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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
(Exact name of registrant as specified in its charter)
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| Maryland | 42-2961489 | |
| (State of Incorporation) | (I.R.S. Employer Identification Number) |
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| 200 Park Avenue, 7th Floor New York, NY | 10166 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (212) 922-8240
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Name of Each Exchange on Which Registered | |
| Common Stock, par value $0.001 per share | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso Nox.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.Yeso Nox.
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.Yesx Noo.
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). Yeso Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-Ko.
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 definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filero | Accelerated filerx | |
| Non-accelerated filero (Do not check if a smaller reporting Company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).Yeso Nox
The aggregate market value of the Registrant’s common stock held by non-affiliates of the Registrant as of the last business day of the Registrant’s most recently completed fiscal quarter was approximately $161,548,652 million based upon the last sale price for the Registrant’s common stock on that date.
There were 13,496,128 shares of the Registrant’s common stock outstanding as of March 9, 2017.
Documents Incorporated by Reference
Portions of the Registrant’s definitive Proxy Statement relating to the Registrant’s 2016 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of the Registrant’s fiscal year, are incorporated by reference in Part III of this Annual Report on Form 10-K as indicated herein.
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| PART I | ||||
ITEM 1. BUSINESS | 1 | |||
ITEM 1A. RISK FACTORS | 31 | |||
ITEM 1B. UNRESOLVED STAFF COMMENTS | 59 | |||
ITEM 2. PROPERTIES | 59 | |||
ITEM 3. LEGAL PROCEEDINGS | 59 | |||
ITEM 4. MINE SAFETY DISCLOSURES | 59 | |||
| PART II | ||||
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES | 60 | |||
ITEM 6. SELECTED FINANCIAL DATA | 63 | |||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 64 | |||
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 75 | |||
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 76 | |||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON ACCOUNTING AND FINANCIAL | 117 | |||
ITEM 9A. CONTROLS AND PROCEDURES | 117 | |||
ITEM 9B. OTHER INFORMATION | 118 | |||
| PART III | ||||
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | 119 | |||
ITEM 11. EXECUTIVE COMPENSATION | 119 | |||
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | 119 | |||
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE | 119 | |||
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES | 119 | |||
| PART IV | ||||
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES | 120 | |||
| SIGNATURES | 124 | |||
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| • | “we,” “us,” “our,” and the “Company” refer to Alcentra Capital Corporation; and |
| • | The “Adviser” and “Alcentra NY” refers to Alcentra NY, LLC, our investment advisor. |
| Item 1. | Business |
We are a specialty finance company that operates as a non-diversified, closed-end management investment company. We have elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, which we refer to as the 1940 Act. In addition, we have elected to be treated for U.S. federal income tax purposes as a regulated investment company, or RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, which we refer to as the Code.
We provide customized debt and equity financing solutions to lower middle-market companies, which we define as companies having annual earnings, before interest, taxes, depreciation and amortization, or EBITDA, of between $5 million and $25 million, and/or revenues of between $10 million and $100 million, although we may selectively make investments in larger or smaller companies. Our investments typically range in size from $5 million to $15 million.
Our Adviser has a history of investing in companies that seek capital to use for growth initiatives, change in ownership in leveraged buyouts or a generational change of ownership, or what we refer to as Growth Companies. We define a Growth Company as a company that has experienced growth of at least two to three times the growth rate of gross domestic product, or GDP, or have a catalyst to achieve that type of growth. It has been the experience of our Adviser’s investment team that Growth Companies typically incur less leverage than larger companies in order to maintain the financial flexibility to continue to invest in the growth of their businesses. In the experience of our Adviser’s investment team, our targeted industry sectors tend to have a greater proportion of Growth Companies and therefore offer greater investment opportunities to pursue. Our targeted industry sectors are: healthcare and pharmaceutical services; defense, aerospace, homeland security and government services; business and outsourced services; and energy services. We may also make investments in portfolio companies that do not possess these characteristics or are outside of these industry sectors.
Our investment activities are managed by our Adviser pursuant to the terms of an investment advisory and management agreement, which we refer to as the Investment Advisory Agreement. We expect to source investments primarily through the extensive network of relationships that the principals of our Adviser have developed with financial sponsor firms, financial institutions, middle-market companies, management teams and other professional intermediaries.
On May 14, 2014, we completed our initial public offering or IPO, at a price of $15.00 per share. Through our IPO we sold 6,666,666 shares for gross proceeds of approximately $100,000,000. On June 6, 2014, we sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.
We originate and invest primarily in lower middle-market companies (typically those with $5.0 million to $25.0 million of EBITDA) through first lien, second lien, unitranche and mezzanine debt financing, often times with a corresponding equity investment. From time to time, we may invest in companies that are larger than this but exhibit good growth characteristics.
As of December 31, 2016, we had $276.3 million (at fair value) invested in 32 portfolio companies. Our portfolio included approximately 34.6% of first lien debt, 30.7% of second lien debt, 26.8% of mezzanine debt and 7.8% of equity investments at fair value. At December 31, 2016, our average portfolio company investment at amortized cost and fair value was approximately $8.8 million and $8.4 million, respectively, and
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our largest portfolio company investment by amortized cost and fair value was approximately $15.1 million and $15.1 million, respectively. At December 31, 2016, 58% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 42% bore interest at fixed rates. We intend to continue to re-balance our portfolio going forward with more investments that are floating rate loans.
The weighted average yield on all of our debt investments as of December 31, 2016 was approximately 11.7%. The weighted average yield of our debt investments is not the same as a return on investment for our stockholders but, rather, relates to a portion of our investment portfolio. The weighted average yield was computed using the effective interest rates for all of our debt investments, which represents the interest rate on our debt investment restated as an interest rate payable annually in arrears and is computed including cash and payment in kind, or PIK interest, as well as accretion of original issue discount. As a result, the weighted average yield figure set forth above does not represent the cash interest payments we received on our debt investments during the period noted above. In this regard, the weighted average cash yield on all of our debt investments as of December 31, 2016 was approximately 10.7%. These yields do not include the dividends, including PIK dividends, received on our preferred equity investments. PIK dividends on preferred equity functions in much the same way as PIK interest on debt investments in that it is paid in the form of additional preferred securities and not cash. There can be no assurance that the weighted average yield and the weighted average cash yield will remain at their current levels.
The companies in which we invest are typically highly leveraged, and, in most cases, our investments in such companies are not rated by any rating agency. If such investments were rated, we believe that they would likely receive a below-investment grade rating from a nationally recognized statistical rating organization, which is often referred to as “high-yield” and “junk.” Exposure to below-investment grade securities involves certain risks, and those securities are viewed as having predominately speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In addition, a substantial portion of our investment portfolio consists of debt investments for which issuers are not required to make principal payments until the maturity of the loans, which may result in a substantial loss to us if such issuers are unable to refinance or repay their debt at maturity. As of December 31, 2016, approximately 15.3% of the income we received from our portfolio companies was in the form of non-cash income, such as contractual pay-in-kind, or PIK, interest. Since PIK interest involves us recognizing income without receiving cash representing such income, we may have difficulty meeting the annual distribution requirement applicable to RICs. Our failure to meet the annual distribution requirements could reduce the amounts available for distributions. In addition, the PIK feature of our subordinated debt and preferred equity investments increases our credit risk exposure over the life of the investments given that it increases the amounts that our portfolio companies will ultimately be required to pay us. Furthermore, we have not previously been required to manage our portfolio in accordance with the RIC asset diversification requirements. See “Item 1.A. Risk Factors — If we are unable to meet the RIC asset diversification requirements, we may fail to qualify as a RIC” and “— PIK interest payments we receive increase our assets under management and, as a result, increases the amount of base management fees and incentive fees payable by us to our Adviser”.
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The following chart shows the ownership structure and various entities affiliated with us and our Adviser.
| (1) | For tax purposes, certain equity investments purchased are held by a wholly-owned subsidiary of ours. |
Our investment activities are managed by Alcentra NY, our investment adviser. Alcentra NY is the U.S. subsidiary of Alcentra Group, an asset management platform focused on below-investment grade credit, often referred to as “high-yield” and “junk.” Alcentra Group has offices in London, New York and Boston and representatives in Singapore and Hong Kong. Alcentra Group manages more than 75 investment vehicles and accounts totaling more than $30.9 billion in assets.
Our Adviser is responsible for sourcing investment opportunities, conducting industry research, performing diligence on potential investments, structuring our investments and monitoring our portfolio companies on an ongoing basis through a team of investment professionals.
Our Adviser’s investment team is led by Paul J. Echausse, our President and Chief Executive Officer, and David Scopelliti, our Senior Vice President. Mr. Echausse was a founding member of Alcentra Middle Market in 1998 through the investment of subordinated debt investments on the Bank of New York platform. Our Investment Committee is comprised of Paul J. Echausse, our President and Chief Executive Officer, Paul Hatfield, Chairman of our board of directors, Kevin Bannon, David Scopelliti, our Senior Vice President, Ellida McMillan, our Chief Accounting Officer and Branko Krmpotic. Members of our Investment Committee together with other investment professional of our Adviser, collectively have more than 60 years of such experience investing and lending across changing market cycles. As of December 31, 2016, the investment professionals of our Adviser have invested more than $800 million in debt and equity securities of primarily lower middle-market companies.
Our Adviser combines significant credit analysis, structuring capability and transaction experience within the larger credit investment platform of the Alcentra Group. See “Item 1. Business — General — Alcentra Group and BNY Mellon.”
We have entered into an the Investment Advisory Agreement with our Adviser pursuant to which we pay a base management fee and incentive fees to our Adviser for its services under the agreement. See “Item 1. Business Investment Advisory Agreement — Management Fees.” Our Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by us, through the quarter ended June 30, 2015 and to the extent required in order for us 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).
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We have entered into a fund administration and accounting agreement, or the Administration Agreement, with State Street Bank and Trust Company, pursuant to which State Street provides us with financial reporting, post-trade compliance, and treasury services. Pursuant to the Administration Agreement, we pay a fixed annual fee, paid in monthly installments in arrears, along with additional fees and expenses as incurred each month. See “Item 1. Business — Administration Agreement.”
Alcentra Middle Market, a division of Alcentra NY, has sponsored three private investment funds that focus on subordinated debt and equity investments in middle market companies, each of which is managed by Alcentra NY. Fund III, the last of the private investment funds, was formed in 2010 and is owned by institutional, family office and private wealth investors. The Alcentra Middle Market professionals have worked together for more than 12 years and as of December 31, 2016 have invested more than $800 million in lower middle-market companies.
Alcentra Middle Market combines significant credit analysis, structuring capability and transactional experience within the larger credit investment platform of the Alcentra Group.
The Alcentra Group was formed in 2002 through the merger of two asset management divisions from Barclays Bank Plc in the United Kingdom and Imperial Credit Industries, Inc. In January 2006, Alcentra Group was purchased by BNY Mellon. As a wholly-owned subsidiary of Bank of New York Mellon Corporation, which we refer to as BNY Mellon, the Alcentra Group manages approximately $30.9 billion in below-investment grade debt assets across more than 75 investment vehicles and funds. The Alcentra Group collectively employed 127 investment professionals as of December 31, 2016. Alcentra Group is the specialist below-investment grade debt manager within BNY Mellon’s group of asset management boutiques.
BNY Mellon is one of the largest bank holding companies in the U.S. with a market capitalization of approximately $49.6 billion and is also one of the largest securities servicing organizations with $29.9 trillion of assets under custody and administration and boasts a global platform across 35 countries as of December 31, 2016. BNY Mellon is a substantial player in asset management with approximately $1.6 trillion of assets under management as of December 31, 2016.
BNY Mellon also maintains a substantial “Wealth Management” business that provides investment advisory services to high net worth individuals, families and family offices. As of December 31, 2016, BNY Mellon’s Wealth Management business has 41 offices, many of which are in major metropolitan offices throughout the country, and manages more than $200 billion on behalf of their clients. BNY Mellon’s Wealth Management group interacts regularly with privately owned businesses and the family owners thereof. The Alcentra Middle Market team maintains an active calling program on these offices as a source of deal flow and deal referrals. We utilize our access to the BNY Wealth Management platform as an important component of our network of relationships in sourcing investment opportunities.
In connection with the IPO, we entered into a senior secured revolving credit agreement (Credit Facility) with ING Capital LLC, as administrative agent and lender. The Credit Facility had an initial commitment of $80 million with an accordion feature that allows for an increase in total commitments to $160 million. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250,000,000, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1.0% and zero or (ii) 3.00% plus the one, three or six month LIBOR rate, as applicable. At such time as we and certain of our subsidiaries reach a combined net worth of $230 million, the interest rate per annum will be reduced to (i) 2.00% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.00% plus the one, three or six month LIBOR rate, as applicable. On March 2, 2016, we amended certain provisions of the Credit Facility
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relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. We are also subject to customary covenants and events of default typical of a facility of this type. As of December 31, 2016, borrowings under the Credit Facility were $39.1 million.
Our investment objective is to generate both current income and capital appreciation primarily by making direct investments in lower middle-market companies in the form of senior debt, unitranche, second lien, subordinated debt and, to a lesser extent, senior debt and minority equity investments. The companies in which we invest are typically highly leveraged, and, in most cases, our investments in such companies will not be rated by any rating agency. If such investments were rated, we believe that they would likely receive a rating below-investment grade, which is often referred to as “high-yield” and “junk.” While our primary investment focus is to make loans to, and selected equity investments in, privately-held lower-middle-market companies, we may also make selective investments in larger or smaller companies.
Our business strategy to achieve our investment objective consists of (1) identifying market opportunity; (2) utilizing our competitive advantages; (3) evaluating investment opportunities and (4) sourcing, structuring and supervising investments.
We believe that the limited amount of capital available to lower middle-market companies, coupled with the desire of these companies for flexible and partnership-oriented sources of capital, creates an attractive investment environment for us. We believe the following factors will continue to provide us with opportunities to grow and deliver attractive returns to our stockholders.
The Lower Middle-market Represents a Large, Underserved Market. We believe that lower middle-market companies, most of which are privately held, are relatively underserved by traditional capital providers such as commercial banks, finance companies, hedge funds and collateralized loan obligation funds. Further, we believe that companies of this size generally are less leveraged relative to their enterprise value, as compared to larger companies with a greater range of financing options.
Reduced Availability of Capital for Lower Middle-market Companies Presents Opportunity for Attractive Risk-adjusted Returns. Beginning with the credit crisis that began in 2007, we believe that the subsequent exit of traditional capital providers from lower middle-market lending created a less competitive market and an increased opportunity for alternative funding sources like us to generate attractive risk-adjusted returns. The remaining lenders and investors in the current environment require lower levels of senior and total leverage, increased equity commitments and more comprehensive covenant packages than were customary prior to the credit crisis. We believe that our ability to offer flexible financing solutions positions us to take advantage of this dislocation.
Regulatory Changes have Decreased Competition among Lower Middle-market Lenders. We believe recent regulatory changes, including the adoption of the Dodd-Frank Act and the introduction of new international capital and liquidity requirements under the Basel III Accords have caused banking institutions to curtail their lending to lower middle-market companies. As a result, we believe that less competition will facilitate higher quality deal flow and allow for greater selectivity for us throughout the investment process.
Large Pools of Uninvested Private Equity Capital should Drive Future Transaction Velocity. We expect that private equity firms will remain active investors in lower middle-market companies. Private equity funds generally seek to leverage their investments by combining their equity capital with senior secured loans and/or mezzanine debt provided by other sources, and we believe that our investment strategy positions us well to partner with such private equity investors, although there can be no assurance that we will be successful in this regard. Although our interests may not always be aligned with the private equity sponsors of
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our portfolio companies given their positions as the equity holders and our position as the debt holder in our portfolio companies, we believe that private equity sponsors will provide significant benefits including incremental due diligence, additional monitoring capabilities and a potential source of capital and operational expertise for our portfolio companies.
Growth Companies Typically Pursue Mezzanine Debt Cost Efficient Capital. Mezzanine debt can be an effective source of capital for companies experiencing rapid growth. We typically focus on companies that can achieve a revenue growth rate of at least two to three times the rate of GDP growth. It is not uncommon for Growth Companies to grow faster than their bank can provide debt to support that growth. Growth Companies therefore have two primary capital market options to fund that growth: (i) raise private equity from individuals or institutions; or (ii) raise mezzanine debt capital. We believe that mezzanine debt capital can be a more cost effective alternative for Growth Companies, and can be more competitive than raising private equity capital.
Experienced Management Team. Members of our Adviser’s investment committee and other investment professionals of our Adviser collectively have more than 60 years of experience investing and lending across changing market cycles. These professionals have diverse backgrounds with prior experience in investment and management positions at investment banks, small business investment companies, which we refer to as SBICs, commercial banks and privately held companies. The investment professionals of our Adviser have invested more than $800 million in debt and equity securities of primarily lower middle-market companies. We believe this experience provides our Adviser with an in-depth understanding of the strategic, financial and operational challenges and opportunities of lower middle-market companies. Further, we believe this positions our Adviser to effectively identify, assess, structure and monitor our investments.
Strong Transaction Sourcing Network. Our Adviser’s investment professionals possess an extensive network of long-standing relationships with private equity firms, middle-market senior lenders, junior-capital partners, SBICs, financial intermediaries, law firms, accountants and management teams of privately owned businesses. We believe that the combination of these relationships and our reputation as a reliable, responsive and value-added financing partner will generate a steady stream of new investment opportunities and proprietary deal flow.
Access to the BNY Mellon Wealth Management Platform. BNY Mellon maintains a substantial Wealth Management business that provides investment advisory and other services to high net worth individuals, families and family offices. BNY Mellon’s Wealth Management group interacts regularly with privately owned businesses and the family owners thereof. The Alcentra Middle Market team maintains an active calling program on these offices as a source of deal flow and deal referrals. We utilize our access to the BNY Wealth Management platform as an important component of our network of relationships in sourcing investment opportunities.
Flexible Financing Solutions. We offer a variety of financing structures and have the flexibility to structure our investments to meet the custom needs of our portfolio companies, including among investment types and investment terms. Typically we invest in senior or subordinated debt, coupled with an equity or equity-like component to increase the total investment return profile. We believe our ability to offer a variety of financing arrangements makes us an attractive partner to lower middle-market companies and enables our Adviser to identify attractive investment opportunities throughout economic cycles and across a company’s capital structure.
Rigorous Underwriting Policies and Active Portfolio Management. Our Adviser has implemented rigorous underwriting policies that are followed in each transaction. These policies include an extensive review and credit analysis of portfolio companies, historical and projected financial performance as well as an assessment of the portfolio company’s business model and forecasts which are designed to assess investment prospects via a thorough analysis of each potential portfolio company’s competitive position, financial performance, management team operating discipline, growth potential and industry attractiveness. In addition, we structure our debt investments with protective financial covenants, designed to proactively address changes in a portfolio company’s financial performance. Covenants are negotiated before an investment is completed and are based on the projected financial performance of the portfolio company. These processes are designed
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to, among other things, provide us with an assessment of the ability of the portfolio company to repay its debt at maturity. After investing in a portfolio company, we monitor the investment closely, receiving financial statements on at least a quarterly basis as well as annual audited financial statements. We analyze and discuss in detail the portfolio company’s financial performance with management in addition to attending regular board meetings. We believe that our initial and ongoing portfolio review process allows us to identify and maintain superior risk adjusted return opportunities in our target portfolio companies.
Minimize Portfolio Concentration. While we focus our investments in lower middle-market companies, we seek to diversify our portfolio across various industries, geographic sectors and private equity or other sponsors. We actively monitor our investment portfolio to ensure we are not overly concentrated across industries, geographic sectors or financial sponsors. By monitoring our investment portfolio in this manner we seek to reduce the effects of economic downturns associated with any particular industry sector or geographic region.
Access to the Alcentra Group Platform. We seek to leverage the depth and breadth of resources of the Alcentra Group platform across all aspects of its operations, benefiting from the Alcentra Group’s investment professionals, who in addition to their credit expertise, possess industry expertise. As of December 31, 2016, the Alcentra Group employs 49 analysts that closely follow a variety of industries, including healthcare, defense and business services. This unique access to in-house expertise will also be utilized in the ongoing monitoring of our investments.
We believe that investing in debt of privately held companies provides several potential benefits, including:
| • | current income; |
| • | priority in capital structure; |
| • | covenants and portfolio monitoring; and |
| • | predictable exits. |
We use the following guidelines in evaluating investment opportunities and constructing our portfolio. However, not all of these guidelines have been, or will be, met in connection with each of our investments.
Current Income. Senior term loans and mezzanine securities contractually provide either a fixed or variable coupon payable on a monthly or quarterly basis. We will seek to invest in debt securities that generate interest rate coupons of between 8 – 10% on our senior term loan investments, and total coupons of between 12 – 15% on our mezzanine investments, comprised of 10 – 12% paid in cash plus 2 – 3% paid in PIK interest.
Priority in Capital Structure. In liquidation, debt holders typically are repaid first, with the remaining capital distributed to the equity holders. The structural priority of debt investing is a key component of our investment strategy to preserve capital.
Covenant and Portfolio Monitoring. We seek debt investments with financial covenants, which are used to proactively address changes in a company’s financial performance. Typical financial covenant tests include minimum EBITDA, total debt/EBITDA and fixed charge coverage. Covenants are negotiated before an investment is completed and are set based on the projected financial performance of the portfolio company. As the portfolio company reports monthly, quarterly or annual results, covenants are tested for compliance. If a portfolio company breaches a covenant, debt holders have several options available including waiving the covenant default, demanding repayment in full or modifying the terms of the debt in exchange for a fee or enhanced economic features, amongst others.
Predictable Exit. We execute each investment with a particular exit strategy determined by a variety of factors, including the portfolio company’s financial position, anticipated growth dynamics and the existing mergers and acquisitions environment. Our senior debt facilities are typically structured with little annual amortization and with principal due at maturity. Mezzanine investments are typically structured with a bullet maturity that is typically one year greater than the maturity on the senior debt facility. With either security, the
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investment will have a finite life, whereby the portfolio company is contractually required to repay the loan. Repayment typically occurs in the event of a refinancing, recapitalization or sale/merger of the company.
Private Funds. We will invest no more than 15% of our net assets in entities which would be required to be registered as an investment company under the Investment Company Act of 1940 but for the exemptions in Section 3(c)(1) or 3(c)(7) thereunder (“Private Investment Companies”). Private Investment Companies include hedge funds and private equity funds. In addition, we will limit our investment in privately offered pooled investment vehicles (“Private Funds”) which include private REITs, private oil and gas funds, private commodity pools, private real estate funds as well as Private Investment Companies, to no more than 35% of our net assets, subject to the overall limit of investing no more than 15% of our net assets in Private Investment Companies. If we change this policy and determine to invest more than 15% of our net assets in Private Investment Companies or more than 35% of our net assets in Private Funds, we have agreed with the SEC staff to only do so after we have filed, and the SEC has declared effective, a new registration statement or a post-effective amendment to the registration statement on which this prospectus is a part.
TransactionSourcing. We source portfolio of investments from a variety of different investment sources, including private equity sponsors, fundless sponsors, family offices, management teams, financial institutions, investment bankers, accounting firms and law firms. We have and will continue to source deal flow and referrals from the BNY Wealth Management Platform. Alcentra Middle Market has actively marketed its resources and capabilities in the middle-market for nearly 15 years, developing a network of over 5,000 transaction sources as of December 31, 2016, We believe that the breadth and depth of experience of the principals of our Adviser across different industries and transaction types, coupled with their strong relationships built from managing private funds with similar investment objectives, make the principals particularly qualified to source, analyze and execute investment opportunities.
Investment Process. Our Adviser maintains a rigorous and disciplined investment process, which initiates with the sourcing of a potential transaction. Upon receiving information on a potential transaction, the information is circulated amongst the principals and the investment professionals of our Adviser and discussed during weekly investment meetings. Upon determination that a potential target has investment merit, our Adviser will schedule a meeting with the management team, investment bank, or private equity sponsor.
Typically, after completing a preliminary analysis of the target’s information, the principals of our Adviser will decide whether to “Phase I” the deal for the Investment Committee. A Phase I consists of a situation overview, a company overview, key investment considerations, investment risks, information on the management team, financial data, a financial model and investment return information. If the Phase I memorandum is approved by our Adviser’s Investment Committee, a term sheet will be issued to the target company. Upon mutual acceptance of the term sheet, our Adviser will proceed with extensive due diligence and prepare a more substantive “Phase II” memorandum that is the basis for receiving a formal approval from our Adviser’s Investment Committee. The Phase II memorandum is a comprehensive document, typically 40 – 50 pages in length, which summarizes the results of our Adviser’s due diligence, investment thesis, investment risks and investment return projections. Investment Committee approval of the Phase II memorandum is required prior to issuing a commitment letter. Further, at least two principals of our Adviser will meet the target company’s management team prior to issuing a commitment letter. Additionally, updates are provided to the Investment Committee as to any material changes in the transaction, investment thesis, or any other relevant deal point, ensuring decisions are made utilizing the most current information.
Deal Analysis. For each investment opportunity that includes a Phase II memorandum, our Adviser conducts rigorous in-house analytics, including a comprehensive analysis of market and operational dynamics as well as historical and projected financial information. Specific attention is given to management and sponsor experience and track record, industry dynamics, revenue growth drivers and valuations and general macroeconomic conditions. Additionally, background checks on company management teams are completed prior to an investment. Our Adviser, typically in conjunction with the control equity investor, often will engage a consultant to interview a range of key customers, suppliers, competitors and other parties deemed relevant to the ongoing performance of the target company. The consultant will typically prepare a report that generally includes a quality of earnings report, a market study and information technology and environmental
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assessments. Finally, in reviewing each anticipated investment, investment professionals of our Adviser will conduct visits to the target company’s headquarters and potentially auxiliary sites (e.g. factories, distribution centers, international locations).
Issuance of Formal Commitment. Once we have determined that a potential transaction is suitable for investment, we work with the management and/or sponsor of the target company and its other capital providers, including senior, junior and equity capital providers, if any, to finalize the structure of the investment. We expect that approximately 2% to 4% of the investments initially reviewed by us eventually result in the issuance of formal commitments.
We expect our debt investments to typically have a term of five to seven years and bear interest at a fixed or floating rate. We expect the average investment holding period to be between three and five years, depending upon portfolio company objectives and conditions in the capital markets.
Ongoing Relationship with and Monitoring of Portfolio Companies. Our Adviser employs rigorous portfolio monitoring of portfolio companies following an investment. The monitoring process is driven by frequent interaction and discussion with target company management, attending operating meetings and board of director meetings, interacting with industry experts and third party sources for market information and working with third-party consultants. Our Adviser works with management and other investors to develop and continually refine the company’s strategic plan as well as to monitor and evaluate the effects of macro-level industry factors. Additionally, our Adviser receives and analyzes monthly financial data and operating metrics and maintains an active database of historical company information. Finally, our Adviser performs regular detailed portfolio valuation analyses and monitors current and future liquidity needs and covenant compliance.
Managerial Assistance. As a BDC, we offer, and must provide upon request, managerial assistance to our portfolio companies. This assistance could involve monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. Our Adviser or an affiliate of our Adviser will provide such managerial assistance on our behalf to portfolio companies that request this assistance. We may receive fees for these services and will reimburse our Adviser or an affiliate of our Adviser for its allocated costs in providing such assistance, subject to the review by our board of directors, including our independent directors.
SBIC License We have applied for a license to form a small business investment company subsidiary, or SBIC subsidiary; however, the application is subject to approval by the SBA and we can make no assurances that the SBA will approve our application. The SBIC subsidiary would be allowed to issue SBA-guaranteed debentures up to a maximum of $150 million under current SBIC regulations, subject to required capitalization of the SBIC subsidiary and other requirements. SBA guaranteed debentures generally have longer maturities and lower interest rates than other forms of debt that may be available to us, and we believe therefore would represent an attractive source of debt capital. See “Risk Factors — Risks Relating to our Business and Structure — If we receive qualification from the SBA to be licensed as an SBIC but we are unable to comply with SBA regulations after the SBIC subsidiary is licensed as an SBIC, our business plan and investment objective could be adversely affected.”
The net asset value per share of our outstanding shares of common stock is determined quarterly by dividing the value of total assets minus total liabilities by the total number of shares outstanding.
In calculating the value of our total assets, investment transactions are recorded on the trade date. Realized gains or losses will be computed using the specific identification method. Investments for which market quotations are readily available will be valued at such market quotations. Debt and equity securities that are not publicly traded or whose market price is not readily available will be valued at fair value as determined in good faith by our board of directors based on the input of our management and audit committee. In addition, our board of directors will retain one or more independent valuation firms to review the valuation of each portfolio investment for which a market quotation is not available at least quarterly. We also have adopted ASC 820, which requires us to assume that the portfolio investment is assumed to be sold in the principal market to market participants, or in the absence of a principal market, the most advantageous
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market, which may be a hypothetical market. Market participants are defined as buyers and sellers in the principal or most advantageous market that are independent, knowledgeable, and willing and able to transact. In accordance with ASC Topic 820, the market in which we can exit portfolio investments with the greatest volume and level of activity is considered our principal market.
The valuation process is conducted at the end of each fiscal quarter. Our board of directors has authorized the engagement of independent valuation firms to provide us with valuation assistance. We have independent valuation firms provide us with valuation assistance on a portion of our portfolio on a quarterly basis and our entire portfolio will be reviewed at least annually by independent valuation firms; however, our board of directors is ultimately and solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and a consistently applied valuation process. When an external event with respect to one of our portfolio companies, such as a purchase transaction, public offering or subsequent equity sale occurs, we expect to use the pricing indicated by the external event to corroborate our valuation. As part of our quarterly valuation process, we will record an expense accrual relating to the capital gains component of the incentive fee payable by us to Alcentra NY when the unrealized gains on our investments exceed all realized capital losses on our investments given the fact that a capital gains incentive fee would be owed to Alcentra NY if we were to liquidate our investment portfolio at such time. The actual incentive fee payable to Alcentra NY related to capital gains will be determined and payable in arrears at the end of each fiscal year and will include only realized capital gains for the period computed net of all realized capital losses and unrealized capital depreciation for such period.
A readily available market value is not expected to exist for substantially all of the investments in our portfolio, and we will value these portfolio investments at fair value as determined in good faith by our board of directors under our valuation policy and process. The types of factors that our board of directors may take into account in determining the fair value of our investments generally include, as appropriate, comparisons of financial ratios of the portfolio companies that issued such private equity securities to peer companies that are public, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, and other relevant factors.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the company will consider the pricing indicated by the external event to corroborate the private equity valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different from the valuations currently assigned. See “Item 1.A. Risk Factors — Risks Relating to our Investments — Price declines and illiquidity in the corporate debt markets may adversely affect the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.”
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
| • | our quarterly valuation process will begin with each portfolio company or investment being initially valued by the investment professionals of our Adviser responsible for the portfolio investment; |
| • | preliminary valuation conclusions will then be documented and discussed with our senior management and our Adviser; |
| • | the audit committee of our board of directors will then review these preliminary valuations; |
| • | at least once quarterly, independent valuation firms engaged by our board of directors will prepare preliminary valuations on a selected basis and submit the reports to us; and |
| • | the board of directors will then discuss valuations and determine the fair value of each investment in our portfolio in good faith, based on the input of our Adviser, the independent valuation firm and the audit committee. |
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In connection with offerings of shares of our common stock, our board of directors or an authorized committee thereof will be required to make the determination that we are not selling shares of our common stock at a price below the then current net asset value, or NAV, of our common stock at the time at which the sale is made. Our board of directors or an authorized committee thereof will consider the following factors, among others, in making such determination:
| • | the NAV of our common stock disclosed in the most recent periodic report that we filed with the SEC; |
| • | our management’s assessment of whether any material change in the NAV of our common stock has occurred (including through the realization of gains on the sale of our portfolio securities) during the period beginning on the date of the most recently disclosed NAV of our common stock and ending two days prior to the date of the sale of our common stock; and |
| • | the magnitude of the difference between (i) a value that our board of directors or a committee thereof has determined reflects the current NAV of our common stock, which is generally based upon the NAV of our common stock disclosed in the most recent periodic report that we filed with the SEC, as adjusted to reflect our management’s assessment of any material change in the NAV of our common stock since the date of the most recently disclosed NAV of our common stock, and (ii) the current offering price of our common stock. |
These processes and procedures are part of our compliance policies and procedures. Records will be made contemporaneously with all determinations described in this section and these records will be maintained with other records that we are required to maintain under the 1940 Act.
We have entered into agreements with our Adviser, in which our senior management and members of our Adviser’s Investment Committee have indirect ownership and other financial interests. Our Adviser may in the future manage other investment funds, accounts or investment vehicles that invest or may invest in assets eligible for purchase by us. To the extent that we compete with entities managed by our Adviser or any of its affiliates for a particular investment opportunity, our Adviser will allocate investment opportunities across the entities for which such opportunities are appropriate, consistent with (a) its internal investment allocation policies, (b) the requirements of the Advisers Act, and (c) certain restrictions under the 1940 Act regarding co-investments with affiliates. See the section entitled “Item 1.A. Risk Factors — Risks Related to Our Business and Structure — There are significant potential conflicts of interest that could negatively affect our investment returns.”
The 1940 Act prohibits us from making certain negotiated co-investments with affiliates unless we receive an order from the SEC permitting us to do so. In the absence of receiving exemptive relief from the SEC that would permit greater flexibility relating to these kinds of co-investments, our Adviser will determine whether these kinds of potential negotiated investments are more appropriate for us or for one of the funds managed by our Adviser or its affiliates and which entity will proceed with the investment. We generally will not make an investment in any company in which any fund managed by our Adviser holds an investment in a different class of such company’s debt or equity securities or obligations unless we also acquire or own the same class of such company’s debt or equity securities as such fund managed by our Adviser or our Adviser determines that (a) the investment is in our best interests and (b)(i) the possibility of a conflict between the interests of such different classes is remote, (ii) either the potential investment by us or the investment of such other fund managed by our Adviser is not large enough to control any actions taken by the collective holders of securities of such company, or (iii) in light of the particular circumstances, our Adviser believes such investment is appropriate for us, notwithstanding the potential for conflict.
On December 30, 2015, the SEC granted us relief sought in an exemptive application that expands our ability to co-invest in portfolio companies with other funds managed by the Adviser or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. Under the
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terms of the order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including, but not limited to, (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching with respect to us or our stockholders on the part of any person concerned and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current objectives and strategies.
See also “Item 1.A. Risk Factors — Risks Related to Our Business and Structure — There are significant potential conflicts of interest that could negatively affect our investment returns” and “— The incentive fee structure we have with our Adviser may create incentives that are not fully aligned with the interests of our stockholders” for the risks related to our incentive fee structure.
We have entered into an Investment Advisory Agreement with our Adviser. Pursuant to this agreement, we have agreed to pay to our Adviser a base management fee and incentive fee. Mr. Echausse is an interested member of our board of directors and has a direct or indirect pecuniary interest in our Adviser. See “Item 1. Business — Investment Advisory Agreement.” The incentive fee is computed and paid on income that we may not have yet received in cash at the time of payment. This fee structure may create an incentive for our Adviser to invest in certain types of speculative securities. Additionally, we rely on investment professionals from our Adviser to assist our board of directors with the valuation of our portfolio investments. Our Adviser’s base management fee and incentive fee is based on the value of our investments and, therefore, there may be a conflict of interest when personnel of our Adviser are involved in the valuation process for our portfolio investments.
