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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarter Ended September 30, 2021
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 814-01294
SCP Private Credit Income BDC LLC
(Exact name of registrant as specified in its charter)
Delaware | 83-0634992 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
500 Park Avenue New York, N.Y. | 10022 | |
(Address of principal executive offices) | (Zip Code) |
(212) 993-1670
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered | ||
N/A | N/A | N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | Smaller Reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 30, 2021, there was no established public market for the registrant’s units. The issuer had 13,384,930 units outstanding as of October 29, 2021.
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SCP PRIVATE CREDIT INCOME BDC LLC
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2021
Index | Page No. | |||||
PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
3 | ||||||
4 | ||||||
5 | ||||||
6 | ||||||
Consolidated Schedule of Investments as of September 30, 2021 (unaudited) | 7 | |||||
Consolidated Schedule of Investments as of December 31, 2020 | 10 | |||||
13 | ||||||
30 | ||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 42 | ||||
Item 4. | Controls and Procedures | 43 | ||||
PART II. | OTHER INFORMATION | |||||
Item 1. | Legal Proceedings | 43 | ||||
Item 1a. | Risk Factors | 44 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 47 | ||||
Item 3. | Defaults Upon Senior Securities | 47 | ||||
Item 4. | Mine Safety Disclosures | 47 | ||||
Item 5. | Other Information | 47 | ||||
Item 6. | Exhibits | 48 | ||||
SIGNATURES | 49 |
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In this Quarterly Report, “Company”, “we”, “us”, and “our” refer to SCP Private Credit Income BDC LLC unless the context states otherwise.
SCP Private Credit Income BDC LLC
Consolidated Statements of Assets and Liabilities
(in thousands, except unit amounts)
September 30, 2021 (unaudited) | December 31, 2020 | |||||||
Assets | ||||||||
Investments at fair value: | ||||||||
Non-controlled/non-affiliated investments (cost: $350,279 and $164,327, respectively) | $ | 353,306 | $ | 165,364 | ||||
Cash | 31,415 | 10,545 | ||||||
Cash equivalents (cost: $0 and $20,000, respectively) | — | 20,000 | ||||||
Interest receivable | 1,818 | 627 | ||||||
Receivable for investments sold | 68 | 4 | ||||||
Prepaid expenses | 47 | 18 | ||||||
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Total assets | $ | 386,654 | $ | 196,558 | ||||
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Liabilities | ||||||||
Revolving credit facility due March 2022 (the “Subscription Facility”) ($49,000 and $23,500 face amounts, respectively, reported net of unamortized debt issuance costs of $88 and $41, respectively. See note 5) | $ | 48,912 | $ | 23,459 | ||||
Revolving credit facility due December 2023 (the “SPV Facility”) ($153,950 and $53,050 face amounts, respectively, reported net of unamortized debt issuance costs of $2,127 and $838, respectively. See note 5) | 151,823 | 52,212 | ||||||
Payable for investments and cash equivalents purchased | 38,024 | 20,000 | ||||||
Distribution payable | — | 3,378 | ||||||
Management fee payable (see note 3) | 1,939 | 143 | ||||||
Incentive fee payable (see note 3) | 2,406 | — | ||||||
Administration fee payable (see note 3) | 61 | 32 | ||||||
Interest payable (see note 5) | 1,066 | 507 | ||||||
Other liabilities and accrued expenses | 849 | 685 | ||||||
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Total liabilities | $ | 245,080 | $ | 100,416 | ||||
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Commitments and contingencies (see note 6) | ||||||||
Unitholders’ Capital | ||||||||
Common Unitholders’ capital (13,384,930 and 9,586,174 units, respectively, issued and outstanding) | 136,182 | 96,182 | ||||||
Accumulated distributable earnings (loss) | 5,392 | (40 | ) | |||||
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Total unitholders’ capital | $ | 141,574 | $ | 96,142 | ||||
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Total liabilities and unitholders’ capital | $ | 386,654 | $ | 196,558 | ||||
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Net asset value per unit | $ | 10.58 | $ | 10.03 | ||||
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See notes to consolidated financial statements.
3
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SCP Private Credit Income BDC LLC
Consolidated Statement of Operations (unaudited)
(in thousands, except unit amounts)
Three months ended | Nine months ended | |||||||||||||||
September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
Investment Income: | ||||||||||||||||
Interest income from non-controlled/non-affiliated investments | $ | 6,210 | $ | 2,778 | $ | 14,095 | $ | 8,541 | ||||||||
Other income from non-controlled/non-affiliated investments | 7 | 25 | 55 | 82 | ||||||||||||
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Total investment income | 6,217 | 2,803 | 14,150 | 8,623 | ||||||||||||
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Expenses: | ||||||||||||||||
Management fees (see note 3) | $ | 701 | $ | 401 | $ | 1,796 | $ | 1,320 | ||||||||
Incentive fees (see note 3) | 528 | — | 2,406 | — | ||||||||||||
Administration fees (see note 3) | 62 | 31 | 145 | 87 | ||||||||||||
Interest and other credit facility expenses (see note 5) | 1,669 | 774 | 3,897 | 2,812 | ||||||||||||
Other general and administrative expenses | 213 | 180 | 547 | 514 | ||||||||||||
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Total expenses | 3,173 | 1,386 | 8,791 | 4,733 | ||||||||||||
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Net investment income | $ | 3,044 | $ | 1,417 | $ | 5,359 | $ | 3,890 | ||||||||
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Realized and unrealized gain (loss) on investments and cash equivalents: | ||||||||||||||||
Net realized gain (loss) on non-controlled/non-affiliated investments and cash equivalents | $ | 16 | $ | (18 | ) | $ | 13 | $ | (21 | ) | ||||||
Net change in unrealized gain (loss) on non-controlled/non-affiliated investments and cash equivalents | (64 | ) | 1,005 | 1,990 | (146 | ) | ||||||||||
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Net realized and unrealized gain (loss) on non-controlled/non-affiliated investments and cash equivalents | (48 | ) | 987 | 2,003 | (167 | ) | ||||||||||
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Net Increase in Unitholders’ Capital Resulting From Operations | $ | 2,996 | $ | 2,404 | $ | 7,362 | $ | 3,723 | ||||||||
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Net Income Per Unit | $ | 0.25 | $ | 0.25 | $ | 0.71 | $ | 0.44 | ||||||||
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See notes to consolidated financial statements.
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SCP Private Credit Income BDC LLC
Consolidated Statement of Changes in Unitholders’ Capital (unaudited)
(in thousands, except unit amounts)
Three months ended | Nine months ended | |||||||||||||||
September 30, 2021 | September 30, 2020 | September 30, 2021 | September 30, 2020 | |||||||||||||
Increase (decrease) in unitholders’ capital resulting from operations: | ||||||||||||||||
Net investment income | $ | 3,044 | $ | 1,417 | $ | 5,359 | $ | 3,890 | ||||||||
Net realized gain (loss) | 16 | (18 | ) | 13 | (21 | ) | ||||||||||
Net change in unrealized gain (loss) | (64 | ) | 1,005 | 1,990 | (146 | ) | ||||||||||
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Net increase in unitholders’ capital resulting from operations | 2,996 | 2,404 | 7,362 | 3,723 | ||||||||||||
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Distributions to unitholders: | ||||||||||||||||
From net investment income | (1,930 | ) | (1,206 | ) | (1,930 | ) | (1,808 | ) | ||||||||
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Increase (decrease) in unitholders’ capital resulting from capital activity: | ||||||||||||||||
Contributions | 40,000 | — | 40,000 | 47,000 | ||||||||||||
Less offering costs | — | — | — | — | ||||||||||||
Cancellation | — | — | — | (1 | ) | |||||||||||
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Net increase in unitholders’ capital resulting from capital activity | 40,000 | — | 40,000 | 46,999 | ||||||||||||
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Total increase in unitholders’ capital | 41,066 | 1,198 | 45,432 | 48,914 | ||||||||||||
Unitholders’ capital, beginning of period | 100,508 | 97,412 | 96,142 | 49,696 | ||||||||||||
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Unitholders’ capital, end of period | $ | 141,574 | $ | 98,610 | $ | 141,574 | $ | 98,610 | ||||||||
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Capital unit activity (see note 7): | ||||||||||||||||
Units issued | 3,798,756 | — | 3,798,756 | 4,630,653 | ||||||||||||
Units canceled | — | — | — | (100 | ) | |||||||||||
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Net increase from capital unit activity | 3,798,756 | — | 3,798,756 | 4,630,553 | ||||||||||||
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See notes to consolidated financial statements.
5
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SCP Private Credit Income BDC LLC
Consolidated Statement of Cash Flows (unaudited)
(in thousands)
Nine months ended | ||||||||
September 30, 2021 | September 30, 2020 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net increase in unitholders’ capital resulting from operations | $ | 7,362 | $ | 3,723 | ||||
Adjustments to reconcile net increase in unitholders’ capital resulting from operations to net cash used in operating activities: | ||||||||
Net realized (gain) loss on investments and cash equivalents | (13 | ) | 21 | |||||
Net change in unrealized (gain) loss on investments | (1,990 | ) | 146 | |||||
(Increase) decrease in operating assets: | ||||||||
Purchase of investments | (247,870 | ) | (53,476 | ) | ||||
Net accretion of discount on investments | (927 | ) | (518 | ) | ||||
Proceeds from disposition of investments | 62,858 | 19,815 | ||||||
Capitalization of payment-in-kind income | — | (22 | ) | |||||
Receivable for investments sold | (64 | ) | 110 | |||||
Interest receivable | (1,191 | ) | 274 | |||||
Other receivable | — | 57 | ||||||
Prepaid expenses | (29 | ) | (27 | ) | ||||
Increase (decrease) in operating liabilities: | ||||||||
Payable for investments and cash equivalents purchased | 18,024 | (9,971 | ) | |||||
Management fee payable | 1,796 | 919 | ||||||
Incentive fee payable | 2,406 | — | ||||||
Administration fee payable | 29 | (3 | ) | |||||
Interest payable | 559 | (233 | ) | |||||
Other liabilities and accrued expenses | 164 | 28 | ||||||
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Net Cash Used in Operating Activities | (158,886 | ) | (39,157 | ) | ||||
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Cash Flows from Financing Activities: | ||||||||
Contributions from unitholders | 40,000 | 47,000 | ||||||
Cancellation of units | — | (1 | ) | |||||
Cash distributions paid | (5,308 | ) | (1,808 | ) | ||||
Deferred financing costs | 622 | 449 | ||||||
Proceeds from borrowings | 199,642 | 96,300 | ||||||
Repayments of borrowings | (75,200 | ) | (112,800 | ) | ||||
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Net Cash Provided by Financing Activities | 159,756 | 29,140 | ||||||
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 870 | (10,017 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 30,545 | 34,186 | ||||||
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CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 31,415 | $ | 24,169 | ||||
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Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 3,338 | $ | 3,045 | ||||
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See notes to consolidated financial statements.
