed equities.
Our Adviser’s primary firm-wide goal is to achieve attractive returns while bearing less than commensurate risk. Our Adviser believes that it can achieve this goal by taking advantage of market inefficiencies in which financial markets and their participants fail to accurately value assets or fail to make available to companies the capital that they reasonably require.
Our Adviser believes that its defining characteristic is its adherence to the highest professional standards, which has yielded several important benefits. First and foremost, this characteristic has allowed our Adviser to attract and retain an extremely talented group of investment professionals, or the Investment Professionals. Further, it has permitted the investment team to build strong relationships with brokers, banks and other market participants. These institutional relationships have been instrumental in strengthening access to trading opportunities, to understanding the current market, and to executing the investment team’s investment strategies.
Our Adviser and its affiliates provide discretionary investment management services to other managed accounts and investment funds, which may have overlapping investment objectives and strategies with our own and, accordingly, may invest in asset classes similar to those targeted by us. The activities of such managed accounts and investment funds may raise actual or potential conflicts of interest.
Oaktree manages assets for a wide varietySenior Executives
Our Adviser’s current senior executives are Howard Marks, Bruce Karsh, Jay Wintrob, John Frank and Sheldon Stone. The original founders formed Oaktree in April 1995 after having managed funds in the high-yield bond, distressed debt, private equity and convertible securities areas of clients, including manyTrust Company of the most significant investorsWest for approximately 10 years. The senior executives have led the investment of clients’ funds in the world. Asconsistent, risk-controlled manner called for by our Adviser’s philosophy, generally resulting in an impressive track record, reduced risk and highly satisfied clients.
Oaktree’s Professionals
Our Adviser is dedicated to highly professional management in a limited number of specialized investment niches. Its strength is its staff of over 900 people, including more than 350 investment, legal and compliance professionals and over 400 administrative and marketing professionals as of September 30, 2017, this2018. The professionals are active in portfolio management, investment analysis, trading, legal, client base includes 75service and administration. The Strategic Credit group has 21 investment professionals who focus on the investment strategy employed by our Adviser and certain of its affiliates.
Strategic Credit
Our Adviser officially launched its Strategic Credit strategy in early 2013 as a step-out from its Distressed Debt strategy, to capture attractive investment opportunities that appear to offer too little return for distressed debt investors, but may pose too much uncertainty for high-yield bond creditors. The strategy seeks to achieve an attractive total return by investing in public and private performing debt.
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1 References to “assets under management” or “AUM” represent assets managed by our Adviser and a proportionate amount ($24.7 billion) of the 100 largestAUM reported by DoubleLine Capital LP, or Doubleline, in which our Adviser owns a 20% minority interest. Our Adviser’s methodology for calculating AUM includes (i) the net asset value of assets managed directly by our Adviser, (ii) the leverage on which management fees are charged, (iii) undrawn capital that our Adviser is entitled to call from investors in Oaktree funds pursuant to their capital commitments, (iv) for collateralized loan obligation vehicles, or CLOs, the aggregate par value of collateral assets and principal cash, (v) for publicly-traded Business Development Companies, gross assets (including assets acquired with leverage), net of cash, and (vi) our Adviser’s pro rata portion of the AUM reported by DoubleLine. Our Adviser’s calculation of AUM may differ from the calculations of other asset managers and, as a result, our Adviser’s measurements of AUM may not be comparable to similar measures presented by other asset managers. Our Adviser’s definition of AUM is not based on the definitions of AUM that may be set forth in agreements governing the investment funds, vehicles or accounts that it manages and is not calculated pursuant to regulatory definitions.
Strategic Credit focuses on U.S. pension plans, the main pension fund of 38 statesand non-U.S. investment opportunities that arise from pricing inefficiencies that occur in the United States, over 400 corporations, over 350 university, charitableprimary and secondary markets or from the financing needs of healthy companies with limited access to traditional lenders or public markets. Typical investments will be in high yield bonds and senior secured loans for borrowers that are in need of direct loans, rescue financings, or other endowmentscapital solutions or that have had challenged or unsuccessful primary offerings.
The Investment Professionals employ a fundamental, value-driven opportunistic approach to credit investing, which seeks to benefit from the resources, relationships and foundations, over 350 non-U.S. institutional investors and 16 sovereign wealth funds.
Membersproprietary information of our Adviser’s global investment platform.
Oaktree’s Investment Adviser’s Strategic Credit team have, inApproach
By implementing our investment strategy, the aggregate, over 50 yearsInvestment Professionals seek to create value at all stages of investment experience and include professionals who have experience structuring newthe investing process. Our Adviser believes that the foundation for all investments, and restructuring existing capital structuresthe basis for the success that has been enjoyed by the Investment Professionals to date, is the thorough analysis of a company’s fundamentals and intrinsic value. The Investment Professionals start by capitalizing on investment opportunities (a) that they source or (b) that other Oaktree investment teams source but that do not meet their strategies’ return objectives. Next, the Investment Professionals execute trades in orderan attempt to maximize recoveries. Ourobtain relatively low purchase prices that should provide additional “downside protection.” After an investment is made, the Investment Adviser’s Strategic Credit team is comprisedProfessionals monitor the progress of individuals with a diversity of backgrounds, including, as ofeach investment, sometimes providing financial and strategic advice. Importantly, the date hereof, former investment bankers, corporate/restructuring lawyers, a doctor, private equity investors,Investment Professionals seek to determine the optimal time and management consultants. We believe this diversity of experience helps enhancestrategy for exiting and maximizing the investment process by bringing different perspectives to credit discussions.return on the investment.
The Transaction and the New Investment Advisory Agreement with Oaktree
On July 13, 2017, Oaktree, entered into an Asset Purchase Agreement, or the Purchase Agreement, with our Former Adviser, and for certain limited purposes, Fifth Street Asset Management Inc., or FSAM, the indirect, partial owner of our Former Adviser, and Fifth Street Holdings L.P., the direct, partial owner of our Former Adviser.
In order to ensure that the transactions contemplated by the Purchase Agreement, or the Transaction, complied with Section 15(f) of the 1940Investment Company Act, our Investment Adviser and our Former Adviser agreed to certain conditions. First, for a period of three years after the closing of the Transaction,through October 17, 2020, at least 75% of the members of our Board of Directors must not be interested persons of Oaktree or our Former Adviser. Second, an “unfair burden” must not be imposed on us as a result of the closing of the Transaction or any express or implied terms, conditions or understandings applicable thereto during the two-year period after the closing of the Transaction. In addition, for the two-year period commencing on October 17, 2017, Oaktree will waive,
to the extent necessary, any management or incentive fees payable under the New Investment Advisory Agreement that exceed what would have been paid to the Former Adviser in the aggregate under the Former Investment Advisory Agreement.
On September 7, 2017, we held a special meeting of stockholders, or the Special Meeting. At the Special Meeting, our stockholders approved the New Investment Advisory Agreement to take effect upon the closing of the Transaction. Our stockholders also approved, contingent upon the closing of the Transaction, the election of John B. Frank, Marc H. Gamsin, Craig Jacobson, Richard G. Ruben and Bruce Zimmerman to serve on our Board of Directors, each of whom commenced serving on our Board of Directors on October 17, 2017. In addition, in connection with the Transaction, Edgar Lee became our Chief Executive Officer and Chief Investment Officer, Mathew Pendo became our Chief Operating Officer, Mel Carlisle became our Chief Financial Officer and Treasurer and Kimberly Larin became our Chief Compliance Officer.(as defined below).
Upon the closing of the Transaction on October 17, 2017, Oaktree became the investment adviser to each of Oaktree Specialty Lending Corporation (formerly known as Fifth Street Finance Corp.), or OCSL, and us, and Oaktree paid gross cash consideration of $320 million to our Former Adviser.us. The closing of the Transaction resulted in an assignment for purposes of the 1940Investment Company Act of the investment advisory agreement between our Former Adviser and us, or the Former Investment Advisory Agreement, and, as a result, its immediate termination. The material terms of the services to be provided under the New Investment Advisory Agreement, other than the fee structure, are substantially the same as the Former Investment Advisory Agreement, except that services are provided by Oaktree.
On October 17, 2017, each of Bernard D. Berman, James Castro-Blanco, Richard P. Dutkiewicz, Alexander C. Frank and Jeffrey R. Kay resigned as a member of our Board of Directors. In addition, on October 17, 2017, each of Mr. Berman, our former Chief Executive Officer, Mr. Steven Noreika, our former Chief Financial Officer, and Ms. Kerry Acocella, our former Secretary and Chief Compliance Officer, resigned from his or her role asOur Administrator
We entered into an officer of the Company.
Our Former Adviser and Administrator
Prior to October 17, 2017, we were externally managed and advised by our Former Adviser, which was a registered investment adviser under the Advisers Act. Subject to the overall supervision of our Board of Directors, our Former Adviser managed our day-to-day operations and provided us with investment advisory services similar to those now provided by Oaktree as described below under “-New Investment Advisory Agreement.” FSC CT LLC, or our Former Administrator, was a wholly-owned subsidiary of our Former Adviser. Our Former Administrator provided administrative services necessary for us to operate pursuant to an administrative and loan servicesadministration agreement, or the Former Administration Agreement. See “- Former Administration Agreement.”
Agreement, with Oaktree Administrator, a Delaware limited liability company and a wholly owned subsidiary of Oaktree. The following diagram shows a simplified organizational structure reflecting our relationship with our Former Adviser and Formerprincipal executive offices of Oaktree Administrator and our direct and indirect ownership interest in certain of our subsidiaries as of September 30, 2017:
Market Opportunity
We believe that the middle market represents a significant opportunity for direct lending for many reasons, including:
Large Market. Accordingare located at 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071. Pursuant to the National CenterAdministration Agreement, Oaktree Administrator provides services to us, and we reimburse Oaktree Administrator for costs and expenses incurred by Oaktree Administrator in performing its obligations under the Middle Market, as of the second quarter of 2017, there were nearly 200,000 businesses with annual revenues of $50 million to $1 billion or EBITDA of $10 million to $50 million, which businesses represented one-third of private sector U.S. gross domestic productAdministration Agreement and accounted for nearly 48 million jobs in the United States.
Demand From Middle-Market Companies. According to Thomson Reuters Q3’17 Middle Market Lender Outlook, over the past five years, middle-market lending has averaged $170 billion annually, much of which we believe has been used to finance leveraged buyouts, recapitalizations, capital expendituresproviding personnel and acquisitions. While the market for middle-market lending has attracted increased capital flows and competition, we believe that the market remains robust and growing and that new market participants may not have the same experience in direct lending and investing across credit cycles as our Investment Adviser. We believe that the market for middle-market lending is relatively less efficient and less well-trafficked, which may provide us with opportunities for incremental returns on our investments relative to the risk of such investments.
Reduced Focus From Banks on Middle-Market Lending. We believe that many commercial banks have decreased their lending to middle-market companies in recent years, which has created an opportunity for non-traditional market participants. According to the Standard & Poor’s Leveraged Commentary & Data Leveraged Lending Review - Q2’17, banks account for just 10% of middle-market loans as of September 30, 2017.
facilities thereunder.Business Strategy
We seek to generate a stable source of current income while minimizing the risk of principal loss and, to a lesser extent, capital appreciation. We invest in companies across a variety of industries that typically possess business models we expect to be resilient in the future with underlying fundamentals that will provide strength in future downturns. We intend to deploy capital across credit and economic cycles with a focus on long-term results, which we believe will enable us to build lasting partnerships with financial sponsors and management teams. Our Investment Adviser intends to implement the following business strategy to achieve our investment objective:
Completion of Portfolio Repositioning. Our Investment Adviser intends to reposition our portfolio in the near-term in order to (1) rotate out of a small number of investments that it views as challenged, (2) focus on increasing the size of our core private investments and (3) supplement the portfolio with broadly syndicated and select privately placed loans. In the longer-term, our Investment Adviser intends to generate consistent income to support sustainable dividends through (1) providing larger, more liquid first lien loans in the established middle market, (2) minimizing risk of principal loss, with reduced focus on opportunities for capital appreciation, (3) mitigating interest rate risk by targeting floating-rate loans and (4) strategically accessing the broadly syndicated and private placement markets.
Emphasis on Proprietary Deals. Our Investment Adviser is primarily focused on proprietary opportunities as well as partnering with other lenders as appropriate and, to a lesser extent strategically accessing the broadly syndicated and private placement markets. Dedicated sourcing professionals of our Investment Adviser are in continuous contact with financial sponsors and corporate clients to originate proprietary deals and seek to leverage the networks and relationships of Oaktree’s over 250 investment professionalsInvestment Professionals with management teams and corporations to originate non-sponsored transactions. Since 2005, our Investment Adviser has invested more than $10$11 billion in over 200250 directly originated loans, and the Oaktree platform has the capacity to invest in large deals and to solely underwrite transactions.
Focus On Quality Companies And Extensive Diligence. Our Investment Adviser seeks to maintain a conservative approach to investing with discipline around fundamental credit analysis and downside protection. Our Investment Adviser intends to focus on companies with business models we expect to be resilient in the future, underlying fundamentals that will provide strength in future downturns, significant asset or enterprise value and seasoned management teams, although not all portfolio companies will meet each of these criteria. Our Investment Adviser intends to leverage its deep credit and deal structuring expertise to lend to companies that have unique needs, complex business models or specific business challenges. Our Investment Adviser conducts diligence on underlying collateral value, including cash flows, hard assets or intellectual property, and will typically model exit scenarios as part of the diligence process, including assessing potential “work-out” scenarios.
Disciplined Portfolio Management. Our Investment Adviser monitors our portfolio on an ongoing basis to manage risk and take preemptive action to resolve potential problems where possible. Our Investment Adviser intends to seek to reduce the impact of individual investment risks by limiting positions to no more than 5% of our portfolio.
Manage Risk Through Loan Structures. Our Investment Adviser seeks to leverage its experience in identifying structural risks in prospective portfolio companies and developing creativecustomized solutions in an effort to enhance downside
protection where possible. Our Investment Adviser has the expertise to structure comprehensive, flexible and creativecustomized solutions for companies of all sizes across numerous industry sectors. Our Investment Adviser employs a rigorous due diligence process and seeks to include covenant protections designed to ensure that we, as the lender, can negotiate with a portfolio company before a deal reaches impairment. The Oaktree platform has the ability to address a wide range of borrower needs, with capability to invest across the capital structure and to fund large loans, and our Investment Adviser pays close attention to market trends. Our Investment Adviser provides certainty to borrowers by seeking to provide fully underwritten financing commitments and has expertise in both performing credit as well as restructuring and turnaround situations, which we expect will allow us to invest and lend during times of market stress when our competitors may halt investment activity.
Concentrate on Floating Rate Senior Loans. We intend to concentrate on first lien secured loans that bear interest based on a floating rate. We believe that these loans, which are supported by a pledge of collateral, minimize the risk of principal loss. In addition, with interest rates near historically low levels, we believe that investing in floating rate loans provides us with positive exposure in a rising interest rate environment.
Our Investment Adviser’s emphasis is on fundamental credit analysis, consistency and downside protection, all of which are key tenets of its investment philosophy. We believe this philosophy strongly aligns with the interests of our stockholders. Our Investment Adviser controls primarily for risk, rather than return. Although this may lead us to underperform in bullish markets, we expect that prudence across the economic cycle and limiting losses will allow us to achieve our investment objectives.
Identification of Investment CriteriaOpportunities
OurAccording to the National Center for the Middle Market, as of the second quarter of 2018, there were nearly 200,000 businesses with annual revenues of $10 million to $1 billion, which businesses represented one-third of private sector U.S. gross domestic product and accounted for approximately 48 million jobs in the United States and, according to the S&P Global Market Intelligence LCD Middle Market Review, during the first nine months of the 2018 calendar year, middle-market lending volume exceeded $20 billion for deal sizes of less than $350 million, much of which we believe has been used to finance leveraged buyouts, recapitalizations, capital expenditures and acquisitions. The Investment AdviserProfessionals employ a rigorous process to identify and evaluate potential investments within this large market. Central to the Investment Professionals’ investment process is the goal of exploiting market dislocations and inefficiencies driven by macro factors, market-level changes and company characteristics.
Macro Factors
Macro factors that drive market dislocations occur throughout the global economy and include sovereign debt crises, political elections and other unexpected geopolitical events. These factors drive highly correlated “risk on” and “risk off” market swings and frequently result in the indiscriminate selling or buying of securities and obligations at prices that the Investment Professionals believe are well below or above their intrinsic values.
Market-Level Changes
We believe that many commercial banks have decreased their lending to middle-market companies in recent years, which has created an opportunity for non-traditional market participants. In addition, we believe that increased regulation of financial markets and its participants, such as Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, has resulted in traditional capital providers focusing on only higher-quality and more liquid opportunities. The lower-rated portion of the market is often less efficiently priced due to limited capital availability, which allows for more attractive risk and return opportunities.
Company Characteristics
Company-specific factors that drive market dislocations include over-leveraged balance sheets, near-term liquidity or maturity issues, secular pressures on businesses, acute shock to company operations, asset-light businesses and new or relatively small issuers. These factors may result in mispriced securities or obligations or require a highly structured direct loan.
The Investment Professionals believe current market conditions give rise to two primary sources of investment opportunities with favorable risk-reward characteristics. The first source is private debt, which capitalizes on the Investment Professionals’ experience in negotiating and structuring complex debt investments. Private debt can include (a) loan portfolios that banks need to sell in response to regulatory capital pressure, (b) capital solutions, which involve customized, negotiated solutions for companies unable to access traditional syndicated loan and high yield markets, (c) rescue financings, which are transactions structured to provide liquidity to companies with overleveraged balance sheets, often on an urgent basis and (d) other direct loan investments to support acquisitions or capital projects that are unable to obtain financing via more traditional channels. The second source is marketable securities or other forms of traded debt, which the Investment Professionals intend to purchase on the secondary market at prices they believe are below their intrinsic value.
Once the Investment Professionals have identified a potential investment opportunity, they will evaluate the opportunity against the following investment criteria and guidelines for identifying and investing in prospective portfolio companies.guidelines. However, not all of these criteria will be met by each prospective portfolio company in which we invest.
Equity Cushion. We generally expect to invest in loans that have covenants that may help to minimize our risk of capital loss and meaningful equity investments in the portfolio company. We intend to target investments that have strong credit protections, including default penalties, information rights and affirmative, negative and financial covenants, such as limitations on debt incurrence, lien protection and prohibitions on dividends.
Sustainable Cash Flow. Our investment philosophy places emphasis on fundamental analysis from an investor’s perspective and has a distinct value orientation. We intend to focus on companies with significant asset or enterprise value in which we can invest at relatively low multiples of normalized operating cash flow. Additionally, we anticipate investing in companies with a demonstrated ability or credible plan to de-lever. Typically, we will not invest in start-up companies, companies having speculative business plans or structures that could impair capital over the long-term although we may target certain earlier stage companies that have yet to reach profitability.
Experienced Management Team. We generally will look to invest in portfolio companies with an experienced management team and proper incentive arrangements, including equity compensation, to induce management to succeed and to act in concert with our interests as investors.
Strong Relative Position In Its Market. We intend to target companies with what we believe to be established and leading market positions within their respective markets and well-developed long-term business strategies.
Exit Strategy. We generally intend to invest in companies that we believe will provide us with the opportunity to exit our investments in three to eight years, including through (1) the repayment of the remaining principal outstanding at maturity, (2) the recapitalization of the company resulting in our debt investments being repaid and (3) the sale of the company resulting in the repayment of all of its outstanding debt.
GeographyGeography.. As a business development company,Business Development Company, we will invest at least 70% of our investments in U.S. companies. To the extent we invest in non-U.S. companies, we intend to do so in accordance with 1940Investment Company Act limitations and only in jurisdictions with established legal frameworks and a history of respecting creditor rights.
Investment Process
Our investment process consists of the following five distinct stages.
Source.Source
Oaktree’s Strategic Credit team has dedicated sourcing professionals and also leverages its strong market presences and relationships across Oaktree’s global platform, which includes more than 250 highly-experienced investment professionals,Investment Professionals, to gain access to opportunities from advisers, sponsors, banks, management teams, capital raising advisers and other sources. Our Investment Adviser is a trusted partner to financial sponsors and management teams based on its long-term commitment and focus on lending across economic cycles. We believe this will give us access to proprietary deal flow and first looks"first looks" at
investment opportunities and that we are well-positioned for difficult and complex transactions. In 2016, Oaktree’s Strategic Credit team evaluated more than 200 potential direct lending opportunities with total transaction value of approximately $30 billion. More than 85% of these potential direct lending opportunities were for transactions of $50 million or larger, and Oaktree’s Strategic Credit team continues to see a meaningful pipeline of sizeable transactions.
Screen Using Investment Criteria.Criteria
We expect to be highly selective in making new investments. The initial screening process will typically include a review of the proposed capital structure of the portfolio company, including level of assets or enterprise value coverage, an assessment by our Investment Adviser of the company’s management team and its equity ownership levels as well as the viability of its long-term business model, and a review of forecasted financial statements and liquidity profile. In addition, our Investment Adviser may assess the prospect of industry or macroeconomic catalysts that may create enhanced value in the investment as well as the potential ability to enforce creditor rights, particularly where collateral is located outside of the United States.
Research.Research
Prior to making any new investment, our Investment Adviser intends to engage in an extensive due diligence process led by investment analysts assigned to each transaction. The analysts will assess a company’s management team, products, services, competitive position in its markets, barriers to entry and operating and financial performance, as well as the growth potential of its markets. In performing this evaluation, the analysts may use financial, descriptive and other due diligence materials provided by the target company, commissioned third party reports and internal sources, including members of the investment team, industry participants and experts with whom our Investment Adviser has relationships. As part of the research process, our Investment Adviser’s analysts typically perform a “what-if” analysis that explores a range of values for each proposed investment and a range of potential credit events.
Evaluate.Evaluate
Our Investment Adviser assesses each potential investment through a robust,rigorous, collaborative decision-making process. Our Investment Adviser applies disciplined investment criteria and evaluates potential risk and reward of each investment with significant focus on downside risk. Our Investment Adviser sizes investments at the portfolio level across a variety of characteristics, including based on the investment criteria described above.
Monitor.Monitor
Our Investment Adviser prioritizes managing risk. In managing our portfolio, our Investment Adviser intends to closely monitor each portfolio company and be well-positioned to make hold and exit decisions when credit events occur, our collateral becomes overvalued or opportunities with more attractive risk/reward profiles are identified. Investment analysts will be assigned to each investment to monitor industry developments, review company financial statements, attend company presentations and regularly speak with company management. In circumstances where a particular investment is underperforming, our Investment Adviser intends to employ a variety of strategies to maximize its recovery based on the specific facts and circumstances of the underperforming investment, including actively working with the management to restructure all or a portion of the business, explore the possibility of a sale or merger of all or a portion of the assets, recapitalize or refinance the balance sheet, negotiate deferrals or other concessions from existing creditors and arrange new liquidity or new equity contributions. We believe that our Investment Adviser’s experience with restructurings and our access to our Investment Adviser’s deep knowledge, expertise and contacts in the distressed debt area will help us preserve the value of our investments.
Due Diligence Process
As part of the underwriting process, our Investment Adviser completes a rigorous due diligence process that focuses on four key areas:
Company Analysis. Our Investment Adviser actively engages and assesses company management teams. The focus of this analysis also includes identifying and understanding key business and demand drivers. Our Investment Adviser strives to evaluate core risks within businesses and industries and to complete the analysis by thinking like company ownership when evaluating cash flows.
Financial Analysis. Our Investment Adviser analyzes the consistency, stability and reliability of cash flows in addition to evaluating the quality of earnings and conversion of EBITDA to cash. Our Investment Adviser also reviews historical performance through economic cycles, analyzes the potential impact of a downturn in the prospective portfolio company’s end markets and compares the prospective portfolio company’s key metrics to those of its competitors.
Down-side Focus. Our Investment Adviser considers the impact on the prospective portfolio company’s business and cash flows under a number of downside case scenarios and develops an exit strategy in the event of the downside case. There is also a focus on potential risks to business models. Following this analysis, our Investment Adviser considers appropriate risk mitigants, including the structure of the investment and affirmative, negative and financial covenants.
Value. Our Investment Adviser analyzes the risk/reward potential of each new investment relative to other opportunities in the industry and market as well as overall industry valuation trends as compared to the industry risk profile. As part of this analysis, our Investment Adviser considers the cost of capital to competitors as well as alternative investment options. Our Investment Adviser also considers the value of liquidity to our business and operations as well as appropriate illiquidity premiums where we are unlikely to acquire liquid securities.
Investments
We seek to generate a stable source of current income while minimizing the risk of principal loss and, to a lesser extent, capital appreciation by providing middle-market companies primarily with first lien senior secured debt financings that pay us interest at a floating rate. We seek to structure our debt investments to provide downside protection through strong credit protections, including default penalties, information rights and affirmative, negative and financial covenants, such as limitations on debt incurrence, lien protection and prohibitions on dividends, although not all of our investments will meet each of these criteria. Our Investment Adviser has expertise in creative, efficient structuring and institutional knowledge of bankruptcy and restructurings enabling our Investment Adviser to focus on risk control. Going forward, we expect most of our debt investments to be collateralized by a first lien on the assets of the portfolio company. As of September 30, 2017, 89.5%2018, 89.1% of our portfolio at fair value consisted of debt investments that were secured by first or second priority liens on the assets of the portfolio company.
Debt Investments
We intend to tailor the terms of each investment by negotiating a structure that seeks to protect our rights and manage our risk while creating incentives for the portfolio company to achieve its business plan. A substantial source of return is monthly or quarterly cash interest that we collect on our debt investments. We expect that our Investment Adviser will focus on middle-market companies, which we define as companies with enterprise valuesOur debt investments may generally consist of between $100 and $750 million. Going forward, we expect our portfolio to include primarily first lien senior secured floating rate loans although we may also make other investments.the following:
First Lien Loans. Our first lien loans generally have terms of three to seven years, provide for a variable or fixed interest rate, contain prepayment penalties and are secured by a first priority security interest in all existing and future assets of the borrower. We target first lien loans where interest is paid on a floating rate basis, often with a floor, based on the LIBOR rate. Our first lien loans may take many forms, including revolving lines of credit, term loans and acquisition lines of credit.
Unitranche Loans. Our unitranche loans generally have terms of five to seven years and provide for a variable or fixed interest rate, contain prepayment penalties and are generally secured by a first priority security interest in all existing and future assets of the borrower. Our unitranche loans may take many forms, including revolving lines of credit, term loans and acquisition lines of credit.
Second Lien Loans. Our second lien loans generally have terms of five to eight years, provide for a variable or fixed interest rate, contain prepayment penalties and are secured by a second priority security interest in all existing and future assets of the borrower. Our second lien loans may include payment-in-kind, or PIK, interest, which represents contractual interest accrued and added to the principal that generally becomes due at maturity.
Unsecured Loans. Our unsecured investments generally have terms of five to ten years and provide for a fixed interest rate. We may make unsecured investments on a stand-alone basis, or in connection with a senior secured loan, a junior secured loan or a “one-stop” financing. Our unsecured investments may include PIK interest and an equity component, such as warrants to purchase common stock in the portfolio company.
Equity Investments
When we make a debt investment, we may be granted equity in the company in the same class of security as the sponsor receives upon funding. In addition, from time to time we may make non-control, equity co-investments in connection with private equity sponsors. We generally seek to structure our equity investments, such as direct equity co-investments, to provide us with minority rights provisions and event-driven put rights. We also seek to obtain limited registration rights in connection with these investments, which may include “piggyback” registration rights.
FSFROCSI Glick JV
We have invested in FSFRthe OCSI Glick JV, which as of September 30, 2017,2018, consisted of a portfolio of loans to 2331 different borrowers in industries similar to the companies in our portfolio. FSFRThe OCSI Glick JV invests in middle-market and other corporate debt securities, including traditional senior debt that are secured by some or all of the company’s assets.
Portfolio ManagementMonitoring and Sale of Investments
Active InvolvementAfter an investment is made, the Investment Professionals monitor industry and company fundamentals and the risk-reward profile of the securities and obligations we hold, including where such securities or obligations sit in a company’s capital structure and the risk of any impairment to our Portfolio Companiesholdings as a result of any refinancings or other restructurings or increased financial stress experienced by such company. Based on their monitoring, the Investment Professionals seek to determine the optimal time and strategy for exiting and maximizing the return on the investment, typically when prices or yields reach target valuations.
Valuation Procedures
As a business development company, we are obligated to offer to provide significant managerial assistance to our portfolio companies and to provide it if requested. We provide managerial assistance to most of our portfolio companies as a general practice and we seek investments where such assistance is appropriate. We monitor the financial trends of each portfolio company to assess the appropriate course of action for each company and to evaluate overall portfolio quality. We have several methods of evaluating and monitoring the performance of our investments, including the following:
Review of monthly and quarterly financial statements and financial projections for portfolio companies;
Periodic and regular contact with portfolio company management to discuss financial position requirements and accomplishments;
Attendance at board meetings;
Periodic formal update interviews with portfolio company management and, if appropriate, the private equity sponsor; and
Assessment of business development success, including product development, profitability and the portfolio company’s overall adherence to its business plan.
Valuation of Portfolio Investments
As a business development company,Business Development Company, we generally invest in illiquid senior loansdebt and equity securities issued by private middle-market companies. All of our Level 3 investments are recorded at fair value as determined in good faith by our Board of Directors.Directors, with the assistance of the Adviser. See “Management’s“– Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations -– Critical Accounting Policies-Policies – Investment Valuation” for a description of our investment valuation processes and procedures.
Competition
We compete for investments with other business development companies, public and private funds (including hedge funds, mezzanine funds and collateralized loan obligations) and private equity funds (to the extent they provide an alternative form of financing), as well as traditional financial services companies such as commercial and investment banks, commercial financing companies and other sources of financing. Many of these entities have greater financial and managerial resources than we do. We believe we are able to be competitive with these entities primarily on the basis of the experience and contacts of our management team, our responsive and efficient investment analysis and decision-making processes, the investment terms we offer, and our willingness to make smaller investments.
We believe that some of our competitors make loans with total rates of returns that are comparable to or lower than the returns that we target. Therefore, we do not seek to compete solely on the interest rates that we offer to potential portfolio companies. See “Risk Factors - Risks Relating to Our Business and Structure - We may face increasing competition for investment opportunities, which could reduce returns and result in losses.”
Employees
We do not have any employees. Our day-to-day investment operations are managed by Oaktree Capital Management, L.P. as our Investment Adviser. See “-New Investment Advisory Agreement.” Our Investment Adviser and its affiliates employ more than 250 investment professionals. In addition, we reimburse our administrator, Oaktree Administrator, for the allocable portion of overhead and other expenses incurred by it in performing its obligations under an administration agreement, or the New Administration Agreement, including our allocable portion of the costs of compensation of our Chief Financial Officer, Chief Compliance Officer, their staffs and other non-investment professionals at Oaktree that perform duties for us. See “- New Administrative Services Agreement.”
Properties
We do not own any real estate or other physical properties material to our operations. Our administrative and principal executive offices are located at 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.
New Investment Advisory Agreement
The following is a description of the New Investment Advisory Agreement, which has been in effect since October 17, 2017.
Management Services
Oaktree is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of our Board of Directors, since October 17, 2017, Oaktree has managedmanages our day-to-day operations and providedprovides us with investment advisory services. Under the New Investment Advisory Agreement, Oaktree:
determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes;
identifies, evaluates and negotiates the structure of the investments we make;
executes, closes, monitors and services the investments we make;
determines what securities and other assets we purchase, retain or sell; and
performs due diligence on prospective portfolio companies.
The New Investment Advisory Agreement provides that Oaktree’s services are not exclusive to us and Oaktree is generally free to furnish similar services to other entities so long as its services to us are not impaired.
Management Fee
Under the New Investment Advisory Agreement, we pay Oaktree a fee for its services under the investment advisory agreement consisting of two components: a base management fee and an incentive fee. The cost of both the base management fee payable to Oaktree and any incentive fees earned by Oaktree is ultimately borne by our common stockholders.
Base Management Fee
Under the New Investment Advisory Agreement, the base management fee onis calculated at an annual rate of 1.00% of total gross assets, including any investment made with borrowings, but excluding cash and cash equivalents, is 1.00%.equivalents.
Incentive Fee
The incentive fee consists of two parts. Under the New Investment Advisory Agreement, the first part of the incentive fee, which is referred to as the incentive fee on income or the Part I incentive fee, is calculated and payable quarterly in arrears based upon our “pre-incentive fee net investment income” for the immediately preceding quarter. The payment of the incentive fee on income is subject to payment of a preferred return to investors each quarter (i.e., a “hurdle rate”), expressed as a rate of return on the value of our net assets at the end of the most recently completed quarter, of 1.50%, subject to a “catch up” feature.
For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies, other than fees for providing managerial assistance) accrued during the fiscal quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the New Administration Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, or OID, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Under the New Investment Advisory Agreement, the calculation of the incentive fee on income for each quarter is as follows:
No incentive fee is payable to Oaktree in any quarter in which our pre-incentive fee net investment income does not exceed the preferred return rate of 1.50% (the “preferred return”) on net assets.
100% of our pre-incentive fee net investment income, if any, that exceeds the preferred return but is less than or equal to 1.8182% in any fiscal quarter is payable to Oaktree. We refer to this portion of the incentive fee on income as the “catch-up” provision, and it is intended to provide Oaktree with an incentive fee of 17.5% on all of our pre-incentive fee net investment income when our pre-incentive fee net investment income reaches 1.8182% on net assets in any fiscal quarter.
For any quarter in which our pre-incentive fee net investment income exceeds 1.8182% on net assets, the subordinated incentive fee on income is equal to 17.5% of the amount of our pre-incentive fee net investment income, as the preferred return and catch-up will have been achieved.
There is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle.
The following is a graphical representation of the calculation of the incentive fee on income under the New Investment Advisory Agreement:
Quarterly Incentive Fee on Income
Pre-incentive fee net investment income
(expressed as a percentage of net assets)
Percentage of pre-incentive fee net investment income
allocated to the incentive fee on income
Under the New Investment Advisory Agreement, the second part of the incentive fee will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the investment advisory agreement,Investment Advisory Agreement, as of the termination date) commencing with the fiscal year ending September 30, 2019 and will equal 17.5% of our realized capital gains, if any, on a cumulative basis from the beginning of the fiscal year ending September 30, 2019 through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees under the New Investment Advisory Agreement. Any realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to the Company’sour portfolio as of the end of the fiscal year ending September 30, 2018 will be excluded from the calculations of the second part of the incentive fee.
Examples of Quarterly Incentive Fee Calculation under the New Investment Advisory Agreement (A)
Example 1: Incentive Fee on Income for Each Quarter
Alternative 1
Assumptions
Investment income (including interest, dividends, fees, etc.) = 1.75%
Preferred return under the New Investment Advisory Agreement1 = 1.50%
Management fee under the New Investment Advisory Agreement2 = 0.25%
Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.20%
Pre-incentive fee net investment income
(investment income - (management fee + other expenses)) = 1.30%
Pre-incentive fee net investment income does not exceed the preferred return under the New Investment Advisory Agreement, therefore there is no incentive fee on income under the New Investment Advisory Agreement.
Alternative 2
Assumptions
Investment income (including interest, dividends, fees, etc.) = 2.25%
Preferred return under the New Investment Advisory Agreement1 = 1.50%
Management fee under the New Investment Advisory Agreement2 = 0.25%
Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.20%
Pre-incentive fee net investment income
(investment income - (management fee + other expenses)) = 1.80%
Incentive fee = 17.5% × pre-incentive fee net investment income, subject to “catch-up”3
= 100% × (1.80% - 1.50%)
= 0.30%
Alternative 3
Assumptions
Investment income (including interest, dividends, fees, etc.) = 3.5%
Preferred return under the New Investment Advisory Agreement1 = 1.50%
Management fee under the New Investment Advisory Agreement2 = 0.25%
Other expenses (legal, accounting, custodian, transfer agent, etc.) = 0.20%
Pre-incentive fee net investment income
(investment income - (management fee + other expenses)) = 3.05%
Incentive fee = 17.5% × pre-incentive fee net investment income, subject to “catch-up”3
Incentive fee = 100% × “catch-up” + (17.5% × (pre-incentive fee net investment income - 1.8182%))
Catch-up = 1.8182% - 1.50% = 0.3182%
Incentive fee = (100% × 0.3182%) + (17.5% × (3.05% - 1.8182%))
= 0.3182% + (17.5% × 1.2318%)
= 0.3182% + 0.2158%
= 0.534%
Example 2: Incentive Fee on Capital Gains under the New Investment Advisory Agreement
Assumptions
Year 1: $10 million investment made in Company A (“Investment A”), $10 million investment made in Company B (“Investment B”), $10 million investment made in Company C (“Investment C”), $10 million investment made in Company D (“Investment D”) and $10 million investment made in Company E (“Investment E”).
Year 2: Investment A sold for $20 million, fair market value (“FMV”) of Investment B determined to be $8 million, FMV of Investment C determined to be $12 million, and FMV of Investments D and E each determined to be $10 million.
Year 3: FMV of Investment B determined to be $8 million, FMV of Investment C determined to be $14 million, FMV of Investment D determined to be $14 million and FMV of Investment E determined to be $16 million.
Year 4: Investment D sold for $12 million, FMV of Investment B determined to be $10 million, FMV of Investment C determined to be $16 million and FMV of Investment E determined to be $14 million.
Year 5: Investment C sold for $20 million, FMV of Investment B determined to be $14 million and FMV of Investment E determined to be $10 million.
Year 6: Investment B sold for $16 million and FMV of Investment E determined to be $8 million.
Year 7: Investment E sold for $8 million and FMV.
These assumptions are summarized in the following chart:
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| | | | | | | | |
| | Investment A | Investment B | Investment C | Investment D | Investment E | Cumulative Unrealized Capital Depreciation | Cumulative Realized Capital Losses | Cumulative Realized Capital Gains |
| Year 1 | $10 million (cost basis) | $10 million (cost basis) | $10 million (cost basis) | $10 million (cost basis) | $10 million (cost basis) | -- | -- | -- |
| Year 2 | $20 million (sale price) | $8 million FMV | $12 million FMV | $10 million FMV | $10 million FMV | $2 million | -- | $10 million |
| Year 3 | -- | $8 million FMV | $14 million FMV | $14 million FMV | $16 million FMV | $2 million | -- | $10 million |
| Year 4 | -- | $10 million FMV | $16 million FMV | $12 million (sale price) | $14 million FMV | -- | -- | $12 million |
| Year 5 | -- | $14 million FMV | $20 million (sale price) | -- | $10 million FMV | -- | -- | $22 million |
| Year 6 | -- | $16 million (sale price) | -- | -- | $8 million FMV | $2 million | -- | $28 million |
| Year 7 | -- | -- | -- | -- | $8 million (sale price) | -- | $2 million | $28 million |
The Incentive Fee on Capital Gains under the New Investment Advisory Agreement would be:
Year 1: None
Year 2: Capital Gains Fee = 17.5% multiplied by ($10 million realized capital gains on sale of Investment A less $2 million cumulative capital depreciation) = $1.4 million
Year 3: Capital Gains Fee = (17.5% multiplied by ($10 million cumulative realized capital gains less $2 million cumulative capital depreciation)) less $1.4 million cumulative Capital Gains Fee previously paid = $1.4 million less $1.4 million = $0.00 million
Year 4: Capital Gains Fee = (17.5% multiplied by ($12 million cumulative realized capital gains)) less $1.4 million cumulative Capital Gains Fee previously paid = $2.1 million less $1.4 million = $0.7 million
Year 5: Capital Gains Fee = (17.5% multiplied by ($22 million cumulative realized capital gains)) less $2.1 million cumulative Capital Gains Fee previously paid = $3.85 million less $2.1 million = $1.75 million
Year 6: Capital Gains Fee = (17.5% multiplied by ($28 million cumulative realized capital gains less $2 million cumulative capital depreciation)) less $3.85 million cumulative Capital Gains Fee previously paid = $4.55 million less $3.85 million = $0.70 million
Year 7: Capital Gains Fee = (17.5% multiplied by ($28 million cumulative realized capital gains less $2 million cumulative realized capital losses)) less $4.55 million cumulative Capital Gains Fee previously paid = $4.55 million less $4.55 million = $0.00 million
__________
(A) Solely for purposes of these illustrative examples, we have assumed that the Company haswe have not incurred any leverage. However, we have in the past and expect to continue in the future to use leverage to partially finance our investments.
| |
| 1. | Represents 6.0% annualized preferred return. |
| |
| 2. | Represents 1.0% annualized management fee. |
| |
| 3. | The “catch-up” provision is intended to provide our Investment Adviser with an incentive fee of 17.5% on all of our pre-incentive fee net investment income as if a preferred return did not apply when our net investment income exceeds 1.50% in any calendar quarter and is not applied once our Investment Adviser has received 17.5% of investment income in a quarter. The “catch-up” portion of our pre-incentive fee net investment income is the portion that exceeds the 1.50% preferred return but is less than or equal to approximately 1.8182% (that is, 1.50% divided by (1 - 0.175)) in any fiscal quarter. |
Collection and Disbursement of Fees Owed to Our Former Adviser
Under the Former Investment Advisory Agreement described below, both the base management fee and incentive fee on income were calculated and paid to our Former Adviser at the end of each quarter. In order to ensure that our Former Adviser receives any compensation earned during the quarter endingended December 31, 2017, the initial payment of the base management fee and incentive fee on income under the New Investment Advisory Agreement will covercovered the entire quarter in which the New Investment Advisory Agreement became effective, and bewas calculated at a blended rate that will reflectreflected fee rates under the respective investment advisory agreements for the portion of the quarter in which our Former Adviser and Oaktree were serving as investment adviser. This structure will allowallowed Oaktree to pay our Former Adviser in early 2018, the pro rata portion of the fees that were earned by, but not paid to, our Former Adviser for services rendered to us prior to October 17, 2017.2017 of $0.3 million.
Duration and Termination
Unless earlier terminated as described below, the New Investment Advisory Agreement will remain in effect until October 17, 2019 and thereafter from year-to-year if approved annually by our Board or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The New Investment Advisory Agreement will automatically terminate in the event of its assignment. The New Investment Advisory Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other. The New Investment Advisory Agreement may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
Indemnification
The New Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oaktree and its officers, managers, partners, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Oaktree’s services under the New Investment Advisory Agreement or otherwise as our investment adviser.
Fee Waiver
For the two-year period commencing on October 17, 2017, Oaktree will waive, to the extent necessary, any management or incentive fees payable under the New Investment Advisory Agreement that exceed what would have been paid to the Former Adviser in the aggregate under the Former Investment Advisory Agreement.
Organization of our Investment Adviser
Our Investment Adviser is a Delaware limited partnership that is registered as an investment adviser under the Advisers Act. The principal address of our Investment Adviser is 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
Board Approval of the New Investment Advisory Agreement
The then-current members of our Board of Directors met in person with Oaktree to consider the New Investment Advisory Agreement on June 20, 2017 and July 13, 2017. At the in personin-person meeting held on July 13, 2017, such members of the Board of Directors, including all of the then-current independent directors, unanimously approved the New Investment Advisory Agreement. Such independent directors met separately with independent counsel on multiple occasions in connection with their review of the New Investment Advisory Agreement and the Transaction. In reaching its decision to approve the New Investment Advisory Agreement, our Board of Directors, including all of the then-current independent directors, reviewed a significant amount of information, which had been furnished by Oaktree at the request of independent counsel, on behalf of the independent directors. In reaching a decision to approve the New Investment Advisory Agreement, the then-current members of our Board of Directors considered, among other things:
the nature, extent and quality of services to be performed by Oaktree;
the investment performance of us and funds managed by Oaktree;
the expected costs of services to be provided and the anticipated profits to be realized by Oaktree and its affiliates from their relationship with us;
the possible economies of scale that would be realized due to our potential growth;
whether fee levels reflect such economies of scale for the benefit of investors; and
comparisons of services to be rendered to and fees to be paid by us with the services provided by and the fees paid to other investment advisers and the services provided to and the fees paid by other Oaktree clients.
The then-current members of our Board of Directors noted that the terms of the New Investment Advisory Agreement would in comparison to the Former Investment Advisory Agreement:
maintain the base management fee at 1.00% of gross assets;
decrease the rate of the income incentive fee from 20.0% to 17.5%;
decrease the rate of the capital gains incentive fee from 20.0% to 17.5%;
increase the catch-up rate from 50.0% to 100.0%, which may have the effect of increasing the income-based incentive fee payable to Oaktree; and
eliminate a capital gains incentive fee until the fiscal year ending September 30, 2019.
The Board of Directors also considered other investment management services to be provided to us, such as the provision of managerial assistance, monitoring adherence to our investment restrictions and monitoring compliance with various of our policies and procedures and with applicable securities laws and regulations. The then-current members of our Board of Directors discussed Oaktree’s cyber security programs and those of its service providers. Based on the factors above, as well as those discussed below, the then-current members of our Board of Directors concluded that they were satisfied with the nature, extent and quality of the services to be provided to us by Oaktree.
No single factor was determinative of the decision of the Board of Directors, including all of the then-current independent directors, to approve the New Investment Advisory Agreement and individual directors may have weighed certain factors differently. Throughout the process, the independent directors were advised by independent counsel. Following this process, the then-current members of the Board of Directors, including all of the then-current independent directors, unanimously voted to approve the New Investment Advisory Agreement subject to stockholder approval. Our stockholders approved the New Investment Advisory Agreement at the Special Meeting.
on September 7, 2017.
Payment of Our Expenses
Our primary operating expenses are the payment of (i) a base management fee and any incentive fees as described below in “-Former Investment Advisory Agreement” with respect to the period prior to October 17, 2017 and as described above in “-New Investment Advisory Agreement” with respect to the period subsequent to that date and (ii) the allocable portion of overhead and other expenses incurred by our Former Administrator or Oaktree Administrator as applicable, in performing its obligations under the Former Administration Agreement or New Administration Agreement, as applicable.Agreement. Our management fee compensates our investment adviserAdviser for its work in identifying, evaluating, negotiating, executing and servicing our investments. We generally bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:
expenses of offering our debt and equity securities;
the investigation and monitoring of our investments;
the cost of calculating our net asset value;
the cost of effecting sales and repurchases of shares of our common stock and other securities;
management and incentive fees payable pursuant to the investment advisory agreement;
fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms);
transfer agent, trustee and custodial fees;
interest payments and other costs related to our borrowings;
fees and expenses associated with marketing efforts (including attendance at investment conferences and similar events);
federal and state registration fees;
any exchange listing fees;
federal, state and local taxes;
independent directors’ fees and expenses;
brokerage commissions;
costs of mailing proxy statements, stockholders’ reports and notices;
costs of preparing government filings, including periodic and current reports with the SEC;
fidelity bond, liability insurance and other insurance premiums; and
printing, mailing, independent accountants and outside legal costs and all other direct expenses incurred by either our administrator or us in connection with administering our business, including payments under the administration agreement.
Former Investment Advisory Agreement
The following is a description of the Former Investment Advisory Agreement, which was terminated on October 17, 2017. The Former Investment Advisory Agreement, dated June 27, 2013, was most recently approved by our Board of Directors on August 7, 2017, and was effective June 27, 2013 through its termination on October 17, 2017.
Management Fee
Through October 17, 2017, we paid our Former Adviser a fee for its services under the Former Investment Advisory Agreement consisting of two components: a base management fee and an incentive fee. The cost of both the base management fee paid to our Former Adviser and any incentive fees earned by our Former Adviser were ultimately borne by our common stockholders.
Base Management Fee
The base management fee was calculated at an annual rate of 1.0% of our gross assets, including any borrowings for investment purposes but excluding cash and cash equivalents. The base management fee was payable quarterly in arrears and the fee for any partial month or quarter was appropriately prorated.
Incentive Fee
The incentive fee paid to our Former Adviser had two parts. The first part was calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding fiscal quarter. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding quarter, was compared to a “hurdle rate” of 1.5% per quarter, subject to a “catch-up” provision measured as of the end of each quarter. Our net investment income used to calculate this part of the incentive fee was also included in the amount of our gross assets used to calculate the 1.0% base management fee. The operation of the incentive fee with respect to our pre-incentive fee net investment income for each quarter was as follows:
No incentive fee was payable to the Former Adviser in any fiscal quarter in which our pre-incentive fee net investment income did not exceed the preferred return rate of 1.5% (the “preferred return”);
50% of our pre-incentive fee net investment income, if any, that exceeded the preferred return rate but was less than or equal to 2.5% in any fiscal quarter was payable to our Former Adviser. We refer to this portion of our pre-incentive fee net investment income (which exceeds the preferred return rate but is less than or equal to 2.5%) as the “catch-up.” The “catch-up” provision was intended to provide our Former Adviser with an incentive fee of 20% on all of our pre-incentive fee net investment income as if a preferred return rate did not apply when our pre-incentive fee net investment income exceeded 2.5% in any quarter;Adviser; and
20% of the amount of our pre-incentive fee net investment income, if any, that exceeds 2.5% in any quarter is payable to our Former Adviser once the preferred return is reached and the catch-up is achieved (20% of all pre-incentive fee net investment income thereafter is allocated to Fifth Street Management)our Former Adviser).
There was no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there was no clawback of amounts previously paid if subsequent quarters were below the quarterly hurdle and there was no delay of payment if prior quarters were below the quarterly hurdle.
The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly Incentive Fee on Income based on Pre-incentive fee net investment income
(expressed as a percentage of net assets)
Percentage of pre-incentive fee net investment income
allocated to income-related portion of incentive fee
The second part of the incentive fee was determined and payable in arrears as of the end of each fiscal year (or upon termination of the Former Investment Advisory Agreement, as of the termination date) commencing on September 30, 2013
and equaled 20% of our realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
Duration and Termination
The Former Investment Advisory Agreement terminated pursuant to its terms on October 17, 2017.
Indemnification
The Former Investment Advisory Agreement provided indemnification similar to that described above under “-New Investment Advisory Agreement-Indemnification.”
New Administrative ServicesAdministration Agreement
We entered into the New Administration Agreement with Oaktree Administrator on October 17, 2017. Pursuant to the New Administration Agreement, Oaktree Administrator provides administrative services to us necessary for our operations, which include providing office facilities, equipment, clerical, bookkeeping and record keeping services at such facilities and such other services as Oaktree Administrator, subject to review by our Board of Directors, shall from time to time deem to be necessary or useful to perform its obligations under the New Administration Agreement. Oaktree Administrator may, on behalf of us, conduct relations and negotiate agreements with custodians, trustees, depositories, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. Oaktree Administrator will make reports to our Board of Directors of its performance of obligations under the New Administration Agreement and furnish advice and recommendations with respect to such other aspects of our business and affairs, in each case, as it shall determine to be desirable or as reasonably required by our Board of Directors; provided that Oaktree Administrator shall not provide any investment advice or recommendation.
Oaktree Administrator will also provideprovides portfolio collection functions for interest income, fees and warrants and is responsible for the financial and other records that we are required to maintain, and prepares, prints and disseminates reports to our stockholders and all other materials filed with the SEC. In addition, Oaktree Administrator will assistassists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. Oaktree Administrator may also offer to provide, on our behalf, managerial assistance to our portfolio companies.
For providing these services, facilities and personnel, we will reimburse Oaktree Administrator the allocable portion of overhead and other expenses incurred by Oaktree Administrator in performing its obligations under the New Administration Agreement, including our allocable portion of the rent of the Company’sour principal executive offices at market rates and the Company’sour allocable portion of the costs of compensation and related expenses of our Chief Financial Officer, Chief Compliance Officer, their staffs and other non-investment professionals at Oaktree that perform duties for us. Such reimbursement is at cost, with no profit to, or markup by, Oaktree Administrator.
The New Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oaktree Administrator and its officers, managers, partners, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Oaktree Administrator’s services under the New Administration Agreement or otherwise as our administrator. Unless earlier terminated as described below, the New Administration Agreement will remain in effect until October 17, 2019 and thereafter from year-to-year if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The New Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other. The New Administration Agreement may also be terminated, without penalty, upon the vote of a majority of our outstanding voting securities.
Former Administration Agreement
The Former Administration Agreement was in effect throughout our 2017 fiscal year and terminated by its terms on October 17, 2017. Our Former Administrator was a wholly-owned subsidiary of Fifth Street Management. Pursuant to the Former Administration Agreement, our Former Administrator provided services substantially similar to those provided by Oaktree Administrator as described above under “-New Administrative Services“- Administration Agreement.” For providing these services, facilities and personnel, we reimbursed the Former Administrator the allocable portion of overhead and other expenses incurred by it in performing its obligations under the Former Administration Agreement, including rent and our allocable portion of the costs of compensation and related expenses of our Chief Financial Officer and Chief Compliance Officer and their staffs. Such reimbursement was at cost, with no profit to, or markup by, our Former Administrator. Our allocable portion of our Former Administrator’s costs was determined based upon costs attributable to our operations versus costs attributable to the operations of other entities for which our Former Administrator provided administrative services.
Competition
We operate in a highly competitive market for investment opportunities. We compete for investments with various other investors, such as other public and private funds, other Business Development Companies, commercial and investment banks, commercial finance companies and to the extent they provide an alternative form of financing, private equity funds, some of
which may be our affiliates. Other Oaktree funds may have investment objectives that overlap with ours, which may create competition for investment opportunities. Many competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of funds and access to funding sources that will not be available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we do, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the Investment Company Act and the Code impose on us. The Formercompetitive pressures could impair our business, financial condition and results of operations. As a result of this competition, we may not be able to take advantage of attractive investment opportunities. See “Item 1A. Risk Factors – Risks Relating to Our Business and Structure – We may face increasing competition for investment opportunities, which could reduce returns and result in losses."
Staffing
We do not currently have any employees and do not expect to have any employees. Services necessary for our business are provided through the Administration Agreement provided indemnification similar to that described under "- New Administrative Servicesand the Investment Advisory Agreement."
License Agreement
We were party to a license agreement with an affiliateAllocation of our Former Adviser pursuant to which such affiliate granted us a non-exclusive, royalty-free license to use the name “Fifth Street” for so long as our Former Adviser or one of its affiliates remained our investment adviser. That license agreement terminated on October 17, 2017.
MaterialInvestment Opportunities and Potential Conflicts of Interest
Our executive officers and directors, and certain members of our Investment Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. For example, Oaktree presently serves as the investment adviser to OCSL, a publicly-traded business development company withBusiness Development Company, and Oaktree Strategic Income II, Inc., or OSI II, a portfolio of approximately $1.5 billion at fair value as of September 30, 2017.privately offered Business Development Company. OCSL has historically invested in senior secured loans, including first lien, unitranche and second lien debt and equityinstruments that pay interest at rates which are determined periodically on the basis of small and mid-sizeda floating base lending rate, made to private middle-market companies primarily in connection with investments by private equity sponsors, including in middle-market leveraged companieswhose debt is rated below investment grade, similar to those we target for investment. In addition, though not the primary focus of its investment portfolio, OCSL’s investmentsOSI II may also include floating rate senior loans.make similar investments. Therefore, there may be certain investment opportunities that satisfy the investment criteria for both OCSL, OSI II and us. OCSL operatesand OSI II operate as a distinct and separate public companycompanies and any investment in our common stock will not be an investment in OCSL.either OCSL or OSI II. In addition, all of
our executive officers serve in substantially similar capacities for OCSL and fourOSI II and three of our independent directors serve in substantially similar capacities foras independent directors of OCSL. Oaktree and its affiliates also manage and sub-advise private investment funds and accounts, and may manage other such funds and accounts in the future, which have investment mandates that are similar, in whole and in part, with ours. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, the personnel of our Investment Adviser may face conflicts of interest in the allocation of investment opportunities to us and such other funds and accounts.
Oaktree has investment allocation guidelines that govern the allocation of investment opportunities among the investment funds and accounts managed or sub-advised by Oaktree and its affiliates. To the extent an investment opportunity is appropriate for us or OCSL, OSI II or any other investment fund or account managed or sub-advised by Oaktree or its affiliates, Oaktree will adhere to its investment allocation guidelines in order to determine a fair and equitable allocation.
We may invest alongside funds and accounts managed or sub-advised by our Investment Adviser and its affiliates in certain circumstances where doing so is consistent with applicable law and SEC staff interpretations. For example, we may invest alongside such accounts consistent with guidance promulgated by the staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that our Investment Adviser, acting on our behalf and on behalf of other clients, negotiates no term other than price or terms related to price.
In addition, on October 18, 2017, our Investment Adviser received exemptive relief from the SEC to allow certain managed funds and accounts, each of whose investment adviser is Oaktree or an investment adviser controlling, controlled by or under common control with Oaktree, to participate in negotiated co-investment transactions where doing so is consistent with the applicable registered fund’s or business development company’sBusiness Development Company’s investment objective and strategies as well as regulatory requirements and other pertinent factors, and pursuant to the conditions of the exemptive relief. Each potential co-investment opportunity that falls under the terms of the exemptive relief and is appropriate for us and any affiliated fund or account, and satisfies the then-current board-established criteria, will be offered to us and such other eligible funds and accounts. If there is a sufficient amount of securities to satisfy all participants, the securities will be allocated among the participants in accordance with their proposed order size and if there is an insufficient amount of securities to satisfy all participants, the securities will be allocated pro rata based on the investment proposed by the applicable investment adviser to such participant, up to the amount proposed to be invested by each, which is reviewed and approved by an independent committee of legal, compliance and accounting professionals at our Investment Adviser.
Although Oaktree will endeavor to allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of our Investment Adviser. We might not participate in each individual opportunity, but will, on an overall basis, be entitled to participate equitably with other entities managed by Oaktree and its affiliates. Oaktree seeksis committed to treattreating all clients fairly and equitably such that none receive preferential treatment vis-à-vis the others over time, in a manner consistent with its fiduciary duty to each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in pro rata allocations or may result in situations where certain funds or accounts receive allocations where others do not.
Pursuant to the New Investment Advisory Agreement, our Investment Adviser’s liability is limited and we are required to indemnify our Investment Adviser against certain liabilities. This may lead our Investment Adviser to act in a riskier manner in performing its duties and obligations under the New Investment Advisory Agreement than it would if it were acting for its own account, and creates a potential conflict of interest.
Pursuant to the New Administration Agreement, the Oaktree Administrator furnishes us with the facilities, including our principal executive office, and administrative services necessary to conduct our day-to-day operations. We pay the Oaktree Administrator its allocable portion of overhead and other expenses incurred by the Oaktree Administrator in performing its obligations under the New Administration Agreement, including, without limitation, a portion of the rent at market rates and compensation of our Chief Financial Officer, Chief Compliance Officer, their respective staffs and other non-investment professionals at Oaktree that perform duties for us.
Available InformationElection to be Taxed as a Regulated Investment Company
We maintainhave elected to be treated, and intend to qualify annually, as a website at www.oaktreestrategicincome.com. The informationRIC for U.S. federal income tax purposes under Subchapter M of the Code. As a RIC, we generally will not be required to pay corporate-level federal income taxes on our website is not incorporated by reference in this annual report on Form 10-K. We make available onany ordinary income or through our website certain reports and amendments to those reportscapital gains that we file withdistribute to our stockholders as dividends. To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of the Company’s “investment company taxable income” for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses, or furnishthe Annual Distribution Requirement.
If we:
qualify as a RIC; and
satisfy the Annual Distribution Requirement;
then we will not be subject to federal income tax on the portion of our investment company taxable income and net capital gain (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) we distribute to stockholders. We are subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the SECsum of (1) 98% of our ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in accordancethat calendar year and (3) any income realized, but not distributed, and on which we paid no federal income tax, in preceding years.
In order to maintain our qualification as a RIC for federal income tax purposes, we must, among other things:
at all times during each taxable year, have in effect an election to be treated as a Business Development Company under the Investment Company Act;
derive in each taxable year at least 90% of our gross income from (a) dividends, interest, payments with respect to certain securities (including loans), gains from the Securities Exchangesale of stock or other securities or currencies, or other income derived with respect to our business of investing in such stock, securities or currencies and (b) net income derived from an interest in a “qualified publicly traded partnership;” (the “90% Gross Income Test”) and
diversify our holdings so that at the end of each quarter of the taxable year:
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| ◦ | (i) at least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of |
the value of its assets or more than 10% of the outstanding voting securities of the issuer; and
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| ◦ | (ii) no more than 25% of the value of our assets is invested in (a) the securities, other than U.S. government securities or securities of other RICs, of one issuer, (b) the securities of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (c) the securities of one or more “qualified publicly traded partnerships” ((i) and (ii) collectively, the “Diversification Tests”). |
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with increasing interest rates or debt instruments issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.
Because we use debt financing, we are subject to certain asset coverage ratio requirements under the Investment Company Act described above and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources or are otherwise limited in our ability to make distributions, we could fail to qualify for RIC tax treatment and thus become subject to corporate-level income tax.
Certain of 1934,our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things: (a) disallow, suspend or otherwise limit the allowance of certain losses or deductions; (b) convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income; (c) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited); (d) cause us to recognize income or gain without a corresponding receipt of cash; (e) adversely affect the time as amended,to when a purchase or sale of securities is deemed to occur; (f) adversely alter the Exchange Act. These includecharacterization of certain complex financial transactions; or (g) produce income that will not be qualifying income for purposes of the 90% gross income test described above. We will monitor our annual reports on Form 10-K,transactions and may make certain tax elections in order to mitigate the potential adverse effect of these provisions.
If, in any particular taxable year, we do not qualify as a RIC, all of our quarterly reports on Form 10-Qtaxable income (including our net capital gains) will be subject to tax at regular corporate rates without any deduction for distributions to stockholders, and distributions will be taxable to the stockholders as ordinary dividends to the extent of our current reports
on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.and accumulated earnings and profits.
Business Development Company Regulations
We have elected to be regulated as a business development companyBusiness Development Company under the 1940Investment Company Act. As with other companies regulated by the Investment Company Act, a Business Development Company must adhere to certain substantive regulatory requirements. The 1940Investment Company Act contains prohibitions and restrictions relating to transactions between business development companiesBusiness Development Companies and their affiliates (including any investment advisers), principal underwriters and affiliates of those affiliates or underwriters.
The 1940Investment Company Act further requires that a majority of our directors be persons other than “interested persons,” as that term is defined in the 1940Investment Company Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development companyBusiness Development Company unless approvedauthorized by a majorityvote of our outstanding voting securities.
The 1940 Act defines “aa majority of the outstanding voting securities”securities, as required by the Investment Company Act. A majority of the outstanding voting securities of a company is defined under the Investment Company Act as the lesser of (i)of: (a) 67% or more of thesuch company’s voting securities present at a meeting if the holders of more than 50% of ourthe outstanding voting securities of such company are present or represented by proxy, or (ii)(b) more than 50% of ourthe outstanding voting securities.
On October 18, 2017,securities of such company. We do not anticipate any substantial change in the nature of our Investment Adviser received exemptive relief from the SEC to allow certain managed funds and accounts, each of whose investment adviser is Oaktree or an investment adviser controlling, controlled by or under common control with Oaktree, to participate in negotiated co-investment transactions where doing so is consistent with the applicable registered fund’s or business development company’s investment objective and strategies, as well as regulatory requirements and other pertinent factors, and pursuant to the conditions of the exemptive relief.business.
We are not generally able to issue and sell our common stock at a price below net asset value per share. We may, invest uphowever, sell our common stock, warrants, options or rights to 100%acquire our common stock, at a price below the current net asset value of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933, as amended, or the Securities Act. Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate and foreign exchange fluctuations. However, we may purchase or otherwise receive warrants to purchase the common stock if our Board of Directors determines that such sale is in our best interests and that of our portfolio companiesstockholders, and our stockholders approve such sale. In any such case, the price at which our securities are to be issued and sold may not be less than a price which, in connection with acquisition financing or other investments. Similarly, in connection with an acquisition, we may acquire rights to require the issuersdetermination of acquired securities or their affiliates to repurchaseour Board of Directors, closely approximates the market value of such securities under certain circumstances.(less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the Investment Company Act.
Investment Restrictions
We do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940Investment Company Act. Under thesesuch limits, except for registered money market funds, we generally cannot acquire more than three percent3% of the voting stock of any registered investment company, invest more than five percent5% of the value of our total assets in the securities of one registered investment company or invest more than 10% of the value of our total assets in the securities of registered investment companies. With regard to thatcompanies in the aggregate. The portion of our portfolio invested in securities issued by investment companies it should be noted that such investments mightordinarily will subject our stockholders to additional indirect expenses. None of thesethe policies isdescribed above are fundamental and alleach such policy may be changed without stockholder approval.approval, subject to any limitations imposed by the Investment Company Act. Our investment portfolio is also subject to certain source-of-income and asset diversification requirements by virtue of its intended status to be a RIC for U.S. tax purposes. See “– Election to be Taxed as a Regulated Investment Company” above for more information.
Qualifying Assets
Under the 1940Investment Company Act, a business development companyBusiness Development Company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940Investment Company Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are any of the following:
(1) Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940Investment Company Act as any issuer which:
(a) is organized under the laws of, and has its principal place of business in, the United States;
(b) is not an investment company (other than a small business investment company wholly owned by the business development company)Business Development Company) or a company that would be an investment company but for certain exclusions under the 1940Investment Company Act; and
(c) satisfies any of the following:
(i) does not have any class of securities that is traded on a national securities exchange;
(ii) has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million;
(iii) is controlled by a business development companyBusiness Development Company or a group of companies including a business development companyBusiness Development Company and the business development companyBusiness Development Company has an affiliated person who is a director of the eligible portfolio company; or
(iv) is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million;
(2) Securities of any eligible portfolio company that we control;
(3) Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements;
(4) Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company;
(5) Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities; or
(6) Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
In addition, a business development companyBusiness Development Company must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above.
Managerial Assistance to Portfolio Companies
A Business Development Company must have been organized under the laws of, and have its principal place of business in, any state or states within the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2) or (3) above. However, in order to count portfolio securities as qualifying assets for the purpose of the 70% test, a Business Development Company must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance. However, when a Business Development Company purchases securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial assistance includes any arrangement whereby a Business Development Company, through its directors, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.
Temporary Investments
Pending investment in other types of “qualifying"qualifying assets,”" as described above, our investments may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment which we refer to, collectively, as temporary investments,(collectively, “temporary investments”) so that 70% of our assets are qualifying assets. We may also invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement (which is substantially similar to a secured loan) involves the purchase by an investor, such as us,the Company, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price thatwhich is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our totalgross assets constitute repurchase agreements from a single counterparty, we would generally not meet the diversification tests in order to qualify as a RIC for U.S. federal income tax purposes.RIC. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Managerial Assistance to Portfolio Companies
Business development companies generally must offer to make available to the issuer of the securities significant managerial assistance, except in circumstances where either (i) the business development company controls such issuer of securities or (ii) the business development company purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available significant managerial assistance means, among other things, any arrangement whereby the business development company, through its directors, officers or employees (if any), offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company.
Senior Securities
WeConsistent with applicable legal and regulatory requirements, we are permitted, under specified conditions, to issue multiple classes of debtindebtedness and one class of stock senior to our common stock if ourwe meet the asset coverage as definedrequirements in the 1940Investment Company Act. On March 23, 2018, the SBCAA was enacted into law. The SBCAA, among other things, amended Section 61(a) of the Investment Company Act isto add a new Section 61(a)(2) that reduces the asset coverage requirements applicable to Business Development Companies from 200% to 150% so long as the Business Development Company meets certain disclosure requirements and obtains certain approvals. On July 10, 2018, we held a special meeting of stockholders at least equalwhich our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to us effective as of July 11, 2018. The reduced asset coverage requirements permit us to double the maximum amount of leverage that we are permitted to incur by reducing the asset coverage requirements applicable to us from 200% immediately after each such issuance. to 150%.
In addition, while any senior securities remain outstanding, we may be prohibited from making distributions to our stockholders or the repurchasing such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We maywould also be permitted to borrow amounts up to 5% of the value of our total assets for generally up to 60 days for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors — Risks Relating to Our Business and Structure — Regulations governing our operation as a business development company and RIC affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have
a negative effect on our growth” and “— Because we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing in us.”
Common StockOther
We are not generally ablesubject to issueperiodic examination by the SEC for compliance with the Investment Company Act.
We are required to provide and sellmaintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a Business Development Company, we are prohibited from protecting any director or officer against any liability to us or our common stock at a price below net asset value per share. We may, however, sell our common stock, warrants, optionsstockholders arising from willful misfeasance, bad faith, gross negligence or rights to acquire our common stock, at a price below the current net asset valuereckless disregard of the common stock if our Boardduties involved in the conduct of Directors determines that such sale is in our best interests and that of our stockholders,person’s office.
We and our stockholders approve such sale. In any such case,Adviser will each be required to adopt and implement written policies and procedures reasonably designed to prevent violation of the price at which ourU.S. federal securities arelaws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a Chief Compliance Officer to be issuedresponsible for administering the policies and sold may not be less than a price which, in the determination of our Board of Directors, closely approximates the market value of such securities (less any distributing commission or discount). We may also make rights offerings to our stockholders at prices per share less than the net asset value per share, subject to applicable requirements of the 1940 Act. See “Risk Factors — Risks Relating to Our Business and Structure — Regulations governing our operation as a business development company and RIC affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.”procedures.
Code of Ethics
We have adopted a joint code of ethics with OCSL pursuant to Rule 17j-1 under the 1940Investment Company Act and we have also approved the investment adviser’s code of ethics that was adopted by it under Rule 17j-1 under the 1940Investment Company Act and Rule 204A-1 under the Advisers Act. These codes establish procedures for personal investments and restrict certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. You may read and copy the codes of ethics at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the codes of ethics are available on the EDGAR Database on the SEC’s website at http://www.sec.gov and are available at the Investors: Corporate Governance portion of our website at www.oaktreestrategicincome.com.
Compliance Policies and Procedures
We and our Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our Chief Compliance Officer is responsible for administering these policies and procedures.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to our Investment Adviser. The proxy voting policies and procedures of our investment adviserAdviser are set forth below. TheThese guidelines are reviewed periodically by our Investment Adviser and our non-interestedindependent directors, and, accordingly, are subject to change.
Introduction
As anAn investment adviser registered under the Advisers Act our Investment Adviser has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, itour Adviser recognizes that it must vote clientportfolio securities in a timely manner free of conflicts of interest and in the best interests of its clients.
These policies and procedures for voting proxies for the investment advisory clients of our Investment Adviser are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy Voting Policies
Our Investment Adviser will vote proxies relating to our portfolio securities, if any, in what it perceives to be the best interest of our stockholders. ItOur Adviser will review on a case-by-case basis each proposal submitted forto a stockholdershareholder vote to determine its impact on the portfolio securities held by us. TheAlthough our Adviser will generally vote against proposals that may have a negative impact on our portfolio securities, it may vote for such a proposal if there are compelling long-term reasons to do so.
Our Adviser’s proxy voting decisions of our Investment Adviser with respect to any of our investments arewill be made by the investment professionalsofficers who are responsible for monitoring such investment.each of our investments. To ensure that itsthe vote is not the product of a conflict of interest, our Investment Adviser requireswill require that: (a)(1) anyone involved in the decision-making process disclose to its legal and compliance personnelthe Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (b)(2) employees involved in the decision makingdecision-making process or vote administration are prohibited from revealing how our Investment Adviser intends to vote on a proposal, in order to reduce any attempted influence from interested parties.
Proxy Voting Records
YouStockholders may obtain information without charge, regarding how our Investment Adviser and Former Adviserwe voted proxies for us for the most recent 12-month period ended June 30, 2017 with respect to our portfolio securities by making a written request for proxy voting information to: Oaktree Specialty LendingStrategic Income Corporation, Chief Compliance Officer, 333 South Grand Avenue 28th Floor, Los Angeles, CA 90071.
OtherReporting Obligations
We are subjectfurnish our stockholders with annual reports containing audited financial statements, quarterly reports, and such other periodic reports as we determine to periodic examinationbe appropriate or as may be required by the SEC for compliance with the 1940 Act.
law. We are required to providecomply with all periodic reporting, proxy solicitation and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a business development company, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard ofother applicable requirements under the duties involved in the conduct of such person’s office.
Securities Exchange Act of 1934, as amended, the Exchange Act.
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC. The SEC also maintains a website that contains reports, proxy and information statements and other information we file with the SEC at www.sec.gov.
We maintain a website at www.oaktreestrategicincome.com. The information on our website is not incorporated by reference in this annual report on Form 10-K.
Sarbanes-Oxley Act Compliance
We are subject to the reporting and disclosure requirements of the Exchange Act, including the filing of quarterly, annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, which imposes a wide variety of regulatory requirements on publicly-held companies and their insiders. For example:
pursuant to Rule 13a-14 under the Exchange Act, our chief executive officer and chief financial officer are required to certify the accuracy of the financial statements contained in our periodic reports;
pursuant to Item 307 of Regulation S-K, our periodic reports are required to disclose our conclusions about the effectiveness of our disclosure controls and procedures; and
pursuant to Rule 13a-15 under the Exchange Act, our management is required to prepare a report regarding its assessment of our internal control over financial reporting. Our independent registered public accounting firm is required to audit our internal control over financial reporting. When
The Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We will continue to monitor compliance with all regulations that are adopted under the Sarbanes-Oxley Act and will take actions necessary to ensure that we are no longer an emerging growth company under the JOBS Act, our independent registered public accounting firm will be required to audit our internal control over financial reporting.in compliance therewith.
We will remain an “emerging growth company,” as defined in the JOBS Act until the earliest of:
September 30, 2018; or
the date on which we have, during the prior three-year period, issued more than $1.0 billion in non-convertible debt.
Stock Exchange Corporate Governance Regulations
The NASDAQNasdaq Global Select Market has adopted corporate governance regulations that listed companies must comply with. We are in compliance with such corporate governance regulations applicable to business development companies.
Taxation as a Regulated Investment Company
As a business development company, we have elected to be treated, and intend to continue to qualify annually, as a RIC under Subchapter M of the Code. As a RIC, we generally will not be subject to corporate-level U.S. federal income taxes on any income that we distribute (or are deemed to have distributed) to our stockholders as dividends for U.S. federal income tax purposes. To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, dividends of an amount generally equal to at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses, determined without regard to any deduction for dividends paid, or the Annual Distribution Requirement.
If we qualify as a RIC and satisfy the Annual Distribution Requirement, then we generally will not be subject to U.S. federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we timely distribute dividends in respect of each calendar year of an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for each calendar year, (2) 98.2% of our capital gain net income (adjusted for certain ordinary losses) for the one-year period ending October 31 in that calendar year and (3) any net ordinary
income or capital gain net income recognized, but not distributed, in preceding years and on which we paid no U.S. federal corporate income tax, or the Excise Tax Avoidance Requirement. We generally will endeavor in each taxable year to make sufficient distributions to our stockholders to avoid any U.S. federal excise tax on our earnings.
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
continue to maintain our election to be treated as a business development company under the 1940 Act at all times during each taxable year;
derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock or securities, or the 90% Income Test; and
diversify our holdings so that at the end of each quarter of the taxable year:
at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and
no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships,” or the Diversification Tests.
Earnings considered qualifying income in determining our satisfaction of the 90% Income Test may exclude such income as management fees received in connection with potential outside managed funds and certain other fees.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt instruments that are treated under applicable tax rules as having OID (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or debt issued with warrants), we generally would be required to include in income each taxable year a portion of the OID that accrues over the life of the debt instrument, regardless of whether cash representing such income is received by us in the same taxable year. We also may be required to include in income other amounts that we have not yet received in cash, such as PIK interest and deferred loan origination fees that are paid after origination of a loan or are paid in non-cash compensation such as warrants or stock. Because any OID or other amounts accrued will be included in our investment company taxable income for the taxable year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, even though we will not have received any corresponding cash amount.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy the Annual Distribution Requirement or the Excise Tax Avoidance Requirement. However, under the 1940 Act, we are not permitted in certain circumstances to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. Moreover, our ability to dispose of assets to meet Annual Distribution Requirement or the Excise Tax Avoidance Requirement may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to maintaining our status as a RIC. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.Business Development Companies.
RISK FACTORS
Item 1A. Risk Factors
Investing in our securities involves a number of significant risks. In addition to the other information contained in this annual report on Form 10-K, you should consider carefully the following information before making an investment in our securities. The risks set out below are not the only risks we or other business development companies face. Additional risks and uncertainties not presently known to us or not presently deemed material by us might also impair our operations and performance. If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, our net asset value and the trading price of our securities could decline, and you may lose part or all of your investment. This section also describes the special risks of investing in business development companies, including the risks associated with investing in a portfolio of small and developing or financially troubled businesses.
Risks Relating to Economic Conditions
Economic recessions or downturns may have a material adverse effect on our business, financial condition and results of operations, and could impair the ability of our portfolio companies to repay debt or pay interest.
Economic recessions or downturns may result in a prolonged period of market illiquidity which could have a material adverse effect on our business, financial condition and results of operations. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could limit our investment originations, limit our ability to grow and negatively impact our operating results. In addition, uncertainty with regard to economic recovery from recessions or downturns could also have a negative impact on our business, financial condition and results of operations.
When recessionary conditions exist, the financial results of small and mid-sized companies, like those in which we invest, typically experience deterioration, which could ultimately lead to difficulty in meeting debt service requirements and an increase in defaults. Additionally, the end markets for certain of our portfolio companies’ products and services would likely experience negative economic trends. Further, adverse economic conditions may decrease the value of collateral securing some of our loans and the value of our equity investments. As a result, we may need to modify the payment terms of our investments, including changes in PIK interest provisions and/or cash interest rates. The performancesperformance of certain of our portfolio companies have been, and may continue to be, negatively impacted by these economic or other conditions, which may result in our receipt of a reduced level of interest income from our portfolio companies and/or losses or charge offs related to our investments, and, in turn, may adversely affect distributable income and have a material adverse effect on our results of operations.
Global economic, political and market conditions, including downgrades of the U.S. credit rating, may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability.
The current worldwide financial market situation, as well as various social and political tensions in the United States and around the world, may contribute to increased market volatility, may have long-term effects on the United States and worldwide financial markets and may cause economic uncertainties or deterioration in the U.S. and worldwide. The impact of downgrades by rating agencies to the U.S. government’s sovereign credit rating or its perceived creditworthiness as well as potential government shutdowns could adversely affect the U.S. and global financial markets and economic conditions. Since 2010, several European Union, or EU, countries have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the Euro and the accompanying coordination of fiscal and wage policy among European Economic and Monetary Union member countries. In addition, the fiscal policy of foreign nations, such as Russia and China, may have a severe impact on the worldwide and U.S. financial markets. The decision made in the United Kingdom referendum to leave the EU (the so-called "Brexit") has led to volatility in global financial markets and may lead to weakening in consumer, corporate and financial confidence in the United Kingdom and Europe. The extent and process by whichWhile the United Kingdom will exitis currently expected to leave the EU remain unclear at this timeon March 29, 2019, uncertainty remains as to the exact timing and couldprocess, which may lead to political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets.continued volatility. Additionally, volatility in the Chinese stock markets and global markets for commodities may affect other financial markets worldwide. We cannot predict the effects of these or similar events in the future on the U.S. and global economies and securities markets or on our investments. We monitor developments in economic, political and market conditions and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
Risks Relating to Our Business and Structure
Our Investment Adviser has limited experience operating under the constraints imposed on us as a business development company,Business Development Company, which may hinder the achievement of our investment objectives.
The 1940Investment Company Act imposes numerous constraints on the operations of business development companiesBusiness Development Companies that do not apply to other investment vehicles managed by Oaktree and its affiliates. Business development companiesDevelopment Companies are required, for example, to invest at least 70% of their total assets primarily in securities of U.S. private or thinly-traded public companies, cash, cash equivalents, U.S. government securities and other high-quality debt instruments that mature in one year or less from the date of investment. Our Investment Adviser does not have anysignificant experience operating under these constraints, which may hinder our ability to take advantage of attractive investment opportunities and to achieve our investment objective. Our Investment Adviser's track record and achievements are not necessarily indicative of the future results it will achieve. Accordingly, we can offer no assurance that we will replicate the historical performance of other investment companies with which our investment professionals have been affiliated, and we caution that our investment returns could be substantially lower than the returns achieved by such other companies.
Changes in interest rates, changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our cost of capital and net investment income.
General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital, our net investment income, our net asset value and the market price of our common stock. The majority of our debt investments have, and are expected to have, variable interest rates that reset periodically based on benchmarks such as the London Interbank Offered Rate, or LIBOR, or the federal funds rate or prime rate, so anrate. An increase in interest rates may make it more difficult for our portfolio companies to service their obligations under the debt investments that we will hold and increase defaults even where our investment income increases. In addition, any increase inRising interest rates would make it more expensivecould also cause borrowers to use debtshift cash from other productive uses to finance our investments.the payment of interest, which may have a material adverse effect on their business and operations and could, over time, lead to increased defaults. Additionally, as interest rates increase and the corresponding risk of a default by borrowers increases, the liquidity of higher interest rate loans may decrease as fewer investors may be willing to purchase such loans in the secondary market in light of the increased risk of a default by the borrower and the heightened risk of a loss of an investment in such loans. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities.
Conversely, if interest rates decline, borrowers may refinance their loans at lower interest rates, which could shorten the average life of the loans and reduce the associated returns on the investment, as well as require our Adviser and the Investment Professionals to incur management time and expense to re-deploy such proceeds, including on terms that may not be as favorable as our existing loans.
In addition, because we borrow to fund our investments, a portion of our net investment income is dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. Portions of our investment portfolio and our borrowings have floating rate components. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against interest rate fluctuations by using standard hedging instruments such as interest rate swap agreements, futures, options and forward contracts, subject to applicable legal requirements, including all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association, or BBA, member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR. Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio of LIBOR-indexed, floating-rate debt securities and our borrowings. In addition, changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities and our borrowings.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S.-dollar LIBOR with the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities. Although there have been a few issuances utilizing SOFR or the Sterling Over Night Index Average, an alternative reference rate that is based on transactions, it is unknown whether these alternative reference rates will attain market acceptance as replacements for LIBOR.
If LIBOR ceases to exist, we may need to renegotiate any credit agreements extending beyond 2021 with our prospective portfolio companies that utilize LIBOR as a factor in determining the interest rate. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our cost of capital and net investment income cannot yet be determined.
A general increase in interest rates will likely have the effect of increasing our net investment income, which would make it easier for our Investment Adviser to receive incentive fees.
Any general increase in interest rates would likely have the effect of increasing the interest rate that we receive on many of our debt investments. Accordingly, a general increase in interest rates may make it easier for our Investment Adviser to meet the quarterly hurdle rate for payment of income incentive fees under the New Investment Advisory Agreement and may result in a substantial increase in the amount of incentive fee on income payable to our New Investment Adviser.
A significant portion of our investment portfolio is and will continue to be recorded at fair value as determined in good faith by our Board of Directors and, as a result, there is and will continue to be uncertainty as to the value of our portfolio investments.
Under the 1940Investment Company Act, we are required to carry our portfolio investments at market value or, if there is no readily available market value, at fair value as determined in good faith by our Board of Directors. Typically, there is not a public market for the securities of the privately held companies in which we have invested and will generally continue to invest. As a result, we value these securities quarterly at fair value as determined in good faith by our Board of Directors. The fair value of such securities may change, potentially materially, between the date of the fair value determination by our Board of Directors and the release of the financial results for the corresponding period or the next date at which fair value is determined.
Certain factors that may be considered in determining the fair value of our investments include the nature and realizable value of any collateral, the portfolio company’s earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business, comparison to comparable publicly-traded companies, discounted cash flow and
other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these securities existed. In addition, any investments that include OID or PIK interest may have unreliable valuations because their continuing accruals require ongoing judgments about the collectability of their deferred payments and the value of their underlying collateral. Due to these uncertainties, our fair value determinations may cause our net asset value on a given date to materially understate or overstate
the value that we may ultimately realize upon the sale of one or more of our investments. As a result, investors purchasing our common stock based on an overstated net asset value would pay a higher price than the realizable value of our investments might warrant.
In addition, the participation of the Investment Professionals in the valuation process, and the indirect pecuniary interest of John B. Frank, an interested member of our Board of Directors, could result in a conflict of interest as the management fee payable to our Adviser is based on our gross assets and the incentive fees earned by the Adviser will be based, in part, on unrealized gains and losses.
Our ability to achieve our investment objective depends on our Investment Adviser’s ability to support our investment process; if our Investment Adviser were to lose any of its key personnel or they were to resign, our ability to achieve our investment objective could be significantly harmed.
We depend on the investment expertise, skill and network of business contacts of the senior personnel of our Investment Adviser. Our Investment Adviser evaluates, negotiates, structures, executes, monitors and services our investments. Key personnel of our Investment Adviser could depart at any time. Our Investment Adviser’s capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable terms depend on the employment of investment professionals in adequate number and of adequate sophistication to match the corresponding flow of transactions. The departure of key personnel or of a significant number of the investment professionals or partners of our Investment Adviser, could have a material adverse effect on our ability to achieve our investment objective. Our Investment Adviser may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process and may not be able to find investment professionals in a timely manner or at all.
In addition, our Adviser may resign on 60 days’ notice. If we are unable to quickly find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms, our operations are likely to experience a disruption and our ability to achieve our investment objective and pay distributions would likely be materially and adversely affected.
Our business model depends to a significant extent upon strong referral relationships, and the inability of the personnel associated with our Investment Adviser to maintain or develop these relationships, or the failure of these relationships to generate investment opportunities, could adversely affect our business.
We expect that personnel associated with our Investment Adviser will maintain and develop their relationships with intermediaries, banks and other sources, and we will rely to a significant extent upon these relationships to provide us with potential investment opportunities. If these individuals fail to maintain their existing relationships or develop new relationships with other sources of investment opportunities, we may not be able to grow or maintain our investment portfolio. In addition, individuals with whom the personnel associated with our Investment Adviser have relationships are not obligated to provide us with investment opportunities, and, therefore, there is no assurance that such relationships will generate investment opportunities for us. The failure of the personnel associated with our Investment Adviser to maintain existing relationships, grow new relationships, or for those relationships to generate investment opportunities could have an adverse effect on our business, financial condition and results of operations.
We may face increasing competition for investment opportunities, which could reduce returns and result in losses.
We compete for investments with other business development companies,Business Development Companies, public and private funds (including hedge funds, mezzanine funds and collateralized loan obligations)CLOs) and private equity funds (to the extent they provide an alternative form of financing), as well as traditional financial services companies such as commercial and investment banks, commercial financing companies and other sources of financing. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost of capital and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we are forced to match our competitors’ pricing, terms and structure, we may not be able to achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant increase in the number and/or the size of our competitors in this target market could force us to accept less attractive investment terms. Furthermore, many of our competitors are not subject to, the regulatory restrictions that the 1940Investment Company Act imposes on us as a business development company.Business Development Company.
Our incentive fee may induce our Investment Adviser to make speculative investments.
The incentive fee payable by us to our Investment Adviser may create an incentive for it to make investments on our behalf that are risky or more speculative than would be the case in the absence of such compensation arrangement, which could result in higher investment losses, particularly during cyclical economic downturns. The incentive fee payable to our Investment Adviser is calculated separately in two components asincludes a component based on a percentage of theour net investment income (subject to a hurdle rate) and as a percentage of the realized gain on invested capital,, which may encourage our Investment Adviser to use leverage to increase the return on our investments or otherwise manipulate our income so as to recognize income in quarters where the hurdle rate is exceeded and may result in an obligation for us to pay an incentive fee to the Investment Adviser even if we have incurred a loss for an applicable period. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor the holders of our common stock.
The incentive fee payable by us to our Investment Adviser also may create an incentive for our Investment Adviser to invest on our behalf in instruments that have a deferred interest feature. Under these investments, we would accrue the interest over the life of the investment but would not receive the cash income from the investment until the end of the investment’s term, if at all. Our net investment income used to calculate the income portion of our incentive fee, however, includes accrued interest. Thus, a portion of the incentive fee would be based on income that we have not yet received in cash and may never receive in cash if the portfolio company is unable to satisfy such interest payment obligation to us. While we may make incentive fee payments on income accruals that we may not collect in the future and with respect to which we do not have a formal “clawback” right against our Investment Adviser, the amount of accrued income written off in any period will reduce the income in the period in which such write-off was taken and thereby reduce such period’s incentive fee payment.
In addition, commencing with the fiscal year ending September 30, 2019, our Investment Adviser will receive an incentive fee based upon net capital gains realized on our investments. Unlike the portion of the incentive fee based on income, there is no performance threshold applicable to the portion of the incentive fee based on net capital gains. As a result, our Investment Adviser may have a tendency to invest more in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.
Given the subjective nature of the investment decisions made by our Investment Adviser on our behalf, we will be unable to monitor these potential conflicts of interest between us and our Investment Adviser.
Our base management fee may induce our Investment Adviser to incur leverage.
The fact that ourOur base management fee is payable based upon our gross assets, which includes borrowings for investment purposes, which may encourage our Investment Adviser to use leverage to make additional investments. Under certain circumstances, the use of increased leverage may increase the likelihood of default, which would disfavor holders of our common stock. Given the subjective nature of the investment decisions made by our Investment Adviser on our behalf, we may not be able to monitor this potential conflict of interest.
The incentive fee we pay to our Investment Adviser relating to capital gains may be effectively greater than 17.5%.
Commencing with the fiscal year ending September 30, 2019, the Investment Adviser can earn an incentive fee based on our capital gains, calculated on a cumulative basis from the beginning of the fiscal year ending September 30, 2019 through the end of each fiscal year. As a result of the operation of the cumulative method of calculating such capital gains portion of the incentive fee, the cumulative aggregate capital gains fee received by our Investment Adviser could be effectively greater than 17.5%, depending on the timing and extent of subsequent net realized capital losses or net unrealized depreciation. This result would occur to the extent that, following receipt by the Investment Adviser of a capital gain incentive fee, we subsequently recognizerealized capital depreciation and capital losses in excess of cumulative recognizedrealized capital gains. We cannot predict whether, or to what extent, this payment calculation would affect your investment in our stock.
Because we borrow money, the potential for loss on amounts invested in us will be magnified and may increase the risk of investing in us.
Borrowings, also known as leverage, magnify the potential for loss on invested equity capital. If weWe expect to continue to use leverage to partially finance our investments, through borrowings from banks and other lenders, youwhich will experience increasedincrease the risks of investing in our common stock.stock, including the likelihood of default. We borrow under our revolving credit facility have issued notes inwith the lenders referred to therein, Citibank, N.A., as administrative agent, and Wells Fargo Bank, N.A., as collateral agent and custodian, or the Citibank Facility, our debt securitizationwholly-owned subsidiary’s revolving credit facility with us as equityholder and as servicer, the lenders from time to time parties thereto, Deutsche Bank AG, New York Branch, as facility agent, the other agents parties thereto and Wells Fargo Bank, National Association, as collateral agent and as collateral custodian, or the Deutsche Bank Facility, and our $25 million senior secured revolving credit facility with the lenders referenced therein, U.S. Bank National Association, as Custodian, and East West Bank as Secured Lender, or the East West Bank Facility, and may issue other debt securities or enter into other types of borrowing arrangements in the future. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. To the extent we incur additional leverage, these effects would be further magnified, increasing the risk of investing in us. Such a decline could negatively affect our ability to make common stock distributions or scheduled debt payments. Leverage is generally considered a speculative investment technique and we only intend to use leverage if expected returns will exceed the cost of borrowing.
As of September 30, 2017,2018, we had $76.5$110.1 million of outstanding indebtedness under our revolving credit facility with the lenders referred to therein, Citibank, N.A., as administrative agent, and Wells Fargo Bank, N.A., as collateral agent and custodian, or the Citibank facility; $180.0Facility; $157.0 million of debt outstanding indebtedness under our $309.0 million debt securitization, or the 2015 Debt Securitization;Deutsche Bank Facility; and $6.5$8.0 million outstanding under our $25 million senior secured revolving credit facility with the lenders referenced therein, U.S. Bank National Association, as Custodian, and East West Bank as Secured Lender, or the East West Bank Facility. These debt instruments require periodic payments of interest. The weighted average interest rate charged on our borrowings as of September 30, 20172018 was 3.46%4.34% (exclusive of deferred financing costs). We will need to generate sufficient cash flow to make these required interest payments. In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our September 30, 20172018 total assets of at least 1.49%2.04%. If we are unable to meet the financial obligations under our credit facilities, the lenders under the credit facilities will have a superior claim to our assets over our stockholders.
As a business development company,Business Development Company, under the 1940Investment Company Act, subject to compliance with certain disclosure requirements, we generally are not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200%150% (i.e., the amount of debt may not exceed 50%66.67% of the value of our assets). If legislation to modify the 1940 Act and increase the amount of debt that business development companies may incur by modifying the asset coverage percentage were enacted into law, we would able to incur additional indebtedness.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below.
| | | Assumed Return on Portfolio (Net of Expenses) | - 10% | - 5% | 0% | 5% | 10% | - 10% | - 5% | 0% | 5% | 10% |
| Corresponding net return to common stockholder | -23.82% | -13.46% | -3.10% | 7.27% | 17.63% | -23.82% | -13.92% | -4.03% | 5.86% | 15.75% |
For purposes of this table, we have assumed $608.7$585.1 million in total assets, $263.0$275.1 million in debt outstanding, $293.6$295.7 million in net assets as of September 30, 2017,2018, and a weighted average interest rate of 3.46%4.34% as of September 30, 20172018 (exclusive of deferred financing costs). Actual interest payments may be different.
Substantially all of our assetsWe are subject to security interests under securedcertain risks associated with our credit facilities or the 2015 Debt Securitization and if we default on our obligations under the facilities or the 2015 Debt Securitization, we may suffer adverse consequences, including foreclosure on our assets.facilities.
