See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
CORPORATE CAPITAL TRUST, INC. AND SUBSIDIARY
| 1. | Principal Business and Organization |
Corporate Capital Trust, Inc. (the “Company”) was incorporated under the general corporation laws of the State of Maryland on June 9, 2010. The Company is a non-diversified closed-end management investment company and it is regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “40 Act”). The Company’s investment objective is to provide its shareholders with current income and, to a lesser extent, long-term capital appreciation, by investing primarily in the debt of privately owned U.S. companies with a focus on originated transactions sourced through the networks of its advisors.
The Company is externally managed by CNL Fund Advisors Company (“CNL”) and KKR Asset Management LLC (“KKR”) (collectively the “Advisors”), which are responsible for sourcing potential investments, analyzing and conducting due diligence on prospective investment opportunities, structuring investments and monitoring the Company’s investment portfolio on an ongoing basis. Both Advisors are registered as investment advisers with the Securities and Exchange Commission (“SEC”). CNL also provides the administrative services necessary for the Company to operate.
The Company is currently selling shares of its common stock pursuant to a registration statement on Form N-2 (as amended and supplemented, the “Registration Statement”) and it is offering to sell, on a continuous basis, shares of common stock for approximately $1.6 billion (150 million shares at an offering price of $10.85 per share) (the “Offering”). The Registration Statement was declared effective by the SEC on April 4, 2011 and the Company commenced its Offering. The Company commenced business operations on June 17, 2011 and it commenced investment operations on July 1, 2011.
As of June 30, 2012, the Company had one wholly owned financing subsidiary, CCT Funding LLC (“CCT Funding”), which was established on July 15, 2011 for the purpose of arranging a secured, revolving credit facility with a bank and to borrow money to invest in portfolio companies.
| 2. | Significant Accounting Policies |
Basis of Presentation and Principles of Consolidation - The accompanying financial statements of the Company are prepared in accordance with the instructions to Form 10-Q and accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The results of operations for interim periods are not indicative of results to be expected for the full year.
Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the SEC on March 16, 2012. The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany account balances and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements, (ii) the reported amounts of income and expenses during the reported period and (iii) disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents - Cash and cash equivalents consist of demand deposits, repurchase agreements, foreign currency, and highly liquid investments with original maturities of three months or less.
Valuation of Investments - The Company measures the value of its investments in accordance with Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure (“ASC Topic 820”), issued by the Financial Accounting Standards Board (“FASB”). Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Investments for which market quotations are readily available are valued using market quotations, which are generally obtained from independent pricing services, broker-dealers or market makers. With respect to the Company’s portfolio investments for which market quotations are not readily available, the Company’s board of directors, with the assistance of the Company’s Advisors and officers, is responsible for determining in good faith the fair value in accordance with the valuation policy approved by the board of directors. The board of directors will make this fair value determination on a quarterly basis and any other time when a decision regarding the fair value of the portfolio investments is required. A determination of fair value involves subjective judgments and estimates. Due to the inherent uncertainty of determining the fair value of portfolio investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
ASC Topic 820 also defines hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuations of these assets and liabilities, and the hierarchical levels are described as follows:
Level 1 – Quoted prices are available in active markets for identical investments as of the reporting date. Publicly listed equities, debt securities and publicly listed derivatives are generally included in Level 1. The Company does not adjust the quoted price for these investments. The Company's money market fund/short term investment funds and foreign currency are included in this category.
Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. In certain cases, debt and equity securities are valued on the basis of prices from orderly transactions for similar investments in active markets between market participants and provided by reputable dealers or independent pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrices, market transactions in comparable investments, and various relationships between investments. Investments generally included in this category are corporate bonds and loans, convertible debt indexed to publicly listed securities, foreign currency forward contracts and certain over-the-counter derivatives.
Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation. Investments generally included in this category are corporate bonds, corporate loans and common stock investments that lack observable market pricing.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy 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 it considers factors specific to the investment.
The Company has implemented Accounting Standard Update (“ASU”) No. 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU 2011-04”), which amends the existing fair value guidance within ASC Topic 820.
Security Transactions, Realized/Unrealized Gains or Losses, and Income Recognition - Security transactions are recorded on a trade-date basis. The Company measures realized gains or losses from the repayment or sale of investments using the specific identification method. The amortized cost basis of investments includes (i) the original cost and (ii) adjustments for the accretion/amortization of market discounts and premiums, original issue discount and loan origination fees. The Company reports changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in the condensed consolidated statement of operations.
