UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2020
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number 814-01185
Hancock Park Corporate Income, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 81-0850535 | |
State or Other Jurisdiction of | I.R.S. Employer Identification No. | |
Incorporation or Organization | ||
10 S. Wacker Drive, Suite 2500, Chicago, Illinois | 60606 | |
Address of Principal Executive Offices | Zip Code | |
(847) 734-2000 | ||
Registrant’s Telephone Number, Including Area Code | ||
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
None | None | None |
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ |
Non-accelerated filer | x | Smaller reporting company | ¨ |
Emerging growth company | x |
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. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 14, 2020 was 2,270,638.
HANCOCK PARK CORPORATE INCOME, INC.
TABLE OF CONTENTS
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2 | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
3
Defined Terms
We have used "we," "us," "our," "our company," and "the Company" to refer to Hancock Park Corporate Income, Inc. in this report. We also have used several other terms in this report, which are explained or defined below:
Term | Explanation or Definition |
1940 Act | Investment Company Act of 1940, as amended |
Administration Agreement | Administration agreement between the Company and OFS Services, dated July 15, 2016 |
Advisers Act | The Investment Advisers Act of 1940, as amended |
Affiliated Account | Another account managed by OFS Advisor or an affiliate of OFS Advisor |
Annual Distribution Requirement | Distributions to our stockholders, for each taxable year, of at least 90% of our ICTI |
ASC | Accounting Standards Codification, as issued by the FASB |
ASC Topic 820 | ASC Topic 820, "Fair Value Measurement" |
ASC Topic 946 | ASC Topic 946, "Financial Services—Investment Companies" |
ASU | Accounting Standards Updates, as issued by the FASB |
BDC | Business Development Company under the 1940 Act |
BLA | Business Loan Agreement, with Pacific Western Bank, as lender, which provides the Company with a senior secured revolving credit facility |
Board | The Company's board of directors |
CLO | Collateralized Loan Obligation |
Code | Internal Revenue Code of 1986, as amended |
Contractual Issuer Expenses | Salaries and direct expenses of OFS Advisor’s employees, employees of their affiliates and others while engaged in offering and other contractually-defined activities |
Dealer Manager | International Assets Advisory, LLC |
Dealer Manager Agreement | Broker dealer management agreement dated August 1, 2016 between the Company, OFS Advisor and the Dealer Manager, as amended, supplemented or modified. |
EBITDA | Earnings before interest, taxes, depreciation, and amortization |
Exchange Act | Securities Exchange Act of 1934, as amended |
Expense Support Agreement | Expense support and conditional reimbursement agreement dated July 15, 2016, between the Company and OFS Advisor |
FASB | Financial Accounting Standards Board |
Funding I | OFS Funding I, LLC, a wholly-owned subsidiary of OFSAM and an affiliate of OFS Advisor |
GAAP | Accounting principles generally accepted in the United States |
HPCI-MB | HPCI-MB, Inc., a wholly owned subsidiary taxed under subchapter C of the Code and generally holds the equity investments of the Company that are taxed as pass-through entities. |
ICTI | Investment company taxable income, which is generally net ordinary income plus net short-term capital gains in excess of net long-term capital losses |
Indicative Prices | Market quotations, prices from pricing services or bids from brokers or dealers |
Investment Advisory Agreement | Investment advisory and management agreement between the Company and OFS Advisor, dated July 15, 2016 |
IRS | Internal Revenue Service |
LIBOR | London Interbank Offered Rate |
Minimum Offering Requirement | The minimum capitalization requirement to commence the Offering. This was satisfied on August 30, 2016, when Funding I, a subsidiary of OFSAM, purchased 74,074 shares of our common stock in the Offering for gross proceeds of $1,000,000, or $13.50 per share |
NBIP | Non-binding indicative price |
Net Loan Fees | The cumulative amount of fees, such as discounts, premiums and amendment fees that are deferred and recognized as income over the life of the loan. |
OCCI | OFS Credit Company, Inc., a Delaware corporation and a non-diversified, closed-end management investment company for whom OFS Advisor serves as investment adviser |
Term | Explanation or Definition |
Offering | Continuous offering of up to $200,000,000 of shares of the Company's common stock |
OFS Advisor | OFS Capital Management, LLC, a wholly-owned subsidiary of OFSAM and registered investment advisor under the Advisers Act |
OFS Capital | OFS Capital Corporation, a Delaware corporation and publicly-traded BDC for whom OFS Advisor serves as investment advisor |
OFS Services | OFS Capital Services, LLC, a wholly-owned subsidiary of OFSAM and affiliate of OFS Advisor |
OFSAM | Orchard First Source Asset Management, LLC, a full-service provider of capital and leveraged finance solutions to U.S. corporations |
PIK | Payment-in-kind. PIK interest and dividends are paid in the form of additional loan principal or preferred securities. |
Prime Rate | United States Prime interest rate |
PWB Credit Facility | Senior secured revolving credit facility between the Company and Pacific Western Bank, as lender |
Reunderwriting Analysis | A discount rate method based upon a hypothetical recapitalization of the entity given its current operating performance and current market condition |
RIC | Regulated investment company under the Code |
SBCAA | Small Business Credit Availability Act |
SEC | U.S. Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
Synthetic Rating Analysis | A discount rate method that assigns a surrogate debt rating to the entity based on known industry standards for assigning such ratings and then estimates the discount rate based on observed market yields for actual rated debt. |
The Order | An exemptive relief order from the SEC to permit us to co-invest in portfolio companies with certain funds managed by OFS Advisor in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, subject to compliance with certain conditions |
Transaction Price | The cost of an arm's length transaction occurring in the same security |
Unsecured Note | An agreement with the HCM Master Fund Limited, an exempted company incorporated with limited liability under the laws of the Cayman Island in which the Company sold in a private placement an unsecured note in an aggregate principal amount of $15,000,000 |
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about us, our prospective portfolio investments, our industry, our beliefs, and our assumptions. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "would," "should," "targets," "projects," and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• | our ability and experience operating a BDC or maintaining our qualification as a RIC under the Code; |
• | our dependence on key personnel; |
• | our ability to maintain or develop referral relationships; |
• | the ability of OFS Advisor, to identify, invest in and monitor companies that meet our investment criteria; |
• | the belief that the carrying amounts of our financial instruments, such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments and that such financial instruments are held with high credit quality institutions to mitigate the risk of loss due to credit risk; |
• | actual and potential conflicts of interest with OFS Advisor and other affiliates of OFSAM; |
• | constraint on investments due to access to material nonpublic information; |
• | restrictions on our ability to enter into transactions with our affiliates; |
• | the use of borrowed money to finance a portion of our investments, including the belief that our long-dated financing facilities affords us operational flexibility; |
• | our ability to incur additional leverage pursuant to the SBCAA, and the impact of such leverage on our net investment income and results of operations; |
• | competition for investment opportunities; |
• | the percentage of investments that bear interest on a floating rate or fixed rate basis; |
• | our ability to raise debt or equity capital as a BDC; |
• | the timing, form and amount of any distributions from our portfolio companies; |
• | the impact of a protracted decline in the liquidity of credit markets on our business; |
• | interest rate volatility, including the decommissioning of LIBOR; |
• | the general economy and its impact on the industries in which we invest; |
• | changes in political, economic or industry conditions, the interest rate environment or conditions affecting the financial and capital markets, including with respect to changes from the impact of the Coronavirus (“COVID-19”) pandemic; the length and duration of the COVID-19 pandemic in the United States as well as worldwide and the magnitude of the economic impact of the outbreak; the effect of the COVID-19 pandemic on our business financial condition, results of operations and cash flows and those of our portfolio companies (including the expectation that a shift from cash interest to PIK interest will result from concessions granted to borrowers due to the COVID-19 pandemic), including our and their ability to achieve our respective objectives; the effect of the disruptions caused by the COVID-19 pandemic on our ability to continue to effectively manage our business (including our belief that new loan activity in the market in which we operate has slowed) and on the availability of equity and debt capital and our use of borrowed money to finance a portion of our investments; |
• | the belief that we have sufficient levels of liquidity to support our existing portfolio companies and deploy capital in new investment opportunities; |
• | uncertain valuations of our portfolio investments, including our belief that overweighting the Reunderwriting Analysis method more accurately captures certain data related to illiquid private credit during the COVID-19 pandemic; and |
• | the effect of new or modified laws or regulations governing our operations. |
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, those assumptions also could be inaccurate. In light of these and
1
other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report on Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include, among others, those described or identified in "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q.
We have based the forward-looking statements on information available to us on the date of this Quarterly Report on Form 10-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. You are advised to consult any additional disclosures that we may make directly to you or through reports that we may file with the SEC in the future, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. The forward-looking statements and projections contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by Section 21E of the Exchange Act.
The following should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
2
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Hancock Park Corporate Income, Inc.
Consolidated Statements of Assets and Liabilities
March 31, 2020 | December 31, 2019 | |||||||
(unaudited) | ||||||||
Assets: | ||||||||
Non-control/non-affiliate investments at fair value (amortized cost of $45,807,612 and $40,770,129 respectively) | $ | 43,242,333 | $ | 40,124,923 | ||||
Cash | 474,477 | 8,814,578 | ||||||
Interest receivable | 181,386 | 116,040 | ||||||
Prepaid expenses and other assets | 37,440 | 41,544 | ||||||
Total assets | $ | 43,935,636 | $ | 49,097,085 | ||||
Liabilities: | ||||||||
Revolving line of credit | $ | 1,300,000 | $ | — | ||||
Unsecured note (net of discount and deferred debt issuance costs of $288,042 and $303,450, respectively) | 14,711,958 | 14,696,550 | ||||||
Payable for investments purchased | — | 4,316,624 | ||||||
Due to advisor and affiliates (see Note 3) | 225,097 | 107,024 | ||||||
Accrued professional fees | 204,145 | 129,135 | ||||||
Distribution payable | 589,261 | 583,912 | ||||||
Other liabilities | 147,608 | 143,334 | ||||||
Total liabilities | 17,178,069 | 19,976,579 | ||||||
Commitments and contingencies (see Notes 3 and 6) | ||||||||
Net assets: | ||||||||
Common stock, par value of $0.001 per share; 20,000,000 shares authorized as of March 31, 2020, and December 31, 2019; 2,250,747 and 2,239,774 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | 2,251 | 2,240 | ||||||
Paid-in capital in excess of par | 29,928,550 | 29,786,761 | ||||||
Total distributable (losses) | (3,173,234 | ) | (668,495 | ) | ||||
Total net assets | 26,757,567 | 29,120,506 | ||||||
Total liabilities and net assets | $ | 43,935,636 | $ | 49,097,085 | ||||
Number of shares outstanding | 2,250,747 | 2,239,774 | ||||||
Net asset value per share | $ | 11.89 | $ | 13.00 |
See Notes to Consolidated Financial Statements.
3
Hancock Park Corporate Income, Inc.
Consolidated Statements of Operations (unaudited)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Investment income | |||||||
Interest income | $ | 1,113,294 | $ | 781,051 | |||
Fee income | 58,425 | 39,875 | |||||
Total investment income | 1,171,719 | 820,926 | |||||
Operating expenses | |||||||
Amortization of deferred offering costs | 84,337 | 29,851 | |||||
Contractual issuer expenses | 536 | 3,112 | |||||
Interest expense | 300,592 | 95,349 | |||||
Management fees | 130,765 | 92,722 | |||||
Incentive fees | 76,050 | 48,770 | |||||
Administrative fees | 186,617 | 141,874 | |||||
Professional fees | 164,296 | 154,339 | |||||
Insurance expense | 24,911 | 16,367 | |||||
Transfer agent fees | 24,522 | 29,819 | |||||
Other expenses | 8,866 | 26,534 | |||||
Total operating expenses | 1,001,492 | 638,737 | |||||
Less: Expense limitations under agreements with adviser (see Note 3) | (416,633 | ) | (280,242 | ) | |||
Net operating expenses | 584,859 | 358,495 | |||||
Net investment income | 586,860 | 462,431 | |||||
Net realized and unrealized gain (loss) on investments | |||||||
Net realized gain (loss) on investments | (573,849 | ) | 2,016 | ||||
Net unrealized appreciation (depreciation) on investments, net of taxes | (1,930,889 | ) | 508,858 | ||||
Net gain (loss) on investments | (2,504,738 | ) | 510,874 | ||||
Net increase (decrease) in net assets resulting from operations | $ | (1,917,878 | ) | $ | 973,305 | ||
Net investment income per common share – basic and diluted | $ | 0.26 | $ | 0.25 | |||
Net increase (decrease) in net assets resulting from operations per common share – basic and diluted | $ | (0.85 | ) | $ | 0.52 | ||
Distributions declared per common share | $ | 0.26 | $ | 0.26 | |||
Basic and diluted weighted average shares outstanding | 2,245,143 | 1,868,883 |
See Notes to Consolidated Financial Statements.
4
Hancock Park Corporate Income, Inc.
Consolidated Statements of Changes in Net Assets (unaudited)
Common Stock | ||||||||||||||||||
Number of shares | Par value | Paid-in capital in excess of par | Total distributable earnings (losses) | Total net assets | ||||||||||||||
Balances at January 1, 2019 | 1,818,799 | $ | 1,819 | $ | 24,200,918 | $ | (564,851 | ) | $ | 23,637,886 | ||||||||
Net investment income | — | — | — | 462,431 | 462,431 | |||||||||||||
Net realized gain on investment | — | — | — | 2,016 | 2,016 | |||||||||||||
Net unrealized appreciation on investments, net of taxes | — | — | — | 508,858 | 508,858 | |||||||||||||
Tax reclassifications of permanent differences | — | — | (25,268 | ) | 25,268 | — | ||||||||||||
Common stock issued | 120,944 | 121 | 1,632,439 | — | 1,632,560 | |||||||||||||
Distributions to stockholders | — | — | — | (489,716 | ) | (489,716 | ) | |||||||||||
Net increase for the period ended March 31, 2019 | 120,944 | 121 | 1,607,171 | 508,857 | 2,116,149 | |||||||||||||
Balances at March 31, 2019 | 1,939,743 | $ | 1,940 | $ | 25,808,089 | $ | (55,994 | ) | $ | 25,754,035 | ||||||||
Common Stock | ||||||||||||||||||
Number of shares | Par value | Paid-in capital in excess of par | Total distributable earnings (losses) | Total net assets | ||||||||||||||
Balances at January 1, 2020 | 2,239,774 | $ | 2,240 | $ | 29,786,761 | $ | (668,495 | ) | $ | 29,120,506 | ||||||||
Net investment income | — | — | — | 586,860 | 586,860 | |||||||||||||
Net realized loss on investment | — | — | — | (573,849 | ) | (573,849 | ) | |||||||||||
Net unrealized depreciation on investments, net of taxes | — | — | — | (1,930,889 | ) | (1,930,889 | ) | |||||||||||
Tax reclassifications of permanent differences | — | — | (2,400 | ) | 2,400 | — | ||||||||||||
Common stock issued | 10,973 | 11 | 144,189 | — | 144,200 | |||||||||||||
Distributions to stockholders | — | — | — | (589,261 | ) | (589,261 | ) | |||||||||||
Net increase (decrease) for the period ended March 31, 2020 | 10,973 | 11 | 141,789 | (2,504,739 | ) | (2,362,939 | ) | |||||||||||
Balances at March 31, 2020 | 2,250,747 | $ | 2,251 | $ | 29,928,550 | $ | (3,173,234 | ) | $ | 26,757,567 | ||||||||
See Notes to Consolidated Financial Statements.
5
Hancock Park Corporate Income, Inc.
Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net increase (decrease) in net assets resulting from operations | $ | (1,917,878 | ) | $ | 973,305 | |||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: | ||||||||
Net unrealized (appreciation) depreciation on investments | 1,930,889 | (508,858 | ) | |||||
Net realized (gains) losses on investments | 573,849 | (2,016 | ) | |||||
Amortization of Net Loan Fees and discounts on investments | (14,374 | ) | (8,151 | ) | ||||
Amortization of deferred debt issuance costs | 24,013 | 15,558 | ||||||
Paid-in-kind interest and dividend income | (2,832 | ) | (3,716 | ) | ||||
Purchase of portfolio investments | (9,094,877 | ) | (4,636,393 | ) | ||||
Proceeds from principal payments on portfolio investments | 2,602,433 | 1,084,641 | ||||||
Sale or redemption of portfolio investments | 899,022 | 1,121,786 | ||||||
Changes in operating assets and liabilities: | ||||||||
Interest receivable | (65,346 | ) | (30,845 | ) | ||||
Due to advisor and affiliates | 118,073 | 41,024 | ||||||
Payable for investments purchased | (4,316,624 | ) | (522,051 | ) | ||||
Other assets and liabilities | 63,263 | (37,434 | ) | |||||
Net cash used in operating activities | (9,200,389 | ) | (2,513,150 | ) | ||||
Cash flows from financing activities | ||||||||
Net proceeds from issuance of common stock | 144,200 | 1,632,560 | ||||||
Distributions paid to stockholders | (583,912 | ) | (445,421 | ) | ||||
Borrowings under revolving line of credit | 3,000,000 | 3,450,000 | ||||||
Repayments under revolving line of credit | (1,700,000 | ) | (2,850,000 | ) | ||||
Net cash provided by financing activities | 860,288 | 1,787,139 | ||||||
Net decrease in cash | (8,340,101 | ) | (726,011 | ) | ||||
Cash at beginning of period | 8,814,578 | 1,250,296 | ||||||
Cash at end of period | $ | 474,477 | $ | 524,285 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Amortization of deferred offering costs limited by investment advisor (see Note 3) | $ | 84,337 | $ | 29,851 | ||||
Cash paid for interest | 275,890 | 80,970 |
See Notes to Consolidated Financial Statements.