We have entered into a License Agreement with our Adviser pursuant to which our Adviser has granted us a non-exclusive, royalty-free license to use the name “Alcentra.” See “Item 1. Business — License Agreement.”
Conflicts of interest may arise between the BNY Mellon Group, on the one hand, and us, on the other hand. We are an affiliate of BNY Mellon. BNY Mellon Group is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. We may benefit from the relationships and activities resulting from these services. However, situations will arise in which the interests of BNY Mellon Group will conflict with our interests and the interests of our stockholders.
BNY Mellon Group may, but is not required to, extend credit to us under credit facilities, derivative instruments or otherwise. The interest of BNY Mellon Group as a creditor of us may conflict with the interests of our investors. BNY Mellon Group, with respect to any such extension of credit, will deal with us on an arm’s-length basis and will be entitled to exercise its rights as a creditor of us without regard to any potential impact therefrom on the interests of our investors.
BNY Mellon Group currently owns or operates, directly or indirectly, several registered investment advisers, registered investment companies, broker-dealers and service providers, or, collectively, the BNYM Affiliates. To the extent permitted by law, BNY Mellon and/or one or more of the BNYM Affiliates may provide us; our Adviser; Alcentra Middle Market; one or more investments funds or accounts or similar investment vehicles that BNY Mellon Group provides advice to or manages or that may in the future provide advice to or manage as a result of acquiring or merging with an entity that owns or manages such vehicles, or, collectively, the Related Funds; and our portfolio companies with certain non-investment management services and facilities, including, without limitation, administrative, custodial, trustee, distribution, banking, lending, short-term credit, and other financial and securities services. Specifically, BNY Mellon Group may provide administrative, custodial and credit facilities to us.
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Neither BNY Mellon Group nor any of the BNYM Affiliates providing these services and facilities to us, our Adviser, Alcentra Middle Market and/or Related Funds, bear any responsibility for selecting the investments of such entities or for their performance. BNY Mellon Group or the BNYM Affiliates may charge arm’s length fees to our Adviser to the extent they perform any services that are included in the operating expenses of our Adviser. Additionally, BNY Mellon Group may recommend to its clients and to our investors that they invest some of their assets in us and Related Funds and may have financial interests in promoting investment in such entities.
To the extent permitted by applicable law and our governing documents, we may enter into transactions and invest in futures, securities, currencies, swaps, options, forward contracts or other instruments in which a BNY Mellon Group entity acts as a principal or, on a proprietary basis for its customers, serves as the counterparty.
Certain Related Funds may in the future have investment objectives and utilize strategies similar to or that overlap with our investment objective and strategies. In such instances our Adviser will be permitted to allocate, in its sole discretion, eligible investments and exit opportunities between such investment funds (and their successors) on the one hand and us on the other hand in a manner it deems equitable to the extent possible under the prevailing facts and circumstances considering various factors including those set out in the paragraph below.
Conflicts (and potential conflicts) may arise when we are competing with the Related Funds for investment opportunities and exits. To address these potential conflicts, our Adviser has developed allocation policies and procedures that provide that personnel of our Adviser making portfolio decisions for us and the Related Funds will make purchase and sale decisions and allocate investment opportunities among us and the Related Funds consistent with its fiduciary obligations. To the extent permitted by applicable law, these policies and procedures may result in the pro rata allocation of limited opportunities across us and the Related Funds. However, in many other cases the investment opportunities will be allocated based on other factors. Related Funds managed by different portfolio management teams are generally viewed separately for allocation purposes. There will be cases where certain Related Funds may receive an allocation of an investment opportunity when we do not and vice versa.
Our Adviser’s investment allocation policy further provides that allocations among us and other eligible accounts will generally be made in accordance with SEC interpretive positions. Our Adviser seeks to treat all clients fairly and equitably in a manner consistent with its fiduciary duty to each of them; however, in some instances, especially in instances of limited liquidity, the factors may not result in pro rata allocations or may result in situations where certain accounts receive allocations where others do not.
In addition, we, or any of our portfolio companies, Related Funds, and/or one or more of their affiliates may have relationships with, invest in, engage in transactions with, make voting decisions with respect to, and/or obtain services from, entities for which BNY Mellon Group performs or seeks to perform services or with which BNY Mellon Group engages in or seeks to engage in transactions. Such relationships may provide our Adviser with an incentive to allocate, directly or indirectly, investments to certain of the funds managed by BNY Mellon Group and not others.
BNY Mellon Group may receive significant advisory, underwriting, or other fees from portfolio companies. Services for advisory fees may range from general corporate financial advice to restructuring advice to merger and acquisition representation. For example, BNY Mellon Group may be compensated as an advisor to a person who sold an investment to us, BNY Mellon Group may earn fees for obtaining equity or debt financing for an investor attempting to consummate an acquisition in which we are a co-investor, or BNY Mellon Group may earn fees acting as a lender, advisor or underwriter to one of our portfolio companies. None of the fees paid to BNY Mellon Group or its affiliates will be shared with us.
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As a result of restrictions imposed on bank holding companies and entities managed by bank holding companies (including us), our Adviser, through Alcentra Middle Market, may be required or may decide to structure an investment in a manner that would be less favorable to us than structures available to a non-regulated entity. Consequently, our Adviser may choose a structure which may be less favorable to us than other structures. In addition, we may be restricted from making an investment or limited in the amount or may be required to divest an investment as a result of such restriction. See “Item 1.A. Risk Factors — Risks Relating to our Business and Structure — Our activities may be limited as a result of being controlled by a bank holding company.”
BNY Mellon has put in place policies and procedures to seek to manage and mitigate the potential conflicts of interests described above.
Our primary competitors in providing financing to middle-market companies include public and private funds, other BDCs, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or to the distribution and other requirements we must satisfy to maintain our qualification as a RIC.
We use the expertise of the investment professionals of our Adviser to which we have access to assess investment risks and determine appropriate pricing for our investments in portfolio companies. In addition, the relationships of the investment professionals of our Adviser enable us to learn about, and compete effectively for, financing opportunities with attractive middle-market companies in the industries in which we seek to invest. For additional information concerning the competitive risks we face, see “Item 1.A. Risk Factors — Risks Relating to our Business and Structure — We operate in a highly competitive market for investment opportunities, which could reduce returns and result in losses.”
We do not have any direct employees, and our day-to-day investment operations are managed by our Adviser and each of our executive officers is an employee of the Adviser. To the extent necessary, our board of directors may hire additional personnel going forward. Our officers are employees of our Adviser and our allocable portion of the cost of our Chief Accounting Officer and Chief Compliance Officer and their respective staffs will be paid by us pursuant to the Investment Advisory Agreement.
Alcentra NY serves as our investment adviser and is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act. Subject to the overall supervision of our board of directors and in accordance with the 1940 Act, our Adviser manages our day-to-day operations and provide investment advisory services to us. Under the terms of the Investment Advisory Agreement, our Adviser:
| • | determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes; |
| • | identifies, evaluates and negotiates the structure of the investments we make; |
| • | executes, closes, services and monitors the investments we make; |
| • | determines the securities and other assets that we purchase, retain or sell; |
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| • | performs due diligence on prospective portfolio companies; and |
| • | provides us with such other investment advisory, research and related services as we may, from time to time, reasonably require for the investment of our funds. |
Pursuant to the Investment Advisory Agreement, we have agreed to pay our Adviser a fee for investment advisory and management services consisting of two components — a base management fee and an incentive fee. The cost of both the base management fee and the incentive fee will ultimately be borne by our stockholders. Our Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by us, through the quarter ended June 30, 2015 to the extent required in order for us 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).
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% of our total gross assets if our gross assets are between $625 million and $750 million; and 1.5% of our total gross assets if our assets are greater than $750 million. These 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. For example, if our gross assets were $800 million, we would pay the Adviser a management fee of 1.5% on the entire $800 million of gross assets. Although we do not anticipate making significant investments in derivative financial instruments, the fair value of any such investments, which will equal their current market value, not their notional value, will be included in our calculation of gross assets. For services rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets, excluding cash and cash equivalents (such as investments in U.S. Treasury Bills), at the end of the two most recently completed calendar quarters. Base management fees for any partial month or quarter will be appropriately pro-rated.
We pay our Adviser an incentive fee. Incentive fees are calculated as below and payable quarterly in arrears. The incentive fee, which provides the Adviser with a share of the income that it generates for us, has two components, ordinary income and capital gains, calculated as follows:
The ordinary income component is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter, subject to a total return requirement and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which our pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets attributable to our common stock, for the immediately preceding calendar quarter, exceeds a 2.0% hurdle rate or preferred return and a “catch-up” provision measured as of the end of each calendar quarter. Under this provision, in any calendar quarter, our Adviser receives no incentive fee until our pre-incentive fee net investment income equals the hurdle rate or preferred return of 2.0%, but then receives, as a “catch-up,” 50% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate or preferred return but is less than 2.5%. Our adviser receives 20% of our pre-incentive fee net investment income, if any, that exceeds 2.5%. For this purpose, pre-incentive fee net investment income means interest income (including on our investments in U.S. Treasury Bills), 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, administrative expenses payable 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 paid incentive fees based on the deferral of non-cash interest). Pre-incentive fee net investment income excludes, in the case of investments with a
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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.
The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of our pre-incentive fee net investment income is payable except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding quarters. In other words, any ordinary income incentive fee that is payable in a calendar quarter is limited to the lesser of (i) 20.0% of the amount by which our pre-incentive fee net investment income for such calendar quarter exceeds the 2.0% hurdle, subject to the “catch-up” provision, and (ii) (x) 20.0% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quartersminus(y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the amount, if positive, of the sum of pre-incentive fee net investment income, realized gains and losses and unrealized appreciation and depreciation for our then current and 11 preceding calendar quarters. In addition, the portion of such incentive fee that is attributable to deferred interest (such as PIK interest or OID) is paid to the Adviser, without any interest thereon, only if and to the extent we actually receive such interest in cash, and any accrual thereof will be reversed if and to the extent such interest is reversed in connection with any write-off or similar treatment of the investment giving rise to any deferred interest accrual. Any reversal of such accounts would reduce net income for the quarter by the net amount of the reversal (after taking into account the reversal of incentive fees payable) and would result in a reduction and possible elimination of the incentive fees for such quarter. There is no accumulation of amounts on the hurdle rate or preferred return from quarter to quarter, and accordingly there is no clawback of amounts previously paid if subsequent quarters are below the quarterly hurdle, and there is no delay of payment if prior quarters are below the quarterly hurdle.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that we may pay an incentive fee in a quarter where we incur a loss, subject to the total return requirement and deferral of non-cash amounts. For example, if we receive pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate or preferred return, we will pay the applicable incentive fee even if we have incurred a loss in that quarter due to realized and unrealized capital losses. Our net investment income used to calculate this component of the incentive fee is also included in the amount of our gross assets used to calculate the 1.75% base management fee. These calculations will be appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The following is a graphical representation of the calculation of the income-related portion of the incentive fee:
Quarterly Incentive Fee Based on Net Investment Income
Pre-incentive Fee Net Investment Income
(expressed as a percentage of the value of net assets)
Percentage of Pre-incentive Fee Net Investment Income
Allocated to Income-Related Portion of Incentive Fee
The capital gains component of the incentive fee is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), commencing on December 31, 2014, and is equal to 20.0% of our cumulative aggregate realized capital gains from inception through the end of that calendar year, computed net of our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less
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the aggregate amount of any previously paid capital gains incentive fees. If such amount is negative, then no capital gains incentive fee will be payable for such year. Additionally, if the Investment Advisory Agreement is terminated as of a date that is not a calendar year end, the termination date will be treated as though it were a calendar year end for purposes of calculating and paying the capital gains incentive fee.
Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate or preferred return(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income – (management fee + other expenses) = 0.6125%
Pre-incentive fee net investment income does not exceed hurdle rate or preferred return, therefore there is no income-related incentive fee.
Investment income (including interest, dividends, fees, etc.) = 2.9%
Hurdle rate or preferred return(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income - (management fee + other expenses) = 2.2625%
| | |
| Incentive fee | = 50% × Pre-incentive fee net investment income (subject to “catch-up”)(4) | |
= 50% × (2.2625% - 2.0%) | ||
= 0.13125% |
Pre-incentive fee net investment income exceeds the hurdle rate, but does not fully satisfy the “catch-up” provision, therefore the income related portion of the incentive fee is 0.2625%.
Investment income (including interest, dividends, fees, etc.) = 3.5%
Hurdle rate or preferred return(1) = 2.0%
Management fee(2) = 0.4375%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income
(investment income – (management fee + other expenses) = 2.8625%
| | |
| Incentive fee | = 50% × Pre-incentive fee net investment income (subject to “catch-up”)(4) | |
| Incentive fee | = 50% × “catch-up” + (20% × (Pre-Incentive Fee Net Investment Income - 2.5%)) | |
| “Catch-up” | = 2.5% - 2.0% | |
= 0.5% |
| | |
| Incentive fee | = (50% × 0.5%) + (20% × (2.8625% - 2.5%)) | |
= 0.25% + (20% × 0.3625%) | ||
| �� | = 0.25% + 0.0725% | |
= 0.3225% |
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Pre-incentive fee net investment income exceeds the hurdle rate or preferred return, and fully satisfies the “catch-up” provision, therefore the income related portion of the incentive fee is 0.5725%.
| (1) | Represents 8.0% annualized hurdle rate. |
| (2) | Represents 1.75% annualized base management fee. For purposes of these examples, we have assumed the maximum amount of Base Management Fees that may be paid, or 1.75% of our gross assets. |
| (3) | Excludes organizational and offering expenses. |
| (4) | The “catch-up” provision is intended to provide our Adviser with an incentive fee of 20% on all pre-incentive fee net investment income as if a hurdle rate or a preferred return did not apply when our net investment income exceeds 2.5% in any fiscal quarter. |
Year 1: $2.0 million investment made in Company A (“Investment A”), and $3.0 million investment made in Company B (“Investment B”)
Year 2: Investment A sold for $5.0 million and fair market value (“FMV”) of Investment B determined to be $3.5 million
Year 3: FMV of Investment B determined to be $2.0 million
Year 4: Investment B sold for $3.25 million
The capital gains portion of the incentive fee would be:
Year 1: None
Year 2: Capital gains incentive fee of $0.6 million — ($3.0 million realized capital gains on sale of Investment A multiplied by 20%)
Year 3: None — $0.4 million (20% multiplied by ($3.0 million cumulative capital gains less $1.0 million cumulative capital depreciation)) less $0.6 million (previous capital gains fee paid in Year 2)
Year 4: Capital gains incentive fee of $50,000 — $0.65 million ($3.25 million cumulative realized capital gains multiplied by 20%) less $0.6 million (capital gains incentive fee taken in Year 2)
Year 1: $2.0 million investment made in Company A (“Investment A”), $5.25 million investment made in Company B (“Investment B”) and $4.5 million investment made in Company C (“Investment C”)
Year 2: Investment A sold for $4.5 million, FMV of Investment B determined to be $4.75 million and FMV of Investment C determined to be $4.5 million
Year 3: FMV of Investment B determined to be $5.0 million and Investment C sold for $5.5 million
Year 4: FMV of Investment B determined to be $6.0 million
Year 5: Investment B sold for $4.0 million
The capital gains incentive fee, if any, would be:
Year 1: None
Year 2: $0.4 million capital gains incentive fee — 20% multiplied by $2.0 million ($2.5 million realized capital gains on Investment A less $0.5 million unrealized capital depreciation on Investment B)
Year 3: $0.25 million capital gains incentive fee(1) — $0.65 million (20% multiplied by $3.25 million ($3.5 million cumulative realized capital gains less $0.25 million unrealized capital depreciation)) less $0.4 million capital gains incentive fee received in Year 2
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Year 4: $0.05 million capital gains incentive fee — $0.7 million ($3.50 million cumulative realized capital gains multiplied by 20%) less $0.65 million cumulative capital gains incentive fee paid in Year 2 and Year 3
Year 5: None — $0.45 million (20% multiplied by $2.25 million (cumulative realized capital gains of $3.5 million less realized capital losses of $1.25 million)) less $0.7 million cumulative capital gains incentive fee paid in Year 2, Year 3 and Year 4(2)
| * | The hypothetical amounts of returns shown are based on a percentage of our total net assets and assume no leverage. There is no guarantee that positive returns will be realized and actual returns may vary from those shown in this example. |
| (1) | As illustrated in Year 3 of Alternative 1 above, if a portfolio company were to be wound up on a date other than its fiscal year end of any year, it may have paid aggregate capital gains incentive fees that are more than the amount of such fees that would be payable if such portfolio company had been wound up on its fiscal year end of such year. |
| (2) | As noted above, it is possible that the cumulative aggregate capital gains fee received by our Adviser ($0.70 million) is effectively greater than $0.45 million (20% of cumulative aggregate realized capital gains less net realized capital losses or net unrealized depreciation ($2.25 million)). |
All investment professionals of our Adviser, when and to the extent engaged in providing investment advisory and management services to us, and the compensation and routine overhead expenses of personnel allocable to these services to us, are provided and paid for by our Adviser and not by us. We bear all other out-of-pocket costs and expenses of our operations and transactions, including, without limitation, those relating to:
| • | organization and offering expenses; |
| • | the investigation and monitoring of our investments; |
| • | the cost of calculating our net asset value; |
| • | management and incentive fees payable pursuant to the Investment Advisory Agreement; |
| • | fees payable to third parties relating to, or associated with, making investments and valuing investments (including third-party valuation firms); |
| • | transfer agent and custodial fees; |
| • | federal and state registration fees; |
| • | any exchange listing fees; |
| • | 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 us in connection with administering our business, including the compensation of our Chief Accounting Officer and Chief Compliance Officer, and their respective staffs, that will be based upon our allocable portion of overhead and other expenses incurred by our Adviser in performing its obligations under the Investment Advisory Agreement. |
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Under the Investment Advisory Agreement, our Adviser furnishes us with office facilities and equipment and provides us with clerical, recordkeeping and other administrative services at such facilities. Under the Investment Advisory Agreement, our Adviser also provides managerial assistance on our behalf to those portfolio companies that have accepted our offer to provide such assistance.
Payments under the Investment Advisory Agreement are equal to an amount based upon our allocable portion (subject to the review of our board of directors) of our Adviser’s overhead in performing its obligations under the Investment Advisory Agreement, including rent and the fees and expenses associated with performing compliance functions. In addition, if requested to provide significant managerial assistance to our portfolio companies, our Adviser will be paid an additional amount based on the services provided, which shall not exceed the amount we receive from such portfolio companies for providing this assistance.
Unless terminated earlier as described below, the Investment Advisory Agreement will continue in effect for a period of two years from its effective date. It will remain in effect from year to year thereafter if approved annually by our board of directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, and, in either case, if also approved by a majority of our directors who are not “interested persons.” The Investment Advisory Agreement automatically terminates in the event of its assignment, as defined in the 1940 Act, by our Adviser and may be terminated by either party without penalty upon not less than 60 days’ written notice to the other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon 60 days’ written notice. See “Item 1.A. Risk Factors — Risks Relating to our Business and Structure — We are dependent upon key personnel of our Adviser and the Alcentra Group for our future success. If our Adviser or the Alcentra Group were to lose any of its key personnel, our ability to achieve our investment objective could be significantly harmed.”
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Investment Advisory Agreement, our Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of our Adviser’s services under the Investment Advisory Agreement or otherwise as our investment adviser.
Alcentra NY is a Delaware limited liability company. The principal executive offices of Alcentra NY are located at 200 Park Avenue, 7th Floor, New York, New York 10166.
At an in-person meeting of the board of directors held on March 9, 2017, the board of directors re-approved the Investment Advisory Agreement for a one-year term.
In approving the renewal of the investment advisory agreement, our board of directors, including a majority of our non-interested directors, made the following determinations:
| • | Nature, extent and quality of services. Our board of directors received and considered information regarding the nature, extent and quality of the investment selection process employed by Alcentra NY. Our board of directors also considered the backgrounds and responsibilities of Alcentra NY’s senior personnel and their qualifications and experience in connection with the types of investments made by us, as well as Alcentra NY’s financial resources. Our board of directors determined that the nature, extent and quality of the services provided or to be provided by Alcentra NY supported the renewal of the investment advisory agreement. |
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| • | Investment Performance. Our board of directors considered the investment performance of Alcentra NY, as well as comparative data with respect to the investment performance of other externally-managed business development companies. Our board of directors considered, among other things, the performance of our common stock and changes in our net asset value in comparison with other business development companies. Our board of directors concluded that Alcentra NY’s investment performance supported the renewal of the investment advisory agreement. |
| • | Reasonableness of advisory fees. Our board of directors considered comparative data based on publicly available information on other business development companies with respect to the advisory fees (including the management fees and incentive fees) of other business development companies. Based upon its review, our board of directors concluded that the fee schedule is comparable with the fee schedules of business development companies with similar investment objectives. |
| • | Economies of Scale. Our board of directors addressed the potential for Alcentra NY to realize economies of scale in managing our assets, and determined that at this time they did not expect economies of scale to be realized by Alcentra NY. |
Based on the information reviewed and the discussions, the board of directors, including a majority of the non-interested directors, concluded that the investment management fee rates and terms are reasonable in relation to the services to be provided and approved the Investment Advisory Agreement as being in the best interests of our stockholders.
Under the Administration Agreement, State Street provides us with financial reporting, post-trade compliance, and treasury services. In providing these services, State Street oversees the performance of, our required administrative services, which includes being responsible for the financial and other records that we are required to maintain and preparing reports to our stockholders and reports and other materials filed with the SEC. State Street provides post-trade compliance services including performing the applicable SEC, IRS, and BDC compliance testing, provide monthly and quarterly reporting and maintain a compliance testing matrix and perform an annual update. In addition, State Street assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax return, the printing and dissemination of reports and other materials to our stockholders and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others.
Payments under the administration agreement equal a fixed annual fee, paid in monthly installments in arrears, along with additional fees and expenses as incurred each month. Under the Administration Agreement, we reimburse State Street for out-of-pocket expenses incurred on our behalf for services, as well as direct pass-through vendor fees incurred on our behalf.
We have entered into a License Agreement with our Adviser under which our Adviser has agreed to grant us a non-exclusive, royalty-free license to use the name “Alcentra.” Under this agreement, we have a right to use the “Alcentra” name for so long as our Adviser or one of its affiliates remains our investment adviser. Other than with respect to this limited license, we have no legal right to the “Alcentra” name. The License Agreement will remain in effect for so long as the Investment Advisory Agreement with our Adviser is in effect.
We maintain a website atwww.alcentracapital.com. The information on our website is not incorporated by reference in this annual report on Form 10-K.
We make available on or through our website certain reports and amendments to those reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.
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We have elected to be regulated as a BDC under the 1940 Act and to be treated as a RIC under the Code. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their affiliates (including any investment advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our outstanding voting securities.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act. Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate fluctuations. However, we may purchase or otherwise receive warrants to purchase the common stock of our portfolio companies in connection with acquisition financing or other investments. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also may not acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, we generally cannot acquire more than 3% of the voting stock of any registered investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments might subject our stockholders to additional expenses. None of these policies is fundamental and may be changed without stockholder approval upon 60 days’ prior written notice to stockholders.
Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in section 55(a) of the 1940 Act, which are referred to as “qualifying assets,” unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our proposed business are the following:
| (1) | Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An eligible portfolio company is defined in the 1940 Act as any issuer which: |
| • | is organized under the laws of, and has its principal place of business in, the United States; |
| • | is not an investment company (other than a small business investment company wholly owned by the Company) or a company that would be an investment company but for certain exclusions under the 1940 Act; and |
| • | satisfies either of the following: |
| º | has a market capitalization of less than $250 million or does not have any class of securities listed on a national securities exchange; or |
| º | is controlled by a BDC or a group of companies including a BDC, the BDC actually exercises a controlling influence over the management or policies of the eligible portfolio company, and, as a result thereof, the BDC has an affiliated person who is a director of the eligible portfolio company. |
| (2) | Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company. |
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| (3) | Securities received in exchange for or distributed on or with respect to securities described above, or pursuant to the exercise of warrants or rights relating to such securities. |
| (4) | Securities of any eligible portfolio company which we control. |
| (5) | Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities, was unable to meet its obligations as they came due without material assistance other than conventional lending or financing arrangements. |
The regulations defining qualifying assets may change over time. We may adjust our investment focus as needed to comply with and/or take advantage of any regulatory, legislative, administrative or judicial actions in this area.
In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described above in Qualifying Assets categories 1, 2 or 3. Business development companies generally must offer to make available to the issuer of the securities significant managerial assistance, except in circumstances where either (i) the business development company controls such issuer of securities or (ii) the business development company purchases such securities in conjunction with one or more other persons acting together and one of the other persons in the group makes available such managerial assistance. Making available managerial assistance means any arrangement whereby the BDC, through its directors, officers, employees or agents, offers to provide, and, if accepted, does so provide, significant guidance and counsel concerning the management, operations or business objectives and policies of a portfolio company. Our Adviser will provide such managerial assistance on our behalf to portfolio companies that request this assistance.
Pending investment in other types of qualifying assets, as described above, our investments may consist of cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt investments that mature in one year or less from the date of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets or temporary investments. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, so long as the agreements are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the Diversification Tests in order to qualify as a RIC for U.S. federal income tax purposes. Accordingly, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. Our Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see “Item 1.A. Risk Factors — Risks Relating to our Business and Structure — Regulations governing our operation as a BDC will affect our ability to, and the way in which we, raise additional capital. As a BDC, the necessity of raising additional capital may expose us to risks, including the typical risks associated with leverage.”
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We and our Adviser have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with such code’s requirements. You may read and copy our code of ethics at the SEC’s Public Reference Room in Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at (202) 551-8090. In addition, our code of ethics is attached as an exhibit to our registration statement on Form N-2 (file number 333-199622) filed on January 14, 2015, and is available on the EDGAR Database on the SEC’s website atwww.sec.gov. You may also obtain copies of our code of ethics, after paying a duplicating fee, by electronic request at the following e-mail address:publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.
We have delegated our proxy voting responsibility to our Adviser. The Proxy Voting Policies and Procedures of our Adviser are set out below. The guidelines will be reviewed periodically by our Adviser and our directors who are not “interested persons,” and, accordingly, are subject to change.
As an investment adviser registered under the Advisers Act, our Adviser has a fiduciary duty to act solely in our best interests. As part of this duty, our Adviser recognizes that it must vote our securities in a timely manner free of conflicts of interest and in our best interests.
Our Adviser’s policies and procedures for voting proxies for its investment advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Our Adviser votes proxies relating to our portfolio securities in what it perceives to be the best interest of our stockholders. Our Adviser reviews on a case-by-case basis each proposal submitted to a stockholder vote to determine its effect on the portfolio securities we hold. In most cases our Adviser will vote in favor of proposals that our Adviser believes are likely to increase the value of the portfolio securities we hold. Although our Adviser will generally vote against proposals that may have a negative effect on our portfolio securities, our Adviser may vote for such a proposal if there exist compelling long-term reasons to do so.
Our Adviser has established a proxy voting committee and adopted proxy voting guidelines and related procedures. The proxy voting committee establishes proxy voting guidelines and procedures, oversees the internal proxy voting process, and reviews proxy voting issues. To ensure that our Adviser’s vote is not the product of a conflict of interest, our Adviser requires that (1) anyone involved in the decision-making process disclose to our Chief Compliance Officer any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (2) employees involved in the decision-making process or vote administration are prohibited from revealing how our Adviser intends to vote on a proposal in order to reduce any attempted influence from interested parties. Where conflicts of interest may be present, our Adviser will disclose such conflicts to us, including our independent directors and may request guidance from us on how to vote such proxies.
You may obtain information about how our Adviser voted proxies by making a written request for proxy voting information to: Alcentra Capital Corporation, 200 Park Avenue, 7th Floor, New York, New York 10166, or by telephone at (212) 922-8240.
We are committed to maintaining the privacy of our stockholders and to safeguarding their nonpublic personal information. The following information is provided to help you understand what personal information we collect, how we protect that information and why, in certain cases, we may share information with select other parties.
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Generally, we do not receive any nonpublic personal information relating to our stockholders, although certain nonpublic personal information of our stockholders may become available to us. We do not disclose any nonpublic personal information about our stockholders or former stockholders to anyone, except as permitted by law or as is necessary in order to service stockholder accounts (for example, to a transfer agent or third-party administrator).
We restrict access to nonpublic personal information about our stockholders to employees of our Adviser and its affiliates with a legitimate business need for the information. We maintain physical, electronic and procedural safeguards designed to protect the nonpublic personal information of our stockholders.
We are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited from protecting any director or officer against any liability to us or our stockholders arising from willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person’s office.
We and our Adviser are each required to adopt and implement written policies and procedures reasonably designed to prevent violation of relevant federal securities laws, review these policies and procedures annually for their adequacy and the effectiveness of their implementation, and designate a chief compliance officer to be responsible for administering the policies and procedures.
We are also prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our board of directors who are not interested persons and, in some cases, prior approval by the SEC. The SEC has interpreted the BDC prohibition on transactions with affiliates to prohibit all “joint transactions” between entities that share a common investment adviser. The staff of the SEC has granted no-action relief permitting purchases of a single class of privately placed securities provided that the adviser negotiates no term other than price and certain other conditions are met. As a result, we only expect to co-invest on a concurrent basis with investment funds, accounts or investment vehicles managed by our Adviser when each of us and such investment fund, account or investment vehicle will own the same securities of the issuer and when no term is negotiated other than price. Any such investment would be made, subject to compliance with existing regulatory guidance, applicable regulations and our allocation procedures. If opportunities arise that would otherwise be appropriate for us and for an investment fund, account or investment vehicle managed by our Adviser to invest in different securities of the same issuer, our Adviser will need to decide which fund will proceed with the investment. Moreover, except in certain circumstances, we will be unable to invest in any issuer in which an investment fund, account or investment vehicle managed by our Adviser has previously invested.
On December 30, 2015, the SEC granted us relief sought in an exemptive application that expands our ability to co-invest in portfolio companies with other funds managed by the Adviser or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. Under the terms of the order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including, but not limited to, (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching with respect to us or our stockholders on the part of any person concerned and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current objectives and strategies. We intend to co-invest, subject to the conditions included in the order.
We are an “emerging growth company, or “EGC,” as defined in the Jumpstart Our Business Startups Act, or the “JOBS Act.” An EGC is defined as a company with total annual gross revenues of less than $1 billion in its most recently completed fiscal year. An EGC will retain such status until the earlier of: (1) the fifth anniversary of the date it first sold securities pursuant to an initial public offering registration statement;
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(2) the last day of the fiscal year in which it first exceeds $1 billion in annual gross revenues; (3) the time it becomes a large accelerated filer (an SEC registered company with a public float of at least $700 million); or (4) the date on which the EGC has, within the previous three years, issued $1 billion of nonconvertible debt.
The JOBS Act affords an EGC an opportunity to get a temporary reprieve from certain SEC regulations by exempting an EGC from these regulations for up to five years. These eased requirements include an exemption from certain financial disclosure and governance requirements and relaxed restrictions on the sale of securities. The JOBS Act provides scaled disclosure provisions for EGCs, including, among other things, removing the requirement that EGCs comply with Sarbanes-Oxley Act Section 404(b) auditor attestation of internal control over financial reporting.
Section 107(b) of the JOBS Act also permits an EGC to elect an extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until such time as these new or revised standards are made applicable to all private companies. We have elected to take advantage of the extended transition period for complying with new or revised accounting standards, which may make it more difficult for investors and securities analysts to evaluate us since our financial statements may not be comparable to companies that comply with public company effective dates.
Our shares of common stock are listed on the NASDAQ Global Select Market under the symbol “ABDC.” As a listed company on the NASDAQ Global Select Market, we are subject to various listing standards, including corporate governance listing standards. We will monitor our compliance with all listing standards and will take actions necessary to ensure that we are in compliance therewith.
The Sarbanes-Oxley Act of 2002 imposes a wide variety of regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:
| • | pursuant to Rule 13a-14 under the Exchange Act, our principal executive officer and principal financial officer must certify the accuracy of the financial statements contained in our periodic reports; |
| • | pursuant to Item 307 under Regulation S-K, our periodic reports must disclose our conclusions about the effectiveness of our disclosure controls and procedures; |
| • | pursuant to Rule 13a-15 under the Exchange Act, our management must prepare an annual report regarding its assessment of our internal control over financial reporting; and |
| • | pursuant to Item 308 of Regulation S-K and Rule 13a-15 under the Exchange Act, our periodic reports must disclose whether there were significant changes in our internal controls over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. |
BNY Mellon is a bank holding company, or a “BHC” under the Bank Holding Company Act of 1956, as amended, or the “BHCA.” BNY Mellon is also a financial holding company, or “FHC,” under the BHCA, which is a status available to BHCs that meet certain criteria. As a BHC and a FHC, the activities of BNY Mellon and its affiliates are subject to certain restrictions imposed by the BHCA and related regulations. BHCs and FHCs are subject to supervision and regulation by the Federal Reserve. Because BNY Mellon may be deemed to “control” us within the meaning of the BHCA, restrictions under the BHCA could apply to us. Accordingly, the BHCA and other applicable banking laws, rules, regulations and guidelines, and their interpretation and administration by the appropriate regulatory agencies, including, but not limited to, the Federal Reserve, may restrict the transactions and relationships between our Adviser, BNY Mellon and their
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affiliates, on the one hand, and us on the other hand, and may restrict our investments, transactions and operations. For example, the BHCA regulations applicable to BNY Mellon and us may, among other things, restrict our ability to make certain investments or the size of certain investments, impose a maximum holding period on some or all of our investments, and restrict our Adviser’s ability to participate in the management and operations of the companies in which we invest. In addition, certain BHCA regulations may require aggregation of the positions owned, held or controlled by related entities. Thus, in certain circumstances, positions held by BNY Mellon and its affiliates (including our Adviser) for client and proprietary accounts may need to be aggregated with positions held by us. In this case, where BHCA regulations impose a cap on the amount of a position that may be held, BNY Mellon may utilize available capacity to make investments for its proprietary accounts or for the accounts of other clients, which may require us to limit and/or liquidate certain investments. Additionally, BNY Mellon may in the future, in its sole discretion and without notice to investors, engage in activities impacting us and/or our Adviser in order to comply with the BHCA or other legal requirements applicable to, or reduce or eliminate the impact or applicability of any bank regulatory or other restrictions on BNY Mellon, us or other funds and accounts managed by our Adviser and its affiliates. “See Item 1.A. Risk Factors — Risks Relating to Our Business and Structure — Our activities may be limited as a result of being controlled by a bank holding company.”
We have elected to be treated as a RIC under Subchapter M of the Code effective as of our taxable year ended December 31, 2014, and qualify annually thereafter. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we distribute to our stockholders as dividends. To maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to maintain our status of a RIC we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which generally is our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the “Annual Distribution Requirement”).