Interest income is recorded on an accrual basis and includes amortization of premiums to par value and accretion of discounts to par value. Discounts and premiums to par value on securities purchased are accreted/amortized into interest income over the life of the respective security using the effective interest method. Premiums and discounts are determined based on the cash flows expected to be collected for a particular investment. Loan origination fees received in connection with the closing of investments are accreted over the contractual life of the loan based on the effective interest method as interest income. Upon prepayment of a loan or debt security, any prepayment penalties, unamortized loan origination fees, unamortized original issue discount, and unamortized market discounts are recorded as interest income.
The Company has investments in debt securities which contain a contractual payment-in-kind, or PIK, interest provision. If the borrower elects to pay, or is obligated to pay, PIK interest, and if deemed collectible in management’s judgment, then the PIK interest is computed at the contractual rate specified in the investment’s credit agreement, the computed PIK interest is added to the principal balance of the investment, and the computed PIK interest is recorded as interest income.
Loans or debt securities are placed on non-accrual status when principal or interest payments are at least 90 days past due or when there is reasonable doubt that principal or interest will be collected. Generally, accrued interest is reversed when a loan or a debt security is placed on non-accrual status. Interest payments received on non-accrual loans or debt securities may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans and debt securities are restored to accrual status when past due principal and interest is paid and, in management’s judgment, are likely to remain current. The Company may make exceptions to this treatment if the loan has sufficient collateral value and is in the process of collection.
Deferred Financing Costs - Deferred financing costs represent fees and other direct costs incurred in connection with arranging the Company’s borrowings. These amounts are initially recorded as deferred financing costs on the condensed consolidated statements of assets and liabilities and then subsequently amortized over the contractual term of the credit facility as interest expense. Deferred financing costs are stated separately on the Company's condensed consolidated statements of assets and liabilities.
Paid In Capital - The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions and marketing support fees.
Foreign Currency Translation, Transactions and Gains/Losses - Foreign currency amounts are translated into U.S. dollars on the following basis: (i) at the exchange rate on the last business day of the reporting period for the fair value of investment securities, other assets and liabilities; and (ii) at the rates of exchange prevailing on the respective recording dates for the purchase and sale of investment securities, income, expenses, gains and losses.
Net assets and fair values are presented based on the applicable foreign exchange rates described above and the Company does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held; therefore the fluctuations related to foreign exchange rate conversion are included with the net realized gain (loss) and unrealized appreciation (depreciation) on investments.
Net realized foreign exchange gains or losses arise from activity in foreign currency forward contracts, sales of foreign currency, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded by the Company and the U.S. dollar equivalent of the amounts actually received or paid by the Company. Unrealized appreciation (depreciation) from currency translation for foreign currency forward contracts and other receivables or payables is presented as net change in unrealized appreciation (depreciation) on foreign currency translation on the condensed consolidated statements of operations. Unrealized appreciation (depreciation) on foreign currency forward contracts is also reported as separate line items on the condensed consolidated statements of assets and liabilities.
Management Fees - The Company accrues for the base management fee (recorded as investment advisory fees) and performance-based incentive fees, including (i) a subordinated incentive fee on income and (ii) an incentive fee on capital gains. The Company records the liability for the incentive fee on capital gains based on a hypothetical liquidation of its investment portfolio at the end of each reporting period. Therefore the accrual for incentive fee on capital gains includes the recognition of incentive fee on both net realized gains and net unrealized appreciation, if any, although any such incentive fee associated with net unrealized appreciation is neither earned nor payable to the Advisors until net unrealized appreciation is realized as net realized gains. Additionally the determination of whether the accrued incentive fee associated with net realized gains is earned and payable to the Advisors can only be made at the end of the calendar year. The components of performance-based incentive fees are combined and expensed on the condensed consolidated statement of operations and accrued on the condensed consolidated statements of assets and liabilities as accrued performance-based incentive fees.
Organization and Offering Expenses - Organization expenses, including reimbursement payments to Advisors, are expensed on the Company’s condensed consolidated statement of operations. Continuous offering expenses, including reimbursement payments to Advisors, but excluding commission and marketing support fees, are accumulated monthly and capitalized on the condensed consolidated statements of assets and liabilities as deferred offering expenses and then subsequently expensed over a 12-month period.
Earnings per Share - Earnings per share is calculated based upon the daily weighted average number of shares of common stock outstanding during the reporting period.
Dividends and Distributions - Dividends and distributions are declared by the Company’s board of directors each calendar quarter and recognized as distribution liabilities on the ex-dividend date. The ex-dividend date for the Company’s common stock is the same as the record date. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment.
The Company has adopted a distribution reinvestment plan that provides for reinvestment of distributions on behalf of shareholders. Shareholders who have elected to participate in the distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of common stock at a price per share equivalent to the public offering price on the distribution payment date, net of commissions and marketing support fees, rather than receiving the cash distribution.