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Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments (unaudited)
March 31, 2020
Portfolio Company (1)(8) Investment Type | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Non-control/Non-affiliate Investments | |||||||||||||||||||||||||
All Star Auto Lights, Inc. | Motor Vehicle Parts (Used) Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 9.24% | (L +7.50%) | 12/19/2019 | 8/20/2024 | $ | 3,260,538 | $ | 3,225,852 | $ | 3,091,317 | 11.6 | % | |||||||||||||
Asurion, LLC (9) | Communication Equipment Repair and Maintenance | ||||||||||||||||||||||||
Senior Secured Loan | 7.49% | (L +6.50%) | 11/19/2019 | 8/4/2025 | 1,500,000 | 1,510,786 | 1,411,000 | 5.3 | |||||||||||||||||
A&A Transfer, LLC | Construction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 8.25% | (L +6.50%) | 2/7/2020 | 2/7/2025 | 1,920,000 | 1,891,945 | 1,900,800 | 7.1 | |||||||||||||||||
Senior Secured Loan (Revolver) (14) | 8.25% | (L +6.50%) | 2/7/2020 | 2/7/2025 | 130,517 | 125,911 | 129,212 | 0.5 | |||||||||||||||||
2,050,517 | 2,017,856 | 2,030,012 | 7.6 | ||||||||||||||||||||||
BayMark Health Services, Inc. | Outpatient Mental Health and Substance Abuse Centers | ||||||||||||||||||||||||
Senior Secured Loan | 10.21% | (L +8.25%) | 3/22/2018 | 3/1/2025 | 1,000,000 | 992,922 | 939,750 | 3.5 | |||||||||||||||||
Carolina Lubes, Inc. | Automotive Oil Change and Lubrication Shops | ||||||||||||||||||||||||
Senior Secured Loan (6) | 9.61% | (L +7.70%) | 8/23/2017 | 8/23/2022 | 553,891 | 551,558 | 550,971 | 2.1 | |||||||||||||||||
Senior Secured Loan (Revolver) (14) | 0.25% (5) | (L +7.25%) | 8/23/2017 | 8/23/2022 | — | (192 | ) | (424 | ) | — | |||||||||||||||
553,891 | 551,366 | 550,547 | 2.1 | ||||||||||||||||||||||
Chemical Resources Holdings, Inc. | Custom Compounding of Purchased Resins | ||||||||||||||||||||||||
Senior Secured Loan (6) | 9.61% | (L +7.83%) | 1/25/2019 | 1/25/2024 | 1,256,850 | 1,243,918 | 1,214,768 | 4.5 | |||||||||||||||||
Common Equity (168 units) (7) (13) | 1/25/2019 | 166,469 | 170,000 | 0.6 | |||||||||||||||||||||
1,256,850 | 1,410,387 | 1,384,768 | 5.1 | ||||||||||||||||||||||
Confie Seguros Holdings II Co. | Insurance Agencies and Brokerages | ||||||||||||||||||||||||
Senior Secured Loan | 10.08% | (L +8.50%) | 6/6/2017 | 11/1/2025 | 1,447,640 | 1,399,139 | 1,316,932 | 4.9 | |||||||||||||||||
7
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments (unaudited)
March 31, 2020
Portfolio Company (1)(8) Investment Type | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Constellis Holdings, LLC | Other Justice, Public Order, and Safety Activities | ||||||||||||||||||||||||
Senior Secured Loan | 11.00% | (L +10.00%) | 3/27/2020 | 6/30/2021 | $ | 1,325 | $ | 1,325 | $ | 1,325 | — | % | |||||||||||||
Senior Secured Loan | 8.50% | (L +7.50%) | 3/27/2020 | 3/27/2024 | 2,650 | 2,650 | 2,650 | — | |||||||||||||||||
Senior Secured Loan | 12.00% | (L +11.00%) | 3/27/2020 | 3/27/2025 | 3,522 | 3,524 | 3,522 | — | |||||||||||||||||
Common Equity (1,362 units) (7) | 3/27/2020 | 46,403 | 46,410 | 0.2 | |||||||||||||||||||||
7,497 | 53,902 | 53,907 | 0.2 | ||||||||||||||||||||||
Convergint Technologies Holdings, LLC | Security Systems Services (except Locksmiths) | ||||||||||||||||||||||||
Senior Secured Loan | 7.74% | (L +6.75%) | 9/28/2018 | 2/2/2026 | 2,393,750 | 2,347,985 | 2,213,080 | 8.3 | |||||||||||||||||
Davis Vision, Inc. | Direct Health and Medical Insurance Carriers | ||||||||||||||||||||||||
Senior Secured Loan | 8.21% | (L +6.75%) | 7/16/2018 | 12/1/2025 | 1,371,000 | 1,348,358 | 1,265,108 | 4.7 | |||||||||||||||||
DRS Imaging Services, LLC | Data Processing, Hosting, and Related Services | ||||||||||||||||||||||||
Senior Secured Loan (6) | 10.67% | (L +9.76%) | 3/8/2018 | 11/20/2023 | 1,088,365 | 1,085,659 | 1,077,917 | 4.0 | |||||||||||||||||
Common Equity (115 units) (7) (13) | 3/8/2018 | 115,154 | 148,000 | 0.6 | |||||||||||||||||||||
1,088,365 | 1,200,813 | 1,225,917 | 4.6 | ||||||||||||||||||||||
DuPage Medical Group (9) | Offices of Physicians, Mental Health Specialists | ||||||||||||||||||||||||
Senior Secured Loan | 3.74% | (L +2.75%) | 8/22/2017 | 8/15/2024 | 96,843 | 96,540 | 91,923 | 0.3 | |||||||||||||||||
Senior Secured Loan | 7.99% | (L +7.00%) | 8/22/2017 | 8/15/2025 | 1,939,435 | 1,935,124 | 1,845,886 | 6.9 | |||||||||||||||||
2,036,278 | 2,031,664 | 1,937,809 | 7.2 | ||||||||||||||||||||||
Eblens Holdings, Inc. | Shoe Store | ||||||||||||||||||||||||
Subordinated Loan (2) | 12.00% cash / 1.00% PIK | N/A | 7/13/2017 | 1/13/2023 | 475,418 | 473,078 | 453,447 | 1.7 | |||||||||||||||||
Common Equity (3,750 units) (7) | 7/13/2017 | 37,500 | 27,000 | 0.1 | |||||||||||||||||||||
475,418 | 510,578 | 480,447 | 1.8 | ||||||||||||||||||||||
Excelin Home Health, LLC | Home Health Care Services | ||||||||||||||||||||||||
Senior Secured Loan | 11.50% | (L +9.50%) | 10/25/2018 | 4/25/2024 | 1,000,000 | 985,217 | 993,903 | 3.7 | |||||||||||||||||
8
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments (unaudited)
March 31, 2020
Portfolio Company (1)(8) Investment Type | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Hyland Software, Inc. | Software Publishers | ||||||||||||||||||||||||
Senior Secured Loan | 4.24% | (L +3.25%) | 10/24/2018 | 7/1/2024 | $ | 21,900 | $ | 21,875 | $ | 20,805 | 0.1 | % | |||||||||||||
Senior Secured Loan (9) | 7.99% | (L +7.00%) | 10/24/2018 | 7/7/2025 | 333,469 | 335,032 | 316,795 | 1.2 | |||||||||||||||||
355,369 | 356,907 | 337,600 | 1.3 | ||||||||||||||||||||||
Inergex Holdings, LLC | Other Computer Related Services | ||||||||||||||||||||||||
Senior Secured Loan | 8.45% | (L +7.00%) | 10/1/2018 | 10/1/2024 | 1,103,188 | 1,090,526 | 1,034,017 | 3.9 | |||||||||||||||||
Senior Secured Loan (Revolver) (14) | 8.75% | (L +7.00%) | 10/1/2018 | 10/1/2024 | 156,250 | 154,844 | 146,431 | 0.5 | |||||||||||||||||
1,259,438 | 1,245,370 | 1,180,448 | 4.4 | ||||||||||||||||||||||
Institutional Shareholder Services Inc. | Administrative Management and General Management Consulting Services | ||||||||||||||||||||||||
Senior Secured Loan | 9.57% | (L +8.50%) | 3/4/2019 | 3/5/2027 | 1,068,750 | 1,040,943 | 993,649 | 3.7 | |||||||||||||||||
McAfee, LLC (9) | Software Publishers | ||||||||||||||||||||||||
Senior Secured Loan | 9.44% | (L +8.50%) | 11/15/2019 | 9/29/2025 | 1,500,000 | 1,501,799 | 1,451,039 | 5.4 | |||||||||||||||||
Milrose Consultants, LLC | All Other Business Support Services | ||||||||||||||||||||||||
Senior Secured Loan (6) | 7.64% | (L +6.19%) | 7/16/2019 | 7/16/2025 | 2,000,000 | 1,986,779 | 1,991,043 | 7.4 | |||||||||||||||||
Online Tech Stores, LLC (10) | Stationery and Office Supplies Merchant Wholesalers | ||||||||||||||||||||||||
Subordinated Loan | 10.50% cash / 3.00% PIK (11) | N/A | 2/1/2018 | 8/1/2023 | 1,054,989 | 1,007,141 | 463,731 | 1.7 | |||||||||||||||||
OnSite Care, PLLC | Home Health Care Services | ||||||||||||||||||||||||
Senior Secured Loan (6) | 9.33% | (L +7.73%) | 8/10/2018 | 8/10/2023 | 1,209,375 | 1,198,209 | 1,163,282 | 4.3 | |||||||||||||||||
Parfums Holding Company, Inc. | Cosmetics, Beauty Supplies, and Perfume Stores | ||||||||||||||||||||||||
Senior Secured Loan | 10.21% | (L +8.75%) | 11/16/2017 | 6/30/2025 | 2,000,000 | 1,983,465 | 1,906,962 | 7.1 | |||||||||||||||||
9
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments (unaudited)
March 31, 2020
Portfolio Company (1)(8) Investment Type | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Pelican Products, Inc. | Unlaminated Plastics Profile Shape Manufacturing | ||||||||||||||||||||||||
Senior Secured Loan | 8.75% | (L +7.75%) | 9/24/2018 | 5/1/2026 | $ | 2,000,000 | $ | 2,008,103 | $ | 1,806,771 | 6.8 | % | |||||||||||||
Performance Team LLC | General Warehousing and Storage | ||||||||||||||||||||||||
Senior Secured Loan | 11.60% | (L +10.00%) | 5/24/2018 | 11/24/2023 | 1,026,316 | 1,019,515 | 1,046,842 | 3.9 | |||||||||||||||||
Professional Pipe Holdings, LLC | Plumbing, Heating, and Air-Conditioning Contractors | ||||||||||||||||||||||||
Senior Secured Loan | 9.75% cash / 1.50% PIK | (L +8.75%) | 3/23/2018 | 3/23/2023 | 431,869 | 426,810 | 414,212 | 1.5 | |||||||||||||||||
Common Equity (86 units) (7) | 3/23/2018 | 85,714 | 82,500 | 0.3 | |||||||||||||||||||||
431,869 | 512,524 | 496,712 | 1.8 | ||||||||||||||||||||||
Resource Label Group, LLC | Commercial Printing (except Screen and Books) | ||||||||||||||||||||||||
Senior Secured Loan | 6.41% | (L +4.50%) | 6/7/2017 | 5/26/2023 | 69,213 | 68,848 | 66,490 | 0.2 | |||||||||||||||||
Senior Secured Loan | 10.41% | (L +8.50%) | 6/7/2017 | 11/26/2023 | 178,571 | 177,059 | 156,500 | 0.6 | |||||||||||||||||
247,784 | 245,907 | 222,990 | 0.8 | ||||||||||||||||||||||
Rocket Software, Inc. | Software Publishers | ||||||||||||||||||||||||
Senior Secured Loan (9) | 5.24% | (L +4.25%) | 11/20/2018 | 11/28/2025 | 135,957 | 135,403 | 113,599 | 0.4 | |||||||||||||||||
Senior Secured Loan | 9.24% | (L +8.25%) | 11/20/2018 | 11/28/2026 | 1,285,406 | 1,265,840 | 1,110,847 | 4.2 | |||||||||||||||||
1,421,363 | 1,401,243 | 1,224,446 | 4.6 | ||||||||||||||||||||||
RPLF Holdings, LLC | Software Publishers | ||||||||||||||||||||||||
Common Equity (45,890 units) (7) (13) | 1/17/2018 | 45,890 | 43,000 | 0.2 | |||||||||||||||||||||
SourceHOV Tax, Inc. (6) | Other Accounting Services | ||||||||||||||||||||||||
Senior Secured Loan | 7.88% | (L +5.50%) | 3/16/2020 | 3/17/2025 | 2,306,306 | 2,289,160 | 2,289,160 | 8.6 | |||||||||||||||||
SSH Group Holdings, Inc. | Child Day Care Services | ||||||||||||||||||||||||
Senior Secured Loan (9) | 9.70% | (L +8.25%) | 7/26/2018 | 7/30/2026 | 704,000 | 698,422 | 636,732 | 2.4 | |||||||||||||||||
10
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments (unaudited)
March 31, 2020
Portfolio Company (1)(8) Investment Type | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
STS Operating, Inc. | Industrial Machinery and Equipment Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 5.25% | (L +4.25%) | 5/15/2018 | 12/11/2024 | $ | 104,639 | $ | 104,452 | $ | 100,684 | 0.4 | % | |||||||||||||
Senior Secured Loan | 9.00% | (L +8.00%) | 5/15/2018 | 4/30/2026 | 1,593,220 | 1,593,188 | 1,519,960 | 5.7 | |||||||||||||||||
1,697,859 | 1,697,640 | 1,620,644 | 6.1 | ||||||||||||||||||||||
The Escape Game, LLC | All other amusement and recreation industries | ||||||||||||||||||||||||
Senior Secured Loan | 9.75% | (L +8.75%) | 12/22/2017 | 12/22/2022 | 500,000 | 499,404 | 484,107 | 1.8 | |||||||||||||||||
Senior Secured Loan | 9.75% | (L +8.75%) | 2/14/2020 | 12/31/2020 | 166,667 | 164,533 | 161,369 | 0.6 | |||||||||||||||||
Senior Secured Loan | 8.00% | (L +7.00%) | 7/18/2019 | 12/31/2020 | 333,333 | 332,314 | 325,821 | 1.2 | |||||||||||||||||
Senior Secured Loan (Delayed Draw) | 9.75% | (L +8.75%) | 7/20/2018 | 12/22/2022 | 500,000 | 499,939 | 484,107 | 1.8 | |||||||||||||||||
1,500,000 | 1,496,190 | 1,455,404 | 5.4 | ||||||||||||||||||||||
Truck Hero, Inc. | Truck Trailer Manufacturing | ||||||||||||||||||||||||
Senior Secured Loan (9) | 4.74% | (L +3.75%) | 5/30/2017 | 4/22/2024 | 15,949 | 15,855 | 12,297 | — | |||||||||||||||||
Senior Secured Loan | 9.25% | (L +8.25%) | 5/30/2017 | 4/21/2025 | 1,878,456 | 1,811,351 | 1,642,954 | 6.1 | |||||||||||||||||
1,894,405 | 1,827,206 | 1,655,251 | 6.1 | ||||||||||||||||||||||
TTG Healthcare, LLC | Diagnostic Imaging Centers | ||||||||||||||||||||||||
Senior Secured Loan | 10.58% | (L +9.00%) | 3/1/2019 | 3/1/2024 | 1,003,518 | 990,735 | 978,024 | 3.7 | |||||||||||||||||
Preferred Equity (191 units) (7) (13) | 3/1/2019 | 191,409 | 271,000 | 1.0 | |||||||||||||||||||||
1,003,518 | 1,182,144 | 1,249,024 | 4.7 | ||||||||||||||||||||||
Wastebuilt Environmental Solutions, LLC | Industrial Supplies Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 10.20% | (L +8.75%) | 10/11/2018 | 10/11/2024 | 1,500,000 | 1,476,230 | 1,113,106 | 4.2 | |||||||||||||||||
Total Investments | $ | 45,623,085 | $ | 45,807,612 | $ | 43,242,333 | 161.5 | % |
11
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments (unaudited)
March 31, 2020
(1) | Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Rule 6-03(f) of Regulation S-X or Rule 144 of the Securities Act. |
(2) | The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of March 31, 2020: |
Portfolio Company | Investment Type | Range of PIK Option | Range of Cash Option | Maximum PIK Rate Allowed | ||||
Eblens Holdings, Inc. | Subordinated Loan | 0% or 1.00% | 13.00% or 12.00% | 1.00% |
(3) | Substantially all of the debt investments bear interest at rates determined by reference to LIBOR (L), and which are reset monthly or quarterly. For all variable-rate investments the schedule presents the spread over LIBOR and the interest rate as of March 31, 2020. All investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision. |
(4) | Unless otherwise noted with footnote 9, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details. |
(5) | Commitment fee on undrawn funds. |
(6) | The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of March 31, 2020: |
Portfolio Company | Reported Interest Rate | Interest Rate per Credit Agreement | Additional Interest per Annum | |||
Carolina Lubes, Inc. | 9.61% | 9.16% | 0.45% | |||
Chemical Resources Holdings, Inc. | 9.61% | 7.78% | 1.83% | |||
DRS Imaging Services, LLC | 10.67% | 9.45% | 1.22% | |||
Milrose Consultants, LLC | 7.64% | 6.95% | 0.69% | |||
OnSite Care, PLLC | 9.33% | 7.83% | 1.50% | |||
SourceHOV Tax, Inc. | 7.88% | 7.00% | 0.88% |
(7) | Non-income producing. |
(8) | Investments pledged as collateral under the PWB Credit Facility. |
(9) | Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details. |
(10) | Investment was on non-accrual status as of March 31, 2020, meaning the Company has ceased recognition of all or a portion of income on the investment. See Note 4 for further details. |
(11) | The lending group entered into a forbearance agreement to convert all cash interest to PIK interest through June 30, 2020. |
(13) All or portion of investment held by HPCI-MB, a wholly owned subsidiary subject to corporate income tax.
(14) Subject to unfunded commitments. See Note 6 for further details.
See Notes to Financial Statements.
12
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments
December 31, 2019
Portfolio Company (1) Investment Type (2) | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Non-control/Non-affiliate Investments | |||||||||||||||||||||||||
All Star Auto Lights, Inc. | Motor Vehicle Parts (Used) Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 9.40% | (L +7.50%) | 12/19/2019 | 8/20/2024 | $ | 3,000,000 | $ | 2,970,229 | $ | 2,970,229 | 10.2 | % | |||||||||||||
Asurion, LLC (9) | Communication Equipment Repair and Maintenance | ||||||||||||||||||||||||
Senior Secured Loan | 8.30% | (L +6.50%) | 11/19/2019 | 8/4/2025 | 1,500,000 | 1,511,250 | 1,511,250 | 5.2 | |||||||||||||||||
BayMark Health Services | Outpatient Mental Health and Substance Abuse Centers | ||||||||||||||||||||||||
Senior Secured Loan | 10.21% | (L +8.25%) | 3/22/2018 | 3/1/2025 | 1,000,000 | 992,561 | 1,000,000 | 3.4 | |||||||||||||||||
Carolina Lubes, Inc. | Automotive Oil Change and Lubrication Shops | ||||||||||||||||||||||||
Senior Secured Loan (5) | 9.83% | (L +7.70%) | 8/23/2017 | 8/23/2022 | 557,824 | 555,230 | 563,314 | 1.9 | |||||||||||||||||
Senior Secured Loan (Revolver) (7) | 0.25% (11) | (L +7.25%) | 8/23/2017 | 8/23/2022 | — | (212 | ) | (212 | ) | — | |||||||||||||||
557,824 | 555,018 | 563,102 | 1.9 | ||||||||||||||||||||||
Chemical Resources Holdings, Inc. | Custom Compounding of Purchased Resins | ||||||||||||||||||||||||
Senior Secured Loan (5) | 9.82% | (L +7.89%) | 1/25/2019 | 1/25/2024 | 1,256,850 | 1,243,072 | 1,257,160 | 4.3 | |||||||||||||||||
Common Equity (168 units) (6) (14) | 1/25/2019 | 166,469 | 223,784 | 0.8 | |||||||||||||||||||||
1,256,850 | 1,409,541 | 1,480,944 | 5.1 | ||||||||||||||||||||||
Cirrus Medical Staffing, Inc. | Temporary Help Services | ||||||||||||||||||||||||
Senior Secured Loan (5) | 10.19% | (L +8.25%) | 3/5/2018 | 10/19/2022 | 820,283 | 813,402 | 806,839 | 2.8 | |||||||||||||||||
Senior Secured Loan (Revolver) (7) | 10.19% | (L +8.25%) | 3/5/2018 | 10/19/2022 | 91,928 | 91,928 | 90,371 | 0.3 | |||||||||||||||||
912,211 | 905,330 | 897,210 | 3.1 | ||||||||||||||||||||||
Confie Seguros Holdings II Co. | Insurance Agencies and Brokerages | ||||||||||||||||||||||||
Senior Secured Loan | 10.41% | (L +8.50%) | 6/6/2017 | 11/1/2025 | 447,640 | 440,143 | 433,920 | 1.5 | |||||||||||||||||
Constellis Holdings, LLC (12) | Other Justice, Public Order, and Safety Activities | ||||||||||||||||||||||||
Senior Secured Loan | 6.93% | (L +5.00%) | 4/27/2017 | 4/21/2024 | 24,438 | 24,281 | 10,079 | — | |||||||||||||||||
Senior Secured Loan | 10.93% | (L +9.00%) | 4/26/2017 | 4/21/2025 | 550,000 | 553,529 | 22,500 | 0.1 | |||||||||||||||||
574,438 | 577,810 | 32,579 | 0.1 |
13
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments
December 31, 2019
Portfolio Company (1) Investment Type (2) | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Convergint Technologies | Security Systems Services (except Locksmiths) | ||||||||||||||||||||||||
Senior Secured Loan | 8.55% | (L +6.75%) | 9/28/2018 | 2/2/2026 | $ | 1,893,750 | $ | 1,856,191 | $ | 1,862,669 | 6.4 | % | |||||||||||||
Davis Vision, Inc. | Direct Health and Medical Insurance Carriers | ||||||||||||||||||||||||
Senior Secured Loan | 8.55% | (L +6.75%) | 7/16/2018 | 12/1/2025 | 1,371,000 | 1,347,363 | 1,370,999 | 4.7 | |||||||||||||||||
DRS Imaging Services, LLC | Data Processing, Hosting, and Related Services | ||||||||||||||||||||||||
Senior Secured Loan (5) | 11.21% | (L +9.27%) | 3/8/2018 | 11/20/2023 | 1,092,259 | 1,085,181 | 1,074,896 | 3.7 | |||||||||||||||||
Common Equity (115 units) (6) (14) | 3/8/2018 | 115,385 | 135,361 | 0.5 | |||||||||||||||||||||
1,092,259 | 1,200,566 | 1,210,257 | 4.2 | ||||||||||||||||||||||
DuPage Medical Group | Offices of Physicians, Mental Health Specialists | ||||||||||||||||||||||||
Senior Secured Loan (9) | 4.55% | (L +2.75%) | 8/22/2017 | 8/15/2024 | 97,091 | 96,770 | 96,909 | 0.3 | |||||||||||||||||
Senior Secured Loan | 8.80% | (L +7.00%) | 8/22/2017 | 8/15/2025 | 1,590,882 | 1,594,381 | 1,590,882 | 5.5 | |||||||||||||||||
1,687,973 | 1,691,151 | 1,687,791 | 5.8 | ||||||||||||||||||||||
Eblens Holdings, Inc. | Shoe Store | ||||||||||||||||||||||||
Subordinated Loan (10) | 12.00% | N/A | 7/13/2017 | 1/13/2023 | 474,220 | 471,670 | 474,994 | 1.6 | |||||||||||||||||
Common Equity (3,750 units) (6) | 7/13/2017 | 37,500 | 46,925 | 0.2 | |||||||||||||||||||||
474,220 | 509,170 | 521,919 | 1.8 | ||||||||||||||||||||||
Excelin Home Health, LLC | Home Health Care Services | ||||||||||||||||||||||||
Senior Secured Loan | 11.50% | (L +9.50%) | 10/25/2018 | 4/25/2024 | 1,000,000 | 984,311 | 957,589 | 3.3 | |||||||||||||||||
Hyland Software, Inc. | Software Publishers | ||||||||||||||||||||||||
Senior Secured Loan (9) | 5.30% | (L +3.50%) | 10/24/2018 | 7/1/2024 | 21,955 | 21,929 | 22,111 | 0.1 | |||||||||||||||||
Senior Secured Loan | 8.80% | (L +7.00%) | 10/24/2018 | 7/7/2025 | 333,469 | 335,106 | 335,453 | 1.2 | |||||||||||||||||
355,424 | 357,035 | 357,564 | 1.3 | ||||||||||||||||||||||
Inergex Holdings | Other Computer Related Services | ||||||||||||||||||||||||
Senior Secured Loan | 8.94% | (L +7.00%) | 10/1/2018 | 10/1/2024 | 1,105,984 | 1,092,589 | 1,099,360 | 3.8 | |||||||||||||||||
Senior Secured Loan (Revolver) (7) | 9.06% | (L +7.00%) | 10/1/2018 | 10/1/2024 | 125,000 | 123,516 | 124,251 | 0.4 | |||||||||||||||||
1,230,984 | 1,216,105 | 1,223,611 | 4.2 |
14
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments
December 31, 2019
Portfolio Company (1) Investment Type (2) | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Institutional Shareholder Services Inc. | Administrative Management and General Management Consulting Services | ||||||||||||||||||||||||
Senior Secured Loan | 10.44% | (L +8.50%) | 3/4/2019 | 3/5/2027 | $ | 1,068,750 | $ | 1,039,942 | $ | 1,043,849 | 3.6 | % | |||||||||||||
McAfee, LLC (9) | Software Publishers | ||||||||||||||||||||||||
Senior Secured Loan | 10.30% | (L +8.50%) | 11/15/2019 | 9/29/2025 | 1,500,000 | 1,501,875 | 1,501,875 | 5.2 | |||||||||||||||||
Milrose Consultants, LLC (5) | Administrative Management and General Management Consulting Services | ||||||||||||||||||||||||
Senior Secured Loan | 8.14% | (L +6.20%) | 7/16/2019 | 7/16/2025 | 2,000,000 | 1,986,156 | 1,981,712 | 6.8 | |||||||||||||||||
Online Tech Stores, LLC | Stationery and Office Supplies Merchant Wholesalers | ||||||||||||||||||||||||
Subordinated Secured Loan | 10.50% | N/A | 2/1/2018 | 8/1/2023 | 1,020,175 | 1,007,141 | 909,902 | 3.1 | |||||||||||||||||
OnSite Care, PLLC (5) | Home Health Care Services | ||||||||||||||||||||||||
