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 and it’s consolidated subsidiaries. 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, 2021 (our “2021 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 2021 10-K, our consolidated financial statements and the accompanying notes to consolidated financial statements (Part I, Item 1 of this report).
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, 2022, 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, 2022, 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 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, 2022.
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
Currently, we do not intend to utilize leverage. 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.
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, 2022, based on fair value, our portfolio consisted of 94.77% first lien senior secured debt investments, 0.01% sponsor subordinated note investments, and 5.22% investments in affiliated funds.
As of March 31, 2022, we had investments in one hundred twenty-five portfolio companies with an aggregate fair value of $162.2 million. As of December 31, 2021, we had investments in one hundred twenty-one portfolio companies with an aggregate fair value of $159.1 million.
Our investment activity for the three months ended March 31, 2022 and 2021 is presented below (information presented herein is at par value unless otherwise indicated).
| | | Three Months Ended | | | Three Months Ended | |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 | |
| Principal amount of investments committed (including add-ons): | | | | | | |
| First lien senior secured debt investments | | $ | 10,526 | | | $ | 19,615 | |
| Sponsor subordinated note | | | - | | | | 2 | |
| Investment in affiliated funds | | | 238 | | | | 130 | |
| Total principal amount of investments committed | | $ | 10,764 | | | $ | 19,747 | |
| Principal amount of investments sold or repaid: | | | | | | | | |
| First lien senior secured debt investments | | $ | (11,335 | ) | | $ | (10,211 | ) |
| Investment in affiliated funds | | | (8 | ) | | | (2 | ) |
| Total principal amount of investments sold or repaid | | $ | (11,343 | ) | | $ | (10,213 | ) |
New debt investments(1): | | | | | | | | |
| New commitments | | $ | 5,468 | | | $ | 18,409 | |
Number of new commitments in new portfolio companies(2) | | | 5 | | | | 11 | |
| Average new commitment amount | | $ | 1,094 | | | $ | 1,674 | |
| Weighted average term for new commitments (in years) | | | 5.4 | | | | 4.9 | |
| 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, 2022 and December 31, 2021, our investments consisted of the following:
| | |
March 31, 2022 | | |
December 31, 2021 | |
| (Amounts in thousands) | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
| First lien senior secured debt | | $ | 153,473 | | | $ | 153,712 | | | $ | 151,054 | | | $ | 151,105 | |
| Sponsor subordinated note | | | 16 | | | | 16 | | | | 16 | | | | 16 | |
| Investment in affiliated funds | | | 6,440 | | | | 8,465 | | | | 6,210 | | | | 7,986 | |
| Total investments | | $ | 159,929 | | | $ | 162,193 | | | $ | 157,280 | | | $ | 159,107 | |
The table below describes investments by industry composition based on fair value as of March 31, 2022 and December 31, 2021:
| | March 31, 2022 | | | December 31, 2021 | |
| Aerospace and defense | | | 1.3 | % | | | 1.3 | % |
| Auto components | | | 1.3 | % | | | 1.4 | % |
| Chemicals | | | 4.5 | % | | | 4.6 | % |
| Commercial services and supplies | | | 5.0 | % | | | 3.7 | % |
| Construction and engineering | | | 1.7 | % | | | 1.6 | % |
| Containers and packaging | | | 3.9 | % | | | 3.9 | % |
| Distributors | | | 0.3 | % | | | 0.3 | % |
| Diversified consumer services | | | 8.6 | % | | | 8.9 | % |
| Electrical equipment | | | 0.8 | % | | | 0.8 | % |
| Electronic equipment, instruments and components | | | 1.4 | % | | | 1.4 | % |
| Food and staples retailing | | | 2.3 | % | | | 2.3 | % |
| Food products | | | 1.0 | % | | | 0.9 | % |
| Gas utilities | | | 0.9 | % | | | 0.9 | % |
| Health care equipment and supplies | | | 2.6 | % | | | 2.0 | % |
| Health care providers and services | | | 22.6 | % | | | 24.8 | % |
