Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number:814-01108
Corporate Capital Trust II
(Exact name of registrant as specified in its charter)
Delaware | 47-1595504 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
201 Rouse Boulevard | ||
Philadelphia, Pennsylvania | 19112 | |
(Address of principal executive offices) | (Zip Code) |
(215) 495-1150
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) Act: None
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
N/A | N/A | N/A |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
There were 12,209,073 shares of the registrant’s common stock outstanding as of May 10, 2019.
Table of Contents
PAGE | ||||||
PART I—FINANCIAL INFORMATION | ||||||
Item 1. | 1 | |||||
Balance Sheets as of March 31, 2019 (Unaudited) and December 31, 2018 | 1 | |||||
Unaudited Statements of Operations for the three months ended March 31, 2019 and 2018 | 2 | |||||
Unaudited Statements of Changes in Net Assets for the three months ended March 31, 2019 and 2018 | 3 | |||||
Unaudited Statements of Cash Flows for the three months ended March 31, 2019 and 2018 | 4 | |||||
Schedules of Investments as of March 31, 2019 (Unaudited) and December 31, 2018 | 5 | |||||
21 | ||||||
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 44 | ||||
Item 3. | 58 | |||||
Item 4. | 59 | |||||
PART II—OTHER INFORMATION | ||||||
Item 1. | 60 | |||||
Item 1A. | 60 | |||||
Item 2. | 60 | |||||
Item 3. | 60 | |||||
Item 4. | 60 | |||||
Item 5. | 60 | |||||
Item 6. | 61 | |||||
62 |
Table of Contents
Item 1. Financial Statements.
Corporate Capital Trust II
(in thousands, except share and per share amounts)
March 31, 2019 (Unaudited) | December 31, 2018 | |||||||
Assets | ||||||||
Investments, at fair value (amortized cost—$185,398 and $183,365, respectively) | $ | 179,230 | $ | 175,166 | ||||
Cash | 2,175 | 3,618 | ||||||
Foreign currency, at fair value (cost—$272 and $866, respectively) | 270 | 861 | ||||||
Due from Advisor | 98 | 165 | ||||||
Receivable for investments sold and repaid | 326 | 1,804 | ||||||
Income receivable | 1,795 | 1,734 | ||||||
Unrealized appreciation on foreign currency forward contracts | 376 | 457 | ||||||
Deferred financing costs | 126 | 153 | ||||||
Prepaid expenses and other assets | 12 | 30 | ||||||
|
|
|
|
|
| |||
Total assets | $ | 184,408 | $ | 183,988 | ||||
|
|
|
|
|
| |||
Liabilities | ||||||||
Credit facility payable | $ | 75,636 | $ | 73,933 | ||||
Payable for investments purchased | 53 | 793 | ||||||
Shareholder distributions payable | 7 | 281 | ||||||
Management fees payable | 684 | 695 | ||||||
Administrative services expense payable | 148 | 223 | ||||||
Interest payable | 139 | 182 | ||||||
Accrued professional services | 276 | 262 | ||||||
Other accrued expenses and liabilities | 251 | 449 | ||||||
|
|
|
|
|
| |||
Total liabilities | 77,194 | 76,818 | ||||||
|
|
|
|
|
| |||
Net assets | $ | 107,214 | $ | 107,170 | ||||
|
|
|
|
|
| |||
Commitments and contingencies (Note 10) | ||||||||
Components of Net Assets | ||||||||
Preferred stock, $0.001 par value per share, 100,000,000 shares authorized, none issued and outstanding | $ | — | $ | — | ||||
Common stock, $0.001 par value per share, 1,000,000,000 shares authorized, 12,320,120 and 12,539,720 shares issued and outstanding, respectively | 12 | 13 | ||||||
Capital in excess of par value | 112,083 | 114,130 | ||||||
Retained earnings (accumulated deficit) | (4,881) | (6,973) | ||||||
|
|
|
|
|
| |||
Net assets | $ | 107,214 | $ | 107,170 | ||||
|
|
|
|
|
| |||
Net asset value per share of common stock at period end | $ | 8.70 | $ | 8.55 | ||||
|
|
|
|
|
|
See notes to unaudited financial statements.
1
Table of Contents
Unaudited Statements of Operations
(in thousands, except share and per share amounts)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Investment income | ||||||||
Interest income | $ | 4,125 | $ | 3,399 | ||||
Fee income | 220 | 42 | ||||||
Dividend income | 19 | 11 | ||||||
|
|
|
|
|
| |||
Total investment income | 4,364 | 3,452 | ||||||
|
|
|
|
|
| |||
Operating expenses | ||||||||
Management fees | 684 | 890 | ||||||
Capital gains incentive fees | — | 217 | ||||||
Administrative services expenses | 92 | 157 | ||||||
Stock transfer agent fees | 45 | 46 | ||||||
Accounting and administrative fees | 119 | 123 | ||||||
Interest expense | 1,058 | 638 | ||||||
Trustees’ fees | 77 | 50 | ||||||
Distribution and shareholder servicing fees | — | 282 | ||||||
Professional services | 162 | 224 | ||||||
Offering costs | — | 20 | ||||||
Other general and administrative expenses | 142 | 199 | ||||||
|
|
|
|
|
| |||
Total operating expenses | 2,379 | 2,846 | ||||||
Expense support | — | (585 | ) | |||||
|
|
|
|
|
| |||
Net operating expenses | 2,379 | 2,261 | ||||||
|
|
|
|
|
| |||
Net investment income | 1,985 | 1,191 | ||||||
|
|
|
|
|
| |||
Realized and unrealized gain (loss) | ||||||||
Net realized gain (loss) on: | ||||||||
Investments | (143 | ) | 179 | |||||
Foreign currency forward contracts | — | (1 | ) | |||||
Foreign currency transactions | 46 | (19 | ) | |||||
|
|
|
|
|
| |||
Net realized gain (loss) | (97 | ) | 159 | |||||
|
|
|
|
|
| |||
Net change in unrealized appreciation (depreciation) on: | ||||||||
Investments | 2,031 | 820 | ||||||
Foreign currency forward contracts | (81 | ) | 90 | |||||
Foreign currency translation | 50 | 14 | ||||||
|
|
|
|
|
| |||
Net change in unrealized appreciation (depreciation) | 2,000 | 924 | ||||||
|
|
|
|
|
| |||
Total net realized and unrealized gain (loss) | 1,903 | 1,083 | ||||||
|
|
|
|
|
| |||
Net increase (decrease) in net assets resulting from operations | $ | 3,888 | $ | 2,274 | ||||
|
|
|
|
|
| |||
Per share information—basic and diluted | ||||||||
Net increase (decrease) in net assets resulting from operations (Earnings per Share) | $ | 0.32 | $ | 0.18 | ||||
|
|
|
|
|
| |||
Weighted average shares outstanding | 12,275,292 | 12,776,314 | ||||||
|
|
|
|
|
|
See notes to unaudited financial statements.
2
Table of Contents
Unaudited Statements of Changes in Net Assets
(in thousands, except share and per share amounts)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Operations | ||||||||
Net investment income | $ | 1,985 | $ | 1,191 | ||||
Net realized gain (loss) on investments, foreign currency forward contracts and foreign currency transactions | (97) | 159 | ||||||
Net change in unrealized appreciation (depreciation) on investments, foreign currency forward contracts and foreign currency translation | 2,000 | 924 | ||||||
|
|
|
|
|
| |||
Net increase in net assets resulting from operations | 3,888 | 2,274 | ||||||
|
|
|
|
|
| |||
Shareholder distributions | ||||||||
Distributions to shareholders(1) | (1,796) | (1,868) | ||||||
|
|
|
|
|
| |||
Net decrease in net assets resulting from shareholder distributions | (1,796) | (1,868) | ||||||
|
|
|
|
|
| |||
Capital share transactions | ||||||||
Issuance of common stock | — | 1,270 | ||||||
Reinvestment of shareholder distributions | 833 | 930 | ||||||
Repurchases of common stock | (2,881) | (840) | ||||||
|
|
|
|
|
| |||
Net increase (decrease) in net assets resulting from capital share transactions | (2,048) | 1,360 | ||||||
|
|
|
|
|
| |||
Total increase (decrease) in net assets | 44 | 1,766 | ||||||
Net assets at beginning of period | 107,170 | 116,471 | ||||||
|
|
|
|
|
| |||
Net assets at end of period | $ | 107,214 | $ | 118,237 | ||||
|
|
|
|
|
|
(1) | The Company estimates that none of the distributions declared during the three months ended March 31, 2019 and 2018 would be classified as a tax basis return of capital. |
See notes to unaudited financial statements.
3
Table of Contents
Unaudited Statements of Cash Flows
(in thousands)
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities | ||||||||
Net increase (decrease) in net assets resulting from operations | $ | 3,888 | $ | 2,274 | ||||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | ||||||||
Purchases of investments | (14,006) | (31,534) | ||||||
Paid-in-kind interest | (72) | — | ||||||
Proceeds from sales and repayments of investments | 12,078 | 28,648 | ||||||
Net realized (gain) loss on investments | 143 | (179) | ||||||
Net change in unrealized (appreciation) depreciation on investments | (2,031) | (820) | ||||||
Net change in unrealized (appreciation) depreciation on foreign currency forward contracts | 81 | (90) | ||||||
Net change in unrealized (appreciation) depreciation on foreign currency translation | 271 | 3 | ||||||
(Gain) loss on borrowings in foreign currency | (321) | (17) | ||||||
Amortization of premium/discount, net | (176) | (209) | ||||||
Amortization of deferred financing costs | 27 | 25 | ||||||
(Increase) decrease in due from Advisor | 67 | 301 | ||||||
(Increase) decrease in receivable for investments sold and repaid | 1,478 | (8,022) | ||||||
(Increase) decrease in interest receivable | (61) | (389) | ||||||
(Increase) decrease in prepaid expenses and other assets | 18 | 321 | ||||||
Increase (decrease) in payable for investments purchased | (740) | (136) | ||||||
Increase (decrease) in management fees payable | (11) | 33 | ||||||
Increase (decrease) in accrued capital gains fees | — | 217 | ||||||
Increase (decrease) in administrative services expense payable | (75) | (121) | ||||||
Increase (decrease) in interest payable | (43) | (104) | ||||||
Increase (decrease) in trustees’ fees payable | — | (2) | ||||||
Increase (decrease) in accrued distribution and shareholder servicing fees | — | 2 | ||||||
Increase (decrease) in accrued professional services | 14 | 61 | ||||||
Increase (decrease) in other accrued expenses and liabilities | (198) | 146 | ||||||
|
|
|
| |||||
Net cash provided by (used in) operating activities | 331 | (9,592) | ||||||
|
|
|
| |||||
Cash flows from financing activities | ||||||||
Issuance of common stock | — | 1,270 | ||||||
Repurchases of common stock | (2,881) | (840) | ||||||
Shareholder distributions | (1,237) | (937) | ||||||
Borrowings under credit facility | 9,117 | 12,733 | ||||||
Repayments of credit facility | (7,093) | (5,500) | ||||||
|
|
|
| |||||
Net cash provided by (used in) financing activities | (2,094) | 6,726 | ||||||
|
|
|
| |||||
Effect of exchange rate changes on cash | (271) | (3) | ||||||
|
|
|
| |||||
Net increase (decrease) in cash | (2,034) | (2,869) | ||||||
Cash and foreign currency at beginning of period | 4,479 | 7,489 | ||||||
|
|
|
| |||||
Cash and foreign currency at end of period | $ | 2,445 | $ | 4,620 | ||||
|
|
|
| |||||
Supplemental disclosure | ||||||||
Cash paid for interest | $ | 1,074 | $ | 718 | ||||
|
|
|
| |||||
Distributions reinvested | $ | 833 | $ | 930 | ||||
|
|
|
| |||||
Excise taxes paid | $ | 66 | $ | 17 | ||||
|
|
|
|
See notes to unaudited financial statements.
4
Table of Contents
Unaudited Schedule of Investments
As of March 31, 2019
(in thousands, except share amounts)
Portfolio Company(a) | Footnotes | Industry | Rate(b) | Floor | Maturity | Principal Amount(c) | Amortized Cost | Fair Value(d) | ||||||||||||||
Senior Secured Loans—First Lien—91.2% | ||||||||||||||||||||||
Accuride Corp | Capital Goods | L+525 | 1.0% | 11/17/23 | $ | 412 | $ | 408 | $ | 346 | ||||||||||||
Acosta Holdco Inc | Commercial & Professional Services | L+325 | 1.0% | 9/26/21 | 5,162 | 4,691 | 2,432 | |||||||||||||||
Advantage Sales & Marketing Inc | Commercial & Professional Services | L+325 | 1.0% | 7/23/21 | 2,806 | 2,711 | 2,395 | |||||||||||||||
American Tire Distributors Inc | Automobiles & Components | L+600, 1.0% PIK (1.0% Max PIK) | 1.0% | 9/1/23 | 244 | 244 | 240 | |||||||||||||||
American Tire Distributors Inc | (e) | Automobiles & Components | L+750 | 1.0% | 9/2/24 | 1,544 | 1,372 | 1,385 | ||||||||||||||
Ammeraal Beltech Holding BV | (g) | Capital Goods | E+375 | 7/30/25 | € | 1,000 | 1,176 | 1,123 | ||||||||||||||
Apex Group Limited | (f)(g)(j) | Diversified Financials | L+650 | 6/15/23 | $ | 89 | 87 | 76 | ||||||||||||||
Apex Group Limited | (e)(f)(g) | Diversified Financials | L+650 | 1.0% | 6/15/25 | 1,724 | 1,704 | 1,684 | ||||||||||||||
Apex Group Limited | (f)(g)(j) | Diversified Financials | L+650 | 1.0% | 6/15/25 | 225 | 225 | 220 | ||||||||||||||
Belk Inc | Retailing | L+475 | 1.0% | 12/12/22 | 4,869 | 4,467 | 3,942 | |||||||||||||||
Berner Food & Beverage LLC | (f) | Food & Staples Retailing | L+675 | 1.0% | 2/2/23 | 4,372 | 4,340 | 4,214 | ||||||||||||||
Bugaboo International BV | (e)(f)(g) | Consumer Durables & Apparel | E+700, 7.8% PIK (7.8% Max PIK) | 3/20/25 | € | 1,262 | 1,502 | 1,357 | ||||||||||||||
Caprock Midstream LLC | Energy | L+475 | 11/3/25 | $ | 615 | 612 | 583 | |||||||||||||||
Conservice LLC | (f) | Consumer Services | L+525 | 11/30/24 | 1,231 | 1,219 | 1,233 | |||||||||||||||
Conservice LLC | (f)(j) | Consumer Services | L+525 | 11/30/24 | 230 | 228 | 224 | |||||||||||||||
Constellis Holdings LLC / Constellis Finance Corp | (f) | Capital Goods | L+575 | 1.0% | 4/15/22 | 1,821 | 1,796 | 1,800 | ||||||||||||||
CTI Foods Holding Co LLC | (f) | Food, Beverage & Tobacco | L+800 | 1.0% | 7/10/19 | 24 | 23 | 23 | ||||||||||||||
Diamond Resorts International Inc | (e) | Consumer Services | L+375 | 1.0% | 9/2/23 | 1,008 | 959 | 973 | ||||||||||||||
Distribution International Inc | Retailing | L+500 | 1.0% | 12/15/21 | 7,463 | 6,737 | 6,810 | |||||||||||||||
Eacom Timber Corp | (f)(g) | Materials | L+650 | 1.0% | 11/30/23 | 2,745 | 2,723 | 2,700 | ||||||||||||||
Eagle Family Foods Inc | (f)(j) | Food, Beverage & Tobacco | L+650 | 1.0% | 6/14/23 | 159 | 158 | 135 | ||||||||||||||
Eagle Family Foods Inc | (e)(f) | Food, Beverage & Tobacco | L+650 | 1.0% | 6/14/24 | 1,053 | 1,043 | 1,020 | ||||||||||||||
Foresight Energy LLC | (g) | Materials | L+575 | 1.0% | 3/28/22 | 1,557 | 1,492 | 1,530 | ||||||||||||||
Frontline Technologies Group LLC | (e)(f) | Software & Services | L+650 | 1.0% | 9/18/23 | 4,665 | 4,602 | 4,647 |
See notes to unaudited financial statements.
5
Table of Contents
Corporate Capital Trust II
Unaudited Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)
Portfolio Company(a) | Footnotes | Industry | Rate(b) | Floor | Maturity | Principal Amount(c) | Amortized Cost | Fair Value(d) | ||||||||||||||
Frontline Technologies Group LLC | (e)(f)(j) | Software & Services | L+650 | 1.0% | 9/18/23 | $ | 691 | $ | 691 | $ | 689 | |||||||||||
ID Verde | (f)(g) | Commercial & Professional Services | E+700 | 3/29/24 | € | 182 | 224 | 205 | ||||||||||||||
ID Verde | (f)(g) | Commercial & Professional Services | E+700 | 3/29/24 | £ | 78 | 102 | 101 | ||||||||||||||
ID Verde | (f)(g)(j) | Commercial & Professional Services | L+700 | 3/29/24 | € | 284 | 319 | 320 | ||||||||||||||
ID Verde | (f)(g) | Commercial & Professional Services | E+700 | 3/29/25 | 936 | 1,121 | 1,053 | |||||||||||||||
ID Verde | (f)(g) | Commercial & Professional Services | L+725 | 3/29/25 | £ | 342 | 468 | 447 | ||||||||||||||
Integro Ltd/United States | (f) | Insurance | L+575 | 10/30/22 | $ | 1,188 | 1,183 | 1,188 | ||||||||||||||
Jo-Ann Stores Inc | Retailing | L+500 | 1.0% | 10/20/23 | 3,321 | 3,297 | 3,312 | |||||||||||||||
Jostens Inc | Consumer Services | L+550 | 12/19/25 | 586 | 569 | 587 | ||||||||||||||||
Lipari Foods LLC | (f) | Food & Staples Retailing | L+588 | 1.0% | 1/4/25 | 4,703 | 4,666 | 4,662 | ||||||||||||||
Lipari Foods LLC | (f)(j) | Food & Staples Retailing | L+588 | 1.0% | 1/4/25 | 973 | 973 | 964 | ||||||||||||||
MedAssets Inc | (e) | Health Care Equipment & Services | L+450 | 1.0% | 10/20/22 | 70 | 71 | 68 | ||||||||||||||
Monitronics International Inc | (e)(g) | Commercial & Professional Services | L+550 | 1.0% | 9/30/22 | 2,002 | 1,972 | 1,683 | ||||||||||||||
NCI Inc | (f) | Software & Services | L+750 | 1.0% | 8/15/24 | 4,265 | 4,224 | 4,156 | ||||||||||||||
Onvoy LLC | (e) | Telecommunication Services | L+450 | 1.0% | 2/10/24 | 155 | 139 | 139 | ||||||||||||||
Patriot Well Solutions LLC | (f) | Energy | L+875 | 1.0% | 5/1/21 | 967 | 956 | 954 | ||||||||||||||
Qdoba Restaurant Corp | Consumer Services | L+700 | 1.0% | 3/21/25 | 1,980 | 1,945 | 1,999 | |||||||||||||||
Quorum Health Corp | Health Care Equipment & Services | L+675 | 1.0% | 4/29/22 | 4,482 | 4,471 | 4,427 | |||||||||||||||
Reliant Rehab Hospital Cincinnati LLC | (e)(f) | Health Care Equipment & Services | L+675 | 1.0% | 8/30/24 | 2,314 | 2,295 | 2,282 | ||||||||||||||
Revere Superior Holdings, Inc | (e)(f) | Software & Services | L+675 | 1.0% | 11/21/22 | 6,289 | 6,236 | 6,247 | ||||||||||||||
Savers Inc | (f) | Retailing | L+650, 0.8% PIK (0.8% Max PIK) | 1.5% | 3/28/24 | C$ | 1,466 | 1,078 | 1,083 | |||||||||||||
Savers Inc | (f) | Retailing | L+650, 0.8% PIK (0.8% Max PIK) | 1.5% | 3/28/24 | $ | 1,056 | 1,042 | 1,042 | |||||||||||||
Sequa Corp | Materials | L+500 | 1.0% | 11/28/21 | 1,526 | 1,534 | 1,497 | |||||||||||||||
SIRVA Worldwide Inc | Commercial & Professional Services | L+550 | 8/2/25 | 461 | 454 | 451 | ||||||||||||||||
SMART Global Holdings Inc | (f)(g) | Semiconductors & Semiconductor Equipment | L+400 | 8/9/22 | 24 | 24 | 22 |
See notes to unaudited financial statements.
