UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 1-36447
ALCENTRA CAPITAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Maryland | 46-2961489 | |
(State or other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
200 Park Avenue, 7th Floor
New York, NY
(Address of Principal Executive Offices) (Zip Code)
(212) 922-8240
(Registrant’s Telephone Number, Including Area Code)
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 x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (do not check if a smaller reporting company) | Smaller reporting company | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares of the issuer’s Common Stock, $0.001 par value, outstanding as of August 13, 2014 was 13,516,766.
ALCENTRA CAPITAL CORPORATION
TABLE OF CONTENTS
Page | ||
PART I. FINANCIAL INFORMATION | 3 | |
Item 1. Financial Statements | 3 | |
Consolidated Financial Statements of Alcentra Capital Corporation: | ||
Consolidated Statement of Assets and Liabilities as of June 30, 2014 (unaudited) | 3 | |
Consolidated Statement of Operations for the period from May 8, 2014 (commencement of operations) to June 30, 2014 (unaudited) | 4 | |
Consolidated Statement of Changes in Net Assets for the period from May 8, 2014 (commencement of operations) to June 30, 2014 (unaudited) | 5 | |
Consolidated Statement of Cash Flows for the period from May 8, 2014 (commencement of operations) to June 30, 2014 (unaudited) | 6 | |
Consolidated Schedule of Investments of Alcentra Capital Corporation as of June 30, 2014 (unaudited) | 7 | |
Financial Statements of BNY Mellon-Alcentra Mezzanine III, L.P.: | ||
Statement of Assets and Liabilities as of December 31, 2013 | 3 | |
Statements of Operations for the period from April 1, 2014 to May 7, 2014, for the period from January 1, 2014 to May 7, 2014, and for the three- and six-month periods ended June 30, 2013 (unaudited) | 4 | |
Statements of Changes in Net Assets for the period from January 1, 2014 to May 7, 2014 and for the six-month period ended June 30, 2013 (unaudited) | 5 | |
Statements of Cash Flows for the period from January 1, 2014 to May 7, 2014 and for the six-month period ended June 30, 2013 (unaudited) | 6 | |
Schedule of Investments of BNY Mellon-Alcentra Mezzanine III, L.P. as of December 31, 2013 | 11 | |
Notes to Unaudited Consolidated Financial Statements | 15 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 39 | |
Item 4. Controls and Procedures | 40 | |
PART II. OTHER INFORMATION | 40 | |
Item 1. Legal Proceedings | 41 | |
Item 1A. Risk Factors | 41 | |
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds | 41 | |
Item 3. Defaults Upon Senior Securities | 41 | |
Item 4. Mine Safety Disclosures | 41 | |
Item 5. Other Information | 41 | |
Item 6. Exhibits | 41 | |
SIGNATURES | 42 |
PART I — FINANCIAL INFORMATION
On May 8, 2014, Alcentra Capital Corporation (the “Company”) acquired substantially all of the investment portfolios of BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company for purposes of this Quarterly Report.
Item 1. Financial Statements
Alcentra Capital Corporation and Subsidiary |
Consolidated Statement of Assets and Liabilities |
Alcentra Capital Corporation and Subsidiary | BNY Mellon-Alcentra Mezzanine III, L.P. | |||||||
As of June 30, 2014 (Unaudited) | As of December 31, 2013 | |||||||
Assets | ||||||||
Portfolio investments, at fair value | ||||||||
Non-controlled, non-affiliated investments, at fair value (cost of $113,745,142 and $57,569,745, respectively) | $ | 113,692,949 | $ | 63,987,210 | ||||
Non-controlled, affiliated investments, at fair value (cost $52,152,865 and $35,529,197, respectively) | 52,003,354 | 35,037,384 | ||||||
Controlled, affiliated investments, at fair value (cost $33,013,696 and $27,274,576, respectively) | 34,547,873 | 25,941,243 | ||||||
Total of portfolio investments, at fair value (cost $198,911,703 and $120,373,518, respectively) | 200,244,176 | 124,965,837 | ||||||
Cash | 24,407,025 | 729,431 | ||||||
Dividends and interest receivable | 560,915 | 736,223 | ||||||
Due from Limited Partners | - | 6,635 | ||||||
Deferred financing costs | 1,558,296 | - | ||||||
Prepaid expenses and other assets | 256,101 | 350,000 | ||||||
Total Assets | $ | 227,026,513 | $ | 126,788,126 | ||||
Liabilities | ||||||||
Credit facility payable | $ | 22,601,654 | $ | 15,000,000 | ||||
Other accrued expenses and liabilities | 83,569 | 326,696 | ||||||
Accrued organization and offering costs | 1,692,023 | - | ||||||
Due to affiliate | - | 10,989 | ||||||
Directors’ fees payable | 80,000 | - | ||||||
Interest and credit facility expense payable | 93,623 | 15,614 | ||||||
Management fee payable | 524,548 | 715,014 | ||||||
Distributions payable | 2,405,984 | 168 | ||||||
Capital contributions paid in advance | - | 80,218 | ||||||
Total Liabilities | 27,481,401 | 16,148,699 | ||||||
Commitments and Contingencies (Note 12) | ||||||||
Net Assets | ||||||||
General Partner | - | 4,967,879 | ||||||
Limited Partners | - | 105,671,548 | ||||||
Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,516,766 shares issued and outstanding) | 13,517 | - | ||||||
Additional paid-in capital | 198,150,479 | - | ||||||
Accumulated net realized gain (loss) | - | - | ||||||
Accumulated net investment income | 48,643 | - | ||||||
Net unrealized appreciation (depreciation) on investments | 1,332,473 | - | ||||||
Total Net Assets | 199,545,112 | 110,639,427 | ||||||
Total Liabilities and Net Assets | $ | 227,026,513 | $ | 126,788,126 | ||||
Net Asset Value Per Share | $ | 14.76 | N.A. |
See notes to unaudited consolidated financial statements
3 |
Alcentra Capital Corporation and Subsidiary |
Consolidated Statement of Operations (Unaudited) |
BNY Mellon- Alcentra Mezzanine III, L.P. | Alcentra Capital Corporation and Subsidiary | BNY Mellon-Alcentra Mezzanine III, L.P. | BNY Mellon-Alcentra Mezzanine III, L.P. | Alcentra Capital Corporation and Subsidiary | BNY Mellon- Alcentra Mezzanine III, L.P. | |||||||||||||||||||
For the period from April 1, 2014 through May 7, 2014 (Unaudited) | For the period from May 8, 2014* through June 30, 2014 (Unaudited) | For the three months ended June 30, 2013 (Unaudited) | For the period from January 1, 2014 through May 7, 2014 (Unaudited) | For the period from May 8, 2014* through June 30, 2014 (Unaudited) | For the six months ended June 30, 2013 (Unaudited) | |||||||||||||||||||
Investment Income: | ||||||||||||||||||||||||
From non-controlled, non-affiliated investments: | ||||||||||||||||||||||||
Interest income from portfolio investments | $ | 942,684 | $ | 1,694,875 | $ | 1,410,955 | $ | 2,335,475 | $ | 1,694,875 | $ | 2,703,395 | ||||||||||||
Paid in-kind interest income from portfolio investments | 196,299 | 469,072 | 152,509 | 569,637 | 469,072 | 303,643 | ||||||||||||||||||
Other income from portfolio investments | 544,872 | - | 44,713 | 649,961 | - | 68,972 | ||||||||||||||||||
Dividend income from portfolio investments | - | - | - | 251,752 | - | - | ||||||||||||||||||
From non-controlled, affiliated investments: | ||||||||||||||||||||||||
Interest income from portfolio investments | 364,795 | 574,922 | 797,163 | 1,089,807 | 574,922 | 1,668,782 | ||||||||||||||||||
Paid in-kind interest income from portfolio investments | 146,467 | 252,888 | 25,464 | 341,850 | 252,888 | 53,850 | ||||||||||||||||||
Other income from portfolio investments | 766,907 | - | 13,931 | 788,083 | - | 21,642 | ||||||||||||||||||
From controlled, affiliated investments: | ||||||||||||||||||||||||
Interest income from portfolio investments | 255,633 | 458,872 | 303,333 | 769,953 | 458,872 | 566,666 | ||||||||||||||||||
Paid in-kind interest income from portfolio investments | 115,201 | 183,995 | - | 521,321 | 183,995 | - | ||||||||||||||||||
Other income from portfolio investments | 433,573 | - | 1,595 | 444,055 | - | 3,124 | ||||||||||||||||||
Dividend income from portfolio investments | - | - | - | - | - | - | ||||||||||||||||||
Total investment income | 3,766,431 | 3,634,624 | 2,749,663 | 7,761,894 | 3,634,624 | 5,390,074 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Management fees | - | 524,548 | 707,246 | 699,473 | 524,548 | 1,398,088 | ||||||||||||||||||
Professional fees | 5,315 | 83,570 | 56,287 | 84,642 | 83,570 | 83,828 | ||||||||||||||||||
Interest and credit facility expense | 9,267 | 290,134 | 32,704 | 50,214 | 290,134 | 65,491 | ||||||||||||||||||
Organization expense | - | 180,953 | - | - | 180,953 | - | ||||||||||||||||||
Directors’ fees | - | 80,000 | - | - | 80,000 | - | ||||||||||||||||||
Other expenses | 7 | 20,792 | - | 7 | 20,792 | - | ||||||||||||||||||
Total expenses | 14,589 | 1,179,997 | 796,237 | 834,336 | 1,179,997 | 1,547,407 | ||||||||||||||||||
Net investment income | 3,751,842 | 2,454,627 | 1,953,426 | 6,927,558 | 2,454,627 | 3,842,667 | ||||||||||||||||||
Realized Gain (Loss) and Net Change in Unrealized Appreciation (Depreciation) from Portfolio Investments | ||||||||||||||||||||||||
Net realized gain (loss) on: | ||||||||||||||||||||||||
Non-controlled, non-affiliated investments | (42,448 | ) | - | 41,628 | 51,961 | - | 41,628 | |||||||||||||||||
Non-controlled, affiliated investments | - | - | - | - | - | - | ||||||||||||||||||
Controlled, affiliated investments | - | - | - | - | - | - | ||||||||||||||||||
Net realized gain (loss) from portfolio investments | (42,448 | ) | - | 41,628 | 51,961 | - | 41,628 | |||||||||||||||||
Net change in unrealized appreciation (depreciation) on: | ||||||||||||||||||||||||
Non-controlled, non-affiliated investments | 239,964 | (52,193 | ) | 1,495,643 | 2,974,591 | (52,193 | ) | 1,708,995 | ||||||||||||||||
Non-controlled, affiliated investments | (182,597 | ) | (149,511 | ) | 12,000 | - | (149,511 | ) | 41,000 | |||||||||||||||
Controlled, affiliated investments | (279,333 | ) | 1,534,177 | - | - | 1,534,177 | - | |||||||||||||||||
Net change in unrealized appreciation (depreciation) from portfolio investments | (221,966 | ) | 1,332,473 | 1,507,643 | 2,974,591 | 1,332,473 | 1,749,995 | |||||||||||||||||
Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments | (264,414 | ) | 1,332,473 | 1,549,271 | 3,026,552 | 1,332,473 | 1,791,623 | |||||||||||||||||
Net Increase in Net Assets from Operations | $ | 3,487,428 | $ | 3,787,100 | $ | 3,502,697 | $ | 9,954,110 | $ | 3,787,100 | $ | 5,634,290 | ||||||||||||
Basic and diluted: | ||||||||||||||||||||||||
Net investment income per share | N.A. | $ | 0.18 | N.A. | N.A. | $ | 0.18 | N.A. | ||||||||||||||||
Earnings per share | N.A. | $ | 0.28 | N.A. | N.A. | $ | 0.28 | N.A. | ||||||||||||||||
Weighted Average Shares of Common Stock Outstanding | N.A. | 13,516,766 | N.A. | N.A. | 13,516,766 | N.A. | ||||||||||||||||||
Dividends declared per common share | N.A. | $ | 0.1780 | N.A. | N.A. | $ | 0.1780 | N.A. |
* | Commencement of operations of the Company |
See notes to unaudited consolidated financial statements
4 |
Alcentra Capital Corporation and Subsidiary |
Consolidated Statement of Changes in Net Assets (Unaudited) |
BNY Mellon-Alcentra Mezzanine III, L.P. | Alcentra Capital Corporation and Subsidiary | BNY Mellon-Alcentra Mezzanine III, L.P. | ||||||||||
For the period from January 1, 2014 through May 7, 2014 (Unaudited) | For the period from May 8, 2014* through June 30, 2014 (Unaudited) | For the six months ended June 30, 2013 (Unaudited) | ||||||||||
Beginning Balances | ||||||||||||
General Partner | 4,967,879 | N.A. | 3,237,056 | |||||||||
Limited Partners | 105,671,548 | N.A. | 93,482,529 | |||||||||
Total Beginning Balances | 110,639,427 | N.A. | 96,719,585 | |||||||||
Capital contributions | ||||||||||||
General Partner | - | N.A. | - | |||||||||
Limited Partners | 58,915,014 | N.A. | 10,907,266 | |||||||||
Total | 58,915,014 | N.A. | 10,907,266 | |||||||||
Distributions | ||||||||||||
General Partner | - | N.A. | (74,140 | ) | ||||||||
Limited Partners | (3,941,341 | ) | N.A. | (4,827,972 | ) | |||||||
Total | (3,941,341 | ) | N.A. | (4,902,112 | ) | |||||||
Net increase in net assets resulting from operations | ||||||||||||
General Partner | 924,600 | N.A. | - | |||||||||
Limited Partners | 9,029,510 | N.A. | 5,634,290 | |||||||||
Total | 9,954,110 | N.A. | 5,634,290 | |||||||||
Carried interest allocation | ||||||||||||
General Partner | (5,966,619 | ) | N.A. | - | ||||||||
Limited Partners | 5,966,619 | N.A. | - | |||||||||
Total | - | N.A. | - | |||||||||
Total - General Partner | (74,140 | ) | N.A. | 3,162,916 | ||||||||
Total - Limited Partners | 175,641,350 | N.A. | 105,196,113 | |||||||||
Ending Balance | $ | 175,567,210 | N.A. | $ | 108,359,029 | |||||||
Increase (decrease) in net assets resulting from operations | ||||||||||||
Net investment income | N.A. | 2,454,627 | N.A. | |||||||||
Net realized gain (loss) on investments | N.A. | - | N.A. | |||||||||
Net change in unrealized appreciation (depreciation) on investments | N.A. | 1,332,473 | N.A. | |||||||||
Net increase in net assets resulting from operations | N.A. | 3,787,100 | N.A. | |||||||||
Capital transactions | ||||||||||||
Proceeds from issuance of common stock from initial public offering (net of sales load) | N.A. | 107,912,490 | N.A. | |||||||||
Proceeds from issuance of common stock to Limited Partners | N.A. | 91,500,000 | N.A. | |||||||||
Offering costs | N.A. | (1,249,994 | ) | N.A. | ||||||||
Net increase (decrease) in net assets resulting from capital transactions | N.A. | 198,162,496 | N.A. | |||||||||
Distributions to shareholders from: | ||||||||||||
Net investment income | N.A. | (2,405,984 | ) | N.A. | ||||||||
Realized gains | N.A. | - | N.A. | |||||||||
Total distributions to shareholders | N.A. | (2,405,984 | ) | N.A. | ||||||||
Total increase (decrease) in net assets | N.A. | 199,543,612 | N.A. | |||||||||
Net assets at beginning of period | N.A. | 1,500 | N.A. | |||||||||
Net assets at end of period (including Accumulated net investment income (loss) of $48,643) | N.A. | $ | 199,545,112 | N.A. |
* | Commencement of operations of the Company |
See notes to unaudited consolidated financial statements
5 |
Alcentra Capital Corporation and Subsidiary
Consolidated Statement of Cash Flows (Unaudited)
BNY Mellon-Alcentra Mezzanine III, L.P. | Alcentra Capital Corporation and Subsidiary | BNY Mellon-Alcentra Mezzanine III, L.P. | ||||||||||