| Health care technology | | | 1.2 | % | | | 1.1 | % |
| Household durables | | | 1.8 | % | | | 1.8 | % |
| Internet and direct marketing retail | | | 2.6 | % | | | 2.6 | % |
| IT services | | | 3.6 | % | | | 3.8 | % |
| Leisure equipment and products | | | 1.9 | % | | | 1.9 | % |
| Leisure products | | | 0.5 | % | | | 0.5 | % |
| Life sciences tools and services | | | 0.7 | % | | | 0.7 | % |
| Machinery | | | 2.1 | % | | | 2.2 | % |
| Media | | | 3.8 | % | | | 3.7 | % |
| Metals and mining | | | 1.6 | % | | | 1.5 | % |
| Multisector holdings | | | 5.2 | % | | | 5.0 | % |
| Personal products | | | 1.9 | % | | | 1.7 | % |
| Pharmaceuticals | | | 2.0 | % | | | 2.1 | % |
| Professional services | | | 0.5 | % | | | 0.5 | % |
| Real estate management and development | | | 1.1 | % | | | 1.0 | % |
| Semiconductors and semiconductor equipment | | | 0.4 | % | | | 0.5 | % |
| Software | | | 2.0 | % | | | 2.1 | % |
| Specialty retail | | | 2.6 | % | | | 2.5 | % |
| Textiles, apparel and luxury goods | | | 1.2 | % | | | 1.2 | % |
| Trading companies and distributors | | | 4.6 | % | | | 4.3 | % |
| Water utilities | | | 0.5 | % | | | 0.5 | % |
| Total | | | 100.0 | % | | | 100.0 | % |
As of March 31, 2022, 99.0% of investments held were based in the United States and 1.0% were based in Canada. As of December 31, 2021, 99.0% of investments held were based in the United States and 1.0% were based in Canada.
The weighted average yields and interest rates of our funded debt investments as of March 31, 2022 and December 31, 2021 were as follows:
| | | March 31, 2022 | | | December 31, 2021 | |
| Weighted average total yield of funded debt investments at cost | | | 9.3 | % | | | 8.2 | % |
| Weighted average total yield of funded debt investments at fair value | | | 9.2 | % | | | 8.1 | % |
Weighted average interest rate of funded debt investments (1) | | | 6.9 | % | | | 6.9 | % |
| Weighted average spread over reference rates of all floating rate funded debt investments | | | 5.9 | % | | | 5.9 | % |
(1) Calculated using actual interest rates in effect as of March 31, 2022 and December 31, 2021 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, 2022 and December 31, 2021:
| | | March 31, 2022
| | December 31, 2021
| |
| | | | | 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 | | | 145,509 | | | 94.7 | % | | 141,945 | | | 93.9 | % |
| C | | | 8,203 | | | 5.3 | % | | 9,160 | | | 6.1 | % |
| D | | | – | | | | | | | | | | |
E
|
| | – | | | | | | | | | | |
| F | | | – | | | – |
| | – | | | – |
|
| Total | | $ | 153,712 | | | 100.0 | % | $ | 151,105 | | | 100.0 | % |
The following table shows the amortized cost of our performing and non-accrual debt investments as of March 31, 2022 and December 31, 2021:
| | |
March 31, 2022 | | |
December 31, 2021 | |
| (Amounts in thousands) | | Amortized Cost | | | Percentage | | | Amortized Cost | | | Percentage | |
| Performing | | $ | 153,473 | | | | 100.0 | % | | $ | 151,054 | | | | 100.0 | % |
| Non-accrual | | | - | | | | - | | | | - | | | | - | |
| Total | | $ | 153,473 | | | | 100.0 | % | | $ | 151,054 | | | | 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, 2022 and 2021:
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.
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 | |
| Total investment income | | $ | 3,072 | | | $ | 1,676 | |
| Less: expenses | | | (1,175 | ) | | | (771 | ) |
| Net investment income (loss) | | | 1,897 | | | | 905 | |
| Net change in unrealized gain (loss) | | | 417 | | | | 388 | |
| Net realized gain (loss) | | | 33 | | | | 10 | |
| Net increase (decrease) in net assets resulting from operations | | $ | 2,347 | | | $ | 1,303 | |
Investment Income
Investment income for the three months ended March 31, 2022 and 2021 were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 | |
| Interest income | | $ | 2,923 | | | $ | 1,622 | |
| Other income | | | 149 | | | | 54 | |
| Total investment income | | $ | 3,072 | | | $ | 1,676 | |
Total investment income increased to $3.1 million for the three months ended March 31, 2022 from $1.7 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 $162.2 million at March 31, 2022 from $84.6 million at March 31, 2021.