6
Table of Contents
Corporate Capital Trust II
Unaudited Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)
Portfolio Company(a) | Footnotes | Industry | Rate(b) | Floor | Maturity | Principal Amount(c) | Amortized Cost | Fair Value(d) | ||||||||||||||||||
SMART Global Holdings Inc | (f)(g)(j) | Semiconductors & Semiconductor Equipment | L+400 | 8/9/22 | $ | 72 | $ | 72 | $ | 67 | ||||||||||||||||
SMART Global Holdings Inc | (f)(g) | Semiconductors & Semiconductor Equipment | L+625 | 1.0% | 8/9/22 | 3,319 | 3,280 | 3,353 | ||||||||||||||||||
Staples Canada | (f)(g) | Retailing | L+700 | 1.0% | 9/12/24 | C$ | 5,021 | 4,064 | 3,812 | |||||||||||||||||
Sutherland Global Services Inc | (e)(g) | Software & Services | L+538 | 1.0% | 4/23/21 | $ | 2,206 | 2,163 | 2,156 | |||||||||||||||||
Tangoe LLC | (f) | Software & Services | L+650 | 1.0% | 11/28/25 | 2,002 | 1,983 | 1,977 | ||||||||||||||||||
Team Health Inc | (e) | Health Care Equipment & Services | L+275 | 1.0% | 2/6/24 | 965 | 938 | 861 | ||||||||||||||||||
Virgin Pulse Inc | (f) | Software & Services | L+650 | 1.0% | 5/22/25 | 3,074 | 3,052 | 3,034 | ||||||||||||||||||
Wheels Up Partners LLC | (f) | Transportation | L+855 | 1.0% | 1/26/21 | 690 | 688 | 685 | ||||||||||||||||||
Wheels Up Partners LLC | (f) | Transportation | L+855 | 1.0% | 8/26/21 | 359 | 358 | 356 | ||||||||||||||||||
Wheels Up Partners LLC | (f) | Transportation | L+710 | 1.0% | 6/30/24 | 1,185 | 1,179 | 1,173 | ||||||||||||||||||
Wheels Up Partners LLC | (f) | Transportation | L+710 | 1.0% | 11/1/24 | 488 | 484 | 483 | ||||||||||||||||||
Wheels Up Partners LLC | (f) | Transportation | L+710 | 1.0% | 12/21/24 | 1,812 | 1,803 | 1,792 | ||||||||||||||||||
WireCo WorldGroup Inc | (e) | Capital Goods | L+500 | 1.0% | 9/29/23 | 96 | 96 | 96 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||||
Total Senior Secured Loans—First Lien | 104,733 | 100,515 | ||||||||||||||||||||||||
Unfunded Loan Commitments | (2,753) | (2,753) | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||
Net Senior Secured Loans—First Lien | 101,980 | 97,762 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||
Senior Secured Loans—Second Lien—33.3% | ||||||||||||||||||||||||||
Access CIG LLC | Software & Services | L+775 | 2/27/26 | 211 | 209 | 209 | ||||||||||||||||||||
Advantage Sales & Marketing Inc | Commercial & Professional Services | L+650 | 1.0% | 7/25/22 | 542 | 483 | 400 | |||||||||||||||||||
Albany Molecular Research Inc | Pharmaceuticals, Biotechnology & Life Sciences | L+700 | 1.0% | 8/28/25 | 913 | 909 | 904 | |||||||||||||||||||
Ammeraal Beltech Holding BV | (f)(g) | Capital Goods | L+800 | 7/27/26 | 2,018 | 1,980 | 1,975 | |||||||||||||||||||
Applied Systems Inc | Software & Services | L+700 | 1.0% | 9/19/25 | 2,624 | 2,624 | 2,654 | |||||||||||||||||||
athenahealth Inc | (f) | Health Care Equipment & Services | L+850 | 1.0% | 2/11/27 | 2,516 | 2,491 | 2,528 | ||||||||||||||||||
CommerceHub Inc | (f) | Software & Services | L+775 | 5/21/26 | 3,222 | 3,136 | 3,111 |
See notes to unaudited financial statements.
7
Table of Contents
Corporate Capital Trust II
Unaudited Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)
Portfolio Company(a) | Footnotes | Industry | Rate(b) | Floor | Maturity | Principal Amount(c) | Amortized Cost | Fair Value(d) | ||||||||||||||||||
CTI Foods Holding Co LLC | (k) | Food, Beverage & Tobacco | L+725 | 1.0% | 6/28/21 | $ | 222 | $ | 211 | $ | 17 | |||||||||||||||
Direct ChassisLink Inc | Transportation | L+600 | 6/15/23 | 587 | 585 | 593 | ||||||||||||||||||||
EaglePicher Technologies LLC | Capital Goods | L+725 | 3/8/26 | 450 | 447 | 438 | ||||||||||||||||||||
Excelitas Technologies Corp | Technology Hardware & Equipment | L+750 | 1.0% | 12/1/25 | 811 | 804 | 813 | |||||||||||||||||||
Grocery Outlet Inc | Food & Staples Retailing | L+725 | 10/22/26 | 382 | 378 | 382 | ||||||||||||||||||||
Integro Ltd/United States | (f) | Insurance | L+925 | 10/30/23 | 222 | 220 | 222 | |||||||||||||||||||
Invictus | Materials | L+675 | 3/30/26 | 451 | 452 | 450 | ||||||||||||||||||||
iParadigms Holdings LLC | Software & Services | L+725 | 1.0% | 7/29/22 | 183 | 180 | 183 | |||||||||||||||||||
LBM Borrower LLC | Capital Goods | L+925 | 1.0% | 8/20/23 | 900 | 895 | 882 | |||||||||||||||||||
Misys Ltd | (g) | Software & Services | L+725 | 1.0% | 6/13/25 | 1,918 | 1,911 | 1,853 | ||||||||||||||||||
New Arclin US Holding Corp | (g) | Materials | L+875 | 1.0% | 2/14/25 | 289 | 286 | 287 | ||||||||||||||||||
One Call Care Management Inc | (f) | Insurance | L+375, 6.0% PIK (6.0% Max PIK) | 1.0% | 4/11/24 | 1,217 | 1,207 | 1,110 | ||||||||||||||||||
Paradigm Acquisition Corp | Health Care Equipment & Services | L+750 | 10/26/26 | 267 | 267 | 266 | ||||||||||||||||||||
Polyconcept North America Inc | (f) | Consumer Durables & Apparel | L+1000 | 1.0% | 2/16/24 | 624 | 614 | 643 | ||||||||||||||||||
Press Ganey Holdings Inc | Health Care Equipment & Services | L+650 | 1.0% | 10/21/24 | 1,066 | 1,079 | 1,069 | |||||||||||||||||||
Pure Fishing Inc | (f) | Consumer Durables & Apparel | L+838 | 1.0% | 12/31/26 | 1,806 | 1,788 | 1,817 | ||||||||||||||||||
Rise Baking Company | (f) | Food, Beverage & Tobacco | L+800 | 1.0% | 8/9/26 | 694 | 687 | 682 | ||||||||||||||||||
Sequa Corp | Materials | L+900 | 1.0% | 4/28/22 | 4,024 | 4,059 | 3,949 | |||||||||||||||||||
SIRVA Worldwide Inc | Commercial & Professional Services | L+950 | 8/2/26 | 417 | 386 | 367 | ||||||||||||||||||||
SMG/PA | Consumer Services | L+700 | 1/23/26 | 230 | 231 | 233 | ||||||||||||||||||||
Sparta Systems Inc | (f) | Software & Services | L+825 | 1.0% | 7/27/25 | 2,438 | 2,406 | 2,098 | ||||||||||||||||||
Transplace | Transportation | L+875 | 1.0% | 10/6/25 | 3,289 | 3,221 | 3,231 | |||||||||||||||||||
Vantage Specialty Chemicals Inc | Materials | L+825 | 1.0% | 10/27/25 | 755 | 745 | 737 | |||||||||||||||||||
WireCo WorldGroup Inc | Capital Goods | L+900 | 1.0% | 9/30/24 | 1,632 | 1,628 | 1,628 | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
Total Senior Secured Loans—Second Lien | 36,519 | 35,731 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
See notes to unaudited financial statements.
8
Table of Contents
Corporate Capital Trust II
Unaudited Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)
Portfolio Company(a) | Footnotes | Industry | Rate(b) | Floor | Maturity | Principal Amount(c) | Amortized Cost | Fair Value(d) | ||||||||||||||||||
Other Senior Secured Debt—7.9% | ||||||||||||||||||||||||||
Cleaver-Brooks Inc | Capital Goods | 7.9% | 3/1/23 | $ | 349 | $ | 349 | $ | 326 | |||||||||||||||||
Cornerstone Chemical Co | Materials | 6.8% | 8/15/24 | 2,682 | 2,685 | 2,550 | ||||||||||||||||||||
Frontier Communications Corp | (g) | Telecommunication Services | 8.5% | 4/1/26 | 353 | 353 | 329 | |||||||||||||||||||
Genesys Telecommunications Laboratories Inc | Technology Hardware & Equipment | 10.0% | 11/30/24 | 672 | 740 | 735 | ||||||||||||||||||||
PAREXEL International Corp | Pharmaceuticals, Biotechnology & Life Sciences | 6.4% | 9/1/25 | 610 | 591 | 594 | ||||||||||||||||||||
Ply Gem Holdings Inc | Capital Goods | 8.0% | 4/15/26 | 1,666 | 1,635 | 1,497 | ||||||||||||||||||||
Vivint Inc | Commercial & Professional Services | 7.9% | 12/1/22 | 1,752 | 1,732 | 1,756 | ||||||||||||||||||||
Vivint Inc | Commercial & Professional Services | 7.6% | 9/1/23 | 821 | 748 | 700 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
Total Other Senior Secured Debt | 8,833 | 8,487 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
Subordinated Debt—24.8% | ||||||||||||||||||||||||||
athenahealth Inc | (f) | Health Care Equipment & Services | L+1125 PIK (L+1125 Max PIK) | 11/30/25 | 1,258 | 1,258 | 1,272 | |||||||||||||||||||
ClubCorp Club Operations Inc | Consumer Services | 8.5% | 9/15/25 | 5,260 | 5,172 | 4,804 | ||||||||||||||||||||
Datatel Inc | Software & Services | 9.0% | 9/30/23 | 102 | 106 | 106 | ||||||||||||||||||||
Kenan Advantage Group Inc | Transportation | 7.9% | 7/31/23 | 3,262 | 3,367 | 3,176 | ||||||||||||||||||||
LifePoint Hospitals Inc | Health Care Equipment & Services | 9.8% | 12/1/26 | 921 | 921 | 957 | ||||||||||||||||||||
Quorum Health Corp | Health Care Equipment & Services | 11.6% | 4/15/23 | 250 | 251 | 225 | ||||||||||||||||||||
Reynolds Group Holdings Inc | Materials | 8.0% | 12/15/25 | 849 | 926 | 860 | ||||||||||||||||||||
Reynolds Group Holdings Inc | Materials | 8.4% | 4/15/27 | 2,653 | 2,933 | 2,715 | ||||||||||||||||||||
SRS Distribution Inc | Capital Goods | 8.3% | 7/1/26 | 3,010 | 2,998 | 2,897 | ||||||||||||||||||||
Surgery Partners Holdings LLC | Health Care Equipment & Services | 6.8% | 7/1/25 | 247 | 227 | 224 | ||||||||||||||||||||
Team Health Inc | Health Care Equipment & Services | 6.4% | 2/1/25 | 1,943 | 1,717 | 1,582 | ||||||||||||||||||||
Vertiv Group Corp | Technology Hardware & Equipment | 9.3% | 10/15/24 | 6,124 | 6,317 | 6,047 | ||||||||||||||||||||
Vivint Inc | Commercial & Professional Services | 8.8% | 12/1/20 | 1,695 | 1,586 | 1,672 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||
Total Subordinated Debt | 27,779 | 26,537 | ||||||||||||||||||||||||
|
|
|
|
|
|
See notes to unaudited financial statements.
9
Table of Contents
Corporate Capital Trust II
Unaudited Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)
Portfolio Company(a) | Footnotes | Industry | Rate(b) | Number of Shares | Amortized Cost | Fair Value(d) | ||||||||||||||||
Asset Based Finance—5.9% | ||||||||||||||||||||||
Accelerator Investments Aggregator LP | (f)(g)(i) | Diversified Financials | 107,825 | $ | 126 | $ | 121 | |||||||||||||||
KKR Zeno Aggregator LP (K2 Aviation) | (f)(g) | Capital Goods | 5,907,086 | 5,907 | 6,178 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
Total Asset Based Finance | 6,033 | 6,299 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
Equity/Other—4.1% | ||||||||||||||||||||||
Altavair NewCo, Private Equity | (f)(g)(i) | Capital Goods | 132,279 | 132 | 136 | |||||||||||||||||
Australis Maritime, Private Equity | (f)(g) | Transportation | 43,819 | 44 | 44 | |||||||||||||||||
Misys Ltd, Preferred Stock | (f)(g) | Software & Services | L+1025 | 2,841 | 2,788 | 2,695 | ||||||||||||||||
Polyconcept North America Inc,Class A-1 Units | (f) | Consumer Durables & Apparel | 624 | 62 | 94 | |||||||||||||||||
VICI Properties Inc, Common Stock | (g) | Consumer Services | 66,020 | 1,228 | 1,445 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
Total Equity/Other | 4,254 | 4,414 | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||
TOTAL INVESTMENTS—167.2% | (h) | $ | 185,398 | 179,230 | ||||||||||||||||||
|
|
| ||||||||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS—(67.2%) | (72,016) | |||||||||||||||||||||
|
|
| ||||||||||||||||||||
NET ASSETS—100.0% | $ | 107,214 | ||||||||||||||||||||
|
|
|
Foreign Currency Forward Contracts
Foreign Currency | Settlement Date | Counterparty | Notional Amount and Transaction | US $ Value at Settlement Date | US $ Value at March 31, 2019 | Unrealized Appreciation (Depreciation) | ||||||||||||||||||
CAD | October 10, 2019 | JP Morgan Chase Bank | C$ | 5,690 Sold | $ | 4,642 | $ | 4,276 | $ | 366 | ||||||||||||||
EUR | July 17, 2023 | JP Morgan Chase Bank | € | 107 Sold | 144 | 134 | 10 | |||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | $ | 4,786 | $ | 4,410 | $ | 376 | ||||||||||||||||||
|
|
|
|
|
|
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Certain variable rate securities in the Company’s portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of March 31, 2019, the three-month London Interbank Offered Rate, or LIBOR or “L”, was 2.60% and the Euro Interbank Offered Rate, or EURIBOR or “E”, was (0.31)%. PIK meanspaid-in-kind. PIK income accruals may be adjusted based on the fair value of the underlying investment. |
See notes to unaudited financial statements.
10
Table of Contents
Corporate Capital Trust II
Unaudited Schedule of Investments (continued)
As of March 31, 2019
(in thousands, except share amounts)
(c) | Denominated in U.S. dollars unless otherwise noted. |
(d) | Fair value determined by the Company’s board of trustees (see Note 8). |
(e) | Position or portion thereof unsettled as of March 31, 2019. |
(f) | Investments classified as Level 3 whereby fair value was determined by the Company’s board of trustees (see Note 2). |
(g) | The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of March 31, 2019, 80.1% of the Company’s total assets represented qualifying assets. |
(h) | As of March 31, 2019, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $1,234; the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $7,402; the net unrealized depreciation was $6,168; the aggregate cost of securities for Federal income tax purposes was $185,398. |
(i) | Security isnon-income producing. |
(j) | Security is an unfunded loan commitment. |
(k) | Security is onnon-accrual status. |
Abbreviations: |
C$ - Canadian Dollar; local currency investment amount is denominated in Canadian Dollar. C$1.00 / U.S. $0.75 as of March 31, 2019.
€ - Euro; local currency investment amount is denominated in Euros. €1.00 / U.S. $1.12 as of March 31, 2019.
£ - British Pound Sterling; local currency investment amount is denominated in British Pound Sterling. £1.00 / U.S. $1.30 as of March 31, 2019.
E = EURIBOR - Euro Interbank Offered Rate
L = LIBOR - London Interbank Offered Rate,typically 3-Month
PIK =Payment-in-kind; the issuance of additional securities by the borrower to settle interest payment obligations.
See notes to unaudited financial statements.