Federal Income Taxes - The Company has elected to be treated for federal income tax purposes, and intends to maintain its qualification as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code (the “Code”). Generally, a RIC is not subject to federal income taxes on distributed income and gains if it distributes at least 90% of “Investment Company Taxable Income,” as defined in the Code. The Company intends to distribute sufficient dividends to maintain its RIC status each year and it does not anticipate paying a material level of federal income taxes in the future.
The Company is also generally subject to nondeductible federal excise taxes if it does not distribute an amount at least equal to the sum (i) 98% of net ordinary income, (ii) 98.2% of the Company’s capital gains in excess of capital losses for the one-year period generally ending on October 31 of the calendar year and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which the Company paid no federal income tax. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this excess taxable income.
3. Investments
The Company is engaged in a strategy to invest primarily in the debt of privately owned U.S. companies. The primary investment concentrations include (i) senior debt securities and (ii) subordinated debt securities. The fair value of senior and subordinated debt investments will generally fluctuate with, among other things, changes in prevailing interest rates, the general supply of, and demand for, debt capital among private and public companies, general domestic and global economic conditions, the condition of certain financial markets, developments or trends in any particular industry and changes in the financial condition and credit quality of each security’s issuer.
Investment purchases, sales and principal payments/paydowns are summarized below for the three months and six months ended June 30, 2012. These purchase and sale amounts exclude short-term investments (i.e. money market fund investments) purchase and sale transactions. The Company did not hold any investments prior to July 1, 2011.
| | | Three Months Ended
June 30, 2012 | | | Six Months Ended
June 30, 2012 | |
| Investment purchases, at cost | | $ | 208,485,240 | | | $ | 344,500,850 | |
| Investment sales, proceeds | | | 17,265,916 | | | | 38,811,976 | |
| Principal payments/paydowns, proceeds | | | 7,028,546 | | | | 9,401,188 | |
At June 30, 2012, none of the Company’s debt investments were on non-accrual status (in default).
As of June 30, 2012, the Company’s investment portfolio consisted of the following:
| Asset Category | | Cost | | | Fair Value | | | Percentage of Portfolio | | | Percentage of Net Assets | |
| Senior debt securities | | $ | 277,527,322 | | | $ | 278,812,226 | | | | 68.7 | % | | | 98.2 | % |
| Subordinated debt securities | | | 125,819,845 | | | | 126,505,550 | | | | 31.2 | | | | 44.5 | |
| Total debt securities | | | 403,347,167 | | | | 405,317,776 | | | | 99.9 | | | | 142.7 | |
| Common stock | | | 448,908 | | | | 480,331 | | | | 0.1 | | | | 0.2 | |
| Subtotal | | | 403,796,075 | | | | 405,798,107 | | | | 100.0 | % | | | 142.9 | |
| Short term investments | | | 10,712,703 | | | | 10,712,703 | | | | | | | | 3.7 | |
| Total investments | | $ | 414,508,778 | | | $ | 416,510,810 | | | | | | | | 146.6 | % |
At December 31, 2011, the Company’s investment portfolio consisted of the following:
| Asset Category | | Cost | | | Fair Value | | | Percentage of Portfolio | | | Percentage of Net Assets | |
| Senior debt securities | | $ | 71,398,157 | | | $ | 71,609,433 | | | | 67.2 | % | | | 109.9 | % |
| Subordinated debt securities | | | 34,613,494 | | | | 34,877,800 | | | | 32.7 | | | | 53.5 | |
| Total debt securities | | | 106,011,651 | | | | 106,487,233 | | | | 99.9 | | | | 163.4 | |
| Preferred stock | | | 99,595 | | | | 102,524 | | | | 0.1 | | | | 0.2 | |
| Subtotal | | | 106,111,246 | | | | 106,589,757 | | | | 100.0 | % | | | 163.6 | |
| Short term investments | | | 7,714,752 | | | | 7,714,752 | | | | | | | | 11.8 | |
| Total investments | | $ | 113,825,998 | | | $ | 114,304,509 | | | | | | | | 175.4 | % |
The industry composition, geographic dispersion, and local currencies of the Company's investment portfolio at fair value, excluding short-term investments, as of June 30, 2012 and December 31, 2011 was as follows:
| Industry Composition | | June 30, 2012 | | | December 31, 2011 | |
| Media | | | 17.5 | % | | | 8.1 | % |
| Software & Services | | | 12.4 | | | | 14.6 | |
| Capital Goods | | | 10.4 | | | | 3.4 | |
| Materials | | | 7.9 | | | | 3.4 | |
| Health Care Equipment & Services | | | 7.1 | | | | 6.9 | |
| Retailing | | | 7.0 | | | | 12.6 | |
| Insurance | | | 6.8 | | | | 2.4 | |
| Technology Hardware & Equipment | | | 5.7 | | | | 4.6 | |
| Diversified Financials | | | 4.7 | | | | 7.8 | |
| Telecommunication Services | | | 3.8 | | | | 9.0 | |
| Consumer Services | | | 3.7 | | | | 4.9 | |
| Remaining Industries | | | 13.0 | | | | 22.3 | |
| | | | | | | | | |
| Total | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
Geographic Dispersion (1) | | | | | | | | |
| United States | | | 94.3 | % | | | 97.4 | % |
| United Kingdom | | | 1.5 | | | | 1.5 | |
| Canada | | | 1.4 | | | | 1.1 | |
| Luxembourg | | | 1.1 | | | | — | |
| Remaining Countries | | | 1.7 | | | <0.1 | |
| | | | | | | | | |
| Total | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
| Local Currency | | | | | | | | |
| U.S. Dollar | | | 97.7 | % | | | 99.0 | % |
| Euro | | | 2.3 | | | | 1.0 | |
| British Pound Sterling | | <0.1 | | | | — | |
| | | | | | | | | |
| Total | | | 100.0 | % | | | 100.0 | % |
(1) The geographic dispersion is determined by the portfolio company’s country of domicile.
