SLR Senior Investment 10Q 2020 Q3 Quarterly report

SLR Senior Investment 10-Q2020 Q3 Quarterly report

Content analysis

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter Ended September 30, 2020

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 814-00849

SOLAR SENIOR CAPITAL LTD.

(Exact name of registrant as specified in its charter)


Maryland		27-4288022
(State of Incorporation)		(I.R.S. Employer Identification No.)
500 Park Avenue New York, N.Y.		10022
(Address of principal executive offices)		(Zip Code)

(212) 993-1670

(Registrant’s telephone number, including area code)

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


Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share	SUNS	The NASDAQ Global Select Market

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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

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

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

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

The number of shares of the registrant’s Common Stock, $.01 par value, outstanding as of October 30, 2020 was 16,049,034.

SOLAR SENIOR CAPITAL LTD.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020

TABLE OF CONTENTS


		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Assets and Liabilities as of September 30, 2020 (unaudited) and December 31, 2019		3
	Consolidated Statements of Operations for the three and nine months ended September 30, 2020 (unaudited) and the three and nine months ended September 30, 2019 (unaudited)		4
	Consolidated Statements of Changes in Net Assets for the three and nine months ended September 30, 2020 (unaudited) and the three and nine months ended September 30, 2019 (unaudited)		5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 (unaudited) and the nine months ended September 30, 2019 (unaudited)		6
	Consolidated Schedule of Investments as of September 30, 2020 (unaudited)		7
	Consolidated Schedule of Investments as of December 31, 2019		10
	Notes to Consolidated Financial Statements (unaudited)		13
	Report of Independent Registered Public Accounting Firm		28
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43
Item 4.	Controls and Procedures		43

PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		44
Item 1A.	Risk Factors		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3.	Defaults Upon Senior Securities		48
Item 4.	Mine Safety Disclosures		48
Item 5.	Other Information		48
Item 6.	Exhibits		49
	Signatures		50

PART I. FINANCIAL INFORMATION

In this Quarterly Report, “Solar Senior”, “Company”, “Fund”, “we”, “us”, and “our” refer to Solar Senior Capital Ltd. unless the context states otherwise.

Item 1.

Financial Statements

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES

(in thousands, except share amounts)


	September 30, 2020 (unaudited)			December 31, 2019
Assets
Investments at fair value:
Companies less than 5% owned (cost: $301,805 and $363,947, respectively)	$	295,613		$	361,665
Companies more than 25% owned (cost: $98,439 and $98,439, respectively)		93,867			98,600
Cash		6,306			7,054
Cash equivalents (cost: $164,987 and $99,898, respectively)		164,987			99,898
Interest receivable		1,319			1,933
Dividends receivable		1,753			1,893
Receivable for investments sold		36			6,667
Prepaid expenses and other assets		253			248

Total assets	$	564,134		$	577,958


Liabilities
Debt ($139,303 and $211,202 face amounts, respectively, reported net of unamortized debt issuance costs of $2,105 and $1,901, respectively. See note 7)	$	137,198		$	209,301
Payable for investments and cash equivalents purchased		170,028			101,811
Distributions payable		1,605			1,885
Management fee payable (see note 3)		314			426
Interest payable (see note 7)		524			1,172
Administrative services payable (see note 3)		566			826
Other liabilities and accrued expenses		537			723

Total liabilities	$	310,772		$	316,144

Commitments and contingencies (see note 10)

Net Assets
Common stock, par value $0.01 per share, 200,000,000 and 200,000,000 common shares authorized, respectively, and 16,049,034 and 16,046,214 issued and outstanding, respectively	$	160		$	160
Paid-in capital in excess of par		282,229			282,181
Accumulated distributable net loss		(29,027	)		(20,527	)

Total net assets	$	253,362		$	261,814

Net Asset Value Per Share	$	15.79		$	16.32

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except share amounts)


	Three months ended						Nine months ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
INVESTMENT INCOME:
Interest:
Companies less than 5% owned	$	5,428		$	7,829		$	17,701		$	23,317
Companies 5% to 25% owned		—			281			—			386
Dividends:
Companies more than 25% owned		2,125			2,265			6,375			6,795
Other income:
Companies less than 5% owned		315			21			425			113
Companies 5% to 25% owned		—			—			—			27

Total investment income		7,868			10,396			24,501			30,638

EXPENSES:
Management fees (see note 3)	$	1,036		$	1,223		$	3,180		$	3,582
Performance-based incentive fees (see note 3)		—			535			95			1,604
Interest and other credit facility expenses (see note 7)		1,927			2,764			6,070			8,238
Administrative services expense (see note 3)		370			405			1,104			1,201
Other general and administrative expenses		442			416			1,186			1,170

Total expenses		3,775			5,343			11,635			15,795

Management fees waived (see note 3)		(722	)		(67	)		(2,606	)		(526	)
Performance-based incentive fees waived (see note 3)		—			(535	)		(95	)		(1,596	)

Net expenses		3,053			4,741			8,934			13,673

Net investment income	$	4,815		$	5,655		$	15,567		$	16,965


REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND CASH EQUIVALENTS:
Net realized gain (loss) on investments and cash equivalents:
Companies less than 5% owned	$	37		$	(6,973	)	$	144		$	(6,760	)
Companies 5% to 25% owned		—			1,979			—			1,979

Net realized gain (loss) on investments and cash equivalents.		37			(4,994	)		144			(4,781	)

Net change in unrealized gain (loss) on investments and cash equivalents:
Companies less than 5% owned		3,794			7,603			(3,910	)		3,932
Companies 5% to 25% owned		—			(1,046	)		—			1,174
Companies more than 25% owned		—			(2,050	)		(4,733	)		(150	)

Net change in unrealized gain (loss) on Investments and cash equivalents		3,794			4,507			(8,643	)		4,956

Net realized and unrealized gain (loss) on investments and cash equivalents		3,831			(487	)		(8,499	)		175


NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS	$	8,646		$	5,168		$	7,068		$	17,140

EARNINGS PER SHARE (see note 5)	$	0.54		$	0.32		$	0.44		$	1.07

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (unaudited)

(in thousands, except share amounts)


	Three months ended						Nine months ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Increase (Decrease) in net assets resulting from operations:
Net investment income	$	4,815		$	5,655		$	15,567		$	16,965
Net realized gain (loss)		37			(4,994	)		144			(4,781	)
Net change in unrealized gain (loss)		3,794			4,507			(8,643	)		4,956

Net increase in net assets resulting from operations		8,646			5,168			7,068			17,140


Distributions to stockholders:
From net investment income		(4,816	)		(5,655	)		(15,568	)		(16,965	)


Capital transactions (see note 12):
Reinvestment of distributions		��			17			48			72

Net increase in net assets resulting from capital transactions		—			17			48			72

Total increase (decrease) in net assets		3,830			(470	)		(8,452	)		247
Net assets at beginning of period		249,532			262,109			261,814			261,392

Net assets at end of period	$	253,362		$	261,639		$	253,362		$	261,639


Capital share activity (see note 12):
Common stock issued from reinvestment of distributions		—			992			2,820			4,242

Net increase from capital share activity		—			992			2,820			4,242

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)


	Nine months ended
	September 30, 2020			September 30, 2019
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations	$	7,068		$	17,140
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities:
Net realized (gain) loss on investments and cash equivalents		(144	)		4,781
Net change in unrealized (gain) loss on investments		8,643			(4,956	)
(Increase) decrease in operating assets:
Purchase of investments		(51,540	)		(72,199	)
Proceeds from disposition of investments		114,980			54,069
Net accretion of discount on investments		(833	)		(999	)
Capitalization of payment-in-kind interest		(321	)		(496	)
Collection of payment-in-kind interest		—			748
Receivable for investments sold		6,631			(728	)
Interest receivable		614			(629	)
Dividends receivable		140			—
Prepaid expenses and other assets		(5	)		(56	)
Increase (decrease) in operating liabilities:
Payable for investments and cash equivalents purchased		68,217			156,938
Management fee payable		(112	)		(33	)
Performance-based incentive fees payable		—			(106	)
Administrative services expense payable		(260	)		(250	)
Interest payable		(648	)		26
Other liabilities and accrued expenses		(186	)		(37	)

Net Cash Provided by Operating Activities		152,244			153,213

Cash Flows from Financing Activities:
Cash distributions paid		(15,800	)		(16,893	)
Deferred financing costs		527			367
Proceeds from issuance of unsecured debt		84,270			—
Proceeds from borrowings		69,200			103,027
Repayments of borrowings		(226,100	)		(52,200	)

Net Cash Provided by (Used in) Financing Activities		(87,903	)		34,301


NET INCREASE IN CASH AND CASH EQUIVALENTS		64,341			187,514

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		106,952			4,875


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	171,293		$	192,389

Supplemental disclosure of cash flow information:
Cash paid for interest	$	6,718		$	8,212

Non-cash financing activities consist of the reinvestment of dividends of $48 and $72 for the nine months ended September 30, 2020 and September 30, 2019, respectively.

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited)

September 30, 2020

(in thousands, except share/unit amounts)


Description	Industry	Spread above Index ⁽³⁾			Libor Floor			Interest Rate ⁽¹⁾			Acquisition Date		Maturity Date		Par Amount		Cost		Fair Value
Bank Debt/Senior Secured Loans — 116.6%
Advantage Sales and Marketing, Inc.⁽²⁾.	Professional Services		L+325			1.00	%		4.25	%		2/14/2018		7/23/2021	$	4,862	$	4,837	$	4,862
Advantage Sales and Marketing, Inc.	Professional Services		L+650			1.00	%		7.50	%		2/14/2013		7/25/2022		8,000		7,983		8,000
Aegis Toxicology Sciences Corporation⁽²⁾⁽⁹⁾	Health Care Providers & Services		L+550			1.00	%		6.50	%		5/7/2018		5/9/2025		10,780		10,639		10,349
Alimera Sciences, Inc.⁽²⁾.	Pharmaceuticals		L+765			1.78	%		9.43	%		12/31/2019		7/1/2024		3,085		3,109		3,101
Alteon Health, LLC (fka Island Medical)⁽²⁾⁽⁹⁾	Health Care Providers & Services		L+650			1.00	%		7.50	%		3/31/2017		9/1/2023		7,013		6,980		6,872
American Teleconferencing Services, Ltd. (PGI)⁽²⁾	Communications Equipment		L+650			1.00	%		7.50	%		5/5/2016		6/8/2023		13,672		13,422		12,647
AQA Acquisition Holding, Inc.⁽²⁾	Software		L+425			1.00	%		5.25	%		9/7/2018		5/24/2023		5,574		5,540		5,491
Capstone Logistics Acquisition, Inc.⁽²⁾⁽⁹⁾	Professional Services		L+450			1.00	%		5.50	%		10/3/2014		10/7/2021		12,060		12,039		11,955
Cerapedics, Inc.⁽²⁾	Health Care Equipment & Supplies		L+695			2.50	%		9.45	%		3/22/2019		3/1/2024		3,297		3,338		3,338
Composite Technology Acquisition Corp. (ClockSpring) ⁽²⁾⁽⁹⁾.	Building Products		L+475			1.00	%		5.75	%		2/1/2019		2/1/2025		11,648		11,520		10,891
Confie Seguros Holding II Co.(2)(9)	Insurance		L+475			1.00	%		5.75	%		10/13/2016		4/19/2022		14,173		14,128		13,756
DISA Holdings Acquisition Subsidiary Corp.(2)	Professional Services		L+425			1.00	%		5.34	%		6/14/2018		6/30/2022		10,148		10,123		9,641
Drilling Info Holdings, Inc.(2)	IT Services		L+450			—			4.65	%		1/31/2020		7/30/2023- 7/30/2025		11,663		11,372		11,429
Edgewood Partners Holdings, LLC(2)(9)	Insurance		L+425			1.00	%		5.25	%		3/28/2018		9/8/2024		16,584		16,545		16,418
Empower Payments Acquisition, Inc. (RevSpring).⁽²⁾	Professional Services		L+425			—			4.47	%		11/28/2016		10/11/2025		4,913		4,903		4,814
ENS Holdings III Corp. & ES Opco USA LLC (BlueFin)(2)	Trading Companies & Distributors		L+475			1.00	%		5.75	%		12/31/2019		12/31/2025		6,150		6,040		6,089
GenMark Diagnostics, Inc⁽²⁾⁽⁴⁾	Health Care Providers & Services		L+590			2.51	%		8.41	%		2/1/2019		2/1/2023		7,598		7,770		7,778
Kindred Biosciences, Inc^(2)(10)	Pharmaceuticals		L+675			2.17	%		8.92	%		9/30/2019		9/30/2024		1,408		1,412		1,411
KORE Wireless Group, Inc.⁽²⁾	Wireless Telecommunication Services		L+550			—			5.72	%		12/21/2018		12/21/2024		11,835		11,655		11,717
Logix Holding Company, LLC⁽²⁾⁽⁹⁾	Communications Equipment		L+575			1.00	%		6.75	%		8/11/2017		12/22/2024		10,491		10,421		10,281
MHE Intermediate Holdings, LLC (TFS-Miner)⁽²⁾⁽⁹⁾	Air Freight & Logistics		L+500			1.00	%		6.00	%		3/8/2017		3/10/2024		5,874		5,840		5,727
Ministry Brands, LLC⁽²⁾⁽⁹⁾	Software		L+400			1.00	%		5.00	%		11/21/2016		12/2/2022		14,065		14,009		13,784
MSHC, Inc. (Service Logic) ⁽²⁾⁽⁹⁾	Commercial Services & Supplies		L+425			1.00	%		5.25	%		7/12/2018		12/31/2024		14,823		14,763		14,453
National Spine and Pain Centers, LLC ⁽⁹⁾	Health Care Providers & Services		L+525			1.00	%		6.25	%		9/18/2018		6/2/2024		2,539		2,531		2,475
Neuronetics, Inc.⁽²⁾.	Health Care Equipment & Supplies		L+765			1.66	%		9.31	%		3/2/2020		2/28/2025		2,400		2,404		2,400
Pet Holdings ULC & Pet Supermarket, Inc. ⁽⁴⁾⁽⁹⁾	Specialty Retail		L+550			1.00	%		6.50	%		9/18/2018		7/5/2022		4,511		4,488		4,376
Pinnacle Treatment Centers, Inc.⁽⁹⁾	Health Care Providers & Services		L+625			1.00	%		7.25	%		1/22/2020		12/31/2022		3,780		3,750		3,780
PPT Management Holdings, LLC⁽²⁾ ††	Health Care Providers & Services		L+850	⁽⁸⁾		1.00	%		9.59	%		12/15/2016		12/16/2022		8,926		8,891		8,033
Rubius Therapeutics, Inc.⁽²⁾⁽⁴⁾	Pharmaceuticals		L+550			—			5.66	%		12/21/2018		12/21/2023		6,182		6,227		6,243
Rxsense Holdings LLC⁽²⁾	Diversified Consumer Services		L+500			1.00	%		6.00	%		3/17/2020		3/13/2026		8,317		8,163		8,317
scPharmaceuticals, Inc.⁽²⁾	Pharmaceuticals		L+795			2.23	%		10.18	%		9/17/2019		9/17/2023		719		723		724
Sentry Data Systems, Inc.⁽²⁾.	Software		L+675			1.00	%		7.75	%		9/27/2020		10/6/2025		5,144		5,041		5,041
SHO Holding I Corporation (Shoes for Crews)⁽²⁾ ††	Footwear		L+525	⁽¹¹⁾		1.00	%		6.25	%		11/20/2015		4/27/2024		5,759		5,735		5,126
SI-BONE, Inc.⁽²⁾⁽⁴⁾	Health Care Equipment & Supplies		L+940			0.33	%		9.73	%		5/29/2020		6/1/2025		2,742		2,740		2,735
Unified Physician Management, LLC⁽²⁾⁽⁹⁾	Health Care Facilities		L+475			1.00	%		5.75	%		4/18/2019		11/27/2023		14,616		14,504		14,470
U.S. Acute Care Solutions, LLC⁽²⁾⁽⁹⁾ ††	Health Care Providers & Services		L+600	⁽¹²⁾		1.00	%		7.00	%		12/22/2016		5/15/2021		6,288		6,278		6,256
US Radiology Specialists, Inc.⁽²⁾⁽⁹⁾	Health Care Providers & Services		L+475			1.00	%		5.75	%		11/27/2018		1/1/2024		14,199		14,079		13,915
Worldwide Facilities, LLC⁽²⁾	Insurance		L+450			—			4.65	%		9/13/2019		9/5/2026		6,908		6,784		6,839

