AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Note 4. Fair Value of Investments
Fair Value Disclosures
The following tables present the fair value hierarchy of financial instruments as of March 31, 2021 and December 31, 2020:
| | |
Assets at Fair Value as of March 31, 2021 |
| (Amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total |
| First lien senior secured debt | | $ | - | | | $ | – | | | $ | 80,517 | | | $ | 80,517 |
| Sponsor subordinated note | | | - | | | | – | | | | 9 | | | | 9 |
| Foreign currency forward contracts | | | - | | | | 16 | | | | – | | | | 16 |
| Total | | $ | - | | | $ | 16 | | | $ | 80,526 | | | $ | 80,542 |
Investments measured at net asset value(1) | | | | | | | | | | | | | | | 4,061 |
| Total financial instruments, at fair value | | | | | | | | | | | | | | $ | 84,603 |
| | | �� | | | | | | | | | | | | | |
| (1) Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities. |
| | |
Assets at Fair Value as of December 31, 2020
|
| (Amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total |
| First lien senior secured debt | | $ | – | | | $ | – | | | $ | 75,805 | | | $ | 75,805 |
| Sponsor subordinated note | | | – | | | | – | | | | 7 | | | | 7
|
| Total | | $ | – | | | $ | – | | | $ | 75,812 | | | $ | 75,812 |
Investments measured at net asset value(1) | | | | | | | | | | | | | | | 3,721
|
| Total financial instruments, at fair value | | | | | | | | | | | | | | $ | 79,533
|
| | | | | | | | | | | | | | | | |
(1) Certain investments that are measured at fair value using NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the Consolidated Statements of Assets and Liabilities. |
The following tables present changes in the fair value of investments for which Level 3 inputs were used to determine the fair value for the three months ended March 31, 2021 and 2020:
| | |
Level 3 Assets at Fair Value for the Three Months Ended March 31, 2021* |
| (Amounts in thousands) | | Balance 1/1/2021 | | | Purchases and Drawdowns | | | Sales and Paydowns | | | Other** | | | Realized Gains/ (Losses) | | | Change in Unrealized Appreciation/(Depreciation) | | | Balance 3/31/2021 | | | Change in Unrealized Appreciation/ (Depreciation) for Level 3 Assets Still Held as of 3/31/2021 | |
| First lien senior secured debt | | $ | 75,805 | | | $ | 13,930 | | | $ | (9,572 | ) | | $ | 175 | | | $ | 18 | | | $ | 161 | | | $ | 80,517 | | | $ | 161 | |
| Sponsor subordinated note | | | 7 | | | | 2 | | | | – | | | | 1 | | | | – | | | | (1 | ) | | | 9 | | | | (1 | ) |
| Total | | $ | 75,812 | | | $ | 13,932 | | | $ | (9,572 | ) | | $ | 176 | | | $ | 18 | | | $ | 160 | | | $ | 80,526 | | | $ | 160 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| * Gains and losses are included in their respective captions in the consolidated statement of operations. | | | | | | | | | |
| ** Includes accretion, paydown gains/(losses) and interest received in-kind on debt instruments, where applicable. | | | | | | | | | |
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
| | |
Level 3 Assets at Fair Value for the Three Months Ended March 31, 2020* |
| (Amounts in thousands) | | Balance 1/1/2020 | | | Purchases and Drawdowns | | | Sales and Paydowns | | | Other** | | | Realized Gains/ (Losses) | | | Change in Unrealized Appreciation/(Depreciation) | | | Balance 3/31/2020 | | | Change in Unrealized Appreciation/ (Depreciation) for Level 3 Assets Still Held as of 3/31/2020 | |
| First lien senior secured debt | | $ | 38,156 | | | $ | 22,155 | | | $ | (922 | ) | | $ | 58 | | | $ | – | | | $ | (1,590 | ) | | $ | 57,857 | | | $ | (1,590 | ) |
| Sponsor subordinated note | | | – | | | | 6 | | | | – | | | | – | | | | – | | | | (1 | ) | | | 5 | | | | (1 | ) |
| Total | | $ | 38,156 | | | $ | 22,161 | | | $ | (922 | ) | | $ | 58 | | | $ | – | | | $ | (1,591 | ) | | $ | 57,862 | | | $ | (1,591 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| * Gains and losses are included in their respective captions in the consolidated statement of operations. | | | | | | | | | |
| ** Includes accretion, paydown gains/(losses) and interest received in-kind on debt instruments, where applicable. | | | | | | | | | |
Debt Not Carried at Fair Value
The fair value of the Company’s subscription facility, which would have been categorized as Level 3 within the fair value hierarchy as of March 31, 2021 and December 31, 2020, approximates its carrying value.
Significant Unobservable Inputs
In accordance with ASC 820, the following tables provide quantitative information about the significant unobservable inputs of the Company’s Level 3 investments as of March 31, 2021 and December 31, 2020. The table is not intended to be all-inclusive but instead capture the significant unobservable inputs relevant to the Company’s determination of fair value.
| | | Fair Value | | | | | | | | | | Impact to Valuation |
| | | as of | | Valuation | Significant | | | | | Weighted | | from an Increase |
| Asset Class | | 3/31/2021 | | Techniques | Unobservable Inputs | | Input Ranges | | | Average | | in Input |
| | | (Amounts in thousands)
| | | | | |
| | |
| |
| First lien senior secured debt | | $ | 69,745 | | Discounted cash flow | Yield | | | 6.5% - 11.4% |
| | | 8.1% |
| Decrease |
| Sponsor subordinated note | | | 9 | | Market comparable | LTM EBITDA multiple | | | 7.0x |
| | | | | Increase |
| | | $ | 69,754 | | | | | | | | | | | | |
| | | Fair Value | | | | | | | | | | Impact to Valuation |
| | | as of | | Valuation | Significant | | | | | Weighted | | from an Increase |
| Asset Class | | 12/31/2020 | | Techniques | Unobservable Inputs | | Input Ranges | | | Average(1) | | in Input |
| | | (Amounts in thousands)
| | | | | | | | | | |
| First lien senior secured debt | | $ | 64,571 | | Discounted cash flow | Yield | | | 6.3% - 11.4% |
| | | 8.0% |
| Decrease |
| Sponsor subordinated note | | | 7 | | Market comparable | LTM EBITDA multiple | | | 7.0x |
| | | | | Increase |
| | | $ | 64,578 | | | | | | | | | | | | |
The Company’s other Level 3 investments have been valued primarily using recent transactions. The significant unobservable input used in the discounted cash flow is the yield. The yield is used to discount the estimated future cash flows expected to be received from the underlying investment. The Company considers the portfolio company performance since close, the leverage used by the portfolio company relative to its total enterprise value and other risks associated with an investment in determining the yield. The significant unobservable input used in the market comparable is the LTM EBITDA multiple
Note 5. Subscription Facility
In accordance with the 1940 Act, the Company can borrow amounts such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings, subject to certain limitations. There were no outstanding borrowings as of March 31, 2021 and December 31, 2020.
On August 14, 2019, the Company entered into a revolving credit facility (the “Subscription Facility”) with Wells Fargo Bank, National Association (the “Lender”). The Subscription Facility enables the Company to request loans from the Lender up to a maximum commitment of $15 million. The borrowings under the Subscription Facility are collateralized by the eligible unfunded capital commitments of investors in the Company. The total amount available under the Subscription Facility may be reduced as a result of decreases in the unfunded capital
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
commitments of investors in the Company as well as other provisions of the Subscription Facility.
Borrowings under the Subscription Facility bear interest at either (i) LIBOR plus the applicable margin of 1.50%, if the borrowing is a LIBOR Rate Loan or (ii) the Prime Rate plus the applicable margin of 0.50%, if the borrowing is a Reference Rate Loan. As of March 31, 2021 and December 31, 2020, there were no outstanding borrowings. In addition, the Company pays an unused commitment fee of 0.20% per annum on the daily unused commitments of the Lender. The maturity date of the Subscription Facility is August 12, 2022.
The Subscription Facility contains representations, warranties, covenants, including financial covenants, events of default and indemnities that are customary for agreements of this type. As of March 31, 2021 and December 31, 2020, the Company is in compliance in all material respects with such covenants.
Debt obligations consisted of the following as of March 31, 2021:
| | |
As of March 31, 2021
|
| (Amounts in thousands) | | Maximum Principal Amount Committed | | | Principal Amount Outstanding | | | Principal Amount Available(1) | | | Carrying Value |
| Subscription facility | | $ | 15,000 | | | $ | - | | | $ | 12,712 | | | $ | – |
| Total debt | | $ | 15,000 | | | $ | - | | | $ | 12,712 | | | $ | – |
(1) The amount available reflects any limitations related to the Subscription Facility’s borrowing base.
Debt obligations consisted of the following as of December 31, 2020:
| | |
As of December 31, 2020
|
| (Amounts in thousands) | | Maximum Principal Amount Committed | | | Principal Amount Outstanding | | | Principal Amount Available(1) | | | Carrying Value |
| Subscription facility | | $ | 15,000 | | | $ | – | | | $ | 13,900 | | | $ | – |
| Total debt | | $ | 15,000 | | | $ | – | | | $ | 13,900 | | | $ | – |
(1) The amount available reflects any limitations related to the Subscription Facility’s borrowing base.