Senior Secured Loan | 9.10% | (L +7.75%) | 8/10/2018 | 8/10/2023 | 1,209,375 | 1,197,378 | 1,161,457 | 4.0 | |||||||||||||||||
Parfums Holding Company, Inc. | Cosmetics, Beauty Supplies, and Perfume Stores | ||||||||||||||||||||||||
Senior Secured Loan | 10.70% | (L +8.75%) | 11/16/2017 | 6/30/2025 | 2,000,000 | 1,982,998 | 1,982,998 | 6.8 | |||||||||||||||||
Pelican Products, Inc. | Unlaminated Plastics Profile Shape Manufacturing | ||||||||||||||||||||||||
Senior Secured Loan | 9.49% | (L +7.75%) | 9/24/2018 | 5/1/2026 | 2,000,000 | 2,008,434 | 1,971,656 | 6.8 | |||||||||||||||||
Performance Team LLC | General Warehousing and Storage | ||||||||||||||||||||||||
Senior Secured Loan | 11.80% | (L +10.00%) | 5/24/2018 | 11/24/2023 | 1,026,316 | 1,019,049 | 1,036,579 | 3.6 | |||||||||||||||||
Professional Pipe Holdings, LLC | Plumbing, Heating, and Air-Conditioning Contractors | ||||||||||||||||||||||||
Senior Secured Loan | 10.55% | (L +8.75%) | 3/23/2018 | 3/23/2023 | 430,236 | 424,753 | 434,538 | 1.4 | |||||||||||||||||
Common Equity (86 Class A units) (6) | 3/23/2018 | 85,714 | 146,000 | 0.5 | |||||||||||||||||||||
430,236 | 510,467 | 580,538 | 1.9 |
15
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments
December 31, 2019
Portfolio Company (1) Investment Type (2) | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Resource Label Group, LLC | Commercial Printing (except Screen and Books) | ||||||||||||||||||||||||
Senior Secured Loan | 6.60% | (L +4.50%) | 6/7/2017 | 5/26/2023 | $ | 69,391 | $ | 68,996 | $ | 67,846 | 0.2 | % | |||||||||||||
Senior Secured Loan | 10.60% | (L +8.50%) | 6/7/2017 | 11/26/2023 | 178,571 | 176,956 | 170,044 | 0.6 | |||||||||||||||||
247,962 | 245,952 | 237,890 | 0.8 | ||||||||||||||||||||||
Rocket Software, Inc. | Software Publishers | ||||||||||||||||||||||||
Senior Secured Loan (9) | 6.05% | (L +4.25%) | 11/20/2018 | 11/28/2025 | 136,300 | 135,720 | 132,970 | 0.5 | |||||||||||||||||
Senior Secured Loan | 10.05% | (L +8.25%) | 11/20/2018 | 11/28/2026 | 1,285,406 | 1,265,107 | 1,248,468 | 4.3 | |||||||||||||||||
1,421,706 | 1,400,827 | 1,381,438 | 4.8 | ||||||||||||||||||||||
RPLF Holdings, LLC (6) (14) | Software Publishers | ||||||||||||||||||||||||
Common Equity (45,890 Class A units) | 1/17/2018 | 45,890 | 33,605 | 0.1 | |||||||||||||||||||||
SSH Group Holdings, Inc. | Child Day Care Services | ||||||||||||||||||||||||
Senior Secured Loan (9) | 6.19% | (L +4.25%) | 7/26/2018 | 7/30/2025 | 94,800 | 94,611 | 95,452 | 0.3 | |||||||||||||||||
Senior Secured Loan | 10.19% | (L +8.25%) | 7/26/2018 | 7/30/2026 | 704,000 | 698,201 | 711,040 | 2.4 | |||||||||||||||||
798,800 | 792,812 | 806,492 | 2.7 | ||||||||||||||||||||||
STS Operating, Inc. | Industrial Machinery and Equipment Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 6.05% | (L +4.25%) | 5/15/2018 | 12/11/2024 | 104,907 | 104,709 | 104,821 | 0.4 | |||||||||||||||||
Senior Secured Loan | 9.80% | (L +8.00%) | 5/15/2018 | 4/30/2026 | 1,593,220 | 1,593,186 | 1,585,535 | 5.3 | |||||||||||||||||
1,698,127 | 1,697,895 | 1,690,356 | 5.7 | ||||||||||||||||||||||
The Escape Game, LLC | All other amusement and recreation industries | ||||||||||||||||||||||||
Senior Secured Loan | 8.80% | (L +7.00%) | 7/18/2019 | 3/31/2020 | 333,333 | 331,582 | 331,810 | 1.1 | |||||||||||||||||
Senior Secured Loan | 10.55% | (L +8.75%) | 12/22/2017 | 12/22/2022 | 500,000 | 497,770 | 498,106 | 1.7 | |||||||||||||||||
Senior Secured Loan (Delayed Draw) | �� | 10.55% | (L +8.75%) | 7/20/2018 | 12/22/2022 | 500,000 | 500,000 | 498,106 | 1.7 | ||||||||||||||||
1,333,333 | 1,329,352 | 1,328,022 | 4.5 | ||||||||||||||||||||||
Truck Hero, Inc. | Truck Trailer Manufacturing | ||||||||||||||||||||||||
Senior Secured Loan | 5.55% | (L +3.75%) | 5/30/2017 | 4/22/2024 | 15,990 | 15,890 | 15,653 | 0.1 | |||||||||||||||||
Senior Secured Loan | 10.05% | (L +8.25%) | 5/30/2017 | 4/21/2025 | 1,878,456 | 1,808,043 | 1,791,751 | 6.2 | |||||||||||||||||
1,894,446 | 1,823,933 | 1,807,404 | 6.3 | ||||||||||||||||||||||
TTG Healthcare, LLC | Diagnostic Imaging Centers | ||||||||||||||||||||||||
Senior Secured Loan | 10.71% | (L +9.00%) | 3/1/2019 | 3/1/2024 | 1,003,518 | 989,921 | 975,594 | 3.4 | |||||||||||||||||
Preferred Equity (191 units) (6) (14) | 3/1/2019 | 191,409 | 201,006 | 0.7 | |||||||||||||||||||||
1,003,518 | 1,181,330 | 1,176,600 | 4.1 |
16
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments
December 31, 2019
Portfolio Company (1) Investment Type (2) | Industry | Interest Rate (3) | Spread Above Index (3) | Initial Acquisition Date | Maturity | Principal Amount | Amortized Cost | Fair Value (4) | Percent of Net Assets | ||||||||||||||||
Wastebuilt Environmental Solutions, LLC. | Industrial Supplies Merchant Wholesalers | ||||||||||||||||||||||||
Senior Secured Loan | 10.69% | (L +8.75%) | 10/11/2018 | 10/11/2024 | $ | 1,500,000 | $ | 1,474,924 | $ | 1,410,917 | 4.8 | % | |||||||||||||
Total Investments | $ | 40,507,317 | $ | 40,770,129 | $ | 40,124,923 | 137.8 | % |
(1) Equity ownership may be held in shares or units of companies affiliated with the portfolio company. The Company's investments are generally classified as "restricted securities" as such term is defined under Rule 6-03(f) of Regulation S-X or Rule 144 of the Securities Act.
(2) All of the Company’s investments were qualifying assets under Section 55(a) of the 1940 Act as of the period end. Qualifying assets must represent at least 70% of the Company's assets, as defined under Section 55 of the 1940 Act, at the time of acquisition of any additional non-qualifying assets.
(3) Substantially all of the debt investments bear interest at rates determined by reference to LIBOR (L), generally between 1.7% and 2.1% at December 31, 2019, and which are reset monthly or quarterly. For all variable-rate investments the schedule presents the spread over LIBOR and the interest rate as of December 31, 2019. Unless otherwise noted, all investments with a stated PIK rate require interest payments with the issuance of additional securities as payment of the entire PIK provision.
(4) Unless otherwise noted with footnote 9, fair value was determined using significant unobservable inputs for all of the Company's investments and are considered Level 3 under GAAP. See Note 5 for further details.
(5) The Company has entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, it has agreed to receive its payment after the repayment of certain co‑lenders pursuant to a payment waterfall. The table below provides additional details as of December 31, 2019:
Portfolio Company | Reported Interest Rate | Interest Rate per Credit Agreement | Additional Interest per Annum | |||
Carolina Lubes, Inc. | 9.83% | 9.35% | 0.48% | |||
Chemical Resources Holdings, Inc. | 9.82% | 7.93% | 1.89% | |||
DRS Imaging Services, LLC | 11.21% | 9.94% | 1.27% | |||
Milrose Consultants, LLC | 8.14% | 7.44% | 0.70% | |||
OnSite Care, PLLC | 9.49% | 7.96% | 1.53% |
(6) Non-income producing.
(7) Subject to unfunded commitments. See Note 6 for further details.
(8) Investments pledged as collateral under the PWB Credit Facility.
(9) Fair value was determined by reference to observable inputs other than quoted prices in active markets and are considered Level 2 under GAAP. See Note 5 for further details.
17
Hancock Park Corporate Income, Inc.
Consolidated Schedule of Investments
December 31, 2019
(10) The interest rate on these investments contains a PIK provision, whereby the issuer has the option to make interest payments in cash or with the issuance of additional securities as payment of the entire PIK provision. The interest rate in the schedule represents the current interest rate in effect for these investments. The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed as of December 31, 2019:
Portfolio Company | Investment Type | Range of PIK Option | Range of Cash Option | Maximum PIK Rate Allowed | ||||
Eblens Holdings, Inc. | Subordinated Loan | 0% or 1.00% | 13.00% or 12.00% | 1.00% |
(11) Commitment fee on undrawn funds.
(12) Investment was on non-accrual status as of December 31, 2019, meaning the Company has ceased recognition of all or a portion of income on the investment.
See Note 4 for further details.
(14) All or portion of investment held by HPCI-MB, LLC, a wholly owned subsidiary subject to corporate income tax.
See Notes to Consolidated Financial Statements.
18
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 1. Organization
The Company is a Maryland corporation formed on December 8, 2015 as an externally managed, non-diversified, closed-end investment company. The Company has elected to be regulated as a BDC and as a RIC under Subchapter M of the Code.
The Company’s objective is to provide stockholders with current income and capital appreciation primarily through debt investments and, to a lesser extent, equity investments primarily in middle-market companies located principally in the United States. OFS Advisor, an affiliate of the Company and a registered investment adviser, manages the day-to-day operations of, and provides investment advisory services to, the Company.
In addition, OFS Advisor serves as the investment adviser to OFS Capital, a publicly traded BDC with an investment strategy similar to the Company. OFS Advisor also serves as the investment adviser to OCCI, a non-diversified, externally managed, closed-end management investment company that is registered as an investment company under the 1940 Act and primarily invests in the equity tranche of CLOs.
The Company intends to raise up to $200,000,000 through offering shares of its common stock to investors in a continuous offering in reliance on exemptions from the registration requirements of the Securities Act. In addition, the Company and OFS Advisor have entered into a dealer manager agreement with the Dealer Manager. Placement activities are conducted by the Dealer Manager and participating broker dealers who solicit subscriptions to purchase shares of the Company’s common stock. As of July 1, 2019, fees and expenses paid pursuant to the Dealer Manager Agreement are paid by the Company.
The Company may also make investments through HPCI-MB, a wholly owned subsidiary taxed under subchapter C of the Code that generally holds the equity investments of the Company that are taxed as pass-through entities.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of presentation: The accompanying interim financial statements of the Company and related financial information have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and pursuant to ASC Topic 946, Financial Services–Investment Companies, the requirements for reporting on Form 10-Q, and Articles 6, 10 and 12 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. However, in the opinion of management, the interim financial statements include all adjustments, consisting only of normal and recurring accruals and adjustments, necessary for fair presentation as of and for the periods presented. Certain amounts in the prior period financial statements have been reclassified to conform to the current year presentation. These financial statements and notes hereto should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10 K for the year ended December 31, 2019. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full year.
Significant Accounting Policies: The following information supplements the description of significant accounting policies contained in Note 2 to the Company's financial statements included in the Company's Annual Report on Form 10 K for the year ended December 31, 2019.
Use of estimates: The preparation of 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 significantly from those estimates.
Concentration of credit risk: Aside from its debt instruments, financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits at financial institutions. At various times during the year, the Company may exceed the federally insured limits. To mitigate this risk, the Company places cash deposits only with high credit quality institutions; management believes this risk of loss is minimal. The amount of loss due to credit risk from debt investments if borrowers fail to perform according to the terms of the contracts, and the collateral or other security for those instruments proved to be of no value to the Company, is equal to the Company's recorded investment in debt instruments and the unfunded loan commitments as disclosed in Note 6.
New accounting pronouncement issued: In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 840): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates (e.g., LIBOR) that are expected to be discontinued. ASU 2020-04 allows, among other things, certain contract modifications, such as those within the scope of Topic 310 on receivables, to be accounted as a continuation of the existing contract. This ASU was effective upon the issuance and its optional relief can be applied through December 31, 2022. The Company will consider this optional guidance prospectively, if applicable.
19
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 3. Related Party Transactions
Investment Advisory and Management Agreement: OFS Advisor manages the day-to-day operations of, and provides investment advisory services to, the Company pursuant to an Investment Advisory Agreement, which became effective on August 30, 2016, when the Company satisfied the Minimum Offering Requirement. Under the terms of the Investment Advisory Agreement, which are in accordance with the 1940 Act and subject to the overall supervision of the Company’s Board, OFS Advisor is responsible for sourcing potential investments, conducting research and diligence on potential investments and equity sponsors, analyzing investment opportunities, structuring investments, and monitoring investments and portfolio companies on an ongoing basis. OFS Advisor is a subsidiary of OFSAM and a registered investment advisor under the Advisers Act.
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other companies, including OFS Capital and OCCI.
OFS Advisor receives fees for providing services, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 1.25% and based on the average value of the Company’s total assets (other than cash but including assets purchased with borrowed amounts and assets owned by any consolidated entity) at the end of the two most recently completed calendar quarters, adjusted for any share issuances or repurchases during the quarter.
The incentive fee has two parts. The first part ("Income Incentive Fee") is calculated and payable quarterly in arrears based on the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees such as commitment, origination and sourcing, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies but excluding fees for providing managerial assistance) accrued during the calendar quarter, minus operating expenses for the quarter (including the base management fee, any expenses payable under the Administration Agreement and any interest expense and dividends paid on any outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest or dividend feature (such as OID, debt instruments with PIK interest, equity investments with accruing or PIK dividend and zero coupon securities), accrued income that the Company has not yet received in cash.
Pre-incentive fee net investment income is expressed as a rate of return on the value of the Company’s net assets (defined as total assets less indebtedness and before taking into account any incentive fees payable during the period) at the end of the immediately preceding calendar quarter. The incentive fee with respect to pre-incentive fee net income is 100.0% of the amount, if any, by which the pre-incentive fee net investment income for the immediately preceding calendar quarter exceeds a 1.75% (which is 7.0% annualized) “hurdle rate” but is less than 2.1875% (or 8.75% annually), referred to as the “catch-up” provision, and 20.0% of the amount of pre-incentive fee net investment income, if any, that exceeds 2.1875%. The “catch-up” is meant to provide OFS Advisor with 20.0% of the pre-incentive fee net investment income as if a hurdle rate did not apply if this pre-incentive fee net investment income exceeds 2.1875% in any calendar quarter.
Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Because of the structure of the incentive fee, it is possible that the Company may pay an incentive fee in a quarter in which the Company incurs a loss. For example, if the Company receives pre-incentive fee net investment income in excess of the quarterly minimum hurdle rate, the Company will pay the applicable incentive fee even if the Company has incurred a loss in that quarter due to realized and unrealized capital losses. The Company’s net investment income used to calculate this part of the incentive fee is also included in the amount of the Company’s gross assets used to calculate the base management fee. These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during such quarter.
The second part of the incentive fee (the “Capital Gain Fee”) will be determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and will equal 20.0% of the Company’s aggregate realized capital gains, if any, on a cumulative basis through the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation through the end of such year, less all previous amounts paid in respect of the Capital Gain Fee.
The Company accrues the Capital Gain Fee if, on a cumulative basis, the sum of net realized capital gains and (losses) plus net unrealized appreciation and (depreciation) is positive. If, on a cumulative basis, the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation) decreases during a period, the Company will reverse any excess Capital Gain Fee previously accrued such that the amount of Capital Gains Fee accrued is no more than 20% of the sum of net realized capital gains (losses) plus net unrealized appreciation (depreciation).
20
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
The Investment Advisory Agreement was originally approved for a period of two years from August 30, 2016 to August 30, 2018 and, unless terminated earlier as described below, will remain in effect from year-to-year upon annual approval by the Company’s Board or by the affirmative vote of the holders of a majority of the Company’s outstanding voting securities, and, in either case, if also approved by a majority of the Company’s directors who are not “interested persons” as defined in the 1940 Act. On April 2, 2020, the Board approved the continuation of the Investment Advisory Agreement for a twelve month period from August 30, 2020 to August 30, 2021. The Investment Advisory Agreement will automatically terminate in the event of its assignment, as defined in the 1940 Act, and may be terminated by the Company or OFS Advisor without penalty upon not less than 60 days written notice to the other. The holders of a majority of our outstanding voting securities may also terminate the Investment Advisory Agreement without penalty upon not less than 60 days written notice.
Administration Agreement: OFS Services furnishes the Company with office facilities and equipment, necessary software licenses and subscriptions, and clerical, bookkeeping and record keeping services at such facilities pursuant to the Administration Agreement. Under the Administration Agreement, OFS Services performs, or oversees the performance of, the Company’s required administrative services, which include being responsible for the financial records that the Company is required to maintain and preparing reports to its stockholders and all other reports and materials required to be filed with the SEC or any other regulatory authority. In addition, OFS Services assists the Company in determining and publishing its net asset value, oversees the preparation and filing of its tax returns and the printing and dissemination of reports to its stockholders, and generally oversees the payment of the Company’s expenses and the performance of administrative and professional services rendered to the Company by others. Under the Administration Agreement, OFS Services also provides managerial assistance on the Company’s behalf to those portfolio companies that have accepted the Company’s offer to provide such assistance. Payment under the Administration Agreement is equal to an amount based upon the Company’s allocable portion of OFS Services’ overhead in performing its obligations under the Administration Agreement, including, but not limited to, rent, information technology services and the Company’s allocable portion of the cost of its officers, including its chief executive officer, chief financial officer, chief compliance officer, chief accounting officer, and their respective staffs. To the extent that OFS Services outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis without profit to OFS Services. Amounts charged under the Administration Agreement exclude Contractual Issuer Expenses.