As of September 30, 2017,2018, substantially all of our assets were pledged as collateral under our credit facilities or the 2015 Debt Securitization.and may be pledged as collateral under future credit facilities. If we default on our obligations under these facilities, or the 2015 Debt Securitization, the lenders may have the right to foreclose upon and sell, or otherwise transfer, the collateral subject to their security interests or their superior claim. In such event, we may be forced to sell our investments to raise funds to repay our outstanding borrowings in order to avoid foreclosure and these forced sales may be at times and at prices we would not consider advantageous. Moreover, such deleveraging of our company could significantly impair our ability to effectively operate our business in the manner in which we have historically operated. As a result, we could be forced to curtail or cease new investment activities and lower or eliminate the distributions that we have historically paid to our stockholders.
We own 100% of the equity interests in OCSI Senior Funding Ltd. and OCSI Senior Funding II LLC, the borrowers under the Deutsche Bank Facility and the Citibank Facility, respectively. We consolidate the financial statements of OCSI Senior Funding Ltd. and OCSI Senior Funding II LLC in our consolidated financial statements and treat the indebtedness of these entities as our leverage. Our interests in OCSI Senior Funding Ltd. and OCSI Senior Funding II LLC are subordinated in priority of payment to every other obligation of OCSI Senior Funding Ltd. and OCSI Senior Funding II LLC and are subject to certain payment restrictions set forth in the Deutsche Bank Facility and the Citibank Facility, respectively. We receive cash
distributions on our equity interests in these entities only if they have made all required cash interest payments to the lenders and no default exists. We cannot assure you that distributions on the assets held by OCSI Senior Funding Ltd. and OCSI Senior Funding II LLC will be sufficient to make any distributions to us or that such distributions will meet our expectations.
We receive cash from OCSI Senior Funding Ltd. and OCSI Senior Funding II LLC only to the extent that we receive distributions on our equity interests in such entities. These entities may make distributions on their equity interests only to the extent permitted by the payment priority provisions of the Citibank Facility and the Deutsche Bank Facility, as applicable, which generally provide that payments on such interests may not be made on any payment date unless all amounts owing to the lenders and other secured parties are paid in full.
In addition, if the lenders exercise their right to sell the assets pledged under our credit facilities, or the 2015 Debt Securitization, such sales may be completed at distressed sale prices, thereby diminishing or potentially eliminating the amount of cash available to us after repayment of the amounts outstanding under the credit facilities or 2015 Debt Securitization.facilities.
Because we intend to distribute at least 90% of our taxable income each taxable year to our stockholders in connection with our election to be treated as a RIC, we will continue to need additional capital to finance our growth.
In order to qualify for the tax benefits available to RICs and to minimize corporate-level U.S. federal income taxes, we intend to distribute to our stockholders at least 90% of our taxable income each taxable year, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions, we would be subject to income taxes at the corporate rate applicable to net capital gains on such deemed distributions on behalf of our stockholders. As a result of these requirements, we will likely need to raise capital from other sources to grow our business. As a business development company,Business Development Company, subject to compliance with certain disclosure requirements we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which includes all of our borrowings and any outstanding preferred stock, of at least 200%150%. These requirements limit the amount that we may borrow. Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so.
While we expect to be able tomay, in the future, issue additional equity securities, we cannot assure you that equity financing will be available to us on favorable terms, or at all. Also, as a business development company,Business Development Company, we generally are not permitted to issue equity securities priced below net asset value without stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease new investment activities, and our net asset value and share price could decline.
Our ability to enter into transactions with our affiliates is restricted.
We are prohibited under the 1940Investment Company Act from participating in certain transactions with certain of our affiliates without the prior approval of the members of our independent directors and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940Investment Company Act, and we are generally prohibited from buying or selling any securities (other than our securities) from or to such affiliate, absent the prior approval of our independent directors. The 1940Investment Company Act also prohibits certain “joint” transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors and, in some cases, the SEC. If a person acquires more than 25% of our voting securities, we will be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to such person or certain of that person’s affiliates, or entering into prohibited joint transactions with such person, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or directors or their affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security (other than any security of which we are the issuer) from or to any portfolio company of a private equity fund managed by our Investment Adviser without the prior approval of the SEC, which may limit the scope of investment opportunities that would otherwise be available to us.
Our Investment Adviser has received exemptive relief from the SEC to allow certain managed funds and accounts to co-invest, subject to the conditions of the relief granted by the SEC, where doing so is consistent with the applicable registered fund’s or business development company’sBusiness Development Company’s investment strategy as well as applicable law (including the terms and conditions of the exemptive order issued by the SEC). Under the terms of this exemptive relief permitting us to co-invest with other funds managed by our Investment Adviser and its affiliates, a “required majority” (as defined in Section 57(o) of the 1940Investment Company Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned, (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objectives and strategies and (3) the investment by other funds advised by our Investment Adviser or its affiliates would not disadvantage us and our participation would not be on a basis different from, or less advantageous than, that of any other fund advised by our Investment Adviser or its affiliates participating in the transaction.
We intend to co-invest, subject to the conditions included in the exemptive order we received from the SEC, with certain of our affiliates. We may also invest alongside funds managed by our Investment Adviser and its affiliates in certain circumstances where doing so is consistent with applicable law and SEC staff interpretations. For example, we may invest alongside such accounts consistent with guidance promulgated by the staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that our Investment Adviser, acting on our behalf and on behalf of other clients, negotiates no term other than price.
There are significant potential conflicts of interest that could adversely impact our investment returns.
Our executive officers and directors, and certain members of our Investment Adviser, serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as we do or of investment funds managed by our affiliates. For example, Oaktree presently serves as the investment adviser to OCSL, a publicly-traded business development company withBusiness Development Company, and OSI II, a portfolio of approximately $1.5 billion at fair value as of September 30, 2017.privately offered Business Development Company. OCSL has historically invested in debt and equity of small and mid-sized companies, primarily in connection with investments by private equity sponsors, including in middle-market companies similar to those we target for investment. OSI II may also make similar investments. In addition, though not the primary focus of its investment portfolio, OCSL’s investments also include floating rate senior loans. Therefore, there may be certain investment opportunities that satisfy the investment criteria for both OCSL, OSI II and us. OCSL operatesand OSI II operate as a distinct and separate public companycompanies and any investment in our common stock will not be an investment in OCSL.OCSL and OSI II. In addition, all of our executive officers serve in substantially similar capacities for OCSL and fourOSI II and three of our independent directors serve in substantially similar capacities foras independent directors of OCSL. Oaktree and its affiliates also manage and sub-advise private investment funds and accounts, and may manage other such funds and accounts in the future, which have investment mandates that are similar, in whole and in part, with ours. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in the best interests of us or our stockholders. For example, the personnel of our Investment Adviser may face conflicts of interest in the allocation of investment opportunities to us and such other funds and accounts. Moreover, the Adviser and the Investment Professionals are engaged in other business activities which divert their time and attention. The Investment Professionals will devote as much time to us as such professionals deem appropriate to perform their duties in accordance with the Investment Advisory Agreement. However, such persons may be committed to providing investment advisory and other services for other clients, and engage in other business ventures in which we have no interest. As a result of these separate business activities, the Adviser may have conflicts of interest in allocating management time, services and functions among us, other advisory clients and other business ventures.
Oaktree has investment allocation guidelines that govern the allocation of investment opportunities among the investment funds and accounts managed or sub-advised by Oaktree and its affiliates. To the extent an investment opportunity is appropriate for us or OCSL or any other investment fund or account managed or sub-advised by Oaktree or its affiliates, Oaktree will adhere to its investment allocation guidelines in order to determine a fair and equitable allocation.
We may invest alongside funds and accounts managed or sub-advised by our Investment Adviser and its affiliates in certain circumstances where doing so is consistent with applicable law and SEC staff interpretations. For example, we may invest alongside such accounts consistent with guidance promulgated by the staff of the SEC permitting us and such other accounts to purchase interests in a single class of privately placed securities so long as certain conditions are met, including that our Investment Adviser, acting on our behalf and on behalf of other clients, negotiates no term other than price or terms related to price.
In addition, on October 18, 2017, our Investment Adviser received exemptive relief from the SEC to allow certain managed funds and accounts, each of whose investment adviser is Oaktree or an investment adviser controlling, controlled by or under common control with Oaktree, to participate in negotiated co-investment transactions where doing so is consistent with the applicable registered fund’s or business development company’sBusiness Development Company’s investment objective and strategies as well as regulatory requirements and other pertinent factors, and pursuant to the conditions of the exemptive relief. Each potential co-investment opportunity that falls under the terms of the exemptive relief and is appropriate for us and any affiliated fund or account, and satisfies the then-current board-established criteria, will be offered to us and such other eligible funds and accounts. If there is a sufficient amount of securities to satisfy all participants, the securities will be allocated among the participants in accordance with their proposed order size and if there is an insufficient amount of securities to satisfy all participants, the securities will be allocated pro rata based on the investment proposed by the applicable investment adviser to such participant, up to the amount proposed to be invested by each, which is reviewed and approved by an independent committee of legal, compliance and accounting professionals at our Investment Adviser. Although Oaktree will endeavor to allocate investment opportunities in a fair and equitable manner, we and our common stockholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of our Investment Adviser. We might not participate in each individual opportunity, but will, on an overall basis, be entitled to participate equitably with other entities managed by Oaktree and its affiliates. Oaktree seeks to treat all clients fairly and equitably such that none receive preferential treatment vis-à-vis the others over time, in a manner consistent with its fiduciary duty to each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in pro rata allocations or may result in situations where certain funds or accounts receive allocations where others do not.
Pursuant to the New Investment Advisory Agreement, our Investment Adviser’s liability is limited and we are required to indemnify our Investment Adviser against certain liabilities. This may lead our Investment Adviser to act in a riskier manner in performing its duties and obligations under the New Investment Advisory Agreement than it would if it were acting for its own account, and creates a potential conflict of interest.
Pursuant to the New Administration Agreement, the Oaktree Administrator furnishes us with the facilities, including our principal executive office, and administrative services necessary to conduct our day-to-day operations. We pay the Oaktree Administrator its allocable portion of overhead and other expenses incurred by the Oaktree Administrator in performing its obligations under the New Administration Agreement, including, without limitation, a portion of the rent at market rates and the compensation of our Chief Financial Officer, Chief Compliance Officer, their respective staffs and other non-investment
professionals at Oaktree that perform duties for us. This arrangement creates conflicts of interest that our Board of Directors must monitor.
A failure on our part to maintain our qualification as a business development companyBusiness Development Company would significantly reduce our operating flexibility.
If we fail to continuously qualify as a business development company,Business Development Company, we might be subject to regulation as a registered closed-end investment company under the 1940Investment Company Act, which would significantly decrease our operating flexibility. In addition, failure to comply with the requirements imposed on business development companiesBusiness Development Companies by the 1940Investment Company Act could cause the SEC to bring an enforcement action against us. See “ -BusinessBusiness - Business Development Company Regulations.”
Regulations governing our operation as a business development companyBusiness Development Company and RIC affect our ability to raise, and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.
In order to qualify for the tax benefits available to RICs and to minimize corporate-level U.S. federal income taxes, we intend to distribute to our stockholders at least 90% of our taxable income each taxable year, except that we may retain certain net capital gains for investment, and treat such amounts as deemed distributions to our stockholders. If we elect to treat any amounts as deemed distributions, we would be subject to income taxes at the corporate rate on such deemed distributions on behalf of our stockholders.
As a business development company,Business Development Company, subject to compliance with certain disclosure requirements we may issue “senior securities,” including borrowing money from banks or other financial institutions only in amounts such that our asset coverage, as defined in the 1940Investment Company Act, equals at least 200%150% after such incurrence or issuance. These requirements limit the amount that we may borrow, may unfavorably limit our investment opportunities and may reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can lend. If the value of our assets declines, we may be unable to satisfy the asset coverage test, which could prohibit us from paying distributions and could prevent us from being subject to tax as a RIC. If we cannot satisfy the asset coverage test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous.
Because we will continue to need capital to grow our investment portfolio, these limitations may prevent us from incurring debt and require us to raise additional equity at a time when it may be disadvantageous to do so. As a result of these requirements we need to periodically access the capital markets to raise cash to fund new investments at a more frequent pace than our privately owned competitors. We generally are not able to issue or sell our common stock at a price below net asset value per share, which may be a disadvantage as compared with other public companies or private investment funds. If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of the common stock if our Board of Directors and independent directors determine that such sale is in our best interests and the best interests of our stockholders, and our stockholders as well as those stockholders that are not affiliated with us approve such sale in accordance with the requirements of the 1940Investment Company Act. In any such case, the price at which our securities are to be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such securities (less any underwriting commission or discount).
We also may make rights offerings to our stockholders at prices less than net asset value, subject to applicable requirements of the 1940Investment Company Act. If we raise additional funds by issuing more shares of our common stock or issuing senior securities convertible into, or exchangeable for, our common stock, the percentage ownership of our stockholders may decline at that time and such stockholders may experience dilution. Moreover, we can offer no assurance that we will be able to issue and sell additional equity securities in the future, on terms favorable to us or at all.
In addition, we may in the future seek to securitize our portfolio securities to generate cash for funding new investments. To securitize loans, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in
the subsidiary. An inability to successfully securitize our loan portfolio could limit our ability to grow our business or fully execute our business strategy and may decrease our earnings, if any. The securitization market is subject to changing market conditions and we may not be able to access this market when we would otherwise deem appropriate. Moreover, the successful securitization of our portfolio might expose us to losses as the residual investments in which we do not sell interests will tend to be those that are riskier and more apt to generate losses. The 1940Investment Company Act also may impose restrictions on the structure of any securitization.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly results due to a number of factors, including our ability or inability to make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, changes in accrual status of our portfolio company investments, distributions, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our market and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse.
Our Board of Directors has the authority to modify or waive our current investment objective, operating policies and strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current investment objective, operating policies and strategies would have on our business, net asset value, operating results and value of our stock. However, the effects might be adverse, which could negatively impact our ability to pay you distributions and cause you to lose part or all of your investment.
We may not be able to pay you distributions, our distributions may not grow over time and a portion of our distributions may be a return of capital.
We intend to pay distributions to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to sustain a specified level of cash distributions or periodic increases in cash distributions. In addition, the inability to satisfy the asset coverage test applicable to us as a business development companyBusiness Development Company can limit our ability to pay distributions. All distributions will be paid at the discretion of our Board of Directors and will depend on our earnings, our financial condition, maintenance of our ability to be subject to tax as a RIC, compliance with applicable business development companyBusiness Development Company regulations and such other factors as our Board of Directors may deem relevant from time to time. We cannot assure you that we will continue to pay distributions to our stockholders at current levels, or at all.
When we make distributions, our distributions generally will be treated as dividends for U.S. federal income tax purposes to the extent such distributions are paid out of our current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of a stockholder's basis in our stock and, assuming that a stockholder holds our stock as a capital asset, thereafter as a capital gain. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from our investment activities. Moreover, we may pay all or a substantial portion of our distributions from the proceeds of the sale of shares of our common stock or from borrowings in anticipation of future cash flow, which could constitute a return of stockholders’ capital and will lower such stockholders’ tax basis in our shares, which may result in increased tax liability to stockholders when they sell or otherwise dispose of such shares. The tax liability incurred by such stockholders upon the sale or other disposition of shares of our common stock may increase even if such shares are sold at a loss.
We will be subject to corporate-level U.S. federal income tax if we are unable to maintain our qualification as a RIC under Subchapter M of the Code or do not satisfy the Annual Distribution Requirement.
To maintain our tax status as a RIC and be relieved of U.S. federal taxes on income and gains distributed to our stockholders, we must meet the following annual distribution, income source and asset diversification requirements:
The Annual Distribution Requirement will be satisfied if we distribute dividends to our stockholders each taxable year of an amount generally at least equal to 90% of the sum of our net taxable income plus realized net short-term capital gains in excess of realized net long-term capital losses, if any. Because we use debt financing, we are and may, in the future, be subject to certain financial covenants under our debt arrangements that could, under certain circumstances, restrict us from making distributions necessary to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources, we could fail to qualify for RIC tax treatment and thus could become subject to corporate-level income tax.
The 90% Gross Income Test will be satisfied if we earn at least 90% of our gross income for each taxable year from dividends, interest, gains from the sale of stock or securities or similar sources.
The Diversification Tests will be satisfied if, at the end of each quarter of our taxable year, at least 50% of the value of our assets consist of cash, cash equivalents, U.S. government securities, securities of other RICs, and other acceptable securities; and no more than 25% of the value of our assets can be invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships.” Failure to meet these requirements may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments will be in
private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could cause us to incur substantial losses.
If we fail to be subject to tax as a RIC and are subject to entity-level U.S. federal corporate income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.
We may have difficulty paying our required distributions if we are required to recognize income for U.S. federal income tax purposes before or without receiving cash representing such income.
For U.S. federal income tax purposes, we generally are required to include in income certain amounts that we have not yet received in cash, such as OID or certain income accruals on contingent payment debt instruments, which may occur if we receive warrants in connection with the origination of a loan or possibly in other circumstances. Such OID is generally required to be included in income before we receive any corresponding cash payments. In addition, our loans typically contain PIK interest provisions. Any PIK interest, computed at the contractual rate specified in each loan agreement, is generally required to be added to the principal balance of the loan and recorded as interest income. We also may be required to include in income certain other amounts that we do not receive, and may never receive, in cash. To avoid the imposition of corporate-level tax on us, this non-cash source of income may need to be distributed to our stockholders in cash or, in the event that we determine to do so, in shares of our common stock, even though we may have not yet collected and may never collect the cash relating to such income.
Since, in certain cases, we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the Annual Distribution Requirement necessary to be relieved of entity-level U.S. federal taxes on income and gains distributed to our stockholders. Accordingly, we may have to sell or otherwise dispose of some of our investments at times and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to satisfy the Annual Distribution Requirement and thus become subject to corporate-level U.S. federal income tax.
We may in the future choose to pay distributions partly in our own stock, in which case you may be subject to tax in excess of the cash you receive.
We may distribute taxable distributions that are payable in part in our stock. In accordance with certain applicable Treasury regulations and other related administrative pronouncements issued by the Internal Revenue Service, or the IRS, a RIC may be eligible to treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder is permitted to elect to receive his or her entire distribution in either cash or stock of the RIC, subject to the satisfaction of certain guidelines. If too many stockholders elect to receive cash (which generally may not be less than 20% of the value of the overall distribution), each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the distribution paid in stock generally will be equal to the amount of cash that could have been received instead of stock. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain dividend) to the extent of their share of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be subject to tax with respect to such distributions in excess of any cash received. If a U.S. stockholder sells the stock it receives as a distribution in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distribution, including in respect of all or a portion of such distribution that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on a distribution, such sales may put downward pressure on the trading price of our stock.
We may enter into reverse repurchase agreements, which are another form of leverage.
We may enter into reverse repurchase agreements as part of our management of our temporary investment portfolio. Our entry into any such reverse repurchase agreements would be subject to the 1940 Act limitations on leverage. In connection with entry into a reverse repurchase agreement, we would effectively pledge our assets as collateral to secure a short-term loan. Generally, the other party to the agreement would make a loan to us in an amount equal to a percentage of the fair value of the collateral we have pledged. At the maturity of the reverse repurchase agreement, we will be required to repay the loan and then receive back our collateral. While used as collateral, the assets continue to pay principal and interest which are for the benefit of us.
Our use of reverse repurchase agreements, if any, involves many of the same risks involved in our use of leverage. For example, the market value of the securities acquired in the reverse repurchase agreement may decline below the price of the securities that we have sold but we would remain obligated to purchase those securities, meaning that we bear the risk of loss that the proceeds at settlement are less than the fair value of the securities pledged. In addition, the market value of the securities retained by us may decline. If a buyer of securities under a reverse repurchase agreement were to file for bankruptcy or experience insolvency, we would be adversely affected. In addition, due to the interest costs associated with reverse repurchase agreements, our net asset value would decline, and, in some cases, we may be worse off than if we had not used such agreements.
We are currently subject to an SEC investigation that could adversely affect our financial condition, business and results of operations.
We are the subject of anhave responded to requests arising from a SEC investigation principally related to the activities of our Former Adviser, andAdviser. Although we may possibly be subject to a variety of additional claims and lawsuits as well as additionalbelieve based on communications from SEC examinations or investigations. See “Business - Legal Proceedings.” The outcome of the SEC investigation may materially adversely affectStaff that our business, financial condition, and/or operating results and may continue without resolution for long periods of time. Litigation and responsesobligations with respect to the SEC’s inquiries might consume substantial amounts of our management’s time and attention, and that time and the devotion of these resources may, at times, be disproportionate to the amounts at stake. Thematter are concluded, SEC investigation isinvestigations are subject to inherent uncertainties and management’s view of these matters may change in the future. A
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
We and our portfolio companies are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make or that impose limits on our ability to pledge a significant amount of our assets to secure loans or that restrict the operations of a portfolio company, any of which could harm us and our stockholders and the value of our investments, potentially with retroactive effect. For example, certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which influences many aspects of the financial services industry, have been amended or repealed and the Code has been substantially amended and reformed. Any amendment or repeal of legislation, or changes in regulations or regulatory interpretations thereof, could create uncertainty in the near term, which could have a material adverse impact on our business, financial condition and results of operations.
Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth herein and may result in our investment focus shifting from the areas of expertise of our Adviser to other types of investments in which our Adviser may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
Future control deficiencies could prevent us from accurately and timely reporting our financial results.
We may identify deficiencies in our internal control over financial reporting in the future, including significant deficiencies and material weaknesses. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements alsowill not be prevented or detected on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
Our failure to identify deficiencies in our internal control over financial reporting in a timely manner or remediate any deficiencies, or the identification of material weaknesses or significant deficiencies in the future could occur forprevent us from accurately and timely reporting our financial results.
We are subject to risks associated with communications and information systems.
We depend on the period in which the effect of an unfavorable final outcome becomes probablecommunications and reasonably estimable, particularly where the claims with respect to a particular period exceed both the amountinformation systems of our insurance coverage relatingAdviser and its affiliates as well as certain third-party service providers. As these systems became more important to claims made with respectour business, the risks posed to the same periodthese communications and the amountinformation systems have continued to increase. Any failure or interruption in these systems could cause disruptions in our activities, including because we do not maintain any such systems of any indemnification recoverable from Fifth Street Holdings L.P.our own. In addition, wethese systems are subject to potential attacks, including through adverse events that threaten the confidentiality, integrity or availability of our information resources. These attacks, which may incur expenses associated with defending ourselves against thisinclude cyber incidents, may involve a third party gaining unauthorized access to our communications or information systems for purposes of misappropriating assets, stealing confidential information related to our operations or portfolio companies, corrupting data or causing operational disruption. Any such attack could result in disruption to our business, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and other future claims and responding to the SEC’s inquiries, and these expenses may be materialdamage to our earnings in future periods that might exceed the amountbusiness relationships, any of any indemnification recoverable from Fifth Street Holdings L.P. Under the New Investment Advisory Agreement, we are required to indemnifywhich could have a material adverse effect on our Investment Adviser for its expenses incurred in any litigation arising from the renderingbusiness, financial condition and results of our Investment Adviser’s services under the investment advisory agreement or otherwise as our Investment Adviser absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, and our Former Adviser may seek similar indemnification under the Former Investment Advisory Agreement.operations.
We may be unable to invest a significant portion of the net proceeds from an offering of our securities on acceptable terms within an attractive timeframe.
Delays in investing the net proceeds raised in an offering of our securities may cause our performance to be worse than that of other fully invested business development companiesBusiness Development Companies or other lenders or investors pursuing comparable investment strategies. We cannot assure you that we will be able to identify any investments that meet our investment objective or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of any offering on acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.
We anticipate that, depending on market conditions, it may take us a substantial period of time to invest substantially all of the net proceeds of any offering in securities meeting our investment objective. During this period, we will invest the net proceeds of an offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, which may produce returns that are significantly lower than the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. As a result, any distributions that we pay during this period may be substantially lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objective. In addition, until such time as the net proceeds of an offering are invested in securities meeting our investment objective, the market price for our common stock may decline. Thus, the return on your investment may be lower than when, if ever, our portfolio is fully invested in securities meeting our investment objective.
We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.
We may enter into reverse repurchase agreements, which are an “emerging growth company,” as defined in the JOBS Act. As a result, we have taken advantageanother form of the exemption for emerging growth companies allowing us to temporarily forgo the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. We cannot predict if investors will find shares of our common stock less attractive because we rely on this exemption. If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our shares and our share price may be more volatile. We did not take advantage of other disclosure or reporting exemptions for emerging growth companies under the JOBS Act. We will remain an emerging growthleverage.
company untilWe may enter into reverse repurchase agreements as part of our management of our temporary investment portfolio. Our entry into any such reverse repurchase agreements would be subject to the earlierInvestment Company Act limitations on leverage. In connection with entry into a reverse repurchase agreement, we would effectively pledge our assets as collateral to secure a short-term loan. Generally, the other party to the agreement would make a loan to us in an amount equal to a percentage of (a) September 30, 2018 or (b) the date on whichfair value of the collateral we have issued more than $1 billion in non-convertible debt duringpledged. At the prior three-year period.
Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy.
We and our portfolio companies are subject to regulation at the local, state and federal level. New legislation may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make or that impose limits on our ability to pledge a significant amount of our assets to secure loans or that restrict the operations of a portfolio company, any of which could harm us and our stockholders and the value of our investments, potentially with retroactive effect. For example, President Trump and certain members of Congress have indicated that they intend to seek to amend or repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act, which influences many aspectsmaturity of the financial services industry, and to substantially amend and reform the Code. Any amendment or repeal of such legislation, or changes in regulations or regulatory interpretations thereof, could create uncertainty in the near term, which could have a material adverse impact on our business, financial condition and results of operations.
Additionally, any changes to the laws and regulations governing our operations relating to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth herein and may result in our investment focus shifting from the areas of expertise of our Investment Adviser to other types of investments in which our Investment Adviser may have less expertise or little or no experience. Thus, any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
We have identified a material weakness in our internal control over financial reporting that, if not properly remediated, could result in material misstatements in our financial statements in future periods.
We identified a material weakness relating to our internal control over financial reporting under standards established by the Public Company Accounting Oversight Board, or PCAOB, for the period ended September 30, 2017. The PCAOB defines a material weakness as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.
We have taken and will take a number of actions to remediate this material weakness, but some of these measures will take time to be fully integrated and confirmed to be effective. We cannot assure you that the steps taken will remediate such weaknesses, nor canreverse repurchase agreement, we be certain of whether additional actions will be required orto repay the costs of any such actions. Until measures are fully implementedloan and tested,then receive back our collateral. While used as collateral, the identified material weakness mayassets continue to exist.pay principal and interest which are for the benefit of us.
We
Our use of reverse repurchase agreements, if any, involves many of the same risks involved in our use of leverage. For example, the market value of the securities acquired in the reverse repurchase agreement may need to take additional measures to fully mitigate these issues, anddecline below the measuresprice of the securities that we have taken, and expectsold but we would remain obligated to take, to improve our internal controls may not be sufficient to addresspurchase those securities, meaning that we bear the issues identified, to ensure that our internal controls are effective or to ensurerisk of loss that the identified material weaknesses or significant deficiencies or other material weaknesses or deficiencies will not result in a material misstatementproceeds at settlement are less than the fair value of our annual or interim financial statements.the securities pledged. In addition, other material weaknesses or deficiencies may be identified in the future. If we are unable to correct material weaknesses or deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and formsmarket value of the SEC willsecurities retained by us may decline. If a buyer of securities under a reverse repurchase agreement were to file for bankruptcy or experience insolvency, we would be adversely affected. This failure could negatively affectIn addition, due to the market price and trading liquidity of our securities, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.
Future control deficiencies could prevent us from accurately and timely reporting our financial results.
We may identify deficiencies in our internal control over financial reporting in the future, including significant deficiencies and material weaknesses. A “significant deficiency” is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting.
Our failure to identify deficiencies in our internal control over financial reporting in a timely manner or remediate any deficiencies, or the identification of material weaknesses or significant deficiencies in the future could prevent us from accurately and timely reporting our financial results.
We are subject to risksinterest costs associated with communicationsreverse repurchase agreements, our net asset value would decline, and, information systems.
We depend on the communications and information systems of our Investment Adviser and its affiliates as well as certain third-party service providers. As our reliance on these systems has increased, so have the risks posed to these communications and information systems. Any failure or interruption in these systems could cause disruptions in our activities. In addition, these systems are subject to potential attacks, including through adverse events that threaten the confidentiality, integrity or availability of our information resources. These attacks, whichsome cases, we may include cyber incidents, may involve a third party gaining unauthorized access to our communications or information systems for purposes of misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. Anybe worse off than if we had not used such attack could result in disruption to our business, misstated or unreliable financial data, liability for stolen assets or information, increased cybersecurity protection and insurance costs, litigation and damage to our business relationships, any of which could have a material adverse effect on our business, financial condition and results of operations.agreements.
We incur significant costs as a result of being a publicly traded company.
As a publicly-traded company, we incur legal, accounting and other expenses, including costs associated with the periodic reporting requirements applicable to a company whose securities are registered under the Exchange Act, as well as additional corporate governance requirements, including requirements under the Sarbanes-Oxley Act, and other rules implemented by the SEC and the listing standards of the NASDAQNasdaq Global Select Market. Beginning with the fiscal year ending September 30, 2018, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, which will increase costs associated with our periodic reporting requirements.
Risks Relating to Our Investments
Our investments in portfolio companies may be risky, and we could lose all or parts of our investments.
The companies in which we invest are typically highly leveraged, and, in most cases, our investments in such companies are not rated by any rating agency. If such investments were rated, we believe that they would likely receive a rating from a nationally recognized statistical rating organization of below investment grade (i.e., below BBB- or Baa), which is often referred to as "high yield" and “junk.” Exposure to below investment grade securities involves certain risks, and those securities are viewed as having predominately speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. Investing in small and mid-sized companies involves a number of significant risks. As of September 30, 2017, 19.7% of
Certain our debt portfolio at fair value consisted of debt securities for which issuers were not required to make principal payments until the maturity of such debt securities, which could result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. Increases in interest rates may affect the ability of our portfolio companies to repay debt or pay interest, which may in turn affect the value of our portfolio investments, and our business, financial condition and results of operations.
Among other things, our portfolio companies:
may have limited financial resources, may have limited or negative EBITDA and may be unable to meet their obligations under their debt instruments that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees from subsidiaries or affiliates of our portfolio companies that we may have obtained in connection with our investments, as well as a corresponding decrease in the value of the equity components of our investments;
may have shorter operating histories, narrower product lines, smaller market shares and/or significant customer concentrations than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns;
may operate in regulated industries and/or provide services to federal, state or local governments, or operate in industries that provide services to regulated industries or federal, state or local governments, any of which could lead to delayed payments for services or subject the company to changing payment and reimbursement rates or other terms;
may not have collateral sufficient to pay any outstanding interest or principal due to us in the event of a default by these companies;
are more likely to depend on the management talents and efforts of a small group of people; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us;
may have difficulty accessing the capital markets to fund capital needs, which may limit their ability to grow or repay outstanding indebtedness at maturity;
generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; and
generally have less publicly available information about their businesses, operations and financial condition. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and as a result may lose part or all of our investment.
In addition, in the course of providing managerial assistance to certain of our portfolio companies, certain of our officers and directors may serve as directors on the boards of such companies. To the extent that litigation arises out of our investments in these companies, our officers and directors may be named as defendants in such litigation, which could result in an expenditure of funds (through our indemnification of such officers and directors) and the diversion of management time and resources.
Finally, as noted above, little public information generally exists about privately owned companies, and these companies may not have third-party debt ratings or audited financial statements. We must therefore rely on the ability of our Adviser to obtain adequate information through due diligence to evaluate the creditworthiness and potential returns from investing in these companies. Additionally, these companies and their financial information will not generally be subject to the Sarbanes-Oxley Act and other rules that govern public companies.
We may be exposed to higher risks with respect to our investments that include OID or PIK interest.
Our investments may include OID and contractual PIK interest, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:
•OID and PIK instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments;
•OID and PIK accruals may create uncertainty about the source of our distributions to stockholders;
•OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral; and
•OID and PIK instruments may represent a higher credit risk than coupon loans.
An investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies.
We invest primarily in privately held companies. Generally, little public information exists about these companies, including typically a lack of audited financial statements and ratings by third parties. Furthermore, such an investment strategy involves a dependence on the management talents and efforts of a small group of people as well as a greater vulnerability to economic downturns. We must therefore rely on the ability of our Investment Adviser to obtain adequate information to evaluate the potential risks of investing in these companies. These companies and their financial information may not be subject to the Sarbanes-Oxley Act and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. These factors could affect our investment returns.
If we acquire the securities and obligations of distressed or bankrupt companies, such investments may be subject to significant risks, including lack of income, extraordinary expenses, uncertainty with respect to satisfaction of debt, lower-than-expected investment values or income potentials and resale restrictions.
We may acquire the securities and other obligations of distressed or bankrupt companies. At times, distressed debt obligations may not produce income and may require us to bear certain extraordinary expenses (including legal, accounting, valuation and transaction expenses) in order to protect and recover our investment. Therefore, to the extent we invest in distressed debt, our ability to achieve current income for our stockholders may be diminished, particularly where the portfolio company has negative EBITDA.
We also will be subject to significant uncertainty as to when and in what manner and for what value the distressed debt we invest in will eventually be satisfied whether through a liquidation, an exchange offer or plan of reorganization involving the distressed debt securities or a payment of some amount in satisfaction of the obligation. In addition, even if an exchange offer is made or plan of reorganization is adopted with respect to distressed debt held by us, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will not have a lower value or income potential than may have been anticipated when the investment was made.
Moreover, any securities received by us upon completion of an exchange offer or plan of reorganization may be restricted as to resale. As a result of our participation in negotiations with respect to any exchange offer or plan of reorganization with respect to an issuer of distressed debt, we may be restricted from disposing of such securities.
Our portfolio companies may prepay loans, which may reduce our yields if capital returned cannot be invested in transactions with equal or greater expected yields.
The loans in our investment portfolio may be prepaid at any time, generally with little advance notice. Whether a loan is prepaid will depend both on the continued positive performance of the portfolio company and the existence of favorable financing market conditions that allow such company the ability to replace existing financing with less expensive capital. As market conditions change, we do not know when, and if, prepayment may be possible for each portfolio company. In some cases, the prepayment of a loan may reduce our achievable yield if the capital returned cannot be invested in transactions with equal or greater expected yields, which could have a material adverse effect on our business, financial condition and results of operations.
The lack of liquidity in our investments may adversely affect our business.
We invest, and will continue to invest, in companies whose securities are not publicly traded, and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid than publicly traded securities. In fact, all of our assets may be invested in illiquid securities. The illiquidity of these investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we had previously recorded these investments. Our investments are usuallymay be subject to contractual or legal restrictions on resale or are otherwise illiquid because there is usually no established trading market for such investments. In addition, we may also face restrictions on our ability to liquidate our investments if our Investment Adviser or any of its affiliates have material nonpublic information regarding the portfolio company. The illiquidity of most of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer losses.
We may not have the funds or ability to make additional investments in our portfolio companies.
After our initial investment in a portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through a follow-on investment. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful operation, may reduce the expected yield on the investment or impair the value of our investment in any such portfolio company.
Our portfolio companies may be highly leveraged.
Our investments may include companies whose capital structures have significant leverage. Such investments are inherently more sensitive to declines in revenues and to increases in expenses and interest rates. The leveraged capital structure
of such investments will increase the exposure of the portfolio companies to adverse economic factors, such as downturns in the economy or deterioration in the condition of the portfolio company or its industry. Additionally, the securities acquired by us may be the most junior in what will typically be a complex capital structure, and thus subject to the greatest risk of loss.
Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies.
We invest primarily in first lien loans issued by small and mid-sized companies. Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we invest. By their terms, such debt instruments may entitle the holders to receive payments of interest or principal on or before the dates on which we are entitled to receive payments with respect to the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution. After repaying such senior creditors, such portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
The disposition of our investments may result in contingent liabilities.
In connection with the disposition of an investment in private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to certain potential liabilities. These arrangements may result in contingent liabilities that ultimately yield funding obligations that must be satisfied through our return of certain distributions previously made to us.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
Even though we have structured some of our investments as senior loans, if one of our portfolio companies were to enter bankruptcy proceedings, a bankruptcy court might re-characterize our debt investment and subordinate all or a portion of our claim to that of other creditors, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company. We may also be subject to lender liability claims for actions taken by us with respect to a borrower’s business or instances where we exercise control over the borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken in rendering significant managerial assistance.
Second priority liens on collateral securing loans that we make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us.
Certain loans that we make to portfolio companies will be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds are not sufficient to repay amounts outstanding under the loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more inter-creditor agreements that we enter into with the holders of senior debt. Under such an inter-creditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions may be taken with respect to the collateral and will be at the direction of the holders of the obligations secured by the first priority liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of such proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to control or direct such actions, even if our rights are adversely affected.
If we make unsecured debt investments, we may lack adequate protection in the event our portfolio companies become distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event such portfolio companies default on their indebtedness.
We have made, and may in the future make, unsecured debt investments in portfolio companies. Unsecured debt investments are unsecured and junior to other indebtedness of the portfolio company. As a consequence, the holder of an unsecured debt investment may lack adequate protection in the event the portfolio company becomes distressed or insolvent and will likely experience a lower recovery than more senior debtholders in the event the portfolio company defaults on its indebtedness. In addition, unsecured debt investments of small and mid-sized companies are often highly illiquid and in adverse market conditions may experience steep declines in valuation even if they are fully performing.
We may incur greater risk with respect to investments we acquire through assignments or participations of interests.
Although we originate a substantial portion of our loans, we may acquire loans through assignments or participations of interests in such loans. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to such debt obligation. However, the purchaser’s rights can be more restricted than those of the assigning institution, and we may not be able to unilaterally enforce all rights and remedies under an assigned debt obligation and with regard to any associated collateral. A participation typically results in a contractual relationship only with the institution participating out the interest and not directly with the borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. In purchasing participations, we generally will have no right to enforce compliance by the borrower with the terms of the loan agreement against the borrower, and we may not directly benefit from the collateral supporting the debt obligation in which we have purchased the participation. As a result, we will be exposed to the credit risk of both the borrower and the institution selling the participation. Further, in purchasing participations in lending syndicates, we will not be able to conduct the same level of due diligence on a borrower or the quality of the loan with respect to which we are buying a participation as we would conduct if we were investing directly in the loan. This difference may result in us being exposed to greater credit or fraud risk with respect to such loans than we expected when initially purchasing the participation.
Our investments in Internet and software companies are subject to many risks, including regulatory concerns, litigation risks and intense competition.
As of September 30, 2017, our investments in Internet and software companies represented 21.72% of our total portfolio, at fair value. Our investments in Internet and software companies are subject to substantial risks. For example, our portfolio companies face intense competition since their businesses are rapidly evolving and intensely competitive, and are subject to changing technology, shifting user needs, and frequent introductions of new products and services. Internet and software companies have many competitors in different industries, including general purpose search engines, vertical search engines and e-commerce sites, social networking sites, traditional media companies, and providers of online products and services. Potential competitors to our portfolio companies in the Internet and software industries range from large and established companies to emerging start-ups. Further, such companies are subject to laws that were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. The laws that do reference the Internet are being interpreted by the courts, but their applicability and scope remain uncertain. For example, the laws relating to the liability of providers of online services are currently unsettled both within the United States and abroad. Claims have been threatened and filed under both U.S. and foreign laws for defamation, invasion of privacy and other tort claims, unlawful activity, copyright and trademark infringement, or other theories based on the nature and content of the materials searched and the ads posted by a company’s users, a company’s products and services, or content generated by a company’s users. Further, the growth of Internet and software companies into a variety of new fields implicate a variety of new regulatory issues and may subject such companies to increased regulatory scrutiny, particularly in the United States and Europe. As a result, these portfolio company investments face considerable risk. This could, in turn, materially adversely affect the value of the Internet and software companies in our portfolio.
We generally do not, and do not expect to, control our portfolio companies.
We do not, and do not expect to, control most of our portfolio companies. As a result, we are subject to the risk that a portfolio company in which we invest may make business decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests as a debt investor, including actions that could decrease the value of our investment. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at an appropriate valuation.
Defaults by our portfolio companies would harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. In addition, we may write-down the value of a portfolio company investment upon the worsening of the financial condition of the portfolio company or in anticipation of a default, which could also have a material adverse effect on our business, financial condition and results of operations.
Our portfolio companies may experience financial distress and our investments in such companies may be restructured.
Our portfolio companies may experience financial distress from time to time. Debt investments in such companies may cease to be income-producing, may require us to bear certain expenses to protect our investment and may subject us to uncertainty as to when, in what manner and for what value such distressed debt will eventually be satisfied, including through liquidation, reorganization or bankruptcy. Any restructuring can fundamentally alter the nature of the related investment, and restructurings may not be subject to the same underwriting standards that our Investment Adviser employs in connection with the origination of an investment. In addition, we may write-down the value of our investment in any such company to reflect the status of financial distress and future prospects of the business. Any restructuring could alter, reduce or delay the payment of interest or principal on any investment, which could delay the timing and reduce the amount of payments made to us. For example, if an exchange offer is made or plan of reorganization is adopted with respect to the debt securities we currently hold, there can be no assurance that the securities or other assets received by us in connection with such exchange offer or plan of reorganization will have a value or income potential similar to what we anticipated when our original investment was made or even at the time of restructuring. Restructurings of investments might also result in extensions of the term thereof, which could
delay the timing of payments made to us, or we may receive equity securities, which may require significantly more of our management’s time and attention or carry restrictions on their disposition. We cannot assure you that any particular restructuring strategy pursued by our Investment Adviser will maximize the value of or recovery on any investment.
We may not realize gains from our equity investments.
Certain investments that we have made in the past and may make in the future include warrants or other equity securities. In addition, we have made in the past and may make in the future direct equity investments in companies. Our goal is ultimately to realize gains upon our disposition of such equity interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We also may be unable to realize any value if a portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may seek puts or similar rights to give us the right to sell our equity securities back to the portfolio company issuer. We may be unable to exercise these put rights for the consideration provided in our investment documents if the issuer is in financial distress.
We are subject to certain risks associated with foreign investments.
We have made in the past and may make in the future investments in foreign companies. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in foreign exchange rates, exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the U.S., higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. In addition, our foreign investments generally do not constitute "qualifying assets" under the 1940Investment Company Act, under which qualifying assets must represent at least 70% of our total assets. See “Business“Business Development Company Regulations — Qualifying Assets.”
Our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. We cannot assure you that these and other factors will not have a material adverse effect on our business as a whole.
We may have foreign currency risks related to our investments denominated in currencies other than the U.S. dollar.
As of September 30, 2018, a portion of our investments are, and may continue to be, denominated in currencies other than the U.S. dollar. Changes in the rates of exchange between the U.S. dollar and other currencies will have an effect, which could be adverse, on our performance, amounts available for withdrawal and the value of securities distributed by us. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments. Additionally, a particular foreign country may impose exchange controls, devalue its currency or take other measures relating to its currency which could adversely affect us. Finally, we could incur costs in connection with conversions between various currencies.
We may expose ourselves to risks if we engage in hedging transactions.
Subject to applicable provisions of the 1940Investment Company Act and applicable regulations promulgated by the Commodities Futures Trading Commission, we have in the past and may in the future enter into hedging transactions, which may expose us to risks associated with such transactions. Such hedging may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions and amounts due under ourany credit facilitiesfacility from changes in currency exchange rates and market interest rates. Use of these hedging instruments may include counterparty credit risk. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions and amounts due under our credit facilities or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.
The success of any hedging transactions will depend on our ability to correctly predict movements in currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rate or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to (or be able to) establish a perfect correlation between such hedging instruments and the portfolio holdings or credit facilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency
fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations. See also “Risks Relating to Our Business and Structure- Changes in interest rates, changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our cost of capital and net investment income.”
We are a non-diversified investment company within the meaning of the 1940Investment Company Act, and therefore have few restrictions with respect to the proportion of our assets that may be invested in securities of a single industry or issuer.
We are classified as a non-diversified investment company within the meaning of the 1940Investment Company Act, which means that we are not limited by the 1940Investment Company Act with respect to the proportion of our assets that we may invest in securities of a single industry or issuer, excluding limitations on investments in other investment companies. We cannot predict the industries or sectors in which our investment strategy may cause us to concentrate and cannot predict the level of our diversification among industries or issuers. To the extent that we assume large positions in a certain type of security or the securities of a small number of industries or issuers, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the security, industry or issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company. Beyond RIC diversification requirements, we do not have fixed guidelines for diversification, and our investments could be concentrated in relatively few industries or issuers.
Our portfolio may be concentrated in a limited number of portfolio companies and industries, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt instruments or if there is a downturn in a particular industry.
Our portfolio may be concentrated in a limited number of portfolio companies and industries. As a result, the aggregate returns we realize may be significantly and adversely affected if a small number of investments perform poorly or if we need to write down the value of any one investment. Additionally, while we are not targeting any specific industries, our investments may be concentrated in relatively few industries, including the Internet and software industry. As a result, a downturn in any particular industry in which we are invested could also significantly impact the aggregate returns we realize.
We may allocate the net proceeds from an offering in ways with which you may not agree.
We have significant flexibility in investing the net proceeds of an offering, and may do so in a way with which you may not agree. Additionally, our Investment Adviser will select our investments subsequent to the closing of an offering, and our stockholders will have no input with respect to such investment decisions. Further, other than general limitations that may be included in a future credit facility, the holders of our debt securities will generally not have veto power or a vote in approving any changes to our investment or operational policies. These factors increase the uncertainty, and thus the risk, of investing in our securities. In addition, pending such investments, we will invest the net proceeds from an offering primarily in high quality, short-term debt securities, consistent with our business development companyBusiness Development Company election and our election to be taxed as a RIC, at yields significantly below the returns which we expect to achieve when our portfolio is fully invested in securities meeting our investment objective. If we are not able to identify or gain access to suitable investments, our income may be limited.
Risks Relating to Our Common Stock
Shares of closed-end investment companies, including business development companies,Business Development Companies, may trade at a discount to their net asset value.
Shares of closed-end investment companies, including business development companies,Business Development Companies, may trade at a discount from net asset value. This characteristic of closed-end investment companies and business development companiesBusiness Development Companies is separate and distinct from the risk that our net asset value per share may decline. During the last two years, shares of our common stock have regularly traded below our net asset value. We cannot predict whether our common stock will trade at, above or below net asset value.
Investing in our common stock may involve an above average degree of risk.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and a higher risk of volatility or loss of principal. Our investments in portfolio companies involve higher levels of risk, and therefore, an investment in our shares may not be suitable for someone with lower risk tolerance.
The market price of our common stock may fluctuate significantly.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
significant volatility in the market price and trading volume of securities of business development companiesBusiness Development Companies or other companies in our sector, which are not necessarily related to the operating performance of these companies;
inability to obtain any exemptive relief that may be required by us from the SEC;
changes in regulatory policies, accounting pronouncements or tax guidelines, particularly with respect to RICs and business development companies;Business Development Companies;
loss of our business development companyBusiness Development Company or RIC status;
changes in earnings or variations in operating results;
increases in expenses associated with defense of litigation and responding to SEC inquiries;
changes in the value of our portfolio of investments;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
departure of our Investment Adviser’s key personnel; and
general economic trends and other external factors.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
Sales of substantial amounts of our common stock, including by large stockholders, or the availability of such common stock for sale, could adversely affect the prevailing market prices for our common stock. If this occurs and continues for a sustained period of time, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.
Certain provisions of our restated certificate of incorporation and our bylaws as well as the Delaware General Corporation Law could deter takeover attempts and have an adverse impact on the price of our common stock.
Our restated certificate of incorporation and our bylaws as well as the Delaware General Corporation Law contain provisions that may have the effect of discouraging a third party from making an acquisition proposal for us. These anti-takeover provisions may inhibit a change in control in circumstances that could give the holders of our common stock the opportunity to realize a premium over the market price for our common stock.
Stockholders may incur dilution if we issue securities to subscribe to, convert to or purchase shares of our common stock.
The 1940Investment Company Act prohibits us from selling shares of our common stock at a price below the current net asset value per share of such stock with certain exceptions. One such exception is prior stockholder approval of issuances of securities to subscribe to, convert to or purchase shares of our common stock even if the subscription, conversion or purchase price per share of our common stock is below the net asset value per share of our common stock at the time of any such subscription, conversion or purchase. Any decision to sell securities to subscribe to, convert to, or purchase shares of our common stock will be subject to the determination by our boardBoard of directorsDirectors that such issuance is in our and our stockholders’ best interests. If we issue securities to subscribe to, convert to or purchase shares of common stock, the exercise or conversion of such securities would increase the number of outstanding shares of our common stock. Any such exercise or conversion would be dilutive on the voting power of existing stockholders, and could be dilutive with regard to distributions and our net asset value, and other economic aspects of the common stock.
Because the number of shares of common stock that could be so issued and the timing of any issuance is not currently known, the actual dilutive effect cannot be predicted; however, the table below illustrates the impact on the net asset value per common share of a business development companyBusiness Development Company that would be experienced upon the exercise of a subscription right to acquire shares of common stock of the business development company.Business Development Company.
Example of Impact of Exercise of Subscription Right to Acquire Common Stock on Net Asset Value Per Share
The example assumes that the business development companyBusiness Development Company has 1,000,000 shares of common stock outstanding, $15,000,000 in total assets and $5,000,000 in total liabilities at the time of the exercise of the subscription right. As a result, the net asset value and net asset value per common share of the business development companyBusiness Development Company are $10,000,000 and $10.00, respectively.
Further, the example assumes that the subscription right permits the holder thereof to acquire 250,000 common shares under the following three different scenarios: (i) with an exercise price equal to a 10% premium to the business development company’sBusiness Development
Company’s net asset value per share at the time of exercise, or $11.00 per share, (ii) with an exercise price equal to the business development company’sBusiness Development Company’s net asset value per share at the time of exercise, or $10.00 per share, and (iii) with an exercise price equal to a 10% discount to the business development company’sBusiness Development Company’s net asset value per share at the time of exercise, or $9.00 per
|
| | | | | | | | |
| Subscription Rights Exercise Price | | Net Asset Value Per Share Prior To Exercise | | Net Asset Value Per Share After Exercise |
| 10% premium to net asset value per common share | | $ | 10.00 |
| | $ | 10.20 |
|
| Net asset value per common share | | $ | 10.00 |
| | $ | 10.00 |
|
| 10% discount to net asset value per common share | | $ | 10.00 |
| | $ | 9.80 |
|
Although have we chosen to demonstrate the impact on the net asset value per common share of a business development companyBusiness Development Company that would be experienced by existing stockholders of the business development companyBusiness Development Company upon the exercise of a subscription right to acquire shares of common stock of the business development company,Business Development Company, the results noted above would be similar in connection with the exercise or conversion of other securities exercisable or convertible into shares of the business development company’sBusiness Development Company’s common stock. In addition, the example does not take into account the impact of other securities that may be issued in connection with the issuance of exercisable or convertible securities (e.g., the issuance of shares of common stock in conjunction with the issuance of subscription rights to acquire shares of common stock).
Risks Related to Our Debt Securitization
We are subject to risks associated with the 2015 Debt Securitization.
As a result of the 2015 Debt Securitization, we are subject to a variety of risks, including those set forth below. We use the term “debt securitization” to describe a form of secured borrowing under which an operating company (sometimes referred to as an “originator” or “sponsor”) acquires or originates mortgages, receivables, loans or other assets that earn income, whether on a one-time or recurring basis (collectively, “income producing assets”), and borrows money on a non-recourse basis against a legally separate pool of loans or other income producing assets. In a typical debt securitization, the originator transfers the loans or income producing assets to a single-purpose, bankruptcy-remote subsidiary (also referred to as a “special purpose entity”), which is established solely for the purpose of holding loans and income producing assets and issuing debt secured by these income producing assets. The special purpose entity completes the borrowing through the issuance of notes secured by the loans or other assets. The special purpose entity may issue the notes in the capital markets to a variety of investors, including banks, non-bank financial institutions and other investors. In the 2015 Debt Securitization, institutional investors purchased $222.6 million long-term secured notes, or the 2015 Notes, issued by FS Senior Funding Ltd., our wholly-owned subsidiary, or the 2015 Issuer, in a private placement.
We are subject to certain risks as a result of our interests in the junior notes and membership interests of the 2015 Issuer.
Under the terms of the master transfer agreement governing the 2015 Debt Securitization, we sold to the 2015 Issuer all of our ownership interest in certain of our portfolio loans and participations for the purchase price and other consideration set forth in such master transfer agreement. Following this transfer, the 2015 Issuer held all of the ownership interest in such portfolio loans and participations. As a result of the 2015 Debt Securitization and as of September 30, 2015, we held the Class C Senior Secured Notes, or the Class C Notes, as well as all of the subordinated notes, or the Subordinated 2015 Notes, of the 2015 Issuer. As a result, we consolidate the financial statements of the 2015 Issuer, as well as our other subsidiaries, in our Consolidated Financial Statements. Because the 2015 Issuer is disregarded as an entity separate from its owner for U.S. federal income tax purposes, the sale or contribution by us to the 2015 Issuer did not constitute a taxable event for U.S. federal income tax purposes. If the U.S. Internal Revenue Service were to take a contrary position, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.
The Class C Notes are subordinated obligations of the 2015 Issuer.
The Class C Notes are the most junior class of rated notes issued by the 2015 Issuer, are subordinated in priority of payment to the Class A-T Senior Secured Floating Rate Notes, Class A-R Senior Secured Revolving Floating Rate Notes, Class A-S Senior Secured Floating Rate Notes, or collectively, the Class A Notes, and the Class B Senior Secured Floating Rate Notes, or the Class B Notes, and, together with the Class A Notes, the Senior 2015 Notes, and are subject to certain payment restrictions set forth in the indenture governing the 2015 Debt Securitization. Therefore, we only receive cash distributions on the Class C Notes if the 2015 Issuer has made all cash interest payments on all the Senior 2015 Notes it has issued. Consequently, to the extent that the value of the 2015 Issuer’s portfolio of loan investments has been reduced as a result of conditions in the credit markets, or as a result of defaulted loans or individual fund assets, the value of the Class C Notes at their redemption will be reduced because the Class C Notes are junior to the Senior 2015 Notes and will bear losses of the 2015 Issuer’s portfolio of loan investments prior to the Senior 2015 Notes.
The 2015 Issuer, as holder of the Subordinated 2015 Notes, is the residual claimant on funds, if any, remaining after holders of all classes of 2015 Notes have been paid in full on each payment date or upon maturity of such notes under the 2015 Debt Securitization documents. The Subordinated 2015 Notes in the 2015 Issuer represent all of the residual interest in the 2015 Issuer, and, as the holder of the Subordinated 2015 Notes, we may receive distributions, if any, only to the extent that the 2015 Issuer makes distributions out of funds remaining after holders of all classes of 2015 Notes have been paid in full on each payment date any amounts due and owing on such payment date or upon maturity of such 2015 Notes.
The interests of holders of the senior classes of securities issued by the 2015 Issuer may not be aligned with our interests.
The Class A Notes are the debt obligations ranking senior in right of payment to other securities issued by the 2015 Issuer in the 2015 Debt Securitization. As such, there are circumstances in which the interests of holders of the Class A Notes may not be aligned with the interests of holders of the other classes of notes issued by the 2015 Issuer. For example, under the terms of the Class A Notes, holders of the Class A Notes have the right to receive payments of principal and interest prior to holders of the Class B Notes, the Class C Notes and the 2015 Issuer and the holders of the Class B Notes have the right to receive payments of the principal and interest prior to the holders of the Class C Notes.
For as long as the Class A Notes remain outstanding, holders of the Class A Notes comprise the most senior class of notes outstanding of the 2015 Issuer, or the Controlling Class, under the 2015 Debt Securitization. If the Class A Notes are paid in full, the Class B Notes would comprise the Controlling Class under the 2015 Debt Securitization. Holders of the Controlling Class under the 2015 Debt Securitization have the right to act in certain circumstances with respect to the portfolio loans in ways that may benefit their interests but not the interests of holders of more junior classes of notes and Subordinated 2015 Notes, including by exercising remedies under the indenture in the 2015 Debt Securitization.
If an event of default has occurred and acceleration occurs in accordance with the terms of the indenture governing the 2015 Debt Securitization, the Controlling Class, as the most senior class of notes then outstanding in the 2015 Debt Securitization will be paid in full before any further payment or distribution on the more junior classes of notes and Subordinated 2015 Notes. In addition, if an event of default under the 2015 Debt Securitization occurs, holders of a majority of the Controlling Class of the 2015 Debt Securitization may be entitled to determine the remedies to be exercised under the indenture, subject to the terms of such indenture. For example, upon the occurrence of an event of default with respect to the notes issued by the 2015 Issuer, the trustee or holders of a majority of the Controlling Class may declare the principal, together with any accrued interest, of all the notes of such class and any junior classes to be immediately due and payable. This would have the effect of accelerating the principal on such notes, triggering a repayment obligation on the part of the 2015 Issuer. If at such time the portfolio loans were not performing well, the 2015 Issuer may not have sufficient proceeds available to enable the trustee under the indenture to repay the obligations of holders of the 2015 Notes or the Subordinated 2015 Notes.
Remedies pursued by the Controlling Class could be adverse to the interests of the holders of the 2015 Notes that are subordinated to the Controlling Class, and the Controlling Class will have no obligation to consider any possible adverse effect on such other interests. Thus, we cannot assure you that any remedies pursued by the Controlling Class will be in the best interests of the 2015 Issuer or us or that the 2015 Issuer or we will receive any payments or distributions upon an acceleration of the notes. In a liquidation under the 2015 Debt Securitization, the Class C Notes will be subordinated to payment of the Class A Notes and Class B Notes and may not be paid in full to the extent funds remaining after payment of the Class A Notes and Class B Notes are insufficient. In addition, under the 2015 Debt Securitization, after the Class A Notes and Class B Notes are paid in full, the holder of the Class C Notes will be the only remaining noteholder and may amend the applicable indenture to, among other things, direct the assignment of any remaining assets to other wholly-owned subsidiaries for a price less than the fair market value of such assets with the difference in price to be considered an equity contribution to such subsidiaries. Any failure of the 2015 Issuer to make distributions on the notes we indirectly or directly hold, whether as a result of an event of default, liquidation or otherwise, could have a material adverse effect on our business, financial condition, results of operations and cash flows and may result in an inability of us to make distributions sufficient to maintain our status as a RIC.
The 2015 Issuer may fail to meet certain asset coverage tests.
Under the documents governing the 2015 Debt Securitization, there are two asset coverage tests applicable to the 2015 Notes. The first such test compares the amount of interest received on the portfolio loans held by the 2015 Issuer to the amount of interest payable in respect of the Class A Notes, the Class B Notes and the Class C Notes, with respect to the 2015 Issuer. To meet this first test, interest received on the portfolio loans must equal at least 200.0% of the interest payable in respect of the Class A Notes and Class B Notes, taken together, and at least 175.0% of the interest payable in respect of the Class C Notes. The second such test compares the principal amount of the portfolio loans of the applicable debt securitization to the aggregate outstanding principal amount of the Class A Notes, the Class B Notes and the Class C Notes. To meet this second test at any time, the aggregate principal amount of the portfolio loans must equal at least 144.95% of the Class A Notes and the Class B Notes, taken together, and 131.63% of the Class C Notes. If any asset coverage test with respect to the Class A Notes, the Class B Notes or Class C Notes is not met, proceeds from the portfolio of loan investments that otherwise would have been distributed to the holders of the Class C Notes and the 2015 Issuer will instead be used to redeem first the Class A Notes and then the Class B Notes, to the extent necessary to satisfy the applicable asset coverage tests on a pro forma basis after giving effect to all payments made in respect of the notes, which we refer to as a mandatory redemption, or to obtain the necessary ratings confirmation.
The value of the Class B Notes or the Class C Notes could be adversely affected by a mandatory redemption because such redemption could result in the applicable notes being redeemed at par at a time when they are trading in the secondary market at a premium to their stated principal amount and when other investments bearing the same rate of interest may be difficult or expensive to acquire. A mandatory redemption could also result in a shorter investment duration than a holder of such notes may have wanted or anticipated, which could, in turn, result in such a holder incurring breakage costs on related hedging transactions. In addition, the reinvestment period under the 2015 Debt Securitization may extend through as late as May 28, 2019, which could affect the value of the collateral securing the Class C Notes.
We may not receive cash from the 2015 Issuer.
We receive cash from the 2015 Issuer only to the extent of payments on the Class C Notes and distributions, if any, with respect to the membership interests of the 2015 Issuer as permitted under the 2015 Debt Securitization. The 2015 Issuer may only make payments on such securities to the extent permitted by the payment priority provisions of the indenture governing the 2015 Debt Securitization, which generally provide that principal payments on the Class C Notes may not be made on any payment date unless all amounts owing under the Class A Notes and Class B Notes are paid in full. If the 2015 Issuer does not meet the asset coverage tests or the interest coverage test set forth in the documents governing the 2015 Debt Securitization, cash would be diverted from the Class C Notes to first pay the Class A Notes and Class B Notes in amounts sufficient to cause such tests to be satisfied. In the event that we fail to receive cash indirectly from the 2015 Issuer, we could be unable to make such distributions in amounts sufficient to maintain our status as a RIC, or at all.
We may be required to assume liabilities of the 2015 Issuer and are indirectly liable for certain representations and warranties in connection with the 2015 Debt Securitization.
The structure of the 2015 Debt Securitization is intended to prevent, in the event of our bankruptcy, the consolidation of the 2015 Issuer with our operations. If the true sale of the assets in the 2015 Debt Securitization was not respected in the event of our insolvency, a trustee or debtor-in-possession might reclaim the assets of the 2015 Issuer for our estate. However, in doing so, we would become directly liable for all of the indebtedness then outstanding under the 2015 Debt Securitization, which would equal the full amount of debt of the 2015 Issuer reflected on our consolidated balance sheet. In addition, we cannot assure you that the recovery in the event we were consolidated with the 2015 Issuer for purposes of any bankruptcy proceeding would exceed the amount to which we would otherwise be entitled as the holder of the Class C Notes had we not been consolidated with the 2015 Issuer.
In addition, in connection with the 2015 Debt Securitization, we gave the lenders certain customary representations with respect to the legal structure of the 2015 Issuer, and the quality of the assets transferred to each entity. We remain liable for any breach of such representations for the life of the 2015 Debt Securitization.
The 2015 Issuer may issue additional 2015 Notes.
Under the terms of the 2015 Debt Securitization documents, the 2015 Issuer could issue additional 2015 Notes in any class at any time during the reinvestment period on a pro rata basis for each class of notes (but not for each sub-class) and use the net proceeds of such issuance to purchase additional portfolio loans or for another permitted use as provided in the 2015 Debt Securitization documents. Any such additional issuance, however, would require the consent of the collateral manager to the 2015 Debt Securitization and the holders of a majority of the Subordinated 2015 Notes. Among the other conditions that must be satisfied in connection with an additional issuance of 2015 Notes, the aggregate principal amount of all additional issuances of any class of 2015 Notes may not exceed 100% of the outstanding principal amount of such class of 2015 Notes; the 2015 Issuer must notify each rating agency of such issuance prior to the issuance date and such rating agency, if it then rates any class of 2015 Notes, must confirm in writing that no immediate withdrawal or reduction with respect to its then-current rating of any such class of 2015 Notes will occur as a result of such issuance; and the terms of the 2015 Notes to be issued must be identical to the terms of previously issued 2015 Notes of the same class (except that all monies due on such additional 2015 Notes will accrue from the issue date of such notes and that the prices of such 2015 Notes do not have to be identical to those of the initial 2015 Notes). We do not expect to cause the 2015 Issuer to issue any additional 2015 Notes at this time. The total purchase price for any additional 2015 Notes that may be issued may not always equal 100% of the par value of such 2015 Notes, depending on several factors, including fees and closing expenses.
Restructurings of investments of our 2015 Debt Securitization may decrease their value and reduce amounts payable on the 2015 Notes.
We and FS Senior Funding Ltd. have entered into a collateral management agreement, an agreement entered into between a manager and a debt securitization vehicle or similar issuer, which sets forth the terms and conditions pursuant to which the manager provides advisory and/or management services with respect to the client’s securities portfolio. Under the collateral management agreement, we serve as collateral manager of the 2015 Debt Securitization. We have retained a sub-collateral manager, which, as of October 17, 2017, was the Investment Adviser and, prior to October 17, 2017, was the Former Adviser, to furnish collateral management sub-advisory services to us pursuant to a sub-collateral management agreement with our investment adviser.
In our capacity as the collateral manager, we have broad authority to direct and supervise the investment and reinvestment of the investments held by the 2015 Debt Securitization, which may include exercising or enforcing, or refraining from exercising or enforcing, any or all of the 2015 Debt Securitization’s rights in connection with the execution of amendments, waivers, modifications and other changes to the investment documentation in accordance with the collateral management agreement. During periods of economic uncertainty and recession, the incidence of amendments, waivers, modifications and restructurings of investments may increase. Such amendments, waivers, modifications and other restructurings will change the terms of the investments and in some cases may result in the 2015 Debt Securitization holding assets not meeting its criteria for investments. This could adversely impact the coverage tests under the indenture governing the 2015 Notes. Any amendment, waiver, modification or other restructuring that reduces the 2015 Debt Securitization’s compliance with certain financial tests will make it more likely that the 2015 Debt Securitization will need to utilize cash to pay down the unpaid principal amount of the 2015 Notes to cure any breach in such test instead of making payments on the 2015 Notes. Any such use of cash would reduce distributions available and delay the timing of payments to us.
We cannot assure you that any particular restructuring strategy pursued by us or any successor collateral manager will maximize the value of or recovery on any investment. Any restructuring can fundamentally alter the nature of the related investment, and restructurings are not subject to the same underwriting standards that are employed in connection with the origination or acquisition of investments. Any restructuring could alter, reduce or delay the payment of interest or principal on any investment, which could delay the timing and reduce the amount of payments made to us. Restructurings of investments might also result in extensions of the term thereof, which could delay the timing of payments made to us.
The 2015 Debt Securitization depends on the managerial expertise and key personnel available to the collateral manager.
The 2015 Debt Securitization’s activities are directed by us (or any successor collateral manager). As of October 17, 2017, we retained the Investment Adviser to furnish collateral management sub-advisory services. In our capacity as holder of the 2015 Notes, we are generally not able to make decisions with respect to the management, disposition or other realization of any investment, or other decisions regarding the business and affairs of the 2015 Debt Securitization. Consequently, the success of the 2015 Debt Securitization will depend, in large part, on the financial and managerial expertise of the investment professionals available to the sub-collateral manager, which, as of October 17, 2017, was the Investment Adviser. There can be no assurance that such investment professionals will continue to serve in their current positions or continue to be authorized persons of the Investment Adviser. Although such investment professionals will devote such time as they determine in their discretion is reasonably necessary to fulfill the obligations under the collateral management sub-advisory services agreement to the 2015 Debt Securitization effectively, they will not devote all of their professional time to the affairs of the 2015 Debt Securitization.
Our ability to transfer the 2015 Notes is limited.
The notes issued pursuant to the 2015 Debt Securitization are illiquid investments and subject to extensive transfer restrictions, and no party is under any obligation to make a market for the notes. There is no market for the notes, and we may not be able to sell or otherwise transfer the 2015 Notes at their fair value, or at all, in the event that we determine to sell them. During economic downturns, notes issued in securitization transactions may experience high volatility and significant fluctuations in market value. Additionally, some potential buyers of such notes now view securitization products as an inappropriate investment, thereby reducing the number of potential buyers and/or potentially affecting liquidity in the secondary market.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We do not own any real estate or other physical properties material to our operations. Our administrative and principal executive offices are located at 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.
Item 3. Legal Proceedings
Although we may, from time to time, be involved in litigation arising out of our operations in the normal course of business or otherwise, we are currently not a party to any pending material legal proceedings except as described below.
SEC Examination and Investigation
On March 23, 2016, the Division of Enforcement of the SEC sent document subpoenas and document preservation notices to us, FSAM, FSCO GP LLC -– General Partner of Fifth Street Opportunities Fund, L.P., or FSOF, and OCSL. The subpoenas sought production of documents relating to a variety of issues principally related to the activities of our Former Adviser, including those raised in an ordinary-course examination of the Former Adviser by the SEC’s Office of Compliance Inspections and Examinations that began in October 2015, and in the previously disclosed OCSL and FSAM securities class actions and other previously disclosed litigation. The subpoenas were issued pursuant to a formal order of private investigation captioned In the Matter of the Fifth Street Group of Companies, No. HO-12925, dated March 23, 2016, which addresses (among other things) (i) the valuation of our portfolio companies and investments, (ii) the expenses allocated or charged to us and OCSL, (iii) FSOF’s trading in the securities of publicly traded business development companies,Business Development Companies, (iv) statements to our boardBoard of directors,Directors, other representatives of pooled investment vehicles, investors, or prospective investors concerning the fair value of our portfolio companies or investments as well as expenses allocated or charged to us and OCSL, (v) various issues relating to adoption and implementation of policies and procedures under the Advisers Act, (vi) statements and/or potential omissions in the entities’ SEC filings, (vii) the entities’ books, records, and accounts and whether they fairly and accurately reflected the entities’ transactions and dispositions of assets, and (viii) several other issues relating to corporate books and records. The formal order cites various provisions of the Securities Act of 1933, as amended, the Exchange Act, and the Advisers Act, as well as rules promulgated under those Acts, as the bases of the investigation. We are cooperating with the Division of Enforcement investigation, have produced requested documents, and have been communicatingbelieve our obligations with Division of Enforcement personnel. Our Investment Adviserrespect to the matter are concluded. Oaktree is not subject to these subpoenas.
Item 4. Mine Safety Disclosures
Not applicable.
PART II — OTHER INFORMATION
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Price Range of Common Stock
Our common stock currently trades on the NASDAQNasdaq Global Select Market under the symbol “OCSI.” Through October 17, 2017, our common stock traded under the symbol “FSFR.” The following table sets forth, for each fiscal quarter during the two most recently completed fiscal years, the range of high and low sales prices of our common stock as reported on the NASDAQ Global Select Market:
|
| | | | | | | | |
| | | High | | Low |
| Fiscal year ended September 30, 2017 | | | | |
| First quarter | | $ | 9.53 |
| | $ | 8.30 |
|
| Second quarter | | $ | 10.37 |
| | $ | 8.50 |
|
| Third quarter | | $ | 8.88 |
| | $ | 7.30 |
|
| Fourth quarter | | $ | 9.09 |
| | $ | 7.89 |
|
| Fiscal year ended September 30, 2016 | | | | |
| First quarter | | $ | 9.10 |
| | $ | 7.34 |
|
| Second quarter | | $ | 8.68 |
| | $ | 6.53 |
|
| Third quarter | | $ | 8.35 |
| | $ | 7.25 |
|
| Fourth quarter | | $ | 8.99 |
| | $ | 7.94 |
|
The last reported price for our common stock on December 7, 2017November 27, 2018 was $8.32$8.28 per share. As of December 7, 2017,November 27, 2018, we had fivefour stockholders of record, which did not include stockholders for whom shares are held in nominee or “street” name.
Sales of Unregistered Securities
We did not engage in any sales of unregistered securities during the fiscal year ended September 30, 2017.
Distributions
Our distributions, if any, are determined by our Board of Directors.
In addition, we have elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As long as we continue to qualify as a RIC, we will not be subject to tax on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed as dividends for U.S. federal income tax purposes, or deemed to be distributed, to our stockholders on a timely basis.
To maintain RIC tax treatment, we must, among other things, distribute dividends to our stockholders each taxable year of an amount generally, with respect to each taxable year, at least equal to 90% of our investment company net taxable income (i.e., the sum of our net ordinary income plus our realized net short-term capital gains in excess of realized net long-term capital losses determined without regard to any deduction for dividends paid). Depending on the level of taxable income earned in a taxable year, we may choose to carry forward taxable income in excess of current year distributions into the next taxable year and incur a 4% U.S. federal excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the taxable year in which such taxable income was generated. We may, in the future, make actual distributions to our stockholders of our net capital gains. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings. See “Business - Taxation as a Regulated Investment Company” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Regulated Investment Company Status and Distributions.”
We have adopted an “opt out” dividend reinvestment plan, or DRIP, for our common stockholders. As a result, if we make a cash distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the DRIP so as to receive cash distributions.
In accordance with certain applicable Treasury regulations and related administrative authorities issued by the IRS, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive
his or her entire distribution in either cash or stock of the RIC, subject to certain requirements, including those relating to the amount of cash to be distributed to all stockholders in connection with such distributions. If too many stockholders elect to receive cash (which generally may not be less than 20% of the value of the overall distribution), each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or administrative authorities.
The following table reflects the distributions per share, including any return of capital, that our Board of Directors has declared, including shares issued under our DRIP on our common stock since October 1, 2015:
|
| | | | | | | | | | | | | | |
| Frequency | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Total Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value |
| Monthly | | July 10, 2015 | | October 6, 2015 | | October 15, 2015 | | 0.075 | | 2,210,008 | | 12,080 | | 108,563 |
| Monthly | | July 10, 2015 | | November 5, 2015 | | November 16, 2015 | | 0.075 | | 2,210,008 | | 13,269 | | 116,730 |
| Monthly | | November 30, 2015 | | December 11, 2015 | | December 22, 2015 | | 0.075 | | 2,210,007 | | 11,103 | | 94,563 |
| Monthly | | November 30, 2015 | | January 4, 2016 | | January 15, 2016 | | 0.075 | | 2,210,007 | | 8,627 | | 61,079 |
| Monthly | | November 30, 2015 | | February 5, 2016 | | February 16, 2016 | | 0.075 | | 2,210,008 | | 4,542 | | 32,923 |
| Monthly | | February 8, 2016 | | March 15, 2016 | | March 31, 2016 | | 0.075 | | 2,210,008 | | 4,383 | | 34,578 |
| Monthly | | February 8, 2016 | | April 15, 2016 | | April 29, 2016 | | 0.075 | | 2,210,008 | | 4,452 | | 35,033 |
| Monthly | | February 8, 2016 | | May 13, 2016 | | May 31, 2016 | | 0.075 | | 2,210,007 | | 4,256 | | 33,494 |
| Monthly | | May 6, 2016 | | June 15, 2016 | | June 30, 2016 | | 0.075 | | 2,210,007 | | 5,822 | | 46,881 |
| Monthly | | May 6, 2016 | | July 15, 2016 | | July 29, 2016 | | 0.075 | | 2,210,008 | | 3,627 | | 30,745 |
| Monthly | | May 6, 2016 | | August 15, 2016 | | August 31, 2016 | | 0.075 | | 2,210,008 | | 3,260 | | 29,002 |
| Monthly | | August 4, 2016 | | September 15, 2016 | | September 30, 2016 | | 0.075 | | 2,210,008 | | 3,078 | | 26,811 |
| Monthly | | August 4, 2016 | | October 14, 2016 | | October 31, 2016 | | 0.075 | | 2,210,008 | | 3,146 | | 26,985 |
| Monthly | | August 4, 2016 | | November 15, 2016 | | November 30, 2016 | | 0.075 | | 2,210,008 | | 2,986 | | 26,909 |
| Monthly | | October 19, 2016 | | December 15, 2016 | | December 30, 2016 | | 0.075 | | 2,210,008 | | 3,438 | | 30,586 |
| Monthly | | October 19, 2016 | | January 31, 2017 | | January 31, 2017 | | 0.075 | | 2,210,008 | | 2,905 | | 29,363 |
| Monthly | | October 19, 2016 | | February 15, 2017 | | February 28, 2017 | | 0.075 | | 2,210,008 | | 2,969 | | 26,427 |
| Monthly | | February 6, 2017 | | March 15, 2017 | | March 31, 2017 | | 0.040 | | 1,178,671 | | 1,508 | | 13,253 |
| Quarterly | | February 6, 2017 | | June 15, 2017 | | June 30, 2017 | | 0.190 | | 5,598,686 | | 6,840 | | 55,221 |
| Quarterly | | August 7, 2017 | | September 15, 2017 | | September 29, 2017 | | 0.190 | | 5,598,686 | | 6,991 | | 61,887 |
| Quarterly | | August 7, 2017 | | December 15, 2017 | | December 29, 2017 | | 0.190 | | | | | | |
_______________________
(1) Shares were purchased on the open market and distributed.
2018.
Stock Performance Graph
The following graph compares the cumulative 5-year total return provided to shareholders on Oaktree Strategic Income Corporation’s common stock relative to the cumulative total returns of the NYSE Composite index,Index, the NASDAQNasdaq Financial indexIndex, the Russell 2000 Financial Services Index and a customized peer group of our two direct competitors, Solar Senior Capital Ltd. and PennantPark Floating Rate Capital Ltd.the Standard & Poor’s 500 Stock Index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock, on July 12, 2013, the date our common stock was listed, and in each index and in the peer group at Juneon September 30, 2013 and its relative performance is tracked through September 30, 2017.2018. The stock performance graph shows returns during management by the Former Adviser.
|
| | | | | | | | | | | | | | | | | | |
| | 7/12/13 | 9/13 | 12/13 | 3/14 | 6/14 | 9/14 | 12/14 | 3/15 | 6/15 |
| | | | | | | | | | |
| Oaktree Strategic Income Corporation | 100.00 |
| 95.69 |
| 95.04 |
| 104.85 |
| 104.23 |
| 90.00 |
| 80.14 |
| 85.71 |
| 76.59 |
|
| NYSE Composite | 100.00 |
| 105.64 |
| 114.82 |
| 116.93 |
| 122.75 |
| 120.34 |
| 122.57 |
| 123.97 |
| 123.72 |
|
| NASDAQ Financial | 100.00 |
| 104.75 |
| 117.25 |
| 118.72 |
| 117.66 |
| 114.96 |
| 124.17 |
| 126.50 |
| 131.77 |
|
| Peer Group | 100.00 |
| 96.46 |
| 98.55 |
| 97.72 |
| 100.79 |
| 96.61 |
| 97.25 |
| 103.96 |
| 104.49 |
|
|
| | | | | | | | | | | | | | | | | | |
| | 9/15 | 12/15 | 3/16 | 6/16 | 9/16 | 12/16 | 3/17 | 6/17 | 9/17 |
| | | | | | | | | | |
| Oaktree Strategic Income Corporation | 73.94 |
| 75.19 |
| 70.94 |
| 73.29 |
| 80.95 |
| 84.47 |
| 87.36 |
| 82.74 |
| 91.28 |
|
| NYSE Composite | 112.91 |
| 117.55 |
| 119.12 |
| 123.31 |
| 126.85 |
| 131.59 |
| 137.62 |
| 141.83 |
| 148.09 |
|
| NASDAQ Financial | 122.67 |
| 128.11 |
| 124.96 |
| 127.04 |
| 137.93 |
| 161.48 |
| 160.89 |
| 169.33 |
| 180.84 |
|
| Peer Group | 94.94 |
| 95.11 |
| 99.33 |
| 109.35 |
| 116.81 |
| 124.87 |
| 131.45 |
| 131.22 |
| 137.57 |
|
Selected unaudited quarterly financial data for Oaktree Strategic Income CorporationAdviser for the yearsperiod from September 30, 2013 through October 16, 2017 and during management by Oaktree for the period from October 17, 2017 through September 30, 2018.
For the fiscal year ended September 30, 2017, 2016,we included a comparison to a customized peer group of two Business Development Companies (Solar Senior Capital Ltd. and 2015, are below:Pennantpark Floating Rate Capital Ltd.). For the fiscal year ending September 30, 2018, we have switched to a comparison to the Russell 2000 Financial Services Index and the Standard & Poor’s 500 Stock Index to be consistent with current market practice. The customized peer group had a cumulative total return for the period from October 1, 2013 to September 30, 2018 of $42.64 as compared to our cumulative total return over the same period of $1.09 and the cumulative total return of the Russell 2000 Financial Services Index of $75.60.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the three months ended |
(dollars in thousands,
except per share
amounts) | September 30, 2017 | June 30,
2017 | March 31,
2017 | December
31, 2016 | September 30, 2016 | June 30,
2016 | March 31,
2016 | December
31, 2015 | September 30, 2015 | June 30,
2015 | March 31,
2015 | December
31, 2014 |
| Total investment income | $ | 11,820 |
| $ | 12,171 |
| $ | 11,020 |
| $ | 11,561 |
| $ | 13,203 |
| $ | 13,114 |
| $ | 13,195 |
| $ | 13,914 |
| $ | 14,068 |
| $ | 14,140 |
| $ | 11,341 |
| $ | 11,923 |
|
| Net investment income | 5,521 |
| 5,930 |
| 5,086 |
| 5,884 |
| 6,342 |
| 6,164 |
| 5,785 |
| 7,002 |
| 7,402 |
| 7,086 |
| 6,294 |
| 7,496 |
|
| Net realized and unrealized gain (loss) | (19,984 | ) | (5,791 | ) | (254 | ) | (5,159 | ) | 2,251 |
| (5,248 | ) | (6,445 | ) | (20,308 | ) | (7,115 | ) | (4,632 | ) | 393 |
| (1,012 | ) |
| Net increase (decrease) in net assets resulting from operations | (14,463 | ) | 139 |
| 4,832 |
| 725 |
| 8,593 |
| 916 |
| (660 | ) | (13,306 | ) | 287 |
| 2,454 |
| 6,687 |
| 6,484 |
|
| Net assets | 293,636 |
| 313,698 |
| 319,158 |
| 319,924 |
| 325,829 |
| 323,866 |
| 329,580 |
| 334,661 |
| 356,807 |
| 361,782 |
| 368,168 |
| 370,322 |
|
| Total investment income per common share | $ | 0.40 |
| $ | 0.41 |
| $ | 0.37 |
| $ | 0.39 |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.47 |
| $ | 0.48 |
| $ | 0.48 |
| $ | 0.38 |
| $ | 0.40 |
|
| Net investment income per common share | 0.19 |
| 0.20 |
| 0.17 |
| 0.20 |
| 0.22 |
| 0.21 |
| 0.20 |
| 0.24 |
| 0.25 |
| 0.24 |
| 0.21 |
| 0.25 |
|
| Earnings (loss) per common share | (0.49 | ) | — |
| 0.16 |
| 0.02 |
| 0.29 |
| 0.03 |
| (0.02 | ) | (0.45 | ) | 0.01 |
| 0.08 |
| 0.23 |
| 0.22 |
|
| Net asset value per common share at period end | 9.97 |
| 10.65 |
| 10.83 |
| 10.86 |
| 11.06 |
| 10.99 |
| 11.18 |
| 11.36 |
| 12.11 |
| 12.28 |
| 12.49 |
| 12.57 |
|
|
| | | | | | | | | | | | |
| | September 30, 2013 | September 30, 2014 | September 30, 2015 | September 30, 2016 | September 30, 2017 | September 30, 2018 |
| Oaktree Strategic Income Corporation | 100.00 |
| 94.05 |
| 77.27 |
| 84.59 |
| 95.40 |
| 101.09 |
|
| NYSE Composite | 100.00 |
| 113.92 |
| 106.88 |
| 120.08 |
| 140.19 |
| 153.94 |
|
| S&P 500 | 100.00 |
| 119.73 |
| 119.00 |
| 137.36 |
| 162.92 |
| 192.10 |
|
| NASDAQ Financial | 100.00 |
| 111.32 |
| 118.54 |
| 134.46 |
| 175.28 |
| 193.76 |
|
| Russell 2000 Financial Services | 100.00 |
| 107.05 |
| 115.83 |
| 134.26 |
| 164.44 |
| 175.60 |
|
| Peer Group | 100.00 |
| 100.11 |
| 97.41 |
| 119.86 |
| 141.02 |
| 142.64 |
|
Item 6. Selected Financial Data
The table below sets forth our selected historical financial data for the periods indicated. Our historical results are not necessarily indicative of future results. The selected financial data in this section is not intended to replace the financial statements and is qualified in its entirety by the financial statements and related notes included in this filing.
The following selected financial data should be read together with our Consolidated Financial Statements and the related notes and the discussion under “Management’sinformation contained in Part II, Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” which is included elsewhereOperations,” and the audited financial statements and the notes thereto in Part II, Item 8 of this annual report on Form 10-K.10-K, "Consolidated Financial Statements and Supplementary Data." The financial information as of and for the fiscal years ended September 30, 2018, 2017, 2016, 2015 and 2014 and as of September 30, 2013 and for the period from the commencement of operations, June 29, 2013, through September 30, 2013 set forth below was derived from our audited financial statements and related notes, for Oaktree Strategic Income Corporation.which are included in "Consolidated Financial Statements and Supplementary Data" in Part II, Item 8 of this Form 10-K.
| | | | | | | | | | | | | | As of and for the Years Ended |
| | | As of and for the Year Ended September 30, 2017 | | As of and for the Year Ended September 30, 2016 | | As of and for the Year Ended September 30, 2015 | | As of and for the Year Ended September 30, 2014 | | As of September 30 and for the period from June 29, 2013 through September 30, 2013 | |
September 30, 2018 | |
September 30, 2017 | |
September 30, 2016 | |
September 30, 2015 | |
September 30,
2014 |
| Statement of Operations data: | | | | | | | | | | | | | | | | | | | | |
| Total investment income | | $ | 46,571,856 |
| | $ | 53,426,234 |
| | $ | 51,472,531 |
| | $ | 12,516,674 |
| | $ | 456,417 |
| | $ | 47,670,547 |
| | $ | 46,571,856 |
| | $ | 53,426,234 |
| | $ | 51,472,531 |
| | $ | 12,516,674 |
|
| Base management fee, net | | 5,648,467 |
| | 6,128,072 |
| | 5,931,155 |
| | 1,602,617 |
| | 61,379 |
| |
| Base management fee | | | 5,657,786 |
| | 5,654,699 |
| | 6,134,304 |
| | 5,931,155 |
| | 1,757,492 |
|
| Part I incentive fee | | 3,236,320 |
| | 5,211,729 |
| | 5,689,371 |
| | 708,235 |
| | — |
| | 2,923,076 |
| | 3,236,320 |
| | 5,211,729 |
| | 5,689,371 |
| | 708,235 |
|
| Part II incentive fee | | — |
| | — |
| | (766,552 | ) | | 774,841 |
| | 137,609 |
| | — |
| | — |
| | — |
| | (766,552 | ) | | 774,841 |
|
| Fees Waived | | | (702,261 | ) | | (6,232 | ) | | (6,232 | ) | | — |
| | (154,875 | ) |
| All other expenses | | 15,265,376 |
| | 16,793,749 |
| | 12,340,527 |
| | 3,667,100 |
| | 241,723 |
| | 20,020,614 |
| | 15,265,376 |
| | 16,793,749 |
| | 12,340,527 |
| | 3,667,100 |
|
| Net investment income | | 22,421,693 |
| | 25,292,684 |
| | 28,278,030 |
| | 5,763,881 |
| | 15,706 |
| | 19,771,332 |
| | 22,421,693 |
| | 25,292,684 |
| | 28,278,030 |
| | 5,763,881 |
|
| Net realized and unrealized gain (loss) on investments | | (31,188,572 | ) | | (29,750,301 | ) | | (12,365,948 | ) | | 3,600,076 |
| | 688,043 |
| |
| Net realized and unrealized gain (loss) on investments, secured borrowings and foreign currency | | | 901,717 |
| | (31,188,572 | ) | | (29,750,301 | ) | | (12,365,948 | ) | | 3,600,076 |
|
| Net increase (decrease) in net assets resulting from operations | | (8,766,879 | ) | | (4,457,617 | ) | | 15,912,082 |
| | 9,363,957 |
| | 703,749 |
| | 20,673,049 |
| | (8,766,879 | ) | | (4,457,617 | ) | | 15,912,082 |
| | 9,363,957 |
|
| Per share data: | | | | | | | | | | | | | | | | | | | | |
| Net asset value per common share at period end | | $ | 9.97 |
| | $ | 11.06 |
| | $ | 12.11 |
| | $ | 12.65 |
| | $ | 15.11 |
| | $ | 10.04 |
| | $ | 9.97 |
| | $ | 11.06 |
| | $ | 12.11 |
| | $ | 12.65 |
|
| Market price at period end | | 8.80 |
| | 8.56 |
| | 8.73 |
| | 11.82 |
| | 13.54 |
| | 8.65 |
| | 8.80 |
| | 8.56 |
| | 8.73 |
| | 11.82 |
|
| Net investment income (2) | | 0.76 |
| | 0.86 |
| | 0.96 |
| | 0.62 |
| | — |
| | 0.67 |
| | 0.76 |
| | 0.86 |
| | 0.96 |
| | 0.62 |
|
| Net realized and unrealized gain (loss) on investments (2) | | (1.06 | ) | | (1.01 | ) | | (0.42 | ) | | 0.39 |
| | 0.13 |
| |
| Net realized and unrealized gain (loss) on investments, secured borrowings and foreign currency (2) | | | 0.03 |
| | (1.06 | ) | | (1.01 | ) | | (0.42 | ) | | 0.39 |
|
| Net increase (decrease) in net assets resulting from operations (2) | | (0.30 | ) | | (0.15 | ) | | 0.54 |
| | 1.01 |
| | 0.13 |
| | 0.70 |
| | (0.30 | ) | | (0.15 | ) | | 0.54 |
| | 1.01 |
|
| Distributions per common share | | 0.80 |
| | 0.90 |
| | 1.07 |
| | 1.01 |
| | — |
| | 0.63 |
| | 0.80 |
| | 0.90 |
| | 1.07 |
| | 1.01 |
|
| Balance Sheet data at period end: | | | | | | | | | | | | | | | | | | | | |
| Total investments at fair value | | $ | 560,436,660 |
| | $ | 573,604,381 |
| | $ | 623,647,474 |
| | $ | 300,001,397 |
| | $ | 48,653,617 |
| | $ | 556,841,828 |
| | $ | 560,436,660 |
| | $ | 573,604,381 |
| | $ | 623,647,474 |
| | $ | 300,001,397 |
|
| Cash, cash equivalents and restricted cash | | 43,012,387 |
| | 28,815,679 |
| | 52,692,097 |
| | 109,557,165 |
| | 52,346,831 |
| | 16,431,787 |
| | 43,012,387 |
| | 28,815,679 |
| | 52,692,097 |
| | 109,557,165 |
|
| Other assets | | 5,213,604 |
| | 19,997,081 |
| | 21,370,913 |
| | 2,946,782 |
| | 449,596 |
| | 11,858,255 |
| | 5,213,604 |
| | 19,997,081 |
| | 21,370,913 |
| | 2,946,782 |
|
| Total assets | | 608,662,651 |
| | 622,417,141 |
| | 697,710,484 |
| | 412,505,344 |
| | 101,450,044 |
| | 585,131,870 |
| | 608,662,651 |
| | 622,417,141 |
| | 697,710,484 |
| | 412,505,344 |
|
| Total liabilities | | 315,026,217 |
| | 296,587,747 |
| | 340,903,381 |
| | 39,827,666 |
| | 744,775 |
| | 289,386,450 |
| | 315,026,217 |
| | 296,587,747 |
| | 340,903,381 |
| | 39,827,666 |
|
| Total net assets | | 293,636,434 |
| | 325,829,394 |
| | 356,807,103 |
| | 372,677,678 |
| | 100,705,269 |
| | 295,745,420 |
| | 293,636,434 |
| | 325,829,394 |
| | 356,807,103 |
| | 372,677,678 |
|
| Other data: | | | | | | | | | | | | | | | | | | | | |
| Weighted average yield on debt investments(1) | | 7.52 | % | | 8.58 | % | | 8.22 | % | | 7.27 | % | | 6.81 | % | |
| Weighted average yield on debt investments (1) | | | 7.70 | % | | 7.52 | % | | 8.58 | % | | 8.22 | % | | 7.27 | % |
| Number of portfolio companies at period end | | 67 |
| | 63 |
| | 64 |
| | 48 |
| | 8 |
| | 75 |
| | 67 |
| | 63 |
| | 64 |
| | 48 |
|
| |
| (1) | Weighted average yield is calculated based upon our debt investments at fair value at the end of the period. |
| |
| (2) | Calculated based on weighted average shares outstanding for the period. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunctionconnection with theour Consolidated Financial Statements and the notes thereto included elsewhere in this annual report on Form 10-K.
Some of the statements in this annual report on Form 10-K constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K may include statements as to:
our future operating results and distribution projections;
the ability of our Investment AdviserOaktree to reposition our portfolio and to implement our Investment Adviser’sOaktree’s future plans with respect to our business;
our business prospects and the prospects of our portfolio companies;
the impact of the investments that we expect to make;
the ability of our portfolio companies to achieve their objectives;
our expected financings and investments;investments and additional leverage we may seek to incur in the future;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies; and
the cost or potential outcome of any litigation to which we may be a party.
In addition, words such as “anticipate,” “believe,” “expect,” “seek,” “plan,” “should,” “estimate,” “project” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Item 1A. Risk Factors” and elsewhere in this annual report on Form 10-K.
Other factors that could cause actual results to differ materially include:
changes in the economy, financial markets and political environment;
risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters;
future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companiesBusiness Development Companies or RICs; and
other considerations that may be disclosed from time to time in our publicly disseminated documents and filings.
We have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Except as otherwise specified, references to the “Company,” “we,” “us,” and “our,” refer to Oaktree Strategic Income Corporation and its consolidated subsidiaries.