Total Bank Debt/Senior Secured Loans																	$	300,726	$	295,534


Common Equity/Equity Interests/Warrants — 37.1%																Shares/Units

Essence Group Holdings Corporation (Lumeris) Warrants†. ..	Health Care Technology											3/22/2017				52,000	$	16	$	68
Gemino Healthcare Finance, LLC⁽⁴⁾⁽⁵⁾	Diversified Financial Services											9/30/2013				32,839		31,439		35,367
North Mill Holdco LLC^(4)(5)(7)	Diversified Financial Services											10/20/2017				100		67,000		58,500
Senseonics Holdings, Inc. Warrants†	Health Care Equipment & Supplies											7/25/2019				80,838		18		1
TwentyEighty Investors, LLC†.	Professional Services											1/31/2017				17,214		1,011		10
Venus Concept Ltd. Warrants† (fka Restoration Robotics)	Health Care Equipment & Supplies											5/10/2018				6,078		34		—


Total Common Equity/Equity Interests/Warrants																	$	99,518	$	93,946


Total Investments⁽⁶⁾— 153.7%																	$	400,244	$	389,480

Cash Equivalents — 65.1%																Par Amount

U.S. Treasury Bill	Government											9/30/2020		11/12/2020	$	165,000	$	164,987	$	164,987


Total Investments & Cash Equivalents— 218.8%																	$	565,231	$	554,467
Liabilities in Excess of Other Assets — (118.8%).																		(301,105)

Net Assets — 100.0%																		$ 253,362

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

September 30, 2020

(in thousands)

(1)

Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2020.

(2)

Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary SUNS SPV LLC (the “SUNS SPV”). Such investments are pledged as collateral under the Senior Secured Revolving Credit Facility (the “Credit Facility”) (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(3)	Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.

(4)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of September 30, 2020, on a fair value basis, non-qualifying assets in the portfolio represented 20.4% of the total assets of the Company.

(5)

Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the nine months ended September 30, 2020 in these controlled investments are as follows:


Name of Issuer	Fair Value at December 31, 2019		Gross Additions		Gross Reductions		Realized Gain (Loss)		Change in Unrealized Gain (Loss)			Dividend /Other Income		Fair Value at September 30, 2020
Gemino Healthcare Finance, LLC	$	36,100	$	—	$	—	$	—	$	(733	)	$	2,595	$	35,367
North Mill Capital LLC		62,500		—		—		—		(4,000	)		3,780		58,500

	$	98,600	$	—	$	—	$	—	$	(4,733	)	$	6,375	$	93,867

(6)

Aggregate net unrealized depreciation for U.S. federal income tax purposes is $6,788; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $10,849 and $17,637, respectively, based on a tax cost of $396,268. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act. All investments are Level 3 unless otherwise indicated.

(7)	Our equity investment in North Mill Capital LLC is partially held through ESP SSC Corporation, a taxable consolidated subsidiary.

(8)	Spread is 6.00% Cash / 2.50% PIK.

(9)

Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary FLLP 2015-1 LLC (the “FLLP SPV”). Such investments are pledged as collateral under the FLLP 2015-1, LLC Revolving Credit Facility (the “FLLP Facility”) (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(10)	Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers.

(11)	Spread is 3.00% Cash / 2.25% PIK.

(12)	Spread is 5.00% Cash / 1.00% PIK.

†	Non-income producing security.

††	Investment contains a payment-in-kind (“PIK”) feature.

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (unaudited) (continued)

September 30, 2020


Industry Classification		Percentage of Total Investments (at fair value) as of September 30, 2020
Diversified Financial Services (includes Gemino Healthcare Finance, LLC and North Mill Holdco LLC)		24.1%
Health Care Providers & Services		15.3%
Professional Services		10.1%
Insurance		9.5%
Software		6.2%
Communications Equipment		5.9%
Health Care Facilities		3.7%
Commercial Services & Supplies		3.7%
Wireless Telecommunication Services		3.0%
Pharmaceuticals		3.0%
IT Services		2.9%
Building Products		2.8%
Health Care Equipment & Supplies		2.2%
Diversified Consumer Services		2.1%
Trading Companies & Distributors		1.6%
Air Freight & Logistics		1.5%
Footwear		1.3%
Specialty Retail		1.1%
Health Care Technology		0.0%

Total Investments		100.0%

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS

December 31, 2019

(in thousands, except share/unit amounts)


Description	Industry		Spread above Index ⁽³⁾			Libor Floor			Interest Rate ⁽¹⁾			Acquisition Date		Maturity Date		Par Amount		Cost		Fair Value
Bank Debt/Senior Secured Loans — 138.1%
1A Smart Start LLC^(2)(10)		Electrical Equipment, Instruments & Components		L+450			1.00	%		6.30	%		12/21/2017		2/21/2022	$	13,795	$	13,758	$	13,795
Acrisure, LLC⁽²⁾		Insurance		L+425			1.00	%		6.19	%		5/3/2017		11/22/2023		7,297		7,286		7,352
Advantage Sales and Marketing, Inc.⁽²⁾.		Professional Services		L+325			1.00	%		5.05	%		2/14/2018		7/23/2021		4,899		4,852		4,899
Advantage Sales and Marketing, Inc.		Professional Services		L+650			1.00	%		8.30	%		2/14/2013		7/25/2022		8,000		7,977		7,880
Aegis Toxicology Sciences Corporation^(2)(10)		Health Care Providers & Services		L+550			1.00	%		7.40	%		5/7/2018		5/9/2025		10,863		10,703		10,319
Alera Group Intermediate Holdings, Inc.⁽²⁾.		Insurance		L+450			—			6.30	%		7/27/2018		8/1/2025		4,942		4,936		4,998
Alimera Sciences, Inc.⁽²⁾.		Pharmaceuticals		L+765			1.78	%		9.43	%		12/31/2019		7/1/2024		2,914		2,914		2,914
Alteon Health, LLC (fka Island Medical)^(2)(10)		Health Care Providers & Services		L+650			1.00	%		8.30	%		3/31/2017		9/1/2022		7,383		7,342		7,383
Altern Marketing, LLC⁽²⁾.		Household & Personal Products		L+600			2.00	%		8.00	%		10/25/2019		10/7/2024		7,924		7,846		7,844
American Teleconferencing Services, Ltd. (PGI)⁽²⁾		Communications Equipment		L+650			1.00	%		8.32	%		5/5/2016		6/8/2023		13,690		13,371		12,869
AQA Acquisition Holding, Inc.⁽²⁾		Software		L+425			1.00	%		6.19	%		9/7/2018		5/24/2023		5,618		5,575		5,618
Capstone Logistics Acquisition, Inc.^(2)(10)		Professional Services		L+450			1.00	%		6.30	%		10/3/2014		10/7/2021		12,074		12,037		11,892
Cerapedics, Inc.⁽²⁾		Health Care Equipment & Supplies		L+695			2.50	%		9.45	%		3/22/2019		3/1/2024		2,885		2,899		2,899
Composite Technology Acquisition Corp. (ClockSpring) ^(2)(10).		Building Products		L+475			—			6.69	%		2/1/2019		2/1/2025		11,733		11,577		11,616
Confie Seguros Holding II Co.(2)(10)		Insurance		L+475			1.00	%		6.66	%		10/13/2016		4/19/2022		14,173		14,108		13,804
DISA Holdings Acquisition Subsidiary Corp.(2)		Professional Services		L+400			1.00	%		5.74	%		6/14/2018		6/30/2022		10,226		10,190		10,226
Edgewood Partners Holdings, LLC(2)(10)		Insurance		L+425			1.00	%		6.05	%		3/28/2018		9/8/2024		16,712		16,667		16,545
Empower Payments Acquisition, Inc. (RevSpring).⁽²⁾		Professional Services		L+400			1.00	%		5.94	%		11/28/2016		10/11/2025		4,950		4,939		4,950
ENS Holdings III Corp. & ES Opco USA LLC (BlueFin)(2)		Trading Companies & Distributors		L+475			1.00	%		6.69	%		12/31/2019		12/31/2025		5,281		5,176		5,176
Falmouth Group Holdings Corp. (AMPAC)^(2)(10)		Chemicals		L+675			1.00	%		8.55	%		12/15/2016		12/14/2021		10,788		10,788		10,788
GenMark Diagnostics, Inc⁽²⁾⁽⁴⁾		Health Care Providers & Services		L+590			2.51	%		8.41	%		2/1/2019		2/1/2023		7,598		7,642		7,674
Kindred Biosciences, Inc^(2)(4)(12)		Pharmaceuticals		L+675			2.17	%		8.92	%		9/30/2019		9/30/2024		1,408		1,405		1,404
KORE Wireless Group, Inc.⁽²⁾		Wireless Telecommunication Services		L+550			—			7.44	%		12/21/2018		12/21/2024		11,926		11,718		11,836
Logix Holding Company, LLC⁽²⁾		Communications Equipment		L+575			1.00	%		7.55	%		8/11/2017		12/22/2024		10,575		10,494		10,575
MHE Intermediate Holdings, LLC (TFS-Miner)^(2)(10)		Air Freight & Logistics		L+500			1.00	%		6.94	%		3/8/2017		3/10/2024		5,919		5,879		5,890
Ministry Brands, LLC^(2)(10)		Software		L+400			1.00	%		5.85	%		11/21/2016		12/2/2022		14,174		14,101		14,139
MRI Software LLC^(2)(10)		Software		L+575			1.00	%		7.55	%		6/7/2017		6/30/2023		10,754		10,688		10,754
MSHC, Inc. (Service Logic) ^(2)(10)		Commercial Services & Supplies		L+425			1.00	%		5.96	%		7/12/2018		12/31/2024		12,486		12,429		12,423
National Spine and Pain Centers, LLC ⁽¹⁰⁾		Health Care Providers & Services		L+450			1.00	%		6.30	%		9/18/2018		6/2/2024		2,558		2,550		2,520
On Location Events, LLC & PrimeSport Holdings Inc.^(2)(10)		Media		L+500			1.00	%		6.94	%		12/7/2017		9/29/2021		13,767		13,683		13,767
Pet Holdings ULC & Pet Supermarket, Inc. ^(4)(10)		Specialty Retail		L+550			1.00	%		7.60	%		9/18/2018		7/5/2022		4,547		4,514		4,535
PPT Management Holdings, LLC⁽²⁾ ††		Health Care Providers & Services		L+675	⁽¹¹⁾		1.00	%		8.44	%		12/15/2016		12/16/2022		8,878		8,832		8,168
Radiology Partners, Inc.⁽²⁾		Health Care Providers & Services		L+475			—			6.62	%		6/28/2018		7/9/2025		7,406		7,347		7,453
Rubius Therapeutics, Inc.⁽²⁾⁽⁴⁾		Pharmaceuticals		L+550			—			7.19	%		12/21/2018		12/21/2023		4,121		4,138		4,142
scPharmaceuticals, Inc.⁽²⁾		Pharmaceuticals		L+795			2.23	%		10.18	%		9/17/2019		9/17/2023		719		720		720
Senseonics Holdings, Inc.⁽²⁾		Health Care Equipment & Supplies		L+650			2.48	%		8.98	%		7/25/2019		7/1/2024		3,234		3,220		3,234
SHO Holding I Corporation (Shoes for Crews)⁽²⁾		Footwear		L+500			1.00	%		6.93	%		11/20/2015		10/27/2022		5,760		5,736		5,645
Solara Medical Supplies, Inc.^(2)(10)		Health Care Providers & Services		L+600			1.00	%		7.94	%		5/31/2018		2/27/2024		13,185		12,996		13,185
Unified Physician Management, LLC⁽²⁾		Health Care Facilities		L+450			1.00	%		6.30	%		4/18/2019		11/27/2023		13,130		13,007		12,998
U.S. Acute Care Solutions, LLC^(2)(10)††		Health Care Providers & Services		L+600	⁽⁹⁾		1.00	%		7.80	%		12/22/2016		5/15/2021		6,305		6,283		6,305
US Radiology Specialists, Inc.⁽²⁾		Health Care Providers & Services		L+475			1.00	%		6.55	%		11/27/2018		1/1/2024		12,073		11,971		11,832
WIRB-Copernicus Group, Inc.^(2)(10)		Professional Services		L+425			1.00	%		5.87	%		3/27/2017		8/15/2022		12,392		12,350		12,392
Worldwide Facilities, LLC⁽²⁾		Insurance		L+450			—			6.21	%		9/13/2019		9/5/2026		6,159		6,040		6,098