For the period from January 1, 2014 through May 7, 2014 | For the period from May 8, 2014* through June 30, 2014 | For the six months ended June 30, 2013 | ||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | ||||||||||
Cash Flows from Operating Activities | ||||||||||||
Net increase in net assets resulting from operations | $ | 9,954,110 | $ | 3,787,100 | $ | 5,634,290 | ||||||
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities: | ||||||||||||
Net realized (gain) loss from portfolio investments | (51,961 | ) | - | (41,628 | ) | |||||||
Net change in unrealized (appreciation) depreciation of portfolio investments | (2,974,591 | ) | (1,332,473 | ) | (1,749,995 | ) | ||||||
Paid in-kind interest income from portfolio investments | (1,432,808 | ) | (905,955 | ) | (357,493 | ) | ||||||
Accretion of discount on debt securities | (2,122,109 | ) | (358,706 | ) | (61,622 | ) | ||||||
Purchases of portfolio investments | (48,769,079 | ) | (108,502,613 | ) | (14,969,063 | ) | ||||||
Net proceeds from sale/return of capital of portfolio investments | 15,780,666 | 2,355,571 | 1,291,628 | |||||||||
Amortization of deferred financing costs | - | (70,779 | ) | - | ||||||||
(Increase) decrease in operating assets: | ||||||||||||
Dividends and interest receivable | 87,770 | (560,915 | ) | (162,363 | ) | |||||||
Due from Limited Partners | (30,023 | ) | - | 217,408 | ||||||||
Deferred financing costs | - | (1,487,517 | ) | - | ||||||||
Prepaid expenses and other assets | 348,518 | (256,101 | ) | (21,172 | ) | |||||||
Escrow receivable | - | - | 180,525 | |||||||||
Increase (decrease) in operating liabilities: | ||||||||||||
Other accrued expenses and liabilities | 25,661 | 83,570 | (40,948 | ) | ||||||||
Accrued organization and offering costs | - | 442,029 | - | |||||||||
Due to affiliate | (5,940 | ) | - | 8,352 | ||||||||
Directors' fees payable | - | 80,000 | - | |||||||||
Interest and credit facility expense payable | (15,614 | ) | 93,623 | 6,300 | ||||||||
Management fee payable | (714,014 | ) | 524,547 | - | ||||||||
Net cash used in operating activities | (29,919,414 | ) | (106,108,619 | ) | (10,065,781 | ) | ||||||
Cash Flows from Financing Activities | ||||||||||||
Proceeds from issuance of common stock from initial public offering | - | 107,912,490 | - | |||||||||
Proceeds from bridge facility | - | 94,126,403 | - | |||||||||
Payment of bridge facility | - | (94,126,403 | ) | - | ||||||||
Proceeds from credit facility payable | 15,000,000 | 29,989,154 | 15,664,063 | |||||||||
Payment from credit facility payable | - | (7,387,500 | ) | - | ||||||||
Capital contributions received from Partners | 58,834,796 | - | 10,907,266 | |||||||||
Repayment of credit facility payable | (30,000,000 | ) | - | (10,000,000 | ) | |||||||
Cash distributions paid to Partners | (3,941,341 | ) | - | (4,901,944 | ) | |||||||
Net cash provided by financing activities | 39,893,455 | 130,514,144 | 11,669,385 | |||||||||
Increase (decrease) in cash and cash equivalents | 9,974,041 | 24,405,525 | 1,603,604 | |||||||||
Cash and cash equivalents at beginning of period | 729,431 | 1,500 | 869,836 | |||||||||
Cash and Cash Equivalents at End of Period | $ | 10,703,472 | $ | 24,407,025 | $ | 2,473,440 | ||||||
Supplemental and non-cash financing activities: | ||||||||||||
Cash paid during the period for interest | $ | 65,828 | $ | 196,511 | $ | 59,191 | ||||||
Accrued offering costs | $ | - | $ | 1,249,994 | $ | - | ||||||
Accrued distributions payable | $ | 168 | $ | 2,405,984 | $ | 168 | ||||||
Acquisition of investments via exchange of common shares of the Company | $ | - | $ | 91,500,000 | $ | - |
* Commencement of operations of the Company
See notes to unaudited consolidated financial statements
6 |
Alcentra Capital Corporation
Consolidated Schedule of Investments
As of June 30, 2014
(Unaudited)
Company*** | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||
Investments in Non-Controlled, Non-Affiliated Portfolio Companies — 56.98% | ||||||||||||||||||||||||||
Senior Secured - First Lien — 20.86% | ||||||||||||||||||||||||||
Aphena Pharma Solutions(2) | Packaging | 7% Cash and 3.5% PIK | 3/3/2019 | 3,233,525 | $ | 3,233,525 | $ | 3,233,465 | 1.62 | % | ||||||||||||||||
Black Diamond Rentals | Oil & Gas Services | 10% Cash and 4% PIK | 7/8/2018 | 13,917,289 | 13,917,289 | 13,917,289 | 6.98 | % | ||||||||||||||||||
Datascan Holdings | Business Services | L + 9.50% | 1.00 | % | 12/17/2018 | 3,000,000 | 3,000,000 | 3,000,000 | 1.50 | % | ||||||||||||||||
HealthFusion, Inc | Healthcare Services | 13% Cash | 10/7/2018 | 5,750,000 | 5,750,000 | 5,750,000 | 2.88 | % | ||||||||||||||||||
Response Team Holdings LLC | Restoration Services | LIBOR + 8.50% Cash, 1.00% PIK | 2.00 | % | 3/28/2019 | 9,469,803 | 9,469,803 | 9,469,803 | 4.75 | % | ||||||||||||||||
Well Biz Brands | Consumer Services | 7% Cash and 3.5% PIK | 10/23/2018 | 6,249,459 | 6,249,459 | 6,249,459 | 3.13 | % | ||||||||||||||||||
Total Senior Secured - First Lien | 41,620,076 | 41,620,016 | 20.86 | % | ||||||||||||||||||||||
Senior Secured - Second Lien — 3.70% | ||||||||||||||||||||||||||
Puerto Rico Cable Acquisition Company d/b/a Choice Cable TV | Media: Broadcasting & Subscription | L + 8.50% | 1.00 | % | 5/30/2019 | 7,500,000 | $ | 7,388,308 | $ | 7,388,308 | 3.70 | % | ||||||||||||||
Total Senior Secured - Second Lien | 7,388,308 | 7,388,308 | 3.70 | % | ||||||||||||||||||||||
Senior Subordinated — 16.22% | ||||||||||||||||||||||||||
Dentistry For Children, Inc.(5) | Healthcare Services | 11% Cash, 2.25% PIK | 9/1/2017 | 14,288,927 | $ | 14,284,238 | $ | 14,344,566 | 7.19 | % | ||||||||||||||||
GTT Communications | Telecommunication Services | 11% Cash | 6/30/2016 | 6,232,125 | 6,232,125 | 6,250,000 | 3.13 | % | ||||||||||||||||||
Media Storm, LLC | Media & Entertainment | 10% Cash | 8/28/2019 | 3,000,000 | 3,000,000 | 3,000,000 | 1.51 | % | ||||||||||||||||||
Wholesome Sweeteners, Inc. | Food & Beverage | 12% Cash, 2% PIK | 10/6/2017 | 8,592,682 | 8,592,681 | 8,757,999 | 4.39 | % | ||||||||||||||||||
Total Senior Subordinated | 32,109,044 | 32,352,565 | 16.22 | % | ||||||||||||||||||||||
Equity/Other — 16.20% | ||||||||||||||||||||||||||
American Addiction Centers, Series A Redeemable Preferred Equity(3) | Healthcare & Pharmaceuticals | 12% Cash | 4/13/2019 | 8,000,000 | $ | 8,000,000 | $ | 8,000,000 | 4.01 | % | ||||||||||||||||
City Carting Holding Company, Inc., | ||||||||||||||||||||||||||
Series A Preferred Shares(4) | Waste Management | 7% Cash, 15% PIK | 4/30/2015 | 7,546,381 | 7,546,381 | 7,570,000 | 3.79 | % | ||||||||||||||||||
Series B Preferred Shares(4) | 10% Cash, 8% PIK | 3,921,899 | 3,921,899 | 3,932,060 | 1.97 | % | ||||||||||||||||||||
11,468,280 | 11,502,060 | 5.76 | % | |||||||||||||||||||||||
Dentistry For Children, Inc., Class A-1 Units(4) | Healthcare Services | 2,203,000 | 2,203,000 | 2,125,000 | 1.06 | % | ||||||||||||||||||||
HealthFusion, Inc., Warrants(4) | Healthcare Services | 418,000 | 418,000 | 350,000 | 0.18 | % | ||||||||||||||||||||
Media Storm, LLC, Preferred Shares(4) | Media & Entertainment | 2,346,964 | 2,346,964 | 2,374,000 | 1.19 | % | ||||||||||||||||||||
Proserve Offshore Group, Warrants(4) | Oil & Gas Services | 6/21/2018 | 793,000 | 793,000 | 824,000 | 0.41 | % |
See notes to unaudited consolidated financial statements
7 |
Alcentra Capital Corporation
Consolidated Schedule of Investments (continued)
June 30, 2014
(Unaudited)
Company | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||
Response Team Holdings LLC, Preferred Shares(4) | Restoration Services | 12% | 3/28/2019 | 2,398,470 | $ | 2,398,470 | $ | 2,436,000 | 1.22 | % | ||||||||||||||||
Wholesome Sweeteners, Inc., Common Shares(4) | Food & Beverage | 5,000 | 5,000,000 | 4,721,000 | 2.37 | % | ||||||||||||||||||||
Total Equity/Other | 32,627,714 | 32,332,060 | 16.20 | % | ||||||||||||||||||||||
Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies | 113,745,142 | 113,692,949 | 56.98 | % | ||||||||||||||||||||||
Investments in Non-Controlled, Affiliated Portfolio Companies — 26.06%* | ||||||||||||||||||||||||||
Senior Secured - First Lien — 3.35% | ||||||||||||||||||||||||||
Show Media, Inc. | Media & Entertainment | 5.5% Cash, 5.5% PIK | 8/10/2017 | 6,432,151 | $ | 6,432,152 | $ | 6,692,000 | 3.35 | % | ||||||||||||||||
Total Senior Secured - First Lien | 6,432,152 | 6,692,000 | 3.35 | % | ||||||||||||||||||||||
Senior Subordinated — 15.97% | ||||||||||||||||||||||||||
Battery Solutions, Inc. | Environmental/Energy Services | 12% Cash, 2% PIK | 12/20/2018 | 5,157,289 | $ | 5,157,289 | $ | 5,157,289 | 2.58 | % | ||||||||||||||||
DBI Holding, LLC | Infrastructure Maintenance | 12% Cash, 1% PIK | 9/5/2019 | 8,566,182 | 8,566,182 | 8,587,836 | 4.30 | % | ||||||||||||||||||
13% PIK | 9/6/2019 | 6,741,913 | 6,251,501 | 6,223,665 | 3.12 | % | ||||||||||||||||||||
14,817,683 | 14,811,501 | 7.42 | % | |||||||||||||||||||||||
Net Access Corporation | Technology | 13% Cash | 7/19/2018 | 3,920,230 | 3,920,230 | 3,920,230 | 1.97 | % | ||||||||||||||||||
Southern Technical Institute, Inc. | Education | 12.5% Cash | 10/15/2016 | 8,233,333 | 7,983,333 | 7,983,333 | 4.00 | % | ||||||||||||||||||
Total Senior Subordinated | 31,878,535 | 31,872,353 | 15.97 | % | ||||||||||||||||||||||
Equity/Other — 6.74% | ||||||||||||||||||||||||||
Battery Solutions, Inc., Class A Units(4) | Environmental/Energy Services | 5,000,000 | $ | 1,058,000 | $ | 977,000 | 0.49 | % | ||||||||||||||||||
DBI Holding, LLC, Warrants(4) | Infrastructure Maintenance | 519,412 | 519,411 | 972,000 | 0.49 | % | ||||||||||||||||||||
Net Access Corporation, Class A Units(4) | Technology | 8,112,000 | 8,112,000 | 8,930,001 | 4.47 | % | ||||||||||||||||||||
Show Media, Inc., Units(4) | Media & Entertainment | 300,000 | 300,000 | — | — | |||||||||||||||||||||
Southern Technical Institute, Inc., | ||||||||||||||||||||||||||
Class A Units(4) | Education | 3,503,629 | 3,742,500 | 2,449,733 | 1.23 | % | ||||||||||||||||||||
Warrants(4) | 110,267 | 110,267 | 110,267 | 0.06 | % | |||||||||||||||||||||
3,852,767 | 2,560,000 | 1.29 | % | |||||||||||||||||||||||
Total Equity/Other | 13,842,178 | 13,439,001 | 6.74 | % | ||||||||||||||||||||||
Total Investments in Non-Controlled, Affiliated Portfolio Companies | 52,152,865 | 52,003,354 | 26.06 | % | ||||||||||||||||||||||
Investments in Controlled, Affiliated Portfolio Companies — 17.31%** | ||||||||||||||||||||||||||
Senior Secured - First Lien — 11.98% | ||||||||||||||||||||||||||
FST Technical Services, LLC | Technology & Telecom | 12% Cash, 2% PIK | 11/18/2018 | 12,656,874 | $ | 12,656,874 | $ | 12,656,874 | 6.34 | % | ||||||||||||||||
The DRC Group | Disaster Recovery Services | 10% Cash | 1/11/2020 | 5,000,000 | 5,000,000 | 5,000,000 | 2.51 | % |
See notes to unaudited consolidated financial statements
8 |
Alcentra Capital Corporation
Consolidated Schedule of Investments (continued)
June 30, 2014
(Unaudited)
Company | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||
The DRC Group(5) | 8% Cash | 12/31/2014 | 6,247,621 | $ | 6,247,620 | $ | 6,248,000 | 3.13 | % | |||||||||||||||||
11,247,620 | 11,248,000 | 5.64 | % | |||||||||||||||||||||||
Total Senior Secured - First Lien | 23,904,494 | 23,904,874 | 11.98 | % | ||||||||||||||||||||||
Equity/Other — 5.33% | ||||||||||||||||||||||||||
FST Technical Services, LLC, Common Shares(4) | Technology & Telecom | 1,806,542 | $ | 1,806,542 | $ | 2,944,999 | 1.47 | % | ||||||||||||||||||
The DRC Group, Preferred Shares(4) | Disaster Recovery Services | 10% PIK | 7,302,660 | 7,302,660 | 7,698,000 | 3.86 | % | |||||||||||||||||||
Total Equity/Other | 9,109,202 | 10,642,999 | 5.33 | % | ||||||||||||||||||||||
Total Investments in Controlled, Affiliated Portfolio Companies | 33,013,696 | 34,547,873 | 17.31 | % | ||||||||||||||||||||||
Total Investments | 198,911,703 | 200,244,176 | 100.35 | % | ||||||||||||||||||||||
Liabilities In Excess Of Other Assets | (699,064 | ) | (0.35 | %) | ||||||||||||||||||||||
Net Assets | $ | 199,545,112 | 100.00 | % |
(1) | The cost of debt securities is adjusted for accretion of discount and interest paid in-kind on such securities. | |
(2) | After September 30, 2014, 8.5% Cash Coupon and 2% PIK Coupon. | |
(3) | The Company provided financing to Behavioral Healthcare Realty, a wholly owned subsidiary of American Addiction Centers. | |
(4) | Non-income producing security. | |
(5) | The investment has an unfunded commitment as of June 30, 2014 which is excluded from the presentation (see Note 12). |
Abbreviation Legend
PIK -Payment-In-Kind
See notes to unaudited consolidated financial statements
9 |
Alcentra Capital Corporation
Consolidated Schedule of Investments (continued)
June 30, 2014
(Unaudited)
* | Denotes investments in which the Company is 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 six months ended June 30, 2014 in these affiliated investments are as follows: |
Name of Issuers | Fair Value at December 31, 2013 | Gross Addition | Gross Reductions | Interest/Dividend/ Other income | Fair Value at June 30, 2014 | |||||||||||||||
Battery Solutions, Inc. | $ | 6,075,969 | $ | - | $ | - | $ | 510,105 | $ | 6,134,289 | ||||||||||
DBI Holding, LLC | - | 15,000,000 | - | 1,142,289 | 15,783,501 | |||||||||||||||
Net Access Corporation | 11,964,457 | - | - | 345,374 | 12,850,231 | |||||||||||||||
Show Media, Inc. | 6,294,000 | 300,000 | - | 403,347 | 6,692,000 | |||||||||||||||
Southern Technical Institute, Inc. | 10,702,958 | - | 500,000 | 646,435 | 10,543,333 | |||||||||||||||
$ | 35,037,384 | $ | 15,300,000 | $ | 500,000 | $ | 3,047,550 | $ | 52,003,354 |
** | Denotes investments in which the Company is an “Affiliate Person” and exceeding a controlling influence, 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 six months ended June 30, 2014 in these affiliated and controlled investments are as follows: |
Name of Issuers | Fair Value at December 31, 2013 | Gross Addition | Gross Reductions | Interest/Dividend/ Other income | Fair Value at June 30, 2014 | |||||||||||||||
The DRC Group | $ | 11,906,520 | $ | 8,103,191 | $ | 1,855,571 | $ | 1,143,392 | $ | 18,946,000 | ||||||||||
FST Technical Services | 14,034,723 | - | - | 1,234,804 | 15,601,873 | |||||||||||||||
$ | 25,941,243 | $ | 8,103,191 | $ | 1,855,571 | $ | 2,378,196 | $ | 34,547,873 |
*** | Pledged as collateral under the credit facility with ING Capital LLC. |
See notes to unaudited consolidated financial statements
10 |
BNY Mellon-Alcentra Mezzanine III, L.P.