As a BDC, we have elected to be treated effective as of our taxable year ended December 31, 2014, and intend to qualify annually thereafter, as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay corporate-level U.S. federal income taxes on any income that we distribute (or are deemed to distribute) to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which generally is our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses (the “Annual Distribution Requirement”).
For any taxable year in which we:
| • | qualify as a RIC; and |
| • | satisfy the Annual Distribution Requirement, |
we generally will not be subject to U.S. federal income tax on the portion of our income we distribute (or are deemed to distribute) to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) to our stockholders.
We will be subject to a 4% nondeductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (1) 98% of our net ordinary income for each calendar year, (2) 98.2% of our capital gain net income for the one-year period ending October 31 in that calendar year and (3) any income recognized, but not distributed, in preceding years and on which we paid no corporate-level U.S. federal income tax (the “Excise Tax Avoidance Requirement”). We generally will endeavor in each taxable year to make sufficient distributions to our stockholders to avoid any U.S. federal excise tax on our earnings.
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In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
| • | continue to qualify as a BDC under the 1940 Act at all times during each taxable year; |
| • | derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to loans of certain securities, gains from the sale of stock or other securities, net income from certain “qualified publicly traded partnerships,” or other income derived with respect to our business of investing in such stock or securities (the “90% Income Test”); and |
| • | diversify our holdings so that at the end of each quarter of the taxable year: |
| • | at least 50% of the value of our assets consists of cash, cash equivalents, U.S. Government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer; and |
| • | no more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, of one issuer, of two or more issuers that are controlled, as determined under applicable Code rules, by us and that are engaged in the same or similar or related trades or businesses or of certain “qualified publicly traded partnerships” (the “Diversification Tests”). |
Qualified earnings may exclude such income as management fees received in connection with our SBIC subsidiaries or other potential outside managed funds and certain other fees.
In accordance with certain applicable Treasury regulations and private letter rulings issued by the IRS, a RIC may treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder may elect to receive his or her entire distribution in either cash or stock of the RIC, subject to a limitation that the aggregate amount of cash to be distributed to all stockholders must be at least 20% of the aggregate declared distribution. If too many stockholders elect to receive cash, each stockholder electing to receive cash must receive a pro rata amount of cash (with the balance of the distribution paid in stock). In no event will any stockholder, electing to receive cash, receive less than 20% of his or her entire distribution in cash. If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the dividend paid in stock will be equal to the amount of cash that could have been received instead of stock. We have no current intention of paying dividends in shares of our stock in accordance with these Treasury regulations or private letter rulings.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or issued with warrants), we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. We may also have to include in income other amounts that we have not yet received in cash, such as PIK interest, deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock, or certain income with respect to equity investments in foreign corporations. Because any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.
Gain or loss realized by us from the sale or exchange of warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating
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to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous. If we are prohibited from making distributions or are unable to obtain cash from other sources to make the distributions, we may fail to qualify as a RIC, which would result in us becoming subject to corporate-level U.S. federal income tax.
In addition, we will be partially dependent on our SBIC subsidiaries for cash distributions to enable us to meet the RIC distribution requirements. Our SBIC subsidiaries may be limited by the Small Business Investment Act of 1958, and SBA regulations governing SBICs, from making certain distributions to us that may be necessary to maintain our status as a RIC. We may have to request a waiver of the SBA’s restrictions for our SBIC subsidiaries to make certain distributions to maintain our RIC status. We cannot assure you that the SBA will grant such waiver. If our SBIC subsidiaries are unable to obtain a waiver, compliance with the SBA regulations may cause us to fail to qualify as a RIC, which would result in us becoming subject to corporate-level U.S. federal income tax.
The remainder of this discussion assumes that we qualify as a RIC and have satisfied the Annual Distribution Requirement.
Any transactions in options, futures contracts, constructive sales, hedging, straddle, conversion or similar transactions, and forward contracts will be subject to special tax rules, the effect of which may be to accelerate income to us, defer losses, cause adjustments to the holding periods of our investments, convert long-term capital gains into short-term capital gains, convert short-term capital losses into long-term capital losses or have other tax consequences. These rules could affect the amount, timing and character of distributions to stockholders. We do not currently intend to engage in these types of transactions.
A RIC is limited in its ability to deduct expenses in excess of its investment company taxable income (which is, generally, ordinary income plus net realized short-term capital gains in excess of net realized long-term capital losses). If our expenses in a given year exceed gross taxable income (e.g., as the result of large amounts of equity-based compensation), we would experience a net operating loss for that year. However, a RIC is not permitted to carry forward net operating losses to subsequent years. In addition, expenses can be used only to offset investment company taxable income, not net capital gain. Due to these limits on the deductibility of expenses, we may for tax purposes have aggregate taxable income for several years that we are required to distribute and that is taxable to our stockholders even if such income is greater than the aggregate net income we actually earned during those years. Such required distributions may be made from our cash assets or by liquidation of investments, if necessary. We may realize gains or losses from such liquidations. In the event we realize net capital gains from such transactions, you may receive a larger capital gain distribution than you would have received in the absence of such transactions.
Investment income received from sources within foreign countries, or capital gains earned by investing in securities of foreign issuers, may be subject to foreign income taxes withheld at the source. In this regard, withholding tax rates in countries with which the United States does not have a tax treaty are often as high as 35% or more. The United States has entered into tax treaties with many foreign countries that may entitle us to a reduced rate of tax or exemption from tax on this related income and gains. The effective rate of foreign tax cannot be determined at this time since the amount of our assets to be invested within various countries is not now known. We do not anticipate being eligible for the special election that allows a RIC to treat foreign income taxes paid by such RIC as paid by its stockholders.
If we acquire stock in certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their total assets in investments producing such passive income (“passive foreign investment companies”), we could be subject to U.S. federal income tax and additional interest charges on “excess distributions” received from such companies or gain from the sale of stock in such companies, even if all income or gain actually received by us is timely distributed to our stockholders. We would not be able to pass through to our stockholders any credit or deduction for such a tax. Certain elections may, if available, ameliorate these adverse tax consequences, but any such election requires us to recognize taxable income or gain without the concurrent receipt of cash. We intend to limit and/or manage our holdings in passive foreign investment companies to minimize our tax liability.
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Foreign exchange gains and losses realized by us in connection with certain transactions involving non-dollar debt securities, certain foreign currency futures contracts, foreign currency option contracts, foreign currency forward contracts, foreign currencies, or payables or receivables denominated in a foreign currency are subject to Code provisions that generally treat such gains and losses as ordinary income and losses and may affect the amount, timing and character of distributions to our stockholders. Any such transactions that are not directly related to our investment in securities (possibly including speculative currency positions or currency derivatives not used for hedging purposes) could, under future Treasury regulations, produce income not among the types of “qualifying income” from which a RIC must derive at least 90% of its annual gross income.
If we fail to satisfy the 90% Income Test or the Diversification Tests for any taxable year, we may nevertheless continue to qualify as a RIC for such year if certain relief provisions are applicable (which may, among other things, require us to pay certain corporate-level U.S. federal income taxes or to dispose of certain assets).
If we were unable to qualify for treatment as a RIC and the foregoing relief provisions are not applicable, we would be subject to tax on all of our taxable income at regular corporate rates, regardless of whether we make any distributions to our stockholders. Distributions would not be required, and any distributions would be taxable to our stockholders as ordinary dividend income to the extent of our current and accumulated earnings and profits and, subject to certain limitations, may be eligible for the 20% maximum rate for noncorporate taxpayers provided certain holding period and other requirements were met. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis, and any remaining distributions would be treated as a capital gain. To requalify as a RIC in a subsequent taxable year, we would be required to satisfy the RIC qualification requirements for that year and dispose of any earnings and profits from any year in which we failed to qualify as a RIC. Subject to a limited exception applicable to RICs that qualified as such under the Code for at least one year prior to disqualification and that requalify as a RIC no later than the second year following the nonqualifying year, we could be subject to tax on any unrealized net built-in gains in the assets held by us during the period in which we failed to qualify as a RIC that are recognized within the subsequent five years, unless we made a special election to pay corporate-level tax on such built-in gain at the time of our requalification as a RIC.
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| Item 1A. | Risk Factors |
Investing in our securities involves a number of significant risks. Before you invest in our securities, you should be aware of various risks, including those described below. You should carefully consider these risk factors, together with all of the other information included in this annual report on Form 10-K, before you decide whether to make an investment in our securities. The risks set out below present the principal risk factors associated with an investment in our securities as well as those factors generally associated with investment in a company with investment objectives, investment policies, capital structure or trading markets similar to ours including the risks of investment in a business development company, which includes risks associated with investing in a portfolio of small and developing or financially troubled businesses. Additional risks and uncertainties not presently known to us or not presently deemed material by us may also impair our operations and performance. If any of the following events occur, our business, financial condition, results of operations and cash flows could be materially and adversely affected. In such case, our business, financial condition and results of operations could be materially and adversely affected and you may lose all or part of your investment.
We have limited experience operating as and our Adviser has limited experience managing a BDC or a RIC. The 1940 Act and the Code impose numerous constraints on the operations of BDCs and RICs that do not apply to other investment vehicles managed by our Adviser. BDCs are required, for example, to invest at least 70% of their total assets primarily in securities of U.S. private or thinly traded public companies, cash, cash equivalents, U.S. government securities and other high-quality debt instruments that mature in one year or less from the date of investment. Moreover, qualification for taxation as a RIC requires satisfaction of certain source-of-income, asset diversification and distribution requirements. Both we and our Adviser have limited experience operating and advising under these constraints, which may hinder our ability to take advantage of attractive investment opportunities and to achieve our investment objective. If we are unable to comply with the requirements imposed on BDCs by the 1940 Act, the SEC could bring an enforcement action against us and/or we could be exposed to claims of private litigants. In addition, we could be regulated as a closed-end management investment company under the 1940 Act, which could further decrease our operating flexibility and may prevent us from operating our business as described in this annual report on Form 10-K, either of which could have a material adverse effect on our business, results of operations or financial condition.
Furthermore, the investment philosophy and techniques used by our Adviser to manage a BDC may differ from the investment philosophy and techniques previously employed by our Adviser in identifying and managing past investments. Accordingly, we can offer no assurance that we will replicate our historical performance or that of other entities that our Adviser has managed or advised in the past, and we caution you that our investment returns could be substantially lower than our past returns or those achieved by other entities managed or advised by our Adviser.
Finally, given our limited operating history, you will have limited information about us in connection with your decision to invest in our common stock and, in light of the fact that our historical cost structure will substantially increase as a result of borrowings under the Credit Facility, our issuance of Notes and the related management fees payable by us to the Adviser on asset funded thereby, such limited operating history may even be less meaningful in connection with your evaluation of whether to invest in our common stock.
We may be unable to replicate the historical results achieved by other entities managed or advised by our Adviser, and our investment returns could be substantially lower than the returns achieved by our Adviser in prior periods. In particular, our Adviser’s returns from several of its other investment vehicles may not be comparable because of the economic period in which those investments were made; or the compositions of those prior portfolios will be different from prospective portfolios. Our Adviser was not subject to the same
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tax and regulatory conditions that we operate under. Furthermore, none of the prior results were from BDCs or public reporting companies. Additionally, all or a portion of these prior results may have been achieved in particular market conditions, which may never be repeated. Moreover, current or future market volatility and regulatory uncertainty may also have an adverse impact on our future performance.
We depend on the diligence, skill and network of business contacts of the investment professionals of our Adviser and the Alcentra Group to achieve our investment objective. Our Adviser’s team of investment professionals evaluates, negotiates, structures, closes and monitors our investments in accordance with the terms of our Investment Advisory Agreement.
Our Investment Committee, which provides oversight over our investment activities, is provided to us by our Adviser under the Investment Advisory Agreement. Our Investment Committee consists of Paul J. Echausse, Paul Hatfield, Kevin Bannon, David Scopelliti, Ellida McMillan and Branko Krmpotic. The loss of any member of our Investment Committee would limit our ability to achieve our investment objective and operate as we anticipate. This could have a material adverse effect on our financial condition, results of operations and cash flows.
We depend upon our Adviser to maintain its relationships with private equity sponsors, placement agents, investment banks, management groups and other financial institutions, and we expect to rely to a significant extent upon these relationships to provide us with potential investment opportunities. If our Adviser fails to maintain such relationships, or to develop new relationships with other sources of investment opportunities, we will not be able to grow our investment portfolio. In addition, individuals with whom our Adviser has relationships are not obligated to provide us with investment opportunities, and we can offer no assurance that these relationships will continue to generate investment opportunities for us in the future.
Our ability to achieve our investment objective depends on our ability to manage our business and to grow our investments and earnings. This depends, in turn, on our Adviser’s ability to identify, invest in and monitor portfolio companies that meet our investment guidelines. The achievement of our investment objective on a cost-effective basis depends upon our Adviser’s execution of our investment process, its ability to provide competent, attentive and efficient services to us and, to a lesser extent, our access to financing on acceptable terms. Our Adviser’s investment professionals have substantial responsibilities in connection with the management of other investment funds, accounts and investment vehicles. The personnel of our Adviser may be called upon to provide managerial assistance to our portfolio companies. These activities may distract them from servicing new investment opportunities for us or slow our rate of investment. Any failure to manage our business and our future growth effectively could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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There are significant potential conflicts of interest that could negatively affect our operations and investment returns. A number of these potential conflicts of interest with affiliates of our Adviser and BNY Mellon are discussed in more detail under Item 1. Business — Certain Relationships, including those relating to:
| • | advisory services, lending and loan syndication; |
| • | conflicting investment interests; |
| • | time commitments of professionals; |
| • | transactions with BNY Mellon and its affiliates; and |
| • | competing funds and allocation policies. |
There may be times when our Adviser, our Adviser’s affiliates including BNY Mellon, or its investment professionals have interests that differ from those of our stockholders, giving rise to conflicts of interest. The members of our Investment Committee and its investment professionals serve, or may serve, as officers, directors, members, or principals of entities that operate in the same or a related line of business as we do, or of investment funds, accounts, or investment vehicles managed by our Adviser. Similarly, our Adviser or its affiliates may have other clients with similar, different or competing investment objectives. In serving in these multiple capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the best interests of us or our stockholders. In addition, our Adviser may enter into fee-sharing arrangements with other entities that may include our affiliates or stockholders.
The 1940 Act imposes significant limits on our ability to co-invest with investment entities managed by our Adviser or its affiliates. On December 30, 2015, the SEC granted us relief sought in an exemptive application that expands our ability to co-invest in portfolio companies with other funds managed by the Adviser or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. Under the terms of the order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including, but not limited to, (1) the terms of the potential co-investment transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching with respect to us or our stockholders on the part of any person concerned and (2) the potential co-investment transaction is consistent with the interests of our stockholders and is consistent with our then-current objectives and strategies. We intend to co-invest, subject to the conditions included in the order.
In addition, we are an affiliate of BNY Mellon. While we may benefit from BNY Mellon’s relationships and activities, situations will arise in which the interests of BNY Mellon and its affiliates will conflict with our interests and the interests of our stockholders. Stockholders should note the matters discussed in “Item 1. Business — Certain Relationships.”
The investment professionals of our Adviser, including members of our Investment Committee, may serve as directors of, or in a similar capacity with, portfolio companies in which we invest, the securities of which are purchased or sold on our behalf. In the event that material nonpublic information is obtained with respect to such companies, or we become subject to trading restrictions under the internal trading policies of those companies or as a result of applicable law or regulations, we could be prohibited for a period of time from purchasing or selling the securities of such companies, and this prohibition may have an adverse effect on us.
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During economic recessions or downturns, we and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital in order to grow. Equity capital may be difficult to raise because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without first obtaining approval for such issuance from our stockholders and our independent directors. In addition, our ability to incur indebtedness (including by issuing preferred stock) is limited by applicable regulations such that our asset coverage, as calculated in accordance with the 1940 Act, must equal at least 200% immediately after each time we incur indebtedness. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we currently experience. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.
Moreover, economic recessions or downturns could make it difficult to extend the maturity of or refinance our existing indebtedness under similar terms and any failure to do so could have a material adverse effect on our business.
We monitor developments and seek to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that we will be successful in doing so.
In August 2011 and then affirmed in August 2013, Standard & Poor’s Rating Services lowered its long-term sovereign credit rating on the U.S. from “AAA” to “AA+”. Additionally, in January of 2012, Standard & Poor’s Rating Services lowered its long-term sovereign credit rating for several large European countries. These ratings negatively impacted global markets and economic conditions. Although U.S. lawmakers have taken steps to avoid further downgrades, U.S. budget deficit concerns and similar conditions in Europe, China and elsewhere have increased the possibility of additional credit-rating downgrades and worsening global economic and market conditions. There can be no assurance that current or future governmental measures to mitigate these conditions will be effective. These conditions, government actions and future developments may cause interest rates and borrowing costs to rise, which may adversely affect our ability to access debt financing on favorable terms and may increase the interest costs of our borrowers, hampering their ability to repay us. Continued or future adverse economic conditions could have a material adverse effect on our business, financial condition and results of operations.
In October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the economy and expand the Federal Reserve’s holdings of long-term securities, suggesting that key economic indicators, such as the unemployment rate, had showed signs of improvement since the inception of the program. It is possible that, without quantitative easing by the Federal Reserve, these developments, along with the United States government’s credit and deficit concerns and other global economic conditions, could cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms. Additionally, in December 2016, the Federal Reserve raised its federal funds target rate. However, if key economic indicators, such as the unemployment rate or inflation, do not progress at a rate consistent with the Federal Reserve’s objectives, the target range for the federal funds rate may further increase and cause interest rates and borrowing costs to rise, which may negatively impact our ability to access the debt markets on favorable terms and may also increase the costs of our borrowers, hampering their ability to repay us.
As a result of the 2016 U.S. election, the Republican Party currently controls both the executive and legislative branches of government, which increases the likelihood that legislation may be adopted that could significantly affect the regulation of U.S. financial markets. Areas subject to potential change, amendment or repeal include the Dodd-Frank Act and the authority of the Federal Reserve and the Financial Stability Oversight Council. The United States may also potentially withdraw from or renegotiate various trade agreements and take other actions that would change current trade policies of the United States. We cannot predict which, if any, of these actions will be taken or, if taken, their effect on the financial stability of the United States. Such actions could have a significant adverse effect on our business, financial condition and results of operations.
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The Trump Administration has called for substantial change to fiscal and tax policies, which may include comprehensive tax reform. According to publicly released statements, a top legislative priority of the Trump Administration and the next Congress may be significant reform of the Code, including significant changes to taxation of business entities and the deductibility of interest expense. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and we cannot predict the impact, if any, of these changes to our business. However, it is possible that these changes could adversely affect our business. If implemented, some policies adopted by the new administration may benefit us while others may negatively affect us. Until we know what changes are going to be enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes.
The recent decision made in the United Kingdom referendum to leave the European Union has led to volatility in global financial markets, and in particular in the markets of the United Kingdom and across Europe, and may also lead to weakening in consumer, corporate and financial confidence in the United Kingdom and Europe. The extent and process by which the United Kingdom will exit the European Union, and the longer term economic, legal, political and social framework to be put in place between the United Kingdom and the European Union are unclear at this stage and are likely to lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. In particular, the decision made in the United Kingdom referendum may lead to a call for similar referenda in other European jurisdictions which may cause increased economic volatility and uncertainty in the European and global markets. This volatility and uncertainty may have an adverse effect on the economy generally and on our ability of and the ability of our portfolio companies to execute our respective strategies and to receive attractive returns.
In particular, currency volatility may mean that our returns and the returns of our portfolio companies are adversely affected by market movements and may make it more difficult, or more expensive, for us to implement appropriate currency hedging. Potential decline in the value of the British Pound and/or the euro against other currencies, along with the potential downgrading of the United Kingdom’s sovereign credit rating, may also have an impact on the performance of any of our portfolio companies located in the United Kingdom or Europe.
General interest rate fluctuations and changes in credit spreads on floating rate loans may have a substantial negative impact on our investments and investment opportunities and, accordingly, may have a material adverse effect on our rate of return on invested capital, our net investment income, our net asset value and the market price of our securities. A substantial portion of our debt investments have variable interest rates that reset periodically based on benchmarks such as LIBOR and the prime rate, so an increase in interest rates from their historically low present levels may make it more difficult for our portfolio companies to service their obligations under the debt investments that we hold. To the extent that interest rates increase, this may negatively impact the operating performance of our portfolio companies due to increasing debt service obligations and, therefore, may affect our results of operations. In addition, to the extent that an increase in interest rates make it difficult or impossible to make payments on outstanding indebtedness to us or other financial sponsors or refinance debt that is maturing in the near term, some of our portfolio companies may be unable to repay such debt at maturity and may be forced to sell assets, undergo a recapitalization or seek bankruptcy protection. In addition, any such increase in interest rates would make it more expensive to use debt to finance our investments. Decreases in credit spreads on debt that pays a floating rate of return would have an impact on the income generation of our floating rate assets. Trading prices for debt that pays a fixed rate of return tend to fall as interest rates rise. Trading prices tend to fluctuate more for fixed rate securities that have longer maturities. Although we have no policy governing the maturities of our investments, under current market conditions we expect that we will invest in a portfolio of debt generally
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having maturities of up to seven years. This means that we will be subject to greater risk (other things being equal) than an entity investing solely in shorter-term securities.
Because we may borrow to fund our investments, a portion of our net investment income may be dependent upon the difference between the interest rate at which we borrow funds and the interest rate at which we invest these funds. Portions of our investment portfolio and our borrowings have floating rate components. As a result, a significant change in market interest rates could have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds could increase, which would reduce our net investment income. We may hedge against such interest rate fluctuations by using standard hedging instruments such as interest rate swap agreements, futures, options and forward contracts, subject to applicable legal requirements, including without limitation, all necessary registrations (or exemptions from registration) with the Commodity Futures Trading Commission or CFTC. These activities may limit our ability to participate in the benefits of lower interest rates with respect to the hedged borrowings. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
Our Adviser receives an incentive fee based, in part, upon net realized gains on our investments. Unlike that portion of the incentive fee based on income, there is no hurdle rate or preferred return applicable to the portion of the incentive fee based on net realized gains. Additionally, under the incentive fee structure, our Adviser may benefit when capital gains are recognized and, because our Adviser determines when to sell a holding, our Adviser controls the timing of the recognition of such capital gains. As a result, our adviser may have a tendency to invest more capital in investments that are likely to result in capital gains as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.
Our Adviser is entitled to incentive compensation for each fiscal quarter in an amount equal to a percentage of the excess of our investment income for that quarter (before deducting incentive compensation) above a threshold return for that quarter. Thus, we may be required to pay our Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. If we pay an incentive fee of 20.0% of our realized capital gains (net of all realized capital losses and unrealized capital depreciation on a cumulative basis) and thereafter experience additional realized capital losses or unrealized capital depreciation, we will not be able to recover any portion of the incentive fee previously paid.
We make many of our portfolio investments in the form of loans and securities that are not publicly traded and for which no market based price quotation is available. As a result, our board of directors determines the fair value of these loans and securities in good faith as described in “Determination of Net Asset Value.” In connection with that determination, investment professionals from our Adviser may provide our board of directors with valuations based upon the most recent portfolio company financial statements available and projected financial results of each portfolio company. While the valuation for at least a portion of our investment portfolio reviewed by an independent valuation firm quarterly, the ultimate determination of fair value will be made by our board of directors and not by such third party valuation firm. In addition, Mr. Echausse, who is an interested member of our board of directors, has a direct or indirect pecuniary interest in our Adviser. The participation of Mr. Echausse in our valuation process, and his pecuniary interest in our Adviser, could result in a conflict of interest as our Adviser’s base management fee is based, in part, on the value of our gross assets, and our Adviser’s incentive fees are based, in part, on realized gains and realized and unrealized losses.
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The Investment Advisory Agreement was negotiated between related parties. Consequently, its terms, including fees payable to our Adviser, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights and remedies under this agreement because of our desire to maintain our ongoing relationship with our Adviser. Any such decision, however, would breach our fiduciary obligations to our stockholders.
Our Adviser and some of its affiliates, including our officers and our interested directors, are not prohibited from raising money for, or managing, another investment entity that makes the same types of investments as those we target. As a result, the time and resources they could devote to us may be diverted. In addition, we may compete with any such investment entity for the same investors and investment opportunities.
Our Adviser manages private investment funds, accounts and other investment vehicles and may manage other funds, accounts and investment vehicles in the future. If our Adviser is paid a higher performance-based fee from any other fund that it may manage in the future, it may have an incentive to devote more research and development or other activities, and/or recommend the allocation of investment opportunities, to such higher fee-paying fund. For example, to the extent our Adviser’s incentive compensation is not subject to a hurdle or total return requirement with respect to another fund, it may have an incentive to devote time and resources to such other fund. As a result, the investment professionals of our Adviser may devote time and resources to a higher fee-paying fund.
Under the Investment Advisory Agreement, our Adviser has not assumed any responsibility to us other than to render the services called for under that agreement. It will not be responsible for any action of our board of directors in following or declining to follow our Adviser’s advice or recommendations. Under the Investment Advisory Agreement, our Adviser, its officers, members and personnel, and any person controlling or controlled by our Adviser will not be liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or omissions performed in accordance with and pursuant to the Investment Advisory Agreement, except those resulting from acts constituting gross negligence, willful misconduct, bad faith or reckless disregard of the duties that our Adviser owes to us under the Investment Advisory Agreement. In addition, as part of the Investment Advisory Agreement, we have agreed to indemnify our Adviser and each of its officers, directors, members, managers and employees from and against any claims or liabilities, including reasonable legal fees and other expenses reasonably incurred, arising out of or in connection with our business and operations or any action taken or omitted on our behalf pursuant to authority granted by the Investment Advisory Agreement, except where attributable to gross negligence, willful misconduct, bad faith or reckless disregard of such person’s duties under the Investment Advisory Agreement. These protections may lead our Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
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A number of entities compete with us to make the types of investments that we plan to make. We compete with public and private funds, other BDCs, commercial and investment banks, commercial financing companies and, to the extent they provide an alternative form of financing, private equity and hedge funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, we believe some of our competitors may have access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC or the source-of-income, asset diversification and distribution requirements we must satisfy to maintain our RIC qualification. The competitive pressures we face may have a material adverse effect on our business, financial condition, results of operations and cash flows. As a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objective.
With respect to the investments we make, we do not seek to compete based primarily on the interest rates we offer, and we believe that some of our competitors may make loans with interest rates that will be lower than the rates we offer. With respect to all investments, we may lose some investment opportunities if we do not match our competitors’ pricing, terms and structure. However, if we match our competitors’ pricing, terms and structure, we may experience decreased net interest income, lower yields and increased risk of credit loss.
BNY Mellon is a bank holding company, or a “BHC” under the Bank Holding Company Act of 1956, as amended, or the “BHCA.” BNY Mellon is also a financial holding company, or “FHC,” under the BHCA, which is a status available to BHCs that meet certain criteria.
FHCs may engage in a broader range of activities than BHCs that are not FHCs. However, the activities of FHCs and their affiliates remain subject to certain restrictions imposed by the BHCA and related regulations. Because BNY Mellon may be deemed to “control” us within the meaning of the BHCA, these restrictions could apply to us as well. Accordingly, the BHCA and other applicable banking laws, rules, regulations and guidelines, and their interpretation and administration by the appropriate regulatory agencies, including but not limited to the Federal Reserve, may restrict the transactions and relationships between our Adviser, BNY Mellon and their affiliates, on the one hand, and us on the other hand, and may restrict our investments, transactions and operations. For example, the BHCA regulations applicable to BNY Mellon and us may, among other things, restrict our ability to make certain investments or the size of certain investments, impose a maximum holding period on some or all of our investments, and restrict our Adviser’s ability to participate in the management and operations of the companies in which we invest. In addition, certain BHCA regulations may require aggregation of the positions owned, held or controlled by related entities. Thus, in certain circumstances, positions held by BNY Mellon and its affiliates (including our Adviser) for client and proprietary accounts may need to be aggregated with positions held by us. In this case, where BHCA regulations impose a cap on the amount of a position that may be held, BNY Mellon may utilize available capacity to make investments for its proprietary accounts or for the accounts of other clients, which may require us to limit and/or liquidate certain investments.
These restrictions may materially adversely affect us by, among other things, affecting our Adviser’s ability to pursue certain strategies within our investment program or trade in certain securities. In addition, BNY Mellon may cease in the future to qualify as an FHC, which may subject us to additional restrictions. Moreover, there can be no assurance that the bank regulatory requirements applicable to BNY Mellon and us will not change, or that any such change will not have a material adverse effect on us.
BNY Mellon may in the future, in its sole discretion and without notice to investors, engage in activities impacting us and/or our Adviser in order to comply with the BHCA or other legal requirements applicable to, or reduce or eliminate the impact or applicability of any bank regulatory or other restrictions on, BNY Mellon, us or other funds and accounts managed by our Adviser and its affiliates. BNY Mellon may seek to
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accomplish this result by causing Alcentra NY, LLC to resign as our Adviser, voting for changes to our board of directors, causing BNY Mellon personnel to resign from our board of directors, reducing the amount of BNY Mellon’s investment in us (if any), or any combination of the foregoing, or by such other means as it determines in its sole discretion. Any replacement investment adviser appointed by us may be unaffiliated with BNY Mellon.
To obtain and maintain our qualification as a RIC under Subchapter M of the Code, we must meet certain source-of-income, asset diversification and distribution requirements. The distribution requirement for a RIC is satisfied if we distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Because we incur debt, we will be subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants under loan and credit agreements that could, under certain circumstances, restrict us from making distributions necessary to qualify as a RIC. If we are unable to obtain the necessary distributions, we may fail to qualify as a RIC and, thus, may be subject to corporate-level U.S. federal income tax. To qualify as a RIC, we must also meet certain asset diversification requirements at the end of each calendar quarter. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of our qualification as a RIC. Because most of our investments will be in private or thinly-traded public companies, any such dispositions may be made at disadvantageous prices and may result in substantial losses. See “Item 1. Business — Taxation as a Regulated Investment Company.”
No certainty can be provided that we will satisfy the asset diversification requirements or the other requirements necessary to qualify as a RIC. If we fail to qualify as a RIC for any reason and become subject to corporate-level U.S. federal income tax, the resulting corporate-level U.S. federal income taxes could substantially reduce our net assets, the amount of income available for distributions to our stockholders and the amount of funds available for new investments. Furthermore, if we fail to qualify as a RIC, we may be in default under the terms of the Credit Facility. Such a failure would have a material adverse effect on us and our stockholders. See “Item 1.A. Risk Factors — Risks Relating to our Business and Structure — We may default under the Credit Facility or any future borrowing facility we enter into or be unable to amend, repay or refinance any such facility on commercially reasonable terms, or at all, which could have a material adverse effect on our business, financial condition, results of operations and cash flows” and “Item 1. Business — Taxation as a Regulated Investment Company.”
We may need additional capital to fund new investments and grow our portfolio of investments. We intend to access the capital markets periodically to issue debt or equity securities or borrow from financial institutions in order to obtain such additional capital. Unfavorable economic conditions could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. A reduction in the availability of new capital could limit our ability to grow. In addition, we will be required to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders to maintain our qualification as a RIC. As a result, these earnings will not be available to fund new investments. An inability on our part to access the capital markets successfully could limit our ability to grow our business and execute our business strategy fully and could decrease our earnings, if any, which would have an adverse effect on the value of our securities.
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For U.S. federal income tax purposes, we will include in income certain amounts that we have not yet received in cash, such as the accrual of original issue discount, or OID. This may arise if we receive warrants in connection with the making of a loan and in other circumstances, or through contractual PIK interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such OID, which could be significant relative to our overall investment activities, and increases in loan balances as a result of contracted PIK arrangements will be included in income before we receive any corresponding cash payments. We also may be required to include in income certain other amounts that we will not receive in cash.
Since in certain cases we may recognize income for U.S. federal income tax purposes before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our net ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to maintain our qualification as a RIC. In such a case, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain such cash from other sources, we may fail to qualify as a RIC and thus be subject to corporate-level U.S. federal income tax. See “Item 1. Business — Certain U.S. Federal Income Tax Considerations — Taxation as a RIC.”
Certain of our debt investments contain provisions providing for the payment of PIK interest. Because PIK interest results in an increase in the size of the loan balance of the underlying loan, the receipt by us of PIK interest has the effect of increasing our assets under management. As a result, because the base management fee that we pay to our Adviser is based on the value of our gross assets, the receipt by us of PIK interest results in an increase in the amount of the base management fee payable by us. In addition, any such increase in a loan balance due to the receipt of PIK interest causes such loan to accrue interest on the higher loan balance, which will result in an increase in our pre-incentive fee net investment income and, as a result, an increase in incentive fees that are payable by us to our Adviser.
Our investments may include OID instruments and contractual PIK interest. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:
| • | OID instruments may have higher yields, which reflect the payment deferral and credit risk associated with these instruments; |
| • | Because we may be required to distribute amounts attributable to OID accruals, such OID accruals may create uncertainty about the source of our distributions to stockholders; |
| • | OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of the collateral; |
| • | PIK interest typically has the effect of increasing the outstanding principal amount of a loan, resulting in a borrower owing more at the end of the term of the loan than what it owed when the loan was originated; and |
| • | OID and PIK instruments may represent a higher credit risk than coupon loans. |
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We have incurred indebtedness under our Credit Facility and through the issuance of the Alcentra Capital InterNotes®, which we refer to as the Notes. We may in the future issue additional debt securities or preferred stock and/or borrow additional money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted as a BDC to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 200% of our gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments at a time when such sales may be disadvantageous to us in order to repay a portion of our indebtedness. If we issue senior securities, we will be exposed to typical risks associated with leverage, including an increased risk of loss.
As a BDC under the 1940 Act, we are generally not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). If legislation proposed in the U.S. House of Representatives is passed, it would modify this section of the 1940 Act and increase the amount of debt that BDCs may incur by modifying the percentage from 200% to 150%. If such legislation is eventually passed, we may be able to incur additional indebtedness in the future and therefore your risk of an investment in our securities may increase.
Borrowings, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. The use of leverage is generally considered a speculative investment technique and increases the risks associated with investing in our securities. However, we borrow from, and may in the future issue debt securities to, banks, insurance companies and other lenders. Lenders of these funds will have fixed dollar claims on our assets that may be superior to the claims of our securities holders, and we would expect such lenders to seek recovery against our assets in the event of a default. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instruments we may enter into with lenders.
In addition, under the terms of the Credit Facility and any borrowing facility or other debt instruments we may enter into, we are likely to be required to use the net proceeds of any investments that we sell to repay a portion of the amount borrowed under such facility or instruments before applying such net proceeds to any other uses. If the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged, thereby magnifying losses or eliminating our stake in a leveraged investment. Similarly, any decrease in our revenue or income will cause our net income to decline more sharply than it would have had we not borrowed.
Our ability to service any debt will depend largely on our financial performance and will be subject to prevailing economic conditions and competitive pressures. Moreover, as the base management fee payable to our Adviser will be payable based on the value of our gross assets, including those assets acquired through the use of leverage, our Adviser will have a financial incentive to incur leverage, which may not be consistent with our stockholders’ interests. In addition, our common stockholders will bear the burden of any increase in our expenses as a result of our use of leverage, including interest expenses and any increase in the base management fee payable to our Adviser.