Expenses recognized for the three months ended March 31, 2020 and 2019, under agreements with OFS Advisor and OFS Services are presented below:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Base management fees | $ | 130,765 | $ | 92,722 | ||||
Incentive fees | 76,050 | 48,770 | ||||||
Administration fees | 186,617 | 141,874 |
Expense Limitation Agreements: OFS Advisor limits the Company's incurred expenses under two agreements: the Investment Advisory Agreement, which contains provisions limiting offering costs and Contractual Issuer Expenses; and an Expense Support Agreement, which limits all other operating expenses. Expense limitations provided under the Investment Advisory Agreement and Expense Support Agreement for the three months ended March 31, 2020 and 2019, are presented below:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net offering costs and Contractual Issuer Expenses limitations under Investment Advisory Agreement | $ | 82,473 | $ | 7,695 | ||||
Operating expense limitations under Expense Support Agreement | 334,160 | 272,547 | ||||||
Net expense limitations under agreements with OFS Advisor | $ | 416,633 | $ | 280,242 |
21
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
The Company is conditionally obligated to reimburse OFS Advisor for aggregate expense support provided of $4,227,611 and $4,167,383 at March 31, 2020 and December 31, 2019, respectively, as presented below:
March 31, 2020 | December 31, 2019 | |||||||
Unreimbursed costs under Investment Advisory Agreement: | ||||||||
Offering costs: | ||||||||
Unamortized as of period end | $ | 165,879 | $ | 167,776 | ||||
Amortized as of period end | 466,413 | 418,283 | ||||||
Contractual Issuer Expenses | 63,706 | 77,476 | ||||||
Total unreimbursed costs under Investment Advisory Agreement | 695,998 | 663,535 | ||||||
Unreimbursed operating expense support under Expense Support Agreement | 3,531,613 | 3,503,848 | ||||||
Total conditional reimbursement obligation under expense limitation agreements with OFS Advisor | $ | 4,227,611 | $ | 4,167,383 |
Offering Costs and Contractual Issuer Expense Limitations: The Company is conditionally liable for offering costs and Contractual Issuer Expenses that OFS Advisor and its affiliates have incurred on its behalf under the terms of the Investment Advisory Agreement. The Investment Advisory Agreement entitles OFS Advisor to receive up to 1.5% of the gross proceeds raised in the Offering until all reimbursable offering costs and Contractual Issuer Expenses paid by OFS Advisor and its affiliates have been recovered. Offering expenses and Contractual Issuer Expenses incurred by OFS Advisor or its affiliates will be eligible for reimbursement for three years from the date incurred. Unreimbursed offering costs and Contractual Issuer Expenses subject to conditional reimbursement as of March 31, 2020, are summarized below:
Period incurred | Unreimbursed Total | Expiration of reimbursement eligibility (1) | ||||
Three months ended June 30, 2017 | 35,369 | June 30, 2020 | ||||
Three months ended September 30, 2017 | 43,760 | September 30, 2020 | ||||
Three months ended December 31, 2017 | 79,120 | December 31, 2020 | ||||
Three months ended March 31, 2018 | 49,363 | March 31, 2021 | ||||
Three months ended June 30, 2018 | 50,109 | June 30, 20221 | ||||
Three months ended September 30, 2018 | 26,413 | September 30, 2021 | ||||
Three months ended December 31, 2018 | 23,452 | December 31, 2021 | ||||
Three months ended March 31, 2019 | 4,113 | March 31, 2022 | ||||
Three months ended June 30, 2019 | 137,749 | June 30, 2022 | ||||
Three months ended September 30, 2019 | 85,068 | September 30, 2022 | ||||
Three months ended December 31, 2019 | 78,506 | December 31, 2022 | ||||
Three months ended March 31, 2020 | 82,976 | March 31, 2023 | ||||
Total unreimbursed organization and offering costs, and Contractual Issuer Expenses | $ | 695,998 |
(1) Expenses are pooled monthly for the determination of their reimbursement expiration date. Therefore, the unreimbursed totals each consist of three monthly expense pools. The expiration of reimbursement eligibility occurs at each month-end within the quarterly periods presented above.
Expense Support Agreement: The Expense Support Agreement is designed to ensure no portion of the Company’s distribution to stockholders will be paid from its Offering proceeds, and provides for expense-reduction payments from OFS Advisor to the Company in any quarterly period in which the Company’s cumulative distributions to stockholders exceeds its cumulative distributable ordinary income and net realized gains ("Cumulative Taxable Income"). Cumulative distributions to stockholders may exceed Cumulative Taxable Income to the extent of cumulative tax-basis return-of-capital distributions received by the Company from its investments without resulting in an expense limitation payment from OFS Advisor. The Expense Support Agreement provides for reimbursement of these payments by the Company to OFS Advisor, however, such liability shall only accrue (i) to the extent they do not cause the then-current annualized year-to-date and quarterly "Other Operating Expense Ratio" (defined below) to exceed such ratios for the annual and quarterly periods, respectively, for which the Company will reimburse OFS Advisor as presented in the table below, and (ii) if the then-current annualized rate of distribution per share
22
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
equals or exceeds the annualized rate of distribution per share of the supported period for which the Company will reimburse OFS Advisor. The Other Operating Expense Ratio is defined as total operating expenses reported in the statement of operations excluding interest expense, management fees, incentive fees, organization cost, amortization of deferred offering costs, and Contractual Issuer Expenses as a percentage of net assets. OFS Advisor will not be entitled to reimbursement (i) if the Other Operating Expenses Ratio at the time of reimbursement, after consideration of the impact of reimbursement on such ratio, exceeds the Other Operating Expenses Ratio in effect at the time the expenses were reimbursed or (ii) if our distribution rate is lower than the distribution rate for the period the expenses will be reimbursed. Payments under the Expense Support Agreement will be eligible for reimbursement for three years from the date accrued. All reimbursement payments shall be applied to the earliest unreimbursed expense payments made by OFS Advisor to the Company within three years prior to the last business day of the quarter in which such reimbursement payment obligation is incurred.
Unreimbursed support for operating expenses provided under the Expense Support Agreement and subject to conditional reimbursement as of March 31, 2020, is summarized below:
Other Operating Expense Ratio | |||||||||||||
Supported period | Amount of expense limitation | Annualized for the quarter limitation was provided | Annual for year limitation was provided | Annualized rate of distribution per share (1) | Expiration of reimbursement eligibility | ||||||||
Three months ended June 30, 2017 | 283,883 | 19.0 | % | 18.1 | % | 7.0% | June 30, 2020 | ||||||
Three months ended September 30, 2017 | 314,987 | 10.7 | % | 18.1 | % | 7.0% | September 30, 2020 | ||||||
Three months ended December 31, 2017 | 316,379 | 8.1 | % | 18.1 | % | 7.0% | December 31, 2020 | ||||||
Three months ended March 31, 2018 | 369,270 | 10.1 | % | 7.2 | % | 7.0% | March 31, 2021 | ||||||
Three months ended June 30, 2018 | 320,732 | 8.2 | % | 7.2 | % | 7.0% | June 30, 2021 | ||||||
Three months ended September 30, 2018 | 275,339 | 6.9 | % | 7.2 | % | 7.0% | September 30, 2021 | ||||||
Three months ended December 31, 2018 | 188,188 | 5.3 | % | 7.2 | % | 7.0% | December 31, 2021 | ||||||
Three months ended March 31, 2019 | 272,547 | 6.1 | % | 5.5 | % | 7.0% | March 31, 2022 | ||||||
Three months ended June 30, 2019 | 238,847 | 5.7 | % | 5.5 | % | 7.0% | June 30, 2022 | ||||||
Three months ended September 30, 2019 | 231,737 | 5.1 | % | 5.5 | % | 7.1% | September 30, 2022 | ||||||
Three months ended December 31, 2019 | 385,544 | 4.9 | % | 5.5 | % | 7.2% | December 31, 2022 | ||||||
Three months ended March 31, 2020 | 334,160 | 5.9 | % | n/m(2) | 7.2% | March 31, 2023 | |||||||
Total unreimbursed operating expense limitations provided under Expense Support Agreement | $ | 3,531,613 |
(1) | The annualized rate of distributions per share is expressed as a percentage equal to the annualized distribution amount as of the end of the applicable period (which is calculated by annualizing the regular quarterly cash distribution per share as of such date without compounding), divided by our Offering price per share as of such date. |
(2) | Not meaningful. Annual Other Operating Expense Ratio upon which reimbursement is conditioned is based on the full-year results, and will not be determined until after December 31, 2020. |
Amounts Due to Adviser and Affiliates: Amounts due to adviser and affiliates of $225,097 and $107,024 reported in the consolidated statements of assets and liabilities as of March 31, 2020 and December 31, 2019, respectively, represents amounts payable under the Investment Advisory Agreement and Administration Agreement net of amounts receivable under the Expense Support Agreement.
23
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 4. Investments
As of March 31, 2020, the Company had loans to 34 portfolio companies, of which 98% were senior secured loans and 2% were subordinated loans, at fair value, as well as common and preferred equity investments in seven of these portfolio companies, while holding only equity in one portfolio company. At March 31, 2020, investments consisted of the following:
Percentage of Total | Percentage of Total | ||||||||||||||||||
Amortized Cost | Amortized Cost | Net Assets | Fair Value | Fair Value | Net Assets | ||||||||||||||
Senior secured debt investments (1) | $ | 43,638,854 | 95.3 | % | 163.1 | % | $ | 41,537,245 | 96.1 | % | 155.3 | % | |||||||
Subordinated debt investments | 1,480,219 | 3.2 | 5.5 | 917,178 | 2.1 | 3.4 | |||||||||||||
Preferred equity investments | 191,409 | 0.4 | 0.7 | 271,000 | 0.6 | 1.0 | |||||||||||||
Common equity investments | 497,130 | 1.1 | 1.9 | 516,910 | 1.2 | 1.9 | |||||||||||||
Total | $ | 45,807,612 | 100.0 | % | 171.2 | % | $ | 43,242,333 | 100.0 | % | 161.6 | % |
(1) Includes debt investments, typically referred to as unitranche, in which we have entered into contractual arrangements with co-lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. Amortized cost and fair value of these investments were $8,355,283 and $8,287,141, respectively.
At March 31, 2020, all of the Company’s investments were domiciled in the United States. Geographic composition is determined by the location of the corporate headquarters of the portfolio company. The industry compositions of the Company’s portfolio were as follows:
Percentage of Total | Percentage of Total | |||||||||||||||||||
Amortized Cost | Amortized Cost | Net Assets | Fair Value | Fair Value | Net Assets | |||||||||||||||
Administrative and Support and Waste Management and Remediation Services | ||||||||||||||||||||
Security Systems Services (except Locksmiths) | $ | 2,347,985 | 5.1 | % | 8.8 | % | $ | 2,213,080 | 5.1 | % | 8.3 | % | ||||||||
Arts, Entertainment, and Recreation | ||||||||||||||||||||
All Other Amusement and Recreation Industries | 1,496,190 | 3.3 | 5.6 | 1,455,404 | 3.4 | 5.4 | ||||||||||||||
Construction | ||||||||||||||||||||
Plumbing, Heating, and Air-Conditioning Contractors | 512,524 | 1.1 | 1.9 | 496,712 | 1.1 | 1.9 | ||||||||||||||
Finance and Insurance | ||||||||||||||||||||
Direct Health and Medical Insurance Carriers | 1,348,358 | 2.9 | 5.0 | 1,265,108 | 2.9 | 4.7 | ||||||||||||||
Insurance Agencies and Brokerages | 1,399,139 | 3.1 | 5.2 | 1,316,932 | 3.0 | 4.9 | ||||||||||||||
Health Care and Social Assistance | ||||||||||||||||||||
Child Day Care Services | 698,422 | 1.5 | 2.6 | 636,732 | 1.5 | 2.4 | ||||||||||||||
Diagnostic Imaging Centers | 1,182,144 | 2.6 | 4.4 | 1,249,024 | 2.9 | 4.7 | ||||||||||||||
Home Health Care Services | 2,183,426 | 4.8 | 8.2 | 2,157,185 | 5.0 | 8.1 | ||||||||||||||
Offices of Physicians, Mental Health Specialists | 2,031,664 | 4.4 | 7.6 | 1,937,809 | 4.5 | 7.2 | ||||||||||||||
Outpatient Mental Health and Substance Abuse Centers | 992,922 | 2.2 | 3.7 | 939,750 | 2.2 | 3.5 | ||||||||||||||
Information | ||||||||||||||||||||
Data Processing, Hosting, and Related Services | 1,200,813 | 2.6 | 4.5 | 1,225,917 | 2.8 | 4.6 | ||||||||||||||
Software Publishers | 3,305,840 | 7.3 | 12.4 | 3,056,085 | 7.1 | 11.4 |
24
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Percentage of Total | Percentage of Total | |||||||||||||||||||
Amortized Cost | Amortized Cost | Net Assets | Fair Value | Fair Value | Net Assets | |||||||||||||||
Manufacturing | ||||||||||||||||||||
Commercial Printing (except Screen and Books) | $ | 245,907 | 0.5 | % | 0.9 | % | $ | 222,990 | 0.5 | % | 0.8 | % | ||||||||
Custom Compounding of Purchased Resins | 1,410,387 | 3.1 | 5.3 | 1,384,768 | 3.2 | 5.2 | ||||||||||||||
Truck Trailer Manufacturing | 1,827,206 | 4.0 | 6.8 | 1,655,251 | 3.8 | 6.2 | ||||||||||||||
Unlaminated Plastics Profile Shape Manufacturing | 2,008,103 | 4.4 | 7.5 | 1,806,771 | 4.2 | 6.8 | ||||||||||||||
Other Services (except Public Administration) | ||||||||||||||||||||
Automotive Oil Change and Lubrication Shops | 551,366 | 1.2 | 2.1 | 550,547 | 1.3 | 2.1 | ||||||||||||||
Communication Equipment Repair and Maintenance | 1,510,786 | 3.3 | 5.6 | 1,411,000 | 3.3 | 5.3 | ||||||||||||||
Professional, Scientific, and Technical Services | ||||||||||||||||||||
Administrative Management and General Management Consulting Services | 3,027,722 | 6.6 | 11.3 | 2,984,692 | 6.9 | 11.1 | ||||||||||||||
Other Accounting Services | 2,289,160 | 5.0 | 8.6 | 2,289,160 | 5.3 | 8.5 | ||||||||||||||
Other Computer Related Services | 1,245,370 | 2.7 | 4.7 | 1,180,448 | 2.7 | 4.4 | ||||||||||||||
Public Administration | ||||||||||||||||||||
Other Justice, Public Order, and Safety Activities | 53,902 | 0.1 | 0.2 | 53,907 | 0.1 | 0.2 | ||||||||||||||
Retail Trade | ||||||||||||||||||||
Cosmetics, Beauty Supplies, and Perfume Stores | 1,983,465 | 4.3 | 7.4 | 1,906,962 | 4.4 | 7.1 | ||||||||||||||
Shoe Store | 510,578 | 1.1 | 1.9 | 480,447 | 1.1 | 1.8 | ||||||||||||||
Transportation and Warehousing | ||||||||||||||||||||
General Warehousing and Storage | 1,019,515 | 2.2 | 3.8 | 1,046,842 | 2.4 | 3.9 | ||||||||||||||
Wholesale Trade | ||||||||||||||||||||
Construction and Mining (except Oil Well) Machinery and Equipment Merchant Wholesalers | 2,017,856 | 4.4 | 7.5 | 2,030,012 | 4.7 | 7.5 | ||||||||||||||
Industrial Machinery and Equipment Merchant Wholesalers | 1,697,640 | 3.7 | 6.3 | 1,620,644 | 3.7 | 6.1 | ||||||||||||||
Industrial Supplies Merchant Wholesalers | 1,476,230 | 3.2 | 5.5 | 1,113,106 | 2.7 | 4.2 | ||||||||||||||
Motor Vehicle Parts (Used) Merchant Wholesalers | 3,225,851 | 7.1 | 12.1 | 3,091,317 | 7.1 | 11.5 | ||||||||||||||
Stationery and Office Supplies Merchant Wholesalers | 1,007,141 | 2.2 | 3.8 | 463,731 | 1.1 | 1.7 | ||||||||||||||
$ | 45,807,612 | 100.0 | % | 171.2 | % | $ | 43,242,333 | 100.0 | % | 161.5 | % |
25
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
As of December 31, 2019, the Company had loans to 33 portfolio companies, of which 96% were senior secured loans and 4% were subordinated loans, at fair value, as well as equity investments in five of these portfolio companies. The Company also held an equity investment in a portfolio company in which it did not hold a debt investment. At December 31, 2019, investments consisted of the following:
Percentage of Total | Percentage of Total | ||||||||||||||||||
Amortized Cost | Amortized Cost | Net Assets | Fair Value | Fair Value | Net Assets | ||||||||||||||
Senior secured debt investments (1) | $ | 38,648,951 | 94.8 | % | 132.7 | % | $ | 37,953,346 | 94.5 | % | 130.4 | % | |||||||
Subordinated debt investments | 1,478,811 | 3.6 | 5.1 | 1,384,896 | 3.5 | 4.8 | |||||||||||||
Preferred equity investments | 191,409 | 0.5 | 0.7 | 201,006 | 0.5 | 0.7 | |||||||||||||
Common equity investments | 450,958 | 1.1 | 1.5 | 585,675 | 1.5 | 2.0 | |||||||||||||
Total | $ | 40,770,129 | 100.0 | % | 140.0 | % | $ | 40,124,923 | 100.0 | % | 137.9 | % |
(1) Includes debt investments in which we have entered into contractual arrangements with co-lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co-lenders pursuant to a payment waterfall. Amortized cost and fair value of these investments were $6,067,017 and $6,038,539, respectively.
At December 31, 2019, all of the Company’s investments were domiciled in the United States. Geographic composition is determined by the location of the corporate headquarters of the portfolio company. The industry compositions of the Company’s portfolio were as follows:
Percentage of Total | Percentage of Total | |||||||||||||||||||
Amortized Cost | Amortized Cost | Net Assets | Fair Value | Fair Value | Net Assets | |||||||||||||||
Administrative and Support and Waste Management and Remediation Services | ||||||||||||||||||||
Security Systems Services (except Locksmiths) | $ | 1,856,192 | 4.6 | % | 6.4 | % | $ | 1,862,669 | 4.6 | % | 6.4 | % | ||||||||
Temporary Help Services | 905,329 | 2.2 | 3.1 | 897,210 | 2.2 | 3.1 | ||||||||||||||
Arts, Entertainment, and Recreation | ||||||||||||||||||||
All other amusement and recreation industries | 1,329,352 | 3.3 | 4.6 | 1,328,022 | 3.3 | 4.6 | ||||||||||||||
Construction | ||||||||||||||||||||
Plumbing, Heating, and Air-Conditioning Contractors | 510,467 | 1.3 | 1.8 | 580,538 | 1.4 | 2.0 | ||||||||||||||
Health Care and Social Assistance | ||||||||||||||||||||
Child Day Care Services | 792,812 | 1.9 | 2.7 | 806,492 | 2.0 | 2.8 | ||||||||||||||
Diagnostic Imaging Centers | 1,181,330 | 2.9 | 4.1 | 1,176,600 | 2.9 | 4.0 | ||||||||||||||
Home Health Care Services | 2,181,688 | 5.4 | 7.5 | 2,119,046 | 5.3 | 7.3 | ||||||||||||||
Offices of Physicians, Mental Health Specialists | 1,691,151 | 4.1 | 5.8 | 1,687,791 | 4.2 | 5.8 | ||||||||||||||
Outpatient Mental Health and Substance Abuse Centers | 992,562 | 2.4 | 3.4 | 1,000,000 | 2.5 | 3.4 | ||||||||||||||
Information | ||||||||||||||||||||
Data Processing, Hosting, and Related Services | 1,200,566 | 2.9 | 4.1 | 1,210,257 | 3.0 | 4.2 | ||||||||||||||
Software Publishers | 3,305,628 | 8.1 | 11.3 | 3,274,482 | 8.2 | 11.2 | ||||||||||||||
Finance and Insurance | ||||||||||||||||||||
Direct Health and Medical Insurance Carriers | 1,347,363 | 3.3 | 4.6 | 1,370,999 | 3.4 | 4.7 | ||||||||||||||
Insurance Agencies and Brokerages | 440,144 | 1.1 | 1.5 | 433,920 | 1.1 | 1.5 | ||||||||||||||
Manufacturing |
26
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Percentage of Total | Percentage of Total | |||||||||||||||||||
Amortized Cost | Amortized Cost | Net Assets | Fair Value | Fair Value | Net Assets | |||||||||||||||
Commercial Printing (except Screen and Books) | $ | 245,952 | 0.6 | % | 0.8 | % | $ | 237,890 | 0.6 | % | 0.8 | % | ||||||||
Custom Compounding of Purchased Resins | 1,409,541 | 3.5 | 4.8 | 1,480,944 | 3.7 | 5.1 | ||||||||||||||
Truck Trailer Manufacturing | 1,823,933 | 4.5 | 6.3 | 1,807,404 | 4.5 | 6.2 | ||||||||||||||
Unlaminated Plastics Profile Shape Manufacturing | 2,008,434 | 4.8 | 6.9 | 1,971,656 | 4.9 | 6.8 | ||||||||||||||
Other Services (except Public Administration) | ||||||||||||||||||||
Automotive Oil Change and Lubrication Shops | 555,017 | 1.4 | 1.9 | 563,102 | 1.4 | 1.9 | ||||||||||||||
Communication Equipment Repair and Maintenance | 1,511,250 | 3.7 | 5.2 | 1,511,250 | 3.8 | 5.2 | ||||||||||||||
Professional, Scientific, and Technical Services | ||||||||||||||||||||
Administrative Management and General Management Consulting Services | 3,026,099 | 7.4 | 10.4 | 3,025,561 | 7.6 | 10.4 | ||||||||||||||
Other Computer Related Services | 1,216,104 | 3.0 | 4.2 | 1,223,611 | 3.0 | 4.2 | ||||||||||||||
Public Administration | ||||||||||||||||||||
Other Justice, Public Order, and Safety Activities | 577,810 | 1.4 | 2.0 | 32,579 | 0.1 | 0.1 | ||||||||||||||
Retail Trade | ||||||||||||||||||||
Cosmetics, Beauty Supplies, and Perfume Stores | 1,982,998 | 4.9 | 6.8 | 1,982,998 | 4.9 | 6.8 | ||||||||||||||
Shoe Store | 509,170 | 1.2 | 1.7 | 521,919 | 1.3 | 1.8 | ||||||||||||||
Transportation and Warehousing | ||||||||||||||||||||
General Warehousing and Storage | 1,019,049 | 2.5 | 3.5 | 1,036,579 | 2.6 | 3.6 | ||||||||||||||
Wholesale Trade | ||||||||||||||||||||
Industrial Machinery and Equipment Merchant Wholesalers | 1,697,896 | 4.2 | 5.8 | 1,690,356 | 4.2 | 5.8 | ||||||||||||||
Industrial Supplies Merchant Wholesalers | 1,474,924 | 3.6 | 5.1 | 1,410,917 | 3.5 | 4.8 | ||||||||||||||
Motor Vehicle Parts (Used) Merchant Wholesalers | 2,970,229 | 7.3 | 10.2 | 2,970,229 | 7.5 | 10.2 | ||||||||||||||
Stationery and Office Supplies Merchant Wholesalers | 1,007,141 | 2.5 | 3.5 | 909,902 | 2.3 | 3.1 | ||||||||||||||
$ | 40,770,129 | 100.0 | % | 140.0 | % | $ | 40,124,923 | 100.0 | % | 137.8 | % |
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. At March 31, 2020, the aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $1,007,141 and $463,731, respectively, and $577,810 and $32,579 at December 31, 2019, respectively.