Business Overview
We are a specialty finance company dedicatedthat looks to providingprovide customized capital solutions for middle-market companies in both the syndicated and private placement markets. We are a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development companyBusiness Development Company under the 1940Investment Company Act. In addition, we have qualified and elected to be treated as a RIC under the Code for tax purposes.
As of October 17, 2017, we are externally managed by Oaktree, a subsidiary of OCG, a global investment manager specializing in alternative investments, pursuant to the New Investment Advisory Agreement. OFA, a subsidiary of our Investment Adviser, alsoOaktree Administrator provides certain administrative and other services necessary for us to operate. Prioroperate pursuant to October 17, 2017, we were externally managed and advised by our Former Adviser, and we were named Fifth Street Senior Floating Rate Corp.the Administration Agreement.
We seek to generate a stable source of current income while minimizing the risk of principal loss and, to a lesser extent, capital appreciation by providing middle-marketinnovative first-lien financing solutions to companies with primarily first lien secured debt financings that pay us interest at rates which are determined periodically on the basisacross a wide variety of a floating base lending rate.industries. We invest in companies across a variety of industries that typically possess resilient business models we expect to be resilient in the future with strong underlying fundamentals.fundamentals that will provide strength in future downturns. We intend to deploy capital across credit and economic cycles with a focus on long-term results, which enableswe believe will enable us to build lasting partnerships with financial sponsors and management teams. Under normal market conditions, through January 18, 2018, at least 80% of the value of our net assets plus borrowings for investment purposes will be invested
in floating rate senior loans, which include both first and second lien secured debt financings. We may also invest in unsecured loans, including subordinated loans, issued by private middle-market companies and, to a lesser extent, senior and subordinated loans issued by public companies and equity investments. Prior to January 18, 2018, under normal market conditions, we were required to invest at least 80% of the value of our net assets plus borrowings for investment purposes in floating rate senior loans, which include both first and second lien secured debt financings.
Following entry into the New Investment Advisory Agreement, our Investment AdviserOaktree intends to reposition our portfolio in the near-term in order to (1) rotate out of a small number of investments that it views as challenged, (2) focus on increasing the size of our core private investments and (3) supplement the portfolio with broadly syndicated and select privately
placed loans. We expect that our InvestmentOur Adviser will focusis generally focused on middle-market companies, which we define as companies with enterprise values of between $100 million and $750 million. Going forward, we expect our portfolio to include primarily first lien floating rate senior secured financings. We expect to target investments of $10 million to $20 million, on average, although we may invest more or less in certain portfolio companies. We generally invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade securities, which are often referred to as “high yield” and “junk,” have predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal.
Since becoming our investment adviser, Oaktree has performed a comprehensive review of our portfolio and categorized our portfolio into core investments, non-core performing investments and non-accrual investments. Certain additional information on such categorization and our portfolio composition is included in investor presentations that we file with the SEC.
Since becoming our investment adviser, Oaktree has reduced the investments it has identified as non-core by approximately $235 million, at fair value. Over time, Oaktree intends to rotate us out of the approximately $59 million of non-core investments at fair value that remain as of September 30, 2018. In addition, over time and under current market conditions, Oaktree generally expects to increase leverage to a debt to equity ratio of 1.20x to 1.60x following effectiveness of the 150% reduced asset coverage requirements to us on July 11, 2018.
Business Environment and Developments
TheWe believe that the shift of commercial banks away from lending to middle-market companies following the 2008 financial crisis, including as a result of the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the adoption of the Basel III Accord continues to create opportunities for non-bank lenders such as us. We believe middle-market companies represent a significant opportunity set in credit is still dominatedfor direct lending as there are nearly 200,000 middle-market businesses, representing one-third of private sector gross domestic product and accounting for approximately 48 million jobs according to the National Center for the Middle Market. In addition, according to the S&P Global Market Intelligence LCD Middle Market Review, during the first nine months of the 2018 calendar year, middle-market lending volume exceeded $20 billion for deal sizes of less than $350 million.
We believe that quantitative easing and other similar monetary policies implemented by the search for yield as central banks worldwide in Japan and Europe continue their accommodative monetary policies. This glutreaction to the 2008 financial crisis have created significant inflows of capital, isincluding from private equity sponsors, focused on yield-driven products such as sub-investment grade debt. While we believe that private equity sponsors continue to have a large pool of available capital and will continue to pursue acquisitions in the middle market, increased competition from other lenders to middle-market companies together with increased capital focused on the sector have led to spread compression across the middle market, resulting in significant inflows into sub-investment grade credit from investors seeking higher spreads as investment grade and highly rated sub-investment grade credit trade at close-to-historically tightnear historically low levels.
DuringWe believe that the fiscal year 2017, the spread on the BAML High Yield Single B Index ranged between 3.43% and 5.34% and was 3.57% asfundamentals of September 30, 2017. In addition, during fiscal year 2017 the Credit Suisse Leveraged Loan Index spread ranged between 3.64% and 4.57% and was 3.87% as of September 30, 2017. The weighted average annual yield on the OCSI portfolio of 7.5% compares favorably in the current environment.
middle-market companies remain strong. In this environment, we believe attractive risk-adjusted returns can be achieved by investing in companies that cannot efficiently access traditional debt capital markets. We believe that the Company has the resources and experience to source, diligence and structure investments in these companies and is well placed to generate attractive returns for investors.
New Investment Advisory Agreement with Oaktree
Upon the closing of the Transaction contemplated by the Purchase Agreement on October 17, 2017, Oaktree became the investment adviser to each of OCSL and us, and Oaktree paid gross cash consideration of $320 million to our Former Adviser.us. The closing of the Transaction resulted in an assignment for purposes of the 1940Investment Company Act of the Former Investment Advisory Agreement, and, as a result, its immediate termination. See “Note 11. Related Party Transactions– Investment Advisory Agreement” and “– Administrative Services” in the notes to the accompanying Consolidated Financial Statements.
Asset Coverage Requirements
On March 23, 2018, the SBCAA was enacted into law. The material termsSBCAA, among other things, amended Section 61(a) of the servicesInvestment Company Act to be providedadd a new Section 61(a)(2) that reduces the asset coverage requirements applicable to Business Development Companies from 200% to 150% so long as the Business Development Company meets certain disclosure requirements and obtains certain approvals. The reduced asset coverage requirements permit a Business Development Company to have a debt to equity ratio of a maximum of 2x (i.e. $2 of debt outstanding for each $1 of equity) as compared to a maximum of 1x (i.e. $1 of debt outstanding for each $1 of equity) under the New200% asset coverage requirement. Effectiveness of the reduced asset coverage requirements to a Business Development Company requires approval by either (1) a “required majority,” as defined in Section 57(o) of the Investment Advisory Agreement, other thanCompany Act, of such Business Development Company’s Board of Directors with effectiveness one year after the fee structure,date of such approval or (2) a majority of votes cast at a special or annual meeting of such Business Development Company’s stockholders at which a quorum is present, which is effective the day after such stockholder approval.
At a meeting held on May 3, 2018, our Board of Directors, including a “required majority” of the directors, as defined in Section 57(o) of the Investment Company Act, approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act as being in the best interests of us and our stockholders. At a special meeting of our stockholders held on July 10, 2018, our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to us effective as of July 11, 2018. The reduced asset coverage requirements permit us to double the maximum amount of
leverage that we are substantiallypermitted to incur by reducing the same as the Former Investment Advisory Agreement, except that services are provided by Oaktree. See “Business-The Investment Adviser”asset coverage requirements applicable to us from 200% to 150%. As of September 30, 2018, we had $275.1 million in senior securities outstanding and “-New Investment Advisory Agreement.”our asset coverage ratio was 207.5%.
Critical Accounting Policies
Basis of Presentation
Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, and pursuant to the requirements for reporting on Form 10-K and Regulation S-X. All intercompany balances and transactions have been eliminated. We are an investment company following the accounting and reporting guidance in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 946, Financial Services-Investment Companies, or ASC 946.
Investment Valuation
We report our investments for which current market values are not readily available at fair value. We value our investments in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC 820, which defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We report our investments for which current market values are not readily available at fair value. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. ASC 820 prioritizes the use of observable market prices derived from such prices over entity-specific inputs. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity.
Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follow:follows:
Level 1 - Unadjusted, quoted prices in active markets for identical assets or liabilities atas of the measurement date.
Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
If inputs used to measure fair value fall into different levels of the fair value hierarchy, an investment's level is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. These investments may be classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustments for investment-specific factors or restrictions.
Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, our Investment AdviserOaktree obtains and analyzes readily available market quotations provided by independent pricing servicesvendors and brokers for all of our senior secured debt investments for which quotations are available. In determining the fair value of a particular investment, pricing servicesvendors and brokers use observable market information, including both binding and non-binding indicative quotations.
Our Investment Adviser evaluatesWe seek to obtain at least two quotations for the subject or similar securities, typically from pricing vendors. If we are unable to obtain two quotes from pricing vendors, or if the prices obtained from independent pricing servicesvendors are not within our set threshold, we seek to obtain a quote directly from a broker making a market for the asset. Oaktree evaluates the quotations provided by pricing vendors and company specific data that could affect the credit quality and/or fair valuebrokers based on available market information, including trading activity of the investment. Investments for which market quotationssubject or similar securities, or by performing a comparable security analysis to ensure that fair values are readily available may be valued at such market quotations.reasonably estimated. Oaktree also performs back-testing of valuation information obtained from pricing vendors and brokers against actual prices received in transactions. In orderaddition to validate market quotations, our Investment Adviser looks at a numberongoing monitoring and back-testing, Oaktree performs due diligence procedures over pricing vendors to understand their methodology and controls to support their use in the valuation process. Generally, we do not adjust any of factors to determine ifthe prices received from these sources.
If the quotations obtained from pricing vendors or brokers are representative of fair value, including the source and nature of the quotations. Our Investment Adviser doesdetermined to not adjust the prices unless it has a reason to believe market quotationsbe reliable or are not reflective of the fair value of an investment. Examples of events that would cause market quotations to not reflect fair value could include cases when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a "fire sale" by a distressed seller. In these instances,readily available, we value such investments by using the valuation procedure that we use with respect to assets for which market quotations are not readily available (as discussed below).
If the quotation provided by the pricing service is based on only one or two market sources, we perform additional procedures to corroborate such information, which may include the market yield technique discussed below and a quantitative and qualitative assessmentany of the credit quality and market trends affecting the portfolio company.
We perform detailed valuations of our debt and equity investments for which market quotations are not readily available or are deemed not to represent fair value of the investments. We typically use three different valuation techniques. The first valuation technique is the transaction precedent technique, which utilizes recent or expected future transactions of the investment to determine fair value, to the extent applicable. The second valuation technique is an analysis of the enterprise value, or EV, of the portfolio company. EV means the entire value of the portfolio
company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The EV analysis is typically performed to determine (i) the value of equity investments, to determine if(ii) whether there is credit impairment for debt investments and to determine(iii) the value for debt investments that we are deemed to control under the 1940Investment Company Act. To estimate the EV of a portfolio company, the Investment AdviserOaktree analyzes various factors, including the portfolio company’s historical and projected financial results, macroeconomic impacts on the company, and competitive dynamics in the company’s industry. The Investment AdviserOaktree also utilizes some or all of the following information based on the individual circumstances of the portfolio company, including:company: (i) valuations of comparable public companies, (ii) recent sales of private and public comparable companies in similar industries or having similar business or earnings characteristics, (iii) purchase price multiples as a multiple of their earnings or cash flow, (iv) the portfolio company’s ability to meet its forecasts and its business prospects, (v) a discounted cash flow analysis, (vi) estimated liquidation or collateral value of the portfolio company's assets and (vii) offers from third parties to buy the portfolio company. We may probability weight potential sale outcomes with respect to a portfolio company due to thewhen uncertainty that exists as of the valuation date. The third valuation technique is a market yield technique, which is typically performed for non-credit impaired debt investments. To determine fair value using aIn the market yield technique, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk. In the market yield technique,risk, and we consider the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by us are substantially illiquid with no active transaction market, we depend on primary market data, including newly funded transactions and industry specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable.
In accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946 may be valued using net asset value as a practical expedient for fair value. Consistent with FASB guidance under ASC 820, these investments are excluded from the hierarchical levels.
We estimate the fair value of privately held warrants using a Black Scholes pricing model, which includes an analysis of various factors and subjective assumptions, including the current stock price (by using an EV analysis as described above), the expected period until exercise, expected volatility of the underlying stock price, expected dividends and the risk-free rate. Changes in the subjective input assumptions can materially affect the fair value estimates.
Our Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of our investments:
The quarterly valuation process begins with each portfolio company or investment being initially valued by our Investment Adviser’sOaktree’s valuation team in conjunction with the Investment Adviser’sOaktree’s portfolio management team and investment professionals responsible for each portfolio investment;
•Preliminary valuations are then reviewed and discussed with management of our Investment Adviser;Oaktree;
Separately, independent valuation firms engaged by our Board of Directors prepare valuations of our investments, on a selected basis, for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment, and submit the reports to us and provide such reports to our Investment AdviserOaktree and the Audit Committee of our Board of Directors;
The Investment AdviserOaktree compares and contrasts its preliminary valuations to the valuations of the independent valuation firms and prepares a valuation report for the Audit Committee of our Board of Directors;Committee;
The Audit Committee of our Board of Directors reviews the preliminary valuations with our Investment Adviser,Oaktree, and our Investment AdviserOaktree responds and supplements the preliminary valuations to reflect any discussions between our Investment AdviserOaktree and the Audit Committee;
The Audit Committee of our Board of Directors makes a recommendation to our full Board of Directors regarding the fair value of the investments in our portfolio; and
Our Board of Directors discusses valuations and determines the fair value of each investment in our portfolio.
The fair value of our investments atas of September 30, 20172018 and September 30, 20162017 was determined in good faith by our Board of Directors. Our Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. Weand will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of a portion of our portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter, and the Board of Directors may reasonably rely on that assistance. The percentageAs of September 30, 2018, 95.0% of our portfolio at fair value was valued either based on market quotations, the transactions precedent approach or corroborated by independent valuation firms may vary from period to period based on the availability of market quotations for our portfolio investments during the respective periods. Typically, a higher percentage of our portfolio is valued by independent valuation firms in our fiscal fourth quarter due to additional year-end procedures.firms. However, our Board of Directors is responsible for the ultimate valuation of the portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process.
The percentages of our portfolio, at fair value, valued by independent valuation firms as of the end of each period during the current and two preceding fiscal years were as follows:
|
| | |
As of December 31, 2014 | 54.1 | % |
As of March 31, 2015 (1) | 32.1 | % |
As of June 30, 2015 | 23.8 | % |
As of September 30, 2015 (2) | 76.5 | % |
As of December 31, 2015 | 29.3 | % |
As of March 31, 2016 | 25.0 | % |
As of June 30, 2016 | 32.0 | % |
As of September 30, 2016 (2) | 73.5 | % |
As of December 31, 2016 | 29.6 | % |
As of March 31, 2017 | 30.1 | % |
As of June 30, 2017 | 29.4 | % |
As of September 30, 2017 (2) | 63.8 | % |
__________
(1) The decrease from prior quarters is primarily related to the increased use of market quotations to value certain of our portfolio investments beginning in the quarter ended March 31, 2015.
(2) Valuations performed by independent valuation firms as of September 30, 2017, 2016 and 2015 were higher primarily due to additional year-end procedures related to portfolio investments that were valued using market quotations based on only one source.
As of September 30, 20172018 and September 30, 2016,2017, approximately 92.1%95.2% and 92.2%92.1%, respectively, of our total assets represented investments in portfolio companies valued at prices equal to fair value.
Revenue Recognition
Interest and Dividend Income
Interest income, adjusted for accretion of OID, is recorded on the accrual basis to the extent that such amounts are expected to be collected. We stop accruing interest on investments when it is determined that interest is no longer collectible. Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when there is reasonable doubt that principal or interest cash payments will be collected. Cash interest payments received on investments may be recognized as income or a return of capital depending upon management’s judgment. SuchA non-accrual investments areinvestment is restored to accrual status if past due principal and interest are paid in cash, and the portfolio companies,company, in management’s judgment, areis likely to continue timely payment of theirits remaining interest.obligations. As of September 30, 2017,2018, there were three investmentswas one investment on which we had stopped accruing cash and/or PIK interest or OID income.
In connection with our investment in a portfolio company, we sometimes receive nominal cost equity that is valued as part of the negotiation process with the portfolio company. When we receive nominal cost equity, we allocate our cost basis in the investment between debt securities and the nominal cost equity at the time of origination. Any resulting discount from recording the loan, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan.
We generally recognize dividend income on the ex-dividend date. Distributions received from equity investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from such equity investments as dividend income unless there are sufficient earnings at the portfolio company prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
Fee Income
We receive a variety of fees in the ordinary course of business, including servicing, advisory, amendment, structuring and prepayment fees, which are classified as fee income and recognized as they are earned.
PIK Interest Income
Our loansinvestments in debt securities may contain contractual PIK interest provisions. The PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. We generally cease accruing PIK interest if there is insufficient value to support the accrual or if we do not expect the portfolio company to be able to pay all principal and interest due. Our decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; financial statements and financial projections for the portfolio company; our assessment of the portfolio company's business development success; information obtained by us in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, we determine whether to cease accruing PIK interest on a loan or debt security when it is determined that PIK interest is no longer collectible.security. Our determination to cease accruing PIK interest on a loan or debt security is generally made well before our full write-down of sucha loan or debt security. In addition, if it is subsequently determined that we will not be able to collect any previously accrued PIK interest, the fair value of ourthe loans or debt securities would be reduced by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on our debt investments increases the recorded cost bases of these investments in our Consolidated Financial Statements and, as a result, increases the cost bases of these investments for purposes of computing the capital gains incentive fee payable by us to our Investment Adviser.
For a discussion of risks we are subject to as a result of our use of PIK interest in connection with our investments, see "Risk Factors - Risks Relating to Our Business and Structure - We may have difficulty paying our required distributions if we are required to recognize income for U.S. federal income tax purposes before or without receiving cash representing such income," "- We mayOaktree beginning in the future choose to pay distributions partly in our own stock, in which case you may be subject to tax in excess of the cash you receive" and "- Our incentive fee may induce our Investment Adviser to make speculative investments" elsewhere in this annual report.fiscal year ending September 30, 2019. To maintain our status as a RIC, income from PIK interest mustmay be paid outrequired to be distributed to our stockholders as distributions even though we have not yet collected the cash and may never collect the cash relating to the PIK interest. Accumulated PIK interest was $0.5 million and $0.1 million as of September 30, 2017 and September 30, 2016, respectively. The net increases in loan balances as a result of contractual PIK arrangements are separately identified in our Consolidated Statements of Cash Flows.
do so.
Portfolio Composition
Our investments principally consist of senior loans in private middle-market companies and investments in FSFRthe OCSI Glick JV. As of September 30, 2017,2018, our senior loans were typically secured by a first or second lien on the assets of the portfolio company and generally havehad terms of up to ten years (but an expected average life of between three and four years). We believe the environment for direct lending remains active, and, as a result, a number of our portfolio companies were able to refinance and repay their loans during the fiscal year ended September 30, 2017.2018.
During the year ended September 30, 2017,2018, we originated $290.8$435.9 million of investment commitments in 3656 new and 12six existing portfolio companies and funded $290.6$443.9 million of investments.
During the year ended September 30, 2017,2018, we received $215.3$445.3 million in connection with the full repayments andof proceeds from prepayments, exits, of 27 of our investments and an additional $61.7 million in connection with other paydowns and sales of investments.and exited 51 portfolio companies.
A summary of the composition of our investment portfolio at cost and fair value as a percentage of total investments is shown in the following tables:
|
| | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| Cost: | | | | |
| Senior secured debt | | 86.50 | % | | 86.40 | % |
| Subordinated notes of FSFR Glick JV | | 10.61 |
| | 10.66 |
|
| LLC equity interests of FSFR Glick JV | | 1.18 |
| | 1.18 |
|
| Purchased equity | | 1.71 |
| | 1.76 |
|
| Equity grants | | — |
| | — |
|
| Total | | 100.00 | % | | 100.00 | % |
|
| | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| Fair value: | | | | |
| Senior secured debt | | 89.53 | % | | 87.58 | % |
| Subordinated notes of FSFR Glick JV | | 10.28 |
| | 9.92 |
|
| LLC equity interests of FSFR Glick JV | | — |
| | 1.12 |
|
| Purchased equity | | 0.19 |
| | 1.36 |
|
| Equity grants | | — |
| | 0.02 |
|
| Total | | 100.00 | % | | 100.00 | % |
|
| | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| Cost: | | | | |
| Senior secured loans | | 87.08 | % | | 86.50 | % |
| OCSI Glick JV subordinated notes | | 11.59 |
| | 10.61 |
|
| OCSI Glick JV equity interests | | 1.24 |
| | 1.18 |
|
| Equity securities | | 0.09 |
| | 1.71 |
|
| Total | | 100.00 | % | | 100.00 | % |
|
| | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| Fair value: | | | | |
| Senior secured loans | | 89.14 | % | | 89.53 | % |
| OCSI Glick JV subordinated notes | | 10.51 |
| | 10.28 |
|
| OCSI Glick JV equity interests | | — |
| | — |
|
| Equity securities | | 0.35 |
| | 0.19 |
|
| Total | | 100.00 | % | | 100.00 | % |
The industry composition of our portfolio at cost and fair value as a percentage of total investments was as follows:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 (revised) | | September 30, 2017 (as reported) |
| Cost: | | | | | |
| Internet software & services | | 21.46 | % | | 22.07 | % | |
| Multi-sector holdings (1) | | 11.79 |
| | 11.84 |
| |
| Cost (1): | | | | | | | |
| Multi-sector holdings (2) | | | 12.84 | % | | 11.79 | % | | 11.79 | % |
| Aerospace & defense | | | 5.45 |
| | 2.10 |
| | 1.07 |
|
| Application software | | | 5.21 |
| | 21.05 |
| | 5.59 |
|
| Oil & gas exploration & production | | | 5.14 |
| | — |
| | — |
|
| Advertising | | | 4.33 |
| | 7.19 |
| | 7.19 |
|
| Diversified support services | | | 3.99 |
| | 3.09 |
| | 4.00 |
|
| Research & consulting services | | | 3.35 |
| | 1.14 |
| | 1.14 |
|
| Integrated telecommunication services | | | 3.29 |
| | 1.87 |
| | 1.87 |
|
| Internet services & infrastructure | | | 3.13 |
| | 4.30 |
| | — |
|
| Specialized finance | | | 2.84 |
| | 2.54 |
| | 2.54 |
|
| Healthcare services | | 8.41 |
| | 14.80 |
| | 2.71 |
| | 8.41 |
| | 8.41 |
|
| Advertising | | 7.19 |
| | 8.06 |
| |
| Application software | | 5.59 |
| | 5.35 |
| |
| Diversified support services | | 4.00 |
| | 3.28 |
| |
| Pharmaceuticals | | | 2.51 |
| | 1.50 |
| | 1.50 |
|
| Systems software | | | 2.49 |
| | 1.71 |
| | — |
|
| Communications equipment | | | 2.41 |
| | — |
| | — |
|
| Industrial machinery | | | 2.37 |
| | 2.06 |
| | 2.06 |
|
| Environmental & facilities services | | | 2.16 |
| | 3.25 |
| | 2.34 |
|
| Commercial printing | | | 2.04 |
| | 1.96 |
| | 1.96 |
|
| Electrical components & equipment | | | 2.03 |
| | — |
| | — |
|
| Personal products | | | 2.02 |
| | 1.08 |
| | 1.08 |
|
| Computer & electronics retail | | | 1.90 |
| | 2.19 |
| | 1.22 |
|
| Publishing | | | 1.81 |
| | — |
| | — |
|
| Commodity chemicals | | | 1.73 |
| | — |
| | — |
|
| IT consulting & other services | | 3.39 |
| | 1.47 |
| | 1.71 |
| | 2.35 |
| | 3.39 |
|
| Human resources & employment services | | 3.33 |
| | — |
| |
| Specialized finance | | 2.54 |
| | — |
| |
| Environmental & facilities services | | 2.34 |
| | 1.06 |
| |
| Human resource & employment services | | | 1.67 |
| | 3.33 |
| | 3.33 |
|
| Metal & glass containers | | | 1.56 |
| | — |
| | — |
|
| Healthcare technology | | | 1.56 |
| | — |
| | — |
|
| Oil & gas equipment & services | | 2.32 |
| | 0.70 |
| | 1.53 |
| | 2.32 |
| | 2.32 |
|
| Leisure facilities | | | 1.53 |
| | — |
| | — |
|
| Specialized REITs | | | 1.51 |
| | — |
| | — |
|
| Trading companies & distributors | | | 1.41 |
| | 0.67 |
| | — |
|
| Movies & entertainment | | | 1.37 |
| | — |
| | — |
|
| Alternative carriers | | | 1.26 |
| | — |
| | — |
|
| Household appliances | | | 1.21 |
| | — |
| | — |
|
| Auto parts & equipment | | | 1.01 |
| | 0.97 |
| | 0.97 |
|
| Investment banking & brokerage | | | 0.96 |
| | — |
| | — |
|
| Specialized consumer services | | | 0.96 |
| | 0.27 |
| | 0.27 |
|
| Data processing & outsourced services | | | 0.95 |
| | 0.65 |
| | 1.62 |
|
| Household products | | | 0.88 |
| | — |
| | — |
|
| Oil & gas storage & transportation | | | 0.84 |
| | — |
| | — |
|
| Specialty chemicals | | | 0.83 |
| | 0.79 |
| | — |
|
| Specialty stores | | | 0.68 |
| | 1.38 |
| | 1.38 |
|
| Hypermarkets & super centers | | | 0.49 |
| | 1.10 |
| | 0.50 |
|
| General merchandise stores | | | 0.33 |
| | — |
| | — |
|
| Food retail | | | — |
| | 1.06 |
| | 1.66 |
|
| Distributors | | 2.14 |
| | — |
| | — |
| | 2.14 |
| | 2.14 |
|
| Industrial machinery | | 2.06 |
| | 0.64 |
| |
| Real estate services | | 2.02 |
| | — |
| | — |
| | 2.02 |
| | 2.02 |
|
| Commercial printing | | 1.96 |
| | 0.98 |
| |
| Integrated telecommunication services | | 1.87 |
| | 4.06 |
| |
| Food retail | | 1.66 |
| | 1.15 |
| |
| Data processing & outsourced services | | 1.62 |
| | 1.64 |
| |
| Pharmaceuticals | | 1.50 |
| | 1.53 |
| |
| Specialty Stores | | 1.38 |
| | — |
| |
| Security & alarm services | | 1.33 |
| | 2.97 |
| | — |
| | 1.33 |
| | 1.33 |
|
| Computer & Electronics Retail | | 1.22 |
| | — |
| |
| Research & consulting services | | 1.14 |
| | 2.85 |
| |
| Personal products | | 1.08 |
| | 0.21 |
| |
| Aerospace & defense | | 1.07 |
| | — |
| |
| Auto parts & equipment | | 0.97 |
| | — |
| |
| Healthcare distributors | | 0.82 |
| | — |
| | — |
| | 0.82 |
| | 0.82 |
|
| Casinos & gaming | | 0.82 |
| | — |
| | — |
| | 0.82 |
| | 0.82 |
|
| Fertilizers & agricultural chemicals | | | — |
| | 0.54 |
| | 0.54 |
|
| Computer hardware | | | — |
| | 0.21 |
| | 0.21 |
|
| Internet software & services | | | — |
| | — |
| | 21.46 |
|
| Trucking | | | — |
| | — |
| | 0.67 |
|
| Housewares & specialties | | 0.79 |
| | — |
| | — |
| | — |
| | 0.79 |
|
| Trucking | | 0.67 |
| | — |
| |
| Fertilizers & agricultural chemicals | | 0.54 |
| | 0.59 |
| |
| Hypermarkets & super centers | | 0.50 |
| | — |
| |
| Specialized consumer services | | 0.27 |
| | 3.76 |
| |
| Computer hardware | | 0.21 |
| | 0.66 |
| |
| Education services | | — |
| | 2.54 |
| |
| Electronic equipment & instruments | | — |
| | 1.82 |
| |
| Diversified capital markets | | — |
| | 1.45 |
| |
| Construction and engineering | | — |
| | 0.98 |
| |
| Wireless telecommunication services | | — |
| | 0.95 |
| |
| Food distributors | | — |
| | 0.95 |
| |
| Restaurants | | — |
| | 0.83 |
| |
| Healthcare technology | | — |
| | 0.81 |
| |
| | | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % |
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 (revised) | | September 30, 2017 (as reported) |
Fair value:
| | | | | |
| Internet software & services | | 21.72 | % | | 20.82 | % | |
| Multi-sector holdings (1) | | 10.28 |
| | 11.04 |
| |
Fair value (1):
| | | | | | | |
| Multi-sector holdings (2) | | | 10.49 | % | | 10.28 | % | | 10.28 | % |
| Aerospace & defense | | | 5.64 |
| | 2.30 |
| | 1.17 |
|
| Application software | | | 5.53 |
| | 21.24 |
| | 6.06 |
|
| Oil & gas exploration & production | | | 5.30 |
| | — |
| | — |
|
| Diversified support services | | | 4.17 |
| | 3.41 |
| | 4.40 |
|
| Advertising | | 7.34 |
| | 8.49 |
| | 4.05 |
| | 7.34 |
| | 7.34 |
|
| Application software | | 6.06 |
| | 5.65 |
| |
| Research & consulting services | | | 3.53 |
| | 1.25 |
| | 1.25 |
|
| Integrated telecommunication services | | | 3.37 |
| | 2.03 |
| | 2.03 |
|
| Internet services & infrastructure | | | 3.23 |
| | 4.68 |
| | — |
|
| Specialized finance | | | 2.90 |
| | 2.79 |
| | 2.79 |
|
| Healthcare services | | 5.27 |
| | 14.64 |
| | 2.70 |
| | 5.27 |
| | 5.27 |
|
| Diversified support services | | 4.40 |
| | 3.42 |
| |
| Systems software | | | 2.61 |
| | 1.88 |
| | — |
|
| Communications equipment | | | 2.52 |
| | — |
| | — |
|
| Industrial machinery | | | 2.43 |
| | 2.22 |
| | 2.22 |
|
| Pharmaceuticals | | | 2.42 |
| | 1.61 |
| | 1.61 |
|
| Environmental & facilities services | | | 2.25 |
| | 3.53 |
| | 2.55 |
|
| Electrical components & equipment | | | 2.17 |
| | — |
| | — |
|
| Commercial printing | | | 2.13 |
| | 2.13 |
| | 2.13 |
|
| Personal products | | | 2.10 |
| | 1.18 |
| | 1.18 |
|
| Computer & electronics retail | | | 1.97 |
| | 2.39 |
| | 1.34 |
|
| Publishing | | | 1.91 |
| | — |
| | — |
|
| Commodity chemicals | | | 1.81 |
| | — |
| | — |
|
| Human resource & employment services | | | 1.74 |
| | 3.59 |
| | 3.59 |
|
| Healthcare technology | | | 1.63 |
| | — |
| | — |
|
| Oil & gas equipment & services | | | 1.63 |
| | 2.51 |
| | 2.51 |
|
| Metal & glass containers | | | 1.63 |
| | — |
| | — |
|
| Leisure facilities | | | 1.58 |
| | — |
| | — |
|
| Specialized REITs | | | 1.54 |
| | — |
| | — |
|
| Trading companies & distributors | | | 1.45 |
| | 0.73 |
| | — |
|
| IT consulting & other services | | 3.66 |
| | 1.55 |
| | 1.44 |
| | 2.52 |
| | 3.66 |
|
| Human resources & employment services | | 3.59 |
| | — |
| |
| Specialized finance | | 2.79 |
| | — |
| |
| Environmental & facilities services | | 2.55 |
| | 1.14 |
| |
| Oil & gas equipment & services | | 2.51 |
| | 0.71 |
| |
| Movies & entertainment | | | 1.42 |
| | — |
| | — |
|
| Alternative carriers | | | 1.30 |
| | — |
| | — |
|
| Household appliances | | | 1.25 |
| | — |
| | — |
|
| Auto Parts & equipment | | | 1.05 |
| | 1.03 |
| | 1.03 |
|
| Data processing & outsourced services | | | 1.00 |
| | 0.71 |
| | 1.76 |
|
| Investment banking & brokerage | | | 0.99 |
| | — |
| | — |
|
| Specialized consumer services | | | 0.96 |
| | 0.30 |
| | 0.30 |
|
| Household products | | | 0.90 |
| | — |
| | — |
|
| Oil & gas storage & transportation | | | 0.88 |
| | — |
| | — |
|
| Specialty chemicals | | | 0.81 |
| | 0.85 |
| | — |
|
| Specialty stores | | | 0.71 |
| | 1.46 |
| | 1.46 |
|
| Hypermarkets & super centers | | | 0.51 |
| | 1.18 |
| | 0.51 |
|
| General merchandise stores | | | 0.35 |
| | — |
| | — |
|
| Food retail | | | — |
| | 1.15 |
| | 1.82 |
|
| Distributors | | 2.31 |
| | — |
| | — |
| | 2.31 |
| | 2.31 |
|
| Industrial machinery | | 2.22 |
| | 0.66 |
| |
| Real estate services | | 2.19 |
| | — |
| | — |
| | 2.19 |
| | 2.19 |
|
| Commercial printing | | 2.13 |
| | 1.03 |
| |
| Integrated telecommunication services | | 2.03 |
| | 4.30 |
| |
| Food retail | | 1.82 |
| | 1.22 |
| |
| Data processing & outsourced services | | 1.76 |
| | 1.71 |
| |
| Pharmaceuticals | | 1.61 |
| | 1.57 |
| |
| Specialty Stores | | 1.46 |
| | — |
| |
| Security & alarm services | | 1.42 |
| | 3.11 |
| | — |
| | 1.42 |
| | 1.42 |
|
| Computer & Electronics Retail | | 1.34 |
| | — |
| |
| Research & consulting services | | 1.25 |
| | 2.99 |
| |
| Personal products | | 1.18 |
| | 0.22 |
| |
| Aerospace & defense | | 1.17 |
| | — |
| |
| Auto parts & equipment | | 1.03 |
| | — |
| |
| Casinos & gaming | | 0.90 |
| | — |
| | — |
| | 0.90 |
| | 0.90 |
|
| Healthcare distributors | | 0.88 |
| | — |
| | — |
| | 0.88 |
| | 0.88 |
|
| Fertilizers & agricultural chemicals | | | — |
| | 0.50 |
| | 0.50 |
|
| Computer hardware | | | — |
| | 0.24 |
| | 0.24 |
|
| Internet software & services | | | — |
| | — |
| | 21.72 |
|
| Trucking | | | — |
| | — |
| | 0.73 |
|
| Housewares & specialties | | 0.85 |
| | — |
| | — |
| | — |
| | 0.85 |
|
| Trucking | | 0.73 |
| | — |
| |
| Hypermarkets & super centers | | 0.51 |
| | — |
| |
| Fertilizers & agricultural chemicals | | 0.50 |
| | 0.59 |
| |
| Specialized consumer services | | 0.30 |
| | 3.93 |
| |
| Computer hardware | | 0.24 |
| | 0.68 |
| |
| Education services | | — |
| | 2.67 |
| |
| Electronic equipment & instruments | | — |
| | 1.90 |
| |
| Diversified capital markets | | — |
| | 1.53 |
| |
| Construction and engineering | | — |
| | 1.01 |
| |
| Food distributors | | — |
| | 0.98 |
| |
| Restaurants | | — |
| | 0.87 |
| |
| Healthcare technology | | — |
| | 0.83 |
| |
| Wireless telecommunication services | | — |
| | 0.74 |
| |
| | | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % | | 100.00 | % |
___________________
| |
| (1) | As of September 30, 2018, certain industry classifications were modified primarily as a result of changes to industry information provided by a third party source. We disclosed both the revised and previously reported industry classifications as of September 30, 2017 above. |
| |
| (2) | This industry includes our investment in FSFRthe OCSI Glick JV. |
Loans and Debt Securities on Non-Accrual Status
As of September 30, 2017, September 30, 20162018 and September 30, 2015,2017, there were three, one and onethree investments, respectively, on which we stopped accruing cash and/or PIK interest or OID income.
The percentages of our debt investments at cost and fair value by accrual status as of September 30, 2017, September 30, 20162018 and September 30, 20152017 were as follows:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2015 | | September 30, 2018 | | September 30, 2017 |
| | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio |
| Accrual | | $ | 564,231,285 |
| | 96.02 | % | | $ | 553,084,120 |
| | 98.88 | % | | $ | 563,757,229 |
| | 96.74 | % | | $ | 552,114,644 |
| | 98.72 | % | | $ | 619,529,324 |
| | 98.79 | % | | $ | 613,701,960 |
| | 99.28 | % | | $ | 564,507,626 |
| | 99.86 | % | | $ | 554,829,583 |
| | 99.99 | % | | $ | 564,231,285 |
| | 96.02 | % | | $ | 553,084,120 |
| | 98.88 | % |
| PIK non-accrual (paying) (1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,605,257 |
| | 1.21 |
| | 4,427,839 |
| | 0.72 |
| |
| Cash non-accrual (nonpaying) (2) | | 23,381,863 |
| | 3.98 |
| | 6,292,551 |
| | 1.12 |
| | 19,027,017 |
| | 3.26 |
| | 7,156,160 |
| | 1.28 |
| | — |
| | — |
| | — |
| | — |
| |
| Cash non-accrual (1) | | | 806,387 |
| | 0.14 |
| | 50,000 |
| | 0.01 |
| | 23,381,863 |
| | 3.98 |
| | 6,292,551 |
| | 1.12 |
|
| Total | | $ | 587,613,148 |
| | 100.00 | % | | $ | 559,376,671 |
| | 100.00 | % | | $ | 582,784,246 |
| | 100.00 | % | | $ | 559,270,804 |
| | 100.00 | % | | $ | 627,134,581 |
| | 100.00 | % | | $ | 618,129,799 |
| | 100.00 | % | | $ | 565,314,013 |
| | 100.00 | % | | $ | 554,879,583 |
| | 100.00 | % | | $ | 587,613,148 |
| | 100.00 | % | | $ | 559,376,671 |
| | 100.00 | % |
__________________
| |
| (1) | PIK non-accrual status is inclusive of other non-cash income, where applicable. |
| |
(2) | Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable. |
The non-accrual status of our portfolio investments as of September 30, 2017, September 30, 2016 and September 30, 2015 was as follows:
|
| | | | | | |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2015 |
Answers Corporation (2) | | — | | Cash non-accrual (1) | | PIK non-accrual (1) |
Ameritox Ltd. | | Cash non-accrual (1) | | — | | — |
New Trident Holdcorp, Inc. - second lien term loan | | Cash non-accrual (1) | | — | | — |
Metamorph US 3, LLC | | Cash non-accrual (1) | | — | | — |
__________________
| |
(1) | PIK non-accrual status is inclusive of other non-cash income, where applicable. Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable. |
| |
(2) | As of September 30, 2017, we no longer held this investment. As of September 30, 2016, our investments in both the first and second lien term loans of the Answers Corporation were on cash non-accrual status. As of September 30, 2015, only the second lien term loan was on PIK non-accrual. |
Income non-accrual amounts for the years ended September 30, 2017, 2016 and 2015, which may include amounts for investments that were no longer held at the end of the period, were as follows:
|
| | | | | | | | | | | | |
| | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 |
| Cash interest income | | $ | 1,291,399 |
| | $ | 1,136,652 |
| | $ | — |
|
| PIK interest income | | 351,323 |
| | — |
| | — |
|
| OID income | | 89,553 |
| | 57,735 |
| | 13,816 |
|
| Total | | $ | 1,732,275 |
| | $ | 1,194,387 |
| | $ | 13,816 |
|
FSFROCSI Glick JV LLC
In October 2014, we entered into ana LLC agreement with GF Equity Funding to form FSFRthe OCSI Glick JV. On April 21, 2015, FSFRthe OCSI Glick JV began investing in senior secured loans of middle-market companies. We co-invest in these securities with GF Equity Funding through FSFRthe OCSI Glick JV. FSFRThe OCSI Glick JV is managed by a four person Board of Directors, two of whom are selected by us and two of whom are selected by GF Equity Funding. FSFRThe OCSI Glick JV is capitalized as transactions are completed, and portfolio decisions and investment decisions in respect of FSFRthe OCSI Glick JV must be approved by the FSFROCSI Glick JV investment committee, consisting of one representative selected by us and one representative selected by GF Equity Funding (with approval from a representative of each required). The members provide capital to FSFRthe OCSI Glick JV in exchange for LLC equity interests, and we and GF Debt Funding, an entity advised by affiliates of GF Equity Funding, provide capital to FSFRthe OCSI Glick JV in exchange for subordinated notes, or the Subordinated Notes. As of September 30, 20172018 and September 30, 2016,2017, we and GF Equity Funding owned 87.5% and 12.5%, respectively, of the outstanding LLC equity interests, and we and GF Debt Funding owned 87.5% and 12.5%, respectively, of the Subordinated Notes. FSFRThe OCSI Glick JV is not an "eligible portfolio company" as defined in section 2(a)(46) of the 1940Investment Company Act.
FSFRThe OCSI Glick JV's portfolio consisted of middle-market and other corporate debt securities of 31 and 23 and 36 "eligible portfolio companies" (as defined in Section 2(a)(46) of the 1940 Act)companies as of September 30, 20172018 and September 30, 2016,2017, respectively. The portfolio companies in FSFRthe OCSI Glick JV are in industries similar to those in which we may invest directly.
FSFRThe OCSI Glick JV has a senior revolving credit facility withentered into the JV Deutsche Bank AG, New York Branch, or the Deutsche Bank facility, withFacility, which had a statedreinvestment period end date and maturity date of April 17,October 7, 2018 and October 7, 2023, whichrespectively, and permitted borrowings of up to $200.0$125.0 million of borrowings as of both September 30, 2017 and September 30, 2016. On June 29, 2017, this Deutsche Bank facility was assigned by Credit Suisse AG, Cayman Islands Branch to Deutsche Bank AG, New York Branch.2018. Borrowings under the JV Deutsche Bank facilityFacility are secured by all of the assets of FSFRthe OCSI Glick JV and all of the equity interests in FSFRthe OCSI Glick JV. During the year ended September 30, 2018, the JV Deutsche Bank Facility was amended to (i) decrease the maximum permissible borrowings from $200 million to $125 million, (ii) extend the reinvestment period end date and borematurity date to October 7, 2018 and October 7, 2023, respectively, and (iii) decrease the interest at a rate equal tofrom the 3-month LIBOR plus 2.5% per annum with no LIBOR floor as of September 30, 2017to the 3-month LIBOR plus 2.3% per annum with no LIBOR floor. The JV Deutsche Bank Facility was further amended on October 4, 2018 to extend the reinvestment period end and September 30, 2016.maturity date to January 7, 2019 and January 5, 2024, respectively. Under the JV Deutsche Bank facility,Facility, $94.3 million and $56.9 million and $124.6 million inof borrowings were outstanding as of September 30, 20172018 and September 30, 2016,2017, respectively.
We have determined that FSFR Glick JV is an investment company under ASC 946; however, in accordance with such guidance, we will generally not consolidate our investment in a company other than a wholly-owned investment company subsidiary or a controlled operating company whose business consists of providing services to us. Accordingly, we do not consolidate our non-controlling interest in FSFR Glick JV.
As of September 30, 20172018 and September 30, 2016, FSFR2017, the OCSI Glick JV had total assets of $126.7$166.2 million and $201.1$126.7 million, respectively. Our investment in FSFRthe OCSI Glick JV consisted of LLC equity interests and Subordinated Notes of $58.5 million and $57.6 million in the aggregate at fair value as of September 30, 2017. As of2018 and September 30, 2016, our investment consisted of LLC equity interests and Subordinated Notes of $63.3 million in the aggregate at fair value.2017, respectively. The Subordinated Notes are junior in right of payment to the repayment of temporary contributions made by us to fund investments of FSFRthe OCSI Glick JV that are repaid when GF Equity Funding and GF Debt Funding make their capital contributions and fund their Subordinated Notes, respectively.
As of September 30, 20172018 and September 30, 2016, FSFR2017, the OCSI Glick JV had total capital commitments of $100.0 million.million, $87.5 million of which was from us and the remaining $12.5 million from GF Equity Funding and GF Debt Funding. Approximately $81.6$84.0 million and $81.3$81.6 million in aggregate commitments was funded as of September 30, 20172018 and September 30, 2016,2017, respectively, of which $71.4
$73.5 million and $71.1$71.4 million, respectively, was from us. As of each of September 30, 20172018 and September 30, 2016,2017, we had commitments to fund Subordinated Notes to FSFRthe OCSI Glick JV of $78.8 million, of which $14.5$12.4 million and $14.7$14.5 million, respectively, was unfunded. As of each of September 30, 20172018 and September 30, 2016,2017, we had commitments to fund LLC equity interests in FSFRthe OCSI Glick JV of $8.7 million, of which $1.6 million was unfunded.unfunded as of each such date.
Below is a summary of FSFRthe OCSI Glick JV's portfolio, followed by a listing of the individual loans in FSFRthe OCSI Glick JV's portfolio as of September 30, 20172018 and September 30, 2016:2017:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 |
| Senior secured loans (1) | | $115,964,537 | | $194,346,557 | | $160,746,402 | | $115,964,537 |
| Weighted average current interest rate on senior secured loans (2) | | 6.92% | | 7.08% | | 7.30% | | 6.92% |
| Number of borrowers in FSFR Glick JV | | 23 | | 36 | |
| Number of borrowers in the OCSI Glick JV | | | 31 | | 23 |
| Largest loan exposure to a single borrower (1) | | $11,267,524 | | $12,641,009 | | $7,960,000 | | $11,267,524 |
| Total of five largest loan exposures to borrowers (1) | | $42,833,696 | | $49,318,344 | | $36,442,500 | | $42,833,696 |
(1) At principal amount.
(2) Computed using the weighted average annual interest rate on accruing senior secured loans.loans at fair value.
FSFROCSI Glick JV Portfolio as of September 30, 20172018
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(4) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (2) |
| Ameritox Ltd. (3)(5) | | Healthcare services | | First Lien Term Loan | | 4/11/2021 | | LIBOR+5% (1% floor) cash 3% PIK | | 6.33 | % | | $ | 2,287,177 |
| | $ | 2,243,202 |
| | $ | 265,211 |
|
| | | Healthcare services | | 119,910.76 Class B Preferred Units | | | | | | | |
| | 119,911 |
| | — |
|
| | | Healthcare services | | 368.96 Class A Common Units | | | | | | | |
| | 2,174,034 |
| | — |
|
| Total Ameritox Ltd. | | | | | | | | | | | | 2,287,177 |
| | 4,537,147 |
| | 265,211 |
|
| Beyond Trust Software, Inc. (3) | | Application software | | First Lien Term Loan | | 9/25/2019 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 11,267,524 |
| | 11,220,478 |
| | 11,267,116 |
|
| Compuware Corporation (3) | | Internet software & services | | First Lien Term Loan B3 | | 12/15/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 6,279,920 |
| | 6,225,992 |
| | 6,358,419 |
|
| Metamorph US 3, LLC (3)(5) | | Internet software & services | | First Lien Term Loan | | 12/1/2020 | | LIBOR+5.5% (1% floor) cash 2% PIK | | 6.74 | % | | 6,825,900 |
| | 6,477,372 |
| | 2,592,115 |
|
| Motion Recruitment Partners LLC (3) | | Human resources & employment services | | First Lien Term Loan | | 2/13/2020 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 8,659,650 |
| | 8,659,650 |
| | 8,659,223 |
|
| NAVEX Global, Inc. | | Internet software & services | | First Lien Term Loan | | 11/19/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 2,977,041 |
| | 2,967,620 |
| | 2,988,205 |
|
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 3/20/2022 | | LIBOR+5.5% (1% floor) cash | | 6.82 | % | | 8,160,622 |
| | 8,141,224 |
| | 8,099,417 |
|
| CM Delaware LLC | | Advertising | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 2,075,162 |
| | 2,073,617 |
| | 2,064,786 |
|
| New Trident Holdcorp, Inc. (3) | | Healthcare services | | First Lien Term Loan B | | 7/31/2019 | | LIBOR+5.75% (1.25% floor) cash | | 7.08 | % | | 2,018,206 |
| | 2,000,877 |
| | 1,453,109 |
|
| Central Security Group, Inc. (3) | | Specialized consumer services | | First Lien Term Loan | | 10/6/2021 | | LIBOR+5.625% (1% floor) cash | | 6.86 | % | | 3,876,067 |
| | 3,880,408 |
| | 3,892,211 |
|
| Aptos, Inc. (3) | | Data processing & outsourced services | | First Lien Term Loan B | | 9/1/2022 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 7,920,000 |
| | 7,790,262 |
| | 7,840,800 |
|
| Vubiquity, Inc. | | Application software | | First Lien Term Loan | | 8/12/2021 | | LIBOR+5.5% (1% floor) cash | | 6.83 | % | | 4,126,500 |
| | 4,099,195 |
| | 4,095,551 |
|
| Poseidon Merger Sub, Inc. (3) | | Advertising | | Second Lien Term Loan | | 8/15/2023 | | LIBOR+8.5% (1% floor) cash | | 9.81 | % | | 3,000,000 |
| | 2,933,633 |
| | 3,030,000 |
|
| Novetta Solutions, LLC | | Diversified support services | | First Lien Term Loan | | 10/16/2022 | | LIBOR+5% (1% floor) cash | | 6.34 | % | | 5,990,978 |
| | 5,932,073 |
| | 5,826,226 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 10/27/2022 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 6,386,250 |
| | 6,338,479 |
| | 6,306,422 |
|
| Valet Merger Sub, Inc. (3) | | Environmental & facilities services | | First Lien Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 3,920,000 |
| | 3,877,655 |
| | 3,919,865 |
|
| | | Environmental & facilities services | | Incremental Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 1,027,425 |
| | 1,006,080 |
| | 1,027,390 |
|
| Total Valet Merger Sub, Inc. (3) | | | | | | | | | | | | 4,947,425 |
| | 4,883,735 |
| | 4,947,255 |
|
| RSC Acquisition, Inc. | | Insurance brokers | | First Lien Term Loan | | 11/30/2022 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 3,930,134 |
| | 3,912,198 |
| | 3,890,832 |
|
| Integro Parent Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 7.06 | % | | 4,913,924 |
| | 4,790,511 |
| | 4,901,639 |
|
| TruckPro, LLC | | Auto parts & equipment | | First Lien Term Loan | | 8/6/2018 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 1,823,268 |
| | 1,821,822 |
| | 1,825,054 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 4,610,174 |
| | 4,572,990 |
| | 4,610,400 |
|
| Ancile Solutions, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 4,042,355 |
| | 3,995,621 |
| | 4,010,198 |
|
| California Pizza Kitchen, Inc. | | Restaurants | | First Lien Term Loan | | 8/23/2022 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 4,950,000 |
| | 4,938,077 |
| | 4,917,008 |
|
| MHE Intermediate Holdings, LLC (3) | | Diversified support services | | First Lien Term Loan B | | 3/11/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 4,228,750 |
| | 4,150,304 |
| | 4,228,752 |
|
| | | Diversified support services | | Delayed Draw Term Loan | | 3/11/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 667,510 |
| | 635,208 |
| | 667,510 |
|
| Total MHE Intermediate Holdings, LLC | | | | | | | | | | | | 4,896,260 |
| | 4,785,512 |
| | 4,896,262 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 115,964,537 |
| | $ | 116,978,493 |
| | $ | 108,737,459 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(2) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (3) |
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 5/31/2024 | | LIBOR+4.75% cash | | 7.03 | % | | $ | 7,500,000 |
| | $ | 7,481,250 |
| | $ | 7,575,000 |
|
| AI Ladder (Luxembourg) Subco S.a.r.l (4) | | Electrical components & equipment | | First Lien Term Loan B | | 7/9/2025 | | LIBOR+4.5% cash | | 7.02 | % | | 5,000,000 |
| | 4,853,898 |
| | 5,029,700 |
|
| AL Midcoast Holdings LLC (4) | | Oil & gas storage & transportation | | First Lien Term Loan B | | 8/1/2025 | | LIBOR+5.5% cash | | 7.84 | % | | 7,000,000 |
| | 6,930,000 |
| | 7,028,455 |
|
| Altice France S.A. | | Integrated telecommunication services | | First Lien Term Loan B13 | | 8/14/2026 | | LIBOR+4% cash | | 6.16 | % | | 3,000,000 |
| | 2,925,338 |
| | 2,982,855 |
|
| Alvogen Pharma US Inc. | | Pharmaceuticals | | First Lien Term Loan B | | 4/1/2022 | | LIBOR+4.75% (1% floor) cash | | 6.99 | % | | 6,875,051 |
| | 6,875,051 |
| | 6,942,358 |
|
| Ancile Solutions, Inc. (4) | | Application software | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 9.39 | % | | 3,750,800 |
| | 3,719,206 |
| | 3,728,294 |
|
| Aptos, Inc. (4) | | Computer & electronics retail | | First Lien Term Loan | | 7/23/2025 | | LIBOR+5.5% cash | | 7.74 | % | | 3,000,000 |
| | 2,970,000 |
| | 2,996,250 |
|
| Asset International, Inc. (4) | | Research & Consulting Services | | First Lien Term Loan | | 12/30/2024 | | LIBOR+4.5% (1% floor) cash | | 6.89 | % | | 3,970,000 |
| | 3,899,167 |
| | 3,952,818 |
|
| Bison Midstream Holdings LLC | | Oil & gas equipment & services | | First Lien Term Loan B | | 5/21/2025 | | LIBOR+4% cash | | 6.17 | % | | 4,987,500 |
| | 4,963,823 |
| | 4,971,914 |
|
| California Pizza Kitchen, Inc. | | Restaurants | | First Lien Term Loan | | 8/23/2022 | | LIBOR+6% (1% floor) cash | | 8.39 | % | | 4,900,000 |
| | 4,888,197 |
| | 4,777,500 |
|
| Chloe Ox Parent LLC (4) | | Healthcare services | | First Lien Term Loan | | 12/23/2024 | | LIBOR+4.5% (1% floor) cash | | 6.89 | % | | 5,970,000 |
| | 5,915,738 |
| | 5,992,388 |
|
| CM Delaware LLC | | Interactive media & services | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 7.64 | % | | 2,053,658 |
| | 2,052,561 |
| | 2,002,316 |
|
| Eton (4) | | Research & consulting services | | Second Lien Term Loan | | 5/1/2026 | | LIBOR+7.5% cash | | 9.74 | % | | 5,000,000 |
| | 4,976,145 |
| | 5,025,000 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan B | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 8.99 | % | | 4,330,233 |
| | 4,295,307 |
| | 4,330,288 |
|
| Gigamon, Inc. | | Systems software | | First Lien Term Loan | | 12/27/2024 | | LIBOR+4.5% (1% floor) cash | | 6.89 | % | | 5,955,000 |
| | 5,901,647 |
| | 5,999,664 |
|
| IBC Capital Ltd. | | Metal & glass containers | | First Lien Term Loan B | | 9/11/2023 | | LIBOR+3.75% cash | | 6.09 | % | | 4,975,000 |
| | 4,962,562 |
| | 5,015,421 |
|
| Indivior Finance S.a.r.l (4) | | Pharmaceuticals | | First Lien Term Loan B | | 12/19/2022 | | LIBOR+4.5% (1% floor) cash | | 6.85 | % | | 4,732,907 |
| | 4,712,773 |
| | 4,718,117 |
|
| Integro Parent, Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 8.07 | % | | 4,863,924 |
| | 4,767,629 |
| | 4,876,084 |
|
McDermott Technology (Americas) Inc. (4)
| | Oil & gas equipment & services | | First Lien Term Loan B | | 5/12/2025 | | LIBOR+5% (1% floor) cash | | 7.24 | % | | 7,960,000 |
| | 7,808,276 |
| | 8,077,728 |
|
| MHE Intermediate Holdings, LLC (4) | | Diversified support services | | First Lien Term Loan B | | 3/8/2024 | | LIBOR+5% (1% floor) cash | | 7.39 | % | | 4,186,250 |
| | 4,119,789 |
| | 4,147,707 |
|
| | | Diversified support services | | Delayed Draw Term Loan | | 3/8/2024 | | LIBOR+5% (1% floor) cash | | 7.39 | % | | 845,676 |
| | 835,253 |
| | 837,883 |
|
| Total MHE Intermediate Holdings, LLC | | | | | | | | | | | | 5,031,926 |
| | 4,955,042 |
| | 4,985,590 |
|
| Morphe LLC (4) | | Personal products | | First Lien Term Loan | | 2/10/2023 | | LIBOR+6% (1% floor) cash | | 8.40 | % | | 3,412,500 |
| | 3,382,166 |
| | 3,412,500 |
|
| Northern Star Industries Inc. | | Electrical components & equipment | | First Lien Term Loan B | | 3/31/2025 | | LIBOR+4.75% (1% floor) cash | | 7.08 | % | | 5,472,500 |
| | 5,447,047 |
| | 5,479,341 |
|
| Novetta Solutions, LLC | | Application software | | First Lien Term Loan | | 10/17/2022 | | LIBOR+5% (1% floor) cash | | 7.25 | % | | 5,929,606 |
| | 5,878,236 |
| | 5,759,129 |
|
| OCI Beaumont LLC (4) | | Commodity chemicals | | First Lien Term Loan B | | 3/13/2025 | | LIBOR+4.25% (1% floor) cash | | 6.39 | % | | 6,965,000 |
| | 6,956,910 |
| | 7,078,288 |
|
| R1 RCM Inc. (4) | | Healthcare services | | First Lien Term Loan B | | 5/8/2025 | | LIBOR+5.25% cash | | 7.65 | % | | 7,000,000 |
| | 6,800,665 |
| | 7,017,500 |
|
| RSC Acquisition, Inc. | | Trading companies & distributors | | First Lien Term Loan | | 11/30/2022 | | LIBOR+4.25% (1% floor) cash | | 6.71 | % | | 3,889,854 |
| | 3,871,269 |
| | 3,880,130 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 11/18/2022 | | LIBOR+5% (1% floor) cash | | 7.34 | % | | 6,321,250 |
| | 6,283,276 |
| | 6,005,189 |
|
| Tribe Buyer LLC (4) | | Human resources & employment services | | First Lien Term Loan | | 2/16/2024 | | LIBOR+4.5% (1% floor) cash | | 6.74 | % | | 5,939,699 |
| | 5,926,444 |
| | 5,984,248 |
|
| Unimin Corp. | | Oil & gas equipment & services | | First Lien Term Loan | | 5/17/2025 | | LIBOR+3.75% (1% floor) cash | | 6.14 | % | | 6,982,500 |
| | 6,982,500 |
| | 6,621,714 |
|
| Verra Mobility, Corp. | | Data processing & outsourced services | | First Lien Term Loan B | | 2/28/2025 | | LIBOR+3.75% (1% floor) cash | | 5.99 | % | | 4,977,494 |
| | 4,957,752 |
| | 5,008,602 |
|
| WP CPP Holdings, LLC (4) | | Aerospace & defense | | Second Lien Term Loan | | 4/30/2026 | | LIBOR+7.75% (1% floor) cash | | 10.15 | % | | 3,000,000 |
| | 2,970,428 |
| | 3,006,570 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 160,746,402 |
| | $ | 159,310,303 |
| | $ | 160,260,951 |
|
__________
(1) Represents the current interest rate as of September 30, 2017.2018. All interest rates are payable in cash, unless otherwise noted.
(2) The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, we have provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement and the cash interest rate as of period end. All LIBOR shown above is in U.S. dollars unless otherwise noted. As of September 30, 2018, the reference rates for the OCSI Glick JV's variable rate loans were the 30-day LIBOR at 2.24%, 60-day LIBOR at 2.29%, the 90-day LIBOR at 2.39%, the 180-day LIBOR at 2.59% and the PRIME at 5.25%.
(2)(3) Represents the current determination of fair value as of September 30, 20172018 utilizing a similar technique as us in accordance with ASC 820. However, the determination of such fair value is not included in our Board of Directors' valuation process described elsewhere herein.
(3)(4) This investment is held by both us and FSFRthe OCSI Glick JV as of September 30, 2017.2018.
(4)
OCSI Glick JV Portfolio as of September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(2) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (3) |
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 3/20/2022 | | LIBOR+5.5% (1% floor) cash | | 6.82 | % | | $ | 8,160,622 |
| | $ | 8,141,224 |
| | $ | 8,099,417 |
|
| Ameritox Ltd. (4)(5) | | Healthcare services | | First Lien Term Loan | | 4/11/2021 | | LIBOR+5% (1% floor) cash 3% PIK | | 6.33 | % | | 2,287,177 |
| | 2,243,202 |
| | 265,211 |
|
| | | Healthcare services | | 119,910.76 Class B Preferred Units | | | | | | | | | | 119,911 |
| | — |
|
| | | Healthcare services | | 368.96 Class A Common Units | | | | | | | |
| | 2,174,034 |
| | — |
|
| Total Ameritox Ltd. | | | | | | | | | | | | 2,287,177 |
| | 4,537,147 |
| | 265,211 |
|
| Ancile Solutions, Inc. (4) | | Internet software & services | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 4,042,355 |
| | 3,995,621 |
| | 4,010,198 |
|
| Aptos, Inc. (4) | | Data processing & outsourced services | | First Lien Term Loan B | | 9/1/2022 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 7,920,000 |
| | 7,790,262 |
| | 7,840,800 |
|
| Beyond Trust Software, Inc. (4) | | Application software | | First Lien Term Loan | | 9/25/2019 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 11,267,524 |
| | 11,220,478 |
| | 11,267,116 |
|
| California Pizza Kitchen, Inc. | | Restaurants | | First Lien Term Loan | | 8/23/2022 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 4,950,000 |
| | 4,938,077 |
| | 4,917,008 |
|
| Central Security Group, Inc. (4) | | Specialized consumer services | | First Lien Term Loan | | 10/6/2021 | | LIBOR+5.625% (1% floor) cash | | 6.86 | % | | 3,876,067 |
| | 3,880,408 |
| | 3,892,211 |
|
| CM Delaware LLC | | Advertising | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 2,075,162 |
| | 2,073,617 |
| | 2,064,786 |
|
| Compuware Corporation (4) | | Internet software & services | | First Lien Term Loan B3 | | 12/15/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 6,279,920 |
| | 6,225,992 |
| | 6,358,419 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 4,610,174 |
| | 4,572,990 |
| | 4,610,400 |
|
| Integro Parent Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 7.06 | % | | 4,913,924 |
| | 4,790,511 |
| | 4,901,639 |
|
| Metamorph US 3, LLC (4)(5) | | Internet software & services | | First Lien Term Loan | | 12/1/2020 | | LIBOR+5.5% (1% floor) cash 2% PIK | | 6.74 | % | | 6,825,900 |
| | 6,477,372 |
| | 2,592,115 |
|
| MHE Intermediate Holdings, LLC (4) | | Diversified support services | | First Lien Term Loan B | | 3/11/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 4,228,750 |
| | 4,150,304 |
| | 4,228,752 |
|
| | | Diversified support services | | Delayed Draw Term Loan | | 3/11/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 667,510 |
| | 635,208 |
| | 667,510 |
|
| Total MHE Intermediate Holdings, LLC | | | | | | | | | | | | 4,896,260 |
| | 4,785,512 |
| | 4,896,262 |
|
| Motion Recruitment Partners LLC (4) | | Human resources & employment services | | First Lien Term Loan | | 2/13/2020 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 8,659,650 |
| | 8,659,650 |
| | 8,659,223 |
|
| NAVEX Global, Inc. | | Internet software & services | | First Lien Term Loan | | 11/19/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 2,977,041 |
| | 2,967,620 |
| | 2,988,205 |
|
| New Trident Holdcorp, Inc. (4) | | Healthcare services | | First Lien Term Loan B | | 7/31/2019 | | LIBOR+5.75% (1.25% floor) cash | | 7.08 | % | | 2,018,206 |
| | 2,000,877 |
| | 1,453,109 |
|
| Novetta Solutions, LLC | | Diversified support services | | First Lien Term Loan | | 10/16/2022 | | LIBOR+5% (1% floor) cash | | 6.34 | % | | 5,990,978 |
| | 5,932,073 |
| | 5,826,226 |
|
| Poseidon Merger Sub, Inc. (4) | | Advertising | | Second Lien Term Loan | | 8/15/2023 | | LIBOR+8.5% (1% floor) cash | | 9.81 | % | | 3,000,000 |
| | 2,933,633 |
| | 3,030,000 |
|
| RSC Acquisition, Inc. | | Insurance brokers | | First Lien Term Loan | | 11/30/2022 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 3,930,134 |
| | 3,912,198 |
| | 3,890,832 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 10/27/2022 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 6,386,250 |
| | 6,338,479 |
| | 6,306,422 |
|
| TruckPro, LLC | | Auto parts & equipment | | First Lien Term Loan | | 8/6/2018 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 1,823,268 |
| | 1,821,822 |
| | 1,825,054 |
|
| Valet Merger Sub, Inc. (4) | | Environmental & facilities services | | First Lien Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 3,920,000 |
| | 3,877,655 |
| | 3,919,865 |
|
| | | Environmental & facilities services | | Incremental Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 1,027,425 |
| | 1,006,080 |
| | 1,027,390 |
|
| Total Valet Merger Sub, Inc. | | | | | | | | | | | | 4,947,425 |
| | 4,883,735 |
| | 4,947,255 |
|
| Vubiquity, Inc. | | Application software | | First Lien Term Loan | | 8/12/2021 | | LIBOR+5.5% (1% floor) cash | | 6.83 | % | | 4,126,500 |
| | 4,099,195 |
| | 4,095,551 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 115,964,537 |
| | $ | 116,978,493 |
| | $ | 108,737,459 |
|
(1) Represents the current interest rate as of September 30, 2017. All interest rates are payable in cash, unless otherwise noted.
(2) The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, we have provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement.
(5) This investment was on cash non-accrual status as of September 30, 2017.
FSFR Glick JV Portfolio as of September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(4) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (2) |
| Ameritox Ltd. (3) | | Healthcare services | | First Lien Term Loan | | 4/11/2021 | | LIBOR+5% (1% floor) cash 3% PIK | | 6.00 | % | | $ | 2,339,146 |
| | $ | 2,336,840 |
| | $ | 2,322,917 |
|
| | | Healthcare services | | 119,910.76 Class B Preferred Units | | | | | | | | — |
| | 119,911 |
| | 131,369 |
|
| | | Healthcare services | | 368.96 Class A Common Units | | | | | | | | — |
| | 2,174,034 |
| | 981,348 |
|
| Total Ameritox Ltd. | | | | | | | | | | | | 2,339,146 |
| | 4,630,785 |
| | 3,435,634 |
|
| Answers Corporation (3) (5) | | Internet software & services | | First Lien Term Loan | | 10/3/2021 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 7,899,749 |
| | 7,636,708 |
| | 4,265,865 |
|
| Beyond Trust Software, Inc. (3) | | Application software | | First Lien Term Loan | | 9/25/2019 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 12,641,009 |
| | 12,554,571 |
| | 12,538,499 |
|
| Compuware Corporation (3) | | Internet software & services | | First Lien Term Loan B1 | | 12/15/2019 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 7,392,405 |
| | 7,306,444 |
| | 7,420,127 |
|
| Metamorph US 3, LLC (3) | | Internet software & services | | First Lien Term Loan | | 12/1/2020 | | LIBOR+6.5% (1% floor) cash | | 7.50 | % | | 6,900,283 |
| | 6,808,009 |
| | 5,744,139 |
|
| Motion Recruitment Partners LLC (3) | | Human resources & employment services | | First Lien Term Loan | | 2/13/2020 | | LIBOR+6% (1% floor) cash | | 7.00 | % | | 9,125,000 |
| | 9,125,000 |
| | 9,099,254 |
|
| NAVEX Global, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 11/19/2021 | | LIBOR+4.75% (1% floor) cash | | 5.99 | % | | 1,793,550 |
| | 1,779,633 |
| | 1,784,582 |
|
| Teaching Strategies, LLC | | Education services | | First Lien Term Loan (3) | | 10/1/2019 | | LIBOR+5.5% (0.5% floor) cash | | 6.34 | % | | 2,570,471 |
| | 2,567,575 |
| | 2,556,891 |
|
| | | Education services | | First Lien Delayed Draw Term Loan | | 10/1/2019 | | LIBOR+5.5% (0.5% floor) cash | | 6.34 | % | | 6,840,000 |
| | 6,832,715 |
| | 6,803,695 |
|
| Total Teaching Strategies, LLC | | | | | | | | | | | | 9,410,471 |
| | 9,400,290 |
| | 9,360,586 |
|
| TrialCard Incorporated (3) | | Healthcare services | | First Lien Term Loan | | 12/31/2019 | | LIBOR+4.5% (1% floor) cash | | 5.50 | % | | 7,179,097 |
| | 7,144,396 |
| | 7,144,248 |
|
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 3/20/2022 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 8,291,864 |
| | 8,267,671 |
| | 7,960,189 |
|
| Fineline Technologies, Inc. (3) | | Electronic equipment & instruments | | First Lien Term Loan | | 5/5/2017 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 7,034,441 |
| | 7,010,963 |
| | 7,015,051 |
|
| LegalZoom.com, Inc. (3) | | Specialized consumer services | | First Lien Term Loan | | 5/13/2020 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 9,850,000 |
| | 9,672,034 |
| | 9,772,706 |
|
| GK Holdings, Inc. | | IT consulting & other services | | First Lien Term Loan | | 1/20/2021 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 3,438,750 |
| | 3,452,038 |
| | 3,412,959 |
|
| Vitera Healthcare Solutions, LLC | | Healthcare technology | | Second Lien Term Loan | | 11/4/2021 | | LIBOR+8.25% (1% floor) cash | | 9.25 | % | | 3,000,000 |
| | 2,958,409 |
| | 2,782,500 |
|
| TIBCO Software, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 12/4/2020 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 2,304,900 |
| | 2,308,815 |
| | 2,277,114 |
|
| CM Delaware LLC | | Advertising | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 2,096,666 |
| | 2,094,658 |
| | 1,978,729 |
|
| New Trident Holdcorp, Inc. (3) | | Healthcare services | | First Lien Term Loan B | | 7/31/2019 | | LIBOR+5.25% (1.25% floor) cash | | 6.50 | % | | 2,041,357 |
| | 2,014,233 |
| | 1,755,567 |
|
| Central Security Group, Inc. (3) | | Specialized consumer services | | First Lien Term Loan | | 10/6/2020 | | LIBOR+5.625% (1% floor) cash | | 6.63 | % | | 5,909,774 |
| | 5,915,626 |
| | 5,776,805 |
|
| Auction.com, LLC | | Internet software & services | | First Lien Term Loan | | 5/12/2019 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 3,940,000 |
| | 3,926,700 |
| | 3,959,700 |
|
| Aptos, Inc. (3) | | Data processing & outsourced services | | First Lien Term Loan B | | 9/1/2022 | | LIBOR+6.75% (1% floor) cash | | 7.75 | % | | 8,000,000 |
| | 7,842,222 |
| | 7,920,000 |
|
| Vubiquity, Inc. | | Application software | | First Lien Term Loan | | 8/12/2021 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 4,168,500 |
| | 4,133,700 |
| | 4,147,658 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Too Faced Cosmetics, LLC (3) | | Personal products | | First Lien Term Loan B | | 7/7/2021 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 642,692 |
| | 581,620 |
| | 645,155 |
|
| American Seafoods Group LLC (3) | | Food distributors | | First Lien Term Loan | | 8/19/2021 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 3,853,704 |
| | 3,837,366 |
| | 3,844,069 |
|
| Worley Claims Services, LLC | | Internet software & services | | First Lien Term Loan | | 10/31/2020 | | LIBOR+8% (1% floor) cash | | 9.00 | % | | 5,730,937 |
| | 5,707,511 |
| | 5,702,282 |
|
| Poseidon Merger Sub, Inc. (3) | | Advertising | | Second Lien Term Loan | | 8/15/2023 | | LIBOR+8.5% (1% floor) cash | | 9.50 | % | | 3,000,000 |
| | 2,922,316 |
| | 3,039,954 |
|
| AccentCare, Inc. | | Healthcare services | | First Lien Term Loan | | 9/3/2021 | | LIBOR+5.75% (1% floor) cash | | 6.75 | % | | 7,850,000 |
| | 7,773,386 |
| | 7,727,344 |
|
| Novetta Solutions, LLC | | Diversified support services | | First Lien Term Loan | | 10/17/2022 | | LIBOR+5.75% (1% floor) cash | | 6.00 | % | | 6,477,948 |
| | 6,392,100 |
| | 6,226,928 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 10/27/2022 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 6,451,250 |
| | 6,393,472 |
| | 6,443,186 |
|
| Valet Merger Sub, Inc. (3) | | Environmental & facilities services | | First Lien Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 3,960,000 |
| | 3,906,498 |
| | 4,026,826 |
|
| RSC Acquisition, Inc. | | Insurance brokers | | First Lien Term Loan | | 11/30/2022 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 3,970,390 |
| | 3,948,754 |
| | 3,950,538 |
|
| Integro Parent Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 6.75 | % | | 4,963,924 |
| | 4,814,658 |
| | 4,889,465 |
|
| TruckPro, LLC | | Auto parts & equipment | | First Lien Term Loan | | 8/6/2018 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 1,920,000 |
| | 1,916,612 |
| | 1,919,232 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 7.75 | % | | 4,962,500 |
| | 4,912,596 |
| | 4,967,689 |
|
| Sundial Group Holdings LLC | | Personal products | | First Lien Term Loan | | 10/19/2021 | | LIBOR+6.25% (1% floor) cash | | 7.25 | % | | 3,900,000 |
| | 3,839,938 |
| | 3,954,402 |
|
| Onvoy, LLC (3) | | Integrated telecommunication services | | First Lien Term Loan | | 4/29/2021 | | LIBOR+6.25% (1% floor) cash | | 7.25 | % | | 7,406,250 |
| | 7,261,422 |
| | 7,386,738 |
|
| Ancile Solutions, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 4,500,000 |
| | 4,433,644 |
| | 4,432,500 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 194,346,557 |
| | $ | 194,624,798 |
| | $ | 188,708,220 |
|
__________
(1) Represents the current interest rate as of September 30, 2016. All interest rates are payable in cash, unless otherwise noted.
(2)(3) Represents the current determination of fair value as of September 30, 20162017 utilizing a similar technique as us in accordance with ASC 820. However, the determination of such fair value is not included in our Board of Directors' valuation process described elsewhere herein.
(3)(4) This investment is held by both us and FSFRthe OCSI Glick JV as of September 30, 2016.2017.
(4) The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, we have provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement.
(5) This investment was on cash non-accrual status as of September 30, 2016.
2017. Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable.
The cost and fair value of our aggregate investment in FSFRthe OCSI Glick JV held by us was $73.5 million and $58.5 million, respectively, as of September 30, 2018 and $71.3 million and $57.6 million, respectively, as of September 30, 2017 and $71.1 million and $63.3 million, respectively, as2017. As of September 30, 2016. The2018, the Subordinated Notes paypaid a weighted average interest rate of LIBOR plus 6.5% per annum. As of September 30, 2017, the Subordinated Notes paid a weighted average interest rate of LIBOR plus 8.0% per annum. For the yearyears ended September 30, 2018, 2017 and September 30, 2016, we earned interest income of $6.1 million, $5.8 million and $5.1 million, respectively, on ourits investment in the Subordinated Notes, respectively.of which $2.2 million, $0.2 million and $0.0 million, respectively, was PIK interest income. The LLC equity interests are dividend producing to the extent there is residual cash to be distributed on a quarterly basis. We did not earn any dividend income for the year ended September 30, 2018 with respect to our investment in the LLC equity interests of the OCSI Glick JV. We reversed $0.6 million of dividend income previously recorded in prior periods during the year ended September 30, 2017 with respect to our LLC equity interests since we determinedfollowing a determination that such dividend payments mayamounts were no longer be collectible. We earned dividend income of $2.7 million for the year ended September 30, 2016 with respect to its LLC equity interests. The LLC equity interests are dividend producing to the extent FSFR Glick JV has residual cash to be distributed on a quarterly basis.
Below is certain summarized financial information for FSFRthe OCSI Glick JV as of September 30, 20172018 and September 30, 20162017 and for the years ended September 30, 20172018 and September 30, 2016:2017:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 |
| Selected Balance Sheet Information: | | | | | | | | |
| Investments in loans at fair value (cost September 30, 2017: $116,978,493; cost September 30, 2016: $194,624,798) | | $ | 108,737,459 |
| | $ | 188,708,220 |
| |
| Receivable from secured financing arrangement at fair value (September 30, 2016 cost: $5,000,000) | | — |
| | 4,985,425 |
| |
| Investments in loans at fair value (cost September 30, 2018: $159,310,303; cost September 30, 2017: $116,978,493) | | | $ | 160,260,951 |
| | $ | 108,737,459 |
|
| Cash and cash equivalents | | 13,891,899 |
| | 980,605 |
| | 2,055,935 |
| | 13,891,899 |
|
| Restricted cash | | 2,249,575 |
| | 3,343,303 |
| | 2,036,487 |
| | 2,249,575 |
|
| Receivable from unsettled transactions | | — |
| | 952,591 |
| |
| Due from portfolio companies | | 7,653 |
| | — |
| | 53,006 |
| | 7,653 |
|
| Other assets | | 1,791,077 |
| | 2,162,942 |
| | 1,781,502 |
| | 1,791,077 |
|
| Total assets | | $ | 126,677,663 |
| | $ | 201,133,086 |
| | $ | 166,187,881 |
| | $ | 126,677,663 |
|
| | | | | | | | | |
| Senior credit facility payable | | $ | 56,881,939 |
| | $ | 124,615,636 |
| | $ | 94,281,939 |
| | $ | 56,881,939 |
|
| Subordinated notes payable at fair value (proceeds September 30, 2017: $73,404,435; cost September 30, 2016: $73,149,434) | | 65,836,199 |
| | 65,012,167 |
| |
| Subordinated notes payable at fair value (proceeds September 30, 2018: $75,874,536; proceeds September 30, 2017: $73,404,435) | | | 66,871,054 |
| | 65,836,199 |
|
| Other liabilities | | 3,959,525 |
| | 4,196,688 |
| | 5,034,888 |
| | 3,959,525 |
|
| Total liabilities | | $ | 126,677,663 |
| | $ | 193,824,491 |
| | $ | 166,187,881 |
| | $ | 126,677,663 |
|
| Members' equity | | — |
| | 7,308,595 |
| | — |
| | — |
|
| Total liabilities and members' equity | | $ | 126,677,663 |
| | $ | 201,133,086 |
| | $ | 166,187,881 |
| | $ | 126,677,663 |
|
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 |
| Selected Statements of Operations Information: | | | | | | | | |
| Interest income | | $ | 11,148,203 |
| | $ | 14,109,946 |
| | $ | 9,823,972 |
| | $ | 11,148,203 |
|
| PIK interest income | | 53,620 |
| | 33,170 |
| | — |
| | 53,620 |
|
| Fee income | | 160,984 |
| | 95,756 |
| | 77,999 |
| | 160,984 |
|
| Total investment income | | 11,362,807 |
| | 14,238,872 |
| | 9,901,971 |
| | 11,362,807 |
|
| Interest expense | | $ | 11,055,880 |
| | $ | 10,780,919 |
| | 11,433,877 |
| | 11,055,880 |
|
| Other expenses | | 224,559 |
| | 283,267 |
| | 211,874 |
| | 224,559 |
|
| Total expenses (1) | | 11,280,439 |
| | 11,064,186 |
| | 11,645,751 |
| | 11,280,439 |
|
| Net unrealized appreciation (depreciation) | | $ | (2,893,408 | ) | | $ | 3,832,274 |
| | 10,626,928 |
| | (2,893,408 | ) |
| Realized loss on investments | | (3,873,454 | ) | | (3,119,735 | ) | | (8,883,148 | ) | | (3,873,454 | ) |
| Net income (loss) | | $ | (6,684,494 | ) | | $ | 3,887,225 |
| | $ | — |
| | $ | (6,684,494 | ) |
__________
(1) There are no management fees or incentive fees charged at FSFRthe OCSI Glick JV.
FSFRThe OCSI Glick JV has elected to fair value the Subordinated Notes issued to the Company and GF Debt Funding under FASB ASC Topic 825, — Financial Instruments.Instruments - Fair Value Options. The subordinated notesSubordinated Notes are valued based on the total assets less the liabilities senior to the subordinated notesSubordinated Notes of FSFRthe OCSI Glick JV in an amount not exceeding par under the enterprise value technique.
During the yearyears ended September 30, 2018 and 2017, we did not sell any senior secured debt investments to FSFRthe OCSI Glick JV. During the year ended September 30, 2016, we sold $48.9 million of senior secured debt investments at fair value to FSFR Glick JV in exchange for $47.6 million cash consideration, $1.2 million of subordinated notes in FSFR Glick JV and $0.1 million of LLC equity interests in FSFR Glick JV. We realized aloss of $0.5 million on these transactions.
Discussion and Analysis of Results and Operations
Results of Operations
The principal measure of our financial performance is the net increase (decrease) in net assets resulting from operations, which includes net investment income, net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income is the difference between our income from interest, dividends, fees, and other investment income and total expenses. Net realized gain (loss) on investments and secured borrowings is the difference between the proceeds received from dispositions of portfolio investmentsinvestment related assets and secured borrowingsliabilities and their stated costs. Net unrealized appreciation (depreciation) is the net change in the fair value of our investment portfoliorelated assets and secured borrowingsliabilities which are carried at fair value during the reporting period, including the reversal of previously recorded unrealized appreciation (depreciation) when gains or losses are realized.
Comparison of Years Ended September 30, 2018 and September 30, 2017
Total Investment Income
Total investment income includes interest on our investments, fee income and dividend and other income.
Total investment income for the years ended September 30, 2018 and September 30, 2017 was $47.7 million and $46.6 million, respectively. For the year ended September 30, 2018, this amount primarily consisted of $45.6 million of interest income from portfolio investments (which included $2.2 million of PIK interest) and $2.1 million of fee income. For the year ended September 30, 2017, this amount primarily consisted of $44.9 million of interest income from portfolio investments (which included $0.4 million of PIK interest) and $2.2 million of fee income. The increase of $1.1 million in our total investment income for the year ended September 30, 2018, as compared to the year ended September 30, 2017, was due primarily to a $2.0 million one-time acceleration of interest income in connection with the repayment of our investment in Allen Media LLC and a $0.6 million increase of dividend income, which was primarily attributable to a reversal of dividend income during the year ended September 30, 2017, partially offset by a lower yield on our debt investments.
Expenses
Net expenses (expenses net of fee waivers and insurance recoveries) for the year ended September 30, 2018 and September 30, 2017 were $27.9 million and $24.2 million, respectively. The increase of $3.7 million in our net expenses for the year ended September 30, 2018, as compared to the year ended September 30, 2017, was primarily due to a $3.6 million increase in interest expense, which was attributable to a $2.0 million write-off of previously unamortized financing costs in connection with the redemption of our $309.0 million debt securitization, or the 2015 Debt Securitization, and increases in LIBOR, a $1.4 million increase in professional fees (net of insurance recoveries) and a $0.4 million increase in administrator expense, partially offset by a $1.0 million decrease in incentive fees on income (net of fee waivers), which was attributable to lower pre-incentive fee net investment income, and a $0.6 million decrease in general and administrative expenses.
Net Investment Income
As a result of the $1.1 million increase in total investment income and the $3.7 million increase in net expenses, net investment income for the year ended September 30, 2018 decreased by approximately $2.7 million, as compared to the year ended September 30, 2017.
Realized Gain (Loss)
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of investments, secured borrowings and foreign currency and the cost basis without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
During the year ended September 30, 2018, we recorded an aggregate net realized loss of $27.7 million primarily in connection with the exit of our investments in Ameritox Ltd. and Metamorph US 3, LLC. During the year ended September 30, 2017, we recorded an aggregate net realized loss of $13.4 million primarily in connection with the exit of our investment in the Answers Corporation.
See “Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments” in the Consolidated Financial Statements for more details regarding realized gain (loss) on investments for the years ended September 30, 2018 and September 30, 2017.
Net Unrealized Appreciation (Depreciation)
Net unrealized appreciation or depreciation is the net change in the fair value of our investments, secured borrowings and foreign currency during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
For the year ended September 30, 2018, we recorded net unrealized appreciation of $28.6 million. For the year ended September 30, 2018, this consisted of $29.0 million of net reclassifications to realized loss (resulting in unrealized appreciation), which was primarily related to the disposal of our investments in Ameritox Ltd. and Metamorph US 3, LLC, and $1.0 million of net unrealized appreciation on equity investments, offset by $1.4 million of net unrealized depreciation on debt investments.
For the year ended September 30, 2017, we recorded net unrealized depreciation of $17.8 million. This consisted of $14.1 millionof net unrealized depreciation on debt investments and $12.9 million of net unrealized depreciation on equity investments, both of which were primarily related to the write-downs of three of our investments, offset by $9.2 millionof net reclassifications to realized loss (resulting in unrealized appreciation), which was primarily in connection with our disposal of our investment in the Answers Corporation.
Comparison of Years Ended September 30, 2017 and September 30, 2016
Total Investment Income
Total investment income includes interest on our investments, fee income and other investment income.
Total investment income for the years ended September 30, 2017 and September 30, 2016 was $46.6 million and $53.4 million, respectively. For the year ended September 30, 2017, this amount primarily consisted of $44.9 million of interest income from portfolio investments (which included $0.4 million of PIK interest) and $2.2 million of fee income. For the year ended September 30, 2016, this amount primarily consisted of $47.6 million of interest income from portfolio investments (which included $0.2 million of PIK interest), $3.1 million of fee income and $2.7 million of dividend income. The decrease of $6.9 million in our total investment income for the year ended September 30, 2017, as compared to the year ended September 30, 2016, was primarily attributable to a lower weighted average annual yield on our debt investments and lower dividend income earned on our investment in FSFROCSI Glick JV. The weighted average annual yield on our debt investments as of September 30, 2017, including the return on our subordinated note investment in FSFR Glick JV,the Subordinated Notes, was approximately 7.52%, as compared to 8.58% as of September 30, 2016.
Expenses
Net expenses (expenses net of base management fee waivers and insurance recoveries) for the years ended September 30, 2017 and September 30, 2016 were $24.2 million and $28.1 million, respectively. The decrease of $3.9 million in our net expenses for the year ended September 30, 2017, as compared to the year ended September 30, 2016, was primarily due to a $2.9 million decrease in professional fees (net of insurance recoveries) incurred in connection with proxy-related matters, a $2.0 million decrease in Part I incentive fees on income payable to our investment adviser, which was attributable to lower pre-incentive fee net investment income for the year-over-year period, partially offset by a $1.2 million increase in interest expense attributable to higher interest rates in the current year.
Net Investment Income
As a result of the $6.9 million decrease in total investment income, offset by the $3.9 million decrease in net expenses, net investment income for the year ended September 30, 2017 reflected an approximate $2.9 million decrease, as compared to the year ended September 30, 2016.
Realized Gain (Loss) on Investments
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption of portfolio investments and the cost basis of the investments without regard to unrealized appreciation or depreciation previously recognized, and includes investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with our determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
Realized losses on investments and secured borrowings increased from $12.8 million for the year ended September 30, 2016 to $13.4 million for the year ended September 30, 2017. Realized losses for the year ended September 30, 2017 were primarily attributable to the sale of our investment in Answers Corporation. Realized losses for the year ended September 30, 2016 were primarily attributable to the restructuring of our investment in Ameritox Ltd. and the disposition of our investment in B&H Education Inc.
See “Note“Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments”Investments” in the Consolidated Financial Statements for more details regarding investment realization eventsrealized gain (loss) on investments and secured borrowings for the years ended September 30, 2017 and September 30, 2016.
Net Unrealized Appreciation (Depreciation) on Investments and Secured Borrowings
Net unrealized appreciation or depreciation is the net change in the fair value of our investments and secured borrowings during the reporting period, including the reversal of previously recorded unrealized appreciation or depreciation when gains or losses are realized.
Net unrealized depreciation on investments and secured borrowings increased from $17.0 million for the year ended September 30, 2016 to $17.8 million for the year ended September 30, 2017. Net unrealized depreciation for the year ended September 30, 2017 was primarily the result of significant write-downs on our investment portfolio, including a $13.6 million write-down on one of our investments. Net unrealized depreciation on investments and secured borrowings for the year ended September 30, 2016 was primarily the result of significant write-downs on our investment portfolio, including $11.9 million of aggregate write-downs on one of our investments and FSFROCSI Glick JV.
See “Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments” in the Consolidated Financial Statements for more details regarding unrealized appreciation (depreciation) on investments and secured borrowings for the years ended September 30, 2017 and September 30, 2016.
Comparison of Years ended September 30, 2016 and September 30, 2015
Total Investment Income
Total investment income for the years ended September 30, 2016 and September 30, 2015 was $53.4 million and $51.5 million, respectively. For the year ended September 30, 2016, this amount primarily consisted of $47.6 million of interest income from portfolio investments (which included $0.2 million of PIK interest), $3.1 million of fee income and $2.7 million of dividend income. For the year ended September 30, 2015, this amount primarily consisted of $41.1 million of interest income from portfolio investments, $9.7 million of fee income and $0.7 million of dividend income.
The increase of $2.0 million in our total investment income for the year ended September 30, 2016, as compared to the year ended September 30, 2015, was primarily attributable to higher average levels of outstanding debt investments and higher dividend income from our investment in FSFR Glick JV, partially offset by lower fee income as a result of a lower level of investment purchases.
Expenses
Total expenses for the years ended September 30, 2016 and September 30, 2015 were $28.1 million and $23.2 million, respectively. The increase of $4.9 million in our total expenses for the year ended September 30, 2016 as compared to the year ended September 30, 2015, was due primarily to an additional $2.6 million of professional fees incurred in connection with proxy-related matters, a $0.8 million reversal of the Part II incentive fee as a result of unrealized losses on the investment portfolio during the year ended September 30, 2015 and a $0.6 million increase in interest expense due to a higher average level of outstanding borrowings.
Net Investment Income
As a result of the $4.9 million increase in total expenses, offset by the $2.0 million increase in total investment income, net investment income for the year ended September 30, 2016 reflected an approximate $3.0 million decrease, as compared to the year ended September 30, 2015.
Realized Gain (Loss) on Investments and Secured Borrowings
Realized gain (loss) on investments and secured borrowings was $(12.8) million for the year ended September 30, 2016 as compared to $0.4 million for the year ended September 30, 2015, resulting in a decrease of $13.2 million. The decrease was driven primarily by the restructuring of our investment in Ameritox Ltd. and the disposition of our investment in B&H Education Inc. during the year ended September 30, 2016.
See “Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments” in the Consolidated Financial Statements for more details regarding investment realization events for the years ended September 30, 2016 and September 30, 2015.
Net Unrealized Appreciation (Depreciation) on Investments and Secured Borrowings
Net unrealized depreciation on investments and secured borrowings increased from $12.8 million for the year ended September 30, 2015 to $17.0 million for the year ended September 30, 2016. Net unrealized depreciation on investments and secured borrowings for the year ended September 30, 2016 was primarily the result of significant write-downs on our investment portfolio, including $11.9 million of aggregate write-downs on one of our investments and FSFR Glick JV. Net unrealized depreciation on investments and secured borrowings for the year ended September 30, 2015 was primarily the result of significant write-downs on our investment portfolio, including a $6.1 million write-down on one of our investments.
See “Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments” in the Consolidated Financial Statements for more details regarding unrealized appreciation (depreciation) on investments and secured borrowings for the years ended September 30, 2016 and September 30, 2015.
Financial Condition, Liquidity and Capital Resources
We have a number of alternatives available to fund our investment portfolio and our operations, including raising equity, increasing or refinancing debt and funding from operational cash flow. Additionally,We generally expect to generate liquidity we may reducefund the growth of our investment size by syndicating a portion of any given transaction. We intend to continue to generate cash primarily from cash flows from operations, including interest earned and future borrowings. We may also from time to time issue securitiesportfolio through (i) equity offerings in public or private offerings, which offerings will depend on future market conditions, funding needs and other factors. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equityfactors and (ii) additional debt offerings or credit facilities, as we deem appropriate.
capital (to the extent permissible under the Investment Company Act). In the future, we may also securitize a portion of our investments to the extent permitted by applicable law and regulation.investments. To securitize investments, we would likely create a wholly-owned subsidiary and contribute a pool of loans to the subsidiary. We would then sell interests in the subsidiary on a non-recourse basis to purchasers and we would retain all or a portion of the equity in the subsidiary. We cannot assure you, however, that our efforts to grow our portfolio will be successful. For example, our common stock has generally traded at prices below net asset value for the past several years, and we are currently limited in our ability to raise additional equity at prices below the then-current net asset value per share. Additionally, to generate liquidity we may reduce investment size by syndicating a portion of any given transaction. We intend to continue to generate cash primarily from cash flows from operations, including interest earned and future borrowings. We intend to fund our future distribution obligations through operating cash flow or with funds obtained through future equity and debt offerings or credit facilities, as we deem appropriate.
Our primary uses of funds are investments in our targeted asset classes and cash distributions to holders of our common stock. Following effectiveness of the 150% reduced asset coverage requirements to us on July 11, 2018, over time and under current market conditions, we generally expect to target a debt to equity ratio of 1.20x to 1.60x over the long-term (i.e., one dollar of equity for each $1.20 to $1.60 of debt outstanding).