Total Bank Debt/Senior Secured Loans																		$	362,684	$	361,456


Common Equity/Equity Interests/Warrants — 37.7%																	Shares/Units

Essence Group Holdings Corporation (Lumeris) Warrants†. ..		Health Care Technology											3/22/2017				52,000	$	16	$	67
Gemino Healthcare Finance, LLC⁽⁴⁾⁽⁵⁾		Diversified Financial Services											9/30/2013				32,839		31,439		36,100
North Mill Holdco LLC^(4)(5)(8)		Diversified Financial Services											10/20/2017				100		67,000		62,500
Senseonics Holdings, Inc. Warrants†		Health Care Equipment & Supplies											7/25/2019				80,838		18		11
TwentyEighty Investors, LLC†.		Professional Services											1/31/2017				17,214		1,195		130
Venus Concept Ltd. Warrants† (fka Restoration Robotics)		Health Care Equipment & Supplies											5/10/2018				6,078		34		1


Total Common Equity/Equity Interests/Warrants																		$	99,702	$	98,809


Total Investments⁽⁷⁾— 175.8%																		$	462,386	$	460,265

Cash Equivalents — 38.2%																	Par Amount
U.S. Treasury Bill		Government											12/31/2019		1/28/2020	$	100,000	$	99,898	$	99,898


Total Investments & Cash Equivalents— 214.0%																		$	562,284	$	560,163
Liabilities in Excess of Other Assets — (114.0%)																					(298,349	)

Net Assets — 100.0%																			$ 261,814

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2019

(in thousands)

(1)

(2)

(3)	Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor.

(4)

Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940 (“1940 Act”), as amended. If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of December 31, 2019, on a fair value basis, non-qualifying assets in the portfolio represented 20.1% of the total assets of the Company.

(5)

Denotes investments in which we are deemed to exercise a controlling influence over the management or policies of a company, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2019 in these controlled investments are as follows:


Name of Issuer	Fair Value at December 31, 2018		Gross Additions		Gross Reductions		Realized Gain (Loss)		Change in Unrealized Gain (Loss)			Dividend /Other Income		Fair Value at December 31, 2019
Gemino Healthcare Finance, LLC	$	32,550	$	—	$	—	$	—	$	3,550		$	3,460	$	36,100
North Mill Holdco LLC		67,000		—		—		—		(4,500	)		5,600		62,500

	$	99,550	$	—	$	—	$	—	$	(950	)	$	9,060	$	98,600

(6)

Denotes investments in which we are an “Affiliated Person” but not exercising a controlling influence, as defined in the 1940 Act, due to beneficially owning, either directly or through one or more controlled companies, more than 5% but less than 25% of the outstanding voting securities of the investment. Transactions during the year ended December 31, 2019 in these affiliated investments are as follows:


Name of Issuer	Fair Value at December 31, 2018		Gross Additions		Gross Reductions		Realized Gain (Loss)		Change in Unrealized Gain (Loss)			Interest/Dividend/ Other Income		Fair Value at December 31, 2019
Engineering Solutions & Products, LLC (1^st lien)	$	—	$	548	$	548	$	—	$	—		$	33	$	—
Engineering Solutions & Products, LLC (2^ndlien)	$	2,282		—		2,402		—		(125	)		380		—
Engineering Solutions & Products, LLC (equity interests)	$	68		—		3,245		1,979		1,299			—		—

	$	2,350	$	548	$	6,195	$	1,979	$	1,174		$	413	$	—

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

CONSOLIDATED SCHEDULE OF INVESTMENTS (continued)

December 31, 2019

(7)

Aggregate net unrealized appreciation for U.S. federal income tax purposes is $1,855; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $12,523 and $10,668, respectively, based on a tax cost of $458,410. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act. All investments are Level 3 unless otherwise indicated.

(8)	Our equity investment in North Mill Capital LLC is partially held through ESP SSC Corporation, a taxable consolidated subsidiary.

(9)	Spread is 5.00% Cash / 1.00% PIK.

(10)

Indicates an investment that is wholly or partially held by Solar Senior Capital Ltd. through its wholly-owned financing subsidiary FLLP 2015-1 LLC (the “FLLP SPV”). Such investments are pledged as collateral under the FLLP 2015-1, LLC Revolving Credit Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company.

(11)	Spread is 6.00% Cash / 0.75% PIK.

(12)	Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers.

†	Non-income producing security.

††	Investment contains a payment-in-kind (“PIK”) feature.


Industry Classification		Percentage of Total Investments (at fair value) as of December 31, 2019
Diversified Financial Services (includes Gemino Healthcare Finance, LLC and North Mill Holdco LLC)		21.4%
Health Care Providers & Services		16.3%
Professional Services		11.4%
Insurance		10.6%
Software		6.6%
Communications Equipment		5.1%
Electronic Equipment, Instruments & Components		3.0%
Media		3.0%
Health Care Facilities		2.8%
Commercial Services & Supplies		2.7%
Wireless Telecommunication Services		2.6%
Building Products		2.5%
Chemicals		2.4%
Pharmaceuticals		2.0%
Household & Personal Products		1.7%
Health Care Equipment & Supplies		1.3%
Air Freight & Logistics		1.3%
Footwear		1.2%
Trading Companies & Distributors		1.1%
Specialty Retail		1.0%
Health Care Technology		0.0%

Total Investments		100.0%

See notes to consolidated financial statements.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2020

(in thousands, except share amounts)

Note 1. Organization

Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, “SUNS”, “we”, “us”, or “our”), a Maryland corporation formed on December 16, 2010, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for U.S. federal income tax purposes, we have elected to be treated, and intend to qualify annually, as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986, as amended (“the Code”).

On January 28, 2011, Solar Senior was capitalized with initial equity of $2 and commenced operations. On February 24, 2011, Solar Senior priced its initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, raising approximately $168,000 of net proceeds. Concurrent with this offering, our senior management team purchased an additional 500,000 shares through a private placement, raising another $10,000.

The Company’s investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by investing directly or indirectly in senior secured loans, including first lien, stretch-senior and second lien debt instruments, made primarily to leveraged private middle-market companies whose debt is rated below investment grade, which the Company refers to collectively as “senior loans.” From time to time, we may also invest in public companies that are thinly traded. Under normal market conditions, at least 80% of the value of the Company’s net assets (including the amount of any borrowings for investment purposes) will be directly or indirectly invested in senior loans.

Note 2. Significant Accounting Policies

The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of the Company and certain wholly-owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current period presentation.

Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2020.

In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for the fair presentation of financial statements, have been included.

The significant accounting policies consistently followed by the Company are:

(a)

Investment transactions are accounted for on the trade date;

(b)

The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on a quarterly basis, or more frequently if required. Investments for which market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of Solar Capital Partners, LLC (the “Investment Adviser”), does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company’s board of directors (the “Board”).

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Investments for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology or provide a valuation or methodology that, in the judgment of the Investment Adviser or the Board does not represent fair value, shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default and the Investment Adviser does not expect to reach an agreement with the portfolio company in the subsequent quarter; (iv) the Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm.

The recommendation of fair value generally considers the following factors among others, as relevant: applicable market yields; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the portfolio company’s earnings and discounted cash flow; the markets in which the issuer does business; and comparisons to publicly traded securities, among others.

When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the 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.

Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the nine months ended September 30, 2020, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.

ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3: Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.

(c)

Gains or losses on investments are calculated by using the specific identification method.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

(d)

The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record call premiums on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee and other fee income for services rendered, if any, are recorded as other income when earned.

(e)

The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate.

(f)

Book and tax basis differences relating to stockholder distributions and other permanent book and tax differences are typically reclassified among the Company’s capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP.

(g)

Distributions to common stockholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually.

(h)

In accordance with Regulation S-X and ASC Topic 810—Consolidation, the Company consolidates its interest in controlled investment company subsidiaries, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company.

(i)

The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against the U.S. dollar on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company’s investments in foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company.

(j)

In accordance with ASC 835-30, the Company reports origination and other expenses related to certain debt issuances, if any, as a direct deduction from the carrying amount of the debt liability. Applicable expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and/or when it approximates the effective yield method.

(k)

The Company records expenses related to shelf registration statements and applicable equity offering costs as prepaid assets. These expenses are typically charged as a reduction of capital upon utilization or expensed, in accordance with ASC 946-20-25.

(l)

Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on such investments may be recognized as income or applied to principal depending on management’s judgment.

(m)

The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Recent Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company has adopted ASU 2018-13 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting ASU 2020-04 on its consolidated financial statements and disclosures.

Note 3. Agreements

Solar Senior has an Advisory Agreement with the Investment Adviser, under which the Investment Adviser manages the day-to-day operations of, and provides investment advisory services to, Solar Senior. For providing these services, the Investment Adviser receives a fee from Solar Senior, consisting of two components—a base management fee and a performance-based incentive fee. The base management fee is calculated at an annual rate of 1.00% of gross assets. For services rendered under the Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters. Base management fees for any partial month or quarter will be appropriately pro-rated. For purposes of computing the base management fee, gross assets exclude temporary assets acquired at the end of each fiscal quarter for purposes of preserving investment flexibility in the next fiscal quarter. Temporary assets include, but are not limited to, U.S. treasury bills, other short-term U.S. government or government agency securities, repurchase agreements or cash borrowings.

The performance-based incentive fee has two parts, as follows: one is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (other than fees for providing managerial assistance) accrued during the calendar quarter, minus our operating expenses for the quarter (excluding the performance-based incentive fee). Pre-incentive fee net investment income includes, in the case of investments, if any, with a deferred interest feature (such as original issue discount, debt instruments with pay-in-kind 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 or losses or unrealized capital appreciation or depreciation. 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 calendar quarter, is compared to a hurdle of 1.75% per quarter (7.00% annualized). The Company pays the Investment Adviser a performance-based incentive fee with respect to pre-incentive fee net investment income for each calendar quarter as follows:

•

no performance-based incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle of 1.75%;

•

50% of pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle but is less than 2.9167% in any calendar quarter (11.67% annualized);

and

•

20% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.9167% in any calendar quarter (11.67% annualized) will be payable to the Investment Adviser.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

The second part of the performance-based incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date) and will equal 20% of the Company’s cumulative realized capital gains less cumulative realized capital losses, unrealized capital depreciation (unrealized depreciation on a gross investment-by-investment basis at the end of each calendar year) and all net capital gains upon which prior performance-based capital gains incentive fee payments were previously made to the Investment Adviser. For financial statement purposes, the second part of the performance-based incentive fee is accrued based upon 20% of cumulative net realized gains and net unrealized capital appreciation. No accrual was required for the three and nine months ended September 30, 2020 and 2019.

For the three and nine months ended September 30, 2020 the Company recognized $1,036 and $3,180, respectively, in gross base management fees and $0 and $95, respectively, in gross performance-based incentive fees. For the three and nine months ended September 30, 2020, $722 and $2,606, respectively, of such base management fees were waived. For the three and nine months ended September 30, 2020, $0 and $95, respectively, of such performance-based incentive fees were waived. For the three and nine months ended September 30, 2019 the Company recognized $1,223 and $3,582, respectively, in gross base management fees and $535 and $1,604, respectively, in gross performance-based incentive fees. For the three and nine months ended September 30, 2019, $67 and $526, respectively, of such base management fees were waived. For the three and nine months ended September 30, 2019, $535 and $1,596, respectively, of such performance-based incentive fees were waived. For the three and nine months ended September 30, 2020 and 2019, there were no fees recaptured by the Investment Adviser. The below voluntary fee waivers were made at the Investment Adviser’s discretion and are subject to recapture by the Investment Adviser and reimbursement by the Company under the conditions noted below. No fees will be recouped by the Investment Adviser if (i) for the period in which recoupment occurs, the ratio of operating expenses to average net assets, when considering the reimbursement, exceeds the same ratio for the period in which the waiver occurred; (ii) for the period in which recoupment occurs, the annualized distribution rate cannot fall below the annualized distribution rate for the period in which the waiver occurred; and (iii) recoupment can only occur within three years from the date of the waiver. The table below presents a summary of fees waived that may be subject to recoupment:


Three Months Ended	Management and Performance- Based Incentive Fees Waived		Management and Performance-Based Incentive Fees Recouped		Unreimbursed Management and Performance-Based Incentive Fees		Ratio of Operating Expense to Average Net Assets for the Period⁽¹⁾		Annualized Distribution Rate for the Period⁽²⁾		Eligible for Recoupment Through
March 31, 2019	$	536	$	—	$	536		0.28%		8.65%		December 31, 2020

June 30, 2019		984		—		984		0.31%		8.60%		March 31, 2021

September 30, 2019		602		—		602		0.31%		8.63%		June 30, 2021

December 31, 2019		671		—		671		0.33%		8.65%		September 30, 2021

March 31, 2020		1,020		—		1,020		0.35%		8.64%		December 31, 2021

June 30, 2020		959		—		959		0.23%		8.71%		March 31, 2022

September 30, 2020		722		—		722		0.33%		7.72%		June 30, 2022


Total	$	5,494	$	—	$	5,494

(1)	Operating expense includes all expenses borne by the Company, except for organizational and offering costs, base management fees, performance-based incentive fees and interest expense. The ratios presented are not annualized.