On March 27, 2020, the Company's debt investments in Constellis Holdings, LLC were restructured. The Company converted its non-accrual debt investments for two new debt investments and 1,362 common shares of equity. The cost and fair value of debt investments received were $6,174 and $6,172, respectively, and the cost and fair value of the common shares received were $46,403 and $46,410, respectively. For the three months ended March 31, 2020, the Company recognized a realized loss of $526,444 on the restructuring, which was fully recognized as an unrealized loss as of December 31, 2019.
27
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 5. Fair Value of Financial Instruments
The Company’s investments are valued as determined by the Company's Board. These fair values are determined in accordance with a documented valuation policy and a consistently applied valuation process.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair values are determined with models or other valuation techniques, valuation inputs, and assumptions market participants would use in pricing an asset or liability. Valuation inputs are organized in a hierarchy that gives the highest priority to prices for identical assets or liabilities quoted in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of inputs in the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.
Level 2: Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified term, a Level 2 input must be observable for substantially the full term of the asset or liability. Level 2 inputs include: (i) quoted prices for similar assets or liabilities in active markets, (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, (iii) inputs other than quoted prices that are observable for the asset or liability, and (iv) inputs that are derived principally from or corroborated by observable market data.
Level 3: Unobservable inputs for the asset or liability, and situations where there is little, if any, market activity for the asset or liability at the measurement date.
The inputs into the determination of fair value are based upon the best information under the circumstances and may require significant judgment or estimation by management. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The Company generally categorizes its investment portfolio into Level 2 and Level 3 of the hierarchy.
The Company assesses the levels of the investments at each measurement date, and transfers between levels are recognized on the measurement date. The Company observed significant declines in market liquidity ascribed to COVID-19 that disqualified certain NBIP as Level 2 inputs. A senior security with a fair value of $12,297 was transfered from Level 3 to Level 2, and senior securities with a fair value of $3,125,313 were transferred from Level 2 to Level 3 during the three months ended March 31, 2020. There were no transfers among Level 1, 2 and 3 during the three months ended March 31, 2019.
Due to the inherent uncertainty of determining the fair value of Level 3 investments, the fair value of the investments may differ significantly from the values that would have been used had a ready market or observable inputs existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions, or otherwise are less liquid than publicly traded instruments. If the Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company might realize significantly less than the value at which such investment had previously been recorded. The Company’s investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded.
The following tables present the Company's investment portfolio measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019:
Security | Level 1 | Level 2 | Level 3 | Fair Value at March 31, 2020 | ||||||||||||
Debt investments | $ | — | $ | 125,896 | $ | 42,328,527 | $ | 42,454,423 | ||||||||
Equity investments | — | — | 787,910 | 787,910 | ||||||||||||
$ | — | $ | 125,896 | $ | 43,116,437 | $ | 43,242,333 |
Security | Level 1 | Level 2 | Level 3 | Fair Value at December 31, 2019 | ||||||||||||
Debt investments | $ | — | $ | 3,360,575 | $ | 35,977,667 | $ | 39,338,242 | ||||||||
Equity investments | — | — | 786,681 | 786,681 | ||||||||||||
$ | — | $ | 3,360,575 | $ | 36,764,348 | $ | 40,124,923 |
28
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
The following tables provide quantitative information about valuation techniques and the Company’s significant inputs to the Company’s Level 3 fair value measurements as of March 31, 2020 and December 31, 2019. In addition to the techniques and inputs noted in the tables below, according to the Company’s valuation policy, the Company may also use other valuation techniques and methodologies when determining the Company’s fair value measurements. The tables below provide information on the significant Level 3 inputs as they relate to the Company’s fair value measurements.
Fair Value at March 31, 2020 | Valuation techniques | Unobservable input | Range (Weighted average) | ||||||
Debt investments: | |||||||||
Senior secured | $ | 36,039,163 | Discounted cash flow | Discount rates | 5.02% - 14.86% (10.88%) | ||||
Senior secured | 6,172 | Market approach | EBITDA multiples | 9.61x - 9.61x (9.61x) | |||||
Senior secured | 5,366,014 | Market approach | Transaction Price | ||||||
Subordinated | 453,447 | Discounted cash flow | Discount rates | 16.18% - 16.18% (16.18%) | |||||
Subordinated | 463,731 | Market approach | EBITDA multiples | 6.50x - 6.50x (6.50x) | |||||
Equity investments: | |||||||||
Preferred equity | 271,000 | Market approach | EBITDA multiples | 7.00x - 7.00x (7.00x) | |||||
Common equity and warrants | 516,910 | Market approach | EBITDA multiples | 3.25x - 10.75x (6.20x) | |||||
$ | 43,116,437 |
Fair Value at December 31, 2019 | Valuation techniques | Unobservable input | Range (Weighted average) | ||||||
Debt investments: | |||||||||
Senior secured | $ | 31,600,042 | Discounted cash flow | Discount rates | 5.64% - 35.00% (10.53%) | ||||
Senior secured | 22,500 | Market approach | EBITDA multiples | 8.09x - 8.09x (8.09x) | |||||
Senior secured | 2,970,229 | Market approach | Transaction Price | ||||||
Subordinated | 1,384,896 | Discounted cash flow | Discount rates | 13.83% - 18.86% (17.14%) | |||||
Equity investments: | |||||||||
Preferred equity | 201,006 | Market approach | EBITDA multiples | 9.02x - 9.02x (9.02x) | |||||
Common equity | 585,675 | Market approach | EBITDA multiples | 4.50x - 10.75x (6.35x) | |||||
$ | 36,764,348 |
Averages in the preceding two tables were weighted by the fair value of the related instruments.
Changes in market credit spreads or events impacting the credit quality of the underlying portfolio company (both of which could impact the discount rate), among other things, could have a significant impact on debt fair value. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
29
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
The following tables present changes in the investment measured at fair value using Level 3 inputs for the three months ended March 31, 2020 and 2019:
Senior Secured Debt Investments | Subordinated Debt Investments | Preferred Equity | Common Equity | Total | |||||||||||||||
Level 3 assets, January 1, 2020 | $ | 34,592,771 | $ | 1,384,896 | $ | 201,006 | $ | 585,675 | $ | 36,764,348 | |||||||||
Net unrealized appreciation (depreciation) on investments | (1,325,847 | ) | (469,126 | ) | 69,994 | (115,168 | ) | (1,840,147 | ) | ||||||||||
Net realized loss on investments | (573,849 | ) | — | — | — | (573,849 | ) | ||||||||||||
Amortization of Net Loan Fees | 14,471 | 209 | — | — | 14,680 | ||||||||||||||
Paid-in-kind interest income | 1,633 | 1,199 | — | — | 2,832 | ||||||||||||||
Proceeds from principal payments on portfolio investments | (2,601,786 | ) | — | — | — | (2,601,786 | ) | ||||||||||||
Sale of portfolio investments | (800,983 | ) | — | — | — | (800,983 | ) | ||||||||||||
Purchase of portfolio investments | 9,038,326 | — | — | — | 9,038,326 | ||||||||||||||
Conversion from debt investment to equity investment (Note 4) | (46,403 | ) | — | — | 46,403 | — | |||||||||||||
Transfers out of Level 3 | (12,297 | ) | — | — | — | (12,297 | ) | ||||||||||||
Transfers into Level 3 | 3,125,313 | — | — | — | 3,125,313 | ||||||||||||||
Level 3 assets, March 31, 2020 | $ | 41,411,349 | $ | 917,178 | $ | 271,000 | $ | 516,910 | $ | 43,116,437 |
Senior Secured Debt Investments | Subordinated Debt Investments | Preferred Equity | Common Equity | Total | |||||||||||||||
Level 3 assets, January 1, 2019 | $ | 26,391,677 | $ | 1,450,840 | $ | — | $ | 258,984 | $ | 28,101,501 | |||||||||
Net unrealized appreciation on investments | 395,177 | 17,455 | — | 110,016 | 522,648 | ||||||||||||||
Net realized gain on investments | 2,016 | — | — | — | 2,016 | ||||||||||||||
Amortization of Net Loan Fees | 4,085 | 1,104 | — | — | 5,189 | ||||||||||||||
Paid-in-kind interest and dividend income | — | 3,641 | — | — | 3,641 | ||||||||||||||
Proceeds from principal payments on portfolio investments | (1,084,641 | ) | — | — | — | (1,084,641 | ) | ||||||||||||
Sale or redemption of portfolio investments | (1,121,786 | ) | — | — | — | (1,121,786 | ) | ||||||||||||
Purchase of portfolio investments | 4,278,515 | — | 191,409 | 166,469 | 4,636,393 | ||||||||||||||
Level 3 assets, March 31, 2019 | $ | 28,865,043 | $ | 1,473,040 | $ | 191,409 | $ | 535,469 | $ | 31,064,961 |
The net unrealized appreciation (depreciation) reported in the Company’s consolidated statements of operations for the three months ended March 31, 2020 and 2019, attributable to the Company’s assets still held at those respective period ends was as follows:
Period ended March 31, | |||||||
2020 | 2019 | ||||||
Senior secured debt investments | $ | (1,958,512 | ) | $ | 380,419 | ||
Subordinated debt investments | (469,126 | ) | 17,455 | ||||
Preferred equity | 69,994 | — | |||||
Common equity | (114,937 | ) | 110,016 | ||||
Net unrealized appreciation (depreciation) on investments held | $ | (2,472,581 | ) | $ | 507,890 |
30
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Other Financial Assets and Liabilities
GAAP requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments, such as cash, receivables and payables, approximate the fair value of such items due to the short maturity of such instruments. The PWB Credit Facility is a variable rate instrument and fair value approximates book value as of March 31, 2020 and December 31, 2019.
The following tables present the fair value measurements of the Company's debt and indicate the fair value hierarchy of the significant unobservable inputs utilized by the Company to determine such fair values as of March 31, 2020 and December 31, 2019:
March 31, 2020 | |||||||||||||||
Description | Level 1 | Level 2 | Level 3 (1) | Total | |||||||||||
PWB Credit Facility | $ | — | $ | — | $ | 1,300,000 | $ | 1,300,000 | |||||||
Unsecured Note | — | — | 13,497,742 | 13,497,742 | |||||||||||
Total debt, at fair value | $ | — | $ | — | $ | 14,797,742 | $ | 14,797,742 |
December 31, 2019 | |||||||||||||||
Description | Level 1 | Level 2 | Level 3 (1) | Total | |||||||||||
PWB Credit Facility | $ | — | $ | — | $ | — | $ | — | |||||||
Unsecured Note | — | — | 14,641,555 | 14,641,555 | |||||||||||
Total debt, at fair value | $ | — | $ | — | $ | 14,641,555 | $ | 14,641,555 |
(1) For Level 3 measurements, fair value is estimated by discounting remaining payments using current market rates for similar instruments at the measurement date and considering such factors as the legal maturity date.
The following are the carrying values and fair values of the Company’s debt as of March 31, 2020 and December 31, 2019:
As of March 31, 2020 | As of December 31, 2019 | ||||||||||||||
Description | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||
PWB Credit Facility | $ | 1,300,000 | $ | 1,300,000 | $ | — | $ | — | |||||||
Unsecured Note | 14,711,958 | 13,497,742 | 14,696,550 | 14,641,555 | |||||||||||
Total debt, at fair value | $ | 16,011,958 | $ | 14,797,742 | $ | 14,696,550 | $ | 14,641,555 |
The information presented should not be interpreted as an estimate of the fair value of the entire Company since fair value measurements are only required for a portion of the Company’s assets and liabilities. Due to the wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.
Note 6. Commitments and Contingencies
The Company has the following unfunded commitments to portfolio companies as of March 31, 2020 and December 31, 2019, respectively:
Name of Portfolio Company | Investment Type | March 31, 2020 | December 31, 2019 | |||||||
A&A Transfer, LLC | Senior Secured Loan (Revolver) | $ | 106,787 | $ | — | |||||
Carolina Lubes, Inc. | Senior Secured Loan (Revolver) | 80,357 | 80,357 | |||||||
Inergex Holdings, LLC | Senior Secured Loan (Revolver) | 31,250 | 62,500 | |||||||
$ | 218,394 | $ | 142,857 |
From time to time, the Company is involved in legal proceedings in the normal course of its business. Although the outcome of such litigation cannot be predicted with any certainty, management is of the opinion, based on the advice of legal counsel, that final disposition of any litigation should not have a material adverse effect on the financial position of the Company as of March 31, 2020 and December 31, 2019, respectively.
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Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnification. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not occurred. The Company believes the risk of any material obligation under these indemnifications to be low.
Note 7. Borrowings
PWB Credit Facility: The Company has up to $10.0 million available credit under its PWB Credit Facility, maturing February 28, 2021, of which $1.3 million was drawn as of March 31, 2020. The effective interest rate on the PWB Credit Facility was 5.85% at March 31, 2020. Maximum availability under the PWB Credit Facility as of March 31, 2020 was $8.7 million based on the stated advance rate of 35% of the borrowing base. All investments are pledged as collateral under the PWB Credit Facility.
Unsecured Note: As of March 31, 2020, the Company's Unsecured Note had an aggregate outstanding principal of $15.0 million. The Unsecured Note has a fixed interest rate of 6.50% and is due on November 27, 2024. The effective interest rate on the Unsecured Note was 6.92% at March 31, 2020.
The Unsecured Note contains customary terms and conditions for unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of the Company’s status as a business development company within the meaning of the 1940 Act, and minimum asset coverage ratio. The Note Purchase Agreement also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, certain judgements and orders, and certain events of bankruptcy.
The Company's interest expense, average outstanding borrowing and weighted average interest expense on the Company's debt are presented below:
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
PWB Credit Facility | $ | 41,434 | $ | 95,349 | |||
Unsecured Note | 259,158 | — | |||||
Total interest expense (1) | $ | 300,592 | $ | 95,349 | |||
Average dollar borrowings | $ | 16,686,813 | $ | 4,636,667 | |||
Weighted average interest rate | 6.84 | % | 8.34 | % |
(1) Interest expense is inclusive of interest on the outstanding balance, commitment fees on undrawn amounts, and the amortization of deferred debt issuance costs.
Note 8. Federal Income Tax
The Company has elected to be taxed as a RIC under Subchapter M of the Code. The determination of the tax attributes of the Company's distributions is made annually as of the end of its fiscal year based on its ICTI and distributions for the full year.
The tax-basis of portfolio investments and net unrealized appreciation (depreciation) on investments did not materially differ from their GAAP basis as of March 31, 2020 and December 31, 2019, respectively.
For further information, see the Company's Annual Report on Form 10-K for the year ended December 31, 2019.
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Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 9. Financial Highlights
The following is a schedule of financial highlights for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Per share operating performance: | |||||||
Net asset value per share at beginning of period | $ | 13.00 | $ | 13.00 | |||
Net investment income (6) | 0.26 | 0.25 | |||||
Net realized loss on non-control/non-affiliate investments (6) | (0.26 | ) | — | ||||
Net unrealized appreciation (depreciation) on non-control/non-affiliate investments (6) | (0.85 | ) | 0.28 | ||||
Total from investment operations | (0.85 | ) | 0.53 | ||||
Distributions (1) | (0.26 | ) | (0.26 | ) | |||
Issuance of common stock (2) (6) | — | 0.01 | |||||
Net asset value per share at end of period | $ | 11.89 | $ | 13.28 | |||
Total return based on net asset value (3) | (6.5 | )% | 4.2 | % | |||
Shares outstanding at end of period | 2,250,747 | 1,939,743 | |||||
Weighted average shares outstanding | 2,245,143 | 1,868,883 | |||||
Ratio/Supplemental Data | |||||||
Average net asset value (4) | $ | 27,939,037 | $ | 24,695,962 | |||
Net asset value at end of period | $ | 26,757,567 | $ | 25,754,037 | |||
Net investment income | $ | 586,860 | $ | 462,431 | |||
Ratio of total net operating expenses to average net assets (5) | 8.4 | % | 5.8 | % | |||
Ratio of net investment income to average net assets (5) | 8.4 | % | 7.5 | % | |||
Portfolio turnover (7) | 8.4 | % | 7.5 | % |
(1) | The per share data for distributions is the actual amount of distributions declared per share during the period. The determination of the tax attributes of the Company’s distributions is made annually as of the end of its fiscal year based upon its ICTI for the full year and distributions paid for the full year. The Company anticipates its distributions to be comprised 100% from net investment income. |
(2) | The issuance of common stock on a per share basis reflects the incremental net asset value change as a result of the issuance of shares of common stock in the Company’s continuous public offering and the dilutive or anti-dilutive impact from significant changes in weighted-average shares outstanding during the period. |
(3) | Calculated as ending net asset value less beginning net asset value, adjusting for distributions reinvested at the Company’s most recent quarter-end net asset value prior to the respective payment date of the distributions. |
(4) | Based on net asset values as the end of the indicated and preceding calendar quarter. |
(5) | Annualized. |
(6) | Calculated on the average share method. |
(7) | Portfolio turnover rate is calculated using the lesser of period-to-date sales and principal payments or period-to-date purchases over the average of the invested assets at fair value. |
33
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 10. Capital Transactions
Common stock transactions
Below is a summary of transactions with respect to shares of the Company’s common stock issued or subscribed in the Offering during the three months ended March 31, 2020 and 2019:
Three Months Ended March 31, | ||||||||||||||
2020 | 2019 | |||||||||||||
Shares | Amount | Shares | Amount | |||||||||||
Gross proceeds from the Offering | 10,973 | $ | 160,000 | 120,944 | $ | 1,684,500 | ||||||||
Commissions and dealer manager fees | — | (15,800 | ) | — | (102,475 | ) | ||||||||
Dealer manager fees paid by OFS Advisor | — | — | — | 50,535 | ||||||||||
Net proceeds to the Company | 10,973 | $ | 144,200 | 120,944 | $ | 1,632,560 |
From May 19, 2017 through June 30, 2019, OFS Advisor paid the dealer manager fee on sales of shares of our common stock in the Offering. Payments of dealer manager fees by OFS Advisor were not subject to reimbursement by the Company. We have agreed to pay the dealer manager fees on sales of shares of our common stock in the Offering subsequent to June 30, 2019.
Distributions
The following table reflects the cash distributions per share that the Company declared on its common stock during the three months ended March 31, 2020 and 2019. Stockholders of record as of each respective record date were entitled to receive the distribution.
Date Declared | Record Dates | Payment Date | Monthly Per Share Amount | Cash Distribution | ||||||||
Three Months Ended March 31, 2019 | ||||||||||||
January 29, 2019 | January 29, 2019, February 26, 2019 and March 27, 2019 | April 15, 2019 | $ | 0.0875 | $ | 489,716 | ||||||
Three Months Ended March 31, 2020 | ||||||||||||
January 29, 2020 | January 29, 2020, February 26, 2020 and March 27, 2020 | April 15, 2020 | $ | 0.0875 | $ | 589,261 |
(1) The quarterly per share distribution amount was $0.2625 for the three months ended March 31, 2020 and 2019, respectively.
The above distributions were funded, in part, through the reimbursement of certain operating expenses by OFS Advisor under the Expense Support Agreement. The Expense Support Agreement is designed to ensure no portion of the Company's distribution to stockholders will be paid from Offering proceeds, and will provide for expense reduction payments to the Company in any quarterly period in which the Company's cumulative distributions to stockholders exceeds the Company's cumulative ICTI and net realized gains. The Expense Support Agreement may be terminated by OFS Advisor, without payment of any penalty, with or without notice to the Company.
Repurchases of Shares
The following table summarizes the common stock repurchases by the Company as of March 31, 2020:
Number of Shares | Amount | ||||||
November 6, 2018 through December 31, 2018 | 18,425 | $ | 243,030 | ||||
January 1, 2019 through April 5, 2019 (1) | 7,407 | 98,296 | |||||
April 6, 2019 through June 30, 2019 | 9,029 | 119,821 | |||||
July 1, 2019 through September 30, 2019 | 7,407 | 97,111 | |||||
October 1, 2019 through December 31, 2019 | 15,597 | 204,317 | |||||
January 1, 2020 through April 3, 2020 (2) | 32,622 | 364,383 |
(1) The Company's February 11, 2019 tender offer that was originally scheduled to end on March 27, 2019, was amended to extend the offer period to April 5, 2019.
(2) The Company's February 21, 2020 tender offer that was originally schedule to end on March 27, 2020, was amended to extend the offer period to April 3, 2020.
All repurchased shares were retired upon acquisition.
34
Hancock Park Corporate Income, Inc.
Notes to Consolidated Financial Statements
Note 11. Subsequent Events Not Disclosed Elsewhere
Subsequent to March 31, 2020, the Company sold an additional 19,891 common shares for additional net proceeds of $246,300.
On April 28, 2020, the Board declared a distribution of $0.0825 per common share, which represents a 7.2% distribution yield, payable on July 15, 2020, to stockholders of record on April 28, 2020.
On May 11, 2020, the Board approved a tender offer, commencing on May 29, 2020, to purchase 2.5% of the weighted average number of shares of the outstanding Common Stock for the trailing 12-month period ending March 31, 2020.