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SCP Private Credit Income BDC LLC
Consolidated Schedule of Investments (unaudited)
September 30, 2021
(in thousands, except share/unit amounts)
Description | Industry | Spread above Index (3) | Libor Floor | Interest Rate (1) | Acquisition Date | Maturity Date | Par Amount | Cost | Fair Value | |||||||||||||||||||||||||
Bank Debt/Senior Secured Loans—249.4% |
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Align Financial Holdings, LLC(2) | Insurance | L+475 | 1.00 | % | 5.75 | % | 8/26/2021 | 6/30/2026 | $ | 8,197 | $ | 8,097 | $ | 8,197 | ||||||||||||||||||||
Alimera Sciences, Inc.(2) | Pharmaceuticals | L+765 | 1.78 | % | 9.43 | % | 12/31/2019 | 7/1/2024 | 3,929 | 4,003 | 3,997 | |||||||||||||||||||||||
All State Ag Parts, LLC(2) | Trading Companies & Distributors | L+500 | 1.00 | % | 6.00 | % | 9/1/2021 | 9/1/2026 | 2,520 | 2,483 | 2,482 | |||||||||||||||||||||||
AmeriMark Intermediate Holdings, LLC(5) | Internet & Catalog Retail | L+600 | 1.00 | % | 7.00 | % | 7/28/2021 | 10/15/2026 | 22,191 | 21,747 | 21,747 | |||||||||||||||||||||||
Apollo Endosurgery, Inc.(2) | Health Care Equipment & Supplies | L+750 | 1.36 | % | 8.86 | % | 3/15/2019 | 3/1/2025 | 4,004 | 4,115 | 4,104 | |||||||||||||||||||||||
Axcella Health, Inc.(2) | Pharmaceuticals | L+860 | 0.10 | % | 8.70 | % | 9/2/2021 | 9/1/2026 | 1,963 | 1,965 | 1,963 | |||||||||||||||||||||||
Basic Fun, Inc.(2) | Specialty Retail | L+675 | 1.00 | % | 7.75 | % | 10/30/2020 | 10/30/2023 | 1,153 | 1,139 | 1,153 | |||||||||||||||||||||||
BayMark Health Services, Inc. | Health Care Providers & Services | L+500 | 1.00 | % | 6.00 | % | 6/29/2021 | 6/11/2027 | 7,440 | 7,369 | 7,440 | |||||||||||||||||||||||
CC SAG Holdings Corp. (Spectrum Automotive) (2) | Diversified Consumer Services | L+575 | 0.75 | % | 6.50 | % | 6/29/2021 | 6/29/2028 | 4,732 | 4,663 | 4,661 | |||||||||||||||||||||||
Centrexion Therapeutics, Inc. | Pharmaceuticals | L+725 | 2.45 | % | 9.70 | % | 6/28/2019 | 1/1/2024 | 3,204 | 3,250 | 3,260 | |||||||||||||||||||||||
Cerapedics, Inc. (2) | Health Care Equipment & Supplies | L+695 | 2.50 | % | 9.45 | % | 3/22/2019 | 3/1/2025 | 5,248 | 5,357 | 5,358 | |||||||||||||||||||||||
Community Brands ParentCo, LLC (f/k/a Ministry Brands) | Software | L+400 | 1.00 | % | 5.00 | % | 6/11/2021 | 12/2/2022 | 17,815 | 17,586 | 17,815 | |||||||||||||||||||||||
Drilling Info Holdings, Inc.(2) | IT Services | L+450 | — | 4.58 | % | 1/31/2020 | 7/30/2025 | 14,125 | 13,841 | 14,125 | ||||||||||||||||||||||||
Enhanced Permanent Capital, LLC(2)(4) | Capital Markets | L+700 | 1.00 | % | 8.00 | % | 12/29/2020 | 12/29/2025 | 4,970 | 4,843 | 4,970 | |||||||||||||||||||||||
ENS Holdings III Corp. & ES Opco USA LLC (BlueFin)(2) | Trading Companies & Distributors | L+475 | 1.00 | % | 5.75 | % | 12/31/2019 | 12/31/2025 | 7,831 | 7,715 | 7,831 | |||||||||||||||||||||||
Erie Construction Mid-west, LLC(2) | Building Products | L+475 | 1.00 | % | 5.75 | % | 8/5/2021 | 7/30/2027 | 11,761 | 11,560 | 11,555 | |||||||||||||||||||||||
Foundation Consumer Brands, LLC(2) | Personal Products | L+638 | 1.00 | % | 7.38 | % | 2/12/2021 | 2/12/2027 | 14,996 | 14,653 | 14,996 | |||||||||||||||||||||||
Glooko, Inc.(2) | Health Care Technology | L+790 | 0.10 | % | 8.00 | % | 9/30/2021 | 10/1/2026 | 1,769 | 1,760 | 1,760 | |||||||||||||||||||||||
GSM Acquisition Corp. | Leisure Equipment & Products | L+500 | 1.00 | % | 6.00 | % | 4/20/2021 | 11/16/2026 | 12,230 | 12,114 | 12,108 | |||||||||||||||||||||||
Higginbotham Insurance Agency, Inc.(2) | Insurance | L+550 | 0.75 | % | 6.25 | % | 11/25/2020 | 11/25/2026 | 7,878 | 7,772 | 7,878 | |||||||||||||||||||||||
High Street Buyer, Inc. | Insurance | L+600 | 0.75 | % | 6.75 | % | 4/16/2021 | 4/16/2028 | 5,074 | 4,976 | 4,973 | |||||||||||||||||||||||
Inszone Mid, LLC | Insurance | L+575 | 1.00 | % | 6.75 | % | 9/28/2021 | 6/30/2026 | 1,900 | 1,881 | 1,881 | |||||||||||||||||||||||
Kid Distro Holdings, LLC (Distro Kid)(2) | Software | L+600 | 1.00 | % | 7.00 | % | 9/24/2021 | 10/1/2027 | 12,614 | 12,362 | 12,362 | |||||||||||||||||||||||
KORE Wireless Group, Inc.(2) | Wireless Telecommunication Services | L+550 | — | 5.63 | % | 3/12/2019 | 12/21/2024 | 14,287 | 14,112 | 14,287 | ||||||||||||||||||||||||
Maurices, Incorporated(2) | Specialty Retail | L+675 | 1.00 | % | 7.75 | % | 8/27/2021 | 6/1/2024 | 6,460 | 6,335 | 6,331 | |||||||||||||||||||||||
MMIT Holdings, LLC(2) | IT Services | L+625 | 1.00 | % | 7.25 | % | 9/21/2021 | 9/15/2027 | 10,898 | 10,731 | 10,730 | |||||||||||||||||||||||
MRI Software LLC(2) | Software | L+550 | 1.00 | % | 6.50 | % | 7/23/2019 | 2/10/2026 | 13,307 | 13,153 | 13,307 | |||||||||||||||||||||||
NAC Holding Corporation (Jaguar)(2) | Insurance | L+475 | 1.00 | % | 5.75 | % | 7/30/2021 | 9/28/2024 | 471 | 466 | 466 | |||||||||||||||||||||||
Neuronetics, Inc.(2)(4) | Health Care Equipment & Supplies | L+765 | 1.66 | % | 9.31 | % | 3/2/2020 | 2/28/2025 | 3,056 | 3,098 | 3,101 | |||||||||||||||||||||||
Pinnacle Treatment Centers, Inc.(2) | Health Care Providers & Services | L+575 | 1.00 | % | 6.75 | % | 1/22/2020 | 12/31/2022 | 4,697 | 4,675 | 4,697 | |||||||||||||||||||||||
Plastics Management, LLC(2) | Health Care Providers & Services | L+500 | 1.00 | % | 6.00 | % | 8/26/2021 | 8/18/2027 | 7,296 | 7,188 | 7,187 | |||||||||||||||||||||||
Revlon, Inc.(2)(4) | Personal Products | L+575 | 1.75 | % | 7.50 | % | 5/7/2021 | 5/7/2024 | 13,905 | 13,798 | 13,905 | |||||||||||||||||||||||
Rezolute, Inc.(2) | Biotechnology | L+875 | 0.12 | % | 8.87 | % | 4/14/2021 | 4/1/2026 | 1,206 | 1,200 | 1,200 | |||||||||||||||||||||||
RQM+ Corp.(2) | Life Sciences Tools & Services | L+575 | 1.00 | % | 6.75 | % | 8/20/2021 | 8/12/2026 | 6,999 | 6,931 | 6,929 | |||||||||||||||||||||||
RSC Acquisition, Inc.(2) | Insurance | L+550 | 1.00 | % | 6.50 | % | 10/5/2020 | 11/1/2026 | 2,678 | 2,605 | 2,678 | |||||||||||||||||||||||
Rubius Therapeutics, Inc. (2)(4) | Pharmaceuticals | L+550 | 2.10 | % | 7.60 | % | 3/12/2019 | 6/1/2026 | 7,872 | 8,005 | 8,010 | |||||||||||||||||||||||
RxSense Holdings LLC(2) | Diversified Consumer Services | L+500 | 1.00 | % | 6.00 | % | 3/17/2020 | 3/13/2026 | 10,570 | 10,410 | 10,570 | |||||||||||||||||||||||
scPharmaceuticals, Inc.(2) | Pharmaceuticals | L+795 | 2.23 | % | 10.18 | % | 9/17/2019 | 9/17/2023 | 915 | 927 | 926 | |||||||||||||||||||||||
Smile Doctors LLC(2) | Personal Products | L+600 | 1.00 | % | 7.00 | % | 12/17/2020 | 10/6/2022 | 13,592 | 13,388 | 13,592 | |||||||||||||||||||||||
SOC Telemed, Inc.(2)(4) | Health Care Providers & Services | L+747 | 0.13 | % | 7.60 | % | 3/26/2021 | 4/1/2026 | 5,673 | 5,676 | 5,673 | |||||||||||||||||||||||
SunMed Group Holdings, LLC(2) | Health Care Equipment & Supplies | L+575 | 0.75 | % | 6.50 | % | 6/16/2021 | 6/16/2028 | 7,944 | 7,809 | 7,805 | |||||||||||||||||||||||
TAUC Management, LLC(2) | Health Care Providers & Services | L+525 | 1.00 | % | 6.25 | % | 2/12/2021 | 2/12/2027 | 7,907 | 7,798 | 7,788 | |||||||||||||||||||||||
The Children’s Place, Inc.(2)(4) | Specialty Retail | L+800 | 1.00 | % | 9.00 | % | 10/5/2020 | 5/9/2024 | 6,956 | 6,876 | 6,956 | |||||||||||||||||||||||
Trinity Partners, LLC(2) | Professional Services | L+500 | 1.00 | % | 6.00 | % | 12/11/2020 | 2/21/2025 | 2,657 | 2,635 | 2,657 |
See notes to consolidated financial statements.
7
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SCP Private Credit Income BDC LLC
Consolidated Schedule of Investments (unaudited) (continued)
September 30, 2021
(in thousands)
Description | Industry | Spread above Index (3) | Libor Floor | Interest Rate (1) | Acquisition Date | Maturity Date | Par Amount | Cost | Fair Value | |||||||||||||||||||||||||
Bank Debt/Senior Secured Loans (continued) | ||||||||||||||||||||||||||||||||||
Ultimate Baked Goods Midco LLC (Rise Baking)(2) | Packaged Foods & Meats | L+625 | 1.00 | % | 7.25 | % | 8/12/2021 | 8/13/2027 | $ | 7,860 | $ | 7,667 | $ | 7,664 | ||||||||||||||||||||
Vessco Midco Holdings, LLC(2) | Water Utilities | L+450 | 1.00 | % | 5.50 | % | 9/3/2021 | 11/2/2026 | 1,309 | 1,296 | 1,296 | |||||||||||||||||||||||
World Insurance Associates, LLC(2) | Insurance | L+575 | 1.00 | % | 6.75 | % | 10/12/2020 | 4/1/2026 | 18,653 | 18,199 | 18,653 | |||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Bank Debt/Senior Secured Loans | $ | 350,229 | $ | 353,024 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Shares/ Units | ||||||||||||||||||||||||||||||||||
Common Equity/Equity Interests/Warrants — 0.2% | ||||||||||||||||||||||||||||||||||
Centrexion Therapeutics, Inc. Warrants† | Pharmaceuticals | 6/28/2019 | 56,483 | 27 | 13 | |||||||||||||||||||||||||||||
Senseonics Holdings, Inc. Common Stock†(4) | Health Care Equipment & Supplies | 7/25/2019 | 79,501 | 23 | 269 | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Common Equity/Equity Interests/Warrants | $ | 50 | $ | 282 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Investments(6) — 249.6% | $ | 350,279 | $ | 353,306 | ||||||||||||||||||||||||||||||
Liabilities in Excess of Other Assets — (149.6%) | (211,732 | ) | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Net Assets — 100.0% | $ | 141,574 | ||||||||||||||||||||||||||||||||
|
|
(1) | Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of September 30, 2021. |
(2) | Indicates an investment that is wholly or partially held by SCP Private Credit Income BDC LLC (the “Company”, “we”, “us” or “our”) through its wholly-owned financing subsidiary SCP Private Credit Income BDC SPV LLC (the “SPV”). Such investments are pledged as collateral under the SPV Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company. |
(3) | Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor. |
(4) | Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (“1940 Act”). If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of September 30, 2021, on a fair value basis, non-qualifying assets in the portfolio represented 9.9% of the total assets of the Company. |
(5) | AmeriMark Interactive, LLC, AmeriMark Direct LLC, AmeriMark Intermediate Sub, Inc., L.T.D. Commodities LLC, Dr. Leonard’s Healthcare Corp. and Amerimark Intermediate Holdings, LLC are each co-Borrowers. |
(6) | Aggregate net unrealized appreciation for U.S. federal income tax purposes is $1,642; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $3,106 and $1,464, respectively, based on a tax cost of $351,664. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act. All investments are Level 3 unless otherwise indicated. |
† | Non-income producing security. |
See notes to consolidated financial statements.