11
Table of Contents
Corporate Capital Trust II
Schedule of Investments
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | Floor | Maturity Date | Principal Amount(c) | Cost(d) | Fair Value | ||||||||||||||||||
Senior Secured Loans—First Lien—87.5% | ||||||||||||||||||||||||||
Accuride Corp | (n) | Capital Goods | L+525 | 1.0% | 11/17/23 | $ | 413 | $ | 408 | $ | 396 | |||||||||||||||
Acosta Holdco Inc | (l) | Commercial & Professional Services | L+325 | 1.0% | 9/26/21 | 5,175 | 4,704 | 3,179 | ||||||||||||||||||
Advantage Sales & Marketing Inc | (l) | Commercial & Professional Services | L+325 | 1.0% | 7/23/21 | 2,813 | 2,710 | 2,499 | ||||||||||||||||||
American Tire Distributors Inc | (j)(l) | Automobiles & Components | L+650, 1.0% PIK (1.0% Max PIK) | 1.0% | 9/1/23 | 244 | 244 | 228 | ||||||||||||||||||
American Tire Distributors Inc | (l) | Automobiles & Components | L+750 | 1.0% | 8/30/24 | 1,548 | 1,376 | 1,274 | ||||||||||||||||||
Ammeraal Beltech Holding BV (NLD) | (g)(h)(o) | Capital Goods | E+375 | 7/30/25 | € | 1,000 | 1,176 | 1,140 | ||||||||||||||||||
Apex Group Limited (GBR) | (f)(g)(h)(n)(q) | Diversified Financials | L+650 | 6/15/23 | $ | 89 | 86 | 76 | ||||||||||||||||||
Apex Group Limited (GBR) | (f)(g)(h)(n) | Diversified Financials | L+650 | 1.0% | 6/15/25 | 600 | 589 | 577 | ||||||||||||||||||
Apex Group Limited (GBR) | (f)(g)(h)(n)(q) | Diversified Financials | L+650 | 1.0% | 6/15/25 | 290 | 284 | 278 | ||||||||||||||||||
Apex Group Limited (GBR) | (f)(g)(h)(n) | Diversified Financials | L+650 | 1.0% | 6/15/25 | 97 | 95 | 93 | ||||||||||||||||||
Apex Group Limited (GBR) | (f)(g)(h)(n)(q) | Diversified Financials | L+650 | 1.0% | 6/15/25 | 145 | 143 | 139 | ||||||||||||||||||
Belk Inc | (n) | Retailing | L+475 | 1.0% | 12/12/22 | 4,885 | 4,460 | 3,964 | ||||||||||||||||||
Berner Food & Beverage LLC | (f)(n) | Food & Staples Retailing | L+675 | 1.0% | 2/2/23 | 4,372 | 4,338 | 4,225 | ||||||||||||||||||
Bugaboo International BV (NLD) | (f)(g)(h)(j)(o) | Consumer Durables & Apparel | E+700, 7.8% PIK (7.8% Max PIK) | 3/20/25 | € | 1,215 | 1,447 | 1,372 | ||||||||||||||||||
Caprock Midstream LLC | (m) | Energy | L+475 | 11/3/25 | $ | 615 | 612 | 573 | ||||||||||||||||||
Constellis Holdings LLC / Constellis Finance Corp | (f)(n) | Capital Goods | L+575 | 1.0% | 4/1/22 | 1,825 | 1,798 | 1,798 | ||||||||||||||||||
Diamond Resorts International Inc | (l) | Consumer Services | L+375 | 1.0% | 9/2/23 | 1,011 | 959 | 945 | ||||||||||||||||||
Distribution International Inc | (n) | Retailing | L+500 | 1.0% | 12/15/21 | 7,482 | 6,698 | 6,659 | ||||||||||||||||||
Eacom Timber Corp (CAN) | (f)(g)(h)(n) | Materials | L+650 | 1.0% | 11/30/23 | 2,782 | 2,758 | 2,773 | ||||||||||||||||||
Eagle Family Foods Inc | (f)(l)(q) | Food, Beverage & Tobacco | L+650 | 1.0% | 6/14/23 | 159 | 158 | 136 | ||||||||||||||||||
Eagle Family Foods Inc | (f)(l) | Food, Beverage & Tobacco | L+650 | 1.0% | 6/14/24 | 1,056 | 1,045 | 1,039 | ||||||||||||||||||
Foresight Energy LLC | (g)(n) | Materials | L+575 | 1.0% | 3/28/22 | 1,557 | 1,487 | 1,533 |
See notes to unaudited financial statements.
12
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | Floor | Maturity Date | Principal Amount(c) | Cost(d) | Fair Value | ||||||||||||||||
Frontline Technologies Group LLC | (f)(l)(q) | Software & Services | L+650 | 1.0% | 9/18/23 | $ | 889 | $ | 879 | $ | 891 | |||||||||||||
Frontline Technologies Group LLC | (f)(l) | Software & Services | L+650 | 1.0% | 9/18/23 | 4,479 | 4,423 | 4,486 | ||||||||||||||||
ID Verde (FRA) | (f)(g)(h)(o) | Commercial & Professional Services | E+700 | 3/29/24 | € | 138 | 124 | 135 | ||||||||||||||||
ID Verde (FRA) | (f)(g)(h)(o)(q) | Commercial & Professional Services | E+700 | 3/29/24 | € | 92 | 158 | 153 | ||||||||||||||||
ID Verde (FRA) | (f)(g)(h)(o) | Commercial & Professional Services | E+700 | 3/29/25 | € | 936 | 1,120 | 1,076 | ||||||||||||||||
ID Verde (FRA) | (f)(g)(h)(o) | Commercial & Professional Services | E+725 | 3/29/25 | £ | 378 | 514 | 485 | ||||||||||||||||
Integro Ltd/United States | (f)(n) | Insurance | L+575 | 10/30/22 | $ | 1,191 | 1,186 | 1,191 | ||||||||||||||||
Jo-Ann Stores Inc | (n) | Retailing | L+500 | 1.0% | 10/20/23 | 3,395 | 3,371 | 3,247 | ||||||||||||||||
Jostens Inc | (e)(n) | Consumer Services | L+550 | 12/19/25 | 612 | 594 | 597 | |||||||||||||||||
MedAssets Inc | (l) | Health Care Equipment & Services | L+450 | 1.0% | 10/20/22 | 71 | 71 | 68 | ||||||||||||||||
Misys Ltd | (e)(g)(n) | Software & Services | L+350 | 1.0% | 6/13/24 | 207 | 192 | 193 | ||||||||||||||||
Monitronics International Inc | (g)(n) | Commercial & Professional Services | L+550 | 1.0% | 9/30/22 | 2,007 | 1,975 | 1,800 | ||||||||||||||||
NCI Inc | (f)(l) | Software & Services | L+750 | 1.0% | 8/15/24 | 4,276 | 4,233 | 4,240 | ||||||||||||||||
Onvoy LLC | (n) | Telecommunication Services | L+450 | 1.0% | 2/10/24 | 155 | 139 | 140 | ||||||||||||||||
Patriot Well Solutions LLC | (f)(l) | Energy | L+875 | 1.0% | 5/1/21 | 325 | 322 | 321 | ||||||||||||||||
Patriot Well Solutions LLC | (f)(n) | Energy | L+875 | 1.0% | 5/1/21 | 667 | 658 | 658 | ||||||||||||||||
Qdoba Restaurant Corp | (l) | Consumer Services | L+700 | 1.0% | 3/21/25 | 1,985 | 1,948 | 1,975 | ||||||||||||||||
Quorum Health Corp | (l) | Health Care Equipment & Services | L+675 | 1.0% | 4/29/22 | 4,501 | 4,490 | 4,476 | ||||||||||||||||
Reliant Rehab Hospital Cincinnati LLC | (f)(l) | Health Care Equipment & Services | L+675 | 1.0% | 8/30/24 | 2,122 | 2,102 | 2,116 | ||||||||||||||||
Revere Superior Holdings, Inc | (f)(n) | Software & Services | L+675 | 1.0% | 11/21/22 | 4,697 | 4,657 | 4,711 | ||||||||||||||||
Revere Superior Holdings, Inc | (f)(n) | Software & Services | L+675 | 1.0% | 11/21/22 | 352 | 346 | 308 | ||||||||||||||||
Revere Superior Holdings, Inc | (f)(n) | Software & Services | L+675 | 1.0% | 11/21/22 | 1,243 | 1,233 | 1,240 | ||||||||||||||||
Savers Inc | (n) | Retailing | L+375 | 1.3% | 7/9/19 | 1,062 | 1,030 | 1,017 | ||||||||||||||||
Sequa Corp | (n) | Materials | L+500 | 1.0% | 11/28/21 | 1,530 | 1,539 | 1,467 | ||||||||||||||||
SIRVA Worldwide Inc | (n) | Commercial & Professional Services | L+550 | 8/2/25 | 464 | 457 | 456 |
See notes to unaudited financial statements.
13
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | Floor | Maturity Date | Principal Amount(c) | Cost(d) | Fair Value | ||||||||||||||||
SMART Global Holdings Inc | (f)(g)(n)(q) | Semiconductors & Semiconductor Equipment | L+400 | 8/9/22 | $ | 96 | $ | 96 | $ | 89 | ||||||||||||||
SMART Global Holdings Inc | (f)(g)(n) | Semiconductors & Semiconductor Equipment | L+625 | 1.0% | 8/9/22 | 3,319 | 3,277 | 3,353 | ||||||||||||||||
Staples Canada (CAN) | (f)(g)(h)(n) | Retailing | L+700 | 1.0% | 9/12/24 | C$ | 5,149 | 4,166 | 3,811 | |||||||||||||||
Sutherland Global Services Inc | (g)(n) | Software & Services | L+538 | 1.0% | 4/23/21 | $ | 1,794 | 1,754 | 1,694 | |||||||||||||||
Sutherland Global Services Inc | (g)(n) | Software & Services | L+538 | 1.0% | 4/23/21 | 418 | 409 | 394 | ||||||||||||||||
Tangoe LLC | (f)(l) | Software & Services | L+650 | 1.0% | 11/28/25 | 2,007 | 1,987 | 1,987 | ||||||||||||||||
Team Health Inc | (l) | Health Care Equipment & Services | L+275 | 1.0% | 2/6/24 | 967 | 939 | 869 | ||||||||||||||||
Utility One Source LP | (l) | Capital Goods | L+550 | 1.0% | 4/18/23 | 3,272 | 3,257 | 3,272 | ||||||||||||||||
Virgin Pulse Inc | (f)(n) | Software & Services | L+650 | 1.0% | 5/22/25 | 3,081 | 3,059 | 2,986 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+855 | 1.0% | 1/26/21 | 724 | 724 | 724 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+855 | 1.0% | 8/26/21 | 372 | 372 | 371 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+710 | 1.0% | 6/30/24 | 1,220 | 1,220 | 1,225 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+710 | 1.0% | 8/1/24 | 809 | 801 | 812 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+710 | 1.0% | 11/1/24 | 502 | 502 | 504 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+710 | 1.0% | 12/21/24 | 790 | 790 | 793 | ||||||||||||||||
Wheels Up Partners LLC | (f)(n) | Transportation | L+710 | 1.0% | 12/21/24 | 257 | 255 | 258 | ||||||||||||||||
WireCo WorldGroup Inc | (e)(l) | Capital Goods | L+500 | 1.0% | 9/29/23 | 97 | 96 | 96 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Senior Secured Loans—First Lien | 99,040 | 95,581 | ||||||||||||||||||||||
Unfunded Loan Commitments | (1,804) | (1,804) | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Net Senior Secured Loans—First Lien | 97,236 | 93,777 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Senior Secured Loans—Second Lien—32.0% | ||||||||||||||||||||||||
Access CIG LLC | (n) | Software & Services | L+775 | 2/27/26 | 211 | 209 | 209 | |||||||||||||||||
Advantage Sales & Marketing Inc | (l) | Commercial & Professional Services | L+650 | 1.0% | 7/25/22 | 542 | 483 | 429 |
See notes to unaudited financial statements.
14
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | Floor | Maturity Date | Principal Amount(c) | Cost(d) | Fair Value | ||||||||||||||||
Albany Molecular Research Inc | (l) | Pharmaceuticals, Biotechnology & Life Sciences | L+700 | 1.0% | 8/28/25 | $ | 913 | $ | 909 | $ | 906 | |||||||||||||
Ammeraal Beltech Holding BV (NLD) | (f)(g)(h)(n) | Capital Goods | L+800 | 7/27/26 | 2,018 | 1,979 | 1,974 | |||||||||||||||||
Applied Systems Inc | (l) | Software & Services | L+700 | 1.0% | 9/19/25 | 2,624 | 2,624 | 2,581 | ||||||||||||||||
CommerceHub Inc | (f)(l) | Software & Services | L+775 | 5/21/26 | 3,222 | 3,133 | 3,016 | |||||||||||||||||
CTI Foods Holding Co LLC | (n)(p)(r) | Food, Beverage & Tobacco | L+725 | 1.0% | 6/28/21 | 222 | 211 | 24 | ||||||||||||||||
Direct ChassisLink Inc | (n) | Transportation | L+600 | 6/15/23 | 587 | 584 | 566 | |||||||||||||||||
EaglePicher Technologies LLC | (l) | Capital Goods | L+725 | 3/8/26 | 450 | 447 | 441 | |||||||||||||||||
Excelitas Technologies Corp | (l) | Technology Hardware & Equipment | L+750 | 1.0% | 12/1/25 | 811 | 804 | 777 | ||||||||||||||||
Grocery Outlet Inc | (n) | Food & Staples Retailing | L+725 | 10/22/26 | 382 | 378 | 380 | |||||||||||||||||
Higginbotham Insurance Agency Inc | (f)(l) | Insurance | L+725 | 1.0% | 12/19/25 | 1,304 | 1,293 | 1,303 | ||||||||||||||||
Integro Ltd/United States | (f)(n) | Insurance | L+925 | 10/30/23 | 222 | 220 | 222 | |||||||||||||||||
Invictus | (m) | Materials | L+675 | 3/30/26 | 451 | 452 | 451 | |||||||||||||||||
iParadigms Holdings LLC | (n) | Software & Services | L+725 | 1.0% | 7/29/22 | 183 | 180 | 182 | ||||||||||||||||
Jo-Ann Stores Inc | (n) | Retailing | L+925 | 1.0% | 5/21/24 | 396 | 391 | 384 | ||||||||||||||||
LBM Borrower LLC | (n) | Capital Goods | L+925 | 1.0% | 8/20/23 | 900 | 895 | 882 | ||||||||||||||||
Misys Ltd | (e)(g)(n) | Software & Services | L+725 | 1.0% | 6/13/25 | 1,918 | 1,911 | 1,777 | ||||||||||||||||
New Arclin US Holding Corp | (g)(l) | Materials | L+875 | 1.0% | 2/14/25 | 289 | 286 | 289 | ||||||||||||||||
One Call Care Management Inc | (f)(j)(l) | Insurance | L+375, 6.0% PIK (6.0% Max PIK) | 4/11/24 | 1,198 | 1,188 | 1,148 | |||||||||||||||||
Paradigm Acquisition Corp | (n) | Health Care Equipment & Services | L+750 | 10/26/26 | 267 | 267 | 269 | |||||||||||||||||
Polyconcept North America Inc | (f)(l) | Consumer Durables & Apparel | L+1000 | 1.0% | 2/16/24 | 624 | 613 | 643 | ||||||||||||||||
Press Ganey Holdings Inc | (l) | Health Care Equipment & Services | L+650 | 1.0% | 10/21/24 | 1,066 | 1,080 | 1,061 |
See notes to unaudited financial statements.
15
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | Floor | Maturity Date | Principal Amount(c) | Cost(d) | Fair Value | ||||||||||||||||
Pure Fishing Inc | (f)(n) | Consumer Durables & Apparel | L+838 | 1.0% | 12/31/26 | $ | 1,806 | $ | 1,788 | $ | 1,788 | |||||||||||||
Rise Baking Company | (f)(l) | Food, Beverage & Tobacco | L+800 | 1.0% | 8/9/26 | 694 | 687 | 687 | ||||||||||||||||
Sequa Corp | (n) | Materials | L+900 | 1.0% | 4/28/22 | 4,024 | 4,061 | 3,823 | ||||||||||||||||
SIRVA Worldwide Inc | (n) | Commercial & Professional Services | L+950 | 8/2/26 | 417 | 386 | 369 | |||||||||||||||||
SMG/PA | (l) | Consumer Services | L+700 | 1/23/26 | 230 | 231 | 227 | |||||||||||||||||
Sparta Systems Inc | (f)(l) | Software & Services | L+825 | 1.0% | 7/27/25 | 2,438 | 2,405 | 2,099 | ||||||||||||||||
Transplace | (l) | Transportation | L+875 | 1.0% | 10/6/25 | 3,289 | 3,218 | 2,993 | ||||||||||||||||
Vantage Specialty Chemicals Inc | (n) | Materials | L+825 | 1.0% | 10/26/25 | 755 | 745 | 741 | ||||||||||||||||
WireCo WorldGroup Inc | (l) | Capital Goods | L+900 | 1.0% | 9/30/24 | 1,632 | 1,628 | 1,636 | ||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Senior Secured Loans—Second Lien | 35,686 | 34,277 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Other Senior Secured Debt—8.9% | ||||||||||||||||||||||||
Cleaver-Brooks Inc | (i) | Capital Goods | 7.9% | 3/1/23 | 625 | 625 | 611 | |||||||||||||||||
Cornerstone Chemical Co | (i) | Materials | 6.8% | 8/15/24 | 2,682 | 2,686 | 2,362 | |||||||||||||||||
Frontier Communications Corp | (g)(i) | Telecommunication Services | 8.5% | 4/1/26 | 353 | 353 | 309 | |||||||||||||||||
Genesys Telecommunications Laboratories Inc | (i) | Technology Hardware & Equipment | 10.0% | 11/30/24 | 672 | 742 | 707 | |||||||||||||||||
PAREXEL International Corp | (i) | Pharmaceuticals, Biotechnology & Life Sciences | 6.4% | 9/1/25 | 610 | 591 | 545 | |||||||||||||||||
Pattonair Holdings Ltd | (g)(i) | Capital Goods | 9.0% | 11/1/22 | 1,057 | 1,071 | 1,068 | |||||||||||||||||
Ply Gem Holdings Inc | (i) | Capital Goods | 8.0% | 4/15/26 | 1,666 | 1,634 | 1,533 | |||||||||||||||||
Surgery Partners Holdings LLC | (i) | Health Care Equipment & Services | 8.9% | 4/15/21 | 18 | 18 | 18 | |||||||||||||||||
Vivint Inc | Commercial & Professional Services | 7.9% | 12/1/22 | 1,752 | 1,731 | 1,660 |
See notes to unaudited financial statements.