Schedule of Investments
December 31, 2013
Investment Description | Industry | Type of investment | Par/Share Amount | Maturity | Cost as of December 31, 2013(1) | Fair Value as of December 31, 2013 | ||||||||||||||
Investments in Non-Controlled, Non-Affiliated Portfolio Companies | ||||||||||||||||||||
Proserv Offshore Group (.72%)* | Energy Services | Warrant | — | 6/21/2018 | $ | 5 | $ | 793,000 | ||||||||||||
City Carting Holding Company, Inc. (9.76%)* | Waste Management | Series A Preferred Shares (7% Cash, 15% PIK)(2) | 571 | 4/30/2015 | 7,028,768 | 7,028,768 | ||||||||||||||
Series B Preferred Shares (10% Cash, 8% PIK) | 329 | — | 3,774,016 | 3,774,016 | ||||||||||||||||
Dentistry For Children, Inc. (11.14%)* | Healthcare Services | Senior Subordinated Note (11% Cash, 2.25% PIK) | $ | 10,638,182 | 9/1/2017 | 10,622,797 | 10,622,797 | |||||||||||||
Equity | 1,500,000 | — | 1,500,000 | 1,703,000 | ||||||||||||||||
GTT Communications Inc. (9.48%)* | Telecommunication Services | Senior Subordinated Note (11% Cash) | $ | 4,750,000 | 6/30/2016 | 4,343,184 | 4,343,184 | |||||||||||||
Common Shares | 666,666.66 | — | 2,000,000 | 4,769,000 | ||||||||||||||||
Warrant | — | — | 410,939 | 1,381,000 | ||||||||||||||||
HealthFusion, Inc. (5.50%)* | Healthcare Services | Senior Subordinated Note (13% Cash) | $ | 5,750,000 | 11/18/2018 | 5,665,994 | 5,665,994 | |||||||||||||
Warrants | — | — | — | 418,000 | ||||||||||||||||
Kaseman Holdings, LLC/Sallyport Holdings, LLC (0.54%)* | Defense Service | Class A interest | 500,000 | — | 500,000 | 594,409 | ||||||||||||||
Media Storm, LLC (9.49%)* | Media & Entertainment | Senior Subordinated Note (12% Cash, 2% PIK) | $ | 8,219,008 | 10/23/2017 | 8,155,514 | 8,155,514 | |||||||||||||
Preferred Shares | 1,216,204 | — | 1,176,964 | 2,346,964 | ||||||||||||||||
Wholesome Sweeteners, Inc. (11.20%)* | Food Distribution | Senior Subordinated Notes (12% Cash, 2% PIK) | $ | 8,079,306 | 10/6/2017 | 7,891,564 | 7,891,564 | |||||||||||||
Common Shares | 4,500 | — | 4,500,000 | 4,500,000 | ||||||||||||||||
Total Non-Controlled, Non-Affiliated (57.83%)* | $ | 57,569,745 | $ | 63,987,210 |
See notes to unaudited consolidated financial statements
11 |
BNY Mellon-Alcentra Mezzanine III, L.P.
Schedule of Investments (continued)
December 31, 2013
Investment Description | Industry | Type of investment | Percentage of class owned | Maturity | Cost as of December 31, 2013(1) | Fair Value as of December 31, 2013 | ||||||||||||||
Investments in Non-Controlled, Affiliated Portfolio Companies** | ||||||||||||||||||||
Battery Solutions, Inc. (5.49%)* | Energy Services | Senior Subordinated Note (12% Cash, 2% PIK) | $ | 5,105,732 | 12/20/2018 | $ | 5,017,969 | $ | 5,017,969 | |||||||||||
Class A Units | 5,000,000 | — | 5,000,000 | 1,058,000 | ||||||||||||||||
Net Access Corporation (10.81%)* | Technology | Senior Subordinated Note (13% Cash) | $ | 3,920,230 | 7/19/2018 | 3,852,457 | 3,852,457 | |||||||||||||
Class A Units | 3,000,000 | — | 3,000,000 | 8,112,000 | ||||||||||||||||
Show Media, Inc. (5.69%)* | Media & Entertainment | Senior Secured Note (5.5% Cash, 5.5% PIK)(3) | $ | 7,068,750 | 8/10/2017 | 7,068,750 | 6,294,000 | |||||||||||||
Southern Technical Institute, Inc. (9.68%)* | Education | Senior Subordinated Note (12.5% Cash) | $ | 8,483,333 | 10/15/2016 | 8,425,691 | 8,425,691 | |||||||||||||
Class A Units | 3,000,000 | — | 3,164,063 | 2,167,000 | ||||||||||||||||
Warrants | — | — | 267 | 110,267 | ||||||||||||||||
Total Non-Controlled, Affiliated Portfolio Companies (31.67%)* | $ | 35,529,197 | $ | 35,037,384 | ||||||||||||||||
Investments in Controlled, Affiliated Portfolio Companies*** | ||||||||||||||||||||
The DRC Group (10.76%)* | Disaster Recovery | Senior Secured Note (10% Cash) | $ | 5,000,000 | 1/11/2020 | 4,906,520 | 4,906,520 | |||||||||||||
Services | Preferred Shares (10% PIK) | — | — | 8,333,333 | 7,000,000 | |||||||||||||||
FST Technical Services, LLC (12.69%)* | Technology and Telecom | Senior Subordinated Note (12% Cash, 2% PIK) | $ | 12,530,556 | 11/18/2018 | 12,284,723 | 12,284,723 | |||||||||||||
Common Shares | 1,750,000 | 1,750,000 | 1,750,000 | |||||||||||||||||
Total Non-Controlled, Affiliated Portfolio Companies (23.45%)* | $ | 27,274,576 | $ | 25,941,243 | ||||||||||||||||
Total Portfolio Investments (112.95%)* | $ | 120,373,518 | $ | 124,965,837 |
See notes to unaudited consolidated financial statements
12 |
BNY Mellon-Alcentra Mezzanine III, L.P.
Schedule of Investments (continued)
December 31, 2013
(1) | The cost of debt securities is adjusted for accretion of discount and interest paid in-kind on such securities. |
(2) | Paid in-kind. |
(3) | Amended on December 31, 2013 (due to default) to 5.5% cash and 5.5% PIK effective January 1, 2014. |
* Fair value as a percentage of Net Assets.
See notes to unaudited consolidated financial statements
13 |
BNY Mellon-Alcentra Mezzanine III, L.P.
Schedule of Investments (continued)
December 31, 2013
��
** | Denotes investments in which the Partnership is 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, 2013 in these affiliated investments are as follows: |
Name of Issuers | Fair Value at December 31, 2012 | Gross Addition | Gross Reductions | Interest/Dividend/ Other income | Fair Value at December 31, 2013 | |||||||||||||||
Battery Solutions, Inc. | $ | 9,902,220 | $ | 115,749 | $ | - | $ | 735,815 | $ | 6,075,969 | ||||||||||
Kaseman Holdings, LLC/Sallyport Holdings, LLC (aka KS International, LLC) | 471,000 | - | - | - | - | |||||||||||||||
Net Access Corporation | 8,593,721 | 8,736 | 250,000 | 536,957 | 11,964,457 | |||||||||||||||
Show Media, Inc. | 10,529,000 | - | 2,931,250 | 715,656 | 6,294,000 | |||||||||||||||
Southern Technical Institute, Inc. | 12,778,476 | 178,212 | 1,366,667 | 1,174,125 | 10,702,958 | |||||||||||||||
$ | 42,274,417 | $ | 302,697 | $ | 4,547,917 | $ | 3,162,553 | $ | 35,037,384 |
*** | Denotes investments in which the Partnership is an “Affiliate Person” and exceeding a controlling influence, 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, 2013 in these affiliated and controlled investments are as follows: |
Name of Issuers | Fair Value at December 31, 2012 | Gross Addition | Gross Reductions | Interest/Dividend/ Other income | Fair Value at December 31, 2013 | |||||||||||||||
The DRC Group | $ | - | $ | 13,239,853 | $ | - | $ | 550,964 | $ | 11,906,520 | ||||||||||
FST Technical Services | - | 14,034,723 | - | 218,056 | 14,034,723 | |||||||||||||||
$ | - | $ | 27,274,576 | $ | - | $ | 769,020 | $ | 25,941,243 |
See notes to unaudited consolidated financial statements
14 |
ALCENTRA CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014 (Unaudited)
1. | Organization and Purpose |
Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation on June 4, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Furthermore, as the Company is an investment company, it continues to apply the guidance in FASB Accounting Standards Codification (“ASC”) Topic 946. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). In addition, for U.S. federal income tax purposes, Alcentra intends to elect to be treated as a regulated investment company (“RIC”), commencing with its tax year ending December 31, 2014, under Subchapter M of the Internal Revenue Code of 1986 (the “Code”).
The Company was formed for the purpose of acquiring certain assets held by BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership”). The Partnership is a Delaware limited partnership, which commenced operations on May 14, 2010 (the “Commencement Date”). BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY, LLC and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY is wholly-owned by BNY Alcentra Group Holdings, Inc. (“Alcentra Group”), which is wholly-owned by The Bank of New York Mellon Corporation.
On May 8, 2014 (commencement of operations), the Company acquired all of the assets of the Partnership other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) for $64.4 million in cash and $91.5 million in shares of Alcentra’s common stock. Alcentra’s investment activities are managed by the Adviser. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain additional investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio consisted of approximately $29 million in debt investments originated by the investment professionals of the Adviser and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the initial public offering of Alcentra’s shares of common stock. Except for the $1,500 seed capital, the Company had no assets or operations prior to the acquisition of the investment portfolios of the Partnership and as a result, the Partnership is considered a predecessor entity of the Company.
On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100 million. Alcentra used $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.
The Company’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through debt and related equity investments in middle-market companies. The Company seeks to achieve its investment objective by originating and investing primarily in private U.S. middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA (earnings before interest, taxes, depreciation and amortization) through first lien, second lien, unitranche and mezzanine debt financing, with corresponding equity co-investments. It sources investments primarily through the extensive network of relationships that the principals of its investment adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
Upon commencement of operations, the Company also entered into an administration and custodian agreement (the “Agreement”) with State Street Bank and Trust Company (the “Administrator”).
15 |
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements of the Partnership and the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X of Regulation S-X. Accordingly, certain financial information that is normally included in annual financial statements, including certain financial statement notes, prepared in accordance with GAAP, is not required for interim reporting purposes and have been omitted. In the opinion of management, the unaudited financial results included herein contain all adjustments considered necessary for the fair presentation of financial statements for the interim periods included herein. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending December 31, 2014.