8
Table of Contents
SCP Private Credit Income BDC LLC
Consolidated Schedule of Investments (unaudited) (continued)
September 30, 2021
(in thousands)
Industry Classification | Percentage of Total Investments (at fair value) as of September 30, 2021 | |||
Insurance | 12.7 | % | ||
Software | 12.3 | % | ||
Personal Products | 12.0 | % | ||
Health Care Providers & Services | 9.3 | % | ||
IT Services | 7.0 | % | ||
Internet & Catalog Retail | 6.2 | % | ||
Health Care Equipment & Supplies | 5.8 | % | ||
Pharmaceuticals | 5.1 | % | ||
Diversified Consumer Services | 4.3 | % | ||
Specialty Retail | 4.1 | % | ||
Wireless Telecommunication Services | 4.0 | % | ||
Leisure Equipment & Products | 3.4 | % | ||
Building Products | 3.3 | % | ||
Trading Companies & Distributors | 2.9 | % | ||
Packaged Foods & Meats | 2.2 | % | ||
Life Sciences Tools & Services | 2.0 | % | ||
Capital Markets | 1.4 | % | ||
Professional Services | 0.8 | % | ||
Health Care Technology | 0.5 | % | ||
Water Utilities | 0.4 | % | ||
Biotechnology | 0.3 | % | ||
|
| |||
Total Investments | 100.0 | % | ||
|
|
See notes to consolidated financial statements.
9
Table of Contents
SCP Private Credit Income BDC LLC
Consolidated Schedule of Investments
December 31, 2020
(in thousands, except share/unit amounts)
Description | Industry | Spread above Index (3) | Libor Floor | Interest Rate (1) | Acquisition Date | Maturity Date | Par Amount | Cost | Fair Value | |||||||||||||||||||||||||
Bank Debt/Senior Secured Loans — 172.0% | ||||||||||||||||||||||||||||||||||
Alimera Sciences, Inc.(2) | Pharmaceuticals | L+765 | 1.78 | % | 9.43 | % | 12/31/2019 | 7/1/2024 | $ | 3,929 | $ | 3,970 | $ | 3,968 | ||||||||||||||||||||
Apollo Endosurgery, Inc.(2) | Health Care Equipment & Supplies | L+750 | 1.36 | % | 8.86 | % | 3/15/2019 | 9/1/2024 | 4,004 | 4,075 | 4,063 | |||||||||||||||||||||||
Basic Fun, Inc.(2) | Specialty Retail | L+675 | 1.00 | % | 7.75 | % | 10/30/2020 | 10/30/2023 | 1,422 | 1,402 | 1,401 | |||||||||||||||||||||||
Centrexion Therapeutics, Inc. | Pharmaceuticals | L+725 | 2.45 | % | 9.70 | % | 6/28/2019 | 1/1/2024 | 3,204 | 3,218 | 3,236 | |||||||||||||||||||||||
Cerapedics, Inc. (2) | Health Care Equipment & Supplies | L+695 | 2.50 | % | 9.45 | % | 3/22/2019 | 3/1/2024 | 4,723 | 4,787 | 4,794 | |||||||||||||||||||||||
Drilling Info Holdings, Inc.(2) | IT Services | L+450 | — | 4.65 | % | 1/31/2020 | 7/30/2025 | 14,271 | 13,932 | 14,022 | ||||||||||||||||||||||||
Enhanced Permanent Capital, LLC(4) | Capital Markets | L+700 | 1.00 | % | 8.00 | % | 12/29/2020 | 12/29/2025 | 3,898 | 3,786 | 3,786 | |||||||||||||||||||||||
ENS Holdings III Corp. & ES Opco USA LLC (BlueFin)(2) | Trading Companies & Distributors | L+475 | 1.00 | % | 5.75 | % | 12/31/2019 | 12/31/2025 | 7,649 | 7,517 | 7,610 | |||||||||||||||||||||||
Galway Partners Holdings, LLC (f/k/a Edgewood)(2) | Insurance | L+425 | 1.00 | % | 5.25 | % | 3/12/2019 | 9/8/2024 | 24,958 | 24,619 | 24,958 | |||||||||||||||||||||||
Higginbotham Insurance Agency, Inc.(2) | Insurance | L+575 | 0.75 | % | 6.50 | % | 11/25/2020 | 11/25/2026 | 6,436 | 6,341 | 6,340 | |||||||||||||||||||||||
Kindred Biosciences, Inc.(2)(6) | Pharmaceuticals | L+675 | 2.17 | % | 8.92 | % | 9/30/2019 | 9/30/2024 | 1,793 | 1,802 | 1,802 | |||||||||||||||||||||||
KORE Wireless Group, Inc.(2) | Wireless Telecommunication Services | L+550 | — | 5.75 | % | 3/12/2019 | 12/21/2024 | 14,254 | 14,042 | 14,253 | ||||||||||||||||||||||||
MRI Software LLC(2) | Software | L+550 | 1.00 | % | 6.50 | % | 7/23/2019 | 2/10/2026 | 8,391 | 8,310 | 8,307 | |||||||||||||||||||||||
Neuronetics, Inc.(2) | Health Care Equipment & Supplies | L+765 | 1.66 | % | 9.31 | % | 3/2/2020 | 2/28/2025 | 3,056 | 3,070 | 3,071 | |||||||||||||||||||||||
Pinnacle Treatment Centers, Inc.(2) | Health Care Providers & Services | L+625 | 1.00 | % | 7.25 | % | 1/22/2020 | 12/31/2022 | 4,608 | 4,575 | 4,608 | |||||||||||||||||||||||
RSC Acquisition, Inc.(2) | Insurance | L+550 | 1.00 | % | 6.50 | % | 10/5/2020 | 11/1/2026 | 1,251 | 1,215 | 1,214 | |||||||||||||||||||||||
Rubius Therapeutics, Inc. (2)(4) | Pharmaceuticals | L+550 | — | 5.65 | % | 3/12/2019 | 12/21/2023 | 7,872 | 7,947 | 7,961 | ||||||||||||||||||||||||
RxSense Holdings LLC(2) | Diversified Consumer Services | L+500 | 1.00 | % | 6.00 | % | 3/17/2020 | 3/13/2026 | 10,339 | 10,155 | 10,339 | |||||||||||||||||||||||
scPharmaceuticals, Inc.(2) | Pharmaceuticals | L+795 | 2.23 | % | 10.18 | % | 9/17/2019 | 9/17/2023 | 915 | 922 | 923 | |||||||||||||||||||||||
SI-BONE, Inc.(2)(4) | Health Care Equipment & Supplies | L+940 | 0.33 | % | 9.73 | % | 5/29/2020 | 6/1/2025 | 3,492 | 3,495 | 3,492 | |||||||||||||||||||||||
Smile Doctors LLC | Personal Products | L+600 | 1.00 | % | 7.00 | % | 12/17/2020 | 10/6/2022 | 1,408 | 1,380 | 1,379 | |||||||||||||||||||||||
Southern Auto Finance Company(2)(4) | Diversified Financial Services | — | — | 11.15 | % | 4/5/2019 | 12/4/2021 | 3,000 | 2,999 | 3,000 | ||||||||||||||||||||||||
The Children’s Place, Inc.(2)(4) | Specialty Retail | L+800 | 1.00 | % | 9.00 | % | 10/5/2020 | 5/9/2024 | 7,044 | 6,944 | 6,938 | |||||||||||||||||||||||
Trinity Partners, LLC(2) | Professional Services | L+525 | 1.00 | % | 6.25 | % | 12/11/2020 | 2/21/2025 | 2,677 | 2,650 | 2,650 | |||||||||||||||||||||||
World Insurance Associates, LLC(2) | Insurance | L+550 | 1.00 | % | 6.50 | % | 10/12/2020 | 4/1/2026 | 13,097 | 12,714 | 12,704 | |||||||||||||||||||||||
Worldwide Facilities, LLC (2) | Insurance | L+450 | — | 4.65 | % | 9/13/2019 | 9/5/2026 | 8,558 | 8,410 | 8,515 | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Bank Debt/Senior Secured Loans | $ | 164,277 | $ | 165,334 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Shares/ Units | ||||||||||||||||||||||||||||||||||
Common Equity/Equity Interests/Warrants — 0.0% | ||||||||||||||||||||||||||||||||||
Centrexion Therapeutics, Inc. Warrants† | Pharmaceuticals | 6/28/2019 | 56,483 | 27 | 14 | |||||||||||||||||||||||||||||
Senseonics Holdings, Inc. Warrants† | Health Care Equipment & Supplies | 7/25/2019 | 102,942 | 23 | 16 | |||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Common Equity/Equity Interests/Warrants | $ | 50 | $ | 30 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Investments(5) — 172.0% | $ | 164,327 | $ | 165,364 | ||||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Par Amount | ||||||||||||||||||||||||||||||||||
Cash Equivalents — 20.8% | ||||||||||||||||||||||||||||||||||
U.S. Treasury Bill | Government | 12/31/2020 | 2/23/2021 | $ | 20,000 | $ | 20,000 | $ | 20,000 | |||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||||
Total Investments & Cash Equivalents — 192.8% | $ | 184,327 | $ | 185,364 | ||||||||||||||||||||||||||||||
Liabilities in Excess of Other Assets — (92.8%) | (89,222 | ) | ||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||
Net Assets — 100.0% | $ | 96,142 |
See notes to consolidated financial statements.
10
Table of Contents
SCP Private Credit Income BDC LLC
Consolidated Schedule of Investments (continued)
December 31, 2020
(in thousands)
(1) | Floating rate debt investments typically bear interest at a rate determined by reference to either the London Interbank Offered Rate (“LIBOR” or “L”) index rate or the prime index rate (PRIME or “P”), and which typically reset monthly, quarterly or semi-annually. For each debt investment we have provided the current interest rate in effect as of December 31, 2020. |
(2) | Indicates an investment that is wholly or partially held by SCP Private Credit Income BDC LLC through its wholly-owned financing subsidiary SCP Private Credit Income BDC SPV LLC (the “SPV”). Such investments are pledged as collateral under the SPV Facility (see Note 7 to the consolidated financial statements) and are not generally available to creditors, if any, of the Company. |
(3) | Floating rate instruments accrue interest at a predetermined spread relative to an index, typically the LIBOR or PRIME rate. These instruments are often subject to a LIBOR or PRIME rate floor. |
(4) | Indicates assets that the Company believes may not represent “qualifying assets” under Section 55(a) of the Investment Company Act of 1940, as amended (“1940 Act”). If we fail to invest a sufficient portion of our assets in qualifying assets, we could be prevented from making follow-on investments in existing portfolio companies or could be required to dispose of investments at inappropriate times in order to comply with the 1940 Act. As of December 31, 2020, on a fair value basis, non-qualifying assets in the portfolio represented 12.8% of the total assets of the Company. |
(5) | Aggregate net unrealized depreciation for U.S. federal income tax purposes is $348; aggregate gross unrealized appreciation and depreciation for U.S. federal tax purposes is $1,097 and $1,445, respectively, based on a tax cost of $165,712. The Company generally acquires its investments in private transactions exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These investments are generally subject to certain limitations on resale, and may be deemed to be “restricted securities” under the Securities Act. All investments are Level 3 unless otherwise indicated. |
(6) | Kindred Biosciences, Inc., KindredBio Equine, Inc. and Centaur Biopharmaceutical Services, Inc. are co-borrowers. |
† | Non-income producing security. |
See notes to consolidated financial statements.