AlthoughFor the year ended September 30, 2018, we mayexperienced a net decrease in cash and cash equivalents of $25.2 million. During that period, $16.9 million of cash was used in operating activities, primarily consisting of cash used to fund $455.0 million of investments and net revolvers, a decrease in net payables from unsettled transactions of $44.7 million and the growthcash activities related to $19.8 million of net investment income, partially offset by $464.3 million of principal payments and proceeds from the sale of investments. During the same period, cash used in financing activities was $8.2 million, primarily consisting of $192.1 millionof net borrowings under our investment portfolio through equity offerings,credit facilities, $180.0 million of net repayments of notes payable under the 2015 Debt Securitization, $18.3 million of cash distributions paid to our plans to do so may not be successful. In this regard, because our common stock has at times traded at a price below our then-current net asset value per share (which has primarily been the case for several years)stockholders and we are limited in our ability to sell our common stock at a price below net asset value per share, we are currently limited in our ability to raise equity capital absent stockholder approval to issue shares$1.8 million of our common stock at prices below then-current net asset value per share.deferred financing costs paid.
For the year ended September 30, 2017, we experienced a net increase in cash and cash equivalents of $15.8 million. During that period, $68.8 million of cash was provided by operating activities, primarily consisting of $276.9 million of principal payments and proceeds from the sale of investments and cash activities related to $22.4 million of net investment income, partially offset by cash used to fund $290.6 million of investments and net revolvers. During the same period, cash used byin financing activities was $53.0 million, primarily consisting of $24.5 million of net repayments under our credit facilities, $23.2 million of cash distributions paid to our stockholders and $5.0 million of repayments of secured borrowings.
For the year ended September 30, 2016, we experienced a net decrease in cash and cash equivalents of $21.7 million. During that period, $40.9 million of cash was provided by operating activities, primarily consisting of $308.4 million of principal payments and proceeds from the sale of investments and cash activities related to $25.3 million of net investment income, partially offset by cash used to fund $286.1 million of investments and net revolvers. During the same period, cash used by financing activities was $62.6 million, primarily consisting of $29.2 million of net repayments under our credit facilities, $6.4 million of net repayments under the 2015 Debt Securitization and $25.9 million of cash distributions paid to our shareholders.
For the year endedAs of September 30, 2015,2018, we experienced a net decrease inhad $16.4 million of cash and cash equivalents (including $6.0 million of $66.0restricted cash), portfolio investments (at fair value) of $556.8 million, $3.1 million of interest, dividends and fees receivable, $3.8 million of net payables from unsettled transactions, $275.1 million of borrowings outstanding under our revolving credit facilities and unfunded commitments of $22.8 million. During that period,Pursuant to the terms of the Citibank Facility, we used $342.3are restricted in terms of access to $3.4 million of cash until the occurrence of the periodic distribution dates and, in operating activities, primarily forconnection therewith, our submission of our required periodic reporting schedules and verifications of our compliance with the fundingterms of $887.0 millionthe credit agreement. As of investments and net revolvers, partially offset by $552.5 million of amortization payments and proceeds from the sale of investments and cash activities related to $28.3 million of net investment income. During the same period, cash provided by financing activities was $276.3 million, primarily consisting of $136.7 million of net borrowings under credit facilities and $186.4 million of borrowings under our 2015 Debt Securitization, partially offset by $39.4September 30, 2018, $1.8 million of cash distributions paidwas restricted due to our shareholders and $6.1the obligation to pay interest under the terms of the Deutsche Bank Facility. As of September 30, 2018, $0.8 million of deferred financing costs paid.was restricted due to minimum balance requirements under the East West Bank Facility.
As of September 30, 2017, we had $43.0 million of cash and cash equivalents (including $7.4 million of restricted cash), portfolio investments (at fair value) of $560.4 million, $3.0 million of interest, dividends and fees receivable, $48.5 million of net payables from unsettled transactions, $83.0 million of borrowings outstanding under our revolving credit facilities, $177.8 million of borrowings outstanding under our 2015 Debt Securitization (net of unamortized financing costs) and unfunded commitments of $43.5 million. Pursuant to the terms of the Citibank facility,Facility, we arewere restricted in terms of access to $2.0 million until such time as we submitthe occurrence of the periodic distribution dates and, in connection therewith, our submission of our required monthlyperiodic reporting schedules.schedules and verifications of our compliance with the terms of the credit agreement. As of September 30, 2017, $5.4 million of cash held in connection with the 2015 Debt Securitization was restricted.
As of September 30, 2016, we had $28.8 million of cash and cash equivalents (including $9.0 million of restricted cash), portfolio investments (at fair value) of $573.6 million, $4.6 million ofdue to the obligation to pay interest dividends and fees receivable, $12.9 million receivables from unsettled transactions, $107.4 million of borrowings outstandingon the notes under our revolving credit facilities, $177.5 million of borrowings outstanding under our 2015 Debt Securitization (net of unamortized financing costs) and unfunded commitments of $52.8 million. Pursuant to the terms of the Citibank facility, we are restricted in terms of access to $3.5 million until such time as we submit required monthly reporting schedules. As of September 30, 2016, $5.5 million of cash held in connection with the 2015 Debt Securitization was restricted.
Securitization.
Significant Capital Transactions
The following table reflects the distributions per share that our Board of Directors has declared,we have paid, including shares issued under our dividend reinvestment plan, or DRIP, on our common stock since October 1, 2015:2016:
| | | Frequency | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value |
| Monthly | | July 10, 2015 | | October 6, 2015 | | October 15, 2015 | | $ | 0.075 |
| | $ | 2,101,445 |
| | 12,080 | | $ | 108,563 |
| | August 4, 2016 | | October 14, 2016 | | October 31, 2016 | | $ | 0.075 |
| | $ | 2,183,023 |
| | 3,146 | | $ | 26,985 |
|
| Monthly | | July 10, 2015 | | November 5, 2015 | | November 16, 2015 | | 0.075 |
| | 2,093,278 |
| | 13,269 | | 116,730 |
| | August 4, 2016 | | November 15, 2016 | | November 30, 2016 | | 0.075 |
| | 2,183,100 |
| | 2,986 | | 26,908 |
|
| Monthly | | November 30, 2015 | | December 11, 2015 | | December 22, 2015 | | 0.075 |
| | 2,115,444 |
| | 11,103 | | 94,563 |
| | October 19, 2016 | | December 15, 2016 | | December 30, 2016 | | 0.075 |
| | 2,179,421 |
| | 3,438 | | 30,586 |
|
| Monthly | | November 30, 2015 | | January 4, 2016 | | January 15, 2016 | | 0.075 |
| | 2,148,928 |
| | 8,627 | | 61,079 |
| | October 19, 2016 | | January 31, 2017 | | January 31, 2017 | | 0.075 |
| | 2,180,645 |
| | 2,905 | | 29,363 |
|
| Monthly | | November 30, 2015 | | February 5, 2016 | | February 16, 2016 | | 0.075 |
| | 2,177,085 |
| | 4,542 | | 32,923 |
| | October 19, 2016 | | February 15, 2017 | | February 28, 2017 | | 0.075 |
| | 2,183,581 |
| | 2,969 | | 26,427 |
|
| Monthly | | February 8, 2016 | | March 15, 2016 | | March 31, 2016 | | 0.075 |
| | 2,175,431 |
| | 4,383 | | 34,577 |
| | February 6, 2017 | | March 15, 2017 | | March 31, 2017 | | 0.04 |
| | 1,165,417 |
| | 1,508 | | 13,253 |
|
| Monthly | | February 8, 2016 | | April 15, 2016 | | April 29, 2016 | | 0.075 |
| | 2,174,974 |
| | 4,452 | | 35,033 |
| |
| Monthly | | February 8, 2016 | | May 13, 2016 | | May 31, 2016 | | 0.075 |
| | 2,176,513 |
| | 4,256 | | 33,494 |
| |
| Monthly | | May 6, 2016 | | June 15, 2016 | | June 30, 2016 | | 0.075 |
| | 2,163,126 |
| | 5,822 | | 46,881 |
| |
| Monthly | | May 6, 2016 | | July 15, 2016 | | July 29, 2016 | | 0.075 |
| | 2,179,263 |
| | 3,627 | | 30,745 |
| |
| Monthly | | May 6, 2016 | | August 15, 2016 | | August 31, 2016 | | 0.075 |
| | 2,181,006 |
| | 3,260 | | 29,002 |
| |
| Monthly | | August 4, 2016 | | September 15, 2016 | | September 30, 2016 | | 0.075 |
| | 2,183,197 |
| | 3,078 | | 26,811 |
| |
| Monthly | | August 4, 2016 | | October 14, 2016 | | October 31, 2016 | | 0.075 |
| | 2,183,023 |
| | 3,146 | | 26,985 |
| |
| Monthly | | August 4, 2016 | | November 15, 2016 | | November 30, 2016 | | 0.075 |
| | 2,183,100 |
| | 2,986 | | 26,908 |
| |
| Monthly | | October 19, 2016 | | December 15, 2016 | | December 30, 2016 | | 0.075 |
| | 2,179,421 |
| | 3,438 | | 30,586 |
| |
| Monthly | | October 19, 2016 | | January 31, 2017 | | January 31, 2017 | | 0.075 |
| | 2,180,645 |
| | 2,905 | | 29,363 |
| |
| Monthly | | October 19, 2016 | | February 15, 2017 | | February 28, 2017 | | 0.075 |
| | 2,183,581 |
| | 2,969 | | 26,427 |
| |
| Monthly | | February 6, 2017 | | March 15, 2017 | | March 31, 2017 | | 0.04 |
| | 1,165,417 |
| | 1,508 | | 13,253 |
| |
| Quarterly | | February 6, 2017 | | June 15, 2017 | | June 30, 2017 | | 0.19 |
| | 5,543,465 |
| | 6,840 | | 55,221 |
| | February 6, 2017 | | June 15, 2017 | | June 30, 2017 | | 0.19 |
| | 5,543,465 |
| | 6,840 | | 55,221 |
|
| Quarterly | | August 7, 2017 | | September 15, 2017 | | September 29, 2017 | | 0.19 |
| | 5,536,798 |
| | 6,991 | | 61,888 |
| | August 7, 2017 | | September 15, 2017 | | September 29, 2017 | | 0.19 |
| | 5,536,798 |
| | 6,991 | | 61,888 |
|
| Quarterly | | August 7, 2017 | | December 15, 2017 | | December 29, 2017 | | 0.19 |
| |
|
| |
| |
|
| | August 7, 2017 | | December 15, 2017 | | December 29, 2017 | | 0.19 |
| | 5,439,519 |
| | 18,809 | | 159,167 |
|
| Quarterly | | | February 5, 2018 | | March 15, 2018 | | March 30, 2018 | | 0.14 |
| | 4,091,583 |
| | 4,204 | | 33,764 |
|
| Quarterly | | | May 3, 2018 | | June 15, 2018 | | June 29, 2018 | | 0.145 |
| | 4,232,547 |
| | 4,829 | | 40,134 |
|
| Quarterly | | | August 1, 2018 | | September 15, 2018 | | September 28, 2018 | | 0.155 |
| | 4,518,677 |
| | 5,620 | | 48,672 |
|
______________
(1) Shares were purchased on the open market and distributed.
Indebtedness
See “Note“Note 6. Borrowings”Borrowings” in the Consolidated Financial Statements for more details regarding our indebtedness and secured borrowings.
Citibank Facility
As of September 30, 2018 and 2017, the Citibank facility permitted upwe were able to $125.0borrow $180 million of borrowings. Borrowingsand $125 million, respectively, under the Citibank facilityFacility. As of September 30, 2018, the reinvestment period under the Citibank Facility is scheduled to expire on July 19, 2021 and the maturity date for the Citibank Facility is July 18, 2023.
As of September 30, 2018, borrowings under the Citibank Facility are subject to certain customary advance rates and accrue interest at a rate equal to LIBOR plus 2.00%1.70% per annum on broadly syndicated loans and LIBOR plus 2.25% per annum on all other eligible loans during the reinvestment period. Following termination of the reinvestment period, andborrowings under the Citibank Facility will accrue interest at rates equal to LIBOR plus 3.50% per annum during the first year after the reinvestment period and LIBOR plus 4.00% per annum during the subsequent two years, respectively.years. In addition, through the reinvestment period there is a commitmentnon-usage fee payable of 0.50% per annum on the undrawn amount under the Citibank facilityFacility. As of either 0.50% per annum onSeptember 30, 2018, the unused amount of the Citibank facility (if the advances outstanding on the Citibank facility exceed 50% of the aggregate commitments by lendersminimum asset coverage ratio applicable to make advances on such day) or 0.75% per annum on the unused amount of the Citibank facility (if the advances outstanding on the Citibank facility do not exceed 50% of the aggregate commitments by lenders to make advances on such day) for the duration of the reinvestment period. Interest and commitment fees are payable quarterly in arrears. The reinvestment periodus under the Citibank facility ends January 15, 2018 andFacility is 150% as determined in accordance with the final maturity date is January 15, 2020. The Citibank facility requires us to comply with certain affirmative and negative covenants and other customary requirements for similar credit facilities.of the Investment Company Act.
As of September 30, 20172018 and September 30, 2016,2017, we had $76.5$110.1 million and $107.4$76.5 million outstanding under the Citibank facility,Facility, respectively. Our borrowings under the Citibank facilityFacility bore interest at a weighted average interest rate of 3.559%4.264%, 2.838%3.559% and 2.516%2.838% for the years ended September 30, 2018, 2017 September 30,and 2016, and September 30, 2015, respectively. For the years ended September 30, 2018, 2017 September 30,and 2016, and September 30, 2015, we recorded interest expense of $4.2 million, $4.1$4.2 million and $2.6$4.1 million, respectively, related to the Citibank facility.Facility.
East West Bank Facility
On January 6, 2016, we entered into thea five-year, $25 million senior secured revolving credit facility with the lenders referenced therein, U.S. Bank National Association, as custodian, and East West Bank as secured lender, or, as amended, the East West Bank Facility. BorrowingsAs of September 30, 2018, borrowings under the East West Bank Facility bear an interest rate of either (i) LIBOR plus 3.75%2.85% per annum for borrowings in year one, 3.50% per annum for borrowings in
year two, 3.25% per annum for borrowings in years three and four and 3.00% per annum for borrowings in year five, or (ii) East West Bank’s prime rate plus 0.75% per annum for borrowings in year one, 0.50% per annum for borrowings in year two, 0.25% per annum for borrowings in years three and four, and 0.00% per annum for borrowings in year five.rate. The East West Bank Facility matures on January 6, 2021. As of September 30, 2018, the minimum
asset coverage ratio applicable to us under the East West Bank Facility is 150% as determined in accordance with the requirements of the Investment Company Act. The East West Bank Facility requires us to comply with certain affirmative and negative covenants and other customary requirements for similar credit facilities.
As of September 30, 2018 and September 30, 2017, we had $8.0 million and $6.5 million of borrowings outstanding under the East West Bank facility. As of September 30, 2016, there were noFacility, respectively. Our borrowings outstanding under the East West Bank facility.Facility bore interest at a weighted average interest rate of 4.949% and 4.633% for the years ended September 30, 2018 and September 30, 2017, respectively. Our borrowings under the East West Bank facility bore interest at a weighted average interest rate of 4.633% and 4.857% for the year ended September 30, 2017 and for the period from January 6, 2016 through September 30, 2016, respectively.2016. For the years ended September 30, 20172018 and September 30, 2016,2017, we recorded interest expense of $0.5$0.6 million and $0.4$0.5 million, respectively, related to the East West Bank facility.Facility. For the period from January 6, 2016 through September 30, 2016, the Company recorded interest expense of $0.4 million related to the East West Bank Facility.
Debt SecuritizationDeutsche Bank Facility
On September 24, 2018, OCSI Senior Funding Ltd., our wholly-owned subsidiary, entered into the Deutsche Bank Facility with us as equityholder and as servicer, the lenders from time to time parties thereto, Deutsche Bank AG, New York Branch, as facility agent, the other agents parties thereto and Wells Fargo Bank, National Association, as collateral agent and as collateral custodian.
Under the Deutsche Bank Facility, as of September 30, 2018, OCSI Senior Funding Ltd. could borrow an aggregate principal amount of up to $250 million, which can be increased to $300 million in the sole discretion of Deutsche Bank AG, New York Branch in connection with certain milestones in the marketing of a collateralized loan obligation. The period during which OCSI Senior Funding Ltd. may request drawdowns under the Deutsche Bank Facility (the “revolving period”) will continue through March 24, 2019 unless there is an earlier termination or event of default. The Deutsche Bank Facility will mature on the earliest of six months from the termination of the revolving period, the occurrence of an event of default or completion of a securitization transaction.
Prior to the end of the revolving period, borrowings under the Deutsche Bank Facility will bear interest at a rate equal to the three-month LIBOR plus 1.90%, following which the interest rate will reset to three-month LIBOR plus 2.05% for the remaining term of the Deutsche Bank Facility. No up-front commitment fees were paid by us in connection with the Deutsche Bank Facility. There is a non-usage fee of 0.25% per annum payable on the undrawn amount under the Deutsche Bank Facility through December 24, 2018, following which the non-usage fee increases to 0.50% per annum for the remaining term of the Deutsche Bank Facility.
The Deutsche Bank Facility is secured by all of the assets held by OCSI Senior Funding Ltd. OCSI Senior Funding Ltd. has made customary representations and warranties and is required to comply with various affirmative and negative covenants, reporting requirements and other customary requirements for similar credit facilities. Our borrowings, including indirectly under the Deutsche Bank Facility, are subject to the leverage restrictions contained in the Investment Company Act.
As of September 30, 2017,2018, we had $157.0 million outstanding under the Deutsche Bank Facility. For the period from September 24, 2018 to September 30, 2018, our borrowings under the Deutsche Bank Facility bore interest at a weighted average interest rate of 4.266%, and we recorded interest expense of $0.1 million.
Debt Securitization
In connection with entry into the Deutsche Bank Facility, on September 24, 2018, FS Senior Funding Ltd. and FS Senior Funding CLO LLC redeemed all outstanding senior secured notes issued in the 2015 Debt Securitization consistspursuant to the terms of the indenture governing the senior secured notes and the revocable notice issued by us on August 14, 2018. Following such redemption, the agreements governing the 2015 Debt Securitization were terminated and FS Senior Funding Ltd. was merged with and into OCSI Senior Funding Ltd. with OCSI Senior Funding Ltd. continuing as the surviving entity. The senior secured notes would have otherwise matured on May 28, 2025. We expensed $2.0 million of previously unamortized financing costs in connection with the redemption of the 2015 Debt Securitization.
Prior to September 24, 2018, the 2015 Debt Securitization consisted of $126.0 million Class A-T Senior Secured 2015 Notes which bearbore interest at three-month LIBOR plus 1.80%; $29.0 million Class A-S Senior Secured 2015 Notes which bore interest at a rate of three-month LIBOR plus 1.55%, until a step-up in spread to 2.10% occurred in October 2016; $20.0 million Class A-R Senior Secured Revolving 2015 Notes which bearbore interest at a rate of commercial paper, or CP, plus 1.80%, or, collectively, the Class A 2015 Notes; and $25.0 million Class B Senior Secured 2015 Notes which bearbore interest at a rate of three-month LIBOR plus 2.65% per annum, which were issued in a private placement. We currently retainPrior to September 24, 2018, we retained the entire $22.6 million of the Class C Senior Secured 2015 Notes (which we purchased at 98.0% of par value) and the entire $86.4 million of the Subordinated 2015 Notes. The 2015 Debt Securitization requires us to comply with certain monthly financial covenants, including overcollateralization and interest coverage tests.
For the years ended September 30, 2018, 2017 September 30,and 2016, and September 30, 2015, the components of interest expense, cash paid for interest, average interest rates and average outstanding balances for the 2015 Debt Securitization were as follows:
| | | | | Year ended September 30, 2017 | | Year ended September 30, 2016 | | Year ended September 30, 2015 | | Year ended September 30, 2018 | | Year ended September 30, 2017 | | Year ended September 30, 2016 |
| Interest expense | | $ | 5,741,534 |
| | $ | 4,668,947 |
| | $ | 1,476,995 |
| | $ | 7,123,152 |
| | $ | 5,741,534 |
| | $ | 4,668,947 |
|
| Loan administration fees | | 69,514 |
| | 79,882 |
| | — |
| | 93,209 |
| | 69,514 |
| | 79,882 |
|
| Amortization of debt issuance costs | | 290,104 |
| | 290,104 |
| | 120,877 |
| | 2,224,132 |
| | 290,104 |
| | 290,104 |
|
| Total interest and other debt financing expenses | | $ | 6,101,152 |
| | $ | 5,038,933 |
| | $ | 1,597,872 |
| | $ | 9,440,493 |
| | $ | 6,101,152 |
| | $ | 5,038,933 |
|
| Cash paid for interest expense | | $ | 5,449,738 |
| | $ | 5,136,063 |
| | $ | — |
| | $ | 8,469,735 |
| | $ | 5,449,738 |
| | $ | 5,136,063 |
|
| Annualized average interest rate | | 3.425 | % | | 2.466 | % | | 2.39 | % | | 4.170 | % | | 3.425 | % | | 2.466 | % |
| Average outstanding balance | | $ | 180,462,192 |
| | $ | 181,782,413 |
| | $ | 61,900,170 |
| | $ | 176,875,000 |
| | $ | 180,462,192 |
| | $ | 181,782,413 |
|
The classes, interest rates, spread over LIBOR, cash paid for interest and stated interest expense and note discount expense of each of the Class A-T, Class A-S, Class A-R, Class B and Class C Senior Secured 2015 Notes for the yearyears ended September 30, 2018 and 2017 isare as follows:
| | | | | | Year ended September 30, 2017 | | | | | | Year ended September 30, 2018 | | Year ended September 30, 2017 |
| | Stated Interest Rate | | LIBOR Spread (basis points) | | Cash Paid for Interest | | Interest Expense | | Stated Interest Rate | | LIBOR Spread (basis points) | | Cash Paid for Interest | | Interest Expense | | Cash Paid for Interest | | Interest Expense |
| Class A-T Notes | | 3.1035% | | 180 | | $ | 3,487,268 |
| | $ | 3,664,619 |
| | 4.1370% | | 180 | | $ | 5,497,980 |
| | $ | 4,634,085 |
| | $ | 3,487,268 |
| | $ | 3,664,619 |
|
| Class A-S Notes | | 3.4035% | | 210 | (1) | 850,073 |
| | 926,401 |
| | 4.4370% | | 210 | (1) | 1,371,258 |
| | 1,151,922 |
| | 850,073 |
| | 926,401 |
|
| Class A-R Notes | | 2.9551% | | 180 | (2) | 205,027 |
| | 207,900 |
| | 4.1370% | | 180 | (2) | 251,086 |
| | 207,373 |
| | 205,027 |
| | 207,900 |
|
| Class B Notes | | 3.9535% | | 265 | | 907,370 |
| | 942,614 |
| | 4.9870% | | 265 | | 1,349,411 |
| | 1,129,772 |
| | 907,370 |
| | 942,614 |
|
| Class C Notes | | 4.5535% | | 325 | (3) | — |
| | — |
| | 5.5870% | | 325 | (3) | — |
| | — |
| | — |
| | — |
|
| Total | | | | | $ | 5,449,738 |
| | $ | 5,741,534 |
| | | | | $ | 8,469,735 |
| | $ | 7,123,152 |
| | $ | 5,449,738 |
| | $ | 5,741,534 |
|
_______________________
(1) Spread increased to 2.10% in October 2016 from 1.55%.
(2) Interest expense includes 1.0% undrawn fee. Class A-R 2015 Notes were not drawn during the three months ended September 30, 2017.
(3) We holdheld all Class C 2015 Senior Secured Notes outstanding and thus have not recorded any related interest expense as it isthey were eliminated in consolidation.
The classes, amounts, ratings and interest rates (expressed as a spread to three-month LIBOR) of the Class A, B, C and Subordinated 2015 Notes as of September 30, 2017 are as follows:
|
| | | | | | | | | | | | |
| Description | | Class A-T Notes | | Class A-S Notes | | Class A-R
Notes | | Class B Notes | | Class C Notes | | Subordinated Notes |
| Type | | Senior Secured Floating Rate Term Debt | | Senior Secured Floating Rate Term Debt | | Senior Secured Floating Rate Revolver | | Senior Secured Floating Rate Term Debt | | Senior Secured Floating Rate Term Debt | | Subordinated Term Notes |
| Amount Outstanding | | $126,000,000 | | $29,000,000 | | $— | | $25,000,000 | | $22,575,680 | | $86,400,000 |
| Moody's Rating | | "Aaa" | | "Aaa" | | "Aaa" | | "Aa2" | | "Aa2" | | NR |
| S&P Rating | | "AAA" | | "AAA" | | "AAA" | | NR | | NR | | NR |
| Interest Rate | | LIBOR + 1.80% | | LIBOR + 2.10%* | | CP + 1.80% ** | | LIBOR + 2.65% | | LIBOR + 3.25% | | NA |
| Stated Maturity | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 |
_______________________
* Spread increased to 2.10% in October 2016 from 1.55%.
** Carries a 1.0% undrawn fee.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of September 30, 20172018 and September 30, 2016,2017, our only off-balance sheet arrangements consisted of $43.5$22.8 million and $52.8$43.5 million, respectively, of unfunded commitments to provide debt and equity financing to certain of our portfolio companies. Such commitments are subject to our portfolio companies' satisfaction of certain financial and nonfinancial covenants and may involve, to varying degrees, elements of credit risk in excess of the amount recognized in our Consolidated Statements of Assets and Liabilities.
A list of unfunded commitments by investment (consisting of revolvers, term loans with delayed draw components and FSFR Glick JV Subordinated Notes and LLC equity interests)interests of the OCSI Glick JV) as of September 30, 20172018 and September 30, 20162017 is shown in the table below:
|
| | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| FSFR Glick JV LLC | | $ | 16,159,368 |
| | $ | 16,382,494 |
|
| MHE Intermediate Holdings | | 6,749,698 |
| | — |
|
| Triple Point Group Holdings, Inc. | | 4,968,590 |
| | 4,968,590 |
|
| BeyondTrust Software, Inc. | | 3,605,000 |
| | 3,605,000 |
|
| Motion Recruitment Partners LLC | | 2,900,000 |
| | 2,900,000 |
|
| PowerPlan, Inc. | | 2,100,000 |
| | 2,100,000 |
|
| Ministry Brands, LLC | | 1,857,967 |
| | — |
|
| Impact Sales, LLC | | 1,078,125 |
| | — |
|
| Valet Merger Sub, Inc. | | 833,333 |
| | 333,333 |
|
| Executive Consulting Group, Inc. | | 800,000 |
| | 800,000 |
|
| Internet Pipeline, Inc. | | 800,000 |
| | 800,000 |
|
| Metamorph US 3, LLC (1) | | 720,000 |
| | 1,800,000 |
|
| Systems, Inc. | | 600,000 |
| | — |
|
| Sailpoint Technologies, Inc. | | 300,000 |
| | 200,000 |
|
| 4 Over International, LLC | | 68,452 |
| | 68,452 |
|
| TIBCO Software, Inc. | | — |
| | 5,300,000 |
|
| All Web Leads, Inc. | | — |
| | 3,458,537 |
|
| Legalzoom.com, Inc. | | — |
| | 2,607,018 |
|
| Teaching Strategies, LLC | | — |
| | 2,400,000 |
|
| Dynatect Group Holdings, Inc. | | — |
| | 1,800,000 |
|
| My Alarm Center, LLC | | — |
| | 1,212,472 |
|
| Baart Programs, Inc. | | — |
| | 1,000,000 |
|
| TrialCard Incorporated | | — |
| | 850,000 |
|
| OBHG Management Services, LLC | | — |
| | 100,000 |
|
| Accruent, LLC | | — |
| | 85,000 |
|
| Total | | $ | 43,540,533 |
| | $ | 52,770,896 |
|
_______
(1) This investment was on cash non-accrual status as of September 30, 2017.
|
| | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| OCSI Glick JV LLC | | $ | 13,998,029 |
| | $ | 16,159,368 |
|
| MHE Intermediate Holdings | | 3,901,478 |
| | 6,749,698 |
|
| Asset International | | 2,500,000 |
| | — |
|
| CircusTrix Holdings | | 1,070,055 |
| | — |
|
| Internet Pipeline, Inc. | | 800,000 |
| | 800,000 |
|
| iCIMs, Inc. | | 294,118 |
| | — |
|
| GKD Index Partners, LLC | | 111,111 |
| | — |
|
| Ministry Brands, LLC | | 70,000 |
| | 1,857,967 |
|
| 4 Over International, LLC | | 68,452 |
| | 68,452 |
|
| Triple Point Group Holdings, Inc. | | — |
| | 4,968,590 |
|
| Valet Merger Sub, Inc. | | — |
| | 833,333 |
|
| Motion Recruitment Partners LLC | | — |
| | 2,900,000 |
|
| PowerPlan, Inc. | | — |
| | 2,100,000 |
|
| Impact Sales, LLC | | — |
| | 1,078,125 |
|
| Metamorph US 3, LLC | | — |
| | 720,000 |
|
| BeyondTrust Software, Inc. | | — |
| | 3,605,000 |
|
| Executive Consulting Group, Inc. | | — |
| | 800,000 |
|
| Systems Inc. | | — |
| | 600,000 |
|
| Sailpoint Technologies, Inc. | | — |
| | 300,000 |
|
| Total | | $ | 22,813,243 |
| | $ | 43,540,533 |
|
Contractual Obligations
The following table reflects information pertaining to our debt outstanding under the Citibank facility,Facility, the East West Bank Facility, the Deutsche Bank Facility and the 2015 Debt Securitization and our secured borrowings:Securitization:
| | | | | Debt Outstanding
as of
September 30, 2016 | | Debt Outstanding
as of September 30,
2017 | | Weighted average debt
outstanding for the
year ended
September 30, 2017 | | Maximum debt
outstanding
for the year ended
September 30, 2017 | | Debt Outstanding
as of
September 30, 2017 | | Debt Outstanding
as of September 30,
2018 | | Weighted average debt
outstanding for the
year ended
September 30, 2018 | | Maximum debt
outstanding
for the year ended
September 30, 2018 |
| Citibank facility | | $ | 107,426,800 |
| | $ | 76,456,800 |
| | $ | 80,785,238 |
| | $ | 107,426,800 |
| |
| Citibank Facility | | | $ | 76,456,800 |
| | $ | 110,056,800 |
| | $ | 80,119,022 |
| | $ | 117,056,800 |
|
| Deutsche Bank Facility | | | — |
| | 157,000,000 |
| | 2,747,222 |
| | 180,000,000 |
|
| East West Bank Facility | | | 6,500,000 |
| | 8,000,000 |
| | 9,519,444 |
| | 22,000,000 |
|
| 2015 Debt Securitization | | 180,000,000 |
| | 180,000,000 |
| | 180,462,192 |
| | 187,500,000 |
| | 180,000,000 |
| | — |
| | 177,375,000 |
| | 183,000,000 |
|
| East West Bank Facility | | — |
| | 6,500,000 |
| | 6,306,301 |
| | 19,500,000 |
| |
| Secured borrowings | | 5,000,000 |
| | — |
| | 54,795 |
| | 5,000,000 |
| |
| Total debt | | $ | 292,426,800 |
| | $ | 262,956,800 |
| | $ | 267,608,526 |
| | | | $ | 262,956,800 |
| | $ | 275,056,800 |
| | $ | 269,760,688 |
| | |
The following table reflects our contractual obligations arising from the Citibank facility, 2015 Debt SecuritizationFacility, Deutsche Bank Facility and East West Bank Facility:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period as of September 30, 2017 |
| | | Total | | < 1 year | | 1-3 years | | 3-5 years | | > 5 years |
| Citibank facility | | $ | 76,456,800 |
| | $ | — |
| | $ | 76,456,800 |
| | $ | — |
| | $ | — |
|
| Interest due on Citibank facility | | 6,636,652 |
| | 2,894,119 |
| | 3,742,533 |
| | — |
| | — |
|
| 2015 Debt Securitization | | 180,000,000 |
| | — |
| | — |
| | — |
| | 180,000,000 |
|
| Interest due on 2015 Debt Securitization | | 45,102,966 |
| | 5,885,800 |
| | 11,771,600 |
| | 11,771,600 |
| | 15,673,966 |
|
| East West Bank Facility | | 6,500,000 |
| | — |
| | — |
| | 6,500,000 |
| | — |
|
| Interest due on East West Bank Facility | | 1,009,993 |
| | 308,750 |
| | 617,500 |
| | 83,743 |
| | — |
|
| Total | | $ | 315,706,411 |
| | $ | 9,088,669 |
| | $ | 92,588,433 |
| | $ | 18,355,343 |
| | $ | 195,673,966 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period as of September 30, 2018 |
| | | Total | | < 1 year | | 1-3 years | | 3-5 years | | > 5 years |
| Citibank Facility | | $ | 110,056,800 |
| | $ | — |
| | $ | — |
| | $ | 110,056,800 |
| | $ | — |
|
| Interest due on Citibank Facility | | 23,120,501 |
| | 4,816,771 |
| | 9,633,542 |
| | 8,670,188 |
| | — |
|
| Deutsche Bank Facility | | 157,000,000 |
| | 157,000,000 |
| | — |
| | — |
| | — |
|
| Interest due on Deutsche Bank Facility | | 6,588,109 |
| | 6,588,109 |
| | — |
| | — |
| | — |
|
| East West Bank Facility | | 8,000,000 |
| | — |
| | 8,000,000 |
| | — |
| | — |
|
| Interest due on East West Bank Facility | | 928,650 |
| | 408,875 |
| | 519,775 |
| | — |
| | — |
|
| Total | | $ | 305,694,060 |
| | $ | 168,813,755 |
| | $ | 18,153,317 |
| | $ | 118,726,988 |
| | $ | — |
|
Regulated Investment Company Status and Distributions
We have qualified and elected to be treated as a RIC under Subchapter M of the Code.Code for tax purposes. As long as we continue to qualify as a RIC, we will not be subject to tax on our investment company taxable income (determined without regard to any deduction for dividends paid) or realized net capital gains, to the extent that such taxable income or gains is distributed, or deemed to be distributed as dividends, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation. Distributions declared and paid by us in a taxable year may differ from taxable income for that taxable year as such distributions may include the distribution of taxable
income derived from the current taxable year or the distribution of taxable income derived from the prior taxable year carried forward into and distributed in the current taxable year. Distributions also may include returns of capital.
To maintain RIC tax treatment, we must, among other things, distribute dividends, with respect to each taxable year, of an amount at least equal to 90% of our investment company taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any) determined without regard to any deduction for dividends paid. As a RIC, we are also subject to a federal excise tax, based on distribution requirements of our taxable income on a calendar year basis. We anticipate timely distribution of our taxable income in accordance with tax rules. We did not incur a U.S. federal excise tax for calendar years 20152016 and 20162017 and do not expect to incur a U.S. federal excise tax for the calendar year 2017.2018. We may incur a federal excise tax in future years.
We intend to distribute at least 90% of our annual taxable income (which includes our taxable interest and fee income) to our stockholders. The covenants under the respective documents governing the Citibank facility,Facility, the East West Bank facilityFacility and the 2015 Debt SecuritizationDeutsche Bank Facility could, under certain circumstances, hinder our ability to satisfy the distribution requirement associated with our ability to be subject to tax as a RIC. In addition, we may retain for investment some or all of our net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) and treat such amounts as deemed distributions to our stockholders. If we do this, our stockholders will be treated as if they received actual distributions of the capital gains we retained and then reinvested the net after-tax proceeds in our common stock. Our stockholders also may be eligible to claim tax credits (or, in certain circumstances, tax refunds) equal to their allocable share of the tax we paid on the capital gains deemed distributed to them. To the extent our taxable earnings for a fiscal and taxable year fall below the total amount of our dividend distributions for that fiscal and taxable year, a portion of those distributions may be deemed a return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, we may be limited in our ability to make distributions due to the asset coverage test
for borrowings applicable to us as a business development companyBusiness Development Company under the 1940Investment Company Act and due to provisions in our credit facilities and debt instruments. If we do not distribute a certain percentage of our taxable income annually, we will suffer adverse tax consequences, including possible loss of our ability to be subject to tax as a RIC. We cannot assure stockholders that they will receive any distributions or distributions at a particular level.
A RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder elects to receive his or her entire distribution in either cash or stock of the RIC, subject to certain limitations regarding the aggregate amount of cash to be distributed to all stockholders. If these and certain other requirements are met, for U.S federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these guidelines.
We may generate qualified net interest income or qualified net short-term capital gains that may be exempt from U.S. withholding tax when distributed to foreign stockholders. A RIC is permitted to designate distributions of qualified net interest income and qualified short-term capital gains as exempt from U.S. withholding tax when paid to non-U.S. shareholders with proper documentation. The following table, which may be subject to change as we finalize our annual tax filings, lists the percentage of qualified net interest income and qualified short-term capital gains for the year ended September 30, 2017.
2018, our last tax year end. |
| | | | | |
| Year Ended | | Qualified Net Interest Income | Qualified Short-Term Capital Gains |
September 30, 20172018 | | 86.783.1 | % | — |
|
We have adopted a DRIP that provides for the reinvestment of any distributions that we declare in cash on behalf of our stockholders, unless a stockholder elects to receive cash. As a result, if our Board of Directors declares a cash distribution, then our stockholders who have not “opted out” of the DRIP will have their cash distributions automatically reinvested in additional shares of our common stock, rather than receiving a cash distribution. If our shares are trading at a premium to net asset value, we typically issue new shares to implement the DRIP, with such shares issued at the greater of the most recently computed net asset value per share of our common stock or 95% of the current market value per share of our common stock on the payment date for such distribution. If our shares are trading at a discount to net asset value, we typically purchase shares in the open market in connection with our obligations under the DRIP.
Related Party Transactions
We have entered into the New Investment Advisory Agreement with our Investment AdviserOaktree and the New Administration Agreement with Oaktree Administrator, a wholly-owned subsidiary of the Investment Adviser.Oaktree. Mr. John B. Frank, an interested member of our Board of Directors, has an indirect pecuniary interest in our Investment Adviser. The Investment AdviserOaktree. Oaktree is a registered investment adviser under the Advisers Act that is partially and indirectly owned by OCG. See “Item 1. Business-The Investment Adviser” and “-New“Note 11. Related Party Transactions - Investment Advisory Agreement.Agreement” and “– Administrative Services” in the notes to the accompanying Consolidated Financial Statements.
Prior to October 17, 2017, we were externally managed and advised by our Former Adviser, and our administrator was our Former Administrator,FSC CT LLC, a wholly-owned subsidiary of our Former Adviser. Messrs. Bernard D. Berman, andPatrick J. Dalton, Ivelin M. Dimitrov, Alexander C.
Frank and Todd G. Owens, each an interested member of our Board of Directorsfor all or a portion of our fiscal year ended September 30, 2017 and prior to October 17, 2017, had a direct or indirect pecuniary interest in our Former Adviser. See “Item 1. Business-Our Former Adviser and Administrator.”
We serveserved as collateral manager to the 2015 IssuerFS Senior Funding Ltd. under a collateral management agreement in connection with the 2015 Debt Securitization and arewere entitled to receive a fee for providing these services. We have retained a sub-collateral manager, which as ofwas Oaktree from October 17, 2017 was the Investment Adviser and, prior to October 17, 2017, was the Former Adviser,September 24, 2018, to provide collateral management sub-advisory services to us pursuant to a sub-collateral management agreement. The sub-collateral manager iswas entitled to receive 100% of the collateral management fees paid to us under the collateral management agreement, but each of our Investment Adviser and the Former AdviserOaktree irrevocably waived and, in the case of the Investment Adviser, intends to continue to irrevocably waive its right to such sub-collateral management fees in respect of the 2015 Debt Securitization.
Recent Developments
Change in Investment PolicyDistribution Declaration
On November 17, 2017, we mailed notices to our stockholders that19, 2018, our Board of Directors approveddeclared a changequarterly distribution of $0.155 per share, payable on December 28, 2018 to our investment policies and, effective January 19, 2018, we will no longer be subject to our current policy to invest, under normal market conditions, at least 80%stockholders of the value of our net assets (plus borrowings for investment purposes) in floating rate senior loans.
Citibank Facility Amendment
Onrecord on December 6, 2017, we entered into an amendment to the documents governing the Citibank facility to remove Citibank, N.A.’s approval rights regarding our ability to purchase assets using proceeds from the Citibank facility, subject to a mark-to-market valuation protocol for broadly syndicated loans and a revised valuation dispute mechanism. The other material terms of the Citibank facility did not change as a result of this amendment. We are in discussions to further amend and/or restate the Citibank facility to extend the reinvestment period and final maturity date, among other changes. Although we cannot assure you that we will successfully amend and/or restate the Citibank facility, we currently expect the facility to be of a similar size to the existing facility and to include certain affirmative and negative covenants and other customary requirements for similar credit facilities. The new facility is not committed, and the terms, including pricing, remain subject to change.
17, 2018.
Recently Issued Accounting Standards
See “Note“Note 2. Significant Accounting Policies”Policies” in the Consolidated Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on our Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in the valuations of our investment portfolio and interest rates.
Valuation Risk
Our investments may not have a readily available market price, and we value these investments at fair value as determined in good faith by our Board of Directors, with the assistance of the Audit Committee and the Adviser. There is no single standard for determining fair value in good faith and valuation methodologies involve a significant degree of management judgment. In addition, our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments. Accordingly, valuations by us do not necessarily represent the amounts which may eventually be realized from sales or other dispositions of investments. Estimated fair values may differ from the values that would have been used had a ready market for the investment existed, and the differences could be material to the financial statements.
Interest Rate Risk
We are subject to financial market risks, including changes in interest rates. Changes in interest rates may affect both our cost of funding and our interest income from portfolio investments, cash and cash equivalents and idle funds investments. Our risk management systems and procedures are designed to identify and analyze our risk, to set appropriate policies and limits and to continually monitor these risks and limits by means of reliable administrative and information systems and other policies and programs. Our investment income will be affected by changes in various interest rates, including LIBOR and prime rates, to the extent our debt investments include floating interest rates. In addition, our investments are carried at fair value as determined in good faith by our Board of Directors in accordance with the 1940 Act. Our valuation methodology utilizes discount rates in part in valuing our investments, and changes in those discount rates may have an impact on the valuation of our investments.
As of September 30, 2017,2018, 100% of our debt investment portfolio (at cost and fair value) bore interest at floating rates and had interest rate floors between 0% and 2%.
Based on our Consolidated Statement of Assets and Liabilities as of September 30, 2017,2018, the following table shows the approximate annualized increase (decrease) in components of net interest incomeassets resulting from operations of hypothetical base rate changes in interest rates, assuming no changes in our investment and capital structure. However, there can be no assurances our portfolio companies will be able to meet their contractual obligations at any or all levels of increases in interest rates.
| | | Basis point increase | | Interest Income | | Interest Expense | | Net increase (decrease) | | Interest Income | | Interest Expense | | Net increase (decrease) |
| 500 | | $ | 23,202,957 |
| | $ | (13,147,840 | ) | | $ | 10,055,117 |
| |
| 400 | | 18,562,365 |
| | (10,518,272 | ) | | 8,044,093 |
| |
| 300 | | 13,921,774 |
| | (7,888,704 | ) | | 6,033,070 |
| | $ | 17,024,270 |
| | $ | (8,251,704 | ) | | $ | 8,772,566 |
|
| 200 | | 9,281,183 |
| | (5,259,136 | ) | | 4,022,047 |
| | 11,349,513 |
| | (5,501,136 | ) | | 5,848,377 |
|
| 100 | | 4,640,591 |
| | (2,629,568 | ) | | 2,011,023 |
| | 5,674,757 |
| | (2,750,568 | ) | | 2,924,189 |
|
| | Basis point decrease (1) | | Interest Income | | Interest Expense | | Net increase (decrease) | | Interest Income | | Interest Expense | | Net increase (decrease) |
| 100 | | (1,158,703 | ) | | 2,629,568 |
| | 1,470,865 |
| | $ | (5,674,757 | ) | | $ | 2,750,568 |
| | $ | (2,924,189 | ) |
| 200 (1) | | | (8,377,528 | ) | | 5,501,136 |
| | (2,876,392 | ) |
____________________________
| |
(1) | A decline in interest rates of 200 basis points or greater would not have a material incremental impact on our Consolidated Financial Statements as compared to a 100 basis point decrease. |
(1) The effect of a 200 basis point decrease or greater is limited by interest rate floors on certain investments.
We regularly measure exposure to interest rate risk. We assess interest rate risk and manage our interest rate exposure on an ongoing basis by comparing our interest rate sensitive assets to our interest rate sensitive liabilities. Based on this review, we determine whether or not any hedging transactions are necessary to mitigate exposure to changes in interest rates. The following table shows a comparison of the interest rate base for our interest-bearing cash and outstanding investments, at principal, and our outstanding borrowings as of September 30, 20172018 and September 30, 2016:2017:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 |
| | | Interest Bearing Cash and Investments | | Borrowings | | Interest Bearing Cash and Investments | | Borrowings | | Interest Bearing Cash and Investments | | Borrowings | | Interest Bearing Cash and Investments | | Borrowings |
| Money market rate | | $ | 43,012,387 |
| | $ | — |
| | $ | 28,815,679 |
| | $ | — |
| | $ | 13,812,673 |
| | $ | — |
| | $ | 43,012,387 |
| | $ | — |
|
| Prime rate | | 490,693 |
| | — |
| | 543,445 |
| | — |
| | 5,520,146 |
| | — |
| | 490,693 |
| | — |
|
| LIBOR: | | | | | | | | | | | | | | | | |
| 30 day | | 218,782,104 |
| | 6,500,000 |
| | — |
| | — |
| | 317,598,350 |
| | 8,000,000 |
| | 218,782,104 |
| | 6,500,000 |
|
| 60 day | | 32,508,060 |
| | | | — |
| | — |
| | — |
| | — |
| | 32,508,060 |
| | — |
|
| 90 day | | 340,420,366 |
| | 256,456,800 |
| | 588,697,358 |
| | 180,000,000 |
| | 220,128,521 |
| | 267,056,800 |
| | 340,420,366 |
| | 256,456,800 |
|
| 180 day | | — |
| | — |
| | — |
| | 107,426,800 |
| | 23,403,305 |
| | — |
| | — |
| | — |
|
| 360 day | | | 3,345,594 |
| | — |
| | — |
| | — |
|
| Fixed rate | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 635,213,610 |
| | $ | 262,956,800 |
| | $ | 618,056,482 |
| | $ | 287,426,800 |
| | $ | 583,808,589 |
| | $ | 275,056,800 |
| | $ | 635,213,610 |
| | $ | 262,956,800 |
|
Item 8. Consolidated Financial Statements and Supplementary Data |
| |
| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Oaktree Strategic Income Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of assets and liabilities of Oaktree Strategic Income Corporation (the Company), including the consolidated schedule of investments, as of September 30, 2018, the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 2018, and the results of its operations, changes in its net assets, and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated November 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned as of September 30, 2018, by correspondence with the custodians, syndication agents and the underlying investee companies and by other appropriate auditing procedures where confirmation was not received. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2018.
Los Angeles, CA
November 28, 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of Oaktree Strategic Income Corporation
Opinion on Internal Control over Financial Reporting
We have audited Oaktree Strategic Income Corporation’s internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Oaktree Strategic Income Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of financial condition of the Company, including the consolidated schedule of investments, as of September 30, 2018, the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended, and the related notes and our report dated November 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Los Angeles, California
November 28, 2018
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Oaktree Strategic Income Corporation
In our opinion, the accompanying consolidated statementsstatement of assets and liabilities, including the consolidated schedule of investments, as of September 30, 2017 and the related consolidated statements of operations, of changes in net assets and of cash flows for each of the two years in the period ended September 30, 2017 present fairly, in all material respects, the financial position of Oaktree Strategic Income Corporation (formerly known as Fifth Street Senior Floating Rate Corp.) and its subsidiaries as of September 30, 2017 and 2016,, and the results of their operations the changes in their net assets and theircash flows for each of the threetwo years in the period ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed infor the accompanying index year endedSeptember 30, 2017 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement scheduleare the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedulebased on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities as of September 30, 2017 by correspondence with the custodian, transfer agent and brokers, and the application of alternative auditing procedures where confirmation had not been received, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
December 8, 2017
Oaktree Strategic Income Corporation
Consolidated Statements of Assets and Liabilities
| | | | | September 30,
2017 | | September 30,
2016 | | September 30,
2018 | | September 30,
2017 |
| ASSETS | ASSETS | | | ASSETS | | |
| Investments at fair value: | | | | | | | | |
| Control investments (cost September 30, 2017: $71,340,632; cost September 30, 2016: $71,117,506) | | $ | 57,606,674 |
| | $ | 63,316,667 |
| |
| Affiliate investments (cost September 30, 2017: $17,479,053; cost September 30, 2016: $15,953,798) | | 935,913 |
| | 13,006,458 |
| |
| Non-control/Non-affiliate investments (cost September 30, 2017: $516,270,639; cost September 30, 2016: $513,397,659) | | 501,894,073 |
| | 497,281,256 |
| |
| Total investments at fair value (cost September 30, 2017: $605,090,324; cost September 30, 2016: $600,468,963) | | 560,436,660 |
| | 573,604,381 |
| |
| Control investments (cost September 30, 2018: $73,501,970; cost September 30, 2017: $71,340,632) | | | $ | 58,512,170 |
| | $ | 57,606,674 |
|
| Affiliate investments (cost September 30, 2018: $0; cost September 30, 2017: $17,479,053) | | | — |
| | 935,913 |
|
| Non-control/Non-affiliate investments (cost September 30, 2018: $499,423,794; cost September 30, 2017: $516,270,639) | | | 498,329,658 |
| | 501,894,073 |
|
| Total investments at fair value (cost September 30, 2018: $572,925,764; cost September 30, 2017: $605,090,324) | | | 556,841,828 |
| | 560,436,660 |
|
| Cash and cash equivalents | | 35,604,127 |
| | 19,778,841 |
| | 10,439,023 |
| | 35,604,127 |
|
| Restricted cash | | 7,408,260 |
| | 9,036,838 |
| | 5,992,764 |
| | 7,408,260 |
|
| Interest, dividends and fees receivable | | 3,014,075 |
| | 4,579,935 |
| | 3,139,334 |
| | 3,014,075 |
|
| Due from portfolio companies | | 286,260 |
| | 336,429 |
| | 167,946 |
| | 286,260 |
|
| Receivables from unsettled transactions | | 505,000 |
| | 12,869,092 |
| | 5,143,533 |
| | 505,000 |
|
| Deferred financing costs | | 1,222,933 |
| | 2,063,133 |
| | 2,469,675 |
| | 1,222,933 |
|
| Derivative asset at fair value | | | 45,807 |
| | — |
|
| Other assets | | 185,336 |
| | 148,492 |
| | 891,960 |
| | 185,336 |
|
| Total assets | | $ | 608,662,651 |
| | $ | 622,417,141 |
| | $ | 585,131,870 |
| | $ | 608,662,651 |
|
| LIABILITIES AND NET ASSETS | LIABILITIES AND NET ASSETS | | | LIABILITIES AND NET ASSETS | | |
| Liabilities: | | | | | | | | |
| Accounts payable, accrued expenses and other liabilities | | $ | 482,877 |
| | $ | 1,246,286 |
| | $ | 649,781 |
| | $ | 482,877 |
|
| Base management fee and incentive fee payable | | 2,236,187 |
| | 2,987,721 |
| | 1,915,682 |
| | 2,236,187 |
|
| Due to FSC CT | | 450,517 |
| | 402,073 |
| |
| Due to affiliate | | | 1,700,952 |
| | 450,517 |
|
| Interest payable | | 1,996,171 |
| | 1,798,653 |
| | 1,130,735 |
| | 1,996,171 |
|
| Payables from unsettled transactions | | 49,029,789 |
| | — |
| | 8,932,500 |
| | 49,029,789 |
|
| Amounts payable to syndication partners | | — |
| | 18,750 |
| |
| Director fees payable | | 98,008 |
| | 236,275 |
| | — |
| | 98,008 |
|
| Credit facilities payable | | 82,956,800 |
| | 107,426,800 |
| | 275,056,800 |
| | 82,956,800 |
|
| Notes payable (net of $2,224,132 and $2,514,236 of unamortized financing costs as of September 30, 2017 and September 30, 2016, respectively) | | 177,775,868 |
| | 177,485,764 |
| |
| Secured borrowings at fair value (proceeds September 30, 2016: $5,000,000) | | — |
| | 4,985,425 |
| |
| Notes payable (net of $0 and $2,224,132 of unamortized financing costs as of September 30, 2018 and September 30, 2017, respectively) | | | — |
| | 177,775,868 |
|
| Total liabilities | | 315,026,217 |
| | 296,587,747 |
| | 289,386,450 |
| | 315,026,217 |
|
| Commitments and contingencies (Note 13) | | | | | |
| Commitments and contingencies (Note 14) | | | | | |
| Net assets: | | | | | | | | |
| Common stock, $0.01 par value, 150,000,000 shares authorized; 29,466,768 shares issued and outstanding at September 30, 2017 and September 30, 2016 | | 294,668 |
| | 294,668 |
| |
| Common stock, $0.01 par value, 150,000,000 shares authorized; 29,466,768 shares issued and outstanding as of September 30, 2018 and September 30, 2017 | | | 294,668 |
| | 294,668 |
|
| Additional paid-in-capital | | 373,995,934 |
| | 373,995,934 |
| | 370,751,389 |
| | 373,995,934 |
|
| Net unrealized depreciation on investments and secured borrowings | | (44,653,664 | ) | | (26,850,007 | ) | |
| Net realized loss on investments | | (24,354,622 | ) | | (10,969,707 | ) | |
| Accumulated overdistributed net investment income | | (11,645,882 | ) | | (10,641,494 | ) | |
| Total net assets (equivalent to $9.97 and $11.06 per common share at September 30, 2017 and September 30, 2016, respectively) (Note 12) | | 293,636,434 |
| | 325,829,394 |
| |
| Accumulated overdistributed earnings | | | (75,300,637 | ) | | (80,654,168 | ) |
| Total net assets (equivalent to $10.04 and $9.97 per common share as of September 30, 2018 and September 30, 2017, respectively) (Note 12) | | | 295,745,420 |
| | 293,636,434 |
|
| Total liabilities and net assets | | $ | 608,662,651 |
| | $ | 622,417,141 |
| | $ | 585,131,870 |
| | $ | 608,662,651 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Statements of Operations
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 | | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 |
| Interest income: | | | | | | | | | | | | | |
| Control investments | | $ | 5,541,299 |
| | $ | 5,065,350 |
| | $ | 1,770,130 |
| | | $ | 3,970,056 |
| | $ | 5,541,299 |
| | $ | 5,065,350 |
|
| Affiliate investments | | 331,804 |
| | 182,194 |
| | — |
| | | — |
| | 331,804 |
| | 182,194 |
|
| Non-control/Non-affiliate investments | | 38,489,924 |
| | 42,152,565 |
| | 39,269,556 |
| | | 39,139,739 |
| | 38,489,924 |
| | 42,152,565 |
|
| Interest on cash and cash equivalents | | 166,896 |
| | 68,630 |
| | 28,571 |
| | | 273,552 |
| | 166,896 |
| | 68,630 |
|
| Total interest income | | 44,529,923 |
| | 47,468,739 |
| | 41,068,257 |
| | | 43,383,347 |
| | 44,529,923 |
| | 47,468,739 |
|
| PIK interest income: | | | | | | | | | | | | | |
| Control investments | | 223,125 |
| | — |
| | — |
| | | 2,161,339 |
| | 223,125 |
| | — |
|
| Affiliate investments | | 164,331 |
| | 91,097 |
| | — |
| | | — |
| | 164,331 |
| | 91,097 |
|
| Non-control/Non-affiliate investments | | 20,965 |
| | 75,968 |
| | — |
| | | 26,059 |
| | 20,965 |
| | 75,968 |
|
| Total PIK interest income | | 408,421 |
| | 167,065 |
| | — |
| | | 2,187,398 |
| | 408,421 |
| | 167,065 |
|
| Fee income: | | | | | | | | | | | | | |
| Affiliate investments | | 9,647 |
| | 6,296 |
| | — |
| | | 14,822 |
| | 9,647 |
| | 6,296 |
|
| Non-control/Non-affiliate investments | | 2,199,909 |
| | 3,071,634 |
| | 9,673,649 |
| | | 2,084,980 |
| | 2,199,909 |
| | 3,071,634 |
|
| Total fee income | | 2,209,556 |
| | 3,077,930 |
| | 9,673,649 |
| | | 2,099,802 |
| | 2,209,556 |
| | 3,077,930 |
|
| Dividend and other income: | | | | | | | | | | | | | |
| Control investments | | (576,044 | ) | | 2,712,500 |
| | 730,625 |
| | | — |
| | (576,044 | ) | | 2,712,500 |
|
| Total dividend and other income | | (576,044 | ) | | 2,712,500 |
| | 730,625 |
| | | — |
| | (576,044 | ) | | 2,712,500 |
|
| Total investment income | | 46,571,856 |
| | 53,426,234 |
| | 51,472,531 |
| | | 47,670,547 |
| | 46,571,856 |
| | 53,426,234 |
|
| Expenses: | | | | | | | | | | | | | |
| Base management fee | | 5,654,699 |
| | 6,134,304 |
| | 5,931,155 |
| | | 5,657,786 |
| | 5,654,699 |
| | 6,134,304 |
|
| Part I incentive fee | | 3,236,320 |
| | 5,211,729 |
| | 5,689,371 |
| | | 2,923,076 |
| | 3,236,320 |
| | 5,211,729 |
|
| Part II incentive fee | | — |
| | — |
| | (766,552 | ) | | |
| Professional fees | | 1,515,536 |
| | 4,193,532 |
| | 985,607 |
| | | 2,691,950 |
| | 1,515,536 |
| | 4,193,532 |
|
| Board of Directors fees | | 538,072 |
| | 546,300 |
| | 359,700 |
| | |
| Directors fees | | | 479,093 |
| | 538,072 |
| | 546,300 |
|
| Interest expense | | 10,769,842 |
| | 9,594,441 |
| | 8,950,703 |
| | | 14,379,881 |
| | 10,769,842 |
| | 9,594,441 |
|
| Administrator expense | | 661,170 |
| | 504,299 |
| | 794,725 |
| | | 1,085,819 |
| | 661,170 |
| | 504,299 |
|
| General and administrative expenses | | 2,030,756 |
| | 1,955,177 |
| | 1,249,792 |
| | | 1,383,871 |
| | 2,030,756 |
| | 1,955,177 |
|
| Total expenses | | 24,406,395 |
| | 28,139,782 |
| | 23,194,501 |
| | | 28,601,476 |
| | 24,406,395 |
| | 28,139,782 |
|
| Base management fee waived | | (6,232 | ) | | (6,232 | ) | | — |
| | |
| Fees waived | | | (702,261 | ) | | (6,232 | ) | | (6,232 | ) |
| Insurance recoveries | | (250,000 | ) | | — |
| | — |
| | | — |
| | (250,000 | ) | | — |
|
| Net expenses | | 24,150,163 |
| | 28,133,550 |
| | 23,194,501 |
| | | 27,899,215 |
| | 24,150,163 |
| | 28,133,550 |
|
| Net investment income | | 22,421,693 |
| | 25,292,684 |
| | 28,278,030 |
| | | 19,771,332 |
| | 22,421,693 |
| | 25,292,684 |
|
| Unrealized appreciation (depreciation) on investments: | | | | | | | | |
| Unrealized appreciation (depreciation) on investments and foreign currency: | | | | | | | |
| Control investments | | (5,933,119 | ) | | (5,979,787 | ) | | (1,821,052 | ) | | | (1,255,842 | ) | | (5,933,119 | ) | | (5,979,787 | ) |
| Affiliate investments | | (13,595,800 | ) | | (2,947,340 | ) | | — |
| | | 16,543,140 |
| | (13,595,800 | ) | | (2,947,340 | ) |
| Non-control/Non-affiliate investments | | 1,739,837 |
| | (8,067,972 | ) | | (10,951,116 | ) | | | 13,282,430 |
| | 1,739,837 |
| | (8,067,972 | ) |
| Net unrealized depreciation on investments | | (17,789,082 | ) | | (16,995,099 | ) | | (12,772,168 | ) | | |
| Foreign currency forward contract | | | 45,807 |
| | — |
| | — |
|
| Net unrealized appreciation (depreciation) on investments and foreign currency | | | 28,615,535 |
| | (17,789,082 | ) | | (16,995,099 | ) |
| Net unrealized (appreciation) depreciation on secured borrowings | | (14,575 | ) | | 14,575 |
| | — |
| | | — |
| | (14,575 | ) | | 14,575 |
|
| Realized gain (loss) on investments and secured borrowings: | | | | | | | | |
| Realized gain (loss) on investments, secured borrowings and foreign currency: | | | | | | | |
| Affiliate investments | | | (15,914,916 | ) | | — |
| | — |
|
| Non-control/Non-affiliate investments | | (13,384,915 | ) | | (12,769,777 | ) | | 406,220 |
| | | (11,675,522 | ) | | (13,384,915 | ) | | (12,769,777 | ) |
| Net realized gain (loss) on investments and secured borrowings | | (13,384,915 | ) | | (12,769,777 | ) | | 406,220 |
| | |
| Foreign currency forward contract | | | (123,380 | ) | | — |
| | — |
|
| Net realized loss on investments, secured borrowings and foreign currency | | | (27,713,818 | ) | | (13,384,915 | ) | | (12,769,777 | ) |
| Net increase (decrease) in net assets resulting from operations | | $ | (8,766,879 | ) | | $ | (4,457,617 | ) | | $ | 15,912,082 |
| | | $ | 20,673,049 |
| | $ | (8,766,879 | ) | | $ | (4,457,617 | ) |
| Net investment income per common share — basic and diluted | | $ | 0.76 |
| | $ | 0.86 |
| | $ | 0.96 |
| | | $ | 0.67 |
| | $ | 0.76 |
| | $ | 0.86 |
|
| Earnings (loss) per common share — basic and diluted (Note 5) | | $ | (0.30 | ) | | $ | (0.15 | ) | | $ | 0.54 |
| | | $ | 0.70 |
| | $ | (0.30 | ) | | $ | (0.15 | ) |
| Weighted average common shares outstanding — basic and diluted | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
|
| Distributions per common share | | $ | 0.80 |
| | $ | 0.90 |
| | $ | 1.07 |
| | |
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Statements of Changes in Net Assets
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 |
| Operations: | | | | | | | | | | | | |
| Net investment income | | $ | 22,421,693 |
| | $ | 25,292,684 |
| | $ | 28,278,030 |
| | $ | 19,771,332 |
| | $ | 22,421,693 |
| | $ | 25,292,684 |
|
| Net unrealized depreciation on investments | | (17,789,082 | ) | | (16,995,099 | ) | | (12,772,168 | ) | |
| Net unrealized appreciation (depreciation) on investments and foreign currency | | | 28,615,535 |
| | (17,789,082 | ) | | (16,995,099 | ) |
| Net unrealized (appreciation) depreciation on secured borrowings | | (14,575 | ) | | 14,575 |
| | — |
| | — |
| | (14,575 | ) | | 14,575 |
|
| Net realized gain (loss) on investments and secured borrowings | | (13,384,915 | ) | | (12,769,777 | ) | | 406,220 |
| |
| Net realized loss on investments, secured borrowings and foreign currency | | | (27,713,818 | ) | | (13,384,915 | ) | | (12,769,777 | ) |
| Net increase (decrease) in net assets resulting from operations | | (8,766,879 | ) | | (4,457,617 | ) | | 15,912,082 |
| | 20,673,049 |
| | (8,766,879 | ) | | (4,457,617 | ) |
| Stockholder transactions: | | | | | | | | | | | | |
| Distributions to stockholders | | (23,426,081 | ) | | (26,520,092 | ) | | (31,676,775 | ) | | (16,452,988 | ) | | (23,426,081 | ) | | (26,520,092 | ) |
| Tax return of capital | | | (2,111,075 | ) | | — |
| | — |
|
| Net decrease in net assets from stockholder transactions | | (23,426,081 | ) | | (26,520,092 | ) | | (31,676,775 | ) | | (18,564,063 | ) | | (23,426,081 | ) | | (26,520,092 | ) |
| Capital share transactions: | | | | | | | | | | | | |
| Issuance of common stock, net | | — |
| | — |
| | (105,882 | ) | |
| Issuance of common stock under dividend reinvestment plan | | 270,630 |
| | 650,402 |
| | 889,511 |
| | 281,737 |
| | 270,630 |
| | 650,402 |
|
| Repurchases of common stock under dividend reinvestment plan | | (270,630 | ) | | (650,402 | ) | | (889,511 | ) | | (281,737 | ) | | (270,630 | ) | | (650,402 | ) |
| Net decrease in net assets from capital share transactions | | — |
|
| — |
| | (105,882 | ) | |
| Total decrease in net assets | | (32,192,960 | ) | | (30,977,709 | ) | | (15,870,575 | ) | |
| Net change in net assets from capital share transactions | | | — |
| | — |
| | — |
|
| Total increase (decrease) in net assets | | | 2,108,986 |
| | (32,192,960 | ) | | (30,977,709 | ) |
| Net assets at beginning of period | | 325,829,394 |
| | 356,807,103 |
| | 372,677,678 |
| | 293,636,434 |
| | 325,829,394 |
| | 356,807,103 |
|
| Net assets at end of period | | $ | 293,636,434 |
| | $ | 325,829,394 |
| | $ | 356,807,103 |
| | $ | 295,745,420 |
| | $ | 293,636,434 |
| | $ | 325,829,394 |
|
| Net asset value per common share | | $ | 9.97 |
| | $ | 11.06 |
| | $ | 12.11 |
| | $ | 10.04 |
| | $ | 9.97 |
| | $ | 11.06 |
|
| Common shares outstanding at end of period | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Statements of Cash Flows
|
| | | | | | | | | | | | |
| | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 |
| Operating activities: | | | |
| | |
| Net increase (decrease) in net assets resulting from operations | | $ | (8,766,879 | ) | | $ | (4,457,617 | ) | | $ | 15,912,082 |
|
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided (used) by operating activities: | | | | | | |
| Net unrealized depreciation on investments | | 17,789,082 |
| | 16,995,099 |
| | 12,772,168 |
|
| Net unrealized appreciation (depreciation) on secured borrowings | | 14,575 |
| | (14,575 | ) | | — |
|
| Net realized (gain) loss on investments and secured borrowings | | 13,384,915 |
| | 12,769,777 |
| | (406,220 | ) |
| PIK interest income | | (408,421 | ) | | (167,065 | ) | | — |
|
| Recognition of fee income | | (2,209,556 | ) | | (3,077,930 | ) | | (9,673,649 | ) |
| Accretion of original issue discount on investments | | (3,945,886 | ) | | (1,924,087 | ) | | (1,634,191 | ) |
| Amortization of deferred financing costs | | 1,255,304 |
| | 874,680 |
| | 2,768,573 |
|
| Changes in operating assets and liabilities: | | | | | | |
| Fee income received | | 2,190,276 |
| | 3,060,760 |
| | 9,767,645 |
|
| (Increase) decrease in restricted cash | | 1,628,578 |
| | 2,221,958 |
| | (9,131,391 | ) |
| (Increase) decrease in interest, dividends and fees receivable | | 1,565,860 |
| | (1,796,556 | ) | | (1,663,369 | ) |
| (Increase) decrease in due from portfolio companies | | 50,169 |
| | (324,842 | ) | | 189,253 |
|
| (Increase) decrease in receivables from unsettled transactions | | 12,364,092 |
| | 5,671,964 |
| | (13,541,056 | ) |
| Increase in other assets | | (36,844 | ) | | (115,276 | ) | | (33,216 | ) |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | | (763,409 | ) | | (665,313 | ) | | 697,916 |
|
| Increase (decrease) in base management fee and incentive fee payable | | (751,534 | ) | | 932,542 |
| | 589,489 |
|
| Increase in due to FSC CT | | 48,444 |
| | 22,432 |
| | 140,024 |
|
| Increase in interest payable | | 197,518 |
| | 129,641 |
| | 1,463,366 |
|
| Increase (decrease) in payables from unsettled transactions | | 49,029,789 |
| | (11,809,500 | ) | | (16,053,500 | ) |
| Increase (decrease) in amounts payable to syndication partners | | (18,750 | ) | | 18,750 |
| | — |
|
| Increase (decrease) in director fees payable | | (138,267 | ) | | 183,625 |
| | 52,650 |
|
| Purchases of investments and net revolver activity | | (290,578,883 | ) | | (286,134,332 | ) | | (886,999,491 | ) |
| Principal payments received on investments (scheduled payments) | | 16,222,229 |
| | 12,221,079 |
| | 11,677,139 |
|
| Principal payments received on investments (payoffs) | | 215,278,210 |
| | 132,931,016 |
| | 60,488,532 |
|
| PIK interest income received in cash | | — |
| | 78,226 |
| | — |
|
| Proceeds from the sale of investments | | 45,445,755 |
| | 163,290,550 |
| | 480,361,990 |
|
| Net cash provided (used) by operating activities | | 68,846,367 |
| | 40,915,006 |
| | (342,255,256 | ) |
| Financing activities: | | | | | | |
| Distributions paid in cash | | (23,155,451 | ) | | (25,869,690 | ) | | (39,436,200 | ) |
| Borrowings under credit facilities | | 55,500,000 |
| | 16,267,000 |
| | 428,509,800 |
|
| Repayments of borrowings under credit facilities | | (79,970,000 | ) | | (45,500,000 | ) | | (291,850,000 | ) |
| Repayments of secured borrowings | | (5,000,000 | ) | | — |
| | — |
|
| Proceeds from issuance of notes payable | | 7,500,000 |
| | 29,715,000 |
| | 186,366,000 |
|
| Repayments of notes payable | | (7,500,000 | ) | | (36,081,000 | ) | | — |
|
| Repurchases of common stock under dividend reinvestment plan | | (270,630 | ) | | (650,402 | ) | | (1,080,605 | ) |
| Deferred financing costs paid | | (125,000 | ) | | (450,374 | ) | | (6,144,316 | ) |
| Offering costs paid | | — |
| | — |
| | (105,882 | ) |
| Net cash provided (used) by financing activities | | (53,021,081 | ) |
| (62,569,466 | ) | | 276,258,797 |
|
| Net increase (decrease) in cash and cash equivalents | | 15,825,286 |
| | (21,654,460 | ) | | (65,996,459 | ) |
| Cash and cash equivalents, beginning of period | | 19,778,841 |
| | 41,433,301 |
| | 107,429,760 |
|
| Cash and cash equivalents, end of period | | $ | 35,604,127 |
| | $ | 19,778,841 |
| | $ | 41,433,301 |
|
Oaktree Strategic Income Corporation
Consolidated Statements of Cash Flows
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 |
| Operating activities: | | | | | | | |
| Net increase (decrease) in net assets resulting from operations | | | $ | 20,673,049 |
| | $ | (8,766,879 | ) | | $ | (4,457,617 | ) |
| Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | | | | | | | |
| Net unrealized (appreciation) depreciation on investments and foreign currency | | | (28,615,535 | ) | | 17,789,082 |
| | 16,995,099 |
|
| Net unrealized appreciation (depreciation) on secured borrowings | | | — |
| | 14,575 |
| | (14,575 | ) |
| Net realized losses on investments, secured borrowings and foreign currency | | | 27,713,818 |
| | 13,384,915 |
| | 12,769,777 |
|
| PIK interest income | | | (2,187,398 | ) | | (408,421 | ) | | (88,839 | ) |
| Deferred fee income | | | 182,004 |
| | (19,280 | ) | | (17,170 | ) |
| Accretion of original issue discount on investments | | | (2,846,469 | ) | | (3,945,886 | ) | | (1,924,087 | ) |
| Amortization of deferred financing costs | | | 2,745,365 |
| | 1,255,304 |
| | 874,680 |
|
| Purchases of investments and net revolver activity | | | (455,031,026 | ) | | (290,578,883 | ) | | (286,134,332 | ) |
| Principal payments received on investments (scheduled payments) | | | 13,692,951 |
| | 16,222,229 |
| | 12,221,079 |
|
| Principal payments received on investments (payoffs) | | | 232,256,819 |
| | 215,278,210 |
| | 132,931,016 |
|
| Proceeds from the sale of investments | | | 218,383,861 |
| | 45,445,755 |
| | 163,290,550 |
|
| Changes in operating assets and liabilities: | | | | | | | |
| Decrease in restricted cash | | | 1,415,496 |
| | 1,628,578 |
| | 2,221,958 |
|
| (Increase) decrease in interest, dividends and fees receivable | | | (125,259 | ) | | 1,565,860 |
| | (1,796,556 | ) |
| (Increase) decrease in due from portfolio companies | | | 118,314 |
| | 50,169 |
| | (324,842 | ) |
| (Increase) decrease in receivables from unsettled transactions | | | (4,638,533 | ) | | 12,364,092 |
| | 5,671,964 |
|
| (Increase) in other assets | | | (706,624 | ) | | (36,844 | ) | | (115,276 | ) |
| Increase (decrease) in accounts payable, accrued expenses and other liabilities | | | 166,904 |
| | (763,409 | ) | | (665,313 | ) |
| Increase (decrease) in base management fee and incentive fee payable | | | (320,505 | ) | | (751,534 | ) | | 932,542 |
|
| Increase in due to affiliate | | | 1,250,435 |
| | 48,444 |
| | 22,432 |
|
| Increase (decrease) in interest payable | | | (865,436 | ) | | 197,518 |
| | 129,641 |
|
| Increase (decrease) in payables from unsettled transactions | | | (40,097,289 | ) | | 49,029,789 |
| | (11,809,500 | ) |
| Increase (decrease) in amounts payable to syndication partners | | | — |
| | (18,750 | ) | | 18,750 |
|
| Increase (decrease) in director fees payable | | | (98,008 | ) | | (138,267 | ) | | 183,625 |
|
| Net cash provided by (used in) operating activities | | | (16,933,066 | ) | | 68,846,367 |
| | 40,915,006 |
|
| Financing activities: | | | | | | | |
| Distributions paid in cash | | | (18,282,326 | ) | | (23,155,451 | ) | | (25,869,690 | ) |
| Borrowings under credit facilities | | | 311,000,000 |
| | 55,500,000 |
| | 16,267,000 |
|
| Repayments of borrowings under credit facilities | | | (118,900,000 | ) | | (79,970,000 | ) | | (45,500,000 | ) |
| Repayments of secured borrowings | | | — |
| | (5,000,000 | ) | | — |
|
| Proceeds from issuance of notes payable | | | 3,000,000 |
| | 7,500,000 |
| | 29,715,000 |
|
| Repayments of notes payable | | | (183,000,000 | ) | | (7,500,000 | ) | | (36,081,000 | ) |
| Repurchases of common stock under dividend reinvestment plan | | | (281,737 | ) | | (270,630 | ) | | (650,402 | ) |
| Deferred financing costs paid | | | (1,767,975 | ) | | (125,000 | ) | | (450,374 | ) |
| Net cash used in financing activities | | | (8,232,038 | ) | | (53,021,081 | ) | | (62,569,466 | ) |
| Net increase (decrease) in cash and cash equivalents | | | (25,165,104 | ) | | 15,825,286 |
| | (21,654,460 | ) |
| Cash and cash equivalents, beginning of period | | | 35,604,127 |
| | 19,778,841 |
| | 41,433,301 |
|
| Cash and cash equivalents, end of period | | | $ | 10,439,023 |
| | $ | 35,604,127 |
| | $ | 19,778,841 |
|
| Supplemental information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 9,317,020 |
| | $ | 8,590,120 |
| | $ | 4,718,763 |
| | $ | 12,499,952 |
| | $ | 9,317,020 |
| | $ | 8,590,120 |
|
| Non-cash operating activities: | | | | | | | | | | | | |
| Purchase of investment from restructuring | | $ | — |
| | $ | (12,559,122 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (12,559,122 | ) |
| Proceeds from investment restructuring | | $ | — |
| | $ | 12,559,122 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 12,559,122 |
|
| Exchange of investments | | $ | — |
| | $ | 1,325,000 |
| | $ | 58,823,756 |
| | $ | — |
| | $ | — |
| | $ | 1,325,000 |
|
| Non-cash financing activities: | | | | | | | | | | | | |
| Proceeds from unsettled secured borrowings | | $ | — |
| | $ | 5,000,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5,000,000 |
|
| Issuance of shares of common stock under dividend reinvestment plan | | $ | 270,630 |
| | $ | 650,402 |
| | $ | 1,080,605 |
| | $ | 281,737 |
| | $ | 270,630 |
| | $ | 650,402 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20172018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Control Investments (3) | | | | | | | | | | |
| FSFR Glick JV LLC (7)(12)(15) | | | | Multi-sector holdings | | | | | | |
| Subordinated Note, LIBOR+8% cash due 10/20/2021 (8) | | 9.23% | | | | $ | 64,228,881 |
| | $ | 64,228,881 |
| | $ | 57,606,674 |
|
| 87.5% equity interest | | | | | | | | 7,111,751 |
| | — |
|
| | | | | | | | | 71,340,632 |
| | 57,606,674 |
|
| Total Control Investments (19.6% of net assets) | | | | | | | | $ | 71,340,632 |
| | $ | 57,606,674 |
|
| Affiliate Investments (4) | | | | | | | | | | |
| Ameritox Ltd. | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash 3% PIK due 4/11/2021 (8)(13) | | 6.33% | | | | 8,071,313 |
| | $ | 7,906,087 |
| | $ | 935,913 |
|
| 3,309,873.6 Class A Preferred Units in Ameritox Holdings II, LLC | | | | | | | | 3,309,874 |
| | — |
|
| 327,393.6 Class B Preferred Units in Ameritox Holdings II, LLC | | | | | | | | 327,394 |
| | — |
|
| 1,007.36 Class A Units in Ameritox Holdings II, LLC | | | | | | | | 5,935,698 |
| | — |
|
| | | | | | | | | 17,479,053 |
| | 935,913 |
|
| Total Affiliate Investments (0.3% of net assets) | | | | | | | | $ | 17,479,053 |
| | $ | 935,913 |
|
| | | | | | | | | | | |
| Non-Control/Non-Affiliate Investments (6) | | | | | | | | | | |
| Triple Point Group Holdings, Inc. | | | | Application software | | | | | | |
| First Lien Revolver, LIBOR+4.25% (1% floor) cash due 7/10/2018 (8)(11) | | 5.25% | | | | | | $ | — |
| | $ | (437,932 | ) |
| | | | | | | | | — |
| | (437,932 | ) |
| New Trident Holdcorp, Inc. | | | | Healthcare services | | | | | | |
| First Lien Term Loan B, LIBOR+5.75% (1.25% floor) cash due 7/31/2019 (8)(13)(16) | | 7.08% | | | | 13,552,077 |
| | 13,285,041 |
| | 9,757,495 |
|
| Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 7/31/2020 (8)(16) | | 10.83% | | | | 1,000,000 |
| | 950,590 |
| | 50,000 |
|
| | | | | | | | | 14,235,631 |
| | 9,807,495 |
|
| Survey Sampling International, LLC | | | | Research & consulting services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 12/16/2020 (8)(13) | | 6.27% | | | | 5,668,523 |
| | 5,642,223 |
| | 5,583,495 |
|
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/16/2021 (8) | | 10.27% | | | | 1,000,000 |
| | 988,095 |
| | 990,000 |
|
| | | | | | | | | 6,630,318 |
| | 6,573,495 |
|
| Maxor National Pharmacy Services, LLC | | | | Pharmaceuticals | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1.25% floor) cash due 1/31/2020 (8)(13) | | 6.08% | | | | 9,068,650 |
| | 9,068,650 |
| | 9,038,634 |
|
| | | | | | | | | 9,068,650 |
| | 9,038,634 |
|
| NextCare, Inc. | | | | Healthcare services | | | | | | |
| Senior Term Loan, LIBOR+6% (1% floor) cash due 7/31/2018 (8)(13) | | 7.24% | | | | 6,957,971 |
| | 6,957,970 |
| | 6,667,987 |
|
| Delayed Draw Term Loan, LIBOR+6% (1% floor) cash due 7/31/2018 (8) | | 7.24% | | | | 1,393,853 |
| | 1,393,853 |
| | 1,322,900 |
|
| | | | | | | | | 8,351,823 |
| | 7,990,887 |
|
| Aptean, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+4.25% (1% floor) cash due 12/20/2022 (8)(13) | | 5.59% | | | | 11,243,500 |
| | 11,170,440 |
| | 11,323,161 |
|
| Second Lien Term Loan, LIBOR+9.5% (1% floor) cash due 12/20/2023 (8) | | 10.84% | | | | 200,000 |
| | 197,320 |
| | 201,750 |
|
| | | | | | | | | 11,367,760 |
| | 11,524,911 |
|
| Stratus Technologies, Inc. | | | | Computer hardware | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 4/28/2021 (8)(13) | | 6.24% | | | | 1,315,119 |
| | 1,279,988 |
| | 1,324,983 |
|
| | | | | | | | | 1,279,988 |
| | 1,324,983 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Control Investments (3) | | | | | | | | | | |
| OCSI Glick JV LLC (6)(11)(13) | | | | Multi-sector holdings | | | | | | |
| Subordinated Note, LIBOR+6.5% cash due 10/20/2021 (7) | | 8.59% | | | | $ | 66,390,220 |
| | $ | 66,390,219 |
| | $ | 58,512,170 |
|
| 87.5% equity interest (16) | | | | | | | | 7,111,751 |
| | — |
|
| | | | | | | | | 73,501,970 |
| | 58,512,170 |
|
| Total Control Investments (19.8% of net assets) | | | | | | | | $ | 73,501,970 |
| | $ | 58,512,170 |
|
| | | | | | | | | | | |
| Non-Control/Non-Affiliate Investments (5) | | | | | | | | | | |
| 4 Over International, LLC | | | | Commercial printing | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 6/7/2022 (7) | | 8.24% | | | | 5,731,236 |
| | $ | 5,661,123 |
| | $ | 5,730,743 |
|
| First Lien Revolver, LIBOR+6% (1% floor) cash due 6/7/2021 (7)(10) | |
| | | | | | (502 | ) | | (6 | ) |
| | | | | | | | | 5,660,621 |
| | 5,730,737 |
|
| 99 Cents Only Stores, LLC | | | | General merchandise stores | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash 1.5% PIK due 1/13/2022 (7)(14) | | 7.35% | | | | 2,006,060 |
| | 1,866,494 |
| | 1,940,863 |
|
| | | | | | | | | 1,866,494 |
| | 1,940,863 |
|
| Airxcel, Inc. | | | | Household appliances | | | | | | |
| First Lien Term Loan, LIBOR+4.5% cash due 4/28/2025 (7)(14) | | 6.74% | | | | 6,982,500 |
| | 6,916,677 |
| | 6,950,485 |
|
| | | | | | | | | 6,916,677 |
| | 6,950,485 |
|
| AI Ladder (Luxembourg) Subco S.a.r.l (6) | | | | Electrical components & equipment | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% cash due 7/9/2025 (7)(14) | | 7.02% | | | | 12,000,000 |
| | 11,649,358 |
| | 12,071,280 |
|
| | | | | | | | | 11,649,358 |
| | 12,071,280 |
|
| AL Midcoast Holdings LLC | | | | Oil & gas storage & transportation | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% cash due 8/1/2025 (7)(14) | | 7.84% | | | | 4,879,000 |
| | 4,830,210 |
| | 4,898,833 |
|
| | | | | | | | | 4,830,210 |
| | 4,898,833 |
|
| All Web Leads, Inc. | | | | Advertising | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 12/29/2020 (7) | | 9.31% | | | | 24,799,927 |
| | 24,799,900 |
| | 22,535,595 |
|
| | | | | | | | | 24,799,900 |
| | 22,535,595 |
|
| Allen Media, LLC | | | | Movies & entertainment | | | | | | |
| First Lien Term Loan B, LIBOR+6.5% (1% floor) cash due 8/30/2023 (7) | | 8.81% | | | | 5,000,000 |
| | 4,875,899 |
| | 4,868,750 |
|
| | | | | | | | | 4,875,899 |
| | 4,868,750 |
|
| Ancile Solutions, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 6/30/2021 (7) | | 9.39% | | | | 9,168,620 |
| | 9,005,809 |
| | 9,113,608 |
|
| | | | | | | | | 9,005,809 |
| | 9,113,608 |
|
| Aptean, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+4.25% (1% floor) cash due 12/20/2022 (7)(14) | | 6.64% | | | | 646,200 |
| | 642,794 |
| | 651,056 |
|
| | | | | | | | | 642,794 |
| | 651,056 |
|
| Aptos, Inc. | | | | Computer & electronics retail | | | | | | |
| First Lien Term Loan, LIBOR+5.5% cash due 7/23/2025 (7)(14) | | 7.74% | | | | 11,000,000 |
| | 10,890,000 |
| | 10,986,250 |
|
| | | | | | | | | 10,890,000 |
| | 10,986,250 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20172018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| TravelCLICK, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/6/2021 (8)(13) | | 8.99% | | | | $ | 2,048,485 |
| | $ | 2,010,607 |
| | $ | 2,058,727 |
|
| | | | | | | | | 2,010,607 |
| | 2,058,727 |
|
| Verdesian Life Sciences, LLC | | | | Fertilizers & agricultural chemicals | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 7/1/2020 (8)(13) | | 6.31% | | | | 3,295,860 |
| | 3,273,753 |
| | 2,801,481 |
|
| | | | | | | | | 3,273,753 |
| | 2,801,481 |
|
| TV Borrower US, LLC (7) | | | | Integrated telecommunication services | | | | | | |
| First Lien Dollar Term B-1 Loan, LIBOR+4.75% (1% floor) cash due 2/22/2024 (8) | | 6.08% | | | | 3,383,000 |
| | 3,367,510 |
| | 3,406,258 |
|
| | | | | | | | | 3,367,510 |
| | 3,406,258 |
|
| BeyondTrust Software, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/25/2019 (8)(13) | | 8.33% | | | | 16,384,644 |
| | 16,255,828 |
| | 16,384,050 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 9/25/2019 (8)(11) | | 8.33% | | | | | | (21,305 | ) | | (130 | ) |