In accordance with Regulation S-X Article 6.03 and ASC Topic 810 - Consolidation, the Company generally will not consolidate its interest in any operating company other than in investment company subsidiaries, certain financing subsidiaries, and controlled operating companies substantially all of whose business consists of providing services to the Company.
As of June 30, 2013, the Company had not yet begun investment operations. Alcentra NY purchased the initial 100 shares for $1,500 on March 12, 2014. As such any per share data is not calculable as of June 30, 2013.
On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes. The financial accounts of this entity are consolidated into the accounts of Alcentra. All intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates and such differences could be material. The most significant estimates relate to the valuation of the Company’s portfolio investments.
Portfolio Investment Classification
The Company classifies its portfolio investments with the requirements of the 1940 Act, (a) “Control Investments” are defined as investments in which the Company owns more than 25% of the voting securities or has rights to maintain greater than 50% of the board representation, (b) “Affiliate Investments” are defined as investments in which the Company owns between 5% and 25% of the voting securities and does not have rights to maintain greater than 50% of the board representation, and (c) “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.
Cash and Cash Equivalents
At June 30, 2014, Cash balances totaling $24,407,025 exceeded FDIC insurance protection levels, subjecting the Company to risk related to the uninsured balance. All of the Company’s cash deposits are held by the Administrator and management believes that risk of loss associated with any uninsured balance is remote.
Cash and cash equivalents include deposits held at the custodian bank and short-term investments with original maturities of less than 90 days at time of purchase.
Deferred Financing Costs
Deferred financing costs consist of fees and expenses paid in connection with the closing of the credit facility and are capitalized at the time of payment. These costs are amortized using the straight line method over the term of the credit facility.
Valuation of Portfolio Investments
Portfolio investments are carried at fair value as determined by the General Partner of the Partnership and, in case of the fair value as of June 30, 2014, by the Board of Directors (the “Board”) of Alcentra.
The methodologies used in determining these valuations include:
(1) Preferred shares/membership units and common shares/membership units
In determining estimated fair value for common shares/membership units and preferred shares, the Company or the Partnership makes assessments of the methodologies and value measurements which market participants would use in pricing comparable investments, based on market data obtained from independent sources as well as from the Partnership’s or Company’s own assumptions and taking into account all material events and circumstance which would affect the estimated fair value of such investments. Several types of factors, circumstances and events could affect the estimated fair value of the investments. These include but are not limited to the following:
16 |
(i) Any material changes in the (a) competitive position of the portfolio investment, (b) legal and regulatory environment within which the portfolio investment operates, (c) management or key managers of the portfolio investment, (d) terms and/or cost of financing available to the portfolio investment, and (e) financial position or operating results of the investment; (ii) pending disposition by the Company or Partnership of all or a major portfolio investments; and (iii) sales prices of recent public or private transactions in identical or comparable investments.
One or a combination of the following valuation techniques are used to fair value these investments: Market Approach and Income Approach. The Market Approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Income Approach uses valuation techniques to convert future amounts to a present amount (i.e., discounting estimated future cash flows to a net present value amount).
(2) Debt
The yield to maturity analysis issued to estimate the fair value of debt, including the unitranche facilities, which are a combination of senior and subordinated debt in one debt instrument. The calculation of yield to maturity takes into account the current market price, par value, coupon interest rate and time to maturity.
(3) Warrants
Where warrants are considered to be in the money, their incremental value is included within the valuation of the investments.
Valuation techniques are applied consistently from period to period, except when circumstances warrant a change to a different valuation technique that will provide a better estimate of fair value. The valuation process begins with each investment being initially valued by the investment professionals of the General Partner or for the Company, its Adviser. Preliminary valuation conclusions are then documented and discussed with senior investment professionals of the General Partner of the Partnership or for the Company, its Adviser. The Investment Committee reviews the valuation of the investment professionals and then determines the fair value of each investment in good faith based on the input of the investment professionals.
With respect to the Company’s valuation process, the Board undertakes a similar multi-step valuation process each quarter, as described below:
· | Alcentra’s quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment; | |
· | preliminary valuation conclusions will then be documented and discussed with Alcentra’s senior management and the Adviser; |
· | the audit committee of the Board then reviews these preliminary valuations; |
· | at least once quarterly, independent valuation firms engaged by the Board prepare preliminary valuations on a selected basis and submit the reports to the Board; and |
· | the Board of Directors then discuss valuations and determine the fair value of each investment in Alcentra’s portfolio in good faith, based on the input of the Adviser, the independent valuation firms and the audit committee. |
The Board has authorized the engagement of independent valuation firms to provide Alcentra with valuation assistance. Alcentra intends to have independent valuation firms provide it with valuation assistance on a portion of its portfolio on a quarterly basis and its entire portfolio will be reviewed at least annually by independent valuation firms; however, the Board is ultimately and solely responsible for the valuation of its portfolio investments at fair value as determined in good faith pursuant to its valuation policy and a consistently applied valuation process.
Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a readily available market for the securities existed or from those which will ultimately be realized.
Translation of Foreign Currencies - The accounting records of the Company and the Partnership are maintained in United States dollars. The fair value of foreign securities, currency holdings, and other assets and liabilities in currencies other than United States dollars are translated based on the exchange rates in effect on the date of valuation. The cost of each security is determined using historical exchange rates. Foreign currency transactions are translated at prevailing exchange rates at the time of such transactions. The Company does not isolate that portion of realized or unrealized gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the local currency market price of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on portfolio investments in the statement of operations.
Organizational and Offering Costs – Organization expenses, including reimbursement payments to the Adviser, are expensed on the Company’s consolidated statement of operations. These expenses consist principally of legal and accounting fees incurred in connection with the organization of the Company and have been expensed as incurred. Offering expenses consist principally of underwriter’s fee, legal, accounting and printing fees associated with the registration statement. Offering costs are offset against proceeds of the offering in paid-in capital in excess of par in the consolidated statement of changes in net assets. $1.25 million of offering costs were incurred with the initial public offering. $0.2 million of organization expenses were incurred as of June 30, 2014 for Alcentra.
The Partnership is obligated to reimburse the General Partner for 100% of the placement fee and for organizational costs of the Partnership in an amount not to exceed $1,250,000 on a cumulative basis. Organizational costs paid by the Partnership in excess of $1,250,000 (“Excess Organizational Expenses”) and all placement fees paid by the Partnership will reduce the management fee as described in Note 7. No costs were charged for the Partnership for the periods ended June 30, 2014 or June 30, 2013.
Paid-In-Capital
The Company records the proceeds from the sale of its common stock on a net basis to (i) capital stock and (ii) paid in capital in excess of par value, excluding all commissions.
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Earnings Per Share– Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period.
Investments - Investment security transactions are accounted for on a trade date basis. Cost of portfolio investments represents the actual purchase price of the securities acquired including capitalized legal, brokerage and other fees as well as the value of interest and dividends received in-kind and the amortization of original issue discounts. Fees may be charged to the issuer by the Company and Partnership in connection with the origination of a debt security financing. Such fees are reflected as a discount to the cost of the portfolio security and the discount is accreted into income over the life of the related debt security.
Original Issue Discount - When the Company and Partnership receive warrants with a nominal or discounted exercise price upon origination of a debt or preferred stock investment, a portion of the cost basis is allocated to the warrants. When the investment is made concurrently with the sale of a substantial amount of equity, the value of the warrants is based on the sales price. The value of the warrants is recorded as original issue discount (“OID”) to the value of the debt or preferred stock investment and the OID is amortized over the life of the investment.
Interest and Dividend Income - Interest income is accrued when earned. Interest is not accrued if realization appears unlikely. The Company and Partnership accrue paid in-kind interest (“PIK”) by recording income and an increase to the cost basis of the related investments. Dividend income is recorded on ex-dividend date. Dividends in-kind are recorded as increase in cost basis of investments and as income.
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 non-accrual designated investments may be recognized as income or applied to principal depending on management’s judgment. There were no non-accrual investments as of June 30, 2014 and December 31, 2013.
Other Income - Other income consists of transaction fees which are accreted into income over the life of the related debt security, fee income discount and tax distributions.
Income Taxes – Beginning with its first taxable year, the Company intends to elect for U.S. federal income tax purposes to be treated as a RIC under Subchapter M of the Internal Revenue Code, and to operate in a manner so as to qualify for the tax treatment applicable to RIC’s. To obtain and maintain our qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements. In addition, the Company must distribute to our stockholders, for each taxable year, at least 90% of ‘‘investment company taxable income,’’ which is generally net ordinary taxable income plus the excess of realized net short-term capital gains over realized net long-term capital losses, or the Annual Distribution Requirement.As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that are timely distributed to stockholders as dividends.
The Partnership is structured as a partnership for U.S. Federal income tax purposes, and as such, is not subject to income taxes; each Partner (depending on its structure for tax purposes) may be individually liable for income taxes, if any, on its share of the Partnership’s taxable income.
Alcentra BDC Equity Holdings LLC has elected to be a taxable entity (the Taxable Subsidiary”). The Taxable Subsidiary permits the Company to hold equity investments in portfolio companies which are “pass through” entities for tax purposes and continue to comply with the “source income” requirements contained in RIC tax provisions of the Code. The Taxable subsidiary is not consolidated with the Company for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of its ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in the Company’s consolidated financial statements.
GAAP provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. GAAP requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Partnerships’ financial statements to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions with respect to tax at the partnership level not deemed to meet the “more-likely-than-not” threshold would be recorded as a tax benefit or expense in the current year. The General Partner has concluded that no provision for income tax is required in the Partnerships’ financial statements. However, the General Partner’s conclusions regarding uncertain tax positions will be subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof.
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The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States – 2010.
Indemnification
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.
3. | Fair Value of Portfolio Investments |
The Company and Partnership account for its investments in accordance with FASB Accounting Standards Codification Topic 820 (“ASC Topic 820”),Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value. ASC Topic 820 established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value.
Market price observability is impacted by a number of factors, including the type of investment, the characteristics specific to the investment, and the state of the marketplace (including the existence and transparency of transactions between market participants). Investments with readily-available actively quoted prices or for which fair value can be measured from actively-quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Investments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:
Level 1 – Quoted prices (unadjusted) are available in active markets for identical investments that the Company and Partnership has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 include listed equity securities and listed derivatives. As required by ASC Topic 820, the Company and Partnership, to the extent that it holds such investments, does not adjust the quoted price for these investments, even in situations where the Company and Partnership holds a large position and a sale could reasonably impact the quoted price.
Level 2 – Pricing inputs are observable for the investments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.
Level 3 – Pricing inputs are unobservable for the investment and include situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant judgment or estimation by the Company and Partnership. The types of investments which would generally be included in this category include debt and equity securities issued by private entities.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company and Partnership’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment.
The following table summarizes the levels in the fair value hierarchy into which the Company and Partnership’s financial instruments are categorized as of June 30, 2014 and December 31, 2013:
As of June 30, 2014 (unaudited):
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Senior Secured – First Lien | $ | 72,216,890 | $ | - | $ | - | $ | 72,216,890 | ||||||||
Senior Secured – Second Lien | 7,388,308 | - | - | 7,388,308 | ||||||||||||
Unsecured Debt | 64,224,918 | - | - | 64,224,918 | ||||||||||||
Equity | 56,414,060 | - | - | 56,414,060 | ||||||||||||
Total investments | $ | 200,244,176 | $ | - | $ | - | $ | 200,244,176 |
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As of December 31, 2013:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Debt | $ | 77,460,413 | $ | - | $ | - | $ | 77,460,413 | ||||||||
Common Shares/Membership Units | 24,653,409 | - | 4,769,000 | 19,884,409 | ||||||||||||
Preferred Shares/Membership Units | 20,149,748 | - | - | 20,149,748 | ||||||||||||
Warrants | 2,702,267 | - | - | 2,702,267 | ||||||||||||
Total investments | $ | 124,965,837 | $ | - | $ | 4,769,000 | $ | 120,196,837 |
There were no transfers between levels 1, 2 and 3 during the period from May 8, 2014 to June 30, 2014 and during the year ended December 31, 2013.
The changes in investments classified as Level 3 are as follows for the period from May 8, 2014 to June 30, 2014 and the year ended December 31 2013.
Senior | Senior | |||||||||||||||||||
Secured - | Secured - | Senior | Equity/ | |||||||||||||||||
First Lien | Second Lien | Subordinated | Other | Total | ||||||||||||||||
Balance as of May 8, 2014(*) | $ | 68,702,696 | $ | - | $ | 60,903,999 | $ | 55,221,616 | $ | 184,828,311 | ||||||||||
Amortized discounts/premiums | - | 808 | 357,898 | - | 358,706 | |||||||||||||||
Paid in-kind interest | 463,809 | - | 225,399 | 216,747 | 905,955 | |||||||||||||||
Net realized gain (loss) | - | - | - | - | - | |||||||||||||||
Net change in unrealized appreciation (depreciation) | 260,168 | - | 237,338 | 834,967 | 1,332,473 | |||||||||||||||
Purchases | 4,645,788 | 7,387,500 | 3,000,284 | 140,730 | 15,174,302 | |||||||||||||||
Sales/Return of capital | (1,855,571) | - | (500,000 | ) | - | (2,355,571 | ) | |||||||||||||
Balance as of June 30, 2014 | $ | 72,216,890 | $ | 7,388,308 | $ | 64,224,918 | $ | 56,414,060 | $ | 200,244,176 | ||||||||||
Net change in unrealized appreciation(depreciation) from investments still held as of June 30, 2014 | $ | 260,168 | $ | - | $ | 237,338 | $ | 834,967 | $ | 1,332,473 |
* Investment portfolios acquired from the Partnership and the Warehouse Portfolios (see Note 1)
Debt | Common Shares/ Membership Units | Preferred Shares/ Membership Units | Warrants | Total | ||||||||||||||||
Balance as of January 1, 2013 | $ | 65,446,132 | $ | 21,874,000 | $ | 10,858,157 | $ | 1,739,267 | $ | 99,917,556 | ||||||||||
Amortized discounts/premiums | 190,362 | - | - | - | 190,362 | |||||||||||||||
Paid in-kind interest | 640,407 | - | 1,065,627 | - | 1,706,034 | |||||||||||||||
Net realized gain (loss) | 317,374 | 3,229,861 | - | - | 3,547,235 | |||||||||||||||
Net change in unrealized appreciation (depreciation) | (774,750 | ) | (2,843,413 | ) | (1,107,369 | ) | 552,061 | (4,173,471 | ) | |||||||||||
Purchases | 32,057,812 | 1,914,063 | 4,333,333 | 410,939 | 38,716,147 | |||||||||||||||
Sales/Return of capital | (15,416,924 | ) | (4,290,102 | ) | - | - | (19,707,026 | ) | ||||||||||||
Transfers in | - | - | 5,000,000 | - | 5,000,000 | |||||||||||||||
Transfers out | (5,000,000 | ) | - | - | - | (5,000,000 | ) | |||||||||||||
Balance as of December 31, 2013 | $ | 77,460,413 | $ | 19,884,409 | $ | 20,149,748 | $ | 2,702,267 | $ | 120,196,837 | ||||||||||
Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2013 | $ | (774,750 | ) | $ | (2,013,654 | ) | $ | (1,107,369 | ) | $ | 552,061 | $ | (3,343,712 | ) |
During the year ended December 31, 2013, a portion of one of the Level 3 investments held by the Partnership was converted from debt to preferred shares.