Our Credit Facility and any future indebtedness may impose financial and operating covenants that restrict our business activities, including limitations that hinder our ability to finance additional loans and investments or to make the distributions required to maintain our qualification as a RIC under the Code.
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As a BDC, we generally are required to meet a coverage ratio of total assets to total borrowings and other senior securities, which include all of our borrowings and any preferred stock that we may issue in the future, of at least 200%. If this ratio declines below 200%, we will not be able to incur additional debt and could be required to sell a portion of our investments to repay some debt when it is otherwise disadvantageous for us to do so. This could have a material adverse effect on our operations, and we may not be able to make distributions. The amount of leverage that we employ will depend on our Adviser’s and our board of directors’ assessment of market and other factors at the time of any proposed borrowing. We cannot assure you that we will be able to obtain credit at all or on terms acceptable to us.
In the event we default under the Credit Facility or any other future borrowing facility, our business could be adversely affected as we may be forced to sell a portion of our investments quickly and prematurely at what may be disadvantageous prices to us in order to meet our outstanding payment obligations and/or support working capital requirements under the Credit Facility or such future borrowing facility, any of which would have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, following any such default, the agent for the lenders under the Credit Facility or such future borrowing facility could assume control of the disposition of any or all of our assets, including the selection of such assets to be disposed and the timing of such disposition, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because we borrow money to make investments, our net investment income will depend, in part, upon the difference between the rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates would not have a material adverse effect on our net investment income in the event we use debt to finance our investments. In periods of rising interest rates, our cost of funds would increase, which could reduce our net investment income. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate fluctuations. Such techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. There is no limit on our ability to enter derivative transactions.
In addition, a rise in the general level of interest rates typically leads to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates may result in an increase of the amount of our pre-incentive fee net investment income and, as a result, an increase in incentive fees payable to our Adviser.
The Credit Facility is, and any future borrowing facility may be, backed by all or a portion of our loans and securities on which the lenders will or, in the case of a future facility, may have a security interest. We may pledge up to 100% of our assets and may grant a security interest in all of our assets under the terms of any debt instrument we enter into with lenders. We expect that any security interests we grant will be set forth in a guarantee pledge and security agreement and evidenced by the filing of financing statements by the agent for the lenders. In addition, we expect that the custodian for our securities serving as collateral for such loan would include in its electronic systems notices indicating the existence of such security interests and, enter into a control agreement that provides that following notice of occurrence of an event of default, if any, and during its continuance, the custodian will only accept transfer instructions with respect to any such securities from the lender or its designee. If we were to default under the terms of any debt instrument, the agent for the applicable lenders would be able to assume control of the timing of disposition of any or all of our assets securing such debt, which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, any security interests granted by us as well as negative covenants under the Credit Facility or any other borrowing facility may provide may limit our ability to create liens on assets to secure additional
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debt and may make it difficult for us to restructure or refinance indebtedness at or prior to maturity or obtain additional debt or equity financing. For example, under the terms of the Credit Facility, we have agreed not to incur any additional secured indebtedness other than in certain limited circumstances as permitted under the Credit Facility. In addition, if our borrowing base under the Credit Facility or any other borrowing facility were to decrease, we would be required to secure additional assets in an amount equal to any borrowing base deficiency. In the event that all of our assets are secured at the time of such a borrowing base deficiency, we could be required to repay advances under the Credit Facility or any other borrowing facility, which could have a material adverse impact on our ability to fund future investments and to make stockholder distributions.
In addition, under the Credit Facility we are subject to limitations as to how borrowed funds may be used, which include restrictions on geographic and industry concentrations, loan size, payment frequency and status, average life, collateral interests and investment ratings, as well as regulatory restrictions on leverage which may affect the amount of funding that may be obtained. There may also be certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, a violation of which could limit further advances and, in some cases, result in an event of default. An event of default under the Credit Facility or any other borrowing facility could result in an accelerated maturity date for all amounts outstanding thereunder, which could have a material adverse effect on our business and financial condition. This could reduce our revenues and, by delaying any cash payment allowed to us under the Credit Facility or any other borrowing facility until the lenders have been paid in full, reduce our liquidity and cash flow and impair our ability to grow our business and maintain our qualification as a RIC.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. See “Item 1. Business — Regulation — Qualifying Assets.”
We may be precluded from investing in what we believe to be attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could violate the 1940 Act provisions applicable to BDCs. As a result of such violation, specific rules under the 1940 Act could prevent us, for example, from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. If we need to dispose of such investments quickly, it could be difficult to dispose of such investments on favorable terms. We may not be able to find a buyer for such investments and, even if we do find a buyer, we may have to sell the investments at a substantial loss. Any such outcomes would have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we do not maintain our status as a BDC, we would be subject to regulation as a registered closed-end investment company under the 1940 Act. As a registered closed-end investment company, we would be subject to substantially more regulatory restrictions under the 1940 Act which would significantly decrease our operating flexibility.
Given the structure of the Investment Advisory Agreement with our Adviser, any general increase in interest rates will likely have the effect of making it easier for our Adviser to meet the quarterly hurdle rate for payment of income incentive fees under the Investment Advisory Agreement without any additional increase in relative performance on the part of our Adviser. In addition, in view of the catch-up provision applicable to income incentive fees under the Investment Advisory Agreement, our Adviser could potentially receive a significant portion of the increase in our investment income attributable to such a general increase in interest rates. If that were to occur, our increase in net earnings, if any, would likely be significantly smaller than the relative increase in our Adviser’s income incentive fee resulting from such a general increase in interest rates.
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Most of our portfolio investments take the form of securities that are not publicly traded. The fair value of loans, securities and other investments that are not publicly traded may not be readily determinable, and we value these investments at fair value as determined in good faith by our board of directors, including to reflect significant events affecting the value of our investments. Most, if not all, of our investments (other than cash and cash equivalents) are classified as Level 3 under Accounting Standards Codification Topic 820,Fair Value Measurements and Disclosure,or ASC Topic 820. This means that our portfolio valuations are based on unobservable inputs and our own assumptions about how market participants would price the asset or liability in question. Inputs into the determination of fair value of our portfolio investments require significant management judgment or estimation. Even if observable market data are available, such information may be the result of consensus pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimers materially reduces the reliability of such information. We have retained the services of an independent service provider to review the valuation of these loans and securities. The types of factors that the board of directors may take into account in determining the fair value of our investments generally include, as appropriate, comparison to publicly traded securities including such factors as yield, maturity and measures of credit quality, the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for these loans and securities existed. Our net asset value could be adversely affected if our determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such loans and securities.
We will adjust quarterly the valuation of our portfolio to reflect our board of directors’ determination of the fair value of each investment in our portfolio. Any changes in fair value are recorded in our statement of operations as net change in unrealized appreciation or depreciation.
As a BDC, we are prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without, among other things, the prior approval of a majority of our independent directors who, have no financial interest in the transaction, or in some cases, the prior approval of the SEC. For example, any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is deemed our affiliate for purposes of the 1940 Act and, if this is the only reason such person is our affiliate, we are generally prohibited from buying any asset from or selling any asset (other than our capital stock) to such affiliate, absent the prior approval of such directors. The 1940 Act also prohibits “joint” transactions with an affiliate, which could include joint investments in the same portfolio company, without approval of our independent directors or, in some cases, the prior approval of the SEC. Moreover, except in certain limited circumstances, we are prohibited from buying any asset from or selling any asset to a holder of more than 25% of our voting securities, absent prior approval of the SEC. The analysis of whether a particular transaction constitutes a joint transaction requires a review of the relevant facts and circumstances then existing.
On December 30, 2015, the SEC granted us relief sought in an exemptive application that expands our ability to co-invest in portfolio companies with other funds managed by the Adviser or its affiliates in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions. We intend to co-invest with certain of our affiliates, subject to the conditions included in the order. See, “Regulation — Other.”
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We could experience fluctuations in our quarterly operating results due to a number of factors, including the interest rate payable on the loans and debt securities we acquire, the default rate on such loans and securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. In light of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
We are and we will remain an “emerging growth company” as defined in the JOBS Act until the earlier of (a) the last day of the fiscal year (i) following the fifth anniversary of the completion of our IPO, (ii) in which we have total annual gross revenue of at least $1.0 billion, or (iii) in which we are deemed to be a large accelerated filer, which means the market value of our common stock that is held by non-affiliates exceeds $700 million as of the prior June 30th, and (b) the date on which we have issued more than $1.0 billion in non-convertible debt during the prior three-year period. For so long as we remain an “emerging growth company” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We cannot predict if investors will find our securities less attractive because we will rely on some or all of these exemptions. If some investors find our securities less attractive as a result, there may be a less active trading market for our securities and the price of our securities may be more volatile.
Because of the exemptions from various reporting requirements provided to us as an “emerging growth company,” we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.
We are required to disclose changes made in our internal control and procedures on a quarterly basis and our management is required to assess the effectiveness of these controls annually. However, for as long as we are an “emerging growth company” under the JOBS Act, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to
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Section 404. We could be an emerging growth company for up to five years. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to financial statement restatements and require us to incur the expense of remediation.
Our board of directors has the authority, except as otherwise provided in the 1940 Act, to modify or waive certain of our operating policies and strategies without prior notice and without stockholder approval. However, absent stockholder approval, we may not change the nature of our business so as to cease to be, or withdraw our election as, a BDC. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, operating results and the market price of our securities. Nevertheless, any such changes could adversely affect our business and impair our ability to make principal and interest payments on the Notes.
Our Adviser has the right under the Investment Advisory Agreement to resign as our investment adviser at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If our Adviser was to resign, we may not be able to find a new investment adviser or hire internal management with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our financial condition, business and results of operations as well as our ability to pay distributions to our stockholders are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by our Adviser. Even if we are able to retain comparable management, whether internal or external, the integration of such management and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition, results of operations and cash flows.
Our business is highly dependent on the communications and information systems of our Adviser. In addition, certain of these systems are provided to our Adviser by third party service providers. Any failure or interruption of such systems, including as a result of the termination of an agreement with any such third party service provider, could cause delays or other problems in our activities. This, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our securities and our ability to make distributions to our stockholders.
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Investing in lower middle-market companies involves a number of significant risks, including:
| • | these companies may have limited financial resources and may be unable to meet their obligations under their debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of us realizing any guarantees we may have obtained in connection with our investment; |
| • | they typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns; |
| • | they are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on our portfolio company and, in turn, on us; |
| • | they generally have less predictable operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position; |
| • | they may have difficulty accessing the capital markets to meet future capital needs, which may limit their ability to grow or to repay their outstanding indebtedness upon maturity; and |
| • | a portion of our income may be non-cash income, such as contractual PIK interest, which represents interest added to the loan balance and due at the end of the loan term. Instruments bearing PIK interest typically carry higher interest rates as a result of their payment deferral and increased credit risk. When we recognize income in connection with PIK interest, there is a risk that such income may become uncollectable if the borrower defaults. |
In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities.
For example, 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.
Our portfolio consists primarily of debt and equity investments in lower middle-market companies. Investing in lower middle-market companies involves a number of significant risks. Typically, the debt in which we invest is not initially rated by any rating agency; however, we believe that if such investments were rated, they would be below investment grade. Compared to larger publicly owned companies, these lower middle-market companies may be in a weaker financial position and experience wider variations in their operating results, which may make them more vulnerable to economic downturns and other business disruptions. Typically, these companies need more capital to compete; however, their access to capital is limited and their cost of capital is often higher than that of their competitors. Our portfolio companies face intense competition from larger companies with greater financial, technical and marketing resources and their success typically depends on the managerial talents and efforts of an individual or a small group of persons.
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Therefore, the loss of any of their key employees could affect a portfolio company’s ability to compete effectively and harm its financial condition. Further, some of these companies conduct business in regulated industries that are susceptible to regulatory changes. These factors could impair the cash flow of our portfolio companies and result in other events, such as bankruptcy. These events could limit a portfolio company’s ability to repay its obligations to us, which may have an adverse effect on the return on, or the recovery of, our investment in these businesses. Deterioration in a borrower’s financial condition and prospects may be accompanied by deterioration in the value of the loan’s collateral and the fair market value of the loan.
Some of these companies cannot obtain financing from public capital markets or from traditional credit sources, such as commercial banks. Accordingly, loans made to these types of companies pose a higher default risk than loans made to companies that have access to traditional credit sources.
Portfolio companies are likely to be susceptible to economic slowdowns or recessions and may be unable to repay our loans during such periods. Therefore, the portion of our investment portfolio composed of non-performing assets are likely to increase and the value of our portfolio is likely to decrease during such periods. Adverse economic conditions may decrease the value of collateral securing some of our loans and debt securities and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing our investments and harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets, which could trigger cross-defaults under other agreements and jeopardize our portfolio company’s ability to meet its obligations under the loans and debt securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting portfolio company. In addition, lenders in certain cases can be subject to lender liability claims for actions taken by them when they become too involved in the borrower’s business or exercise control over a borrower. It is possible that we could become subject to a lender’s liability claim, including as a result of actions taken if we render significant managerial assistance to the borrower. Furthermore, if one of our portfolio companies were to file for bankruptcy protection, a bankruptcy court might re-characterize our debt holding and subordinate all or a portion of our claim to claims of other creditors, even though we may have structured our investment as senior secured debt. The likelihood of such a re-characterization would depend on the facts and circumstances, including the extent to which we provided managerial assistance to that portfolio company.
Investment in leveraged companies involves a number of significant risks. Leveraged companies in which we invest may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold. Such developments may be accompanied by deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees that we may have obtained in connection with our investment. Smaller leveraged companies also may have less predictable operating results and may require substantial additional capital to support their operations, finance their expansion or maintain their competitive position.
Leveraged companies may experience bankruptcy or similar financial distress. The bankruptcy process has a number of significant inherent risks. Many events in a bankruptcy proceeding are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy filing by a portfolio company may adversely and permanently affect that company. If the proceeding is converted to a liquidation, the value of the portfolio company may not equal the liquidation value that was believed to
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exist at the time of the investment. The duration of a bankruptcy proceeding is also difficult to predict, and a creditor’s return on investment can be adversely affected by delays until the plan of reorganization or liquidation ultimately becomes effective. The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Because the standards for classification of claims under bankruptcy law are vague, our influence with respect to the class of securities or other obligations we own may be lost by increases in the number and amount of claims in the same class or by different classification and treatment. In the early stages of the bankruptcy process, it is often difficult to estimate the extent of, or even to identify, any contingent claims that might be made. In addition, certain claims that have priority by law (for example, claims for taxes) may be substantial.
Investment in private and middle-market companies involves a number of significant risks. Generally, little public information exists about these companies, and we will rely on the ability of our Adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments. Middle-market companies may have limited financial resources and may be unable to meet their obligations under their loans and debt securities that we hold, which may be accompanied by a deterioration in the value of any collateral and a reduction in the likelihood of our realizing any guarantees we may have obtained in connection with our investment. In addition, such companies typically have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions, as well as general economic downturns. Additionally, middle-market companies are more likely to depend on the management talents and efforts of a small group of persons. Therefore, the death, disability, resignation or termination of one or more of these persons could have a material adverse impact on one or more of the portfolio companies we invest in and, in turn, on us. Middle-market companies also may be parties to litigation and may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence. In addition, our executive officers, directors and Adviser may, in the ordinary course of business, be named as defendants in litigation arising from our investments in portfolio companies.
All of our assets may be invested in illiquid loans and securities, and a substantial portion of our investments in leveraged companies will be subject to legal and other restrictions on resale or will otherwise be less liquid than more broadly traded public securities. The illiquidity of these investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. Also, as noted above, we may be limited or prohibited in our ability to sell or otherwise exit certain positions in our initial portfolio as such a transaction could be considered a joint transaction prohibited by the 1940 Act.
As a BDC, we are required to carry our investments at fair value or, if no market value is ascertainable, at fair value as determined in good faith by our board of directors. As part of the valuation process, we may take into account the following types of factors, if relevant, in determining the fair value of our investments:
| • | available current market data, including relevant and applicable market trading and transaction comparables; |
| • | applicable market yields and multiples; |
| • | security covenants; |
| • | call protection provisions; |
| • | information rights; |
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| • | the nature and realizable value of any collateral; |
| • | the portfolio company’s ability to make payments, its earnings and discounted cash flows and the markets in which it does business; |
| • | comparisons of financial ratios of peer companies that are public; |
| • | comparable merger and acquisition transactions; and |
| • | the principal market and enterprise values. |
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, we use the pricing indicated by the external event to corroborate our valuation. We record decreases in the market values or fair values of our investments as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets may result in significant net unrealized depreciation in our portfolio. The effect of all of these factors on our portfolio may reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are classified as a non-diversified investment company within the meaning of the 1940 Act, which means that we are not limited by the 1940 Act with respect to the proportion of our assets that we may invest in securities of a single issuer. Beyond the asset diversification requirements associated with our qualification as a RIC under the Code, we do not have fixed guidelines for diversification. To the extent that we assume large positions in the securities of a small number of issuers or our investments are concentrated in relatively few industries, our net asset value may fluctuate to a greater extent than that of a diversified investment company as a result of changes in the financial condition or the market’s assessment of the issuer. We may also be more susceptible to any single economic or regulatory occurrence than a diversified investment company.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in seeking to:
| • | increase or maintain in whole or in part our position as a creditor or equity ownership percentage in a portfolio company; |
| • | exercise warrants, options or convertible securities that were acquired in the original or subsequent financing; or |
| • | preserve or enhance the value of our investment. |
We have discretion to make follow-on investments, subject to the availability of capital resources. Failure on our part to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our level of risk, because we prefer other opportunities or because we are inhibited by compliance with BDC requirements of the 1940 Act or the desire to maintain our qualification as a RIC.
We do not generally hold controlling equity positions in the majority of the portfolio companies included in our portfolio. In addition, we expect to not hold controlling equity positions in portfolio companies in which we will make future investments. As a result, we are subject to the risk that a portfolio company may
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make business decisions with which we disagree, and that the management and/or stockholders of a portfolio company may take risks or otherwise act in ways that are adverse to our interests. Due to the lack of liquidity of the debt and equity investments that we expect to hold in our portfolio companies, we may not be able to dispose of our investments in the event we disagree with the actions of a portfolio company and may therefore suffer a decrease in the value of our investments.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its assets. This could trigger cross-defaults under other agreements and jeopardize such portfolio company’s ability to meet its obligations under the loans or debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company.
We are subject to the risk that the debt investments we make in our portfolio companies may be repaid prior to maturity. We expect that our investments will generally allow for repayment at any time subject to certain penalties. When this occurs, we intend to generally reinvest these proceeds in temporary investments, pending their future investment in accordance with our investment strategy. These temporary investments will typically have substantially lower yields than the debt being prepaid, and we could experience significant delays in reinvesting these amounts. Any future investment may also be at lower yields than the debt that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elects to prepay amounts owed to us. Additionally, prepayments could negatively impact our ability to make, or the amount of, principal and interest payments on the Notes, which could result in a decline in the market price of our securities.
We invest a in second lien and subordinated loans issued by our portfolio companies. The portfolio companies usually have, or may be permitted to incur, other debt that ranks equally with, or senior to, the loans in which we invest. By their terms, such debt instruments may provide that the holders are entitled to receive payment of interest or principal on or before the dates on which we are entitled to receive payments in respect of the loans in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to our investment in that portfolio company would typically be entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying senior creditors, a portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with loans in which we invest, we would have to share any distributions on an equal and ratable basis with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
Additionally, certain loans that we may make to portfolio companies may be secured on a second priority basis by the same collateral securing senior secured debt of such companies. The first priority liens on the collateral will secure the portfolio company’s obligations under any outstanding senior debt and may secure certain other future debt that may be permitted to be incurred by the portfolio company under the agreements governing the loans. The holders of obligations secured by first priority liens on the collateral will generally control the liquidation of, and be entitled to receive proceeds from, any realization of the collateral to repay their obligations in full before us. In addition, the value of the collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of all of the collateral would be sufficient to satisfy the loan obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If such proceeds were not sufficient to repay amounts outstanding under the
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loan obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the collateral, will only have an unsecured claim against the portfolio company’s remaining assets, if any.
We may also make unsecured loans to portfolio companies, meaning that such loans will not benefit from any interest in collateral of such companies. Liens on such portfolio companies’ collateral, if any, will secure the portfolio company’s obligations under its outstanding secured debt and may secure certain future debt that is permitted to be incurred by the portfolio company under its secured loan agreements. The holders of obligations secured by such liens will generally control the liquidation of, and be entitled to receive proceeds from, any realization of such collateral to repay their obligations in full before us. In addition, the value of such collateral in the event of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from sales of such collateral would be sufficient to satisfy our unsecured loan obligations after payment in full of all secured loan obligations. If such proceeds were not sufficient to repay the outstanding secured loan obligations, then our unsecured claims would rank equally with the unpaid portion of such secured creditors’ claims against the portfolio company’s remaining assets, if any.
The rights we may have with respect to the collateral securing the loans we make to our portfolio companies with senior debt outstanding may also be limited pursuant to the terms of one or more intercreditor agreements that we enter into with the holders of such senior debt. Under a typical intercreditor agreement, at any time that obligations that have the benefit of the first priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority liens:
| • | the ability to cause the commencement of enforcement proceedings against the collateral; |
| • | the ability to control the conduct of such proceedings; |
| • | the approval of amendments to collateral documents; |
| • | releases of liens on the collateral; and |
| • | waivers of past defaults under collateral documents. |
We may not have the ability to control or direct such actions, even if our rights are adversely affected.
We may make subordinated investments that rank below other obligations of the obligor in right of payment. Subordinated investments are subject to greater risk of default than senior obligations as a result of adverse changes in the financial condition of the obligor or economic conditions in general. If we make a subordinated investment in a portfolio company, the portfolio company may be highly leveraged, and its relatively high debt-to-equity ratio may create increased risks that its operations might not generate sufficient cash flow to service all of its debt obligations.
We currently expect that substantially all of our investments will continue to involve loans and private securities. In connection with the disposition of an investment in loans and private securities, we may be required to make representations about the business and financial affairs of the portfolio company typical of those made in connection with the sale of a business. We may also be required to indemnify the purchasers of such investment to the extent that any such representations turn out to be inaccurate or with respect to potential liabilities. These arrangements may result in contingent liabilities that ultimately result in funding obligations that we must satisfy through our return of distributions previously made to us.
When we invest in loans and debt securities, we may acquire warrants or other equity securities of portfolio companies as well. We may also invest in equity securities directly. To the extent we hold equity investments, we will attempt to dispose of them and realize gains upon our disposition of them. However, the
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equity interests we receive may not appreciate in value and may decline in value. As a result, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
Our investment strategy contemplates potential investments in securities of non-U.S. companies to the extent permissible under the 1940 Act. See “Item 1. Business — Regulation — Qualifying Assets” for a discussion of our ability, as a BDC, to invest in securities of non-U.S. companies. Investing in non-U.S. companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of non-U.S. taxes (potentially at confiscatory levels), less liquid markets, less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility.
Our investments that are denominated in a non-U.S. currency will be subject to the risk that the value of a particular currency will change in relation to the U.S. dollar. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation and political developments.
If we engage in hedging transactions we may expose ourselves to risks associated with such transactions. Such hedging may utilize instruments such as forward contract currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Use of these hedging instruments may include counter-party credit risk.
Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the underlying portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.
The success of any hedging transactions we may enter into will depend on our ability to correctly predict movements in currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to (or be able to) establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies because the value of those securities is likely to fluctuate as a result of factors not related to currency fluctuations.
There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on
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the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions. Energy companies could also be affected by the potential for lawsuits against or taxes or other regulatory costs imposed on greenhouse gas emitters, based on links drawn between greenhouse gas emissions and climate change.
We and our portfolio companies are subject to regulation by laws and regulations at the local, state, federal and, in some cases, foreign levels. These laws and regulations, as well as their interpretation, may be changed from time to time, and new laws and regulations may be enacted. Accordingly, any change in these laws or regulations, changes in their interpretation, or newly enacted laws or regulations and any failure by us or our portfolio companies to comply with these laws or regulations, could require changes to certain business practices of us or our portfolio companies, negatively impact the operations, cash flows or financial condition of us or our portfolio companies, impose additional costs on us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies.
Additionally, changes to the laws and regulations governing our operations related to permitted investments may cause us to alter our investment strategy in order to avail ourselves of new or different opportunities. Such changes could result in material differences to the strategies and plans set forth in this annual report on Form 10-K and may shift our investment focus from the areas of expertise of our Adviser to other types of investments in which our Adviser may have little or no expertise or experience. Any such changes, if they occur, could have a material adverse effect on our results of operations and the value of your investment.
One of our key industry sectors for investment is healthcare and pharmaceutical services. Our investments in portfolio companies that operate in this sector are subject to certain significant risks particular to that industry. The laws and rules governing the business of healthcare companies and interpretations of those laws and rules are subject to frequent change. Broad latitude is given to the agencies administering those regulations. Existing or future laws and rules could force our portfolio companies engaged in healthcare to change how they do business, restrict revenue, increase costs, change reserve levels and change business practices. Healthcare companies often must obtain and maintain regulatory approvals to market many of their products, change prices for certain regulated products and consummate some of their acquisitions and divestitures. Delays in obtaining or failing to obtain or maintain these approvals could reduce revenue or increase costs. Policy changes on the local, state and federal level, such as the expansion of the government’s role in the healthcare arena and alternative assessments and tax increases specific to the healthcare industry or healthcare products as part of federal health care reform initiatives, could fundamentally change the dynamics of the healthcare industry. In particular, health insurance reform, including The Patient Protection and Affordable Care Act and The Health Care and Education Reconciliation Act of 2010, or Health Insurance Reform Legislation, could have a significant effect on our portfolio companies in this industry sector. As Health Insurance Reform Legislation is implemented, our portfolio companies in this industry sector may be forced to change how they do business. We can give no assurance that these portfolio companies will be able to adapt successfully in response to these changes. Any of these factors could materially adversely affect the operations of a portfolio company in this industry sector and, in turn, impair our ability to timely collect principal and interest payments owed to us.
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One of our key industry sectors for investment is defense, homeland security and government services. Investments in this sector are subject to certain significant risks particular to that industry. These businesses depend upon continued U.S. government expenditures on defense, homeland security and other services. These expenditures have not remained constant over time, have been reduced in certain periods and, recently, have been affected by the U.S. government’s efforts to improve efficiency and reduce costs affecting federal government programs generally. These expenditures are also subject to budgetary constraints affecting U.S. government spending generally or specific agencies in particular. Furthermore, these businesses are generally subject to changes in the political climate and general economic conditions, including a slowdown of the economy or unstable economic conditions and responses to conditions, such as emergency spending, that reduce funds available for other government priorities.
Portfolio companies operating in the defense, homeland security and government services industry sector may be required to comply with laws and regulations relating to the formation, administration, and performance of U.S. government contracts. Such laws and regulations may potentially impose added costs on these businesses and may subject them to civil or criminal penalties, termination of U.S. government contracts, and/or suspension or debarment from contracting with federal agencies, in the event they fail to comply. Further, these portfolio companies may derive significant amounts of their revenue from contracts awarded through a competitive bidding process. Their revenue may be adversely affected if they are unable to compete effectively in the process or there are delays caused by their competitors protecting contract awards.
Any of these factors could materially adversely affect the operations of a portfolio company in this industry sector and, in turn, impair our ability to timely collect principal and interest payments owed to us.
Shares of closed-end investment companies, including BDCs, frequently trade at a discount from their net asset value. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share of common stock may decline. We cannot predict whether our common stock will trade at, above or below net asset value. As of December 31, 2016, our net asset value per share was $13.72. The last reported sale price of a share of our common stock on the NASDAQ Global Select Market on March 8, 2017 was $12.66. If our common stock trades below its net asset value, we will generally not be able to sell additional shares of our common stock to the public at its market price without first obtaining the approval of a majority of our stockholders (including a majority of our unaffiliated stockholders) and our independent directors for such issuance.
We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay distributions might be adversely affected by the impact of one or more of the risk factors described in this prospectus. Due to the asset coverage test applicable to us under the 1940 Act as a BDC, we may be limited in our ability to make distributions. In addition, for so long as the Credit Facility or any other borrowing facility that we enter into, is outstanding, we anticipate that we may be required by its terms to use all payments of interest and principal that we receive from our current investments as well as any proceeds received from the sale of our current investments to repay amounts outstanding thereunder, which could adversely affect our ability to make distributions.
When we make distributions, we will be required to determine the extent to which such distributions are paid out of current or accumulated earnings and profits. Distributions in excess of current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of an investor’s basis in our stock and, assuming that an investor holds our stock as a capital asset, thereafter as a capital gain.
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Our shares of common stock have a limited trading history and we cannot assure you that a public trading market will be sustained for such shares. We cannot predict the prices at which our common stock will trade. We cannot assure you that the market price of shares of our common stock will not decline at any time. In addition, our common stock has traded below its net asset value, and if our common stock continues to trade below its net asset value, we will generally not be able to sell additional shares of our common stock to the public at its market price without first obtaining the approval of our stockholders (including our unaffiliated stockholders) and our independent directors for such issuance.
The market price and liquidity of the market for shares of our common stock may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
| • | price and volume fluctuations in the overall stock market from time to time; |
| • | investor demand for our shares; |
| • | significant volatility in the market price and trading volume of securities of business development companies or other companies in our sector, which are not necessarily related to the operating performance of these companies; |
| • | changes in regulatory policies or tax guidelines with respect to RICs, BDCs or SBICs; |
| • | failure to qualify as a RIC, or the loss of RIC status; |
| • | any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts; |
| • | changes, or perceived changes, in the value of our portfolio investments; |
| • | departures of our Adviser’s key personnel; |
| • | operating performance of companies comparable to us; or |
| • | general economic conditions and trends and other external factors. |
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company. Due to the potential volatility of our stock price, we may become the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
The Notes are not secured by any of our assets and will not be secured by any of the assets of any future subsidiaries and will rank equally in right of payment of our future unsubordinated, unsecured senior indebtedness. As a result, the Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have currently outstanding and may incur in the future (or any indebtedness that is initially unsecured to which we subsequently grant security) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our existing or future secured indebtedness and the secured indebtedness of any future subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the Notes. As of December 31, 2016 we had $39.1 million outstanding under the Credit Facility. The indebtedness under the Credit Facility is effectively senior to the Notes to the extent of the value of the assets securing such indebtedness.
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The Notes are obligations exclusively of Alcentra Capital Corporation and not of our subsidiaries. None of our subsidiaries have guaranteed the Notes and the Notes are not required to be guaranteed by any subsidiaries we may acquire or create in the future. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such subsidiaries (and therefore the claims of our creditors, including holders of the Notes) with respect to the assets of such subsidiaries. Even if we are recognized as a creditor of one or more of our subsidiaries, our claims would still be effectively subordinated to any security interests in the assets of any such subsidiary and to any indebtedness or other liabilities of any such subsidiary senior to our claims. Consequently, the Notes are structurally subordinated to all indebtedness, including any future SBA-guaranteed debentures, and other liabilities of any of our subsidiaries and any subsidiaries that we may in the future acquire or establish. In addition, our subsidiaries may incur substantial additional indebtedness in the future, all of which would be structurally senior to the Notes.
The indenture under which the Notes are issued offers limited protection to holders of the Notes. The terms of the indenture and the Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have an adverse impact on your investment in the Notes. In particular, the terms of the indenture and the Notes will not place any restrictions on our or our subsidiaries’ ability to:
| • | issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries or that would be senior to our equity interests in those entities and therefore rank structurally senior to the Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation at a time when our asset coverage, as defined in the 1940 Act, is below 200% after incurring such indebtedness or obligation, but giving effect, in each case, to any exemptive relief granted to us by the SEC; |
| • | pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the Notes, including subordinated indebtedness; |
| • | sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); |
| • | enter into transactions with affiliates; |
| • | make investments; or |
| • | create restrictions on the payment of dividends or other amounts to us from our subsidiaries. |
In addition, the indenture does not require us to offer to purchase the Notes in connection with a change of control or any other event.
Furthermore, the terms of the indenture and the Notes do not protect holders of the Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity other than as described under.
Our ability to recapitalize, incur additional debt and take a number of other actions that are not limited by the terms of the Notes may have important consequences as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes or negatively affecting the trading value of the Notes.
57
Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the Notes, including additional covenants and events of default. For example, the indenture under which the Notes are issued does not contain cross-default provisions that are contained in the Credit Facility. The issuance or incurrence of any such debt with incremental protections could affect the market for and trading levels and prices of the Notes.
In evaluating the Notes, a holder of the Notes should assume that they will be holding the Notes until their stated maturity. The Notes are a new issue of securities and will not be listed on an exchange or quoted through a quotation system. We cannot assure you that a trading market for the Notes will ever develop, be liquid or be maintained. Many factors independent of our creditworthiness affect the trading market for and market value of the Notes. Those factors include, without limitation:
| • | the method of calculating the principal and interest for the Notes; |
| • | the time remaining to the stated maturity of the Notes; |
| • | the outstanding amount of the Notes; |
| • | the redemption or repayment features of the Notes; and |
| • | the level, direction and volatility of interest rates generally. |
There may be a limited number of buyers when you decide to sell the Notes. This may affect the price a holder of the Notes receives for Notes or the ability to sell Notes at all.
The Notes contain a provision permitting the optional repayment of those Notes prior to stated maturity, if requested by the authorized representative of the beneficial owner of those Notes, following the death of the beneficial owner of the Notes, so long as the Notes were owned by the beneficial owner or his or her estate at least six months prior to the request. We refer to this option as the “Survivor’s Option.” We will have a discretionary right to limit the aggregate principal amount of Notes subject to the Survivor’s Option that may be exercised in any calendar year to an amount equal to 2% of the outstanding principal amount of all Notes outstanding as of the end of the most recent calendar year. We also have the discretionary right to limit to $250,000 in any calendar year the aggregate principal amount of Notes subject to the Survivor’s Option that may be exercised in such calendar year on behalf of any individual deceased beneficial owner of Notes. Accordingly, no assurance can be given that exercise of the Survivor’s Option for the desired amount will be permitted in any single calendar year.
After the first anniversary of the issuance of the Notes, we may choose to redeem the Notes from time to time, especially when prevailing interest rates are lower than the rate borne by the Notes. If prevailing rates are lower at the time of redemption, a holder of the Notes would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the Notes being redeemed. Our redemption right also may adversely impact the ability to sell the Notes as the optional redemption date or period approaches.
As of December 31, 2016, we had approximately $39.1 million of indebtedness outstanding under the Credit Facility. Any default under the agreements governing our indebtedness, including a default under the Credit Facility or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the Notes and substantially decrease the market value of the Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various
58
covenants, including financial and operating covenants, in the instruments governing our indebtedness (including the Credit Facility), we could be in default under the terms of the agreements governing such indebtedness. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the Credit Facility or other debt we may incur in the future could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. Our ability to generate sufficient cash flow in the future is, to some extent, subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under the Credit Facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Notes and our other debt and to fund other liquidity needs.