During the period ended June 30, 2012, the Company did not hold any non-controlled investments where it owned 5% or more of a portfolio company’s outstanding voting securities as investments in “affiliated” companies. In addition, the Company did not hold any investments in “controlled” companies where it owned more than 25% of a portfolio company’s outstanding voting securities.
4. Foreign Currency Forward Contracts
The Company may enter into foreign currency forward contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies and to economically hedge the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A foreign currency forward contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market exchange rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when forward contracts are settled. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts; the Company attempts to limit counterparty risk by only dealing with creditworthy counterparties.
There were no open foreign currency forward contracts at December 31, 2011. At June 30, 2012, the details of the Company's open foreign currency forward contracts were as follows:
| Foreign Currency | | Settlement Date | | Amount and Transaction | | US$ Value at Settlement Date | | | US$ Value at June 30, 2012 | | | Unrealized Appreciation/ (Depreciation) | |
| EUR | | Nov. 29, 2012 | | 5,300,000 Sold | | $ | 6,644,080 | | | $ | 6,718,222 | | | $ | (74,142 | ) |
| EUR | | Jan. 3, 2013 | | 2,300,000 Sold | | | 2,917,964 | | | | 2,916,812 | | | | 1,152 | |
| Total | | | | | | $ | 9,562,044 | | | $ | 9,635,034 | | | $ | (72,990 | ) |
| 5. | Fair Value of Financial Instruments |
The Company’s investments were categorized in the fair value hierarchy as follows at June 30, 2012 and December 31, 2011:
| | | June 30, 2012 | |
| Investment Type | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Senior debt securities | | $ | — | | | $ | 261,911,439 | | | $ | 16,900,787 | | | $ | 278,812,226 | |
| Subordinated debt securities | | | — | | | | 119,445,265 | | | | 7,060,285 | | | | 126,505,550 | |
| Common stock | | | — | | | | — | | | | 480,331 | | | | 480,331 | |
| Subtotal | | | — | | | | 381,356,704 | | | | 24,441,403 | | | | 405,798,107 | |
| Short term investments | | | 10,712,703 | | | | — | | | | — | | | | 10,712,703 | |
| Total | | $ | 10,712,703 | | | $ | 381,356,704 | | | $ | 24,441,403 | | | $ | 416,510,810 | |
| Derivative Type | | | | | | | | | | | | |
| Foreign currency forward contracts | | $ | — | | | $ | (72,990 | ) | | $ | — | | | $ | (72,990 | ) |
| | | December 31, 2011 | |
| Investment Type | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Senior debt securities | | $ | — | | | $ | 66,957,496 | | | $ | 4,651,937 | | | $ | 71,609,433 | |
| Subordinated debt securities | | | — | | | | 33,914,267 | | | | 963,533 | | | | 34,877,800 | |
| Preferred stock | | | 102,524 | | | | — | | | | — | | | | 102,524 | |
| Subtotal | | | 102,524 | | | | 100,871,763 | | | | 5,615,470 | | | | 106,589,757 | |
| Short term investments | | | 7,714,752 | | | | — | | | | — | | | | 7,714,752 | |
| Total | | $ | 7,817,276 | | | $ | 100,871,763 | | | $ | 5,615,470 | | | $ | 114,304,509 | |
At June 30, 2012, the Company held 13 distinct investment positions that were classified as Level 3, representing an aggregate fair value of $24,441,403 and 5.9% of the total investment portfolio. The ranges of unobservable inputs used in the fair value measurement of the Company’s Level 3 investments as of June 30, 2012 were as follows:
| Asset Group | | | Fair Value | | | Valuation Techniques (1) | | Unobservable Input (2) | | Range (Weighted Average) |
| | | $ | 9,825,030 | | | Broker Quotes | | Mid price | | 98.875-100.3125 (99.725) |
| | | | | | | Broker Quotes | | Mid price | | 97.5-101.0 (98.0) |
| Senior debt securities | | | | | | | | Yield-to-maturity | | 6.1-8.4% (7.9%) |
| | | | 7,075,757 | | | Market Comparables | | Discount margin | | 524-771 bps (719 bps) |
| | | | | | | | | Net EBITDA multiple | | 2.1-3.4x (2.3x) |
| | | | | | | | | Illiquidity discount | | 0.6-1.0% (0.9%) |
| | | | | | | Broker Quotes | | Bid price | | 102.33 (NA) |
| | | | | | | | | Yield | | 12.65-15.3% (14.2%) |
| | | | | | | Market Comparables | | Discount margin | | 1115-1450 bps (1305 bps) |
| Subordinated debt securities | | | 7,060,285 | | | | | Leverage EBITDA multiple | | 5.3x (NA) |
| | | | | | | | | Illiquidity discount | | 2% (NA) |