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The following is a summary of the quantitative inputs and assumptions used for items categorized in Level 3 of the fair value hierarchy as of June 30, 2014 and December 31, 2013, respectively.
As of June 30, 2014 (unaudited):
Assets at fair value | Fair Value at June 30, 2014 | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | ||||||||||||
First Lien Debt | $ | 72,216,890 | Yield Analysis/Market Approach | Yield to Maturity | 10.0% - 14.3% | 12.2 | % | ||||||||||
Second Lien Debt | $ | 7,388,308 | Yield Analysis/Market Approach | Yield to Maturity | 9.5% - 9.5% | 9.5 | % | ||||||||||
Unsecured Debt | $ | 64,224,918 | Yield Analysis/Market Approach | Yield to Maturity | 11.0% - 14.0% | 13.0 | % | ||||||||||
Preferred Ownership | $ | 32,010,060 | Market Approach | Enterprise Value/LTM EBITDA Multiple | 6.4x – 11.0% | 8.9 | x | ||||||||||
Common Ownership/ Common Warrants | $ | 24,404,000 | Market Approach | Enterprise Value/LTM EBITDA Multiple | 7.0% – 13.0% | 11.1 | x | ||||||||||
Total | $ | 200,244,176 |
As of December 31, 2013:
Assets at fair value | Fair Value at December 31, 2013 | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | ||||||||||
Preferred Ownership | $ | 20,149,748 | Market Approach | Enterprise Value/LTM EBITDA Multiple | 5.25x – 9.0x | 7.5 | x | ||||||||
Common Ownership/ Common Warrants | $ | 22,586,676 | Market Approach | Enterprise Value/LTM EBITDA Multiple | 5.0x – 14.0x | 9.2 | x | ||||||||
Debt | $ | 77,460,413 | Yield Analysis/ Market Approach | Yield to Maturity | 6.7% – 14.0x | 12.3 | |||||||||
Total | $ | 120,196,837 |
4. | Share Transactions/Partners’ Capital |
The following table summarizes the total shares issued and proceeds received in connection with the Company’s Offering for the period ended June 30, 2014 (May 8, 2014 – June 30, 2014).
Shares | Amount | |||||||
Issuance of shares to Limited Partners of the Partnership | 6,100,000 | $ | 91,500,000 | |||||
Issuance of shares in the Offering | 6,666,666 | 99,999,990 | ||||||
Overallotment | 750,000 | 11,250,000 | ||||||
Total shares issued | 13,516,666 | 202,749,990 | ||||||
Less: | ||||||||
Underwriting costs (sales load) | — | 3,337,500 | ||||||
Offering costs | — | 1,249,994 | ||||||
Total shares outstanding/net proceeds to Company | 13,516,666 | $ | 198,162,496 |
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The Partnership held its initial closing on May 14, 2010, accepting capital commitments amounting to $105,850,000 from Limited Partners. Seven additional closings were held subsequent to May 14, 2010. The most recent of which being the final closing, took place on August 10, 2012, bringing total commitments to $210,200,000. Such capital commitments are due and payable when called by the General Partner. As of May 7, 2014 and June 30, 2013, Limited Partners have contributed $226,397,552 and $149,205,944 or 107.71% and 70.98% of their total capital commitments to the Partnership, respectively. As of May 7, 2014, the capital balances of Class A Limited Partners and Class B Limited Partners amounted to 70.02% and 30.02% of total partners’ capital, respectively. As of June 30, 2013 the capital balances of Class A Limited Partners and Class B Limited Partners amounted to 66.60% and 28.91% of total partners’ capital, respectively.
5. | Distributions |
Alcentra Capital Corporation
The Company intends to make quarterly distributions of available net investment income determined on a tax basis to its stockholders. Distributions to stockholders are recorded on the record date. The amount, if any, to be distributed to stockholders is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, will be distributed at least annually, although the Company may decide to retain such capital gains for investment and pay a 4% excise tax on such excess.
The following table reflects the Company’s dividends declared and paid or to be paid on its common stock:
Date Declared | Record Date | Payment Date | Amount Per Share | |||||
June 24, 2014 | June 30, 2014 | July 7, 2014 | $ | 0.178 |
The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the stockholders who have not “opted out” of the DRIP no later than the record date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the common stock on the NASDAQ Global Select Market on the dividend payment date. Shares purchased in the open market to satisfy the DRIP requirements will be valued upon the average price of the applicable shares purchased by the Plan Administrator, before any associated brokerage or other costs.
BNY Mellon-Alcentra Mezzanine III, L.P.
Proceeds from portfolio investments will be distributed to the partners in proportion to their contributions to such investment until the partners have received a) first, 100% to all Limited Partners until the Limited Partners have received an amount equal to their aggregate capital contributions made to the Partnership (including, capital contributions made to the Partnership to fund the Partnership’s organizational expenses, management fees and other ongoing costs); b) second, 100% to all Limited Partners until the Limited Partners have received preferred returns of 8% and 5%, for Class A Limited Partners and Class B Limited Partners, respectively, per annum on the aggregate capital contributions made to the Partnership (including, capital contributions made to the Partnership to fund the Partnership’s organizational expenses, management fees and other ongoing costs); c) third, for Class A Limited Partners only, 100% to the General Partner as a carried interest distribution until the General Partner has received an amount equal to 20% of the aggregate amount of distributions; and d) thereafter (a) 80% to such Partner and (b) 20% to the General Partner. Income from short-term investments is distributed to all partners in proportion to such partners’ contributions to such investments.
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For the period from January 1, 2014 to May 7, 2014 and six months ended June 30, 2013, the Partnership made distributions to the Limited Partners totaling $3,941,341 and $4,902,112, respectively. For the period from January 1, 2014 to May 7, 2014, distributions made to Class A Limited Partners and Class B Limited Partners amounted to 70.48% and 29.52% of total distributions, respectively. For the six months ended June 30, 2013, distributions made to Class A Limited Partners and Class B Limited Partners amounted to 67.87% and 29.21% of total distributions, respectively.
Upon the termination of the Partnership, if it is determined that the General Partner has received carried interest distributions in excess of the amount it would have received had such distributions been determined on a cumulative basis, a clawback payment of such excess is required of the General Partner.
Distributions to limited partners in 2014 are broken down as follows:
Return on capital | $ | 3,191,341 | ||
Return of capital | 750,000 | |||
Total | $ | 3,941,341 |
6. | Allocation of Profits and Losses |
Allocations of Partnership profits are made in a manner which is consistent with, and gives effect to, the distribution procedures outlined in Note 5 above. Partnership losses are allocated to all partners in proportion to such partners’ capital commitments or to such partners’ percentage ownership in such investment from which the losses arose, or if there is no such investment, in proportion to their capital commitment. For the period from January 1, 2014 to May 7, 2014 and six months ended June 30, 2013, the General Partner was allocated carried interest distributions of $924,600 and $1,804,963, respectively. As a result of the completion of Alcentra’s initial public offering, the General Partner’s allocated carried interest as of May 7, 2014 was reallocated to the Limited Partners in accordance with the provisions of the Partnership’s Limited Partnership Agreement (December 31, 2013, as revised). Accordingly, the carried interest allocated to the General Partner through May 7, 2014 of approximately $6 million was reallocated to the Limited Partners.
7. | Related Party Transactions |
Management Fee
Alcentra Capital Corporation
Under the Investment Advisory Agreement, we have agreed to pay Alcentra NY an annual base management fee based on our gross assets as well as an incentive fee based on our performance. The base management fee is calculated at an annual rate as follows: 1.75% of our gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if our gross assets are below $625 million; 1.625% if our gross assets are between $625 million and $750 million; and 1.5% if our gross assets are greater than $750 million. The various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to our entire gross assets in the event our gross assets exceed the various gross asset thresholds. The base management fee will be payable quarterly in arrears.
The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of our ‘‘pre-incentive fee net investment income’’ for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a ‘‘catch-up’’ feature. The second part is calculated 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 equals 20% of our aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees. Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees, such as commitment, origination, structuring, diligence, managerial assistance and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable for administrative services under the Investment Advisory Agreement, and any interest expense and any distributions paid on any issued and outstanding preferred stock, but excluding the incentive fee and any offering expenses and other expenses not charged to operations but excluding certain reversals to the extent such reversals have the effect of reducing previously accrued incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income until we have received such income in cash.
For the period May 8, 2014 through June 30, 2014, the Company recorded an expense for management fees of $524,548 of which $524,548 was payable at June 30, 2014.
Our Adviser may waive its fees (base management and incentive fee), without recourse against or reimbursement by us, for the remainder of the quarter in which the initial public offering is completed and the subsequent four quarters to the extent required in order for the Company to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis). There are no waived fees for the period May 8, 2014 through June 30, 2014 and no incentive fees incurred by the Company during the same period.
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BNY Mellon-Alcentra Mezzanine III, L.P.
For the period from the Commencement Date to the fifth anniversary of the Final Closing Date, the Partnership will pay to the Manager a management fee at an annual rate equal to the product of 1.50% for each Class A Limited Partner and 1.00% - 1.25% for each Class B Limited Partner, in each case multiplied by such Limited Partner’s Capital Commitment. After the fifth anniversary of the Final Closing Date, the management fee will be paid at annual rates of 1.50% and 1.00% - 1.25% for Class A Limited Partners and Class B Limited Partners, respectively, in each case multiplied by the aggregate amount of such Limited Partner’s Capital Contributions used to fund the cost of Investments that have not been the subject of a Disposition less the aggregate amount of such Limited Partner’s Capital Contributions with respect to all Investments which have not been disposed of prior to the date of such distribution and which have been permanently written off. The management fee is payable quarterly in advance. For the period from January 1, 2014 to May 7, 2014, Class A Limited Partners were charged $751,956 and Class B Limited Partners were charged $242,850 in Management Fees. For the six months ended June 30, 2013, Class A Limited Partners were charged $1,037,423 and Class B Limited Partners were charged $360,665 in Management Fees.
The management fee is reduced by the placement fees and Excess Organization Expenses paid by the Partnership. The management fee is further reduced by 100% of all transaction fees, investment fees, monitoring fees, management fees and directors’ fees received by the General Partner or any affiliate thereof, net of unreimbursed out-of-pocket expenses. For the period from January 1, 2014 to May 7, 2014 and six months ended June 30, 2013 there were no placement fees, Excess Organizational Expenses, or fees received by the Manager that reduced management fee expense in the reporting period.
Certain employees of the Manager are Limited Partners of the Partnership. As of May 7, 2014, an affiliate of the Partnership also has a $50.0 million commitment to the Partnership as a Limited Partner. As of May 7, 2014 and December 31, 2013, this Limited Partner has contributed $56,602,997 and $40,136,386, respectively, or 113.21% and 80.27%, respectively, of its total capital commitments to the Partnership.
As of December 31, 2013, the amounts due from Limited Partners, amounts due to affiliates and distributions payable amounting to $6,635, $10,989 and $168, respectively, relate to capital activity during the period. Additionally, the Partnership incurred $699,473 in management fees, for the period from January 1, 2014 to May 7, 2014 and $1,398,088 for the six months ended June 30, 2013.
8. | Directors Fees |
The independent directors of the Company each receive an annual fee of $40,000. They also receive $2,500 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending in person each board of directors meeting and $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with attending each board meeting telephonically. They also receive $1,000 plus reimbursement of reasonable out-of-pocket expenses incurred in connection with each committee meeting attended in person and each telephonic committee meeting. The chairman of the audit committee, the nominating and corporate governance committee and the compensation committee will receive an annual fee of $10,000, $5,000 and $5,000, respectively. We have obtained directors’ and officers’ liability insurance on behalf of our directors and officers.
For the period May 8, 2014 through June 30, 2014, the Company recorded directors fee expense of $80,000, of which $80,000 was payable at June 30, 2014.
9. | Purchases and Sales (Investment Transactions) |
Investment purchases, sales and principal payments/paydowns are summarized below for the period from May 8, 2014 through June 30, 2014, the period from January 1, 2014 through May 7, 2014 and the six months ended June 30, 2013.
For the period from January 1, 2014 through | For the period from May 8, 2014* through | For the six months ended | ||||||||||
May 7, 2014 | June 30, 2014 | June 30, 2013 | ||||||||||
Investment purchases, at cost (including PIK interest) | $ | 50,201,887 | $ | 16,080,257 | ** | $ | 14,969,063 | |||||
Investment sales, proceeds (including Principal payments/paydown proceeds) | 15,780,666 | 2,355,571 | 1,291,628 |
* Commencement of operations of the Company
** Excludes $185 million of investment portfolios acquired by the Company from the Partnership and the Warehouse Portfolios (see Note 1)
10. | Credit Facility/Line of Credit |
In May 2014, the Company entered into a credit facility (the “Credit Facility”) with ING Capital LLC to provide liquidity in support of its investment and operational activities. The Credit Facility, which has an initial commitment of $80 million supported by seven financial institutions. The Credit Facility matures on May 8, 2018. Deferred financing costs related to this credit facility were $1.55 million as of June 30, 2014.
The Credit Facility has an accordion feature that allows for an increase in the total commitment size up to $160 million, subject to certain conditions. The Credit Facility is secured primarily by the Company’s assets.
Borrowings under the Credit Facility bear interest, subject to the Company’s election, at a rate per annum equal to (i) the one, three or six month LIBOR, as applicable, plus 3.25% or (ii) 2.25% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. The Company pays a commitment fee of 1.0% per annum on undrawn amounts, which is included with interest fees on the Company’s consolidated statements of operations. Borrowings under the Credit Facility are also limited to a borrowing base, which includes certain cash and a portion of eligible debt investments.
As of June 30, 2014, the Company had United States dollar borrowings of $22.6 million outstanding under the Credit Facility.
The Partnership entered into a credit agreement with the Administrator under which the Partnership can borrow an aggregate principal amount of $15 million for the financing of portfolio investments. Interest is charged at the LIBOR Rate plus 1.00%. The credit agreement terminated on April 24, 2014. As of December 31, 2013, the Partnership had outstanding borrowings of $15,000,000. For the six months ended June 30, 2014 and the year ended December 31, 2013, Alcentra and the Partnership borrowed an average of $19,158,875 and $5,000,000, respectively.
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11. | Market and Other Risk Factors |
At June 30, 2014, the Company’s portfolio investments are comprised of non-publicly-traded securities. The non-publicly-traded securities trade in an illiquid marketplace. The portfolio is concentrated in the eighteen industries listed in Note 13. Risks affecting these industries include, but are not limited to, increasing competition, rapid changes in technology, government actions and changes in economic conditions. These risk factors could have a material effect on the ultimate realizable value of the Company’s investments.