For the three months ended March 31, 2021 and 2020, the components of interest expense were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
| Interest expense | | $ | 7 | | | $ | 98 | |
| Amortization of deferred financing costs | | | 53 | | | | 27 | |
| Total interest expense | | $ | 60 | | | $ | 125 | |
| Average interest rate | | | 3.54 | % | | | 3.04 | % |
| Average daily borrowings | | $ | 56 | | | $ | 9,293 | |
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Note 6. Agreements and Related Party Transactions
Administration Agreement
On June 26, 2019, the Company entered into an Administration Agreement (the “Administration Agreement”) with Angelo Gordon (the “Administrator”). Under the terms of the Administration Agreement, the Administrator performs, or oversees the performance of, required administrative services, which include providing office space, equipment and office services, maintaining financial records, preparing reports to shareholders and reports filed with the SEC, and managing the payment of expenses and the performance of administrative and professional services rendered by others.
The Company reimburses the Administrator for services performed for it pursuant to the terms of the Administration Agreement. In addition, pursuant to the terms of the Administration Agreement, the Administrator may delegate its obligations under the Administration Agreement to an affiliate or to a third party and the Company will reimburse the Administrator for any services performed for it by such affiliate or third party.
Unless earlier terminated as described below, the Administration Agreement will remain in effect until June 26, 2021 and from year to year thereafter if approved annually by the vote of the Board of Directors of the Company and the vote of a majority of the Company’s Independent Directors. The Administration Agreement may be terminated by either party without penalty upon not less than 60 days’ written notice to the other.
No person who is an officer, director, or employee of the Administrator or its affiliates and who serves as a director of the Company receives any compensation from the Company for his or her services as a director. However, the Company reimburses the Administrator (or its affiliates) for an allocable portion of the compensation paid by the Administrator or its affiliates to the Company’s officers who provide operational and administrative services, as well as their respective staffs and other professionals who provide services to the Company, who assist with the preparation, coordination and administration of the foregoing or provide other “back office” or “middle office” financial or operational services to the Company (based on the percentage of time those individuals devote, on an estimated basis, to the business and affairs of the Company). Directors who are not affiliated with the Administrator receive compensation for their services and reimbursement of expenses incurred to attend meetings.
For the three ended March 31, 2021, the Administrator charged approximately $0.1 million for certain costs and expenses allocable to the Company under the terms of the Administration agreement. For the three months ended March 31, 2020, the Administrator had the option to charge approximately $0.2 million for certain costs and expenses allocable to the Company under the terms of the Administration Agreement, all of which were waived and borne by the Administrator for those periods.
Investment Management Agreement
On June 26, 2019, the Company entered into an Investment Management Agreement (the “Investment Management Agreement”) with the Advisor. Under the terms of the Investment Management Agreement, the Advisor is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring the Company’s investments and monitoring the Company’s investments and portfolio companies on an ongoing basis.
Unless earlier terminated as described below, the Investment Management Agreement will remain in effect until June 26, 2021 and from year to year thereafter if approved annually by (a) the vote of the Board of Directors of the Company or by the vote of a majority of the outstanding voting securities of the Company and (b) the vote of a majority of the Company’s Independent Directors. The Investment Management
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Agreement will automatically terminate in the event of assignment. The Investment Management Agreement may be terminated without penalty upon not less than 60 days’ written notice by the vote of a majority of the outstanding voting securities of the Company, or by the vote of the Company’s Directors or by the Advisor.
From time to time, the Advisor may pay amounts owed by the Company to third-party providers of goods or services and the Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Amounts payable to the Advisor are settled in the normal course of business without formal payment terms.
The Investment Management Agreement also provides that the Company reimburses the Advisor for certain organizational costs incurred prior to the commencement of the Company’s operations, and for certain offering costs. The Company has agreed to repay the Advisor for initial organizational costs and offering costs up to a maximum of $1.25 million, with the Advisor bearing any organizational and offering costs in excess of such amount.
As of March 31, 2021, the Company had approximately $0.6 million payable to Angelo Gordon for operating costs which is included in “Accrued expenses and other liabilities payable to affiliate” on the consolidated statement of assets and liabilities. As of December 31, 2020, the Company had approximately $0.5 million payable to Angelo Gordon for operating costs, which is included in "Accrued expenses and other liabilities payable to affiliate" on the consolidated statement of assets and liabilities.
Under the terms of the Investment Management Agreement, the Company will pay the Advisor a base management fee and may also pay to it certain incentive fees. The cost of both the base management fee and the incentive fee will ultimately be borne by the Company’s shareholders.
The base management fee is calculated at an annual rate of 0.60% of the Company’s gross assets, excluding cash and cash equivalents. For services rendered under the Investment Management Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of the Company’s gross assets (excluding cash and cash equivalents) at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. Base management fees for any partial month or quarter will be appropriately pro-rated. For purposes of the Investment Management Agreement, cash equivalents means U.S. government securities and commercial paper instruments maturing within one year of purchase. Upon the occurrence of a Qualified IPO, the base management fee will be calculated at an annual rate of 1.25% of the Company’s gross assets, excluding cash and cash equivalents.
For the three months ended March 31, 2021, the Company accrued approximately $123,000 of base management fees payable to the Advisor. For the three months ended March 31, 2020, the Company accrued approximately $74,000 of base management fees payable to the advisor. As of March 31, 2021 and December 31, 2020, base management fees payable by the Company to the Advisor were approximately $123,000 and $105,000, respectively.
Pursuant to the Investment Management Agreement, the Advisor is entitled to an incentive fee (“Incentive Fee”), which consists of two components; an incentive fee based on income and an incentive fee based on capital gains.
The first part, the income incentive fee, is calculated and payable quarterly in arrears and equals (a) 100% of the excess of the Company’s pre-incentive fee net investment income for the immediately preceding calendar quarter, over a preferred return of 1.00% per quarter (4% annualized) (the “Hurdle”), until the
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Advisor has received a “catch-up” equal to 16.75% of the pre-incentive fee net investment income for the current quarter; and (b) 16.75% of all remaining pre-incentive fee net investment income above the “catch-up.”
The second part, the capital gains incentive fee, is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Investment Management Agreement), and equals 16.75% of the Company’s realized capital gains, if any, on a cumulative basis from inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees (the “Cumulative Capital Gains”).
For the three months ended March 31, 2021, the Company accrued approximately $147,000 of income incentive fees payable to the Advisor, of which $147,000 were unpaid as of March 31, 2021. For the three months ended March 31, 2020, the Company accrued approximately $39,000 of income incentive fees payable to the Advisor. As of December 31, 2020, the Company had approximately $99,000 of income incentive fees payable to the Advisor.
Affiliated Transactions
The Company may be prohibited under the 1940 Act from participating in certain transactions with its affiliates without prior approval of the Company’s Independent Directors, and in some cases, the prior approval of the SEC. The Company intends to rely on exemptive relief that has been granted by the SEC to the Company, the Advisor, and Angelo Gordon to permit the Company to co-invest with other funds managed by the Advisor or Angelo Gordon, in a manner consistent with the Company’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors.
Pursuant to such exemptive relief, the Company is generally permitted to co-invest with certain of its affiliates if a “required majority” (as defined in Section 57(o) of the 1940 Act) of the Board make 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 the Company and its shareholders and do not involve overreaching of the Company or its shareholders on the part of any person concerned, (2) the transaction is consistent with the interests of the Company’s shareholders and is consistent with its investment objective and strategies, and (3) the investment by its affiliates would not disadvantage the Company, and the Company’s participation would not be on a basis different from or less advantageous than that on which its affiliates are investing. In certain situations where co-investment with one or more funds managed by Angelo Gordon is not permitted or appropriate, Angelo Gordon will need to decide which funds will proceed with the investment. Angelo Gordon will make these determinations based on its policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations.
Investment in Affiliated Fund
Fair value as of March 31, 2021 and 2020 and transactions during the three months ended March 31, 2021 and 2020 of the Company’s investments in affiliates were as follows:
| | | Investment in Affiliated Fund at Fair Value for the Three Months Ended March 31, 2021 |
| (Amounts in thousands) | | Fair Value as of January 1, 2021 | | | Gross Additions | | | Gross Reductions | | | Net Realized Gain (Loss) | | | Net Change in Unrealized Appreciation (Depreciation) | | | Fair Value as of March 31, 2021 | | | Dividend, Interest, PIK and Other Income |
| Non-controlled/affiliated investments | | | | | | | | | | | | | | | | | | | | |
| Twin Brook Equity Holdings, LLC | | $ | 3,721 | | | $ | 130 | | | $ | (2 | ) | | $ | – | | | $ | 212 | | | $ | 4,061 | | | $ | – |
| Total non-controlled/affiliated investments | | $ | 3,721 | | | $ | 130 | | | $ | (2 | ) | | $ | – | | | $ | 212 | | | $ | 4,061 | | | $ | – |
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
| | | Investment in Affiliated Fund at Fair Value for the Three Months Ended March 31, 2020 |
| (Amounts in thousands) | | Fair Value as of January 1, 2020
| | | Gross Additions | | | Gross Reductions | | | Net Realized Gain (Loss) | | | Net Change in Unrealized Appreciation (Depreciation) | | | Fair Value as of March 31, 2020 | | | Dividend, Interest, PIK and Other Income |
| Non-controlled/affiliated investments | | | | | | | | | | | | | | | | | | | | |
| Twin Brook Equity Holdings, LLC | | $ | 1,641
| | | $ | 479 | | | $ | – | | | $ | – | | | $ | (361
| ) | | $ | 1,759 | | | $ | – |
| Total non-controlled/affiliated investments | | $ | 1,641
| | | $ | 479 | | | $ | – | | | $ | – | | | $ | (361 | )
| | $ | 1,759 | | | $ | – |
Note 7. Derivatives
The Company may enter into foreign currency forward contracts from time to time to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies.