| 500,000 Class A membership interests in BeyondTrust Holdings LLC | | | | | | | | 500,000 |
| | 628,846 |
|
| | | | | | | | | 16,734,523 |
| | 17,012,766 |
|
| Dynatect Group Holdings, Inc. | | | | Industrial machinery | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 9/30/2020 (8) | | 5.83% | | | | 3,786,203 |
| | 3,786,203 |
| | 3,672,617 |
|
| | | | | | | | | 3,786,203 |
| | 3,672,617 |
|
| Idera, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 6/27/2024 (8) | | 6.24% | | | | 3,457,698 |
| | 3,424,359 |
| | 3,483,630 |
|
| | | | | | | | | 3,424,359 |
| | 3,483,630 |
|
| Central Security Group, Inc. | | | | Specialized consumer services | | | | | | |
| First Lien Term Loan, LIBOR+5.625% (1% floor) cash due 10/6/2021 (8) | | 6.86% | | | | 1,665,740 |
| | 1,660,679 |
| | 1,672,677 |
|
| | | | | | | | | 1,660,679 |
| | 1,672,677 |
|
| Kellermeyer Bergensons Services, LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 10/29/2021 (8)(13) | | 6.32% | | | | 5,251,500 |
| | 5,208,454 |
| | 5,248,218 |
|
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 4/29/2022 (8)(13) | | 9.81% | | | | 280,000 |
| | 280,000 |
| | 274,400 |
|
| | | | | | | | | 5,488,454 |
| | 5,522,618 |
|
| GOBP Holdings Inc. | | | | Food retail | | | | | | |
| Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (8)(13) | | 9.58% | | | | 3,685,714 |
| | 3,644,031 |
| | 3,717,983 |
|
| | | | | | | | | 3,644,031 |
| | 3,717,983 |
|
| Executive Consulting Group, LLC | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/21/2019 (8)(13) | | 5.99% | | | | 7,000,000 |
| | 7,000,000 |
| | 6,999,745 |
|
| Delayed Draw Term Loan, LIBOR+4.75% (1% floor) cash due 11/21/2019 (8) | | 5.99% | | | | 3,791,650 |
| | 3,791,650 |
| | 3,791,657 |
|
| | | | | | | | | 10,791,650 |
| | 10,791,402 |
|
| Metamorph US 3, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash 2% PIK due 12/1/2020 (8)(13) | | 6.74% | | | | 14,070,138 |
| | 13,488,111 |
| | 5,343,093 |
|
| First Lien Revolver, LIBOR+6.5% (1% floor) cash due 12/1/2020 (8)(11)(13) | | 7.74% | | | | 1,080,000 |
| | 1,037,075 |
| | (36,455 | ) |
| | | | | | | | | 14,525,186 |
| | 5,306,638 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Aretec Group, Inc. | | | | Investment banking & brokerage | | | | | | |
| First Lien Term Loan B1, PRIME+3.25% (1% floor) cash due 11/23/2020 (7)(14) | | 8.50% | | | | $ | 5,490,146 |
| | $ | 5,525,388 |
| | $ | 5,500,440 |
|
| | | | | | | | | 5,525,388 |
| | 5,500,440 |
|
| Asset International, Inc. | | | | Research & consulting services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 12/30/2024 (7) | | 6.89% | | | | 13,895,000 |
| | 13,647,085 |
| | 13,834,862 |
|
| First Lien Revolver, LIBOR+4.5% (1% floor) cash due 12/29/2022 (7) | | 6.89% | | | | 625,000 |
| | 571,947 |
| | 611,475 |
|
| | | | | | | | | 14,219,032 |
| | 14,446,337 |
|
| Avantor Inc. | | | | Commodity chemicals | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 11/21/2024 (7)(14) | | 6.24% | | | | 4,962,500 |
| | 4,958,640 |
| | 5,028,799 |
|
| | | | | | | | | 4,958,640 |
| | 5,028,799 |
|
| Avaya, Inc. | | | | Communications equipment | | | | | | |
| First Lien Term Loan B, LIBOR+4.25% (1% floor) cash due 12/15/2024 (7)(14) | | 6.41% | | | | 9,925,000 |
| | 9,823,325 |
| | 10,025,044 |
|
| | | | | | | | | 9,823,325 |
| | 10,025,044 |
|
| Ball Metalpack Finco, LLC | | | | Metal & glass containers | | | | | | |
| First Lien Term Loan, LIBOR+4.5% due 7/31/2025 (7)(14) | | 6.74% | | | | 8,977,500 |
| | 8,933,303 |
| | 9,084,108 |
|
| | | | | | | | | 8,933,303 |
| | 9,084,108 |
|
| Barracuda Networks, Inc. | | | | Systems software | | | | | | |
| Second Lien Term Loan, LIBOR+7.25% (1% floor) cash due 2/12/2026 (7)(14) | | 9.41% | | | | 6,000,000 |
| | 5,972,286 |
| | 6,082,500 |
|
| | | | | | | | | 5,972,286 |
| | 6,082,500 |
|
| BeyondTrust Holdings LLC | | | | Application software | | | | | | |
| 500,000 Class A membership interests | | | | | | | | 500,000 |
| | 1,758,950 |
|
| | | | | | | | | 500,000 |
| | 1,758,950 |
|
| Blackhawk Network Holdings, Inc. | | | | Data processing & outsourced services | | | | | | |
| Second Lien Term Loan, LIBOR+7% (1% floor) cash due 6/15/2026 (7)(14) | | 9.38% | | | | 4,375,000 |
| | 4,329,703 |
| | 4,424,219 |
|
| | | | | | | | | 4,329,703 |
| | 4,424,219 |
|
| Cadence Aerospace LLC | | | | Aerospace & defense | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 11/14/2023 (7) | | 8.82% | | | | 13,651,323 |
| | 13,527,955 |
| | 13,514,811 |
|
| | | | | | | | | 13,527,955 |
| | 13,514,811 |
|
| Chloe Ox Parent LLC | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 12/23/2024 (7)(14) | | 6.89% | | | | 10,945,000 |
| | 10,845,368 |
| | 10,986,044 |
|
| | | | | | | | | 10,845,368 |
| | 10,986,044 |
|
| Cincinnati Bell Inc. (6) | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan B, LIBOR+3.25% (1% floor) cash due 10/02/2024 (7)(14) | | 5.49% | | | | 3,000,000 |
| | 3,003,693 |
| | 3,010,305 |
|
| | | | | | | | | 3,003,693 |
| | 3,010,305 |
|
| CircusTrix Holdings LLC | | | | Leisure facilities | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% (1% floor) cash due 12/16/2021 (7) | | 7.96% | | | | 8,154,712 |
| | 8,086,543 |
| | 8,083,073 |
|
| First Lien Delayed Draw Term Loan B, LIBOR+5.5% (1% floor) cash due 12/16/2021 (7) | | 7.74% | | | | 711,587 |
| | 696,693 |
| | 695,935 |
|
| | | | | | | | | 8,783,236 |
| | 8,779,008 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20172018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Compuware Corporation | | | | Internet software & services | | | | | | |
| First Lien Term Loan B3, LIBOR+4.25% (1% floor) cash due 12/15/2021 (8)(13) | | 5.49% | | | | $ | 8,423,623 |
| | $ | 8,345,374 |
| | $ | 8,528,918 |
|
| | | | | | | | | 8,345,374 |
| | 8,528,918 |
|
| Motion Recruitment Partners LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 2/13/2020 (8)(13) | | 7.24% | | | | 13,509,054 |
| | 13,498,295 |
| | 13,508,389 |
|
| First Lien Revolver, LIBOR+6% (1% floor) cash due 2/13/2020 (8)(11) | | 7.24% | | | | — |
| | (960 | ) | | (143 | ) |
| | | | | | | | | 13,497,335 |
| | 13,508,246 |
|
| PowerPlan, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 2/23/2022 (8)(13) | | 6.49% | | | | 17,839,352 |
| | 17,800,018 |
| | 17,839,013 |
|
| First Lien Revolver, LIBOR+5.25% (1% floor) cash due 2/23/2021 (8)(11) | | 6.49% | | | | | | — |
| | (40 | ) |
| | | | | | | | | 17,800,018 |
| | 17,838,973 |
|
| Digital River, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 2/12/2021 (8)(13) | | 7.82% | | | | 4,723,868 |
| | 4,681,840 |
| | 4,747,488 |
|
| | | | | | | | | 4,681,840 |
| | 4,747,488 |
|
| Research Now Group, Inc. | | | | Data processing & outsourced services | | | | | | |
| Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 3/18/2022 (8) | | 10.08% | | | | 4,000,000 |
| | 3,962,143 |
| | 3,960,000 |
|
| | | | | | | | | 3,962,143 |
| | 3,960,000 |
|
| Staples, Inc. | | | | Distributors | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 9/12/2024 (8)(16) | | 5.31% | | | | 13,000,000 |
| | 12,967,500 |
| | 12,957,035 |
|
| | | | | | | | | 12,967,500 |
| | 12,957,035 |
|
| Raley's | | | | Food retail | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 5/18/2022 (8)(13) | | 6.49% | | | | 3,209,821 |
| | 3,164,432 |
| | 3,209,821 |
|
| | | | | | | | | 3,164,432 |
| | 3,209,821 |
|
| Aptos, Inc. | | | | Data processing & outsourced services | | | | | | |
| First Lien Term Loan, LIBOR+6.75% (1% floor) cash due 9/1/2022 (8)(13) | | 8.08% | | | | 5,940,000 |
| | 5,842,031 |
| | 5,880,600 |
|
| | | | | | | | | 5,842,031 |
| | 5,880,600 |
|
| Zep Inc. | | | | Housewares & specialties | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 8/12/2024 (8) | | 5.24% | | | | 4,750,000 |
| | 4,795,075 |
| | 4,771,779 |
|
| | | | | | | | | 4,795,075 |
| | 4,771,779 |
|
| All Web Leads, Inc. | | | | Advertising | | | | | | |
| First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/29/2020 (8)(13) | | 8.77% | | | | 25,839,538 |
| | 25,839,538 |
| | 23,192,266 |
|
| | | | | | | | | 25,839,538 |
| | 23,192,266 |
|
| Allied Universal Holdco, LLC (f/k/a USAGM Holdco, LLC) | | | | Security & alarm services | | | | | | |
| First Lien Term Loan, LIBOR+3.75% (1% floor) cash due 7/28/2022 (8)(16) | | 5.08% | | | | 7,979,747 |
| | 8,018,318 |
| | 7,972,286 |
|
| | | | | | | | | 8,018,318 |
| | 7,972,286 |
|
| Internet Pipeline, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+7.25% (1% floor) cash due 8/4/2022 (8)(13) | | 8.49% | | | | 13,081,433 |
| | 13,068,115 |
| | 13,212,714 |
|
| First Lien Revolver, LIBOR+7.25% (1% floor) cash due 8/4/2021 (8) | | 8.49% | | | | | | — |
| | 8,029 |
|
| | | | | | | | | 13,068,115 |
| | 13,220,743 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Poseidon Merger Sub, Inc. | | | | Advertising | | | | | | |
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/15/2023 (8) | | 9.81% | | | | $ | 7,000,000 |
| | $ | 6,980,121 |
| | $ | 7,070,000 |
|
| | | | | | | | | 6,980,121 |
| | 7,070,000 |
|
| Valet Merger Sub, Inc. | | | | Environmental & facilities services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/24/2021 (8)(13) | | 8.24% | | | | 5,880,000 |
| | 5,852,065 |
| | 5,879,798 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 9/24/2021 (8)(11) | | 8.24% | | | | — |
| | (10,697 | ) | | (29 | ) |
| Incremental Term Loan , LIBOR+7% (1% floor) cash due 9/24/2021 (8) | | 8.24% | | | | 8,407,683 |
| | 8,328,663 |
| | 8,407,394 |
|
| | | | | | | | | 14,170,031 |
| | 14,287,163 |
|
| DigiCert, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 10/21/2022 (8)(13) | | 10.24% | | | | 2,000,000 |
| | 1,984,880 |
| | 2,000,000 |
|
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 10/21/2021 (8) | | 5.99% | | | | 11,000,000 |
| | 10,945,000 |
| | 11,000,000 |
|
| | | | | | | | | 12,929,880 |
| | 13,000,000 |
|
| Lytx, Inc. | | | | Research & consulting services | | | | | | |
| 500 Class B Units in Lytx Holdings, LLC | | | | | | | | — |
| | 351,355 |
|
| 500 Class A Units in Lytx Holdings, LLC | | | | | | | | 292,459 |
| | 79,788 |
|
| | | | | | | | | 292,459 |
| | 431,143 |
|
| 4 Over International, LLC | | | | Commercial printing | | | | | | |
| First Lien Term Loan, LIBOR+6.0% (1% floor) cash due 6/7/2022 (8)(13) | | 7.24% | | | | 5,850,412 |
| | 5,804,485 |
| | 5,850,463 |
|
| First Lien Revolver, LIBOR+6.0% (1% floor) cash due 6/7/2021 (8)(11) | | 7.24% | | | | | | (502 | ) | | — |
|
| | | | | | | | | 5,803,983 |
| | 5,850,463 |
|
| Ancile Solutions, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 6/30/2021 (8)(13) | | 8.33% | | | | 9,881,312 |
| | 9,664,392 |
| | 9,802,707 |
|
| | | | | | | | | 9,664,392 |
| | 9,802,707 |
|
| Pomeroy Group Holdings, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 11/30/2021 (8)(13) | | 7.59% | | | | 4,443,467 |
| | 4,339,309 |
| | 4,443,467 |
|
| | | | | | | | | 4,339,309 |
| | 4,443,467 |
|
| Sailpoint Technologies, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 8/16/2021 (8) | | 8.33% | | | | 17,391,304 |
| | 17,070,160 |
| | 17,391,307 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 8/16/2021 (8)(11) | | 8.33% | | | | | | (3,067 | ) | | — |
|
| | | | | | | | | 17,067,093 |
| | 17,391,307 |
|
| Curvature, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 10/30/2023 (8)(13) | | 6.24% | | | | 9,925,000 |
| | 9,871,624 |
| | 9,701,688 |
|
| | | | | | | | | 9,871,624 |
| | 9,701,688 |
|
| Cardenas Markets LLC | | | | Food retail | | | | | | |
| First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 11/29/2023 (8)(13) | | 7.08% | | | | 3,275,250 |
| | 3,246,405 |
| | 3,254,780 |
|
| | | | | | | | | 3,246,405 |
| | 3,254,780 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Curvature, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 10/30/2023 (7)(14) | | 7.24% | | | | $ | 9,825,000 |
| | $ | 9,774,839 |
| | $ | 8,040,141 |
|
| | | | | | | | | 9,774,839 |
| | 8,040,141 |
|
| DigiCert, Inc. | | | | Internet services & infrastructure | | | | | | |
| First Lien Term Loan B, LIBOR+4% (1% floor) cash due 10/31/2024 (7)(14) | | 6.24% | | | | 4,987,500 |
| | 4,965,491 |
| | 5,007,774 |
|
| | | | | | | | | 4,965,491 |
| | 5,007,774 |
|
| Dynatect Group Holdings, Inc. | | | | Industrial machinery | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 9/30/2020 (7) | | 6.89% | | | | 3,682,754 |
| | 3,682,754 |
| | 3,573,015 |
|
| | | | | | | | | 3,682,754 |
| | 3,573,015 |
|
| Empower Payments Acquisition, Inc. | | | | Commercial printing | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 11/30/2023 (7) | | 6.74% | | | | 6,091,500 |
| | 6,000,552 |
| | 6,106,729 |
|
| | | | | | | | | 6,000,552 |
| | 6,106,729 |
|
| EnergySolutions LLC | | | | Environmental & facilities services | | | | | | |
| First Lien Term Loan B, LIBOR+3.75% (1% floor) cash due 5/9/2025 (7)(14) | | 6.14% | | | | 6,982,500 |
| | 6,949,295 |
| | 7,043,597 |
|
| | | | | | | | | 6,949,295 |
| | 7,043,597 |
|
| Eton | | | | Research & consulting services | | | | | | |
| Second Lien Term Loan, LIBOR+7.5% cash due 5/1/2026 (7)(14) | | 9.74% | | | | 5,000,000 |
| | 4,976,146 |
| | 5,025,000 |
|
| | | | | | | | | 4,976,146 |
| | 5,025,000 |
|
| Flight Bidco Inc. | | | | Alternative carriers | | | | | | |
| First Lien Term Loan, LIBOR+3.5% cash due 7/23/2025 (7)(14) | | 5.84% | | | | 7,228,916 |
| | 7,193,230 |
| | 7,237,952 |
|
| | | | | | | | | 7,193,230 |
| | 7,237,952 |
|
| Frontier Communications Corporation (6) | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan A, LIBOR+2.75% cash due 3/31/2021 (7)(14) | | 5.00% | | | | 2,957,746 |
| | 2,893,453 |
| | 2,908,766 |
|
| | | | | | | | | 2,893,453 |
| | 2,908,766 |
|
| GKD Index Partners, LLC | | | | Specialized finance | | | | | | |
| First Lien Term Loan, LIBOR+7.25% (1% floor) cash due 6/29/2023 (7) | | 9.64% | | | | 9,376,389 |
| | 9,287,452 |
| | 9,282,625 |
|
| First Lien Revolver, LIBOR+7.25% (1% floor) cash due 6/29/2023 (7) | | 9.60% | | | | 333,333 |
| | 329,118 |
| | 328,889 |
|
| | | | | | | | | 9,616,570 |
| | 9,611,514 |
|
| GOBP Holdings Inc. | | | | Hypermarkets & super centers | | | | | | |
| Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (7)(14) | | 10.49% | | | | 2,828,571 |
| | 2,800,762 |
| | 2,842,714 |
|
| | | | | | | | | 2,800,762 |
| | 2,842,714 |
|
| iCIMs, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+6.50% (1% floor), cash due 9/12/2024 (7) | | 8.64% | | | | 4,705,882 |
| | 4,612,581 |
| | 4,611,765 |
|
| First Lien Revolver, LIBOR+6.50% (1% floor), cash due 9/12/2024 (7)(10) | |
| | | | | | (5,831 | ) | | (5,882 | ) |
| | | | | | | | | 4,606,750 |
| | 4,605,883 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20172018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Ministry Brands, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 12/2/2022 (8)(13) | | 6.24% | | | | $ | 9,648,871 |
| | $ | 9,565,812 |
| | $ | 9,648,874 |
|
| First Lien Delayed Draw Term Loan, LIBOR+5% (1% floor) cash due 12/2/2022 (8)(13) | | 6.24% | | | | 3,354,904 |
| | 3,314,185 |
| | 3,354,905 |
|
| Second Lien Term Loan, LIBOR+9.25% (1% floor) cash due 6/2/2023 (8)(13) | | 10.49% | | | | 1,568,067 |
| | 1,547,561 |
| | 1,568,067 |
|
| Second Lien Delayed Draw Term Loan, LIBOR+9.25% (1% floor) cash due 6/2/2023 (8) | | 10.49% | | | | 431,933 |
| | 426,285 |
| | 431,933 |
|
| First Lien Revolver, LIBOR+5% (1% floor) cash due 12/2/2022 (8)(11) | | 6.24% | | | | | | (861 | ) | | — |
|
| | | | | | | | | 14,852,982 |
| | 15,003,779 |
|
| Impact Sales, LLC | | | | Advertising | | | | | | |
| First Lien Term Loan B, LIBOR+7% (1% floor) cash due 12/30/2021 (8) | | 8.30% | | | | 3,721,875 |
| | 3,628,868 |
| | 3,715,131 |
|
| First Lien Delayed Draw Term Loan, LIBOR+7% (1% floor) cash due 12/30/2021 (8) | | 8.30% | | | | 171,016 |
| | 171,016 |
| | 168,751 |
|
| | | | | | | | | 3,799,884 |
| | 3,883,882 |
|
| Empower Payments Acquisition, Inc. | | | | Commercial printing | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% (1% floor) cash due 11/30/2023 (8)(13) | | 6.83% | | | | 6,153,500 |
| | 6,043,807 |
| | 6,091,669 |
|
| | | | | | | | | 6,043,807 |
| | 6,091,669 |
|
| First American Payment Systems, L.P. | | | | Diversified support services | | | | | | |
| First Lien Term Loan B, LIBOR+5.75% (1% floor) cash due 1/8/2024 (8)(13) | | 6.98% | | | | 4,143,750 |
| | 4,106,872 |
| | 4,131,319 |
|
| | | | | | | | | 4,106,872 |
| | 4,131,319 |
|
| DFT Intermediate LLC | | | | Specialized finance | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 3/1/2023 (8)(13) | | 6.74% | | | | 14,962,500 |
| | 14,624,842 |
| | 14,864,020 |
|
| First Lien Revolver, LIBOR+5.5% (1% floor) cash due 3/1/2022 (8) | | 6.74% | | | | 750,000 |
| | 733,438 |
| | 745,064 |
|
| | | | | | | | | 15,358,280 |
| | 15,609,084 |
|
| Systems, Inc. | | | | Industrial machinery | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 3/3/2022 (8)(13) | | 6.57% | | | | 8,831,921 |
| | 8,715,152 |
| | 8,787,762 |
|
| First Lien Revolver, LIBOR+5.5% (1% floor) cash due 3/3/2022 (8)(11) | | 6.57% | | | | | | (7,950 | ) | | (7,920 | ) |
| | | | | | | | | 8,707,202 |
| | 8,779,842 |
|
| Onvoy, LLC | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 2/10/2024 (8)(13) | | 5.83% | | | | 7,960,000 |
| | 7,923,563 |
| | 7,962,507 |
|
| | | | | | | | | 7,923,563 |
| | 7,962,507 |
|
| Salient CRGT, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 2/28/2022 (8)(13) | | 6.99% | | | | 6,387,798 |
| | 6,275,056 |
| | 6,343,083 |
|
| | | | | | | | | 6,275,056 |
| | 6,343,083 |
|
| MHE Intermediate Holdings, LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 3/11/2024 (8)(13) | | 6.33% | | | | 11,774,771 |
| | 11,556,138 |
| | 11,774,776 |
|
| First Lien Revolver, LIBOR+5% (1% floor) cash due 3/10/2023 (8) | | 6.33% | | | | 1,353,038 |
| | 1,255,454 |
| | 1,353,038 |
|
| Delayed Draw Term Loan, LIBOR+5% (1% floor) cash due 3/11/2024 (8) | | 6.33% | | | | 1,873,430 |
| | 1,782,689 |
| | 1,873,430 |
|
| | | | | | | | | 14,594,281 |
| | 15,001,244 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Indivior Finance S.a.r.l (6) | | | | Pharmaceuticals | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 12/19/2022 (7)(14) | | 6.85% | | | | $ | 6,626,069 |
| | $ | 6,603,250 |
| | $ | 6,605,363 |
|
| | | | | | | | | 6,603,250 |
| | 6,605,363 |
|
| Internet Pipeline, Inc. | | | | Internet services & infrastructure | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 8/4/2022 (7) | | 7.00% | | | | 12,975,681 |
| | 12,964,018 |
| | 12,975,681 |
|
| First Lien Revolver, LIBOR+4.75% cash due 08/4/2021 (7) | |
| | | | | | — |
| | — |
|
| | | | | | | | | 12,964,018 |
| | 12,975,681 |
|
| Jo-Ann Stores LLC | | | | Specialty stores | | | | | | |
| First Lien Term Loan B, LIBOR+5.0% (1% floor) cash due 10/20/2023 (7)(14) | | 7.51% | | | | 3,903,305 |
| | 3,903,306 |
| | 3,927,701 |
|
| | | | | | | | | 3,903,306 |
| | 3,927,701 |
|
| Kellermeyer Bergensons Services, LLC | | | | Environmental & facilities services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 10/31/2021 (7) | | 7.32% | | | | 5,197,500 |
| | 5,162,307 |
| | 5,216,991 |
|
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 4/29/2022 (7) | | 10.84% | | | | 280,000 |
| | 280,000 |
| | 283,850 |
|
| | | | | | | | | 5,442,307 |
| | 5,500,841 |
|
| KIK Custom Products Inc. (6) | | | | Household products | | | | | | |
| First Lien Term Loan B, LIBOR+4% (1% floor) cash due 5/15/2023 (7)(14) | | 6.24% | | | | 5,000,000 |
| | 5,032,864 |
| | 4,984,375 |
|
| | | | | | | | | 5,032,864 |
| | 4,984,375 |
|
| Lannett Company, Inc. (6) | | | | Pharmaceuticals | | | | | | |
| First Lien Term Loan B, LIBOR+5.375% (1% floor) cash due 11/25/2022 (7)(14) | | 7.62% | | | | 7,768,507 |
| | 7,786,308 |
| | 6,855,746 |
|
| | | | | | | | | 7,786,308 |
| | 6,855,746 |
|
| Lytx Holdings, LLC | | | | Research & consulting services | | | | | | |
| 500 Class B Units | | | | | | | | — |
| | 203,295 |
|
| | | | | | | | | — |
| | 203,295 |
|
| McAfee, LLC | | | | Systems software | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 9/30/2024 (7)(14) | | 6.74% | | | | 6,930,000 |
| | 6,870,386 |
| | 6,995,592 |
|
| | | | | | | | | 6,870,386 |
| | 6,995,592 |
|
| McDermott Technology (Americas) Inc. (6) | | | | Oil & gas equipment & services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 5/12/2025 (7)(14) | | 7.24% | | | | 8,955,000 |
| | 8,785,515 |
| | 9,087,444 |
|
| | | | | | | | | 8,785,515 |
| | 9,087,444 |
|
| MHE Intermediate Holdings, LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 3/8/2024 (7) | | 7.39% | | | | 11,656,432 |
| | 11,473,296 |
| | 11,549,111 |
|
| First Lien Revolver, LIBOR+5% (1% floor) cash due 3/10/2023 (7) | | 7.32% | | | | 1,353,038 |
| | 1,124,091 |
| | 1,304,659 |
|
| Delayed Draw Term Loan, LIBOR+5% (1% floor) cash due 3/8/2024 (7) | | 7.39% | | | | 2,373,472 |
| | 2,400,516 |
| | 2,351,619 |
|
| | | | | | | | | 14,997,903 |
| | 15,205,389 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Ministry Brands, LLC | | | | Application software | | | | | | |
| Second Lien Term Loan, LIBOR+9.25% (1% floor) cash due 6/2/2023 (7) | | 11.75% | | | | $ | 1,568,067 |
| | $ | 1,551,179 |
| | $ | 1,575,619 |
|
| Second Lien Delayed Draw Term Loan, LIBOR+9.25% (1% floor) cash due 6/2/2023 (7) | | 11.75% | | | | 431,933 |
| | 427,282 |
| | 434,013 |
|
| First Lien Revolver, PRIME+4% (1% floor) cash due 12/2/2022 (7) | | 9.25% | | | | 30,000 |
| | 29,139 |
| | 30,000 |
|
| | | | | | | | | 2,007,600 |
| | 2,039,632 |
|
| Monitronics International, Inc. | | | | Specialized consumer services | | | | | | |
| First Lien Term Loan B2, LIBOR+5.5% (1% floor) cash due 9/30/2022 (7)(14) | | 7.89% | | | | 5,490,805 |
| | 5,492,997 |
| | 5,370,007 |
|
| | | | | | | | | 5,492,997 |
| | 5,370,007 |
|
| Morphe LLC | | | | Personal products | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 2/10/2023 (7) | | 8.40% | | | | 11,700,000 |
| | 11,595,993 |
| | 11,700,000 |
|
| | | | | | | | | 11,595,993 |
| | 11,700,000 |
|
| New Trident Holdcorp, Inc. | | | | Healthcare services | | | | | | |
| Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 7/31/2020 (7)(15) | |
| | | | 1,000,000 |
| | 806,387 |
| | 50,000 |
|
| | | | | | | | | 806,387 |
| | 50,000 |
|
| OCI Beaumont LLC (6) | | | | Commodity chemicals | | | | | | |
| First Lien Term Loan B, LIBOR+4% cash due 3/13/2025 (7)(14) | | 6.39% | | | | 4,975,000 |
| | 4,969,221 |
| | 5,055,918 |
|
| | | | | | | | | 4,969,221 |
| | 5,055,918 |
|
| Onvoy, LLC | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 2/10/2024 (7)(14) | | 6.89% | | | | 3,900,202 |
| | 3,885,170 |
| | 3,824,636 |
|
| | | | | | | | | 3,885,170 |
| | 3,824,636 |
|
| Peraton Corp. | | | | Aerospace & defense | | | | | | |
| First Lien Term Loan B, LIBOR+5.25% (1% floor) cash due 4/29/2024 (7)(14) | | 7.64% | | | | 6,418,750 |
| | 6,393,205 |
| | 6,394,680 |
|
| | | | | | | | | 6,393,205 |
| | 6,394,680 |
|
| ProFrac Services, LLC | | | | Industrial machinery | | | | | | |
| First Lien Term Loan B, LIBOR+5.75% (1% floor) cash due 9/15/2023 (7) | | 8.07% | | | | 10,000,000 |
| | 9,900,604 |
| | 9,950,000 |
|
| | | | | | | | | 9,900,604 |
| | 9,950,000 |
|
| PSI Services LLC | | | | Human resource & employment services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 1/20/2023 (7) | | 7.24% | | | | 6,669,280 |
| | 6,595,298 |
| | 6,673,261 |
|
| | | | | | | | | 6,595,298 |
| | 6,673,261 |
|
| R1 RCM Inc. (6) | | | | Healthcare services | | | | | | |
| First Lien Term Loan B, LIBOR+5.25% cash due 5/8/2025 (7) | | 7.43% | | | | 4,000,000 |
| | 3,886,229 |
| | 4,010,000 |
|
| | | | | | | | | 3,886,229 |
| | 4,010,000 |
|
| Recorded Books Inc. | | | | Publishing | | | | | | |
| First Lien Term Loan, LIBOR+4.50% cash due 8/29/2025 (7) | | 6.89% | | | | 10,500,000 |
| | 10,395,000 |
| | 10,618,125 |
|
| | | | | | | | | 10,395,000 |
| | 10,618,125 |
|
| Salient CRGT, Inc. | | | | Aerospace & defense | | | | | | |
| First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 2/28/2022 (7)(14) | | 7.99% | | | | 5,894,494 |
| | 5,814,167 |
| | 5,982,912 |
|
| | | | | | | | | 5,814,167 |
| | 5,982,912 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Sandvine Corporation (6) | | | | Communications equipment | | | | | | |
| First Lien Term Loan B, LIBOR+5.75% (1% floor) cash due 9/21/2022 (7)(14) | | 7.99% | | | | $ | 3,969,925 |
| | $ | 3,974,283 |
| | $ | 3,984,812 |
|
| | | | | | | | | 3,974,283 |
| | 3,984,812 |
|
| Sirva Worldwide, Inc. | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+5.5% cash due 8/4/2025 (7)(14) | | 7.75% | | | | 8,000,000 |
| | 7,880,000 |
| | 8,030,000 |
|
| | | | | | | | | 7,880,000 |
| | 8,030,000 |
|
| Sophia, L.P. | | | | Systems software | | | | | | |
| First Lien Term Loan B, LIBOR+3.25% (1% floor) cash due 9/30/2022 (7)(14) | | 5.64% | | | | 1,453,087 |
| | 1,449,504 |
| | 1,461,116 |
|
| | | | | | | | | 1,449,504 |
| | 1,461,116 |
|
| TravelCLICK, Inc. | | | | Data processing & outsourced services | | | | | | |
| Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/6/2021 (7) | | 9.99% | | | | 1,147,152 |
| | 1,124,362 |
| | 1,147,152 |
|
| | | | | | | | | 1,124,362 |
| | 1,147,152 |
|
| Tribe Buyer LLC | | | | Human resources & employment services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 2/16/2024 (7)(14) | | 6.74% | | | | 2,969,849 |
| | 2,963,247 |
| | 2,992,123 |
|
| | | | | | | | | 2,963,247 |
| | 2,992,123 |
|
| Truck Hero, Inc. | | | | Auto parts & equipment | | | | | | |
| First Lien Term Loan, LIBOR+3.75% (1% floor) cash due 4/22/2024 (7)(14) | | 5.96% | | | | 5,798,600 |
| | 5,810,752 |
| | 5,823,070 |
|
| | | | | | | | | 5,810,752 |
| | 5,823,070 |
|
| TV Borrower US, LLC (6) | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 2/22/2024 (7)(14) | | 7.14% | | | | 1,906,643 |
| | 1,899,304 |
| | 1,913,602 |
|
| | | | | | | | | 1,899,304 |
| | 1,913,602 |
|
| UFC Holdings, LLC | | | | Movies & entertainment | | | | | | |
| First Lien Term Loan B, LIBOR+3.25% (1% floor) cash due 8/18/2023 (7)(14) | | 5.50% | | | | 2,992,386 |
| | 2,995,985 |
| | 3,013,662 |
|
| | | | | | | | | 2,995,985 |
| | 3,013,662 |
|
| Ultra Resources, Inc. (6) | | | | Oil & gas exploration & production | | | | | | |
| First Lien EXIT Term Loan, LIBOR+3% cash due 4/12/2024 (7)(14) | | 5.17% | | | | 5,000,000 |
| | 4,707,408 |
| | 4,519,800 |
|
| | | | | | | | | 4,707,408 |
| | 4,519,800 |
|
| Uniti Group LP (6) | | | | Specialized REITs | | | | | | |
| First Lien Term Loan B, LIBOR+3% (1% floor) cash due 10/24/2022 (7)(14) | | 5.24% | | | | 8,939,470 |
| | 8,662,946 |
| | 8,567,364 |
|
| | | | | | | | | 8,662,946 |
| | 8,567,364 |
|
| UOS, LLC | | | | Trading companies & distributors | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% (1% floor) cash due 4/18/2023 (7)(14) | | 7.74% | | | | 7,909,900 |
| | 8,066,137 |
| | 8,097,760 |
|
| | | | | | | | | 8,066,137 |
| | 8,097,760 |
|
| Veritas US Inc. | | | | Application software | | | | | | |
| First Lien Term Loan B-1, LIBOR+4.5% (1% floor) cash due 1/27/2023 (7)(14) | | 6.78% | | | | 12,943,283 |
| | 13,062,585 |
| | 12,639,957 |
|
| | | | | | | | | 13,062,585 |
| | 12,639,957 |
|
| Verscend Holding Corp. | | | | Healthcare technology | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 8/27/2025 (7)(14) | | 6.74% | | | | 9,000,000 |
| | 8,932,500 |
| | 9,091,890 |
|
| | | | | | | | | 8,932,500 |
| | 9,091,890 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20172018
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Paris Presents Incorporated | | | | Personal Products | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 12/31/2020 (8)(13) | | 6.24% | | | | $ | 3,134,006 |
| | $ | 3,106,950 |
| | $ | 3,134,006 |
|
| Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 12/31/2021 (8)(13) | | 9.99% | | | | 3,500,000 |
| | 3,437,500 |
| | 3,465,000 |
|
| | | | | | | | | 6,544,450 |
| | 6,599,006 |
|
| PSI Services LLC | | | | Human Resource & Employment Services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 1/20/2023 (8)(13) | | 6.24% | | | | 6,736,979 |
| | 6,644,622 |
| | 6,616,844 |
|
| | | | | | | | | 6,644,622 |
| | 6,616,844 |
|
| MHVC Acquisition Corp. | | | | Aerospace & Defense | | | | | | |
| First Lien Term Loan B, LIBOR+5.25% (1% floor) cash due 4/25/2024 (8)(13) | | 6.49% | | | | 6,483,750 |
| | 6,453,287 |
| | 6,556,692 |
|
| | | | | | | | | 6,453,287 |
| | 6,556,692 |
|
| LSF9 Atlantis Holdings, LLC | | | | Computer & Electronics Retail | | | | | | |
| First Lien Term Loan B, LIBOR+6% (1% floor) cash due 5/1/2023 (8)(13) | | 7.24% | | | | 7,453,125 |
| | 7,383,862 |
| | 7,498,142 |
|
| | | | | | | | | 7,383,862 |
| | 7,498,142 |
|
| Everi Payments Inc. | | | | Casinos & gaming | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 5/9/2024 (8)(13)(16) | | 5.74% | | | | 4,987,500 |
| | 4,963,767 |
| | 5,038,622 |
|
| | | | | | | | | 4,963,767 |
| | 5,038,622 |
|
| BJ's Wholesale Club, Inc. | | | | Hypermarkets & super centers | | | | | | |
| First Lien Term Loan B, LIBOR+3.75% (1% floor) cash due 1/26/2024 (8)(16) | | 4.98% | | | | 2,992,500 |
| | 2,996,051 |
| | 2,876,002 |
|
| | | | | | | | | 2,996,051 |
| | 2,876,002 |
|
| Bass Pro Group, LLC | | | | Specialty Stores | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 12/15/2023 (8) | | 6.24% | | | | 6,000,000 |
| | 5,877,353 |
| | 5,667,480 |
|
| | | | | | | | | 5,877,353 |
| | 5,667,480 |
|
| Imagine! Print Solutions, LLC | | | | Advertising | | | | | | |
| First Lien Term Loan B, LIBOR+4.75% (1% floor) cash due 6/21/2022 (8) | | 6.09% | | | | 6,965,000 |
| | 6,898,900 |
| | 6,999,825 |
|
| | | | | | | | | 6,898,900 |
| | 6,999,825 |
|
| MND Holdings III Corp. | | | | Specialty Stores | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 6/19/2024 (8)(13) | | 5.83% | | | | 2,493,750 |
| | 2,481,733 |
| | 2,526,480 |
|
| | | | | | | | | 2,481,733 |
| | 2,526,480 |
|
| Veritas US Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 1/27/2023 (8)(16) | | 5.83% | | | | 10,077,193 |
| | 10,215,779 |
| | 10,189,503 |
|
| | | | | | | | | 10,215,779 |
| | 10,189,503 |
|
| UOS, LLC | | | | Trucking | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% (1% floor) cash due 4/18/2023 (8) | | 6.74% | | | | 3,990,000 |
| | 4,079,548 |
| | 4,099,725 |
|
| | | | | | | | | 4,079,548 |
| | 4,099,725 |
|
| Accudyne Industries, LLC | | | | Oil & gas equipment & services | | | | | | |
| First Lien Term Loan, LIBOR+3.75% (1% floor) cash due 8/18/2024 (8)(16) | | 5.01% | | | | 14,000,000 |
| | 14,057,018 |
| | 14,052,500 |
|
| | | | | | | | | 14,057,018 |
| | 14,052,500 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| DTZ U.S. Borrower, LLC | | | | Real Estate Services | | | | | | |
| First Lien Term Loan, LIBOR+3.25% (1% floor) cash due 11/4/2021 (8)(16) | | 4.57% | | | | $ | 12,211,343 |
| | $ | 12,247,424 |
| | $ | 12,256,098 |
|
| | | | | | | | | 12,247,424 |
| | 12,256,098 |
|
| Truck Hero, Inc. | | | | Auto parts & equipment | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 4/22/2024 (8) | | 5.33% | | | | 5,857,320 |
| | 5,871,777 |
| | 5,798,747 |
|
| | | | | | | | | 5,871,777 |
| | 5,798,747 |
|
| Alphabet Holding Company, Inc. | | | | Healthcare distributors | | | | | | |
| First Lien Term Loan, LIBOR+3.5% (1% floor) cash due 9/26/2024 (8) | | 4.83% | | | | 5,000,000 |
| | 4,975,000 |
| | 4,948,950 |
|
| | | | | | | | | 4,975,000 |
| | 4,948,950 |
|
| McAfee, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 9/30/2024 (8) | | 5.83% | | | | 7,000,000 |
| | 6,930,000 |
| | 7,072,905 |
|
| | | | | | | | | 6,930,000 |
| | 7,072,905 |
|
| | | | | | | | | | | |
| Total Non-Control/Non-Affiliate Investments (170.9% of net assets) | | | | | | | | $ | 516,270,639 |
| | $ | 501,894,073 |
|
| Total Portfolio Investments (190.9% of net assets) | | | | | | | | $ | 605,090,324 |
| | $ | 560,436,660 |
|
| Cash and Cash Equivalents | | | | | | | | | | |
Wells Fargo Bank Institutional Money Market Fund
| | | | | | | | $ | 32,214,184 |
| | $ | 32,214,184 |
|
| JP Morgan Prime Money Market Fund | | | | | | | | 3,118,675 |
| | 3,118,675 |
|
| Other cash accounts | | | | | | | | 271,268 |
| | 271,268 |
|
| Total Cash and Cash Equivalents (12.1% of net assets) | | | | | | | | $ | 35,604,127 |
| | $ | 35,604,127 |
|
| Total Portfolio Investments, Cash and Cash Equivalents (203.0% of net assets) | | | | | | | | $ | 640,694,451 |
| | $ | 596,040,787 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(8)(9)(12) | | Cash Interest Rate (7) | | Industry (17) | | Principal (4) |
| | Cost | | Fair Value |
| Vine Oil & Gas LP | | | | Oil & gas exploration & production | | | | | | |
| First Lien Term Loan B, LIBOR+6.875% (1% floor) cash due 11/25/2021 (7)(14) | | 9.12% | | | | $ | 10,000,000 |
| | $ | 9,929,758 |
| | $ | 10,075,000 |
|
| | | | | | | | | 9,929,758 |
| | 10,075,000 |
|
| Windstream Services, LLC (6) | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan B6, LIBOR+4% (0.75% floor) cash due 3/29/2021 (7)(14) | | 6.16% | | | | 7,403,715 |
| | 7,141,079 |
| | 7,098,312 |
|
| | | | | | | | | 7,141,079 |
| | 7,098,312 |
|
| Woodford Express LLC | | | | Oil & gas exploration & production | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 1/27/2025 (7)(14) | | 7.24% | | | | 14,925,000 |
| | 14,789,478 |
| | 14,906,418 |
|
| | | | | | | | | 14,789,478 |
| | 14,906,418 |
|
| WP CPP Holdings, LLC | | | | Aerospace & defense | | | | | | |
| First Lien Term Loan B, LIBOR+3.75% (1% floor) cash due 4/30/2025 (7)(14) | | 6.21% | | | | 4,500,000 |
| | 4,488,934 |
| | 4,534,695 |
|
| Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 4/30/2026 (7)(14) | | 10.15% | | | | 1,000,000 |
| | 990,142 |
| | 1,002,190 |
|
| | | | | | | | | 5,479,076 |
| | 5,536,885 |
|
| Zep Inc. | | | | Specialty chemicals | | | | | | |
| First Lien Term Loan B, LIBOR+4% (1% floor) cash due 8/12/2024 (7)(14) | | 6.39% | | | | 4,702,500 |
| | 4,740,634 |
| | 4,487,948 |
|
| | | | | | | | | 4,740,634 |
| | 4,487,948 |
|
| Zephyr Bidco Limited (6) | | | | Specialized finance | | | | | | |
| First Lien Term Loan B1, UK LIBOR+4.75% cash due 7/23/2025 (7)(14) | | 5.47% | | | | £ | 5,000,000 |
| | 6,667,495 |
| | 6,541,082 |
|
| | | | | | | | | 6,667,495 |
| | 6,541,082 |
|
| Total Non-Control/Non-Affiliate Investments (168.5% of net assets) | | | | | | | | $ | 499,423,794 |
| | $ | 498,329,658 |
|
| Total Portfolio Investments (188.3% of net assets) | | | | | | | | $ | 572,925,764 |
| | $ | 556,841,828 |
|
| Total Cash and Cash Equivalents (3.5% of net assets) | | | | | | | | $ | 10,439,023 |
| | $ | 10,439,023 |
|
| Total Portfolio Investments, Cash and Cash Equivalents (191.8% of net assets) | | | | | | | | $ | 583,364,787 |
| | $ | 567,280,851 |
|
|
| | | | | | | | | | | | | | | | |
| Derivatives Instrument | | Notional Amount to be Purchased | | Notional Amount to be Sold | | Maturity Date | | Counterparty | | Unrealized Appreciation (Depreciation) |
| Foreign currency forward contract | | $ | 6,541,130 |
| | £ | 4,975,000 |
| | 10/26/2018 | | J.P. Morgan | | $ | 45,807 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2017
| |
| (1) | All debt investments are income producing unless otherwise noted. All equity investments are non-income producing unless otherwise noted. |
| |
| (2) | See Note 3 in the accompanying notes to the Consolidated Financial Statements for portfolio composition by geographic region. |
| |
| (3) | Control Investments generally are defined by the Investment Company Act of 1940, as amended ("1940Investment Company Act"), as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation. |
| |
| (4) | Principal includes accumulated payment in kind ("PIK") interest and is net of repayments, if any. “£” signifies the investment is denominated in British Pounds. All other investments are denominated in U.S. dollars. |
| |
| (5) | Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments. Affiliate Investments generally are defined by the 1940Investment Company Act as investments in companies in which the Company owns between 5% and 25% of the voting securities. |
| |
(5) | Principal includes accumulated payment in kind ("PIK") interest and is net of repayments, if any.securities |
| |
| (6) | Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments. |
| |
(7) | Investment is not a qualifying asset as defined under Section 55(a) of the 1940Investment Company Act. Under the 1940Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. As of JuneSeptember 30, 2017,2018, qualifying assets represented 89.6%73.6% of the Company's total assets and non-qualifying assets represented 10.4%26.4% of the Company's total assets. |
| |
(8)(7) | The interest rate on the principal balance outstanding for all floating rate loans is indexed to the London Interbank Offered Rate ("LIBOR") and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement and the cash interest rate as of period end. All LIBOR shown above is in U.S. dollars unless otherwise noted. As of September 30, 2018, the reference rates for our variable rate loans were the 30-day LIBOR at 2.24%, 60-day LIBOR at 2.29%, the 90-day LIBOR at 2.39%, the 180-day LIBOR at 2.59%, the PRIME at 5.25% and the 30-day UK LIBOR at 0.72%. |
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2018
| |
(9)(8) | Interest rates may be adjusted from period to period on certain term loans and revolvers. These rate adjustments may be either temporary in nature due to tier pricing arrangements or financial or payment covenant violations in the original credit agreements or permanent in nature per loan amendment or waiver documents. |
| |
(10)(9) | Each of the Company's investments is pledged as collateral under one or more of its credit facilities or its debt securitization.facilities. A single investment may be divided into parts that are individually pledged as collateral to separate credit facilities. |
| |
(11)(10) | Investment has undrawn commitments. Unamortized fees are classified as unearned income which reduces cost basis, which may result in a negative cost basis. A negative fair value may result from the unfunded commitment being valued below par. |
| |
(12)(11) | As defined in the 1940Investment Company Act, the Company is deemed to be both an "Affiliated Person" of and to "Control" this portfolio company as the Company owns more than 25% of the portfolio company's outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). See Schedule 12-14 in the accompanying notes to the Consolidated Financial Statements for transactions during the year ended September 30, 20172018 in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to control. |
| |
(13) | Investment pledged as collateral under the Company's 2015 Debt Securitization (as defined in Note 6 -Borrowings), in whole or in part.
|
| |
(14)(12) | Equity ownership may be held in shares or units of companies related to the portfolio companies. |
| |
(15)(13) | See Note 3 to the Consolidated Financial Statements for portfolio composition. |
| |
(16)(14) | As of September 30, 2017,2018, these investments are categorized as levelLevel 2 within the fair value hierarchy established by FASB ASCFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurements and Disclosures ("ASC 820"). All other investments, with the exception of investments valued using net asset value as a practical expedient, are categorized as levelLevel 3 as of September 30, 20172018 and were valued using significant unobservable inputs. |
| |
| (15) | This investment was on cash non-accrual status as of September 30, 2018. Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable. |
| |
| (16) | This investment was valued using net asset value as a practical expedient for fair value. Consistent with FASB guidance under ASC 820, these investments are excluded from the hierarchical levels. |
| |
| (17) | As of September 30, 2018, certain industry classifications were modified primarily as a result of changes to industry information provided by a third party source. |
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20162017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Control Investments (3) | | | | | | | | | | |
| FSFR Glick JV LLC (7)(12)(18) | | | | Multi-sector holdings | | | | | | |
| Subordinated Note, LIBOR+8% cash due 10/20/2021 (8) | | 8.47% | | | | $ | 64,005,755 |
| | $ | 64,005,755 |
| | $ | 56,885,646 |
|
| 87.5% equity interest (14) | | | | | | | | 7,111,751 |
| | 6,431,021 |
|
| | | | | | | | | 71,117,506 |
| | 63,316,667 |
|
| Total Control Investments (19.4% of net assets) | | | | | | | | $ | 71,117,506 |
| | $ | 63,316,667 |
|
| Affiliate Investments (4) | | | | | | | | | | |
| Ameritox Ltd. (15) | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash 3% PIK due 4/11/2021 (8)(13) | | 6.00% | | | | 6,387,128 |
| | $ | 6,380,832 |
| | $ | 6,342,286 |
|
| 3,309,873.6 Class A Preferred Units in Ameritox Holdings II, LLC | | | | | | | | 3,309,874 |
| | 3,626,150 |
|
| 327,393.6 Class B Preferred Units in Ameritox Holdings II, LLC | | | | | | | | 327,394 |
| | 358,679 |
|
| 1,007.36 Class A Units in Ameritox Holdings II, LLC | | | | | | | | 5,935,698 |
| | 2,679,343 |
|
| | | | | | | | | 15,953,798 |
| | 13,006,458 |
|
| Total Affiliate Investments (4.0% of net assets) | | | | | | | | $ | 15,953,798 |
| | $ | 13,006,458 |
|
| | | | | | | | | | | |
| Non-Control/Non-Affiliate Investments (6) | | | | | | | | | | |
| Triple Point Group Holdings, Inc. | | | | Application software | | | | | | |
| First Lien Revolver, LIBOR+4.25% (1% floor) cash due 7/10/2018 (8) | | 5.25% | | | | | | — |
| | — |
|
| | | | | | | | | — |
| | — |
|
| Blackhawk Specialty Tools, LLC | | | | Oil & gas equipment & services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1.25% floor) cash due 8/1/2019 (8)(13) | | 6.50% | | | | 4,249,996 |
| | 4,177,081 |
| | 4,090,429 |
|
| | | | | | | | | 4,177,081 |
| | 4,090,429 |
|
| New Trident Holdcorp, Inc. | | | | Healthcare services | | | | | | |
| First Lien Term Loan B, LIBOR+5.25% (1.25% floor) cash due 7/31/2019 (8)(13) | | 6.50% | | | | 13,707,532 |
| | 13,289,778 |
| | 11,788,478 |
|
| Second Lien Term Loan, LIBOR+9% (1.25% floor) cash due 7/31/2020 (8) | | 10.25% | | | | 1,000,000 |
| | 972,500 |
| | 820,000 |
|
| | | | | | | | | 14,262,278 |
| | 12,608,478 |
|
| NXT Capital, LLC | | | | Diversified capital markets | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 9/4/2018 (8)(13) | | 6.25% | | | | 8,719,887 |
| | 8,685,189 |
| | 8,763,486 |
|
| | | | | | | | | 8,685,189 |
| | 8,763,486 |
|
| Vitera Healthcare Solutions, LLC | | | | Healthcare technology | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 11/4/2020 (8)(13) | | 6.00% | | | | 4,862,500 |
| | 4,856,420 |
| | 4,747,016 |
|
| | | | | | | | | 4,856,420 |
| | 4,747,016 |
|
| The Active Network, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 11/15/2021 (8)(13) | | 9.50% | | | | 2,400,000 |
| | 2,314,573 |
| | 2,370,000 |
|
| | | | | | | | | 2,314,573 |
| | 2,370,000 |
|
| Accruent, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 5/16/2022 (8) | | 6.25% | | | | 9,975,000 |
| | 9,881,944 |
| | 9,994,012 |
|
| First Lien Revolver, LIBOR+5.25% (1% floor) cash due 5/16/2022 (8)(11) | | 6.25% | | | | | | (791 | ) | | — |
|
| | | | | | | | | 9,881,153 |
| | 9,994,012 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2016
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Survey Sampling International, LLC | | | | Research & consulting services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 12/16/2020 (8)(13) | | 6.00% | | | | $ | 5,726,682 |
| | $ | 5,691,793 |
| | $ | 5,726,682 |
|
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/16/2021 (8) | | 10.00% | | | | 1,000,000 |
| | 985,238 |
| | 980,000 |
|
| | | | | | | | | 6,677,031 |
| | 6,706,682 |
|
| Answers Corporation | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 10/3/2021 (8)(13) | | 6.25% | | | | 11,820,000 |
| | 11,421,760 |
| | 6,382,800 |
|
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 10/3/2022 (8) | | 10.00% | | | | 8,000,000 |
| | 7,605,257 |
| | 773,360 |
|
| | | | | | | | | 19,027,017 |
| | 7,156,160 |
|
| Maxor National Pharmacy Services, LLC | | | | Pharmaceuticals | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1.25% floor) cash due 1/31/2020 (8)(13) | | 6.50% | | | | 9,162,870 |
| | 9,162,870 |
| | 9,033,850 |
|
| | | | | | | | | 9,162,870 |
| | 9,033,850 |
|
| NextCare, Inc. | | | | Healthcare services | | | | | | |
| Senior Term Loan, LIBOR+7.5% (1% floor) cash due 7/31/2018 (8)(13) | | 8.50% | | | | 7,029,160 |
| | 7,029,160 |
| | 6,744,944 |
|
| Delayed Draw Term Loan, LIBOR+7.5% (1% floor) cash due 7/31/2018 (8) | | 8.50% | | | | 1,407,969 |
| | 1,407,969 |
| | 1,330,269 |
|
| | | | | | | | | 8,437,129 |
| | 8,075,213 |
|
| Aptean, Inc. | | | | Application software | | | | | | |
| Second Lien Term Loan, LIBOR+7.5% (1% floor) cash due 2/26/2021 (8) | | 8.50% | | | | 1,250,000 |
| | 1,240,179 |
| | 1,232,038 |
|
| | | | | | | | | 1,240,179 |
| | 1,232,038 |
|
| Stratus Technologies, Inc. | | | | Computer hardware | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 4/28/2021 (8)(13) | | 6.00% | | | | 4,003,658 |
| | 3,956,802 |
| | 3,903,567 |
|
| | | | | | | | | 3,956,802 |
| | 3,903,567 |
|
| TravelCLICK, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/6/2021 (8)(13) | | 8.75% | | | | 3,380,000 |
| | 3,299,165 |
| | 3,027,128 |
|
| | | | | | | | | 3,299,165 |
| | 3,027,128 |
|
| GTCR Valor Companies, Inc. | | | | Advertising | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 6/16/2023 (8)(13) | | 7.00% | | | | 12,219,375 |
| | 11,607,301 |
| | 11,688,626 |
|
| | | | | | | | | 11,607,301 |
| | 11,688,626 |
|
| ConvergeOne Holdings Corp. | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 6/17/2020 (8)(13) | | 6.00% | | | | 5,343,010 |
| | 5,316,746 |
| | 5,322,974 |
|
| | | | | | | | | 5,316,746 |
| | 5,322,974 |
|
| Verdesian Life Sciences, LLC | | | | Fertilizers & agricultural chemicals | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 7/1/2020 (8)(13) | | 6.00% | | | | 3,554,890 |
| | 3,522,668 |
| | 3,377,146 |
|
| | | | | | | | | 3,522,668 |
| | 3,377,146 |
|
| PR Wireless, Inc. | | | | Wireless telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+9% (1% floor) cash due 6/29/2020 (7)(8) | | 10.00% | | | | 5,836,771 |
| | 5,719,729 |
| | 4,111,317 |
|
| 35.5263 Common Stock Warrants (exercise price $0.01) expiration date 6/27/2024 (7) | | | | | | | | — |
| | 120,342 |
|
| | | | | | | | | 5,719,729 |
| | 4,231,659 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2016
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| TV Borrower US, LLC | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 1/8/2021 (7)(8)(13) | | 6.00% | | | | $ | 6,086,385 |
| | $ | 5,973,885 |
| | $ | 6,063,561 |
|
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 7/8/2021 (7)(8)(13) | | 9.50% | | | | 3,000,000 |
| | 2,921,780 |
| | 2,910,000 |
|
| | | | | | | | | 8,895,665 |
| | 8,973,561 |
|
| American Dental Partners, Inc. | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 8/30/2021 (8)(13) | | 5.75% | | | | 5,880,000 |
| | 5,860,000 |
| | 5,791,800 |
|
| | | | | | | | | 5,860,000 |
| | 5,791,800 |
|
| BeyondTrust Software, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/25/2019 (8)(13) | | 8.00% | | | | 18,381,895 |
| | 18,136,331 |
| | 18,309,259 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 9/25/2019 (8)(11) | | 8.00% | | | | | | (30,304 | ) | | — |
|
| 500,000 Class A membership interests in BeyondTrust Holdings LLC | | | | | | | | 500,000 |
| | 613,869 |
|
| | | | | | | | | 18,606,027 |
| | 18,923,128 |
|
| Hill International, Inc. | | | | Construction & engineering | | | | | | |
| First Lien Term Loan, LIBOR+6.75% (1% floor) cash due 9/26/2020 (8)(13) | | 7.75% | | | | 5,978,000 |
| | 5,907,850 |
| | 5,768,770 |
|
| | | | | | | | | 5,907,850 |
| | 5,768,770 |
|
| Teaching Strategies, LLC | | | | Education services | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (8)(13) | | 6.34% | | | | 15,252,341 |
| | 15,262,322 |
| | 15,293,164 |
|
| First Lien Revolver, LIBOR+5.5% (0.5% floor) cash due 10/1/2019 (8) | | 6.34% | | | | | | — |
| | — |
|
| | | | | | | | | 15,262,322 |
| | 15,293,164 |
|
| Dynatect Group Holdings, Inc. | | | | Industrial machinery | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 9/30/2020 (8) | | 5.50% | | | | 3,826,203 |
| | 3,826,203 |
| | 3,778,376 |
|
| First Lien Delayed Draw Term Loan, LIBOR+4.5% (1% floor) cash due 9/30/2020 (8) | | 5.50% | | | | | | — |
| | — |
|
| | | | | | | | | 3,826,203 |
| | 3,778,376 |
|
| Idera, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 4/9/2021 (8)(13) | | 6.50% | | | | 17,356,053 |
| | 16,490,668 |
| | 16,878,761 |
|
| | | | | | | | | 16,490,668 |
| | 16,878,761 |
|
| Central Security Group, Inc. | | | | Specialized consumer services | | | | | | |
| First Lien Term Loan, LIBOR+5.625% (1% floor) cash due 10/6/2020 (8) | | 6.63% | | | | 2,539,726 |
| | 2,532,917 |
| | 2,482,582 |
|
| | | | | | | | | 2,532,917 |
| | 2,482,582 |
|
| Kellermeyer Bergensons Services, LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 10/29/2021 (8)(13) | | 6.00% | | | | 5,265,325 |
| | 5,211,587 |
| | 5,081,038 |
|
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 4/29/2022 (8)(13) | | 9.50% | | | | 280,000 |
| | 280,000 |
| | 266,000 |
|
| | | | | | | | | 5,491,587 |
| | 5,347,038 |
|
| GOBP Holdings Inc. | | | | Food retail | | | | | | |
| Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (8)(13) | | 9.25% | | | | 3,685,714 |
| | 3,635,831 |
| | 3,685,714 |
|
| | | | | | | | | 3,635,831 |
| | 3,685,714 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry (19) | | Principal (5) |
| | Cost | | Fair Value |
| Control Investments (3) | | | | | | | | | | |
| OCSI Glick JV LLC (7)(12)(15) | | | | Multi-sector holdings | | | | | | |
| Subordinated Note, LIBOR+8% cash due 10/20/2021 (8) | | 9.23% | | | | $ | 64,228,881 |
| | $ | 64,228,881 |
| | $ | 57,606,674 |
|
| 87.5% equity interest (17) | | | | | | | | 7,111,751 |
| | — |
|
| | | | | | | | | 71,340,632 |
| | 57,606,674 |
|
| Total Control Investments (19.6% of net assets) | | | | | | | | $ | 71,340,632 |
| | $ | 57,606,674 |
|
| Affiliate Investments (4) | | | | | | | | | | |
| Ameritox Ltd. | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash 3% PIK due 4/11/2021 (8)(13)(18) | | 6.33% | | | | 8,071,313 |
| | $ | 7,906,087 |
| | $ | 935,913 |
|
| 3,309,873.6 Class A Preferred Units in Ameritox Holdings II, LLC | | | | | | | | 3,309,874 |
| | — |
|
| 327,393.6 Class B Preferred Units in Ameritox Holdings II, LLC | | | | | | | | 327,394 |
| | — |
|
| 1,007.36 Class A Units in Ameritox Holdings II, LLC | | | | | | | | 5,935,698 |
| | — |
|
| | | | | | | | | 17,479,053 |
| | 935,913 |
|
| Total Affiliate Investments (0.3% of net assets) | | | | | | | | $ | 17,479,053 |
| | $ | 935,913 |
|
| | | | | | | | | | | |
| Non-Control/Non-Affiliate Investments (6) | | | | | | | | | | |
| 4 Over International, LLC | | | | Commercial printing | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 6/7/2022 (8)(13) | | 7.24% | | | | 5,850,412 |
| | $ | 5,804,485 |
| | $ | 5,850,463 |
|
| First Lien Revolver, LIBOR+6% (1% floor) cash due 6/7/2021 (8)(11) | | | | | | | | (502 | ) | | — |
|
| | | | | | | | | 5,803,983 |
| | 5,850,463 |
|
| Accudyne Industries, LLC | | | | Oil & gas equipment & services | | | | | | |
| First Lien Term Loan, LIBOR+3.75% (1% floor) cash due 8/18/2024 (8)(16) | | 5.01% | | | | 14,000,000 |
| | 14,057,018 |
| | 14,052,500 |
|
| | | | | | | | | 14,057,018 |
| | 14,052,500 |
|
| Allied Universal Holdco, LLC (f/k/a USAGM Holdco, LLC) | | | | Security & alarm services | | | | | | |
| First Lien Term Loan, LIBOR+3.75% (1% floor) cash due 7/28/2022 (8)(16) | | 5.08% | | | | 7,979,747 |
| | 8,018,318 |
| | 7,972,286 |
|
| | | | | | | | | 8,018,318 |
| | 7,972,286 |
|
| All Web Leads, Inc. | | | | Advertising | | | | | | |
| First Lien Term Loan, LIBOR+7.5% (1% floor) cash due 12/29/2020 (8)(13) | | 8.77% | | | | 25,839,538 |
| | 25,839,538 |
| | 23,192,266 |
|
| | | | | | | | | 25,839,538 |
| | 23,192,266 |
|
| Alphabet Holding Company, Inc. | | | | Healthcare distributors | | | | | | |
| First Lien Term Loan, LIBOR+3.5% (1% floor) cash due 9/26/2024 (8) | | 4.83% | | | | 5,000,000 |
| | 4,975,000 |
| | 4,948,950 |
|
| | | | | | | | | 4,975,000 |
| | 4,948,950 |
|
| Ancile Solutions, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 6/30/2021 (8)(13) | | 8.33% | | | | 9,881,312 |
| | 9,664,392 |
| | 9,802,707 |
|
| | | | | | | | | 9,664,392 |
| | 9,802,707 |
|
| Aptean, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+4.25% (1% floor) cash due 12/20/2022 (8)(13) | | 5.59% | | | | 11,243,500 |
| | 11,170,440 |
| | 11,323,161 |
|
| Second Lien Term Loan, LIBOR+9.5% (1% floor) cash due 12/20/2023 (8) | | 10.84% | | | | 200,000 |
| | 197,320 |
| | 201,750 |
|
| | | | | | | | | 11,367,760 |
| | 11,524,911 |
|
| Aptos, Inc. | | | | Data processing & outsourced services | | | | | | |
| First Lien Term Loan, LIBOR+6.75% (1% floor) cash due 9/1/2022 (8)(13) | | 8.08% | | | | 5,940,000 |
| | 5,842,031 |
| | 5,880,600 |
|
| | | | | | | | | 5,842,031 |
| | 5,880,600 |
|
| Bass Pro Group, LLC | | | | Specialty stores | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 12/15/2023 (8) | | 6.24% | | | | 6,000,000 |
| | 5,877,353 |
| | 5,667,480 |
|
| | | | | | | | | 5,877,353 |
| | 5,667,480 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20162017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| NAVEX Global, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/19/2021 (8)(13) | | 5.99% | | | | $ | 3,450,918 |
| | $ | 3,440,820 |
| | $ | 3,433,662 |
|
| Second Lien Term Loan, LIBOR+9.5% (1% floor) cash due 11/18/2022 (8) | | 10.31% | | | | 1,438,468 |
| | 1,438,468 |
| | 1,395,314 |
|
| | | | | | | | | 4,879,288 |
| | 4,828,976 |
|
| Executive Consulting Group, LLC | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/21/2019 (8)(13) | | 5.75% | | | | 7,000,000 |
| | 7,000,000 |
| | 6,960,668 |
|
| Delayed Draw Term Loan, LIBOR+4.75% (1% floor) cash due 11/21/2019 (8) | | 5.75% | | | | 4,000,000 |
| | 4,000,000 |
| | 3,979,448 |
|
| | | | | | | | | 11,000,000 |
| | 10,940,116 |
|
| TIBCO Software, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 12/4/2020 (8) | | 6.50% | | | | 7,919,400 |
| | 7,590,582 |
| | 7,823,932 |
|
| First Lien Revolver, LIBOR+4% cash due 11/25/2020 (8) | | 4.24% | | | | | | — |
| | — |
|
| | | | | | | | | 7,590,582 |
| | 7,823,932 |
|
| Metamorph US 3, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 12/1/2020 (8)(13) | | 7.50% | | | | 14,223,467 |
| | 14,181,149 |
| | 11,840,322 |
|
| First Lien Revolver, LIBOR+6.5% (1% floor) cash due 12/1/2020 (8)(13) | | 7.50% | | | | 600,000 |
| | 573,856 |
| | 600,000 |
|
| | | | | | | | | 14,755,005 |
| | 12,440,322 |
|
| Compuware Corporation | | | | Internet software & services | | | | | | |
| First Lien Term Loan B1, LIBOR+5.25% (1% floor) cash due 12/15/2019 (8)(13) | | 6.25% | | | | 7,825,554 |
| | 7,720,514 |
| | 7,854,900 |
|
| First Lien Term Loan B2, LIBOR+5.25% (1% floor) cash due 12/15/2021 (8) | | 6.25% | | | | 905,896 |
| | 889,191 |
| | 904,198 |
|
| | | | | | | | | 8,609,705 |
| | 8,759,098 |
|
| AF Borrower, LLC | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 1/28/2022 (8)(13) | | 6.25% | | | | 1,036,642 |
| | 1,020,406 |
| | 1,041,612 |
|
| | | | | | | | | 1,020,406 |
| | 1,041,612 |
|
| TrialCard Incorporated | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 12/31/2019 (8)(13) | | 5.50% | | | | 9,874,962 |
| | 9,869,718 |
| | 9,827,027 |
|
| First Lien Revolver, LIBOR+4.5% (1% floor) cash due 12/31/2019 (8)(11) | | 5.50% | | | | | | (375 | ) | | — |
|
| | | | | | | | | 9,869,343 |
| | 9,827,027 |
|
| Motion Recruitment Partners LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 2/13/2020 (8)(13) | | 7.00% | | | | 14,235,000 |
| | 14,224,241 |
| | 14,250,584 |
|
| First Lien Revolver, LIBOR+6% (1% floor) cash due 2/13/2020 (8)(11) | | 7.00% | | | | | | (960 | ) | | — |
|
| | | | | | | | | 14,223,281 |
| | 14,250,584 |
|
| PowerPlan, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 2/23/2022 (8)(13) | | 5.75% | | | | 16,737,833 |
| | 16,710,709 |
| | 16,731,213 |
|
| First Lien Revolver, LIBOR+4.75% (1% floor) cash due 2/23/2021 (8) | | 5.75% | | | | | | — |
| | — |
|
| | | | | | | | | 16,710,709 |
| | 16,731,213 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry (19) | | Principal (5) |
| | Cost | | Fair Value |
| BeyondTrust Software, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/25/2019 (8)(13) | | 8.33% | | | | $ | 16,384,644 |
| | $ | 16,255,828 |
| | $ | 16,384,050 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 9/25/2019 (8)(11) | | | | | | | | (21,305 | ) | | (130 | ) |
| 0.33% Class A membership interests in BeyondTrust Holdings LLC | | | | | | | | 500,000 |
| | 628,846 |
|
| | | | | | | | | 16,734,523 |
| | 17,012,766 |
|
| BJ's Wholesale Club, Inc. | | | | Hypermarkets & super centers | | | | | | |
| First Lien Term Loan B, LIBOR+3.75% (1% floor) cash due 1/26/2024 (8)(16) | | 4.98% | | | | 2,992,500 |
| | 2,996,051 |
| | 2,876,002 |
|
| | | | | | | | | 2,996,051 |
| | 2,876,002 |
|
| Cardenas Markets LLC | | | | Food retail | | | | | | |
| First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 11/29/2023 (8)(13) | | 7.08% | | | | 3,275,250 |
| | 3,246,405 |
| | 3,254,780 |
|
| | | | | | | | | 3,246,405 |
| | 3,254,780 |
|
| Central Security Group, Inc. | | | | Specialized consumer services | | | | | | |
| First Lien Term Loan, LIBOR+5.625% (1% floor) cash due 10/6/2021 (8) | | 6.86% | | | | 1,665,740 |
| | 1,660,679 |
| | 1,672,677 |
|
| | | | | | | | | 1,660,679 |
| | 1,672,677 |
|
| Compuware Corporation | | | | Internet software & services | | | | | | |
| First Lien Term Loan B3, LIBOR+4.25% (1% floor) cash due 12/15/2021 (8)(13) | | 5.49% | | | | 8,423,623 |
| | 8,345,374 |
| | 8,528,918 |
|
| | | | | | | | | 8,345,374 |
| | 8,528,918 |
|
| Curvature, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 10/30/2023 (8)(13) | | 6.24% | | | | 9,925,000 |
| | 9,871,624 |
| | 9,701,688 |
|
| | | | | | | | | 9,871,624 |
| | 9,701,688 |
|
| DFT Intermediate LLC | | | | Specialized finance | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 3/1/2023 (8)(13) | | 6.74% | | | | 14,962,500 |
| | 14,624,842 |
| | 14,864,020 |
|
| First Lien Revolver, LIBOR+5.5% (1% floor) cash due 3/1/2022 (8) | | 6.74% | | | | 750,000 |
| | 733,438 |
| | 745,064 |
|
| | | | | | | | | 15,358,280 |
| | 15,609,084 |
|
| DigiCert, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 10/21/2022 (8)(13) | | 10.24% | | | | 2,000,000 |
| | 1,984,880 |
| | 2,000,000 |
|
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 10/21/2021 (8) | | 5.99% | | | | 11,000,000 |
| | 10,945,000 |
| | 11,000,000 |
|
| | | | | | | | | 12,929,880 |
| | 13,000,000 |
|
| Digital River, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 2/12/2021 (8)(13) | | 7.82% | | | | 4,723,868 |
| | 4,681,840 |
| | 4,747,488 |
|
| | | | | | | | | 4,681,840 |
| | 4,747,488 |
|
| DTZ U.S. Borrower, LLC | | | | Real estate services | | | | | | |
| First Lien Term Loan, LIBOR+3.25% (1% floor) cash due 11/4/2021 (8)(16) | | 4.57% | | | | 12,211,343 |
| | 12,247,424 |
| | 12,256,098 |
|
| | | | | | | | | 12,247,424 |
| | 12,256,098 |
|
| Dynatect Group Holdings, Inc. | | | | Industrial machinery | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 9/30/2020 (8) | | 5.83% | | | | 3,786,203 |
| | 3,786,203 |
| | 3,672,617 |
|
| | | | | | | | | 3,786,203 |
| | 3,672,617 |
|
| Empower Payments Acquisition, Inc. | | | | Commercial printing | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% (1% floor) cash due 11/30/2023 (8)(13) | | 6.83% | | | | 6,153,500 |
| | 6,043,807 |
| | 6,091,669 |
|
| | | | | | | | | 6,043,807 |
| | 6,091,669 |
|
| Everi Payments Inc. | | | | Casinos & gaming | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 5/9/2024 (8)(13)(16) | | 5.74% | | | | 4,987,500 |
| | 4,963,767 |
| | 5,038,622 |
|
| | | | | | | | | 4,963,767 |
| | 5,038,622 |
|
| Executive Consulting Group, LLC | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1% floor) cash due 11/21/2019 (8)(13) | | 5.99% | | | | 7,000,000 |
| | 7,000,000 |
| | 6,999,745 |
|
| Delayed Draw Term Loan, LIBOR+4.75% (1% floor) cash due 11/21/2019 (8) | | 5.99% | | | | 3,791,650 |
| | 3,791,650 |
| | 3,791,657 |
|
| | | | | | | | | 10,791,650 |
| | 10,791,402 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20162017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Digital River, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 2/12/2021 (8)(13) | | 7.50% | | | | $ | 4,523,868 |
| | $ | 4,349,859 |
| | $ | 4,515,386 |
|
| | | | | | | | | 4,349,859 |
| | 4,515,386 |
|
| Research Now Group, Inc. | | | | Data processing & outsourced services | | | | | | |
| Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 3/18/2022 (8) | | 9.75% | | | | 4,000,000 |
| | 3,953,571 |
| | 3,880,000 |
|
| | | | | | | | | 3,953,571 |
| | 3,880,000 |
|
| Fineline Technologies, Inc. | | | | Electronic equipment & instruments | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash due 5/5/2017 (8)(13) | | 6.50% | | | | 10,942,464 |
| | 10,942,464 |
| | 10,912,302 |
|
| | | | | | | | | 10,942,464 |
| | 10,912,302 |
|
| My Alarm Center, LLC | | | | Security & alarm services | | | | | | |
| First Lien Term Loan A, LIBOR+8% (1% floor) cash due 1/9/2019 (8)(13) | | 9.00% | | | | 16,047,619 |
| | 16,047,619 |
| | 16,075,921 |
|
| First Lien Term Loan B, LIBOR+8% (1% floor) cash due 1/9/2019 (8) | | 9.00% | | | | 909,936 |
| | 909,936 |
| | 911,452 |
|
| First Lien Term Loan C, LIBOR+8% (1% floor) cash due 1/9/2019 (8) | | 9.00% | | | | 757,592 |
| | 757,592 |
| | 757,750 |
|
| First Lien Term Revolver, LIBOR+8% (1% floor) cash due 1/9/2019 (8) | | 9.00% | | | | 120,000 |
| | 120,000 |
| | 120,000 |
|
| | | | | | | | | 17,835,147 |
| | 17,865,123 |
|
| Legalzoom.com, Inc. | | | | Specialized consumer services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 5/13/2020 (8)(13) | | 8.00% | | | | 19,700,000 |
| | 19,690,068 |
| | 19,659,526 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 5/13/2020 (8)(11) | | 8.00% | | | | | | (17,714 | ) | | — |
|
| First Lien Delayed Draw Term Loan, LIBOR+7% (1% floor) cash due 5/13/2020 (8) | | 8.00% | | | | 400,000 |
| | 400,000 |
| | 396,683 |
|
| | | | | | | | | 20,072,354 |
| | 20,056,209 |
|
| Raley's | | | | Food retail | | | | | | |
| First Lien Term Loan, LIBOR+6.25% (1% floor) cash due 5/18/2022 (8)(13) | | 7.25% | | | | 3,319,504 |
| | 3,254,099 |
| | 3,325,728 |
|
| | | | | | | | | 3,254,099 |
| | 3,325,728 |
|
| Aptos, Inc. | | | | Data processing & outsourced services | | | | | | |
| First Lien Term Loan, LIBOR+6.75% (1% floor) cash due 9/1/2022 (8)(13) | | 7.75% | | | | 6,000,000 |
| | 5,881,667 |
| | 5,940,000 |
|
| | | | | | | | | 5,881,667 |
| | 5,940,000 |
|
| All Web Leads, Inc. | | | | Advertising | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 6/30/2020 (8)(13) | | 7.50% | | | | 29,808,067 |
| | 29,808,066 |
| | 29,983,454 |
|
| First Lien Revolver, LIBOR+6.5% (1% floor) cash due 6/30/2020 (8) | | 7.50% | | | | | | — |
| | — |
|
| | | | | | | | | 29,808,066 |
| | 29,983,454 |
|
| Too Faced Cosmetics, LLC | | | | Personal products | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 7/7/2021 (8)(13) | | 6.00% | | | | 1,285,383 |
| | 1,285,383 |
| | 1,290,310 |
|
| | | | | | | | | 1,285,383 |
| | 1,290,310 |
|
| Internet Pipeline, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+7.25% (1% floor) cash due 8/4/2022 (8)(13) | | 8.25% | | | | 11,880,000 |
| | 11,880,000 |
| | 12,045,801 |
|
| First Lien Revolver, LIBOR+7.25% (1% floor) cash due 8/4/2021 (8) | | 8.25% | | | | | | — |
| | — |
|
| | | | | | | | | 11,880,000 |
| | 12,045,801 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry (19) | | Principal (5) |
| | Cost | | Fair Value |
| First American Payment Systems, L.P. | | | | Diversified support services | | | | | | |
| First Lien Term Loan B, LIBOR+5.75% (1% floor) cash due 1/8/2024 (8)(13) | | 6.98% | | | | $ | 4,143,750 |
| | $ | 4,106,872 |
| | $ | 4,131,319 |
|
| | | | | | | | | 4,106,872 |
| | 4,131,319 |
|
| GOBP Holdings Inc. | | | | Food retail | | | | | | |
| Second Lien Term Loan, LIBOR+8.25% (1% floor) cash due 10/21/2022 (8)(13) | | 9.58% | | | | 3,685,714 |
| | 3,644,031 |
| | 3,717,983 |
|
| | | | | | | | | 3,644,031 |
| | 3,717,983 |
|
| Idera, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 6/27/2024 (8) | | 6.24% | | | | 3,457,698 |
| | 3,424,359 |
| | 3,483,630 |
|
| | | | | | | | | 3,424,359 |
| | 3,483,630 |
|
| Imagine! Print Solutions, LLC | | | | Advertising | | | | | | |
| First Lien Term Loan B, LIBOR+4.75% (1% floor) cash due 6/21/2022 (8) | | 6.09% | | | | 6,965,000 |
| | 6,898,900 |
| | 6,999,825 |
|
| | | | | | | | | 6,898,900 |
| | 6,999,825 |
|
| Impact Sales, LLC | | | | Advertising | | | | | | |
| First Lien Term Loan B, LIBOR+7% (1% floor) cash due 12/30/2021 (8) | | 8.30% | | | | 3,721,875 |
| | 3,628,868 |
| | 3,715,131 |
|
| First Lien Delayed Draw Term Loan, LIBOR+7% (1% floor) cash due 12/30/2021 (8) | | 8.30% | | | | 171,016 |
| | 171,016 |
| | 168,751 |
|
| | | | | | | | | 3,799,884 |
| | 3,883,882 |
|
| Internet Pipeline, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+7.25% (1% floor) cash due 8/4/2022 (8)(13) | | 8.49% | | | | 13,081,433 |
| | 13,068,115 |
| | 13,212,714 |
|
| First Lien Revolver, LIBOR+7.25% (1% floor) cash due 8/4/2021 (8) | | | | | | | | — |
| | 8,029 |
|
| | | | | | | | | 13,068,115 |
| | 13,220,743 |
|
| Kellermeyer Bergensons Services, LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 10/29/2021 (8)(13) | | 6.32% | | | | 5,251,500 |
| | 5,208,454 |
| | 5,248,218 |
|
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 4/29/2022 (8)(13) | | 9.81% | | | | 280,000 |
| | 280,000 |
| | 274,400 |
|
| | | | | | | | | 5,488,454 |
| | 5,522,618 |
|
| LSF9 Atlantis Holdings, LLC | | | | Computer & electronics retail | | | | | | |
| First Lien Term Loan B, LIBOR+6% (1% floor) cash due 5/1/2023 (8)(13) | | 7.24% | | | | 7,453,125 |
| | 7,383,862 |
| | 7,498,142 |
|
| | | | | | | | | 7,383,862 |
| | 7,498,142 |
|
| Lytx Holdings, LLC | | | | Research & consulting services | | | | | | |
| 500 Class A Units | | | | | | | | 292,459 |
| | 351,355 |
|
| 500 Class B Units | | | | | | | | — |
| | 79,788 |
|
| | | | | | | | | 292,459 |
| | 431,143 |
|
| Maxor National Pharmacy Services, LLC | | | | Pharmaceuticals | | | | | | |
| First Lien Term Loan, LIBOR+4.75% (1.25% floor) cash due 1/31/2020 (8)(13) | | 6.08% | | | | 9,068,650 |
| | 9,068,650 |
| | 9,038,634 |
|
| | | | | | | | | 9,068,650 |
| | 9,038,634 |
|
| McAfee, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 9/30/2024 (8) | | 5.83% | | | | 7,000,000 |
| | 6,930,000 |
| | 7,072,905 |
|
| | | | | | | | | 6,930,000 |
| | 7,072,905 |
|
| Metamorph US 3, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.5% (1% floor) cash 2% PIK due 12/1/2020 (8)(13)(18) | | 6.74% | | | | 14,070,138 |
| | 13,488,111 |
| | 5,343,093 |
|
| First Lien Revolver, LIBOR+6.5% (1% floor) cash due 12/1/2020 (8)(11)(13)(18) | | 7.74% | | | | 1,080,000 |
| | 1,037,075 |
| | (36,455 | ) |
| | | | | | | | | 14,525,186 |
| | 5,306,638 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20162017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Poseidon Merger Sub, Inc. | | | | Advertising | | | | | | |
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/15/2023 (8) | | 9.50% | | | | $ | 7,000,000 |
| | $ | 6,980,768 |
| | $ | 7,012,868 |
|
| | | | | | | | | 6,980,768 |
| | 7,012,868 |
|
| American Seafoods Group LLC | | | | Food distributors | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 8/19/2021 (8)(13) | | 6.00% | | | | 2,780,556 |
| | 2,736,111 |
| | 2,773,604 |
|
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 2/19/2022 (8) | | 10.00% | | | | 3,000,000 |
| | 2,975,385 |
| | 2,850,000 |
|
| | | | | | | | | 5,711,496 |
| | 5,623,604 |
|
| CRGT Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+6.5% (1% floor) cash due 12/19/2020 (8)(13) | | 7.50% | | | | 3,440,713 |
| | 3,433,096 |
| | 3,449,315 |
|
| | | | | | | | | 3,433,096 |
| | 3,449,315 |
|
| Valet Merger Sub, Inc. | | | | Environmental & facilities services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/24/2021 (8)(13) | | 8.00% | | | | 5,940,000 |
| | 5,905,025 |
| | 6,040,239 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 9/24/2021 (8) | | 8.00% | | | | 500,000 |
| | 486,811 |
| | 500,000 |
|
| | | | | | | | | 6,391,836 |
| | 6,540,239 |
|
| Baart Programs, Inc. | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+7.75% cash due 10/9/2021 (8)(13) | | 8.42% | | | | 7,661,077 |
| | 7,377,745 |
| | 7,647,291 |
|
| First Lien Revolver, LIBOR+7.75% cash due 10/9/2021 (8)(11) | | 8.42% | | | | | | (12,500 | ) | | — |
|
| | | | | | | | | 7,365,245 |
| | 7,647,291 |
|
| DigiCert, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 10/21/2022 (8) | | 10.00% | | | | 2,000,000 |
| | 1,982,857 |
| | 2,032,529 |
|
| | | | | | | | | 1,982,857 |
| | 2,032,529 |
|
| Lytx, Inc. | | | | Research & consulting services | | | | | | |
| First Lien Term Loan, LIBOR+8.5% (1% floor) cash due 3/15/2023 (8) | | 9.50% | | | | 9,951,389 |
| | 9,951,389 |
| | 9,951,389 |
|
| 500 Class A Units in Lytx Holdings, LLC | | | | | | | | 500,000 |
| | 504,173 |
|
| | | | | | | | | 10,451,389 |
| | 10,455,562 |
|
| Onvoy, LLC | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+6.25% (1% floor) cash due 4/29/2021 (8)(13) | | 7.25% | | | | 10,368,750 |
| | 10,173,233 |
| | 10,341,433 |
|
| | | | | | | | | 10,173,233 |
| | 10,341,433 |
|
| 4 Over International, LLC | | | | Commercial printing | | | | | | |
| First Lien Term Loan, LIBOR+6.0% (1% floor) cash due 6/7/2022 (8)(13) | | 7.00% | | | | 5,970,000 |
| | 5,913,333 |
| | 5,929,733 |
|
| First Lien Revolver LIBOR+6.0% (1% floor) cash due 6/7/2021 (8)(11) | | 7.00% | | | | | | (639 | ) | | — |
|
| | | | | | | | | 5,912,694 |
| | 5,929,733 |
|
| OBHG Management Services, LLC | | | | Healthcare services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 6/28/2022 (8)(13) | | 6.25% | | | | 16,123,227 |
| | 16,117,309 |
| | 16,076,397 |
|
| First Lien Revolver, LIBOR+5.25% (1% floor) cash due 6/28/2021 (8)(11) | | 6.25% | | | | | | (39 | ) | | — |
|
| | | | | | | | | 16,117,270 |
| | 16,076,397 |
|
| Ancile Solutions, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 6/30/2021 (8)(13) | | 8.00% | | | | 11,000,000 |
| | 10,692,000 |
| | 10,835,000 |
|
| | | | | | | | | 10,692,000 |
| | 10,835,000 |
|
| See notes to Consolidated Financial Statements. |
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2016
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(17)(19) | | Cash Interest Rate (8) | | Industry | | Principal (5) |
| | Cost | | Fair Value |
| Pomeroy Group Holdings, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 11/30/2021 (8)(13) | | 7.00% | | | | $ | 4,488,693 |
| | $ | 4,357,979 |
| | $ | 4,393,309 |
|
| | | | | | | | | 4,357,979 |
| | 4,393,309 |
|
| Sailpoint Technologies, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+8% (1% floor) cash due 8/16/2021 (8) | | 9.00% | | | | 12,500,000 |
| | 12,258,333 |
| | 12,250,000 |
|
| First Lien Revolver, LIBOR+8% (1% floor) cash due 8/16/2021 (8)(11) | | 9.00% | | | | | | (3,867 | ) | | — |
|
| | | | | | | | | 12,254,466 |
| | 12,250,000 |
|
| California Pizza Kitchen, Inc. (16) | | | | Restaurants | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 8/23/2022 (8) | | 7.00% | | | | 5,000,000 |
| | 5,000,000 |
| | 4,985,425 |
|
| | | | | | | | | 5,000,000 |
| | 4,985,425 |
|
| Total Non-Control/Non-Affiliate Investments (152.6% of net assets) | | | | | | | | $ | 513,397,659 |
| | $ | 497,281,256 |
|
| Total Portfolio Investments (176.0% of net assets) | | | | | | | | $ | 600,468,963 |
| | $ | 573,604,381 |
|
| Cash and Cash Equivalents | | | | | | | | | | |
Wells Fargo Bank Institutional Money Market Fund
| | | | | | | | $ | 18,856,559 |
| | $ | 18,856,559 |
|
| Other cash accounts | | | | | | | | 922,282 |
| | 922,282 |
|
| Total Cash and Cash Equivalents (6.1% of net assets) | | | | | | | | $ | 19,778,841 |
| | $ | 19,778,841 |
|
| Total Portfolio Investments, Cash and Cash Equivalents (182.1% of net assets) | | | | | | | | $ | 620,247,804 |
| | $ | 593,383,222 |
|
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry (19) | | Principal (5) |
| | Cost | | Fair Value |
| MHE Intermediate Holdings, LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 3/8/2024 (8)(13) | | 6.33% | | | | $ | 11,774,771 |
| | $ | 11,556,138 |
| | $ | 11,774,776 |
|
| First Lien Revolver, LIBOR+5% (1% floor) cash due 3/10/2023 (8) | | 6.33% | | | | 1,353,038 |
| | 1,255,454 |
| | 1,353,038 |
|
| Delayed Draw Term Loan, LIBOR+5% (1% floor) cash due 3/8/2024 (8) | | 6.33% | | | | 1,873,430 |
| | 1,782,689 |
| | 1,873,430 |
|
| | | | | | | | | 14,594,281 |
| | 15,001,244 |
|
| MHVC Acquisition Corp. | | | | Aerospace & defense | | | | | | |
| First Lien Term Loan B, LIBOR+5.25% (1% floor) cash due 4/25/2024 (8)(13) | | 6.49% | | | | 6,483,750 |
| | 6,453,287 |
| | 6,556,692 |
|
| | | | | | | | | 6,453,287 |
| | 6,556,692 |
|
| Ministry Brands, LLC | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 12/2/2022 (8)(13) | | 6.24% | | | | 9,648,871 |
| | 9,565,812 |
| | 9,648,874 |
|
| First Lien Delayed Draw Term Loan, LIBOR+5% (1% floor) cash due 12/2/2022 (8)(13) | | 6.24% | | | | 3,354,904 |
| | 3,314,185 |
| | 3,354,905 |
|
| Second Lien Term Loan, LIBOR+9.25% (1% floor) cash due 6/2/2023 (8)(13) | | 10.49% | | | | 1,568,067 |
| | 1,547,561 |
| | 1,568,067 |
|
| Second Lien Delayed Draw Term Loan, LIBOR+9.25% (1% floor) cash due 6/2/2023 (8) | | 10.49% | | | | 431,933 |
| | 426,285 |
| | 431,933 |
|
| First Lien Revolver, LIBOR+5% (1% floor) cash due 12/2/2022 (8)(11) | | | | | | | | (861 | ) | | — |
|
| | | | | | | | | 14,852,982 |
| | 15,003,779 |
|
| MND Holdings III Corp. | | | | Specialty stores | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 6/19/2024 (8)(13) | | 5.83% | | | | 2,493,750 |
| | 2,481,733 |
| | 2,526,480 |
|
| | | | | | | | | 2,481,733 |
| | 2,526,480 |
|
| Motion Recruitment Partners LLC | | | | Diversified support services | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 2/13/2020 (8)(13) | | 7.24% | | | | 13,509,054 |
| | 13,498,295 |
| | 13,508,389 |
|
| First Lien Revolver, LIBOR+6% (1% floor) cash due 2/13/2020 (8)(11) | | | | | | | | (960 | ) | | (143 | ) |
| | | | | | | | | 13,497,335 |
| | 13,508,246 |
|
| New Trident Holdcorp, Inc. | | | | Healthcare services | | | | | | |
| First Lien Term Loan B, LIBOR+5.75% (1.25% floor) cash due 7/31/2019 (8)(13)(16) | | 7.08% | | | | 13,552,077 |
| | 13,285,041 |
| | 9,757,495 |
|
| Second Lien Term Loan, LIBOR+9.5% (1.25% floor) cash due 7/31/2020 (8)(16)(18) | | 10.83% | | | | 1,000,000 |
| | 950,590 |
| | 50,000 |
|
| | | | | | | | | 14,235,631 |
| | 9,807,495 |
|
| NextCare, Inc. | | | | Healthcare services | | | | | | |
| Senior Term Loan, LIBOR+6% (1% floor) cash due 7/31/2018 (8)(13) | | 7.24% | | | | 6,957,971 |
| | 6,957,970 |
| | 6,667,987 |
|
| Delayed Draw Term Loan, LIBOR+6% (1% floor) cash due 7/31/2018 (8) | | 7.24% | | | | 1,393,853 |
| | 1,393,853 |
| | 1,322,900 |
|
| | | | | | | | | 8,351,823 |
| | 7,990,887 |
|
| Onvoy, LLC | | | | Integrated telecommunication services | | | | | | |
| First Lien Term Loan, LIBOR+4.5% (1% floor) cash due 2/10/2024 (8)(13) | | 5.83% | | | | 7,960,000 |
| | 7,923,563 |
| | 7,962,507 |
|
| | | | | | | | | 7,923,563 |
| | 7,962,507 |
|
| Paris Presents Incorporated | | | | Personal products | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 12/31/2020 (8)(13) | | 6.24% | | | | 3,134,006 |
| | 3,106,950 |
| | 3,134,006 |
|
| Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 12/31/2021 (8)(13) | | 9.99% | | | | 3,500,000 |
| | 3,437,500 |
| | 3,465,000 |
|
| | | | | | | | | 6,544,450 |
| | 6,599,006 |
|
| Pomeroy Group Holdings, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+6% (1% floor) cash due 11/30/2021 (8)(13) | | 7.59% | | | | 4,443,467 |
| | 4,339,309 |
| | 4,443,467 |
|
| | | | | | | | | 4,339,309 |
| | 4,443,467 |
|
| Poseidon Merger Sub, Inc. | | | | Advertising | | | | | | |
| Second Lien Term Loan, LIBOR+8.5% (1% floor) cash due 8/15/2023 (8) | | 9.81% | | | | 7,000,000 |
| | 6,980,121 |
| | 7,070,000 |
|
| | | | | | | | | 6,980,121 |
| | 7,070,000 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 20162017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry (19) | | Principal (5) |
| | Cost | | Fair Value |
| PowerPlan, Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 2/23/2022 (8)(13) | | 6.49% | | | | $ | 17,839,352 |
| | $ | 17,800,018 |
| | $ | 17,839,013 |
|
| First Lien Revolver, LIBOR+5.25% (1% floor) cash due 2/23/2021 (8)(11) | | | | | | | | — |
| | (40 | ) |
| | | | | | | | | 17,800,018 |
| | 17,838,973 |
|
| PSI Services LLC | | | | Human resource & employment services | | | | | | |
| First Lien Term Loan B, LIBOR+5% (1% floor) cash due 1/20/2023 (8)(13) | | 6.24% | | | | 6,736,979 |
| | 6,644,622 |
| | 6,616,844 |
|
| | | | | | | | | 6,644,622 |
| | 6,616,844 |
|
| Raley's | | | | Food retail | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 5/18/2022 (8)(13) | | 6.49% | | | | 3,209,821 |
| | 3,164,432 |
| | 3,209,821 |
|
| | | | | | | | | 3,164,432 |
| | 3,209,821 |
|
| Research Now Group, Inc. | | | | Data processing & outsourced services | | | | | | |
| Second Lien Term Loan, LIBOR+8.75% (1% floor) cash due 3/18/2022 (8) | | 10.08% | | | | 4,000,000 |
| | 3,962,143 |
| | 3,960,000 |
|
| | | | | | | | | 3,962,143 |
| | 3,960,000 |
|
| Sailpoint Technologies, Inc. | | | | Application software | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 8/16/2021 (8) | | 8.33% | | | | 17,391,304 |
| | 17,070,160 |
| | 17,391,307 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 8/16/2021 (8)(11) | | | | | | | | (3,067 | ) | | — |
|
| | | | | | | | | 17,067,093 |
| | 17,391,307 |
|
| Salient CRGT, Inc. | | | | IT consulting & other services | | | | | | |
| First Lien Term Loan, LIBOR+5.75% (1% floor) cash due 2/28/2022 (8)(13) | | 6.99% | | | | 6,387,798 |
| | 6,275,056 |
| | 6,343,083 |
|
| | | | | | | | | 6,275,056 |
| | 6,343,083 |
|
| Staples, Inc. | | | | Distributors | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 9/12/2024 (8)(16) | | 5.31% | | | | 13,000,000 |
| | 12,967,500 |
| | 12,957,035 |
|
| | | | | | | | | 12,967,500 |
| | 12,957,035 |
|
| Stratus Technologies, Inc. | | | | Computer hardware | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 4/28/2021 (8)(13) | | 6.24% | | | | 1,315,119 |
| | 1,279,988 |
| | 1,324,983 |
|
| | | | | | | | | 1,279,988 |
| | 1,324,983 |
|
| Survey Sampling International, LLC | | | | Research & consulting services | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 12/16/2020 (8)(13) | | 6.27% | | | | 5,668,523 |
| | 5,642,223 |
| | 5,583,495 |
|
| Second Lien Term Loan, LIBOR+9% (1% floor) cash due 12/16/2021 (8) | | 10.27% | | | | 1,000,000 |
| | 988,095 |
| | 990,000 |
|
| | | | | | | | | 6,630,318 |
| | 6,573,495 |
|
| Systems, Inc. | | | | Industrial machinery | | | | | | |
| First Lien Term Loan, LIBOR+5.25% (1% floor) cash due 3/3/2022 (8)(13) | | 6.57% | | | | 8,831,921 |
| | 8,715,152 |
| | 8,787,762 |
|
| First Lien Revolver, LIBOR+5.5% (1% floor) cash due 3/3/2022 (8)(11) | | | | | | | | (7,950 | ) | | (7,920 | ) |
| | | | | | | | | 8,707,202 |
| | 8,779,842 |
|
| TravelCLICK, Inc. | | | | Internet software & services | | | | | | |
| Second Lien Term Loan, LIBOR+7.75% (1% floor) cash due 11/6/2021 (8)(13) | | 8.99% | | | | 2,048,485 |
| | 2,010,607 |
| | 2,058,727 |
|
| | | | | | | | | 2,010,607 |
| | 2,058,727 |
|
| Triple Point Group Holdings, Inc. | | | | Application software | | | | | | |
| First Lien Revolver, LIBOR+4.25% (1% floor) cash due 7/10/2018 (8)(11) | | | | | | | | — |
| | (437,932 | ) |
| | | | | | | | | — |
| | (437,932 | ) |
| Truck Hero, Inc. | | | | Auto parts & equipment | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 4/22/2024 (8) | | 5.33% | | | | 5,857,320 |
| | 5,871,777 |
| | 5,798,747 |
|
| | | | | | | | | 5,871,777 |
| | 5,798,747 |
|
| TV Borrower US, LLC (7) | | | | Integrated telecommunication services | | | | | | |
| First Lien Dollar Term B-1 Loan, LIBOR+4.75% (1% floor) cash due 2/22/2024 (8) | | 6.08% | | | | 3,383,000 |
| | 3,367,510 |
| | 3,406,258 |
|
| | | | | | | | | 3,367,510 |
| | 3,406,258 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2017
|
| | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1)(2)(9)(10)(14) | | Cash Interest Rate (8) | | Industry (19) | | Principal (5) |
| | Cost | | Fair Value |
| UOS, LLC | | | | Trucking | | | | | | |
| First Lien Term Loan B, LIBOR+5.5% (1% floor) cash due 4/18/2023 (8) | | 6.74% | | | | $ | 3,990,000 |
| | $ | 4,079,548 |
| | $ | 4,099,725 |
|
| | | | | | | | | 4,079,548 |
| | 4,099,725 |
|
| Valet Merger Sub, Inc. | | | | Environmental & facilities services | | | | | | |
| First Lien Term Loan, LIBOR+7% (1% floor) cash due 9/24/2021 (8)(13) | | 8.24% | | | | 5,880,000 |
| | 5,852,065 |
| | 5,879,798 |
|
| First Lien Revolver, LIBOR+7% (1% floor) cash due 9/24/2021 (8)(11) | | | | | | | | (10,697 | ) | | (29 | ) |
| Incremental Term Loan , LIBOR+7% (1% floor) cash due 9/24/2021 (8) | | 8.24% | | | | 8,407,683 |
| | 8,328,663 |
| | 8,407,394 |
|
| | | | | | | | | 14,170,031 |
| | 14,287,163 |
|
| Verdesian Life Sciences, LLC | | | | Fertilizers & agricultural chemicals | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash due 7/1/2020 (8)(13) | | 6.31% | | | | 3,295,860 |
| | 3,273,753 |
| | 2,801,481 |
|
| | | | | | | | | 3,273,753 |
| | 2,801,481 |
|
| Veritas US Inc. | | | | Internet software & services | | | | | | |
| First Lien Term Loan B, LIBOR+4.5% (1% floor) cash due 1/27/2023 (8)(16) | | 5.83% | | | | 10,077,193 |
| | 10,215,779 |
| | 10,189,503 |
|
| | | | | | | | | 10,215,779 |
| | 10,189,503 |
|
| Zep Inc. | | | | Housewares & specialties | | | | | | |
| First Lien Term Loan, LIBOR+4% (1% floor) cash due 8/12/2024 (8) | | 5.24% | | | | 4,750,000 |
| | 4,795,075 |
| | 4,771,779 |
|
| | | | | | | | | 4,795,075 |
| | 4,771,779 |
|
| Total Non-Control/Non-Affiliate Investments (170.9% of net assets) | | | | | | | | $ | 516,270,639 |
| | $ | 501,894,073 |
|
| Total Portfolio Investments (190.9% of net assets) | | | | | | | | $ | 605,090,324 |
| | $ | 560,436,660 |
|
| Total Cash and Cash Equivalents (12.1% of net assets) | | | | | | | | $ | 35,604,127 |
| | $ | 35,604,127 |
|
| Total Portfolio Investments, Cash and Cash Equivalents (203.0% of net assets) | | | | | | | | $ | 640,694,451 |
| | $ | 596,040,787 |
|
See notes to Consolidated Financial Statements.