Economic conditions in 2014 continued to impact revenues and operating cash flows for most businesses and continued to impact the lending markets, leaving many businesses unable to borrow or refinance debt obligations. These restrictions on obtaining available financing, coupled with the continuing economic slowdown, have resulted in a low volume of purchase and sale transactions across all industries, which has limited the amount of observable inputs available to the Company in estimating the fair value of the Company’s investments. The Company estimates the fair value of investments for which observable market prices in active markets do not exist based on the best information available, which may differ significantly from values that would have otherwise been used had a ready market for the investments existed and the differences could be material.
Market conditions may deteriorate, which may negatively impact the estimated fair value of the Company’s investments or the amounts which are ultimately realized for such investments.
The above events are beyond the control of the Company and cannot be predicted. Furthermore, the ability to liquidate investments and realize value is subject to significant limitations and uncertainties. There may also be risk associated with the concentration of investments in one geographic region or in certain industries.
12. | Commitments and Contingencies |
In the normal course of business, the Company and the Partnership enter into contracts that contain a variety of representations and warranties and which provide general indemnifications. In addition, the Company has agreed to indemnify its officers, directors, employees, agents or any person who serves on behalf of the Company from any loss, claim, damage, or liability which such person incurs by reason of his performance of activities of the Company, provided they acted in good faith. The Company expects the risk of loss related to its indemnifications to be remote.
The Company’s investment portfolio may contain debt investments that are in the form of lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014 the Company had two unfunded commitments under loan and financing agreements. As of December 31, 2013, the Partnership’s unfunded commitment under loan and financing agreements are presented below.
As of | ||||||||
June 30, 2014 | December 31, 2013 | |||||||
Dentistry For Children | $ | 3,500,000 | $ | 2,625,000 | ||||
DRC | 3,752,380 | - | ||||||
Total | $ | 7,252,380 | $ | 2,625,000 |
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13. | Classification of Portfolio Investments |
As of June 30, 2014, the Company’s portfolio investments were categorized as follows:
Industry | Cost | Fair Value | % of Net Assets* | |||||||||
Healthcare Services | $ | 22,655,238 | $ | 22,569,566 | 11.32 | % | ||||||
Disaster Recovery Services | 18,550,280 | 18,946,000 | 9.49 | % | ||||||||
Infrastructure Maintenance | 15,337,094 | 15,783,501 | 7.91 | % | ||||||||
Technology & Telecom | 14,463,416 | 15,601,873 | 7.82 | % | ||||||||
Oil & Gas Services | 14,710,289 | 14,741,289 | 7.40 | % | ||||||||
Food & Beverage | 13,592,681 | 13,478,999 | 6.75 | % | ||||||||
Technology | 12,032,230 | 12,850,231 | 6.44 | % | ||||||||
Media & Entertainment | 12,079,116 | 12,066,000 | 6.05 | % | ||||||||
Restoration Services | 11,868,273 | 11,905,803 | 5.97 | % | ||||||||
Waste Management | 11,468,280 | 11,502,060 | 5.76 | % | ||||||||
Education | 11,836,100 | 10,543,333 | 5.28 | % | ||||||||
Healthcare & Pharmaceuticals | 8,000,000 | 8,000,000 | 4.01 | % | ||||||||
Media: Broadcasting & Subscription | 7,388,308 | 7,388,308 | 3.70 | % | ||||||||
Telecommunication Services | 6,232,125 | 6,250,000 | 3.13 | % | ||||||||
Consumer Services | 6,249,459 | 6,249,459 | 3.13 | % | ||||||||
Environmental/Energy Services | 6,215,289 | 6,134,289 | 3.07 | % | ||||||||
Packaging | 3,233,525 | 3,233,465 | 1.62 | % | ||||||||
Business Services | 3,000,000 | 3,000,000 | 1.50 | % | ||||||||
Total | $ | 198,911,703 | $ | 200,244,176 | 100.35 | % |
Geographic Region | ||||||||||||
South | $ | 121,973,927 | $ | 122,170,328 | 61.22 | % | ||||||
Eastern | 44,184,568 | 45,509,792 | 22.81 | % | ||||||||
West | 25,364,900 | 25,175,748 | 12.62 | % | ||||||||
Puerto Rico | 7,388,308 | 7,388,308 | 3.70 | % | ||||||||
Total | $ | 198,911,703 | $ | 200,244,176 | 100.35 | % | ||||||
Investment Type | ||||||||||||
Senior secured - 1st Lien | $ | 71,956,722 | $ | 72,216,890 | 36.19 | % | ||||||
Senior secured - 2nd Lien | 7,388,308 | 7,388,308 | 3.70 | % | ||||||||
Unsecured | 63,987,579 | 64,224,918 | 32.19 | % | ||||||||
Equity | 55,579,094 | 56,414,060 | 28.27 | % | ||||||||
Total | $ | 198,911,703 | $ | 200,244,176 | 100.35 | % |
*Fair value as a percentage of Net Assets
As of December 31, 2013, the Partnership's portfolio investments were categorized as follows:
Industry | Cost | Fair Value | % of Net Assets* | |||||||||
Technology | $ | 27,641,303 | $ | 36,492,364 | 32.98 | % | ||||||
Healthcare | 17,788,791 | 18,409,791 | 16.64 | % | ||||||||
Media & Entertainment | 16,401,228 | 16,796,478 | 15.18 | % | ||||||||
Food and Beverage | 12,391,564 | 12,391,564 | 11.20 | % | ||||||||
Disaster Recovery Services | 13,239,853 | 11,906,520 | 10.76 | % | ||||||||
Waste Management Services | 10,802,784 | 10,802,784 | 9.76 | % | ||||||||
Education | 11,590,021 | 10,702,958 | 9.68 | % | ||||||||
Energy Service Company | 10,017,974 | 6,868,969 | 6.21 | % | ||||||||
Defense Services | 500,000 | 594,409 | 0.54 | % | ||||||||
Total | $ | 120,373,518 | $ | 124,965,837 | 112.95 | % | ||||||
Geographic Region | ||||||||||||
Eastern United States | $ | 78,263,263 | $ | 85,586,587 | 77.36 | % | ||||||
Midwest United States | 22,409,538 | 19,260,533 | 17.41 | % | ||||||||
West United States | 19,700,717 | 20,118,717 | 18.18 | % | ||||||||
Total | $ | 120,373,518 | $ | 124,965,837 | 112.95 | % | ||||||
Investment Type | ||||||||||||
Debt | $ | 78,235,163 | $ | 77,460,413 | 70.02 | % | ||||||
Common Shares/Membership Units | 21,414,063 | 24,653,409 | 22.28 | % | ||||||||
Preferred Shares/Membership Units | 20,313,081 | 20,149,748 | 18.21 | % | ||||||||
Warrants | 411,211 | 2,702,267 | 2.44 | % | ||||||||
Total | $ | 120,373,518 | $ | 124,965,837 | 112.95 | % |
*Fair value as a percentage of Net Assets
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14. | Financial Highlights |
The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company financial statements. The following is a schedule of financial highlights for one share of common stock for the period May 8, 2014 through June 30, 2014.
Per share data(1) | ||||
Net asset value, beginning of period | $ | 15.00 | ||
Net investment income (loss) | 0.18 | |||
Net realized and unrealized gains (losses) | 0.30 | |||
Net increase (decrease) in net assets resulting from operations | 0.48 | |||
Distributions to shareholders:(2) | ||||
From net investment income | (0.18 | ) | ||
Offering costs | (0.09 | ) | ||
Sales load | (0.45 | ) | ||
Net increase (decrease) in net assets resulting from capital share transactions | (0.54 | ) | ||
Net asset value, end of period | $ | 14.76 | ||
Market value per share, end of period | $ | 14.85 | ||
Total return based on net asset value(3)(4)(5) | 3.3 | % | ||
Total return based on market value(3)(4)(5) | 2.7 | % | ||
Shares outstanding at end of period | 13,516,766 | |||
Ratio/Supplemental Data: | ||||
Net assets, at end of period | $ | 199,545,112 | ||
Ratio of total expenses to average net assets(6) | 4.14 | % | ||
Ratio of interest expense to average net assets(6) | 1.02 | % | ||
Ratio of net investment income (loss) to average net assets (6) | 8.61 | % | ||
Total Credit Facility payable outstanding | $ | 22,601,654 | ||
Asset coverage ratio(7) | 9.8 | |||
Portfolio turnover rate(5)(8) | 1 | % |
(1) | The per share data was derived by using the shares outstanding during the period. |
(2) | The per share data for distributions is the actual amount of distributions paid or payable per share of common stock outstanding during the entire period.. |
(3) | Returns are historical and are calculated by determining the percentage change in net asset value or market value with all distributions reinvested. Distributions are assumed to be reinvested at prices obtained under the Company’s dividend reinvestment plan. |
(4) | Total investment return on net asset value is calculated assuming a purchase at the offering price of $15.00 less the sales load of $0.45 per share paid by the shareholder on the first day and a sale at the net asset value on the last day of the period reported with all distributions reinvested. Total investment return on market value is calculated assuming a purchase at the offering price of $15.00 less the sales load of $0.45 per share paid by the shareholder on the first day and a sale at the current market price on the last day of the period reported with all distributions reinvested. |
(5) | Not Annualized. |
(6) | Annualized. |
(7) | Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. |
(8) | For the period from May 8, 2014 to June 30,2014. |
The following performance ratios and internal rate of return (“IRR”) (since inception) are presented for the Limited Partners as a single class, taken as a whole. The actual ratios of each individual investor may vary and are dependent upon the specific allocations of income and expense to such investor and the timing of capital transactions for such investor.
The net investment income (loss) ratio and the expense ratio are computed using the weighted average capital of the Limited Partners during the periods. The net investment income (loss) ratio does not include the effects of the carried interest allocation. The weighted average capital calculation reflects a measure of capital after each capital contribution, distribution or other significant change in capital at the end of each quarterly accounting period. The IRR was computed based on the actual dates of Limited Partners’ cash inflows (capital contributions) and outflows (cash and stock distributions), and the residual value of the Limited Partners’ capital accounts as from January 1, 2014 through May 7, 2014 and the year ended December 31, 2013.
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January 1, 2014 to May 7, | December 31, | |||||||
2014 | 2013 | |||||||
Net investment income (loss) ratio before carried interest allocation | 15.06 | % | 7.50 | % | ||||
Expense ratio before carried interest allocation | 1.81 | % | 3.54 | % | ||||
Carried interest allocation | (4.51 | )% | 1.80 | % | ||||
Expense ratio after carried interest allocation | (2.70 | )% | 5.34 | % | ||||
Cumulative IRR after carried interest allocation | 13.69 | % | 10.03 | % |
These financial highlights may not be indicative of future performance.
15. | Tax Information |
As of June 30, 2014, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
Tax cost | $ | 198,911,703 | ||
Gross unrealized appreciation | 3,459,135 | |||
Gross unrealized depreciation | (2,126,662 | ) | ||
Net unrealized investment appreciation | $ | 1,332,473 |
The tax cost of the Company’s investment as of June 30, 2014, approximates their amortized cost.
16. | Unconsolidated Significant Subsidiaries |
In accordance with the SEC’s Regulation S-X and GAAP, we have subsidiaries that are not required to be consolidated. We have certain unconsolidated significant subsidiaries that pursuant to Rule 4-08(g) of Regulation S-X, summarized financial information is presented below in aggregate as of and for the period ended June 30, 2014.
As of | For the six months ended | |||||||||
Balance Sheet | June 30, 2014 | Income Statement | June 30, 2014 | |||||||
Current Assets | 39,705,724 | Net Sales | 59,536,165 | |||||||
Noncurrent Assets | 22,334,755 | Gross Profit | 22,920,737 | |||||||
Current Liabilities | 15,805,983 | Net Income (Loss) | 13,856,963 | |||||||
Noncurrent Liabilities | 20,463,551 |
In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities. In this regard, The DRC Group (DRC) derives significantly all of its revenue from contracts with federal, state and local governments and governmental agencies. As a result, if it does not comply with the terms of a contract or with regulations or statutes, it could be subject to downward contract price adjustments or refund obligations or could in extreme circumstances be assessed penalties or be debarred or suspended from obtaining future contracts for a specified period of time. Any such suspension or debarment or other sanction could have an adverse effect on its business.
Similarly, the business and growth of FST Technical Services, LLC (FST) depends in large part on the continued trend toward outsourcing of certain services in the semiconductor and biopharmaceutical industries. There can be no assurance that this trend in outsourcing will continue, as companies may elect to perform such services internally. A significant change in the direction of this trend generally, or a trend in the semiconductor and biopharmaceutical industry not to use, or to reduce the use of, outsourced services such as those provided by it, could significantly decrease its revenues and such decreased revenues could have a material adverse effect on it or its results operations or financial condition.
The aggregate summarized financial information for DRC and FST as of and for the year ended December 31, 2013 are presented below.
As of | For the year ended | |||||||||
Balance Sheet | December 31, 2013 | Income Statement | December 31, 2013 | |||||||
Current Assets | 14,298,448 | Net Sales | 38,655,576 | |||||||
Noncurrent Assets | 32,385,291 | Gross Profit | 11,532,026 | |||||||
Current Liabilities | 4,606,485 | Net Income (Loss) | (8,157,148 | ) | ||||||
Noncurrent Liabilities | 20,295,994 |
17. | Subsequent Events |
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued.
Subsequent to June 30, 2014, new investments were made as follows:
On July 11, 2014, GST Autoleather was funded for $8,000,000 (11% Cash, 2% PIK senior subordinated note).
On July 24, 2014, ACT Lighting was funded for $9,750,000 (12% Cash, 2% PIK note) and $1,750,000 (8% PIK note).
Subsequent to June 30, 2014 the following add on investments were made.
On July 25, 2014, Well Biz Brands was funded $820,000 (senior secured 7% cash, 3.5% PIK).
On July 30, 2014, Black Diamond Rentals was funded $1,480,500 (senior secured 10% cash, 4% PIK).
On August 4, 2014, Aphena Pharma Solutions was funded $433,029 (senior secured 7% cash, 3.5% PIK).
Repayments made subsequent to June 30, 2014 are as follows:
On July 21, 2014, Net Access Corporation repaid their debt obligation of $3,920,230.