Expenses
Expenses for the three months ended March 31, 2022 and 2021 were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 | |
| Income incentive fees | | $ | 381 | | | $ | 147 | |
| Management fees | | | 241 | | | | 123 | |
| Professional fees | | | 119 | | | | 44 | |
| Accounting fees | | | 104 | | | | 104 | |
| Insurance fees | | | 90 | | | | 122 | |
| Other | | | 86 | | | | 38 | |
| Interest | | | 55 | | | | 60 | |
| Administrative fees | | | 54 | | | | 88 | |
| Directors' fees | | | 45 | | | | 45 | |
| Total net expenses | | $ | 1,175 | | | $ | 771 | |
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 months ended March 31, 2022, 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, 2021, the Administrator charged approximately $0.1 million for certain costs and expenses allocable to the Company under the terms of the Administration Agreement
Total net expenses increased to approximately $1.2 million from $0.8 million, for the three months ended March 31, 2022 and 2021, respectively, primarily due to increases in income incentive fees, management fees, and professional fees. These increases in fees 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 continue 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, 2022 and 2021, we did not accrue 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, 2022 and 2021, we did not accrue U.S. federal tax expense related to fee income received.
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, 2022 and 2021, net unrealized gains (losses) on our investment transactions were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 | |
| Net change in unrealized gain (loss) on investments | | $ | 437 | | | $ | 372 | |
| Net change in unrealized gain (loss) on foreign currency forward contracts | | | (18 | ) | | | 16 | |
| Net change in unrealized gain (loss) on foreign currency translation | | | (2 | ) | | | – | |
| Net change in unrealized gain (loss) on investment transactions | | $ | 417 | | | $ | 388 | |
For the three months ended March 31, 2022, the net unrealized gain was primarily driven by an increase in the fair value of our investments as compared to December 31, 2021. The unrealized gains were also driven by improved performance of our portfolio companies including equity investments held by Twin Brook Equity Holdings, LLC, that increased our net asset value in the affiliated fund during the three months ended March 31, 2022.
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.
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, 2022 and 2021, were as follows:
| | | Three Months | | | Three Months | |
| | | Ended | | | Ended | |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 | |
| Net realized gain (loss) on investments | | $ | 35 | | | $ | 18 | |
| Net realized gain (loss) on foreign currency forward transactions | | | (2 | ) | | | (8 | ) |
| Net realized gain (loss) on investment transactions | | $ | 33 | | | $ | 10 | |
The increase in realized gains during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 was due to increased paydown activity as the portfolio matures.
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 and Administrator or its affiliates), (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, 2022 and December 31, 2021. 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, 2022, taken together with our uncalled capital commitments of $32.4 million and available debt capacity of $3.6 million, is expected to be sufficient for our investing activities and to conduct our operations.
As of March 31, 2022 we had $25.3 million in cash. During the three months ended March 31, 2022, we used $0.6 million in cash for operating activities, primarily as a result of funding portfolio investments of $13.3 million, partially offset by sales and paydowns of portfolio investments of $10.9 million, and other operating activities of $1.8 million. Cash used for financing activities was $1.8 million during the period, which was the result of dividend payments.
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.
Equity
Subscriptions and Drawdowns
As of March 31, 2022, we had 9,141,176 shares issued and outstanding with a par value of $0.001 per share.
We have entered into subscription agreements with investors providing for the private placement of our common shares. Under the terms of the subscription agreements, investors are required to fund drawdowns to purchase our common shares up to the amount of their respective Capital Commitment on an as-needed basis each time our Advisor delivers a capital call notice to such investors.
During the three months ended March 31, 2022, there were no capital call notices delivered to investors.
During the three months ended March 31, 2021, our Advisor delivered the following capital call notices to investors:
| | | Three Months Ended March 31, 2021 | | | | | |
| | | | | Number of
| | | Aggregate Offering
|
| | | Common Share | | Common Shares
| | | Price
|
| Capital Drawdown Notice Date | | Issuance Date | | Issued
| | | ($ in millions)
|
| March 16, 2021 | | March 30, 2021 | | 540,000 | | $
| 10.80 |
| Total | | | | 540,000 | | $
| 10.80 |
Dividends
There were no dividends declared for the three months ended March 31, 2022 and 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, 2022 and December 31, 2021.
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 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, 2022 and December 31, 2021, 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, 2022, we are in compliance with such covenants.
On May 4, 2022, we terminated the Subscription Facility’s revolving credit agreement.