11
Table of Contents
SCP Private Credit Income BDC LLC
Consolidated Schedule of Investments (continued)
December 31, 2020
(in thousands)
Industry Classification | Percentage of Total Investments (at fair value) as of December 31, 2020 | |||
Insurance | 32.5 | % | ||
Pharmaceuticals | 10.8 | % | ||
Health Care Equipment & Supplies | 9.3 | % | ||
Wireless Telecommunication Services | 8.6 | % | ||
IT Services | 8.5 | % | ||
Diversified Consumer Services | 6.3 | % | ||
Specialty Retail | 5.1 | % | ||
Software | 5.0 | % | ||
Trading Companies & Distributors | 4.6 | % | ||
Health Care Providers & Services | 2.8 | % | ||
Capital Markets | 2.3 | % | ||
Diversified Financial Services | 1.8 | % | ||
Professional Services | 1.6 | % | ||
Personal Products | 0.8 | % | ||
|
| |||
Total Investments | 100.0 | % | ||
|
|
See notes to consolidated financial statements.
12
Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited)
September 30, 2021
(in thousands, except unit amounts)
Note 1. Organization
SCP Private Credit Income BDC LLC is a Delaware limited liability company formed on May 18, 2018. The Company has elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (“the 1940 Act”). Furthermore, as the Company is an investment company, it applies the guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946. In addition, for U.S. federal income tax purposes, the Company has elected to be treated, and intends to qualify annually, as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). The Company was formed primarily to provide investors with attractive long-term returns through investments made pursuant to the investment strategy of the Company described below (the Company’s investments in portfolio companies are referred to herein as “Portfolio Investments”).
On October 5, 2018 (the “Initial Closing Date”), the Company closed on $326,000 in capital commitments. On March 12, 2019, the sale and issuance of 2,800,000 units, at an aggregate purchase price of $28,000 ($10.00 per unit) occurred and the Company commenced material operations. As of September 30, 2021, $136,500 of capital commitments were drawn and $189,500 were unfunded.
The Company has implemented a corporate lending strategy focused on sourcing, underwriting and managing a diverse portfolio of private senior secured loans primarily to upper middle market companies (generally, loan sizes of $100,000 to $300,000 to companies with earnings before interest, tax, depreciation and amortization (“EBITDA”) between approximately $25,000 and $100,000) across the United States. In addition to senior secured loans to upper middle market companies, the Company intends to invest a portion of its assets in non-traditional asset-based loans and first lien loans to rapidly growing healthcare companies. The Company also expects that some of its investments will contain delayed-draw term loan type features and/or other types of unfunded commitments.
The offering period of the Company ended on April 5, 2019 (the “Offering Period”). The term of the Company will be six years from the end of the Offering Period unless the Company is liquidated earlier as set forth in the Limited Liability Company Agreement of the Company (as amended, restated or otherwise modified from time to time, the “LLC Agreement”), but may be extended by the board of directors for up to two consecutive one year periods upon approval of the Company’s independent directors and the approval of unitholders of the Company (“Unitholders”), which approval will be obtained through a non-1940 Act vote as described in the LLC Agreement. The Company may be dissolved and its affairs wound up prior to the end of the term under the circumstances set forth in the LLC Agreement. The fiscal year end of the Company is December 31.
Note 2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”), and include the accounts of the Company and certain wholly-owned subsidiaries. The consolidated financial statements reflect all adjustments and reclassifications which, in the opinion of management, are necessary for the fair presentation of the results of the operations and financial condition for the periods presented. All significant intercompany balances and transactions have been eliminated. Certain prior period amounts may have been reclassified to conform to current period presentation.
13
Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Interim consolidated financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation S-X, as appropriate. Accordingly, they may not include all of the information and notes required by GAAP for annual consolidated financial statements. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported periods. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially. The current period’s results of operations will not necessarily be indicative of results that ultimately may be achieved for the fiscal year ending on December 31, 2021.
In the opinion of management, all adjustments which are of a normal recurring nature considered necessary for the fair presentation of financial statements, have been included.
The significant accounting policies consistently followed by the Company are:
(a) | Investment transactions are accounted for on the trade date; |
(b) | In accordance with GAAP and the 1940 Act, the Company’s assets will generally be valued as follows: |
(i) | securities or other instruments (other than as referred to in clauses (ii) and (iii) below) for which market quotes are readily available will be valued based on quotes obtained from a quotation reporting system, market makers or pricing services (when deemed to represent fair value under U.S. GAAP); |
(ii) | exchange-traded options, futures and options on futures will be valued at the settlement price determined by the exchange or through the use of a model such as Black-Scholes; |
(iii) | short-term investments with maturities of sixty (60) days or less generally will be valued at amortized cost; and |
(iv) | securities, loans or other instruments for which market quotes are not readily available will be valued as described below: |
a. | the quarterly valuation process begins with each portfolio company or investment being initially valued by the investment professionals of SLR Capital Partners, LLC (f/k/a Solar Capital Partners, LLC) (the “Adviser”) responsible for the portfolio investment; |
b. | preliminary valuation conclusions are then documented and discussed with senior management of the Adviser; |
c. | the audit committee of the Board of Directors ( the “Board”) reviews the preliminary valuations of the Adviser and third party valuation specialist, if any, and responds to the valuation recommendations to reflect any comments; and |
d. | the Board discusses valuations and determines the fair value of each investment in the Company’s portfolio in good faith based on the input of the Adviser, the audit committee, and third party valuation specialist, if any, that may from time to time be engaged. |
14
Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
The valuation principles set forth above may be modified from time to time without notice to Unitholders, in whole or in part, as determined by the Board in its sole discretion.
When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material.
Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the nine months ended September 30, 2021, there has been no change to the Company’s valuation approaches or techniques and the nature of the related inputs considered in the valuation process.
ASC Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
(c) | Gains or losses on investments are calculated by using the specific identification method. |
(d) | The Company records dividend income and interest, adjusted for amortization of premium and accretion of discount, on an accrual basis. Loan origination fees, original issue discount, and market discounts are capitalized and we amortize such amounts into income using the effective interest method. Upon the prepayment of a loan, any unamortized loan origination fees are recorded as interest income. We record call premiums on loans repaid as interest income when we receive such amounts. Capital structuring fees, amendment fees, consent fees, and any other non-recurring fee income as well as management fee and other fee income for services rendered, if any, are recorded as other income when earned. |
15
Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
(e) | The Company intends to comply with the applicable provisions of the Code pertaining to regulated investment companies to make distributions of taxable income sufficient to relieve it of substantially all U.S. federal income taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on such estimated excess taxable income as appropriate. |
(f) | Book and tax basis differences relating to Unitholder distributions and other permanent book and tax differences are typically reclassified among the Company’s capital accounts annually. In addition, the character of income and gains to be distributed is determined in accordance with income tax regulations that may differ from GAAP. |
(g) | Distributions to Unitholders are recorded as of the record date. The amount to be paid out as a distribution is determined by the Board. Net realized capital gains, if any, are generally distributed or deemed distributed at least annually. |
(h) | In accordance with Regulation S-X and ASC Topic 810—Consolidation, the Company consolidates its interest in controlled investment company subsidiaries, financing subsidiaries and certain wholly-owned holding companies that serve to facilitate investment in portfolio companies. In addition, the Company may also consolidate any controlled operating companies substantially all of whose business consists of providing services to the Company. |
(i) | The accounting records of the Company are maintained in U.S. dollars. Any assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against the U.S. dollar on the date of valuation. The Company will not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations would be included with the net unrealized gain or loss from investments. The Company’s investments in foreign securities, if any, may involve certain risks, including without limitation: foreign exchange restrictions, expropriation, taxation or other political, social or economic risks, all of which could affect the market and/or credit risk of the investment. In addition, changes in the relationship of foreign currencies to the U.S. dollar can significantly affect the value of these investments in terms of U.S. dollars and therefore the earnings of the Company. |
(j) | In accordance with ASC 835-30, the Company reports origination and other expenses related to certain debt issuances, if any, as a direct deduction from the carrying amount of the debt liability. Applicable expenses are deferred and amortized using either the effective interest method or the straight-line method over the stated life. The straight-line method may be used on revolving facilities and/or when it approximates the effective yield method. |
(k) | The Company records expenses related to applicable equity offering costs as a charge to capital upon the sale of units, in accordance with ASC 946-20-25. |
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
(l) | Investments that are expected to pay regularly scheduled interest in cash are generally placed on non-accrual status when principal or interest cash payments are past due 30 days or more and/or when it is no longer probable that principal or interest cash payments will be collected. Such non-accrual investments are restored to accrual status if past due principal and interest are paid in cash, and in management’s judgment, are likely to continue timely payment of their remaining principal and interest obligations. Cash interest payments received on such investments may be recognized as income or applied to principal depending on management’s judgment. |
(m) | The Company records expenses directly related to its organization as incurred. |
(n) | The Company defines cash equivalents as securities that are readily convertible into known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only securities with a maturity of three months or less would qualify, with limited exceptions. The Company believes that certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities would qualify as cash equivalents. |
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the potential impact that the adoption of this guidance will have on the Company’s financial statements.
Note 3. Agreements and Related Party Transactions
The Company has entered into an investment management agreement with the Adviser (the “Investment Management Agreement”) pursuant to which it will pay management fees, administrative coordinator fees and incentive fees to the Adviser. The Company will pay the Adviser a fee for investment advisory and management services consisting of two components: a base management fee and an incentive fee. The Company will also pay the Adviser (in its capacity as Administrative Coordinator, defined herein) an administration fee for administrative and coordination services. The cost of the base management fee, the incentive fee, and the administration fee will be borne by the Unitholders.
Management Fees and Administration Fees
The Company will pay the Adviser a management fee (the “Management Fee”), calculated as of the close of business in New York, New York on the last day of each calendar quarter (each such date, the “Management Fee Calculation Date”), in an amount equal to 1.5% per annum of Invested Capital (defined as, as of any date, the sum of (i) capital contributions to the Company plus (ii) the total amount of credit drawn on subscription credit facilities), and payable quarterly in arrears after such Management Fee Calculation Date.
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Pursuant to the Investment Management Agreement, the Adviser has also been appointed to provide administrative and coordination services to the Company (in such capacity, the “Administrative Coordinator”). The Company will pay the Administrative Coordinator, a fee (the “Administration Fee”), calculated as of the close of business in New York, New York on the last day of each calendar quarter (the “Administration Fee Calculation Date”), in an amount equal to 0.08% per annum of the average Cost Basis (defined as the aggregate accreted and amortized cost of all portfolio investments, including any amounts reinvested in investments and the cost of investments acquired using leverage), as measured on the last day of the preceding quarter and the last day of the current quarter for the period ended and payable quarterly in arrears after such Administration Fee Calculation Date. The Administrative Coordinator will be responsible for all expenses of its own staff responsible for (i) certain on-going, routine, non-investment-related administrative services for the Company, (ii) the coordination of various third party services needed or required by the Company and (iii) certain Unitholder servicing functions.
Each of the Management Fee and the Administration Fee will be appropriately adjusted for any stub period. Such fees will be paid out of net current income and/or disposition proceeds or, to the extent such amounts are not available, from unfunded capital commitments that will be drawn down, or borrowings of the Company. In the event that the Adviser arranges for the Company to pay any portion of a placement fee to a placement agent, the amount of management fees otherwise payable shall be reduced by an amount equal to 100% of such payment to the placement agent.