If our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the future need to refinance or restructure our debt, including any Notes sold, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the required lenders under the Credit Facility or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Notes and our other debt. If we breach our covenants under the Credit Facility or other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under the Credit Facility or other debt, the lenders could exercise their rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt. Because the Credit Facility has, and any future credit facilities will likely have, customary cross-default provisions, if the indebtedness under the Notes, the Credit Facility or under any future credit facility is accelerated, we may be unable to repay or finance the amounts due.
Not applicable.
We do not own any real estate or other physical properties materially important to our operation. Our principal executive offices are located at 200 Park Avenue, 7th Floor, New York, NY 10166.
A complaint was filed in the Supreme Court of the State of New York on December 17, 2015 relating to DRC which alleges that certain parties entered into an oral agreement to transfer a 10% equity interest in DRC’s parent company to the plaintiff.
The Company believes this complaint has no merit and has filed a motion for dismissal which was granted on February 7, 2017.
From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Not applicable.
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock is traded on the NASDAQ Global Select Market under the symbol “ABDC.” The following table sets forth the range of high and low sales prices of our common stock as reported on the NASDAQ Global Select Market for each fiscal quarter since our initial public offering on May 9, 2014:
| | | ||||||
| Fiscal Year Ended | Price Range | |||||||
| High | Low | |||||||
| December 31, 2016 | ||||||||
| Fourth Quarter | $ | 13.33 | $ | 11.17 | ||||
| Third Quarter | $ | 13.47 | $ | 12.10 | ||||
| Second Quarter | $ | 12.50 | $ | 11.00 | ||||
| First Quarter | $ | 12.04 | $ | 8.87 | ||||
| December 31, 2015 | ||||||||
| Fourth Quarter | $ | 12.80 | $ | 11.01 | ||||
| Third Quarter | $ | 13.48 | $ | 10.01 | ||||
| Second Quarter | $ | 14.25 | $ | 12.42 | ||||
| First Quarter | $ | 14.44 | $ | 12.36 | ||||
| December 31, 2014 | ||||||||
| Fourth Quarter | $ | 13.50 | $ | 11.20 | ||||
| Third Quarter | $ | 15.04 | $ | 10.60 | ||||
| Second Quarter | $ | 15.50 | $ | 14.00 | ||||
The last reported sale price for our common stock on the NASDAQ Global Select Market on March 8, 2017 was $12.66 per share. As of March 8, 2017, we had 17 shareholders of record.
Our dividends, if any, are determined by our board of directors. We have elected to be treated for federal income tax purposes as a RIC under Subchapter M of the Code effective as of our taxable year ended December 31, 2014, and intend to qualify annually thereafter. As a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
To qualify for RIC tax treatment, we must, among other things, distribute at least 90% of our net ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any. Depending on the level of taxable income earned in a tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income. Any such carryover taxable income must be distributed through a dividend declared prior to filing the final tax return related to the year which generated such taxable income. We may, in the future, make actual distributions to our stockholders of our net capital gains. We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
We have adopted an “opt out” dividend reinvestment plan, or “DRIP,” for our common stockholders. As a result, if we make cash distributions, then stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically “opt out” of the dividend reinvestment plan so as to receive cash distributions.
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The following table reflects the distributions per share that our board of directors has declared on our common stock since our initial public offering in May 2014:
| | | | |||||||||
| Date Declared | Record Date | Payment Date | Amount Per Share | |||||||||
| Fiscal 2016 | ||||||||||||
| November 3, 2016 | December 31, 2016 | January 5, 2017 | 0.34 | |||||||||
| August 4, 2016 | September 30, 2016 | October 6, 2016 | 0.34 | |||||||||
| May 5, 2016 | June 30, 2016 | July 7, 2016 | 0.34 | |||||||||
| March 7, 2016 | March 31, 2016 | April 7, 2016 | 0.34 | |||||||||
| Total: | $ | 1.36 | ||||||||||
| Fiscal 2015 | ||||||||||||
| November 5, 2015 | December 30, 2015 | January 7, 2016 | 0.34 | |||||||||
| August 10, 2015 | September 30, 2015 | October 6, 2015 | 0.34 | |||||||||
| May 11, 2015 | June 30, 2015 | July 6, 2015 | 0.34 | |||||||||
| March 10, 2015 | March 31, 2015 | April 6, 2015 | 0.34 | |||||||||
| Total: | $ | 1.36 | ||||||||||
| Fiscal 2014 | ||||||||||||
| November 4, 2014 | December 30, 2014 | January 6, 2015 | 0.34 | |||||||||
| August 12, 2014 | September 30, 2014 | October 6, 2014 | 0.34 | |||||||||
| June 24, 2014 | June 30, 2014 | July 7, 2014 | 0.178 | |||||||||
| Total: | $ | 0.858 | ||||||||||
For each year end, a statement on IRS Form 1099-DIV identifying the source(s) of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return on paid-in-capital surplus which is a nontaxable distribution) is mailed to our stockholders. To the extent that our distributions for a fiscal year exceed current and accumulated earnings and profits, a portion of those distributions may be deemed a return of capital to our stockholders for U.S. Federal income tax purposes.
Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our taxable ordinary income or capital gains.
Stockholders should read any written disclosure accompanying a dividend payment carefully and should not assume that any distribution is taxable as ordinary income or capital gains.
During the year ended December 31, 2016, 2015 and 2014, no shares of our common stock were issued under our dividend reinvestment plan (“DRIP”).
None.
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This graph compares the stockholder return on our common stock with that of the Wells Fargo BDC Index and a customized peer group of five companies that include: CM Finance Inc., Garrison Capital Inc., Gladstone Capital Corp., Stellus Capital Investment Corp., and Whitehorse Finance Inc., from the period May 8, 2014 (inception) through March 6, 2016. The comparison assumes that a $100 was invested on May 8, 2014 in our common stock and in the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect. The comparisons in the graph below are based on historical data and are not intended to forecast the possible future performance of our common stock.
The graph and other information furnished under this Part II Item 5 of this Form 10-K shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the 1934 Act.
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| Item 6. | Selected Financial Data |
The following selected financial and other data is presented for the years ended December 31, 2016, 2015, the period from January 1, 2014 through May 7, 2014 the period from May 8, 2014 through December 31, 2014, 2013 and 2012 in thousands, except for per share data. The following selected financial data has been derived from financial statements that were audited by KPMG LLP and should be read in conjunction with our financial statements and related notes thereto and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this annual report on Form 10-K.
| | | | | | | ||||||||||||||||||
| Year ended December 31, 2014 | ||||||||||||||||||||||||
| Alcentra Capital Corporation for the year ended December 31, 2016 | Alcentra Capital Corporation for the year ended December 31, 2015 | Alcentra Capital Corporation from May 8,* 2014 through December 31, 2014 | BNY Mellon- Alcentra Mezzanine III, L.P. from January 1, 2014 through May 7, 2014 | BNY Mellon- Alcentra Mezzanine III, L.P. for the year ended December 31, 2013 | BNY Mellon- Alcentra Mezzanine III, L.P. for the year ended December 31, 2012 | |||||||||||||||||||
| Statement of operations data: | ||||||||||||||||||||||||
| Total investment income | $ | 40,602,599 | $ | 33,916,249 | $ | 16,166,214 | $ | 7,761,894 | $ | 11,051,383 | $ | 12,687,061 | ||||||||||||
| Total expenses, net of fee waiver | 18,193,683 | 14,618,080 | 4,564,482 | 834,336 | 3,541,736 | 5,052,550 | ||||||||||||||||||
| Net investment income | $ | 22,408,916 | $ | 19,298,169 | $ | 11,601,732 | $ | 6,927,558 | $ | 7,509,647 | $ | 7,634,511 | ||||||||||||
| Net increase in net assets resulting from operations | $ | 8,789,516 | $ | 12,611,774 | $ | 14,735,021 | $ | 9,954,110 | $ | 9,652,411 | $ | 15,448,530 | ||||||||||||
| Per share data: | ||||||||||||||||||||||||
| Net investment income | $ | 1.66 | $ | 1.43 | $ | 0.86 | $ | N.A. | $ | N.A. | $ | N.A. | ||||||||||||
| Net increase in net assets resulting from operations | $ | 0.65 | $ | 0.93 | $ | 1.09 | $ | N.A. | $ | N.A. | $ | N.A. | ||||||||||||
| Dividends declared | $ | 1.36 | $ | 1.36 | $ | 0.858 | $ | N.A. | $ | N.A. | $ | N.A. | ||||||||||||
| Net asset value per share | $ | 13.72 | $ | 14.43 | $ | 14.87 | $ | N.A. | $ | N.A. | $ | N.A. | ||||||||||||
| Balance sheet data: | ||||||||||||||||||||||||
| Total assets | $ | 292,928,229 | $ | 307,495,807 | $ | 272,219,375 | $ | 175,925,784 | $ | 126,788,126 | $ | 101,858,640 | ||||||||||||
| Cash and cash equivalents | 3,891,606 | 4,866,972 | 10,022,617 | 10,703,472 | 729,431 | 869,836 | ||||||||||||||||||
| Total net assets | $ | 184,524,591 | $ | 195,032,211 | $ | 200,989,308 | $ | 175,567,210 | $ | 110,639,427 | $ | 96,719,585 | ||||||||||||
| * | On May 8, 2014, we purchased a portfolio of approximately $155.9 million in debt and equity investments, which consisted of all of the investment assets of Fund III, except for its equity investment and warrants in GTT Communications, for $64.3 million in cash and $91.5 million in shares of our common stock at the same price as shares issued in our initial public offering. Concurrent with our acquisition of these investment assets from Fund III, we also purchased approximately $29 million of debt and equity investment held by Alcentra Group for $29 million in cash. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements |
Some of the statements in this annual report on Form 10-K constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties, including statements as to:
| • | our future operating results, including the performance of our existing investments; |
| • | the introduction, withdrawal, success and timing of business initiatives and strategies; |
| • | changes in political, economic or industry conditions, the interest rate environment or financial and capital markets, which could result in changes in the value of our assets; |
| • | the relative and absolute investment performance and operations of our investment adviser; |
| • | the impact of increased competition; |
| • | the impact of investments we intend to make and future acquisitions and divestitures; |
| • | our ability to turn potential investment opportunities into transactions and thereafter into completed and successful investments; |
| • | the unfavorable resolution of any future legal proceedings; |
| • | our business prospects and the prospects of our portfolio companies; |
| • | our regulatory structure and tax status; |
| • | the adequacy of our cash resources and working capital; |
| • | the timing of cash flows, if any, from the operations of our portfolio companies; |
| • | the impact of interest rate volatility on our results, particularly because we use leverage as part of our investment strategy; |
| • | the ability of our portfolio companies to achieve their objective; |
| • | the impact of legislative and regulatory actions and reforms and regulatory, supervisory or enforcement actions of government agencies relating to us or our investment adviser; |
| • | our contractual arrangements and relationships with third parties; |
| • | our ability to access capital and any future financings by us; |
| • | the ability of our investment adviser to attract and retain highly talented professionals; and |
| • | the impact of changes to tax legislation and, generally, our tax position. |
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 annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K, and we assume no obligation to update any such forward-looking statements. 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.
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained elsewhere in this annual report on Form 10-K.
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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. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.
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 Company used $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 place of business in the United States.
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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-K.
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.
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 December 31, 2016, we had $276.3 million (at fair value) invested in 32 companies. Our portfolio included approximately 34.6% of first lien debt, 30.7% of second lien debt, 26.8% of mezzanine debt and 7.8% of equity investments at fair value. The composition of our investments as of December 31, 2016 was as follows:
| | | ||||||
| Cost | Fair Value | |||||||
| Senior Secured – First Lien | $ | 97,515,871 | $ | 95,684,153 | ||||
| Senior Secured – Second Lien | 87,730,962 | 84,864,909 | ||||||
| Senior Subordinated | 77,960,103 | 74,050,349 | ||||||
| Equity/Other | 30,129,133 | 21,673,539 | ||||||
| Total | $ | 293,336,069 | $ | 276,272,950 | ||||
As of December 31, 2015, we had $296.3 million (at fair value) invested in 32 portfolio companies, Our portfolio included approximately 29.9% of first lien debt, 28.1% of second lien debt, 27.2% of mezzanine debt and 14.9% of equity investments at fair value. The composition of our investments as of December 31, 2015 was as follows:
| | | ||||||
| Cost | Fair Value | |||||||
| Senior Secured – First Lien | $ | 92,807,114 | $ | 88,453,325 | ||||
| Senior Secured – Second Lien | 83,015,409 | 83,266,558 | ||||||
| Unsecured Debt | 80,358,874 | 80,458,554 | ||||||
| Equity | 47,250,336 | 44,163,174 | ||||||
| Total Investments | $ | 303,431,733 | $ | 296,341,611 | ||||
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 December 31, 2016 we had 4 such investments with an aggregate unfunded commitment of $6.3 million and at December 31, 2015 we had 1 such investments with an aggregate unfunded commitment of $1.0 million.
As of December 31, 2016, the Company’s industry concentration was as follows:
| | | ||||||
| Row Labels | Cost | Fair Value | ||||||
| Healthcare Services | 43,497,566.00 | 43,750,000.00 | ||||||
| Telecommunications | 26,601,444.00 | 27,342,064.00 | ||||||
| Security | 22,425,000.00 | 22,909,589.00 | ||||||
| High Tech Industries | 20,400,000.00 | 20,516,000.00 | ||||||
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| | | ||||||
| Row Labels | Cost | Fair Value | ||||||
| Industrial Services | 20,358,827.00 | 19,440,026.00 | ||||||
| Automotive Business Services | 20,090,093.00 | 20,206,939.00 | ||||||
| Industrial Manufacturing | 15,472,567.00 | 16,259,000.00 | ||||||
| Technology & Telecom | 15,122,171.00 | 14,456,630.00 | ||||||
| Education | 14,837,425.00 | 13,500,157.00 | ||||||
| Oil & Gas Services | 14,750,272.00 | 10,077,583.00 | ||||||
| Waste Services | 13,586,080.00 | 13,160,777.00 | ||||||
| Retail | 11,876,716.00 | 12,022,615.00 | ||||||
| Media: Advertising, Printing & Publishing | 11,750,000.00 | 10,870,000.00 | ||||||
| Media & Entertainment | 10,258,933.00 | 4,531,545.00 | ||||||
| Transportation Logistics | 7,475,203.00 | 4,316,871.00 | ||||||
| Environmental/Recycling Services | 7,093,046.00 | 6,517,046.00 | ||||||
| Food & Beverage | 5,000,000.00 | 3,700,000.00 | ||||||
| Wholesale/Distribution | 4,900,000.00 | 4,900,000.00 | ||||||
| Aerospace | 4,000,000.00 | 3,877,000.00 | ||||||
| Technology & IT | 3,840,726.00 | 3,919,108.00 | ||||||
| Grand Total | 293,336,069 | 276,272,950 | ||||||
As of December 31, 2015, the Company’s industry concentration was as follows:
| | | ||||||
| Industry | Cost | Fair Value | ||||||
| Healthcare Services | $ | 38,677,488 | $ | 40,672,488 | ||||
| Infrastructure Maintenance | 17,611,477 | 22,894,780 | ||||||
| Waste Services | 23,743,476 | 22,743,634 | ||||||
| Automotive Business Services | 19,963,981 | 19,963,981 | ||||||
| Telecommunications | 17,829,891 | 18,825,219 | ||||||
| Transportation Logistics | 15,475,386 | 15,475,386 | ||||||
| Technology & Telecom | 14,466,264 | 13,943,721 | ||||||
| Education | 14,338,600 | 13,890,332 | ||||||
| Restoration Services | 12,830,771 | 13,232,437 | ||||||
| Oil & Gas Services | 13,127,489 | 13,127,489 | ||||||
| Wholesale | 10,330,768 | 12,753,733 | ||||||
| Healthcare: Orthopedic Products | 11,810,851 | 12,000,000 | ||||||
| Media: Advertising, Printing & Publishing | 11,750,000 | 11,750,000 | ||||||
| Industrial Services | 10,203,840 | 10,068,757 | ||||||
| Security | 9,500,000 | 9,500,000 | ||||||
| High Tech Industries | 5,168,000 | 7,007,913 | ||||||
| Media & Entertainment | 12,323,985 | 6,860,544 | ||||||
| Environmental/Recycling Services | 6,623,154 | 6,095,154 | ||||||
| Wholesale/Distribution | 5,981,818 | 5,981,818 | ||||||
| Technology & IT | 4,869,375 | 4,968,750 | ||||||
| Aerospace | 4,000,000 | 4,000,000 | ||||||
| Packaging | 3,792,657 | 3,792,657 | ||||||
| Food & Beverage | 5,000,000 | 3,788,000 | ||||||
| Disaster Recovery Services | 12,823,731 | 1,804,817 | ||||||
| Call Center Services | 1,188,731 | 1,200,000 | ||||||
| Total | $ | 303,431,733 | $ | 296,341,611 | ||||
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As of Decemer 31, 2016, the Company’s geographical concentration of the investment portfolio was as follows:
Geographic Region
| | | ||||||
| Cost | Fair Value | |||||||
| South Eastern | 35,200,203 | 31,186,871 | ||||||
| Eastern | 48,228,643 | 48,486,134 | ||||||
| South | 82,260,883 | 73,848,766 | ||||||
| West | 34,637,881 | 29,231,392 | ||||||
| South West | 29,981,737 | 29,506,630 | ||||||
| North East | 14,240,726 | 14,435,108 | ||||||
| Mid West | 48,785,996 | 49,578,049 | ||||||
| Total | 293,336,069 | 276,272,950 | ||||||
As of December 31, 2015, the Company’s geographical concentration of the investment portfolio was as follows:
| | | ||||||
| Cost | Fair Value | |||||||
| South East | $ | 78,199,153 | $ | 80,722,968 | ||||
| Eastern | 51,779,326 | 54,523,091 | ||||||
| South | 67,214,814 | 54,400,549 | ||||||
| West | 34,068,929 | 34,419,331 | ||||||
| Mid West | 32,695,872 | 33,163,200 | ||||||
| South West | 18,466,264 | 17,943,722 | ||||||
| North East | 11,007,375 | 11,168,750 | ||||||
| North West | 10,000,000 | 10,000,000 | ||||||
| Total | $ | 303,431,733 | $ | 296,341,611 | ||||
At December 31, 2016, our average portfolio company investment at amortized cost and fair value was approximately $8.8 million and $8.4 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $15.1 million and $15.1 million, respectively. At December 31, 2015, our average portfolio company investment at amortized cost and fair value was approximately $9.6 million and $9.3 million, respectively, and our largest portfolio company investment by amortized cost and fair value was approximately $17.5 million and $22.8 million, respectively.
At December 31, 2016, 58.4% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR, and 41.6% bore interest at fixed rates. At December 31, 2015, 52.1% of our debt investments bore interest based on floating rates (subject to interest rate floors), such as LIBOR and 47.9% bore interest at fixed rates.
The weighted average yield on all of our debt investments as of December 31, 2016 and December 31, 2015 was approximately 11.7% 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. $127.7 million of the portfolio (46.2%) had a first dollar loss at 0.0x – 1.0x EBITDA; $82.6 million of the portfolio (29.9%) had a first dollar loss at 1.0x – 3.0x EBITDA; $24.6 million of the portfolio (8.9%) had a first dollar loss of 3.0x – 4.0x EBITDA; $0.003 million of the portfolio (01.2%) had a first dollar loss of 4.0x – 4.5x EBITDA; and $38.1 million of the portfolio (13.8%) had a first dollar loss >4.5x EBITDA.
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.
During the year ended December 31, 2016, Alcentra invested $124.8 million in 12 new portfolio companies and $28.3 million in additional funding. We also received $184.0 million of repayments.
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During the year ended December 31, 2015, Alcentra invested $86.3 million in 10 new portfolio companies and $21.0 million in additional funding. We also received $63.4 million of repayments.
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.
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 December 31, 2016 we had one loan on non-accrual and as of December 31, 2015, we had no loans on non-accrual status.
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.
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.
The following shows the breakdown of investment income for the years ended December 31, 2016, 2015, 2014, 2013 and 2012.
| | | | | | |||||||||||||||
| Alcentra Capital Corporation Year Ended December 31, 2016 | Alcentra Capital Corporation Year Ended December 31, 2015 | Alcentra Capital Corporation For the period from Inception (May 8,* 2014) through December 31, 2014 | BNY Mellon-Alcentra Mezzanine III, L.P. Year Ended December 31, 2013 | BNY Mellon-Alcentra Mezzanine III, L.P. Year Ended December 31, 2012 | ||||||||||||||||
| Interest Income | $ | 29.5 | $ | 25.7 | $ | 11.5 | $ | 9.1 | $ | 9.4 | ||||||||||
| PIK Interest | 6.2 | 5.9 | 3.6 | 1.7 | 2.0 | |||||||||||||||
| Other Income/Fees | 4.9 | 2.3 | 1.1 | 0.2 | 1.3 | |||||||||||||||
| Total | $ | 40.6 | $ | 33.9 | $ | 16.1 | $ | 11.1 | $ | 12.6 | ||||||||||
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The increases in interest income from the respective periods were due to the growth in the overall investment portfolio.
The following shows the breakdown of operating expenses for the years ended December 31, 2016, 2015, 2014, 2013 and 2012:
| | | | | | |||||||||||||||
| Alcentra Capital Corporation Year Ended December 31, 2016 | Alcentra Capital Corporation Year Ended December 31, 2015 | Alcentra Capital Corporation For the period from Inception (May 8,* 2014) through December 31, 2014 | BNY Mellon-Alcentra Mezzanine III, L.P. Year Ended December 31, 2013 | BNY Mellon-Alcentra Mezzanine III, L.P. Year Ended December 31, 2012 | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||
| Management Fees | $ | 5.2 | $ | 4.9 | $ | 2.5 | $ | 2.8 | $ | 4.4 | ||||||||||
| Incentive Fees | 3.3 | 3.3 | 1.0 | — | — | |||||||||||||||
| Professional Fees | 1.2 | 1.0 | 0.8 | 0.4 | 0.5 | |||||||||||||||
| Valuation services | 0.2 | 0.4 | 0.4 | — | — | |||||||||||||||
| Interest and credit facility expense | 5.7 | 4.1 | 1.0 | 0.1 | 0.1 | |||||||||||||||
| Amortization of deferred financing costs | 1.3 | 0.9 | 0.3 | — | — | |||||||||||||||
| Directors Fees | 0.3 | 0.2 | 0.2 | — | — | |||||||||||||||
| Insurance Expense | 0.3 | 0.3 | 0.2 | — | — | |||||||||||||||
| Other Expenses | 0.7 | 0.5 | 0.2 | 0.2 | 0.1 | |||||||||||||||
| Total Operating Expenses | $ | 18.2 | $ | 15.6 | $ | 6.6 | $ | 3.5 | $ | 5.1 | ||||||||||
| Waiver of Incentive & Management Fees | — | (1.0 | ) | (2.0 | ) | — | — | |||||||||||||
| Total Expenses, net of fee waivers | $ | 18.2 | $ | 14.6 | $ | 4.6 | $ | 3.5 | $ | 5.1 | ||||||||||
| * | Commencement of operations |
For the year ended December 31, 2016, 2014 and 2013 we did not incur any capital gains incentive fee. For the year ended December 31, 2015 incentive fees include the effect of the Capital Gains Incentive Fee of $1.0 million.
The increase in operating expenses was primarily due to an increase in interest expense due to the issuance of an additional $15 million in aggregate principal amount of InterNotes, and an increase in amortization of deferred financings costs and deferred note offering costs. The year ended December 31, 2015 represented the first full year of operations. The increase in operating expenses was primarily due to an increase in interest expense due to the issuance of $40 million in aggregate principal amount of InterNotes and an increase in management fees due to the increase in the size of our portfolio.
For the year ended December 31, 2014, the increase of $1.1 million in operating expenses is due primarily to the interest expense on the Credit Facility and increased operating expenses due to growth in our investment portfolio. These operating expenses consist of base management fees, incentive fees, administrative services expenses, professional fees, and other general and administrative expenses.
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 had an initial commitment of $80 million with an accordion feature that allows for an increase in total commitments to $160 million. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250,000,000, subject to satisfaction of certain
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conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1.0% and zero or (ii) 3.00% plus the one, three or six month LIBOR rate, as applicable.
On March 2, 2016, we amended certain provisions of the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured by a first priority security interest in all of our portfolio investments, the equity interests in certain of its direct and indirect subsidiaries and substantially all of its other assets. We are also subject to customary covenants and events of default typical of a facility of this type. As of December 31, 2016, total commitments under the Credit Facility were $135 million. Borrowings under the facility were $39.1 million and $63.5 million as of December 31, 2016 and 2015, respectively.
Interest expense for the period January 1, 2014 through May 7, 2014 was $0.05 million and for the period May 8, 2014 through December 31, 2014, interest expense was $1.0 million.
The Partnership had entered into a credit agreement under which it 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 was 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 ranged from 1.39% to 1.40%. Fund III recorded interest and fee expense of $0.138 million for the period ended December 31, 2013. The average borrowings under the credit agreement for the period ended May 7, 2014 was $9,512,147. The credit agreement, which was not assumed by Alcentra in connection with the acquisition of Fund III Acquired Assets, terminated on April 24, 2014.
Net investment income was $22.4 million, or $1.66 per common share based on the weighted average of 13,496,128 common shares outstanding for the year ended December 31, 2016 as compared to $19.3 million, or $1.43 per common share for the year ending December 31, 2015.
The increase in net investment income is primarily the result of our growing portfolio, which was partially offset by the increase in interest and fees due to the issuance of the Notes and amortization of deferred financing and offering costs.
For the period January 1, 2014 to May 7, 2014, net investment income was $6.9 million.
For the period May 8, 2014 through December 31, 2014, net investment income was $11.6 million. This was an increase of $4.1 million from December 31, 2013 and $4.0 million from December 31, 2012, due primarily to the increase in the investment portfolio.
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.
Proceeds from sales and repayments on investments for the year ended December 31, 2016 totaled $159 million and net realized losses totaled $4.3 million. Proceeds from sales and repayments on investments for the year ended December 31, 2015 totaled $74.7 million and net realized gains totaled $6.6 million.
Proceeds from sales and repayments on investments for the partial year ended December 31, 2014 totaled $31.9 million and net realized gains totaled $0.279 million.
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For the year ended December 31, 2013, there was a realized gain of $3.5 million and for December 31, 2012 there was a $3.2 million realized gain.
Net change in unrealized appreciation primarily reflects the net change in the portfolio investment fair values relative to its cost basis 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 year ended December 31, 2016 and for the year ended December 31, 2015 totaled $(9.9) million and $(11.6) million, respectively. The change in unrealized appreciation (depreciation) was due primarily to the reversals of the write downs of Xpress Global Sysems, Black Diamond, and Show Media and the unrealized depreciation on DRC Emergency Services for December 31, 2016 and 2015, respectively.
Net change in unrealized appreciation (depreciation) on investments for the partial year ended December 31, 2014 totaled $4.5 million, respectively.
Net change in unrealized appreciation (depreciation) on investments for the period January 1, 2014 to May 7, 2014 totaled $2.9 million.
Net change in unrealized appreciation (depreciation) on investments for the period ended December 31, 2013 was $(1.4) million.
We have direct wholly owned subsidiaries that have elected to be taxable entities (the “Taxable Subsidiaries”). The Taxable Subsidiaries permit us 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 Subsidiaries are not consolidated with us for income tax purposes and may generate income tax expense, benefit, and the related tax assets and liabilities, as a result of their ownership of certain portfolio investments. The income tax expense, or benefit, if any, and related tax assets and liabilities are reflected in our consolidated financial statements. For the year ended December 31, 2016, we recognized a benefit for taxes on unrealized loss on investments of $0.635 million. For the year ended December 31, 2015, we recognized a benefit for taxes on unrealized loss on investments of $2.2 million. For the year ended December 31, 2014, we recognized a provision for income tax on unrealized gain on investments of $1.6 million for the Taxable Subsidiaries. For the year ended December 31, 2013, we recognized no income tax or benefit related to the taxable subsidiaries. As of December 31, 2015 and 2014, $1.4 million and $1.7 million, respectively, was included in the deferred tax asset on the Consolidated Statement of Assets and Liabilities.
The Form 1099-DIV you receive in February 2017 will show the tax status of all distributions paid to your account in calendar year 2016. Shareholders are advised to consult their own tax adviser with respect to the tax consequences of their investment in the Company. As required by the Internal Revenue Code and/or regulations, shareholders must be notified regarding the status of qualified dividend income for individuals, the dividends received deduction for corporations and capital gains dividends.
For the fiscal year ended December 31, 2016, the Company designates approximately $1,498,128, or up to the maximum amount of such dividends allowable pursuant to the Internal Revenue Code, as qualified dividend income eligible for the reduced tax rate of 20%.
Net increase in net assets resulting from operations totaled $8.8 million, or $0.65 per common share for the year ended December 31, 2016, as compared to $12.6 million, or $0.93 per common share for the year ended December 31, 2015. These are based on 13,496,128 and 13,516,766 common shares outstanding for December 31, 2016 and 2015, respectively.
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Net increase in net assets resulting from operations totaled $14.7 million, or $1.09 per common share for the period May 8 – December 31, 2016.
Net increase in net assets resulting from operations totaled $9.9 million for the period January 1, 2014 to May 7, 2014, and $9.6 million for the year ended December 31, 2013.
The net increase is due to interest income and an increase in net unrealized appreciation generated from our investment portfolio offset by our operating expenses.
Our operating activities provided cash of $28.5 million for the year ended December 31, 2016, primarily in connection with the return of capital from of our portfolio investments. Our financing activities for the year ended December 31, 2016 used cash of $29.4 million primarily from repayments of the credit facility.
Our operating activities used cash of $25.4 million for the year ended December 31, 2015, primarily in connection with the purchase of portfolio investments. Our financing activities for the year ended December 31, 2015 provided cash of $20.2 million primarily from the issuance of the InterNotes and increased borrowing under the Credit Facility.
Our operating activities used cash of $149.5 million for the period May 8, 2014 through December 31, 2014, primarily in connection with the initial purchase of investments. Financing activities for the same period provided $159.5 million primarily through the Offering.
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 year ended December 31, 2013, the Partnership’s net cash used in operating activities was $14.4 million primarily due to the purchase of investments. Net cash provided by financing activities was $14.3 million due to proceeds from the line of credit and capital contributions 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 our stock holders. 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.
Although we expect to fund the growth of our investment portfolio through the net proceeds from future public and private equity offerings and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act, our plans to raise capital may not be successful. In this regard, if our common stock trades at a price below our then-current net asset value per share, we may be limited in our ability to raise equity capital given that we cannot sell our common stock at a price below net asset value per share unless our stockholders approve such a sale and our board of directors makes certain determinations in connection therewith.
Also, as a business development company, we generally are required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of our borrowings and any outstanding preferred stock, of at least 200%. We were in compliance with the asset coverage ratios at all times. As of December 31, 2016, 2015 and 2014, our asset coverage ratio was 299%, 298% and 436%, respectively. The amount of leverage that we employ will depend on our assessment of market conditions and other factors at the time of any proposed borrowing, such as the maturity, covenant package and rate structure of the proposed borrowings, our ability to raise funds through the issuance of shares of our common stock and the risks of such borrowings within the context of our investment outlook. Ultimately, we only intend to use leverage if the expected returns from borrowing to make investments will exceed the cost of such borrowing.
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As of December 31, 2016, 2015 and 2014, we had cash of $3.9 million, $4.9 million and $10.0 million, respectively.
We have elected to be treated as a RIC under Subchapter M of the Code for the fiscal year ending December 31, 2014. As a RIC, we will not be taxed on our investment company taxable income or realized net capital gains, to the extent that such taxable income or gains are distributed, or deemed to be distributed, to stockholders on a timely basis.
Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation until realized. Dividends declared and paid by us in a year may differ from taxable income for that year as such dividends may include the distribution of current year taxable income or the distribution of prior year taxable income carried forward into and distributed in the current year. Distributions also may include returns of capital.
To qualify for RIC tax treatment, we must, among other things, distribute, with respect to each taxable year, at least 90% of our investment company net taxable income (i.e., our net ordinary income and our realized net short-term capital gains in excess of realized net long-term capital losses, if any). If we qualify as a RIC, we will also be subject to a federal excise tax, based on distributive requirements of our taxable income on a calendar year basis.
We intend to distribute to our stockholders between 90% and 100% of our annual taxable income (which includes our taxable interest and fee income).
Under the Advisory Agreement, Alcentra pays 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 pays 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 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).
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As of December 31, 2016, our future fixed commitments for cash payments on contractual obligations for each of the next five years and thereafter are as follows:
| | | | | | | | |||||||||||||||||||||
| Total | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 and thereafter | ||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||
| Credit facility payable | $ | 39,133 | $ | — | $ | — | $ | 39,133 | $ | — | $ | — | $ | — | ||||||||||||||
| Notes payable | $ | 55,000 | — | — | $ | 0 | 53,582 | 1,418 | 1,418 | |||||||||||||||||||
| $ | 94,133 | $ | — | $ | — | $ | 39,133 | $ | 53,582 | $ | 1,418 | $ | 1,418 | |||||||||||||||
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our portfolio companies. As of December 31, 2016, 2015 and 2014, our off-balance sheet arrangements consisted of 6.3 million $1.0 million and $12.3 million of unfunded commitments. As of December 31, 2013, our off-balance sheet arrangements consisted of $2.6 million of unfunded commitments to provide debt financing to one portfolio company.
Subsequent to December 31, 2016, the following activity occurred:
On January 3, 2017, Alcentra sold its equity interest in Wholesome Sweetners in a secondary sale for $3,700,000.
On January 5, 2017, a $0.34 per share dividend was paid to shareholders of record as of December 28, 2016.
On January 13, 2017, Alcentra invested an additional $2.7 million in LRI Energy Solutions.
On January 31, 2017, Alcentra invested $10.2 million in Pharmalogics Recruiting (10.25% 1st Lien Debt).
On February 1, 2017, Alcentra invested an additional $0.402 million in Black Diamond Rentals.
On February 21, 2017, Duke Finance, LLC repaid their investment in the amount of $7.5 million.
On February 27, 2017, Alpine Waste repaid their investment in the amount of $11.0 million.
On February 28, 2017, Alcentra invested an additional $2.1 million in Pharmalogic Holdings Corp.
On February 28, 2017, Alcentra invested an additional $0.064 million in Black Diamond Rentals.
On March 9, 2017, the Board of Directors approved the 2017 first quarter regular dividend of $0.34 per share and a $0.03 special dividend for shareholders of record date March 31, 2017 and payable April 6, 2017.