(2)	Annualized distribution rate equals the annualized rate of distributions paid to stockholders based on the amount of the distributions declared prior to the date that the waivers of expenses related to management and performance-based incentive fees were incurred.

Solar Senior has also entered into an Administration Agreement with Solar Capital Management, LLC (the “Administrator”) under which the Administrator provides administrative services for Solar Senior. For providing these services, facilities and personnel, Solar Senior reimburses the Administrator for Solar Senior’s allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement, including rent. The Administrator will also provide, on Solar Senior’s behalf, managerial assistance to those portfolio companies to which Solar Senior is required to provide such assistance. The Company typically reimburses the Administrator on a quarterly basis.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

For the three and nine months ended September 30, 2020, the Company recognized expenses under the Administration Agreement of $370 and $1,104, respectively. For the three and nine months ended September 30, 2019, the Company recognized expenses under the Administration Agreement of $405 and $1,201, respectively. No managerial assistance fees were accrued or collected for the three and nine months ended September 30, 2020 and 2019.

Note 4. Net Asset Value Per Share

At September 30, 2020, the Company’s total net assets and net asset value per share were $253,362 and $15.79, respectively. This compares to total net assets and net asset value per share at December 31, 2019 of $261,814 and $16.32, respectively.

Note 5. Earnings Per Share

The following table sets forth the computation of basic and diluted net increase in net assets per share resulting from operations, pursuant to ASC 260-10, for the three and nine months ended September 30, 2020 and 2019:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Earnings per share (basic & diluted)
Numerator - net increase in net assets resulting from operations:	$	8,646	$	5,168	$	7,068	$	17,140
Denominator - weighted average shares:		16,049,034		16,044,226		16,048,691		16,042,807
Earnings per share:	$	0.54	$	0.32	$	0.44	$	1.07

Note 6. Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.

Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in non-active markets;

Pricing models whose inputs are observable for substantially the full term of the asset or liability; and

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability.

Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications involving Level 3 assets and liabilities are reported as transfers in/out of Level 3 as of the end of the quarter in which the reclassifications occur. Within the fair value hierarchy tables below, cash and cash equivalents are excluded but could be classified as Level 1.

The following tables present the balances of assets measured at fair value on a recurring basis, as of September 30, 2020 and December 31, 2019:

Fair Value Measurements

As of September 30, 2020


	Level 1		Level 2		Level 3		Total
Assets:
Bank Debt/Senior Secured Loans	$	—	$	—	$	295,534	$	295,534
Common Equity/Equity Interests/Warrants		—		—		93,946		93,946

Total Investments	$	—	$	—	$	389,480	$	389,480

Fair Value Measurements

As of December 31, 2019


	Level 1		Level 2		Level 3		Total
Assets:
Bank Debt/Senior Secured Loans	$	—	$	—	$	361,456	$	361,456
Common Equity/Equity Interests/Warrants		—		—		98,809		98,809

Total Investments	$	—	$	—	$	460,265	$	460,265

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

The following tables provides a summary of the changes in fair value of Level 3 assets for the three and nine months ended September 30, 2020, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets still held at September 30:

Fair Value Measurements Using Level 3 Inputs


	Bank Debt/Senior Secured Loans			Common Equity/Equity Interests/Warrants			Total
Fair value, June 30, 2020	$	322,367		$	94,070		$	416,437
Total gains or losses included in earnings:
Net realized gain (loss)		45			—			45
Net change in unrealized gain		3,917			(124	)		3,793
Purchase of investment securities		7,701			—			7,701
Proceeds from dispositions of investment securities		(38,496	)		—			(38,496	)
Transfers in/out of Level 3		—			—			—

Fair value, September 30, 2020	$	295,534		$	93,946		$	389,480

Unrealized gains for the period relating to those Level 3 assets that were still held by the Company at the end of the period:
Net change in unrealized gain:	$	3,917		$	(124	)	$	3,793


	Bank Debt/Senior Secured Loans			Common Equity/Equity Interests/Warrants			Total
Fair value, December 31, 2019	$	361,456		$	98,809		$	460,265
Total gains or losses included in earnings:
Net realized gain		169			—			169
Net change in unrealized loss		(3,964	)		(4,679	)		(8,643	)
Purchase of investment securities		52,694			—			52,694
Proceeds from dispositions of investment securities		(114,821	)		(184	)		(115,005	)
Transfers in/out of Level 3		—			—			—

Fair value, September 30, 2020	$	295,534		$	93,946		$	389,480

Unrealized losses for the period relating to those Level 3 assets that were still held by the Company at the end of the period:
Net change in unrealized loss:	$	(3,964	)	$	(4,679	)	$	(8,643	)

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

The following table provides a summary of the changes in fair value of Level 3 assets for the year ended December 31, 2019, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets still held at December 31, 2019:


	Bank Debt/Senior Secured Loans			Common Equity/Equity Interests/Warrants			Total
Fair value, December 31, 2018	$	341,814		$	99,708		$	441,522
Total gains or losses included in earnings:
Net realized gain (loss)		(6,738	)		1,920			(4,818	)
Net change in unrealized gain (loss)		2,459			2,412			4,871
Purchase of investment securities		109,851			27			109,878
Proceeds from dispositions of investment securities		(93,288	)		(5,258	)		(98,546	)
Transfers into Level 3		7,358			—			7,358
Transfers out of Level 3		—			—			—

Fair value, December 31, 2019	$	361,456		$	98,809		$	460,265

Unrealized gains (losses) for the period relating to those Level 3 assets that were still held by the Company at the end of the period:
Net change in unrealized gain (loss):	$	2,459		$	2,412		$	4,871

The following table shows a reconciliation of the beginning and ending balances for fair valued liabilities measured using significant unobservable inputs (Level 3) for the year ended December 31, 2019:


Beginning fair value at December 31, 2018	$	51,371
Borrowings		5,082
Repayments		—
Transfers in/out of Level 3		(56,453	)

Ending fair value at December 31, 2019	$	—

The Company did not elect to apply the fair value option of accounting to the FLLP Facility, which was refinanced by way of amendment on May 31, 2019. As this refinancing was deemed to be a significant modification of debt, per ASC 825-10-25, a new election was triggered. As such, the FLLP Facility is shown as a transfer out of Level 3. During the fourth quarter of 2019, our investment in Acrisure, LLC was transferred from Level 2 to Level 3. At December 31, 2019, the Investment Adviser no longer believed the market quote to be representative of fair value due to its specific knowledge of transaction activity in the position.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Quantitative Information about Level 3 Fair Value Measurements

The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of our investment within each portfolio company.

Significant unobservable quantitative inputs typically used in the fair value measurement of the Company’s Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (“EBITDA”) multiples of similar companies, and comparable market transactions for equity securities.

Quantitative information about the Company’s Level 3 asset fair value measurements as of September 30, 2020 is summarized in the table below:

Asset or
Liability

Fair Value at
September 30,
2020

Principal Valuation
Technique/Methodology

Unobservable Input

Range (Weighted
Average)

Bank Debt / Senior Secured Loans

Asset

295,534

Income Approach

Market Yield

4.3% –13.1% (7.4%)

Common Equity/Equity Interests/Warrants

Asset

93,946

Market Approach

Return on Equity

(4.1%) –18.9%

(15.6%)

Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets.

Quantitative information about the Company’s Level 3 asset fair value measurements as of December 31, 2019 is summarized in the table below:

Asset or
Liability

Fair Value at
December 31,
2019

Principal Valuation
Technique/Methodology

Unobservable Input

Range (Weighted
Average)

Bank Debt / Senior Secured Loans

Asset

361,456

Income Approach

Market Yield

5.2% –12.0% (7.6%)

Common Equity/Equity Interests/Warrants

Asset

98,809

Market Approach

Return on Equity

0.0% –28.6% (11.5%)

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Note 7. Debt

Our debt obligations consisted of the following as of September 30, 2020 and December 31, 2019:


	September 30, 2020					December 31, 2019
Facility	Face Amount		Carrying Value			Face Amount		Carrying Value
Credit Facility	$	18,400	$	17,391	⁽¹⁾	$	157,600	$	156,314	⁽¹⁾
FLLP Facility		35,903		35,471	⁽²⁾		53,602		52,987	⁽²⁾
2025 Unsecured Notes		85,000		84,336	⁽³⁾		—		—

	$139,303		$ 137,198			$ 211,202		$ 209,301

(1)	Carrying Value equals the Face Amount net of unamortized debt issuance costs of $1,009 and $1,286, respectively, as of September 30, 2020 and December 31, 2019.

(2)	Carrying Value equals the Face Amount net of unamortized debt issuance costs of $432 and $615, respectively, as of September 30, 2020 and December 31, 2019.

(3)	Carrying Value equals the Face Amount net of unamortized debt issuance costs of $664 as of September 30, 2020.

Unsecured Notes

On March 31, 2020, the Company closed a private offering of $85,000 of senior unsecured notes due 2025 (the “2025 Unsecured Notes”) with a fixed interest rate of 3.90% and a maturity date of March 31, 2025. Interest on the 2025 Unsecured Notes is due semi-annually on March 31 and September 30. The 2025 Unsecured Notes were issued in a private placement only to qualified institutional buyers.

Revolving Loan Facilities

On August 26, 2011, the Company established our wholly-owned subsidiary, SUNS SPV LLC (the “SUNS SPV”) which entered into the Credit Facility with Citigroup Global Markets Inc. acting as administrative agent. On January 10, 2017, commitments to the Credit Facility, as amended, were increased from $175,000 to $200,000 by utilizing the accordion feature. The commitment can also be expanded up to $600,000. The stated interest rate on the Credit Facility is LIBOR plus 2.00% with no LIBOR floor requirement and the current final maturity date is June 1, 2023. The Credit Facility is secured by all of the assets held by SUNS SPV. Under the terms of the Credit Facility, Solar Senior and SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature. The Credit Facility was amended on November 7, 2012, June 30, 2014 and May 29, 2015 to extend maturities and add greater investment flexibility, among other changes. On June 1, 2018, the Credit Facility was refinanced by way of amendment, allowing for greater investment flexibility and the extension of the maturity date, among other changes. On July 13, 2018, commitments to the Credit Facility, as amended, were increased from $200,000 to $225,000 by utilizing the accordion feature. There were $18,400 of borrowings outstanding as of September 30, 2020 under the Credit Facility.

On May 31, 2019, the Company as transferor and FLLP 2015-1, LLC, a wholly-owned subsidiary of the Company, as borrower entered into amendment number five to the $75,000 FLLP Facility with Wells Fargo Bank, NA acting as administrative agent. The Company acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature on May 31, 2024. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.15-2.25%. The Company and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. There were $35,903 of borrowings outstanding as of September 30, 2020.

The average annualized interest cost for all borrowings for the nine months ended September 30, 2020 and the year ended December 31, 2019 was 3.51% and 4.51%, respectively. These costs are exclusive of other credit facility expenses such as unused fees and fees paid to the back-up servicer, if any. The maximum amount borrowed on the credit facilities during the nine months ended September 30, 2020 and the year ended December 31, 2019, was $215,003 and $224,553, respectively.

Note 8. Financial Highlights

The following is a schedule of financial highlights for the nine months ended September 30, 2020 and 2019:


	Nine months ended September 30, 2020			Nine months ended September 30, 2019
Per Share Data: (a)
Net asset value, beginning of year	$	16.32		$	16.30

Net investment income		0.97			1.06
Net realized and unrealized gain (loss)		(0.53	)		0.01

Net increase in net assets resulting from operations		0.44			1.07
Distributions to stockholders:
From net investment income		(0.97	)		(1.06	)

Net asset value, end of period	$	15.79		$	16.31

Per share market value, end of period	$	12.60		$	17.76
Total Return (b)		(22.99	%)		25.90	%
Net assets, end of period	$	253,362		$	261,639
Shares outstanding, end of period		16,049,034			16,044,727

Ratios to average net assets (c):
Net investment income		6.27	%		6.47	%

Operating expenses		1.15	%*		2.07	%*
Interest and other credit facility expenses		2.45	%		3.14	%

Total expenses		3.60	%*		5.21	%*

Average debt outstanding	$	166,007		$	212,092
Portfolio turnover ratio		12.6	%		11.8	%

(a)	Calculated using the average shares outstanding method.

(b)

Total return is based on the change in market price per share during the period and takes into account distributions, if any, reinvested in accordance with the dividend reinvestment plan. The market price per share as of December 31, 2019 and December 31, 2018 was $17.60 and $15.12, respectively. Total return does not include a sales load.

(c)	Not annualized for periods less than one year.

The ratio of operating expenses to average net assets and the ratio of total expenses to average net assets is shown net of voluntary management and/or incentive fee waivers (see note 3). For the nine months ended September 30, 2020, the ratios of operating expenses to average net assets and total expenses to average net assets would be 2.23% and 4.68%, respectively, without the voluntary management and incentive fee waivers. For the nine months ended September 30, 2019, the ratios of operating expenses to average net assets and total expenses to average net assets would be 2.88% and 6.02%, respectively, without the voluntary management and incentive fee waivers.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Note 9. Gemino Healthcare Finance, LLC

We acquired Gemino Healthcare Finance, LLC (d/b/a Gemino Senior Secured Healthcare Finance) (“Gemino”) on September 30, 2013. Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare industry. Our initial investment in Gemino was $32,839. The management team of Gemino co-invested in the transaction and continues to lead Gemino. As of September 30, 2020, Gemino’s management team and Solar Senior own approximately 7% and 93% of the equity in Gemino, respectively.

Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse, $100,000 credit facility with non-affiliates, which was expandable to $150,000 under its accordion feature. Effective March 31, 2014, the credit facility was expanded to $105,000 and again on June 27, 2014 to $110,000. On May 27, 2016, Gemino entered into a new $125,000 credit facility which replaced the previously existing facility. The new facility has similar terms as compared to the previous facility and includes an accordion feature increase to $200,000 and had a maturity date of May 27, 2020. On June 28, 2019, this $125,000 facility was amended, extending the maturity date to June 28, 2023.

Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2020, the portfolio totaled approximately $215,119 of commitments with a total net investment in loans of $37,582 on total assets of $70,758. As of December 31, 2019, the portfolio totaled approximately $203,828 of commitments with a total net investment in loans of $110,968 on total assets of $122,124. At September 30, 2020, the portfolio consisted of 34 issuers with an average balance of approximately $1,105 versus 34 issuers with an average balance of approximately $3,264 at December 31, 2019. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $38,000 and $89,000 of borrowings outstanding at September 30, 2020 and December 31, 2019, respectively .For the three months ended September 30, 2020 and 2019, Gemino had net income of $771 and $1,074, respectively, on gross income of $2,266 and $3,162, respectively. For the nine months ended September 30, 2020 and 2019, Gemino had net income of $2,418 and $2,953, respectively, on gross income of $8,072 and $9,699, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions.

Note 10. Commitments and Contingencies

The Company had unfunded debt and equity commitments to various revolving and delayed draw loans as well as to Gemino Healthcare Finance, LLC. The total amount of these unfunded commitments as of September 30, 2020 and December 31, 2019 is $10,569 and $25,009, respectively, comprised of the following:


	September 30, 2020		December 31, 2019
Kindred Biosciences, Inc	$	2,112	$	2,112
Worldwide Facilities, LLC.		1,484		2,278
Gemino Healthcare Finance, LLC*		1,400		1,400
Rxsense Holdings LLC.		1,216		—
Neuronetics, Inc.		1,028		—
Drilling Info Holdings, Inc.		822		—
ENS Holdings III Corp. & ES Opco USA LLC		559		1,453
Sentry Data Systems, Inc.		514		—
Composite Technology Acquisition Corp.		445		1,136
Pinnacle Treatment Centers, Inc.		435		—
Cerapedics, Inc.		412		824
AQA Acquisition Holding, Inc.		142		142
Solara Medical Supplies, Inc.		—		3,186
MSHC, Inc.		—		2,448
US Radiology Specialists, Inc.		—		2,163
Rubius Therapeutics, Inc		—		2,061
WIRB-Copernicus Group, Inc.		—		1,660
Unified Physician Management, LLC		—		1,593
Altern Marketing, LLC		—		1,201
MRI Software LLC		—		1,181
Alimera Sciences, Inc.		—		171

Total Commitments	$	10,569	$	25,009

*	The Company controls the funding of the Gemino commitment and may cancel it at its discretion.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company’s achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of September 30, 2020 and December 31, 2019, the Company had sufficient cash available and/or liquid securities available to fund its commitments.

In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Consolidated Statements of Assets and Liabilities.

Note 11. North Mill Holdco LLC

We acquired 100% of the equity interests of North Mill Capital LLC (“NMC”) on October 20, 2017. NMC is a leading asset-backed lending commercial finance company that provides senior secured asset-backed financings to U.S. based small-to-medium-sized businesses primarily in the manufacturing, services and distribution industries. We invested approximately $51,000 to effect the transaction. Subsequently, the Company contributed 1% of its equity interest in NMC to ESP SSC Corporation. Immediately thereafter, the Company and ESP SSC Corporation contributed their equity interests to NorthMill LLC (“North Mill”). On May 1, 2018, North Mill merged with and into NMC, with NMC being the surviving company. The Company and ESP SSC Corporation own 99% and 1% of the equity interests of NMC, respectively. The management team of NMC continues to lead NMC. On June 28, 2019, North Mill Holdco LLC (“NM Holdco”), a newly formed entity and ESP SSC Corporation acquired Summit Financial Resources, a Salt Lake City-based provider of asset-backed financing to small and medium-sized businesses. As part of this transaction, the Company’s 99% interest in the equity of NMC was contributed to NM Holdco. This approximately $15,500 transaction was financed with borrowings on NMC’s credit facility.

NM Holdco currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2020, the portfolio totaled approximately $412,350 of commitments, of which $154,885 were funded, on total assets of $180,788. As of December 31, 2019, the portfolio totaled approximately $383,082 of commitments, of which $171,144 were funded, on total assets of $199,417. At September 30, 2020, the portfolio consisted of 133 issuers with an average balance of approximately $1,165 versus 159 issuers with an average balance of approximately $1,076 at December 31, 2019. NMC has a senior credit facility with a bank lending group for $160,000 which expires on October 20, 2021. Borrowings are secured by substantially all of NMC’s assets. NMC’s credit facility, which is non-recourse to us, had approximately $109,589 and $122,551 of borrowings outstanding at September 30, 2020 and December 31, 2019, respectively. For the three months ended September 30, 2020 and 2019, NM Holdco had net income of $1,044 and $1,192, respectively, on gross income of $4,432 and $6,274, respectively. For the nine months ended September 30, 2020 and 2019, NM Holdco had net income of $3,544 and $2,057, respectively, on gross income of $15,163 and $14,368, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NM Holdco’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NM Holdco will be able to maintain consistent dividend payments to us.

SOLAR SENIOR CAPITAL LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)

September 30, 2020

(in thousands, except share amounts)

Note 12. Capital Share Transactions

As of September 30, 2020 and September 30, 2019, 200,000,000 shares of $0.01 par value capital stock were authorized.

Transactions in capital stock were as follows:


	Shares				Amount
	Three months ended September 30, 2020		Three months ended September 30, 2019		Three months ended September 30, 2020		Three months ended September 30, 2019
Shares issued in reinvestment of distributions		—		992	$	—	$	17

Net increase		—		992	$	—	$	17


	Shares				Amount
	Nine months ended September 30, 2020		Nine months ended September 30, 2019		Nine months ended September 30, 2020		Nine months ended September 30, 2019
Shares issued in reinvestment of distributions		2,820		4,242	$	48	$	72

Net increase		2,820		4,242	$	48	$	72

Note 13. Subsequent Events

The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.

On October 6, 2020, the Board declared a monthly distribution of $0.10 per share payable on October 30, 2020 to stockholders of record as of October 22, 2020.

On November 5, 2020, the Board declared a monthly distribution of $0.10 per share payable on December 2, 2020 to stockholders of record as of November 19, 2020.

The global outbreak of the COVID-19 pandemic, and the related effect on the U.S. and global economies, has continued to have adverse consequences for the business operations of some of the Company’s portfolio companies and, as a result, has had adverse effects on the Company’s operations. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, remain uncertain. The operational and financial performance of the issuers of securities in which the Company invests depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn adversely affect the value and liquidity of the Company’s investments and negatively impact the Company’s performance.

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Solar Senior Capital Ltd.:

Results of Review of Interim Financial Information

We have reviewed the consolidated statement of assets and liabilities of Solar Senior Capital Ltd. (and subsidiaries) (the Company), including the consolidated schedule of investments, as of September 30, 2020, the related consolidated statements of operations and changes in net assets for the three-month and nine-month periods ended September 30, 2020 and 2019, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2020 and 2019, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the Company as of December 31, 2019, and the related consolidated statements of operations, changes in net assets, and cash flows for the year then ended (not presented herein); and in our report dated February 20, 2020, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. 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 reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

New York, New York

November 5, 2020

Item 2.

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

The information contained in this section should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:

•

our future operating results, including our ability to achieve objectives as a result of the current COVID-19 pandemic;

•

our business prospects and the prospects of our portfolio companies;

•

the impact of investments that we expect to make;

•

our contractual arrangements and relationships with third parties;

•

the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon;

•

the impact of any protracted decline in the liquidity of credit markets on our business and the impact of the COVID-19 pandemic thereon;

•

the ability of our portfolio companies to achieve their objectives, including as a result of the current COVID-19 pandemic;

•

the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon;

•

market conditions and our ability to access alternative debt markets and additional debt and equity capital, and the impact of the COVID-19 pandemic thereon;

•

our expected financings and investments;

•

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 impact of the COVID-19 pandemic thereon; and

•

the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments and the impacts of the COVID-19 pandemic thereon.

These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:

•

an economic downturn, including as a result of the current COVID-19 pandemic, could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies;

•

a contraction of available credit and/or an inability to access the equity markets, including as a result of the current COVID-19 pandemic, could impair our lending and investment activities;

•

interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy;

•

currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and

•

the risks, uncertainties and other factors we identify in Item 1A. — Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2019, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC.

We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in “Risk Factors” and elsewhere in this report.

We have based the forward-looking statements included in this report on information available to us on the date of this 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 any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Overview

Solar Senior Capital Ltd. (“Solar Senior”, the “Company”, “we” or “our”), a Maryland corporation formed in December 2010, is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for tax purposes, the Company has elected to be treated, and intend to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).

On February 24, 2011, we priced our initial public offering, selling 9.0 million shares, including the underwriters’ over-allotment, raising approximately $168 million in net proceeds. Concurrent with this offering, Solar Senior Capital Investors LLC, an entity controlled by Michael S. Gross, our Chairman, Co-Chief Executive Officer and President, and Bruce Spohler, our Co-Chief Executive Officer and Chief Operating Officer, purchased an additional 500,000 shares through a concurrent private placement, raising another $10 million.

We invest primarily in privately held U.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. We define “middle market” to refer to companies with annual revenues between $50 million and $1 billion. Our investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by directly and indirectly investing in senior loans, including first lien, stretch-senior, and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which we refer to collectively as “senior loans.” We may also invest in debt of public companies that are thinly traded or in equity securities. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will be invested directly and indirectly in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarily LIBOR, plus a premium. 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 which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securities rated below investment grade are often referred to as “leveraged loans,” “high yield” or “junk” securities, and may be considered “high risk” compared to debt instruments that are rated investment grade. In addition, some of our debt investments are not scheduled to fully amortize over their stated terms, which could cause us to suffer losses if the respective issuer of such debt investment is unable to refinance or repay their remaining indebtedness at maturity. While the Company does not typically seek to invest in traditional equity securities as part of its investment objective, the Company may occasionally acquire some equity securities in connection with senior loan investments and in certain other unique circumstances, such as the Company’s equity investments in Gemino Healthcare Finance, LLC (“Gemino”) and North Mill Holdco LLC (“NM Holdco”).

We invest in senior loans made primarily to private, leveraged middle-market companies with approximately $20 million to $100 million of earnings before income taxes, depreciation and amortization (“EBITDA”). Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our direct investments in individual securities will generally range between $5 million and $30 million each, although we expect that this investment size will vary proportionately with the size of our capital base and/or strategic initiatives. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside of the United States. We may invest up to 30% of our total assets in such opportunistic investments, including loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the 1940 Act. Our investment activities are managed by Solar Capital Partners, LLC (“Solar Capital Partners” or “Investment Adviser”) and supervised by our board of directors, a majority of whom are non-interested, as such term is defined in the 1940 Act. Solar Capital Management, LLC (“Solar Capital Management” or “Administrator”) provides the administrative services necessary for us to operate.

As of September 30, 2020, the Investment Adviser has directly invested approximately $9.5 billion in more than 400 different portfolio companies since 2006. Over the same period, the Investment Adviser completed transactions with approximately 200 different financial sponsors.

Recent Developments

On October 6, 2020, the Board declared a monthly distribution of $0.10 per share payable on October 30, 2020 to stockholders of record as of October 22, 2020.

On November 5, 2020, the Board declared a monthly distribution of $0.10 per share payable on December 2, 2020 to stockholders of record as of November 19, 2020.

Investments

Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in “eligible portfolio companies.” The definition of “eligible portfolio company” includes certain public companies that do not have any securities listed on a national securities exchange and companies whose securities are listed on a national securities exchange but whose market capitalization is less than $250 million.

Revenue

We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmark London interbank offered rate (“LIBOR”), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable monthly or quarterly but may be bi-monthly or semi-annually. In addition, our investments may provide payment-in-kind (“PIK”) interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.

Expenses

All investment professionals of the Investment Adviser and their respective staffs, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for by Solar Capital Partners. We bear all other costs and expenses of our operations and transactions, including (without limitation):

•

the cost of our organization and public offerings;

•

the cost of calculating our net asset value, including the cost of any third-party valuation services;

•

the cost of effecting sales and repurchases of our shares and other securities;

•

interest payable on debt, if any, to finance our investments;

•

fees payable to third parties relating to, or associated with, making investments, including fees and expenses associated with performing due diligence reviews of prospective investments and advisory fees;

•

transfer agent and custodial fees;

•

fees and expenses associated with marketing efforts;

•

federal and state registration fees, any stock exchange listing fees;

•

federal, state and local taxes;

•

independent directors’ fees and expenses;

•

brokerage commissions;

•

fidelity bond, directors and officers errors and omissions liability insurance and other insurance premiums;

•

direct costs and expenses of administration, including printing, mailing, long distance telephone and staff;

•

fees and expenses associated with independent audits and outside legal costs;

•

costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state securities laws; and

•

all other expenses incurred by either Solar Capital Management or us in connection with administering our business, including payments under the Administration Agreement that will be based upon our allocable portion of overhead and other expenses incurred by Solar Capital Management in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and our allocable portion of the costs of compensation and related expenses of our chief compliance officer and our chief financial officer and their respective staffs.

We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.

Portfolio and Investment Activity

During the three months ended September 30, 2020, we invested $7.2 million across 6 portfolio companies. This compares to investing $22.1 million in 15 portfolio companies for the three months ended September 30, 2019. Investments sold or prepaid during the three months ended September 30, 2020 totaled $38.7 million versus $27.7 million for the three months ended September 30, 2019.