On August 6, 2014, GTT Communications repaid their debt obligation of $6,250,000.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
• | our future operating results; |
• | our business prospects and the prospects of our portfolio companies; |
• | the effect of investments that we expect to make; |
• | our contractual arrangements and relationships with third parties; |
• | actual and potential conflicts of interest with Alcentra NY, LLC; |
• | the dependence of our future success on the general economy and its effect on the industries in which we invest; |
• | the ability of our portfolio companies to achieve their objectives; |
• | the use of borrowed money to finance a portion of our investments; |
• | the adequacy of our financing sources and working capital; |
• | the timing of cash flows, if any, from the operations of our portfolio companies; |
• | our ability to maintain our qualification as a business development company; and |
• | the effect of future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities) and conditions in our operating areas, particularly with respect to business development companies. |
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words “may,” “might,” “will,” “intend,” “should,” “could,” “can,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “potential,” “plan” or similar words.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q. Actual results could differ materially from those anticipated in our forward-looking statements, and future results could differ materially from historical performance. We undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law or SEC rule or regulation. You are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
Alcentra Capital Corporation (the “Company”, “Alcentra”, “ACC”, “we”, “us” or “our”) was formed as a Maryland corporation on June 4, 2013 as an externally managed, non-diversified closed-end management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). Alcentra is managed by Alcentra NY, LLC (the “Adviser”, or “Alcentra NY”), registered investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). State Street Bank and Trust Company (“State Street”) provides us with financial reporting, post-trade compliance, and treasury services. In addition, for U.S. federal income tax purposes, Alcentra intends to elect to be treated as a regulated investment company (“RIC”), commencing with its tax year ending December 31, 2014, under Subchapter M of the Internal Revenue.
BNY Mellon-Alcentra Mezzanine III, L.P. (the “Partnership” or “Fund III”) is a Delaware limited partnership, which commenced operations on May 14, 2010. The Partnership was formed for the purpose of seeking current income and long-term capital appreciation by making investments in senior debt securities, subordinated debt securities, and common and preferred equity securities with equity rights or participations in U.S.-based middle market companies. BNY Mellon-Alcentra Mezzanine III (GP), L.P. (the “General Partner”), a Delaware limited liability company, is the General Partner of the Partnership. BNY Mellon-Alcentra Mezzanine Partners (the “Manager”), a division of Alcentra NY, LLC (“Alcentra Group”) and an affiliate of the General Partner, manages the investment activities of the Partnership. Alcentra NY, LLC is wholly owned by BNY Alcentra Group Holdings, Inc. which is wholly owned by The Bank of New York Mellon Corporation.
On May 14, 2014, Alcentra completed its initial public offering (the “Offering”), at a price of $15.00 per share. Through its initial public offering the Company sold 6,666,666 shares for gross proceeds of approximately $100,000,000. Alcentra used $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.
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Immediately prior to the Offering, Fund III sold all of its assets other than its investment in the shares of common stock and warrants to purchase common stock of GTT Communications (the “Fund III Acquired Assets”) to the Company for $64.4 million in cash and $91.5 million in shares of the Company’s common stock. Concurrent with the acquisition of the Fund III Acquired Assets from Fund III, the Company also purchased for $29 million in cash certain additional investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio consisted of approximately $29 million in debt investments originated by the investment professionals of the Manager and purchased by Alcentra Group using funds under a warehouse credit facility provided by The Bank of New York Mellon Corporation in anticipation of the Offering.
The Company entered into a senior secured term loan agreement (the “Bridge Facility”) with ING Capital LLC as lender that it used to fund the purchase of the Warehouse Portfolio and to fund the cash portion of the consideration paid to Fund III. In May 2014, the Companyused $94.2 million of the proceeds from the Offering to repay the Bridge Facility in full.
The Company’s investment objective is to generate both current income and capital appreciation through debt and equity investments by targeting investment opportunities with favorable risk-adjusted returns. The Company invests primarily in middle-market companies in the form of mezzanine and senior secured loans, each of which may include an equity component, and, to a lesser extent, by making direct equity investments in such companies
The Company is required to comply with certain regulatory requirements such as not acquiring 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. Qualifying assets include investments in “eligible portfolio companies.” Under the relevant SEC rules, the term “eligible portfolio company” includes all private operating companies, operating companies whose securities are not listed on a national securities exchange, and certain public operating companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million, in each case organized and with their principal of business in the United States.
Since Alcentra did not commence investment operations until May 8, 2014, the discussion and analysis of financial condition and results of operations through May 7, 2014 described in this section pertains to the historical operations of Fund III given that the Company acquired substantially all of Fund III’s investment portfolio. However, no liabilities of Fund III were assumed by the Company in connection with the acquisition of the Fund III Acquired Assets other than to fund $2.6 million under revolving lines of credit. As a result, you should be mindful of the foregoing facts when reviewing the discussion and analysis set forth in this section as well as in connection with reviewing the financial information contained elsewhere in this Form 10-Q.
As used in this section, the terms “we” and “us” refer to Fund III for the periods prior to the Offering and refer to Alcentra for the periods after the Offering.
Portfolio Composition and Investment Activity
Portfolio Composition
We originate and invest primarily in middle-market companies (typically those with $5.0 million to $15.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment.
As of June 30, 2014, we had $200 million (at fair value) invested in 21 companies. Our portfolio included approximately 36% of first lien debt, 4% of second lien debt, 32% of mezzanine debt and 28% of equity investments at fair value. The composition of our investments as of June 30, 2014 was as follows:
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Cost | Fair Value | |||||||
Senior Secured – First Lien | $ | 71,956,722 | $ | 72,216,890 | ||||
Senior Secured – Second Lien | 7,388,308 | 7,388,308 | ||||||
Unsecured Debt | 63,987,579 | 64,224,918 | ||||||
Equity | 55,579,094 | 56,414,060 | ||||||
Total Investments | $ | 198,911,703 | $ | 200,244,176 |
As of December 31, 2013, we had $124.9 million (at fair value) invested in 14 portfolio companies, including $6.2 million (at fair value) relating to the shares of common stock and $2.4 million in warrants to purchase common stock of GTT Communications (“Excluded Assets”) which were not acquired by Alcentra in connection of the Fund III Acquired Assets. As of December 31, 2013, our portfolio included approximately 23% of first lien debt, 39% of mezzanine debt and 38% of equity investments at fair value. The composition of our investments as of December 31, 2013 was as follows:
Cost | Fair Value | |||||||
Senior Secured – First Lien | $ | 29,925,987 | $ | 29,151,237 | ||||
Unsecured Debt | 48,309,176 | 48,309,176 | ||||||
Equity* | 42,138,355 | 47,505,424 | ||||||
Total Investments | $ | 120,373,518 | $ | 124,965,837 |
* | Includes the Excluded Assets. The aggregate cost basis and fair value of the Excluded Assets at December 31, 2013 was $2.4 million and $6.2 million, respectively. |
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014 we had two such investments with an aggregate unfunded commitment of $9.7 million and at December 31, 2013, we had one such investment with aggregate unfunded commitments of $2.6 million in both periods.
The following is a summary of geographical concentration of our investment portfolio as of June 30, 2014:
Cost | Fair Value | % of Total Net Assets | ||||||||||
Texas | $ | 31,302,970 | $ | 31,220,287 | 15.65 | % | ||||||
Alabama | 18,550,280 | 18,946,000 | 9.50 | % | ||||||||
Connecticut | 16,815,244 | 16,876,059 | 8.46 | % | ||||||||
Georgia | 16,487,237 | 16,469,566 | 8.25 | % | ||||||||
Pennsylvania | 15,337,094 | 15,783,500 | 7.91 | % | ||||||||
Arizona | 14,463,416 | 15,601,873 | 7.82 | % | ||||||||
New Jersey | 12,032,230 | 12,850,231 | 6.44 | % | ||||||||
North Carolina | 11,868,272 | 11,905,802 | 5.97 | % | ||||||||
Tennessee | 11,233,525 | 11,233,465 | 5.63 | % | ||||||||
Florida | 11,836,100 | 10,543,333 | 5.28 | % | ||||||||
Puerto Rico | 7,388,308 | 7,388,308 | 3.70 | % | ||||||||
Nevada | 6,732,151 | 6,692,000 | 3.35 | % | ||||||||
Virginia | 6,232,125 | 6,250,000 | 3.13 | % | ||||||||
Colorado | 6,249,459 | 6,249,459 | 3.13 | % | ||||||||
Michigan | 6,215,288 | 6,134,288 | 3.07 | % | ||||||||
California | 6,168,000 | 6,100,000 | 3.06 | % | ||||||||
Total | $ | 198,911,703 | $ | 200,244,176 | 100.35 | % |
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The following is a summary of geographical concentration of our investment portfolio as of December 31, 2013:
Cost | Fair Value | % of Net Assets | ||||||||||
Connecticut | $ | 20,135,262 | $ | 21,305,262 | 19.25 | % | ||||||
Arizona | 14,034,723 | 14,034,723 | 12.69 | % | ||||||||
Texas | 12,391,569 | 13,184,564 | 11.92 | % | ||||||||
California | 12,734,744 | 12,377,994 | 11.19 | % | ||||||||
Georgia | 12,122,797 | 12,325,797 | 11.14 | % | ||||||||
New Jersey | 6,852,457 | 11,964,457 | 10.81 | % | ||||||||
Alabama | 13,239,853 | 11,906,520 | 10.76 | % | ||||||||
Florida | 11,590,021 | 10,702,958 | 9.67 | % | ||||||||
Virginia* | 6,754,123 | 10,493,184 | 9.48 | % | ||||||||
Michigan | 10,017,969 | 6,075,969 | 5.49 | % | ||||||||
Pennsylvania | 500,000 | 594,409 | 0.54 | % | ||||||||
$ | 120,373,518 | $ | 124,965,837 | 112.95 | % |
* | Includes the Excluded Assets. The aggregate cost basis and fair value of the Excluded Assets at December 31, 2013 was $2.4 million and $6.2 million, respectively. |
The following is a summary of industry concentration of our investment portfolio as of June 30, 2014:
industry | Cost | Fair Value | % of Net Assets | |||||||||
Healthcare Services | $ | 22,655,238 | $ | 22,569,566 | 11.32 | % | ||||||
Disaster Recovery Services | 18,550,280 | 18,946,000 | 9.49 | % | ||||||||
Infrastructure Maintenance | 15,337,094 | 15,783,501 | 7.91 | % | ||||||||
Technology & Telecom | 14,463,416 | 15,601,873 | 7.82 | % | ||||||||
Oil & Gas Services | 14,710,289 | 14,741,289 | 7.40 | % | ||||||||
Food & Beverage | 13,592,681 | 13,478,999 | 6.75 | % | ||||||||
Technology | 12,032,230 | 12,850,231 | 6.44 | % | ||||||||
Media & Entertainment | 12,079,116 | 12,066,000 | 6.045 | % | ||||||||
Restoration Services | 11,868,273 | 11,905,803 | 5.97 | % | ||||||||
Waste Management | 11,468,280 | 11,502,060 | 5.76 | % | ||||||||
Education | 11,836,100 | 10,543,333 | 5.28 | % | ||||||||
Healthcare & Pharmaceuticals | 8,000,000 | 8,000,000 | 4.01 | % | ||||||||
Media: Broadcasting & Subscription | 7,388,308 | 7,388,308 | 3.70 | % | ||||||||
Telecommunication Services | 6,232,125 | 6,250,000 | 3.13 | % | ||||||||
Consumer Services | 6,249,459 | 6,249,459 | 3.13 | % | ||||||||
Environmental/Energy Services | 6,215,289 | 6,134,289 | 3.07 | % | ||||||||
Packaging | 3,233,525 | 3,233,465 | 1.62 | % | ||||||||
Business Services | 3,000,000 | 3,000,000 | 1.50 | % | ||||||||
Total | $ | 198,911,703 | $ | 200,244,176 | 100.35 | % |
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The following is a summary of industry concentration of our investment portfolio as of December 31, 2013:
Cost | Fair Value | % of Net Assets | ||||||||||
Technology and Telecom* | $ | 27,641,303 | $ | 36,492,364 | 32.98 | % | ||||||
Healthcare | 17,788,791 | 18,409,791 | 16.64 | % | ||||||||
Media and Entertainment | 16,401,228 | 16,796,478 | 15.18 | % | ||||||||
Food and Beverage | 12,391,564 | 12,391,564 | 11.20 | % | ||||||||
Disaster Recovery Services | 13,239,853 | 11,906,520 | 10.76 | % | ||||||||
Waste Management Services | 10,802,784 | 10,802,784 | 9.76 | % | ||||||||
Education | 11,590,021 | 10,702,958 | 9.70 | % | ||||||||
Energy Service Company | 10,017,974 | 6,868,969 | 6.20 | % | ||||||||
Defense Services | 500,000 | 594,409 | .53 | % | ||||||||
$ | 120,373,518 | $ | 124,965,837 | 112.95 | % |
* | Includes the Excluded Assets. The aggregate cost basis and fair value of the Excluded Assets at December 31, 2013 was $2.4 million and $6.2 million, respectively. |
At June 30, 2014, our average portfolio company investment at amortized cost and fair value was approximately $10.4 million and $10.5 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $18.5 million and $18.9 million, respectively. At December 31, 2013, our average portfolio company investment at amortized cost and fair value was approximately $8.5 million and $8.9 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $14.0 million and $14.0 million, respectively.
At June 30, 2014, 9.92% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 90.08% bore interest at fixed rates. At December 31, 2013, 100% of our debt investments bore interest at fixed rates.
The weighted average yield on all of our debt investments as of June 30, 2014 and December 31, 2013 was approximately 12.3% and 12.4%, respectively. The weighted average yield was computed using the effective interest rates for all of our debt investments, including accretion of original issue discount.
As of June 30, 2014 and December 31, 2013, we had cash of $24.4 million and $0.7 million, respectively.
Investment Activity
During the period January 1, 2014 to May 7, 2014, the Partnership invested $48.7 million were made and $15.7 million of repayments were received.
From May 8, 2014 to June 30, 2014, Alcentra invested $10.5 million in two new portfolio companies and $4.7 million of add on investments. We also received $2.3 million in paydowns. $1.8 million in a paydown of the DRC Deferred draw Facility and $500,000 as part of scheduled repayments from Southern Tech.
During the three and six months ended June 30, 2013, the Partnership invested $5 million and $15.0 million, respectively. During the same period we received $0.1 million and $1.2 million in proceeds from repayments, respectively.
Our level of investment activity can vary substantially from period to period depending on many factors, including the amount of debt and equity capital to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
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Asset Quality
We currently do not use a rating system to monitor portfolio performance. As the portfolio grows in size, we would expect to implement a portfolio rating system.
Loans and Debt Securities on Non-Accrual Status
We will generally not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest. As of June 30, 2014 and December 31, 2013, we had no loans on non-accrual status.
Results of Operations
An important measure of our financial performance is net increase (decrease) in net assets resulting from operations, which includes net investment income (loss), net realized gain (loss) and net unrealized appreciation (depreciation). Net investment income (loss) is the difference between our income from interest, dividends, fees and other investment income and our operating expenses including interest on borrowed funds. Net realized gain (loss) on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net unrealized appreciation (depreciation) on investments is the net change in the fair value of our investment portfolio.