Debt obligations consisted of the following as of March 31, 2022 and December 31, 2021:
| | |
As of March 31, 2022
| |
| (Amounts in thousands) | | Maximum Principal Amount Committed | | | Principal Amount Outstanding | | | Principal Amount Available(1) | | | Carrying Value | |
| Subscription facility | | $ | 15,000 | | | $ | – | | | $ | 3,564 | | | $ | – | |
| Total debt | | $ | 15,000 | | | $ | – | | | $ | 3,564 | | | $ | – | |
(1) The amount available reflects any limitations related to the Subscription Facility’s borrowing base.
| | |
As of December 31, 2021 | |
| (Amounts in thousands) | | Maximum Principal Amount Committed | | | Principal Amount Outstanding | | | Principal Amount Available(1) | | | Carrying Value | |
| Subscription facility | | $ | 15,000 | | | $ | – | | | $ | 3,564 | | | $ | – | |
| Total debt | | $ | 15,000 | | | $ | – | | | $ | 3,564 | | | $ | – |
|
(1) The amount available reflects any limitations related to the Subscription Facility’s borrowing base.
For the three months ended March 31, 2022 and 2021 the components of interest expense were as follows:
| | | Three Months Ended | | | Three Months Ended |
| (Amounts in thousands) | | March 31, 2022 | | | March 31, 2021 |
| Interest expense | | $ | 8 | | | $ | 7 |
| Amortization of deferred financing costs | | | 47 | | | | 53 |
| Total interest expense | | $ | 55 | | | $ | 60 |
| Average interest rate | | | N/A | | | | 3.54% |
| Average daily borrowings | | | N/A | | | $ | 56 |
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, 2022 and December 31, 2021, the Company had the following outstanding commitments to fund investments in current portfolio companies:
| Portfolio Company | | March 31, 2022 | | | December 31, 2021 | |
First lien senior secured debt(1) | | (Amounts in thousands) | | | (Amounts in thousands) | |
| 50Floor, LLC | | $ | 199 | | | $ | 199 | |
| Abrasive Technology Intermediate, LLC | | | 156 | | | | 173 | |
| Advanced Lighting Acquisition, LLC | | | 324 | | | | 324 | |
| AEP Passion Intermediate Holdings, Inc. | | | 69 | | | | 91 | |
| AFC Industries, Inc. | | | 137 | | | | 223 | |
| Affinitiv, Inc. | | | 248 | | | | 248 | |
| Agility Intermediate, Inc. | | | 534 | | | | 534 | |
| Alliance Environmental Group, LLC | | | 66 | | | | 113 | |
| ALM Media, LLC | | | 971 | | | | 971 | |
| Altamira Material Solutions, LP | | | 41 | | | | 45 | |
| AM Buyer, LLC | | | 111 | | | | 111 | |
| Answer Acquisition, LLC | | | 34 | | | | 38 | |
| Apex Dental Partners, LLC | | | 146 | | | | 215 | |
| Aptitude Health Holdings, LLC | | | 267 | | | | 240 | |
| Aquatic Sales Solutions, LLC | | | 117 | | | | 117 | |
| ASC Ortho Management, LLC | | | 398 | | | | 398 | |
| ASP Global Acquisition, LLC | | | 485 | | | | 534 | |
| AvCarb, LLC | | | 704 | | | | 704 | |
| Banner Buyer, LLC | |
| 715 | | |
| 838 | |
| BBG Intermediate Holdings, Inc. | | | 229 | | | | 233 | |
| BCI Burke Holding Corp. | | | 195 | | | | 196 | |
| Beacon Oral Specialists Management LLC | | | 116 | | | | 36 | |
| Behavior Frontiers, LLC | | | 19 | | | | 19 | |
| Bio Agri Mix Holdings Inc. | | | 90 | | | | 89 | |
| Brightview, LLC | | | 160 | | | | 358 | |
| Canadian Orthodontic Partners Corp. | | | 142 | | | | 237 | |
| Community Care Partners, LLC | | | 146 | | | | 169 | |
| Copperweld Group, Inc. | | | 493 | | | | 197 | |
| Cosmetic Solutions, LLC | | | 344 | | | | 710 | |
| CPS HVAC Group, LLC | | | 182 | | | | 188 | |
| Data Source Intermediate Holdings, LLC | | | 123 | | | | 123 | |
| DealerOn Inc. | | | 314 | | | | 314 | |
| Dermatology Medical Partners OpCo, LLC | | | 106 | | | | 134 | |
| Diamondback Buyer, LLC | | | 75 | | | | 75 | |