In order to better define its contractual rights and to secure rights that will help the Company mitigate its counterparty risk, the Company may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or a similar agreement with its derivative counterparties. An ISDA Master Agreement is a bilateral agreement between the Company and a counterparty that governs OTC derivatives, including foreign currency forward contracts, and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of a default (close-out netting) or similar event, including the bankruptcy or insolvency of the counterparty. The Company minimizes counterparty credit risk by only entering into agreements with counterparties that it believes to be of good standing and by monitoring the financial stability of those counterparties.
For the three months ended March 31, 2021, the Company’s average USD notional exposure to foreign currency forward contracts was $809,026.
The following table presents both gross and net information about derivative instruments eligible for offset in the consolidated statements of assets and liabilities as of March 31, 2021.
| Counterparty | | Gross Amount of Assets | | | Gross Amount of Liabilities | | | Net Amount of Assets/(Liabilities) | | | Collateral Received/Pledged(1) | | | Net Amounts(2) |
| Wells Fargo Bank, National Association | | $ | 16 | | | $ | – | | | $ | 16 | | | $ | – | | | $ | 16 |
| | | | | | | | | | | | | | | | | | | | |
| (1) Amount excludes excess cash collateral paid. | | | | | | | | | | | | | | | | | | | |
| (2) Net amount represents the net amount due (to) from counterparty in the event of a default based on the contractual setoff rights under the agreement. Net amount excludes any over-collateralized amounts. |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The effect of transactions in derivative instruments on the consolidated statements of operations during the three months ended March 31, 2021 was as follows:
| | | Three Months Ended March 31, 2021 | |
| Net change in unrealized gain (loss) on foreign currency forward contracts | | $ | 16 | |
There were no derivative transactions entered in to or outstanding for the year ended December 31, 2020.
Note 8. Commitments and Contingencies
Commitments
The Company’s investment portfolio may contain debt investments that are in the form of revolving lines of credit and unfunded delayed draw commitments, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements.
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Unfunded portfolio company commitments and funded debt investments are presented on the consolidated schedule of investments and are fair valued. Unrealized appreciation or depreciation, if any, is included in the consolidated statement of assets and liabilities and consolidated statement of operations.
As of March 31, 2021 and December 31, 2020, the Company had the following outstanding commitments to fund investments in current portfolio companies:
| Portfolio Company | | March 31, 2021 | | December 31, 2020 | |
First lien senior secured debt(1) | | (Amounts in thousands) | | (Amounts in thousands) | |
| 50Floor, LLC | | $ | 199 | | $ | 199 | |
| Advanced Lighting Acquisition, LLC | | | 162 | | | 162 | |
| Affinitiv, Inc. | | | 248 | | | 248 | |
| ALM Media, LLC | | | 776 | | | 971 | |
| AM Buyer, LLC | | | 111 | | | 108 | |
| Anne Arundel Dermatology Management, LLC | | | 634 | | | 780 | |
| Apex Dental Partners, LLC | | | 566 | | | 600 | |
| Aquatic Sales Solutions, LLC | | | 150 | | | 135 | |
| ASP Global Acquisition, LLC | | | 534 | | | 534 | |
| Banner Buyer, LLC | | | 1,269 | | | 1,343 | |
| BBG Intermediate Holdings, Inc. | | | 210 | | | – | |
| Beacon Oral Specialists Management LLC | | | 686 | | | 686 | |
| BRTS Holdings, LLC | | | 400 | | | 341 | |
| Canadian Orthodontic Partners Corp. | | | 600 | | | – | |
| Copperweld Group, Inc. | | | 400 | | | 400 | |
| Cosmetic Solutions, LLC | | | 710 | | | 710 | |
| DealerOn Inc. | | | 314 | | | 314 | |
| Empire Equipment Company, LLC | | | 1,379 | | | 1,254 | |
| EMSAR Acquisition LLC | | | 774 | | | – | |
| Engelman Baking Co., LLC | | | 157 | | | 157 | |
| G2O Technologies, LLC | | | 207 | | | 207 | |
| Geriatric Medical and Surgical Supply, LLC | | | 270 | | | 270 | |
| Groundworks Operations, LLC | | | 967 | | | 739 | |
| Hydromax USA, LLC | | | 216 | | | 330 | |
| Industrial Dynamics Company, Ltd. | | | 141 | | | 141 | |
| Innovative FlexPak, LLC | | | 627 | | | 627 | |
| ISSA, LLC | | | 131 | | | – | |
| Jansy Packaging, LLC | | | 706 | | | 676 | |
| Kalkomey Enterprises, LLC | | | 77 | | | 77 | |
| Lakeshirts LLC | | | 650 | | | 703 | |
| Legility, LLC | | | 123 | | | 123 | |
| Leonard Group, Inc. | | | 197 | | | – | |
| Library Associates, LLC | | | 211 | | | 211 | |
| Mattco Forge, Inc. | | | 506 | | | 506 | |
| Millennia Patient Services, LLC | | | 401 | | | – | |
| Montway LLC | | | 825 | | | 825 | |
––
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
| Portfolio Company | | March 31, 2021 | | December 31, 2020 | |
First lien senior secured debt(1) | | (Amounts in thousands) | | (Amounts in thousands) | |
| MRC Keeler Acquisition, LLC | | $ | 300 | | $ | 300 | |
| Nimlok Company, LLC | | | 11 | | | 11 | |
| NSG Buyer, Inc. | | | 294 | | | 294 | |
| Peak Dental Services, LLC | | | 636 | | | 636 | |
| Peak Investment Holdings, LLC | | | 809 | | | 809 | |
| Perimeter Brands Intermediate Holdco LLC | | | 210 | | | 210 | |
| Reliable Medical Supply LLC | | | 138 | | | 138 | |
| Revolution Plastics Buyer, LLC | | | 281 | | | 492 | |
| SAMGI Buyer, Inc. | | | 138 | | | 138 | |
| SCA Buyer, LLC | | | 484 | | | – | |
| SCP ENT and Allergy Services, LLC | | | 1,287 | | | 1,287 | |
| SCP Eye Care Services, LLC | | | – | | | 469 | |
| ShiftKey, LLC | | | 187 | | | – | |
| Silver Falls MSO, LLC | | | 178 | | | 178 | |
| Southeast Primary Care Partners, LLC | | | 525 | | | 525 | |
| Southern Orthodontic Partners Management, LLC | | | 659 | | | – | |
| Spear Education, LLC | | | 888 | | | 474 | |
| Spectrum Solutions, LLC | | | 267 | | | – | |
| Teel Plastics, LLC | | | 324 | | | 324 | |
| Triad Technologies, LLC | | | 314 | | | 282 | |
| United Land Services Opco Parent, LLC | | | 1,205 | | | – | |
| Vanguard Packaging, LLC | | | 535 | | | 535 | |
| Varsity DuvaSawko Operating Corp. | | | 474 | | | 474 | |
| Vital Care Buyer, LLC | | | 580 | | | 580 | |
| Total unfunded portfolio company commitments | | $ | 27,258 | | $ | 22,533 | |
(1) Unfunded commitments denominated in currencies other than USD have been converted to USD using the exchange rate as of the applicable reporting date.
As of March 31, 2021 and December 31, 2020, approximately $193,000 and $181,000, respectively, of the Company's unfunded revolver commitments are reserved for letters of credit issued to third party beneficiaries on behalf of the Company's investments.
Investor Commitments
As of March 31, 2021 and December 31, 2020, the Company had $216.0 million in total capital commitments from investors ($115.6 million and $126.4 million, respectively, undrawn). These undrawn capital commitments will no longer remain in effect following the completion of a Qualified IPO.
Four investors in the Company have aggregate capital commitments representing 100% of the Company’s total capital commitments. Such concentration of investor commitments could have a material effect on the Company.
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Other Commitments and Contingencies
From time to time, the Company may become a party to certain legal proceedings during the normal course of business. As of March 31, 2021, management was not aware of any material pending or threatened litigation.
Note 9. Net Assets
Subscriptions and Drawdowns
The Company has the authority to issue 100,000,000 shares of its common stock with a par value of $0.001 per share.
The Company has entered into subscription agreements with investors providing for the private placement of the Company’s common shares. Under the terms of the subscription agreements, investors are required to fund drawdowns to purchase the Company’s common shares up to the amount of their respective capital commitment on an as-needed basis each time the Advisor delivers a drawdown notice to such investors.
During the three months ended March 31, 2021 and 2020, the Advisor delivered the following capital call notices to investors:
Three Months Ended March 31, 2021
|
| | | | | Number of Common Shares Issued | | | Aggregate Offering Price ($ in millions) |
| | | | |
| Capital Drawdown Notice Date | | Common Share Issuance Date | | | |
March 16, 2021
| | March 30, 2021 | | | 540,000 | | | $ | 10.80 |
| Total | | | | | 540,000 | | | $ | 10.80 |
| Three Months Ended March 31, 2020 |
| | | | | Number of Common Shares Issued | | | Aggregate Offering Price ($ in millions) |
| | | | |
| Capital Drawdown Notice Date | | Common Share Issuance Date | | | |
| February 28, 2020 | | March 13, 2020 | | | 810,000 | | | $ | 16.20 |
| Total | | | | | 810,000 | | | $ | 16.20 |
Dividends
There were no dividends declared during the three months ended March 31, 2021 or 2020.