| | | | | | | Discounted Cash Flow | | Weighted avg. cost of capital | | 12.0% (NA) |
| | | | | | | Trade Price Indexing | | Index option adjusted spread | | +53 bps (NA) |
| | | | | | | | | EBITDA multiple | | 13.9x (NA) |
| Common stock | | | 480,331 | | | Market Comparables | | Illiquidity discount | | 15 % (NA) |
| | | | | | | Discounted Cash Flow | | Weighted avg. cost of capital | | 12.8% (NA) |
| Total | | $ | 24,441,403 | | | | | . | | |
| | |
| (1) | For the assets and investment that have more than one valuation technique, the Company may rely on the stated techniques individually or in the aggregate based on a weight ascribed to each valuation technique, ranging from 0 – 100%. Broker quotes obtained for valuation purposes are reviewed by the Company relative to other valuation techniques. |
| | |
| (2) | Weighted average amounts are based on the estimated fair values. If noted as NA, then the number of inputs is too few to compute the weighted average for the range. |
The more significant unobservable inputs used in the fair value measurement of the Company’s senior and subordinated loan investments are quotes obtained from unaffiliated brokers. In the event that there are limited broker quotes, then the valuation process will further rely on the inputs from comparable investments and/or discounted cash flow analysis. Depending on the type of loan investment position held by the Company, the relative comparable value analysis may rely on any of (i) market yields, (ii) discount margin, (iii) illiquidity discount and (iv) leverage EBITDA multiples analysis to either confirm a single broker quote, or to generate a fair value in the absence of any broker quote. Other significant unobservable inputs used in the fair value measurement of the Company’s investments are also disclosed in the table above. Any significant increases or decreases in these unobservable inputs would result in significant increases or decreases in the fair value of the Company’s investments.
The following is a reconciliation for the three months ended June 30, 2012 of investments for which Level 3 inputs were used in determining fair value:
| | | Senior Debt Securities | | | Subordinated Debt Securities | | | Common Stock | | | Total | |
| Fair Value Balance as of April 1, 2012 | | $ | 8,560,560 | | | $ | 6,006,623 | | | $ | 448,908 | | | $ | 15,016,091 | |
| Purchases | | | 10,487,336 | | | | 1,120,486 | | | | — | | | | 11,607,822 | |
| Sales | | | — | | | | — | | | | — | | | | — | |
| Net realized gain | | | 338 | | | | — | | | | — | | | | 338 | |
Net change in unrealized appreciation (1) | | | 105,524 | | | | (67,137 | ) | | | 31,423 | | | | 69,810 | |
| Principal reduction | | | (2,258,210 | ) | | | — | | | | — | | | | (2,258,210 | ) |
| Net discount accretion | | | 5,239 | | | | 313 | | | | — | | | | 5,552 | |
| Transfers into Level 3 | | | — | | | | — | | | | — | | | | — | |
| Fair Value Balance as of June 30, 2012 | | $ | 16,900,787 | | | $ | 7,060,285 | | | $ | 480,331 | | | $ | 24,441,403 | |
Change in net unrealized appreciation (depreciation) in investments still held as of June 30, 2012 (1) | | $ | 124,738 | | | $ | (67,128 | ) | | $ | 31,423 | | | $ | 57,610 | |
| (1) | Amount is included in the related amount on investments in the condensed consolidated statement of operations. |
The following is a reconciliation for the six months ended June 30, 2012 of investments for which Level 3 inputs were used in determining fair value:
| | | Senior Debt Securities | | | Subordinated Debt Securities | | | Common Stock | | | Total | |
| Fair Value Balance as of January 1, 2012 | | $ | 4,651,937 | | | $ | 963,533 | | | $ | — | | | $ | 5,615,470 | |
| Purchases | | | 14,185,435 | | | | 7,090,290 | | | | 448,908 | | | | 21,724,633 | |
| Sales | | | — | | | | — | | | | — | | | | — | |
| Net realized gain | | | 967 | | | | 11,960 | | | | — | | | | 12,927 | |
Net change in unrealized appreciation (1) | | | 144,031 | | | | (6,328 | ) | | | 31,423 | | | | 169,126 | |
| Principal reduction | | | (2,292,619 | ) | | | (998,479 | ) | | | — | | | | (3,291,098 | ) |
| Net discount accretion | | | 9,969 | | | | (691 | ) | | | — | | | | 9,278 | |
| Transfers into Level 3 | | | 201,067 | | | | — | | | | — | | | | 201,067 | |
| Fair Value Balance as of June 30, 2012 | | $ | 16,900,787 | | | $ | 7,060,285 | | | $ | 480,331 | | | $ | 24,441,403 | |
Change in net unrealized appreciation (depreciation) in investments still held as of June 30, 2012 (1) | | $ | 171,616 | | | $ | (28,919 | ) | | $ | 31,423 | | | $ | 142,697 | |