We are subject to financial market risks, including changes in interest rates. For the year ended December 31, 2016, 16 of our loans or 58.4% of the fair value of our portfolio bore interest at floating rates. All of these floating rate loans have interest rate floors, which have effectively converted the loans to fixed rate loans in the current interest rate environment. For year ended December 31, 2015, 14 loans of the portfolio bore interest at floating rates or 52.2% of the fair value of our portfolio. In the future, we expect other loans in our portfolio will have floating rates. Assuming that the Statement of Assets and Liabilities as of December 31, 2016, were to remain constant and no actions were taken to alter the existing interest rate sensitivity, a hypothetical one or two percent increase in LIBOR would have less than a 2% effect on our portfolio. Although we believe that this measure is indicative of our sensitivity to interest rate changes, it does not adjust for potential changes in credit quality, size and composition of the assets on the balance sheet and other business developments that could affect net increase in net assets resulting from operations, or net income. Accordingly, no assurances can be given that actual results would not differ materially from the potential outcome simulated by this estimate. We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contacts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. We have not engaged in any hedging activities to date.
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| Item 8. | Financial Statements and Supplementary Data |
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KPMG LLP
345 Park Avenue
New York, NY 10154-0102
The Board of Directors and Shareholders
Alcentra Capital Corporation and Subsidiary:
We have audited the accompanying consolidated statements of assets and liabilities of Alcentra Capital Corporation and Subsidiary (the “Company”), including the consolidated schedules of investments, as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in net assets and cash flows and financial highlights for the years ended December 31, 2016 and 2015 and for the period from May 8, 2014 (commencement of operations) through December 31, 2014, and the statements of operations, changes in net assets, and cash flows and financial highlights of BNY Mellon-Alcentra Mezzanine III, L.P. for the period from January 1, 2014 through May 7, 2014 and financial highlights for each of the years in the two-year period ending December 31, 2013, and related notes to the consolidated financial statements. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our procedures included confirmation of securities owned as of December 31, 2016 and 2015, by correspondence with portfolio companies, or by other appropriate audit procedures. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alcentra Capital Corporation and Subsidiary as of December 31, 2016 and 2015, and the results of its operations, its cash flows and financial highlights for each of the years in the two-year period ended December 31, 2016 and for the period from May 8, 2014 (commencement of operations) through December 31, 2014, and the results of BNY Mellon-Alcentra Mezzanine III, L.P.’s operations, its cash flows and financial highlights for the period from January 1, 2014 through May 7, 2014 and financial highlights for each of the years in the two-year period ending December 31, 2013 in conformity with U.S. generally accepted accounting principles.
March 9, 2017
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| | | ||||||
| As of December 31, 2016 | As of December 31, 2015 | |||||||
| Assets | ||||||||
| Portfolio investments, at fair value | ||||||||
| Non-controlled, non-affiliated investments, at fair value (cost of $248,479,039 and $219,715,263, respectively) | $ | 239,722,117 | $ | 221,349,073 | ||||
| Non-controlled, affiliated investments, at fair value (cost of $29,734,859 and $56,426,475, respectively) | 22,094,203 | 59,243,999 | ||||||
| Controlled, affiliated investments, at fair value (cost $15,122,171 and $27,289,995, respectively) | 14,456,630 | 15,748,539 | ||||||
| Total of portfolio investments, at fair value (cost $293,336,069 and $303,431,733, respectively) | 276,272,950 | 296,341,611 | ||||||
| Cash | 3,891,606 | 4,866,972 | ||||||
| Dividends and interest receivable | 3,240,640 | 2,607,205 | ||||||
| Receivable for investments sold | 2,139,463 | — | ||||||
| Deferred financing costs | 1,287,807 | 2,183,881 | ||||||
| Deferred tax asset | 1,264,811 | 1,382,408 | ||||||
| Prepaid expenses and other assets | 100,770 | 113,730 | ||||||
| Total Assets | $ | 288,198,047 | $ | 307,495,807 | ||||
| Liabilities | ||||||||
| Credit facility payable | $ | 39,133,273 | $ | 63,504,738 | ||||
| Notes payable (net of deferred note offering costs of $1,495,062 and $1,156,622, respectively) | 53,504,938 | 38,843,378 | ||||||
| Other accrued expenses and liabilities | 282,165 | 271,801 | ||||||
| Directors’ fees payable | 95,000 | 37,025 | ||||||
| Professional fees payable | 331,867 | 481,333 | ||||||
| Interest and credit facility expense payable | 1,008,127 | 813,222 | ||||||
| Management fee payable | 1,301,591 | 1,302,213 | ||||||
| Income-based incentive fees payable | 2,071,661 | 1,081,797 | ||||||
| Distributions payable | 4,586,816 | 4,595,700 | ||||||
| Unearned structuring fee revenue | 1,175,319 | 689,577 | ||||||
| Income tax liability | 182,699 | 842,812 | ||||||
| Total Liabilities | $ | 103,673,456 | $ | 112,463,596 | ||||
| Commitments and Contingencies (Note 12) | ||||||||
| Net Assets | ||||||||
| Common stock, par value $0.001 per share (100,000,000 shares authorized, 13,451,633 and 13,516,766 shares issued and outstanding, respectively) | 13,452 | 13,517 | ||||||
| Additional paid-in capital | 196,290,348 | 197,652,086 | ||||||
| Accumulated net realized gain (loss) | (776,548 | ) | 2,791,590 | |||||
| Undistributed net investment income | 4,890,065 | 1,130,327 | ||||||
| Net unrealized appreciation (depreciation) on investments, net of benefit/(provision) for taxes of $1,170,393 and $534,813 as of December 31, 2016 and December 31, 2015, respectively | (15,892,726 | ) | (6,555,309 | ) | ||||
| Total Net Assets | 184,524,591 | 195,032,211 | ||||||
| Total Liabilities and Net Assets | $ | 288,198,047 | $ | 307,495,807 | ||||
| Net Asset Value Per Share | $ | 13.72 | $ | 14.43 | ||||
See notes to consolidated financial statements
78
See notes to consolidated financial statements
79
| | | | | ||||||||||||
| BNY Mellon-Alcentra Mezzanine III, L.P. | ||||||||||||||||
| For the year ended December 31, 2016 | For the year ended December 31, 2015 | For the period from January 1, 2014 through May 7, 2014 | For the period from May 8, 2014* through December 31, 2014 | |||||||||||||
| Net change in unrealized appreciation (depreciation) on: | ||||||||||||||||
| Non-controlled, non-affiliated investments | (10,390,732 | ) | 230,245 | $ | 2,974,591 | 1,403,565 | ||||||||||
| Non-controlled, affiliated investments | (10,458,180 | ) | 3,128,631 | — | (311,107 | ) | ||||||||||
| Controlled, affiliated investments | 10,875,915 | (15,000,080 | ) | — | 3,458,624 | |||||||||||
| Net change in unrealized appreciation (depreciation) from portfolio investments | (9,972,997 | ) | (11,641,204 | ) | 2,974,591 | 4,551,082 | ||||||||||
| Benefit/(Provision) for taxes on unrealized gain (loss) on investments | 635,580 | 2,231,817 | — | (1,697,004 | ) | |||||||||||
| Net realized gain (loss) and net change in unrealized appreciation (depreciation) from portfolio investments | (13,619,400 | ) | (6,686,395 | ) | 3,026,552 | 3,133,289 | ||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 8,789,786 | $ | 12,611,774 | $ | 9,954,110 | $ | 14,735,021 | ||||||||
| Basic and diluted: | ||||||||||||||||
| Net investment income per share | $ | 1.66 | $ | 1.43 | N.A. | $ | 0.86 | |||||||||
| Earnings per share | $ | 0.65 | $ | 0.93 | N.A. | $ | 1.09 | |||||||||
| Weighted Average Shares of Common Stock Outstanding | 13,496,128 | 13,516,766 | N.A. | 13,516,766 | ||||||||||||
| * | Commencement of operations of the Company. |
See notes to consolidated financial statements
80
| * | Commencement of operations of the Company. |
See notes to consolidated financial statements
81
| * | Commencement of operations of the Company. |
See notes to consolidated financial statements
82
| | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||
| 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 — 129.91% | ||||||||||||||||||||||||||||||||
| Senior Secured – First Lien — 43.51% | ||||||||||||||||||||||||||||||||
| A2Z Wireless Holdings, Inc.(2) | Telecommunications | LIBOR + 9.0% Cash | 1.00 | % | 1/15/2021 | 14,437,500 | $ | 14,293,125 | $ | 14,437,500 | 7.82% | |||||||||||||||||||||
| Black Diamond Rentals | Oil & Gas Services | 10.00% Cash, 4% PIK | 7/9/2018 | 6,741,084 | 6,741,084 | 6,368,583 | 3.45% | |||||||||||||||||||||||||
| IGT(2),(3) | Industrial Services | LIBOR + 8.75% Cash, 1.50% PIK | 1.00 | % | 12/10/2019 | 8,063,911 | 8,004,995 | 8,063,911 | 4.37% | |||||||||||||||||||||||
| LRI Holding, Inc.(2) | Industrial Services | LIBOR + 9.75% Cash | 0.50 | % | 9/28/2021 | 10,000,000 | 9,906,795 | 10,000,000 | 5.42% | |||||||||||||||||||||||
| Lugano Diamonds & Jewelry, Inc(2),(3) | Retail | LIBOR + 10.0% Cash | 0.75 | % | 10/24/2021 | 6,000,000 | 5,235,101 | 5,356,000 | 2.90% | |||||||||||||||||||||||
| NTI Holdings, LLC(2) | Telecommunications | LIBOR + 8.0% Cash | 1.00 | % | 3/30/2021 | 11,876,288 | 11,680,600 | 11,680,566 | 6.33% | |||||||||||||||||||||||
| NWN Corporation(2) | Technology & IT | LIBOR + 10.0% Cash | 1.00 | % | 10/16/2020 | 3,919,108 | 3,840,726 | 3,919,108 | 2.12% | |||||||||||||||||||||||
| Palmetto Moon LLC | Retail | 11.5% Cash | 10/31/2021 | 5,565,855 | 5,540,855 | 5,565,855 | 3.02% | |||||||||||||||||||||||||
| Stancor, Inc.(2) | Wholesale/Distribution | LIBOR + 9.0% | 0.75 | % | 8/19/2019 | 4,900,000 | 4,900,000 | 4,900,000 | 2.66% | |||||||||||||||||||||||
| Superior Controls, Inc.(2),(3) | High Tech Industries | LIBOR + 8.75% | 1.00 | % | 3/22/2021 | 10,000,000 | 10,000,000 | 10,000,000 | 5.42% | |||||||||||||||||||||||
| Total Senior Secured – First Lien | 80,143,281 | 80,291,523 | 43.51% | |||||||||||||||||||||||||||||
| Senior Secured – Second Lien — 41.57% | ||||||||||||||||||||||||||||||||
| Alpine Waste(2) | Waste Services | LIBOR + 8.75% | 1.00 | % | 12/30/2020 | 11,131,777 | $ | 11,131,777 | $ | 11,131,777 | 6.03% | |||||||||||||||||||||
| Conisus LLC(2) | Media: Advertising, Printing & Publishing | LIBOR + 8.75% Cash | 1.00 | % | 6/23/2021 | 11,750,000 | 11,750,000 | 10,870,000 | 5.89% | |||||||||||||||||||||||
| Duke Finance, LLC(2) | Industrial Manufacturing | LIBOR + 9.75% Cash | 1.00 | % | 10/28/2022 | 7,500,000 | 6,722,567 | 7,350,000 | 3.98% | |||||||||||||||||||||||
| Graco Supply Company | Aerospace | 12% Cash | 3/17/2021 | 4,000,000 | 4,000,000 | 3,877,000 | 2.10% | |||||||||||||||||||||||||
| Healthcare Associates of Texas, LLC(3) | Healthcare Services | 12.25% Cash | 4/30/2022 | 8,500,000 | 8,500,000 | 8,500,000 | 4.61% | |||||||||||||||||||||||||
| Medsurant Holdings, LLC | Healthcare Services | 12.25% Cash | 6/18/2021 | 6,200,000 | 6,138,000 | 6,200,000 | 3.36% | |||||||||||||||||||||||||
| My Alarm Center, LLC(2) | Security | LIBOR + 11.0% Cash | 1.00 | % | 7/9/2019 | 12,625,000 | 12,625,000 | 12,625,000 | 6.84% | |||||||||||||||||||||||
| Nation Safe Drivers (NSD)(2) | Automotive Business Services | LIBOR + 8.0% Cash | 2.00 | % | 9/29/2020 | 11,721,154 | 11,721,154 | 11,838,000 | 6.42% | |||||||||||||||||||||||
| Xpress Global Systems, LLC(2) | Transportation Logistics | 4/10/2020 | 7,420,134 | 6,986,203 | 4,316,871 | 2.34% | ||||||||||||||||||||||||||
| Total Senior Secured – Second Lien | 79,574,701 | 76,708,648 | 41.57% | |||||||||||||||||||||||||||||
| Senior Subordinated — 38.93% | ||||||||||||||||||||||||||||||||
| Black Diamond Rentals | Oil & Gas Services | 4.0% Cash | 7/9/2018 | 8,009,188 | $ | 8,009,188 | $ | 3,709,000 | 2.01% | |||||||||||||||||||||||
| GST Autoleather | Automotive Business Services | 11% Cash, 2.0% PIK | 1/11/2021 | 8,368,939 | 8,368,939 | 8,368,939 | 4.53% | |||||||||||||||||||||||||
| Media Storm, LLC | Media & Entertainment | 10% Cash | 8/28/2019 | 2,454,545 | 2,454,545 | 2,454,545 | 1.33% | |||||||||||||||||||||||||
| Metal Powder Products LLC(2) | Industrial Manufacturing | LIBOR + 12.25% Cash | 0.75 | % | 11/5/2021 | 8,250,000 | 8,250,000 | 8,250,000 | 4.47% | |||||||||||||||||||||||
| NextCare Holdings, Inc. | Healthcare Services | 10% Cash, 4% PIK | 12/31/2018 | 15,050,000 | 14,859,566 | 15,050,000 | 8.16% | |||||||||||||||||||||||||
| Pharmalogic Holdings Corp. | Healthcare Services | 12% Cash | 9/1/2021 | 14,000,000 | 14,000,000 | 14,000,000 | 7.59% | |||||||||||||||||||||||||
| QRC Holdings, LLC | High Tech Industries | 12.25% Cash | 11/20/2021 | 10,000,000 | 10,000,000 | 10,000,000 | 5.42% | |||||||||||||||||||||||||
| Security Alarm Financing Enterprises L. P.(2) | Security | LIBOR + 13.00% Cash | 1.00 | % | 6/19/2020 | 10,000,000 | 9,800,000 | 10,000,000 | 5.42% | |||||||||||||||||||||||
| Total Senior Subordinated | 75,742,238 | 71,832,484 | 38.93% | |||||||||||||||||||||||||||||
| Equity/Other — 5.90% | ||||||||||||||||||||||||||||||||
| IGT, Preferred Shares(4) | Industrial Services | 11% PIK | 1,110,922 | $ | 1,110,922 | $ | — | — | ||||||||||||||||||||||||
| Common Shares(4) | 44,000 | 44,000 | — | — | ||||||||||||||||||||||||||||
| Preferred AA Shares | 15% PIK | 292,115 | 292,115 | 292,115 | 0.16% | |||||||||||||||||||||||||||
| 1,447,037 | 292,115 | 0.16 | % | |||||||||||||||||||||||||||||
| LRI Holding, Inc., Preferred Shares(4) | Industrial Services | 1,000,000 | 1,000,000 | 1,084,000 | 0.59% | |||||||||||||||||||||||||||
| Lugano Diamonds & Jewelry, Inc, Warrants | Retail | 666,615 | 666,615 | 666,615 | 0.36 | % | ||||||||||||||||||||||||||
| Metal Powder Products, LLC, Common Shares(4) | Industrial Manufacturing | 500,000 | 500,000 | 659,000 | 0.36% | |||||||||||||||||||||||||||
83
| | | | | | | | | ||||||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||||||
| Company(+)*** | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||||||||||||
| My Alarm Center, LLC, Class A Preferred(4) | Security | 284,589 | — | 284,589 | 0.15% | |||||||||||||||||||||||||||||||
| NTI Holdings, LLC, Common Shares(4) | Telecommunications | 376,515 | 403,030 | 779,000 | 0.42% | |||||||||||||||||||||||||||||||
| Warrants(4) | 417,823 | 224,689 | 444,998 | 0.24% | ||||||||||||||||||||||||||||||||
| 627,719 | 1,223,998 | 0.66% | ||||||||||||||||||||||||||||||||||
| Palmetto Moon LLC, Common Shares | Retail | 434,145 | 434,145 | 434,145 | 0.24% | |||||||||||||||||||||||||||||||
| Superior Controls, Inc., Preferred Shares(4) | High Tech Industries | 400,000 | 400,000 | 516,000 | 0.28% | |||||||||||||||||||||||||||||||
| Tunnel Hill Class B Common Units(4),(5) | Waste Services | 93,160 | 2,454,303 | 2,029,000 | 1.10% | |||||||||||||||||||||||||||||||
| Wholesome Sweeteners, Inc., Common Shares(4) | Food & Beverage | 5,000 | 5,000,000 | 3,700,000 | 2.00% | |||||||||||||||||||||||||||||||
| Xpress Global Systems, LLC, Warrants(4) | Transportation Logistics | 489,000 | 489,000 | — | — | |||||||||||||||||||||||||||||||
| Total Equity/Other | 13,018,819 | 10,889,462 | 5.90% | |||||||||||||||||||||||||||||||||
| Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies | 248,479,039 | 239,722,117 | 129.91% | |||||||||||||||||||||||||||||||||
| Investments in Non-Controlled, Affiliated Portfolio Companies — 11.97%* | ||||||||||||||||||||||||||||||||||||
| Senior Secured – First Lien — 1.12% | ||||||||||||||||||||||||||||||||||||
| Show Media, Inc.(4) | Media & Entertainment | 5.5% Cash, 5.5% PIK | 8/10/2017 | 4,153,393 | $ | 4,056,960 | $ | 2,077,000 | 1.12% | |||||||||||||||||||||||||||
| Total Senior Secured – First Lien | 4,056,960 | 2,077,000 | 1.12% | |||||||||||||||||||||||||||||||||
| Senior Secured – Second Lien — 4.42% | ||||||||||||||||||||||||||||||||||||
| Southern Technical Institute, Inc.(2) | Education | LIBOR + 8.0% Cash, 4% PIK | 1.00 | % | 12/2/2020 | 8,156,261 | $ | 8,156,261 | $ | 8,156,261 | 4.42% | |||||||||||||||||||||||||
| Total Senior Secured – Second Lien | 8,156,261 | 8,156,261 | 4.42% | |||||||||||||||||||||||||||||||||
| Senior Subordinated — 1.20% | ||||||||||||||||||||||||||||||||||||
| Battery Solutions, Inc. | Environmental/Recycling Services | 6% Cash, 8% PIK | 11/6/2021 | 2,217,865 | $ | 2,217,865 | $ | 2,217,865 | 1.20% | |||||||||||||||||||||||||||
| Total Senior Subordinated | 2,217,865 | 2,217,865 | 1.20% | |||||||||||||||||||||||||||||||||
| Equity/Other — 5.23% | ||||||||||||||||||||||||||||||||||||
| Battery Solutions, Inc., Class A and F Units(4) | Environmental/Recycling Services | 5,000,000 | $ | 1,058,000 | $ | 482,000 | 0.26% | |||||||||||||||||||||||||||||
| Class E Units | 8% PIK | 11/6/2021 | 3,817,181 | 3,817,181 | 3,817,181 | 2.07% | ||||||||||||||||||||||||||||||
| 4,875,181 | 4,299,181 | 2.33% | ||||||||||||||||||||||||||||||||||
| Show Media, Inc., Units(4) | Media & Entertainment | 4,092,210 | 3,747,428 | — | — | |||||||||||||||||||||||||||||||
| Southern Technical Institute, Inc., Class A Units(4) | Education | 3,164,063 | 2,167,000 | 795,999 | 0.43% | |||||||||||||||||||||||||||||||
| Preferred Shares | 15.75% PIK | 4,403,897 | 4,292,897 | 4,403,897 | 2.39% | |||||||||||||||||||||||||||||||
| Warrants(4) | 3/30/2026 | 111,000 | 111,000 | 144,000 | 0.08% | |||||||||||||||||||||||||||||||
| 110,267 | 110,267 | — | — | |||||||||||||||||||||||||||||||||
| 221,267 | 144,000 | 0.08% | ||||||||||||||||||||||||||||||||||
| 6,681,164 | 5,343,896 | 2.90% | ||||||||||||||||||||||||||||||||||
| Total Equity/Other | 15,303,773 | 9,643,077 | 5.23% | |||||||||||||||||||||||||||||||||
| Total Investments in Non-Controlled, Affiliated Portfolio Companies | 29,734,859 | 22,094,203 | 11.97% | |||||||||||||||||||||||||||||||||
| Investments in Controlled, Affiliated Portfolio Companies — 7.84%** | ||||||||||||||||||||||||||||||||||||
| Senior Secured – First Lien — 7.22% | ||||||||||||||||||||||||||||||||||||
| FST Technical Services, LLC | Technology & Telecom | 12% Cash, 5% PIK | 11/18/2018 | 13,315,630 | $ | 13,315,630 | $ | 13,315,630 | 7.22% | |||||||||||||||||||||||||||
| Total Senior Secured – First Lien | 13,315,630 | 13,315,630 | 7.22% | |||||||||||||||||||||||||||||||||
84
| | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||
| Company(+)*** | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||||||||
| Equity/Other — 0.62% | ||||||||||||||||||||||||||||||||
| FST Technical Services, LLC, Common Class B Shares | Technology & Telecom | 9% PIK | 1,750,000 | $ | 1,806,541 | $ | 1,141,000 | 0.62% | ||||||||||||||||||||||||
| Total Equity/Other | 1,806,541 | 1,141,000 | 0.62% | |||||||||||||||||||||||||||||
| Total Investments in Controlled, Affiliated Portfolio Companies | 15,122,171 | 14,456,630 | 7.84% | |||||||||||||||||||||||||||||
| Total Investments | 293,336,069 | 276,272,950 | 149.72% | |||||||||||||||||||||||||||||
| Liabilities In Excess Of Other Assets | (91,748,359 | ) | (49.72)% | |||||||||||||||||||||||||||||
| Net Assets | $ | 184,524,591 | 100.00% | |||||||||||||||||||||||||||||
| (+) | All portfolio companies listed are qualifying assets. |
| * | 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 year ended December 31, 2016 in these affiliated investments are as follows: |
| | | | | | |||||||||||||||
| Name of Issuers | Fair Value at December 31, 2015 | Gross Addition | Gross Reductions | Interest/ Dividend/ Other Income | Fair Value at December 31, 2016 | |||||||||||||||
| ACT Lighting | $ | 12,753,733 | $ | — | $ | (12,053,793 | ) | $ | 2,097,103 | $ | — | |||||||||
| Battery Solutions, Inc. | 6,095,154 | — | — | 598,729 | 6,517,046 | |||||||||||||||
| DBI Holding, LLC | 22,894,780 | — | (27,831,221 | ) | 2,244,921 | — | ||||||||||||||
| Net Access Corporation | — | — | (394,733 | ) | 235,641 | — | ||||||||||||||
| Show Media, Inc. | 3,610,000 | — | — | 449,870 | 2,077,000 | |||||||||||||||
| Southern Technical Institute, Inc. | 13,890,332 | 4,235,280 | (4,235,280 | ) | 1,833,929 | 13,500,157 | ||||||||||||||
| $ | 59,243,999 | $ | 4,235,280 | $ | (44,515,027 | ) | $ | 7,460,193 | $ | 22,094,203 | ||||||||||
| ** | 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 year ended December 31, 2016 in these affiliated and controlled investments are as follows: |
| | | | | | |||||||||||||||
| Name of Issuers | Fair value at December 31, 2015 | Gross Addition | Gross Reductions | Interest/ Dividend/ Other income | Fair Value at December 31, 2016 | |||||||||||||||
| The DRC Group | $ | 1,804,817 | $ | 133,333 | $ | (832,752 | ) | $ | (4,526 | ) | $ | — | ||||||||
| FST Technical Services, LLC | 13,943,722 | — | — | 2,226,606 | 14,456,630 | |||||||||||||||
| $ | 15,748,539 | $ | 133,333 | $ | (832,752 | ) | $ | 2,222,080 | $ | 14,456,630 | ||||||||||
| *** | Pledged as collateral under the Credit Facility with ING Capital LLC. |
| (1) | The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities. |
| (2) | The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement. |
85
| (3) | The investment has an unfunded commitment as of December 31, 2016 which is excluded from the presentation (see Note 12). |
| (4) | Non-income producing security. |
| (5) | The investment was formerly known as City Carting Holding Company, Inc. On June 3, 2016, City Carting combined with Tunnel Hill Partners, L.P. |
Abbreviation Legend
PIK — Payment-In-Kind
86
| | | | | | | | | ||||||||||||||||||||||||
| 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 — 113.49% | ||||||||||||||||||||||||||||||||
| Senior Secured – First Lien — 36.58% | ||||||||||||||||||||||||||||||||
| A2Z Wireless Holdings, Inc.(2),(3) | Telecommunications | LIBOR + 11.75% | 3/31/2018 | 9,885,542 | $ | 9,722,622 | $ | 10,379,594 | 5.32 | % | ||||||||||||||||||||||
| Aphena Pharma Solutions(4) | Packaging | 8.50% Cash, 2.0% PIK | 3/3/2019 | 3,792,657 | 3,792,657 | 3,792,657 | 1.94 | % | ||||||||||||||||||||||||
| Black Diamond Rentals | Oil & Gas Services | 12% Cash, 5.0% PIK | 7/8/2018 | 13,127,489 | 13,127,489 | 13,127,489 | 6.73 | % | ||||||||||||||||||||||||
| HealthFusion, Inc. | High Tech Industries | 13% Cash | 10/7/2018 | 4,750,000 | 4,750,000 | 4,892,913 | 2.51 | % | ||||||||||||||||||||||||
| IGT(3) | Industrial Services | LIBOR + 9.25% Cash | 1.00 | % | 12/10/2019 | 9,168,757 | 9,080,156 | 9,168,757 | 4.70 | % | ||||||||||||||||||||||
| NTI Holding, LLC(3) | Telecommunications | LIBOR + 8.0% Cash | 1.00 | % | 3/30/2021 | 7,835,625 | 7,757,269 | 7,835,625 | 4.02 | % | ||||||||||||||||||||||
| NWN Corporation(3) | Technology & IT | LIBOR + 9.0% Cash | 1.00 | % | 10/16/2020 | 4,968,750 | 4,869,375 | 4,968,750 | 2.55 | % | ||||||||||||||||||||||
| Response Team Holdings LLC(3) | Restoration Services | LIBOR + 8.50% Cash, 1.00% PIK | 2.00 | % | 3/28/2019 | 9,902,334 | 9,902,334 | 10,001,000 | 5.13 | % | ||||||||||||||||||||||
| Stancor, Inc.(3) | Wholesale/Distribution | LIBOR + 8.0% | 0.75 | % | 8/19/2019 | 5,981,818 | 5,981,818 | 5,981,818 | 3.07 | % | ||||||||||||||||||||||
| Triton Technologies(4) | Call Center Services | 8.50% Cash, 2.0% PIK | 10/23/2018 | 1,200,000 | 1,188,731 | 1,200,000 | 0.61 | % | ||||||||||||||||||||||||
| Total Senior Secured – First Lien | 70,172,451 | 71,348,603 | 36.58 | % | ||||||||||||||||||||||||||||
| Senior Secured – Second Lien — 36.51% | ||||||||||||||||||||||||||||||||
| Alpine Waste(3) | Waste Services | LIBOR + 9.0% Cash, 0.5% PIK | 1.00 | % | 12/30/2020 | 11,047,685 | $ | 11,047,685 | $ | 11,047,685 | 5.66 | % | ||||||||||||||||||||
| Bioventus(3) | Healthcare: Orthopedic Products | LIBOR + 10.0% Cash | 1.00 | % | 4/10/2020 | 12,000,000 | 11,810,851 | 12,000,000 | 6.15 | % | ||||||||||||||||||||||
| Conisus LLC(3) | Media: Advertising, Printing & Publishing | LIBOR + 10.25% Cash | 1.00 | % | 6/23/2021 | 11,750,000 | 11,750,000 | 11,750,000 | 6.03 | % | ||||||||||||||||||||||
| Graco Supply Company | Aerospace | 12% Cash | 3/17/2021 | 4,000,000 | 4,000,000 | 4,000,000 | 2.05 | % | ||||||||||||||||||||||||
| Medsurant Holdings, LLC | Healthcare Services | 12.25% Cash | 6/18/2021 | 6,200,000 | 6,138,000 | 6,200,000 | 3.18 | % | ||||||||||||||||||||||||
| My Alarm Center, LLC(3) | Security | LIBOR + 11.0% Cash | 1.00 | % | 7/9/2019 | 9,500,000 | 9,500,000 | 9,500,000 | 4.87 | % | ||||||||||||||||||||||
| Nation Safe Drivers (NSD)(3) | Automotive Business Services | LIBOR + 8.0 | % | 2.00 | % | 9/29/2020 | 11,721,154 | 11,721,154 | 11,721,154 | 6.01 | % | |||||||||||||||||||||
| Xpress Global Systems, LLC(3) | Transportation Logistics | LIBOR + 10.5%, 2% PIK | 1.00 | % | 4/10/2020 | 5,454,778 | 4,986,386 | 4,986,386 | 2.56 | % | ||||||||||||||||||||||
| Total Senior Secured – Second Lien | 70,954,076 | 71,205,225 | 36.51 | % | ||||||||||||||||||||||||||||
| Senior Subordinated — 26.17% | ||||||||||||||||||||||||||||||||
| Dentistry For Children, Inc. | Healthcare Services | 11% Cash, 2.25% PIK | 9/1/2017 | 14,836,488 | $ | 14,836,488 | $ | 14,836,488 | 7.61 | % | ||||||||||||||||||||||
| GST Autoleather | Automotive Business Services | 11% Cash, 2.0% PIK | 1/11/2021 | 8,242,827 | 8,242,827 | 8,242,827 | 4.22 | % | ||||||||||||||||||||||||
| Media Storm, LLC | Media & Entertainment | 10% Cash | 8/28/2019 | 2,454,545 | 2,454,545 | 2,454,545 | 1.26 | % | ||||||||||||||||||||||||
| Pharmalogic Holdings Corp. | Healthcare Services | 12% Cash | 9/1/2021 | 15,500,000 | 15,500,000 | 15,500,000 | 7.95 | % | ||||||||||||||||||||||||
| Radiant Logistics(3) | Transportation Logistics | LIBOR + 11% Cash | 1.00 | % | 4/2/2021 | 10,000,000 | $ | 10,000,000 | $ | 10,000,000 | 5.13 | % | ||||||||||||||||||||
| Total Senior Subordinated | 51,033,860 | 51,033,860 | 26.17 | % | ||||||||||||||||||||||||||||
| Equity/Other — 14.23% | ||||||||||||||||||||||||||||||||
| City Carting Holding Company, Inc., Series A Preferred Shares(5) | Waste Services | 22% PIK | 4/30/2016 | 8,542,950 | $ | 8,542,950 | $ | 8,542,950 | 4.38 | % | ||||||||||||||||||||||
| Series B Preferred Shares(5) | 18% PIK | 4/30/2016 | 4,152,842 | 4,152,841 | 3,152,999 | 1.62 | % | |||||||||||||||||||||||||
| 12,695,791 | 11,695,949 | 6.00 | % | |||||||||||||||||||||||||||||
| Dentistry For Children, Inc., Class A-1 Units(6) | Healthcare Services | 2,000,000 | 2,203,000 | 4,136,000 | 2.12 | % | ||||||||||||||||||||||||||
| HealthFusion, Inc., Warrants(6) | High Tech Industries | 418,000 | 418,000 | 2,115,000 | 1.08 | % | ||||||||||||||||||||||||||
| IGT, Preferred Shares(6) | Industrial Services | 1,079,684 | 1,079,684 | 900,000 | 0.46 | % | ||||||||||||||||||||||||||
| Common Shares(6) | 44,000 | 44,000 | — | — | ||||||||||||||||||||||||||||
| 1,123,684 | 900,000 | 0.46 | % | |||||||||||||||||||||||||||||
See notes to consolidated financial statements
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| | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||
| Company*** | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||||||||
| Media Storm, LLC, Preferred Shares(6) | Media & Entertainment | 1,216,204 | 2,346,964 | 795,999 | 0.41 | % | ||||||||||||||||||||||||||
| NTI Holding, LLC Common Shares(6) | Telecommunications | 350,000 | 350,000 | 610,000 | 0.31 | % | ||||||||||||||||||||||||||
| Response Team Holdings LLC, Preferred Shares | Restoration Services | 12% PIK | 3/28/2019 | 2,928,437 | 2,928,437 | 2,928,437 | 1.50 | % | ||||||||||||||||||||||||
| Warrants(6) | 5 | — | 303,000 | 0.16 | % | |||||||||||||||||||||||||||
| 2,928,437 | 3,231,437 | 1.66 | % | |||||||||||||||||||||||||||||
| Wholesome Sweeteners, Inc., Common Shares(6) | Food & Beverage | 5,000 | 5,000,000 | 3,788,000 | 1.94 | % | ||||||||||||||||||||||||||
| Xpress Global Systems, LLC, Warrants(6) | Transportation Logistics | 489,000 | 489,000 | 489,000 | 0.25 | % | ||||||||||||||||||||||||||
| Total Equity/Other | 27,554,876 | 27,761,385 | 14.23 | % | ||||||||||||||||||||||||||||
| Total Investments in Non-Controlled, Non-Affiliated Portfolio Companies | 219,715,263 | 221,349,073 | 113.49 | % | ||||||||||||||||||||||||||||
| Investments in Non-Controlled, Affiliated Portfolio Companies — 30.38%* | ||||||||||||||||||||||||||||||||
| Senior Secured – First Lien — 1.85% | ||||||||||||||||||||||||||||||||
| Show Media, Inc. | Media & Entertainment | 5.5% Cash, 5.5% PIK | 8/10/2017 | 3,984,269 | $ | 3,775,048 | $ | 3,610,000 | 1.85 | % | ||||||||||||||||||||||
| Total Senior Secured – First Lien | 3,775,048 | 3,610,000 | 1.85 | % | ||||||||||||||||||||||||||||
| Senior Secured – Second Lien — 6.19% | ||||||||||||||||||||||||||||||||
| Southern Technical Institute, Inc.(3) | Education | LIBOR + 9.75% | 1.00 | % | 12/2/2020 | 12,061,333 | $ | 12,061,333 | $ | 12,061,333 | 6.19 | % | ||||||||||||||||||||
| Total Senior Secured – Second Lien | Cash, 2% PIK | 12,061,333 | 12,061,333 | 6.19 | % | |||||||||||||||||||||||||||
| Senior Subordinated — 15.09% | ||||||||||||||||||||||||||||||||
| ACT Lighting | Wholesale | 12% Cash, 2% PIK | 7/24/2019 | 8,506,733 | $ | 8,372,671 | $ | 8,506,733 | 4.36 | % | ||||||||||||||||||||||
| 8% PIK | 7/24/2020 | 1,964,331 | 1,815,097 | 1,860,000 | 0.96 | % | ||||||||||||||||||||||||||
| 10,187,768 | 10,366,733 | 5.32 | % | |||||||||||||||||||||||||||||
| Battery Solutions, Inc. | Environmental/ Recycling Services | 6% Cash, 8% PIK | 12/20/2018 | 2,045,181 | $ | 2,045,181 | $ | 2,045,181 | 1.05 | % | ||||||||||||||||||||||
| DBI Holding, LLC | Infrastructure Maintenance | 12% Cash, 4% PIK | 9/6/2019 | 9,032,780 | 9,032,780 | 9,032,780 | 4.63 | % | ||||||||||||||||||||||||
| 16% PIK | 9/6/2019 | 8,444,350 | 8,059,285 | 7,980,000 | 4.09 | % | ||||||||||||||||||||||||||
| 17,092,065 | 17,012,780 | 8.72 | % | |||||||||||||||||||||||||||||
| Total Senior Subordinated | 29,325,014 | 29,424,694 | 15.09 | % | ||||||||||||||||||||||||||||
| Equity/Other — 7.25% | ||||||||||||||||||||||||||||||||
| ACT Lighting, Warrants(6) | Wholesale | 7/24/2019 | 143,000 | $ | 143,000 | $ | 2,387,000 | 1.22 | % | |||||||||||||||||||||||
| Battery Solutions, Inc., Class A Units(6) | Environmental/ Recycling Services | 5,000,000 | 1,058,000 | 530,000 | 0.27 | % | ||||||||||||||||||||||||||
| Class E Units | 8% PIK | 12/20/2018 | 3,519,973 | 3,519,973 | 3,519,973 | 1.80 | % | |||||||||||||||||||||||||
| 4,577,973 | 4,049,973 | 2.07 | % | |||||||||||||||||||||||||||||
| DBI Holding, LLC, Warrants(6) | Infrastructure Maintenance | 3/6/2024 | 519,412 | 519,412 | 5,882,000 | 3.02 | % | |||||||||||||||||||||||||
| Show Media, Inc., Units(6) | Media & Entertainment | 4,092,210 | 3,747,428 | — | — | |||||||||||||||||||||||||||
| Warrants(6) | — | — | — | — | ||||||||||||||||||||||||||||
| 3,747,428 | — | — | ||||||||||||||||||||||||||||||
| Southern Technical Institute, Inc., Class A Units(6) | Education | 3,164,063 | 2,167,000 | 1,828,999 | 0.94 | % | ||||||||||||||||||||||||||
| Warrants(6) | 110,267 | 110,267 | — | — | ||||||||||||||||||||||||||||
| 2,277,267 | 1,828,999 | 0.94 | % | |||||||||||||||||||||||||||||
| Total Equity/Other | 11,265,080 | 14,147,972 | 7.25 | % | ||||||||||||||||||||||||||||
| Total Investments in Non-Controlled, Affiliated Portfolio Companies | 56,426,475 | 59,243,999 | 30.38% | |||||||||||||||||||||||||||||
See notes to consolidated financial statements
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| | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | | ||||||||||||||||||||||||
| Company*** | Industry | Interest Rate | Base Rate Floor | Maturity Date | No. Shares/ Principal Amount | Cost(1) | Fair Value | % of Net Assets | ||||||||||||||||||||||||
| Investments in Controlled, Affiliated Portfolio Companies — 8.07%** | ||||||||||||||||||||||||||||||||
| Senior Secured – First Lien — 6.92% | ||||||||||||||||||||||||||||||||
| DRC Emergency Services | Disaster Recovery Services | 10% Cash | 1/11/2020 | 5,000,000 | $ | 5,000,000 | $ | — | — | |||||||||||||||||||||||
| 8% Cash | 6/30/2016 | 1,199,893 | 1,199,893 | 835,000 | 0.43 | % | ||||||||||||||||||||||||||
| 6,199,893 | 835,000 | 0.43 | % | |||||||||||||||||||||||||||||
| FST Technical Services, LLC | Technology & Telecom | 12% Cash, 5.0% PIK | 11/18/2018 | 12,659,722 | 12,659,722 | 12,659,722 | 6.49 | % | ||||||||||||||||||||||||
| Total Senior Secured – First Lien | 18,859,615 | 13,494,722 | 6.92 | % | ||||||||||||||||||||||||||||
| Equity/Other — 1.15% | ||||||||||||||||||||||||||||||||
| DRC Emergency Services, Preferred Shares | Disaster Recovery Services | 10% PIK | 7,885,459 | $ | 6,623,838 | $ | 969,817 | 0.49 | % | |||||||||||||||||||||||
| FST Technical Services, LLC, Common Shares | Technology & Telecom | 9% PIK | 1,750,000 | 1,806,542 | 1,284,000 | 0.66 | % | |||||||||||||||||||||||||
| Total Equity/Other | 8,430,380 | 2,253,817 | 1.15 | % | ||||||||||||||||||||||||||||
| Total Investments in Controlled, Affiliated Portfolio Companies | 27,289,995 | 15,748,539 | 8.07 | % | ||||||||||||||||||||||||||||
| Total Investments | 303,431,733 | 296,341,611 | 151.94 | % | ||||||||||||||||||||||||||||
| Liabilities In Excess Of Other Assets | (101,309,400 | ) | (51.94 | )% | ||||||||||||||||||||||||||||
| Net Assets | $ | 195,032,211 | 100.00 | % | ||||||||||||||||||||||||||||
| * | 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, 2015 in these affiliated investments are as follows: |
| | | | | | |||||||||||||||
| Name of Issuers | Fair Value at December 31, 2014 | Gross Addition | Gross Reductions | Interest/ Dividend/ Other income | Fair Value at December 31, 2015 | |||||||||||||||
| ACT Lighting | $ | 10,849,399 | $ | 321,902 | $ | — | $ | 1,393,060 | $ | 12,753,733 | ||||||||||
| Battery Solutions, Inc. | 4,576,000 | 3,688,255 | 3,333,333 | 617,795 | 6,095,154 | |||||||||||||||
| DBI Holding, LLC | 16,102,785 | 1,677,744 | — | 2,866,050 | 22,894,780 | |||||||||||||||
| Net Access Corporation | 9,412,000 | — | 10,729,267 | 34,748 | — | |||||||||||||||
| Show Media, Inc. | 4,596,000 | 3,639,487 | 3,423,107 | 651,883 | 3,610,000 | |||||||||||||||
| Southern Technical Institute, Inc. | 15,717,008 | 61,333 | — | 1,372,069 | 13,890,332 | |||||||||||||||
| $ | 61,253,192 | $ | 9,388,721 | $ | 17,485,707 | $ | 6,935,605 | $ | 59,243,999 | |||||||||||
| ** | 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, 2015 in these affiliated and controlled investments are as follows: |
| | | | | | |||||||||||||||
| Name of Issuers | Fair Value at December 31, 2014 | Gross Addition | Gross Reductions | Interest/ Dividend/ Other income | Fair Value at December 31, 2015 | |||||||||||||||
| The DRC Group | $ | 12,596,562 | $ | 533,333 | $ | — | $ | 564,704 | $ | 1,804,817 | ||||||||||
| FST Technical Services, LLC | 17,459,000 | 159,722 | — | 1,939,967 | 13,943,722 | |||||||||||||||
| $ | 30,055,562 | $ | 693,055 | $ | — | $ | 2,504,671 | $ | 15,748,539 | |||||||||||
| *** | Pledged as collateral under the Credit Facility with ING Capital LLC. |
See notes to consolidated financial statements
89
| (1) | The cost of debt securities is adjusted for accretion of discount/amortization of premium and interest paid-in-kind on such securities. |
| (2) | The investment has an unfunded commitment as of December 31, 2015 which is excluded from the presentation (see Note 13). |
| (3) | The principal balance outstanding for all floating rate loans is indexed to LIBOR or an alternate base rate (e.g., prime rate), which typically resets semi-annually, quarterly, or monthly at the borrower's option. The borrower may also elect to have multiple interest reset periods for each loan. For each of these loans, the Company has provided the applicable margin over LIBOR based on each respective credit agreement. |
| (4) | The investments are portfolio companies of Enhanced Equity Fund, L.P. (“EEF”). EEF has guaranteed the portfolio company's obligations to the company pursuant to this investment. |
| (5) | City Carting Holding Company, Inc. is in the process of exploring strategic alternatives. As a result, maturity dates of Preferred Shares have been extended to 4/30/16. |
| (6) | Non-income producing security. |
Abbreviation Legend
PIK — Payment-In-Kind
See notes to consolidated financial statements
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Alcentra Capital Corporation (the “Company”, “Alcentra”, “we”, “us” or “our”) was formed as a Maryland corporation on June 6, 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”) and is applying the guidance of Accounting Standards Codification (“ASC”) Topic 946,Financial Services Investment Companies. Alcentra is managed by Alcentra NY, LLC (the “Adviser” or “Alcentra NY”), a 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 has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), commencing with its tax year ending December 31, 2014.