16
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | Floor | Maturity Date | Principal Amount(c) | Cost(d) | Fair Value | ||||||||||||||||
Vivint Inc | Commercial & Professional Services | 7.6% | 9/1/23 | $ | 821 | $ | 744 | $ | 672 | |||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Other Senior Secured Debt | 10,195 | 9,485 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Subordinated Debt—25.0% | ||||||||||||||||||||||||
Allegheny Technologies Inc | (g) | Materials | 7.9% | 8/15/23 | 850 | 829 | 871 | |||||||||||||||||
CDK Global Inc | (g) | Software & Services | 4.9% | 6/1/27 | 7 | 7 | 7 | |||||||||||||||||
ClubCorp Club Operations Inc | (i) | Consumer Services | 8.5% | 9/15/25 | 5,260 | 5,169 | 4,734 | |||||||||||||||||
Consolidated Energy Finance SA (LUX) | (g)(h)(i) | Materials | 6.5% | 5/15/26 | 201 | 201 | 192 | |||||||||||||||||
Datatel Inc | (i) | Software & Services | 9.0% | 9/30/23 | 102 | 107 | 103 | |||||||||||||||||
Hub International Ltd | (i) | Insurance | 7.0% | 5/1/26 | 1,180 | 1,179 | 1,069 | |||||||||||||||||
Kenan Advantage Group Inc | (i) | Transportation | 7.9% | 7/31/23 | 3,262 | 3,371 | 3,140 | |||||||||||||||||
LifePoint Hospitals Inc | (i) | Health Care Equipment & Services | 9.8% | 12/1/26 | 921 | 921 | 877 | |||||||||||||||||
Quorum Health Corp | Health Care Equipment & Services | 11.6% | 4/15/23 | 268 | 269 | 255 | ||||||||||||||||||
Reynolds Group Holdings Inc | Materials | 8.0% | 12/15/25 | 849 | 929 | 838 | ||||||||||||||||||
Reynolds Group Holdings Inc | Materials | 8.4% | 4/15/27 | 2,653 | 2,940 | 2,637 | ||||||||||||||||||
SRS Distribution Inc | (i) | Capital Goods | 8.3% | 7/1/26 | 3,010 | 2,997 | 2,769 | |||||||||||||||||
Surgery Partners Holdings LLC | (i) | Health Care Equipment & Services | 6.8% | 7/1/25 | 548 | 502 | 474 | |||||||||||||||||
Team Health Inc | (i) | Health Care Equipment & Services | 6.4% | 2/1/25 | 1,943 | 1,710 | 1,586 | |||||||||||||||||
Tenet Healthcare Corp | (g) | Health Care Equipment & Services | 7.0% | 8/1/25 | 31 | 31 | 29 | |||||||||||||||||
Triumph Group Inc | Capital Goods | 7.8% | 8/15/25 | 217 | 217 | 192 | ||||||||||||||||||
Vertiv Group Corp | (i) | Technology Hardware & Equipment | 9.3% | 10/15/24 | 6,124 | 6,324 | 5,450 | |||||||||||||||||
Vivint Inc | Commercial & Professional Services | 8.8% | 12/1/20 | 1,695 | 1,571 | 1,617 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Subordinated Debt | 29,274 | 26,840 | ||||||||||||||||||||||
|
|
|
|
See notes to unaudited financial statements.
17
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Portfolio Company(a)(b) | Footnotes | Industry | Rate | No. of Shares | Cost(d) | Fair Value | ||||||||||||||||||
Asset Based Finance—6.3% | ||||||||||||||||||||||||
Accelerator Investments Aggregator LP (NLD) | (f)(g)(h)(p) | Diversified Financials | 107,825 | $ | 126 | $ | 123 | |||||||||||||||||
KKR Zeno Aggregator LP (K2 Aviation) (IRE) | (f)(g)(h) | Capital Goods | 5,630,570 | 5,631 | 5,631 | |||||||||||||||||||
Montgomery Credit Holdings LP | (f)(g)(p) | Diversified Financials | 1,095,595 | 1,095 | 975 | |||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Asset Based Finance | 6,852 | 6,729 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Equity/Other—3.8% | ||||||||||||||||||||||||
Australis Maritime (MHL) | (f)(g)(h) | Transportation | 43,819 | 44 | 44 | |||||||||||||||||||
Misys Ltd, Preferred Stock | (f)(g)(j)(n) | Software & Services | �� | L+1025 | 2,842 | 2,788 | 2,682 | |||||||||||||||||
Polyconcept North America Inc, Class A—1 Units | (f) | Consumer Durables & Apparel | 624 | 62 | 92 | |||||||||||||||||||
VICI Properties Inc, Common Stock | Consumer Services | 66,020 | 1,228 | 1,240 | ||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
Total Equity/Other | 4,122 | 4,058 | ||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||
TOTAL INVESTMENTS—163.5% | (k) | $ | 183,365 | 175,166 | ||||||||||||||||||||
|
| |||||||||||||||||||||||
OTHER ASSETS IN EXCESS OF LIABILITIES—(63.5%) | (67,996) | |||||||||||||||||||||||
|
| |||||||||||||||||||||||
NET ASSETS—100.0% | $ | 107,170 | ||||||||||||||||||||||
|
| |||||||||||||||||||||||
Derivative Instruments (Note 7)—0.4% | ||||||||||||||||||||||||
|
| |||||||||||||||||||||||
Foreign currency forward contracts | $ | 457 |
(a) | Security may be an obligation of one or more entities affiliated with the named company. |
(b) | Non-controlled/non-affiliated investments as defined by the Investment Company Act of 1940, as amended (“1940 Act”), unless otherwise indicated.Non-controlled/non-affiliated investments are investments that are neither controlled investments nor affiliated investments. |
(c) | Denominated in U.S. dollars unless otherwise noted. |
(d) | Represents amortized cost for debt securities and cost for equity investments translated to U.S. dollars. |
See notes to unaudited financial statements.
18
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
(e) | Position or portion thereof unsettled as of December 31, 2018. |
(f) | Investments classified as Level 3 whereby fair value was determined by the Company’s board of trustees (see Note 2). |
(g) | The investment is not a qualifying asset as defined in Section 55(a) under the 1940 Act. A business development company may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. As of December 31, 2018, 80.0% of the Company’s total assets represented qualifying assets. |
(h) | A portfolio company domiciled in a foreign country. The jurisdiction of the security issuer may be a different country than the domicile of the portfolio company. |
(i) | This security was acquired in a transaction that was exempt from the registration requirements of the Securities Act, pursuant to Rule 144A thereunder. This security may be resold only in transactions that are exempt from the registration requirements of the Securities Act, normally to qualified institutional buyers. |
(j) | The issuer of this security may elect at any time to capitalize distributions or interest. |
(k) | As of December 31, 2018, the aggregate gross unrealized appreciation for all investments in which there was an excess of value over tax cost was $570; the aggregate gross unrealized depreciation for all investments in which there was an excess of tax cost over value was $9,053; the net unrealized depreciation was $8,483; the aggregate cost of investments for federal income tax purposes was $183,649. |
(l) | The interest rate on these investments is subject to a base rate of1-Month LIBOR, which at December 31, 2018 was 2.52%. The current base rate for each investment may be different from the reference rate on December 31, 2018. |
(m) | The interest rate on these investments is subject to a base rate of2-Month LIBOR, which at December 31, 2018 was 2.62%. The current base rate for each investment may be different from the reference rate on December 31, 2018. |
(n) | The interest rate on these investments is subject to a base rate of3-Month LIBOR, which at December 31, 2018 was 2.81%. The current base rate for each investment may be different from the reference rate on December 31, 2018. |
(o) | The interest rate on these investments is subject to a base rate of3-Month Euro Interbank Offered Rate, which at December 31, 2018 was approximately (0.31)%. The current base rate for each investment may be different from the reference rate on December 31, 2018. |
(p) | Security isnon-income producing. |
(q) | Security is an unfunded loan commitment. |
(r) | Security is onnon-accrual status. |
See notes to unaudited financial statements.
19
Table of Contents
Corporate Capital Trust II
Schedule of Investments (continued)
As of December 31, 2018
(in thousands, except share amounts)
Abbreviations:
C$ - Canadian Dollar; local currency investment amount is denominated in Canadian Dollar. C$ 1 / U.S. $0.73 as of December 31, 2018.
€ - Local currency investment amount is denominated in Euros. € 1 / U.S. $1.15 as of December 31, 2018.
£ - Local currency investment amount is denominated in British Pound Sterling. £ 1 / U.S. $1.28 as of December 31, 2018.
CAN = Canada
CDOR = Canadian Banker Acceptance Rate
E = EURIBOR - Euro Interbank Offered Rate
FRA = France
GBR = United Kingdom
IRE = Ireland
L = LIBOR - London Interbank Offered Rate,typically 3-Month
LUX = Luxembourg
MHL = Marshall Islands
NLD = Netherlands
PIK =Payment-in-kind; the issuance of additional securities by the borrower to settle interest payment obligations.
See notes to unaudited financial statements.
20
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
Corporate Capital Trust II, or the Company, was formed as a Delaware statutory trust on August 12, 2014. The Company is anon-diversified,closed-end management investment company and has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, the Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code.
The Company’s investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. The Company’s portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle-market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. In addition, a portion of the Company’s portfolio may be comprised of equity and equity-related securities, corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps.
The Company is externally managed by FS/KKR Advisor, LLC, or the Advisor, pursuant to an investment advisory agreement, dated as of April 9, 2018, or the investment advisory agreement. Since inception and through April 8, 2018, the Company was externally managed by CNL Fund Advisors II, LLC, or CNL, as investment adviser and KKR Credit Advisors (US) LLC, or KKR, as investmentsub-adviser, or together, the Former Advisors.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation:The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and with the instructions for Form10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company’s interim unaudited financial statements should be read in conjunction with its audited financial statements as of and for the year ended December 31, 2018 included in the Company’s annual report on Form10-K for the year ended December 31, 2018. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The December 31, 2018 balance sheet and schedule of investments are derived from the Company’s audited financial statements as of and for the year ended December 31, 2018. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies under Accounting Standards Codification Topic 946,Financial Services—Investment Companies.
Use of Estimates: The preparation of the unaudited financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Subordinated Income Incentive Fee:Pursuant to the terms of the Investment Advisory Agreement, a subordinated incentive fee on income is determined and payable in arrears as of the end of each calendar quarter
21
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
(or upon termination of the Investment Advisory Agreement). A subordinated incentive fee on income is payable to the Advisor each calendar quarter if the Company’s“pre-incentive fee net investment fee income” (as defined in the Investment Advisory Agreement and approved by the Company’s board of trustees) exceeds the 1.75% “quarterly preferred return” to the Company’s shareholders (the ratio ofpre-incentive fee net investment income divided by average adjusted capital). Once theCompany’s pre-incentive fee net investment income in any quarter exceeds the quarterly preferred return of 1.75%, the Advisor will be entitled to a fee equal to the amount of theCompany’s pre-incentive fee net investment income in excess of the quarterly preferred return, until theCompany’s pre-incentive fee net investment income for such quarter equals 2.1875% of the Company’s average adjusted capital. Thereafter, the Advisor will be entitled to receive 20.0% of the Company’spre-incentive fee net investment income.
Capital Gains Incentive Fee:Pursuant to the terms of the Investment Advisory Agreement, an incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement). This fee equals 20.0% of the Company’s incentive fee on capital gains, which equals the Company’s realized capital gains on a cumulative basis since inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the incentive fee on capital gains based on net realized and unrealized gains; however, the fee payable to the Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized.
Reclassifications:Certain amounts in the unaudited financial statements as of and for the three months ended March 31, 2018 and the audited financial statements as of and for the year ended December 31, 2018 may have been reclassified to conform to the classifications used to prepare the unaudited financial statements as of and for the three months ended March 31, 2019.
Revenue Recognition:Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis to the extent that it expects to collect such amounts. The Company records dividend income on theex-dividend date. Distributions received from limited liability company, or LLC, and limited partnership, or LP, investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. The Company does not accrue as a receivable interest or dividends on loans and securities if it has reason to doubt its ability to collect such income. The Company’s policy is to place investments onnon-accrual status when there is reasonable doubt that interest income will be collected. The Company considers many factors relevant to an investment when placing it on or removing it fromnon-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that the Company will receive any previously accrued interest, then the interest income will bewritten-off. Payments received onnon-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest.Non-accrual investments may be restored to accrual status when principal and interest become current and are likely to remain current based on the Company’s judgment.
Loan origination fees, original issue discount and market discount are capitalized and the Company amortizes such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest
22
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
income. Structuring and othernon-recurring upfront fees are recorded as fee income when earned. For the three months ended March 31, 2019, the Company recognized $194 in structuring fee revenue. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.
Recent Accounting Pronouncements:In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update2018-13,Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU2018-13. ASU2018-13 introduces new fair value disclosure requirements and eliminates and modifies certain existing fair value disclosure requirements. ASU2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of ASU2018-13 on its financial statements.
Note 3. Share Transactions
Below is a summary of transactions with respect to shares of the Company’s common stock during the three months ended March 31, 2019 and 2018:
Three Months Ended March 31, | ||||||||||||||||
2019 | 2018(1) | |||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||
Gross Proceeds from Offering | — | $ | — | 136,070 | $ | 1,331 | ||||||||||
Reinvestment of Distributions | 95,573 | 833 | 99,684 | 930 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total Gross Proceeds | 95,573 | 833 | 235,754 | 2,261 | ||||||||||||
Commissions and Dealer Manager Fees | — | — | — | (61) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Proceeds to Company | 95,573 | 833 | 235,754 | 2,200 | ||||||||||||
Repurchases of Common Shares | (315,173) | (2,881) | (91,276) | (840) | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Net Proceeds from Share Transactions | (219,600) | $ | (2,048) | 144,478 | $ | 1,360 | ||||||||||
|
|
|
|
|
|
|
|
(1) | The Company terminated its Offering to new investors effective April 30, 2018. However, the Company continues to issue new shares under its distribution reinvestment plan. |
During the three months ended March 31, 2019, the Company issued 95,573 shares of common stock pursuant to its distribution reinvestment plan, or DRP, at a price per share of $8.72 for gross proceeds of $833. For additional information regarding the terms of the DRP, see Note 5.
Share Repurchase Program
The Company conducts quarterly tender offers pursuant to its share repurchase program. The Company currently limits repurchases in each quarter to 2.5% of the weighted average number of shares of common stock outstanding. The Company may limit the number of shares to be repurchased during any calendar year to the number of shares it can repurchase with the proceeds it receives from the issuance of shares of its common stock under its distribution reinvestment plan. At the discretion of the Company’s board of trustees, the Company may
23
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
also use cash on hand, cash available from borrowings and cash from the sale of investments as of the end of the applicable period to repurchase shares. The Company’s board of trustees may amend, suspend or terminate the share repurchase program upon 30 days’ notice.
The following table provides information concerning the Company’s repurchases of shares of common stock pursuant to its share repurchase program during the three months ended March 31, 2019 and 2018:
For the Three Months Ended | Repurchase Date | Shares Repurchased | Percentage of Shares Tendered That Were Repurchased | Percentage of Outstanding Shares Repurchased | Repurchase Price Per Share | Aggregate Consideration for Repurchased Shares | ||||||||||||||||||
Fiscal 2018 | ||||||||||||||||||||||||
December 31, 2017 | February 20, 2018 | 91,276 | 37% | 0.72% | $ | 9.20 | $ | 840 | ||||||||||||||||
Fiscal 2019 | ||||||||||||||||||||||||
December 31, 2018 | January 7, 2019 | 315,173 | 90% | 2.51% | $ | 9.14 | $ | 2,881 |
On April 9, 2019, the Company repurchased approximately 111,047 shares (representing 100% of the shares of common stock tendered for repurchase and 0.90% of the shares outstanding as of such date) at $8.54 per share for aggregate consideration totaling $948.
Note 4. Related Party Transactions
Managing Dealer Agreement and Distribution and Shareholder Servicing Plan
The Company was a party to a managing dealer agreement with CNL Securities Corp., an affiliate of CNL. CNL Securities Corp. which served as the managing dealer of the Company’s Offering and in connection therewith receivedup-front selling commissions of up to 2.00% of gross offering proceeds,up-front dealer manager fees of up to 2.75% of gross offering proceeds and ongoing distribution and shareholder servicing fees at an annualized rate of 1.25% of the Company’s most recently published net asset value per share, excluding shares issued through the distribution reinvestment plan. All or any portion of these fees werere-allowed to participating brokers.
On March 16, 2017, the board of trustees approved an amended and restated managing dealer agreement, or the Managing Dealer Agreement, between the Company and the managing dealer and approved an amended and restated distribution and shareholder servicing plan for the Company, or the Distribution and Shareholder Servicing Plan, which lowered the ongoing distribution and shareholder servicing fee paid to the managing dealer from an annualized rate of 1.25% to an annualized rate of 1.00% of the Company’s net asset value per share. On April 9, 2018, the Managing Dealer Agreement and the Distribution and Shareholder Servicing Plan were terminated effective April 30, 2018.
Investment Advisory Agreements
On April 9, 2018, the Company terminated the Former Investment Advisory Agreement (as defined below) and concurrently entered into the Investment Advisory Agreement with the Advisor. Pursuant to the Investment Advisory Agreement, the Company pays the Advisor a fee for their services consisting of two components—a base management fee based on the average value of the Company’s gross assets and incentive fees based on the Company’s performance. The incentive fee consists of (i) a subordinated incentive fee on income and (ii) an incentive fee on capital gains. Under the Investment Advisory Agreement, the Advisor is entitled to an annual
24
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
base management fee of 1.50% of the average value of the Company’s gross assets, as compared to the annual rate of 2.00% under the Former Investment Advisory Agreement. In addition, the calculation of the base management fee under the Investment Advisory Agreement excludes cash and cash equivalents from gross assets, as compared to the Former Investment Advisory Agreement, which included cash and cash equivalents within the definition of gross assets. Under the Investment Advisory Agreement, the Advisor serves as the sole investment adviser of the Company. See Note 2 for a discussion of the capital gains and subordinated income incentive fees that the Advisor may be entitled to under the Investment Advisory Agreement.
Previously, the Company was a party to an investment advisory agreement with CNL, or the Former Investment Advisory Agreement, for the overall management of the Company’s activities. CNL was a party to asub-advisory agreement with KKR, or the FormerSub-Advisory Agreement, under which KKR was responsible for theday-to-day management of the Company’s investment portfolio. Pursuant to the Former Investment Advisory Agreement, CNL earned (i) a management fee equal to an annual rate of 2.00% of the Company’s average gross assets, and (ii) an incentive fee based on the Company’s performance. The incentive fee consisted of (i) a subordinated incentive fee on income and (ii) an incentive fee on capital gains. CNL compensated KKR for advisory services that it provided to the Company with 50% of the fees that CNL received under the Former Investment Advisory Agreement.
A subordinated incentive fee on income is payable to the Advisor each calendar quarter if the Company’spre-incentive fee net investment fee income (as defined in the Investment Advisory Agreement and approved by the Company’s board of trustees) exceeds the 1.75% quarterly preferred return to the Company’s shareholders (the ratio ofpre-incentive fee net investment income divided by average adjusted capital).
The annual incentive fees on capital gains recorded for GAAP purposes are equal to (i) 20% of the Company’s realized and unrealized capital gains on a cumulative basis since inception, net of all realized capital losses and unrealized depreciation on a cumulative basis from inception, less (ii) the aggregate amount of any previously paid incentive fees on capital gains. For financial reporting purposes, in accordance with GAAP, the Company includes unrealized appreciation on the investment portfolio in the calculation of incentive fees on capital gains; however, such amounts are not payable by the Company unless and until the net unrealized appreciation is actually realized. The actual amount of incentive fees on capital gains that are due and payable to the Advisor is determined at the end of the calendar year.
The terms of the incentive fees are substantially the same as those to which the Former Advisors were entitled to receive under the Former Investment Advisory Agreement. The Company did not incur any subordinated incentive fee on income under the Investment Advisory Agreements during the three months ended March 31, 2019 and 2018. The Company has not accrued any incentive fees payable on capital gains under the Investment Advisory Agreement as of March 31, 2019.