At September 30, 2020, our portfolio consisted of 44 portfolio companies and was invested 75.9% directly in senior secured loans and 24.1% in common equity/equity interests/warrants (of which 9.1% is Gemino and 15.0% is NM Holdco, through which the Company indirectly invests in senior secured loans), in each case, measured at fair value versus 50 portfolio companies invested 78.4% directly in senior secured loans and 21.6% in common equity/equity interests/warrants (of which 7.4% is Gemino and 13.7% is NM Holdco) at September 30, 2019.

At September 30, 2020, 98.3% or $382.7 million of our income producing investment portfolio* was floating rate and 1.7% or $6.7 million was fixed rate, measured at fair value. At September 30, 2019, 98.1% or $458.0 million of our income producing investment portfolio* was floating rate and 1.9% or $9.0 million was fixed rate, measured at fair value.

Since the initial public offering of Solar Senior on February 24, 2011 and through September 30, 2020, invested capital totaled approximately $1.7 billion in over 145 portfolio companies. Over the same period, Solar Senior completed transactions with more than 100 different financial sponsors.

^*	We have included Gemino Healthcare Finance, LLC and North Mill Holdco LLC within our income producing investment portfolio.

Gemino Healthcare Finance, LLC

We acquired Gemino (d/b/a Gemino Senior Secured Healthcare Finance) on September 30, 2013. Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare industry. Our initial investment in Gemino was $32.8 million. The management team of Gemino co-invested in the transaction and continues to lead Gemino. As of September 30, 2020, Gemino’s management team and Solar Senior own approximately 7% and 93% of the equity in Gemino, respectively.

Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse, $100.0 million credit facility with non-affiliates, which was expandable to $150.0 million under its accordion feature. Effective March 31, 2014, the credit facility was expanded to $105.0 million and again on June 27, 2014 to $110.0 million. On May 27, 2016, Gemino entered into a new $125.0 million credit facility which replaced the previously existing facility. The new facility has similar terms as compared to the previous facility and includes an accordion feature increase to $200.0 million and had a maturity date of May 27, 2020. On June 28, 2019, this $125.0 million facility was amended, extending the maturity date to June 28, 2023.

Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2020, the portfolio totaled approximately $215.1 million of commitments with a total net investment in loans of $37.6 million on total assets of $70.8 million. As of December 31, 2019, the portfolio totaled approximately $203.8 million of commitments with a total net investment in loans of $111.0 million on total assets of $122.1 million. At September 30, 2020, the portfolio consisted of 34 issuers with an average balance of approximately $1.1 million versus 34 issuers with an average balance of approximately $3.3 million at December 31, 2019. All of the commitments in Gemino’s portfolio are floating-rate, senior-secured, cash-pay loans. Gemino’s credit facility, which is non-recourse to us, had approximately $38.0 million and $89.0 million of borrowings outstanding at September 30, 2020 and December 31, 2019, respectively. For the three months ended September 30, 2020 and 2019, Gemino had net income of $0.7 million and $1.1 million, respectively, on gross income of $2.3 million and $3.2 million, respectively. For the nine months ended September 30, 2020 and 2019,

Gemino had net income of $2.4 million and $3.0 million, respectively, on gross income of $8.1 million and $9.7 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in Gemino’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that Gemino will be able to maintain consistent dividend payments to us.

North Mill Holdco LLC

We acquired 100% of the equity interests of North Mill Capital LLC (“NMC”) on October 20, 2017. NMC is a leading asset-backed lending commercial finance company that provides senior secured asset-backed financings to U.S. based small-to-medium-sized businesses primarily in the manufacturing, services and distribution industries. We invested approximately $51 million to effect the transaction. Subsequently, the Company contributed 1% of its equity interest in NMC to ESP SSC Corporation. Immediately thereafter, the Company and ESP SSC Corporation contributed their equity interests to North Mill. On May 1, 2018, North Mill merged with and into NMC, with NMC being the surviving company. The Company and ESP SSC Corporation own 99% and 1% of the equity interests of NMC, respectively. The management team of NMC continues to lead NMC. On June 28, 2019, NM Holdco, a newly formed entity and ESP SSC Corporation acquired Summit Financial Resources, a Salt Lake City-based provider of asset-backed financing to small and medium-sized businesses. As part of this transaction, the Company’s 99% interest in the equity of NMC was contributed to NM Holdco. This approximately $15.5 million transaction was financed with borrowings on NMC’s credit facility.

NM Holdco currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As of September 30, 2020, the portfolio totaled approximately $412.4 million of commitments, of which $154.9 million were funded, on total assets of $180.8 million. As of December 31, 2019, the portfolio totaled approximately $383.1 million of commitments, of which $171.1 million were funded, on total assets of $199.4 million. At September 30, 2020, the portfolio consisted of 133 issuers with an average balance of approximately $1.2 million versus 159 issuers with an average balance of approximately $1.1 million at December 31, 2019. NMC has a senior credit facility with a bank lending group for $160.0 million which expires on October 20, 2021. Borrowings are secured by substantially all of NMC’s assets. NMC’s credit facility, which is non-recourse to us, had approximately $109.6 million and $122.6 million of borrowings outstanding at September 30, 2020 and December 31, 2019, respectively. For the three months ended September 30, 2020 and 2019, NM Holdco had net income of $1.0 million and $1.2 million, respectively on gross income of $4.4 million and $6.3 million, respectively. For the nine months ended September 30, 2020 and 2019, NM Holdco had net income of $3.5 million and $2.1 million, respectively on gross income of $15.2 million and $14.4 million, respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NM Holdco’s funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NM Holdco will be able to maintain consistent dividend payments to us.

Critical Accounting Policies

The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.

Valuation of Portfolio Investments

We conduct the valuation of our assets, pursuant to which our net asset value is determined, at all times consistent with GAAP, and the 1940 Act. Our valuation procedures are set forth in more detail below:

The Company conducts the valuation of its assets in accordance with GAAP and the 1940 Act. The Company generally values its assets on a quarterly basis, or more frequently if required. Investments for which market quotations are readily available on an exchange are valued at the closing price on the date of valuation. The Company may also obtain quotes with respect to certain of its investments from pricing services or brokers or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company’s board of directors (the “Board”).

value, each shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser’s preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default and the Investment Adviser does not expect to reach an agreement with the portfolio company in the subsequent quarter; (iv) the Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm.

Accounting Standards Codification (“ASC”) Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:

Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.

Level 3: Unobservable inputs for the asset or liability.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.

Revenue Recognition

The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Investments that are expected to pay regularly scheduled interest and/or dividends in cash are generally placed on non-accrual status when principal or interest/dividend cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest/dividend cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest or dividends are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining interest or dividend obligations. Interest or dividend cash payments received on investments may be recognized as income or applied to principal depending upon management’s judgment. Some of our investments may have contractual PIK interest or dividends. PIK interest and dividends computed at the contractual rate are accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received,

they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, the Company capitalizes the accrued interest or dividends receivable (reflecting such amounts as the basis in the additional securities received). PIK generally becomes due at the maturity of the investment or upon the investment being called by the issuer. At the point the Company believes PIK is not expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends is reversed from the related receivable through interest or dividend income, respectively. The Company does not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if the Company again believes that PIK is expected to be realized. Loan origination fees, original issue discount, and market discounts are capitalized and amortized into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and other investments as interest income when we receive such amounts. Capital structuring fees are recorded as other income when earned.

The typically higher yields and interest rates on PIK securities, to the extent we invested, reflects the payment deferral and increased credit risk associated with such instruments and that such investments may represent a significantly higher credit risk than coupon loans. PIK securities may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the deferral of PIK interest also increases the loan-to-value ratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Investment Adviser based on non-cash accruals that ultimately may not be realized, but the Investment Adviser will be under no obligation to reimburse the Company for these fees. For the three and nine months ended September 30, 2020, capitalized PIK income totaled $0.2 million and $0.3 million, respectively. For the three and nine months ended September 30, 2019, capitalized PIK income totaled $0.2 million and $0.5 million, respectively.

Net Realized Gain or Loss and Net Change in Unrealized Gain or Loss

We generally measure realized gain or loss by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized. Gains or losses on investments are calculated by using the specific identification method.

Income Taxes

Solar Senior Capital, a U.S. corporation, has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify for taxation as a RIC, the Company is required, among other things, to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income.

Recent Accounting Pronouncements

RESULTS OF OPERATIONS

Results comparisons are for the three and nine months ended September 30, 2020 and 2019:

Investment Income

For the three and nine months ended September 30, 2020, gross investment income totaled $7.9 million and $24.5 million, respectively. For the three and nine months ended September 30, 2019, gross investment income totaled $10.4 million and $30.6 million, respectively. The decrease in gross investment income for the year over year three and nine month periods was primarily due to a reduction in portfolio yield, mainly as a result of the approximately 175 basis point decrease in average LIBOR year over year, on a smaller income producing investment portfolio on average.

Expenses

Net expenses totaled $3.1 million and $8.9 million, respectively, for the three and nine months ended September 30, 2020, of which $1.0 million and $3.3 million, respectively, were gross base management fees and gross performance-based incentive fees and $1.9 million and $6.1 million, respectively, were interest and other credit facility expenses. Over the same periods, $0.7 and $2.6 million, respectively, of base management fees were waived and $0.0 million and $0.1 million, respectively, of performance-based incentive fees were waived. Administrative services and other general and administrative expenses totaled $0.9 million and $2.3 million, respectively, for the three and nine months ended September 30, 2020. Net expenses totaled $4.7 million and $13.7 million, respectively, for the three and nine months ended September 30, 2019, of which $1.8 million and $5.2 million, respectively, were gross base management fees and gross performance-based incentive fees and $2.8 million and $8.2 million, respectively, were interest and other credit facility expenses. Over the same periods, $0.1 and $0.5 million, respectively, of base management fees were waived and $0.5 million and $1.6 million, respectively, of performance-based incentive fees were waived. Administrative services and other general and administrative expenses totaled $0.8 million and $2.4 million, respectively, for the three and nine months ended September 30, 2019. Expenses generally consist of management fees, performance-based incentive fees, administrative services expenses, insurance, legal expenses, directors’ expenses, audit and tax expenses, transfer agent fees and expenses, and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The decrease in net expenses year over year is primarily due to lower interest expense due to reductions in LIBOR and an increase in the waivers of fees.

Net Investment Income

The Company’s net investment income totaled $4.8 million and $15.6 million, or $0.30 and $0.97, per average share, respectively, for the three and nine months ended September 30, 2020. The Company’s net investment income totaled $5.7 million and $17.0 million, or $0.35 and $1.06, per average share, respectively, for the three and nine months ended September 30, 2019.

Net Realized Gain (Loss)

The Company had investment sales and prepayments totaling approximately $38.7 million and $115.7 million, respectively, for the three and nine months ended September 30, 2020. Net realized gains over the same periods were $0.04 million and $0.1 million, respectively. The Company had investment sales and prepayments totaling approximately $27.7 million and $55.1 million, respectively, for the three and nine months ended September 30, 2019. Net realized losses over the same periods were $5.0 million and $4.8 million, respectively. Net realized gains for the three and nine months ended September 30, 2020 were immaterial. Net realized losses for the three and nine months ended September 30, 2019 were primarily related to the Company’s exit of Trident USA Health Services partially offset by gains on the exit of Engineering Solutions & Products, LLC.

Net Change in Unrealized Gain (Loss)

For the three and nine months ended September 30, 2020, net change in unrealized gain (loss) on the Company’s assets and liabilities totaled $3.8 million and ($8.6) million, respectively. For the three and nine months ended September 30, 2019, net change in unrealized gain on the Company’s assets and liabilities totaled 4.5 million and $5.0 million, respectively. Net unrealized gain for the three months ended September 30, 2020 is primarily due to appreciation on our investments in Confie Seguros Holding II Co., Advantage Sales and Marketing, Inc., Unified Physician Management, LLC and US Radiology Specialists, Inc., among others, partially offset by the reversal of previously recognized unrealized appreciation in the value of our investment in Solara Medical Supplies, Inc. as well as depreciation in the value of our investment in TwentyEighty, Inc. Net unrealized loss for the nine months ended September 30, 2020 is primarily due to depreciation on our investments in North Mill Holdco LLC, Gemino Healthcare Finance, LLC, Composite Technology Acquisition Corp., DISA Holdings Acquisition Subsidiary Corp. and SHO Holdings I Corporation, among others, partially offset by appreciation on our investments in RxSense Holdings LLC and Advantage Sales and Marketing, Inc., among others. Net unrealized gain for the three months ended September 30, 2019 is primarily due to the reversal of previously recorded unrealized loss on Trident USA Health Services as well as appreciation on our investments in TwentyEighty, Inc. and Gemino Healthcare Finance, LLC, among others, partially offset by depreciation in NM Holdco and Confie Seguros Holding II Co., among others. Net unrealized gain for the nine months ended September 30, 2019 is primarily due to the reversal of previously recorded unrealized loss on Trident USA Health Services as well as appreciation on our investments in TwentyEighty, Inc. and Gemino Healthcare Finance, LLC, among others, partially offset by depreciation in NM Holdco, Aegis Toxicology Sciences Corporation and American Teleconferencing Services, Ltd., among others. The year over year net change in unrealized loss for the nine month period ended September 30, 2020 is impacted by uncertainty due to the COVID-19 pandemic and its effect on market yields and fundamental portfolio company performance.

Net Increase in Net Assets From Operations

For the three and nine months ended September 30, 2020, the Company had a net increase in net assets resulting from operations of $8.6 million and $7.1 million, respectively. For the same periods, earnings per average share were $0.54 and $0.44, respectively. For the three and nine months ended September 30, 2019, the Company had a net increase in net assets resulting from operations of $5.2 million and $17.1 million, respectively. For the same periods, earnings per average share were $0.32 and $1.07, respectively.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s liquidity and capital resources are generally available through its revolving credit facilities, unsecured notes and through periodic follow-on equity offerings, as well as from cash flows from operations, investment sales and pre-payments of investments. At September 30, 2020, the Company had $139.3 million in borrowings outstanding on its credit facilities and $245.7 million of unused capacity, subject to borrowing base limits.