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 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. Concurrent with Alcentra’s acquisition of the Fund III Acquired Assets from the Partnership, Alcentra also purchased for $29 million in cash certain debt investments (the “Warehouse Portfolio”) from Alcentra Group. The Warehouse Portfolio debt investments were 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 fund the purchase of the warehouse portfolio, and the cash portion of the consideration paid to Fund III. On June 6, 2014, Alcentra sold 750,000 shares through the underwriters’ exercise of the overallotment option for gross proceeds of $11,250,000.
On April 8, 2014, the Company formed Alcentra BDC Equity Holdings, LLC, a wholly-owned subsidiary for tax purposes. This subsidiary allows us to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements of a RIC under the Code. The financial statements of this entity are consolidated into the financial statements of Alcentra. All intercompany balances and transactions have been eliminated.
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
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the 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”).
Basis of Presentation — The accompanying financial statements of the Partnership and the Company have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“GAAP”) and pursuant to the requirements for reporting on Form 10-K and Article 6 of Regulation S-X.
The accounting records of the Company and the Partnership are maintained in United States dollars.
Alcentra NY purchased the initial 100 shares for $1,500 on March 12, 2014.
Use of Estimates — The preparation of financial statements in accordance 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.
Consolidation — 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.
Portfolio Investment Classification — The Company classifies its investments in accordance with the requirements of the 1940 Act. Under the 1940 Act, “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. Under the 1940 Act, “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. “Non-controlled, non-affiliate investments” are defined as investments that are neither Control Investments or Affiliate Investments.
Cash — At December 31, 2016, cash balances totaling $3.9 million 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 the risk of loss associated with any uninsured balance is remote.
Deferred Financing Costs — Deferred financing costs consist of fees and expenses paid in connection with the credit facility (as defined in Note 10) and are capitalized at the time of payment. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Credit Facility.
Deferred Note Offering Costs — Deferred Note Offering costs consist of fees and expenses paid in connection with the series of Senior Securities issued (as defined in Note 9) and are capitalized at this time as these fees and expenses were incurred before the issuance commenced. These costs are amortized using the straight line method, which approximate the effective interest method over the term of the Notes.
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Valuation of Portfolio Investments — Portfolio investments are carried at fair value as determined by the Board of Directors (the “Board”) of Alcentra and by the General Partner of the Partnership for the period ended May 8, 2014 and prior.
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:
(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 the 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 is used 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 Company and its Adviser. Preliminary valuation conclusions are then documented and discussed with senior investment professional of 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.
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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 then discusses 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.
Organizational and Offering Costs — Organization expenses, including reimbursement payments to the Adviser, are expensed on the Company’s Consolidated Statements 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, printing fees and other related expenses associated with the filing of a registration statement. Offering costs are offset against proceeds of the offering in paid-in capital in excess of par in the Consolidated Statements of Changes in Net Assets. $1.56 million of offering costs were incurred with the initial public offering.
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 years ended December 31, 2016, December 31, 2015 or December 31, 2014.
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
Earnings and Net Asset Value Per Share — Earnings per share is calculated based upon the weighted average number of shares of common stock outstanding during the reported period. Net Asset Value per share is calculated using the number of shares outstanding as of the end of the 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 accretion of
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original issue discounts. Fees may be charged to the issuer by the Company 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 the 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 is recorded on the accrual basis to the extent that the Company and the Partnership expect to collect such amounts. The Company and the 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 an 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 December 31, 2016 and December 31, 2015.
Other Income — The Company may also receive structuring or closing fees in connection with its investments. Such upfront fees are accreted into income over the life of the investment. These fees are non-recurring in nature.
Prepayment penalties received by the Company for debt instruments paid back to the Company prior to the maturity date are recorded as income upon receipt.
Income Taxes — The Company has elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the 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 for taxation 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
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tax assets and liabilities are reflected in the Company’s consolidated financial statements. For the years ended December 31, 2016, December 31, 2015 and December 31, 2014, we recognized a benefit/(provision) for income tax on unrealized gain/(loss) on investments of $0.6 million, $2.2 million and $(1.7) million, respectively, for the Taxable Subsidiaries. As of December 31, 2016 and December 31, 2015, $1.3 million and $1.4 million, respectively, was included in the deferred tax asset on the Consolidated Statements of Assets and Liabilities.
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 Partnership’s 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 Partnership’s 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.
The Company has analyzed such tax positions and has concluded that no unrecognized tax benefits should be recorded for uncertain tax positions for tax years that may be open for the years ended December 31, 2016, December 31, 2015 and December 31, 2014. This conclusion may be subject to review and adjustment at a later date based on factors, including but not limited to, ongoing analysis and changes to laws, regulations, and interpretations thereof.
Permanent differences between investment company taxable income and net investment income for financial reporting purposes are reclassified among capital accounts in the financial statements to reflect their tax character. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. During the years ended December 31, 2016 and 2015, the Company reclassified for book purposes amounts arising from permanent book/tax differences related to the different tax treatment of dividend reclasses, as follows:
| | | | |||||||||
| As of December 31, 2016 | As of December 31, 2015 | As of December 31, 2014 | ||||||||||
| Accumulated undistributed net investment income | $ | (293,029 | ) | $ | 3,114 | $ | 207,499 | |||||
| Accumulated net realized gains | 713,845 | (3,114 | ) | (207,499 | ) | |||||||
| Additional paid in capital | (420,816 | ) | — | — | ||||||||
The tax character of distributions paid by the company for the years ended December 31, 2016, 2015 and 2014 are as follows:
| | | | |||||||||
| As of December 31, 2016 | As of December 31, 2015 | As of December 31, 2014 | ||||||||||
| Ordinary income | $ | 18,351,553 | $ | 18,382,802 | $ | 11,597,385 | ||||||
| Net long-term capital gains | 4,596 | — | — | |||||||||
| Total distributions paid | $ | 18,356,149 | $ | 18,382,802 | $ | 11,597,385 | ||||||
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At December 31, 2016, December 31, 2015 and December 31, 2014, the components of distributable earnings on a tax basis are as follows:
| | | | |||||||||
| As of December 31, 2016 | As of December 31, 2015 | As of December 31, 2014 | ||||||||||
| Undistributed net investment income | $ | 6,262,940 | $ | 1,231,457 | $ | 211,846 | ||||||
| Accumulated net realized gains (losses) | -0- | 2,693,574 | 71,712 | |||||||||
| Unrealized appreciation (depreciation) | (12,564,546 | ) | (6,558,423 | ) | 2,854,078 | |||||||
| Components of tax distributable earnings at year end | $ | (6,301,606 | ) | $ | (2,633,392 | ) | $ | 3,137,636 | ||||
The following is the major tax jurisdiction for the Partnership and the earliest tax year subject to examination: United States — 2010.
As of December 31, 2015, Wholesome Sweeteners and Dentistry for Children were sold from Alcentra BDC Equity Holdings LLC to Alcentra Capital Corporation. This sale resulted in a tax liability which is reflected in our financial statements.
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.
Recently Issued Accounting Standards — In April 2015, FASB issued ASU 2015-03, Interest — Imputation of interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. Amortization of the costs are included in Amortization of deferred financing costs and Amortization of deferred note offering costs. This guidance is effective for annual and interim periods beginning after December 15, 2015. The Company adopted this guidance as of January 1, 2016. The new guidance will be applied retrospectively to each prior period presented.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The update eliminates the requirement to categorize investments in the fair value hierarchy if their fair value is measured at net asset value (NAV) per share (or its equivalent) using the practical expedient in the FASB’s fair value measurement guidance. Public companies are required to apply ASU 2015-07 retrospectively for interim and annual reporting periods beginning after December 15, 2015. Accordingly, the Company has evaluated the impact of ASU 2015-07 on its consolidated financial statements and determined that the adoption of ASU 2015-07 has not had a material impact on our consolidated financial statements.
The Company and the 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.
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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 the Partnership has the ability to access as of the reporting date. The type of investments which would generally be included in Level 1 includes listed equity securities and listed derivatives. As required by ASC Topic 820, the Company and the 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 the 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. 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 the 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 fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2016 are as follows:
| | | | | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Senior Secured – First Lien | $ | — | $ | — | $ | 95,684,153 | $ | 95,684,153 | ||||||||
| Senior Secured – Second Lien | — | — | 84,864,909 | 84,864,909 | ||||||||||||
| Subordinated Debt | — | — | 74,050,349 | 74,050,349 | ||||||||||||
| Equity/Other | — | — | 21,673,539 | 21,673,539 | ||||||||||||
| Total Investments | $ | — | $ | — | $ | 276,272,950 | $ | 276,272,950 | ||||||||
The fair values of our investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant input used in the valuation as of December 31, 2015 are as follows:
| | | | | ||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Senior Secured – First Lien | $ | — | $ | — | $ | 88,453,325 | $ | 88,453,325 | ||||||||
| Senior Secured – Second Lien | — | — | 83,266,558 | 83,266,558 | ||||||||||||
| Subordinated Debt | — | — | 80,458,554 | 80,458,554 | ||||||||||||
| Equity/Other | — | — | 44,163,174 | 44,163,174 | ||||||||||||
| Total Investments | $ | — | $ | — | $ | 296,341,611 | $ | 296,341,611 | ||||||||
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The changes in investments classified as Level 3 are as follows for the years ended December 31, 2016 and December 31, 2015.
As of December 31, 2016:
| | | | | | |||||||||||||||
| Senior Secured- First Lien | Senior Secured- Second Lien | Senior Subordinated | Equity/ Other | Total | ||||||||||||||||
| Balance as of January 1, 2016 | $ | 88,453,325 | $ | 83,266,558 | $ | 80,458,554 | $ | 44,163,174 | $ | 296,341,611 | ||||||||||
| Amortized discounts/premiums | 234,054 | 298,817 | 692,963 | — | 1,225,834 | |||||||||||||||
| Paid in-kind interest | 1,729,143 | 618,732 | 1,660,971 | 2,195,117 | 6,203,963 | |||||||||||||||
| Net realized gain (loss) | (5,334,131 | ) | 11,658 | 411,308 | 629,182 | (4,281,983 | ) | |||||||||||||
| Net change in unrealized appreciation (depreciation) | 2,522,071 | (3,117,202 | ) | (4,009,434 | ) | (5,368,432 | ) | (9,972,997 | ) | |||||||||||
| Purchases | 60,425,816 | 20,956,473 | 67,125,299 | 9,098,318 | 157,605,906 | |||||||||||||||
| Sales/Return of capital | (52,346,125 | ) | (17,170,127 | ) | (72,289,312 | ) | (29,043,820 | ) | (170,849,384 | ) | ||||||||||
| Balance as of December 31, 2016 | $ | 95,684,153 | $ | 84,864,909 | $ | 74,050,349 | $ | 21,673,539 | $ | 276,272,950 | ||||||||||
| Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2016 | $ | (1,902,020 | ) | $ | (2,928,053 | ) | $ | (3,909,754 | ) | $ | (2,033,672 | ) | $ | (10,773,499 | ) | |||||
As of December 31, 2015:
| | | | | | |||||||||||||||
| Senior Secured- First Lien | Senior Secured- Second Lien | Senior Subordinated | Equity/ Other | Total | ||||||||||||||||
| Balance as of January 1, 2015 | $ | 97,395,708 | $ | 46,748,798 | $ | 54,986,207 | $ | 51,343,141 | $ | 250,473,854 | ||||||||||
| Amortized discounts/premiums | 244,029 | 79,380 | 121,148 | — | 444,557 | |||||||||||||||
| Paid in-kind interest | 1,002,136 | 281,587 | 2,662,765 | 1,974,016 | 5,920,504 | |||||||||||||||
| Net realized gain (loss) | 11,051 | 94,674 | — | 2,617,267 | 2,722,992 | |||||||||||||||
| Net change in unrealized appreciation (depreciation) | (3,199,100 | ) | (166,447 | ) | 521,766 | (8,637,423 | ) | (11,481,204 | ) | |||||||||||
| Purchases | 26,665,951 | 46,946,356 | 25,500,001 | 7,595,440 | 106,707,748 | |||||||||||||||
| Sales/Return of capital | (33,666,450 | ) | (10,717,790 | ) | (3,333,333 | ) | (10,729,267 | ) | (58,446,840 | ) | ||||||||||
| Balance as of December 31, 2015 | $ | 88,453,325 | $ | 83,266,558 | $ | 80,458,554 | $ | 44,163,174 | $ | 296,341,611 | ||||||||||
| Net change in unrealized appreciation (depreciation) from investments still held as of December 31, 2015 | $ | (3,330,817 | ) | $ | 500,149 | $ | 116,006 | $ | (6,846,899 | ) | $ | (9,561,561 | ) | |||||||
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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 December 31, 2016 and December 31, 2015, respectively.
As of December 31, 2016:
| | | | | | |||||||||||||||
| Assets at Fair Value | Fair Value at December 31, 2016 | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | |||||||||||||||
| Senior Secured – First Lien | $ | 95,684,153 | Yield to Maturity | Comparable Market Rate | 9.0% – 17.0% | 11.44 | % | |||||||||||||
| Senior Secured – Second Lien | $ | 84,864,909 | Yield to Maturity | Comparable Market Rate | 9.75% – 20.7% | 11.39 | % | |||||||||||||
| Senior Subordinated | $ | 74,050,349 | Yield to Maturity | Comparable Market Rate | 10% – 14% | 12.33 | % | |||||||||||||
| Preferred Ownership | $ | 12,426,782 | Market Approach | Enterprise Value/ LTM EBITDA Multiple | 4.00x – 13.00x | 8.26 | % | |||||||||||||
| Common Ownership/ Common Warrants | $ | 9,246,757 | Market Approach | Enterprise Value/ LTM EBITDA Multiple | 4.00x – 13.00x | 10.13 | % | |||||||||||||
| Total | $ | 276,272,950 | ||||||||||||||||||
As of December 31, 2015:
| | | | | | |||||||||||||||
| Assets at Fair Value | Fair Value at December 31, 2015 | Valuation Technique | Unobservable Input | Range of Inputs | Weighted Average | |||||||||||||||
| Senior Secured – First Lien | $ | 88,453,325 | Yield to Maturity | Comparable Market Rate | 8.75% – 17.0% | 12.29 | % | |||||||||||||
| Senior Secured – Second Lien | $ | 83,266,558 | Yield to Maturity | Comparable Market Rate | 10.0% – 13.5% | 11.28 | % | |||||||||||||
| Senior Subordinated | $ | 80,458,554 | Yield to Maturity | Comparable Market Rate | 8.0% – 26.2% | 13.80 | % | |||||||||||||
| Preferred Ownership | $ | 20,810,175 | Market Approach | Enterprise Value/ LTM EBITDA Multiple | 6.84x – 8.06x | 7.45x | ||||||||||||||
| Common Ownership/ Common Warrants | $ | 23,352,999 | Market Approach | Enterprise Value/ LTM EBITDA Multiple | 8.97x – 9.14x | 9.05x | ||||||||||||||
| Total | $ | 296,341,611 | ||||||||||||||||||
On January 18, 2016, the Board of Directors approved a $5.0 million open market stock repurchase program. Pursuant to the program, we are authorized to repurchase up to $5.0 million in the aggregate of our outstanding common stock in the open market. The timing, manner, price and amount of any share repurchases will be determined by our management, in its discretion, based upon the evaluation of economic conditions, stock price, applicable legal and regulatory requirements and other factors. The open market stock repurchase program will be in effect until the earlier of (i) January 18, 2017 or (ii) the repurchase of $5.0 million of the Company’s common stock. The program does not require us to repurchase any specific number of shares and we cannot assure that any shares will be repurchased under the program. The program may be suspended, extended, modified or discontinued at any time.
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The following table sets forth the number of shares of common stock repurchased by the Company under its share repurchase program for the year ended December 31, 2016:
| | | | | | |||||||||||||||
| Month Ended | Shares Repurchased | Repurchase Price Per Share | Aggregate Consideration for Repurchased Shares | |||||||||||||||||
| March 31, 2016 | 10,509 | $ | 10.7700 – $11.2444 | $ | 115,828 | |||||||||||||||
| May 31, 2016 | 9,547 | $ | 11.5596 – $12.3333 | 114,762 | ||||||||||||||||
| June 30, 2016 | 6,074 | $ | 12.2335 – $12.3586 | 74,860 | ||||||||||||||||
| November 30, 2016 | 17,003 | $ | 11.4991 – $12.3032 | 203,026 | ||||||||||||||||
| December 31, 2016 | 22,000 | $ | 11.6527 – $12.4857 | 267,146 | ||||||||||||||||
| 65,133 | $ | 775,622 | ||||||||||||||||||
For the year ended December 31, 2015, there were no shares issued or proceeds received by the Company.
The following table summarizes the total shares issued and proceeds received in connection with the Company’s Offering for the period ended December 31, 2014 (May 8, 2014 — December 31, 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 | — | 1,562,318 | ||||||
| Total shares outstanding/net proceeds to Company | 13,516,666 | $ | 197,850,172 | |||||
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. As of May 7, 2014, Limited Partners have contributed $226,397,552, or 107.71% of their total capital commitments to the Partnership. 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.
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. If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income. As of December 31, 2016 and December 31, 2015, we accrued $240,207 and $0,
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respectively, for any unpaid potential excise tax liability and have included these amounts within income tax liability on the accompanying Consolidated Statements of Assets and Liabilities.
The following table reflects the Company’s dividends declared and paid on its common stock for the year ended December 31, 2016:
| | | | |||||||||
| Date Declared | Record Date | Payment Date | Amount Per Share | |||||||||
| March 7, 2016 | March 31, 2016 | April 7, 2016 | $ | 0.340 | ||||||||
| May 5, 2016 | June 30, 2016 | July 7, 2016 | $ | 0.340 | ||||||||
| August 4, 2016 | September 30, 2016 | October 6, 2016 | $ | 0.340 | ||||||||
| November 3, 2016 | December 31, 2016 | January 5, 2017 | $ | 0.340 | ||||||||
The following table reflects the Company’s dividends declared and paid on its common stock for the year ended December 31, 2015:
| | | | |||||||||
| Date Declared | Record Date | Payment Date | Amount Per Share | |||||||||
| March 10, 2015 | March 31, 2015 | April 6, 2015 | $ | 0.340 | ||||||||
| May 11, 2015 | June 30, 2015 | July 6, 2015 | $ | 0.340 | ||||||||
| August 10, 2015 | September 30, 2015 | October 6, 2015 | $ | 0.340 | ||||||||
| November 5, 2015 | December 31, 2015 | January 7, 2016 | $ | 0.340 | ||||||||
The following table reflects the Company’s dividends declared and paid on its common stock for the period ended December 31, 2014:
| | | | |||||||||
| Date Declared | Record Date | Payment Date | Amount Per Share | |||||||||
| June 24, 2014 | June 30, 2014 | July 7, 2014 | $ | 0.178 | ||||||||
| August 12, 2014 | September 30, 2014 | October 6, 2014 | $ | 0.340 | ||||||||
| November 4, 2014 | December 30, 2014 | January 6, 2015 | $ | 0.340 | ||||||||
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.
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
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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.
For the period from January 1, 2014 to May 7, 2014, the Partnership made distributions to the General Partner and the Limited Partners totaling $3,941,341. 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 70.03% and 29.97% 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 during the period from January 1, 2014 to May 7, 2014, are broken down as follows:
| | |||
| For the period from January 1, 2014 to May 7, 2014 | ||||
| Return of capital | $ | 750,000 | ||
| Return on capital | 3,191,341 | |||
| Total | $ | 3,941,341 | ||
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, the General Partner was allocated carried interest distributions of $(5,966,619). 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.
Under the Investment Advisory Agreement, the Company has agreed to pay Alcentra NY an annual base management fee based on its gross assets as well as an incentive fee based on its performance. The base management fee is 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% if its gross assets are between $625 million and $750 million; and 1.5% if its gross assets are greater than $750 million. The various management fee percentages (i.e. 1.75%, 1.625% and 1.5%) would apply to the Company’s entire gross assets in the event its gross assets exceed the various gross asset thresholds. The base management fee will be payable quarterly in arrears and shall be calculated based
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on the average value of the Company’s gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters.
The incentive fee consists of two parts. The first part, which is calculated and payable quarterly in arrears, equals 20% of the Company’s “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a hurdle rate of 2% per quarter, and is subject to a “catch-up” feature. The “catch-up” feature is intended to provide the Adviser with an incentive fee of 50% of the Company’s “pre-incentive fee net investment income” as if a preferred return did not apply when our net investment income exceeds 2.5% in any quarter. 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 the Company receives 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 the Company has received such income in cash.
For the year ended December 31, 2016, the Company recorded expenses for base management fees of $5,209,684, of which none was waived by the Adviser and $1,301,591 was payable at December 31, 2016. For the year ended December 31, 2015, the Company recorded expenses for base management fees of $4,943,886, of which none was waived by the Adviser and $1,302,213 was payable at December 31, 2015. For the period from May 8, 2014 to December 31, 2014, the Company recorded an expense for base management fee of $2,506,937, of which $1,051,811 was waived by the Adviser and $615,668 was payable at December 31, 2014. For the period from January 1, 2014 to May 7, 2014 the Partnership recorded an expense for base management fees of $699,473, of which $0 was payable at December 31, 2014.
The Adviser agreed to waive its fees (base management and incentive fee), without recourse against or reimbursement by the Company, through the quarter ended June 30, 2015 and 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). For the year ended December 31, 2016, the Company incurred income-based incentive fees of $3,255,167, of which none was waived by the Adviser. For the year ended December 31, 2015, the Company incurred income-based incentive fees of $2,270,450, of which none was waived by the Adviser. For the period from May 8, 2014 to December 31, 2014 the Company incurred incentive fees of $966,059, of which $966,059 was waived by the Adviser. For the year ended December 31, 2016, the Company incurred capital gains incentive fees of $0, of which $0 was waived by the Adviser. For the year ended December 31, 2015, the Company incurred capital gains incentive fees of $1,001,467, of which $1,001,467 was waived by the Adviser.
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For the period from May 8, 2014 to December 31, 2014, the Company recorded a waiver of management and incentive fees which totaled $2,017,870.
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 $528,719 and Class B Limited Partners were charged $170,754 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 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 had a $50.0 million commitment to the Partnership as a Limited Partner. For the period from January 1, 2014 through May 7, 2014, this Limited Partner has contributed $56,602,997, or 113.21%, of its total capital commitments to the Partnership.
Additionally, the Partnership incurred $699,473 in management fees, for the period from January 1, 2014 to May 7, 2014. The base management fee payable at May 7, 2014 was $0.
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. The Company has obtained directors’ and officers’ liability insurance on behalf of its directors and officers.
For the year ended December 31, 2016 the Company recorded directors’ fee expense of $296,809, of which $95,000 was payable at December 31, 2016. For the year ended December 31, 2015 the Company recorded directors’ fee expense of $243,726, of which $37,025 was payable at December 31, 2015. For the period from May 8, 2014 to December 31, 2014 the Company recorded directors’ fee expense of $192,608, of which $85,692 was payable at December 31, 2014.
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Investment purchases, sales and principal payments/paydowns are summarized below for the years ended December 31, 2016 and 2015, and the period from January 1, 2014 through May 7, 2014 and the period from May 8, 2014 through December 31, 2014.
| | | | | ||||||||||||
| For the year ended December 31, 2016 | For the year ended December 31, 2015 | For the period from January 1, 2014 through May 7, 2014 | For the period from May 8, 2014* through December 31, 2014 | |||||||||||||
| Investment purchases, at cost (including PIK interest and dividends) | $ | 151,765,946 | $ | 112,628,252 | $ | 50,201,887 | $ | 113,005,276 | ** | |||||||
| Investment sales, proceeds (including Principal payments/paydown proceeds) | 158,805,461 | 66,446,840 | 15,780,666 | 44,354,959 | ||||||||||||
| * | 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) |
On January 30, 2015, the Company entered into a Selling Agent Agreement with Incapital LLC, as purchasing agent for our issuance of $40.0 million of Alcentra Capital InterNotes®. On January 25, 2016, the Company entered into an additional Selling Agent Agreement with Incapital LLC, as purchasing agent for the Company’s issuance of up to $15 million of Alcentra Capital InterNotes®.
These notes are direct unsecured obligations and each series of notes will be issued by a separate trust (administered by U.S. Bank). These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.
During the year ended December 31, 2016, the Company issued $15.0 million in aggregate principal amount of the Alcentra Capital InterNotes® for net proceeds of $14.7 million. These notes were issued with a stated interest rate of 6.50%, 6.375% and 6.25%. These notes mature on February 15, 2021, June 15, 2021 and July 15, 2021. For the years ended December 31, 2016 and 2015, the Company borrowed an average of $49.7 million and $29.6 million with a weighted average interest rate of 6.38% and 6.35%, respectively.
The following table summarizes the Alcentra Capital InterNotes® issued and outstanding during the year ended December 31, 2016.
| | | | | ||||||||||||
| Tenor at Origination (in years) | Principal Amount (000��s omitted) | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | ||||||||||||
| 5 | $ | 53,582 | 6.25% – 6.50% | 6.38 | % | February 15, 2020 – July 15, 2021 | ||||||||||
| 7 | 1,418 | 6.50% – 6.75% | 6.63 | % | January 15, 2022 – April 15, 2022 | |||||||||||
| $ | 55,000 | |||||||||||||||
During the year ended December 31, 2016, the Company redeemed $0 aggregate principal amount of our Alcentra Capital InterNotes®. The net proceeds of this offering were used to repay outstanding indebtedness under the Credit Facility.
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In connection with the issuance of the Alcentra Capital InterNotes®, the Company incurred $1.196 million of fees which are being amortized over the term of the notes and are included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of December 31, 2016. During the year ended December 31, 2016 we recorded $0.359 million of interest costs and amortization of offering costs on the Alcentra Capital InterNotes® as interest expense.
On May 8, 2014, the Company entered into a senior secured revolving credit agreement (the “Credit Facility”) with ING Capital LLC (“ING”), as administrative agent, collateral agent and lender to provide liquidity in support of its investment and operational activities. The Credit Facility has an initial commitment of $80 million with an accordion feature that allows for an increase in the total commitments up to $160 million, subject to certain conditions and the satisfaction of specified financial covenants. The Credit Facility was amended on August 11, 2015 to increase the accordion feature to allow for a future increase of the total commitments up to $250 million, subject to satisfaction of certain conditions at the time of any such future increase. As amended, the Credit Facility has a maturity date of August 11, 2020 and bears interest, at our election, at a rate per annum equal to (i) 2.25% plus the highest of a prime rate, the Federal Funds rate plus 0.5%, three month LIBOR plus 1%, and zero or (ii) 3.25% plus the one, three or six month LIBOR rate, as applicable.