Under the terms of the Former Investment Advisory Agreement, CNL (and indirectly KKR) was entitled to receive up to 1.50% of gross offering proceeds as reimbursement for organization and offering expenses incurred by the Former Advisors on behalf of the Company. The Former Advisors had incurred organization and offering costs of approximately $5,400 as of March 31, 2018 on behalf of the Company. The Former Advisors waived the reimbursement of organization and offering expenses in connection with the Company’s gross capital raise received from the Offering from March 1, 2016 (when the Company satisfied the minimum offering requirement) through April 30, 2017, or the O&O Reimbursement Waiver. The O&O Reimbursement Waiver did not reduce
25
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
the amount of organization and offering expenses incurred by the Former Advisors that were eligible for reimbursement in future periods based on subsequent gross capital raised by the Company after April 30, 2017. Gross capital raised by the Company after April 30, 2017 was subject to the maximum organization and offering cost reimbursement of 1.50%. The Former Advisors were entitled to reimbursement of approximately $400 of organization and offering costs for gross capital raised for the period May 1, 2017 through April 9, 2018, all of which had been reimbursed to the Former Advisors as of April 9, 2018. A contingent obligation for the balance of organization and offering costs, subject to reimbursement based on future gross proceeds raised assuming a reinstatement of the Company’s Offering, was approximately $5,000 as of April 30, 2018.
On April 30, 2018, the Company terminated its Offering and in conjunction therewith, the Former Advisors agreed to permanently waive their rights to receive reimbursement of approximately $5,000 of organization and offering expenses that they had incurred on the Company’s behalf. As such, as of March 31, 2019, the Company had no contingent obligations to reimburse its Former Advisors for organization and offering expenses.
Administrative Services Agreements
The Company was a party to an administrative services agreement with CNL, or the Former Administrative Services Agreement, under which CNL performed, or oversaw the performance of, various administrative services on behalf of the Company. Administrative services include investor services, general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, maintaining required financial records, calculating the Company’s net asset value, filing tax returns, preparing and filing SEC reports, preparing, printing, and disseminating shareholder reports and generally overseeing the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. The Company reimbursed CNL for administrative expenses it incurred in performing its obligations.
On April 9, 2018, the Company terminated the Former Administrative Services Agreement with CNL and concurrently entered into a new administrative services agreement with the Advisor, or the Administrative Services Agreement under which the Advisor serves as the Company’s administrator. The terms of the Administrative Services Agreement, including the services to be provided by the Advisor as administrator and the amount of reimbursements to be paid by the Company for certain administrative expenses, are substantially the same as those under the Former Administrative Services Agreement.
Expense Support Agreements
The Company was a party to an expense support and conditional reimbursement agreement, as amended and restated, or the Former Expense Support Agreement, with the Former Advisors pursuant to which the Former Advisors jointly and severally agreed to pay to the Company some or all of its operating expenses, or an Expense Support Payment, for each month during the Former Expense Support Payment Period (as defined below) in which the Company’s board of trustees declared a distribution to its shareholders. Expense Support Payments were made in accordance with the terms of the Former Expense Support Agreement. The Expense Support Payment Period commenced on March 1, 2016 and terminated effective with the termination of the Former Expense Support Agreement on April 9, 2018. The amount of Expense Support Payments provided by the Former Advisors since inception was approximately $5,400. Effective April 30, 2018, the Former Advisors waived their right to reimbursement of such Expense Support Payments.
26
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
The Former Advisors were entitled to be reimbursed promptly by the Company, or a Reimbursement Payment, for Expense Support Payments made with respect to any class of common stock, subject to the limitation that no Reimbursement Payment may be made by the Company to the extent that it would cause the Company’s Other Operating Expenses (as defined in the Former Expense Support Agreement) for such class of common stock to exceed the lesser of (A) 1.75% of average net assets attributable to common shares on an annualized basis after taking such payment into account and (B) the percentage of average net assets attributable to shares of such class of common stock represented by Other Operating Expenses (as defined in the Former Expense Support Agreement) during the period in which such Expense Support Payment from the Former Advisors was made (provided, however, that this clause (B) did not apply to any Reimbursement Payment which related to an Expense Support Payment from the Former Advisors made during the same period).
Concurrently with the Company’s entry into the Investment Advisory Agreement and the Administrative Services Agreement, on April 9, 2018, the Company entered into a new expense support and conditional reimbursement agreement, or the Expense Support Agreement, which replaced the Former Expense Support Agreement. The Expense Support Agreement was substantially similar to the Former Expense Support Agreement.
On November 14, 2018, the Advisor announced that for any calendar month ending on or prior to September 30, 2019, it will defer the receipt of base management fees under the Investment Advisory Agreement if, and to the extent that, the Company’s distributions paid to the Company’s shareholders in the calendar month exceeds the sum of the Company’s investment company taxable income (as defined in Section 852 of the Internal Revenue Code of 1986, as amended, or the Code), net capital gains (as defined in Section 1222 of the Code) and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts were not included in net investment company taxable income or net capital gains) in the calendar month, or collectively, the Company’s distributable funds on a tax basis. The Advisor will only receive any deferred fees in a future calendar month if, and to the extent that, the Company’s distributable funds on a tax basis in the future calendar month exceeds the Company’s distributions paid to the Company’s shareholders in such month. In light of this commitment by the Advisor, the Expense Support Agreement was terminated on November 14, 2018. The Company’s conditional obligation to reimburse the Advisor pursuant to the terms of the Expense Support Agreement survived the termination of such agreement. Prior to September 30, 2019, the Advisor will evaluate whether to extend this commitment to future periods.
During the three months ended March 31, 2019, the Advisor did not defer the receipt of any base management fees. As of March 31, 2019, there were no deferred base management fees subject to future payment by the Company.
27
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
The following table describes the fees and expenses accrued under the Investment Advisory Agreement, the Former Investment Advisory Agreement, the Administrative Services Agreement, the Former Administrative Services Agreement, the Expense Support Agreement and the Former Expense Support Agreement, as applicable, during the three months ended March 31, 2019 and 2018:
Three Months Ended March 31, | ||||||||||||
Related Party | Source Agreement | Description | 2019 | 2018 | ||||||||
CNL Securities Corp. | Managing Dealer Agreement | Up-front Selling Commissions and Dealer Manager Fees | $ | — | $ | 61 | ||||||
CNL Securities Corp. | Managing Dealer Agreement | Distribution and Shareholder Servicing Fees | $ | — | $ | 282 | ||||||
CNL and KKR | Former Investment Advisory Agreement | Offering Costs | $ | — | $ | 20 | ||||||
FS/KKR Advisor, CNL and KKR | Investment Advisory Agreement Former Investment Advisory Agreement | Base Management Fee(1) | $ | 684 | $ | 890 | ||||||
FS/KKR Advisor, CNL and KKR | Investment Advisory Agreement Former Investment Advisory Agreement | Capital Gains Incentive Fee(2) | $ | — | $ | 217 | ||||||
FS/KKR Advisor and CNL | Administrative Services Agreement Former Administrative Services Agreement | Administrative Services Expenses(3) | $ | 92 | $ | 157 | ||||||
FS/KKR Advisor, CNL and KKR | Expense Support Agreement Former Expense Support Agreement | Expense Support(1) | $ | — | $ | (585) |
(1) | During the three months ended March 31, 2019, $628 of base management fees were paid to the Advisor and $67 of expense support payments due from the Advisor were used to offset management fees payable. It is intended that of the $98 in expense support payments due from the Advisor as of March 31, 2019, all of such payments will be applied to offset the $684 of base management fees payable to the Advisor as of March 31, 2019. |
(2) | During the three months ended March 31, 2019 and 2018, no capital gains incentive fees were paid to the Advisor and/or Former Advisors. As of March 31, 2019, no capital gains incentive fees were payable to the Advisor. |
(3) | During the three months ended March 31, 2019, $16 of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to the Company by the Advisor, and the remainder related to other reimbursable expenses, including reimbursement of fees related to transactional expenses for prospective investments, such as fees and expenses associated with performing due diligence reviews of investments that do not close, often referred to as “broken deal” costs. Broken deal costs were $3 and $3 for the three months ended March 31, 2019 and 2018, respectively. The Company paid $167 in administrative services expenses to the Advisor during the three months ended March 31, 2019. |
Potential Conflicts of Interest
The members of the senior management and investment teams of the Advisor serve or may serve as officers, directors or principals of entities that operate in the same or a related line of business as the Company does, or of investment vehicles managed by the same personnel. For example, the Advisor is the investment adviser to FS
28
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
KKR Capital Corp., FS Investment Corporation II, FS Investment Corporation III and FS Investment Corporation IV, or together with the Company, the Fund Complex, and the officers, managers and other personnel of the Advisor may serve in similar or other capacities for the investment advisers to future investment vehicles affiliated with FS Investments or KKR Credit Advisors (US) LLC, or KKR Credit. In serving in these multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in the Company’s best interests or in the best interest of the Company’s shareholders. The Company’s investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For additional information regarding potential conflicts of interest, see the Company’s annual report on Form10-K for the year ended December 31, 2018.
Exemptive Relief
As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not permittedto co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may,simultaneously co-invest in transactions where price is the only negotiated term.
In an order dated April 3, 2018, or the SEC Exemptive Order, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain conditions,to co-invest in certain privately negotiated investment transactions, including investments originated and directly negotiated by the Advisor or KKR Credit, with certain affiliates of the Advisor. The SEC Exemptive Order extendedthe co-investment exemptive order previously granted by the SEC to the Company in June 2017.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared on its common stock during the three months ended March 31, 2019 and 2018:
Distribution | ||||||||
For the Three Months Ended | Per Share | Amount | ||||||
Fiscal 2018 | ||||||||
March 31, 2018 | $ | 0.14625 | $ | 1,868 | ||||
Fiscal 2019 | ||||||||
March 31, 2019 | $ | 0.14625 | $ | 1,796 |
The Company currently intends to declare and pay regular cash distributions on a quarterly basis. On May 1, 2019, the Company’s board of trustees declared a regular quarterly cash distribution of $0.14625 per share, which will be paid on or about July 15, 2019 to shareholders of record as of the close of business on June 30, 2019. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company’s board of trustees.
The Company has adopted a distribution reinvestment plan for its shareholders. As a result, if the Company makes a cash distribution, its shareholders who have elected to participate in the distribution reinvestment plan will have their cash distribution automatically reinvested in additional shares of the Company’s common stock.
29
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
The Company may fund its cash distributions to shareholders from any sources of funds legally available to it, including proceeds from the sale of shares of the Company’s common stock, borrowings, net investment income from operations, capital gains proceeds from the sale of assets,non-capital gains proceeds from the sale of assets and dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies. The Company has not established limits on the amount of funds it may use from available sources to make distributions. During certain periods, the Company’s distributions may exceed its earnings. As a result, it is possible that a portion of the distributions the Company makes may represent a return of capital. A return of capital generally is a return of a stockholder’s investment rather than a return of earnings or gains derived from the Company’s investment activities. Each year a statement on Form1099-DIV identifying the sources of the distributions (i.e., paid from ordinary income, paid from net capital gains on the sale of securities, and/or a return of capital, which is a nontaxable distribution) will be mailed to the Company’s shareholders. There can be no assurance that the Company will be able to pay distributions at a specific rate or at all.
The Company estimates that none of the distributions declared during the three months ended March 31, 2019 would be classified as a tax basis return of capital. None of the distributions declared during the year ended December 31, 2018 were classified as a tax basis return of capital. As of March 31, 2019 and December 31, 2018, the Company had undistributed net investment income of $483 and $294, respectively.
The total and the sources of declared distributions on a GAAP basis for the three months ended March 31, 2019 and 2018 are presented in the table below:
Three Months Ended March 31, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Per Share | Amount | Allocation | Per Share | Amount | Allocation | |||||||||||||||||||
Net investment income | $ | 0.15 | $ | 1,796 | 100.0% | $ | 0.09 | $ | 1,191 | 63.8% | ||||||||||||||
Net realized gains | — | — | — | 0.02 | 159 | 8.5% | ||||||||||||||||||
Distributions in excess of net investment income | — | — | — | 0.04 | 518 | 27.7% | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total declared distributions | $ | 0.15 | $ | 1,796 | 100.0% | $ | 0.15 | $ | 1,868 | 100.0% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income includes Expense Support Payments of $585 which supported distributions during the three months ended March 31, 2018. Sources of distributions, other than net investment income and realized gains on a GAAP basis, include (i) the ordinary income component of prior year tax basis undistributed earnings and (ii) required adjustments to GAAP net investment income and realized gains in the current period to determine taxable income available for distributions.
30
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio
The following table summarizes the composition of the Company’s investment portfolio at cost and fair value as of March 31, 2019 and December 31, 2018:
March 31, 2019 (Unaudited) | December 31, 2018 | |||||||||||||||||||||||
Amortized Cost(1) | Fair Value | Percentage of Portfolio | Amortized Cost(1) | Fair Value | Percentage of Portfolio | |||||||||||||||||||
Senior Secured Loans—First Lien | $ | 101,980 | $ | 97,762 | 54.6% | $ | 97,236 | $ | 93,777 | 53.6% | ||||||||||||||
Senior Secured Loans—Second Lien | 36,519 | 35,731 | 19.9% | 35,686 | 34,277 | 19.6% | ||||||||||||||||||
Other Senior Secured Debt | 8,833 | 8,487 | 4.7% | 10,195 | 9,485 | 5.4% | ||||||||||||||||||
Subordinated Debt | 27,779 | 26,537 | 14.8% | 29,274 | 26,840 | 15.3% | ||||||||||||||||||
Asset Based Finance | 6,033 | 6,299 | 3.5% | 6,852 | 6,729 | 3.8% | ||||||||||||||||||
Equity/Other | 4,254 | 4,414 | 2.5% | 4,122 | 4,058 | 2.3% | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 185,398 | $ | 179,230 | 100.0% | $ | 183,365 | $ | 175,166 | 100.0% | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
In general, under the 1940 Act, the Company would be presumed to “control” a portfolio company if it owned more than 25% of its voting securities or it had the power to exercise control over the management or policies of such portfolio company, and would be an “affiliated person” of a portfolio company if it owned 5% or more of its voting securities. As of March 31, 2019 and December 31, 2018, the Company did not hold investments in any portfolio companies of which it is deemed to “control” or be an “affiliated person.”
The Company’s investment portfolio may contain loans and other unfunded arrangements that are in the form of lines of credit, revolving credit facilities, delayed draw credit facilities or other investments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of March 31, 2019, the Company had unfunded debt investments with aggregate unfunded commitments of $2,753 and unfunded equity commitments of $7,920. As of December 31, 2018, the Company had unfunded debt investments with aggregate unfunded commitments of $1,804 and unfunded equity commitments of $9,531. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise. See Note 10 for additional details regarding the Company’s unfunded debt and equity investments.
31
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2019 and December 31, 2018:
March 31, 2019 (Unaudited) | December 31, 2018 | |||||||||||||||
Industry Classification | Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | ||||||||||||
Automobiles & Components | $ | 1,625 | 0.9 | % | $ | 1,502 | 0.9 | % | ||||||||
Capital Goods | 19,322 | 10.8 | % | 23,439 | 13.4 | % | ||||||||||
Commercial & Professional Services | 13,663 | 7.6 | % | 14,372 | 8.2 | % | ||||||||||
Consumer Durables & Apparel | 3,911 | 2.2 | % | 3,895 | 2.2 | % | ||||||||||
Consumer Services | 11,270 | 6.3 | % | 9,718 | 5.5 | % | ||||||||||
Diversified Financials | 1,789 | 1.0 | % | 1,748 | 1.0 | % | ||||||||||
Energy | 1,537 | 0.9 | % | 1,552 | 0.9 | % | ||||||||||
Food & Staples Retailing | 9,249 | 5.2 | % | 4,605 | 2.6 | % | ||||||||||
Food, Beverage & Tobacco | 1,719 | 1.0 | % | 1,728 | 1.0 | % | ||||||||||
Health Care Equipment & Services | 15,761 | 8.8 | % | 12,098 | 6.9 | % | ||||||||||
Insurance | 2,520 | 1.4 | % | 4,933 | 2.8 | % | ||||||||||
Materials | 17,275 | 9.6 | % | 17,977 | 10.3 | % | ||||||||||
Pharmaceuticals, Biotechnology & Life Sciences | 1,498 | 0.8 | % | 1,451 | 0.8 | % | ||||||||||
Retailing | 20,001 | 11.1 | % | 19,082 | 10.9 | % | ||||||||||
Semiconductors & Semiconductor Equipment | 3,370 | 1.9 | % | 3,346 | 1.9 | % | ||||||||||
Software & Services | 35,124 | 19.6 | % | 34,907 | 19.9 | % | ||||||||||
Technology Hardware & Equipment | 7,595 | 4.2 | % | 6,934 | 4.0 | % | ||||||||||
Telecommunication Services | 468 | 0.3 | % | 449 | 0.3 | % | ||||||||||
Transportation | 11,533 | 6.4 | % | 11,430 | 6.5 | % | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 179,230 | 100.0 | % | $ | 175,166 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Note 7. Financial Instruments
The following is a summary of the fair value and location of the Company’s derivative instruments in the balance sheets held as of March 31, 2019 and December 31, 2018:
Fair Value | ||||||||||
Derivative Instrument | Statement Location | March 31, 2019 (Unaudited) | December 31, 2018 | |||||||
Foreign currency forward contracts | Unrealized appreciation on foreign currency forward contracts | $ | 376 | $ | 457 | |||||
|
|
|
| |||||||
Total | $ | 376 | $ | 457 | ||||||
|
|
|
|
32
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Financial Instruments (continued)
Net realized and unrealized gains and losses on derivative instruments recorded by the Company for the three months ended March 31, 2019 and 2018 are in the following locations in the unaudited statements of operations:
Net Realized Gains (Losses) | ||||||||||
Three Months Ended March 31, | ||||||||||
Derivative Instrument | Statement Location | 2019 | 2018 | |||||||
Foreign currency forward contracts | Net realized gain (loss) on foreign currency forward contracts | $ | — | $ | (1) | |||||
|
|
|
| |||||||
Total | $ | — | $ | (1) | ||||||
|
|
|
|
Net Unrealized Gains (Losses) | ||||||||||
Three Months Ended March 31, | ||||||||||
Derivative Instrument | Statement Location | 2019 | 2018 | |||||||
Foreign currency forward contracts | Net change in unrealized appreciation (depreciation) on foreign currency forward contracts | $ | (81) | $ | 90 | |||||
|
|
|
| |||||||
Total | $ | (81) | $ | 90 | ||||||
|
|
|
|
Foreign Currency Forward Contracts
The Company may enter into foreign currency forward contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies and to economically hedge the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. A foreign currency forward contract is a commitment to purchase or sell a foreign currency at a future date at a negotiated forward rate. These contracts aremarked-to-market by recognizing the difference between the contract forward exchange rate and the forward market exchange rate on the last day of the period presented as unrealized appreciation or depreciation. Realized gains or losses are recognized when forward contracts are settled. Risks arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit counterparty risk by only dealing with well-known counterparties.