Incentive Fee
The Company will make distributions out of two categories: Current Proceeds and Disposition Proceeds (collectively referred to as “Investment Proceeds”). “Disposition Proceeds” means all amounts received by the Company upon the disposition of an investment, including full or partial repayments or amortization of principal (but excluding Current Proceeds). “Current Proceeds” means all proceeds from investments, including interest income, fee income, warrant gains, prepayment fees and exit fees, other than Disposition Proceeds. The Adviser will apportion each Unitholder’s pro rata share of Investment Proceeds between Disposition Proceeds and Current Proceeds. Amounts of Investment Proceeds apportioned to Unitholders will be divided between and distributed to Unitholders, on the one hand, and the Adviser, on the other hand, in the following amounts and order of priority:
(i) First, Return of Capital Contributions: 100% of amounts constituting Disposition Proceeds to Unitholders until each Unitholder has received cumulative distributions of Disposition Proceeds pursuant to this clause (i) equal to each Unitholder’s total capital contributions to the Company (including amounts contributed to pay Management Fees, Administration Fees, Organizational Expenses and other Company expenses). Amounts constituting Current Proceeds proceed to clause (ii) and are not returned under this clause (i);
(ii) Second, Unitholder Preferred Return: 100% of all remaining Investment Proceeds to Unitholders until they have each received distributions, without duplication, pursuant to this clause (ii) and clause (iv) below equal to a 6% per annum return, compounded annually, on Unitholders’ unreturned capital contributions to the Company (including amounts contributed to pay Management Fees, Administration Fees, Organizational Expenses and other Company expenses);
(iii) Third, Adviser Catch Up: 80% of all remaining Investment Proceeds to the Adviser, as a “catch up” distribution with respect to its incentive fee, until the Adviser has received distributions of Investment Proceeds with respect to Unitholders pursuant to this clause (iii) equal to 15% of the total amounts distributed to Unitholders and the Adviser with respect to Unitholders pursuant to clause (ii) above and this clause (iii); and
(iv) Fourth, 85%/15% units: 85% to Unitholders and 15% to the Adviser as an incentive fee.
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
In no event will the Adviser receive amounts attributable to Disposition Proceeds that, as of any distribution or payment date, exceeds 20% of cumulative realized capital gains net of all cumulative realized capital losses and unrealized capital depreciation.
The Adviser may also elect not to receive all or any portion of the incentive fee that would otherwise be distributed to it, and may cause any or all amounts subsequently available for distribution to the Unitholders to be distributed to the Adviser until it has received the same aggregate amount of incentive fees had it not previously waived receipt of incentive fees.
The Adviser will be entitled to withhold from any distributions, in its discretion, any required tax withholdings. Amounts of taxes paid or withheld from amounts otherwise distributable to a Unitholder will be deemed distributed for purposes of the calculations above.
Upon liquidation of the Company, the Adviser will be required to restore funds to the Company for distribution to the Unitholders if and to the extent that the Adviser has received cumulative incentive fees in excess of the incentive fees that would have been payable to the Adviser on an aggregate basis covering all transactions of the Company; provided, however, that in no event will the Adviser be required to contribute an aggregate amount in excess of 100% of the net amount distributed to the Adviser (net of taxes) on account of its incentive fees. In addition, the Adviser will apply an interim incentive fee adjustment at the end of each fiscal year so that, in the event of any over-distribution of incentive fee to the Adviser (measured with respect to each Unitholder using the fair value of the Company’s portfolio at the end of the applicable fiscal year as if the Company were to liquidate on such date), future distributions that would, absent such interim incentive fee adjustment, otherwise be distributed to the Adviser as an incentive fee, shall be distributed to such Unitholder until such over-distribution (net of taxes payable by the Adviser with respect to such incentive fee) has been eliminated.
For the three and nine months ended September 30, 2021, the Company incurred $701 and $1,796, respectively, in Management Fees, $62 and $145, respectively, in Administration Fees and $528 and $2,406, respectively, in Incentive Fees. For the three and nine months ended September 30, 2020, the Company incurred $401 and $1,320, respectively in Management Fees, $31 and $87, respectively in Administration Fees and $0 and $0, respectively in Incentive Fees.
The aggregate amount of certain operating expenses relating to Unitholders investing directly in the Company will not exceed the Operating Expense Cap, calculated as follows: (A) if the Company has less than or equal to $400,000 in capital commitments, an amount equal to the sum of (x) the product of the capital commitments and 0.0025 and (y) $1,250, or (B) if the Company has greater than $400,000 in capital commitments, $2,250. Any amount in excess of the Operating Expense Cap for any fiscal year will be paid by the Adviser. For the avoidance of doubt, the Operating Expense Cap will not apply to any fees, costs, expenses and liabilities allocable to persons investing indirectly in the Company through any Unitholder.
The Adviser or Administrative Coordinator and/or their affiliates has advanced organizational and offering expenses to the Company, which include organizational fees, costs, expenses and liabilities of the Company, including legal expenses, incurred in connection with the initial offering of Units and the formation and establishment of the Company. The Adviser or Administrative Coordinator (or such affiliate) has been reimbursed by the Company for such advanced costs and expenses in an amount not to exceed $500. $308 of offering expenses were charged to capital and $84 of organizational costs were expensed in 2019.
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Note 4. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three levels. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:
a) | Quoted prices for similar assets or liabilities in active markets; |
b) | Quoted prices for identical or similar assets or liabilities in non-active markets; |
c) | Pricing models whose inputs are observable for substantially the full term of the asset or liability; and |
d) | Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability. |
Level 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management’s and, if applicable, an independent third-party valuation firm’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3).
Gains and losses for assets and liabilities categorized within the Level 3 table below may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3).
A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Such reclassifications involving Level 3 assets and liabilities are reported as transfers in/out of Level 3 as of the end of the quarter in which the reclassifications occur. Within the fair value hierarchy tables below, cash and cash equivalents are excluded but could be classified as Level 1.
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
The following table presents the balances of assets measured at fair value on a recurring basis, as of September 30, 2021 and December 31, 2020:
Fair Value Measurements
As of September 30, 2021
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Bank Debt/Senior Secured Loans | $ | — | $ | — | $ | 353,024 | $ | 353,024 | ||||||||
Common Equity/Equity Interests/Warrants | 269 | — | 13 | 282 | ||||||||||||
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Total Investments | $ | 269 | $ | — | $ | 353,037 | $ | 353,306 | ||||||||
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Fair Value Measurements
As of December 31, 2020
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Bank Debt/Senior Secured Loans | $ | — | $ | — | $ | 165,334 | $ | 165,334 | ||||||||
Common Equity/Equity Interests/Warrants | — | — | 30 | 30 | ||||||||||||
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Total Investments | $ | — | $ | — | $ | 165,364 | $ | 165,364 | ||||||||
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
The following table provides a summary of the changes in fair value of Level 3 assets for the three and nine months ended September 30, 2021, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at September 30, 2021:
Bank Debt/Senior Secured Loans | Common Equity/Equity Interests/Warrants | Total | ||||||||||
Fair value, June 30, 2021 | $ | 258,520 | $ | 10 | $ | 258,530 | ||||||
Total gains or losses included in earnings: | ||||||||||||
Net realized loss | 16 | — | 16 | |||||||||
Net change in unrealized gain (loss) | (30 | ) | 3 | (27 | ) | |||||||
Purchase of investment securities | 134,687 | — | 134,687 | |||||||||
Proceeds from dispositions of investment securities | (40,169 | ) | — | (40,169 | ) | |||||||
Transfers into Level 3 | — | — | — | |||||||||
Transfers out of Level 3 | — | — | — | |||||||||
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Fair value, September 30, 2021 | $ | 353,024 | $ | 13 | $ | 353,037 | ||||||
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Unrealized gains for the period relating to those Level 3 assets that were still held by the Company at the end of the period: | ||||||||||||
Net change in unrealized gain (loss) | $ | 574 | $ | 3 | $ | 577 | ||||||
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Bank Debt/Senior Secured Loans | Common Equity/Equity Interests/Warrants | Total | ||||||||||
Fair value, December 31, 2020 | $ | 165,334 | $ | 30 | $ | 165,364 | ||||||
Total gains or losses included in earnings: | ||||||||||||
Net realized gain | 16 | — | 16 | |||||||||
Net change in unrealized gain | 1,738 | 6 | 1,744 | |||||||||
Purchase of investment securities | 248,798 | — | 248,798 | |||||||||
Proceeds from dispositions of investment securities | (62,862 | ) | — | (62,862 | ) | |||||||
Transfers into Level 3 | — | — | — | |||||||||
Transfers out of Level 3(1) | — | (23 | ) | (23 | ) | |||||||
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Fair value, September 30, 2021 | $ | 353,024 | $ | 13 | $ | 353,037 | ||||||
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Unrealized gains for the period relating to those Level 3 assets that were still held by the Company at the end of the period: | ||||||||||||
Net change in unrealized gain (loss) | $ | 2,179 | $ | (1 | ) | 2,178 | ||||||
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(1) | On February 17, 2021, the Company exercised its warrants in Senseonics Holdings, Inc., receiving shares in the common stock of Senseonics Holdings, Inc. The common stock of Senseonics Holdings, Inc. is publicly traded, so this position is considered to be a Level 1 asset. |
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
The following table provides a summary of the changes in fair value of Level 3 assets for the year ended December 31, 2020, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets still held at December 31, 2020:
Bank Debt/Senior Secured Loans | Common Equity/Equity Interests/Warrants | Total | ||||||||||
Fair value, December 31, 2019 | $ | 120,453 | $ | 29 | $ | 120,482 | ||||||
Total gains or losses included in earnings: | ||||||||||||
Net realized gain (loss) | 173 | (17 | ) | 156 | ||||||||
Net change in unrealized loss | 371 | 12 | 383 | |||||||||
Purchase of investment securities | 92,255 | 6 | 92,261 | |||||||||
Proceeds from dispositions of investment securities | (47,918 | ) | — | (47,918 | ) | |||||||
Transfers into Level 3 | — | — | — | |||||||||
Transfers out of Level 3 | — | — | — | |||||||||
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Fair value, December 31, 2020 | $ | 165,334 | $ | 30 | $ | 165,364 | ||||||
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Unrealized losses for the period relating to those Level 3 assets that were still held by the Company at the end of the period: | ||||||||||||
Net change in unrealized loss | $ | 365 | $ | (5 | ) | $ | 360 | |||||
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Quantitative Information about Level 3 Fair Value Measurements
The Company typically determines the fair value of its performing debt investments utilizing a yield analysis. In a yield analysis, a price is ascribed for each investment based upon an assessment of current and expected market yields for similar investments and risk profiles. Additional consideration is given to current contractual interest rates, relative maturities and other key terms and risks associated with an investment. Among other factors, a significant determinant of risk is the amount of leverage used by the portfolio company relative to the total enterprise value of the company, and the rights and remedies of our investment within each portfolio company.
Significant unobservable quantitative inputs typically used in the fair value measurement of the Company’s Level 3 assets and liabilities primarily reflect current market yields, including indices, and readily available quotes from brokers, dealers, and pricing services as indicated by comparable assets and liabilities, as well as enterprise values, returns on equity and earnings before income taxes, depreciation and amortization (“EBITDA”) multiples of similar companies, and comparable market transactions for equity securities.
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Quantitative information about the Company’s Level 3 asset fair value measurements as of September 30, 2021 is summarized in the table below:
Asset or Liability | Fair Value at September 30, 2021 | Principal Valuation Technique/Methodology | Unobservable Input | Range (Weighted Average) | ||||||||||||||||
Bank Debt / Senior Secured Loans | Asset | $ | 353,024 | Income Approach | Market Yield | 4.6% – 23.4% (7.1% | ) | |||||||||||||
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Common Equity/Equity Interests/Warrants | Asset | $ | 13 | Market Approach | Volatility | 21.9% – 21.9% (21.9% | ) | |||||||||||||
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Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets. Generally, an increase in market yields may result in a decrease in the fair value of certain of the Company’s investments.