Comparison of the six months ended June 30, 2014 and 2013
Revenues
We generate revenue in the form of interest income on debt investments and capital gains and distributions, if any, on investment securities that we may acquire in portfolio companies. Our debt investments typically have a term of five to seven years and bear interest at a fixed or floating rate. Interest on our debt securities is generally payable quarterly. Payments of principal on our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments may pay interest in-kind, or PIK. Any outstanding principal amount of our debt securities and any accrued but unpaid interest will generally become due at the maturity date. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect that the total dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases. In addition, we may generate revenue in the form of prepayment fees, commitment, loan origination, structuring or due diligence fees, fees for providing significant managerial assistance and consulting fees. Total investment income for the period May 8, 2014 through June 30, 2014 totaled $3.6 million and was primarily composed of interest income, including $0.9 million of PIK income. Total Investment income on the Partnership from January 1, 2014 through May 7, 2014 was $7.8 million and was primarily composed of $4.4 million of interest income, including $1.4 million of PIK income, $1.8 million of other income and $0.2 million of dividend income.
Total investment income for the three month period ended June 30, 2013 was $2.7 million, including $0.1 million of PIK interest and $0.08 million of other income.
Total investment income for the six months ended June 30, 2013 was $5.4 million including $0.4 million of PIK interest and $0.01 million of other income.
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Expenses
Operating expenses for the Partnership for the period January 1, 2014 through May 7, 2014 totaled $0.8 million (inclusive of a management fee of $0.7 million).
Operating expenses for Alcentra for the period May 8, 2014 through June 30, 2014 totaled $1.2 million (inclusive of a management fee of $0.5 million).
Operating expenses for the Partnership for the period April 1, 2013 through June 30, 2013 totaled $0.8 million (including $0.7 million in management fees).
Operating expenses for the Partnership for the six months ended June 30, 2013 totaled $1.5 million (inclusive of $1.4 million of management fees).
Operating expenses consist of base management fees, administrative services expenses, professional fees, and other general and administrative expenses.
The Partnership had entered into a credit agreement under which they could borrow an aggregate principal amount of $15 million for the financing of portfolio investments. Borrowings under the credit agreement were $10 million and $15.0 million as of May 7, 2014 and December 31, 2013, respectively.
Interest is charged at the Alternative Rate, defined as the higher of (a) the Federal Fund Rate and (b) the Overnight LIBOR Rate, plus 130 basis points. The interest rate, period to date, ranged from 1.39% to 1.40%. Fund III recorded interest and fee expense of $0.1 million for the three months ended March 31, 2014. The average borrowings under the credit agreement for the period ended May 7, 2014 was $9,512,147 and for the six months ended June 30, 2013 of $5 million. The credit agreement, which was not assumed by Alcentra in connection with the acquisition of Fund III Acquired Assets, terminated on April 24, 2014.
For the period January 1, 2014 through May 7, 2014 interest expense was $0.050 million.
For the six months ended June 30, 2013, interest expense was $0.033 million and $0.065 million.
Interest expense for April 1, 2014 through May 7, 2014 was $.009 million.
Interest expense for the period May 8, 2014 to June 30, 2014 was $0.18 million.
In connection with the Offering, Alcentra entered into a senior secured revolving credit agreement (“Credit Facility”) with ING Capital LLC, as administrative agent and lender. The Credit Facility initially provided for borrowings of up to $20.0 million at closing and with the addition of one additional eligible investment shortly thereafter, Alcentra’s borrowing capacity under the Credit Facility increased to $67.5 million. In addition, subsequent to the closing of the overallotment of the Offering, two additional lenders joined the Credit Facility increasing the size of the Credit Facility to $80 million. The Credit Facility has a maturity date of May 8, 2018 and bears interest, at Alcentra’s election, at a rate per annum equal to (i) the one, three or six month LIBOR, as applicable, plus 3.25% or (ii) 2.25% plus the highest of (A) a prime rate, (B) the Federal Funds rate plus 0.5% and (C) three month LIBOR plus 1.0%. The Credit Facility is secured by a first priority security interest in all of Alcentra’s portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. Alcentra is also subject to customary covenants and events of default typical of a facility of this type.
Under the Advisory Agreement, Alcentra will pay Alcentra NY, LLC (the “Adviser”) a base management fee calculated at an annual rate as follows: 1.75% of its gross assets (i.e., total assets held before deduction of any liabilities), including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), if its gross assets are below $625 million; 1.625% of its total gross assets if our gross assets are between $625 million and $750 million; and 1.5% of its gross assets if its assets are greater than $750 million. These various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to ACC’s entire gross assets in the event its gross assets exceed the various gross asset thresholds.
In addition, ACC will pay the Adviser an incentive fee under the Advisory Agreement which consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of ACC’s “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter (8% annualized), and is subject to a “catch-up” feature. The second part is calculated and payable in arrears as of the end of each calendar year (or, upon termination of the Advisory Agreement, as of the termination date) and equals 20% of ACC’s aggregate cumulative realized capital gains from inception through the end of each calendar year, computed net of aggregate cumulative realized capital losses and aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid capital gain incentive fees.
The Adviser has agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by ACC, for the remainder of the quarter in which the Offering is completed and the subsequent four quarters to the extent required in order for ACC to earn a quarterly net investment income to maintain a targeted dividend payment on shares of common stock outstanding on the relevant dividend payment dates of 9.0% (to be paid on a quarterly basis).
Alcentra’s primary operating expenses will include the payment of fees to the Adviser under the Advisory Agreement and ACC’s allocable portion of overhead expenses under the Advisory Agreement, including payments under the administration agreement with the Administrator.
Aside from these operating expenses, ACC will bear all other out-of-pocket costs and expenses of its operations and transactions, including:
• | future offering expenses; |
• | the cost of calculating its net asset value; |
• | the cost of effecting sales and repurchases of shares of its common stock and other securities; |
• | fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms); |
• | transfer agent and custodial fees; | |
• | fees and expenses associated with marketing efforts (including attendance at industry and investor conferences and similar events); |
• | federal and state registration fees; |
• | any exchange listing fees; |
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• | federal, state and local taxes; |
• | independent directors’ fees and expenses; |
• | brokerage commissions; |
• | costs of proxy statements, stockholders’ reports and notices; |
• | costs of preparing government filings, including periodic and current reports with the SEC; |
• | fidelity bond, liability insurance and other insurance premiums; and |
• | printing, mailing, independent accountants and outside legal costs and all other direct expenses incurred by either our Adviser or Alcentra in connection with administering Alcentra’s business, including the compensation of Alcentra’s Chief Accounting Officer and Chief Compliance Officer, and their respective staffs that will be based upon Alcentra’s allocable portion of overhead and other expenses incurred by the Adviser in performing its obligations under the Advisory Agreement. |
Net Investment Income
For the period January 1, 2014 to May 7, 2014, net investment income was $6.9 million.
For the period April 1, 2014 to May 7, 2014, net investment income was $3.7 million.
For the period May 8, 2014 through June 30, 2014, net investment income was $2.4 million.
For the three and six month period ended June 30, 2013, net investment income was $1.9 million and $3.8 million, respectively.
Net Realized Gains and Losses
We measure realized gains or losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, using the specific identification method, without regard to unrealized appreciation or depreciation previously recognized.
For the period May 8, 2014 through June 30, 2014, there were $2.3 million in paydowns on investments, there were no realized gains.
For the period January 1, 2014 to May 7, 2014, there was a realized gain of $0.05 million.
For the period April 1, 2014 to May 7, 2014, there was a realized loss of $0.04 million.
For the three and six month period ended June 30, 2013 realized gains totaled $.04 million.
Net Change in Unrealized Appreciation (Depreciation) of Investments
Net change in unrealized appreciation primarily reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded appreciation or depreciation when gains or losses are realized.
Net change in unrealized appreciation (depreciation) on investments for the period January 1, 2014 to May 7, 2014 totaled $3.0 million.
Net change in unrealized appreciation (depreciation) on investments for the period April 1, 2014 to May 7, 2014 totaled $(0.2) million.
Net change in unrealized appreciation (depreciation) on investments for the period May 8, 2014 through June 30, 2014 totaled $1.3 million.
Net change in unrealized appreciation (depreciation) on investments for the three and six months ended June 30, 2013 were $1.5 million and $1.7 million, respectively.
Net Increase in Net Assets Resulting from Operations
For the period January 1, 2014 to May 7, 2014, net increase in net assets resulting from operations totaled $9.9 million.
For the period April 1, 2014 through May 7, 2014, net increase in assets resulting from operations totaled $3.5 million.
For the period May 8, 2014 through June 30, 2014, net increase in net assets resulting from operations totaled $3.7 million.
For the three and six months ended June 30, 2013, net increase in net assets resulting from operations totaled $3.5 million and $5.6 million, respectively.
Financial condition, liquidity and capital resources
Cash Flows from Operating and Financing Activities
The Partnership’s net cash used in operating activities amounted to $29.9 million for the period from January 1, 2014 to May 7, 2014, primarily in connection with the purchase of investments. Financing activities for the period from January 1, 2014 to May 7, 2014 provided cash of $39.9 million primarily from capital contributions received from limited partners.
For the period May 8, 2014 through June 30, 2014, Alcentra’s operating activities used cash of $106.1 million, primarily in connection with the initial purchase of investments. Financing activities for the same period provided $130.5 million primarily through the Offering.
The Partnership’s operating activities used cash of $10 million for the six months ended June 30, 2013, primarily in connection with purchases of investments. Financing activities for the six months ended June 30, 2013 provided cash of $11.7 million primarily from capital contributions received from limited partners.
Our liquidity and capital resources are derived from the capital contributions and cash flows from operations, including investment sales and repayments, and income earned. Our primary use of funds from operations includes investments in portfolio companies and other operating expenses we incur, as well as distributions to the Limited Partners. After the Offering, we expect to use these capital resources as well as proceeds from turnover within our portfolio, borrowings under the Credit Facility and from public and private offerings of securities to finance our investment activities.
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Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As of June 30, 2014, our off-balance sheet arrangements consisted of $9.7 million of unfunded commitments to provide debt financing to two of our portfolio companies. As of December 31, 2013, our off-balance sheet arrangements consisted of $2.6 million of unfunded commitments to provide debt financing to one of our portfolio companies.
Recent Developments
Subsequent to June 30, 2014, new investments were made::
On July 11, 2014 GST Autoleather was funded for $8,000,000 (11% cash and 2% PIK senior subordinated note).
On July 24, 2014 ACT Lighting was funded for $9,750,000 (12% cash, 2% PIK) and $1,750,000 (8% PIK note).
Add on investments subsequent to June 30, 2014 were made to the following portfolio companies:
On July 25, 2014, Well Biz Brands was funded $820,000 (senior secured 7% cash, 3.5% PIK).
On July 30, 2014, Black Diamond Rentals was funded $1,480,500 (senior secured 10% cash, 4% PIK).
On August 4, 2014, Aphena Pharma Solutions was funded $433,029 (senior secured 7% cash. 3.5% PIK).
Repayments made subsequent to June 30, 2014 are as follows:
On July 21, 2014, Net Access Corporation repaid their debt obligation of $3,920,230.
On August 6, 2014, GTT Communications repaid their debt obligation of $6,250,000.
Critical Accounting Policies
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ.
Valuation of portfolio investments
We generally invest in illiquid loans and securities including debt and equity securities of middle-market companies. Debt and equity securities that are not publicly traded or whose market prices are not readily available are valued at fair value as determined in good faith by Alcentra’s board of directors. Such determination of fair values may involve subjective judgments and estimates, although we engage independent valuation providers to review the valuation of each portfolio investment that does not have a readily available market quotation at least once annually. With respect to unquoted securities, we value each investment considering, among other measures, discounted cash flow models, comparisons of financial ratios of peer companies and other factors.
Because there is not a readily available market for substantially all of the investments in our portfolio, we value most of our portfolio investments at fair value as determined in good faith by Alcentra’s board of directors using a documented valuation policy and a consistently applied valuation process. 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 our 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.
With respect to investments for which market quotations are not readily available, Alcentra’s board of directors undertakes a multi-step valuation process each quarter, as described below:
• | Our quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of the Adviser responsible for the portfolio investment; |
• | Preliminary valuation conclusions are then documented and discussed with our senior management and the Adviser committee; |
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• | The audit committee of Alcentra’s board of directors then reviews these preliminary valuations; |
• | At least once quarterly, independent valuation firms engaged by Alcentra’s board of directors will prepare valuations on a selected basis and submit reports to the board of directors; and |
• | The board of directors then discusses valuations and determines the fair value of each investment in our portfolio in good faith, based on the input of Adviser, the independent valuation firm and the audit committee. |
Revenue recognition
We record interest income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, which represents contractual interest accrued and added to the loan balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We will not accrue interest on loans and debt securities if principal or interest cash payments are past due 30 days or more and/or we have reason to doubt our ability to collect such interest.
Loan origination fees, original issue discount and market discount or premium are capitalized, and we then accrete or amortize such amounts using the effective interest method as interest income. Upon the prepayment of a loan or debt security, any unamortized loan origination is recorded as interest income. We record prepayment premiums on loans and debt securities as interest income.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are subject to financial market risks, including changes in interest rates. For the period ended June 30, 2014 and June 30, 2013, 9.9% and 0%, or 3 and 0 of the loans in our portfolio bore interest at floating rates, respectively. In the future, we expect other loans in our portfolio will have floating rates. For the six months ended June 30, 2014 and June 30, 2013, we did not engage in hedging activities.
Changes in interest rates will affect our cost of funding. Our interest expense will be affected by changes in certain published indices such as the LIBOR rate in connection with the Credit Facility.
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Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management, under the supervision and with the participation of various members of management, including its Chief Executive Officer (“CEO”) and its Chief Accounting Officer (“CAO”), has evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.
(b) Changes in Internal Control Over Financial Reporting
Management did not identify any change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not currently subject to any material legal proceedings, nor, its knowledge, is any material legal proceeding threatened against it. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of its rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that these proceedings will have a material effect upon its financial condition or results of operations.
Item 1A. Risk Factors
There has been no material change in the information provided under the heading “Risk Factors” in the Company’s final prospectus filed with the SEC on May 9, 2014. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial may materially affect its business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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 | |
31.1 | Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
31.2 | Chief Accounting Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
* | Filed herewith. |
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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.
Dated: August 13, 2014
By: | /s/ Paul J. Echausse | |
Name: Paul J. Echausse | ||
Title: Chief Executive Officer and President | ||
By: | /s/ Ellida McMillan | |
Name: Ellida McMillan | ||
Title: Chief Accounting Officer, Secretary, and Treasurer |
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EXHIBIT INDEX
Exhibit Number | Description | |
31.1 | Chief Executive Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
31.2 | Chief Accounting Officer Certification Pursuant to Exchange Act Rule 13a-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | |
32.1 | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Chief Accounting Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
* | Filed herewith. |