33
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Financial Instruments (continued)
The Company was a party to two foreign currency forward contracts during the period which related to economic hedging of the Company’s foreign currency denominated debt investments. As of March 31, 2019 and December 31, 2018, the Company’s open foreign currency forward contracts were as follows:
Foreign Currency | Settlement Date | Counterparty | Notional Amount | US $ Value at Settlement Date | US $ Value at March 31, 2019 | Unrealized Appreciation | ||||||||||||
CAD | October 10, 2019 | JP Morgan Chase Bank | C$ 5,690 Sold | $ | 4,642 | $ | 4,276 | $ | 366 | |||||||||
EUR | July 17, 2023 | JP Morgan Chase Bank | € 107 Sold | 144 | 134 | 10 | ||||||||||||
|
|
|
|
|
| |||||||||||||
Total | $ | 4,786 | $ | 4,410 | $ | 376 | ||||||||||||
|
|
|
|
|
|
Foreign Currency | Settlement Date | Counterparty | Notional Amount | US $ Value at Settlement Date | US $ Value at December 31, 2018 | Unrealized Appreciation | ||||||||||||
CAD | October 10, 2019 | JP Morgan Chase Bank | C$ 5,690 Sold | $ | 4,642 | $ | 4,191 | $ | 451 | |||||||||
EUR | July 17, 2023 | JP Morgan Chase Bank | € 107 Sold | 144 | 138 | 6 | ||||||||||||
|
|
|
|
|
| |||||||||||||
Total | $ | 4,786 | $ | 4,329 | $ | 457 | ||||||||||||
|
|
|
|
|
|
As of March 31, 2019 and December 31, 2018, the combined contractual notional balance of the Company’s foreign currency forward contracts totaled $4,410 and $4,329, respectively, all of which related to hedging of the Company’s foreign currency denominated debt investments. The table below displays the Company’s foreign currency denominated debt investments and foreign currency forward contracts, summarized by foreign currency type as of March 31, 2019 and December 31, 2018:
Debt Investments Denominated in Foreign Currencies As of March 31, 2019 | Hedges As of March 31, 2019 | |||||||||||||||||||
Foreign Currency | Par Value in Local Currency | Par Value in U.S. Dollars | Fair Value | Net Foreign Currency Hedge Amount in Local Currency | Net Foreign Currency Hedge Amount in U.S. Dollars | |||||||||||||||
Canadian Dollars | C$ | 6,487 | $ | 4,865 | $ | 4,895 | C$ | 5,690 | $ | 4,276 | ||||||||||
Euros | € | 3,380 | 3,786 | 3,739 | € | 107 | 134 | |||||||||||||
British Pound Sterling | £ | 420 | 546 | 548 | £ | — | — | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 9,197 | $ | 9,182 | $ | 4,410 | ||||||||||||||
|
|
|
|
|
|
34
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Financial Instruments (continued)
Debt Investments Denominated in Foreign Currencies As of December 31, 2018 | Hedges As of December 31, 2018 | |||||||||||||||||||
Foreign Currency | Par Value in Local Currency | Par Value in U.S. Dollars | Fair Value | Net Foreign Currency Hedge Amount in Local Currency | Net Foreign Currency Hedge Amount in U.S. Dollars | |||||||||||||||
Canadian Dollars | C$ | 5,149 | $ | 3,759 | $ | 3,811 | C$ | 5,690 | $ | 4,191 | ||||||||||
Euros | € | 3,289 | 3,782 | 3,718 | € | 107 | 138 | |||||||||||||
British Pound Sterling | £ | 378 | 484 | 485 | £ | — | — | |||||||||||||
|
|
|
|
|
| |||||||||||||||
Total | $ | 8,025 | $ | 8,014 | $ | 4,329 | ||||||||||||||
|
|
|
|
|
|
Note 8. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes valuation techniques that maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3: Inputs that are unobservable for an asset or liability.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
As of March 31, 2019 and December 31, 2018, the Company’s investments were categorized as follows in the fair value hierarchy:
March 31, 2019 (Unaudited) | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured Loans—First Lien | $ | — | $ | 39,035 | $ | 58,727 | $ | 97,762 | ||||||||
Senior Secured Loans—Second Lien | — | 21,545 | 14,186 | 35,731 | ||||||||||||
Other Senior Secured Debt | — | 8,487 | — | 8,487 | ||||||||||||
Subordinated Debt | — | 25,265 | 1,272 | 26,537 | ||||||||||||
Asset Based Finance | — | — | 6,299 | 6,299 | ||||||||||||
Equity/Other | 1,445 | — | 2,969 | 4,414 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Investments | $ | 1,445 | $ | 94,332 | $ | 83,453 | $ | 179,230 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
35
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
December 31, 2018 | ||||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Senior Secured Loans—First Lien | $ | — | $ | 44,151 | $ | 49,626 | $ | 93,777 | ||||||||
Senior Secured Loans—Second Lien | — | 21,397 | 12,880 | 34,277 | ||||||||||||
Other Senior Secured Debt | — | 9,485 | — | 9,485 | ||||||||||||
Subordinated Debt | — | 26,840 | — | 26,840 | ||||||||||||
Asset Based Finance | — | — | 6,729 | 6,729 | ||||||||||||
Equity/Other | 1,240 | — | 2,818 | 4,058 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total Investments | $ | 1,240 | $ | 101,873 | $ | 72,053 | $ | 175,166 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company had foreign currency forward contracts, as described in Note 7, which were categorized as Level 2 in the fair value hierarchy as of March 31, 2019 and December 31, 2018.
The Company’s investments consist primarily of debt investments that were acquired directly from the issuer. Debt investments, for which broker quotes are not available, are valued by independent valuation firms, which determine the fair value of such investments by considering, among other factors, the borrower’s ability to adequately service its debt, prevailing interest rates for like investments, expected cash flows, call features, anticipated repayments and other relevant terms of the investments. Except as described below, all of the Company’s equity/other investments are also valued by independent valuation firms, which determine the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. An investment that is newly issued and purchased near the date of the financial statements is valued at cost if the Company’s board of trustees determines that the cost of such investment is the best indication of its fair value. Such investments described above are typically classified as Level 3 within the fair value hierarchy. Investments that are traded on an active public market are valued at their closing price as of the date of the financial statements and are classified as Level 1 within the fair value hierarchy. Except as described above, the Company typically values its other investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which are provided by independent third-party pricing services and screened for validity by such services and are typically classified as Level 2 within the fair value hierarchy.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing services and/or dealers and independent valuation firms as applicable, against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company’s management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. The audit committee for valuation of the Company’s board of trustees, or the audit committee, and the board of trustees reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company’s valuation policy.
36
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
The following tables provide reconciliations for the three months ended March 31, 2019 and 2018 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
For the Three Months Ended March 31, 2019 | ||||||||||||||||||||||||
Senior Secured Loans—First Lien | Senior Secured Loans—Second Lien | Subordinated Debt | Asset Based Finance | Equity/Other | Total | |||||||||||||||||||
Fair value at beginning of period | $ | 49,626 | $ | 12,880 | $ | — | $ | 6,729 | $ | 2,818 | $ | 72,053 | ||||||||||||
Purchases | 9,848 | 2,491 | 1,258 | 277 | 132 | 14,006 | ||||||||||||||||||
Paid-in-kind interest | 54 | 18 | — | — | — | 72 | ||||||||||||||||||
Net realized gain (loss) | (12) | 2 | — | (171) | — | (181) | ||||||||||||||||||
Net change in unrealized appreciation (depreciation) | (220) | 83 | 14 | 389 | 19 | 285 | ||||||||||||||||||
Sales and repayments | (586) | (1,295) | — | (925) | — | (2,806) | ||||||||||||||||||
Net discount accretion | 17 | 7 | — | — | — | 24 | ||||||||||||||||||
Net transfers in or out of Level 3 | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Fair value at end of period | $ | 58,727 | $ | 14,186 | $ | 1,272 | $ | 6,299 | $ | 2,969 | $ | 83,453 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date | $ | (220) | $ | 93 | $ | 14 | $ | 269 | $ | 19 | $ | 175 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
37
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
For the Three Months Ended March 31, 2018 | ||||||||||||||||||||
Senior Secured Loans—First Lien | Senior Secured Loans—Second Lien | Asset Based Finance | Equity/Other | Total | ||||||||||||||||
Fair value at beginning of period | $ | 27,060 | $ | 4,964 | $ | 2,682 | $ | 2,814 | $ | 37,520 | ||||||||||
Purchases | 9,080 | — | 1,224 | — | 10,304 | |||||||||||||||
Net realized gain (loss) | 3 | — | — | — | 3 | |||||||||||||||
Net change in unrealized appreciation (depreciation) | 137 | 100 | 71 | (7) | 301 | |||||||||||||||
Sales and repayments | (235) | — | — | — | (235) | |||||||||||||||
Net discount accretion | 24 | 2 | — | — | 26 | |||||||||||||||
Net transfers in or out of Level 3 | — | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Fair value at end of period | $ | 36,069 | $ | 5,066 | $ | 3,977 | $ | 2,807 | $ | 47,919 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date | $ | 140 | $ | 100 | $ | 71 | $ | (7) | $ | 304 | ||||||||||
|
|
|
|
|
|
|
|
|
|
38
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Fair Value of Financial Instruments (continued)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of March 31, 2019 and December 31, 2018 were as follows:
Type of Investment | Fair Value at March 31, 2019(1) (Unaudited) | Valuation Technique(2) | Unobservable Input | Range (Weighted Average)(3) | Impact to Valuation from an Increase in Input(4) | |||||||||||||||
Senior Debt | $ | 68,948 | | Discounted Cash Flow | | | Discount Rate |
| | 7.46% - 15.07% (10.58%) |
| Decrease | ||||||||
3,965 | Cost | Cost | N/A | N/A | ||||||||||||||||
Subordinated Debt | 1,272 | | Discounted Cash Flow | | | Discount Rate |
| | 11.58% - 11.58% (11.58%) |
| Decrease | |||||||||
Asset Based Finance | 121 | | Net Asset Value | | | Price to Book Value | | | 1.00x - 1.00x (1.00x) |
| Increase | |||||||||
6,178 | Cost | Cost | N/A | N/A | ||||||||||||||||
Equity/Other | 94 | Waterfall | EBITDA Multiple | | 9.24x - 9.24x (9.24x) |
| Increase | |||||||||||||
2,695 | | Discounted Cash Flow | | | Discount Rate |
| | 14.48% - 14.48% (14.48%) |
| Decrease | ||||||||||
180 | Cost | Cost | N/A | N/A | ||||||||||||||||
|
| |||||||||||||||||||
Total | $ | 83,453 | ||||||||||||||||||
|
| |||||||||||||||||||
Type of Investment | Fair Value at December 31, 2018(1) | Valuation Technique(2) | Unobservable Input | Range (Weighted Average)(3) | Impact to Valuation from an Increase in Input(4) | |||||||||||||||
Senior Debt | $ | 56,933 | | Discounted Cash Flow | | | Discount Rate |
| | 7.68% - 15.55% (10.90%) |
| Decrease | ||||||||
5,573 | Cost | Cost | N/A | N/A | ||||||||||||||||
Asset Based Finance | 975 | | Discounted Cash Flow | | | Discount Rate |
| 10.96% (10.96%) | Decrease | |||||||||||
5,754 | Cost | Cost | N/A | N/A | ||||||||||||||||
Equity/Other | 2,682 | | Discounted Cash Flow | | | Discount Rate |
| 15.59% (15.59%) | Decrease | |||||||||||
92 | | Market Comparables | | | Illiquidity Discount | | 10.00% (10.00%) | Decrease | ||||||||||||
44 | Cost | Cost | N/A | N/A | ||||||||||||||||
|
| |||||||||||||||||||
Total | $ | 72,053 | ||||||||||||||||||
|
|
(1) | Certain investments may be valued at cost for a period of time after an acquisition as the best indicator of fair value. |
(2) | For the assets and investments that have more than one valuation technique, the Company may rely on the stated techniques individually or in the aggregate based on a weight ascribed to each valuation technique, ranging from 0 - 100%. Indicative dealer quotes obtained for valuation purposes are reviewed by the Company relative to other valuation techniques. |
(3) | Weighted average amounts are based on the estimated fair values. |
(4) | This column represents the directional change in the fair value of the Level 3 investments that would result from an increase to the corresponding unobservable input. A decrease to the input would have the opposite effect. Significant changes in these inputs in isolation could result in significantly higher or lower fair value measurements. |
39
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financing Arrangements
On July 14, 2017, the Company entered into a senior secured revolving credit agreement, or the Credit Agreement. The Credit Agreement provides for a revolving credit facility, or the Revolving Credit Facility, consisting of loans to be made in dollars and other foreign currencies in an initial aggregate principal amount of $70,000. Availability under the Revolving Credit Facility will terminate on July 14, 2019, and the outstanding loans under the Revolving Credit Facility will mature on July 14, 2020. On June 11, 2018, the Company entered into an incremental commitment agreement with ING Capital LLC to increase the total borrowing capacity under the Revolving Credit Facility to $82,000.
Under the Revolving Credit Facility, the Company has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar revolving credit facilities. The Company was in compliance with all covenants required by the Revolving Credit Facility as of March 31, 2019 and December 31, 2018.
As of March 31, 2019 and December 31, 2018, the principal amount outstanding on the Revolving Credit Facility was approximately $75,636 and $73,933, respectively. Of the $75,636 principal outstanding as of March 31, 2019, approximately $748, $3,691 and $547 were denominated in Canadian dollars, Euros and British pound sterling, respectively. Of the $73,933 principal outstanding as of December 31, 2018, approximately $73, $3,770 and $440 were denominated in Canadian dollars, Euros and British pound sterling, respectively.
The components of interest expense, average interest rates (i.e., base interest rate in effect plus the spread) and average outstanding balances for the Revolving Credit Facility for the three months ended March 31, 2019 and 2018 were as follows:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Interest expense | $ | 1,028 | $ | 593 | ||||
Unused commitment fees | 3 | 20 | ||||||
Amortization of deferred financing costs | 27 | 25 | ||||||
|
|
|
| |||||
Total interest expense | $ | 1,058 | $ | 638 | ||||
|
|
|
| |||||
Weighted average interest rate(1) | 5.2% | 4.5% | ||||||
Average borrowings | $ | 79,885 | $ | 54,099 |
(1) | Weighted average interest rate for the three months ended March 31, 2019 includes the effect of unused commitment fees. Weighted average interest rate for the three months ended March 31, 2018 does not include the effect of unused commitment fees. |
The weighted average effective interest rate and weighted average remaining years to maturity of the Company’s outstanding borrowings as of March 31, 2019 were approximately 5.2% and 1.3 years, respectively. As of March 31, 2019, the asset coverage per unit was 2.42. Asset coverage per unit is the ratio of the carrying value of the Company’s total assets available to cover senior securities, less all liabilities and indebtedness not represented by senior securities, to the aggregate amount of senior securities representing indebtedness.
40
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Commitments and Contingencies
The Company enters into contracts that contain a variety of indemnification provisions. The Company’s maximum exposure under these arrangements is unknown; however, the Company has not had prior claims or losses pursuant to these contracts. The Advisor has reviewed the Company’s existing contracts and expects the risk of loss to the Company to be remote.
The Company is not currently subject to any material legal proceedings and, to the Company’s knowledge, no material legal proceedings are threatened against the Company. From time to time, the Company may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company’s rights under contracts with its portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material effect upon its financial condition or results of operations.
As of March 31, 2019, the Company had a contingent obligation to reimburse the Advisor for expense support payments of $165. On April 30, 2018, the Former Advisors agreed to permanently waive the Company’s obligation to reimburse the Former Advisors approximately $5,400 in expense support payments not previously reimbursed under the Former Expense Support Agreement and approximately $5,000 of organization and offering expenses that they had incurred on the Company’s behalf. As such, as of March 31, 2019, the Company had no contingent obligations to reimburse its Former Advisors for expense support and organization and offering expenses. See Note 4 for further detail of the agreements with the Advisor and the Former Advisors.
Unfunded commitments to provide funds to portfolio companies are not recorded in the Company’s balance sheets. Since these commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company has sufficient liquidity to fund these commitments.
As of March 31, 2019, the Company’s unfunded commitments consisted of the following:
Category / Company(1) | Commitment Amount | |||
Senior Secured Loans—First Lien | ||||
Apex Group Limited | $ | 87 | ||
Apex Group Limited | 225 | |||
Conservice LLC | 228 | |||
Eagle Family Foods Inc | 158 | |||
Frontline Technologies Group LLC | 691 | |||
ID Verde | 319 | |||
Lipari Foods LLC | 973 | |||
SMART Global Holdings Inc | 72 | |||
|
| |||
Total unfunded loans | $ | 2,753 | ||
|
| |||
Unfunded equity commitments | $ | 7,920 | ||
| ||||
(1) May be commitments to one or more entities affiliated with the named company. |
|
As of March 31, 2019, the Company’s unfunded debt commitments have a fair value representing unrealized appreciation (depreciation) of $(58). The Company funds its equity investments as it receives funding
41
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 10. Commitments and Contingencies (continued)
notices from the portfolio companies. As of March 31, 2019, the Company’s unfunded equity commitments have a fair value of zero.