Note 10. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2021 and 2020:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands, except share and per share amounts) | | March 31, 2021 | | | March 31, 2020 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 1,303 | | | $ | (1,656 | ) |
| Weighted average shares of common stock outstanding - basic and diluted | | | 4,488,000 | | | | 2,320,220 | |
| Earnings (loss) per common share - basic and diluted | | $ | 0.29 | | | $ | (0.71 | ) |
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Note 11. Income Taxes
Taxable income generally differs from net increase (decrease) in net assets resulting from operations due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized gains or losses, as unrealized gains or losses are generally not included in taxable income until they are realized.
The Company makes certain adjustments to the classification of net assets as a result of permanent book-to-tax differences, which include differences in the book and tax basis of certain assets and liabilities, and nondeductible federal taxes or losses among other items. To the extent these differences are permanent, they are charged or credited to additional paid in capital or total distributable earnings (losses), as appropriate. There were no permanent differences for the three months ended March 31, 2021. For the three months ended March 31, 2020, permanent differences were approximately $170,000, consisting of nondeductible offering costs.
Note 12. Financial Highlights
The following are financial highlights for a common share outstanding during the three months ended March 31, 2021 and 2020:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| | | March 31, | | | March 31, | |
| (Amounts in thousands, except share and per share amounts) | | 2021 | | | 2020 | |
| Per share data: | | | | | | |
| Net asset value, beginning of period | | $ | 19.75 | | | $ | 19.77 | |
Net investment income (loss)(1) | | | 0.20 | | | | 0.13 | |
Net realized and unrealized gain (loss) on investment transactions(1) | | | 0.09 | | | | (0.84 | ) |
| Total from operations | | | 0.29 | | | | (0.71 | ) |
| Impact of issuance of common stock | | | (0.01 | ) | | | 0.22 | |
| Total increase (decrease) in net assets | | | 0.28 | | | | (0.50 | ) |
| Net asset value, end of period | | $ | 20.03 | | | $ | 19.27 | |
| Shares outstanding, end of period | | | 5,022,000 | | | | 2,970,000 | |
Total return(2) | | | 1.4 | % | | | (2.5 | )% |
| Ratios / supplemental data | | | | | | | | |
Ratio of gross expenses to average net assets(3)(4)(5) | | | 0.9 | % | | | 2.2 | % |
Ratio of net expenses to average net assets(3)(4)(6) | | | 0.9 | % | | | 1.8 | % |
Ratio of net investment income (loss) to average net assets(3)(4) | | | 1.0 | % | | | 0.7 | % |
| Net assets, end of period | | $ | 100,604 | | | $ | 57,245 | |
| Weighted average shares outstanding | | | 4,488,000 | | | | 2,320,220 | |
| Total capital commitments, end of period | | $ | 216,000 | | | $ | 216,000 | |
| Ratio of total contributed capital to total committed capital, end of period | | | 46.5 | % | | | 27.5 | % |
Portfolio turnover rate(7) | | | 11.7 | % | | | 1.9 | % |
Asset coverage ratio(8) | | | N/A | | | | 873.6 | % |
| (1) | The per share data was derived using the weighted average shares outstanding during the period. |
| (2) | Total return is calculated as the change in net asset value ("NAV") per share during the period, plus distributions per share, if any, divided by the NAV per share at the beginning of the period. |
| (3) | Not annualized. |
| (4) | Average net assets are computed using the average balance of net assets at the end of each month of the reporting period. |
| (5) | Ratio of gross expenses to average net assets is computed using expenses before waivers from the Administrator. |
| (6) | Ratio of net expenses to average net assets is computed using total expenses net of waivers from the Administrator. |
| (7) | Portfolio turnover rate is calculated using the lesser of total sales or total purchases over the average of the investments at fair value for the periods reported. |
| (8) | Asset coverage ratio is equal to (i) the sum of (A) net assets at the end of the period and (B) total debt outstanding at the end of the period, divided by (ii) total debt outstanding at the end of the period. |
AG Twin Brook BDC, Inc.
Notes to Consolidated Financial Statements (Unaudited) - Continued
Note 13. Subsequent Events
The Company’s management evaluated subsequent events through the date of issuance of these consolidated financial statements. There have been no subsequent events that occurred that would require disclosure in, or would be required to be recognized in, these consolidated financial statements, except as discussed below.
On April 14, 2021, the Board declared a dividend of $0.20 per share on the Company’s common stock, which is payable on April 30, 2021 to stockholders of record at the close of business on April 26, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In this quarterly report on Form 10-Q, or this "report," we refer to AG Twin Brook BDC, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our investment adviser, AG Twin Brook Manager, LLC, as our "Advisor," and we refer to the direct parent company of our Advisor, Angelo, Gordon & Co., L.P., as "Angelo Gordon." Angelo Gordon serves as the Company’s Administrator and may also be referred to herein as “Administrator”.
Forward-Looking Statements
This report includes estimates, projections, statements relating to our business plans, objectives, and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including the following sections: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” (Part II, Item 1A of this Form 10-Q). These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including the U.S. Department of the Treasury and the Federal Reserve, and the potential effects of actual and proposed legislation on us, our views on certain macroeconomic trends, and the impact of COVID-19. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied by the forward-looking statements. We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks identified under the captions “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “2020 10-K”). Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of AG Twin Brook BDC, Inc. This MD&A is provided as a supplement to, and should be read in conjunction with our 2020 10-K, our consolidated financial statements and the accompanying Notes to Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q).
Overview
AG Twin Brook BDC, Inc. is a Delaware corporation formed on February 4, 2016. We have elected to be regulated as a Business Development Company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, we have elected to be treated as a Regulated Investment Company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We were formed to provide risk-adjusted returns and current income to investors by investing primarily in middle market companies.
We are managed by our Advisor, a wholly-owned subsidiary of Angelo Gordon. The Advisor is registered as an investment adviser with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Advisers Act of 1940. Subject to the overall supervision of our board of directors (the “Board”), our Advisor manages our day-to-day operations, and provides investment advisory and management services to us. Our Advisor will be responsible for originating prospective investments,
conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring our investments, and monitoring our investments and portfolio companies on an ongoing basis.
We conduct private offerings (each, a “Private Offering”), where investors make a capital commitment to purchase shares of our common stock pursuant to a subscription agreement entered into with us. Investors will be required to make capital contributions to purchase shares of our common stock each time the Company delivers a drawdown notice. The initial closing of the Private Offering occurred on July 19, 2019 (the “Initial Closing”). As of March 31, 2021, we had $216 million in total capital commitments from investors. Upon the earlier to occur of (i) a Qualified IPO (as defined below), and (ii) the five year anniversary of the Initial Closing, investors will be released from any further obligation to purchase additional shares, subject to certain exceptions. A “Qualified IPO” is an initial public offering (“IPO”) of our common stock that results in an unaffiliated public float of at least the lower of (A) $60 million and (B) 17.5% of the aggregate capital commitments received prior to the date of such initial public offering.
As a BDC, we must invest at least 70% of our assets in “eligible portfolio companies,” generally, U.S. private operating companies (or small U.S. public operating companies with a market capitalization of less than $250 million). As a BDC, we may also invest up to 30% of our portfolio in non-eligible portfolio company investments, such as investments in non-U.S. companies, which may include investments in a “passive foreign investment company” (a “PFIC”). Because we have elected to be regulated as a BDC, and we intend to continue to qualify as a RIC under the Code, our portfolio will also be subject to the diversification and other requirements under the Code.
Investments
We invest principally in privately originated senior secured loans to U.S. middle market companies, which we believe have consistent capital needs and have not only been underserved in recent years by traditional providers of capital such as banks and the public debt markets, but also for a variety of reasons may prefer working with experienced non-bank lenders. Our origination strategy focuses on the middle market private equity community. This financing is utilized for a variety of purposes, including to fund organic growth, acquisitions, recapitalizations, management buyouts and leveraged buyouts for companies with revenue generally under $500 million. In describing our business, we generally use the term “middle market” to refer to companies with EBITDA of between $3 million and $50 million annually; however, we typically invest in companies with EBITDA of less than $25 million. Notwithstanding the foregoing, the Advisor may determine whether companies qualify as “middle market” in its sole discretion, and we may from time to time invest in larger or smaller companies.
By investing predominantly in senior secured debt, we expect to reduce our risk of principal loss and deliver more stable returns over time as compared with investments in bonds, unsecured loans, mezzanine investments and public, private and project equity. However, we may also invest opportunistically in other parts of the capital structure, including senior secured stretch and unitranche facilities, second lien loans, mezzanine and mezzanine-related loans, and equity investments, as well as select other subordinated instruments either directly or through acquisitions in the secondary market.
The level of our investment activity depends on many factors, including the amount of debt and equity capital available to prospective portfolio companies, the level of merger, acquisition and refinancing activity for such companies, the availability of credit to finance transactions, the general economic environment and the competitive environment for the types of investments we make, all of which have been, and may continue to be, impacted by COVID-19.
Revenues
We generate revenues primarily through the receipt of interest income from the investments we hold. In addition, we generate income from various loan origination and other fees and from dividends on direct equity investments. In addition, we may generate revenue in the form of commitment, origination, administration, amendment, and loan servicing fees. Loan origination fees, original issue discount and market discount or premium are capitalized as part of the underlying cost of the investments and accreted or amortized over the life of the investment as interest income. We record contractual prepayment premiums on loans and debt securities as interest income.
Our debt investment portfolio consists of primarily floating rate loans. As of March 31, 2021, 100% of our debt investments, based on fair value, bore interest at floating rates, which may be subject to interest rate floors. Variable-rate investments subject to a floor generally reset periodically to the applicable floor, only if the floor exceeds the index. Trends in base interest rates, such as LIBOR, may affect our net investment income over the long term. In addition, our results may vary from period to period depending on the interest rates of new investments made during the period compared to investments that were sold or repaid during the period; these results reflect the characteristics of the particular portfolio companies that we invested in or exited during the period and not necessarily any trends in our business or macroeconomic trends.