COVID-19
The Company evaluated events subsequent to March 31, 2020 through May 14, 2020. On March 11, 2020, the World Health Organization declared the novel coronavirus as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to the COVID-19 pandemic. The outbreak of the COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown which may be protracted. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of the Company’s portfolio companies, the Company’s business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Further, the operational and financial performance of the portfolio companies in which the Company makes investments have been, and may continue to be, significantly impacted by the COVID-19 pandemic, which in turn has, and may continue to have, an impact the valuation of the Company’s investments.
Accordingly, the Company cannot predict the full extent to which its business, financial condition, results of operations and cash flows will be affected at this time. The potential impact to the Company’s results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond the Company’s control.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. For additional overview information on the Company, see "Item 1. Business" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Overview
Key performance metrics are presented below:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net investment income per common share | $ | 0.26 | $ | 0.25 | ||||
Net increase (decrease) in net assets resulting from operations per common share | $ | (0.85 | ) | $ | 0.52 | |||
Distributions declared per common share | $ | 0.26 | $ | 0.26 | ||||
At March 31, 2020 | At December 31, 2019 | |||||||
Net asset value per common share | $ | 11.89 | $ | 13.00 |
Our portfolio experienced net losses of $2,504,738, or $1.12 per share, during the three months ended March 31, 2020, principally as a result of the economic uncertainty caused by the COVID-19 pandemic and related state-mandated social distancing measures. The fair value of the portfolio declined $1,920,072 in the first quarter primarily as a result of the immediate adverse economic effects of the COVID-19 pandemic on market conditions and the overall economy through March 31, 2020, and the related uncertainty regarding its future impact, including, but not limited to, the related declines in quoted loan prices, increases in underlying market credit spreads and company-specific negative impacts on past and expected future operating performance. Additionally, we realized a loss of $526,444 upon the restructuring of our debt investment in Constellis Holdings, LLC, which had unrealized depreciation of $545,231 as of December 31, 2019, and therefore positively impacted the current quarter net loss by $18,787.
Net investment income per share increased $0.01 from the corresponding quarter in the prior year. Weighted average yield on debt for the three months ended March 31, 2020, declined to 9.21% from 10.09% in the first quarter ending March 31, 2019, however, our weighted average interest costs decreased to 6.84% from 8.34%. During the quarter, our investment in the subordinated debt of Online Tech Stores, LLC was placed on non-accrual status resulting in a decrease of interest income of approximately $34,816.
Since OFS Advisor implemented its business continuity plan in mid-March, the entire team has effectively transitioned to remote work and we are currently capable of maintaining our normal functionality to complete our operational requirements.
We are actively monitoring our portfolio companies throughout this period of economic uncertainty including assessing our portfolio companies' operational and liquidity outlook. During the quarter, portfolio companies drew down credit commitments of $206,150. As of March 31, 2020, we have unfunded commitments of $218,394. In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which, among other things, provides eligible companies with up to $10 million in 100% SBA-guaranteed forgivable Paycheck Protection Program ("PPP") loans was signed into law. As of May 14, 2020, eleven of our portfolio companies, for which we had investment exposure totaling approximately $13 million at cost, had secured approximately $32 million in PPP loans from the SBA. Also 94% of our performing loans as of December 31, 2019 satisfied their first quarter 2020 interest payments. We believe new loan activity in the market in which we operate has slowed and we have observed a decrease in origination and underwriting activity. We have not originated a portfolio company investment since March 16, 2020.
At March 31, 2020, our asset coverage ratio was 264% and we remained in compliance with all applicable financial covenant thresholds under our outstanding debt and our minimum asset coverage requirements under the 1940 Act. As of March 31, 2020, we had available borrowings of $8.7 million under our PWB Credit Facility. Based on fair values and equity capital at March 31, 2020, we could access our entire availability under the PWB Credit Facility and have an asset coverage ratio of 207%. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and selectively deploy capital in new investment opportunities in this challenging environment.
On April 28, 2020, our Board declared a distribution of $0.0825 per common share, payable on July 15, 2020, to stockholders of record on April 28, 2020.
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We cannot predict the full impact of the COVID-19 pandemic, including its duration in the United States and worldwide and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will negatively affect our portfolio companies’ operating results or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and possibly default on their financial obligations to us and their other capital providers. We also expect that some of our portfolio companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company.
We are also subject to financial risks, including changes in market interest rates. As of March 31, 2020, approximately $44 million (principal amount) of our debt portfolio investments bore interest at variable rates, which generally are LIBOR-based (or based on an equivalent applicable currency rate), and many of which are subject to certain floors. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on any portfolio investments, a decrease in our operating expenses, including with respect to our income incentive fee, or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR.
We will continue to monitor the rapidly evolving situation relating to the COVID-19 pandemic and guidance from U.S. and international authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of the COVID-19 pandemic on our financial condition, results of operations or cash flows in the future. However, to the extent our portfolio companies continue to be adversely impacted by the COVID-19 pandemic, our future net investment income, financial condition, results of operations and the fair value of our portfolio investments may be materially adversely impacted.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
• | The Investment Advisory Agreement with OFS Advisor to manage our operating and investment activities. Under the Investment Advisory Agreement we have agreed to pay OFS Advisor an annual base management fee based on the average value of our total assets (other than cash but including assets purchased with borrowed amounts and including assets owned by any consolidated entity) as well as an incentive fee based on our investment performance. See "Item 1. Financial Statements –– Notes to Financial Statements – Note 3." |
• | The Administration Agreement with OFS Services, an affiliate of OFS Advisor, to provide us with the office facilities and administrative services necessary to conduct our operations. See "Item 1. Financial Statements – Notes to Financial Statements – Note 3." |
• | Expense Limitation Agreements: OFS Advisor limits the Company's incurred expenses under two agreements: (1) the Investment Advisory Agreement, which contains provisions limiting organization and offering costs, and Contractual Issuer Expenses; and (2) an Expense Support Agreement, which limits all other operating expenses. Both agreements contain conditions under which we may become obligated to reimburse OFS Advisor for expense limitations provided thereunder. See "Item 1. Financial Statements – Notes to Financial Statements – Note 3." |
OFS Advisor’s services under the Investment Advisory Agreement are not exclusive to us and OFS Advisor is free to furnish similar services to other entities, including other BDCs affiliated with OFS Advisor, so long as its services to us are not impaired. OFS Advisor also serves as the investment adviser to CLO funds and other assets, including OFS Capital and OCCI. OFS Advisor provides sub-advisory services to CMFT Securities Investments, LLC, a wholly owned subsidiary of CIM Real Estate Finance Trust, Inc., a corporation that qualifies as a real estate investment trust. Additionally, OFS Advisor expects to provide sub-advisory services to CIM Real Assets & Credit Fund, a newly organized externally managed registered investment company that intends to operate as an interval fund that expects to invest primarily in a combination of real estate, credit and related investments.
The 1940 Act generally prohibits BDCs from making certain negotiated co-investments with certain affiliates absent an order from the SEC permitting the BDC to do so. On October 12, 2016, we received the Order from the SEC to permit us to co-invest in portfolio companies with certain BDCs, registered investment companies and private funds managed by OFS
37
Advisor, or any adviser that controls, is controlled by, or is under common control with, OFS Adviser and is registered as an investment adviser under the Advisers Act, in a manner consistent with our investment strategy as well as applicable law, including the terms and conditions of the Order. Pursuant to the Order, we are generally permitted to participate in a co-investment transaction if a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors makes certain conclusions in connection with a co-investment transaction, including that (1) the terms of the transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies.
In addition, pursuant to an exemptive order issued by the SEC on April 8, 2020 and applicable to all BDCs, through at least December 31, 2020, the Company may, subject to the satisfaction of certain conditions, co-invest in its existing portfolio companies with certain other funds managed by OFS Advisor or its affiliates, even if such other fund has not previously invested in such existing portfolio company. Without this order, the Company generally would not be able to participate in such co-investments unless the affiliated fund had previously acquired securities of the portfolio company in a co-investment transaction with the Company. We have applied for a new exemptive order, which, if granted, would supersede the Order and would permit us greater flexibility to enter into co-investment transactions. There can be no assurance that we will obtain such new exemptive relief from the SEC.
Conflicts may arise when an account managed by OFS Advisor makes an investment in conjunction with an investment being made by another account managed by OFS Advisor or an affiliate of OFS Advisor (each, an "Affiliated Account"), or in a transaction where an Affiliated Account has already made an investment. Investment opportunities are, from time to time, appropriate for more than one account in the same, different or overlapping securities of a portfolio company’s capital structure. Conflicts arise in determining the terms of investments, particularly where these accounts may invest in different types of securities in a single portfolio company. Potential conflicts arise when addressing, among other things, questions as to whether payment obligations and covenants should be enforced, modified or waived, or whether debt should be restructured, modified or refinanced. For additional information see "Item 1A. Business — Conflicts of Interest" and "Item 1A. Risk Factors — Risks Related to Our Business and Structure — We have potential conflicts of interest related to obligations that OFS Advisor or its affiliates may have to other clients" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are those relating to revenue recognition, expense limitation agreements and fair value estimates. Management has discussed the development and selection of each critical accounting policy and estimate with the Audit Committee of the Board. For descriptions of our revenue recognition and fair value policies, see "Item 8. Financial Statements – Notes to Financial Statements – Note 2" and "Management's Discussion and Analysis – Critical Accounting Policies and Significant Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2019.
Fair value estimates. Our approach to fair value estimates was significantly adjusted in response to the economic uncertainty associated with the spread of the COVID-19 pandemic. Our use of NBIP includes assessment of whether a sufficient number of market quotations are available or whether a sufficient number of indicative prices from pricing services or brokers or dealers have been received, and whether the depth of the markets from which those quotes were received is sufficient to transact at those prices in amounts approximating our positions in such assets. Moreover, these assessments are generally based on a 90-day moving average of our depth and liquidity metrics. The 90-day moving average generally counters the effects of intermittent quoting activity observed and month- and quarter-ends, irregular quoting activity that tends to artificially inflate our metrics. We observed significant declines in market liquidity beginning in the middle of March and concluded the 90-day moving average was dilutive to the significant market dislocation during this period. Accordingly, we adjusted our depth and liquidity assessment to one based on a 5-day moving average of the metrics. This change to our depth and liquidity metrics, as well as changes in the level of the metrics themselves, led to the transfer of four instruments with an aggregate fair value of $3,125,313 from a fair value estimate based on Level 2 NBIP inputs to estimates based on models and Level 3 inputs, and one instrument with an aggregate fair value of $12,297 from a fair value estimate based on Level 3 models and inputs to estimates based on Level 2 NBIP inputs.
We also adjusted our Level 3 fair value models responsive to current economic and market conditions. Our processes included an assessment of the impact of the COVID-19 pandemic on the financial condition, results of operations or cash flows of our portfolio companies. Generally, such forward-looking assessments were fragmentary, however in the limited circumstances in which forward-looking estimates were believed to be reliable, such information was directly incorporated into our fair value models. However, given the general lack of reliable forward-looking information, we considered the market impact on performance-metric multiples and related impact on enterprise values. The re-estimated enterprise values were then utilized to re-assess the capital structure and available "equity cushions". Re-estimated portfolio company equity levels were then used to adjust leverage multiples and the structural components of capital included in our valuation models. Our approach
38
also considered an assessment of the relative weighting of the models in our concluded fair value estimates. Our primary approaches to estimating the fair value of debt instruments are the Synthetic Debt Rating and Reunderwrtitng Analysis, to which we had generally given equal weighting in our concluded values. As a result of observed secondary market dislocation, wide bid-ask spreads, and lessened liquidity following the economic uncertainty caused by the COVID-19 pandemic, we decreased the weighting for the Synthetic Rating Analysis and increased the weighting for the Reunderwriting Analysis in the current period analysis, from a weighting of 50/50 to weightings of 25/75 to 10/90. We believe overweighting the Reunderwriting Analysis method more accurately captures certain data related to illiquid private credit during the COVID-19 pandemic.
The following table illustrates the impact of our fair value measures if we selected the low or high end of the range of values for all investments at March 31, 2020:
Fair Value at March 31, 2020 | Range of Fair Value | |||||||||||
Investment Type | Low-end | High-end | ||||||||||
Debt investments: | ||||||||||||
Senior secured | $ | 36,225,231 | $ | 35,130,068 | $ | 37,212,769 | ||||||
Senior secured (Transaction Price) | 5,366,014 | 5,366,014 | 5,366,014 | |||||||||
Subordinated | 863,178 | 856,187 | 977,951 | |||||||||
Equity investments: | ||||||||||||
Preferred equity | 271,000 | 234,000 | 279,000 | |||||||||
Common equity | 516,910 | 404,790 | 622,582 | |||||||||
$ | 43,242,333 | $ | 41,991,059 | $ | 44,458,316 |
Portfolio Composition and Investment Activity
Portfolio Composition
The following table summarizes the composition of our investment portfolio as of March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | ||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||||
Senior secured debt investments (1) | $ | 43,638,854 | $ | 41,537,245 | $ | 38,648,951 | $ | 37,953,346 | |||||||
Subordinated debt investments | 1,480,219 | 917,178 | 1,478,811 | 1,384,896 | |||||||||||
Preferred equity investments | 191,409 | 271,000 | 191,409 | 201,006 | |||||||||||
Common equity investments | 497,130 | 516,910 | 450,958 | 585,675 | |||||||||||
$ | 45,807,612 | $ | 43,242,333 | $ | 40,770,129 | $ | 40,124,923 | ||||||||
Total number of portfolio companies | 35 | 35 | 34 | 34 |
(1) | Includes debt investments, typically referred to as unitranche, in which we have entered into a contractual arrangement with co‑lenders whereby, subject to certain conditions, we have agreed to receive our principal payments after the repayment of certain co‑lenders pursuant to a payment waterfall. At March 31, 2020, the aggregate amortized cost and fair value of these investments was $8,355,283 and $8,287,141, respectively. |
As of March 31, 2020, all of our senior secured debt investments were floating rate loans and our subordinated debt investments were fixed rate loans. Approximately 98% of our debt investments at fair value, are senior securities of the borrower, rather than in the subordinated securities, preferred equity or common equity. We believe the seniority of our debt investments in the borrowers' capital structure may provide greater downside protection against the impact of the COVID-19 pandemic.
As of March 31, 2020, our investment portfolio’s three largest industries by fair value, were (1) Wholesale Trade of 19.3%, (2) Health Care and Social Assistance of 16.1%, and (3) Professional, Scientific, and Technical Services of 14.9%, totaling approximately 50.3% of the investment portfolio. We have limited exposure to the Retail Trade industry, 5.5%, which has been significantly impacted by the COVID-19 pandemic. For a full summary of our investment portfolio by industry, see "Item 1–Financial Statements–Note 4."
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The following table presents our debt investment portfolio by investment size as of March 31, 2020 and December 31, 2019:
Amortized Cost | Fair Value | ||||||||||||||||||||||||||
March 31, 2020 | December 31, 2019 | March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||||
Up to $1,000,000 | $ | 5,728,863 | 12.7 | % | $ | 7,737,315 | 19.3 | % | $ | 6,992,082 | 16.5 | % | $ | 7,171,472 | 18.2 | % | |||||||||||
$1,000,000 to $1,500,000 | 14,961,915 | 33.1 | 13,360,333 | 33.3 | 14,920,292 | 35.1 | 13,198,830 | 33.6 | |||||||||||||||||||
$1,500,000 to $2,000,000 | 10,507,675 | 23.3 | 14,051,452 | 35.0 | 10,918,480 | 25.7 | 14,026,055 | 35.6 | |||||||||||||||||||
Greater than $2,000,000 | 13,920,620 | 30.9 | 4,978,662 | 12.4 | 9,623,569 | 22.7 | 4,941,885 | 12.6 | |||||||||||||||||||
Total | $ | 45,119,073 | 100.0 | % | $ | 40,127,762 | 100.0 | % | $ | 42,454,423 | 100.0 | % | $ | 39,338,242 | 100.0 | % |
The following table displays the composition of our debt investment portfolio by weighted average yield as of March 31, 2020 and December 31, 2019:
March 31, 2020 | December 31, 2019 | |||||||||||||||||
Senior Secured | Subordinated | Total | Senior Secured | Subordinated | Total | |||||||||||||
Weighted Average Yield (1) | Debt | Debt | Debt | Debt | Debt | Debt | ||||||||||||
Less than 8% | 9.8 | % | — | % | 9.7 | % | 1.7 | % | — | % | 1.7 | % | ||||||
8% - 10% | 56.3 | — | 55.7 | 45.9 | — | 44.2 | ||||||||||||
10% - 12% | 29.3 | — | 29.0 | 47.1 | — | 45.3 | ||||||||||||
12% - 14% | 4.6 | 100.0 | 5.6 | 5.3 | 100.0 | 8.8 | ||||||||||||
Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Weighted average yield - performing debt investments (1) | 9.53 | % | 13.42 | % | 9.57 | % | 10.15 | % | 12.57 | % | 10.24 | % | ||||||
Weighted average yield - total debt investments (2) | 9.53 | % | 4.29 | % | 9.21 | % | 10.00 | % | 12.57 | % | 10.09 | % |
(1) The weighted average yield on our performing debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of Net Loan Fees divided by (b) amortized cost of our debt investments as of the balance sheet date, excluding debt investments in non-accrual status as of the balance sheet date.
(2) The weighted average yield on our total debt investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of Net Loan Fees divided by (b) amortized cost of our debt investments as of the balance sheet date, including debt investments in non-accrual status as of the balance sheet date.
The weighted average yield on senior secured debt investments decreased approximately 63 basis point during the three months ended March 31, 2020, primarily as a result of an effective yield of 8.5% on new investments in new portfolio companies and a decrease in LIBOR. During the three months ended March 31, 2020, the weighted average yield on subordinated debt decreased 8.23% due to the change in status of Online Tech Stores, LLC to non-accrual.
The weighted average yield on total investments was 9.21% and 9.93% at March 31, 2020 and December 31, 2019, respectively. Weighted average yield on total investments is computed as (a) the annual stated accruing interest on our debt investments at the balance sheet date, plus the annualized accretion of Net Loan Fees, plus the effective yield on our performing preferred equity investments, divided by (b) amortized cost of our total investment portfolio, including assets in non-accrual status as of the balance sheet date. The weighted average yield of our investments is not the same as a return on investment for our stockholders but rather the gross investment income from our investment portfolio before the payment of all of our fees and expenses. There can be no assurance that the weighted average yield will remain at its current level.
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Investment Activity
The following is a summary of our investment activity for the three months ended March 31, 2020:
Three Months Ended March 31, 2020 | ||||||||
Debt Investments | Equity Investments | |||||||
Investments in new portfolio companies | $ | 6,187,557 | $ | — | ||||
Investments in existing portfolio companies: | ||||||||
Follow-on investments | 2,644,620 | — | ||||||
Restructured investments | 10,147 | 46,403 | ||||||
Delayed draw / revolver funding | 206,150 | — | ||||||
Total investments in existing portfolio companies | 2,860,917 | 46,403 | ||||||
Total investments in new and existing portfolio companies | $ | 9,048,474 | $ | 46,403 | ||||
Number of new portfolio company investments | 3 | — | ||||||
Number of existing portfolio company investments | 10 | 1 | ||||||
Proceeds from principal payments | $ | 2,602,433 | $ | — | ||||
Proceeds from investments sold or redeemed | 899,022 | — | ||||||
Total proceeds from principal payments, equity distributions and investments sold | $ | 3,501,455 | $ | — |
Notable investments in new portfolio companies during the three months ended March 31, 2020, include A&A Transfer, LLC. ($2.0 million senior secured loan) and SourceHOV Tax, Inc. ($2.3 million senior secured loan).
Non-cash investment activity
On March 27, 2020, our debt investments in Constellis Holdings, LLC were restructured. We converted our non-accrual debt investments for two new debt investments and 1,362 common shares of equity. The cost and fair value of debt investments received were $6,174 and $6,172, respectively, and the cost and fair value of the common shares received were $46,403 and $46,410, respectively. For the three months ended March 31, 2020, we recognized a realized loss on the restructuring of $526,444, which was fully recognized as an unrealized loss as of December 31, 2019.
The following is a summary of our investment activity for three months ended March 31, 2019:
Three Months Ended March 31, 2019 | ||||||||
Debt Investments | Equity Investments | |||||||
Investments in new portfolio companies | $ | 3,260,046 | $ | 357,878 | ||||
Investments in existing portfolio companies: | ||||||||
Follow-on investments | 817,427 | — | ||||||
Delayed draw / revolver funding | 201,042 | — | ||||||
Total investments in existing portfolio companies | 1,018,469 | — | ||||||
Total investments in new and existing portfolio companies | $ | 4,278,515 | $ | 357,878 | ||||
Number of new portfolio company investments | 3 | 2 | ||||||
Number of existing portfolio company investments | 4 | — | ||||||
Proceeds from principal payments | $ | 1,084,641 | $ | — | ||||
Proceeds from investments sold or redeemed | 1,121,786 | — | ||||||
Total proceeds from principal payments, equity distributions and investments sold | $ | 2,206,427 | $ | — |
Notable investments in new portfolio companies during the three months ended March 31, 2019, include Chemical Resources Holdings, Inc. ($1.2 million senior secured loan and $0.2 million common equity), TTG Healthcare, LLC ($1.0 million senior secured loan and $0.2 million preferred stock), and Institutional Shareholder Services, Inc. ($1.0 million senior secured loan).
The weighted-average yield of debt investments in new portfolio companies during the three months ended March 31, 2019, was 11.9%.
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Our level of investment activity may vary substantially from period to period depending on various factors, including, but not limited to, the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make.