| DNS IMI Acquisition Corp | | | 125 | | | | 124 | |
| Domino Equipment Company, LLC | | | 79 | | | | 79 | |
| Dykstra's Auto, LLC | | | 152 | | | | 129 | |
| Edko Acquisition, LLC | | | 38 | | | | 38 | |
| EH Management Company, LLC | | | 38 | | | | 38 | |
| Empire Equipment Company, LLC | | | 282 | | | | 1,254 | |
| EMSAR Acquisition LLC | | | 515 | | | | 542 | |
| Engelman Baking Co., LLC | | | 163 | | | | 153 | |
| E-Phoenix Acquisition Co. Inc. | | | 75 | | | | 75 | |
| Exclusive Concepts, LLC | | | 248 | | | | 248 | |
| Portfolio Company | | March 31, 2022 | | | December 31, 2021 | |
First lien senior secured debt (continued)(1) | | (Amounts in thousands) | | | (Amounts in thousands) | |
| Formulated Buyer, LLC | | $ | 390 | | | $ | 390 | |
| FreshAddress, LLC | | | 30 | | | | 30 | |
| Geriatric Medical and Surgical Supply, LLC | | | 300 | | | | 300 | |
| Golden Bear PT Partners, LLC | | | 218 | | | | 267 | |
| Green Monster Acquisition, LLC | | | 38 | | | | 38 | |
| Groundworks Operations, LLC | | | 425 | | | | 575 | |
| Guardian Dentistry Practice Management, LLC | | | 81 | | | | 90 | |
| Home Brands Group Holdings, Inc. | | | 48 | | | | 48 | |
| Hydromax USA, LLC | | | 125 | | | | 182 | |
| Icelandirect, LLC | | | 17 | | | | 23 | |
| Industrial Dynamics Company, Ltd. | | | 141 | | | | 141 | |
| Infolinks Media Buyco, LLC | | | 77 | | | | 77 | |
| Innovative FlexPak, LLC | | | 408 | | | | 408 | |
| ISSA, LLC | | | 66 | | | | 66 | |
| Jansy Packaging, LLC | | | 470 | | | | 706 | |
| Juniper Landscaping Holdings LLC | | | 132 | | | | 110 | |
| Kaizen Auto Care, LLC | | | 99 | | | | 204 | |
| Kalkomey Enterprises, LLC | |
| 46 | | |
| 77 | |
| Lakeshirts LLC | | | 80 | | | | 80 | |
| Leonard Group, Inc. | | | 66 | | | | 197 | |
| Library Associates, LLC | | | - | | | | 84 | |
| MacNeill Pride Group Corp. | | | 158 | | | | 52 | |
| Mad Rose Company, LLC | | | 119 | | | | 119 | |
| Main Street Gourmet, LLC | | | 685 | | | | 704 | |
| Mattco Forge, Inc. | | | 506 | | | | 506 | |
| Maxor National Pharmacy Services, LLC | | | 84 | | | | 84 | |
| Millennia Patient Services, LLC | | | 401 | | | | 401 | |
| Montway LLC | | | 825 | | | | 825 | |
| Motis Brands, Inc. | | | 8 | | | | 14 | |
| MRC Keeler Acquisition, LLC | | | 300 | | | | 300 | |
| Nelson Name Plate Company | | | 86 | | | | 94 | |
| Network Partners Acquisition, LLC | | | 150 | | | | 150 | |
| Nimlok Company, LLC | | | 320 | | | | 320 | |
| Novum Orthopedic Partners Management, LLC | | | 331 | | | | 373 | |
| NSG Buyer, Inc. | | | 294 | | | | 294 | |
| NutriScience Innovations, LLC | | | 131 | | | | 131 | |
| P&R Dental Strategies, LLC | | | 23 | | | | 23 | |
| Peak Dental Services, LLC | | | 146 | | | | 149 | |
| Peak Investment Holdings, LLC | | | 908 | | | | 908 | |
| Pentec Acquisition Corp. | | | 75 | | | | 75 | |
| Performance PowerSports Group Purchaser, Inc. | | | 12 | | | | 8 | |
| Pink Lily Holdings, LLC | | | 38 | | | | 46 | |
| PPW Acquisition, LLC | | | 21 | | | | 30 | |
| Reliable Medical Supply LLC | | | 87 | | | | 178 | |
| Revival Animal Health, LLC | | | 131 | | | | 131 | |
| RQM Buyer, Inc. | | | 234 | | | | 234 | |
| Portfolio Company | | March 31, 2022 | | | December 31, 2021 | |
First lien senior secured debt (continued)(1) | | (Amounts in thousands) | | | (Amounts in thousands) | |
| RTP Acquisition, LLC | | $ | 38 | | | $
| 38 | |
| SAMGI Buyer, Inc. | | | 138 | | | | 138 | |
| SASE Company, LLC | | | 38 | | | | 38 | |
| SCA Buyer, LLC | | | 373 | | | | 412 | |
| SCP Beverage Buyer, LLC | | | 23 | | | | 38 | |
| SCP ENT and Allergy Services, LLC | | | 879 | | | | 966 | |