Oaktree Strategic Income Corporation
Consolidated Schedule of Investments
September 30, 2017
| |
| (1) | All debt investments are income producing unless otherwise noted. All equity investments are non-income producing unless otherwise noted. |
| |
| (2) | See Note 3 in the accompanying notes to the Consolidated Financial Statements for portfolio composition by geographic region. |
| |
| (3) | Control Investments generally are defined by the 1940Investment Company Act as investments in companies in which the Company owns more than 25% of the voting securities or maintains greater than 50% of the board representation. |
| |
| (4) | Affiliate Investments generally are defined by the 1940Investment Company Act as investments in companies in which the Company owns between 5% and 25% of the voting securities. |
| |
| (5) | Principal includes accumulated PIK interest and is net of repayments, if any. |
| |
| (6) | Non-Control/Non-Affiliate Investments are investments that are neither Control Investments nor Affiliate Investments. |
| |
| (7) | Investment is not a qualifying asset as defined under Section 55(a) of the 1940Investment Company Act. Under the 1940Investment Company Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company's total assets. As of September 30, 2016,2017, qualifying assets represented 84.9%89.6% of the Company's total assets and non-qualifying assets represented 15.1%10.4% of the Company's total assets. |
| |
| (8) | The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement and the cash interest rate as of period end. |
| |
| (9) | Interest rates may be adjusted from period to period on certain term loans and revolvers. These rate adjustments may be either temporary in nature due to tier pricing arrangements or financial or payment covenant violations in the original credit agreements or permanent in nature per loan amendment or waiver documents. |
| |
| (10) | Each of the Company's investments is pledged as collateral under one or more of its credit facilities or its debt securitization. A single investment may be divided into parts that are individually pledged as collateral to separate credit facilities. |
| |
| (11) | Investment has undrawn commitments. Unamortized fees are classified as unearned income which reduces cost basis, which may result in a negative cost basis. A negative fair value may result from the unfunded commitment being valued below par. |
| |
| (12) | As defined in the 1940Investment Company Act, the Company is deemed to be both an "Affiliated Person" of and to "Control" this portfolio company as the Company owns more than 25% of the portfolio company's outstanding voting securities or has the power to exercise control over management or policies of such portfolio company (including through a management agreement). See Schedule 12-14 in the accompanying notes to the Consolidated Financial Statements for transactions during the year ended September 30, 2017 in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to control. |
| |
| (13) | Investment pledged as collateral under the Company's 2015 Debt Securitization (as defined in Note 6 -— Borrowings), in whole or in part. |
| |
| (14) | Income producing through payment of dividends or distributions. |
| |
(15) | In April 2016, the Companyrestructured its debt investment in Ameritox Ltd. As a part of the restructuring, the Company exchanged cash and its debt securities for debt and equity securities in the newly restructured entity.
|
| |
(16) | The sale of this loan does not qualify for true sale accounting under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 860 - Transfers and Servicing ("ASC 860"), and therefore, the entire debt investment remains in the Consolidated Schedule of Investments. Accordingly, the fair value of the Company's debt investments includes $5.0 million related to the Company's secured borrowings. (See Note 6 in the accompanying notes to the Consolidated Financial Statements.)
|
| |
(17) | Equity ownership may be held in shares or units of companies related to the portfolio companies. |
| |
(18)(15) | See Note 3 to the Consolidated Financial Statements for portfolio composition. |
| |
(19)(16) | As of September 30, 2016, all2017, these investments are categorized as level 3Level 2 within the fair value hierarchy established by ASC 820820. All other investments, with the exception of investments valued using net asset value as a practical expedient, are categorized as Level 3 as of September 30, 2017 and were valued using significant unobservable inputs. |
| |
| (17) | This investment was valued using net asset value as a practical expedient for fair value. Consistent with FASB guidance under ASC 820, these investments are excluded from the hierarchical levels. |
| |
| (18) | This investment was on cash non-accrual status as of September 30, 2017. Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable. |
| |
| (19) | As of September 30, 2018, certain industry classifications were modified primarily as a result of changes to industry information provided by a third party source. The Company revised the September 30, 2017 industry classifications to be consistent with those disclosed as of September 30, 2018. |
See notes to Consolidated Financial Statements.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
Oaktree Strategic Income Corporation (formerly known as Fifth Street Senior Floating Rate Corp. through October 17, 2017), (together with its consolidated subsidiaries, the "Company") is a specialty finance company that islooks to provide customized capital solutions for middle-market companies in both the syndicated and private placement markets. The company was formed in May 2013 and operates as a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development companyBusiness Development Company under the 1940Investment Company Act. The Company has qualified and elected to be treated as a regulated investment company ("RIC") under the Internal Revenue Code of 1986, as amended (the "Code"), for tax purposes.
As of October 17, 2017, the Company is externally managed by Oaktree Capital Management, L.P., (“Oaktree” or the “Investment Adviser”), a subsidiary of Oaktree Capital Group, LLC (“OCG”), a global investment manager specializing in alternative investments, pursuant to an investment advisory agreement between the Company and the Investment Adviser (the “New Investment Advisory Agreement”). Oaktree Fund Administration, LLC (“Oaktree Administrator” or “OFA”), a subsidiary of the Investment Adviser, provides certain administrative and other services necessary for the Company to operate pursuant to an administration agreement between the Company and OFA (the “New Administration Agreement”). See Note 11 for additional information regarding the New Investment Advisory Agreement and the New Administration Agreement.
Prior to October 17, 2017, the Company was externally managed by Fifth Street Management LLC (“FSM”), an indirect, partially-owned subsidiary of Fifth Street Asset Management Inc. (“FSAM”), and FSC CT LLC ("FSC CT"), a subsidiary of FSM, also provided certain administrative and other services necessary for the Company to operate pursuant to an administration agreement (the “Prior Administration Agreement”).
The Company seeks to generate a stable source of current income while minimizing the risk of principal loss and, to a lesser extent, capital appreciation by providing middle-marketinnovative first-lien financing solutions to companies with primarily first lien secured debt financings that pay interest at rates which are determined periodically on the basisacross a wide variety of industries. To a floating base lending rate. The Company also has an investment in a joint venture that invests in similar types of loans. The Companylesser extent, we may also invest in senior unsecured loans, issued by private middle-market companies and, to a lesser extent,including subordinated loans, issued by private middle marketmiddle-market companies, senior and subordinated loans issued by public companies and equity investments.
As of October 17, 2017, the Company is externally managed by Oaktree Capital Management, L.P. (“Oaktree”), a subsidiary of Oaktree Capital Group, LLC (“OCG”), a publicly traded Delaware limited liability company listed on the New York Stock Exchange under the ticker "OAK", pursuant to an investment advisory agreement between the Company and Oaktree (the “Investment Advisory Agreement”). Oaktree Fund Administration, LLC (“Oaktree Administrator”), a subsidiary of Oaktree, provides certain administrative and other services necessary for the Company to operate pursuant to an administration agreement between the Company and Oaktree Administrator (the “Administration Agreement”). See Note 11.
Prior to October 17, 2017, the Company was externally managed by Fifth Street Management LLC (the “Former Adviser”), an indirect, partially-owned subsidiary of Fifth Street Asset Management Inc. (“FSAM”) and was named Fifth Street Senior Floating Rate Corp. A subsidiary of the Former Adviser, FSC CT LLC (the "Former Administrator"), also provided certain administrative and other services necessary for the Company to operate pursuant to an administration agreement (the “Former Administration Agreement”).
On July 13,September 7, 2017, Oaktree entered into anstockholders of the Company approved the Investment Advisory Agreement to take effect upon the closing of the transactions contemplated by the Asset Purchase Agreement (the “Purchase Agreement”) with FSM,by and among Oaktree, the Former Adviser, and, for certain limited purposes, FSAM, and Fifth Street Holdings L.P., the direct, partial owner of FSM.
On September 7, 2017, the Company held a special meeting of stockholders (the "Special Meeting"). At the Special Meeting, stockholders of the Company approved the New Investment Advisory Agreement to take effect upon the closing of the transactions contemplated by the Purchase AgreementFormer Adviser (the “Transaction”). Upon the closing of the Transaction on October 17, 2017, Oaktree became the investment adviser to each of Oaktree Specialty Lending Corporation (formerly known as Fifth Street Finance Corp.), (“OCSL”), and the Company. The closing of the Transaction resulted in an assignment for purposes of the 1940Investment Company Act of the investment advisory agreement between FSMthe Former Adviser and the Company (the "Former Investment Advisory Agreement") and, as a result, its immediate termination.
Note 2. Significant Accounting Policies
Basis of Presentation:
The Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and pursuant to the requirements for reporting on Form 10-K and Regulation S-X. All intercompany balances and transactions have been eliminated. Certain prior-year financial information has been reclassified to conform to current year presentation. The Company is an investment company following the accounting and reporting guidance in FASB ASC Topic 946, Financial Services - Investment Companies ("ASC 946").
Use of Estimates:
The preparation of the financial statements in conformity with GAAP requires management to make certain estimates and assumptions affecting amounts reported in the financial statements and accompanying notes. These estimates are based on the information that is currently available to the Company and on various other assumptions that the Company believes to be reasonable under the circumstances. Changes in the economic and political environments, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material. Significant estimates include the valuation of investments and revenue recognition.
Consolidation:
The accompanying Consolidated Financial Statements include the accounts of Oaktree Strategic Income Corporation and its consolidated subsidiaries. Each consolidated subsidiary is wholly-owned and, as such, consolidated into the Consolidated Financial Statements. Certain subsidiaries that hold investments are treated as pass through entities for tax purposes. The assets of certain of the Company's consolidated subsidiaries are not directly available to satisfy the claims of the creditors of the CompanyOaktree Strategic Income Corporation or any of its other subsidiaries. As of September 30, 2018, the consolidated subsidiaries were OCSI Senior Funding II LLC and OCSI Senior Funding Ltd.
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subsidiaries. As of September 30, 2017, the Company's consolidated subsidiaries were FS Senior Funding CLO LLC, FS Senior Funding II LLC and FS Senior Funding Ltd. (“2015 Issuer”).
Since the Company is an investment company, portfolio investments held by the Company are not consolidated into the Consolidated Financial Statements. The portfolio investments held by the CompanyStatements but rather are included on the Statements of Assets and Liabilities as investments at fair value.
Fair Value Measurements:
The Company is required to report its investments for which current market values are not readily available at fair value. The Company values its investments in accordance with ASC 820, which defines fair value as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company is required to report its investments for which current market values are not readily available at fair value. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. ASC 820 prioritizes the use of observable market prices derived from such prices over entity-specific inputs. Where observable prices or inputs are not available or reliable, valuation techniques are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the investments or market and the investments' complexity.
Hierarchical levels, defined by ASC 820 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 — Unadjusted, quoted prices in active markets for identical assets or liabilities atas of the measurement date.
Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data at the measurement date for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
If inputs used to measure fair value fall into different levels of the fair value hierarchy, an investment's level is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. This includes investment securities that are valued using "bid" and "ask" prices obtained from independent third party pricing services or directly from brokers. These investments may be classified as Level 3 because the quoted prices may be indicative in nature for securities that are in an inactive market, may be for similar securities or may require adjustments for investment-specific factors or restrictions.
Financial instruments with readily available quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment inherent in measuring fair value. As such, the Investment AdviserOaktree obtains and analyzes readily available market quotations provided by independent pricing servicesvendors and brokers for all of the Company's first lien and second lien ("senior secured") debt investments for which quotations are available. In determining the fair value of a particular investment, pricing servicesvendors and brokers use observable market information, including both binding and non-binding indicative quotations.
The Investment Adviser evaluatesCompany seeks to obtain at least two quotations for the subject or similar securities, typically from pricing vendors. If the Company is unable to obtain two quotes from pricing vendors, or if the prices obtained from independent pricing servicesvendors are not within the Company's set threshold, the Company seeks to obtain a quote directly from a broker making a market for the asset. Oaktree evaluates the quotations provided by pricing vendors and company specific data that could affect the credit quality and/or fair valuebrokers based on available market information, including trading activity of the investment. Investments for which market quotationssubject or similar securities, or by performing a comparable security analysis to ensure that fair values are readily available may be valued at such market quotations.reasonably estimated. Oaktree also performs back-testing of valuation information obtained from pricing vendors and brokers against actual prices received in transactions. In orderaddition to validate market quotations,ongoing monitoring and back-testing, Oaktree performs due diligence procedures over pricing vendors to understand their methodology and controls to support their use in the Investment Adviser looks at a number of factors to determine ifvaluation process. Generally, the quotations are representative of fair value, including the source and nature of the quotations. The Investment AdviserCompany does not adjust any of the prices unless it has a reasonreceived from these sources.
If the quotations obtained from pricing vendors or brokers are determined to believe market quotationsnot be reliable or are not reflective of the fair value of an investment. Examples of events that would cause market quotations to not reflect fair value could include cases when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a "fire sale" by a distressed seller. In these instances,readily available, the Company values such investments by using the valuation procedure that it uses with respect to assets for which market quotations are not readily available (as discussed below).
If the quotation provided by the pricing service is based on only one or two market sources, the Company performs additional procedures to corroborate such information, which may include the market yield technique discussed below and a quantitative and qualitative assessmentany of the credit quality and market trends affecting the portfolio company.
The Company performs detailed valuations of its debt and equity investments for which market quotations are not readily available or are deemed not to represent fair value of the investments. The Company typically uses three different valuation techniques. The first valuation technique is the transaction precedent technique, which utilizes recent or expected future transactions of the investment to determine fair value, to the extent applicable. The second valuation technique is an analysis of the enterprise value
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("EV") of the portfolio company. EV means the entire value of the portfolio company to a market participant, including the sum of the values of debt and equity securities used to capitalize the enterprise at a point in time. The EV analysis is typically performed to determine (i) the value of equity investments, to determine if(ii) whether there is credit impairment for debt investments and to determine(iii) the value for debt investments that the Company is deemed to control under the 1940Investment Company Act. To estimate the EV of a portfolio company, the Investment AdviserOaktree analyzes various factors, including the portfolio company’s historical and projected financial results, macroeconomic impacts on the company and competitive dynamics in the company’s industry. The Investment AdviserOaktree also utilizes some or all of the following information based on the individual circumstances of the portfolio company, including:company: (i) valuations of comparable public companies, (ii) recent sales of private and public comparable companies in similar industries or having similar business or earnings characteristics, (iii) purchase price multiples as a multiple of their earnings or
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cash flow, (iv) the portfolio company’s ability to meet its forecasts and its business prospects, (v) a discounted cash flow analysis, (vi) estimated liquidation or collateral value of the portfolio company's assets and (vii) offers from third parties to buy the portfolio company. The Company may probability weight potential sale outcomes with respect to a portfolio company due to thewhen uncertainty that exists as of the valuation date. The third valuation technique is a market yield technique, which is typically performed for non-credit impaired debt investments. To determine fair value using aIn the market yield technique, a current price is imputed for the investment based upon an assessment of the expected market yield for a similarly structured investment with a similar level of risk. In the market yield technique,risk, and the Company considers the current contractual interest rate, the capital structure and other terms of the investment relative to risk of the company and the specific investment. A key determinant of risk, among other things, is the leverage through the investment relative to the EV of the portfolio company. As debt investments held by the Company are substantially illiquid with no active transaction market, the Company depends on primary market data, including newly funded transactions and industry specific market movements, as well as secondary market data with respect to high yield debt instruments and syndicated loans, as inputs in determining the appropriate market yield, as applicable.
In accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946 may be valued using net asset value as a practical expedient for fair value. Consistent with FASB guidance under ASC 820, these investments are excluded from the hierarchical levels.
The Company estimates the fair value of privately held warrants using a Black Scholes pricing model, which includes an analysis of various factors and subjective assumptions, including the current stock price (by using an EV analysis as described above), the expected period until exercise, expected volatility of the underlying stock price, expected dividends and the risk free rate. Changes in the subjective input assumptions can materially affect the fair value estimates.
The Company's Board of Directors undertakes a multi-step valuation process each quarter in connection with determining the fair value of the Company's investments:
The quarterly valuation process begins with each portfolio company or investment being initially valued by the Investment Adviser'sOaktree's valuation team in conjunction with the Investment Adviser'sOaktree's portfolio management team and investment professionals responsible for each portfolio investment;
•Preliminary valuations are then reviewed and discussed with management of the Investment Adviser;Oaktree;
Separately, independent valuation firms engaged by the Board of Directors prepare valuations of the Company's investments, on a selected basis, for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment, and submit the reports to the Company and provide such reports to the Investment AdviserOaktree and the Audit Committee of the Board of Directors;
The Investment AdviserOaktree compares and contrasts its preliminary valuations to the valuations of the independent valuation firms and prepares a valuation report for the Audit Committee of the Board of Directors;Committee;
The Audit Committee of the Board of Directors reviews the preliminary valuations with the Investment Adviser,Oaktree, and the Investment AdviserOaktree responds and supplements the preliminary valuations to reflect any discussions between the Investment AdviserOaktree and the Audit Committee;
The Audit Committee of the Board of Directors makes a recommendation to the full Board of Directors regarding the fair value of the investments in the Company's portfolio; and
The Board of Directors discusses valuations and determines the fair value of each investment in the Company's portfolio.
The fair value of the Company's investments atas of September 30, 20172018 and September 30, 20162017 was determined in good faith by the Board of Directors. The Board of Directors has authorized the engagement of independent valuation firms to provide valuation assistance. The Companyand will continue to engage independent valuation firms to provide assistance regarding the determination of the fair value of a portion of the Company's portfolio securities for which market quotations are not readily available or are readily available but deemed not reflective of the fair value of the investment each quarter, and the Board of Directors may reasonably rely on that assistance. As of September 30, 2017, 84.5% of the Company's portfolio at fair value was valued either using market quotations or
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by independent valuation firms. The percentage of the Company's portfolio valued by independent valuation firms may vary from period to period based on the availability of market quotations for the portfolio investments during the respective periods. However, the Board of Directors is responsible for the ultimate valuation of the portfolio investments at fair value as determined in good faith pursuant to the Company's valuation policy and a consistently applied valuation process.
With the exception of the line items entitled "deferred financing costs," "other assets," "credit facilities payable" and "notes payable," which are reported at amortized cost, all assets and liabilities approximate fair value on the Consolidated Statements of Assets and Liabilities. The carrying value of the line items titled "interest, dividends and fees receivable," "due from portfolio companies," "receivables from unsettled transactions," "accounts payable, accrued expenses and other liabilities," "base management fee and incentive fee payable," "due to affiliate," "interest payable," "director fees payable" and "payables from unsettled transactions" approximate fair value due to their short maturities.
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Foreign Currency Translation
The accounting records of the Company are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the prevailing foreign exchange rate on the reporting date. The Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments and investment related assets and liabilities from the fluctuations arising from changes in market prices of securities held. The Company’s investments in foreign securities may involve certain risks, including foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments and therefore the earnings of the Company.
Derivative Instruments
The Company does not utilize hedge accounting and as such values its derivative instruments at fair value with the unrealized gains or losses recorded in “net unrealized appreciation (depreciation) on investments and foreign currency” in the Company’s Consolidated Statement of Operations.
Investment Income:
Interest Income
Interest income, adjusted for accretion of original issue discount ("OID"), is recorded on an accrual basis to the extent that such amounts are expected to be collected. The Company stops accruing interest on investments when it is determined that interest is no longer collectible. Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when there is reasonable doubt that principal or interest cash payments will be collected. Cash interest payments received on investments may be recognized as income or a return of capital depending upon management’s judgment. SuchA non-accrual investments areinvestment is restored to accrual status if past due principal and interest are paid in cash, and the portfolio companies,company, in management's judgment, areis likely to continue timely payment of theirits remaining interest.obligations.
In connection with its investment in a portfolio company, the Company sometimes receives nominal cost equity that is valued as part of the negotiation process with the portfolio company. When the Company receives nominal cost equity, the Company allocates its cost basis in the investment between debt securities and the nominal cost equity at the time of origination. Any resulting discount from recording the loan, or otherwise purchasing a security at a discount, is accreted into interest income over the life of the loan.
For the Company’s secured borrowings, the interest earned on the entire loan balance is recorded within interest income and the interest earned by the buyer from the partial loan sales is recorded within interest expense in the Consolidated Statements of Operations.
PIK Interest Income
The Company's investments in debt securities may contain PIK interest provisions. PIK interest, which represents contractually deferred interest added to the loan balance that is generally due at the end of the loan term, is generally recorded on the accrual basis to the extent such amounts are expected to be collected. The Company generally ceases accruing PIK interest if there is insufficient value to support the accrual or if the Company does not expect the portfolio company to be able to pay all principal and interest due. The Company's decision to cease accruing PIK interest involves subjective judgments and determinations based on available information about a particular portfolio company, including whether the portfolio company is current with respect to its payment of principal and interest on its loans and debt securities; financial statements and financial projections for the portfolio company; the Company's assessment of the portfolio company's business development success; information obtained by the Company in connection with periodic formal update interviews with the portfolio company's management and, if appropriate, the private equity sponsor; and information about the general economic and market conditions in which the portfolio company operates. Based on this and other information, the Company determines whether to cease accruing PIK interest on a loan or debt security. The Company's determination to cease accruing PIK interest on a loan or debt security is generally made well before the Company's full write-down of sucha loan or debt security. In addition, if it is subsequently determined that the Company will not be able to collect any previously accrued PIK interest, the fair value of the loans or debt securities would be reduced by the amount of such previously accrued, but uncollectible, PIK interest. The accrual of PIK interest on the Company’s debt investments increases the recorded cost bases of these investments in the consolidated financial statementsConsolidated Financial Statements and, as a result, increaseswill increase the cost bases of these investments for purposes of computing the capital gain incentive fee payable by the Company to Oaktree beginning in the Investment Adviser.fiscal year ending September 30, 2019. To maintain its status as a RIC, certain income from PIK interest mustmay be paid outrequired to be distributed to the Company’s stockholders, as distributions, even though the Company has not yet collected the cash and may never collect the cash relating to the PIK interest.do so.
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Fee Income
The Company receives a variety of fees in the ordinary course of business, including servicing, advisory, amendment, structuring and prepayment fees, which are classified as fee income and recognized as they are earned.
Dividend Income
The Company generally recognizes dividend income on the ex-dividend date. Distributions received from equity investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from such equity investments as dividend income unless there are sufficient earnings at the portfolio company prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
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During the year ended September 30, 2017, the Company reversed $0.6 million of dividend income previously recorded in prior periods. The Company determined that such dividend receivable balance may no longer be collectible.
Cash and Cash Equivalents and Restricted Cash:
Cash and cash equivalents and restricted cash consist of demand deposits and highly liquid investments with maturities of three months or less when acquired. The Company places its cash and cash equivalents and restricted cash with financial institutions and, at times, cash held in bank accounts may exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limit. Cash and cash equivalents are classified as Level 1 assets and are included on the Company's Consolidated Schedule of Investments.
As of September 30, 2018, included in restricted cash was $5.2 million that was held at Wells Fargo Bank, N.A. in connection with the Company's Citibank Facility and Deutsche Bank Facility (each as defined in Note 6– Borrowings) and $0.8 million held at East West Bank in connection with the Company's East West Bank Facility (as defined in Note 6 – Borrowings). Of the $5.2 million of restricted cash held at Wells Fargo Bank, N.A., pursuant to the terms of the Citibank Facility, the Company was restricted in terms of access to $3.4 million of that amount until the occurrence of the periodic distribution dates and, in connection therewith, the Company’s submission of its required periodic reporting schedules and verifications of the Company’s compliance with the terms of the credit agreement. As of September 30, 2018, the remaining $1.8 million of cash held at Wells Fargo Bank, N.A. was restricted due to the obligation to pay interest under the terms of the Deutsche Bank Facility. As of September 30, 2018, $0.8 million was restricted due to minimum balance requirements under the East West Bank Facility.
As of September 30, 2017, included in restricted cash was $7.4 million that was held at Wells Fargo Bank, N.A. in connection with the Company's Citibank facilityFacility and 2015 Debt Securitization (as defined in Note 6 —– Borrowings). Pursuant to the terms of the Citibank facility,Facility, the Company was restricted in terms of access to $2.0 million of that amount until such time asthe occurrence of the Company submitsperiodic distribution dates and, in connection therewith, the Company’s submission of its required monthlyperiodic reporting schedules.schedules and verifications of the Company’s compliance with the terms of the credit agreement. As of September 30, 2017, $5.4 million of cash held in connection with the 2015 Debt Securitization was restricted due to the obligation to pay interest on the notes under the terms of the 2015 Debt Securitization.
As of September 30, 2016, included in restricted cash was $9.0 million that was held at Wells Fargo Bank, N.A. in connection with the Company's Citibank facility and 2015 Debt Securitization. Pursuant to the terms of the Citibank facility, the Company was restricted in terms of access to $3.5 million until such time as the Company submits its required monthly reporting schedules. As of September 30, 2016, $5.5 million of cash held in connection with the 2015 Debt Securitization was restricted due to the obligation to pay interest on the notes under the terms of the 2015 Debt Securitization.
Due from Portfolio Companies:
Due from portfolio companies consists of amounts payable to the Company from its portfolio companies, excluding those amounts attributable to interest, dividends or fees receivable. These amounts are recognized as they become payable to the Company (e.g., principal payments on the scheduled amortization payment date).
Receivables/Payables From Unsettled Transactions:
Receivables/payables from unsettled transactions consistsconsist of amounts receivable to or payable by the Company for transactions that have not settled at the reporting date.
Deferred Financing Costs:
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs which requires debt financing costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the related debt liability, similar to the presentation of debt discounts. Additionally, in August 2015, the FASB issued ASU 2015-15, Interest - Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which provides further clarification on the same topic and states that the Securities and Exchange Commission ("SEC") would not object to the deferral and presentation of debt issuance costs as an asset and subsequent amortization of the deferred costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The Company adopted the guidance for debt arrangements that are not line-of-credit arrangements for the three months ended December 31, 2016 and applied a retrospective approach. As a result of the adoption, the Company reclassified $2.5 million of deferred financing costs assets to a direct deduction from the related debt liability on the Statement of Assets and Liabilities as of September 30, 2016. The adoption of this guidance had no impact on net assets or the Consolidated Statement of Operations.
Deferred financing costs consist of fees and expenses paid in connection with the closing or amending of credit facilities and debt offerings. Deferred financing costs in connection with credit facilities are capitalized as an asset at the time of payment. Deferred financing costs in connection with all other debt arrangements are a direct deduction from the related debt liability at the time of payment. Deferred financing costs are amortized either using the straight line method or effective interest method over the terms of the respective debt arrangement, as appropriate.arrangement. This amortization expense is included in interest expense in the Company's Consolidated Statements of Operations. Upon early termination or modification of a credit facility, all or a portion of unamortized fees related to such facility may be accelerated into interest expense.
Offering Costs:
Offering costs consist of fees and expenses incurred in connection with the offer and sale of the Company's securities, including legal, accounting and printing fees. The Company charges offering costs to capital at the time of an offering. There werenooffering costs charged to capital during the years ended September 30, 2017 and September 30, 2016.
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Amounts Payable to Syndication Partners:
The Company acts as administrative agent for certain loans it originates and then syndicates. As administrative agent, the Company receives interest, principal and/or other payments from borrowers that are redistributed to syndication partners. If not redistributed by the reporting date, such amounts are classified as restricted cash and a payable is recorded to syndication partners on the Consolidated Statements of Assets and Liabilities.
Secured Borrowings:
The Company follows the guidance in ASC 860 when accounting for loan participations and other partial loan sales. Such guidance provides accounting and reporting standards for transfers and servicing of financial assets and requires a participation or other partial loan sales to meet the definition of a "participating interest," as defined in the guidance, in order for sale treatment to be allowed. Participations or other loan sales which do not meet the definition of a participating interest or which are not eligible for sale accounting remain on the Company's Consolidated Statements of Assets and Liabilities and the proceeds are recorded as a secured borrowing until the definition is met. Secured borrowings are carried at fair value to correspond with the related investments, which are carried at fair value. See Note 6 for additional information.
Fair Value Option:
The Company adopted certain principles under FASB ASC Topic 825 Financial Instruments - Fair Value Option ("ASC 825") and elected the fair value option for its secured borrowings. The Company believes that by electing the fair value option for these financial instruments, it provides consistent measurement of the assets and liabilities which relate to the loan sales mentioned above.
However, the Company has not elected the fair value option to report other selected financial assets and liabilities at fair value. With the exception of the line items entitled "deferred financing costs", "credit facilities payable" and "notes payable," which are reported at amortized cost, all assets and liabilities approximate fair value on the Consolidated Statement of Assets and Liabilities. The carrying value of the line items titled "interest, dividends, and fees receivable," "due from portfolio companies," "receivables from unsettled transactions," "accounts payable, accrued expenses and other liabilities," "base management fee and incentive fee payable," "due to FSC CT," "interest payable," "amounts payable to syndication partners," "director fees payable" and "payables from unsettled transactions" approximate fair value due to their short maturities.
Income Taxes:
The Company has elected to be subject to tax as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment applicable to RICs. In order to be subject to tax as a RIC, among other things, the Company is required to meet certain source of income and asset diversification requirements and timely distribute dividends to its stockholders of an amount generally at least equal to 90% of investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each taxable year. As a RIC, the Company is not subject to federal income tax on the portion of its taxable income and gains distributed currently to stockholders as a dividend. Depending on the level of taxable income earned during a taxable year, the Company may choose to retain taxable income in excess of current year dividend distributions and would distribute such taxable income in the next taxable year. The Company would then incur a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income, determined on a calendar year basis, could exceed estimated current calendar year dividend distributions, the Company accrues excise tax, if any, on estimated excess taxable income as taxable income is earned. The Company anticipates timely distribution of its taxable income within the tax rules under Subchapter M of the Code. The Company did not incur a U.S. federal excise tax for calendar years 20152016 and 20162017 and does not expect to incur a U.S. federal excise tax for calendar year 2017. The Company may incur a U.S. federal excise tax in future years.2018.
The Company holds certain portfolio investments through taxable subsidiaries. The purpose of the Company's taxable subsidiaries is to permit the Company to hold equity investments in portfolio companies which are "pass through" entities for U.S. federal income tax purposes in order to comply with the RIC tax requirements. The taxable subsidiaries are consolidated for financial reporting purposes, and portfolio investments held by them are included in the Company’s Consolidated Financial Statements as portfolio investments and recorded at fair value. The taxable subsidiaries are not consolidated with the Company for U.S. federal income tax purposes and may generate income tax expense, or benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. This income tax expense if any, would beis reflected in the Company's Consolidated Statements of Operations. The Company uses the asset and liability method to account for its taxable subsidiaries' income taxes. Using this method, the Company recognizes deferred tax assets and liabilities for the estimated future tax effects attributable to temporary differences between financial reporting and tax bases of assets and liabilities. In addition, the Company recognizes deferred tax benefits associated with net operating loss carry forwards that it may use to offset future tax obligations. The Company measures deferred tax
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which it expects to recover or settle those temporary differences.
FASB ASC Topic 740, Accounting for Uncertainty in Income Taxes ("ASC 740"), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the Company's Consolidated Financial Statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company's tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management's determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company recognizes the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. Management has analyzed the Company's tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years 2014, 2015, 2016 or 2016.2017. The Company identifies its major tax jurisdictions as U.S. Federal and Connecticut,California, and the Company is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.
Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606) - Principal versus Agent Considerations. This ASU is intended to clarify revenue recognition accounting when a third party is involved in providing goods or services to a customer. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing. This ASU is intended to clarify two aspects of Topic 606: identifying performance obligations and licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients. This ASU amends certain aspects of ASU 2014-09, addresses certain implementation issues identified and clarifies the new revenue standards’ core revenue recognition principles. The new standards will be effective for the Company on October 1, 2018 and early adoption is permitted onpermitted. The Company did not early adopt the original effective date of January 1, 2017.new guidance during the year ended September 30, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effectmajority of this standard on its Consolidated Financial StatementsCompany's revenues is accounted for under FASB ASC Topic 320, Investments - Debt and related disclosures and its ongoing financial reporting.
In August 2014, the FASB issued ASU 2014-15, Equity SecuritiesPresentation of Financial Statements - Going Concern, which requires management to evaluate, at each annual and interim reporting period, a company's ability to continue as a going concern within one year of the date the financial statements are issued and provide related disclosures. The Company adopted ASU 2014-16 on a prospective basis during the year ended September 30, 2017 and determined that the adoption did not have a material impact on its Consolidated Financial Statements.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company adopted ASU 2015-07 during the three months ended December 31, 2016 and determined that the adoption did not have a material impact on its Consolidated Financial Statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall ("ASU 2016-01"), which makes limited amendments to the guidance in 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. Upon adoption, the Company will be required to make a cumulative-effect adjustment to the Consolidated Statement of Assets and Liabilities as of the beginning of the first reporting period in which the guidance is effective. The Company did not early adopt the new guidance during the year ended September 30, 2017. The Company is evaluating the effect that ASU 2016-01 will have on its Consolidated Financial Statements and related disclosures.excluded from
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this standard. The application of this guidance is not expected to have a material impact on the Company’s Consolidated Financial Statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included within cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The new guidance is effective for interim and annual periodsfiscal years beginning after December 15, 2017, including interim periods therein, and early adoption is permitted. The amendment should be adopted retrospectively. The Company did not early adopt the new guidance during the year ended September 30, 2017.2018. The new guidance is not expected to have a material effect on the Company's Consolidated Financial Statements other than a change in presentation of individual line items on the Consolidated Statement of Cash Flows.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which changes the fair value disclosure requirements. The new guidance includes new, eliminated and modified fair value disclosures. Among other requirements, the guidance requires disclosure of the range and weighted average of the significant unobservable inputs for Level 3 fair value measurements and the way it is calculated. The guidance also eliminated the following disclosures: (i) amount and reason for transfers between Level 1 and Level 2, (ii) policy for timing of transfers between levels of the fair value hierarchy and (iii) valuation processes for Level 3 fair value measurement. The guidance is effective for all entities for interim and annual periods beginning after December 15, 2019. Early adoption is permitted upon issuance of the guidance. The adoption of this guidance is not expected to have a material effect on the Company’s financial statements.
In August 2018, the SEC adopted amendments to certain disclosure requirements intended to eliminate redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, US GAAP requirements, or changes in the information environment in its Disclosure Update and Simplification release (the “DUS Release”). In part, the DUS Release requires an investment company to present distributable earnings in total, rather than showing the three components of distributable earnings. The compliance date for the DUS Release was for all filings on or after November 5, 2018. The Company has adopted the DUS Release on November 5, 2018, which did not have a material impact on the Company’s Consolidated Financial Statements.
Note 3. Portfolio Investments
AtAs of September 30, 2018, 188.3% of net assets at fair value, or $556.8 million, was invested in 75 portfolio companies, including 19.8% of net assets, or $58.5 million, in subordinated notes and limited liability company ("LLC") equity interests of OCSI Glick JV LLC (together with its consolidated subsidiaries, the "OCSI Glick JV") at fair value, and 5.6% of net assets, or $16.4 million, was invested in cash and cash equivalents (including $6.0 million of restricted cash). In comparison, as of September 30, 2017, 190.9% of net assets at fair value, or $560.4 million, was invested in 67 portfolio companies, including 19.6% of net assets, or $57.6 million, in subordinated notes and limited liability company ("LLC")LLC equity interests of FSFRthe OCSI Glick JV LLC (together with its consolidated subsidiaries, "FSFR Glick JV"),at fair value, and 14.6% of net assets, or $43.0 million, was invested in cash and cash equivalents (including $7.4 million of restricted cash). In comparison, atAs of September 30, 2016, 176.0%2018, 89.1% of net assetsthe Company's portfolio at fair value or $573.6 million, was investedconsisted of senior secured debt investments that bore interest at floating rates, 10.5% consisted of investments in 63 portfolio companies, including 19.4% of net assets, or $63.3 million, inthe subordinated notes and LLC equity interests of FSFRthe OCSI Glick JV and 8.8%0.4% consisted of net assets, or $28.8 million, was invested in cash and cash equivalents (including $9.0 million of restricted cash).equity investments. As of September 30, 2017, 89.5% of the Company's portfolio at fair value consisted of senior secured debt investments that bore interest at floating rates, and that are secured by first or second priority liens on the assets of the portfolio companies, 10.3% consisted of investments in the subordinated notes of FSFRthe OCSI Glick JV and 0.2% consisted of equity investments in other portfolio companies. As of September 30, 2016, 87.6% of the Company's portfolio at fair value consisted of senior secured debt investments that bore interest at floating rates and that are secured by first or second priority liens on the assets of the portfolio companies, 9.9%0.2% consisted of equity investments.
As of September 30, 2018 and 2017, the Company's equity investments in the subordinated notesconsist of FSFR Glick JV, 1.1% consisted of investments in the LLC equity interests of FSFR Glick JVin portfolio companies. These instruments generally do not produce a current return but are held for potential investment appreciation and 1.4% consisted of equity investments in other portfolio companies.capital gain.
During the years ended September 30, 2018, 2017 2016 and 2015,2016, the Company recorded net realized gain (loss)loss on investments, and secured borrowings and foreign currency of $(13.4)$27.7 million, $(12.8)$13.4 million and $0.4$12.8 million, respectively. During the years ended September 30, 2018, 2017 2016 and 2015,2016, the Company recorded net unrealized depreciationappreciation (depreciation) on investments, and secured borrowings and foreign currency of $17.8$28.6 million, $17.0$(17.8) million and $12.8$(17.0) million, respectively.
The composition of the Company's investments as of September 30, 20172018 and September 30, 20162017 at cost and fair value was as follows:
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| | | Cost | | Fair Value | | Cost | | Fair Value |
| Investments in debt securities (senior secured) | | $ | 523,384,267 |
| | $ | 501,769,997 |
| | $ | 518,778,491 |
| | $ | 502,385,158 |
|
| Investments in equity securities (common stock, preferred stock and warrants) | | 10,365,425 |
| | 1,059,989 |
| | 10,572,966 |
| | 7,902,556 |
|
| Debt investment in FSFR Glick JV | | 64,228,881 |
| | 57,606,674 |
| | 64,005,755 |
| | 56,885,646 |
|
| Equity investment in FSFR Glick JV | | 7,111,751 |
| | — |
| | 7,111,751 |
| | 6,431,021 |
|
| Total | | $ | 605,090,324 |
| | $ | 560,436,660 |
| | $ | 600,468,963 |
| | $ | 573,604,381 |
|
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| | | Cost | | Fair Value | | Cost | | Fair Value |
| Senior secured loans | | $ | 498,923,794 |
| | $ | 496,367,413 |
| | $ | 523,384,267 |
| | $ | 501,769,997 |
|
| Equity securities, excluding the OCSI Glick JV | | 500,000 |
| | 1,962,245 |
| | 10,365,425 |
| | 1,059,989 |
|
| OCSI Glick JV subordinated notes | | 66,390,219 |
| | 58,512,170 |
| | 64,228,881 |
| | 57,606,674 |
|
| OCSI Glick JV equity interests | | 7,111,751 |
| | — |
| | 7,111,751 |
| | — |
|
| Total | | $ | 572,925,764 |
| | $ | 556,841,828 |
| | $ | 605,090,324 |
| | $ | 560,436,660 |
|
The following table presents the financial instruments carried at fair value as of September 30, 20172018 on the Company's Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Measured at Net Asset Value (a) | | Total |
| Investments in debt securities (senior secured) | | $ | — |
| | $ | 75,149,541 |
| | $ | 426,620,456 |
| | $ | — |
| | $ | 501,769,997 |
|
| Investments in debt securities (subordinated notes of FSFR Glick JV) | | — |
| | — |
| | 57,606,674 |
| | — |
| | 57,606,674 |
|
| Investment in equity securities (common stock, preferred stock and warrants, including LLC equity interests of FSFR Glick JV) | | — |
| | — |
| | 1,059,989 |
| | — |
| | 1,059,989 |
|
| Total investments at fair value | | — |
| | 75,149,541 |
| | 485,287,119 |
| | — |
| | 560,436,660 |
|
| Cash and cash equivalents | | 35,604,127 |
| | — |
| | — |
| | — |
| | 35,604,127 |
|
| Total assets at fair value | | $ | 35,604,127 |
| | $ | 75,149,541 |
| | $ | 485,287,119 |
| | $ | — |
| | $ | 596,040,787 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Measured at Net Asset Value (a) | | Total |
| Senior secured loans | | $ | — |
| | $ | 313,611,346 |
| | $ | 182,756,067 |
| | $ | — |
| | $ | 496,367,413 |
|
| OCSI Glick JV subordinated notes | | — |
| | — |
| | 58,512,170 |
| | — |
| | 58,512,170 |
|
| Equity securities | | — |
| | — |
| | 1,962,245 |
| | — |
| | 1,962,245 |
|
| Total investments at fair value | | $ | — |
| | $ | 313,611,346 |
| | $ | 243,230,482 |
| | $ | — |
| | $ | 556,841,828 |
|
| Derivative asset | | $ | — |
| | $ | 45,807 |
| | $ | — |
| | $ | — |
| | $ | 45,807 |
|
__________
| |
| (a) | In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy. These investments are generally not redeemable. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities. |
The following table presents the financial instruments carried at fair value as of September 30, 20162017 on the Company's Consolidated Statement of Assets and Liabilities for each of the three levels of hierarchy established by ASC 820:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Measured at Net Asset Value (a) | | Total |
| Investments in debt securities (senior secured) | | $ | — |
| | $ | — |
| | $ | 502,385,158 |
| | $ | — |
| | $ | 502,385,158 |
|
| Investments in debt securities (subordinated notes of FSFR Glick JV) | | — |
| | — |
| | 56,885,646 |
| | — |
| | 56,885,646 |
|
| Investment in equity securities (common stock, preferred stock and warrants, including LLC equity interests of FSFR Glick JV) | | — |
| | — |
| | 7,902,556 |
| | 6,431,021 |
| | 14,333,577 |
|
| Total investments at fair value | | — |
| | — |
| | 567,173,360 |
| | 6,431,021 |
| | 573,604,381 |
|
| Cash and cash equivalents | | 19,778,841 |
| | — |
| | — |
| | — |
| | 19,778,841 |
|
| Total assets at fair value | | $ | 19,778,841 |
| | $ | — |
| | $ | 567,173,360 |
| | $ | 6,431,021 |
| | $ | 593,383,222 |
|
| Secured borrowings | | — |
| | — |
| | 4,985,425 |
| | — |
| | 4,985,425 |
|
| Total liabilities at fair value | | $ | — |
| | $ | — |
| | $ | 4,985,425 |
| | $ | — |
| | $ | 4,985,425 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Level 1 | | Level 2 | | Level 3 | | Measured at Net Asset Value (a) | | Total |
| Senior secured loans | | $ | — |
| | $ | 75,149,541 |
| | $ | 426,620,456 |
| | $ | — |
| | $ | 501,769,997 |
|
| OCSI Glick JV subordinated notes | | — |
| | — |
| | 57,606,674 |
| | — |
| | 57,606,674 |
|
| Equity securities | | — |
| | — |
| | 1,059,989 |
| | — |
| | 1,059,989 |
|
| Total investments at fair value | | $ | — |
| | $ | 75,149,541 |
| | $ | 485,287,119 |
| | $ | — |
| | $ | 560,436,660 |
|
__________
| |
| (a) | In accordance with ASC 820-10, certain investments that are measured using the net asset value per share (or its equivalent) as a practical expedient for fair value have not been classified in the fair value hierarchy. These investments are generally not redeemable. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities. |
When a determination is made to classify a financial instrument within Level 3 of the valuation hierarchy, the determination is based upon the fact that the unobservable factors are significant to the overall fair value measurement. However, Level 3 financial instruments typically include, in addition to the unobservable or Level 3 components, observable components (i.e. components that are actively quoted and can be validated by external sources). Accordingly, the appreciation (depreciation) in the tables below includes changes in fair value due in part to observable factors that are part of the valuation methodology. Transfers between levels are recognized at the beginning of the reporting period.
The following table provides a roll-forward in the changes in fair value from September 30, 2017 to September 30, 2018 for all investments for which the Company determined fair value using unobservable (Level 3) factors:
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | |
| | | Investments |
| | | | | | | | | |
| | | Senior Secured Loans | | OCSI Glick JV Subordinated Notes | | Equity Securities | | Total Investments |
| Fair value as of September 30, 2017 | | $ | 426,620,456 |
| | $ | 57,606,674 |
| | $ | 1,059,989 |
| | $ | 485,287,119 |
|
| New investments & net revolver activity | | 119,198,120 |
| | — |
| | — |
| | 119,198,120 |
|
| Redemptions/repayments/sales | | (260,726,248 | ) | | — |
| | (976,260 | ) | | (261,702,508 | ) |
| Transfers in (a) | | 6,561,893 |
| | — |
| | — |
| | 6,561,893 |
|
| Transfers out (a) | | (111,857,840 | ) | | | | — |
| | (111,857,840 | ) |
| Net accrual of PIK interest income | | — |
| | 2,161,339 |
| | — |
| | 2,161,339 |
|
| Accretion of OID | | 2,349,407 |
| | — |
| | — |
| | 2,349,407 |
|
| Net unrealized appreciation (depreciation) on investments and foreign currency | | 16,308,314 |
| | (1,255,843 | ) | | 10,767,685 |
| | 25,820,156 |
|
| Net realized loss on investments | | (15,698,035 | ) | | — |
| | (8,889,169 | ) | | (24,587,204 | ) |
| Fair value as of September 30, 2018 | | $ | 182,756,067 |
| | $ | 58,512,170 |
| | $ | 1,962,245 |
| | $ | 243,230,482 |
|
| Net unrealized appreciation (depreciation) relating to Level 3 assets still held as of September 30, 2018 and reported within net unrealized appreciation (depreciation) on investments and foreign currency in the Consolidated Statement of Operations for the year ended September 30, 2018 | | $ | 1,048,941 |
| | $ | (1,255,843 | ) | | $ | 982,044 |
| | $ | 775,142 |
|
__________
| |
| (a) | There were transfers in/out of Level 3 from/to Level 2 for certain investments during the year ended September 30, 2018 as a result of a change in the number of market quotes available and/or a change in market liquidity. |
The following table provides a roll-forward in the changes in fair value from September 30, 2016 to September 30, 2017 for all investments and secured borrowings for which the Company determined fair value using unobservable (Level 3) factors:
| | | | | Investments | | Liabilities | | Investments | | Liabilities |
| | | | | | | | | | | | | | | | | | | | | |
| | | Senior Secured Debt | | Subordinated notes of FSFR Glick JV | | Common stock, preferred stock and warrants | | Total | | Secured Borrowings | | Senior Secured Loans | | OCSI Glick JV Subordinated Notes
| | Equity Securities | | Total Investments | | Secured Borrowings |
| Fair value as of September 30, 2016 | | $ | 502,385,158 |
| | $ | 56,885,646 |
| | $ | 7,902,556 |
| | $ | 567,173,360 |
| | $ | 4,985,425 |
| | $ | 502,385,158 |
| | $ | 56,885,646 |
| | $ | 7,902,556 |
| | $ | 567,173,360 |
| | $ | 4,985,425 |
|
| New investments & net revolver activity | | 225,012,781 |
| | — |
| | 14,743 |
| | 225,027,524 |
| | — |
| | 225,012,781 |
| | — |
| | 14,743 |
| | 225,027,524 |
| | — |
|
| Redemptions/repayments/sales | | (276,479,425 | ) | | — |
| | (222,284 | ) | | (276,701,709 | ) | | (5,000,000 | ) | | (276,479,425 | ) | | — |
| | (222,284 | ) | | (276,701,709 | ) | | (5,000,000 | ) |
| Transfers out (a) | | (12,608,478 | ) | | — |
| | — |
| | (12,608,478 | ) | | — |
| | (12,608,478 | ) | | — |
| | — |
| | (12,608,478 | ) | | — |
|
| Net accrual of PIK interest income | | 185,296 |
| | 223,125 |
| | — |
| | 408,421 |
| | — |
| | 185,296 |
| | 223,125 |
| | — |
| | 408,421 |
| | — |
|
| Accretion of original issue discount | | 3,794,604 |
| | — |
| | — |
| | 3,794,604 |
| | — |
| |
| Accretion of OID | | | 3,794,604 |
| | — |
| | — |
| | 3,794,604 |
| | — |
|
| Net change in unearned income | | 19,280 |
| | — |
| | — |
| | 19,280 |
| | — |
| | 19,280 |
| | — |
| | — |
| | 19,280 |
| | — |
|
| Net unrealized appreciation (depreciation) on investments | | (2,303,845 | ) | | 497,903 |
| | (6,635,026 | ) | | (8,440,968 | ) | | — |
| | (2,303,845 | ) | | 497,903 |
| | (6,635,026 | ) | | (8,440,968 | ) | | — |
|
| Net unrealized appreciation on secured borrowings | | — |
| | — |
| | — |
| | — |
| | 14,575 |
| | — |
| | — |
| | — |
| | — |
| | 14,575 |
|
| Net realized loss on investments | | (13,384,915 | ) | | — |
| | — |
| | (13,384,915 | ) | | — |
| | (13,384,915 | ) | | — |
| | — |
| | (13,384,915 | ) | | — |
|
| Fair value as of September 30, 2017 | | $ | 426,620,456 |
| | $ | 57,606,674 |
| | $ | 1,059,989 |
| | $ | 485,287,119 |
| | $ | — |
| | $ | 426,620,456 |
| | $ | 57,606,674 |
| | $ | 1,059,989 |
| | $ | 485,287,119 |
| | $ | — |
|
| Net unrealized appreciation (depreciation) relating to Level 3 assets and liabilities still held at September 30, 2017 and reported within net unrealized appreciation (depreciation) on investments and net unrealized appreciation on secured borrowings in the Consolidated Statement of Operations for the year ended September 30, 2017 | | $ | (15,458,340 | ) | | $ | 497,902 |
| | $ | 149,488 |
| | $ | (14,810,950 | ) | | $ | — |
| |
| Net unrealized appreciation (depreciation) relating to Level 3 assets and liabilities still held at September 30, 2017 and reported within net unrealized appreciation (depreciation) on investments and foreign currency and net unrealized appreciation on secured borrowings in the Consolidated Statement of Operations for the year ended September 30, 2017 | | | $ | (15,458,340 | ) | | $ | 497,902 |
| | $ | 149,488 |
| | $ | (14,810,950 | ) | | $ | — |
|
__________
| |
| (a) | There was a transfer out of level 3 to level 2 for one investment during the year ended September 30, 2017 as a result of an increased number of market quotes available.available and/or a change in market liquidity. |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a roll-forward in the changes in fair value from September 30, 2015 to September 30, 2016 for all investments for which the Company determined fair value using unobservable (Level 3) factors:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Investments | | Liabilities |
| | | | | | | | | | | |
| | | Senior Secured Debt | | Subordinated notes of FSFR Glick JV | | Common stock, preferred stock and warrants | | Total | | Secured Borrowings |
| Fair value as of September 30, 2015 | | $ | 565,526,453 |
| | $ | 52,603,346 |
| | $ | 964,100 |
| | $ | 619,093,899 |
| | $ | — |
|
| New investments & net revolver activity | | 276,326,738 |
| | 11,064,375 |
| | 10,072,966 |
| | 297,464,079 |
| | 5,000,000 |
|
| Redemptions/repayments/sales | | (320,847,550 | ) | | (154,217 | ) | | — |
| | (321,001,767 | ) | | — |
|
| Net accrual of PIK interest income | | 88,839 |
| | — |
| | — |
| | 88,839 |
| | — |
|
| Accretion of original issue discount | | 1,924,087 |
| | — |
| | — |
| | 1,924,087 |
| | — |
|
| Net change in unearned income | | 17,170 |
| | — |
| | — |
| | 17,170 |
| | — |
|
| Net unrealized depreciation on investments | | (7,880,802 | ) | | (6,627,858 | ) | | (3,134,510 | ) | | (17,643,170 | ) | | — |
|
| Net unrealized depreciation on secured borrowings | | — |
| | — |
| | — |
| | — |
| | (14,575 | ) |
| Net realized loss on investments | | (12,769,777 | ) | | — |
| | — |
| | (12,769,777 | ) | | — |
|
| Fair value as of September 30, 2016 | | $ | 502,385,158 |
| | $ | 56,885,646 |
| | $ | 7,902,556 |
| | $ | 567,173,360 |
| | $ | 4,985,425 |
|
| Net unrealized depreciation relating to Level 3 assets and liabilities still held at September 30, 2016 and reported within net unrealized appreciation (depreciation) on investments and net unrealized depreciation on secured borrowings in the Consolidated Statement of Operations for the year ended September 30, 2016 | | $ | (10,913,833 | ) | | $ | (6,627,858 | ) | | $ | (2,486,439 | ) | | $ | (20,028,130 | ) | | $ | (14,575 | ) |
Significant Unobservable Inputs for Level 3 Investments
The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments, which are carried at fair value as of September 30, 2018:
|
| | | | | | | | | | | | | | | |
| Asset | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average (a) |
| Senior secured loans | | $ | 124,248,587 |
| | Market yield technique | | Market yield | | (b) | 7.7% | - | 15.8% | | 10.4% |
| | | 9,474,633 |
| | Transactions precedent technique | | Transaction price | | (c) | N/A | - | N/A | | N/A |
| | | 49,032,847 |
| | Broker Quotations | | Broker quoted price | | (d) | N/A | - | N/A | | N/A |
| OCSI Glick JV subordinated notes | | 58,512,170 |
| | Enterprise value technique | | N/A | | (e) | N/A | - | N/A | | N/A |
| Equity securities | | 1,758,950 |
| | Enterprise value technique | | Revenue multiple | | (f) | 5.9x | - | 6.9x | | 6.4x |
| | | 203,295 |
| | Enterprise value technique | | EBITDA multiple | | (f) | 17.0x | - | 19.0x | | 18.0x |
| Total | | $ | 243,230,482 |
| | | | | | | | | | | |
_____________________
(a) Weighted averages are calculated based on fair value of investments.
(b) Used when market participant would take into account market yield when pricing the investment.
(c) Used when there is an observable transaction or pending event for the investment.
(d) The Company generally uses prices provided by an independent pricing service which are non-binding indicative prices on or near the valuation date as the primary basis for the fair value determinations for quoted senior secured debt investments. Since these prices are non-binding, they may not be indicative of fair value. The Company evaluates the quotations provided by pricing vendors and brokers based on available market information, including trading activity of the subject or similar securities, or by performing a comparable security analysis to ensure that fair values are reasonably estimated. Each quoted price is evaluated by the Audit Committee of the Company's Board of Directors in conjunction with additional information compiled by Oaktree.
(e) The Company determined the value of its subordinated notes of the OCSI Glick JV based on the total assets less the total liabilities senior to the subordinated notes held at the OCSI Glick JV in an amount not exceeding par under the enterprise value technique.
(f) Used when market participant would use such multiples when pricing the investment.
Under the market yield technique, the significant unobservable input used in the fair value measurement of the Company's investments in debt securities as of September 30, 2018 is the market yield. Increases or decreases in the market yield may result in a lower or higher fair value measurement, respectively.
Under the enterprise value technique, the significant unobservable input used in the fair value measurement of the Company's investments in debt or equity securities as of September 30, 2018 is the earnings before interest, taxes, depreciation and amortization ("EBITDA") multiple or revenue multiple, as applicable. Increases or decreases in the valuation multiples in isolation may result in a higher or lower fair value measurement, respectively.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments, which are carried at fair value as of September 30, 2017:
|
| | | | | | | | | | | | | | | |
| Asset | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average (c) |
| Senior secured debt | | $ | 208,118,444 |
| | Market yield technique | | Capital structure premium | | (a) | 0.0% | - | 2.0% | | 0.2% |
| | | | | | | Tranche specific risk premium / (discount) | | (a) | (3.1)% | - | 8.0% | | 0.2% |
| | | | | | | Size premium | | (a) | 0.0% | - | 1.5% | | 0.7% |
| | | | | | | Industry premium / (discount) | | (a) | (1.1)% | - | 2.6% | | 0.0% |
| | | 23,192,266 |
| | Enterprise value technique | | EBITDA multiple | | (b) | 6.4x | - | 6.4x | | 6.4x |
| | | 6,242,550 |
| | Enterprise value technique | | Revenue multiple | | (b) | 0.2x | - | 0.6x | | 0.5x |
| | | 20,070,000 |
| | Transactions precedent technique | | Transaction price | | (d) | N/A | - | N/A | | N/A |
| | | 168,997,196 |
| | Market quotations | | Broker quoted price | | (e) | N/A | - | N/A | | N/A |
| FSFR Glick JV subordinated notes | | 57,606,674 |
| | Enterprise value technique | | N/A | | (f) | N/A | - | N/A | | N/A |
| Preferred & Common Equity | | 1,059,989 |
| | Enterprise value technique | | EBITDA multiple | | (b) | 0.2x | - | 15.5x | | 8.1x |
| Total | | $ | 485,287,119 |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| Asset | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average (a) |
| Senior secured loans | | $ | 208,118,444 |
| | Market yield technique | | Capital structure premium | | (b) | 0.0% | - | 2.0% | | 0.2% |
| | | | | | | Tranche specific risk premium / (discount) | | (b) | (3.1)% | - | 8.0% | | 0.2% |
| | | | | | | Size premium | | (b) | 0.0% | - | 1.5% | | 0.7% |
| | | | | | | Industry premium / (discount) | | (b) | (1.1)% | - | 2.6% | | 0.0% |
| | | 23,192,266 |
| | Enterprise value technique | | EBITDA multiple | | (c) | 5.9x | - | 6.9x | | 6.4x |
| | | 6,242,550 |
| | Enterprise value technique | | Revenue multiple | | (c) | 0.2x | - | 0.6x | | 0.5x |
| | | 20,070,000 |
| | Transactions precedent technique | | Transaction price | | (d) | N/A | - | N/A | | N/A |
| | | 168,997,196 |
| | Market quotations | | Broker quoted price | | (e) | N/A | - | N/A | | N/A |
| OCSI Glick JV subordinated notes | | 57,606,674 |
| | Enterprise value technique | | N/A | | (f) | N/A | - | N/A | | N/A |
| Equity securities | | 1,059,989 |
| | Enterprise value technique | | EBITDA multiple | | (c) | 0.2x | - | 15.5x | | 8.1x |
| Total | | $ | 485,287,119 |
| | | | | | | | | | | |
_____________________
(a) Weighted averages are calculated based on fair value of investments.
(b) Used when market participant would take into account this premium or discount when pricing the investment.investment based on a market yield.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(b)(c) Used when market participant would use such multiples when pricing the investment.
(c) Weighted averages are calculated based on fair value of investments.
(d) Used when there is an observable transaction or pending event for the investment.
(e) The Company generally uses prices provided by an independent pricing service which are non-binding indicative prices on or near the valuation date as the primary basis for the fair value determinations for quoted senior secured debt investments. Since these prices are non-binding, they may not be indicative of fair value. The Company evaluates the quotations provided by pricing vendors and brokers based on available market information, including trading activity of the subject or similar securities, or by performing a comparable security analysis to ensure that fair values are reasonably estimated. Each quoted price is evaluated by the Audit Committee of the Company's Board of Directors in conjunction with additional information compiled by the Investment Adviser, including financial performance, recent business developments and various other factors.Oaktree.
(f) The Company determined the value of its subordinated notes of the OCSI Glick JV based on the total assets less the total liabilities senior to the subordinated notes held at FSFRthe OCSI Glick JV in an amount not exceeding par under the enterprise value technique.
The following table provides quantitative information related to the significant unobservable inputs for Level 3 investments and secured borrowings, which are carried at fair value as of September 30, 2016:
|
| | | | | | | | | | | | | | | |
| Asset | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average (c) |
| Senior secured debt | | $ | 270,620,843 |
| | Market yield technique | | Capital structure premium | | (a) | 0.0% | - | 2.0% | | 0.1% |
| | | | | | | Tranche specific risk premium / (discount) | | (a) | (4.5)% | - | 5.3% | | (1.4)% |
| | | | | | | Size premium | | (a) | 0.0% | - | 1.5% | | 0.8% |
| | | | | | | Industry premium / (discount) | | (a) | (1.3)% | - | 5.4% | | 0.3% |
| | | 12,440,322 |
| | Enterprise value technique | | Weighted average cost of capital | | | 23.0% | - | 23.0% | | 23.0% |
| | | | | | | Company specific risk premium | | (a) | 15.0% | - | 15.0% | | 15.0% |
| | | | | | | Revenue growth rate | | | 6.0% | - | 6.0% | | 6.0% |
| | | | | | | Revenue multiple | | (b) | 1.1x | - | 1.1x | | 1.1x |
| | | 33,036,389 |
| | Transactions precedent technique | | Transaction price | | (d) | N/A | - | N/A | | N/A |
| | | 186,287,604 |
| | Market quotations | | Broker quoted price | | (e) | N/A | - | N/A | | N/A |
| FSFR Glick JV subordinated notes | | 56,885,646 |
| | Market yield technique | | Capital structure premium | | (a) | 2.0% | - | 2.0% | | 2.0% |
| | | | | | | Tranche specific risk premium / (discount) | | (a) | (1.4)% | - | (1.4)% | | (1.4)% |
| | | | | | | Size premium | | (a) | 2.0% | - | 2.0% | | 2.0% |
| | | | | | | Industry premium / (discount) | | (a) | 1.9% | - | 1.9% | | 1.9% |
| Preferred & Common Equity | | 7,902,556 |
| | Enterprise value technique | | Weighted average cost of capital | | | 14.0% | - | 18.0% | | 14.5% |
| | | | | | | Company specific risk premium | | (a) | 1.0% | - | 2.0% | | 1.9% |
| | | | | | | Revenue growth rate | | | (21.6)% | - | 57.8% | | (12.0)% |
| | | | | | | Revenue multiple | | | 1.0x | - | 1.0x | | 1.0x |
| | | | | | | EBITDA multiple | | (b) | 13.7x | - | 18.0x | | 15.6x |
| Total | | $ | 567,173,360 |
| | | | | | | | | | | |
| Liabilities | | Fair Value | | Valuation Technique | | Unobservable Input | | Range | | Weighted Average |
| Secured borrowings | | $ | 4,985,425 |
| | Market quotations | | Broker quoted price | | (e) | N/A | - | N/A | | N/A |
| Total | | $ | 4,985,425 |
| | | | | | | | | | | |
_____________________
(a) Used when market participant would take into account this premium or discount when pricing the investment.
(b) Used when market participant would use such multiples when pricing the investment.
(c) Weighted averages are calculated based on fair value of investments.
(d) Used when there is an observable transaction or pending event for the investment.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) The Company generally uses prices provided by an independent pricing service which are non-binding indicative prices on or near the valuation date as the primary basis for the fair value determinations for quoted senior secured debt investments. Since these prices are non-binding, they may not be indicative of fair value. Each quoted price is evaluated by the Audit Committee of the Company's Board of Directors in conjunction with additional information compiled by the Company, including financial performance, recent business developments and various other factors.
Under the market yield technique, the significant unobservable inputs used in the fair value measurement of the Company's investments in debt securities and secured borrowingsas of September 30, 2017 are capital structure premium, tranche specific risk premium (discount), size premium and industry premium (discount). Increases or decreases in any of those inputs in isolation may result in a lower or higher fair value measurement, respectively.
Under the enterprise value technique, the significant unobservable input used in the fair value measurement of the Company's investments in debt or equity securities as of September 30, 2017 is the EBITDA/Revenue multiple.EBITDA or revenue multiple, as applicable. Increases or decreases in the valuation multiples in isolation may result in a higher or lower fair value measurement, respectively.
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of September 30, 20172018 and the level of each financial liability within the fair value hierarchy:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Citibank facility payable | | $ | 76,456,800 |
| | $ | 76,456,800 |
| | $ | — |
| | $ | — |
| | $ | 76,456,800 |
|
| East West Bank facility payable | | 6,500,000 |
| | 6,500,000 |
| | — |
| | — |
| | 6,500,000 |
|
| Notes payable (net of unamortized financing costs) | | 177,775,868 |
| | 180,000,000 |
| | — |
| | — |
| | 180,000,000 |
|
| Total | | $ | 260,732,668 |
| | $ | 262,956,800 |
| | $ | — |
| | $ | — |
|
| $ | 262,956,800 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Citibank Facility payable | | $ | 110,056,800 |
| | $ | 110,056,800 |
| | $ | — |
| | $ | — |
| | $ | 110,056,800 |
|
| East West Bank Facility payable | | 8,000,000 |
| | 8,000,000 |
| | — |
| | — |
| | 8,000,000 |
|
| Deutsche Bank Facility payable | | 157,000,000 |
| | 157,000,000 |
| | — |
| | — |
| | 157,000,000 |
|
| Total | | $ | 275,056,800 |
| | $ | 275,056,800 |
| | $ | — |
| | $ | — |
|
| $ | 275,056,800 |
|
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying value and fair value of the Company’s financial liabilities disclosed, but not carried, at fair value as of September 30, 20162017 and the level of each financial liability within the fair value hierarchy:
| | | | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Citibank facility payable | | $ | 107,426,800 |
| | $ | 107,426,800 |
| | $ | — |
| | $ | — |
| | $ | 107,426,800 |
| |
| Citibank Facility payable | | | $ | 76,456,800 |
| | $ | 76,456,800 |
| | $ | — |
| | $ | — |
| | $ | 76,456,800 |
|
| East West Bank Facility payable | | | 6,500,000 |
| | 6,500,000 |
| | — |
| | — |
| | 6,500,000 |
|
| Notes payable (net of unamortized financing costs) | | 177,485,764 |
| | 180,000,000 |
| | — |
| | — |
| | 180,000,000 |
| | 177,775,868 |
| | 180,000,000 |
| | — |
| | — |
| | 180,000,000 |
|
| Total | | $ | 284,912,564 |
| | $ | 287,426,800 |
| | $ | — |
| | $ | — |
| | $ | 287,426,800 |
| | $ | 260,732,668 |
| | $ | 262,956,800 |
| | $ | — |
| | $ | — |
| | $ | 262,956,800 |
|
The principal values of the credit facilities payable and notes payable approximate their fair values due to their variable interest rates and are included in Level 3 of the hierarchy.
Portfolio Composition
Summaries of the composition of the Company's investment portfolio at cost as a percentage of total investments and at fair value as a percentage of total investments and total net assets are shown in the following tables:
|
| | | | | | | | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| Cost: | | | | % of Total Investments | | | | % of Total Investments |
| Senior secured debt | | $ | 523,384,267 |
| | 86.50 | % | | $ | 518,778,491 |
| | 86.40 | % |
| Subordinated notes of FSFR Glick JV | | 64,228,881 |
| | 10.61 | % | | 64,005,755 |
| | 10.66 | % |
| LLC equity interests of FSFR Glick JV | | 7,111,751 |
| | 1.18 | % | | 7,111,751 |
| | 1.18 | % |
| Purchased equity | | 10,365,425 |
| | 1.71 | % | | 10,572,966 |
| | 1.76 | % |
| Equity grants | | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 605,090,324 |
| | 100.00 | % | | $ | 600,468,963 |
| | 100.00 | % |
|
| | | | | | | | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| Cost: | | | | % of Total Investments | | | | % of Total Investments |
| Senior secured loans | | $ | 498,923,794 |
| | 87.08 | % | | $ | 523,384,267 |
| | 86.50 | % |
| OCSI Glick JV subordinated notes | | 66,390,219 |
| | 11.59 | % | | 64,228,881 |
| | 10.61 | % |
| OCSI Glick JV equity interests | | 7,111,751 |
| | 1.24 | % | | 7,111,751 |
| | 1.18 | % |
| Equity securities | | 500,000 |
| | 0.09 | % | | 10,365,425 |
| | 1.71 | % |
| Total | | $ | 572,925,764 |
| | 100.00 | % | | $ | 605,090,324 |
| | 100.00 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| Fair Value: | | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets |
| Senior secured loans | | $ | 496,367,413 |
| | 89.14 | % | | 167.84 | % | | $ | 501,769,997 |
| | 89.53 | % | | 170.87 | % |
| OCSI Glick JV subordinated notes | | 58,512,170 |
| | 10.51 | % | | 19.78 | % | | 57,606,674 |
| | 10.28 | % | | 19.62 | % |
| OCSI Glick JV equity interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Equity securities | | 1,962,245 |
| | 0.35 | % | | 0.66 | % | | 1,059,989 |
| | 0.19 | % | | 0.36 | % |
| Total | | $ | 556,841,828 |
| | 100.00 | % | | 188.28 | % | | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| Fair Value: | | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets |
| Senior secured debt | | $ | 501,769,997 |
| | 89.53 | % | | 170.87 | % | | $ | 502,385,158 |
| | 87.58 | % | | 154.18 | % |
| Subordinated notes of FSFR Glick JV | | 57,606,674 |
| | 10.28 | % | | 19.62 | % | | 56,885,646 |
| | 9.92 | % | | 17.46 | % |
| LLC equity interests of FSFR Glick JV | | — |
| | — |
| | — |
| | 6,431,021 |
| | 1.12 | % | | 1.97 | % |
| Purchased equity | | 1,059,989 |
| | 0.19 | % | | 0.36 | % | | 7,782,214 |
| | 1.36 | % | | 2.39 | % |
| Equity grants | | — |
| | — |
| | — |
| | 120,342 |
| | 0.02 | % | | 0.04 | % |
| Total | | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % | | $ | 573,604,381 |
| | 100.00 | % | | 176.04 | % |
The Company primarily invests in portfolio companies located in North America. The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company's business. The following tables show the portfolio composition by geographic region at cost as a percentage of total investments and at fair value as a percentage of total investments and total net assets:
|
| | | | | | | | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| Cost: | | | | % of Total Investments | | | | % of Total Investments |
| Northeast U.S. | | $ | 217,508,260 |
| | 35.94 | % | | $ | 223,662,953 |
| | 37.25 | % |
| Midwest U.S. | | 115,147,194 |
| | 19.03 | % | | 77,086,840 |
| | 12.84 | % |
| Southwest U.S. | | 101,583,440 |
| | 16.79 | % | | 123,909,372 |
| | 20.64 | % |
| Southeast U.S. | | 89,214,997 |
| | 14.74 | % | | 76,201,785 |
| | 12.69 | % |
| West U.S. | | 74,469,039 |
| | 12.31 | % | | 84,992,619 |
| | 14.15 | % |
| Northwest | | 3,799,884 |
| | 0.63 | % | | — |
| | — |
|
| International | | 3,367,510 |
| | 0.56 | % | | 14,615,394 |
| | 2.43 | % |
| Total | | $ | 605,090,324 |
| | 100.00 | % | | $ | 600,468,963 |
| | 100.00 | % |
|
| | | | | | | | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| Cost: | | | | % of Total Investments | | | | % of Total Investments |
| Northeast | | $ | 173,813,451 |
| | 30.33 | % | | $ | 217,508,260 |
| | 35.94 | % |
| Southwest | | 120,288,446 |
| | 21.00 | % | | 101,583,440 |
| | 16.79 | % |
| West | | 94,366,910 |
| | 16.47 | % | | 74,469,039 |
| | 12.31 | % |
| Midwest | | 86,780,283 |
| | 15.15 | % | | 115,147,194 |
| | 19.03 | % |
| Southeast | | 61,850,120 |
| | 10.80 | % | | 89,214,997 |
| | 14.74 | % |
| International | | 35,826,554 |
| | 6.25 | % | | 3,367,510 |
| | 0.56 | % |
| Northwest | | — |
| | — |
| | 3,799,884 |
| | 0.63 | % |
| Total | | $ | 572,925,764 |
| | 100.00 | % | | $ | 605,090,324 |
| | 100.00 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| Fair Value: | | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets |
| Northeast U.S. | | $ | 173,667,526 |
| | 30.99 | % | | 59.14 | % | | $ | 208,857,837 |
| | 36.41 | % | | 64.10 | % |
| Midwest U.S. | | 115,780,284 |
| | 20.66 | % | | 39.43 | % | | 65,672,577 |
| | 11.45 | % | | 20.16 | % |
| Southwest U.S. | | 99,398,397 |
| | 17.74 | % | | 33.85 | % | | 124,470,758 |
| | 21.70 | % | | 38.20 | % |
| Southeast U.S. | | 89,246,247 |
| | 15.92 | % | | 30.39 | % | | 76,053,964 |
| | 13.26 | % | | 23.34 | % |
| West U.S. | | 75,054,066 |
| | 13.39 | % | | 25.56 | % | | 85,344,025 |
| | 14.88 | % | | 26.19 | % |
| Northwest | | 3,883,882 |
| | 0.69 | % | | 1.32 | % | | — |
| | — |
| | — |
|
| International | | 3,406,258 |
| | 0.61 | % | | 1.16 | % | | 13,205,220 |
| | 2.30 | % | | 4.05 | % |
| Total | | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % | | $ | 573,604,381 |
| | 100.00 | % | | 176.04 | % |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| Fair Value: | | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets |
| Northeast | | $ | 158,042,549 |
| | 28.39 | % | | 53.44 | % | | $ | 173,667,526 |
| | 30.99 | % | | 59.14 | % |
| Southwest | | 119,935,588 |
| | 21.54 | % | | 40.55 | % | | 99,398,397 |
| | 17.74 | % | | 33.85 | % |
| West | | 95,136,359 |
| | 17.08 | % | | 32.17 | % | | 75,054,066 |
| | 13.39 | % | | 25.56 | % |
| Midwest | | 87,543,463 |
| | 15.72 | % | | 29.60 | % | | 115,780,284 |
| | 20.66 | % | | 39.43 | % |
| Southeast | | 60,083,355 |
| | 10.79 | % | | 20.31 | % | | 89,246,247 |
| | 15.92 | % | | 30.39 | % |
| International | | 36,100,514 |
| | 6.48 | % | | 12.21 | % | | 3,406,258 |
| | 0.61 | % | | 1.16 | % |
| Northwest | | — |
| | — |
| | — |
| | 3,883,882 |
| | 0.69 | % | | 1.32 | % |
| Total | | $ | 556,841,828 |
| | 100.00 | % | | 188.28 | % | | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % |
The composition of the Company's portfolio by industry at cost as a percentage of total investments and at fair value as a percentage of total investments and total net assets as of September 30, 20172018 and September 30, 20162017 was as follows:
|
| | | | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 |
| Cost: | | | % of Total Investments | | | | % of Total Investments |
| Internet software & services | $ | 129,816,292 |
| | 21.46 | % | | $ | 132,462,581 |
| | 22.07 | % |
| Multi-sector holdings (1) | 71,340,632 |
| | 11.79 |
| | 71,117,506 |
| | 11.84 |
|
| Healthcare services | 50,858,157 |
| | 8.41 |
| | 88,865,063 |
| | 14.80 |
|
| Advertising | 43,518,443 |
| | 7.19 |
| | 48,396,135 |
| | 8.06 |
|
| Application software | 33,801,616 |
| | 5.59 |
| | 32,100,672 |
| | 5.35 |
|
| Diversified support services | 24,189,607 |
| | 4.00 |
| | 19,714,868 |
| | 3.28 |
|
| IT consulting & other services | 20,485,989 |
| | 3.39 |
| | 8,811,481 |
| | 1.47 |
|
| Human resources & employment services | 20,141,957 |
| | 3.33 |
| | — |
| | — |
|
| Specialized finance | 15,358,280 |
| | 2.54 |
| | — |
| | — |
|
| Environmental & facilities services | 14,170,031 |
| | 2.34 |
| | 6,391,836 |
| | 1.06 |
|
| Oil & gas equipment & services | 14,057,018 |
| | 2.32 |
| | 4,177,081 |
| | 0.70 |
|
| Distributors | 12,967,500 |
| | 2.14 |
| | — |
| | — |
|
| Industrial machinery | 12,493,405 |
| | 2.06 |
| | 3,826,203 |
| | 0.64 |
|
| Real estate services | 12,247,424 |
| | 2.02 |
| | — |
| | — |
|
| Commercial printing | 11,847,790 |
| | 1.96 |
| | 5,912,694 |
| | 0.98 |
|
| Integrated telecommunication services | 11,291,073 |
| | 1.87 |
| | 24,385,644 |
| | 4.06 |
|
| Food retail | 10,054,868 |
| | 1.66 |
| | 6,889,930 |
| | 1.15 |
|
| Data processing & outsourced services | 9,804,174 |
| | 1.62 |
| | 9,835,238 |
| | 1.64 |
|
| Pharmaceuticals | 9,068,650 |
| | 1.50 |
| | 9,162,870 |
| | 1.53 |
|
| Specialty Stores | 8,359,086 |
| | 1.38 |
| | — |
| | — |
|
| Security & alarm services | 8,018,318 |
| | 1.33 |
| | 17,835,147 |
| | 2.97 |
|
| Computer & Electronics Retail | 7,383,862 |
| | 1.22 |
| | — |
| | — |
|
| Research & consulting services | 6,922,777 |
| | 1.14 |
| | 17,128,420 |
| | 2.85 |
|
| Personal products | 6,544,450 |
| | 1.08 |
| | 1,285,383 |
| | 0.21 |
|
| Aerospace & defense | 6,453,287 |
| | 1.07 |
| | — |
| | — |
|
| Auto parts & equipment | 5,871,777 |
| | 0.97 |
| | — |
| | — |
|
| Healthcare distributors | 4,975,000 |
| | 0.82 |
| | — |
| | — |
|
| Casinos & gaming | 4,963,767 |
| | 0.82 |
| | — |
| | — |
|
| Housewares & specialties | 4,795,075 |
| | 0.79 |
| | — |
| | — |
|
| Trucking | 4,079,548 |
| | 0.67 |
| | — |
| | — |
|
| Fertilizers & agricultural chemicals | 3,273,753 |
| | 0.54 |
| | 3,522,668 |
| | 0.59 |
|
| Hypermarkets & super centers | 2,996,051 |
| | 0.50 |
| | — |
| | — |
|
| Specialized consumer services | 1,660,679 |
| | 0.27 |
| | 22,605,271 |
| | 3.76 |
|
| Computer hardware | 1,279,988 |
| | 0.21 |
| | 3,956,802 |
| | 0.66 |
|
| Education services | — |
| | — |
| | 15,262,322 |
| | 2.54 |
|
| Electronic equipment & instruments | — |
| | — |
| | 10,942,464 |
| | 1.82 |
|
| Diversified capital markets | — |
| | — |
| | 8,685,189 |
| | 1.45 |
|
| Construction and engineering | — |
| | — |
| | 5,907,850 |
| | 0.98 |
|
| Wireless telecommunication services | — |
| | — |
| | 5,719,729 |
| | 0.95 |
|
| Food distributors | — |
| | — |
| | 5,711,496 |
| | 0.95 |
|
| Restaurants | — |
| | — |
| | 5,000,000 |
| | 0.83 |
|
| Healthcare technology | | | | | 4,856,420 |
| | 0.81 |
|
| Total | $ | 605,090,324 |
| | 100.00 | % |
| $ | 600,468,963 |
| | 100.00 | % |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | September 30, 2016 |
| Fair Value: | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets |
| Internet software & services | $ | 121,778,922 |
| | 21.72 | % | | 41.43 | % | | $ | 119,438,318 |
| | 20.82 | % | | 36.64 | % |
| Multi-sector holdings (1) | 57,606,674 |
| | 10.28 |
| | 19.62 |
| | 63,316,667 |
| | 11.04 |
| | 19.43 |
|
| Advertising | 41,145,973 |
| | 7.34 |
| | 14.01 |
| | 48,684,948 |
| | 8.49 |
| | 14.94 |
|
| Application software | 33,966,141 |
| | 6.06 |
| | 11.57 |
| | 32,405,166 |
| | 5.65 |
| | 9.95 |
|
| Healthcare services | 29,525,697 |
| | 5.27 |
| | 10.06 |
| | 83,972,780 |
| | 14.64 |
| | 25.77 |
|
| Diversified support services | 24,655,181 |
| | 4.40 |
| | 8.40 |
| | 19,597,622 |
| | 3.42 |
| | 6.01 |
|
| IT consulting & other services | 20,488,238 |
| | 3.66 |
| | 6.98 |
| | 8,884,236 |
| | 1.55 |
| | 2.73 |
|
| Human resources & employment services | 20,125,090 |
| | 3.59 |
| | 6.85 |
| | — |
| | — |
| | — |
|
| Specialized finance | 15,609,084 |
| | 2.79 |
| | 5.32 |
| | — |
| | — |
| | — |
|
| Environmental & facilities services | 14,287,163 |
| | 2.55 |
| | 4.87 |
| | 6,540,239 |
| | 1.14 |
| | 2.01 |
|
| Oil & gas equipment & services | 14,052,500 |
| | 2.51 |
| | 4.79 |
| | 4,090,429 |
| | 0.71 |
| | 1.26 |
|
| Distributors | 12,957,035 |
| | 2.31 |
| | 4.41 |
| | — |
| | — |
| | — |
|
| Industrial machinery | 12,452,459 |
| | 2.22 |
| | 4.24 |
| | 3,778,376 |
| | 0.66 |
| | 1.16 |
|
| Real estate services | 12,256,098 |
| | 2.19 |
| | 4.17 |
| | — |
| | — |
| | — |
|
| Commercial printing | 11,942,132 |
| | 2.13 |
| | 4.07 |
| | 5,929,733 |
| | 1.03 |
| | 1.82 |
|
| Integrated telecommunication services | 11,368,765 |
| | 2.03 |
| | 3.87 |
| | 24,637,968 |
| | 4.30 |
| | 7.56 |
|
| Food retail | 10,182,584 |
| | 1.82 |
| | 3.47 |
| | 7,011,442 |
| | 1.22 |
| | 2.15 |
|
| Data processing & outsourced services | 9,840,600 |
| | 1.76 |
| | 3.35 |
| | 9,820,000 |
| | 1.71 |
| | 3.01 |
|
| Pharmaceuticals | 9,038,634 |
| | 1.61 |
| | 3.08 |
| | 9,033,850 |
| | 1.57 |
| | 2.77 |
|
| Specialty Stores | 8,193,960 |
| | 1.46 |
| | 2.79 |
| | — |
| | — |
| | — |
|
| Security & alarm services | 7,972,286 |
| | 1.42 |
| | 2.72 |
| | 17,865,123 |
| | 3.11 |
| | 5.48 |
|
| Computer & Electronics Retail | 7,498,142 |
| | 1.34 |
| | 2.55 |
| | — |
| | — |
| | — |
|
| Research & consulting services | 7,004,638 |
| | 1.25 |
| | 2.39 |
| | 17,162,244 |
| | 2.99 |
| | 5.27 |
|
| Personal products | 6,599,006 |
| | 1.18 |
| | 2.25 |
| | 1,290,310 |
| | 0.22 |
| | 0.40 |
|
| Aerospace & defense | 6,556,692 |
| | 1.17 |
| | 2.23 |
| | — |
| | — |
| | — |
|
| Auto parts & equipment | 5,798,747 |
| | 1.03 |
| | 1.97 |
| | — |
| | — |
| | — |
|
| Casinos & gaming | 5,038,622 |
| | 0.90 |
| | 1.72 |
| | — |
| | — |
| | — |
|
| Healthcare distributors | 4,948,950 |
| | 0.88 |
| | 1.69 |
| | — |
| | — |
| | — |
|
| Housewares & specialties | 4,771,779 |
| | 0.85 |
| | 1.63 |
| | — |
| | — |
| | — |
|
| Trucking | 4,099,725 |
| | 0.73 |
| | 1.40 |
| | — |
| | — |
| | — |
|
| Hypermarkets & super centers | 2,876,002 |
| | 0.51 |
| | 0.98 |
| | — |
| | — |
| | — |
|
| Fertilizers & agricultural chemicals | 2,801,481 |
| | 0.50 |
| | 0.95 |
| | 3,377,146 |
| | 0.59 |
| | 1.04 |
|
| Specialized consumer services | 1,672,677 |
| | 0.30 |
| | 0.57 |
| | 22,538,791 |
| | 3.93 |
| | 6.92 |
|
| Computer hardware | 1,324,983 |
| | 0.24 |
| | 0.45 |
| | 3,903,567 |
| | 0.68 |
| | 1.20 |
|
| Education services | — |
| | — |
| | — |
| | 15,293,164 |
| | 2.67 |
| | 4.69 |
|
| Electronic equipment & instruments | — |
| | — |
| | — |
| | 10,912,302 |
| | 1.90 |
| | 3.35 |
|
| Diversified capital markets | — |
| | — |
| | — |
| | 8,763,486 |
| | 1.53 |
| | 2.69 |
|
| Construction and engineering | — |
| | — |
| | — |
| | 5,768,770 |
| | 1.01 |
| | 1.77 |
|
| Food distributors | — |
| | — |
| | — |
| | 5,623,604 |
| | 0.98 |
| | 1.73 |
|
| Restaurants | — |
| | — |
| | — |
| | 4,985,425 |
| | 0.87 |
| | 1.53 |
|
| Healthcare technology | — |
| | — |
| | — |
| | 4,747,016 |
| | 0.83 |
| | 1.46 |
|
| Wireless telecommunication services | — |
| | — |
| | — |
| | 4,231,659 |
| | 0.74 |
| | 1.30 |
|
| Total | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % | | $ | 573,604,381 |
| | 100.00 | % | | 176.04 | % |
___________________
| |
(1) | This industry includes the Company's investment in FSFR Glick JV. |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | September 30, 2017 (revised) | | September 30, 2017 (as reported) |
| Cost (1): | | | % of Total Investments | | | | % of Total Investments | | | | % of Total Investments |
| Multi-sector holdings (2) | $ | 73,501,970 |
| | 12.84 | % | | $ | 71,340,632 |
| | 11.79 | % | | $ | 71,340,632 |
| | 11.79 | % |
| Aerospace & defense | 31,214,405 |
| | 5.45 |
| | 12,728,343 |
| | 2.10 |
| | 6,453,287 |
| | 1.07 |
|
| Application software | 29,825,536 |
| | 5.21 |
| | 127,265,554 |
| | 21.05 |
| | 33,801,616 |
| | 5.59 |
|
| Oil & gas exploration & production | 29,426,644 |
| | 5.14 |
| | — |
| | — |
| | — |
| | — |
|
| Advertising | 24,799,901 |
| | 4.33 |
| | 43,518,443 |
| | 7.19 |
| | 43,518,443 |
| | 7.19 |
|
| Diversified support services | 22,877,903 |
| | 3.99 |
| | 18,701,153 |
| | 3.09 |
| | 24,189,607 |
| | 4.00 |
|
| Research & consulting services | 19,195,177 |
| | 3.35 |
| | 6,922,777 |
| | 1.14 |
| | 6,922,777 |
| | 1.14 |
|
| Integrated telecommunication services | 18,822,698 |
| | 3.29 |
| | 11,291,073 |
| | 1.87 |
| | 11,291,073 |
| | 1.87 |
|
| Internet services & infrastructure | 17,929,508 |
| | 3.13 |
| | 25,997,995 |
| | 4.30 |
| | — |
| | — |
|
| Specialized finance | 16,284,064 |
| | 2.84 |
| | 15,358,280 |
| | 2.54 |
| | 15,358,280 |
| | 2.54 |
|
| Healthcare services | 15,537,984 |
| | 2.71 |
| | 50,858,157 |
| | 8.41 |
| | 50,858,157 |
| | 8.41 |
|
| Pharmaceuticals | 14,389,558 |
| | 2.51 |
| | 9,068,650 |
| | 1.50 |
| | 9,068,650 |
| | 1.50 |
|
| Systems software | 14,292,176 |
| | 2.49 |
| | 10,354,359 |
| | 1.71 |
| | — |
| | — |
|
| Communications equipment | 13,797,609 |
| | 2.41 |
| | — |
| | — |
| | — |
| | — |
|
| Industrial machinery | 13,583,358 |
| | 2.37 |
| | 12,493,405 |
| | 2.06 |
| | 12,493,405 |
| | 2.06 |
|
| Environmental & facilities services | 12,391,602 |
| | 2.16 |
| | 19,658,485 |
| | 3.25 |
| | 14,170,031 |
| | 2.34 |
|
| Commercial printing | 11,661,172 |
| | 2.04 |
| | 11,847,790 |
| | 1.96 |
| | 11,847,790 |
| | 1.96 |
|
| Electrical components & equipment | 11,649,358 |
| | 2.03 |
| | — |
| | — |
| | — |
| | — |
|
| Personal products | 11,595,993 |
| | 2.02 |
| | 6,544,450 |
| | 1.08 |
| | 6,544,450 |
| | 1.08 |
|
| Computer & electronics retail | 10,890,000 |
| | 1.90 |
| | 13,225,893 |
| | 2.19 |
| | 7,383,862 |
| | 1.22 |
|
| Publishing | 10,395,000 |
| | 1.81 |
| | — |
| | — |
| | — |
| | — |
|
| Commodity chemicals | 9,927,861 |
| | 1.73 |
| | — |
| | — |
| | — |
| | — |
|
| IT consulting & other services | 9,774,840 |
| | 1.71 |
| | 14,210,933 |
| | 2.35 |
| | 20,485,989 |
| | 3.39 |
|
| Human resource & employment services | 9,558,548 |
| | 1.67 |
| | 20,141,957 |
| | 3.33 |
| | 20,141,957 |
| | 3.33 |
|
| Metal & glass containers | 8,933,303 |
| | 1.56 |
| | — |
| | — |
| | — |
| | — |
|
| Healthcare technology | 8,932,500 |
| | 1.56 |
| | — |
| | — |
| | — |
| | — |
|
| Oil & gas equipment & services | 8,785,515 |
| | 1.53 |
| | 14,057,018 |
| | 2.32 |
| | 14,057,018 |
| | 2.32 |
|
| Leisure facilities | 8,783,236 |
| | 1.53 |
| | — |
| | — |
| | — |
| | — |
|
| Specialized REITs | 8,662,946 |
| | 1.51 |
| | �� |
| | — |
| | — |
| | — |
|
| Trading companies & distributors | 8,066,138 |
| | 1.41 |
| | 4,079,548 |
| | 0.67 |
| | — |
| | — |
|
| Movies & entertainment | 7,871,884 |
| | 1.37 |
| | — |
| | — |
| | — |
| | — |
|
| Alternative carriers | 7,193,230 |
| | 1.26 |
| | — |
| | — |
| | — |
| | — |
|
| Household appliances | 6,916,677 |
| | 1.21 |
| | — |
| | — |
| | — |
| | — |
|
| Auto parts & equipment | 5,810,752 |
| | 1.01 |
| | 5,871,777 |
| | 0.97 |
| | 5,871,777 |
| | 0.97 |
|
| Investment banking & brokerage | 5,525,388 |
| | 0.96 |
| | — |
| | — |
| | — |
| | — |
|
| Specialized consumer services | 5,492,997 |
| | 0.96 |
| | 1,660,679 |
| | 0.27 |
| | 1,660,679 |
| | 0.27 |
|
| Data processing & outsourced services | 5,454,064 |
| | 0.95 |
| | 3,962,143 |
| | 0.65 |
| | 9,804,174 |
| | 1.62 |
|
| Household products | 5,032,864 |
| | 0.88 |
| | — |
| | — |
| | — |
| | — |
|
| Oil & gas storage & transportation | 4,830,210 |
| | 0.84 |
| | — |
| | — |
| | — |
| | — |
|
| Specialty chemicals | 4,740,634 |
| | 0.83 |
| | 4,795,075 |
| | 0.79 |
| | — |
| | — |
|
| Specialty stores | 3,903,305 |
| | 0.68 |
| | 8,359,086 |
| | 1.38 |
| | 8,359,086 |
| | 1.38 |
|
| Hypermarkets & super centers | 2,800,762 |
| | 0.49 |
| | 6,640,082 |
| | 1.10 |
| | 2,996,051 |
| | 0.50 |
|
| General merchandise stores | 1,866,494 |
| | 0.33 |
| | — |
| | — |
| | — |
| | — |
|
| Food retail | — |
| | — |
| | 6,410,837 |
| | 1.06 |
| | 10,054,868 |
| | 1.66 |
|
| Distributors | — |
| | — |
| | 12,967,500 |
| | 2.14 |
| | 12,967,500 |
| | 2.14 |
|
| Real estate services | — |
| | — |
| | 12,247,424 |
| | 2.02 |
| | 12,247,424 |
| | 2.02 |
|
| Security & alarm services | — |
| | — |
| | 8,018,318 |
| | 1.33 |
| | 8,018,318 |
| | 1.33 |
|
| Healthcare distributors | — |
| | — |
| | 4,975,000 |
| | 0.82 |
| | 4,975,000 |
| | 0.82 |
|
| Casinos & gaming | — |
| | — |
| | 4,963,767 |
| | 0.82 |
| | 4,963,767 |
| | 0.82 |
|
| Fertilizers & agricultural chemicals | — |
| | — |
| | 3,273,753 |
| | 0.54 |
| | 3,273,753 |
| | 0.54 |
|
| Computer hardware | — |
| | — |
| | 1,279,988 |
| | 0.21 |
| | 1,279,988 |
| | 0.21 |
|
| Internet software & services | — |
| | — |
| | — |
| | — |
| | 129,816,292 |
| | 21.46 |
|
| Trucking | — |
| | — |
| | — |
| | — |
| | 4,079,548 |
| | 0.67 |
|
| Housewares & specialties | — |
| | — |
| | — |
| | — |
| | 4,795,075 |
| | 0.79 |
|
| Total | $ | 572,925,764 |
| | 100.00 | % |
| $ | 605,090,324 |
| | 100.00 | % | | $ | 605,090,324 |
| | 100.00 | % |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2018 | | September 30, 2017 (revised) | | September 30, 2017 (as reported) |
| Fair Value (1): | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets | | | | % of Total Investments | | % of Total Net Assets |
| Multi-sector holdings (2) | $ | 58,512,170 |
| | 10.49 | % | | 19.75 | % | | $ | 57,606,674 |
| | 10.28 | % | | 19.62 | % | | $ | 57,606,674 |
| | 10.28 | % | | 19.62 | % |
| Aerospace & defense | 31,429,288 |
| | 5.64 |
| | 10.63 |
| | 12,899,775 |
| | 2.30 |
| | 4.39 |
| | 6,556,692 |
| | 1.17 |
| | 2.23 |
|
| Application software | 30,809,085 |
| | 5.53 |
| | 10.42 |
| | 118,967,785 |
| | 21.24 |
| | 40.46 |
| | 33,966,141 |
| | 6.06 |
| | 11.57 |
|
| Oil & gas exploration & production | 29,501,218 |
| | 5.30 |
| | 9.98 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Diversified support services | 23,235,390 |
| | 4.17 |
| | 7.86 |
| | 19,132,563 |
| | 3.41 |
| | 6.52 |
| | 24,655,181 |
| | 4.40 |
| | 8.40 |
|
| Advertising | 22,535,595 |
| | 4.05 |
| | 7.62 |
| | 41,145,973 |
| | 7.34 |
| | 14.01 |
| | 41,145,973 |
| | 7.34 |
| | 14.01 |
|
| Research & consulting services | 19,674,633 |
| | 3.53 |
| | 6.65 |
| | 7,004,638 |
| | 1.25 |
| | 2.39 |
| | 7,004,638 |
| | 1.25 |
| | 2.39 |
|
| Integrated telecommunication services | 18,755,621 |
| | 3.37 |
| | 6.34 |
| | 11,368,765 |
| | 2.03 |
| | 3.87 |
| | 11,368,765 |
| | 2.03 |
| | 3.87 |
|
| Internet services & infrastructure | 17,983,455 |
| | 3.23 |
| | 6.08 |
| | 26,220,743 |
| | 4.68 |
| | 8.93 |
| | — |
| | — |
| | — |
|
| Specialized finance | 16,152,596 |
| | 2.90 |
| | 5.46 |
| | 15,609,084 |
| | 2.79 |
| | 5.32 |
| | 15,609,084 |
| | 2.79 |
| | 5.32 |
|
| Healthcare services | 15,046,044 |
| | 2.70 |
| | 5.09 |
| | 29,525,697 |
| | 5.27 |
| | 10.06 |
| | 29,525,697 |
| | 5.27 |
| | 10.06 |
|
| Systems software | 14,539,208 |
| | 2.61 |
| | 4.92 |
| | 10,556,535 |
| | 1.88 |
| | 3.60 |
| | — |
| | — |
| | — |
|
| Communications equipment | 14,009,856 |
| | 2.52 |
| | 4.74 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Industrial machinery | 13,523,015 |
| | 2.43 |
| | 4.57 |
| | 12,452,459 |
| | 2.22 |
| | 4.24 |
| | 12,452,459 |
| | 2.22 |
| | 4.24 |
|
| Pharmaceuticals | 13,461,109 |
| | 2.42 |
| | 4.55 |
| | 9,038,634 |
| | 1.61 |
| | 3.08 |
| | 9,038,634 |
| | 1.61 |
| | 3.08 |
|
| Environmental & facilities services | 12,544,437 |
| | 2.25 |
| | 4.24 |
| | 19,809,781 |
| | 3.53 |
| | 6.75 |
| | 14,287,163 |
| | 2.55 |
| | 4.87 |
|
| Electrical components & equipment | 12,071,280 |
| | 2.17 |
| | 4.08 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commercial printing | 11,837,466 |
| | 2.13 |
| | 4.00 |
| | 11,942,132 |
| | 2.13 |
| | 4.07 |
| | 11,942,132 |
| | 2.13 |
| | 4.07 |
|
| Personal products | 11,700,000 |
| | 2.10 |
| | 3.96 |
| | 6,599,006 |
| | 1.18 |
| | 2.25 |
| | 6,599,006 |
| | 1.18 |
| | 2.25 |
|
| Computer & electronics retail | 10,986,250 |
| | 1.97 |
| | 3.71 |
| | 13,378,742 |
| | 2.39 |
| | 4.56 |
| | 7,498,142 |
| | 1.34 |
| | 2.55 |
|
| Publishing | 10,618,125 |
| | 1.91 |
| | 3.59 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Commodity chemicals | 10,084,717 |
| | 1.81 |
| | 3.41 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Human resource & employment services | 9,665,384 |
| | 1.74 |
| | 3.27 |
| | 20,125,090 |
| | 3.59 |
| | 6.85 |
| | 20,125,090 |
| | 3.59 |
| | 6.85 |
|
| Healthcare technology | 9,091,890 |
| | 1.63 |
| | 3.07 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Oil & gas equipment & services | 9,087,444 |
| | 1.63 |
| | 3.07 |
| | 14,052,500 |
| | 2.51 |
| | 4.79 |
| | 14,052,500 |
| | 2.51 |
| | 4.79 |
|
| Metal & glass containers | 9,084,108 |
| | 1.63 |
| | 3.07 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Leisure facilities | 8,779,008 |
| | 1.58 |
| | 2.97 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Specialized REITs | 8,567,365 |
| | 1.54 |
| | 2.90 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Trading companies & distributors | 8,097,760 |
| | 1.45 |
| | 2.74 |
| | 4,099,725 |
| | 0.73 |
| | 1.40 |
| | — |
| | — |
| | — |
|
| IT consulting & other services | 8,040,141 |
| | 1.44 |
| | 2.72 |
| | 14,145,155 |
| | 2.52 |
| | 4.82 |
| | 20,488,238 |
| | 3.66 |
| | 6.98 |
|
| Movies & entertainment | 7,882,412 |
| | 1.42 |
| | 2.67 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Alternative carriers | 7,237,952 |
| | 1.30 |
| | 2.45 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Household appliances | 6,950,485 |
| | 1.25 |
| | 2.35 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Auto Parts & equipment | 5,823,070 |
| | 1.05 |
| | 1.97 |
| | 5,798,747 |
| | 1.03 |
| | 1.97 |
| | 5,798,747 |
| | 1.03 |
| | 1.97 |
|
| Data processing & outsourced services | 5,571,370 |
| | 1.00 |
| | 1.88 |
| | 3,960,000 |
| | 0.71 |
| | 1.35 |
| | 9,840,600 |
| | 1.76 |
| | 3.35 |
|
| Investment banking & brokerage | 5,500,440 |
| | 0.99 |
| | 1.86 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Specialized consumer services | 5,370,007 |
| | 0.96 |
| | 1.82 |
| | 1,672,677 |
| | 0.30 |
| | 0.57 |
| | 1,672,677 |
| | 0.30 |
| | 0.57 |
|
| Household products | 4,984,375 |
| | 0.90 |
| | 1.69 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Oil & gas storage & transportation | 4,898,833 |
| | 0.88 |
| | 1.66 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Specialty chemicals | 4,487,948 |
| | 0.81 |
| | 1.52 |
| | 4,771,779 |
| | 0.85 |
| | 1.63 |
| | — |
| | — |
| | — |
|
| Specialty stores | 3,927,701 |
| | 0.71 |
| | 1.33 |
| | 8,193,960 |
| | 1.46 |
| | 2.79 |
| | 8,193,960 |
| | 1.46 |
| | 2.79 |
|
| Hypermarkets & super centers | 2,842,714 |
| | 0.51 |
| | 0.96 |
| | 6,593,985 |
| | 1.18 |
| | 2.25 |
| | 2,876,002 |
| | 0.51 |
| | 0.98 |
|
| General merchandise stores | 1,940,863 |
| | 0.35 |
| | 0.66 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Food retail | — |
| | — |
| | — |
| | 6,464,601 |
| | 1.15 |
| | 2.20 |
| | 10,182,584 |
| | 1.82 |
| | 3.47 |
|
| Distributors | — |
| | — |
| | — |
| | 12,957,035 |
| | 2.31 |
| | 4.41 |
| | 12,957,035 |
| | 2.31 |
| | 4.41 |
|
| Real estate services | — |
| | — |
| | — |
| | 12,256,098 |
| | 2.19 |
| | 4.17 |
| | 12,256,098 |
| | 2.19 |
| | 4.17 |
|
| Security & alarm services | — |
| | — |
| | — |
| | 7,972,286 |
| | 1.42 |
| | 2.72 |
| | 7,972,286 |
| | 1.42 |
| | 2.72 |
|
| Casinos & gaming | — |
| | — |
| | — |
| | 5,038,622 |
| | 0.90 |
| | 1.72 |
| | 5,038,622 |
| | 0.90 |
| | 1.72 |
|
| Healthcare distributors | — |
| | — |
| | — |
| | 4,948,950 |
| | 0.88 |
| | 1.69 |
| | 4,948,950 |
| | 0.88 |
| | 1.69 |
|
| Fertilizers & agricultural chemicals | — |
| | — |
| | — |
| | 2,801,481 |
| | 0.50 |
| | 0.95 |
| | 2,801,481 |
| | 0.50 |
| | 0.95 |
|
| Computer hardware | — |
| | — |
| | — |
| | 1,324,983 |
| | 0.24 |
| | 0.45 |
| | 1,324,983 |
| | 0.24 |
| | 0.45 |
|
| Internet software & services | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 121,778,922 |
| | 21.72 |
| | 41.43 |
|
| Trucking | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,099,725 |
| | 0.73 |
| | 1.40 |
|
| Housewares & specialties | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,771,779 |
| | 0.85 |
| | 1.63 |
|
| Total | $ | 556,841,828 |
| | 100.00 | % | | 188.28 | % | | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % | | $ | 560,436,660 |
| | 100.00 | % | | 190.85 | % |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's investments are generally in middle-market companies in a variety of industries.