We categorize debt investments into seven risk categories based on relevant information about the ability of borrowers to service their debt. For additional information regarding our risk categories, see “Item 1. Business–Portfolio Review/Risk Monitoring” in our Annual Report on Form 10-K for the year ended December 31, 2019. The following table shows the classification of our debt securities of portfolio companies, by credit risk rating as of March 31, 2020 and December 31, 2019.
Debt Investments, at Fair Value | ||||||||||||||
Risk Category | March 31, 2020 | December 31, 2019 | ||||||||||||
1 (Low Risk) | $ | 2,650 | — | % | $ | — | — | % | ||||||
2 (Below Average Risk) | 1,046,842 | 2.5 | 1,036,579 | 2.6 | ||||||||||
3 (Average) | 39,409,033 | 92.8 | 37,359,182 | 95.0 | ||||||||||
4 (Special Mention) | 1,532,167 | 3.6 | 909,902 | 2.3 | ||||||||||
5 (Substandard) | 463,731 | 1.1 | 10,079 | — | ||||||||||
6 (Doubtful) | — | — | 22,500 | 0.1 | ||||||||||
7 (Loss) | — | — | — | — | ||||||||||
$ | 42,454,423 | 100.0 | % | $ | 39,338,242 | 100.0 | % |
Changes in the distribution of our debt investments across risk categories were a result of new debt investments, the receipt of amortization payments on existing debt investments, repayment of certain debt investments in full, changes in the fair value of our existing debt investments, realized gains on the sale of investments, as well as the risk rating change in debt investments from risk category 3 to risk category 4, with a total amortized cost and fair value of $1,903,041 and $1,527,320, as well as the risk rating change in a debt investment from risk category 4 to risk category 5, with an amortized cost and fair value of $1,007,141 and $463,731 respectively, and other investment activity.
Non-Accrual Loans
When there is reasonable doubt that principal, cash interest, or PIK interest will be collected, loan investments are placed on non-accrual status and the Company will generally cease recognizing cash interest, PIK interest, or Net Loan Fee amortization, as applicable. Interest accruals and Net Loan Fee amortization are resumed on non-accrual investments only when they are brought current with respect to principal, interest and when, in the judgment of management, the investments are estimated to be fully collectible as to all principal. At March 31, 2020, the aggregate amortized cost and fair value of loans on non-accrual status with respect to all interest and Net Loan Fee amortization was $1,007,141 and $463,731, respectively, and $577,810 and $32,579 at December 31, 2019, respectively.
On March 27, 2020, our debt investments in Constellis Holdings, LLC were restructured. We converted our non-accrual debt investments for two new debt investments and 1,362 common shares of equity. The cost and fair value of debt investments received were $6,174 and $6,172, respectively, and the cost and fair value of the common shares received were $46,403 and $46,410, respectively.
Results of Operations
Our key financial measures are described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations–Results of Operations–Key Financial Measures" in our Annual Report on Form 10-K for the year ended December 31, 2019. The following is a discussion of the key financial measures that management employs in reviewing the performance of our operations.
We do not believe that our historical operating performance is necessarily indicative of our future results of operations. We are primarily focused on debt investments in middle-market and larger companies in the United States and, to a lesser extent, equity investments, including warrants and other minority equity securities. Moreover, as a BDC and a RIC, we will also be subject to certain constraints on our operations, including, but not limited to, limitations imposed by the 1940 Act and the Code. For the reasons described above, the results of operations described below may not necessarily be indicative of the results we expect to report in future periods.
Net increase in net assets resulting from operations can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, annual comparisons of net increase in net assets resulting from operations may not be meaningful.
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Comparison of the Three Months Ended March 31, 2020, and 2019
Operating results for the three months ended March 31, 2020 and 2019, are as follows:
Investment Income
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Interest income | $ | 1,113,294 | $ | 781,051 | |||
Fee income | 58,425 | 39,875 | |||||
Total investment income | $ | 1,171,719 | $ | 820,926 |
Investment income for the three months ended March 31, 2020 consisted primarily of interest income on our debt investments and syndication fee income. The increase in interest income for three months ended March 31, 2020 compared to the corresponding periods in the prior year, was primarily due to the growth in our portfolio from the deployment of funds raised through our Offering and the deployment of funds from the Unsecured Note into portfolio securities. Syndication fee income for the three months ended March 31, 2020 increased compared to the corresponding periods in the prior year, primarily due to approximately $33.4 million in loan originations in which OFS Advisor sourced, structured, and arranged the lending group, and for which we were additionally compensated.
Due to the COVID-19 pandemic and the impact to our borrowers, we expect a partial shift from cash interest to PIK
interest as a result of concessions granted to borrowers to support the borrowers' liquidity. Since the onset of the COVID-19 pandemic, we have continued to originate loans, although we have observed a decrease in underwriting and origination activity. There has been no portfolio company investments originated since March 16, 2020.
Gross Expenses. Our gross expenses are limited under the Investment Management Agreement and the Expense Support Agreement; see "—Expense Limitations." Investment expenses shown with respect to each governing expense limitation agreement for the three months ended March 31, 2020 and 2019, are presented below:
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Expenses subject to limitation under Investment Advisory Agreement: | |||||||
Amortization of deferred offering costs | $ | 84,337 | $ | 29,851 | |||
Contractual issuer expenses | 536 | 3,112 | |||||
Total expenses subject to limitation under Investment Advisory Agreement | 84,873 | 32,963 | |||||
Expenses subject to limitation under Expense Support Agreement: | |||||||
Interest expense | 300,592 | 95,349 | |||||
Management fees | 130,765 | 92,722 | |||||
Incentive fees | 76,050 | 48,770 | |||||
Administration fee | 186,617 | 141,874 | |||||
Professional fees | 164,296 | 154,339 | |||||
Insurance expense | 24,911 | 16,367 | |||||
Transfer agent fees | 24,522 | 29,819 | |||||
Other expenses | 8,866 | 26,534 | |||||
Total expenses subject to limitation under Expense Support Agreement | 916,619 | 605,774 | |||||
Total expenses | $ | 1,001,492 | $ | 638,737 |
Expenses Limited under the Investment Management Agreement
Offering Expenses. OFS Advisor incurred, on our behalf, offering costs of $82,439 and $1,001 during the three months ended March 31, 2020 and 2019, respectively, which are deferred and amortized over the twelve months following incurrence. Offering costs for the three months ended March 31, 2020 and 2019, relate to ordinary due diligence and development of distribution platforms for our common stock.
Amortization of offering costs were $84,337 and $29,851 for the three months ended March 31, 2020 and 2019, respectively. Higher amortization expense in the three months ended March 31, 2020 relate to additional monthly costs of developing distribution platforms of the Offering.
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Contractual Issuer Expenses. Contractual Issuer Expenses declined in the three months ended March 31, 2020, compared to the corresponding periods in the prior year as the fund has grown and the marketing of the fund has required less direct involvement of OFS Advisor’s employees and employees of their affiliates.
Expenses Limited under the Expense Support Agreement
Interest expense increased due to the average dollar amount of borrowings outstanding of $16,686,813 during the three months ended March 31, 2020.
Management and incentive fees increased for the three months ended March 31, 2020, compared to the corresponding periods in the prior year as a result of growth in our portfolio and investment activity from the deployment of Offering proceeds and the Unsecured Note. Administrative fees are primarily related to accounting and record-keeping services, and preparation and filing of required periodic reports with the SEC. Administrative fees for the three months ended March 31, 2020, compared to the corresponding period in the prior year slightly increased due to more labor allocated to the fund due to the increase in the size of our portfolio.
Professional fees include fees for our attorneys, independent accountants and consultants. Professional fees remained stable compared to the corresponding period.
General and administrative expenses, such as insurance, transfer agent and other expenses were $58,299 and $72,720 for the three months ended March 31, 2020 and March 31, 2019, respectively. The decrease in general and administrative expenses was primarily due to a decrease in taxes.
Expense Limitations
Expense Limitations under Investment Advisory Agreement. We reimbursed OFS Advisor $2,400 and $25,268 for offering expenses and Contractual Issuer Expenses for the three months ended March 31, 2020 and March 31, 2019, respectively. This amount consisted of Contractual Issuer Expenses and offering expenses incurred in prior periods by OFS Advisor on our behalf.
We are conditionally obligated to pay OFS Advisor up to 1.5% of the gross proceeds raised in the Offering until all reimbursable offering costs and Contractual Issuer Expenses paid by OFS Advisor and its affiliates have been recovered. Reimbursable offering costs and Contractual Issuer Expenses were $695,998 as of March 31, 2020.
The determination of expense limitations under the Investment Advisory Agreement is presented below.
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Total expenses limited under Investment Advisory Agreement | $ | 84,873 | $ | 32,963 | ||||
Offering costs and Contractual Issuer Expenses reimbursed and incurred | (2,400 | ) | (25,268 | ) | ||||
Net offering costs and Contractual Issuer Expenses limitations under Investment Advisory Agreement | $ | 82,473 | $ | 7,695 |
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Expense Limitations under Expense Support Agreement. Gross operating expenses (operating expenses exclusive of organization and offering expenses, and Contractual Issuer Expenses, and before limitations) are subject to limitation under the Expense Support Agreement. OFS Advisor's obligation to provide such expense support is a function of declared distributions on our common stock, and the amount of support provided is determined by reference to unsupported investment company taxable income (expense), net realized gains (losses), and the amount of declared distributions; the Expense Support Agreement provides expense support such that distributions are not paid from Offering proceeds. The determination of expense limitation under the Expense Support Agreement for the three months ended March 31, 2020 and 2019, is presented below.
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Total investment income | $ | 1,171,719 | $ | 820,926 | ||||
Expenses limited under the Expense Support Agreement (1): | ||||||||
Interest expense, base management fees, and incentive fees | 507,407 | 236,841 | ||||||
Other operating expenses as defined in the Expense Support Agreement (2) | 409,211 | 368,932 | ||||||
Total expenses limited under the Expense Support Agreement | 916,618 | 605,773 | ||||||
Net investment income prior to limitation | 255,101 | 215,153 | ||||||
Net realized gain in ICTI | — | 2,016 | ||||||
Unsupported ICTI prior to expense limitation | 255,101 | 217,169 | ||||||
Declared distributions | 589,261 | 489,716 | ||||||
Expense limitation under Expense Support Agreement | $ | 334,160 | $ | 272,547 |
(1) | Expense limitation under Expense Support Agreement excludes organization costs, amortization of deferred offering costs, Contractual Issuer Expenses, and the related expense support under the Investment Advisory Agreement as such items are permanent differences between GAAP and taxable income. See “Item 8. Financial Statements–Notes to Financial Statements–Note 8” in our Annual Report on Form 10-K. |
(2) | Generally defined in the Expense Support Agreement as our operating expenses determined in accordance with GAAP excluding organization and offering expenses, Contractual Issuer Expenses, interest expenses, and base management fees, and incentive fees. The annualized ratio of other operating expenses to net assets at the time of support and annual ratio for the year in which support is provided constitute conditions for reimbursement to OFS Advisor. See "Item 1. Financial Statements–Notes to Financial Statements–Note 3." |
Expense support provided by OFS Advisor or its affiliates is reimbursable for three years from the date incurred. Expense limitation under both the Investment Advisory Agreement and the Expense Support Agreement is cancelable at any time.
Net realized and unrealized gain (loss) on investments
Three months ended March 31, 2020
The fair value of the portfolio declined due to the net unrealized depreciation of $1,920,072 in the first quarter primarily as a result of the adverse economic effects of the COVID-19 pandemic on market conditions and the overall economy as of March 31, 2020 and the related declines in quoted loan prices, increases in underlying market credit spreads and company-specific negative impacts on past and expected future operating performance. Additionally, we incurred realized losses of $573,849 primarily due to the restructuring of our debt investments in Constellis Holdings, LLC, which was fully recognized as an unrealized loss as of December 31, 2019.
The net unrealized depreciation for the three months ended March 31, 2020 is principally due to the decrease in fair value in our Online Tech Store, LLC and Wastebuilt Environmental Solutions, LLC investments for total unrealized depreciation of $745,289.
Three months ended March 31, 2019
Net unrealized appreciation on non-control/non-affiliate investments for the three months ended March 31, 2019 is principally due to market recovery observed in STS Operating, Inc., DuPage Medical Group, Rocket Software, Inc. and Davis Vision, Inc. for a total unrealized appreciation of $231,240. Common stock appreciation of $110,016 was principally due to the positive impact of portfolio company-specific performance factors in DRS Imaging Services, LLC. and Professional Pipe Holdings, LLC.
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Liquidity and Capital Resources
At March 31, 2020, we held cash of $474,477 and had available borrowings of $8.7 million under our PWB Credit Facility. Based on fair values and equity capital at March 31, 2020, we could access our entire availability under the PWB Credit Facility and have an asset coverage ratio of 207%. We continue to believe that we have sufficient levels of liquidity to support our existing portfolio companies and selectively deploy capital in new investment opportunities in this challenging environment.
Sources and Uses of Cash
We expect to generate cash primarily from (i) the net proceeds of the Offering, (ii) cash flows from our operations, including net amounts received from OFS Advisor, (iii) the PWB Credit Facility and any other financing arrangements we may enter into in the future and (iv) any future offerings of our equity or debt securities. We may fund a portion of our investments through borrowings from banks, including the PWB Credit Facility, and issuances of senior securities. Our primary use of cash will be for (i) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (ii) the cost of operations (including paying OFS Advisor), (iii) debt service of any borrowings, including the Unsecured Note and (iv) cash distributions to the holders of our stock. These principal sources and uses of cash and liquidity are presented below:
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash from net investment income | $ | 709,657 | $ | 438,867 | ||||
Net purchases and originations of portfolio investments | (9,910,046 | ) | (2,952,017 | ) | ||||
Net cash used in operating activities | (9,200,389 | ) | (2,513,150 | ) | ||||
Net proceeds from issuances of common stock | 144,200 | 1,632,560 | ||||||
Net borrowings under revolving line of credit | 1,300,000 | 600,000 | ||||||
Common stock distributions paid | (583,912 | ) | (445,421 | ) | ||||
Net change in cash | $ | (8,340,101 | ) | $ | (726,011 | ) |
We used $9,200,389 and $2,513,150 in cash from operating activities for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, the principal source of operating liquidity was investment income collected. The increase in total investment income collected is due to the growth in our portfolio from the deployment of Offering proceeds. Net cashed used in operating activities decreased $6,687,239 over the corresponding period primarily due to an increase in net investment purchases of $6,958,029. Net cash used in operating activities benefited from the positive cash flow impact of expense limitations under the Investment Advisory Agreement and the Expense Support Agreement of $416,633 and $280,242 for the three months ended March 31, 2020 and 2019, respectively, which reduced the net amount paid to OFS Advisor and affiliates. Expense support and limitation under both the Investment Advisory Agreement and the Expense Support Agreement is cancelable at any time.
94% of our performing loans as of December 31, 2019 satisfied their first quarter 2020 interest payments. Cash flow used in operating activities was minimally effected as a result of the deferral of an interest payment for 90 days to one borrower.
Net purchases and origination of portfolio investments relates to the deployment of Offering proceeds. See "—Portfolio Composition and Investment Activity."
We collected $144,200 and $1,632,560 from the sale of our common stock during the three months ended March 31, 2020 and 2019, respectively. Offering proceeds are net of aggregate commissions and dealer manager fees of $15,800 and $102,475 for the three months ended March 31, 2020 and 2019, respectively, of which $0 and $50,535, respectively, were paid by OFS Advisor.
During the three months ended March 31, 2020, we paid $583,912 in dividends to common stockholders and, subsequent to March 31, 2020, we paid $589,261 in dividends to our common stockholders.
Borrowings
PWB Credit Facility: We are party to the BLA with Pacific Western Bank, as lender, to provide us with a $10.0 million senior secured revolving credit facility, or PWB Credit Facility. The PWB Credit Facility is available for general corporate purposes including investment funding and is scheduled to mature on February 28, 2021. The maximum availability of the PWB Credit Facility is equal to 35% of the aggregate outstanding principal amount of eligible loans included in the borrowing base, which excludes subordinated loan investments and as otherwise specified in the BLA. The PWB Credit Facility bears interest at a variable rate of the Prime Rate plus a 0.75% margin, with a 5.50% floor, and includes an unused commitment fee
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for any unused portion in excess of $3.0 million, payable monthly in arrears, equal to 0.50% per annum on any unused portion. As of March 31, 2020, the stated interest rate on the PWB Credit Facility was 5.50%. The PWB Credit Facility bore an effective interest rate of 5.85%, inclusive of interest on the outstanding balance, commitment fees on undrawn amounts, and the amortization of deferred financing costs.
We have up to $10.0 million of available credit under our PWB Credit Facility, of which $1.3 million was drawn as of March 31, 2020. Maximum availability under the PWB Credit Facility as of March 31, 2020 was $8.7 million based on the stated advance rate of 35% of the borrowing base. As of March 31, 2020, we were in compliance with the applicable covenants under the PWB Credit Facility.
Unsecured Note: On November 27, 2019, we entered into an agreement with a qualified institutional investor ("Note Purchase Agreement") pursuant to which we issued the Unsecured Note. The purchase price of the Unsecured Note was $14,700,000 after deducting the offering price discount. The Unsecured Note has a fixed interest rate of 6.50% and is due on November 27, 2024, unless redeemed, purchased or prepaid prior to such date by us or its affiliates in accordance with its terms. Interest on the Unsecured Note will be due quarterly. In addition,we are obligated to repay the Unsecured Note at par if certain change in control events occur. The Unsecured Note is a general unsecured obligation that ranks pari passu with all outstanding and future unsecured unsubordinated indebtedness we may issue.
The Note Purchase Agreement contains customary terms and conditions for unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of our status as a business development company within the meaning of the 1940 Act, and minimum asset coverage ratio. The Note Purchase Agreement also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, certain judgments and orders, and certain events of bankruptcy. As of March 31, 2020, we were in compliance with the applicable covenants under the Note Purchase Agreement.
As of March 31, 2020, the Unsecured Note had the following terms and balances:
Principal | Unamortized Discount and Issuance Costs | Stated Interest Rate | Effective Interest Rate (1) | Maturity | 2020 Interest Expense (2) | ||||||||||||||
Unsecured Note | $ | 15,000,000 | $ | 288,042 | 6.50 | % | 6.92 | % | 11/27/24 | $ | 259,158 |
(1) The effective interest rate on the Unsecured Note includes deferred debt issuance cost amortization.
(2) Interest expense includes debt issuance costs amortization of $15,408 for the three months ended March 31, 2020.
Other Liquidity Matters
We expect to fund the growth of our investment portfolio through the private placement of our common shares and issuances of senior securities or future borrowings to the extent permitted by the 1940 Act. We cannot assure stockholders that our plans to raise capital will be successful. In addition, we intend to distribute to our stockholders substantially all of our taxable income in order to satisfy the requirements applicable to RICs under Subchapter M of the Code. Consequently, we may not have the ability to fund new investments or make additional investments in our portfolio companies. The illiquidity of our portfolio investments may make it difficult for us to sell these investments when desired and, if we are required to sell these investments, we may realize significantly less than their recorded value.
In addition, as a BDC, we generally will be required to meet a coverage ratio of total assets, less liabilities and indebtedness not represented by senior securities, to total senior securities, which include all of any borrowings or outstanding preferred stock of at least 200% (or 150% if certain requirements are met). This requirement limits the amount that we may borrow. To fund growth in our investment portfolio in the future, we anticipate needing to raise additional capital from various sources, including the equity markets and the securitization or other debt-related markets, which may or may not be available on favorable terms, if at all.
On November 6, 2018, a “required majority” (as defined in Section 57(o) of the 1940 Act) our Board approved the application of a reduced 150% asset coverage ratio to us. In accordance with the SBCAA, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, the asset coverage ratio test applicable to us decreased from 200% to 150%, effective November 6, 2019.
As of March 31, 2020, the aggregate amount outstanding of the senior securities issued by the Company was $16.3 million, for which the Company’s asset coverage was 264%. The asset coverage ratio for a class of senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by total senior securities representing indebtedness.
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Contractual Obligations
We, with approval by our Board, entered into the Investment Advisory Agreement, the Expense Support Agreement, the Investment Sub-Advisory Agreement, and the Administration Agreement. See "Item 1. Financial Statements – Notes to Financial Statements – Note 3."
The following table shows our contractual obligations as of March 31, 2020 (in thousands):
Payments due by period | ||||||||||||||||||||
Contractual Obligation | Total | Less than year | 1-3 years | 3-5 years | After 5 years | |||||||||||||||
PWB Credit Facility (1) | $ | 1,300,000 | $ | 1,300,000 | $ | — | $ | — | $ | — | ||||||||||
Unsecured Note | 15,000,000 | — | — | 15,000,000 | — | |||||||||||||||
Total | $ | 16,300,000 | $ | 1,300,000 | $ | — | $ | 15,000,000 | $ | — |
(1) The PWB Credit Facility is scheduled to mature on February 28, 2021.
(2) The Unsecured Note is scheduled to mature on November 27, 2024.
We continue to believe our long-dated financing, with approximately 92% of our total debt contractually maturing in
2024, affords us operational flexibility.
Off-Balance Sheet Arrangements
Amounts Conditionally Reimbursable to OFS Advisor.
OFS Advisor and its affiliates have incurred organizational and offering costs, and Contractual Issuer Expenses related to the Company of which $695,998 and $663,534 were unreimbursed as of March 31, 2020 and December 31, 2019, respectively. We remain conditionally liable for organization and offering costs incurred by OFS Advisor and its affiliates on our behalf. See "Item 1. Financial Statements – Notes to FInancial Statements – Note 3."