| (1) | Amount is included in the related amount on investments in the condensed consolidated statement of operations. |
There were no investments held for the six month period ended June 30, 2011. One senior debt security was transferred into the Level 3 hierarchy during the six months ended June 30, 2012 and this investment was transferred at fair value as of the beginning of the period. This transfer from Level 2 to Level 3 was based on the observed lack of liquidity (i.e. insufficient number of broker quotes) based on information supplied by a third party pricing source, whereby such liquidity information is routinely reviewed no less frequently than monthly. All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Company’s condensed consolidated statements of operations.
The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying value of cash and foreign currency is classified as Level 1 with respect to the fair value hierarchy. The carrying value of the revolving credit facility approximates its fair value and it would be classified as Level 2 with respect to the fair value hierarchy.
| 6. | Agreements and Related Party Transactions |
The Company entered into a managing dealer agreement with CNL Securities Corp., an affiliate of CNL. CNL Securities Corp. serves as the managing dealer of the Offering and in connection therewith receives selling commissions of up to 7% of gross offering proceeds, a marketing support fee of up to 3% of gross offering proceeds, and reimbursement of due diligence and certain other expenses incurred in connection with the Offering. All or any portion of these fees and expense reimbursements may be reallowed to participating brokers. The Company will pay a maximum sales load of 10% of gross offering proceeds for all combined selling commissions, marketing support fees and expense reimbursements.
The Company entered into an investment advisory agreement with CNL (together with one amendment, the “Investment Advisory Agreement”) for the overall management of the Company’s investment activities. The Company and CNL have entered into a sub-advisory agreement with KKR (the “Sub-Advisory Agreement”), under which KKR is responsible for the day-to-day management of the Company’s investment portfolio. CNL earns a base management fee equal to an annual rate of 2% of the Company’s average gross assets and it is computed and paid monthly. CNL also earns a performance-based incentive fee that is comprised of the following two parts: (i) a subordinated incentive fee on pre-incentive fee net investment income, and (ii) an incentive fee on capital gains. The subordinated incentive fee, paid quarterly if earned, is computed as the sum of (A) 100% of quarterly pre-incentive fee net investment income in excess of 1.75% of average adjusted capital up to a limit of 0.4375% of average adjusted capital, and (B) 20% of pre-incentive net investment income in excess of 2.1875% of average adjusted capital. The incentive fee on capital gains, paid annually if earned, is equal to 20% of realized capital gains on a cumulative basis from inception, net of (A) all realized capital losses and unrealized depreciation on a cumulative basis and (B) net of the aggregate amount of any previously paid incentive fee on capital gains. CNL compensates KKR for advisory services that it provides to the Company with 50% of the base management fees and performance-based incentive fees that CNL receives under the Investment Advisory Agreement.
The terms of the Investment Advisory Agreement entitle CNL (and indirectly KKR) to receive up to 5% of gross proceeds in connection with the Offering as reimbursement for organization and offering expenses incurred by the Advisors on behalf of the Company. The Advisors waived the requirement for the Company to reimburse them for organization and offering expenses for the period from June 17, 2011 through January 31, 2012. The waiver of the organization and offering expense reimbursement requirements did not reduce the overall amount of organization and offering expenses incurred by the Advisors that is eligible for reimbursement by the Company in future periods. Beginning February 1, 2012, the Company implemented an expense accrual rate of 0.75% of gross offering proceeds to initiate the reimbursement of organization and offering expenses incurred by the Advisors.