___________________
| |
| (1) | As of September 30, 2018, certain industry classifications were modified primarily as a result of changes to industry information provided by a third party source. The Company has disclosed both the revised and previously reported industry classifications as of September 30, 2017 above. |
| |
| (2) | This industry includes the Company's investment in the OCSI Glick JV. |
The Company has one investment that represented greater than 10% of the total investment portfolio at fair value as of September 30, 20172018 and September 30, 2016,2017, which is as follows:
|
| | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| FSFR Glick JV LLC | | 10.3 | % | | 11.0 | % |
|
| | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| OCSI Glick JV | | 10.5 | % | | 10.3 | % |
Income, consisting of interest, dividends, fees, other investment income and realization of gains or losses, can fluctuate upon repayment or sale of an investment and in any given yearperiod can be highly concentrated among several investments.
Details of investment income of
FSFRthe OCSI Glick JV
LLC for the years ended September 30,
20172018 and September 30,
20162017 are as follows:
|
| | | | | | | | | | | | | | |
| | | Year ended September 30, 2017 | | Year ended September 30, 2016 |
| | | Investment Income | | Percent of Total Investment Income | | Investment Income | | Percent of Total Investment Income |
| FSFR Glick JV LLC | | $ | 5,188,380 |
| | 11.1 | % | | $ | 7,777,850 |
| | 14.6 | % |
|
| | | | | | | | | | | | | | |
| | | Year ended September 30, 2018 | | Year ended September 30, 2017 |
| | | Investment Income | | Percent of Total Investment Income | | Investment Income | | Percent of Total Investment Income |
| OCSI Glick JV | | $ | 6,131,395 |
| | 12.9 | % | | $ | 5,188,380 |
| | 11.1 | % |
OCSI Glick JV LLC
In October 2014, the Company entered into an LLC agreement with GF Equity Funding 2014 LLC ("GF Equity Funding") to form FSFRthe OCSI Glick JV. On April 21, 2015, FSFRthe OCSI Glick JV began investing primarily in senior secured loans of middle-market companies. The Company co-invests in these securities with GF Equity Funding through FSFRthe OCSI Glick JV. FSFRThe OCSI Glick JV is managed by a four person Board of Directors, two of whom are selected by the Company and two of whom are selected by GF Equity Funding. FSFRThe OCSI Glick JV is capitalized as transactions are completed, and portfolio decisions and investment decisions in respect of FSFRthe OCSI Glick JV must be approved by the FSFROCSI Glick JV investment committee, which consists of one representative selected by the Company and one representative selected by GF Equity Funding (with approval from a representative of each required). Since the Company does not have a controlling financial interest in the OCSI Glick JV, the Company does not consolidate the OCSI Glick JV. The members provide capital to FSFRthe OCSI Glick JV in exchange for LLC equity interests, and the Company and GF Debt Funding 2014 LLC ("GF Debt Funding"), an entity advised by affiliates of GF Equity Funding, provide capital to FSFRthe OCSI Glick JV in exchange for subordinated notes (the "Subordinated Notes"). As of September 30, 20172018 and September 30, 2016,2017, the Company and GF Equity Funding owned 87.5% and 12.5%, respectively, of the outstanding LLC equity interests, and the Company and GF Debt Funding owned 87.5% and 12.5%, respectively, of the Subordinated Notes. FSFRThe OCSI Glick JV is not an "eligible portfolio company" as defined in section 2(a)(46) of the 1940Investment Company Act.
FSFRThe OCSI Glick JV's portfolio consisted of middle-market and other corporate debt securities of 31 and 23 and 36 "eligible portfolio companies" (as defined in Section 2(a)(46) of the 1940 Act)companies as of September 30, 20172018 and September 30, 2016,2017, respectively. The portfolio companies in FSFRthe OCSI Glick JV are in industries similar to those in which the Company may invest directly.
FSFRThe OCSI Glick JV hasentered into a senior revolving credit facility with Deutsche Bank AG, New York Branch ("(the "JV Deutsche Bank facility"Facility") with, which had a statedreinvestment period end date and maturity date of April 17,October 7, 2018 and October 7, 2023, whichrespectively, and permitted borrowings of up to $200.0$125.0 million of borrowings as of both September 30, 2017 and September 30, 2016. On June 29, 2017, the Deutsche Bank facility was assigned by Credit Suisse AG, Cayman Islands Branch to Deutsche Bank AG, New York Branch.2018. Borrowings under the JV Deutsche Bank facilityFacility are secured by all of the assets of FSFRthe OCSI Glick JV and all of the equity interests in FSFRthe OCSI Glick JV. During the year ended September 30, 2018, the JV Deutsche Bank Facility was amended to (i) decrease the maximum permissible borrowings from $200 million to $125 million, (ii) extend the reinvestment period end date and borematurity date to October 7, 2018 and October 7, 2023, respectively, and (iii) decrease the interest at a rate equal tofrom the 3-month LIBOR plus 2.5% per annum with no LIBOR floor as of September 30, 2017to the 3-month LIBOR plus 2.3% per annum with no LIBOR floor. The JV Deutsche Bank Facility was further amended on October 4, 2018 to extend the reinvestment period end and September 30, 2016.maturity date to January 7, 2019 and January 5, 2024, respectively. Under the JV Deutsche Bank facility, $56.9Facility, $94.3 million and $124.6$56.9 million of borrowings were outstanding as of September 30, 20172018 and September 30, 2016,2017, respectively.
The Company has determined that FSFR Glick JV is an investment company under ASC 946; however, in accordance with such guidance, the Company will generally not consolidate its investment in a company other than a wholly-owned investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company does not consolidate its non-controlling interest in FSFR Glick JV.OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 20172018 and September 30, 2016, FSFR2017, the OCSI Glick JV had total assets of $126.7$166.2 million and $201.1$126.7 million, respectively. As of September 30, 2017,2018, the Company's investment in FSFRthe OCSI Glick JV consisted of LLC equity interests and Subordinated Notes of $57.6$58.5 million in the aggregate at fair value. As of September 30, 2016,2017, the Company's investment in FSFRthe OCSI Glick JV consisted of LLC equity interests and Subordinated Notes of $63.3$57.6 million in the aggregate at fair value. The Subordinated Notes are junior in right of payment to the repayment of temporary contributions made by the Company to fund investments of FSFRthe OCSI Glick JV that are repaid when GF Equity Funding and GF Debt Funding make their capital contributions and fund their Subordinated Notes, respectively.
As of September 30, 20172018 and September 30, 2016, FSFR2017, the OCSI Glick JV had total capital commitments of $100.0 million, $87.5 million of which was from the Company and the remaining $12.5 million of which was from GF Equity Funding and GF Debt Funding.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Approximately $81.6$84.0 million and $81.3$81.6 million in aggregate commitments were funded as of September 30, 20172018 and September 30, 2016,2017, respectively, of which $73.5 million and $71.4 million, and $71.1 million, respectively, waswere from the Company. As of each of September 30, 20172018 and September 30, 2016,2017, the Company had commitments to fund Subordinated Notes to FSFRthe OCSI Glick JV of $78.8 million, of which $12.4 million and $14.5 million, and $14.7 million, respectively, waswere unfunded. As of each of September 30, 20172018 and September 30, 2016,2017, the Company had commitments to fund LLC equity interests in FSFRthe OCSI Glick JV of $8.7 million, of which $1.6 million was unfunded.were unfunded as of each such date.
Below is a summary of FSFRthe OCSI Glick JV's portfolio, followed by a listing of the individual loans in FSFRthe OCSI Glick JV's portfolio as of September 30, 20172018 and September 30, 2016:2017:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 |
| Senior secured loans (1) | | $115,964,537 | | $194,346,557 | | $160,746,402 | | $115,964,537 |
| Weighted average current interest rate on senior secured loans (2) | | 6.92% | | 7.08% | | 7.30% | | 6.92% |
| Number of borrowers in FSFR Glick JV | | 23 | | 36 | |
| Number of borrowers in the OCSI Glick JV | | | 31 | | 23 |
| Largest loan exposure to a single borrower (1) | | $11,267,524 | | $12,641,009 | | $7,960,000 | | $11,267,524 |
| Total of five largest loan exposures to borrowers (1) | | $42,833,696 | | $49,318,344 | | $36,442,500 | | $42,833,696 |
(1) At principal amount.
(2) Computed using the weighted average annual interest rate on accruing senior secured loans.
loans at fair value.
OCSI Glick JV Portfolio as of September 30, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(2) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (3) |
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 5/31/2024 | | LIBOR+4.75% cash | | 7.03 | % | | $ | 7,500,000 |
| | $ | 7,481,250 |
| | $ | 7,575,000 |
|
| AI Ladder (Luxembourg) Subco S.a.r.l (4) | | Electrical components & equipment | | First Lien Term Loan B | | 7/9/2025 | | LIBOR+4.5% cash | | 7.02 | % | | 5,000,000 |
| | 4,853,898 |
| | 5,029,700 |
|
| AL Midcoast Holdings LLC (4) | | Oil & gas storage & transportation | | First Lien Term Loan B | | 8/1/2025 | | LIBOR+5.5% cash | | 7.84 | % | | 7,000,000 |
| | 6,930,000 |
| | 7,028,455 |
|
| Altice France S.A. | | Integrated telecommunication services | | First Lien Term Loan B13 | | 8/14/2026 | | LIBOR+4% cash | | 6.16 | % | | 3,000,000 |
| | 2,925,338 |
| | 2,982,855 |
|
| Alvogen Pharma US Inc. | | Pharmaceuticals | | First Lien Term Loan B | | 4/1/2022 | | LIBOR+4.75% (1% floor) cash | | 6.99 | % | | 6,875,051 |
| | 6,875,051 |
| | 6,942,358 |
|
| Ancile Solutions, Inc. (4) | | Application software | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 9.39 | % | | 3,750,800 |
| | 3,719,206 |
| | 3,728,294 |
|
| Aptos, Inc. (4) | | Computer & electronics retail | | First Lien Term Loan | | 7/23/2025 | | LIBOR+5.5% cash | | 7.74 | % | | 3,000,000 |
| | 2,970,000 |
| | 2,996,250 |
|
| Asset International, Inc. (4) | | Research & Consulting Services | | First Lien Term Loan | | 12/30/2024 | | LIBOR+4.5% (1% floor) cash | | 6.89 | % | | 3,970,000 |
| | 3,899,167 |
| | 3,952,818 |
|
| Bison Midstream Holdings LLC | | Oil & gas equipment & services | | First Lien Term Loan B | | 5/21/2025 | | LIBOR+4% cash | | 6.17 | % | | 4,987,500 |
| | 4,963,823 |
| | 4,971,914 |
|
| California Pizza Kitchen, Inc. | | Restaurants | | First Lien Term Loan | | 8/23/2022 | | LIBOR+6% (1% floor) cash | | 8.39 | % | | 4,900,000 |
| | 4,888,197 |
| | 4,777,500 |
|
| Chloe Ox Parent LLC (4) | | Healthcare services | | First Lien Term Loan | | 12/23/2024 | | LIBOR+4.5% (1% floor) cash | | 6.89 | % | | 5,970,000 |
| | 5,915,738 |
| | 5,992,388 |
|
| CM Delaware LLC | | Interactive media & services | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 7.64 | % | | 2,053,658 |
| | 2,052,561 |
| | 2,002,316 |
|
| Eton (4) | | Research & consulting services | | Second Lien Term Loan | | 5/1/2026 | | LIBOR+7.5% cash | | 9.74 | % | | 5,000,000 |
| | 4,976,145 |
| | 5,025,000 |
|
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FSFR Glick JV Portfolio as of September 30, 2017 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(4) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (2) |
| Ameritox Ltd. (3)(5) | | Healthcare services | | First Lien Term Loan | | 4/11/2021 | | LIBOR+5% (1% floor) cash 3% PIK | | 6.33 | % | | $2,287,177 | | $2,243,202 | | $265,211 |
| | | Healthcare services | | 119,910.76 Class B Preferred Units | | | | | | | |
| | 119,911 |
| | — |
|
| | | Healthcare services | | 368.96 Class A Common Units | | | | | | | |
| | 2,174,034 |
| | — |
|
| Total Ameritox Ltd | | | | | | | | | | | | 2,287,177 |
| | 4,537,147 |
| | 265,211 |
|
| Beyond Trust Software, Inc. (3) | | Application software | | First Lien Term Loan | | 9/25/2019 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 11,267,524 |
| | 11,220,478 |
| | 11,267,116 |
|
| Compuware Corporation (3) | | Internet software & services | | First Lien Term Loan B3 | | 12/15/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 6,279,920 |
| | 6,225,992 |
| | 6,358,419 |
|
| Metamorph US 3, LLC (3)(5) | | Internet software & services | | First Lien Term Loan | | 12/1/2020 | | LIBOR+5.5% (1% floor) cash 2% PIK | | 6.74 | % | | 6,825,900 |
| | 6,477,372 |
| | 2,592,115 |
|
| Motion Recruitment Partners LLC (3) | | Human resources & employment services | | First Lien Term Loan | | 2/13/2020 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 8,659,650 |
| | 8,659,650 |
| | 8,659,223 |
|
| NAVEX Global, Inc. | | Internet software & services | | First Lien Term Loan | | 11/19/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 2,977,041 |
| | 2,967,620 |
| | 2,988,205 |
|
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 3/20/2022 | | LIBOR+5.5% (1% floor) cash | | 6.82 | % | | 8,160,622 |
| | 8,141,224 |
| | 8,099,417 |
|
| CM Delaware LLC | | Advertising | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 2,075,162 |
| | 2,073,617 |
| | 2,064,786 |
|
| New Trident Holdcorp, Inc. (3) | | Healthcare services | | First Lien Term Loan B | | 7/31/2019 | | LIBOR+5.75% (1.25% floor) cash | | 7.08 | % | | 2,018,206 |
| | 2,000,877 |
| | 1,453,109 |
|
| Central Security Group, Inc. (3) | | Specialized consumer services | | First Lien Term Loan | | 10/6/2021 | | LIBOR+5.625% (1% floor) cash | | 6.86 | % | | 3,876,067 |
| | 3,880,408 |
| | 3,892,211 |
|
| Aptos, Inc. (3) | | Data processing & outsourced services | | First Lien Term Loan B | | 9/1/2022 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 7,920,000 |
| | 7,790,262 |
| | 7,840,800 |
|
| Vubiquity, Inc. | | Application software | | First Lien Term Loan | | 8/12/2021 | | LIBOR+5.5% (1% floor) cash | | 6.83 | % | | 4,126,500 |
| | 4,099,195 |
| | 4,095,551 |
|
| Poseidon Merger Sub, Inc. (3) | | Advertising | | Second Lien Term Loan | | 8/15/2023 | | LIBOR+8.5% (1% floor) cash | | 9.81 | % | | 3,000,000 |
| | 2,933,633 |
| | 3,030,000 |
|
| Novetta Solutions, LLC | | Diversified support services | | First Lien Term Loan | | 10/16/2022 | | LIBOR+5% (1% floor) cash | | 6.34 | % | | 5,990,978 |
| | 5,932,073 |
| | 5,826,226 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 10/27/2022 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 6,386,250 |
| | 6,338,479 |
| | 6,306,422 |
|
| Valet Merger Sub, Inc. (3) | | Environmental & facilities services | | First Lien Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 3,920,000 |
| | 3,877,655 |
| | 3,919,865 |
|
| | | Environmental & facilities services | | Incremental Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 1,027,425 |
| | 1,006,080 |
| | 1,027,390 |
|
| Total Valet Merger Sub, Inc. | | | | | | | | | | | | 4,947,425 |
| | 4,883,735 |
| | 4,947,255 |
|
| RSC Acquisition, Inc. | | Insurance brokers | | First Lien Term Loan | | 11/30/2022 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 3,930,134 |
| | 3,912,198 |
| | 3,890,832 |
|
| Integro Parent Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 7.06 | % | | 4,913,924 |
| | 4,790,511 |
| | 4,901,639 |
|
| TruckPro, LLC | | Auto parts & equipment | | First Lien Term Loan | | 8/6/2018 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 1,823,268 |
| | 1,821,822 |
| | 1,825,054 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 4,610,174 |
| | 4,572,990 |
| | 4,610,400 |
|
| Ancile Solutions, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 4,042,355 |
| | 3,995,621 |
| | 4,010,198 |
|
| California Pizza Kitchen, Inc. | | Restaurants | | First Lien Term Loan | | 8/23/2022 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 4,950,000 |
| | 4,938,077 |
| | 4,917,008 |
|
| MHE Intermediate Holdings, LLC (3) | | Diversified support services | | First Lien Term Loan B | | 3/11/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 4,228,750 |
| | 4,150,304 |
| | 4,228,752 |
|
| | | Diversified support services | | Delayed Draw Term Loan | | 3/11/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 667,510 |
| | 635,208 |
| | 667,510 |
|
| Total MHE Intermediate Holdings, LLC | | | | | | | | | | | | 4,896,260 |
| | 4,785,512 |
| | 4,896,262 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 115,964,537 |
| | $ | 116,978,493 |
| | $ | 108,737,459 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(2) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (3) |
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan B | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 8.99 | % | | $ | 4,330,233 |
| | $ | 4,295,307 |
| | $ | 4,330,288 |
|
| Gigamon, Inc. | | Systems software | | First Lien Term Loan | | 12/27/2024 | | LIBOR+4.5% (1% floor) cash | | 6.89 | % | | 5,955,000 |
| | 5,901,647 |
| | 5,999,664 |
|
| IBC Capital Ltd. | | Metal & glass containers | | First Lien Term Loan B | | 9/11/2023 | | LIBOR+3.75% cash | | 6.09 | % | | 4,975,000 |
| | 4,962,562 |
| | 5,015,421 |
|
| Indivior Finance S.a.r.l (4) | | Pharmaceuticals | | First Lien Term Loan B | | 12/19/2022 | | LIBOR+4.5% (1% floor) cash | | 6.85 | % | | 4,732,907 |
| | 4,712,773 |
| | 4,718,117 |
|
| Integro Parent, Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 8.07 | % | | 4,863,924 |
| | 4,767,629 |
| | 4,876,084 |
|
McDermott Technology (Americas) Inc. (4)
| | Oil & gas equipment & services | | First Lien Term Loan B | | 5/12/2025 | | LIBOR+5% (1% floor) cash | | 7.24 | % | | 7,960,000 |
| | 7,808,276 |
| | 8,077,728 |
|
| MHE Intermediate Holdings, LLC (4) | | Diversified support services | | First Lien Term Loan B | | 3/8/2024 | | LIBOR+5% (1% floor) cash | | 7.39 | % | | 4,186,250 |
| | 4,119,789 |
| | 4,147,707 |
|
| | | Diversified support services | | Delayed Draw Term Loan | | 3/8/2024 | | LIBOR+5% (1% floor) cash | | 7.39 | % | | 845,676 |
| | 835,253 |
| | 837,883 |
|
| Total MHE Intermediate Holdings, LLC | | | | | | | | | | | | 5,031,926 |
| | 4,955,042 |
| | 4,985,590 |
|
| Morphe LLC (4) | | Personal products | | First Lien Term Loan | | 2/10/2023 | | LIBOR+6% (1% floor) cash | | 8.40 | % | | 3,412,500 |
| | 3,382,166 |
| | 3,412,500 |
|
| Northern Star Industries Inc. | | Electrical components & equipment | | First Lien Term Loan B | | 3/31/2025 | | LIBOR+4.75% (1% floor) cash | | 7.08 | % | | 5,472,500 |
| | 5,447,047 |
| | 5,479,341 |
|
| Novetta Solutions, LLC | | Application software | | First Lien Term Loan | | 10/17/2022 | | LIBOR+5% (1% floor) cash | | 7.25 | % | | 5,929,606 |
| | 5,878,236 |
| | 5,759,129 |
|
| OCI Beaumont LLC (4) | | Commodity chemicals | | First Lien Term Loan B | | 3/13/2025 | | LIBOR+4.25% (1% floor) cash | | 6.39 | % | | 6,965,000 |
| | 6,956,910 |
| | 7,078,288 |
|
| R1 RCM Inc. (4) | | Healthcare services | | First Lien Term Loan B | | 5/8/2025 | | LIBOR+5.25% cash | | 7.65 | % | | 7,000,000 |
| | 6,800,665 |
| | 7,017,500 |
|
| RSC Acquisition, Inc. | | Trading companies & distributors | | First Lien Term Loan | | 11/30/2022 | | LIBOR+4.25% (1% floor) cash | | 6.71 | % | | 3,889,854 |
| | 3,871,269 |
| | 3,880,130 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 11/18/2022 | | LIBOR+5% (1% floor) cash | | 7.34 | % | | 6,321,250 |
| | 6,283,276 |
| | 6,005,189 |
|
| Tribe Buyer LLC (4) | | Human resources & employment services | | First Lien Term Loan | | 2/16/2024 | | LIBOR+4.5% (1% floor) cash | | 6.74 | % | | 5,939,699 |
| | 5,926,444 |
| | 5,984,248 |
|
| Unimin Corp. | | Oil & gas equipment & services | | First Lien Term Loan | | 5/17/2025 | | LIBOR+3.75% (1% floor) cash | | 6.14 | % | | 6,982,500 |
| | 6,982,500 |
| | 6,621,714 |
|
| Verra Mobility, Corp. | | Data processing & outsourced services | | First Lien Term Loan B | | 2/28/2025 | | LIBOR+3.75% (1% floor) cash | | 5.99 | % | | 4,977,494 |
| | 4,957,752 |
| | 5,008,602 |
|
| WP CPP Holdings, LLC (4) | | Aerospace & defense | | Second Lien Term Loan | | 4/30/2026 | | LIBOR+7.75% (1% floor) cash | | 10.15 | % | | 3,000,000 |
| | 2,970,428 |
| | 3,006,570 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 160,746,402 |
| | $ | 159,310,303 |
| | $ | 160,260,951 |
|
__________
(1) Represents the current interest rate as of September 30, 2017.2018. All interest rates are payable in cash, unless otherwise noted.
(2) The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement and the cash interest rate as of period end. All LIBOR shown above is in U.S. dollars unless otherwise noted. As of September 30, 2018, the reference rates for the OCSI Glick JV's variable rate loans were the 30-day LIBOR at 2.24%, 60-day LIBOR at 2.29%, the 90-day LIBOR at 2.39%, the 180-day LIBOR at 2.59% and the PRIME at 5.25%.
(3) Represents the current determination of fair value as of September 30, 20172018 utilizing a similar technique as the Company in accordance with ASC 820. However, the determination of such fair value is not included in the Company's Board of Directors' valuation process described elsewhere herein.
(4) This investment is held by both the Company and the OCSI Glick JV as of September 30, 2018.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) This investment is held by both the Company and FSFROCSI Glick JV Portfolio as of September 30, 2017.2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(2) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (3) |
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 3/20/2022 | | LIBOR+5.5% (1% floor) cash | | 6.82 | % | | $ | 8,160,622 |
| | $ | 8,141,224 |
| | $ | 8,099,417 |
|
| Ameritox Ltd. (4)(5) | | Healthcare services | | First Lien Term Loan | | 4/11/2021 | | LIBOR+5% (1% floor) cash 3% PIK | | 6.33 | % | | 2,287,177 |
| | 2,243,202 |
| | 265,211 |
|
| | | Healthcare services | | 119,910.76 Class B Preferred Units | | | | | | | | | | 119,911 |
| | — |
|
| | | Healthcare services | | 368.96 Class A Common Units | | | | | | | |
|
| | 2,174,034 |
| | — |
|
| Total Ameritox Ltd. | | | | | | | | | | | | 2,287,177 |
| | 4,537,147 |
| | 265,211 |
|
| Ancile Solutions, Inc. (4) | | Internet software & services | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 4,042,355 |
| | 3,995,621 |
| | 4,010,198 |
|
| Aptos, Inc. (4) | | Data processing & outsourced services | | First Lien Term Loan B | | 9/1/2022 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 7,920,000 |
| | 7,790,262 |
| | 7,840,800 |
|
| Beyond Trust Software, Inc. (4) | | Application software | | First Lien Term Loan | | 9/25/2019 | | LIBOR+7% (1% floor) cash | | 8.33 | % | | 11,267,524 |
| | 11,220,478 |
| | 11,267,116 |
|
| California Pizza Kitchen, Inc. | | Restaurants | | First Lien Term Loan | | 8/23/2022 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 4,950,000 |
| | 4,938,077 |
| | 4,917,008 |
|
| Central Security Group, Inc. (4) | | Specialized consumer services | | First Lien Term Loan | | 10/6/2021 | | LIBOR+5.625% (1% floor) cash | | 6.86 | % | | 3,876,067 |
| | 3,880,408 |
| | 3,892,211 |
|
| CM Delaware LLC | | Advertising | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 2,075,162 |
| | 2,073,617 |
| | 2,064,786 |
|
| Compuware Corporation (4) | | Internet software & services | | First Lien Term Loan B3 | | 12/15/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 6,279,920 |
| | 6,225,992 |
| | 6,358,419 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 8.08 | % | | 4,610,174 |
| | 4,572,990 |
| | 4,610,400 |
|
| Integro Parent, Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 7.06 | % | | 4,913,924 |
| | 4,790,511 |
| | 4,901,639 |
|
| Metamorph US 3, LLC (4)(5) | | Internet software & services | | First Lien Term Loan | | 12/1/2020 | | LIBOR+5.5% (1% floor) cash 2% PIK | | 6.74 | % | | 6,825,900 |
| | 6,477,372 |
| | 2,592,115 |
|
| MHE Intermediate Holdings, LLC (4) | | Diversified support services | | First Lien Term Loan B | | 3/8/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 4,228,750 |
| | 4,150,304 |
| | 4,228,752 |
|
| | | Diversified support services | | Delayed Draw Term Loan | | 3/8/2024 | | LIBOR+5% (1% floor) cash | | 6.33 | % | | 667,510 |
| | 635,208 |
| | 667,510 |
|
| Total MHE Intermediate Holdings, LLC | | | | | | | | | | | | 4,896,260 |
| | 4,785,512 |
| | 4,896,262 |
|
| Motion Recruitment Partners LLC (4) | | Human resources & employment services | | First Lien Term Loan | | 2/13/2020 | | LIBOR+6% (1% floor) cash | | 7.24 | % | | 8,659,650 |
| | 8,659,650 |
| | 8,659,223 |
|
| NAVEX Global, Inc. | | Internet software & services | | First Lien Term Loan | | 11/19/2021 | | LIBOR+4.25% (1% floor) cash | | 5.49 | % | | 2,977,041 |
| | 2,967,620 |
| | 2,988,205 |
|
| New Trident Holdcorp, Inc. (4) | | Healthcare services | | First Lien Term Loan B | | 7/31/2019 | | LIBOR+5.75% (1.25% floor) cash | | 7.08 | % | | 2,018,206 |
| | 2,000,877 |
| | 1,453,109 |
|
| Novetta Solutions, LLC | | Diversified support services | | First Lien Term Loan | | 10/16/2022 | | LIBOR+5% (1% floor) cash | | 6.34 | % | | 5,990,978 |
| | 5,932,073 |
| | 5,826,226 |
|
| Poseidon Merger Sub, Inc. (4) | | Advertising | | Second Lien Term Loan | | 8/15/2023 | | LIBOR+8.5% (1% floor) cash | | 9.81 | % | | 3,000,000 |
| | 2,933,633 |
| | 3,030,000 |
|
| RSC Acquisition, Inc. | | Insurance brokers | | First Lien Term Loan | | 11/30/2022 | | LIBOR+5.25% (1% floor) cash | | 6.58 | % | | 3,930,134 |
| | 3,912,198 |
| | 3,890,832 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 10/27/2022 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 6,386,250 |
| | 6,338,479 |
| | 6,306,422 |
|
| TruckPro, LLC | | Auto parts & equipment | | First Lien Term Loan | | 8/6/2018 | | LIBOR+5% (1% floor) cash | | 6.24 | % | | 1,823,268 |
| | 1,821,822 |
| | 1,825,054 |
|
| Valet Merger Sub, Inc. (4) | | Environmental & facilities services | | First Lien Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 3,920,000 |
| | 3,877,655 |
| | 3,919,865 |
|
| | | Environmental & facilities services | | Incremental Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.24 | % | | 1,027,425 |
| | 1,006,080 |
| | 1,027,390 |
|
| Total Valet Merger Sub, Inc. | | | | | | | | | | | | 4,947,425 |
| | 4,883,735 |
| | 4,947,255 |
|
| Vubiquity, Inc. | | Application software | | First Lien Term Loan | | 8/12/2021 | | LIBOR+5.5% (1% floor) cash | | 6.83 | % | | 4,126,500 |
| | 4,099,195 |
| | 4,095,551 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 115,964,537 |
| | $ | 116,978,493 |
| | $ | 108,737,459 |
|
_________
(1) Represents the current interest rate as of September 30, 2017. All interest rates are payable in cash, unless otherwise noted.
(2) The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement.
(5) This investment was on cash non-accrual status as of September 30, 2017.
FSFR Glick JV Portfolio as of September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(4) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (2) |
| Ameritox Ltd. (3) | | Healthcare services | | First Lien Term Loan | | 4/11/2021 | | LIBOR+5% (1% floor) cash 3% PIK | | 6.00 | % | | $2,339,146 | | $2,336,840 | | $2,322,917 |
| | | Healthcare services | | 119,910.76 Class B Preferred Units | | | | | | | | — |
| | 119,911 |
| | 131,369 |
|
| | | Healthcare services | | 368.96 Class A Common Units | | | | | | | | — |
| | 2,174,034 |
| | 981,348 |
|
| Total Ameritox Ltd | | | | | | | | | | | | 2,339,146 |
| | 4,630,785 |
| | 3,435,634 |
|
| Answers Corporation (3) (5) | | Internet software & services | | First Lien Term Loan | | 10/3/2021 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 7,899,749 |
| | 7,636,708 |
| | 4,265,865 |
|
| Beyond Trust Software, Inc. (3) | | Application software | | First Lien Term Loan | | 9/25/2019 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 12,641,009 |
| | 12,554,571 |
| | 12,538,499 |
|
| Compuware Corporation (3) | | Internet software & services | | First Lien Term Loan B1 | | 12/15/2019 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 7,392,405 |
| | 7,306,444 |
| | 7,420,127 |
|
| Metamorph US 3, LLC (3) | | Internet software & services | | First Lien Term Loan | | 12/1/2020 | | LIBOR+6.5% (1% floor) cash | | 7.50 | % | | 6,900,283 |
| | 6,808,009 |
| | 5,744,139 |
|
| Motion Recruitment Partners LLC (3) | | Diversified support services | | First Lien Term Loan | | 2/13/2020 | | LIBOR+6% (1% floor) cash | | 7.00 | % | | 9,125,000 |
| | 9,125,000 |
| | 9,099,254 |
|
| NAVEX Global, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 11/19/2021 | | LIBOR+4.75% (1% floor) cash | | 5.99 | % | | 1,793,550 |
| | 1,779,633 |
| | 1,784,582 |
|
| Teaching Strategies, LLC | | Education services | | First Lien Term Loan (3) | | 10/1/2019 | | LIBOR+5.5% (0.5% floor) cash | | 6.34 | % | | 2,570,471 |
| | 2,567,575 |
| | 2,556,891 |
|
| | | Education services | | First Lien Delayed Draw Term Loan | | 10/1/2019 | | LIBOR+5.5% (0.5% floor) cash | | 6.34 | % | | 6,840,000 |
| | 6,832,715 |
| | 6,803,695 |
|
| Total Teaching Strategies, LLC | | | | | | | | | | | | 9,410,471 |
| | 9,400,290 |
| | 9,360,586 |
|
| TrialCard Incorporated (3) | | Healthcare services | | First Lien Term Loan | | 12/31/2019 | | LIBOR+4.5% (1% floor) cash | | 5.50 | % | | 7,179,097 |
| | 7,144,396 |
| | 7,144,248 |
|
| Air Newco LLC | | IT consulting & other services | | First Lien Term Loan B | | 3/20/2022 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 8,291,864 |
| | 8,267,671 |
| | 7,960,189 |
|
| Fineline Technologies, Inc. (3) | | Electronic equipment & instruments | | First Lien Term Loan | | 5/5/2017 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 7,034,441 |
| | 7,010,963 |
| | 7,015,051 |
|
| LegalZoom.com, Inc. (3) | | Specialized consumer services | | First Lien Term Loan | | 5/13/2020 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 9,850,000 |
| | 9,672,034 |
| | 9,772,706 |
|
| GK Holdings, Inc. | | IT consulting & other services | | First Lien Term Loan | | 1/20/2021 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 3,438,750 |
| | 3,452,038 |
| | 3,412,959 |
|
| Vitera Healthcare Solutions, LLC | | Healthcare technology | | Second Lien Term Loan | | 11/4/2021 | | LIBOR+8.25% (1% floor) cash | | 9.25 | % | | 3,000,000 |
| | 2,958,409 |
| | 2,782,500 |
|
| TIBCO Software, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 12/4/2020 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 2,304,900 |
| | 2,308,815 |
| | 2,277,114 |
|
| CM Delaware LLC | | Advertising | | First Lien Term Loan | | 3/18/2021 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 2,096,666 |
| | 2,094,658 |
| | 1,978,729 |
|
| New Trident Holdcorp, Inc. (3) | | Healthcare services | | First Lien Term Loan B | | 7/31/2019 | | LIBOR+5.25% (1.25% floor) cash | | 6.50 | % | | 2,041,357 |
| | 2,014,233 |
| | 1,755,567 |
|
| Central Security Group, Inc. (3) | | Specialized consumer services | | First Lien Term Loan | | 10/6/2020 | | LIBOR+5.625% (1% floor) cash | | 6.63 | % | | 5,909,774 |
| | 5,915,626 |
| | 5,776,805 |
|
| Auction.com, LLC | | Internet software & services | | First Lien Term Loan | | 5/12/2019 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 3,940,000 |
| | 3,926,700 |
| | 3,959,700 |
|
| Aptos, Inc. (3) | | Data processing & outsourced services | | First Lien Term Loan B | | 9/1/2022 | | LIBOR+6.75% (1% floor) cash | | 7.75 | % | | 8,000,000 |
| | 7,842,222 |
| | 7,920,000 |
|
| Vubiquity, Inc. | | Application software | | First Lien Term Loan | | 8/12/2021 | | LIBOR+5.5% (1% floor) cash | | 6.50 | % | | 4,168,500 |
| | 4,133,700 |
| | 4,147,658 |
|
| Too Faced Cosmetics, LLC (3) | | Personal products | | First Lien Term Loan B | | 7/7/2021 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 642,692 |
| | 581,620 |
| | 645,155 |
|
| American Seafoods Group LLC (3) | | Food distributors | | First Lien Term Loan | | 8/19/2021 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 3,853,704 |
| | 3,837,366 |
| | 3,844,069 |
|
| Worley Claims Services, LLC | | Internet software & services | | First Lien Term Loan | | 10/31/2020 | | LIBOR+8% (1% floor) cash | | 9.00 | % | | 5,730,937 |
| | 5,707,511 |
| | 5,702,282 |
|
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company | | Industry | | Investment Type | | Maturity Date | | Current Interest Rate (1)(4) | | Cash Interest Rate (1) | | Principal | | Cost | | Fair Value (2) |
| Poseidon Merger Sub, Inc. (3) | | Advertising | | Second Lien Term Loan | | 8/15/2023 | | LIBOR+8.5% (1% floor) cash | | 9.50 | % | | $ | 3,000,000 |
| | $ | 2,922,316 |
| | $ | 3,039,954 |
|
| AccentCare, Inc. | | Healthcare services | | First Lien Term Loan | | 9/3/2021 | | LIBOR+5.75% (1% floor) cash | | 6.75 | % | | 7,850,000 |
| | 7,773,386 |
| | 7,727,344 |
|
| Novetta Solutions, LLC | | Diversified support services | | First Lien Term Loan | | 10/17/2022 | | LIBOR+5.75% (1% floor) cash | | 6.00 | % | | 6,477,948 |
| | 6,392,100 |
| | 6,226,928 |
|
| SHO Holding I Corporation | | Footwear | | First Lien Term Loan | | 10/27/2022 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 6,451,250 |
| | 6,393,472 |
| | 6,443,186 |
|
| Valet Merger Sub, Inc. (3) | | Environmental & facilities services | | First Lien Term Loan | | 9/24/2021 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 3,960,000 |
| | 3,906,498 |
| | 4,026,826 |
|
| RSC Acquisition, Inc. | | Insurance brokers | | First Lien Term Loan | | 11/30/2022 | | LIBOR+5.25% (1% floor) cash | | 6.25 | % | | 3,970,390 |
| | 3,948,754 |
| | 3,950,538 |
|
| Integro Parent Inc. | | Insurance brokers | | First Lien Term Loan | | 10/31/2022 | | LIBOR+5.75% (1% floor) cash | | 6.75 | % | | 4,963,924 |
| | 4,814,658 |
| | 4,889,465 |
|
| TruckPro, LLC | | Auto parts & equipment | | First Lien Term Loan | | 8/6/2018 | | LIBOR+5% (1% floor) cash | | 6.00 | % | | 1,920,000 |
| | 1,916,612 |
| | 1,919,232 |
|
| Falmouth Group Holdings Corp. | | Specialty chemicals | | First Lien Term Loan | | 12/13/2021 | | LIBOR+6.75% (1% floor) cash | | 7.75 | % | | 4,962,500 |
| | 4,912,596 |
| | 4,967,689 |
|
| Sundial Group Holdings LLC | | Personal products | | First Lien Term Loan | | 10/19/2021 | | LIBOR+6.25% (1% floor) cash | | 7.25 | % | | 3,900,000 |
| | 3,839,938 |
| | 3,954,402 |
|
| Onvoy, LLC (3) | | Integrated telecommunication services | | First Lien Term Loan | | 4/29/2021 | | LIBOR+6.25% (1% floor) cash | | 7.25 | % | | 7,406,250 |
| | 7,261,422 |
| | 7,386,738 |
|
| Ancile Solutions, Inc. (3) | | Internet software & services | | First Lien Term Loan | | 6/30/2021 | | LIBOR+7% (1% floor) cash | | 8.00 | % | | 4,500,000 |
| | 4,433,644 |
| | 4,432,500 |
|
| Total Portfolio Investments | | | | | | | | | | | | $ | 194,346,557 |
| | $ | 194,624,798 |
| | $ | 188,708,220 |
|
_________
(1) Represents the current interest rate as of September 30, 2016. All interest rates are payable in cash, unless otherwise noted.
(2)(3) Represents the current determination of fair value as of September 30, 20162017 utilizing a similar technique as the Company in accordance with ASC 820. However, the determination of such fair value is not included in the Company's Board of Directors' valuation process described elsewhere herein.
(3)(4) This investment is held by both the Company and FSFRthe OCSI Glick JV as of September 30, 2016.
(4) The interest rate on the principal balance outstanding for all floating rate loans is indexed to LIBOR and/or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR or the alternate base rate based on each respective credit agreement.2017.
(5) This investment was on cash non-accrual status as of September 30, 2016.2017. Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable.
The cost and fair value of the Company's aggregate investment in FSFRthe OCSI Glick JV was $73.5 million and $58.5 million, respectively, as of September 30, 2018 and $71.3 million and $57.6 million, respectively, as of September 30, 2017 and $71.1 million and $63.3 million, respectively, as2017. As of September 30, 2016. The2018, the Subordinated Notes paybore a weighted average interest rate of LIBOR plus 6.5% per annum. As of September 30, 2017, the Subordinated Notes bore a weighted average interest rate of LIBOR plus 8.0% per annum. For the years ended September 30, 2018, 2017 and September 30, 2016, the Company earned interest income of $6.1 million, $5.8 million and $5.1 million, respectively, on its investment in the Subordinated Notes.Notes, of which $2.2 million, $0.2 million and $0.0 million, respectively, was PIK interest income. The Company did not earn any dividend income for the year ended September 30, 2018 with respect to its investment in the LLC equity interests of the OCSI Glick JV. The Company reversed $0.6 million of dividend income previously recorded in prior periods during the year ended September 30, 2017 with respect to its LLC equity interests since the Company determinedfollowing a determination that such dividend payments mayamounts were no longer be collectible. The Company earned dividend income of $2.7 million for the year ended September 30, 2016 with respect to its LLC equity interests. The LLC equity interests of the OCSI Glick JV are dividendincome producing to the extent there is residual cash to be distributed on a quarterly basis.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is certain summarized financial information for FSFRthe OCSI Glick JV as of September 30, 20172018 and September 30, 20162017 and for the years ended September 30, 20172018 and September 30, 2016:2017:
| | | | | September 30, 2017 | | September 30, 2016 | | September 30, 2018 | | September 30, 2017 |
| Selected Balance Sheet Information: | | | | | | | | |
| Investments in loans at fair value (cost September 30, 2017: $116,978,493; cost September 30, 2016: $194,624,798) | | $ | 108,737,459 |
| | $ | 188,708,220 |
| |
| Receivable from secured financing arrangement at fair value (September 30, 2016 cost: $5,000,000) | | — |
| | 4,985,425 |
| |
| Investments in loans at fair value (cost September 30, 2018: $159,310,303; cost September 30, 2017: $116,978,493) | | | $ | 160,260,951 |
| | $ | 108,737,459 |
|
| Cash and cash equivalents | | 13,891,899 |
| | 980,605 |
| | 2,055,935 |
| | 13,891,899 |
|
| Restricted cash | | 2,249,575 |
| | 3,343,303 |
| | 2,036,487 |
| | 2,249,575 |
|
| Receivable from unsettled transactions | | — |
| | 952,591 |
| |
| Due from portfolio companies | | 7,653 |
| | — |
| | 53,006 |
| | 7,653 |
|
| Other assets | | 1,791,077 |
| | 2,162,942 |
| | 1,781,502 |
| | 1,791,077 |
|
| Total assets | | $ | 126,677,663 |
| | $ | 201,133,086 |
| | $ | 166,187,881 |
| | $ | 126,677,663 |
|
| | | | | | | | | |
| Senior credit facility payable | | $ | 56,881,939 |
| | $ | 124,615,636 |
| | $ | 94,281,939 |
| | $ | 56,881,939 |
|
| Subordinated notes payable at fair value (proceeds September 30, 2017: $73,404,435; cost September 30, 2016: $73,149,434) | | 65,836,199 |
| | 65,012,167 |
| |
| Subordinated notes payable at fair value (proceeds September 30, 2018: $75,874,536; proceeds September 30, 2017: $73,404,435) | | | 66,871,054 |
| | 65,836,199 |
|
| Other liabilities | | 3,959,525 |
| | 4,196,688 |
| | 5,034,888 |
| | 3,959,525 |
|
| Total liabilities | | $ | 126,677,663 |
| | $ | 193,824,491 |
| | $ | 166,187,881 |
| | $ | 126,677,663 |
|
| Members' equity | | — |
| | 7,308,595 |
| | — |
| | — |
|
| Total liabilities and members' equity | | $ | 126,677,663 |
| | $ | 201,133,086 |
| | $ | 166,187,881 |
| | $ | 126,677,663 |
|
|
| | | | | | | | |
| | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 |
| Selected Statements of Operations Information: | | | | |
| Interest income | | $ | 11,148,203 |
| | $ | 14,109,946 |
|
| PIK interest income | | 53,620 |
| | 33,170 |
|
| Fee income | | 160,984 |
| | 95,756 |
|
| Total investment income | | 11,362,807 |
| | 14,238,872 |
|
| Interest expense | | 11,055,880 |
| | 10,780,919 |
|
| Other expenses | | 224,559 |
| | 283,267 |
|
| Total expenses (1) | | 11,280,439 |
| | 11,064,186 |
|
| Net unrealized appreciation (depreciation) | | (2,893,408 | ) | | 3,832,274 |
|
| Realized loss on investments | | (3,873,454 | ) | | (3,119,735 | ) |
| Net income (loss) | | $ | (6,684,494 | ) | | $ | 3,887,225 |
|
|
| | | | | | | | |
| | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 |
| Selected Statements of Operations Information: | | | | |
| Interest income | | $ | 9,823,972 |
| | $ | 11,148,203 |
|
| PIK interest income | | — |
| | 53,620 |
|
| Fee income | | 77,999 |
| | 160,984 |
|
| Total investment income | | 9,901,971 |
| | 11,362,807 |
|
| Interest expense | | 11,433,877 |
| | 11,055,880 |
|
| Other expenses | | 211,874 |
| | 224,559 |
|
| Total expenses (1) | | 11,645,751 |
| | 11,280,439 |
|
| Net unrealized appreciation (depreciation) | | 10,626,928 |
| | (2,893,408 | ) |
| Realized loss on investments | | (8,883,148 | ) | | (3,873,454 | ) |
| Net income (loss) | | $ | — |
| | $ | (6,684,494 | ) |
__________
(1) There are no management fees or incentive fees charged at FSFRthe OCSI Glick JV.
FSFROAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The OCSI Glick JV has elected to fair value the Subordinated Notes issued to the Company and GF Debt Funding under FASB ASC 825.Topic 825, Financial Instruments - Fair Value Options. The Subordinated Notes are valued based on the total assets less the liabilities senior to the subordinated notes of FSFR Glick JVSubordinated Notes in an amount not exceeding par under the enterprise value technique.
During the yearyears ended September 30, 2018 and 2017, the Company did not sell any senior secured debt investments to FSFRthe OCSI Glick JV. During the year ended September 30, 2016, the Company sold $48.9 million of senior secured debt investments at fair value to FSFR Glick JV in exchange for $47.6 million cash consideration, $1.2 million of subordinated notes in FSFR Glick JV and $0.1 million of LLC equity interests in FSFR Glick JV. The Company realized aloss of $0.5 million on these transactions.
The Company determined that FSFRthe OCSI Glick JV is a significant subsidiary for the years ended September 30, 20172018 and September 30, 20162017 under at least one of the significance conditions of Rule 4-08(g) of SEC Regulation S-X. The related summary financial information is presented in the "FSFR Glick JV LLC" heading above.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this footnote.
Note 4. Fee Income
The Company receives a variety of fees in the ordinary course of business, including servicing, advisory, amendment, structuring and prepayment fees, which are classified as fee income and recognized as they are earned. The majority of fee income is comprised of advisory fees which are recognized at investment close and are non-recurring in nature.
For the yearyears ended September 30, 2018, 2017 the Company recorded total fee income of $2.2 million, $0.5 million of which was recurring in nature. For the year ended September 30,and 2016, the Company recorded total fee income of $2.1 million, $2.2 million, and $3.1 million, respectively, of which $0.1 million, $0.5 million and $0.6 million, of whichrespectively, was recurring in nature. Recurring fee income primarily consists of servicing fees.
Note 5. Share Data and Distributions
Earnings per Share
The following table sets forth the computation of basic and diluted earnings per share, pursuant to FASB ASC Topic 260-10, Earnings per Share, for the years ended September 30, 2018, 2017 2016 and 2015:2016:
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 | | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 |
| Earnings (loss) per common share — basic and diluted: | | | | | | | | | | | | | |
| Net increase (decrease) in net assets resulting from operations | | $ | (8,766,879 | ) | | $ | (4,457,617 | ) | | $ | 15,912,082 |
| | | $ | 20,673,049 |
| | $ | (8,766,879 | ) | | $ | (4,457,617 | ) |
| Weighted average common shares outstanding | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
|
| Earnings (loss) per common share — basic and diluted | | $ | (0.30 | ) | | $ | (0.15 | ) | | $ | 0.54 |
| | | $ | 0.70 |
| | $ | (0.30 | ) | | $ | (0.15 | ) |
Distributions
Distributions to common stockholders are recorded on the ex-dividend date. The Company is required to distribute dividends each taxable year to its stockholders of an amount generally at least equal to 90% of its investment company taxable income, determined without regard to any deduction for dividends paid, in order to be eligible for tax benefits allowed to a RIC under Subchapter M of the Code. The Company anticipates paying out as a distribution all or substantially all of those amounts. The amount to be paid out as a dividend is determined by the Board of Directors and is based on management’s estimate of the Company’s annual taxable income. Net realized capital gains, if any, are generally distributed, although the Company may decide to retain such net realized capital gains for investment.
The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for reinvestment of any distributions the Company declares in cash on behalf of its stockholders, unless a stockholder elects to receive cash. As a result, if the Company’s Board of Directors authorizes, and the Company declares a cash distribution, then the Company’s stockholders who have not “opted out” of the Company’s DRIP will have their cash distribution automatically reinvested in additional shares of the Company’s common stock, rather than receiving the cash distribution. If the Company’s shares are trading at a premium to net asset value, the Company typically issues new shares to implement the DRIP.DRIP with such shares issued at the greater of the most recently computed net asset value per share of common stock or 95% of the current market price per share of common stock on the payment date for such distribution. If the Company’s shares are trading at a discount to net asset value, the Company typically purchases shares in the open market in connection with the Company’s obligations under the DRIP.
For income tax purposes, the Company estimates that its distributions for the 20172018 calendar year will be composed primarily of ordinary income and the actual character of such distributions will be appropriately reported to the Internal Revenue Service and stockholders for the 20172018 calendar year. To the extent that the Company’s taxable earnings for a fiscal and taxable year fall below the amount of distributions paid for the fiscal and taxable year, a portion of the total amount of the Company’s distributions for the fiscal and taxable year may be deemed a return of capital for tax purposes to the Company’s stockholders. For the year ended September 30, 2018, $2.1 million of the Company's distributions were deemed a return of capital for tax purposes.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects the distributions per share that the Company has paid, including shares issued under the DRIP, on its common stock during the years ended September 30, 2018, 2017 2016 and 2015:2016:
|
| | | | | | | | | | | | | | | | | | | | |
| Frequency | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value |
| Monthly | | August 4, 2016 | | October 14, 2016 | | October 31, 2016 | | $ | 0.075 |
| | $ | 2,183,023 |
| | 3,146 | | $ | 26,985 |
|
| Monthly | | August 4, 2016 | | November 15, 2016 | | November 30, 2016 | | 0.075 |
| | 2,183,100 |
| | 2,986 | | 26,908 |
|
| Monthly | | October 19, 2016 | | December 15, 2016 | | December 30, 2016 | | 0.075 |
| | 2,179,421 |
| | 3,438 | | 30,586 |
|
| Monthly | | October 19, 2016 | | January 31, 2017 | | January 31, 2017 | | 0.075 |
| | 2,180,645 |
| | 2,905 | | 29,363 |
|
| Monthly | | October 19, 2016 | | February 15, 2017 | | February 28, 2017 | | 0.075 |
| | 2,183,581 |
| | 2,969 | | 26,427 |
|
| Monthly | | February 6, 2017 | | March 15, 2017 | | March 31, 2017 | | 0.04 |
| | 1,165,417 |
| | 1,508 | | 13,253 |
|
| Quarterly | | February 6, 2017 | | June 15, 2017 | | June 30, 2017 | | 0.19 |
| | 5,543,465 |
| | 6,840 | | 55,221 |
|
| Quarterly | | August 7, 2017 | | September 15, 2017 | | September 29, 2017 | | 0.19 |
| | 5,536,798 |
| | 6,991 | | 61,888 |
|
| Total for the year ended September 30, 2017 | | | | $ | 0.80 |
| | $ | 23,155,451 |
| | 30,783 | | $ | 270,630 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Frequency | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value |
| Quarterly | | August 7, 2017 | | December 15, 2017 | | December 29, 2017 | | $ | 0.19 |
| | $ | 5,439,519 |
| | 18,809 | | $ | 159,167 |
|
| Quarterly | | February 5, 2018 | | March 15, 2018 | | March 30, 2018 | | 0.14 |
| | 4,091,583 |
| | 4,204 | | 33,764 |
|
| Quarterly | | May 3, 2018 | | June 15, 2018 | | June 29, 2018 | | 0.145 |
| | 4,232,547 |
| | 4,829 | | 40,134 |
|
| Quarterly | | August 1, 2018 | | September 15, 2018 | | September 28, 2018 | | 0.155 |
| | 4,518,677 |
| | 5,620 | | 48,672 |
|
| Total for the year ended September 30, 2018 | | | | $ | 0.63 |
| | $ | 18,282,326 |
| | 33,462 | | $ | 281,737 |
|
| | | Frequency | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value (2) | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value (2) |
| Monthly | | July 10, 2015 | | October 6, 2015 | | October 15, 2015 | | $ | 0.075 |
| | $ | 2,101,445 |
| | 12,080 | | $ | 108,563 |
| | August 4, 2016 | | October 14, 2016 | | October 31, 2016 | | $ | 0.075 |
| | $ | 2,183,023 |
| | 3,146 | | $ | 26,985 |
|
| Monthly | | July 10, 2015 | | November 5, 2015 | | November 16, 2015 | | 0.075 |
| | 2,093,278 |
| | 13,269 | | 116,730 |
| | August 4, 2016 | | November 15, 2016 | | November 30, 2016 | | 0.075 |
| | 2,183,100 |
| | 2,986 | | 26,908 |
|
| Monthly | | November 30, 2015 | | December 11, 2015 | | December 22, 2015 | | 0.075 |
| | 2,115,444 |
| | 11,103 | | 94,563 |
| | October 19, 2016 | | December 15, 2016 | | December 30, 2016 | | 0.075 |
| | 2,179,421 |
| | 3,438 | | 30,586 |
|
| Monthly | | November 30, 2015 | | January 4, 2016 | | January 15, 2016 | | 0.075 |
| | 2,148,928 |
| | 8,627 | | 61,079 |
| | October 19, 2016 | | January 31, 2017 | | January 31, 2017 | | 0.075 |
| | 2,180,645 |
| | 2,905 | | 29,363 |
|
| Monthly | | November 30, 2015 | | February 5, 2016 | | February 16, 2016 | | 0.075 |
| | 2,177,085 |
| | 4,542 | | 32,923 |
| | October 19, 2016 | | February 15, 2017 | | February 28, 2017 | | 0.075 |
| | 2,183,581 |
| | 2,969 | | 26,427 |
|
| Monthly | | February 8, 2016 | | March 15, 2016 | | March 31, 2016 | | 0.075 |
| | 2,175,431 |
| | 4,383 | | 34,577 |
| | February 6, 2017 | | March 15, 2017 | | March 31, 2017 | | 0.04 |
| | 1,165,417 |
| | 1,508 | | 13,253 |
|
| Monthly | | February 8, 2016 | | April 15, 2016 | | April 29, 2016 | | 0.075 |
| | 2,174,974 |
| | 4,452 | | 35,033 |
| |
| Monthly | | February 8, 2016 | | May 13, 2016 | | May 31, 2016 | | 0.075 |
| | 2,176,513 |
| | 4,256 | | 33,494 |
| |
| Monthly | | May 6, 2016 | | June 15, 2016 | | June 30, 2016 | | 0.075 |
| | 2,163,126 |
| | 5,822 | | 46,881 |
| |
| Monthly | | May 6, 2016 | | July 15, 2016 | | July 29, 2016 | | 0.075 |
| | 2,179,263 |
| | 3,627 | | 30,745 |
| |
| Monthly | | May 6, 2016 | | August 15, 2016 | | August 31, 2016 | | 0.075 |
| | 2,181,006 |
| | 3,260 | | 29,002 |
| |
| Monthly | | August 4, 2016 | | September 15, 2016 | | September 30, 2016 | | 0.075 |
| | 2,183,197 |
| | 3,078 | | 26,811 |
| |
| Total for the year ended September 30, 2016 | | $ | 0.90 |
| | $ | 25,869,690 |
| | 78,499 | | $ | 650,402 |
| |
| Quarterly | | | February 6, 2017 | | June 15, 2017 | | June 30, 2017 | | 0.19 |
| | 5,543,465 |
| | 6,840 | | 55,221 |
|
| Quarterly | | | August 7, 2017 | | September 15, 2017 | | September 29, 2017 | | 0.19 |
| | 5,536,798 |
| | 6,991 | | 61,888 |
|
| Total for the year ended September 30, 2017 | | Total for the year ended September 30, 2017 | | $ | 0.795 |
| | $ | 23,155,451 |
| | 30,783 | | $ | 270,630 |
|
| | | Frequency | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value | | Date Declared | | Record Date | | Payment Date | | Amount
per Share | | Cash Distribution | | DRIP Shares Issued (1) | | DRIP Shares Value (2) |
| Quarterly | | May 12, 2014 | | September 15, 2014 | | October 15, 2014 | | 0.30 |
| | 8,648,937 |
| | 17,127 | | 191,093 |
| |
| Quarterly | | September 9, 2014 | | December 15, 2014 | | January 15, 2015 | | 0.30 |
| | 8,597,352 |
| | 23,183 | | 242,678 |
| |
| Quarterly | | November 20, 2014 | | April 2, 2015 | | April 15, 2015 | | 0.30 |
| | 8,532,236 |
| | 28,296 | | 307,794 |
| |
| Monthly | | February 4, 2015 | | May 1, 2015 | | May 15, 2015 | | 0.10 |
| | 2,895,847 |
| | 5,045 | | 50,830 |
| | July 10, 2015 | | October 6, 2015 | | October 15, 2015 | | $ | 0.075 |
| | $ | 2,101,445 |
| | 12,080 | | $ | 108,563 |
|
| Monthly | | February 4, 2015 | | June 1, 2015 | | June 15, 2015 | | 0.10 |
| | 2,893,440 |
| | 5,296 | | 53,237 |
| | July 10, 2015 | | November 5, 2015 | | November 16, 2015 | | 0.075 |
| | 2,093,278 |
| | 13,269 | | 116,730 |
|
| Monthly | | February 4, 2015 | | July 1, 2015 | | July 15, 2015 | | 0.10 |
| | 2,809,213 |
| | 14,572 | | 137,464 |
| | November 30, 2015 | | December 11, 2015 | | December 22, 2015 | | 0.075 |
| | 2,115,444 |
| | 11,103 | | 94,563 |
|
| Monthly | | February 4, 2015 | | August 3, 2015 | | August 17, 2015 | | 0.10 |
| | 2,890,289 |
| | 6,174 | | 56,388 |
| | November 30, 2015 | | January 4, 2016 | | January 15, 2016 | | 0.075 |
| | 2,148,928 |
| | 8,627 | | 61,079 |
|
| Monthly | | July 10, 2015 | | September 4, 2015 | | September 15, 2015 | | 0.07 |
| | 2,168,886 |
| | 4,575 | | 41,121 |
| | November 30, 2015 | | February 5, 2016 | | February 16, 2016 | | 0.075 |
| | 2,177,085 |
| | 4,542 | | 32,923 |
|
| Total for the year ended September 30, 2015 | | $ | 1.37 |
| | $ | 39,436,200 |
| | 104,268 | | $ | 1,080,605 |
| |
| Monthly | | | February 8, 2016 | | March 15, 2016 | | March 31, 2016 | | 0.075 |
| | 2,175,431 |
| | 4,383 | | 34,577 |
|
| Monthly | | | February 8, 2016 | | April 15, 2016 | | April 29, 2016 | | 0.075 |
| | 2,174,974 |
| | 4,452 | | 35,033 |
|
| Monthly | | | February 8, 2016 | | May 13, 2016 | | May 31, 2016 | | 0.075 |
| | 2,176,513 |
| | 4,256 | | 33,494 |
|
| Monthly | | | May 6, 2016 | | June 15, 2016 | | June 30, 2016 | | 0.075 |
| | 2,163,126 |
| | 5,822 | | 46,881 |
|
| Monthly | | | May 6, 2016 | | July 15, 2016 | | July 29, 2016 | | 0.075 |
| | 2,179,263 |
| | 3,627 | | 30,745 |
|
| Monthly | | | May 6, 2016 | | August 15, 2016 | | August 31, 2016 | | 0.075 |
| | 2,181,006 |
| | 3,260 | | 29,002 |
|
| Monthly | | | August 4, 2016 | | September 15, 2016 | | September 30, 2016 | | 0.075 |
| | 2,183,197 |
| | 3,078 | | 26,811 |
|
| Total for the year ended September 30, 2016 | | Total for the year ended September 30, 2016 | | $ | 0.90 |
| | $ | 25,869,690 |
| | 78,499 | | $ | 650,402 |
|
__________
(1) Shares were purchased on the open market and distributed.
(2) Totals do not sum due to rounding
Common Stock Offering
There were no common stock offerings during the years ended September 30, 2018, 2017 September 30, 2016 and September 30, 2015.2016.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Borrowings
Citibank Facility
On January 15, 2015, OCSI Senior Funding II LLC (formerly FS Senior Funding II LLC,LLC), the Company's wholly-owned, special purpose financing subsidiary, entered into a $175 million revolving credit facility (as amended, the "Citibank facility"Facility") with the lenders referred to therein, Citibank, N.A., as administrative agent, and Wells Fargo Bank, N.A., as collateral agent and custodian.
In connection with the Transaction, on July 13,OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2018 and 2017, the Company entered into an amendment (the “Citibank Amendment”) to the Citibank facility that amends the Loan and Security Agreement, dated as of January 15, 2015, by and among the Company, as the collateral manager and as the seller, FS Senior Funding II LLC, as the borrower, Citibank, N.A., as administrative agent, and Citibank, N.A., as the sole lender. Under the Citibank Amendment, certain events of default that would result from the closing of the Transaction are waived and the abilitywas able to borrow amounts$180 million and $125 million, respectively, under the Citibank facility for investment was revised to require the consentFacility. As of the lenders prior to the closing of the Transaction and completion of satisfactory due diligence by the lenders on Oaktree. In addition, the Citibank Amendment provided that if the closing of the Transaction did not occur by December 31, 2017,September 30, 2018, the reinvestment period under the Citibank Facility is scheduled to expire on July 19, 2021 and the maturity date for the Citibank facility would have terminated and the Company would have been required to pay down any amounts outstandingFacility is July 18, 2023.
As of September 30, 2018, borrowings under the Citibank facility as set forth in the Citibank Amendment.
Borrowings under the Citibank facilityFacility are subject to certain customary advance rates and accruedaccrue interest at a rate equal to LIBOR plus 2.00%1.70% per annum on broadly syndicated loans and LIBOR plus 2.25% per annum on all other eligible loans during the reinvestment period. Following termination of the reinvestment period, andborrowings under the Citibank Facility will accrue interest at rates equal to LIBOR plus 3.50% per annum during the first year after the reinvestment period and LIBOR plus 4.00% per annum during the subsequent two years, respectively. In addition, as of September 30, 2018, for the duration of the reinvestment period there is a commitmentnon-usage fee payable of 0.50% per annum on the undrawn amount under the Citibank facilityFacility. As of either 0.50% per annum onSeptember 30, 2018, the unused amountminimum asset coverage ratio applicable to the Company under the Citibank Facility is 150% as determined in accordance with the requirements of the Citibank facility (if the advances outstanding on the Citibank facility exceed 50% of the aggregate commitments by lenders to make advances on such day) or 0.75% per annum on the unused amount of the credit facility (if the advances outstanding on the Citibank facility do not exceed 50% of the aggregate commitments by lenders to make advances on such day) for the duration of the reinvestment period. Interest and commitment fees are payable quarterly in arrears. The Citibank facility will mature on January 15, 2020. The Citibank facility requires theInvestment Company to comply with certain affirmative and negative covenants and other customary requirements for similar credit facilities.
On March 23, 2017, FS Senior Funding II LLC entered into an amendment to the documents governing the Citibank facility. The amendment was effective as of March 23, 2017 and, among other things, decreased the size of the Citibank facility from $175 million to $125 million. The interest rate, reinvestment period and maturity date were not modified as part of this amendment. The Company accelerated deferred financing costs of $406,230 in connection with the amendment. Act.
As of September 30, 20172018 and September 30, 2016,2017, the Company had $76.5$110.1 million and $107.4$76.5 million outstanding under the Citibank facility,Facility, respectively. Borrowings under the Citibank facilityFacility are secured by all of the assets of FSOCSI Senior Funding II LLC and all of the Company's equity interests in FSOCSI Senior Funding II LLC.II. The Company may use the Citibank facilityFacility to fund a portion of its loan origination activities and for general corporate purposes. Each loan origination under the Citibank facilityFacility is subject to the satisfaction of certain conditions. The Company's borrowings under the Citibank facilityFacility bore interest at a weighted average interest rate of 3.559%4.264%, 2.838%3.559% and 2.516%2.838% for the years ended September 30, 2018, 2017 September 30,and 2016, and September 30, 2015, respectively. For the years ended September 30, 2018, 2017 September 30,and 2016, and September 30, 2015, the Company recorded interest expense of $4.2 million, $4.1$4.2 million and $2.6$4.1 million respectively, related to the Citibank facility.Facility.
East West Bank Facility
On January 6, 2016, the Company entered into a five-year $25 million senior secured revolving credit facility with the lenders referenced therein, U.S. Bank National Association, as Custodian, and East West Bank as Secured Lender (the(as amended, the "East West Bank facility"Facility"). TheAs of September 30, 2018, the East West Bank facilityFacility bears an interest rate of either (i) LIBOR plus 3.75%2.85% per annum for borrowings in year one, 3.50% per annum for borrowings in year two, 3.25% per annum for borrowings in years three and four and 3.00% per annum for borrowings in year five, or (ii) East West Bank’s prime rate plus 0.75% per annum for borrowingsrate. As of September 30, 2018, the minimum asset coverage ratio applicable to the Company under the East West Bank Facility was 150% as determined in year one, 0.50% per annum for borrowings in year two, 0.25% per annum for borrowings in years three and four, and 0.00% per annum for borrowings in year five.accordance with the requirements of the Investment Company Act. The East West Bank facilityFacility matures on January 6, 2021. The East West Bank facilityFacility requires the Company to comply with certain affirmative and negative covenants and other customary requirements for similar credit facilities.
As of September 30, 2018 and September 30, 2017, the Company had $8.0 million and $6.5 million outstanding under the East West Bank facility. As of September 30, 2016, the Company had no borrowings outstanding under the East West Bank facility.Facility, respectively. Borrowings under the East West Bank facilityFacility are secured by the loans pledged as collateral thereunder from time to time as well as certain other assets of the Company. The Company may use the East West Bank facilityFacility to fund a portion of its loan origination activities and for general corporate purposes. The Company’s borrowings under the East West Bank facilityFacility bore interest at a weighted average interest rate of 4.949% and 4.633% for the yearyears ended September 30, 2017.2018 and 2017, respectively. The Company’s borrowings under the East West Bank facility bore interest at a weighted average interest rate of
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4.857% for the period from January 6, 2016 through September 30, 2016. For the years ended September 30, 2018 and 2017, the Company recorded interest expense of $0.6 million and $0.5 million, respectively, related to the East West Bank Facility. For the period from January 6, 2016 through September 30, 2016, the Company recorded interest expense of $0.5 million and $0.4 million, respectively, related to the East West Bank facility.Facility.
Deutsche Bank Facility
On September 24, 2018, OCSI Senior Funding Ltd., a wholly-owned subsidiary of the Company, entered into a loan financing and servicing agreement (the “Deutsche Bank Facility”) with the Company as equityholder and as servicer, the lenders from time to time parties thereto, Deutsche Bank AG, New York Branch, as facility agent, the other agents parties thereto and Wells Fargo Bank, National Association, as collateral agent and as collateral custodian.
Under the Deutsche Bank Facility, as of September 30, 2018, OCSI Senior Funding Ltd. could borrow an aggregate principal amount of up to $250 million, which can be increased to $300 million in the sole discretion of Deutsche Bank AG, New York Branch in connection with certain milestones in the marketing of a collateralized loan obligation. The period during which OCSI Senior Funding Ltd. may request drawdowns under the Deutsche Bank Facility (the “revolving period”) will continue through March 24, 2019 unless there is an earlier termination or event of default. The Deutsche Bank Facility will mature on the earliest of six months from the termination of the revolving period, the occurrence of an event of default or completion of a securitization transaction.
Prior to the end of the revolving period, borrowings under the Deutsche Bank Facility will bear interest at a rate equal to the three-month LIBOR plus 1.90%, following which the interest rate will reset to three-month LIBOR plus 2.05% for the remaining term of the Deutsche Bank Facility. No up-front commitment fees were paid by the Company in connection with the Deutsche Bank Facility. There is a non-usage fee of 0.25% per annum payable on the undrawn amount under the Deutsche Bank Facility through December 24, 2018, following which the non-usage fee increases to 0.50% per annum for the remaining term of the Deutsche Bank Facility.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Deutsche Bank Facility is secured by all of the assets held by OCSI Senior Funding Ltd. OCSI Senior Funding Ltd. has made customary representations and warranties and is required to comply with various affirmative and negative covenants, reporting requirements and other customary requirements for similar credit facilities. The borrowings of the Company, including indirectly under the Deutsche Bank Facility, are subject to the leverage restrictions contained in the Investment Company Act.
As of September 30, 2018, the Company had $157.0 million outstanding under the Deutsche Bank Facility. For the period from September 24, 2018 to September 30, 2018, the Company’s borrowings under the Deutsche Bank Facility bore interest at a weighted average interest rate of 4.266%, and the Company recorded interest expense of $0.1 million.
2015 Debt Securitization
On May 28, 2015, the Company completed its $309.0 million debt securitization ("2015 Debt Securitization") consisting of $222.6 million in senior secured notes ("2015 Notes") and $86.4 million of unsecured subordinated notes ("Subordinated 2015 Notes"). The notes offered in the 2015 Debt Securitization were issued by the 2015 Issuer,FS Senior Funding Ltd., a wholly-owned subsidiary of the Company, through a private placement. The 2015 Notes arewere secured by the assets held by the 2015 Issuer.FS Senior Funding Ltd. The 2015 Debt Securitization consistsconsisted of $126.0 million Class A-T Senior Secured 2015 Notes, which bearbore interest at three-month LIBOR plus 1.80% per annum; $29.0 million Class A-S Senior Secured 2015 Notes, which bore interest at a rate of three-month LIBOR plus 1.55% per annum, until a step-up in spread to 2.10% occurred in October 2016; $20.0 million Class A-R Senior Secured Revolving 2015 Notes, which bearbore interest at a rate of Commercial Paper ("CP") plus 1.80% per annum (collectively, the "Class A Notes") and $25.0 million Class B Senior Secured 2015 Notes, which bearbore interest at a rate of three-month LIBOR plus 2.65% per annum (the "Class B Notes").
In partial consideration forconnection with entry into the loans transferred to theDeutsche Bank Facility, on September 24, 2018, FS Senior Funding Ltd. and FS Senior Funding CLO LLC redeemed all outstanding 2015 Issuer as part ofNotes issued in the 2015 Debt Securitization pursuant to the Company currently retains the entire $22.6 millionterms of the Class C Senior Securedindenture governing the 2015 Notes (which the Company purchased at 98.0% of par value) (the "Class C Notes") and the entire $86.4 million of the Subordinated 2015 Notes. The Class A Notes and Class B Notes are included in the Company's September 30, 2017 Consolidated Statements of Assets and Liabilities as notes payable. As of September 30, 2017, the Class C Notes and the Subordinatedrevocable notice issued by the Company on August 14, 2018. Following such redemption, the agreements governing the 2015 Debt Securitization were terminated and FS Senior Funding Ltd. was merged with and into OCSI Senior Funding Ltd. with OCSI Senior Funding Ltd. continuing as the surviving entity. The 2015 Notes were eliminatedwould have otherwise matured on May 28, 2025. The Company expensed $2.0 million of previously unamortized financing costs in consolidation.connection with the redemption of the 2015 Notes.
ThePrior to September 24, 2018, the Company servesserved as collateral manager to the 2015 IssuerFS Senior Funding Ltd. under a collateral management agreement. The Company iswas entitled
to a fee for its services as collateral manager. The Company has retained a sub-collateral manager, which as ofwas Oaktree from October 17, 2017 was the Investment Adviser and, prior to October 17, 2017, was FSM,September 24, 2018, to provide collateral management sub-advisory services to the Company pursuant to a sub-collateral management agreement. The sub-collateral manager iswas entitled to receive 100% of the collateral management fees paid to the Company under the collateral management agreement, but each of the Investment Adviser and FSMOaktree irrevocably waived and, in the case of the Investment Adviser, intends to continue to irrevocably waive its right to such sub-collateral management fees in respect of the 2015 Debt Securitization.
The collateral management agreement doesdid not include any incentive fee payable to the Company as collateral manager or payable to the sub-collateral manager as sub-advisor under the sub-collateral management agreement.
Through May 28, 2019, all principal collections received on the underlying collateral may be used by the 2015 Issuer to purchase new collateral under the direction of the Investment Adviser in its capacity as sub-collateral manager of the 2015 Issuer and in accordance with the Company's investment strategy. All 2015 Notes are scheduled to mature on May 28, 2025.
As of September 30, 2017, there were 57 investments in portfolio companies with a total fair value of $277.9 million, securing the 2015 Notes. The pool of loans in the 2015 Debt Securitization must meet certain requirements, including asset mix and concentration, collateral coverage, term, agency rating, minimum coupon, minimum spread and sector diversity requirements.
For the years ended September 30, 2018, 2017 and September 30, 2016, the components of interest expense, cash paid for interest, average interest rates and average outstanding balances for the 2015 Debt Securitization were as follows:
| | | | | Year ended September 30, 2017 | | Year ended September 30, 2016 | | Year ended September 30, 2015 | | | Year ended September 30, 2018 | | Year ended September 30, 2017 | | Year ended September 30, 2016 |
| Interest expense | | $ | 5,741,534 |
| | $ | 4,668,947 |
| | $ | 1,476,995 |
| | | $ | 7,123,152 |
| | $ | 5,741,534 |
| | $ | 4,668,947 |
|
| Loan administration fees | | 69,514 |
| | 79,882 |
| | — |
| | | 93,209 |
| | 69,514 |
| | 79,882 |
|
| Amortization of debt issuance costs | | 290,104 |
| | 290,104 |
| | 120,877 |
| | | 2,224,132 |
| | 290,104 |
| | 290,104 |
|
| Total interest and other debt financing expenses | | $ | 6,101,152 |
| | $ | 5,038,933 |
| | $ | 1,597,872 |
| | | $ | 9,440,493 |
| | $ | 6,101,152 |
| | $ | 5,038,933 |
|
| Cash paid for interest expense | | $ | 5,449,738 |
| | $ | 5,136,063 |
| | $ | — |
| | | $ | 8,469,735 |
| | $ | 5,449,738 |
| | $ | 5,136,063 |
|
| Annualized average interest rate | | 3.425 | % | | 2.466 | % | | 2.390 | % | | | 4.170 | % | | 3.425 | % | | 2.466 | % |
| Average outstanding balance | | $ | 180,462,192 |
| | $ | 181,782,413 |
| | $ | 61,900,170 |
| | | $ | 176,875,000 |
| | $ | 180,462,192 |
| | $ | 181,782,413 |
|
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The classes, interest rates, spread over LIBOR, cash paid for interest and interest expense of each of the Class A-T, Class A-S, Class A-R, Class B and Class C 2015 Senior Secured Notes for the yearyears ended September 30, 2018 and 2017 isare as follows:
| | | | | | Year ended September 30, 2017 | | Year ended September 30, 2018 | | Year ended September 30, 2017 |
| | Stated Interest Rate | | LIBOR Spread (basis points) | | Cash Paid for Interest | | Interest Expense | | Stated Interest Rate | | LIBOR Spread (basis points) | | Cash Paid for Interest | | Interest Expense | | Cash Paid for Interest | | Interest Expense |
| Class A-T Notes | | 3.1035% | | 180 | | $ | 3,487,268 |
| | $ | 3,664,619 |
| | 4.1370% | | 180 | | $ | 5,497,980 |
| | $ | 4,634,085 |
| | $ | 3,487,268 |
| | $ | 3,664,619 |
|
| Class A-S Notes | | 3.4035% | | 210 | (1) | 850,073 |
| | 926,401 |
| | 4.4370% | | 210 | (1) | 1,371,258 |
| | 1,151,922 |
| | 850,073 |
| | 926,401 |
|
| Class A-R Notes | | 2.9551% | | 180 | (2) | 205,027 |
| | 207,900 |
| | 4.1370% | | 180 | (2) | 251,086 |
| | 207,373 |
| | 205,027 |
| | 207,900 |
|
| Class B Notes | | 3.9535% | | 265 | | 907,370 |
| | 942,614 |
| | 4.9870% | | 265 | | 1,349,411 |
| | 1,129,772 |
| | 907,370 |
| | 942,614 |
|
| Class C Notes | | 4.5535% | | 325 | (3) | — |
| | — |
| | 5.5870% | | 325 | (3) | — |
| | — |
| | — |
| | — |
|
| Total | | | | | $ | 5,449,738 |
| | $ | 5,741,534 |
| | | | | $ | 8,469,735 |
| | $ | 7,123,152 |
| | $ | 5,449,738 |
| | $ | 5,741,534 |
|
_______________________
(1) Spread increased to 2.10% in October 2016 from 1.55%.
(2) Interest expense includes 1.0% undrawn fee.
(3) The Company holdsheld all Class C Senior Secured Notes outstanding and thus has not recorded any related interest expense as they arewere eliminated in consolidation.
The classes, amounts, ratings and interest rates (expressed as a spread to three-month LIBOR) of the Class A, B, C and Subordinated 2015 Notes as of September 30, 2017 are as follows:
|
| | | | | | | | | | | | |
| Description | | Class A-T Notes | | Class A-S Notes | | Class A-R
Notes | | Class B Notes | | Class C Notes | | Subordinated Notes |
| Type | | Senior Secured Floating Rate Term Debt | | Senior Secured Floating Rate Term Debt | | Senior Secured Floating Rate Revolver | | Senior Secured Floating Rate Term Debt | | Senior Secured Floating Rate Term Debt | | Subordinated Term Notes |
| Amount Outstanding | | $126,000,000 | | $29,000,000 | | $— | | $25,000,000 | | $22,575,680 | | $86,400,000 |
| Moody's Rating | | "Aaa" | | "Aaa" | | "Aaa" | | "Aa2" | | "Aa2" | | NR |
| S&P Rating | | "AAA" | | "AAA" | | "AAA" | | NR | | NR | | NR |
| Interest Rate | | LIBOR + 1.80% | | LIBOR + 2.10%* | | CP + 1.80% ** | | LIBOR + 2.65% | | LIBOR + 3.25% | | NA |
| Stated Maturity | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 | | May 28, 2025 |
_______________________
* Spread increased to 2.10% in October 2016 from 1.55%.
** Carries a 1.0% undrawn fee.
The proceeds of the private placement of the Class A Notes and the Class B Notes of the 2015 Issuer, net of debt issuance costs, were used to fund a portion of the 2015 Issuer's loan origination activities and for general corporate purposes. The creditors of the 2015 Issuer have received security interests in the assets owned by the 2015 Issuer and such assets are not intended to be available to the creditors of the Company (or any other affiliate of the Company). As part of the 2015 Debt Securitization, the Company entered into master loan sale agreements under which the Company agreed to directly or indirectly sell or contribute certain senior secured debt investments (or participation interests therein) to the 2015 Issuer, and to purchase or otherwise acquire the Subordinated 2015 Notes, as applicable. The 2015 Notes are the secured obligations of the 2015 Issuer and the indenture governing the 2015 Notes includes customary covenants and events of default. The 2015 Debt Securitization requires the Company to comply with certain monthly financial covenants, including overcollateralization and interest coverage tests.
Secured Borrowings
See Note 2 "Secured Borrowings" for a description of the Company's accounting treatment of secured borrowings.
As of September 30, 2016, secured borrowings at fair value totaled $5.0 million and the fair value of the investment that is associated with these secured borrowings was $5.0 million. These secured borrowings were the result of the Company's completion of a loan sale of a senior secured debt investment that did not meet the definition of a participating interest. As a result, sale treatment was not allowed and this loan sale was treated as a secured borrowing. No secured borrowings were outstanding as of September 30, 2017.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Principal Payments
Scheduled principal payments for debt obligations atas of September 30, 20172018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due during fiscal years ended September 30, |
| | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 and Thereafter |
| Citibank facility | | $ | 76,456,800 |
| | $ | — |
| | $ | — |
| | $ | 76,456,800 |
| | $ | — |
| | $ | — |
|
| Notes Payable | | 180,000,000 |
| | — |
| | — |
| | — |
| | — |
| | 180,000,000 |
|
| East West Bank facility | | 6,500,000 |
| | — |
| | — |
| | — |
| | 6,500,000 |
| | — |
|
| Total | | $ | 262,956,800 |
| | $ | — |
| | $ | — |
| | $ | 76,456,800 |
| | $ | 6,500,000 |
| | $ | 180,000,000 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due during fiscal years ended September 30, |
| | | Total | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 and Thereafter |
| Citibank Facility | | $ | 110,056,800 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 110,056,800 |
|
| Deutsche Bank Facility | | 157,000,000 |
| | 157,000,000 |
| | — |
| | — |
| | — |
| | — |
|
| East West Bank Facility | | 8,000,000 |
| | — |
| | — |
| | 8,000,000 |
| | — |
| | — |
|
| Total | | $ | 275,056,800 |
| | $ | 157,000,000 |
| | $ | — |
| | $ | 8,000,000 |
| | $ | — |
| | $ | 110,056,800 |
|
Note 7. Interest and Dividend Income
See Note 2 "Investment Income""Investment Income" for a description of the Company's accounting treatment of investment income.
Accumulated PIK interest activity for the years ended September 30, 2017 and 2016 was as follows:
|
| | | | | | | | |
| | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 |
| PIK balance at beginning of period | | $ | 88,839 |
| | $ | — |
|
| Gross PIK interest accrued | | 759,744 |
| | 167,065 |
|
| PIK income reserves (1) | | (351,323 | ) | | — |
|
| PIK interest received in cash | | — |
| | (78,226 | ) |
| PIK balance at end of period | | $ | 497,260 |
| | $ | 88,839 |
|
___________________
Note: There was no accumulated PIK interest activity during the year ended September 30, 2015.
| |
(1) | PIK income is generally reserved for when a loan is placed on PIK non-accrual status. |
As of September 30, 2017, September 30, 20162018 and September 30, 2015,2017, there were three, one and onethree investments, respectively, on which the Company had stopped accruing cash and/or PIK interest or OID income.
The percentages of the Company's debt investments at cost and fair value by accrual status as of September 30, 2017, 20162018 and 20152017 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 | | September 30, 2015 |
| | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio |
| Accrual | | $ | 564,231,285 |
| | 96.02 | % | | $ | 553,084,120 |
| | 98.88 | % | | $ | 563,757,229 |
| | 96.74 | % | | $ | 552,114,644 |
| | 98.72 | % | | $ | 619,529,324 |
| | 98.79 | % | | $ | 613,701,960 |
| | 99.28 | % |
| PIK non-accrual (paying) (1) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,605,257 |
| | 1.21 |
| | 4,427,839 |
| | 0.72 |
|
| Cash non-accrual (nonpaying) (2) | | 23,381,863 |
| | 3.98 |
| | 6,292,551 |
| | 1.12 |
| | 19,027,017 |
| | 3.26 |
| | 7,156,160 |
| | 1.28 |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 587,613,148 |
| | 100.00 | % | | $ | 559,376,671 |
| | 100.00 | % | | $ | 582,784,246 |
| | 100.00 | % | | $ | 559,270,804 |
| | 100.00 | % | | $ | 627,134,581 |
| | 100.00 | % | | $ | 618,129,799 |
| | 100.00 | % |
__________________
| |
(1) | PIK non-accrual status is inclusive of other non-cash income, where applicable. |
| |
(2) | Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable. |
The non-accrual status of the Company's portfolio investments as of September 30, 2017, 2016 and 2015 was as follows:
|
| | | | | | |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2015 |
Answers Corporation (2) | | — | | Cash non-accrual (1) | | PIK non-accrual (1) |
Ameritox Ltd. | | Cash non-accrual (1) | | — | | — |
New Trident Holdcorp, Inc. - second lien term loan | | Cash non-accrual (1) | | — | | — |
Metamorph US 3, LLC | | Cash non-accrual (1) | | — | | — |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio | | Cost | | % of Debt
Portfolio | | Fair
Value | | % of Debt
Portfolio |
| Accrual | | $ | 564,507,626 |
| | 99.86 | % | | $ | 554,829,583 |
| | 99.99 | % | | $ | 564,231,285 |
| | 96.02 | % | | $ | 553,084,120 |
| | 98.88 | % |
| Cash non-accrual (1) | | 806,387 |
| | 0.14 |
| | 50,000 |
| | 0.01 |
| | 23,381,863 |
| | 3.98 |
| | 6,292,551 |
| | 1.12 |
|
| Total | | $ | 565,314,013 |
| | 100.00 | % | | $ | 554,879,583 |
| | 100.00 | % | | $ | 587,613,148 |
| | 100.00 | % | | $ | 559,376,671 |
| | 100.00 | % |
__________________
| |
| (1) | Cash non-accrual status is inclusive of PIK and other non-cash income, where applicable. |
| |
(2) | As of September 30, 2017, the Company no longer held this investment. As of September 30, 2016, the Company's investments in both the first and second lien term loans of the Answers Corporation were on cash non-accrual status. As of September 30, 2015, only the second lien term loan was on PIK non-accrual. |
Income non-accrual amounts for the years ended September 30, 2017, 2016 and 2015, which may include amounts for investments that were no longer held at the end of the period, were as follows:
|
| | | | | | | | | | | | |
| | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2015 |
| Cash interest income | | $ | 1,291,399 |
| | $ | 1,136,652 |
| | $ | — |
|
| PIK interest income | | 351,323 |
| | — |
| | — |
|
| OID income | | 89,553 |
| | 57,735 |
| | 13,816 |
|
| Total | | $ | 1,732,275 |
| | $ | 1,194,387 |
| | $ | 13,816 |
|
Note 8. Taxable/Distributable Income and Dividend Distributions
Taxable income differs from net increase (decrease) in net assets resulting from operations primarily due to: (1) unrealized appreciation (depreciation) on investments, and secured borrowings and foreign currency, as gains and losses are not included in taxable income until they are realized; (2) originationexit fees received in connection with investments in portfolio companies; (3) origination fees
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
received in connection with investments in portfolio companies; (4) recognition of interest income on certain loans; and (4)(5) income or loss recognition on exited investments.