OFS Advisor has provided aggregate operating expense support of $3,531,613 and $3,503,848 as of March 31, 2020 and December 31, 2019, respectively. We remain conditionally liable for operating expense support provided by OFS Advisor. See "Item 1. Financial Statements – Notes to Financial Statements – Note 3."
Unfunded Commitments.
We may become a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. We had $218,394 of total unfunded commitments to three portfolio companies at March 31, 2020. See "Item 1. Financial Statements – Notes to Financial Statements – Note 6."
Distributions
We have elected to be taxed as a RIC under Subchapter M of the Code. In order to maintain our status as a RIC, we are required to distribute annually to our stockholders at least 90% of our ICTI, as defined by the Code. Additionally, to avoid a 4% excise tax on undistributed earnings we are required to distribute each calendar year the sum of (i) 98% of our ordinary income for such calendar year (ii) 98.2% of our net capital gains for the one-year period ending October 31 of that calendar year, and (iii) any income recognized, but not distributed, in preceding years and on which we paid no federal income tax. Maintenance of our RIC status also requires adherence to certain source of income and asset diversification requirements. Generally, a RIC is entitled to deduct dividends it pays to its stockholders from its income to determine “taxable income.” Taxable income includes our taxable interest, dividend and fee income, and taxable net capital gains. Taxable income generally differs from net income for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized appreciation or depreciation, as gains or losses are not included in taxable income until they are realized. In addition, gains realized for financial reporting purposes may differ from gains included in taxable income as a result of our election to recognize gains using installment sale treatment, which generally results in the deferment of gains for tax purposes until notes or other amounts, including amounts held in escrow, received as consideration from the sale of investments are collected in cash. Taxable income includes non-cash income, such as changes in accrued and reinvested interest and dividends, which includes contractual PIK interest, and the amortization of discounts and fees. Cash collections of income resulting from contractual PIK interest and dividends or the amortization of discounts and fees generally occur upon the repayment of the loans or debt securities that include such items. Non-cash taxable income is reduced by non-cash expenses, such as realized losses and depreciation, and amortization expense.
We do not currently qualify as a “publicly offered regulated investment company,” as defined in the Code. Accordingly, stockholders will be taxed as though they received a distribution of some of the our expenses. A “publicly offered
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regulated investment company” is a RIC whose shares are either (i) continuously offered pursuant to a public offering, (ii) regularly traded on an established securities market, or (iii) held by at least 500 persons at all times during the taxable year. We anticipate that we will not qualify as a publicly offered RIC for the 2020 tax year, and we cannot determine when we will qualify as a publicly offered RIC. Since we are not a publicly offered RIC, a non-corporate stockholder’s allocable portion of our affected expenses, including a portion of our management fees, will be treated as an additional distribution to the stockholder. A non-corporate stockholder’s allocable portion of these expenses are treated as miscellaneous itemized deductions that are not currently deductible by such stockholders.
Our Board maintains a variable dividend policy with the objective of distributing four quarterly distributions in an amount not less than 90-100% of our taxable quarterly income or potential annual income for a particular year. In addition, at the end of the year, we may also pay an additional special dividend, or fifth dividend, such that we may distribute approximately all of our annual taxable income in the year it was earned, while maintaining the option to spill over our excess taxable income to a following year. Each year, a statement on Form 1099-DIV identifying the source of the distribution is mailed to the Company’s stockholders.
Our distributions to date were, and our distributions may in the future, be funded through expense limitation payments by OFS Advisor under the Expense Support Agreement. The Expense Support Agreement is designed to ensure no portion of our distribution to stockholders will be paid from Offering proceeds, and provides for expense limitation payments to us in any quarterly period our cumulative distributions to stockholders exceeds the Company's cumulative ICTI and net realized gains. Any such distributions funded through expense limitation payments are not based on our investment performance, and can only be sustained if we achieve positive investment performance in future periods and/or OFS Advisor continues to make such payments. The Expense Support Agreement may be terminated by us or OFS Advisor, without payment of any penalty, upon written notice to us.
Share Repurchases
On November 6, 2018, a "required majority" (as defined in Section 57(o) of the 1940 Act) of our Board approved the application of a reduced 150% asset coverage ratio to us. In accordance with the SBCAA, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, effective November 6, 2019, the asset coverage ratio test applicable to us was decreased from 200% to 150%. Additionally, in November 2019 and February 2020, the Board subsequently approved tender offers to purchase, in each case, 2.5% of the weighted average number of shares of the outstanding common stock for the trailing 12-month period.
The repurchase offer allowed our stockholders to sell their shares back to us at a price equal to the most recently disclosed net asset value per share of our common stock immediately prior to the date of repurchase. See "Item 1. Financial Statements – Notes to Financial Statements – Note 10" for details on share repurchases.
Recent Developments
On April 28, 2020, our Board declared a distribution of $0.0825 per common share, payable on July 15, 2020, to stockholders of record on April 28, 2020.
On May 11, 2020, our Board approved a tender offer, commencing on May 29, 2020, to purchase 2.5% of the weighted average number of shares of the outstanding Common Stock for the trailing 12-month period.
We evaluated events subsequent to March 31, 2020 through May 14, 2020. On March 11, 2020, the World Health Organization declared the novel coronavirus as a pandemic, and on March 13, 2020 the United States declared a national emergency with respect to the COVID-19 pandemic. The outbreak of the COVID-19 pandemic has severely impacted global economic activity and caused significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel. Such actions are creating disruption in global supply chains and adversely impacting a number of industries. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown which may be protracted. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic. Nevertheless, the COVID-19 pandemic presents material uncertainty and risks with respect to the underlying value of our portfolio companies, our business, financial condition, results of operations and cash flows, such as the potential negative impact to financing arrangements, increased costs of operations, changes in law and/or regulation, and uncertainty regarding government and regulatory policy. Further, the operational and financial performance of the portfolio companies in which we make investments have been, and may continue to be, significantly impacted by the COVID-19 pandemic, which in turn has, and may continue to have, an impact the valuation of our investments.
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Accordingly, we cannot predict the full extent to which our business, financial condition, results of operations and cash flows will be affected at this time. The potential impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to our market risks reported in our Annual Report on Form 10-K for the year ended December 31, 2019; however, uncertainty with respect to the economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets, and the effect of the volatility could materially impact our market risks.
Our outstanding Unsecured Note bears interest at a fixed rate. Our PWB Credit Facility has a floating interest rate provision based on the Prime Rate with a 5.50% interest rate floor, which resulted in an stated interest rate of 5.50% as of March 31, 2020. Assuming that the interim, unaudited Statement of Assets and Liabilities as of March 31, 2020 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates:
Basis point increase | Interest income | Interest expense | Net increase in net investment income | |||||||||
25 | $ | 90,823 | $ | — | $ | 90,823 | ||||||
50 | 194,850 | — | 194,850 | |||||||||
75 | 304,409 | — | 304,409 | |||||||||
100 | 416,168 | — | 416,168 | |||||||||
125 | 527,928 | — | 527,928 |
Basis point decrease | Interest income | Interest expense | Net decrease in net investment income | |||||||||
25 | $ | (73,623 | ) | $ | — | $ | (73,623 | ) | ||||
50 | (114,520 | ) | — | (114,520 | ) | |||||||
75 | (138,392 | ) | — | (138,392 | ) | |||||||
100 | (162,265 | ) | — | (162,265 | ) | |||||||
125 | (177,934 | ) | — | (177,934 | ) |
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Item 4. Controls and Procedures
Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020. The term “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the Company’s disclosure controls and procedures as of March 31, 2020, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We, OFS Advisor and OFS Services, 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 a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. Furthermore, third parties may try to seek to impose liability on us in connection with the activities of our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
Investing in our common stock may be speculative and involves a high degree of risk. In addition to the other information contained in this Quarterly Report on Form 10-Q, including our financial statements, and the related notes, schedules and exhibits, you should carefully consider the risk factors described in "Part I – Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
Other than the risks described below, there have been no material changes from the risk factors previously disclosed in "Part I – Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019. However, the risks below and disclosed in our Annual Report on Form 10-K may be, and will continue to be, exacerbated by the COVID-19 pandemic and any worsening of the economic environment, The risks previously disclosed in our Annual Report on Form 10-K should be read together with the other information disclosed elsewhere in this Quarterly Report on Form 10-Q and our other reports filed with the SEC.
Events outside of our control, including public health crises such as the COVID-19 pandemic, have and may continue to negatively affect the results of our operations.
Periods of market volatility may continue in response to pandemics, such as the COVID-19 pandemic, or other events outside of our control. These types of events have and could continue to adversely affect our operating results. In December 2019, COVID-19 surfaced in Wuhan, China, and continues to spread globally including in the United States. As a result of the COVID-19 pandemic, we have and may continue to experience difficulty collecting timely interest and principal payments from our borrowers, our asset values have and may continue to decline, and certain of our outstanding loans may need to be extended or restructured. We have held discussions with our borrowers and they have expressed their general concern about the uncertain economic condition. We believe that it is premature to determine the magnitude of the impact to our future operating results at this point. The impact to our results will depend to a large extent on future developments and new information that may emerge regarding the duration of the coronavirus and the actions taken by authorities and other entities to contain the coronavirus or treat its impact, all of which are beyond our control. These impacts, the duration of which remains uncertain, have and may continue to adversely affect our operating results.
We have been, and will continue to be, adversely impacted by the outbreak of COVID-19.
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. Shortly thereafter, the President of the United States declared a National Emergency throughout the United States attributable to such outbreak. The outbreak has become increasingly widespread in the United States, including in the markets in which we operate. We continue to assess the effects of the COVID-19 pandemic on our portfolio companies, and are taking steps to help mitigate the adverse consequences to each of their businesses stemming from the COVID-19 pandemic; however, though the magnitude of the impact remains to be seen, our portfolio companies and by extension our operating results will be adversely impacted by the COVID-19 pandemic.
In addition to adverse United States domestic and global macroeconomic effects, including the adverse impacts on our portfolio companies and investment assets, the COVID-19 pandemic has caused, and will continue to cause, a reduction in our ability to access capital and through our credit facilities, and has otherwise adversely impacted, and will continue to impact, the operation of our business. The COVID-19 pandemic has also caused, and will continue to cause, substantial disruption to our employees, investors, business partners, referral sources, borrowers and prospective borrowers through self-isolation, travel limitations, business restrictions, and otherwise. Many areas within the United States have imposed mandatory closures for
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businesses not deemed to be essential, and it is currently unclear for how long such closures will last. Though all of our employees are able to work remotely, these closures have nevertheless affected many of our borrowers and many businesses through which we seek new borrowers, resulting in significant declines in new loans and investments. These effects, individually or in the aggregate, have, and will continue to, adversely impact our business, financial condition, operating results and cash flows and such adverse impacts may be material.
Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially increase our costs, negatively impact our investment income and damage our results of operations and our liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted.
The effects of the outbreak of COVID-19 have negatively affected the global economy, the United States economy and the global financial markets, and have and may continue to disrupt our operations and our borrowers' operations, which have and may continue to adversely impact our business, financial condition and results of operations.
The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and United States economies and financial markets. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability. The United States now has the world’s most reported COVID-19 cases, and all 50 states and the District of Columbia have reported cases of infected individuals. A majority of states, including Illinois, where we are headquartered, have declared states of emergency. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the beginning of the COVID-19 pandemic, more than 30 million people have filed claims for unemployment, and stock markets have declined in value and, in particular, BDC stocks have significantly declined in value. In response to the COVID-19 pandemic, the Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused OFS Advisor to modify its business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. OFS Advisor may take further actions as may be required by government authorities or that it determines are in the best interests of its employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.
As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
• | demand for our services may decline, making it difficult to grow assets and income; |
• | if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase, resulting in increased charges and reduced income; |
• | collateral for loans may decline in value, which could cause loan losses to increase; |
• | our fair values may continue to decrease if borrowers experience financial difficulties, which will adversely affect our net income; |
• | increased amendments and/or restructuring to the terms or our portfolio company loan agreements, which may increase the amount of PIK interest, and defer the collection of cash interest and/or increase the risk of default; |
• | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; |
• | as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; |
• | a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; |
• | we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and |
• | reduction in our ability to access capital, including our credit facilities, may cause a distressed liquidity position and result in a decrease or inability to pay dividends. |
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Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of our executive officers or directors or key employees of OFS Advisor due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above has and could continue to negatively impact our business, financial condition and results of operations and prospects.
Due to the COVID-19 pandemic or other disruptions in the economy, we may not be able to increase our dividends and may reduce or defer our dividends and choose to incur US federal excise tax in order preserve cash and maintain flexibility.
As a BDC, we are not required to make any distributions to stockholders other than in connection with our election to be taxed as a RIC under subchapter M of the Code. In order to maintain our tax treatment as a RIC, we must distribute to stockholders for each taxable year at least 90% of our investment company taxable income (i.e., net ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses). If we qualify for taxation as a RIC, we generally will not be subject to corporate-level US federal income tax on our investment company taxable income and net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) that we timely distribute to stockholders. We will be subject to a 4% US federal excise tax on undistributed earnings of a RIC unless we distribute each calendar year at least the sum of (i) 98.0% of our ordinary income for the calendar year, (ii) 98.2% of our capital gains in excess of capital losses for the one-year period ending on October 31 of the calendar year, and (iii) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income tax.
Under the Code, we may satisfy certain of our RIC distributions with dividends paid after the end of the current year. In particular, if we pay a distribution in January of the following year that was declared in October, November, or December of the current year and is payable to shareholders of record in the current year, the dividend will be treated for all US federal tax purposes as if it were paid on December 31 of the current year. In addition, under the Code, we may pay dividends, referred to as “spillover dividends,” that are paid during the following taxable year that will allow us to maintain our qualification for taxation as a RIC and eliminate our liability for corporate-level U.S. federal income tax. Under these spillover dividend procedures, we may defer distribution of income earned during the current year until December of the following year. For example, we may defer distributions of income earned during 2020 until as late as December 31, 2021. However, if we choose to pay a spillover dividend, we will still incur the 4% U.S. federal excise tax on some or all of the distribution.
Due to the COVID-19 pandemic or other disruptions in the economy, we anticipate that we may take certain actions with respect to the timing and amounts of our distributions in order to preserve cash and maintain flexibility. For example, we anticipate that we will not be able to increase our dividends. In addition, we may reduce our dividends and/or defer our dividends to the following taxable year. If we defer our dividends, we may choose to utilize the spillover dividend rules discussed above and incur the 4% U.S. federal excise tax on such amounts. To further preserve cash, we may combine these reductions or deferrals of dividends with one or more distributions that are payable partially in our stock.
We may in the future choose to pay distributions in our own stock, in which case stockholders may be required to pay tax in excess of the cash they receive.
We distribute taxable distributions that are payable in cash or shares of our common stock at the election of each stockholder. In accordance with guidance issued by the Internal Revenue Service, a publicly traded RIC should generally be eligible to treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder is permitted to elect to receive his or her distribution in either cash or stock of the RIC (even where there is a limitation on the percentage of the distribution payable in cash, provided that the limitation is at least 20% or some lesser amount, if permitted by subsequent guidance), subject to the satisfaction of certain guidelines. If too many stockholders elect to receive their distributions in cash, each such stockholder would receive a pro rata share of the total cash to be distributed and would receive the remainder of their distribution in shares of stock. If this and certain other requirements are met, for U.S. federal income tax purposes, the amount of the distribution paid in stock generally will be a taxable distribution in an amount equal to the amount of cash that could have been received instead of stock. If we decide to make any distributions consistent with this guidance that are payable in part in our stock, stockholders receiving such distribution would be required to include the full amount of the distribution (whether received in cash, our stock, or a combination thereof) as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, it may be subject to transaction fees (e.g., broker fees or transfer agent fees) and the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale.
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Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock.
Uncertainty relating to the LIBOR calculation process may adversely affect the value of any portfolio of LIBOR-indexed, floating-rate debt securities.
Concerns have been publicized that some of the member banks surveyed by the British Bankers' Association (“BBA”) in connection with the calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in various jurisdictions are ongoing.
Actions by the BBA, regulators or law enforcement agencies may result in changes to the manner in which LIBOR is determined. Uncertainty as to the nature of such potential changes may adversely affect the market for LIBOR-based securities, including our potential portfolio of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our potential portfolio of LIBOR-indexed, floating-rate debt securities.
On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next several years. As a result of this transition, interest rates on financial instruments tied to LIBOR rates, as well as the revenue and expenses associated with those financial instruments, may be adversely affected. Further, any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could adversely affect the value of our financial instruments tied to LIBOR rates. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index calculated by short term repurchase agreements, backed by Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). The first publication of SOFR was released in April 2018. Whether or not SOFR attains market traction as a LIBOR replacement remains a question and the future of LIBOR at this time is uncertain. In addition, on March 25, 2020, the FCA stated that although the central assumption that firms cannot rely on LIBOR being published after the end of 2021 has not changed, the outbreak of COVID-19 has impacted the timing of many firms’ transition planning, and the FCA will continue to assess the impact of the COVID-19 outbreak on transition timelines and update the marketplace as soon as possible.
Additionally, on July 12, 2019 the Staff of the SEC’s Division of Corporate Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant issued a statement about the potentially significant effects on financial markets and market participants when LIBOR is discontinued in 2021 and no longer available as a reference benchmark rate. The Staff encouraged all market participants to identify contracts that reference LIBOR and begin transitions to alternative rates. On December 30, 2019, the SEC’s Chairman, Division of Corporate Finance and Office of the Chief Accountant issued a statement to encourage audit committees in particular to understand management’s plans to identify and address the risks associated with the elimination of LIBOR, and, specifically, the impact on accounting and financial reporting and any related issues associated with financial products and contracts that reference LIBOR, as the risks associated with the discontinuation of LIBOR and transition to an alternative reference rate will be exacerbated if the work is not completed in a timely manner.
The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, or on our overall financial condition or results of operations. If LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period ended March 31, 2020, we sold 10,973 shares of our common stock for gross proceeds of $160,000, or a weighted average price of $14.58 per share, to investors who participated in the Offering and each of whom met the criteria of an “accredited investor” as defined in Rule 501 of Regulation D under the Securities Act.
The offer and sale of the Company’s common stock in the Offering was exempt from the registration requirements of the Securities Act pursuant to Section 4(a)(2) of, and Rule 506 of Regulation D under, the Securities Act. We paid $15,800 in commissions in connection with the sale of the shares. On May 19, 2017, OFS Advisor agreed to pay the dealer manager fee on subsequent sales of shares of our common stock in the Offering. Effective July 1, 2019, we will pay the dealer manager fee on subsequent sales of shares of our common stock in the Offering. Previous payments of dealer manager fees by OFS Advisor are not subject to reimbursement by us.
Because shares of our common stock have been acquired by investors in one or more transactions "not involving a public offering," they are "restricted securities" and may be required to be held indefinitely. Our common stock may not be sold, transferred, assigned, pledged or otherwise disposed of unless: (i) the transferor provides OFS Advisor with at least 10 days written notice of the transfer; (ii) the transfer is made in accordance with applicable securities laws; and (iii) the transferee agrees in writing to be bound by these restrictions and the other restrictions imposed on the common stock and to execute such other instruments or certifications as are reasonably required by us. Accordingly, an investor must be willing to bear the economic risk of investment in the common stock until we are liquidated. No sale, transfer, assignment, pledge or other disposition, whether voluntary or involuntary, of the common shares may be made except by registration of the transfer on our books.
On November 6, 2018, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our board of directors approved the application of a reduced 150% asset coverage ratio to us. In accordance with the SBCAA, we extended to each of our stockholders as of November 6, 2018, an offer to repurchase the equity securities held by such stockholders, with 25% of such equity securities to be repurchased in each of the four quarters following November 6, 2018. As a result, effective November 6, 2019, the asset coverage ratio test applicable to us decreased from 200% to 150%. Additionally, in November 2019 and February 2020, the Company's Board subsequently approved tender offers to purchase, in each case, 2.5% of the weighted average number of shares of the outstanding Common Stock for the trailing 12-month period.
The following table summarizes the common stock repurchases by us as of March 31, 2020:
Number of Shares | Amount | ||||||
November 6, 2018 through December 31, 2018 | 18,425 | $ | 243,030 | ||||
January 1, 2019 through April 5, 2019 (1) | 7,407 | 98,296 | |||||
April 6, 2019 through June 30, 2019 | 9,029 | 119,821 | |||||
July 1, 2019 through September 30, 2019 | 7,407 | 97,111 | |||||
October 1, 2019 through December 31, 2019 | 15,597 | 204,317 | |||||
January 1, 2020 through April 3, 2020 (2) | 32,622 | 364,383 |
(1) The Company's February 11, 2019 tender offer that was originally scheduled to end on March 27, 2019, was amended to extend the offer period to April 5, 2019.
(2) The Company's February 21, 2020 tender offer that was originally schedule to end on March 27, 2020, was amended to extend the offer period to April 3, 2020.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
Listed below are the exhibits that are filed as part of this report (according to the number assigned to them in Item 601 of Regulation S-K):
Incorporated by Reference | |||||
Exhibit Number | Description | Form and SEC File No. | Filing Date with SEC | Filed with this 10-Q | |
11.1 | Computation of Per Share Earnings | + | |||
14.1 | * | ||||
31.1 | * | ||||
31.2 | * | ||||
32.1 | † | ||||
32.2 | † |
+ | Included in the statements of operations contained in this report |
* | Filed herewith. |
† | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: May 15, 2020 | HANCOCK PARK CORPORATE INCOME, INC. | |
By: | /s/ Bilal Rashid | |
Name: | Bilal Rashid | |
Title: | Chief Executive Officer | |
By: | /s/ Jeffrey A. Cerny | |
Name: | Jeffrey A. Cerny | |
Title: | Chief Financial Officer |
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