Quantitative information about the Company’s Level 3 asset fair value measurements as of December 31, 2020 is summarized in the table below:
Asset or Liability | Fair Value at December 31, 2020 | Principal Valuation Technique/Methodology | Unobservable Input | Range (Weighted Average) | ||||||||||||||||
Bank Debt / Senior Secured Loans | Asset | $ | 165,334 | Income Approach | Market Yield | 5.0% – 16.4% (7.1% | ) | |||||||||||||
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Common Equity/Equity Interests/Warrants | Asset | $ | 30 | Market Approach | Volatility | 22.9% – 22.9% (22.9% | ) | |||||||||||||
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Significant increases or decreases in any of the above unobservable inputs in isolation, including unobservable inputs used in deriving bid-ask spreads, if applicable, would result in a significantly lower or higher fair value measurement for such assets. Generally, an increase in market yields may result in a decrease in the fair value of certain of the Company’s investments.
24
Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Note 5. Debt
SPV Facility—During the first quarter of 2019, the Company, through its wholly-owned subsidiary, SCP Private Credit Income BDC SPV LLC (the “SPV”), entered into the $100,000 SPV Facility with JPMorgan Chase Bank, N.A. acting as administrative agent. The commitment can also be expanded up to $400,000. The stated interest rate on the Credit Facility is LIBOR plus 2.75% with no LIBOR floor requirement and the current final maturity date is December 31, 2023. The Credit Facility is secured by all of the assets held by the SPV. Under the terms of the SPV Facility, the Company and SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SPV also includes usual and customary events of default for credit facilities of this nature. On November 18, 2019, the Company amended the SPV Facility, reducing commitments to $75,000. On February 27, 2021, the Company again amended the SPV Facility, increasing commitments to $100,000. On July 16, 2021, the Company entered into an amended SPV Facility, which increased commitments to $125,000, and on August 18, 2021 entered into a second amended SPV Facility which increased commitments to $200,000 and extended the final maturity date to December 31, 2023. There were $153,950 of borrowings outstanding as of September 30, 2021 under the SPV Facility.
Subscription Facility—During the first quarter of 2019, the Company established the $35,000 Subscription Facility with East West Bank, and subsequently entered into an amendment on June 24, 2019, which increased commitments from $35,000 to $50,000. On March 5, 2021, the Company entered into a second amendment. Under the second amendment, commitments were increased from $50,000 to $75,000, the stated interest rate on the Subscription Facility is LIBOR plus 2.70% and the current final maturity date is March 5, 2022. Under the terms of the Subscription Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Subscription Facility also includes usual and customary events of default for credit facilities of this nature. There were $49,000 of borrowings outstanding as of September 30, 2021 under the Subscription Facility.
The average annualized interest cost for borrowings for the nine months ended September 30, 2021 and the year ended December 31, 2020 was 3.01% and 3.94%, respectively. These costs are exclusive of other credit facility expenses such as unused fees and fees paid to the back-up servicer, if any. The maximum amount borrowed on the credit facilities during the nine months ended September 30, 2021 and the year ended December 31, 2020 was $202,950 and $90,750, respectively.
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Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Note 6. Commitments and Contingencies
The Company had unfunded debt commitments to various revolving and delayed-draw term loans. The total amount of these unfunded commitments as of September 30, 2021 and December 31, 2020 is $92,733 and $34,315, respectively, comprised of the following:
September 30, 2021 | December 31, 2020 | |||||||
BayMark Health Services, Inc. | $ | 9,098 | $ | — | ||||
NAC Holdings Corporation | 8,517 | — | ||||||
CC SAG Holdings Corp. (Spectrum Automotive) | 8,394 | — | ||||||
Inszone Mid, LLC | 8,097 | — | ||||||
Vessco Midco Holdings, LLC | 5,881 | — | ||||||
Glooko, Inc. | 5,308 | — | ||||||
High Street Buyer, Inc. | 5,259 | — | ||||||
Plastics Management, LLC | 4,529 | — | ||||||
Smile Doctors LLC | 4,444 | 11,398 | ||||||
Maurices, Incorporated | 3,479 | — | ||||||
GSM Acquisition Corp. | 3,132 | — | ||||||
MRI Software LLC | 2,770 | 5,432 | ||||||
RSC Acquisition, Inc. | 2,458 | 3,902 | ||||||
SOC Telemed, Inc. | 1,891 | — | ||||||
Drilling Info Holdings, Inc. | 1,758 | 1,252 | ||||||
RQM+ Corp. | 1,615 | — | ||||||
Erie Construction Mid-west, LLC | 1,593 | — | ||||||
RxSense Holdings, LLC | 1,561 | 1,515 | ||||||
TAUC Management, LLC | 1,498 | — | ||||||
World Insurance Associates, LLC | 1,339 | 1,412 | ||||||
Rezolute, Inc. | 1,206 | — | ||||||
Kid Distro Holdings, LLC | 1,121 | — | ||||||
MMIT Holdings, LLC | 971 | — | ||||||
Foundation Consumer Brands, LLC | 967 | — | ||||||
Trinity Partners, LLC | 907 | 907 | ||||||
Neuronetics, Inc. | 873 | 1,310 | ||||||
Ultimate Baked Goods Midco LLC | 783 | — | ||||||
Basic Fun, Inc. | 768 | 499 | ||||||
ENS Holdings III Corp. & ES Opco USA LLC | 717 | 696 | ||||||
All States Ag Parts, LLC | 562 | — | ||||||
Pinnacle Treatment Centers, Inc. | 553 | 542 | ||||||
SunMed Group Holdings, LLC | 350 | — | ||||||
Higginbotham Insurance Agency, Inc. | 334 | 1,812 | ||||||
Worldwide Facilities, LLC | — | 1,554 | ||||||
Kindred Biosciences, Inc. | — | 1,345 | ||||||
Centrexion Therapeutics, Inc. | — | 739 | ||||||
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Total Commitments | $ | 92,733 | $ | 34,315 | ||||
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Table of Contents
SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company’s achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of September 30, 2021 and December 31, 2020, the Company had sufficient cash available and/or liquid securities available to fund its commitments and had reviewed them for any appropriate fair value adjustment.
In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Consolidated Statements of Assets and Liabilities.
Note 7. Unitholders’ Capital
Transactions in Unitholders’ capital were as follows:
Three months ended September 30, 2021 | Three months ended September 30, 2020 | |||||||
Units at beginning of period | 9,586,174 | 9,586,174 | ||||||
Units issued | 3,798,756 | — | ||||||
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Units issued and outstanding at end of period | 13,384,930 | 9,586,174 | ||||||
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Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
Units at beginning of period | 9,586,174 | 4,955,621 | ||||||
Units issued | 3,798,756 | 4,630,653 | ||||||
Units canceled | — | (100 | ) | |||||
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Units issued and outstanding at end of period | 13,384,930 | 9,586,174 | ||||||
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Note 8. Financial Highlights
The following is a schedule of financial highlights for the nine months ended September 30, 2021 and September 30, 2020:
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||
Per Share Data: (a) | ||||||||
Net asset value per unit, beginning of period | $ | 10.03 | $ | 10.03 | ||||
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Net investment income | 0.52 | 0.48 | ||||||
Net realized and unrealized gain (loss) | 0.22 | (0.01 | ) | |||||
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Net increase in Unitholders’ capital resulting from operations | 0.74 | 0.47 | ||||||
Distributions to Unitholders: | ||||||||
From net investment income | (0.19 | ) | (0.21 | ) | ||||
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Net asset value per unit, end of period | $ | 10.58 | $ | 10.29 | ||||
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Total Return (b)(c) | 5.41 | % | 3.85 | % | ||||
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Unitholders’ capital, end of period | $ | 141,574 | $ | 98,610 | ||||
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Units outstanding, end of period | 13,384,930 | 9,586,174 | ||||||
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Ratios to average net assets of Unitholders’ Capital (c): | ||||||||
Net investment income | 5.01 | % | 4.65 | % | ||||
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Operating expenses | 4.58 | % | 2.30 | % | ||||
Interest and other credit facility expenses | 3.64 | % | 3.36 | % | ||||
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Total expenses | 8.22 | % | 5.66 | % | ||||
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Average debt outstanding | $ | 132,775 | $ | 63,435 | ||||
Portfolio turnover ratio | 26.6 | % | 14.1 | % |
(a) | Calculated using the average units outstanding method. Weighted average units outstanding for the nine months ended September 30, 2021 and September 30, 2020 were 10,415,066 and 8,396,998, respectively. |
(b) | Total return is based on the change in net asset value during the period and takes into account distributions, if any. Total return does not include a sales load. |
(c) | Not annualized for periods less than one year. |
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SCP Private Credit Income BDC LLC
Notes to Consolidated Financial Statements (unaudited) (continued)
September 30, 2021
(in thousands, except unit amounts)
Note 9. Subsequent Events
On October 4, 2021, the Company amended and restated the Subscription Facility. The Subscription Facility was amended to, among other things, expand commitments to $100,000 and extend the maturity date to December 31, 2022.
On October 21, 2021, the Company delivered a capital drawdown notice to its investor, an investment fund created by a financial institution unaffiliated with the Company (the “Access Fund”), relating to the sale of approximately 3,800,000 of the Company’s units (the “Units”), for an aggregate offering price of $40,000. The sale is expected to close on or about November 4, 2021.
The sale of Units is being made pursuant to a subscription agreement (the “Subscription Agreement”) and the second amended and restated limited liability company agreement (the “LLC Agreement”) entered into by the Company and the Access Fund. Under the terms of the Subscription Agreement and the LLC Agreement, the Access Fund is required to fund drawdowns to purchase Units up to the amount of its capital commitment on an as-needed basis with a minimum of 10 business days’ prior notice to the Access Fund.
The issuance and sale of the Units are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Regulation D thereunder.
On November 3, 2021, the Company entered into a first amendment of the second amended and restated SPV Facility, which increased commitments from $200,000 to $275,000.
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. There have been no additional subsequent events that require recognition or disclosure in these consolidated financial statements.
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Report of Independent Registered Public Accounting Firm
To the Unitholders’ and Board of Directors
SCP Private Credit Income BDC LLC:
Results of Review of Interim Financial Information
We have reviewed the consolidated statement of assets and liabilities of SCP Private Credit Income BDC LLC (and subsidiaries) (the Company), including the consolidated schedule of investments, as of September 30, 2021, the related consolidated statements of operations and changes in unitholders’ capital, for the three-month and nine-month periods ended September 30, 2021 and 2020, the related consolidated statements of cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statement of assets and liabilities, including the consolidated schedule of investments, of the Company as of December 31, 2020, and the related consolidated statements of operations, changes in unitholders’ capital, and cash flows for the year then ended (not presented herein); and in our report dated February 24, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated statement of assets and liabilities, including the consolidated schedule of investments, as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated statement of assets and liabilities, including the consolidated schedule of investments, from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ KPMG LLP
New York, New York
November 3, 2021
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about SCP Private Credit Income BDC LLC, our current and prospective portfolio investments, our industry, our beliefs and opinions, and our assumptions. Words such as “anticipates,” “expects,” “intends,” “plans,” “will,” “may,” “continue,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” “targets,” “projects,” “outlook,” “potential,” “predicts” and variations of these words and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• | our future operating results, including our ability to achieve objectives as a result of the current COVID-19 pandemic; |
• | our business prospects and the prospects of our portfolio companies; |
• | the impact of investments that we expect to make; |
• | our contractual arrangements and relationships with third parties; |
• | the dependence of our future success on the general economy and its impact on the industries in which we invest and the impact of the COVID-19 pandemic thereon; |
• | the impact of any protracted decline in the liquidity of credit markets on our business and the impact of the COVID-19 pandemic thereon; |
• | the ability of our portfolio companies to achieve their objectives, including as a result of the current COVID-19 pandemic; |
• | the valuation of our investments in portfolio companies, particularly those having no liquid trading market, and the impact of the COVID-19 pandemic thereon; |
• | market conditions and our ability to access alternative debt markets and additional debt and equity capital, and the impact of the COVID-19 pandemic thereon; |
• | our expected financings and investments; |
• | the adequacy of our cash resources and working capital; |
• | the timing of cash flows, if any, from the operations of our portfolio companies and the impact of the COVID-19 pandemic thereon; and |
• | the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments and the impacts of the COVID-19 pandemic thereon. |
These statements are not guarantees of future performance and are subject to risks, uncertainties, and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements, including without limitation:
• | an economic downturn, including as a result of the current COVID-19 pandemic, could impair our portfolio companies’ ability to continue to operate, which could lead to the loss of some or all of our investments in such portfolio companies; |
• | a contraction of available credit and/or an inability to access the equity markets, including as a result of the current COVID-19 pandemic, could impair our lending and investment activities; |
• | interest rate volatility could adversely affect our results, particularly because we use leverage as part of our investment strategy; |
• | currency fluctuations could adversely affect the results of our investments in foreign companies, particularly to the extent that we receive payments denominated in foreign currency rather than U.S. dollars; and |
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• | the risks, uncertainties and other factors we identify in Item 1A. — Risk Factors contained in our Annual Report on Form 10-K for the year ended December 31, 2020, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC. |
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this report should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those described or identified in the section entitled “Item 1A. Risk Factors” and elsewhere in this report. These forward-looking statements apply only as of the date of this report. Moreover, we assume no duty and do not undertake to update the forward-looking statements.