Note 11. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2019 and 2018:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Per Share Data:(1) | ||||||||
Net asset value, beginning of period | $ | 8.55 | $ | 9.20 | ||||
Results of operations(2) | ||||||||
Net investment income, before expense support | 0.16 | 0.05 | ||||||
Expense support | — | 0.04 | ||||||
|
|
|
| |||||
Net investment income | 0.16 | 0.09 | ||||||
Net realized gain (loss) and unrealized appreciation (depreciation) | 0.15 | 0.10 | ||||||
|
|
|
| |||||
Net increase (decrease) in net assets resulting from operations | 0.31 | 0.19 | ||||||
|
|
|
| |||||
Shareholder distributions(3) | ||||||||
Distributions from net investment income | (0.15) | (0.09) | ||||||
Distributions from net realized gains | — | (0.02) | ||||||
Distributions in excess of net investment income(4) | — | (0.04) | ||||||
|
|
|
| |||||
Net decrease in net assets resulting from shareholder distributions | (0.15) | (0.15) | ||||||
|
|
|
| |||||
Issuance of common stock(5) | 0.00 | 0.00 | ||||||
Repurchases of common stock(6) | (0.01) | 0.00 | ||||||
|
|
|
| |||||
Net increase (decrease) in net assets resulting from capital share transactions | (0.01) | 0.00 | ||||||
|
|
|
| |||||
Net asset value, end of period | $ | 8.70 | $ | 9.24 | ||||
|
|
|
| |||||
Total return based on net asset value(7) | 3.46% | 2.02% | ||||||
|
|
|
| |||||
Ratio/Supplemental Data: | ||||||||
Net assets, end of period | $ | 107,214 | $ | 118,238 | ||||
Average net assets(8) | $ | 107,281 | $ | 118,135 | ||||
Average borrowings(8) | $ | 79,885 | $ | 54,099 | ||||
Shares outstanding, end of period | 12,320,120 | 12,801,094 | ||||||
Weighted average shares outstanding | 12,275,292 | 12,776,314 | ||||||
Ratios to average net assets:(8) | ||||||||
Total operating expenses before expense support | 2.22% | 2.41% | ||||||
Total operating expenses after expense support | 2.22% | 1.91% | ||||||
Net investment income | 1.85% | 1.01% | ||||||
Portfolio turnover rate | 7% | 17% |
(1) | Per share data may be rounded in order to recompute the ending net asset value per share. |
42
Table of Contents
Corporate Capital Trust II
Notes to Unaudited Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 11. Financial Highlights (continued)
(2) | The per share data was derived by using the weighted average shares outstanding during the applicable period. |
(3) | 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; distributions per share are rounded to the nearest $0.01. |
(4) | See Note 5 for further information on the source of distributions from other than net investment income and realized gains. |
(5) | The issuance of common stock on a per share basis reflects the incremental net asset value changes as a result of the issuance of shares of common stock in the Company’s continuous public offering and pursuant to the DRP. The issuance of common stock at a price, net of selling commissions and dealer manager fees, that is greater than the net asset value per share results in an increase in net asset value per share. The per share impact of the Company’s DRP is an increase to the net asset value of less than $0.01 per share during the three months ended March 31, 2019 and 2018. |
(6) | The per share impact of the Company’s repurchases of common stock reflects a change in net asset value of less than $0.01 per share during the three months ended March 31, 2018. |
(7) | The total return based on net asset value for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash distributions per share that were declared during the period and dividing the total by the net asset value per share at the beginning of the period. Total return based on net asset value does not consider the effect of any sales commissions or charges that may be incurred in connection with the sale of shares of the Company’s common stock. The historical calculation of total return based on net asset value in the table should not be considered a representation of the Company’s future total return based on net asset value, which may be greater or less than the return shown in the table due to a number of factors, including the Company’s ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company’s expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company’s investment portfolio during the applicable period and do not represent an actual return to shareholders. |
(8) | The computation of average net assets and average borrowings during the period is based on the daily value of net assets and borrowing balances, respectively. |
43
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except share and per share amounts)
The information contained in this section should be read in conjunction with our financial statements and related notes thereto appearing elsewhere in this quarterly report on Form10-Q. In this report, “we,” “us,” “our” and the “Company” refer to Corporate Capital Trust II.
Forward-Looking Statements
Some of the statements in this quarterly report on Form10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form10-Q may include statements as to:
• | our future operating results; |
• | our business prospects and the prospects of the companies in which we may invest; |
• | the impact of the investments that we expect to make; |
• | the ability of our portfolio companies to achieve their objectives; |
• | our current and expected financings and investments; |
• | receiving and maintaining corporate credit ratings and changes in the general interest rate environment; |
• | the adequacy of our cash resources, financing sources and working capital; |
• | the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies; |
• | our contractual arrangements and relationships with third parties; |
• | actual and potential conflicts of interest with the other funds in the Fund Complex, their respective current or future investment advisers or any of their affiliates; |
• | the dependence of our future success on the general economy and its effect on the industries in which we may invest; |
• | our use of financial leverage; |
• | the ability of the Advisor to locate suitable investments for us and to monitor and administer our investments; |
• | the ability of the Advisor or its affiliates to attract and retain highly talented professionals; |
• | our ability to maintain our qualification as a RIC and as a BDC; |
• | the impact on our business of the Dodd-Frank Act, and the rules and regulations issued thereunder; |
• | the effect of changes to tax legislation on us and the portfolio companies in which we may invest and our and their tax position; and |
• | the tax status of the enterprises in which we may invest. |
In addition, words such as “anticipate,” “believe,” “expect” and “intend” indicate a forward-looking statement, although not all forward-looking statements include these words. The forward-looking statements contained in this quarterly report on Form10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:
• | changes in the economy; |
44
Table of Contents
• | risks associated with possible disruption in our operations or the economy generally due to terrorism or natural disasters; and |
• | future changes in laws or regulations and conditions in our operating areas. |
We have based the forward-looking statements included in this quarterly report on Form10-Q on information available to us on the date of this quarterly report on Form10-Q. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders are advised to consult any additional disclosures that we may make directly to shareholders or through reports that we may file in the future with the SEC, including annual reports onForm 10-K, quarterly reports onForm 10-Q and current reports onForm 8-K. The forward-looking statements and projections contained in this quarterly report on Form10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Exchange Act.
Overview
We are anon-diversified,closed-end management investment company that has elected to be treated as a BDC under the 1940 Act and has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. We commenced operations on March 1, 2016 when we satisfied our minimum offering requirement. Formed as a Delaware statutory trust on August 12, 2014, we were externally managed by our Former Advisors through April 8, 2018 under the Former Investment Advisory Agreement and the Former Administrative Services Agreement.
On April 9, 2018, we entered into the Investment Advisory Agreement with the Advisor. The Investment Advisory Agreement replaced the Former Investment Advisory Agreement with KKR and CNL. In addition, we entered into the Administrative Services Agreement, which replaced the Former Administrative Services Agreement between us and CNL.
Through April 8, 2018, our Former Advisors were, and commencing April 9, 2018, our Advisor is responsible for sourcing potential investments, conducting due diligence on prospective investments, analyzing investment opportunities, structuring investments, determining the securities and other assets that we purchase, retain or sell and monitoring our portfolio on an ongoing basis, as well as providing the administrative services necessary for our company to operate. Our Former Advisors were, and our Advisor is, registered as investment advisers with the SEC.
Our investment objectives are to generate current income and, to a lesser extent, long-term capital appreciation. We pursue our investment objective by investing primarily in the debt of middle market U.S. companies with a focus on originated transactions sourced through the network of the Advisor and its affiliates. We define direct originations as any investment where the Advisor or its affiliates negotiates the terms of the transaction beyond just the price, which, for example, may include negotiating financial covenants, maturity dates or interest rate terms. These directly originated transactions include participation in other originated transactions where there may be third parties involved, or a bank acting as an intermediary, for a closely held club, or similar transactions.
Our portfolio is comprised primarily of investments in senior secured loans and second lien secured loans of private middle market U.S. companies and, to a lesser extent, subordinated loans of private U.S. companies. Although we do not expect a significant portion of our portfolio to be comprised of subordinated loans, there is no limit on the amount of such loans in which we may invest. We may purchase interests in loans or make other debt investments, including investments in senior secured bonds, through secondary market transactions in the OTC market or directly from our target companies as primary market or directly originated investments. In connection with our debt investments, we may on occasion receive equity interests such as warrants or options as
45
Table of Contents
additional consideration. We may also purchase or otherwise acquire interests in the form of common or preferred equity or equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of common stock or other equity, in our target companies, generally in conjunction with one of our debt investments, including through the restructuring of such investments, or through aco-investment with a financial sponsor, such as an institutional investor or private equity firm. In addition, a portion of our portfolio may be comprised of corporate bonds, structured products, other debt securities and derivatives, including total return swaps and credit default swaps. The Advisor will seek to tailor our investment focus as market conditions evolve. Depending on market conditions, we may increase or decrease our exposure to less senior portions of the capital structure or otherwise make opportunistic investments, such as where the market price of loans, bonds or other securities reflects a lower value than deemed warranted by the Advisor’s fundamental analysis, which may occur due to general dislocations in the markets, a misunderstanding by the market of a particular company or an industry being out of favor with the broader investment community and may include event driven investments, anchor orders and structured products.
The senior secured loans, second lien secured loans and senior secured bonds in which we invest generally have stated terms of three to seven years and subordinated debt investments that we make generally have stated terms of up to ten years, but the expected average life of such securities is generally between three and seven years. However, there is no limit on the maturity or duration of any security in our portfolio. Our debt investments may be rated by a NRSRO and, in such case, generally will carry a rating below investment grade (rated lower than “Baa3” by Moody’s or lower than“BBB-” by S&P). We also invest innon-rated debt securities.
Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain or loss on investments, net realized gain or loss on foreign currency, net unrealized appreciation or depreciation on investments and net unrealized gain or loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment transactions. Net realized gain or loss on foreign currency is the portion of realized gain or loss attributable to foreign currency fluctuations. Net unrealized appreciation or depreciation on investments is the net change in the fair value of our investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.
We principally generate revenues in the form of interest income on the debt investments we hold. In addition, we may generate revenues in the form ofnon-recurring commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. We may also generate revenues in the form of dividends and other distributions on the equity or other securities we hold.
Expenses
Our primary operating expenses include the payment of management and incentive fees and other expenses under the Investment Advisory Agreement and the Administrative Services Agreement, interest expense from financing arrangements and other indebtedness, and other expenses necessary for our operations. The management and incentive fees compensate the Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments.
The Advisor oversees ourday-to-day operations, including the provision of general ledger accounting, fund accounting, legal services, investor relations, certain government and regulatory affairs activities, and other
46
Table of Contents
administrative services. The Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our stockholders and reports filed with the SEC. In addition, the Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our stockholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.
Pursuant to the Administrative Services Agreement, we reimburse the Advisor for expenses necessary to perform services related to our administration and operations, including the Advisor’s allocable portion of the compensation and related expenses of certain personnel of FS Investments and KKR Credit providing administrative services to us on behalf of the Advisor. We reimburse the Advisor quarterly for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) the Advisor’s actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same geographic location. The Advisor allocates the cost of such services to us based on factors such as total assets, revenues, time allocations and/or other reasonable metrics. Our board of trustees reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of the Advisor and assesses the reasonableness of such reimbursements.
We bear all other expenses of our operations and transactions, including all other expenses incurred by the Advisor in performing services for us and administrative personnel paid by FS Investments and KKR Credit.
In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by the Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.
Portfolio Investment Activity for the Three Months Ended March 31, 2019 and for the Year Ended December 31, 2018
Total Portfolio Activity
The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2019 and the year ended December 31, 2018:
Net Investment Activity | For the Three Months Ended March 31, 2019 | For the Year Ended December 31, 2018 | ||||||
Purchases | $ | 14,006 | $ | 97,488 | ||||
Sales and Repayments | (12,078) | (78,749) | ||||||
|
|
|
| |||||
Net Portfolio Activity | $ | 1,928 | $ | 18,739 | ||||
|
|
|
|
For the Three Months Ended March 31, 2019 | For the Year Ended December 31, 2018 | |||||||||||||||
New Investment Activity by Asset Class | Purchases | Percentage | Purchases | Percentage | ||||||||||||
Senior Secured Loans—First Lien | $ | 9,848 | 70.3% | $ | 48,862 | 50.1% | ||||||||||
Senior Secured Loans—Second Lien | 2,491 | 17.8% | 14,237 | 14.6% | ||||||||||||
Other Senior Secured Debt | — | — | 9,280 | 9.5% | ||||||||||||
Subordinated Debt | 1,258 | 9.0% | 19,309 | 19.8% | ||||||||||||
Asset Based Finance | 277 | 2.0% | 5,756 | 5.9% | ||||||||||||
Equity/Other | 132 | 0.9% | 44 | 0.1% | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Total | $ | 14,006 | 100.0% | $ | 97,488 | 100.0% | ||||||||||
|
|
|
|
|
|
|
|
|
|
47
Table of Contents
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2019 and December 31, 2018:
March 31, 2019 (Unaudited) | December 31, 2018 | |||||||||||||||||||||||||||||
Amortized Cost(1) | Fair Value | Percentage of Portfolio | Amortized Cost(1) | Fair Value | Percentage of Portfolio | |||||||||||||||||||||||||
Senior Secured Loans—First Lien | $ | 101,980 | $ | 97,762 | 54.6% | $ | 97,236 | $ | 93,777 | 53.6% | ||||||||||||||||||||
Senior Secured Loans—Second Lien | 36,519 | 35,731 | 19.9% | 35,686 | 34,277 | 19.6% | ||||||||||||||||||||||||
Other Senior Secured Debt | 8,833 | 8,487 | 4.7% | 10,195 | 9,485 | 5.4% | ||||||||||||||||||||||||
Subordinated Debt | 27,779 | 26,537 | 14.8% | 29,274 | 26,840 | 15.3% | ||||||||||||||||||||||||
Asset Based Finance | 6,033 | 6,299 | 3.5% | 6,852 | 6,729 | 3.8% | ||||||||||||||||||||||||
Equity/Other | 4,254 | 4,414 | 2.5% | 4,122 | 4,058 | 2.3% | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total | $ | 185,398 | $ | 179,230 | 100.0% | $ | 183,365 | $ | 175,166 | 100.0% | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments. |
The following table presents certain selected information regarding the composition of our investment portfolio as of March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | |||||||||
Number of Portfolio Companies |
| 88 |
| 94 | ||||||
% Variable Rate Debt Investments (based on fair value)(1)(2) |
| 76.7 | % |
| 74.6 | % | ||||
% Fixed Rate Debt Investments (based on fair value)(1)(2) |
| 18.8 | % |
| 20.8 | % | ||||
% Other Income Producing Investments (based on fair value)(3) |
| 4.3 | % |
| 4.0 | % | ||||
%Non-Income Producing Investments (based on fair value)(2) |
| 0.2 | % |
| 0.6 | % | ||||
% of Investments onNon-Accrual (based on fair value) |
| 0.0 | % |
| 0.0 | % | ||||
Weighted Average Annual Yield on Accruing Debt Investments(2)(4) |
| 9.6 | % |
| 9.5 | % |
(1) | “Debt Investments” means investments that pay or are expected to pay a stated interest rate, stated dividend rate or other similar stated return. |
(2) | Does not include investments onnon-accrual status. |
(3) | “Other Income Producing Investments” means investments that pay or are expected to pay interest, dividends or other income to the Company on an ongoing basis but do not have a stated interest rate, stated dividend rate or other similar stated return. |
(4) | The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. |
For the three months ended March 31, 2019, our total return based on net asset value was 3.46% as compared to 2.02% for the three months ended March 31, 2018. See footnote 7 to the table included in Note 11 to our unaudited financial statements included herein for information regarding the calculation of our total return based on net asset value.
48
Table of Contents
Direct Originations
The following table presents certain selected information regarding our direct originations as of March 31, 2019 and December 31, 2018:
Characteristics of All Direct Originations held in Portfolio | March 31, 2019 | December 31, 2018 | ||||||
Number of Portfolio Companies | 32 | 31 | ||||||
% of Investments onNon-Accrual | — | — | ||||||
Total Cost of Direct Originations | $ | 84,285 | $ | 73,193 | ||||
Total Fair Value of Direct Originations | $ | 83,430 | $ | 72,053 | ||||
% of Total Investments, at Fair Value | 46.5% | 41.1% | ||||||
Weighted Average Annual Yield on Accruing Debt Investments(1) | 9.3% | 10.4% |
(1) | The Weighted Average Annual Yield on Accruing Debt Investments is computed as (i) the sum of (a) the stated annual interest rate, dividend rate or other similar stated return of each Debt Investment, multiplied by its par amount, adjusted to U.S. dollars and for any partial income accrual when necessary, as of the end of the applicable reporting period, plus (b) the annual amortization of the purchase or original issue discount or premium of each accruing Debt Investment; divided by (ii) the total amortized cost of Debt Investments included in the calculated group as of the end of the applicable reporting period. |
Portfolio Composition by Industry Classification
See Note 6 to our unaudited financial statements included herein for additional information regarding the composition of our investment portfolio by industry classification.
Portfolio Asset Quality
In addition to various risk management and monitoring tools, the Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. The Advisor uses an investment rating scale of 1 to 4. The following is a description of the conditions associated with each investment rating:
Investment | Summary Description | |
1 | Performing investment—generally executing in accordance with plan and there are no concerns about the portfolio company’s performance or ability to meet covenant requirements. | |
2 | Performing investment—no concern about repayment of both interest and our cost basis but company’s recent performance or trends in the industry require closer monitoring. | |
3 | Underperforming investment—some loss of interest or dividend possible, but still expecting a positive return on investment. | |
4 | Underperforming investment—concerns about the recoverability of principal or interest. |
The following table shows the distribution of our investments on the 1 to 4 investment rating scale at fair value as of March 31, 2019 and December 31, 2018:
March 31, 2019 | December 31, 2018 | |||||||||||||||
Investment Rating | Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | ||||||||||||
1 | $ | 92,045 | 52% | $ | 80,548 | 46% | ||||||||||
2 | 84,336 | 47% | 90,011 | 51% | ||||||||||||
3 | 400 | 0% | 1,404 | 1% | ||||||||||||
4 | 2,449 | 1% | 3,203 | 2% | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total | $ | 179,230 | 100% | $ | 175,166 | 100% | ||||||||||
|
|
|
|
|
|
|
|
49
Table of Contents
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended March 31, 2019 and March 31, 2018
Revenues
Our investment income for the three months ended March 31, 2019 and 2018 was as follows:
Three Months Ended March 31, | ||||||||||||||||
2019 | 2018 | |||||||||||||||
Amount | Percentage of Total Income | Amount | Percentage of Total Income | |||||||||||||
Interest income | $ | 4,125 | 94.6% | $ | 3,399 | 98.5% | ||||||||||
Fee income | 220 | 5.0% | 42 | 1.2% | ||||||||||||
Dividend and other income | 19 | 0.4% | 11 | 0.3% | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||
Total investment income | $ | 4,364 | 100.0% | $ | 3,452 | 100.0% | ||||||||||
|
|
|
|
|
|
|
|
|
|
The level of interest income we receive is generally related to the balance of income-producing investments, multiplied by the weighted average yield of our investments. Fee income is transaction-based, and typically consists of prepayment fees and structuring fees. As such, fee income is generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.
The increase in income during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 can primarily be attributed to the increase in average investments held in our portfolio, along with higher yielding assets, resulting in increased interest income as well as the increase of structuring and upfront fees during the three months ended March 31, 2019.
Expenses
Our operating expenses for the three months ended March 31, 2019 and 2018 were as follows:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Management fees | $ | 684 | $ | 890 | ||||
Capital gains incentive fees | — | 217 | ||||||
Administrative services expenses | 92 | 157 | ||||||
Stock transfer agent fees | 45 | 46 | ||||||
Accounting and administrative fees | 119 | 123 | ||||||
Interest expense | 1,058 | 638 | ||||||
Trustees’ fees | 77 | 50 | ||||||
Distribution and shareholder servicing fees | — | 282 | ||||||
Professional services | 162 | 224 | ||||||
Offering costs | — | 20 | ||||||
Other general and administrative expenses | 142 | 199 | ||||||
|
|
|
| |||||
Total operating expenses | 2,379 | 2,846 | ||||||
Expense support | — | (585) | ||||||
|
|
|
| |||||
Total net expenses | $ | 2,379 | $ | 2,261 | ||||
|
|
|
|
50
Table of Contents
The following table reflects selected expense ratios as a percent of average net assets for the three months ended March 31, 2019 and 2018:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Ratio of operating expenses to average net assets | 2.22% | 2.41% | ||||||
Ratio of expense support to average net assets(1) | — | (0.50)% | ||||||
|
|
|
| |||||
Ratio of net operating expenses to average net assets | 2.22% | 1.91% | ||||||
Ratio of incentive fees and interest expense to average net assets(1) | 0.99% | 0.72% | ||||||
|
|
|
| |||||
Ratio of net operating expenses, excluding certain expenses, to average net assets | 1.23% | 1.19% | ||||||
|
|
|
|
(1) | Ratio data may be rounded in order to recompute the ending ratio of net operating expenses to average net assets or net operating expenses, excluding certain expenses, to average net assets. |
Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in amounts outstanding under our financing arrangements and benchmark interest rates such as LIBOR, among other factors.