Dividend income that we receive from our ownership of private securities is recorded pursuant to the terms of the respective investments.
Expenses
Our primary operating expenses will include the payment of fees to the Advisor under the Investment Management Agreement, our allocable portion of overhead expenses under the Administration Agreement and other operating costs described below.
We are responsible for all costs and expenses incurred in connection with the operations of the Company and locating, structuring, evaluating, consummating, maintaining and disposing of investments and potential investments (whether or not the acquisition is consummated), including but not limited to legal, regulatory, accounting and other professional or third-party costs or disbursements including travel, rent or lodging, out-of-pocket expenses of the Advisor, the fees and expenses of any independent counsel engaged by the Advisor and out-of-pocket expenses related to third-party service providers (including loan servicer fees), placement agent fees and expenses, advertising expenses, litigation expenses, brokerage commissions, clearing and settlement charges and other transaction costs, custody fees, interest expenses, financing charges, initial and variation margin, broken deal expenses, compensation (which may include fees or performance-based compensation) of advisors, consultants and finders, joint venture partners, or other professionals relating to the Company’s operations and investments or potential investments (whether or not completed), which may include costs incurred to attend or sponsor networking and other similar events hosted by both for-profit and not-for-profit organizations (which may include organizations affiliated with current or prospective investors), specific expenses incurred in obtaining, developing or maintaining market data technology systems, research and other information and information service subscriptions utilized with respect to the Company’s investment program including fees to third party providers of research, portfolio risk management services (including the costs of risk management software or database packages), fees of pricing and valuation services, appraisal costs and brokerage expenses. We will also bear all commitment fees and any transfer or recording taxes, registration fees and other expenses in connection with acquisitions and dispositions of investments, and all expenses relating to the ownership and operation of investments, including taxes, interest, insurance, and other fees and expenses. Travel expenses may include first-class airfare and limited use of private or charter aircraft, as well as premium accommodations, in accordance with our Advisor’s policies related thereto.
In addition, we will bear all costs of the administration of the Company, including but not limited to accounting expenses (including accounting systems) and expenses relating to audit, legal and regulatory expenses (including filings with U.S. and non-U.S. regulators and compliance obligations), costs associated with our reporting and compliance obligations under the 1940 Act and other applicable U.S. federal and state securities laws, fees and expenses of any administrators in connection with the administration of the Company, expenses relating to the maintenance of registered offices of the Company to the extent provided by unaffiliated service providers, temporary office space of non-employee consultants or auditors, blue sky and corporate filing fees and expenses, corporate licensing expenses, indemnification expenses, costs of holding any meetings or conferences of investors or their delegates or advisors (including meetings of the Advisor and related activities), Independent Directors’ fees and expenses, costs of any litigation or threatened litigation or costs of any investigation or legal inquiries involving Company activities (including regulatory sweeps), the cost of any liability insurance or fidelity coverage for the Company, including any directors’ and officers’ liability insurance and key-person life insurance policies, maintained with respect to liabilities arising in connection with the activities of our directors and officers conducted on behalf of the Company, costs associated with reporting and providing information to existing and prospective investors, including printing and mailing costs, wind-up and liquidation expenses, and any extraordinary expenses arising in connection with the operations of the Company.
We have agreed to repay the Advisor for initial organization and offering costs up to a maximum of $1.25 million, of which the Advisor has incurred approximately $1.1 million as of March 31, 2021.
From time to time, the Administrator or its affiliates may pay third-party providers of goods or services. We will reimburse the Administrator or such affiliates thereof for any such amounts paid on our behalf.
Leverage
We have obtained a subscription facility to meet our capital needs. We may borrow money from time to time within the levels permitted by the 1940 Act.
Impact of COVID-19
In late 2019 and early 2020, a novel coronavirus (SARS-CoV-2) and related respiratory disease ("COVID-19") emerged in China and spread rapidly across the world, including to the U.S. This outbreak has led and for an unknown period of time will continue to lead to disruptions in local, regional, national and global markets and economies affected thereby. The extent to which the COVID-19 pandemic will adversely impact our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of this outbreak, and any future outbreaks.
It is clear that these types of events are negatively impacting and will, for at least some time, continue to negatively impact our business and portfolio companies and in many instances the impact will be profound. For example, smaller and middle market companies in which we may invest are being significantly impacted by these events and the uncertainty caused by these events. With respect to loans to such companies, we have been, and may continue to be impacted if, among other things, (i) amendments and waivers are granted (or are required to be granted) to borrowers permitting deferral of loan payments or allowing for payment-in-kind (“PIK”) interest payments, (ii) borrowers default on their loans, are unable to refinance their loans at maturity, or go out of business permanently, and/or (iii) the value of loans we hold decreases as a result of such events and the uncertainty they cause. Such events have caused us, and may continue to cause us, to suffer losses. We will also be negatively affected if the operations and effectiveness of our Adviser or a portfolio company (or any of the key personnel or service providers of the foregoing) is compromised or if necessary or beneficial systems and processes are disrupted as a result of the interruptions to regular business operations caused by COVID-19.
With respect to our investments, we have taken, and will continue to take, steps to actively oversee all of our individual portfolio companies. These measures include, among other things, frequent communication with our portfolio company management teams and related private equity sponsors to understand the expected financial performance impact of the COVID-19 pandemic.
The effects of the COVID-19 pandemic on economic and market conditions have increased the demands to provide capital to our existing portfolio companies. We maintain adequate cash, capital commitments and additional borrowing capacity in reserve to meet any further such draw requests.
During the three months ended March 31, 2021, we continued to experience an increase in our net assets resulting from operations after experiencing unrealized losses across the fair value of our investments resulting from the COVID-19 pandemic during the first half of 2020. We experienced a decrease in our net assets resulting from operations for the first six months of 2020 and an increase for the six months ended December 31, 2020.
It is impossible to determine the scope of this outbreak, or any future outbreaks, how long any such outbreak, market disruption or uncertainties may last, the effect any governmental actions will have or the full potential impact on our business, the Advisor and portfolio companies. The impact of this outbreak, or any future outbreaks, while uncertain, could materially adversely affect our and our portfolio companies’ operating results.
Portfolio and Investment Activity
As of March 31, 2021, based on fair value, our portfolio consisted of 95.19% first lien senior secured debt investments, a 0.01% sponsor subordinated note investment, and a 4.80% investment in an affiliated fund.
As of March 31, 2021, we had investments in sixty portfolio companies with an aggregate fair value of $84.6 million. As of December 31, 2020, we had investments in fifty-one portfolio companies with an aggregate fair value of $79.5 million.
Our investment activity for the three months ended March 31, 2021 and 2020 is presented below (information presented herein is at par value unless otherwise indicated).
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| | | March 31, | | | March 31, | |
| (Amounts in thousands) | | 2021 | | | 2020 | |
| Principal amount of investments committed (including add-ons): | | | | | | |
| First lien senior secured debt investments | | $ | 19,615 | | | $ | 21,945 | |
| Sponsor subordinated note | | | 2 | | | | 6 | |
| Investment in affiliated fund | | | 130 | | | | 479 | |
| Total principal amount of investments committed | | $ | 19,747 | | | $ | 22,430 | |
| Principal amount of investments sold or repaid: | | | | | | | | |
| First lien senior secured debt investments | | $ | (10,211 | ) | | $ | (666 | ) |
| Investment in affiliated fund | | | (2 | ) | | | – | |
| Total principal amount of investments sold or repaid | | $ | (10,213 | ) | | $ | (666 | ) |
New debt investments(1): | | | | | | | | |
| New commitments | | $ | 18,409 | | | $ | 21,945 | |
Number of new commitments in new portfolio companies(2) | | | 11 | | | | 12 | |
| Average new commitment amount | | $ | 1,674 | | | $ | 1,829 | |
| Weighted average term for new commitments (in years) | | | 4.9 | | | | 5.1 | |
| Percentage of new commitments at floating rates | | | 100.0 | % | | | 100.0 | % |
| Percentage of new commitments at fixed rates | | | 0.0 | % | | | 0.0 | % |
| (1) | Amounts shown exclude add-on transactions to existing portfolio companies during the period. |
| (2) | Number of new debt investment commitments represent commitments to a particular portfolio company. |
As of March 31, 2021 and December 31, 2020, our investments consisted of the following:
| | |
March 31, 2021 | | |
December 31, 2020
| |
| (Amounts in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| First lien senior secured debt | | $ | 80,966 | | | $ | 80,517 | | | $ | 76,415 | | | $ | 75,805 | |
| Sponsor subordinated note | | | 10 | | | | 9 | | | | 7 | | | | 7 | |
| Investment in affiliated fund | | | 3,329 | | | | 4,061 | | | | 3,201 | | | | 3,721 | |
| Total investments | | $ | 84,305 | | | $ | 84,587 | | | $ | 79,623 | | | $ | 79,533 | |
The table below describes investments by industry composition based on fair value as of March 31, 2021 and December 31, 2020:
| March 31, 2021 | | December 31, 2020 | |
| Aerospace and defense | | 2.5 | % | | 2.7 | % |
| Auto components | | -
|
| | 1.5 | % |
| Chemicals | | 8.2 | % | | 8.4 | % |
| Commercial services and supplies | | 6.6 | % | | 7.0 | % |
| Containers and packaging | | 6.5 | % | | 7.0 | % |
| Diversified consumer services | | 10.5 | % | | 9.8 | % |
| Electronic equipment, instruments and components | | 1.8 | % | | 2.0 | % |
| Food and staples retailing | | 0.8 | % | | 0.9 | % |
| Food products | | 1.2 | % | | 1.3 | % |
| Gas utilities | | 1.6 | % | | 1.6 | % |
| Health care equipment and supplies | | 3.2
| % | | 0.8 | % |
| Health care providers and services | | 20.1
| % | | 24.0 | % |
| Health care technology | | 2.1 | % | | 1.6 | % |
| Internet and direct marketing retail | | 2.3 | % | | 2.5 | % |
| IT services | | 3.2 | % | | 3.4 | % |
| Machinery | | 1.1 | % | | 1.1 | % |
| Media | | 3.4 | % | | 3.4 | % |
| Metals and mining | | 2.4 | % | | 2.6 | % |
| Multisector holdings | | 4.8 | % | | 4.7 | % |
| Personal products | | 3.3 | % | | 3.5 | % |
Real estate management and development
| | 1.9
| % | | – | |
| Software | | 3.8 | % | | 2.9 | % |
| Specialty retail | | 1.5 | % | | – | |
| Textiles, apparel and luxury goods | | 2.0 | % | | 2.0 | % |
| Trading companies and distributors | | 5.2 | % | | 5.3 | % |
| Total | | 100.0 | % | | 100.0 | % |
As of March 31 2021, 97.2% of investments held were based in the United States and 2.8% were based in Canada. Investments held as of December 31, 2020 were based solely in the United States.