Listed below is a reconciliation of net decreaseincrease (decrease) in net assets resulting from operations to taxable income for the years ended September 30, 20172018 and September 30, 2016:2017:
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended
September 30, 2018 | | Year ended
September 30, 2017 |
| Net decrease in net assets resulting from operations | | $ | (8,766,879 | ) | | $ | (4,457,617 | ) | |
| Net unrealized depreciation on investments and secured borrowings | | 17,803,657 |
| | 16,980,524 |
| |
| Net increase (decrease) in net assets resulting from operations | | | $ | 20,673,049 |
| | $ | (8,766,879 | ) |
| Net unrealized (appreciation) depreciation on investments, secured borrowings and foreign currency | | | (28,615,535 | ) | | 17,803,657 |
|
| Book/tax difference due to deferred loan fees | | (1,438,850 | ) | | (94,659 | ) | | — |
| | (1,438,850 | ) |
| Book/tax difference due to interest income on certain loans | | 1,642,722 |
| | 1,136,652 |
| | — |
| | 1,642,722 |
|
| Book/tax difference due to capital losses not recognized | | 13,384,915 |
| | 12,769,777 |
| | 23,225,073 |
| | 13,384,915 |
|
| Other book/tax differences | | 557,519 |
| | (79,467 | ) | | — |
| | 557,519 |
|
| Taxable/Distributable Income (1) | | $ | 23,183,084 |
| | $ | 26,255,210 |
| | $ | 15,282,587 |
| | $ | 23,183,084 |
|
__________________
| |
| (1) | The Company's taxable income for the year ended September 30, 20172018 is an estimate and will not be finally determined until the Company files its tax return. Therefore, the final taxable income may be different than the estimate. |
As of September 30, 2017, the components of accumulated undistributed income on a tax basis were as follows:
|
| | | |
| Undistributed ordinary income, net | $ | 2,808,747 |
|
| Net realized capital losses | 28,564,899 |
|
| Unrealized losses, net | (46,826,393 | ) |
As of September 30, 2017,2018, the Company had a net capital loss carryforwardscarryforward of $28,564,899$54,093,608, which can be used to offset future capital gains and is not subject to expiration. Of the net capital gains, to the extent available and permitted by U.S. federal income tax law. Of the capital loss carryforwards, $2,699,949 arecarryforward, $11,431,686 is available to offset future short-term capital gains and $25,864,950 are$42,661,922 is available to offset future long-term capital gains. The Company is permitted to carry forward net capital losses, if any, incurred in taxable years beginning after December 22, 2010 for an unlimited period.
As a RIC, the Company is also subject to a U.S. federal excise tax based on distribution requirements of its taxable income on a calendar year basis. The Company anticipates timely distribution of its taxable income in accordance with tax rules. The Company did not incur a U.S. federal excise tax for calendar years 20152016 and 20162017 and does not expect to incur a U.S. federal excise tax for calendar year 2018.
For the year ended September 30, 2018, the Company reclassified $3.2 million of additional paid-in-capital to accumulated overdistributed earnings on the Consolidated Statement of Assets and Liabilities to reflect distributions that were deemed to be a return of capital for income tax purposes. Of the $3.2 million, $1.1 million relates to distributions that occurred prior to September 30, 2017. These reclassification entries did not impact total net assets.
As of September 30, 2018, the Company's last tax year end, the components of accumulated overdistributed earnings on a tax basis were as follows:
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| Undistributed ordinary income, net | $ | — |
|
| Net realized capital losses | (54,093,608 | ) |
| Unrealized losses, net | (21,207,029 | ) |
The aggregate cost of investments for income tax purposes was $607.3$578.1 million as of September 30, 2017. For the year ended2018. As of September 30, 2017,2018, the aggregate gross unrealized appreciation for all investments in which there was an excess of value over cost for income tax purposes was $4.6$12.2 million. For the year endedAs of September 30, 2017,2018, the aggregate gross unrealized depreciation for all investments in which there was an excess of cost for income tax purposes over value was $51.4$33.4 million. Net unrealized depreciation based on the aggregate cost of investments for income tax purposes was $46.8$21.2 million.
Note 9. Realized Gains or Losses and Net Unrealized Appreciation or Depreciation on Investments
Realized Gains or Losses
Realized gains or losses are measured by the difference between the net proceeds from the sale or redemption and the cost basis of the investment without regard to unrealized appreciation or depreciation previously recognized, and include investments written-off during the period, net of recoveries. Realized losses may also be recorded in connection with the Company's determination that certain investments are considered worthless securities and/or meet the conditions for loss recognition per the applicable tax rules.
During the year ended September 30, 2018, the Company recorded an aggregate net realized loss on investments, secured borrowings and foreign currency of $27.7 million, which consisted of the following:
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| ($ in millions) | |
| Portfolio Company | Net Realized Gain (Loss) |
| Ameritox Ltd. | $ | (15.9 | ) |
| Metamorph US 3, LLC | (8.9 | ) |
| Other, net | (2.9 | ) |
| Total, net | $ | (27.7 | ) |
During the year ended September 30, 2017, the Company recorded an aggregate net realized loss on investments, secured borrowings and foreign currency of $13.4 million, primarily in connection with the sale of the Company's first and second lien term loan investments in the Answers Corporation.
During the year ended September 30, 2016, the Company recorded an aggregate net realized loss on investments, secured borrowings and foreign currency of $12.8 million, which consisted of the following:
|
| | | |
| ($ in millions) | |
| Portfolio Company | Net Realized Gain (Loss) |
| Ameritox Ltd. | $ | (8.7 | ) |
| B&H Education Inc. | (4.3 | ) |
| Other, net | 0.2 |
|
| Total, net | $ | (12.8 | ) |
Net Unrealized Appreciation or Depreciation on Investments
Net unrealized appreciation or depreciation reflects the net change in the valuation of the portfolio pursuant to the Company's valuation guidelines and the reclassification of any prior period unrealized appreciation or depreciation.
A summary of the Company's recorded investment realization events, excluding syndications of debt investments and sales of debt investments in the open market, forFor the year ended September 30, 2017 is shown in2018, the table below:
|
| | | | | | | | | | | | |
Date | | Portfolio Company | | Investment Type | | Consideration at Exit | | Realized Gain (Loss) | | Transaction |
October 2016 | | TrialCard Incorporated | | Debt | | $ 9.9 million | | $ | — |
| | Full payoff |
November 2016 | | Blackhawk Specialty Tools, LLC | | Debt | | 4.2 million | | — |
| | Full payoff |
November 2016 | | NXT Capital, LLC | | Debt | | 8.7 million | | — |
| | Full payoff |
November 2016 | | The Active Network, Inc. (a) | | Debt | | 2.4 million | | — |
| | Full payoff |
November 2016 | | Fineline Technologies, Inc. | | Debt | | 10.5 million | | — |
| | Full payoff |
November 2016 | | Legalzoom.com, Inc. (a) | | Debt | | 20.1 million | | — |
| | Full payoff |
December 2016 | | Aptean, Inc. | | Debt | | 1.2 million | | — |
| | Full payoff |
December 2016 | | Too Faced Cosmetics, LLC | | Debt | | 1.3 million | | — |
| | Full payoff |
February 2017 | | Vitera Healthcare Solutions, LLC | | Debt | | 4.7 million | | — |
| | Full payoff |
February 2017 | | TV Borrower US, LLC (a) | | Debt | | 9.1 million | | — |
| | Full payoff |
February 2017 | | Teaching Strategies, LLC | | Debt | | 15.1 million | | — |
| | Full payoff |
February 2017 | | AF Borrower, LLC | | Debt | | 1.1 million | | — |
| | Full payoff |
February 2017 | | CRGT Inc. | | Debt | | 3.2 million | | — |
| | Full payoff |
February 2017 | | Onvoy Merger Sub, LLC | | Debt | | 10.2 million | | — |
| | Full payoff |
March 2017 | | NAVEX Global, Inc. | | Debt | | 5.0 million | | — |
| | Full payoff |
May 2017 | | Hill International, Inc. | | Debt | | 5.9 million | | — |
| | Full payoff |
May 2017 | | Baart Programs, Inc. (a) | | Debt | | 8.3 million | | — |
| | Full payoff |
June 2017 | | ConvergeOne Holdings Corp. (a) | | Debt | | 5.3 million | | — |
| | Full payoff |
June 2017 | | Idera, Inc. | | Debt | | 17.3 million | | — |
| | Full payoff |
July 2017 | | TIBCO Software, Inc. | | Debt | | 7.9 million | | — |
| | Full payoff |
July 2017 | | My Alarm Center, LLC (a) | | Debt | | 18.7 million | | — |
| | Full payoff |
August 2017 | | GTCR Valor Companies, Inc. | | Debt | | 12.1 million | | — |
| | Full payoff |
August 2017 | | NAVEX Global, Inc. | | Debt | | 0.9 million | | — |
| | Full payoff |
August 2017 | | American Seafoods Group LLC (a) | | Debt | | 5.7 million | | — |
| | Full payoff |
August 2017 | | Lytx, Inc. (a) | | Debt | | 9.9 million | | — |
| | Full payoff |
August 2017 | | OBHG Management Services, LLC | | Debt | | 16.0 million | | — |
| | Full payoff |
September 2017 | | Auction.com, LLC | | Debt | | 0.2 million | | — |
| | Full payoff |
| | | | | | | | $ | — |
| | |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
| |
(a) | The Company also received prepayment fees in connection with the exit of these portfolio investments. |
DuringCompany recorded net unrealized appreciation of $28.6 million. For the year ended September 30, 2017, the Company received cash payments2018, this consisted of $45.4$29.0 million in connection with syndications and sales of debt investments and recorded a net reclassifications to realized loss (resulting in unrealized appreciation) and $1.0 million of $13.4net unrealized appreciation on equity investments, offset by $1.4 million including a realized loss of $13.4 million from the sale of the Company's investment in the first and second lien term loans of Answers Corporation.
A summary of the Company's recorded investment realization events, excluding syndications ofnet unrealized depreciation on debt investments and sales of debt investments in the open market, during the year ended September 30, 2016 is shown in the table below:
|
| | | | | | | | | | | | |
Date | | Portfolio Company | | Investment Type | | Consideration at Exit | | Realized Gain (Loss) | | Transaction |
October 2015 | | Reliant Hospital Partners, LLC | | Debt | | $ 7.4 million | | $ | — |
| | Full payoff |
October 2015 | | Idera, Inc. | | Debt | | 16.8 million | | — |
| | Full payoff |
October 2015 | | Novetta Solutions, LLC | | Debt | | 5.7 million | | — |
| | Full payoff |
December 2015 | | All Web Leads, Inc. | | Debt | | 17.6 million | | — |
| | Full payoff |
January 2016 | | TWCC Holding Corp. | | Debt | | 6.4 million | | — |
| | Full payoff |
February 2016 | | B&H Education Inc. | | Debt | | 1.4 million | | (4.3 million) |
| | Partial payoff |
March 2016 | | Pacific Architects and Engineers Incorporated | | Debt | | 3.4 million | | — |
| | Full payoff |
April 2016 | | Ameritox Ltd. | | Debt | | 12.6 million | | (8.7 million) |
| | Restructuring |
May 2016 | | Accruent, LLC | | Debt | | 20.8 million | | — |
| | Full payoff |
June 2016 | | GTCR Valor Companies, Inc. | | Debt | | 13.3 million | | — |
| | Partial payoff |
August 2016 | | Smile Brands Group Inc. | | Debt | | 5.8 million | | — |
| | Full payoff |
September 2016 | | Language Line, LLC | | Debt | | 14.0 million | | — |
| | Full payoff |
September 2016 | | Aptos, Inc. | | Debt | | 5.9 million | | — |
| | Full payoff |
| | | | | | | | $ (13.0 million) |
| | |
During the year ended September 30, 2016, the Company received cash payments of $163.3 million in connection with syndications and sales of debt investments and recorded a net realized gain of $0.2 million.
A summary of the Company's recorded investment realization events, excluding syndications of debt investments and sales of debt investments in the open market, for the year ended September 30, 2015 is shown in the table below:
|
| | | | | | | | | | | | |
Date | | Portfolio Company | | Investment Type | | Consideration at Exit | | Realized Gain (Loss) | | Transaction |
October 2014 | | Answers Corporation | | Debt | | $ 6.8 million | | $ | — |
| | Full payoff |
December 2014 | | Survey Sampling International, LLC | | Debt | | 4.9 million | | — |
| | Full payoff |
April 2015 | | Travel Leaders Group, LLC | | Debt | | 9.4 million | | — |
| | Full payoff |
April 2015 | | IPC Systems, Inc. | | Debt | | 11.2 million | | — |
| | Full payoff |
April 2015 | | Symphony Teleca Services, Inc. | | Debt | | 2.5 million | | — |
| | Full payoff |
May 2015 | | GOBP Holdings, Inc. | | Debt | | 4.1 million | | — |
| | Full payoff |
August 2015 | | AMAG Pharmaceuticals, Inc. | | Debt | | 14.3 million | | — |
| | Full payoff |
| | | | | | | | $ | — |
| | |
During the year ended September 30, 2015, the Company received cash payments of $480.4 million in connection with full or partial sales of debt investments and recorded a net realized gain of $0.4 million.
Net Unrealized Appreciation or Depreciation on Investmentsinvestments.
For the year ended September 30, 2017, the Company recorded net unrealized depreciation of $17.8 million. This consisted of $14.1 million of net unrealized depreciation on debt investments and $12.9 million of net unrealized depreciation on equity investments, offset by $9.2 million of net reclassifications to realized loss (resulting in unrealized appreciation).
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the year ended September 30, 2016, the Company recorded net unrealized depreciation of $17.0 million. This consisted of $17.5 million of net unrealized depreciation on debt investments and $2.5 million of net unrealized depreciation on equity investments, offset by $3.0 million of net reclassifications to realized loss (resulting in unrealized appreciation).
For the year ended September 30, 2015, the Company recorded net unrealized depreciation of $12.8 million. This consisted of $11.8 million of net unrealized depreciation on debt investments and $1.0 million of net unrealized depreciation on equity investments.
Note 10. Concentration of Credit Risks
The Company deposits its cash with financial institutions and at times such balances may be in excess of the FDIC insurance limit. The Company limits its exposure to credit loss by depositing its cash with high credit quality financial institutions and monitoring their financial stability.
Note 11. Related Party Transactions
As of September 30, 2018 and September 30, 2017, the Company washad a liability on its Consolidated Statements of Assets and Liabilities in the amount of $1.9 million and $2.2 million, respectively, reflecting the unpaid portion of the base management fees and incentive fees payable to Oaktree and the Former Adviser, respectively.
Investment Advisory Agreement
Effective October 17, 2017 and as of September 30, 2018, the Company is party to an investment advisory agreement with FSM (the “Formerthe Investment Advisory Agreement”), which was the Company’s investment adviser through the closing of the Transaction.Agreement with Oaktree. Under the Former Investment Advisory Agreement, the Company paid FSMpays Oaktree a fee for its services under the Investment Advisory Agreement consisting of two components: a base management fee and an incentive fee. The cost of both the base
management fee payable to Oaktree and any incentive fees earned by Oaktree is ultimately borne by common stockholders of the Company.
Unless earlier terminated as described below, the Investment Advisory Agreement will remain in effect until October 17, 2019 and thereafter from year-to-year if approved annually by the Company's Board of Directors or by the affirmative vote of the holders of a majority of the outstanding voting securities of the Company, including, in either case, approval by a majority of directors of the Company who are not interested persons. The Investment Advisory Agreement will automatically terminate in the event of its assignment. The Investment Advisory Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other. The Investment Advisory Agreement may also be terminated, without penalty, upon the vote of a majority of the outstanding voting securities of the Company.
Base Management Fee
TheUnder the Investment Advisory Agreement, the base management fee wasis calculated at an annual rate of 1%1.00% of the Company'stotal gross assets, (i.e., total assets held before deduction of any liabilities), including any investments acquiredinvestment made with the use of leverageborrowings, but excluding cash and excluding any cash cash equivalents and restricted cash.equivalents. The base management fee was calculated based on the average value of the Company's gross assets at the end of the two most recently completed quarters. The base management fee wasis payable quarterly in arrears and the fee for any partial month or quarter wasis appropriately prorated.
For the years endedperiod from October 17, 2017 to September 30, 2017, 2016 and 2015,2018, the base management fees (net of waivers, if any) were $5.6fee incurred under the Investment Advisory Agreement was $5.4 million, $6.1 million and $5.9 million, respectively.which was payable to Oaktree.
Incentive Fee
AsThe incentive fee consists of September 30, 2017,two parts. Under the Investment Advisory Agreement, the first part of the incentive fee portion of the Former Investment Advisory Agreement had two parts. The first part ("Part(the “incentive fee on income" or "Part I incentive fee") wasis calculated and payable quarterly in arrears based onupon the Company's "Pre-Incentive Fee Net Investment Income"“pre-incentive fee net investment income” of the Company for the immediately preceding fiscal quarter. The payment of the incentive fee on income is subject to payment of a preferred return to investors each quarter (i.e., a “hurdle rate”), expressed as a rate of return on the value of the Company’s net assets at the end of the most recently completed quarter, of 1.50%, subject to a “catch up” feature.
For this purpose, "Pre-Incentive Fee Net Investment Income" meant“pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receivedreceives from portfolio companies)companies, other than fees for providing managerial assistance) accrued during the fiscal quarter, minus the Company'sCompany’s operating expenses for the quarter (including the base management fee, expenses payable under the Prior Administration Agreement and any interest expense and dividends paid on any issued and outstanding indebtedness or preferred stock, but excluding the incentive fee). Pre-Incentive Fee Net Investment Income included,Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as OID, debt instruments with PIK interest and zero coupon securities), accrued income that the Company hadhas not yet received in cash. Pre-Incentive Fee Net Investment Income didPre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Pre-Incentive Fee NetUnder the Investment Income, expressedAdvisory Agreement, the calculation of the incentive fee on income for each quarter is as afollows:
No incentive fee is payable to Oaktree in any quarter in which the Company’s pre-incentive fee net investment income does not exceed the preferred return rate of 1.50% (the “preferred return”) on net assets;
100% of the Company’s pre-incentive fee net investment income, if any, that exceeds the preferred return but is less than or equal to 1.8182% in any fiscal quarter is payable to Oaktree. This portion of the incentive fee on income is referred to as the “catch-up” provision, and it is intended to provide Oaktree with an incentive fee of 17.5% on all of the Company’s pre-incentive fee net investment income when the Company’s pre-incentive fee net investment income exceeds 1.8182% on net assets in any fiscal quarter; and
For any quarter in which the Company’s pre-incentive fee net investment income exceeds 1.8182% on net assets, the incentive fee on income is equal to 17.5% of the amount of the Company’s pre-incentive fee net investment income, as the preferred return and catch-up will have been achieved.
There is no accumulation of amounts on the valuehurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle.
For the period from October 17, 2017 to September 30, 2018, the first part of the Company's net assets atincentive fee (net of waivers) incurred under the Investment Advisory Agreement was $2.2 million. To ensure compliance of the Transactions with Section 15(f) of the Investment Company Act, Oaktree entered into a two-year contractual fee waiver with the Company that will waive, to the extent necessary, any management or incentive fees payable under the Investment Advisory Agreement that exceed what would have been paid to the Former Adviser in the aggregate under the Former Investment Advisory Agreement. Amounts potentially subject to waiver are accrued
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
quarterly on a cumulative basis and, to the extent required, any fees will be waived or reimbursed as soon as practicable after the end of the immediately preceding fiscal quarter, was compared to a "hurdle rate"two-year period. As of 1.5% per quarter,September 30, 2018, Oaktree had accrued an aggregate amount of $0.7 million of incentive fees potentially subject to a "catch-up" provision measuredwaiver, which was included in base management fee and incentive fee payable.
Under the Investment Advisory Agreement, the second part of the incentive fee will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Advisory Agreement, as of the termination date) commencing with the fiscal year ending September 30, 2019 and will equal 17.5% of the Company’s realized capital gains, if any, on a cumulative basis from the beginning of the fiscal year ending September 30, 2019 through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees under the Investment Advisory Agreement. Any realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to the Company’s portfolio as of the end of the fiscal year ending September 30, 2018 will be excluded from the calculations of the second part of the incentive fee.
Indemnification
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oaktree and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of Oaktree's services under the Investment Advisory Agreement or otherwise as investment adviser.
Collection and Disbursement of Fees Owed to the Former Adviser
Under the Former Investment Advisory Agreement, both the base management fee and incentive fee on income were calculated and paid to the Former Adviser at the end of each quarter. In order to ensure that the Former Adviser received the compensation earned during the quarter ended December 31, 2017, the initial payment of the base management fee and incentive fee on income under the Investment Advisory Agreement covered the entire quarter in which the Investment Advisory Agreement became effective and was calculated at a blended rate that reflected fee rates under the respective investment advisory agreements for the portion of the quarter in which the Former Adviser and Oaktree were serving as investment adviser. This structure allowed Oaktree to pay the Former Adviser in early 2018 the pro rata portion of the fees that were earned by, but not paid to, the Former Adviser for services rendered to the Company prior to October 17, 2017.
Former Investment Advisory Agreement
The Company'sfollowing is a description of the Former Investment Advisory Agreement, which was terminated on October 17, 2017. The Former Investment Advisory Agreement, dated June 27, 2013, was effective June 27, 2013 through its termination on October 17, 2017.
Through October 17, 2017, the Company paid the Former Adviser a fee for its services under the Former Investment Advisory Agreement consisting of two components: a base management fee and an incentive fee. The cost of both the base management fee paid to the Former Adviser and any incentive fees earned by the Former Adviser were ultimately borne by common stockholders of the Company.
Base Management Fee
The base management fee was calculated at an annual rate of 1.0% of the Company’s gross assets, including any borrowings for investment purposes but excluding cash and cash equivalents. The base management fee was payable quarterly in arrears and the fee for any partial month or quarter was appropriately prorated.
For the period from October 1, 2017 to October 17, 2017, the years ended September 30, 2017 and 2016, the base management fee (net of waivers, if any) incurred under the Former Investment Advisory Agreement with the Former Adviser was $0.2 million, $5.6 million and $6.1 million, respectively, all of which were payable to the Former Adviser. For each of the years ended September 30, 2017 and 2016, the Former Adviser voluntarily waived $0.1 million of the base management fee.
Incentive Fee
The incentive fee paid to the Former Adviser had two parts. The first part was calculated and payable quarterly in arrears at a rate of 20% based on the Company’s pre-incentive fee net investment income for the immediately preceding fiscal quarter subject to a
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
quarterly hurdle of 1.5% and a catch-up. The Company’s net investment income used to calculate this part of the incentive fee was also included in the amount of its gross assets used to calculate the 1%1.0% base management fee. The operation of the incentive fee with respect to the Company's Pre-Incentive Fee Net Investment Income for each quarter was as follows:
No incentive fee was payable to the FSM in any fiscal quarter in which the Company's Pre-Incentive Fee Net Investment Income did not exceed the hurdle rate of 1.5% (the "preferred return" or "hurdle");
50% of the Company's Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeded the hurdle rate but was less than or equal to 2.5% in any fiscal quarter was payable to FSM. The Company refers to this portion of its Pre-Incentive Fee Net Investment Income (which exceeds the hurdle rate but is less than or equal to 2.5%) as the "catch-up." The "catch-up" provision was intended to provide FSM with an incentive fee of
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20% on all of the Company's Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply when the Company's Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter; and
20% of the amount of the Company's Pre-Incentive Fee Net Investment Income, if any, that exceeded 2.5% in any fiscal quarter is payable to FSM once the hurdle is reached and the catch-up is achieved.
There was no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there was no clawback of amounts previously paid if subsequent quarters were below the quarterly hurdle, and there was no delay of payment if prior quarters were below the quarterly hurdle.
For the years ended September 30, 2017, 2016 and 2015, the Part I incentive fee was $3.2 million, $5.2 million and $5.7 million, respectively.
As of September 30, 2017, theThe second part ("Part II incentive fee" or "capital gain incentive fee") of the incentive fee was determined and payable in arrears as of the end of each fiscal year (or upon termination of the Former Investment Advisory Agreement, as of the termination date) commencing on September 30, 2013 and equaled 20% of the Company'sCompany’s realized capital gains, if any, on a cumulative basis from inception through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees.
For the period from October 1, 2017 to October 17, 2017, the years ended September 30, 2017 and 2016, there was no Part II incentive fee. For the year ended September 30, 2015, $0.8 million of the Part II incentive fee was reversed due to
unrealized losses on the investment portfolio. From inception to date, the Company has paid aggregate Part II incentive fees of approximatelyincurred under the Former Investment Advisory Agreement with the Former Adviser were $0.1 million.million, $3.2 million and $5.2 million, respectively.
GAAP Accruals
GAAP requires the Company to accrue for the theoretical capital gain incentive fee that would be payable after giving effect to the net unrealized capital appreciation. A fee so calculated and accrued would not be payable under the Former Investment Advisory Agreement,applicable law and may never be paid based upon the computation of capital gain incentive fees in subsequent periods. Amounts ultimately paid under the Former Investment Advisory Agreement will be consistent with the formula reflected in the Former Investment Advisory Agreement. The Company did not accrue for capital gain incentive fees as of September 30, 2017 due to2018 because the accumulated realized and unrealized losses incapital gain incentive fee under the portfolio.
As ofInvestment Advisory Agreement will not be charged until the fiscal year ending September 30, 2017 and September 30, 2016,2019.
Administrative Services
The Company entered into the Company had a liability on its Consolidated Statements of Assets and Liabilities in the amount of $2.2 million and $3.0 million, respectively, reflecting the unpaid portion of the base management fee and incentive fee payable to FSM.
Prior Administration Agreement
As of September 30, 2017, the Company was party to the Prior Administration Agreement with FSC CT. UnderOaktree Administrator on October 17, 2017. Pursuant to the Prior Administration Agreement, FSC CT providedOaktree Administrator provides administrative services to the Company necessary for the Company, including providingoperations of the Company, withwhich include providing office facilities, including its principal executive offices, and equipment, and clerical, bookkeeping and recordkeepingrecord keeping services at such facilities. Underfacilities and such other services as Oaktree Administrator, subject to review by the PriorCompany’s Board of Directors, shall from time to time deem to be necessary or useful to perform its obligations under the Administration Agreement. Oaktree Administrator may, on behalf of the Company, conduct relations and negotiate agreements with custodians, trustees, depositories, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. Oaktree Administrator makes reports to the Company’s Board of Directors of its performance of obligations under the Administration Agreement FSC CT also performed or oversaw the performanceand furnishes advice and recommendations with respect to such other aspects of the Company'sCompany’s business and affairs, in each case, as it shall determine to be desirable or as reasonably required administrative services, which included beingby the Company’s Board of Directors; provided that Oaktree Administrator shall not provide any investment advice or recommendation.
Oaktree Administrator also provides portfolio collection functions for interest income, fees and warrants and is responsible for the financial and other records whichthat the Company is required to maintain and preparingprepares, prints and disseminates reports to the Company'sCompany’s stockholders and reportsall other materials filed with the SEC. In addition, FSC CT assistedOaktree Administrator assists the Company in determining and publishing the Company'sCompany’s net asset value, oversawoverseeing the preparation and filing of the Company'sCompany’s tax returns, and the printing and dissemination of reports to the Company's stockholders, and generally oversawoverseeing the payment of the Company'sCompany’s expenses and the performance of administrative and professional services rendered to the Company by others. FSC CTOaktree Administrator may also provided,offer to provide, on behalf of the Company,Company’s behalf, managerial assistance to itsthe Company’s portfolio companies.
For providing these services, facilities and personnel, the Company reimbursed FSC CTreimburses Oaktree Administrator the allocable portion of overhead and other expenses incurred by FSC CTOaktree Administrator in performing its obligations under the Prior Administration Agreement, including the Company’s allocable portion of the rent of the Company'sCompany’s principal executive offices at market rates and the Company’s allocable portion of the costs of compensation and related expenses of the Company'sits Chief Financial Officer, and Chief Compliance Officer, their staffs and their staffs.other non-investment professionals at Oaktree that perform duties for the Company. Such reimbursement wasis at cost, with no profit to, or markup by, FSC CT. As of September 30, 2017, the Company utilized office space in Greenwich, CT that was leased by FSC CT from an entity controlled by the chief executive officer of FSM and FSC CT, Mr. Leonard M. Tannenbaum. As of September 30, 2017, the Company also utilized additional office space that was leased by affiliates of FSM and FSC CT in Chicago, IL. Any reimbursement for a portion of the rent at this location was at cost with no profit to, or markup by, FSC CT.Oaktree Administrator. The administration agreement was terminableAdministration Agreement may be terminated by either party without penalty upon 60 days'days’ written notice to the other party and wasother. The Administration Agreement may also be terminated, without penalty, upon the vote of a majority of the Company’s outstanding voting securities.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to its termination by its terms on October 17, 2017.2017 and throughout the Company’s 2017 fiscal year, the Company was party to the Former Administration Agreement with the Former Administrator. The Former Administrator was a wholly-owned subsidiary of the Former Adviser. Pursuant to the Former Administration Agreement, the Former Administrator provided services substantially similar to those provided by Oaktree Administrator as described above. For providing these services, facilities and personnel, the Company reimbursed the Former Administrator the allocable portion of overhead and other expenses incurred by it in performing its obligations under the Former Administration Agreement.
For the year ended September 30, 2018, the Company accrued administrative expenses of $1.3 million, including $0.2 million of general and administrative expenses. Of this amount, $0.1 million was due to the Former Administrator for administrative expenses incurred prior to October 17, 2017 and $1.2 million was due to Oaktree Administrator. For the years ended September 30, 2017 and 2016, the Company accrued administrative expenses of $1.9 million, including $1.2 million of general and administrative expenses, which was due to FSC CT. For the years ended September 30, 2016 and September 30, 2015, the Company accrued administrative expenses of $1.2 million, including $0.7 million of general and administrative expenses, and $1.3 million, including $0.5 million of general and administrative expenses, respectively, which waswere due to FSC CT. the Former Administrator.
As of September 30, 2018 and September 30, 2017, $1.7 million and $0.5 million was included in “Due to affiliate” in the Consolidated Statements of Assets and Liabilities, respectively, reflecting the unpaid portion of administrative expenses and other reimbursable expenses payable to Oaktree Administrator and the Former Administrator, respectively.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017 and September 30, 2016, $0.5 million and $0.4 million, respectively, was included in "Due to FSC CT" in the Consolidated Statements of Assets and Liabilities.
Common Stock held by FSAM and Principals
Based on reports filed with the SEC, as of September 30, 2017, a subsidiary of FSAM reported holdings of 2,677,519 shares of the Company's common stock, which represents approximately 9.1% of the Company's common stock outstanding.
Based on reports filed with the SEC, as of September 30, 2017, Mr. Tannenbaum directly and indirectly held 5,333,785 shares of the Company's common stock, which represents approximately 18.1% of the Company's common stock outstanding.
Note 12. Financial Highlights
| | | | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended September 30, 2015 | | Year ended September 30, 2014 | | Period from June 29, 2013 (commencement of operations) through September 30, 2013
| | Year ended
September 30, 2018 (1) | | Year ended
September 30, 2017 | | Year ended
September 30, 2016 | | Year ended September 30, 2015 | | Year ended September 30, 2014 |
| Net asset value at beginning of period | | $ | 11.06 |
| | $ | 12.11 |
| | $ | 12.65 |
| | $ | 15.11 |
| | $ | — |
| | $ | 9.97 |
| | $ | 11.06 |
| | $ | 12.11 |
| | $ | 12.65 |
| | $ | 15.11 |
|
Net investment income (5)(2) | | 0.76 |
| | 0.86 |
| | 0.96 |
| | 0.62 |
| | — |
| | 0.67 |
| | 0.76 |
| | 0.86 |
| | 0.96 |
| | 0.62 |
|
| Net unrealized appreciation (depreciation) on investments and secured borrowings (5) | | (0.60 | ) | | (0.58 | ) | | (0.43 | ) | | 0.24 |
| | 0.12 |
| |
| Net realized gain (loss) on investments (5) | | (0.45 | ) | | (0.43 | ) | | 0.01 |
| | 0.14 |
| | 0.01 |
| |
| Net unrealized appreciation (depreciation) on investments, secured borrowings and foreign currency (2) | | | 0.97 |
| | (0.60 | ) | | (0.58 | ) | | (0.43 | ) | | 0.24 |
|
| Net realized gain (loss) on investments, secured borrowings and foreign currency (2) | | | (0.94 | ) | | (0.45 | ) | | (0.43 | ) | | 0.01 |
| | 0.14 |
|
Distributions to stockholders (5)(2) | | (0.80 | ) | | (0.90 | ) | | (1.07 | ) | | (0.62 | ) | | — |
| | (0.56 | ) | | (0.80 | ) | | (0.90 | ) | | (1.07 | ) | | (0.62 | ) |
Tax return of capital (5)(2) | | — |
| | — |
| | — |
| | (0.39 | ) | | — |
| | (0.07 | ) | | — |
| | — |
| | — |
| | (0.39 | ) |
Net issuance of common stock (5)(2) | | — |
| | — |
| | (0.01 | ) | | (2.45 | ) | | 14.98 |
| | — |
| | — |
| | — |
| | (0.01 | ) | | (2.45 | ) |
| Net asset value at end of period | | $ | 9.97 |
| | $ | 11.06 |
| | $ | 12.11 |
| | $ | 12.65 |
| | $ | 15.11 |
| | $ | 10.04 |
| | $ | 9.97 |
| | $ | 11.06 |
| | $ | 12.11 |
| | $ | 12.65 |
|
| Per share market value at beginning of period | | $ | 8.56 |
| | $ | 8.73 |
| | $ | 11.82 |
| | $ | 13.54 |
| | $ | 15.00 |
| | $ | 8.80 |
| | $ | 8.56 |
| | $ | 8.73 |
| | $ | 11.82 |
| | $ | 13.54 |
|
| Per share market value at end of period | | $ | 8.80 |
| | $ | 8.56 |
| | $ | 8.73 |
| | $ | 11.82 |
| | $ | 13.54 |
| | $ | 8.65 |
| | $ | 8.80 |
| | $ | 8.56 |
| | $ | 8.73 |
| | $ | 11.82 |
|
Total return (1)(3) | | 12.51 | % | | 9.44 | % | | (15.76 | )% | | (8.20 | )% | | (9.73 | )% | | 5.90 | % | | 12.51 | % | | 9.44 | % | | (15.76 | )% | | (8.20 | )% |
| Common shares outstanding at beginning of period | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 6,666,768 |
| | 100 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 6,666,768 |
|
| Common shares outstanding at end of period | | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 6,666,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
| | 29,466,768 |
|
| Net assets at beginning of period | | $ | 325,829,394 |
| | $ | 356,807,103 |
| | $ | 372,677,678 |
| | $ | 100,705,269 |
| | $ | 1,500 |
| | $ | 293,636,434 |
| | $ | 325,829,394 |
| | $ | 356,807,103 |
| | $ | 372,677,678 |
| | $ | 100,705,269 |
|
| Net assets at end of period | | $ | 293,636,434 |
| | $ | 325,829,394 |
| | $ | 356,807,103 |
| | $ | 372,677,678 |
| | $ | 100,705,269 |
| | $ | 295,745,420 |
| | $ | 293,636,434 |
| | $ | 325,829,394 |
| | $ | 356,807,103 |
| | $ | 372,677,678 |
|
Average net assets (2)(4) | | $ | 316,440,902 |
| | $ | 332,486,362 |
| | $ | 368,839,422 |
| | $ | 132,873,801 |
| | $ | 80,133,138 |
| | $ | 294,285,497 |
| | $ | 316,440,902 |
| | $ | 332,486,362 |
| | $ | 368,839,422 |
| | $ | 132,873,801 |
|
Ratio of net investment income to average net assets (3) | | 7.09 | % | | 7.59 | % | | 7.67 | % | | 4.34 | % | | 0.08 | % | | 6.72 | % | | 7.09 | % | | 7.59 | % | | 7.67 | % | | 4.34 | % |
Ratio of total expenses to average net assets (3) | | 7.71 | % | | 8.44 | % | | 6.29 | % | | 5.20 | % | | 2.14 | % | | 9.72 | % | | 7.71 | % | | 8.44 | % | | 6.29 | % | | 5.20 | % |
| Ratio of base management fee waiver to average net assets (3) | | — | % | | — | % | | — % |
| | (0.12 | )% | | — % |
| |
| Ratio of insurance recoveries to average net assets (3) | | (0.08 | )% | | — | % | | — | % | | — | % | | — | % | |
| Ratio of net expenses to average net assets (3) | | 7.63 | % | | 8.44 | % | | 6.29 | % | | 5.08 | % | | 2.14 | % | |
| Ratio of net expenses to average net assets | | | 9.48 | % | | 7.63 | % | | 8.44 | % | | 6.29 | % | | 5.08 | % |
| Ratio of portfolio turnover to average investments at fair value | | 46.80 | % | | 28.02 | % | | 21.48 | % | | 78.96 | % | | 16.44 | % | | 74.88 | % | | 46.80 | % | | 28.02 | % | | 21.48 | % | | 78.96 | % |
| Weighted average outstanding debt (4) | | $ | 267,608,526 |
| | $ | 303,204,218 |
| | $ | 243,240,691 |
| | $ | 49,833,018 |
| | $ | — |
| |
| Average debt per share (5) | | $ | 9.08 |
| | $ | 10.29 |
| | $ | 8.25 |
| | $ | 5.36 |
| | $ | — |
| |
| Weighted average outstanding debt (5) | | | $ | 269,760,689 |
| | $ | 267,608,526 |
| | $ | 303,204,218 |
| | $ | 243,240,691 |
| | $ | 49,833,018 |
|
| Average debt per share (2) | | | $ | 9.15 |
| | $ | 9.08 |
| | $ | 10.29 |
| | $ | 8.25 |
| | $ | 5.36 |
|
| Asset coverage ratio (6) | | | 207.52 | % | | 211.67 | % | | 211.43 | % | | 210.46 | % | | — |
|
|
| |
| (1) | Beginning on October 17, 2017, the Company is externally managed by Oaktree. Prior to October 17, 2017, the Company was externally managed by the Former Adviser. |
| (2) | Calculated based upon weighted average shares outstanding for the period. |
| (3) | Total return equals the increase or decrease of ending market value over beginning market value, plus distributions, divided by the beginning market value, assuming dividend reinvestment prices obtained under the Company's DRIP. Total return is not annualized during interim periods. |
(2)(4) | Calculated based upon the weighted average net assets for the period. |
(3) | Periods less than twelve months are annualized. |
(4)(5) | Calculated based upon the weighted average of loans payable for the period. |
(5)(6) | Calculated based upon weighted average sharesBased on outstanding forsenior securities of $275.1 million, $263.0 million, $292.4 million, and $323.0 million as of September 30, 2018, 2017, 2016, and 2015, respectively. As of September 30, 2014, the period.Company did not have any outstanding senior securities. |
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 13. Derivative Instruments
The Company enters into forward currency contracts from time to time to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. As of September 30, 2018, the counterparty to these forward currency contracts was JPMorgan Chase Bank, N.A. Net unrealized gains or losses on foreign currency contracts are included in “net unrealized gains (losses) on investments and foreign currency” and net realized gains or losses on forward currency contracts are included in “net realized gains (losses) on investments, secured borrowings and foreign currency” in the accompanying consolidated statement of operations. Forward currency contracts and interest rate swaps are considered undesignated derivative instruments.
Certain information related to the Company’s foreign currency forward contracts is presented below as of September 30, 2018.
|
| | | | | | | | | | | | | | | | | | | | |
| Description | | Notional Amount to be Purchased | | Notional Amount to be Sold | | Maturity Date | | Gross Amount of Recognized Assets | | Gross Amount of Recognized Liabilities | | Balance Sheet Location of Net Amounts |
| Foreign currency forward contract | | $ | 6,541,130 |
| | £ | 4,975,000 |
| | 10/26/2018 | | $ | 45,807 |
| | $ | — |
| | Derivative asset |
Note 13.14. Commitments and Contingencies
SEC Examination and Investigation
On March 23, 2016, the Division of Enforcement of the SECSecurities and Exchange Commission (the "SEC") sent document subpoenas and document-preservation notices to the Company, FSAM, FSCO GP LLC - General Partner of Fifth Street Opportunities Fund, L.P. (“FSOF”), and OCSL. The subpoenas sought production of documents relating to a variety of issues principally related to the activities of FSM,the Former Adviser, including those raised in an ordinary-course examination of FSMthe Former Adviser by the SEC’s Office of Compliance Inspections and Examinations that began in October 2015, and in certain previously disclosed OCSL and FSAM securities class actions and OCSL derivative actions. The subpoenas were issued pursuant to a formal order of private investigation captioned In the Matter of the Fifth Street Group of Companies, No. HO-12925, dated March 23, 2016, which addresses (among other things) (i) the valuation of the Company's portfolio companies and investments, (ii) the expenses allocated or charged to the Company and OCSL, (iii) FSOF’s trading in the securities of publicly traded business-development companies, (iv) statements to the boardBoard of directors,Directors, other representatives of pooled investment vehicles, investors, or prospective investors concerning the fair value of the Company's portfolio companies or investments as well as expenses allocated or charged to the Company and OCSL, (v) various issues relating to adoption and implementation of policies and procedures under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), (vi) statements and/or potential omissions in the entities’ SEC filings, (vii) the entities’ books, records, and accounts and whether they fairly and accurately reflected the entities’ transactions and dispositions of assets, and (viii) several other issues relating to corporate books and records. The formal order cites various provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Advisers Act, as well as rules promulgated under those Acts, as the bases of the investigation. The Company is cooperating with the Division of Enforcement investigation, has produced requested documents, and has been communicatingbelieves its obligations with Division of Enforcement personnel. The Investment Adviserrespect to the matter are concluded. Oaktree is not subject to these subpoenas.
During the year ended September 30, 2017, the Company received insurance reimbursements related to previously incurred legal professional fees of approximately $0.3 million.
Off-Balance Sheet Arrangements
The Company may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its portfolio companies. As of September 30, 20172018 and September 30, 2016,2017, off-balance sheet arrangements consisted of $43.5$22.8 million and $52.8$43.5 million, respectively, of unfunded commitments to provide debt and equity financing to certain of the Company's portfolio companies. Such commitments are subject to the portfolio companies' satisfaction of certain financial and nonfinancial covenants and may involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Statements of Assets and Liabilities.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A list of unfunded commitments by investment (consisting of revolvers, term loans and FSFRthe OCSI Glick JV Subordinated Notes and LLC equity interests) as of September 30, 20172018 and September 30, 20162017 is shown in the table below: |
| | | | | | | | |
| | | September 30, 2017 | | September 30, 2016 |
| FSFR Glick JV LLC | | $ | 16,159,368 |
| | $ | 16,382,494 |
|
| MHE Intermediate Holdings | | 6,749,698 |
| | — |
|
| Triple Point Group Holdings, Inc. | | 4,968,590 |
| | 4,968,590 |
|
| BeyondTrust Software, Inc. | | 3,605,000 |
| | 3,605,000 |
|
| Motion Recruitment Partners LLC | | 2,900,000 |
| | 2,900,000 |
|
| PowerPlan, Inc. | | 2,100,000 |
| | 2,100,000 |
|
| Ministry Brands, LLC | | 1,857,967 |
| | — |
|
| Impact Sales, LLC | | 1,078,125 |
| | — |
|
| Valet Merger Sub, Inc. | | 833,333 |
| | 333,333 |
|
| Executive Consulting Group, Inc. | | 800,000 |
| | 800,000 |
|
| Internet Pipeline, Inc. | | 800,000 |
| | 800,000 |
|
| Metamorph US 3, LLC (1) | | 720,000 |
| | 1,800,000 |
|
| Systems, Inc. | | 600,000 |
| | — |
|
| Sailpoint Technologies, Inc. | | 300,000 |
| | 200,000 |
|
| 4 Over International, LLC | | 68,452 |
| | 68,452 |
|
| TIBCO Software, Inc. | | — |
| | 5,300,000 |
|
| All Web Leads, Inc. | | — |
| | 3,458,537 |
|
| Legalzoom.com, Inc. | | — |
| | 2,607,018 |
|
| Teaching Strategies, LLC | | — |
| | 2,400,000 |
|
| Dynatect Group Holdings, Inc. | | — |
| | 1,800,000 |
|
| My Alarm Center, LLC | | — |
| | 1,212,472 |
|
| Baart Programs, Inc. | | — |
| | 1,000,000 |
|
| TrialCard Incorporated | | — |
| | 850,000 |
|
| OBHG Management Services, LLC | | — |
| | 100,000 |
|
| Accruent, LLC | | — |
| | 85,000 |
|
| Total | | $ | 43,540,533 |
| | $ | 52,770,896 |
|
_______
(1) This investment was on cash non-accrual status as of September 30, 2017. |
| | | | | | | | |
| | | September 30, 2018 | | September 30, 2017 |
| OCSI Glick JV LLC | | $ | 13,998,029 |
| | $ | 16,159,368 |
|
| MHE Intermediate Holdings | | 3,901,478 |
| | 6,749,698 |
|
| Asset International | | 2,500,000 |
| | — |
|
| CircusTrix Holdings | | 1,070,055 |
| | — |
|
| Internet Pipeline, Inc. | | 800,000 |
| | 800,000 |
|
| iCIMs, Inc. | | 294,118 |
| | — |
|
| GKD Index Partners, LLC | | 111,111 |
| | — |
|
| Ministry Brands, LLC | | 70,000 |
| | 1,857,967 |
|
| 4 Over International, LLC | | 68,452 |
| | 68,452 |
|
| Triple Point Group Holdings, Inc. | | — |
| | 4,968,590 |
|
| Valet Merger Sub, Inc. | | — |
| | 833,333 |
|
| Motion Recruitment Partners LLC | | — |
| | 2,900,000 |
|
| PowerPlan, Inc. | | — |
| | 2,100,000 |
|
| Impact Sales, LLC | | — |
| | 1,078,125 |
|
| Metamorph US 3, LLC | | — |
| | 720,000 |
|
| BeyondTrust Software, Inc. | | — |
| | 3,605,000 |
|
| Executive Consulting Group, Inc. | | — |
| | 800,000 |
|
| Systems Inc. | | — |
| | 600,000 |
|
| Sailpoint Technologies, Inc. | | — |
| | 300,000 |
|
| Total | | $ | 22,813,243 |
| | $ | 43,540,533 |
|
Note 14.15. Selected Quarterly Financial Data (unaudited)
Selected unaudited quarterly financial data for Oaktree Strategic Income Corporation for the years ended September 30, 2018, 2017 2016 and 20152016 are below:
| | | | For the three months ended | For or as of the three months ended |
(dollars in thousands,
except per share
amounts) | September 30, 2017 | June 30,
2017 | March 31,
2017 | December
31, 2016 | September 30, 2016 | June 30,
2016 | March 31,
2016 | December
31, 2015 | September 30, 2015 | June 30,
2015 | March 31,
2015 | December
31, 2014 | September 30, 2018 | June 30,
2018 | March 31,
2018 | December
31, 2017 | September 30, 2017 | June 30,
2017 | March 31,
2017 | December
31, 2016 | September 30, 2016 | June 30,
2016 | March 31,
2016 | December
31, 2015 |
| Total investment income | $ | 11,820 |
| $ | 12,171 |
| $ | 11,020 |
| $ | 11,561 |
| $ | 13,203 |
| $ | 13,114 |
| $ | 13,195 |
| $ | 13,914 |
| $ | 14,068 |
| $ | 14,140 |
| $ | 11,341 |
| $ | 11,923 |
| $ | 14,724 |
| $ | 11,661 |
| $ | 10,555 |
| $ | 10,731 |
| $ | 11,820 |
| $ | 12,171 |
| $ | 11,020 |
| $ | 11,561 |
| $ | 13,203 |
| $ | 13,114 |
| $ | 13,195 |
| $ | 13,914 |
|
| Net investment income | 5,521 |
| 5,930 |
| 5,086 |
| 5,884 |
| 6,342 |
| 6,164 |
| 5,785 |
| 7,002 |
| 7,402 |
| 7,086 |
| 6,294 |
| 7,496 |
| 5,563 |
| 5,072 |
| 4,589 |
| 4,547 |
| 5,521 |
| 5,930 |
| 5,086 |
| 5,884 |
| 6,342 |
| 6,164 |
| 5,785 |
| 7,002 |
|
| Net realized and unrealized gain (loss) | (19,984 | ) | (5,791 | ) | (254 | ) | (5,159 | ) | 2,251 |
| (5,248 | ) | (6,445 | ) | (20,308 | ) | (7,115 | ) | (4,632 | ) | 393 |
| (1,012 | ) | 2,796 |
| (3,347 | ) | 4,093 |
| (2,641 | ) | (19,984 | ) | (5,791 | ) | (254 | ) | (5,159 | ) | 2,251 |
| (5,248 | ) | (6,445 | ) | (20,308 | ) |
| Net increase (decrease) in net assets resulting from operations | (14,463 | ) | 139 |
| 4,832 |
| 725 |
| 8,593 |
| 916 |
| (660 | ) | (13,306 | ) | 287 |
| 2,454 |
| 6,687 |
| 6,484 |
| 8,359 |
| 1,725 |
| 8,683 |
| 1,906 |
| (14,463 | ) | 139 |
| 4,832 |
| 725 |
| 8,593 |
| 916 |
| (660 | ) | (13,306 | ) |
| Net assets | 293,636 |
| 313,698 |
| 319,158 |
| 319,924 |
| 325,829 |
| 323,866 |
| 329,580 |
| 334,661 |
| 356,807 |
| 361,782 |
| 368,168 |
| 370,322 |
| 295,745 |
| 291,953 |
| 294,501 |
| 289,944 |
| 293,636 |
| 313,698 |
| 319,158 |
| 319,924 |
| 325,829 |
| 323,866 |
| 329,580 |
| 334,661 |
|
| Total investment income per common share | $ | 0.40 |
| $ | 0.41 |
| $ | 0.37 |
| $ | 0.39 |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.47 |
| $ | 0.48 |
| $ | 0.48 |
| $ | 0.38 |
| $ | 0.40 |
| $ | 0.50 |
| $ | 0.40 |
| $ | 0.36 |
| $ | 0.36 |
| $ | 0.40 |
| $ | 0.41 |
| $ | 0.37 |
| $ | 0.39 |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.45 |
| $ | 0.47 |
|
| Net investment income per common share | 0.19 |
| 0.20 |
| 0.17 |
| 0.20 |
| 0.22 |
| 0.21 |
| 0.20 |
| 0.24 |
| 0.25 |
| 0.24 |
| 0.21 |
| 0.25 |
| 0.19 |
| 0.17 |
| 0.16 |
| 0.15 |
| 0.19 |
| 0.20 |
| 0.17 |
| 0.20 |
| 0.22 |
| 0.21 |
| 0.20 |
| 0.24 |
|
| Earnings (loss) per common share | (0.49 | ) | — |
| 0.16 |
| 0.02 |
| 0.29 |
| 0.03 |
| (0.02 | ) | (0.45 | ) | 0.01 |
| 0.08 |
| 0.23 |
| 0.22 |
| 0.28 |
| 0.06 |
| 0.29 |
| 0.06 |
| (0.49 | ) | — |
| 0.16 |
| 0.02 |
| 0.29 |
| 0.03 |
| (0.02 | ) | (0.45 | ) |
| Net asset value per common share at period end | 9.97 |
| 10.65 |
| 10.83 |
| 10.86 |
| 11.06 |
| 10.99 |
| 11.18 |
| 11.36 |
| 12.11 |
| 12.28 |
| 12.49 |
| 12.57 |
| 10.04 |
| 9.91 |
| 9.99 |
| 9.84 |
| 9.97 |
| 10.65 |
| 10.83 |
| 10.86 |
| 11.06 |
| 10.99 |
| 11.18 |
| 11.36 |
|
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15.16. Subsequent Events
The Company's management evaluated subsequent events through the date of issuance of the Consolidated Financial Statements. There have been no subsequent events that occurred during such period that would require disclosure in, or would be required to be recognized in, the Consolidated Financial Statements as of and for the year ended September 30, 2017,2018, except as discussed below.
The Transaction and the New Investment Advisory Agreement with Oaktree
On July 13, 2017, Oaktree, entered into the Purchase Agreement, with FSM, and, for certain limited purposes, FSAM, the indirect, partial owner of FSM, and Fifth Street Holdings L.P. (“FSH”), the direct, partial owner of FSM.
In order to ensure that the Transaction complied with Section 15(f) of the 1940 Act, the Investment Adviser and FSM agreed to certain conditions. First, for a period of three years after the closing of the Transaction, at least 75% of the members of the Company’s Board of Directors must not be interested persons of Oaktree or FSM. Second, an “unfair burden” must not be imposed on the Company as a result of the closing of the Transaction or any express or implied terms, conditions or understandings applicable thereto during the two-year period after the closing of the Transaction. In addition, for the two-year period commencing on October 17, 2017, Oaktree will waive, to the extent necessary, any management or incentive fees payable under the New Investment Advisory Agreement that exceed what would have been paid to the Former Adviser in the aggregate under the Former Investment Advisory Agreement.
On September 7, 2017, the Company held a special meeting of stockholders (the "Special Meeting"). At the Special Meeting, stockholders of the Company approved the New Investment Advisory Agreement to take effect upon the closing of the Transaction. Stockholders of the Company also approved, contingent upon the closing of the Transaction, the election of John B. Frank, Marc H. Gamsin, Craig Jacobson, Richard G. Ruben and Bruce Zimmerman to serve on the Company’s Board of Directors, each of whom commenced serving on the Company’s Board of Directors on October 17, 2017. In addition, in connection with the Transaction, Edgar Lee became the Company’s Chief Executive Officer and Chief Investment Officer, Mathew Pendo became the Company’s Chief Operating Officer, Mel Carlisle became the Company’s Chief Financial Officer and Treasurer and Kimberly Larin became the Company’s Chief Compliance Officer.
Upon the closing of the Transaction on October 17, 2017, Oaktree became the investment adviser to each of OCSL and the Company, and Oaktree paid gross cash consideration of $320 million to FSM. The closing of the Transaction resulted in an assignment for purposes of the 1940 Act of the Former Investment Advisory Agreement and, as a result, its immediate termination. The material terms of the services to be provided under the New Investment Advisory Agreement, other than the fee structure, are substantially the same as the Former Investment Advisory Agreement, except that services are provided by Oaktree.
On October 17, 2017, each of Bernard D. Berman, James Castro-Blanco, Richard P. Dutkiewicz, Alexander C. Frank and Jeffrey R. Kay resigned as a member of the Company’s Board of Directors. In addition, on October 17, 2017, each of Mr. Berman, the Company’s former Chief Executive Officer, Mr. Steven Noreika, the Company’s former Chief Financial Officer, and Ms. Kerry Acocella, the Company’s former Secretary and Chief Compliance Officer, resigned from his or her role as an officer of the Company.
In connection with the Transaction, the Company and GF Equity Funding, in their respective capacities as members of FSFR Glick JV, consented to the assignment by FSC CT of the administrative and loan services agreement between FSFR Glick JV and FSC CT to Oaktree Administrator, effective as of October 17, 2017.
The following is a description of the New Investment Advisory Agreement, which has been in effect since October 17, 2017.
Management Services
Oaktree is registered as an investment adviser under the Advisers Act. Subject to the overall supervision of the Company’s Board of Directors since October 17, 2017, Oaktree has managed the day-to-day operations of the Company and provided the Company with investment advisory services. Under the New Investment Advisory Agreement, Oaktree:
determines the composition of the Company’s portfolio, the nature and timing of the changes to the Company’s portfolio and the manner of implementing such changes;
identifies, evaluates and negotiates the structure of the investments the Company makes;
executes, closes, monitors and services the investments the Company makes;
determines what securities and other assets the Company purchases, retains or sells; and
performs due diligence on prospective portfolio companies.
The New Investment Advisory Agreement provides that Oaktree’s services are not exclusive to the Company and Oaktree is generally free to furnish similar services to other entities so long as its services to us are not impaired.
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management FeeDistribution Declaration
Under the New Investment Advisory Agreement, the Company pays Oaktree a fee for its services under the New Investment Advisory Agreement consisting of two components - a base management fee and an incentive fee. The cost of both the base management fee payable to Oaktree and any incentive fees earned by Oaktree is ultimately borne by common stockholders of the Company.
Base Management Fee
Under the New Investment Advisory Agreement, the base management fee on total gross assets, including any investment made with borrowings, but excluding cash and cash equivalents, is 1.00%.
Incentive Fee
The incentive fee consists of two parts. Under the New Investment Advisory Agreement, the first part of the incentive fee (the “incentive fee on income”) is calculated and payable quarterly in arrears based upon the “pre-incentive fee net investment income” of the Company for the immediately preceding quarter. The payment of the incentive fee on income is subject to payment of a preferred return to investors each quarter (i.e., a “hurdle rate”), expressed as a rate of return on the value of the Company’s net assets at the end of the most recently completed quarter, of 1.50%, subject to a “catch up” feature.
For this purpose, “pre-incentive fee net investment income” means interest income, dividend income and any other income (including any other fees such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies, other than fees for providing managerial assistance) accrued during the fiscal quarter, minus the Company’s operating expenses for the quarter (including the base management fee, expenses payable under the New Administration Agreement and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Under the New Investment Advisory Agreement, the calculation of the incentive fee on income for each quarter is as follows:
No incentive fee is payable to Oaktree in any quarter in which the Company’s pre-incentive fee net investment income does not exceed the preferred return rate of 1.50% (the “preferred return”) on net assets.
100% of the Company’s pre-incentive fee net investment income, if any, that exceeds the preferred return but is less than or equal to 1.8182% in any fiscal quarter is payable to Oaktree. This portion of the incentive fee on income is referred to as the “catch-up” provision, and it is intended to provide Oaktree with an incentive fee of 17.5% on all of the Company’s pre-incentive fee net investment income when the Company’s pre-incentive fee net investment income exceeds 1.8182% on net assets in any fiscal quarter.
For any quarter in which the Company’s pre-incentive fee net investment income exceeds 1.8182% on net assets, the subordinated incentive fee on income is equal to 17.5% of the amount of the Company’s pre-incentive fee net investment income, as the preferred return and catch-up will have been achieved.
There is no accumulation of amounts on the hurdle rate from quarter to quarter and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle.
Under the New Investment Advisory Agreement, the second part of the incentive fee will be determined and payable in arrears as of the end of each fiscal year (or upon termination of the New Investment Advisory Agreement, as of the termination date) commencing with the fiscal year ending September 30, 2019 and will equal 17.5% of the Company’s realized capital gains, if any, on a cumulative basis from the beginning of the fiscal year ending September 30, 2019 through the end of each fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees under the New Investment Advisory Agreement. Any realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to the Company’s portfolio as of the end of the fiscal year ending September 30,On November 19, 2018, will be excluded from the calculations of the second part of the incentive fee.
Collection and Disbursement of Fees Owed to Fifth Street Management
Under the Former Investment Advisory Agreement, both the base management fee and incentive fee on income were calculated and paid to FSM at the end of each quarter. In order to ensure that FSM receives any compensation earned during the quarter ending December 31, 2017, the initial payment of the base management fee and incentive fee on income under the New Investment Advisory Agreement will cover the entire quarter in which the New Investment Advisory Agreement became effective, and be calculated at a
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
blended rate that will reflect fee rates under the respective investment advisory agreements for the portion of the quarter in which FSM and Oaktree were serving as investment adviser. This structure will allow Oaktree to pay FSM in early 2018 the pro rata portion of the fees that were earned by, but not paid to, FSM for services rendered to the Company prior to the termination of the Former Investment Advisory Agreement with FSM.
Duration and Termination
Unless earlier terminated as described below, the New Investment Advisory Agreement will remain in effect until October 17, 2019 and thereafter from year-to-year if approved annually by the Company’s Board of Directors or by the affirmative votedeclared a quarterly distribution of the holders$0.155 per share, payable on December 28, 2018 to stockholders of a majority of the outstanding voting securities of the Company, including, in either case, approval by a majority of the directors of the Company who are not interested persons. The New Investment Advisory Agreement will automatically terminate in the event of its assignment. The New Investment Advisory Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other. The New Investment Advisory Agreement may also be terminated, without penalty, upon the vote of a majority of the outstanding voting securities of the Company.
Administrative Services
The Company entered into the New Administration Agreement with Oaktree Administratorrecord on OctoberDecember 17, 2017. Pursuant to the New Administration Agreement, Oaktree Administrator provides administrative services to the Company necessary for the operations of the Company, which include providing office facilities, equipment, clerical, bookkeeping and record keeping services at such facilities and such other services as Oaktree Administrator, subject to review by the Company’s Board of Directors, shall from time to time deem to be necessary or useful to perform its obligations under the New Administration Agreement. Oaktree Administrator may, on behalf of the Company, conduct relations and negotiate agreements with custodians, trustees, depositories, attorneys, underwriters, brokers and dealers, corporate fiduciaries, insurers, banks and such other persons in any such other capacity deemed to be necessary or desirable. Oaktree Administrator will make reports to the Board of its performance of obligations under the New Administration Agreement and furnish advice and recommendations with respect to such other aspects of the business and affairs of the Company, in each case, as it shall determine to be desirable or as reasonably required by the Board; provided that the Oaktree Administrator shall not provide any investment advice or recommendation.
Oaktree Administrator will also provide portfolio collection functions for interest income, fees and warrants and is responsible for the financial and other records that the Company is required to maintain and prepares, prints and disseminates reports to the Company’s stockholders and all other materials filed with the SEC. In addition, Oaktree Administrator will assist the Company in determining and publishing the Company’s net asset value, overseeing the preparation and filing of the Company’s tax returns, and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. For providing these services, facilities and personnel, the Company will reimburse Oaktree Administrator the allocable portion of overhead and other expenses incurred by Oaktree Administrator in performing its obligations under the New Administration Agreement, including the Company’s allocable portion of the rent of the Company’s principal executive offices at market rates and the Company’s allocable portion of the costs of compensation and related expenses of its Chief Financial Officer, Chief Compliance Officer, their staffs and other non-investment professionals at Oaktree that perform duties for the Company. Such reimbursement is at cost, with no profit to, or markup by, Oaktree Administrator. Oaktree Administrator may also offer to provide, on the Company’s behalf, managerial assistance to the Company’s portfolio companies. The New Administration Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of their respective duties or by reason of the reckless disregard of their respective duties and obligations, Oaktree Administrator and its officers, managers, partners, agents, employees, controlling persons, members (or their owners) and any other person or entity affiliated with it, are entitled to indemnification from the Company for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Oaktree Administrator’s services under the New Administration Agreement or otherwise as the Company’s administrator. Unless earlier terminated as described below, the New Administration Agreement will remain in effect until October 17, 2019 and thereafter from year-to-year if approved annually by the Company’s Board of Directors or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, including, in either case, approval by a majority of the Company’s directors who are not interested persons. The New Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other. The New Administration Agreement may also be terminated, without penalty, upon the vote of a majority of the Company’s outstanding voting securities.
Pledge Agreement
On October 17, 2017, in connection with the Purchase Agreement, the Company entered into a pledge agreement (the “Pledge Agreement”) with FSH with respect to 1,131,991 shares of the Company’s common stock owned by FSH, pursuant to which FSH pledged such shares to the Company to secure indemnification obligations of FSM and FSH under the Purchase Agreement relating to certain SEC investigation-related legal costs and expenses, if any, and certain fees, fines, monetary penalties, deductibles and
OAKTREE STRATEGIC INCOME CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
disgorgements, if any, that may be ordered by the SEC to be paid by the Company, net of any disgorgements paid by FSM to the Company and any insurance recoveries received by the Company.
Change in Investment Policy
On November 17, 2017, the Company mailed notices to its stockholders that the Board of Directors of the Company approved a change to the Company’s investment policies and, effective January 19, 2018, the Company will no longer be subject to its current policy to invest, under normal market conditions, at least 80% of the value of its net assets (plus borrowings for investment purposes) in floating rate senior loans.
Citibank Facility Amendment
On December 6, 2017, the Company entered into an amendment to the documents governing the Citibank facility to remove Citibank, N.A.’s approval rights regarding the Company’s ability to purchase assets using proceeds from the Citibank facility, subject to a mark-to-market valuation protocol for broadly syndicated loans and a revised valuation dispute mechanism. The other material terms of the Citibank facility did not change as a result of this amendment.
2018.
Schedule 12-14
Oaktree Strategic Income Corporation
Schedule of Investments in and Advances to Affiliates
Year ended September 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1) | | Cash Interest Rate | | Industry | | Principal | | Net Realized Gain (Loss) | | Amount of
Interest,
Fees or
Dividends
Credited in
Income (2) | | Fair Value
at October 1, 2017 | | Gross
Additions (3) | | Gross
Reductions (4) | | Fair Value at September 30, 2018 | | % of Total Net Assets |
| Control Investments | | | | | | | | | | | | | | | | | | | | |
| OCSI Glick JV LLC | | | | Multi-sector holdings | | | | | | | | | | | | | | | | |
| Subordinated Note, LIBOR+6.5% cash due 10/20/2021 | | 8.59% | | | | $ | 66,390,220 |
| | $ | — |
| | $ | 6,131,395 |
| | $ | 57,606,674 |
| | $ | 2,161,340 |
| | $ | (1,255,844 | ) | | $ | 58,512,170 |
| | 19.8% |
| 87.5% LLC equity interest (5) | | | | | | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | —% |
| Total Control Investments | | | | | | $ | 66,390,220 |
| | $ | — |
| | $ | 6,131,395 |
| | $ | 57,606,674 |
| | $ | 2,161,340 |
| | $ | (1,255,844 | ) | | $ | 58,512,170 |
| | 19.8% |
| | | | | | | | | | | | | | | | | | | | | |
| Affiliate Investments | | | | | | | | | | | | | | | | | | | | |
| Ameritox Ltd. | | | | Healthcare services | | | | | | | | | | | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash 3% PIK due 4/11/2021 | | | | | | $ | — |
| | $ | (6,341,950 | ) | | $ | 14,822 |
| | $ | 935,913 |
| | $ | 6,970,176 |
| | $ | (7,906,089 | ) | | $ | — |
| | —% |
| 3,309,873.6 Class A Preferred Units | | | | | | | | (3,309,874 | ) | | — |
| | — |
| | 3,309,874 |
| | (3,309,874 | ) | | — |
| | —% |
| 327,393.6 Class B Preferred Units | | | | | | | | (327,394 | ) | | — |
| | — |
| | 327,394 |
| | (327,394 | ) | | — |
| | —% |
| 1,007.36 Class A Units | | | | | | | | (5,935,698 | ) | | — |
| | — |
| | 5,935,698 |
| | (5,935,698 | ) | | — |
| | —% |
| Total Affiliate Investments | | | | | | $ | — |
| | $ | (15,914,916 | ) | | $ | 14,822 |
| | $ | 935,913 |
| | $ | 16,543,142 |
| | $ | (17,479,055 | ) | | $ | — |
| | —% |
| Total Control & Affiliate Investments | | | | | | $ | 66,390,220 |
| | $ | (15,914,916 | ) | | $ | 6,146,217 |
| | $ | 58,542,587 |
| | $ | 18,704,482 |
| | $ | (18,734,899 | ) | | $ | 58,512,170 |
| | 19.8% |
This schedule should be read in connection with the Company's Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
| |
| (1) | The principal amount and ownership detail are shown in the Company's Consolidated Schedules of Investments. |
| |
| (2) | Represents the total amount of interest (net of non-accrual amounts), fees and dividends credited to income for the portion of the year an investment was included in the Control or Affiliate categories. |
| |
| (3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest (net of non-accrual amounts), and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category. |
| |
| (4) | Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category. |
| |
| (5) | Together with GF Equity Funding, the Company co-invests through the OCSI Glick JV. The OCSI Glick JV is capitalized as transactions are completed and all portfolio and investment decisions in respect to the OCSI Glick JV must be approved by the OCSI Glick JV investment committee consisting of representatives of the Company and GF Equity Funding (with approval from a representative of each required). |
Schedule 12-14
Oaktree Strategic Income Corporation
Schedule of Investments in and Advances to Affiliates
Year ended September 30, 2017
| | | Portfolio Company/Type of Investment (1) | | Cash Interest Rate | | Industry | | Principal | | Net Realized Gain (Loss) | | Net Unrealized Appreciation (Depreciation) | | Amount of
Interest,
Fees or
Dividends
Credited in
Income (2) | | Fair Value
at October 1, 2016 | | Gross
Additions (3) | | Gross
Reductions (4) | | Fair Value at September 30, 2017 | | % of Total Net Assets | | Cash Interest Rate | | Industry | | Principal | | Net Realized Gain (Loss) | | Amount of
Interest,
Fees or
Dividends
Credited in
Income (2) | | Fair Value
at October 1, 2016 | | Gross
Additions (3) | | Gross
Reductions (4) | | Fair Value at September 30, 2017 | | % of Total Net Assets |
| Control Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FSFR Glick JV LLC | | Multi-sector holdings | | | | | | | | | | | | | | | | | | |
| OCSI Glick JV LLC | | | Multi-sector holdings | | | | | | | | | | | | | | | |
| Subordinated Note, LIBOR+8% cash due 10/20/2021 | | 9.23% | | $ | 64,228,881 |
| | $ | — |
| | $ | 497,902 |
| | $ | 5,764,424 |
| | $ | 56,885,646 |
| | $ | 5,186,507 |
| | $ | (4,465,479 | ) | | $ | 57,606,674 |
| | 19.6% | | 9.23% | | $ | 64,228,881 |
| | $ | — |
| | $ | 5,764,424 |
| | $ | 56,885,646 |
| | $ | 5,186,507 |
| | $ | (4,465,479 | ) | | $ | 57,606,674 |
| | 19.6% |
| 87.5% LLC equity interest (5) | | | | — |
| | (6,431,021 | ) | | (576,044 | ) | | 6,431,021 |
| | — |
| | (6,431,021 | ) | | — |
| | —% | | | | — |
| | (576,044 | ) | | 6,431,021 |
| | — |
| | (6,431,021 | ) | | — |
| | —% |
| Total Control Investments | | $ | 64,228,881 |
| | $ | — |
| | $ | (5,933,119 | ) | | $ | 5,188,380 |
| | $ | 63,316,667 |
| | $ | 5,186,507 |
| | $ | (10,896,500 | ) | | $ | 57,606,674 |
| | 19.6% | | $ | 64,228,881 |
| | $ | — |
| | $ | 5,188,380 |
| | $ | 63,316,667 |
| | $ | 5,186,507 |
| | $ | (10,896,500 | ) | | $ | 57,606,674 |
| | 19.6% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Affiliate Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ameritox Ltd. (6) | | Healthcare services | | | | | | | | | | | | | | | | | | | Healthcare services | | | | | | | | | | | | | | | |
First Lien Term Loan, LIBOR+5% (1% floor) cash 3% PIK due 4/11/2021 | | 6.33% | | $ | 8,071,313 |
| | $ | — |
| | $ | (6,931,628 | ) | | $ | 505,782 |
| | $ | 6,342,286 |
| | $ | 2,118,166 |
| | $ | (7,524,539 | ) | | $ | 935,913 |
| | 0.3% | | 6.33% | | $ | 8,071,313 |
| | $ | — |
| | $ | 505,782 |
| | $ | 6,342,286 |
| | $ | 2,118,166 |
| | $ | (7,524,539 | ) | | $ | 935,913 |
| | 0.3% |
| 3,309,873.6 Class A Preferred Units | | | | — |
| | (3,626,150 | ) | | — |
| | 3,626,150 |
| | 169,172 |
| | (3,795,322 | ) | | — |
| | —% | | | | — |
| | — |
| | 3,626,150 |
| | 169,172 |
| | (3,795,322 | ) | | — |
| | —% |
| 327,393.6 Class B Preferred Units | | | | — |
| | (358,679 | ) | | — |
| | 358,679 |
| | 198,597 |
| | (557,276 | ) | | — |
| | —% | | | | — |
| | — |
| | 358,679 |
| | 198,597 |
| | (557,276 | ) | | — |
| | —% |
| 1,007.36 Class A Units | | | | — |
| | (2,679,343 | ) | | — |
| | 2,679,343 |
| | — |
| | (2,679,343 | ) | | — |
| | —% | | | | — |
| | — |
| | 2,679,343 |
| | — |
| | (2,679,343 | ) | | — |
| | —% |
| Total Affiliate Investments | | $ | 8,071,313 |
| | $ | — |
| | $ | (13,595,800 | ) | | $ | 505,782 |
| | $ | 13,006,458 |
| | $ | 2,485,935 |
| | $ | (14,556,480 | ) | | $ | 935,913 |
| | 0.3% | | $ | 8,071,313 |
| | $ | — |
| | $ | 505,782 |
| | $ | 13,006,458 |
| | $ | 2,485,935 |
| | $ | (14,556,480 | ) | | $ | 935,913 |
| | 0.3% |
| Total Control & Affiliate Investments | | $ | 72,300,194 |
| | $ | — |
| | $ | (19,528,919 | ) | | $ | 5,694,162 |
| | $ | 76,323,125 |
| | $ | 7,672,442 |
| | $ | (25,452,980 | ) | | $ | 58,542,587 |
| | 19.9% | | $ | 72,300,194 |
| | $ | — |
| | $ | 5,694,162 |
| | $ | 76,323,125 |
| | $ | 7,672,442 |
| | $ | (25,452,980 | ) | | $ | 58,542,587 |
| | 19.9% |
This schedule should be read in connection with the Company's Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
| |
| (1) | The principal amount and ownership detail are shown in the Company's Consolidated Schedules of Investments. |
| |
| (2) | Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Affiliate categories. |
| |
| (3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest (net of non-accrual amounts), and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category. |
| |
| (4) | Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category. |
| |
| (5) | Together with GF Equity Funding, the Company co-invests through FSFRthe OCSI Glick JV. FSFRThe OCSI Glick JV is capitalized as transactions are completed and all portfolio and investment decisions in respect to FSFRthe OCSI Glick JV must be approved by the FSFROCSI Glick JV investment committee consisting of representatives of the Company and GF Equity Funding (with approval from a representative of each required). |
| |
| (6) | This investment was on cash non-accrual status as of September 30, 2017. |
Schedule 12-14
Oaktree Strategic Income Corporation
Schedule of Investments in and Advances to Affiliates
Year ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio Company/Type of Investment (1) | | Cash Interest Rate | | Industry | | Principal | | Net Realized Gain (Loss) | | Net Unrealized Appreciation (Depreciation) | | Amount of
Interest,
Fees or
Dividends
Credited in
Income (2) | | Fair Value
at October 1, 2015 | | Gross
Additions (3) | | Gross
Reductions (4) | | Fair Value at September 30, 2016 | | % of Total Net Assets |
| Control Investments | | | | | | | | | | | | | | | | | | | | | | |
| FSFR Glick JV LLC | | | | Multi-sector holdings | | | | | | | | | | | | | | | | | | |
| Subordinated Note, LIBOR+8% cash due 10/20/2021 | | 8.47% | | | | $ | 64,005,755 |
| | $ | — |
| | $ | (6,627,858 | ) | | $ | 5,065,350 |
| | $ | 52,603,346 |
| | $ | 10,910,158 |
| | $ | (6,627,858 | ) | | $ | 56,885,646 |
| | 17.5% |
| 87.5% LLC equity interest (5) | | | | | | | | — |
| | 648,071 |
| | 2,712,500 |
| | 4,553,575 |
| | 4,902,020 |
| | (3,024,574 | ) | | 6,431,021 |
| | 2.0% |
| Total Control Investments | | | | | | $ | 64,005,755 |
| | $ | — |
| | $ | (5,979,787 | ) | | $ | 7,777,850 |
| | $ | 57,156,921 |
| | $ | 15,812,178 |
| | $ | (9,652,432 | ) | | $ | 63,316,667 |
| | 19.4% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Affiliate Investments | | | | | | | | | | | | | | | | | | | | | | |
| Ameritox Ltd. | | | | Healthcare services | | | | | | | | | | | | | | | | | | |
| First Lien Term Loan, LIBOR+5% (1% floor) cash 3% PIK due 4/11/2021 | | 6.00% | | | | $ | 6,387,128 |
| | $ | — |
| | $ | (38,546 | ) | | $ | 279,587 |
| | $ | — |
| | $ | 6,402,868 |
| | $ | (60,582 | ) | | $ | 6,342,286 |
| | 1.9% |
| 3,309,873.6 Class A Preferred Units | | | | | | | | — |
| | 316,276 |
| | — |
| | — |
| | 3,626,150 |
| | — |
| | 3,626,150 |
| | 1.1% |
| 327,393.6 Class B Preferred Units | | | | | | | | — |
| | 31,285 |
| | — |
| | — |
| | 358,679 |
| | — |
| | 358,679 |
| | 0.1% |
| 1,007.36 Class A Units | | | | | | | | — |
| | (3,256,355 | ) | | — |
| | — |
| | 5,935,698 |
| | (3,256,355 | ) | | 2,679,343 |
| | 0.8% |
| Total Affiliate Investments | | | | | | $ | 6,387,128 |
| | $ | — |
| | $ | (2,947,340 | ) | | $ | 279,587 |
| | $ | — |
| | $ | 16,323,395 |
| | $ | (3,316,937 | ) | | $ | 13,006,458 |
| | 4.0% |
| Total Control & Affiliate Investments | | | | | | $ | 70,392,883 |
| | $ | — |
| | $ | (8,927,127 | ) | | $ | 8,057,437 |
| | $ | 57,156,921 |
| | $ | 32,135,573 |
| | $ | (12,969,369 | ) | | $ | 76,323,125 |
| | 23.4% |
This schedule should be read in connection with the Company's Consolidated Financial Statements, including the Consolidated Schedules of Investments and Notes to the Consolidated Financial Statements.
______________________
| |
(1) | The principal amount and ownership detail are shown in the Company's Consolidated Schedules of Investments. |
| |
(2) | Represents the total amount of interest, fees and dividends credited to income for the portion of the year an investment was included in the Control or Affiliate categories. |
| |
(3) | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, follow-on investments and accrued PIK interest (net of non-accrual amounts), and the exchange of one or more existing securities for one or more new securities. Gross additions also include net increases in unrealized appreciation or net decreases in unrealized depreciation as well as the movement of an existing portfolio company into this category or out of a different category. |
| |
(4) | Gross reductions include decreases in the cost basis of investment resulting from principal payments or sales and exchanges of one or more existing securities for one or more new securities. Gross reductions also include net increases in unrealized depreciation or net decreases in unrealized appreciation as well as the movement of an existing portfolio company out of this category and into a different category. |
| |
(5) | Together with GF Equity Funding, the Company co-invests through FSFR Glick JV. FSFR Glick JV is capitalized as transactions are completed and all portfolio and investment decisions in respect to FSFR Glick JV must be approved by the FSFR Glick JV investment committee consisting of representatives of the Company and GF Equity Funding (with approval from a representative of each required). |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017.2018. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on the evaluation of our disclosure controls and procedures as of September 30, 2017,2018, our Chief Executive Officer and Chief Financial Officer concluded that as a result of the material weakness in internal control over financial reporting that is described below, our disclosure controls and procedures were not effective.effective, at the reasonable assurance level, in timely identifying, recording, processing, summarizing and reporting any material information relating to us that is required to be disclosed in the reports we file or submit under the Exchange Act.
(b) Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). under the Exchange Act. A company’s internal control over financial reporting is a process designed by, or under the supervision of, its chief executive officer and chief financial officer, and effected by such company's boardBoard of directors,Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2017,2018, based on the framework set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness is a deficiency, or a combination of deficiencies, inBased on our evaluation, management concluded that our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of a company's annual or interim financial statements will not be prevented or detected on a timely basis.
Aswas effective as of September 30, 2017, management has determined that the Company had a material weakness because it did not design or maintain effective controls to internally communicate current accounting policies and procedures including the nature of supporting documentation required to validate certain portfolio company data.2018.
These control deficiencies, in the aggregate, could result in misstatementsThe effectiveness of accounts or disclosures that would each result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected and, therefore, management has determined that these control deficiencies constitute a material weakness. This material weakness did not result in a material misstatement of the consolidated annual or interim financial statements in the year ended September 30, 2017. Because of this material weakness, management concluded that the Company did not maintain effectiveour internal control over financial reporting as of September 30, 2017.2018 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears herein.
(c) Remediation of Material Weaknesses in Internal Control Over Financial Reporting
During the fiscal year ending September 30, 2018, we will take a number of steps to remediate this material weakness, including the formalization of policies and procedures and the implementation of controls over the validation of portfolio company data. Management is committed to improving our internal control processes and believes that the measures described above should be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. We cannot assure you, however, that the steps taken will remediate such weakness, nor can we be certain of whether additional actions will be required or the costs of any such actions.
(d) Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter of 2017three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
PART III
We will file a definitive Proxy Statement for our 2018 Annual Meeting of Stockholders with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G (3) to Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference. — OTHER INFORMATION
Item 10. Directors, Executive Officers and Corporate Governance
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to our 20182019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 20182019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 20182019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 20182019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 20182019 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
PART IV
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed or incorporated by reference as part of this Annual Report:
1. Consolidated Financial Statements
|
| |
ReportReports of Independent Registered Public Accounting FirmFirms | |
Consolidated Statements of Assets and Liabilities as of September 30, 20172018 and 20162017 | |
Consolidated Statements of Operations for the Years Ended September 30, 2018, 2017 2016 and 20152016 | |
Consolidated Statements of Changes in Net Assets for the Years Ended September 30, 2018, 2017 2016 and 20152016 | |
Consolidated Statements of Cash Flows for the Years Ended September 30, 2018, 2017 2016 and 20152016 | |
| Consolidated Schedule of Investments as of September 30, 2018 | |
| Consolidated Schedule of Investments as of September 30, 2017 | |
Consolidated Schedule of Investments as of September 30, 2016 | |
| Notes to Consolidated Financial Statements | |
2. Financial Statement Schedule
The following financial statement schedule is filed herewith:
|
| |
| | |
| Schedule 12-14 — Investments in and advances to affiliates | |
3. Exhibits required to be filed by Item 601 of Regulation S-K
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
|
| | |
| | Amended and Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit a filed with the Registrant’s Registration Statement on Form N-2 (File No. 333-188904) filed on July 8, 2013). |
| | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company,Registrant, dated as of October 17, 2017 (Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on October 17, 2017). |
| | Amended and Restated Bylaws of the Registrant (Incorporated by reference to Exhibit 3.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on September 9, 2016)January 29, 2018).
|
| | Form of Common Stock Certificate (Incorporated by reference to Exhibit d filed with the Registrant’s Registration Statement on Form N-2 (File No. 333-188904) filed on July 8, 2013). |
| | Indenture among FS Senior Funding Ltd., as issuer, FS Senior Funding CLO LLC, as co-issuer, and Wells Fargo Bank, National Association, as trustee, dated as of May 28, 2015 (Incorporated by reference to Exhibit 4.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on June 3, 2015). |
| | Dividend Reinvestment Plan (Incorporated by reference to Exhibit e filed with the Registrant’s Registration Statement on Form N-2 (File No. 333-188904) filed on July 8, 2013). |
| | Investment Advisory Agreement, dated as of October 17, 2017, between the Registrant and Oaktree Capital Management, L.P. (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on October 17, 2017). |
| | Form of Custody Agreement (Incorporated by reference to Exhibit j filed with the Registrant’s Registration Statement on Form N-2 (File No. 333-188904) filed on July 8, 2013). |
| | Administration Agreement, dated as of October 17, 2017, between the Registrant and Oaktree Fund Administration, LLC (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on October 17, 2017). |
| | AmendedLoan Financing and Restated CreditServicing Agreement, dated as of September 24, 2018, by and among OCSI Senior Funding Ltd., as borrower, Registrant, as equityholder and as servicer, the lenders referredfrom time to therein, FS Senior Funding LLC, Natixis,time party thereto, Deutsche Bank AG, New York Branch, as facility agent, the other agents parties thereto and U.S.Wells Fargo Bank, National Association, dated as of October 16, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Registrants Current Report on Form 8-k (File No. 814-01013) filed October 21, 2014). |
|
| | |
| | Amendedcollateral agent and Restated Loan Sale and Contribution Agreement by and between Registrant and FS Senior Funding LLC, dated as of October 16, 2014 (Incorporated by reference to Exhibit 10.2 filed with the Registrants Current Report on Form 8-k (File No. 814-01013) filed October 21, 2014). |
| | Collateral Management Agreement by and between FS Senior Funding LLC and Registrant, dated as of November 1, 2013 (Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on November 7, 2013). |
| | Amended and Restated Credit Agreement by and among the lenders referred to therein, FS Senior Funding LLC, Natixis, New York Branch, and U.S. Bank National Association, dated as of October 16, 2014collateral custodian (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on October 21, 2014)September 25, 2018). |
| | Amended and Restated Loan Sale and Contribution Agreement, dated as of September 24, 2018, by and between Registrant, as seller, and FSOCSI Senior Funding LLC, datedLtd., as of October 16, 2014purchaser (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on October 21, 2014)September 25, 2018).
|
|
| | |
| | Loan and Security Agreement by and among Registrant, FS Senior Funding II LLC, the lenders referred to therein, Citibank, N.A., and Wells Fargo Bank, National Association, dated as of January 15, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on January 21, 2015). |
| | Loan Sale Agreement by and between Registrant and FS Senior Funding II LLC, dated as of January 15, 2015 (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on January 21, 2015). |
| | Administration Agreement by and between Registrant and FSC CT LLC dated as of January 1, 2014 (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q (File No. 814-010103) filed on February 9, 2015). |
| | Amendment No. 3 to the Amended and Restated Credit Agreement by and among the lenders referred to therein, FS Senior Funding LLC, Natixis, New York Branch, and U.S. Bank National Association, dated as of May 4, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q (File No. 814-010103) filed on May 11, 2015). |
| | Class A-R Note Purchase Agreement, by and among FS Senior Funding Ltd., as issuer, FS Senior Funding CLO LLC, as co-issuer, Natixis, New York Branch, as Class A-R Note Agent, and each of the Class A-R Noteholders parties thereto, dated as of May 28, 2015 (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Quarterly Report on Form 10-Q (File No. 814-010103) filed on August 10, 2015).
|
| | Master Transfer Agreement by and between Registrant, as the seller, and FS Senior Funding Ltd., as the buyer, dated as of May 28, 2015 (Incorporated by reference to Exhibit 10.2 filed with the Registrant’s Quarterly Report on Form 10-Q (File No. 814-010103) filed on August 10, 2015). |
| | Collateral Management Agreement by and between FS Senior Funding Ltd., as issuer, and Registrant, as collateral manager, dated as of May 28, 2015 (Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Quarterly Report on Form 10-Q (File No. 814-010103) filed on August 10, 2015). |
| | Sub-Advisory Agreement between Registrant, as collateral manager, and Fifth Street Management LLC, as sub-advisor, dated as of May 28, 2015 (Incorporated by reference to Exhibit 10.4 filed with the Registrant’s Quarterly Report on Form 10-Q (File No. 814-010103) filed on August 10, 2015). |
| | Loan and Security Agreement by and between the Registrant and East West Bank, and Registrant, dated as of January 6, 2016 (Incorporated by reference to Exhibit 10.1 filed with Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on January 12, 2016).
|
| | FifthFirst Amendment to Loan and Security Agreement, and Waiver, dated as of July 13, 2017,March 17, 2018, by and among Fifth Street Senior Floating Rate Corp., FS Senior Funding II LLCbetween the Registrant and Citibank, N.A.East West Bank (Incorporated by reference to Exhibit 10.110.2 filed with the Registrant’s CurrentQuarterly Report on Form 8-K10-Q (File No. 001-35999)814-01013) filed on July 17, 2017)May 8, 2018).
|
| | Pledge Agreement, dated as of October 17, 2017, between the CompanyRegistrant and FSH (Incorporated by reference to Exhibit 10.3 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on October 17, 2017). |
| | Sixth Amendment toAmended and Restated Loan and Security Agreement, dated as of October 25, 2017,January 31, 2018, by and among Registrant, FSOCSI Senior Funding II LLC, andthe lenders referred to therein, Citibank, N.A., and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on February 1, 2018).
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| | SeventhFirst Amendment to the Amended and Restated Loan and Security Agreement by and among the Registrant, as collateral manager, OCSI Senior Funding II LLC, as borrower, and Citibank, N.A., as administrative agent and sole lender, dated as of May 14, 2018 (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on May 16, 2018).
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| | Second Amendment to Loan and Security Agreement by and between the Registrant and East West Bank, dated as of December 6, 2017,May 21, 2018 (Incorporated by and among Registrant, FS Senior Funding II LLC and Citibank, N.A.reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on May 23, 2018).
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| | Computation of Per Share Earnings (included in the NotesSecond Amendment to the Financial Statements contained in this report)Amended and Restated Loan and Security Agreement by and among Registrant, as collateral manager, OCSI Senior Funding II LLC, as borrower, and Citibank, N.A., as administrative agent and sole lender, dated as of July 18, 2018 (Incorporated by reference to Exhibit 10.1 filed with the Registrant’s Current Report on Form 8-K (File No. 814-01013) filed on July 19, 2018). |
| | Third Amendment to the Amended and Restated Loan and Security Agreement by and among Registrant, as collateral manager, OCSI Senior Funding II LLC, as borrower, and Citibank, N.A., as administrative agent and sole lender, dated as of September 17, 2018.
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| | Joint Code of Ethics of the Registrant and Oaktree Specialty Lending Corporation.Corporation (Incorporated by reference to Exhibit 14.1 filed with the Registrant's Annual Report on Form 10-K (File No. 814-01013) filed on December 8, 2017). |
| | Code of Ethics of Oaktree Capital Management, L.P. |
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| | (Incorporated by reference to Exhibit 14.2 filed with the Registrant's Annual Report on Form 10-K (File No. 814-01013) filed on December 8, 2017). |
| 21 | | Subsidiaries of Registrant and jurisdiction of incorporation/organizations: FS Senior Funding CLO LLC - Delaware
FSOCSI Senior Funding II LLC - Delaware
FSOCSI Senior Funding Ltd. - DelawareCayman Islands
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| | Power of Attorney (included on the signature page hereto). |
| | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
| | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
| | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| OAKTREE STRATEGIC INCOME CORPORATION |
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| By: | | /s/ Edgar Lee |
| | | Edgar Lee
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| | | Chief Executive Officer |
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| By: | | /s/ Mel Carlisle |
| | | Mel Carlisle
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| | | Chief Financial Officer and Treasurer |
Date: December 8, 2017November 28, 2018
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Edgar Lee, Mel Carlisle and Mathew Pendo, and each of them (with full power to each of them to act alone), his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and on his behalf and in his name, place and stead, in any and all capacities, to sign, execute and file this Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2018, and any or all amendments to this Report, with all exhibits and any and all documents required to be filed with respect thereto, with the Securities and Exchange Commission or any other regulatory authority, granting unto such attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing appropriate or necessary to be done in order to effectuate the same, as fully to all intents and purposes as he himself might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | | Date |
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/s/ EDGAR LEE Edgar Lee
| | Chief Executive Officer (principal executive officer) | | December 8, 2017November 28, 2018
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/s/ MEL CARLISLE Mel Carlisle | | Chief Financial Officer and Treasurer (principal financial officer and principal accounting officer) | | December 8, 2017November 28, 2018
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/s/ RICHARD W. COHEN Richard W. Cohen | | Director | | December 8, 2017November 28, 2018
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/s/ JOHN B. FRANK John B. Frank | | Director | | December 8, 2017
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/s/ MARC H. GAMSIN
Marc H. Gamsin
| | Director | | December 8, 2017November 28, 2018
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/s/ CRAIG JACOBSON Craig Jacobson | | Director | | December 8, 2017November 28, 2018
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/s/ RICHARD G. RUBEN Richard G. Ruben | | Director | | December 8, 2017November 28, 2018
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/s/ BRUCE ZIMMERMAN Bruce Zimmerman | | Director | | December 8, 2017November 28, 2018
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