Net Investment Income
Our net investment income totaled $1,985 ($0.16 per share) and $1,191 ($0.09 per share) for the three months ended March 31, 2019 and 2018, respectively. The increase in net investment income can be attributed primarily to higher interest income and fee income, as discussed above, during the three months ended March 31, 2019.
Net Realized Gains or Losses
Our net realized gains (losses) for the three months ended March 31, 2019 and 2018 were as follows:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net realized gain (loss) on investments(1) | $ | (143) | $ | 179 | ||||
Net realized gain (loss) on foreign currency forward contracts | — | (1) | ||||||
Net realized gain (loss) on foreign currency transactions | 46 | (19) | ||||||
|
|
|
| |||||
Total net realized gain (loss) | $ | (97) | $ | 159 | ||||
|
|
|
|
(1) | We sold investments and received principal repayments, respectively, of $10,178 and $1,900 during the three months ended March 31, 2019 and $25,671 and $2,977 during the three months ended March 31, 2018. |
51
Table of Contents
Net Change in Unrealized Appreciation (Depreciation)
Our net change in unrealized appreciation (depreciation) for the three months ended March 31, 2019 and 2018 were as follows:
Three Months Ended March 31, | ||||||||
2019 | 2018 | |||||||
Net change in unrealized appreciation (depreciation) on investments | $ | 2,031 | $ | 820 | ||||
Net change in unrealized appreciation (depreciation) on foreign currency forward contracts | (81) | 90 | ||||||
Net change in unrealized appreciation (depreciation) on foreign currency translation | 50 | 14 | ||||||
|
|
|
| |||||
Total net change in unrealized appreciation (depreciation) | $ | 2,000 | $ | 924 | ||||
|
|
|
|
During the three months ended March 31, 2019, the net change in unrealized appreciation (depreciation) was primarily driven by the increase in valuation of certain of our investments.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended March 31, 2019 and 2018, the net increase (decrease) in net assets resulting from operations was $3,888 ($0.32 per share) and $2,274 ($0.18 per share), respectively.
Financial Condition, Liquidity and Capital Resources
Overview
As of March 31, 2019, we had approximately $2,445 in cash and foreign currency and $6,364 in borrowings available under our revolving credit facility, subject to borrowing base and other limitations. Proceeds from sales of investments and principal payments totaled $10,178 and $1,900, respectively, during the three months ended March 31, 2019. As of March 31, 2019, we had unfunded debt investments with aggregate unfunded commitments of $2,753 and unfunded equity commitments of $7,920. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.
Our capital resources and liquidity are primarily derived from (i) cash flows from operations, including sales and repayments, (ii) our distribution reinvestment plan and (iii) borrowings under our credit facility. Our primary uses of funds include (i) investments in portfolio companies, (ii) distributions to our shareholders, (iii) repurchases under our share repurchase program, (iv) interest payments on borrowings under our credit facility and (v) operating expenses. We expect to use proceeds from the sales and repayments of our investment portfolio and proceeds from borrowings under our credit facility to finance our investment activities at our discretion.
Financing Arrangements
On July 14, 2017, we entered into a senior secured revolving credit agreement, or the Credit Agreement. The Credit Agreement provides for a revolving credit facility, or the Revolving Credit Facility, consisting of loans to be made in dollars and other foreign currencies in an initial aggregate principal amount of up to $70,000. Availability under the Revolving Credit Facility will terminate on July 14, 2019, or the Revolver Termination Date, and the outstanding loans under the Revolving Credit Facility will mature on July 14, 2020. On June 11, 2018, we entered into an incremental commitment agreement with ING Capital LLC to increase the total borrowing capacity under the Revolving Credit Facility to $82,000.
The Revolving Credit Facility also requires mandatory prepayment of interest and principal upon certain events during theterm-out period commencing on the Revolver Termination Date. The stated borrowing rate
52
Table of Contents
under the Revolving Credit Facility is based on LIBOR or with respect to borrowings in foreign currencies on a base rate applicable to such currency borrowings plus an applicable spread of 2.75%, or on an “alternate base rate” (as defined in the Credit Agreement). The Revolving Credit Facility includes an “accordion” feature that allows us, under certain circumstances, to increase the size of the facility to a maximum of $200,000. Under the Revolving Credit Facility, we have made certain representations and warranties and are required to comply with various covenants, reporting requirements and other customary requirements for similar revolving credit facilities. During the three months ended March 31, 2019, we borrowed approximately $9,117 and repaid approximately $7,093 on our Revolving Credit Facility. We have and will continue to use proceeds from borrowings to make investments in portfolio companies.
See Note 9 to our unaudited financial statements included herein for additional information regarding our financing arrangements.
RIC Status and Distributions
We have elected to be subject to tax as a RIC under Subchapter M of the Code. In order to qualify for RIC tax treatment, we must, among other things, make distributions of an amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, each tax year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of a tax year or the due date of the tax return for such tax year, including extensions, distributions paid up to twelve months after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our shareholders to qualify for and maintain our RIC tax status each tax year. We are also subject to a 4% nondeductible federal excise tax on certain undistributed income unless we make distributions in a timely manner to our shareholders generally of an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the excess of capital gains in excess of capital losses, or “capital gain net income” (adjusted for certain ordinary losses), for theone-year period ending October 31 of that calendar year and (3) any net ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us during October, November or December of any calendar year, payable to shareholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had been paid by us, as well as received by our shareholders, on December 31 of the calendar year in which the distribution was declared. We can offer no assurance that we will achieve results that will permit us to pay any cash distributions. If we issue senior securities, we will 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.
Subject to applicable legal restrictions and the sole discretion of our board of trustees, we intend to authorize, declare and pay regular cash distributions on a quarterly basis. We will calculate each shareholder’s specific distribution amount for the period using record and declaration dates and each shareholder’s distributions will begin to accrue on the date that shares of our common stock are issued to such shareholder. From time to time, we may also pay special interim distributions in the form of cash or shares of our common stock at the discretion of our board of trustees.
During certain periods, our distributions may exceed our earnings. As a result, it is possible that a portion of the distributions we make may represent a return of capital. A return of capital generally is a return of a shareholder’s investment rather than a return of earnings or gains derived from our investment activities. Each year a statement on Form1099-DIV identifying the sources of the distributions will be mailed to our shareholders. No portion of the distributions paid during the three months ended March 31, 2019 or 2018 represented a return of capital.
53
Table of Contents
We intend to continue to make our regular distributions in the form of cash, out of assets legally available for distribution, except for those shareholders who receive their distributions in the form of shares of our common stock under the DRP. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. shareholder.
The following table reflects the cash distributions per share and the total amount of distributions that we have declared on our common stock during the three months ended March 31, 2019 and 2018:
Distribution | ||||||||
For the Three Months Ended | Per Share | Amount | ||||||
Fiscal 2018 | ||||||||
March 31, 2018 | $ | 0.14625 | $ | 1,868 | ||||
Fiscal 2019 | ||||||||
March 31, 2019 | $ | 0.14625 | $ | 1,796 |
See Note 5 to our unaudited financial statements included herein for additional information regarding our distributions for the three months ended March 31, 2019 and 2018.
Critical Accounting Policies
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management’s most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
Valuation of Portfolio Investments
We determine the fair value of our investment portfolio each quarter. Securities are valued at fair value as determined in good faith by our board of trustees. In connection with that determination, the Advisor provides our board of trustees with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.
Accounting Standards Codification Topic 820,Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
54
Table of Contents
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
• | our quarterly fair valuation process begins with the Advisor reviewing and documenting valuations of each portfolio company or investment, which valuations are obtained from an independent third-party valuation service, and provide a valuation range; |
• | the Advisor then provides the audit committee with its valuation recommendation for each portfolio company or investment, along with supporting materials; |
• | preliminary valuations are then discussed with the audit committee; |
• | our audit committee reviews the preliminary valuations and the Advisor, together with our independent third-party valuation services, if applicable, supplement the preliminary valuations to reflect any comments provided by the audit committee; |
• | following its review, the audit committee will recommend that our board of trustees approve our fair valuations; and |
• | our board of trustees discusses the valuations and determines the fair value of each such investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of the Advisor, the audit committee and any independent third-party valuation services, if applicable. |
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our financial statements. In making its determination of fair value, our board of trustees may use any approved independent third-party pricing or valuation services. However, our board of trustees is not required to determine fair value in accordance with the valuation provided by any single source, and may use any relevant data, including information obtained from the Advisor or any approved independent third-party valuation or pricing service that our board of trustees deems to be reliable in determining fair value under the circumstances. Below is a description of factors that the Advisor, any approved independent third-party valuation services and our board of trustees may consider when determining the fair value of our investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that may be considered include the borrower’s ability to adequately service its debt, the fair market value of the borrower in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
For convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of trustees, in its determination of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
The Advisor, any approved independent third-party valuation services and our board of trustees may also consider private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in
55
Table of Contents
determining fair value. The Advisor, any approved independent third-party valuation services and our board of trustees may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as well as such other factors as our board of trustees, in consultation with the Advisor and any approved independent third-party valuation services, if applicable, may consider relevant in assessing fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
When we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of trustees subsequently values these warrants or other equity securities received at their fair value.
The fair values of our investments are determined in good faith by our board of trustees. Our board of trustees is responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our board of trustees has delegatedday-to-day responsibility for implementing our valuation policy to the Advisor, and has authorized the Advisor to utilize independent third-party valuation and pricing services that have been approved by our board of trustees. The audit committee is responsible for overseeing the Advisor’s implementation of the valuation process.
See Note 8 to our unaudited financial statements included herein for additional information regarding the fair value of our financial instruments.
Revenue Recognition
Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect to collect such amounts. We record dividend income on theex-dividend date. Distributions received from limited liability company (“LLC”) and limited partnership (“LP”) investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to collect such income. Our policy is to place investments onnon-accrual status when there is reasonable doubt that interest income will be collected. We consider many factors relevant to an investment when placing it on or removing it fromnon-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that we will receive any previously accrued interest, then the interest income will bewritten-off. Payments received onnon-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest.Non-accrual investments may be restored to accrual status when principal and interest become current and are likely to remain current based on our judgment.
Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Structuring and othernon-recurring upfront fees are recorded as fee income when earned. For the three months ended March 31, 2019, we recognized $194 in structuring fee revenue. We record prepayment premiums on loans and securities as fee income when we receive such amounts.
56
Table of Contents
Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign Currency
Gains or losses on the sale of investments are calculated by using the specific identification method. 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, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gains or losses when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.
Uncertainty in Income Taxes
We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is “more likely than not” to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our statements of operations. During the three months ended March 31, 2019 and 2018, we did not incur any interest or penalties.
Derivative Instruments
Our derivative instruments include foreign currency forward contracts. We recognize all derivative instruments as assets or liabilities at fair value in our financial statements. Derivative contracts entered into by us are not designated as hedging instruments, and as a result, we present changes in fair value through net change in unrealized appreciation (depreciation) on derivative instruments in the statements of operations. Realized gains and losses that occur upon the cash settlement of the derivative instruments are included in net realized gains (losses) on derivative instruments in the statements of operations.
See Note 2 to our unaudited financial statements included herein for additional information regarding our significant accounting policies.
Contractual Obligations
We have entered into agreements with the Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the Investment Advisory Agreement are equal to (a) an annual base management fee based on the average value of our gross assets (excluding cash and cash equivalents) and (b) an incentive fee based on our performance. The Advisor is reimbursed for administrative expenses incurred on our behalf. See Note 4 to our unaudited financial statements included herein for a discussion of these agreements and for the amount of fees and expenses accrued under these agreements during the three months ended March 31, 2019 and 2018.
As of March 31, 2019, the principal amount outstanding on the Revolving Credit Facility was approximately $75,636. Of the $75,636 principal outstanding as of March 31, 2019, approximately $748, $3,691 and $547 were denominated in Canadian dollars, Euros and British pound sterling, respectively. The amount outstanding under the Revolving Credit Facility will mature, and all accrued and unpaid interest thereunder will be due and payable on July 14, 2020, the maturity date. As of March 31, 2019, $6,364 remained unused under the Revolving Credit Facility.
Off-Balance Sheet Arrangements
We had nooff-balance sheet arrangements as of March 31, 2019.
57
Table of Contents
Recently Issued Accounting Standards
In August 2018, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update2018-13,Fair Value Measurement (Topic 820)—Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU2018-13. ASU2018-13 introduces new fair value disclosure requirements and eliminates and modifies certain existing fair value disclosure requirements. ASU2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact of ASU2018-13 on our financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We are subject to financial market risks, including changes in interest rates. As of March 31, 2019, 76.7% of our portfolio investments (based on fair value) were debt investments paying variable interest rates and 18.8% were debt investments paying fixed interest rates while 4.3% were other income producing investments, and the remaining 0.2% consisted ofnon-income producing investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income, and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to the Advisor with respect to our increasedpre-incentive fee net investment income.
The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the composition of our investment portfolio, including the accrual status of our investments, and our financing arrangements in effect as of March 31, 2019 (dollar amounts are presented in thousands):
Basis Point Change in Interest | Increase (Decrease) in Interest Income(1) | Increase (Decrease) in Interest Expense | Increase (Decrease) in Net Interest Income | Percentage Change in Net Interest Income | ||||||||||||
Down 100 basis points | $ | (1,410) | $ | (754) | $ | (656) | (4.9)% | |||||||||
No change | — | — | — | — | ||||||||||||
Up 100 basis points | $ | 1,437 | $ | 754 | $ | 683 | 5.1% | |||||||||
Up 300 basis points | $ | 4,335 | $ | 2,261 | $ | 2,074 | 15.4% | |||||||||
Up 500 basis points | $ | 7,233 | $ | 3,768 | $ | 3,465 | 25.8% |
(1) | Assumes no defaults or prepayments by portfolio companies over the next twelve months. |
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. 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. During the three months ended March 31, 2019 and 2018 we did not engage in interest rate hedging activities.
Foreign Currency Risk
From time to time, we may make investments that are denominated in a foreign currency that are subject to the effects of exchange rate movements between the foreign currency of each such investment and the U.S. dollar, which may affect future fair values and cash flows, as well as amounts translated into U.S. dollars for inclusion in our financial statements.
58
Table of Contents
The table below presents the effect that a 10% immediate, unfavorable change in the foreign currency exchange rates (i.e. strengthening of the U.S. dollar) would have on the fair value of our investments denominated in foreign currencies as of March 31, 2019, by foreign currency, all other valuation assumptions remaining constant. In addition, the table below presents the cost of our investments denominated in foreign currencies and the notional amount of foreign currency forward contracts in local currency in place as of March 31, 2019 to hedge against foreign currency risks.
Investments Denominated in Foreign Currencies As of March 31, 2019 | Hedges As of March 31, 2019 | |||||||||||||||||||||||
Foreign Currency | Cost in Local Currency | Cost in U.S. Dollars | Fair Value | Reduction in Fair Value as of March 31, 2019 if 10% Adverse Change in Exchange Rate(1) | Net Foreign Currency Hedge Amount in Local Currency | Net Foreign Currency Hedge Amount in U.S. Dollars | ||||||||||||||||||
Canadian Dollars | C$ | 6,856 | $ | 5,142 | $ | 4,895 | $ | 490 | C$ | 5,690 | $ | 4,276 | ||||||||||||
Euros | € | 3,704 | 4,149 | 3,860 | 386 | € | 107 | 134 | ||||||||||||||||
British Pound Sterling | £ | 438 | 570 | 548 | 55 | £ | — | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 9,861 | $ | 9,303 | $ | 931 | $ | 4,410 | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
|
(1) Excludes effect, if any, of any foreign currency hedges.
As illustrated in the table above, we use derivative instruments from time to time, including foreign currency forward contracts, to manage the impact of fluctuations in foreign currency exchange rates. In addition, we have the ability to borrow in foreign currencies under our Revolving Credit Facility, which provides a natural hedge with regard to changes in exchange rates between the foreign currencies and U.S. dollar and reduces our exposure to foreign exchange rate differences. We are typically a net receiver of these foreign currencies as related to our international investment positions, and, as a result, our investments denominated in foreign currencies, to the extent not hedged, benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar.
As of March 31, 2019, the net contractual amount of our foreign currency forward contracts totaled $4,410, all of which related to hedging of our foreign currency denominated debt investments. As of March 31, 2019, approximately $748, $3,691 and $547 of our outstanding borrowings under our Revolving Credit Facility were denominated in Canadian dollars, Euros and British pound sterling, respectively.
In addition, we may have risk regarding portfolio valuation. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies—Valuation of Portfolio Investments.”
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report to provide reasonable assurance that information required to be disclosed by us in the reports we file under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the relevant SEC rules and forms.
Changes in Internal Control Over Financial Reporting
During the most recent fiscal quarter, there was no change in our internal controls over financial reporting (as defined underRule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
59
Table of Contents
PART II—OTHER INFORMATION
We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be 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 any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.
There have been no material changes from the risk factors set forth in our annual report on Form10-K for the year ended December 31, 2018.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table provides information concerning our repurchases of shares of our common stock during the three months ended March 31, 2019, pursuant to our share repurchase program.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
January 1, 2019 through January 31, 2019 | 315,173 | $ | 9.14 | 315,173 | (1) | |||||||||||
February 1, 2019 through February 28, 2019 | — | — | — | — | ||||||||||||
March 1, 2019 through March 31, 2019 | — | — | — | — | ||||||||||||
|
|
|
|
|
| |||||||||||
315,173 | $ | 9.14 | 315,173 | (1) | ||||||||||||
|
|
|
|
|
|
(1) | The maximum number of shares available for repurchase on January 7, 2019 was 315,181. A description of the calculation of the maximum number of shares of our common stock that may be repurchased under our share repurchase program is set forth in Note 3 to our unaudited financial statements included herein. |
See Note 3 to our unaudited financial statements included herein for a more detailed discussion of the terms of our share repurchase program.
Item 3. | Defaults upon Senior Securities. |
Not applicable.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
Not applicable.
60
Table of Contents
Item 6. | Exhibits. |
The following exhibits are filed or incorporated as part of this report:
61
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized on May 15, 2019.
CORPORATE CAPITAL TRUST II |
/s/ MICHAEL C. FORMAN |
Michael C. Forman Chief Executive Officer (Principal Executive Officer) |
/s/ WILLIAM GOEBEL |
William Goebel Chief Financial Officer |
62