The following analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the related notes thereto contained elsewhere in this Quarterly Report on Form 10-Q.
Overview
The Company was formed as a limited liability company under the laws of the State of Delaware on May 18, 2018. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), and have elected to be treated as a regulated investment company (“RIC”) for U.S. federal income tax purposes. As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in “qualifying assets,” source of income limitations, RIC asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest. In addition, we expect that all of the Company’s total portfolio will be comprised of investments in the U.S.
SLR Capital Partners, LLC (the “Adviser”) serves as the Company’s investment adviser pursuant to an investment management agreement between the Company and the Adviser (as amended, restated or otherwise modified from time to time, the “Investment Management Agreement”). Subject to the overall supervision of the Company’s Board of Directors (the “Board”), the Adviser is responsible for managing the Company’s business and activities, including sourcing investment opportunities, conducting research, performing diligence on potential investments, structuring our investments, and monitoring our portfolio companies on an ongoing basis through a team of investment professionals. The managing members of the Adviser are Michael Gross and Bruce Spohler, who also comprise the Adviser’s investment committee. Pursuant to the Investment Management Agreement, the Adviser has also been appointed to provide administrative and coordination services to the Company (in such capacity, the “Administrative Coordinator”). The Administrative Coordinator supervises or provides the Company’s administrative services, including operational trade support, net asset value calculations, financial reporting, fund accounting, registrar and transfer agent services. The Administrative Coordinator also provides assistance to the Adviser in connection with communicating with investors and other persons with respect to the Company.
The Company is organized primarily for investors who may invest through one or more investment funds created by one or more financial institutions unaffiliated with the Company (collectively, the “Access Fund”). Certain other investors may also invest directly in the Company. For those investors who invest through the Access Fund, we expect the Access Fund will issue a pro rata interest to each investor in the Access Fund (the “Access Fund Investors”) that, with respect to each Access Fund Investor’s investment in the Access Fund, corresponds to the pro rata share of the units issued by the Company to the Access Fund. We also expect that units will only be sold (i) in the U.S. only to U.S. persons who are “accredited investors” within the meaning of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) and (ii) outside the U.S. in accordance with Regulation S under the Securities Act. Upon a sale of units to an investor, we expect the Access Fund will pass its voting rights in the Company through to the Access Fund Investors.
The Company’s principal focus is to invest in first lien secured floating rate loans primarily to upper middle market private leveraged companies (generally, loan sizes of $100 million to $300 million to companies with earnings before interest, tax, depreciation and amortization (“EBITDA”) between approximately $25 million and $100 million) that have significant free cash flow and are in non-cyclical industries in which the Adviser has direct experience. In addition to senior secured loans to upper middle market companies, the Company intends to invest a portion of its
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assets in non-traditional asset-based loans and first lien loans to rapidly growing healthcare companies. The Company also expects that some of its investments will contain delayed-draw term loan type features (which is a legally binding commitment by the Company to fund additional term loans to a borrower in the future) and/or other types of unfunded commitments. The Company will seek to be the single source lender for the majority of its portfolio companies by leveraging the significant capital base at the Adviser for co-investment opportunities where appropriate. The Company believes many financial sponsors and individual corporate management teams are looking for a single lender to provide the entire debt financing to streamline and simplify the debt negotiation process. In order to provide a single source lender while maintaining the Company’s investment objectives, the Company expects to co-invest with other vehicles managed by the Adviser. There can be no assurance that the Company will be able to co-invest with such other funds, including as a result of legal restrictions and contractual restrictions and, as a result, the Company may not be able to meet its investment objective. The Company believes the potential scale resulting from co-investments with vehicles managed by the Adviser will provide the Company a significant advantage to source loans over other lenders that do not have the capital base to provide the entire debt financing.
The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) and the Company may from time to time take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act.
Recent Developments
On October 4, 2021, the Company amended and restated the Subscription Facility. The Subscription Facility was amended to, among other things, expand commitments to $100 million and extend the maturity date to December 31, 2022.
On October 21, 2021, the Company delivered a capital drawdown notice to its investor, an investment fund created by a financial institution unaffiliated with the Company (the “Access Fund”), relating to the sale of approximately 3.8 million of the Company’s units (the “Units”), for an aggregate offering price of $40 million. The sale is expected to close on or about November 4, 2021.
The sale of Units is being made pursuant to a subscription agreement (the “Subscription Agreement”) and the second amended and restated limited liability company agreement (the “LLC Agreement”) entered into by the Company and the Access Fund. Under the terms of the Subscription Agreement and the LLC Agreement, the Access Fund is required to fund drawdowns to purchase Units up to the amount of its capital commitment on an as-needed basis with a minimum of 10 business days’ prior notice to the Access Fund.
The issuance and sale of the Units are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Regulation D thereunder.
On November 3, 2021, the Company entered into a first amendment of the second amended and restated SPV Facility, which increased commitments from $200 million to $275 million.
Revenues
The Company’s principal focus is to invest in first lien secured floating rate loans primarily to upper middle market private leveraged companies (generally, loan sizes of $100 million to $300 million to companies with EBITDA between approximately $25 million and $100 million) that have significant free cash flow and are in non-cyclical industries in which we have direct experience. In addition to senior secured loans to upper middle market companies, the Company intends to invest a portion of its assets in non-traditional asset-based loans and first lien loans to rapidly growing healthcare companies.
Expenses
The Company will (directly or indirectly) bear:
(i) | all of its fees, costs, expenses and liabilities, all of its investment-related fees, costs, expenses and liabilities (including with respect to amounts incurred prior to the Company’s initial closing) and all of its other operating fees, costs, expenses and liabilities, including all fees, due diligence costs and other fees, costs, expenses and liabilities related to the identification, sourcing, evaluation, pursuit, acquisition, holding, appraisals, asset management, restructuring and disposing of investments, including all reasonable travel- |
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related fees, costs, expenses and liabilities, including lodging and meals, all fees, costs, expenses and liabilities of legal counsel and financial and other advisers incurred in connection therewith, all fees, costs, expenses and liabilities of information technology services relating to the ongoing management of investments, and all other investment-related fees, costs, expenses and liabilities (to the extent not reimbursed by the relevant portfolio company); | ||
(ii) | all fees, costs, expenses and liabilities related to any audits or agreed upon procedures, tax forms and return preparations and filings, custodian fees and expenses, fund accounting, administrator services, financial statement preparation and reporting, web services for the benefit of Unitholders, delivery costs and expenses in connection with reporting obligations and communications and compliance services; | |
(iii) | all fees, costs, expenses and liabilities relating to insurance policies (including director and officer liability insurance) maintained by or for the Company, including in respect of Portfolio Investments and/or personnel of the Adviser, the Administrative Coordinator and their affiliates; | |
(iv) | other administrative fees, costs, and liabilities; | |
(v) | all fees, costs, expenses and liabilities of brokers, transaction finders and other intermediaries, including brokerage commissions and spreads, and all other transaction-related fees, costs, expenses and liabilities, including reverse break-up fees; | |
(vi) | all fees, costs, expenses and liabilities relating to derivatives and hedging transactions; | |
(vii) | all principal amounts of, and interest expense on, borrowings and guarantees, and all other fees, costs, expenses and liabilities arising out of borrowings and guarantees, including the arranging and maintenance thereof, whether incurred by the Company or incurred or facilitated by a special purpose vehicle that makes Portfolio Investments; | |
(viii) | Management Fees; | |
(ix) | Administration Fees; | |
(x) | all fees, costs, expenses and liabilities incurred through the use or engagement of Service Providers; | |
(xi) | all taxes, fees, penalties and other governmental charges levied against the Company and all fees, costs, expenses, penalties and liabilities related to tax compliance; | |
(xii) | all fees, costs, expenses and liabilities of the Company’s legal counsel related to extraordinary matters, including expenses for any dispute resolution (including litigation and regulatory-related legal expenses); | |
(xiii) | all fees, costs, expenses and liabilities relating to legal and regulatory filings, including securities law filings relating to Portfolio Investments; | |
(xiv) | all fees, costs, expenses and liabilities related to the Company’s indemnification or contribution obligations; | |
(xv) | all fees, costs, expenses and liabilities for subscription services (to the extent such subscription is required by the general partner of the Access Fund); | |
(xvi) | any required regulatory filings and related legal fees; | |
(xvii) | all fees, costs, expenses and liabilities of liquidating the Company; | |
(xviii) | transfer agent services; and | |
(xix) | any other fees, costs, expenses and liabilities not specifically assumed by the Adviser or the Administrative Coordinator. |
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In addition, the aggregate amount of the operating expenses relating to Unitholders investing directly in the Company set forth in clauses (ii)-(iv) and the operating expenses included in sub-clauses (xiii) and (xvi) related to U.S. regulatory bodies above borne by the Company (directly or indirectly) will not exceed the Operating Expense Cap, calculated as follows: (A) if the Company has less than or equal to $400 million in Commitments, an amount equal to the sum of (x) the product of the Commitments and 0.0025 and (y) $1.25 million, or (B) if the Company has greater than $400 million in Commitments, $2.25 million. Any amount in excess of the Operating Expense Cap for any fiscal year will be paid by the Adviser. Solely by way of example, if Commitments equal $350 million, the Operating Expense Cap will be equal to $2.125 million. For the avoidance of doubt, the Operating Expense Cap will not apply to any fees, costs, expenses and liabilities allocable to persons investing indirectly in the Company through any Unitholder.
Additionally, the Company will not bear the costs of any third-party valuation agent engaged solely for purposes of valuing the net asset value of the Company.
The Adviser or Administrative Coordinator and/or their affiliates has advanced organizational and offering expenses to the Company, which include organizational fees, costs, expenses and liabilities of the Company, including legal expenses, incurred in connection with the initial offering of Units and the formation and establishment of the Company. The Adviser or Administrative Coordinator (or such affiliate) has been reimbursed by the Company for such advanced costs and expenses in an amount not to exceed $0.5 million. Accordingly, $0.3 million of offering expenses were charged to capital and $0.1 million of organizational costs were expensed in 2019.
Portfolio and Investment Activity
During the three months ended September 30, 2021, we invested $134.3 million across 28 portfolio companies. This compares to investing $3.2 million in 7 portfolio companies for the three months ended September 30, 2020. Investments sold or prepaid during the three months ended September 30, 2021 totaled $40.7 million versus $1.0 million for the three months ended September 30, 2020.
At September 30, 2021, our portfolio consisted of 48 portfolio companies and was invested 99.9% directly in senior secured loans and 0.1% in common equity/equity interests/warrants, in each case, measured at fair value versus 23 portfolio companies invested 100.0% directly in senior secured loans and 0.0% in common equity/equity interests/warrants at September 30, 2020.
At September 30, 2021, 100% of our income producing investment portfolio was floating rate, measured at fair value. At September 30, 2020, 98.1% of our income producing investment portfolio was floating rate and 1.9% was fixed rate, measured at fair value.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.