| Shearer Supply, LLC | | | 67 | | | | 71 | |
| ShiftKey, LLC | | | 241 | | | | 120 | |
| Signature Dental Partners LLC | | | 152 | | | | 179 | |
| Silver Falls MSO, LLC | | | - | | | | 94 | |
| SimiTree Acquisition LLC | | | 191 | | | | 522 | |
| Southeast Primary Care Partners, LLC | | | 405 | | | | 435 | |
| Southern Orthodontic Partners Management, LLC | | | 45 | | | | 167 | |
Southern Sports Medicine Partners, LLC
| | | 216 | | | | - | |
| Spear Education, LLC | | | 359 | | | | 888 | |
| Spectrum Solutions, LLC | | | 267 | | | | 267 | |
| Starwest Botanicals Acquisition, LLC | |
| 139 | | |
| 174 | |
| Stax Holding Company, LLC | | | 60 | | | | 60 | |
| Steel City Wash, LLC | | | 38 | | | | 38 | |
| Storm Smart Buyer LLC | | | 131 | | | | 131 | |
| Teel Plastics, LLC | | | 324 | | | | 324 | |
| The Channel Company, LLC | | | 62 | | | | 62 | |
| The Stratix Corporation | | | 75 | | | | 150 | |
| Trademark Global, LLC | | | 65 | | | | 88 | |
| Triad Technologies, LLC | | | 314 | | | | 314 | |
| United Land Services Opco Parent, LLC | | | 803 | | | | 914 | |
| USALCO, LLC | | | 68 | | | | 93 | |
| Vanguard Packaging, LLC | | | 303 | | | | 303 | |
| Varsity DuvaSawko Operating Corp. | | | 474 | | | | 474 | |
| Vehicle Accessories, Inc. | | | 34 | | | | 38 | |
| Vital Care Buyer, LLC | | | 406 | | | | 580 | |
| Western Veterinary Partners, LLC | | | 217 | | | | 147 | |
| Total unfunded portfolio company commitments | | $ | 27,294 | | | $ | 30,379 | |
(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, 2022 and December 31, 2021, approximately $203,000 and $185,000, 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, 2022 and December 31, 2021, the Company had $216.0 million in total capital commitments from investors ($32.4 million 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, 2022.
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, 2021, filed with the SEC on March 10, 2022, and elsewhere in our filings with the SEC. There have been no significant changes this quarter in our critical accounting policies and practices.
Good Faith Determinations of Fair Value (“Rule 2a-5”) under the 1940 Act was adopted by SEC in December 2020 and establishes requirements for determining fair value good faith for purposes of the 1940 Act. The company is evaluating the impact of adopting Rule 2a-5 on the financial statements and intends to comply with the new rule’s requirements on or before the compliance date in September 2022.
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, 2022, 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, 2022, 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 | | $ | 3.1 | | | $ | - | | | $ | 3.1 | |
| Up 100 basis points | | $ | 1.5 | | | $ | - | | | $ | 1.5 | |
| 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, 2022 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, 2021, 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, 2022, 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, 2021.
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.
| Exhibit No. | | Description |
| | |
| | |
| | |
| | |
| | |
| | |
* Filed herewith | | |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused his report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | AG TWIN BROOK BDC, INC. |
| | | |
May 13, 2022
|
| By:
| /s/ Trevor Clark |
|
| | Trevor Clark |
|
| | Chief Executive Officer |
| | | | (Principal Executive Officer) |
| May 13, 2022 |
| By:
| /s/ Terrence Walters
|
|
| | Terrence Walters |
|
| | Chief Financial Officer and Treasurer |
| | | | (Principal Financial Officer and Principal Accounting Officer) |