On May 31, 2019, the Company as transferor and FLLP 2015-1, LLC, a wholly-owned subsidiary of the Company, as borrower entered into amendment number five to the $75 million credit facility with Wells Fargo Bank, NA acting as administrative agent (the “FLLP Facility”). The Company acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature on May 31, 2024. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.15-2.25%.

On June 1, 2018, the $200 million senior secured revolving credit facility with our wholly-owned subsidiary SUNS SPV LLC as borrower and Citibank, N.A. acting as administrative agent (the “Credit Facility”) was refinanced by way of amendment, allowing for greater investment flexibility and the extension of the maturity date, among other changes. On July 13, 2018, commitments to the Credit Facility, as amended, were increased from $200 million to $225 million by utilizing the accordion feature.

In September 2016, the Company closed a follow-on public equity offering of 4.5 million shares of common stock at $16.76 per share raising approximately $75.0 million in net proceeds. In the future, the Company may raise additional equity or debt capital, among other considerations. The primary uses of funds will be investments in portfolio companies, reductions in debt outstanding and other general corporate purposes. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.

Cash Equivalents

We deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. We held approximately $165 million of cash equivalents as of September 30, 2020.

Debt

Unsecured Notes

On March 31, 2020, the Company closed a private offering of $85 million of the 2025 Unsecured Notes with a fixed interest rate of 3.90% and a maturity date of March 31, 2025. Interest on the 2025 Unsecured Notes is due semi-annually on March 31 and September 30. The 2025 Unsecured Notes were issued in a private placement only to qualified institutional buyers.

Revolving Loan Facilities

Credit Facility, Solar Senior and SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature. The Credit Facility was amended on November 7, 2012, June 30, 2014 and May 29, 2015 to extend maturities and add greater investment flexibility, among other changes. On June 1, 2018, the Credit Facility was refinanced by way of amendment, allowing for greater investment flexibility and the extension of the maturity date, among other changes. On July 13, 2018, commitments to the Credit Facility, as amended, were increased from $200 million to $225 million by utilizing the accordion feature. There were $18.4 million of borrowings outstanding as of September 30, 2020 under the Credit Facility.

On May 31, 2019, the Company as transferor and FLLP 2015-1, LLC, a wholly-owned subsidiary of the Company, as borrower entered into amendment number five to the $75 million FLLP Facility with Wells Fargo Bank, NA acting as administrative agent. The Company acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature on May 31, 2024. The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.15-2.25%. The Company and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. There were $35.9 million of borrowings outstanding as of September 30, 2020. At September 30, 2020, the Company was in compliance with all financial and operational covenants required by its credit facilities.

Contractual Obligations


	Payments due by Period as of September 30, 2020 (dollars in millions)
	Total		Less than 1 year	1-3 years		3-5 years		More than 5 years
Revolving credit facilities (1)	$	54.3	$ —	$	18.4	$	35.9	$ —
Unsecured senior notes		85.0	—		—		85.0	—

(1)	At September 30, 2020, we had a total of $245.7 million of unused borrowing capacity under our revolving credit facilities, subject to borrowing base limits.

Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss.

Senior Securities

Information about our senior securities is shown in the following table as of the quarter ended September 30, 2020 and each year ended December 31 since the Company commenced operations, unless otherwise noted. The “—” indicates information which the SEC expressly does not require to be disclosed for certain types of senior securities.


Class and Year	Total Amount Outstanding(1)		Asset Coverage Per Unit(2)		Involuntary Liquidating Preference Per Unit(3)	Average Market Value Per Unit(4)
Credit Facility
Fiscal 2020 (through September 30, 2020)	$	18,400	$	372	$ —		N/A
Fiscal 2019		157,600		1,671	—		N/A
Fiscal 2018		119,200		1,770	—		N/A
Fiscal 2017		124,200		3,175	—		N/A
Fiscal 2016		98,300		3,738	—		N/A
Fiscal 2015		116,200		2,621	—		N/A
Fiscal 2014		143,200		2,421	—		N/A
Fiscal 2013		61,400		4,388	—		N/A
Fiscal 2012		39,100		5,453	—		N/A
Fiscal 2011		8,600		21,051	—		N/A
FLLP Facility
Fiscal 2020 (through September 30, 2020)		35,903		727	—		N/A
Fiscal 2019		53,602		569	—		N/A
Fiscal 2018		51,371		762	—		N/A
2025 Unsecured Notes
Fiscal 2020 (through September 30, 2020)		85,000		1,720	—		N/A
Total Senior Securities
Fiscal 2020 (through September 30, 2020	$	139,303	$	2,819	$ —		N/A
Fiscal 2019		211,202		2,240	—		N/A
Fiscal 2018		170,571		2,532	—		N/A
Fiscal 2017		124,200		3,175	—		N/A
Fiscal 2016		98,300		3,738	—		N/A
Fiscal 2015		116,200		2,621	—		N/A
Fiscal 2014		143,200		2,421	—		N/A
Fiscal 2013		61,400		4,388	—		N/A
Fiscal 2012		39,100		5,453	—		N/A
Fiscal 2011		8,600		21,051	—		N/A

(1)	Total amount of each class of senior securities outstanding (in thousands) at the end of the period presented.

(2)

The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by senior securities representing indebtedness. This asset coverage ratio is multiplied by one thousand to determine the Asset Coverage Per Unit. In order to determine the specific Asset Coverage Per Unit for each class of debt, the total Asset Coverage Per Unit was divided based on the amount outstanding at the end of the period for each. As of September 30, 2020, asset coverage was 281.9%.

(3)	The amount to which such class of senior security would be entitled upon the involuntary liquidation of the issuer in preference to any security junior to it.

(4)	Not applicable, we do not have senior securities that are registered for public trading.

We have also entered into two contracts under which we have future commitments: the Advisory Agreement, pursuant to which Solar Capital Partners has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which Solar Capital Management has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the Advisory Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of the Administrator’s overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of

the costs of our chief financial officer and chief compliance officer and their respective staffs. Either party may terminate each of the Advisory Agreement and Administration Agreement without penalty upon 60 days’ written notice to the other. See note 3 to our Consolidated Financial Statements.

Off-Balance Sheet Arrangements

From time-to-time and in the normal course of business, the Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital commitments always take into account the Company’s liquidity and cash available for investment, portfolio and issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments at September 30, 2020 and December 31, 2019, respectively:


	September 30, 2020		December 31, 2019
(in millions)
Kindred Biosciences, Inc	$	2.1	$	2.1
Worldwide Facilities, LLC.		1.5		2.3
Gemino Healthcare Finance, LLC*		1.4		1.4
Rxsense Holdings LLC.		1.2		—
Neuronetics, Inc.		1.0		—
Drilling Info Holdings, Inc.		0.8		—
ENS Holdings III Corp. & ES Opco USA LLC		0.6		1.4
Sentry Data Systems, Inc.		0.5		—
Composite Technology Acquisition Corp.		0.5		1.1
Pinnacle Treatment Centers, Inc.		0.5		—
Cerapedics, Inc.		0.4		0.8
AQA Acquisition Holding, Inc.		0.1		0.1
Solara Medical Supplies, Inc.		—		3.2
MSHC, Inc.		—		2.4
US Radiology Specialists, Inc.		—		2.2
Rubius Therapeutics, Inc		—		2.1
WIRB-Copernicus Group, Inc.		—		1.7
Unified Physician Management, LLC		—		1.6
Altern Marketing, LLC		—		1.2
MRI Software LLC		—		1.2
Alimera Sciences, Inc.		—		0.2

Total Commitments	$	10.6	$	25.0

*	The Company controls the funding of the Gemino commitment and may cancel it at its discretion.

Distributions

The following table reflects the cash distributions per share on our common stock for the two most recent fiscal years and the current fiscal year to date:


Date Declared	Record Date	Payment Date	Amount
Fiscal 2020
November 5, 2020	November 19, 2020	December 2, 2020	$	0.10
October 6, 2020	October 22, 2020	October 30, 2020		0.10
September 9, 2020	September 24, 2020	October 2, 2020		0.10
August 4, 2020	August 20, 2020	September 2, 2020		0.10
July 7, 2020	July 22, 2020	July 31, 2020		0.10
June 4, 2020	June 18, 2020	July 1, 2020		0.10
May 7, 2020	May 22, 2020	June 2, 2020		0.10
April 2, 2020	April 23, 2020	May 1, 2020		0.1175
February 20, 2020	March 19, 2020	April 3, 2020		0.1175
February 4,2020	February 20, 2020	February 28, 2020		0.1175
January 8, 2020	January 23, 2020	January 31, 2020		0.1175

*Total (2020)*			$	1.17

Fiscal 2019
December 5, 2019	December 19, 2019	January 3, 2020	$	0.1175
November 4, 2019	November 21, 2019	December 3, 2019		0.1175
October 3, 2019	October 17, 2019	November 1, 2019		0.1175
September 3, 2019	September 20, 2019	October 2, 2019		0.1175
August 5, 2019	August 22, 2019	August 30, 2019		0.1175
July 2, 2019	July 25, 2019	August 1, 2019		0.1175
June 5, 2019	June 20, 2019	July 2, 2019		0.1175
May 6, 2019	May 23, 2019	June 4, 2019		0.1175
April 4, 2019	April 18, 2019	May 1, 2019		0.1175
February 21, 2019	March 21, 2019	April 3, 2019		0.1175
February 6, 2019	February 21, 2019	March 1, 2019		0.1175
January 8, 2019	January 24, 2019	February 1, 2019		0.1175

*YTD Total (2019)*			$	1.41

Fiscal 2018
December 6, 2018	December 20, 2018	January 4, 2019	$	0.1175
November 5, 2018	November 21, 2018	December 4, 2018		0.1175
October 4, 2018	October 24, 2018	November 1, 2018		0.1175
September 6, 2018	September 25, 2018	October 2, 2018		0.1175
August 2, 2018	August 23, 2018	August 31, 2018		0.1175
July 3, 2018	July 19, 2018	July 31, 2018		0.1175
June 6, 2018	June 21, 2018	July 3, 2018		0.1175
May 7, 2018	May 23, 2018	June 1, 2018		0.1175
April 3, 2018	April 19, 2018	May 2, 2018		0.1175
February 22, 2018	March 22, 2018	April 3, 2018		0.1175
February 7, 2018	February 22, 2018	March 1, 2018		0.1175
January 5, 2018	January 18, 2018	January 31, 2018		0.1175

*Total (2018)*			$	1.41

Tax characteristics of all distributions will be reported to stockholders on Form 1099 after the end of the calendar year. Future distributions, if any, will be determined by our Board. We expect that our distributions to stockholders will generally be from accumulated net investment income, from net realized capital gains or non-taxable return of capital, if any, as applicable.

We have elected to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.

We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.

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, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare distributions if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company.

With respect to the distributions to stockholders, income from origination, structuring, closing and certain other upfront fees associated with investments in portfolio companies are treated as taxable income and accordingly, distributed to stockholders. For the nine months ended September 30, 2020 and December 31, 2019, 17.3% and 12.3% of distributions were funded from the waiver of management and/or incentive fees.

Related Parties

We have entered into a number of business relationships with affiliated or related parties, including the following:

•

We have entered into the Advisory Agreement with Solar Capital Partners. Mr. Gross, our Chairman, Co-Chief Executive Officer and President and Mr. Spohler, our Co-Chief Executive Office, Chief Operating Officer and board member, are managing members and senior investment professionals of, and have financial and controlling interests in, the Investment Adviser. In addition, Mr. Peteka, our Chief Financial Officer, Treasurer and Secretary serves as the Chief Financial Officer for Solar Capital Partners.

•

The Administrator provides us with the office facilities and administrative services necessary to conduct day-to-day operations pursuant to our Administration Agreement. We reimburse the Administrator for the allocable portion of overhead and other expenses incurred by it in performing its obligations under the Administration Agreement, including rent, the fees and expenses associated with performing compliance functions, and the compensation of our chief compliance officer, our chief financial officer and their respective staffs.

•

We have entered into a license agreement with the Investment Adviser, pursuant to which the Investment Adviser has granted us a non-exclusive, royalty-free license to use the name “Solar Capital.”

The Investment Adviser may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Investment Adviser presently serves as investment adviser to Solar Capital Ltd., a publicly traded BDC, which focuses on investing in senior secured loans, including stretch-senior loans and to a lesser extent unsecured loans and equity securities, as well as SCP Private Income BDC LLC, an unlisted BDC that focuses primarily in senior secured loans, including asset-based loans and first lien loans. In addition, Michael S. Gross, our Chairman, Co-Chief Executive Officer and President, Bruce Spohler, our Co-Chief Executive Officer and Chief Operating Officer, and Richard L. Peteka, our Chief Financial Officer, serve in similar capacities for Solar Capital Ltd. and SCP Private Credit Income BDC LLC. The Investment Adviser and certain investment advisory affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Adviser or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Investment Adviser’s allocation procedures. On June 13, 2017, the Adviser received an exemptive order that permits the Company to participate in negotiated co-investment transactions with certain affiliates, in a manner consistent with the Company’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, and pursuant to various conditions (the “Order”). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity’s investment strategy, on an alternating basis. Although the Adviser’s investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its 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 the Adviser.

Related party transactions may occur among Solar Senior Capital Ltd., Gemino and NM Holdco. These transactions may occur in the normal course of business. No administrative fees are paid to Solar Capital Partners by Gemino or NM Holdco.