The Company entered into an administrative services agreement with CNL (the “Administrative Services Agreement”) whereby CNL performs, and oversees the performance of, various administrative services on behalf of the Company. Administrative services may include transfer agency oversight and supervisory services, shareholder communication services, general ledger accounting, maintaining required financial records, financial reporting, internal audit, preparations of report to the Company's board of directors and lenders, calculating the Company’s net asset value, filing tax returns, preparing and filing SEC reports, preparing, printing and disseminating shareholder reports, overseeing the payment of the Company’s expenses, oversight of services providers and the performance of administrative and professional services rendered to the Company by others. CNL may also enter into agreements with its affiliates for the performance of select administrative services or the retention of personnel. The Company reimburses CNL and its affiliates for the professional services and expenses it incurs in performing its administrative obligations on behalf of the Company.
CNL, certain CNL affiliates, and KKR receive compensation and reimbursement of expenses in connection with (i) the performance and supervision of administrative services and (ii) the Offering. Related party fees, expenses and reimbursement of expenses incurred in the three and six month period ended June 30, 2012 and three and six month period ended June 30, 2011 are summarized below:
Related Party | | Source Agreement | | Description | | Three Months Ended June 30, 2012 | | | Three Months Ended
June 30, 2011 | | | Six Months Ended June 30, 2012 | | | Six Months Ended June 30, 2011 | |
| CNL Securities Corp. | | Managing Dealer Agreement | | Selling commissions and marketing support fees | | $ | 13,767,017 | | | $ | 199,750 | | | $ | 22,636,040 | | | $ | 199,750 | |
| CNL and KKR | | Investment Advisory Agreement | | Base management fees (investment advisory fees) | | | 1,621,659 | | | | 973 | | | | 2,515,819 | | | | 973 | |
| CNL and KKR | | Investment Advisory Agreement | | Performance-based incentive fees (1) | | | (342,279 | ) | | | — | | | | 532,967 | | | | — | |
| CNL and KKR | | Investment Advisory Agreement | | Organization and offering expenses reimbursement (2) | | | 1,087,899 | | | | — | | | | 1,615,640 | | | | — | |
| CNL | | Administrative Services Agreement | | Administrative and compliance services | | | 199,597 | | | | 12,639 | | | | 318,415 | | | | 12,639 | |
| (1) | During the six months ended June 30, 2012, the Company recorded performance-based incentive fee expense of $532,967, comprised of (i) $532,967 expense provision for incentive fee on capital gains and (ii) no expense provision for subordinated incentive fee on income. The incentive fee on capital gains was not earned by the Advisors nor payable to the Advisors as of June 30, 2012. |
| (2) | The Advisors received reimbursement payments for organization and offering expenses in the amount of $1,184,860 in the six months ended June 30, 2012, including $896,218 for organization expenses and $288,642 for offering expenses. The Company recorded a reimbursement payable to the Advisors in the amount of $430,780 for offering expenses as of June 30, 2012 which is included in other accrued expenses and liabilities on the condensed consolidated statements of assets and liabilities. During the six months ended June 30, 2012, the Advisors incurred $1,418,725 in additional offering costs. As of June 30, 2012, approximately $5.0 million was the net amount of offering expenses incurred by the Advisors, net of additional offering costs, reimbursement payments and amounts payable to the Advisors in the six months ended June 30, 2012. |
On June 7, 2011, the Company entered into an Expense Support and Conditional Reimbursement Agreement (the “Expense Support Agreement”) with CNL and KKR pursuant to which CNL and KKR jointly and severally agreed to pay to the Company all operating expenses (an “Expense Support Payment”) during the Expense Support Payment Period between June 17, 2011 to December 31, 2011. On December 16, 2011, the Company and the Advisors entered into an amendment to the Expense Support Agreement, effective January 1, 2012, that extended the terminal date of the Expense Support Payment Period to March 31, 2012 and reduced the Reimbursement Ratio from 100% to 65% of the Company’s Operating Expenses. The Amendment also redefined Operating Expenses as all operating costs and expenses paid or incurred by the Company, as determined under GAAP, including base advisory fees payable pursuant to the Investment Advisory Agreement, and excluding (i) performance-based incentive fees payable pursuant to the Investment Advisory Agreement, (ii) organization and offering expenses, and (iii) all interest costs related to borrowings for such period. On March 16, 2012, the Company and the Advisors entered into an amendment and restatement of the Expense Support Agreement, effective April 1, 2012, that extended the terminal date of the Expense Support Payment Period to June 30, 2012 and reduced the Reimbursement Ratio from 65% to 25% of the Company’s Operating Expenses.