The weighted average yields and interest rates of our funded debt investments as of March 31, 2021 and December 31, 2020 were as follows:
| | | March 31, 2021 | | | December 31, 2020 | |
| Weighted average total yield of funded debt investments at cost | | | 8.0 | % | | | 7.7 | % |
| Weighted average total yield of funded debt investments at fair value | | | 8.1 | % | | | 7.9 | % |
Weighted average interest rate of funded debt investments (1) | | | 7.0 | % | | | 7.0 | % |
| Weighted average spread over LIBOR/CDOR of all floating rate funded debt investments | | | 5.9 | % | | | 5.9 | % |
(1) Calculated using actual interest rates in effect as of March 31, 2021 and December 31, 2020 based on borrower elections.
The weighted average yield of our funded debt investments is not the same as a return on investment for our shareholders but, rather, relates to a portion of our investment portfolio and is calculated before the payment of all of our and our subsidiaries’ fees and expenses. The weighted average yield was computed
using the effective interest rates of each investment as of each respective date, including accretion of original issue discount, but excluding investments on non-accrual status, if any. There can be no assurance that the weighted average yield will remain at its current level.
Our Advisor monitors our portfolio companies on an ongoing basis. It monitors the financial trends of each portfolio company to determine if they are meeting their respective business plans and to assess the appropriate course of action with respect to each portfolio company. Our Advisor has several methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:
| • | assessment of success of the portfolio company in adhering to its business plan and compliance with covenants; |
| • | periodic and regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor, to discuss financial position, requirements and accomplishments;
|
| • | comparisons to other companies in the portfolio company’s industry; and
|
| • | review of monthly or quarterly financial statements and financial projections for portfolio companies.
|
As part of the monitoring process, our Advisor employs an investment rating system to categorize our investments. In addition to various risk management and monitoring tools, our Advisor rates the credit risk of all debt investments on a scale of A to F. This system is intended primarily to reflect the underlying risk of a portfolio investment relative to our initial cost basis in respect of such portfolio investment (i.e., at the time of origination or acquisition), although it may also take into account the performance of the portfolio company’s business, the collateral coverage of the investment and other relevant factors. The rating system is as follows:
Investment Ratings
| | Description
|
A
| | A loan supported by exceptional financial strength, stability and liquidity; |
B
| | As a general rule, a new transaction will be risk rated a “B” loan. Overtime, a “B” loan is supported by good financial strength, stability and liquidity; |
C
| | A loan that is exhibiting deteriorating trends, which if not corrected could jeopardize repayment of the debt. In general, a default by the borrower of one of its financial performance covenants (leverage or coverage ratios) would warrant downgrade of a loan to a risk rating of “C”; |
| D | | A loan that has a well-defined weakness that jeopardizes the repayment of the debt or the ongoing enterprise value of the borrower;
|
E
| | A loan that has an uncured payment default; and |
| F | | An asset that is considered uncollectible or of such little value that its continuance as a booked asset is unwarranted. |
Our Advisor rates the investments in our portfolio at least quarterly and it is possible that the rating of a portfolio investment may be reduced or increased over time. For investments rated C through F, our Advisor enhances its level of scrutiny over the monitoring of such portfolio company.
The following table shows the composition of our debt investments on the A to F rating scale as of March 31, 2021 and December 31, 2020:
| | | March 31, 2021
| | December 31, 2020
| |
| | | | | Percentage of | | | | Percentage of | |
| | | Investments | | Total | | Investments | | Total | |
| Investment Rating | | at Fair Value | | Debt Investments | | at Fair Value | | Debt Investments | |
| (Amounts in thousands) | | | | | | | | | |
| A | | $ | – | | | – | | $ | – | | | – | |
| B | | | 70,891 | | | 88.0 | % | | 68,960 | | | 91.0 | % |
| C | | | 9,626 | | | 12.0 | % | | 6,845 | | | 9.0 | % |
| D | | | – | | | – | | | – | | | – | |
E
| | | – | | | – | | | – | | | – | |
F
| | | – | | | – | | | – | | | – | |
| Total | | $ | 80,517 | | | 100.0 | % | $ | 75,805 | | | 100.0 | % |
The following table shows the amortized cost of our performing and non-accrual debt investments as of March 31, 2021 and December 31, 2020:
| | |
March 31, 2021
| | |
December 31, 2020 | |
| (Amounts in thousands) | | Amortized Cost | | Percentage | | | Amortized Cost | | Percentage | |
| Performing | | $ | 80,966 | | | 100.0 | % | | $ | 76,415 | | | 100.0 | % |
| Non-accrual | | | – | | | – | | | | – | | | – | |
| Total | | $ | 80,966 | | | 100.0 | % | | $ | 76,415 | | | 100.0 | % |
Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon the Advisor’s judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest is paid current and, in the Advisor’s judgment, are likely to remain current. Management may make exceptions to this treatment and determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection.
Results of Operations
The following table represents the operating results for the three months ended March 31, 2021 and 2020:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
| Total investment income | | $ | 1,676 | | | $ | 1,114 | |
| Less: expenses | | | (771 | ) | | | (818 | ) |
| Net investment income (loss) | | | 905 | | | | 296 | |
| Net change in unrealized gain (loss) | | | 388 | | | | (1,952 | ) |
| Net realized gain (loss) | | | 10 | | | | – | |
Net increase (decrease) in net assets resulting from operations
| | $ | 1,303 | | | $ | (1,656 | ) |
Net increase (decrease) in net assets resulting from operations can vary from period to period as a result of various factors, including the level of new investment commitments, expenses, the recognition of realized gains and losses and changes in unrealized appreciation and depreciation on the investment portfolio.
Investment Income
Investment income for the three months ended March 31, 2021 and 2020 were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
| Interest income | | $ | 1,622 | | | $ | 1,003 | |
| Other income | | | 54 | | | | 111 | |
| Total investment income | | $ | 1,676 | | | $ | 1,114 | |
Total investment income increased to $1.7 million for the three months ended March 31, 2021 from $1.1 million for the same period in the prior year primarily driven by our deployment of capital and the increased balance of our investments. The size of our investment portfolio at fair value increased to $84.6 million at March 31, 2021 from $59.6 million at March 31, 2020.
Expenses
Expenses for the three months ended March 31, 2021 and 2020 were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
| Income incentive fees | | $ | 147 | | | $ | 39 | |
| Management fees | | | 123 | | | | 74 | |
| Insurance fees | | | 122 | | | | 121 | |
| Accounting fees | | | 104 | | | | 93 | |
| Administrative fees | | | 88 | | | | 164 | |
| Interest | | | 60 | | | | 125 | |
| Directors' fees | | | 45 | | | | 45 | |
| Professional fees | | | 44 | | | | 101 | |
| Other | | | 38 | | | | 50 | |
| Offering costs | | | – | | | | 170 | |
| Total gross expenses | | $ | 771 | | | $ | 982 | |
| Less waivers: | | | | | | | | |
| Administrative fees waived | | | – | | | | (164 | ) |
| Total net expenses | | $ | 771 | | | $ | 818 | |
Under the terms of the Administration Agreement and Investment Management Agreement, we reimburse the Administrator and Advisor, respectively, for services performed for us. In addition, pursuant to the terms of these agreements, the Administrator and Advisor may delegate its obligations under these agreements to an affiliate or to a third party and we reimburse the Administrator and Advisor for any services performed for us by such affiliate or third party.
For the three ended March 31, 2021, the Administrator charged approximately $0.1 million for certain costs and expenses allocable to the Company under the terms of the Administration Agreement. For the three months ended March 31, 2020, the Administrator had the option to charge approximately $0.2 million for certain costs and expenses allocable to the Company under the terms of the Administration Agreement, all of which were waived and borne by the Administrator for those periods.
Total net expenses remained relatively consistent at approximately $0.8 million for the three months ended March 31, 2021 and 2020, primarily due to decreases in offering costs, interest expense, and professional fees, offset by increases in income incentive fees, administrative fees and management fees. These increases were largely driven by our deployment of capital and increased balance of our investments.