On March 2, 2016, we amended certain provisions of the Credit Facility relating to the treatment of approximately $38.6 million in aggregate principal amount of outstanding InterNotes that mature prior to the Credit Facility. Among other things, the amendments to the Credit Facility provide that, in the nine-month period prior to the maturity of these particular InterNotes, which mature between February 15 and April 15, 2020, our ability to borrow under the Credit Facility will be reduced by and in the amount of such InterNotes still outstanding during such time. The Credit Facility is secured primarily by the Company’s assets. Costs of $3.6 million were incurred in connection with obtaining and amending the Credit Facility, which have been recorded as deferred financing costs on the Consolidated Statements of Assets and Liabilities and are being amortized over the life of the Credit Facility.
Amounts available to borrow under the Credit Facility are subject to a minimum borrowing/collateral base that applies an advance rate to certain investments held by the Company. The Company is subject to limitations with respect to the investments securing the Credit Facility, including, but not limited to, restrictions on sector concentrations, loan size, portfolio company leverage which may affect the borrowing base and therefore amounts available to borrow.
The Company pays a commitment fee between 0.5% and 1.0% per annum based on the size of the unused portion of the Credit Facility. This fee is included in interest expense on the Company’s Consolidated Statements of Operations.
The Company has made customary representations and warranties and is required to comply with various covenants and reporting requirements. These covenants are subject to important limitations and exceptions that are described in the documents governing the Credit Facility. As of December 31, 2016, the Company was in compliance in all material respects with the terms of the Credit Facility.
As of December 31, 2016 and December 31, 2015, the Company had United States dollar borrowings of $39.1 million and $63.5 million outstanding under the Credit Facility, respectively. For the year ended December 31, 2016, the Company borrowed an average of $50.0 million with a weighted average interest rate of 3.84%. For the year ended December 31, 2015, the Company borrowed an average of $48.8 million with a weighted average interest rate of 3.55%.
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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. For the period May 8, 2014 through December 31, 2014, Alcentra borrowed an average of $28,678,508. For the period January 1, 2014 through May 7, 2014, the Partnership borrowed an average of $21,953,080. Alcentra’s weighted average interest rate for the period May 8, 2014 through December 31, 2014 is 3.78%. The Partnership’s weighted average interest rate for the period January 1, 2014 through May 7, 2014 is 1.76%.
At December 31, 2016, 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 twenty industries listed in Note 14. 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 2016 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 have 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.
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 December 31, 2016 and December 31, 2015, the Company had $6.3 million and $1.0 million in unfunded commitments under loan and financing agreements, respectively. As of December 31, 2016 and December 31, 2015, the Company’s unfunded commitment under loan and financing agreements are presented below.
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| | | ||||||
| As of | ||||||||
| December 31, 2016 | December 31, 2015 | |||||||
| A2Z Wireless Holdings, Inc. | $ | — | $ | 1,004,270 | ||||
| Superior Controls, Inc. | 2,500,000 | — | ||||||
| Lugano Diamonds & Jewelry, Inc. | 2,000,000 | — | ||||||
| Healthcare Associates of Texas, LLC | 1,300,000 | — | ||||||
| IGT | 500,000 | — | ||||||
| Total | $ | 6,300,000 | $ | 1,004,270 | ||||
As of December 31, 2016, the Company’s portfolio investments were categorized as follows:
| | | | |||||||||
| Industry | Cost | Fair Value | % of Net Assets* | |||||||||
| Healthcare Services | $ | 43,497,566 | $ | 43,750,000 | 23.71 | % | ||||||
| Telecommunications | 26,601,444 | 27,342,064 | 14.82 | % | ||||||||
| Security | 22,425,000 | 22,909,589 | 12.41 | % | ||||||||
| High Tech Industries | 20,400,000 | 20,516,000 | 11.12 | % | ||||||||
| Automotive Business Services | 20,090,093 | 20,206,939 | 10.95 | % | ||||||||
| Industrial Services | 20,358,827 | 19,440,026 | 10.53 | % | ||||||||
| Industrial Manufacturing | 15,472,567 | 16,259,000 | 8.81 | % | ||||||||
| Technology & Telecom | 15,122,171 | 14,456,630 | 7.83 | % | ||||||||
| Education | 14,837,425 | 13,500,157 | 7.32 | % | ||||||||
| Waste Services | 13,586,080 | 13,160,777 | 7.13 | % | ||||||||
| Retail | 11,876,716 | 12,022,615 | 6.52 | % | ||||||||
| Media: Advertising, Printing & Publishing | 11,750,000 | 10,870,000 | 5.89 | % | ||||||||
| Oil & Gas Services | 14,750,272 | 10,077,583 | 5.46 | % | ||||||||
| Environmental/Recycling Services | 7,093,046 | 6,517,046 | 3.53 | % | ||||||||
| Wholesale/Distribution | 4,900,000 | 4,900,000 | 2.66 | % | ||||||||
| Media & Entertainment | 10,258,933 | 4,531,545 | 2.46 | % | ||||||||
| Transportation Logistics | 7,475,203 | 4,316,871 | 2.34 | % | ||||||||
| Technology & IT | 3,840,726 | 3,919,108 | 2.12 | % | ||||||||
| Aerospace | 4,000,000 | 3,877,000 | 2.10 | % | ||||||||
| Food & Beverage | 5,000,000 | 3,700,000 | 2.01 | % | ||||||||
| Total | $ | 293,336,069 | $ | 276,272,950 | 149.72 | % | ||||||
| Geographic Region | ||||||||||||
| South | $ | 82,260,883 | $ | 73,848,766 | 40.02 | % | ||||||
| Mid West | 48,785,996 | 49,578,049 | 26.87 | % | ||||||||
| Eastern | 48,228,643 | 48,486,134 | 26.28 | % | ||||||||
| South East | 35,200,203 | 31,186,871 | 16.90 | % | ||||||||
| South West | 29,981,737 | 29,506,630 | 15.99 | % | ||||||||
| West | 34,637,881 | 29,231,392 | 15.84 | % | ||||||||
| North East | 14,240,726 | 14,435,108 | 7.82 | % | ||||||||
| Total | $ | 293,336,069 | $ | 276,272,950 | 149.72% | |||||||
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| | | | |||||||||
| Industry | Cost | Fair Value | % of Net Assets* | |||||||||
| Investment Type | ||||||||||||
| Senior Secured – First Lien | $ | 97,515,871 | $ | 95,684,153 | 51.85 | % | ||||||
| Senior Secured – Second Lien | 87,730,962 | 84,864,909 | 45.99 | % | ||||||||
| Senior Subordinated | 77,960,103 | 74,050,349 | 40.13 | % | ||||||||
| Equity/Other | 30,129,133 | 21,673,539 | 11.75 | % | ||||||||
| Total | $ | 293,336,069 | $ | 276,272,950 | 149.72 | % | ||||||
| * | Fair value as a percentage of Net Assets |
As of December 31, 2015, the Company’s portfolio investments were categorized as follows:
| | | | |||||||||
| Industry | Cost | Fair Value | % of Net Assets* | |||||||||
| Healthcare Services | $ | 38,677,488 | $ | 40,672,488 | 20.85 | % | ||||||
| Infrastructure Maintenance | 17,611,477 | 22,894,780 | 11.74 | % | ||||||||
| Waste Services | 23,743,476 | 22,743,634 | 11.66 | % | ||||||||
| Automotive Business Services | 19,963,981 | 19,963,981 | 10.24 | % | ||||||||
| Telecommunications | 17,829,891 | 18,825,219 | 9.65 | % | ||||||||
| Transportation Logistics | 15,475,386 | 15,475,386 | 7.93 | % | ||||||||
| Technology & Telecom | 14,466,264 | 13,943,722 | 7.15 | % | ||||||||
| Education | 14,338,600 | 13,890,332 | 7.12 | % | ||||||||
| Restoration Services | 12,830,771 | 13,232,437 | 6.78 | % | ||||||||
| Oil & Gas Services | 13,127,489 | 13,127,489 | 6.73 | % | ||||||||
| Wholesale | 10,330,768 | 12,753,733 | 6.54 | % | ||||||||
| Healthcare: Orthopedic Products | 11,810,851 | 12,000,000 | 6.15 | % | ||||||||
| Media: Advertising, Printing & Publishing | 11,750,000 | 11,750,000 | 6.02 | % | ||||||||
| Industrial Services | 10,203,840 | 10,068,757 | 5.16 | % | ||||||||
| Security | 9,500,000 | 9,500,000 | 4.87 | % | ||||||||
| High Tech Industries | 5,168,000 | 7,007,913 | 3.59 | % | ||||||||
| Media & Entertainment | 12,323,985 | 6,860,544 | 3.53 | % | ||||||||
| Environmental/Recycling Services | 6,623,154 | 6,095,154 | 3.13 | % | ||||||||
| Wholesale/Distribution | 5,981,818 | 5,981,818 | 3.07 | % | ||||||||
| Technology & IT | 4,869,375 | 4,968,750 | 2.55 | % | ||||||||
| Aerospace | 4,000,000 | 4,000,000 | 2.05 | % | ||||||||
| Packaging | 3,792,657 | 3,792,657 | 1.94 | % | ||||||||
| Food & Beverage | 5,000,000 | 3,788,000 | 1.94 | % | ||||||||
| Disaster Recovery Services | 12,823,731 | 1,804,817 | 0.93 | % | ||||||||
| Call Center Services | 1,188,731 | 1,200,000 | 0.62 | % | ||||||||
| Total | $ | 303,431,733 | $ | 296,341,611 | 151.94% | |||||||
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| | | | |||||||||
| Industry | Cost | Fair Value | % of Net Assets* | |||||||||
| Geographic Region | ||||||||||||
| South East | $ | 78,199,153 | $ | 80,722,968 | 41.39 | % | ||||||
| Eastern | 51,779,326 | 54,523,091 | 27.95 | % | ||||||||
| South | 67,214,814 | 54,400,549 | 27.89 | % | ||||||||
| West | 34,068,929 | 34,419,331 | 17.65 | % | ||||||||
| Mid West | 32,695,872 | 33,163,200 | 17.00 | % | ||||||||
| South West | 18,466,264 | 17,943,722 | 9.20 | % | ||||||||
| North East | 11,007,375 | 11,168,750 | 5.73 | % | ||||||||
| North West | 10,000,000 | 10,000,000 | 5.13 | % | ||||||||
| Total | $ | 303,431,733 | $ | 296,341,611 | 151.94 | % | ||||||
| Investment Type | ||||||||||||
| Senior Secured – First Lien | $ | 92,807,114 | $ | 88,453,325 | 45.35 | % | ||||||
| Senior Secured – Second Lien | 83,015,409 | 83,266,558 | 42.69 | % | ||||||||
| Senior Subordinated | 80,358,874 | 80,458,554 | 41.26 | % | ||||||||
| Equity/Other | 47,250,336 | 44,163,174 | 22.64 | % | ||||||||
| Total | $ | 303,431,733 | $ | 296,341,611 | 151.94 | % | ||||||
| * | Fair value as a percentage of Net Assets |
The following per share data and financial ratios have been derived from information provided in the consolidated financial statements of the Company. The following is a schedule of financial highlights for one share of common stock for the years ended December 31, 2016 and 2015, and for the period May 8, 2014 through December 31, 2014.
| | | | |||||||||
| For the year ended December 31, 2016 | For the year ended December 31, 2015 | For the period from May 8, 2014* through December 31, 2014 | ||||||||||
| Per share data(1) | ||||||||||||
| Net asset value, beginning of period | $ | 14.43 | $ | 14.87 | $ | 14.55 | ||||||
| Net investment income (loss) | 1.66 | 1.43 | 0.86 | |||||||||
| Net realized and unrealized gains (losses) | (1.06 | ) | (0.68 | ) | 0.57 | |||||||
| Benefit/(Provision) for taxes on unrealized appreciation (depreciation) on investments | 0.05 | 0.17 | (0.13 | ) | ||||||||
| Net increase (decrease) in net assets resulting from operations | 0.65 | 0.92 | 1.30 | |||||||||
| Distributions to shareholders:(2) | ||||||||||||
| From net investment income | (1.36 | ) | (1.36 | ) | (0.86 | ) | ||||||
| Offering costs | 0.00 | 0.00 | (0.12 | ) | ||||||||
| Net asset value, end of period | $ | 13.72 | $ | 14.43 | $ | 14.87 | ||||||
| Market value per share, end of period | $ | 11.97 | $ | 11.60 | $ | 12.50 | ||||||
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| | | | |||||||||
| For the year ended December 31, 2016 | For the year ended December 31, 2015 | For the period from May 8, 2014* through December 31, 2014 | ||||||||||
| Total return based on net asset value(3) | 4.5 | % | 6.2 | % | 4.9%(4)(5) | |||||||
| Total return based on market value(3) | 14.9 | % | 3.7 | % | (10.9)%(4)(5) | |||||||
| Shares outstanding at end of period | 13,451,633 | 13,516,766 | 13,516,766 | |||||||||
| Ratio/Supplemental Data: | ||||||||||||
| Net assets, at end of period | $ | 184,524,591 | $ | 195,032,211 | $ | 200,989,308 | ||||||
| Ratio of total expenses before waiver to average net assets | 9.58 | % | 7.79 | % | 5.12%(6) | |||||||
| Ratio of interest expenses to average net assets | 3.59 | % | 2.50 | % | 1.04%(6) | |||||||
| Ratio of incentive fees to average net assets | 1.71 | % | 1.63 | % | 0.75%(6) | |||||||
| Ratio of waiver of management and incentive fees to average net assets | — | % | 0.50 | % | 1.57%(6) | |||||||
| Ratio of net expenses to average net assets | 9.58 | % | 7.29 | % | 3.55%(6) | |||||||
| Ratio of net investment income (loss) before waiver to average net assets | 11.80 | % | 9.13 | % | 7.45%(6) | |||||||
| Ratio of net investment income (loss) after waiver to average net assets | 11.80 | % | 9.63 | % | 9.02%(6) | |||||||
| Total Credit Facility payable outstanding | $ | 39,133,273 | $ | 63,504,738 | $ | 62,499,154 | ||||||
| Total Notes payable outstanding | $ | 55,000,000 | $ | 40,000,000 | $ | — | ||||||
| Asset coverage ratio(7) | 3.0 | 2.9 | 4.2 | |||||||||
| Portfolio turnover rate | 51 | % | 24 | % | 20%(4)(8) | |||||||
| * | Commencement of operations of the Company. |
| (1) | The per share data was derived by using the average 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) | Not Annualized. |
| (5) | Total investment return on net asset value is calculated assuming a purchase at the offering price of $15.00 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 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. |
| (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 December 31, 2014. |
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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 from January 1, 2014 through May 7, 2014 and the years ended December 31, 2013, and December 31, 2012.
| | | | |||||||||
| January 1, 2014 to May 7, 2014 | December 31, 2013 | December 31, 2012 | ||||||||||
| Net investment income (loss) ratio before carried interest allocation | 15.06 | % | 7.50 | % | 8.94 | % | ||||||
| Expense ratio before carried interest allocation | 1.81 | % | 3.54 | % | 5.92 | % | ||||||
| Carried interest allocation | (4.51 | )% | 1.80 | % | 3.79 | % | ||||||
| Expense ratio after carried interest allocation | (2.70 | )% | 5.34 | % | 9.71 | % | ||||||
| Cumulative IRR after carried interest allocation | 13.69 | % | 10.03 | % | 11.30 | % | ||||||
These financial highlights may not be indicative of future performance.
As of December 31, 2016, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
| | |||
| Tax Cost | $ | 293,276,560 | ||
| Gross unrealized appreciation | 3,101,358 | |||
| Gross unrealized depreciation | (20,104,968 | ) | ||
| Net unrealized investment depreciation | $ | (17,003,610 | ) | |
As of December 31, 2016, the Company’s aggregate investment unrealized appreciation and depreciation based on cost for U.S. federal income tax purposes were as follows:
| | |||
| Tax Cost | $ | 303,187,733 | ||
| Gross unrealized appreciation | 12,834,854 | |||
| Gross unrealized depreciation | (19,680,976 | ) | ||
| Net unrealized investment depreciation | $ | (6,846,122 | ) | |
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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 year ended December 31, 2016 and as of and for the year ended December 31, 2015.
| | | | |||||||||
| Balance Sheet | As of December 31, 2016 | Income Statement | For the year ended December 31, 2016 | |||||||||
| Current Assets | 4,881,976 | Net Sales | 15,174,299 | |||||||||
| Noncurrent Assets | 18,320,899 | Gross Profit | 5,271,000 | |||||||||
| Current Liabilities | 811,164 | Net Income/EBITDA | 3,322,367 | |||||||||
| Noncurrent Liabilities | 13,315,630 | |||||||||||
| | | | |||||||||
| Balance Sheet | As of December 31, 2015 | Income Statement | For the year ended December 31, 2015 | |||||||||
| Current Assets | 9,799,192 | Net Sales | 26,808,399 | |||||||||
| Noncurrent Assets | 25,016,525 | Gross Profit | 4,817,956 | |||||||||
| Current Liabilities | 3,982,975 | Net Income (Loss) | (8,829,955 | ) | ||||||||
| Noncurrent Liabilities | 20,000,000 | |||||||||||
In addition to the risks associated with our investments in general, there are unique risks associated with our investments in each of these entities.
For example, 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.
DRC Emergency Services, LLC (“DRC”) was sold to a third party on January 19, 2016. As such, summary financial information for DRC is included for the year ended December 31, 2015 and is not included for the year ended December 31, 2016.
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| | | | | ||||||||||||
| 2016 | ||||||||||||||||
| For the quarter ended December 31 | For the quarter ended September 30 | For the quarter ended June 30 | For the quarter ended March 31 | |||||||||||||
| Total investment income | $ | 10,899,771 | $ | 9,116,468 | $ | 10,639,969 | $ | 9,946,391 | ||||||||
| Total investment income per common share | 0.81 | 0.68 | 0.79 | 0.74 | ||||||||||||
| Net investment income | 6,119,155 | 4,786,793 | 5,898,346 | 5,604,892 | ||||||||||||
| Net investment income per common share | 0.45 | 0.35 | 0.44 | 0.41 | ||||||||||||
| Net realized and unrealized (loss) gain | (1,195,769 | ) | (6,629,320 | ) | (4,503,177 | ) | (1,291,134 | ) | ||||||||
| Net realized and unrealized (loss) gain per common share | (0.09 | ) | (0.49 | ) | (0.33 | ) | (0.10 | ) | ||||||||
| Net (decrease) increase in net assets resulting from operations | 4,923,386 | (1,842,527 | ) | 1,395,169 | 4,313,758 | |||||||||||
| Basic and diluted earnings per common share | 0.37 | (0.14 | ) | 0.10 | 0.32 | |||||||||||
| Net asset value per common share at the end of quarter | 13.72 | 13.69 | 14.16 | 14.41 | ||||||||||||
| | | | | ||||||||||||
| 2015 | ||||||||||||||||
| For the quarter ended December 31 | For the quarter ended September 30 | For the quarter ended June 30 | For the quarter ended March 31 | |||||||||||||
| Total investment income | $ | 8,676,914 | $ | 8,507,142 | $ | 8,507,540 | $ | 8,224,653 | ||||||||
| Total investment income per common share | 0.64 | 0.63 | 0.63 | 0.61 | ||||||||||||
| Net investment income | 4,529,602 | 5,142,044 | 4,649,349 | 4,977,174 | ||||||||||||
| Net investment income per common share | 0.34 | 0.38 | 0.34 | 0.37 | ||||||||||||
| Net realized and unrealized (loss) gain | (6,577,824 | ) | (1,887,595 | ) | 1,764,307 | 14,717 | ||||||||||
| Net realized and unrealized (loss) gain per common share | (0.49 | ) | (0.14 | ) | 0.13 | 0.00 | ||||||||||
| Net (decrease) increase in net assets resulting from operations | (2,048,222 | ) | 3,254,449 | 6,413,656 | 4,991,891 | |||||||||||
| Basic and diluted earnings per common share | (0.15 | ) | 0.24 | 0.47 | 0.37 | |||||||||||
| Net asset value per common share at the end of quarter | 14.43 | 14.92 | 15.03 | 14.90 | ||||||||||||
| | | | | | |||||||||||||||
| 2014 | ||||||||||||||||||||
| For the quarter ended December 31 | For the quarter ended September 30 | For the period from May 8, 2014 through June 30 | For the period from April 1, 2014 through May 7 | For the quarter ended March 31 | ||||||||||||||||
| Total investment income | $ | 6,670,403 | $ | 5,861,187 | $ | 3,634,624 | $ | 3,766,431 | $ | 3,995,463 | ||||||||||
| Total investment income per common share | 0.49 | 0.43 | 0.27 | N.A. | N.A. | |||||||||||||||
| Net investment income | 4,551,406 | 4,595,699 | 2,454,627 | 3,751,842 | 3,175,716 | |||||||||||||||
| Net investment income per common share | 0.34 | 0.34 | 0.18 | N.A. | N.A. | |||||||||||||||
| Net realized and unrealized (loss) gain | (1,505,337 | ) | 3,306,153 | 1,332,473 | (264,414 | ) | 3,290,966 | |||||||||||||
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| | | | | | |||||||||||||||
| 2014 | ||||||||||||||||||||
| For the quarter ended December 31 | For the quarter ended September 30 | For the period from May 8, 2014 through June 30 | For the period from April 1, 2014 through May 7 | For the quarter ended March 31 | ||||||||||||||||
| Net realized and unrealized (loss) gain per common share | (0.11 | ) | 0.24 | 0.10 | N.A. | N.A. | ||||||||||||||
| Net (decrease) increase in net assets resulting from operations | 3,046,069 | 7,901,852 | 3,787,100 | 3,487,428 | 6,466,682 | |||||||||||||||
| Basic and diluted earnings per common share | 0.23 | 0.58 | 0.28 | N.A. | N.A. | |||||||||||||||
| Net asset value per common share at the end of quarter | 14.87 | 15.00 | 14.76 | N.A. | N.A. | |||||||||||||||
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 December 31, 2016, the following activity occurred:
On January 3, 2017, Alcentra sold its equity interest in Wholesome Sweetners in a secondary sale for $3,700,000.
On January 5, 2017, a $0.34 per share dividend was paid to shareholders of record as of December 28, 2016.
On January 13, 2017, Alcentra invested an additional $2.7 million in LRI Energy Solutions.
On January 31, 2017, Alcentra invested $10.2 million in Pharmalogics Recruiting (10.25% 1st Lien Debt).
On February 1, 2017, Alcentra invested an additional $0.402 million in Black Diamond Rentals.
On February 21, 2017, Duke Finance, LLC repaid their investment in the amount of $7.5 million.
On February 27, 2017, Alpine Waste repaid their investment in the amount of $11.0 million.
On February 28, 2017, Alcentra invested an additional $2.1 million in Pharmalogic Holdings Corp.
On February 28, 2017, Alcentra invested an additional $0.064 million in Black Diamond Rentals.
On March 9, 2017, the Board of Directors approved the 2017 first quarter regular dividend of $0.34 per share and a $0.03 special dividend for shareholders of record date March 31, 2017 and payable April 6, 2017.
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| Item 9. | Changes in and Disagreements with Independent Registered Public Accounting Firm on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures. |
As of December 31, 2016 (the end of the period covered by this report), our Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”), under the supervision and with the participation of various members of management, has evaluated the effectiveness of our 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, our CEO and CAO have concluded that our disclosure controls and procedures are effective, as of the end of the period covered by this report, to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our CEO and CAO, as appropriate to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f), and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2015. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Management performed an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015 based upon the criteria set forth in Internal Control — Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO 2013”). Based on our assessment, management determined that our internal control over financial reporting was effective as of December 31, 2015.
This annual report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. We were not required to have, nor have we, engaged our independent registered public accounting firm to perform an audit of internal control over financial reporting pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report on Form 10-K.
117
Management did not identify any change in our internal control over financial reporting that occurred during the year ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the SEC for newly reporting companies and provisions in the JOBS Act applicable to emerging growth companies.
| Item 9B. | Other Information. |
118
We will file a definitive Proxy Statement for our 2017 Annual Meeting of Stockholders with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to the annual report on Form 10-K. Only those sections of our definitive Proxy Statement that specifically address the items set forth herein are incorporated by reference.
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by Item 10 is hereby incorporated by reference from our definitive Proxy Statement relating to Our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
We have adopted a code of business conduct that applies to our directors, officers and employees, if any. This code of business conduct is published on our website atwww.alcentracapital.com. We intend to disclose any future amendments to, or waivers from, this code of business conduct within four business days of the waiver or amendment through a current report on Form 8-K.
| Item 11. | Executive Compensation |
The information required by Item 11 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by Item 12 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by Item 13 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
| Item 14. | Principal Accountant Fees and Services |
The information required by Item 14 is hereby incorporated by reference from our definitive Proxy Statement relating to our 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission within 120 days following the end of our fiscal year.
119
| Item 15. | Exhibits, Financial Statement Schedules |
The following financial statements are set forth in Item 8:
| Item 8. | Financial Statements and Supplementary Data |
120
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
| | |
| 3.1 | Articles of Amendment and Restatement of Alcentra Capital Corporation (the “Registrant”)(1) | |
| 3.2 | Bylaws(1) | |
| 4.1 | Form of Stock Certificate(4) | |
| 4.2 | Form of Base Indenture(6) | |
| 4.3 | Statement of Eligibility of Trustee on Form T-1(5) | |
| 4.4 | Form of Supplemental Indenture(6) | |
| 4.5 | Form of First Supplemental Indenture relating to the Alcentra Capital Internotes® 6.500% Notes due 2022(6) | |
| 4.6 | Form of Global Note relating to the Alcentra Capital Internotes® 6.500% Notes due 2022 (included as Exhibit A to the Form of First Supplemental Indenture)(6) | |
| 4.7 | Form of Second Supplemental Indenture relating to the Alcentra Capital Internotes® 6.375% Notes due 2020(7) | |
| 4.8 | Form of Global Note relating to the Alcentra Capital Internotes® 6.375% Notes due 2020 (included as Exhibit A to the Form of Second Supplemental Indenture)(7) | |
| 4.9 | Form of Third Supplemental Indenture relating to the Alcentra Capital Internotes® 6.375% Notes due 2020(8) | |
| 4.10 | Form of Global Note relating to the Alcentra Capital Internotes® 6.375% Notes due 2020 (included as Exhibit A to the Form of Third Supplemental Indenture)(8) | |
| 4.11 | Form of Fourth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.375% Notes due 2020(9) | |
| 4.12 | Form of Global Note relating to the Alcentra Capital Internotes® 6.375% Notes due 2020 (included as Exhibit A to the Form of Fourth Supplemental Indenture)(9) | |
| 4.13 | Form of Fifth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.375% Notes due 2020(10) | |
| 4.14 | Form of Global Note relating to the Alcentra Capital Internotes® 6.375% Notes due 2020 (included as Exhibit A to the Form of Fifth Supplemental Indenture)(10) | |
| 4.15 | Form of Sixth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.375% Notes due 2020(12) | |
| 4.16 | Form of Global Note relating to the Alcentra Capital Internotes® 6.375% Notes due 2020 (included as Exhibit A to the Form of Sixth Supplemental Indenture)(12) | |
| 4.17 | Form of Seventh Supplemental Indenture relating to the Alcentra Capital Internotes® 6.750% Notes due 2022(12) | |
| 4.18 | Form of Global Note relating to the Alcentra Capital Internotes® 6.750% Notes due 2022 (included as Exhibit A to the Form of Seventh Supplemental Indenture(12) | |
| 4.19 | Form of Eighth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.25% Notes due 2020(13) | |
| 4.20 | Form of Global Note relating to the Alcentra Capital Internotes® 6.25% Notes due 2020 (included as Exhibit A to the Form of Eighth Supplemental Indenture)(13) | |
| 4.21 | Form of Ninth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.50% Notes due 2020(13) | |
| 4.22 | Form of Global Note relating to the Alcentra Capital Internotes® 6.50% Notes due 2020 (included as Exhibit A to the Form of Ninth Supplemental Indenture)(13) | |
| 4.23 | Form of Tenth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.50% Notes due 2021(16) |
121
| | |
| 4.24 | Form of Global Note relating to the Alcentra Capital Internotes® 6.50% Notes due 2021 (included as Exhibit A to the Form of Tenth Supplemental Indenture)(16) | |
| 4.25 | Form of Eleventh Supplemental Indenture relating to the Alcentra Capital Internotes® 6.50% Notes due 2021(17) | |
| 4.26 | Form of Global Note relating to the Alcentra Capital Internotes® 6.50% Notes due 2021 (included as Exhibit A to the Form of Eleventh Supplemental Indenture)(17) | |
| 4.27 | Form of Twelfth Supplemental Indenture relating to the Alcentra Capital Internotes® 6.50% Notes due 2021(18) | |
| 4.28 | Form of Global Note relating to the Alcentra Capital Internotes® 6.50% Notes due 2021 (included as Exhibit A to the Form of Twelfth Supplemental Indenture)(18) | |
| 4.29 | Form of Warrant Certificate and Warrant Agreement(15) | |
| 4.30 | Form of Articles Supplementary Establishing and Fixing the Rights and Preferences of Preferred Stock(15) | |
| 10.1 | Form of Dividend Reinvestment Plan(3) | |
| 10.2 | Form of Investment Advisory Agreement between the Registrant and Alcentra NY, LLC* | |
| 10.3 | Form of Custodian Agreement between the Registrant and State Street Bank and Trust Company(4) | |
| 10.4 | Form of Master Administration and Accounting Agreement between the Registrant and State Street Bank and Trust Company(4) | |
| 10.5 | Form of License Agreement between the Registrant and Alcentra NY, LLC(2) | |
| 10.6 | Form of Registration Rights Agreement between the Registrant and BNY Mellon-Alcentra Mezzanine III, L.P.(2) | |
| 10.7 | Form of Senior Secured Revolving Credit Agreement, dated as of May 8, 2014, among the Registrant and ING Capital LLC(4) | |
| 10.8 | Form of Guarantee, Pledge and Security Agreement, dated as of May 8, 2014, among the Registrant and ING Capital LLC(4) | |
| 10.9 | Amendment No. 1 to the Senior Revolving Credit Agreement, dated December 19, 2014, by and among the Company as borrower, the Lenders party thereto and ING Capital LLC, as Administrative Agent, Arranger and Bookrunner(11) | |
| 10.10 | Incremental Commitment Agreement, dated as of December 19, 2014, by and among the Company, as borrower, the Increasing Lenders party thereto and ING Capital LLC as Administrative Agent and Collateral Agent(11) | |
| 10.11 | Form of Amendment No. 2 to the Senior Revolving Credit Agreement, to be entered into by and among the Company as borrower, the Lenders party thereto and ING Capital LLC, as Administrative Agent, Arranger and Bookrunner(6) | |
| 10.12 | Amendment No. 3 to the Senior Secured Revolving Credit Agreement, dated as of August 11, 2015, by and among the Company as borrower, the Lenders party thereto and ING Capital LLC, as Administrative Agent, Arranger and Bookrunner(14) | |
| 10.13 | Incremental Commitment Agreement, dated as of August 11, 2015, by and among the Company, as borrower, the Increasing Lenders party thereto and ING Capital LLC, as Administrative Agent and Collateral Agent(14) | |
| 10.14 | Form of Selling Agent Agreement, by and among Alcentra Capital Corporation, Alcentra NY, LLC and Incapital LLC(6) | |
| 11.1 | Computation of Per Share Earnings (included in the notes to the audited financial statements contained in this report) | |
| 12.1 | Computation of ratios (included in the notes to the audited financial statements contained in this report). | |
| 21.1 | Subsidiaries of the Registrant Alcentra BDC Equity Holdings, LLC — Delaware |
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| | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934* | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934* | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)* | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)* |
| * | Filed herewith. |
| (1) | Incorporated by reference to the Registrant’s Registration Statement on Form N-2 (File No. 333-194521) filed on March 12, 2014. |
| (2) | Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 1 to the Registration Statement on Form N-2 (File No. 333-194521) filed on April 9, 2014. |
| (3) | Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 2 to the Registration Statement on Form N-2 (File No. 333-194521) filed on April 22, 2014. |
| (4) | Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 4 to the Registrant’s Registration Statement on Form N-2 (File No. 333-194521) filed on May 8, 2014. |
| (5) | Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on January 14, 2015. |
| (6) | Incorporated by reference to the Registrant’s Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on January 28, 2015. |
| (7) | Incorporated by reference to the Registrant’s Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on February 12, 2015. |
| (8) | Incorporated by reference to the Registrant’s Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on February 20, 2015. |
| (9) | Incorporated by reference to the Registrant’s Post-Effective Amendment No. 4 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on February 26, 2015. |
| (10) | Incorporated by reference to the Registrant’s Post-Effective Amendment No. 5 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on March 5, 2015. |
| (11) | Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on December 29, 2014. |
| (12) | Previously filed in connection with Post-Effective Amendment No. 5 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on March 5, 2015 and incorporated by reference herein. |
| (13) | Previously filed in connection with Post-Effective Amendment No. 8 to the Registrant’s Registration Statement on Form N-2 (File No. 333-199622) filed on April 15, 2015 and incorporated by reference herein. |
| (14) | Previously filed in connection with the Registrant’s Current Report on Form 8-K, filed on August 12, 2015, and incorporated herein by reference. |
| (15) | Previously filed in connection with the Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (File No. 333-205154) filed on December 21, 2015 and incorporated herein by reference. |
| (16) | Previously filed in connection with the Post-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-2 (File No. 333-205154) filed on February 4, 2016 and incorporated herein by reference. |
| (17) | Previously filed in connection with the Post-Effective Amendment No. 2 to the Registrant’s Registration Statement on form N-2 (File No. 333-205154) filed on February 11, 2016 and incorporated herein by reference. |
| (18) | Previously filed in connection with the Post-Effective Amendment No. 3 to the Registrant’s Registration Statement on form N-2 (File No. 333-205154) filed on February 19, 2016 and incorporated herein by reference. |
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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.
| | |
| ALCENTRA CAPITAL CORPORATION | ||
| Date: March 9, 2017 | /s/ Paul J. Echausse Name: Paul J. Echausse Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
| | |
| Date: March 9, 2017 | /s/ Paul J. Echausse Paul J. Echausse President and Chief Executive Officer, (Principal Executive Officer) and Director | |
| Date: March 9, 2017 | /s/ Ellida McMillan Ellida McMillan Chief Accounting Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) | |
| Date: March 9, 2017 | /s/ Paul Hatfield Paul Hatfield Director | |
| Date: March 9, 2017 | /s/ T. Ulrich Brechbuhl T. Ulrich Brechbuhl Director | |
| Date: March 9, 2017 | /s/ Douglas J. Greenlaw Douglas J. Greenlaw Director | |
| Date: March 9, 2017 | /s/ Rudolph L. Hertlein Rudolph L. Hertlein Director | |
| Date: March 9, 2017 | /s/ Edward Grebow Edward Grebow Director | |
| Date: March 9, 2017 | /s/ Steven H. Reiff Steven H. Reiff Director |
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