Presented below is a summary of Expense Support Payments and the associated terminal eligibility dates for Reimbursement Payments for the year ending December 31, 2011 and the six months ended June 30, 2012.
| Period | | Expense Support Payments | | Eligible for Reimbursement Payments through |
| Period ended December 31, 2011 | | $ | 1,375,592 | | December 31, 2014 |
| Six months ended June 30, 2012 | | | 1,590,221 | | December 31, 2015 |
| Total | | $ | 2,965,813 | | |
During the term of the Expense Support Agreement, the Advisors are entitled to an annual year-end reimbursement payment by the Company for unreimbursed Expense Support Payments made under the Expense Support Agreement (a “Reimbursement Payment”), but such Reimbursement Payments may only be paid (i) within three years after the year in which such Expense Support Payments are attributable, (ii) to the extent that it would not cause the Company’s Other Operating Expenses (Operating Expenses excluding base advisory fees) to exceed 1.91% of average net assets attributable to common shares as of the end of any such calendar year and (iii) after January 1, 2013. As of June 30, 2012 the Company has accrued $30,093 for Reimbursement Payment obligations and such amount has been recorded as (i) reimbursement of expense support on the condensed consolidated statement of operations and (ii) accrued reimbursement of expense support on the condensed consolidated statements of assets and liabilities. As a result, the Other Operating Expense-to-average net asset ratio is equal to 1.91%, annualized. The Company records the liability for the Reimbursement Payments based on a hypothetical liquidation of its investment portfolio at the end of each reporting period. Management believes that additional liabilities for Reimbursement Payments are not probable as of June 30, 2012.
Indemnification - The Investment Advisory Agreement and the Sub-Advisory Agreement provide certain indemnification to the Advisors, their directors, officers, persons associated with the Advisors, and their affiliates. As of June 30, 2012, management believes that the risk of incurring any losses for such indemnification is remote. The managing dealer agreement provides certain indemnification to the managing dealer and each participating broker and their respective officers, directors, partners, employees, associated persons, agents and control persons. As of June 30, 2012, management believes that the risk of incurring any losses for such indemnification is remote.
The following information sets forth the computation of basic and diluted net increase in net assets from operations per share (earnings per share).
| Basic and Diluted Net Increase in Net Assets Per Share |
| | | Three Months Ended June 30, 2012 | | | Three Months Ended June 30, 2011 | | | Six Months Ended June 30, 2012 | | | Six Months Ended June 30, 2011 | |
| Numerator - net increase in net assets resulting from operations | | $ | 2,075,699 | | | $ | — | | | $ | 7,551,627 | | | $ | — | |
| Denominator - Weighted average shares outstanding | | | 22,102,008 | | | | 60,465 | | | | 16,525,646 | | | | 41,449 | |
Basic/diluted net increase in net assets from operations per share (1) | | $ | 0.09 | | | $ | — | | | $ | 0.46 | | | $ | — | |
| (1) | Diluted and basic net increase in net assets from operations per share were equivalent in each period because there were no common stock equivalents outstanding in each period. |
The Company's board of directors declared distributions for 26 record dates in the six months ended June 30, 2012. Declared distributions are paid monthly. The total of declared distributions and the sources of distribution payments for the six months ended June 30, 2012 are presented in the table below. There were no distributions for the six months ended June 30, 2011.
| Distributions | | Per Share | | | Amount | | | Allocation | |
| For three months ended March 31, 2012 (13 record dates) | | $ | 0.19 | | | $ | 1,987,103 | | | | |
| For three months ended June 30, 2012 (13 record dates) | | | 0.19 | | | | 4,107,381 | | | | |
| Total Distributions for the six months ended June 30, 2012 | | $ | 0.38 | | | $ | 6,094,484 | | | | 100.0 | % |
| From Net Investment Income | | $ | 0.29 | | | $ | 4,854,946 | | | | 79.7 | |
| From Realized Gains | | | 0.09 | | | | 1,239,538 | | | | 20.3 | |
For federal income tax purposes, the distributions paid to shareholders for the six months ended June 30, 2012 are expected to be fully taxable as ordinary income and management does not expect to classify any portion of the distributions as return of capital. The tax classification of the calendar year 2012 distributions will be finalized after the end of the calendar year and then reported to shareholders.
On June 29, 2012, the Company’s board of directors declared a distribution of $0.014606 per share for 13 record dates beginning July 3, 2012 and ending on September 25, 2012.
On January 4, 2012, January 23, 2012 and February 28, 2012, the Company’s board of directors increased the public offering price per share of common stock under the Offering to $10.40, $10.65 and $10.85, respectively, to ensure that the associated net offering price per share, exclusive of sales load ($9.360, $9.585 and $9.765, respectively) equaled or exceeded the net asset value per share on each subsequent subscription closing date and distribution reinvestment date.