Income Taxes, including Excise Taxes
We have elected to be treated as a RIC under Subchapter M of the Code, and we intend to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. To qualify for tax treatment as a RIC, we must, among other things, distribute to our shareholders in each taxable year generally at least 90% of our investment company taxable income, as defined by the Code, and net tax-exempt income for that taxable year. To maintain our tax treatment as a RIC, we, among other things, intend to make the requisite distributions to our shareholders, which generally relieves us from corporate-level U.S. federal income taxes.
Depending on the level of taxable income earned in a tax year, we can be expected to carry forward taxable income (including net capital gains, if any) in excess of current year dividend distributions from the current tax year into the next tax year and pay a nondeductible 4% U.S. federal excise tax on such taxable income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such income, we will accrue excise tax on estimated excess taxable income. For the three months ended March 31, 2021 and 2020, we did not accrue any U.S. federal excise tax.
We conduct certain activities through our wholly-owned subsidiary, Twin Brook Equity XVIII Corp., a Delaware C corporation. Twin Brook Equity XVIII Corp. is treated as a corporation for United States federal income tax purposes and is subject to U.S. federal, state or local income tax. For the three months ended March 31, 2021 and 2020, we did not accrue any U.S. federal tax expense.
Net Change in Unrealized Gains (Losses) on Investment Transactions
We fair value our portfolio investments quarterly and any changes in fair value are recorded as unrealized gains or losses. During the three months ended March 31, 2021 and 2020, net unrealized gains (losses) on our investment transactions were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
Net change in unrealized gain (loss) on investments
| | $ | 372 | | | $ | (1,952 | ) |
| Net change in unrealized gain (loss) on foreign currency forward contracts | | | 16 | | | | – | |
| Net change in unrealized gain (loss) on investment transactions | | $ | 388 | | | $ | (1,952 | ) |
For the three months ended March 31, 2021, the net unrealized gain was primarily driven by an increase in the fair value of our investments as compared to December 31, 2020. The primary drivers of our portfolio's unrealized gains were improved market conditions and credit spreads tightening during the three months ended March 31, 2021.
For the three months ended March 31, 2020, the net unrealized loss was primarily driven by a decrease in the fair value of our investments as compared to December 31, 2019. The primary drivers of our portfolio's unrealized losses were increased market volatility and credit spreads widening during the three months ended March 31, 2020.
Net Realized Gains (Losses) on Investment Transactions
The realized gains and losses on fully and partially exited portfolio companies and foreign currency transactions during the three months ended March 31, 2021 and 2020, were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
Net realized gain (loss) on investments
| | $ | 18 | | | $ | – | |
| Net realized gain (loss) on foreign currency transactions | | | (8 | ) | | | – | |
| Net realized gain (loss) on investment transactions | | $ | 10 | | | $ | – | |
There were no significant changes in net realized gain (loss) on investment transactions for the three months ended March 31, 2021 as compared to the same period in the prior year.
Financial Condition, Liquidity, and Capital Resources
Our liquidity and capital resources are generated primarily from the proceeds of capital drawdowns of our privately placed capital commitments, cash flows from interest, dividends and fees earned from our investments and principal repayments, and our subscription facility. The primary uses of our cash are (1) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (2) the cost of operations (including paying our Advisor), (3) debt service of any borrowings and (4) cash distributions to the holders of our stock.
We may from time to time increase the size of our existing subscription facility. Any such incurrence would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors. In accordance with the 1940 Act, with certain limited exceptions, we are only allowed to incur borrowings, issue debt securities or issue preferred stock, if immediately after the borrowing or issuance, the ratio of total assets (less total liabilities other than indebtedness) to total indebtedness plus preferred stock, is at least 200%. There were no outstanding borrowings as of March 31, 2021 and December 31, 2020. We seek to carefully consider our unfunded commitments for the purpose of planning our ongoing financial leverage. Further, we maintain sufficient borrowing capacity within the 200% asset coverage limitation to cover any outstanding unfunded commitments we are required to fund.
Cash as of March 31, 2021, taken together with our uncalled capital commitments of $115.6 million and available debt capacity of $12.7 million, is expected to be sufficient for our investing activities and to conduct our operations.
As of March 31, 2021, we had $16.6 million in cash. During the three months ended March 31, 2021, we used $3.4 million in cash for operating activities, primarily as a result of funding portfolio investments of $14.1 million, partially offset by sales and paydowns of portfolio investments of $9.6 million, and other operating activities of $1.1 million. Cash provided by financing activities was $9.6 million during the period, which was primarily the result of proceeds from the issuance of shares of $10.8 million, partially offset by dividend payments of $1.2 million.
As of March 31, 2020, we had $5.1 million in cash. During the three months ended March 31, 2020, we used $21.1 million in cash for operating activities, primarily as a result of funding portfolio investments of $22.7 million, partially offset by sales of portfolio investments of $1.0 million, and other operating activities of $0.6 million. Cash provided by financing activities was $17.1 million during the period, which was primarily the result of proceeds from the issuance of shares of $16.2 million and proceeds from net borrowings on our credit facility of $0.9 million.
Equity
Subscriptions and Drawdowns
We have the authority to issue 100,000,000 shares of common stock with a par value of $0.001 per share.
We have entered into subscription agreements with investors providing for the private placement of our common shares. Under the terms of the subscription agreements, investors are required to fund drawdowns to purchase our common shares up to the amount of their respective Capital Commitment on an as-needed basis each time our Advisor delivers a capital call notice to such investors.
During the three months ended March 31, 2021 and 2020, our Advisor delivered the following capital call notices to investors:
Three Months Ended March 31, 2021
|
| | | | | Number of Common Shares Issued | | | Aggregate Offering Price ($ in millions) |
| | | | |
| Capital Drawdown Notice Date | | Common Share Issuance Date | | | |
March 16, 2021
| | March 30, 2021 | | | 540,000 | | | $ | 10.80 |
| Total | | | | | 540,000 | | | $ | 10.80 |
| Three Months Ended March 31, 2020 |
| | | | | Number of Common Shares Issued | | | Aggregate Offering Price ($ in millions) |
| | | | |
| Capital Drawdown Notice Date | | Common Share Issuance Date | | | |
| February 28, 2020 | | March 13, 2020 | | | 810,000 | | | $ | 16.20 |
| Total | | | | | 810,000 | | | $ | 16.20 |
Dividends
There were no dividends declared for the three months ended March 31, 2021 and 2020.
On April 14, 2021, the Board declared a dividend of $0.20 per share on the Company’s common stock, which is payable on April 30, 2021 to stockholders of record at the close of business on April 26, 2021.
Debt
Subscription Facility
In accordance with the 1940 Act, we can borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 200% after such borrowings, subject to certain limitations. There were no outstanding borrowings as of March 31, 2021 and December 31, 2020.
On August 14, 2019, we entered into a revolving credit facility (the “Subscription Facility”), pursuant to a Revolving Credit Agreement, as amended, with Wells Fargo Bank, National Association (the “Lender”). The Subscription Facility enables us to request loans from the Subscription Facility Lender up to a maximum commitment of $15 million. The borrowings under the Subscription Facility are collateralized by the eligible unfunded capital commitments of our investors. The total amount available under the Subscription Facility may be reduced as a result of decreases in the unfunded capital commitments of our investors as well as other provisions of the Subscription Facility agreement.
Borrowings under the Subscription Facility bear interest at either (i) LIBOR plus the applicable margin of 1.50%, if the borrowing is a LIBOR Rate Loan or (ii) the Prime Rate plus the applicable margin of 0.50%, if the borrowing is a Reference Rate Loan. As of March 31, 2021 and December 31, 2020, there were no outstanding borrowings. In addition, we pay an unused commitment fee of 0.20% per annum on
the daily unused commitments of the Lender. The maturity date of the Subscription Facility is August 12, 2022.
The Subscription Facility agreement subjects us to certain covenants including, but not limited to, providing financial information and requirements concerning compliance with certain financial tests and investor attributes. As of March 31, 2021, we are in compliance with such covenants.
Debt obligations consisted of the following as of March 31, 2021 and December 31, 2020:
| | |
As of March 31, 2021
|
| (Amounts in thousands) | | Maximum Principal Amount Committed | | | Principal Amount Outstanding | | | Principal Amount Available(1) | | | Carrying Value |
| Subscription facility | | $ | 15,000 | | | $ | – | | | $ | 12,712 | | | $ | - |
| Total debt | | $ | 15,000 | | | $ | – | | | $ | 12,712 | | | $ | - |
(1) The amount available reflects any limitations related to the Subscription Facility’s borrowing base.
| | |
As of December 31, 2020
|
| (Amounts in thousands) | | Maximum Principal Amount Committed | | | Principal Amount Outstanding | | | Principal Amount Available(1) | | | Carrying Value |
| Subscription facility | | $ | 15,000 | | | $ | - | | | $ | 13,900 | | | $ | – |
| Total debt | | $ | 15,000 | | | $ | - | | | $ | 13,900 | | | $ | – |
(1) The amount available reflects any limitations related to the Subscription Facility’s borrowing base.
For the three months ended March 31, 2021 and 2020, the components of interest expense were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2021 | | | March 31, 2020 | |
| Interest expense | | $ | 7 | | | $ | 98 | |
| Amortization of deferred financing costs | | | 53 | | | | 27 | |
| Total interest expense | | $ | 60 | | | $ | 125 | |
| Average interest rate | | | 3.54 | % | | | 3.04 | % |
| Average daily borrowings | | $ | 56 | | | $ | 9,293 | |
Off-Balance Sheet Arrangements
Portfolio Company Commitments
Our investment portfolio may contain debt investments that are in the form of revolving lines of credit and unfunded delayed draw commitments, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. Unfunded portfolio company commitments and funded debt investments are presented on the consolidated schedule of investments at fair value. Unrealized appreciation or depreciation, if any, is included in the consolidated statement of assets and liabilities and consolidated statement of operations.