In addition, we have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the Maryland General Corporation Law.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We are subject to financial market risks, including changes in interest rates. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities that we hold. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In a prolonged low interest rate environment, including a reduction of LIBOR to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. During the nine months ended September 30, 2020, certain of the investments in our comprehensive investment portfolio had floating interest rates. These floating rate investments were primarily based on floating LIBOR and typically have durations of one to three months after which they reset to current market interest rates. Additionally, some of these investments have LIBOR floors. The Company also has revolving credit facilities that are generally based on floating LIBOR. Assuming no changes to our balance sheet as of September 30, 2020 and no new defaults by portfolio companies, a hypothetical one percent decrease in LIBOR on our comprehensive floating rate assets and liabilities would decrease our net investment income by two cents per average share over the next twelve months. Assuming no changes to our balance sheet as of September 30, 2020 and no new defaults by portfolio companies, a hypothetical one percent increase in LIBOR on our comprehensive floating rate assets and liabilities would decrease our net investment income by approximately two cents per average share over the next twelve months. However, we may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options, swaps and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in any benefits of certain changes in interest rates with respect to our portfolio of investments. At September 30, 2020, we have no interest rate hedging instruments outstanding on our balance sheet.


Increase (Decrease) in LIBOR		(1.00	%)		1.00	%
Increase (Decrease) in Net Investment Income Per Share Per Year	$	(0.02	)	$	(0.02	)

Item 4.

Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of September 30, 2020 (the end of the period covered by this report), we, including our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Co-Chief Executive Officers and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.

(b) Changes in Internal Controls Over Financial Reporting

Management has not identified any change in the Company’s internal control over financial reporting that occurred during the third quarter of 2020 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

We, Solar Capital Management, LLC and Solar Capital Partners, LLC are not currently subject to any material pending legal proceedings threatened against us. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations beyond what has been disclosed with these financial statements.

Item 1A.

Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in the February 20, 2020 filing of our Annual Report on Form 10-K, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. Aside from the below updated risk factors, there have been no material changes during the period ended September 30, 2020 to the risk factors discussed in “Risk Factors” in the February 20, 2020 filing of our Annual Report on Form 10-K.

Events outside of our control, including public health crises, could negatively affect our portfolio companies and our results of our operations.

Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, in December 2019, a novel strain of coronavirus (also known as “COVID-19”) surfaced in China and has since spread and continues to spread to other countries, including the United States This outbreak has led and for an unknown period of time will continue to lead to disruptions in local, regional, national and global markets and economies affected thereby, including a recession and a steep increase in unemployment in the United States.

With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) government imposition of various forms of shelter-in-place orders and the closing of “non-essential” businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses.

While several countries, as well as certain states in the United States, have begun to lift public health restrictions with the view to reopening their economies, recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Health advisors warn that recurring COVID-19 outbreaks will continue if reopening is pursued too soon or in the wrong manner, which may lead to the re-introduction or continuation of certain public health restrictions (such as instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues). Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration, severity or potential worsening of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the COVID-19 pandemic or treat its impact, all of which are beyond our control.

This outbreak is having, and any future outbreaks could have, an adverse impact on the markets and the economy in general, which could have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by us and returns to us, among other things. As of the date of this 10-Q, it is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on us and our portfolio companies Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations.

We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted.

Any public health emergency, including the COVID-19 pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments. Our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that may not show the complete impact of the COVID-19 pandemic and the resulting measures taken in response thereto.These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.

We are currently operating in a period of capital markets disruption and economic uncertainty.

The impact of COVID- 19 has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As COVID-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess. Some economists and major investment banks have expressed concern that the continued spread of the virus globally could lead to a world-wide economic downturn.

Disruptions in the capital markets caused by the COVID-19 pandemic have increased the spread between the yields realized on risk-free and higher risk securities, resulting in illiquidity in parts of the capital markets. These and future market disruptions and/or illiquidity would be expected to have an adverse effect on our business, financial condition, results of operations and cash flows. Unfavorable economic conditions also would be expected to 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 have limited and could continue to limit our investment originations, limit our ability to grow and have a material negative impact on our operating results and the fair values of our debt and equity investments.

Additionally, the recent disruption in economic activity caused by the COVID-19 pandemic has had, and may continue to have, a negative effect on the potential for liquidity events involving our investments. The illiquidity of our investments may make it difficult for us to sell such investments to access capital if required, and as a result, we could realize significantly less than the value at which we have recorded our investments if we were required to sell them for liquidity purposes. An inability to raise or access capital, and any required sale of all or a portion of our investments as a result, could have a material adverse effect on our business, financial condition or results of operations.

Adverse developments in the credit markets may impair our ability to secure debt financing.

In past economic downturns, such as the financial crisis in the United States that began in mid-2007 and during other times of extreme market volatility, many commercial banks and other financial institutions stopped lending or significantly curtailed their lending activity. In addition, in an effort to stem losses and reduce their exposure to segments of the economy deemed to be high risk, some financial institutions limited routine refinancing and loan modification transactions and even reviewed the terms of existing facilities to identify bases for accelerating the maturity of existing lending facilities. If these conditions recur, for example as a result of the COVID-19 pandemic, it may be difficult for us to obtain desired financing to finance the growth of our investments on acceptable economic terms, or at all.

So far, the COVID-19 pandemic has resulted in, and until fully resolved is likely to continue to result in, among other things, increased draws by borrowers on revolving lines of credit and increased requests by borrowers for amendments, modifications and waivers of their credit agreements to avoid default or change payment terms, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans. In addition, the duration and effectiveness of responsive measures implemented by governments and central banks cannot be predicted. The commencement, continuation, or cessation of government and central bank policies and economic stimulus programs, including changes in monetary policy involving interest rate adjustments or governmental policies, may contribute to the development of or result in an increase in market volatility, illiquidity and other adverse effects that could negatively impact the credit markets and the Company.

If we are unable to consummate credit facilities on commercially reasonable terms, our liquidity may be reduced significantly. If we are unable to repay amounts outstanding under any facility we may enter into and are declared in default or are unable to renew or refinance any such facility, it would limit our ability to initiate significant originations or to operate our business in the normal course. These situations may arise due to circumstances that we may be unable to control, such as inaccessibility of the credit markets, a severe decline in the value of the

U.S. dollar, a further economic downturn or an operational problem that affects third parties or us, and could materially damage our business. Moreover, we are unable to predict when economic and market conditions may become more favorable. Even if such conditions improve broadly and significantly over the long term, adverse conditions in particular sectors of the financial markets could adversely impact our business.

There is uncertainty surrounding potential legal, regulatory and policy changes by new presidential administrations in the United States that may directly affect financial institutions and the global economy.

2020 is a U.S. presidential election year. Changes in federal policy, including tax policies, and at regulatory agencies occur over time through policy and personnel changes following elections, which lead to changes involving the level of oversight and focus on the financial services industry or the tax rates paid by corporate entities. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain pending the results of the presidential election. Uncertainty surrounding future changes may adversely affect our operating environment and therefore our business, financial condition, results of operations and growth prospects.

Changes relating to the LIBOR calculation process may adversely affect the value of our portfolio of LIBOR-indexed, floating-rate debt securities.

LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending transactions between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in floating-rate loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a portfolio company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR. In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivative positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.

Actions by the ICE Benchmark Administration, 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. In addition, any further 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, loans, and other financial obligations or extensions of credit held by or due to us.

On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 pandemic on transition timelines and update the marketplace as soon as possible. It is unclear if after 2021 LIBOR will cease to exist or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. We have exposure to LIBOR, including in financial instruments that mature after 2021. Our exposure arises from the value of our portfolio of LIBOR-indexed, floating-rate debt securities.

In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, 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 a new index calculated by short-term repurchase agreements, backed by Treasury securities called the Secured Overnight Financing Rate (“SOFR”). The Federal Reserve Bank of New York began publishing SOFR in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain, including whether the COVID-19 pandemic will have further effect on LIBOR transition plans.

The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-indexed, floating-rate debt securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established. In the event that the LIBOR Rate is no longer available or published on a current basis or no longer made available or used for determining the interest rate of loans, our administrative agent that manages our loans will generally select a comparable successor rate; provided that (i) to the extent a comparable or successor rate is approved by the administrative

agent, the approved rate shall be applied in a manner consistent with market practice; and (ii) to the extent such market practice is not administratively feasible for the administrative agent, such approved rate shall be applied as otherwise reasonably determined by the administrative agent.

If the current period of capital market disruption and instability continues for an extended period of time, there is a risk that investors in our equity securities may not receive distributions consistent with historical levels or at all or that our distributions may not grow over time and a portion of our distributions may be a return of capital.

We intend to make distributions on a monthly basis 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 make a specified level of cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this quarterly report or incorporated herein by reference, including the COVID-19 pandemic described above. For example, if the temporary closure of many corporate offices, retail stores, and manufacturing facilities and factories in the jurisdictions, including the United States, affected by the COVID-19 pandemic were to continue for an extended period of time, it could result in reduced cash flows to us from our existing portfolio companies, which could reduce cash available for distribution to our stockholders. If we violate certain covenants under our existing or future credit facilities or other leverage, we may be limited in our ability to make distributions. If we declare a distribution and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash distribution payments. To the extent we make distributions to stockholders that include a return of capital, such portion of the distribution essentially constitutes a return of the stockholder’s investment. Although such return of capital may not be taxable, such distributions would generally decrease a stockholder’s basis in our common stock and may therefore increase such stockholder’s tax liability for capital gains upon the future sale of such stock. A return of capital distribution may cause a stockholder to recognize a capital gain from the sale of our common stock even if the stockholder sells its shares for less than the original purchase price.

Due to the recent COVID-19 pandemic, shares of BDCs have traded below their respective NAVs. If our shares of common stock trade at a discount from NAV, it could limit our ability to raise equity capital.

As a result of the COVID-19 pandemic, the stocks of BDCs as an industry, including shares of our common stock, have traded below NAV, at or near historic lows as a result of concerns over liquidity, leverage restrictions and distribution requirements. If our common stock trades below its NAV, we will generally not be able to issue additional shares of our common stock at its market price without first obtaining the approval for such issuance from our stockholders and our independent directors. At our 2020 Annual Stockholders Meeting, our stockholders approved our ability to sell or otherwise issue shares of our common stock, not exceeding 25% of our then outstanding common stock immediately prior to each such offering, at a price or prices below the then current net asset value per share, in each case subject to the approval of our board of directors and compliance with the conditions set forth in the proxy statement pertaining thereto, during a period beginning on October 6, 2020 and expiring on the earlier of the one-year anniversary of the date of the 2020 Annual Stockholders Meeting and the date of our 2021 Annual Stockholders Meeting. However, notwithstanding such stockholder approval, since our initial public offering on February 24, 2011, we have not sold any shares of our common stock in an offering that resulted in proceeds to us of less than our then current net asset value per share. Any offering of our common stock that requires stockholder approval must occur, if at all, within one year after receiving such stockholder approval. If additional funds are not available to us, we could be forced to curtail or cease our new lending and investment activities, and our net asset value could decrease and our level of distributions could be impacted.

Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur U.S. federal excise tax in order preserve cash and maintain flexibility.

As a BDC, we are not required to make any distributions to shareholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to shareholders for each taxable year at least 90% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level US federal income tax on our investment company taxable income and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to shareholders. We will be subject to a 4% U.S. federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period 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 we paid no federal income tax.

Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to shareholders of record in the current year, the dividend will be treated for all US federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level

U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income earned during 2020 until as late as December 31, 2021. If we choose to pay a spillover dividend, we will incur the 4% U.S. federal excise tax on some or all of the distribution.

Due to the COVID-19 pandemic or other disruptions in the economy, we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we may not be able to increase our dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock as discussed below under “We may choose to pay distributions in our own stock, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash distributions they receive.”

We may choose to pay distributions in our own common stock, in which case our stockholders may be required to pay U.S. federal income taxes in excess of the cash distributions they receive.

We may distribute taxable distributions that are payable in cash or shares of our common stock at the election of each stockholder. Under certain applicable provisions of the Code and the published guidance, distributions payable of a publicly offered RIC that are in cash or in shares of stock at the election of stockholders may be treated as taxable distributions. The Internal Revenue Service has issued a revenue procedure indicating that this rule will apply if the total amount of cash to be distributed is not less than 20% (which has been temporarily reduced to 10% for distributions declared on or after April 1, 2020, and on or before December 31, 2020) of the total distribution. Under this revenue procedure, if too many stockholders elect to receive their distributions in cash, the cash available for distribution must be allocated among the stockholders electing to receive cash (with the balance of distributions paid in stock). If we decide to make any distributions consistent with this revenue procedure that are payable in part in our stock, taxable stockholders receiving such distributions will be required to include the full amount of the distribution (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly reported as a capital gain distribution) to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes. As a result, a U.S. stockholder may be required to pay 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 distributions, including in respect of all or a portion of such distribution that is payable in stock. If a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on distributions, it may put downward pressure on the trading price of our stock.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

We did not engage in unregistered sales of securities during the quarter ended September 30, 2020.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:


Exhibit Number		Description

3.1		Articles of Amendment and Restatement(1)

3.2		Amended and Restated Bylaws(1)

4.1		Form of Common Stock Certificate(1)

10.12		Form of Note Purchase Agreement by and between the Registrant and the lenders party thereto(2)

31.1		Certification of Co-Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*

31.2		Certification of Co-Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*

31.3		Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*

32.1		Certification of Co-Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*

32.2		Certification of Co-Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*

32.3		Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.*

(1)	Previously filed in connection with Solar Senior Capital Ltd.’s registration statement on Form N-2 (File No. 333-171330) filed on February 14, 2011.

(2)	Previously filed in connection with Solar Senior Capital Ltd.’s report on Form 10-Q filed on May 7, 2020.

*	Filed herewith.

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 on November 5, 2020.


SOLAR SENIOR CAPITAL LTD.

By:		/S/ MICHAEL S. GROSS
		Michael S. Gross
		Co-Chief Executive Officer
		(Principal Executive Officer)

By:		/S/ BRUCE J. SPOHLER
		Bruce J. Spohler
		Co-Chief Executive Officer
		(Principal Executive Officer)

By:		/S/ RICHARD L. PETEKA
		Richard L. Peteka
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting company

Emerging growth company