As of March 31, 2021 and December 31, 2020, the Company had the following outstanding commitments to fund investments in current portfolio companies:
| Portfolio Company | | March 31, 2021 | | December 31, 2020 | |
First lien senior secured debt(1) | | (Amounts in thousands) | | (Amounts in thousands) | |
| 50Floor, LLC | | $ | 199 | | $ | 199 | |
| Advanced Lighting Acquisition, LLC | | | 162 | | | 162 | |
| Affinitiv, Inc. | | | 248 | | | 248 | |
| ALM Media, LLC | | | 776 | | | 971 | |
| AM Buyer, LLC | | | 111 | | | 108 | |
| Anne Arundel Dermatology Management, LLC | | | 634 | | | 780 | |
| Apex Dental Partners, LLC | | | 566 | | | 600 | |
| Aquatic Sales Solutions, LLC | | | 150 | | | 135 | |
| ASP Global Acquisition, LLC | | | 534 | | | 534 | |
| Banner Buyer, LLC | | | 1,269 | | | 1,343 | |
| BBG Intermediate Holdings, Inc. | | | 210 | | | – | |
| Beacon Oral Specialists Management LLC | | | 686 | | | 686 | |
| BRTS Holdings, LLC | | | 400 | | | 341 | |
| Canadian Orthodontic Partners Corp. | | | 600 | | | – | |
| Copperweld Group, Inc. | | | 400 | | | 400 | |
| Cosmetic Solutions, LLC | | | 710 | | | 710 | |
| DealerOn Inc. | | | 314 | | | 314 | |
| Empire Equipment Company, LLC | | | 1,379 | | | 1,254 | |
| EMSAR Acquisition LLC | | | 774 | | | – | |
| Engelman Baking Co., LLC | | | 157 | | | 157 | |
| G2O Technologies, LLC | | | 207 | | | 207 | |
| Geriatric Medical and Surgical Supply, LLC | | | 270 | | | 270 | |
| Groundworks Operations, LLC | | | 967 | | | 739 | |
| Hydromax USA, LLC | | | 216 | | | 330 | |
| Industrial Dynamics Company, Ltd. | | | 141 | | | 141 | |
| Innovative FlexPak, LLC | | | 627 | | | 627 | |
| ISSA, LLC | | | 131 | | | – | |
| Jansy Packaging, LLC | | | 706 | | | 676 | |
| Kalkomey Enterprises, LLC | | | 77 | | | 77 | |
| Lakeshirts LLC | | | 650 | | | 703 | |
| Legility, LLC | | | 123 | | | 123 | |
| Leonard Group, Inc. | | | 197 | | | – | |
| Library Associates, LLC | | | 211 | | | 211 | |
| Mattco Forge, Inc. | | | 506 | | | 506 | |
| Millennia Patient Services, LLC | | | 401 | | | – | |
| Montway LLC | | | 825 | | | 825 | |
| Portfolio Company | | March 31, 2021 | | December 31, 2020 | |
First lien senior secured debt(1) | | (Amounts in thousands) | | (Amounts in thousands) | |
| MRC Keeler Acquisition, LLC | | $ | 300 | | $ | 300 | |
| Nimlok Company, LLC | | | 11 | | | 11 | |
| NSG Buyer, Inc. | | | 294 | | | 294 | |
| Peak Dental Services, LLC | | | 636 | | | 636 | |
| Peak Investment Holdings, LLC | | | 809 | | | 809 | |
| Perimeter Brands Intermediate Holdco LLC | | | 210 | | | 210 | |
| Reliable Medical Supply LLC | | | 138 | | | 138 | |
| Revolution Plastics Buyer, LLC | | | 281 | | | 492 | |
| SAMGI Buyer, Inc. | | | 138 | | | 138 | |
| SCA Buyer, LLC | | | 484 | | | – | |
| SCP ENT and Allergy Services, LLC | | | 1,287 | | | 1,287 | |
| SCP Eye Care Services, LLC | | | – | | | 469 | |
| ShiftKey, LLC | | | 187 | | | – | |
| Silver Falls MSO, LLC | | | 178 | | | 178 | |
| Southeast Primary Care Partners, LLC | | | 525 | | | 525 | |
| Southern Orthodontic Partners Management, LLC | | | 659 | | | – | |
| Spear Education, LLC | | | 888 | | | 474 | |
| Spectrum Solutions, LLC | | | 267 | | | – | |
| Teel Plastics, LLC | | | 324 | | | 324 | |
| Triad Technologies, LLC | | | 314 | | | 282 | |
| United Land Services Opco Parent, LLC | | | 1,205 | | | – | |
| Vanguard Packaging, LLC | | | 535 | | | 535 | |
| Varsity DuvaSawko Operating Corp. | | | 474 | | | 474 | |
| Vital Care Buyer, LLC | | | 580 | | | 580 | |
| Total unfunded portfolio company commitments | | $ | 27,258 | | $ | 22,533 | |
(1) Unfunded commitments denominated in currencies other than USD have been converted to USD using the exchange rate as of the applicable reporting date.
As of March 31, 2021 and December 31, 2020, approximately $193,000 and $181,000, respectively, of the Company's unfunded revolver commitments are reserved for letters of credit issued to third party beneficiaries on behalf of the Company's investments.
We maintain sufficient borrowing capacity along with undrawn capital commitments of our investors to cover outstanding unfunded portfolio company commitments that we may be required to fund. We seek to carefully manage our unfunded portfolio company commitments for purposes of planning our ongoing financial leverage. Further, we maintain sufficient borrowing capacity within the 200% asset coverage ratio, along with undrawn capital commitments of our investors, to cover any outstanding portfolio company unfunded commitments we are required to fund.
Investor Commitments
As of March 31, 2021 and December 31, 2020, the Company had $216.0 million in total capital commitments from investors ($115.6 million and $126.4 million, respectively, undrawn). These undrawn capital commitments will no longer remain in effect following the completion of a Qualified IPO.
Contractual Obligations
We have no contractual payment obligations under our subscription facility as there were no borrowings outstanding as of March 31, 2021.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the Investment Management Agreement, the Administration Agreement, and the Resource Sharing Agreement.
In addition to the aforementioned agreements, we intend to rely on exemptive relief that has been granted to us, our Advisor, and Angelo Gordon to permit us to co-invest with other funds managed by Angelo Gordon in a manner consistent with our investment objective, positions, policies, strategies and restrictions as well as any regulatory requirements and other pertinent factors. See “Item 1. – Notes to Consolidated Financial Statements – Note 6. Agreements and Related Party Transactions” for further description of our related party transactions.
Critical Accounting Policies
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are described in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 11, 2021, and elsewhere in our filings with the SEC. There have been no significant changes this quarter in our critical accounting policies and practices.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
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, including those listed below. We are subject to financial market risks, including valuation risk and interest rate risk.
Valuation Risk
We have invested, and plan to continue to invest, primarily in illiquid debt and equity securities of private companies. Most of our investments will not have a readily available market price, and therefore, we will value these investments at fair value as determined in good faith by our Board, based on, among other things, the input of our Advisor and independent third party valuation firm(s) engaged at the direction of the Board, and in accordance with our valuation policy. There is no single standard for determining fair value. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize amounts that are different from the amounts presented and such differences could be material.
Interest Rate Risk
Interest rate sensitivity refers to the change in earnings that may result from changes in the level of interest rates. We may fund portions of our investments with borrowings on a short term basis, and at such time, our net investment income will be affected by the difference between the rate at which we invest and the rate at which we borrow. Accordingly, we cannot assure you that a significant change in market interest rates will not have a material adverse effect on our net investment income.
As of March 31, 2021, 100% of our debt investments based on fair value in our portfolio were at floating rates.
Based on our Consolidated Statement of Assets and Liabilities as of March 31, 2021, the following table shows the annualized impact on net income of hypothetical base rate changes in interest rates on our debt investments and leverage (considering interest rate floors for floating rate instruments) assuming each floating rate investment is subject to 3-month LIBOR and there are no changes in our investment and borrowing structure:
| (Amounts in millions) | | Interest Income | | | Interest Expense | | | Net Income | |
| Up 200 basis points | | $ | 1.0 | | | $ | – | | | $ | 1.0 | |
| Up 100 basis points | | $ | 0.2 | | | $ | – | | | $ | 0.2 | |
| Down 100 basis points | | $ | – | | | $ | – | | | $ | – | |
| Down 200 basis points | | $ | – | | | $ | – | | | $ | – | |
To a limited extent, we may in the future hedge against interest rate fluctuations by using hedging instruments such as futures, options, swaps and forward contracts, and credit hedging contracts, such as credit default swaps. However, no assurance can be given that such hedging transactions will be entered into or, if they are, that they will be effective.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q and determined that our disclosure controls and procedures are effective as of the end of the period covered by the Quarterly Report on Form 10-Q.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are not currently subject to any material legal proceedings, nor, to our knowledge, are any material legal proceedings threatened against us. From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of any such future legal or regulatory proceedings cannot be predicted with certainty, we do not expect that any such future proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, 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 we face. Additional risks and uncertainties are not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. During the three months ended March 31, 2021, there have been no material changes from the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Except as previously reported by the Company on its current reports on Form 8-K, we did not sell any securities during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