Valuation of Portfolio Investments
The Company’s NAV will be calculated periodically by the Adviser or its delegate, and approved by the Board, by taking the value of the Portfolio Investments and other assets of the Company and subtracting all liabilities, including accrued expenses.
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It is anticipated that in respect of many of the Company’s assets, readily available market quotations will not be obtainable and that such assets will be valued at fair value.
For purposes of calculating the NAV, the Company’s assets will generally be valued as described in Note 2(b) to the Company’s Consolidated Financial Statements.
Leverage
The Company is required to comply with the asset coverage requirements of the 1940 Act. The Company expects to employ leverage and otherwise incur indebtedness with respect to the portfolio both on a recourse and non-recourse basis (including and potentially through guarantees, derivatives, forward commitments and reverse repurchase agreements), but will not exceed the maximum amount permitted by the 1940 Act. The Company is generally permitted, under specified conditions, to issue senior securities in amounts such that the Company’s asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after such issuance. In connection with the organization of the Company, the Adviser, as the initial Unitholder, has authorized the Company to adopt the 150% asset coverage ratio as of August 2, 2018. In connection with their subscriptions of the Units, our Unitholders were required to acknowledge our ability to operate with an asset coverage ratio that may be as low as 150%. The Company will be exposed to the risks of leverage, which may be considered a speculative investment technique. The use of leverage magnifies the potential for gain and loss on amounts invested and therefore increases the risks associated with investing in our securities. In addition, the costs associated with our borrowings, including any increase in the management fee payable to the Adviser will be borne by our Unitholders. As of September 30, 2021, the Company held $203.0 million of senior securities, for an asset coverage ratio of 169.8%.
Taxation as a Regulated Investment Company (“RIC”)
The Company elected to be treated as a RIC under Subchapter M of the Code and intends to qualify for taxation as a RIC annually. As a RIC, the Company generally will not pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it timely distributes to Unitholders as dividends. In order to qualify for taxation as a RIC, the Company is required, among other things, to be diversified at each quarter end and to timely distribute to its Unitholders at least 90% of investment company taxable income, as defined by the Code, for each year. There is no guarantee the Company will be able to maintain its status as a RIC. Depending on the level of taxable income earned in a given tax year, the Company may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a nondeductible 4% U.S. federal excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company will accrue an estimated excise tax, if any, on estimated excess taxable income.
Recent Accounting Pronouncements
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The guidance provides optional expedients and exceptions for applying GAAP to contract modifications, hedging relationships and other transactions, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the potential impact that the adoption of this guidance will have on the Company’s financial statements.
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Results of Operations
Results are shown for the three and nine months ended September 30, 2021 and September 30, 2020:
Investment Income
For the three and nine months ended September 30, 2021, gross investment income totaled $6.2 million and $14.2 million, respectively. For the three and nine months ended September 30, 2020, gross investment income totaled $2.8 million and $8.6 million, respectively. The comparative increases in gross investment income year over year are due to an increase in the size of the income-producing portfolio.
Expenses
Expenses totaled $3.2 million and $8.8 million, respectively, for the three and nine months ended September 30, 2021, of which $1.3 million and $4.3 million, respectively, were management, incentive and administration fees and $1.7 million and $3.9 million, respectively, were interest and other credit facility expenses. Other general and administrative expenses totaled $0.2 million and $0.6 million, respectively, for the three and nine months ended September 30, 2021. Expenses totaled $1.4 million and $4.7 million, respectively, for the three and nine months ended September 30, 2020, of which $0.4 million and $1.4 million, respectively, were management fees and administration fees and $0.8 million and $2.8 million, respectively, were interest and other credit facility expenses. Other general and administrative expenses totaled $0.2 million and $0.5 million, respectively, for the three and nine months ended September 30, 2020. Expenses generally consist of management fees, administration fees, performance-based incentive fees, insurance, legal expenses, directors’ expenses, audit and tax expenses, organization and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The increase in expenses for the year over year comparative periods is due to an increase in fees and interest costs on a larger income-producing portfolio.
Net Investment Income
The Company’s net investment income totaled $3.0 million and $5.4 million, or $0.25 and $0.51 per average unit, respectively, for the three and nine months ended September 30, 2021. The Company’s net investment income totaled $1.4 million and $3.9 million, or $0.15 and $0.48 per average unit, respectively, for the three and nine months ended September 30, 2020.
Net Realized Gain (Loss)
The Company had investment sales and prepayments totaling approximately $40.7 million and $63.6 million, respectively, for the three and nine months ended September 30, 2021. Net realized gain over the same periods was immaterial. The Company had investment sales and prepayments totaling approximately $1.0 million and $20.0 million, respectively, for the three and nine months ended September 30, 2020. Net realized loss over the same periods was immaterial.
Net Change in Unrealized Gain (Loss)
For the three and nine months ended September 30, 2021, net change in unrealized gain (loss) on the Company’s assets totaled ($0.1) million and $2.0 million, respectively. Net unrealized loss for the three months ended September 30, 2021 was primarily due the reversal of previously recognized unrealized appreciation on our investments in MMIT Holdings, LLC and Galway Partners Holdings, LLC, partially offset by appreciation on our investments in Community Brands ParentCo, LLC, Revlon, Inc. and Align Financial Holdings, LLC, among others. Net unrealized gain for the nine months ended September 30, 2021 was primarily due to appreciation on our investments in Foundation Consumer Brands, LLC, Senseonics Holdings, Inc. and Community Brands ParentCo, LLC, among others, partially offset by the reversal of previously recognized unrealized appreciation in the value of Galway Partners Holdings, LLC and Worldwide Facilities, LLC. For the three and nine months ended September 30, 2020, net change in unrealized gain (loss) on the Company’s assets totaled $1.0 million and ($0.1) million, respectively. Net unrealized gain for the three months ended September 30, 2020 was primarily due to appreciation on our investments in Edgewood Partners Holdings, LLC, RxSense Holdings LLC and Kore Wireless Group, Inc., among others. Net unrealized loss for the nine months ended September 30, 2020 was primarily due to depreciation on our investments in MRI Software, LLC and MSHC, Inc., among others, partially offset by appreciation on our investment in RxSense Holdings LLC, among others.
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Net Increase in Unitholders’ Capital Resulting From Operations
For the three and nine months ended September 30, 2021, the Company had a net increase in Unitholders’ capital resulting from operations of $3.0 million and $7.4 million, respectively. For the same periods, income per average unit was $0.25 and $0.71, respectively. For the three and nine months ended September 30, 2020, the Company had a net increase in unitholders’ capital resulting from operations of $2.4 million and $3.7 million, respectively. For the same period, net income per average unit was $0.25 and $0.44, respectively.
Financial Condition, Liquidity and Capital Resources
Our primary uses of cash are for (i) investments in portfolio companies and other investments to comply with certain portfolio RIC diversification requirements, (ii) the cost of operations (including paying the Adviser), (iii) debt service of any borrowings, and (iv) cash distributions to our Unitholders.
Equity
During the period March 12, 2019 (commencement of operations) to September 30, 2021, on a net basis, the Company sold and issued 13,384,930 common units at an average price of $10.20 per unit, for net proceeds of $136.5 million. All of our outstanding units were issued and sold in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the Securities Act. Unfunded equity capital commitments totaled $189.5 million at September 30, 2021.
Debt
Revolving credit facility due December 2023 (the “SPV Facility”)—On February 27, 2019, the Company, through its wholly-owned subsidiary, SCP Private Credit Income BDC SPV LLC (the “SPV”), entered into a $100 million SPV Facility with JPMorgan Chase Bank, N.A. acting as administrative agent. The commitment can also be expanded up to $400 million. The stated interest rate on the Credit Facility is LIBOR plus 2.75% with no LIBOR floor requirement and the current final maturity date is December 31, 2023. The Credit Facility is secured by all of the assets held by SPV. Under the terms of the SPV Facility, the Company and SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SPV also includes usual and customary events of default for credit facilities of this nature. On November 18, 2019, the Company amended the SPV Facility, reducing commitments to $75 million. On February 27, 2021, the Company again amended the SPV Facility, increasing commitments to $100 million. On July 16, 2021, the Company entered into an amended SPV Facility, which increased commitments to $125 million, and on August 18, 2021 entered into a second amended SPV Facility which increased commitments to $200 million and extended the final maturity date to December 31, 2023. As of September 30, 2021, there were $154.0 million of borrowings outstanding under the SPV Facility.
Revolving credit facility due March 2022 (the “Subscription Facility”)— During the first quarter of 2019, the Company established the $35.0 million Subscription Facility with East West Bank, and subsequently entered into an amendment on June 24, 2019, which increased commitments from $35.0 million to $50.0 million. On March 5, 2021, the Company entered into a second amendment. Under the second amendment, commitments were increased from $50.0 million to $75.0 million, the stated interest rate on the Subscription Facility is LIBOR plus 2.70% and the current final maturity date is March 5, 2022. Under the terms of the Subscription Facility, the Company has made certain customary representations and warranties, and is required to comply with various covenants, including reporting requirements and other customary requirements for similar credit facilities. The Subscription Facility also includes usual and customary events of default for credit facilities of this nature. As of September 30, 2021, there were $49.0 million of borrowings outstanding under the Subscription Facility.
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Cash Equivalents
We deem certain U.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchase U.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded for purposes of computing the asset base upon which the management fee is determined. We held no cash equivalents as of September 30, 2021.
Contractual Obligations
We have entered into certain contracts under which we have material future commitments. We have entered into the Investment Management Agreement with the Adviser in accordance with the 1940 Act. Under the Investment Management Agreement, the Company will pay the Adviser the Management Fee and the Incentive Fee, and the Administrative Coordinator the Administration Fee. Under the Investment Management Agreement, the Administrative Coordinator may engage or delegate certain administrative functions to third parties or affiliates on behalf of the Company. The Administrative Coordinator will be responsible for all expenses of its own staff responsible for (i) certain on-going, routine, non-investment-related administrative services for the Company, (ii) the coordination of various third party services needed or required by the Company, and (iii) certain Unitholder servicing functions.
Payments due by Period as of September 30, 2021 (dollars in millions) | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Credit facilities (1) | $ | 203.0 | $ | 49.0 | $ | 154.0 | $ | — | $ | — |
(1) | At September 30, 2021, we had a total of $72.0 million of unused borrowing capacity under our credit facilities, subject to borrowing base limits. |
If any of the contractual obligations discussed above are terminated, our costs under any new agreements that we enter into may increase. In addition, we would likely incur significant time and expense in locating alternative parties to provide the services we expect to receive under the Investment Management Agreement. Any new investment advisory agreement would also be subject to approval by our Unitholders.
Off-Balance Sheet Arrangements
From time-to-time and in the normal course of business, the Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital commitments always take into account the Company’s liquidity and cash available for investment, prudent portfolio management of issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments at September 30, 2021 and December 31, 2020, respectively:
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September 30, 2021 | December 31, 2020 | |||||||
(in millions) | ||||||||
BayMark Health Services, Inc. | $ | 9.1 | $ | — | ||||
NAC Holdings Corporation | 8.5 | — | ||||||
CC SAG Holdings Corp. (Spectrum Automotive) | 8.4 | — | ||||||
Inszone Mid, LLC | 8.1 | — | ||||||
Vessco Midco Holdings, LLC | 5.9 | — | ||||||
Glooko, Inc. | 5.3 | — | ||||||
High Street Buyer, Inc. | 5.2 | — | ||||||
Plastics Management, LLC | 4.5 | — | ||||||
Smile Doctors LLC | 4.4 | 11.4 | ||||||
Maurices, Incorporated | 3.5 | — | ||||||
GSM Acquisition Corp. | 3.1 | — | ||||||
MRI Software LLC | 2.8 | 5.4 | ||||||
RSC Acquisition, Inc. | 2.4 | 3.9 | ||||||
SOC Telemed, Inc. | 1.9 | — | ||||||
Drilling Info Holdings, Inc. | 1.8 | 1.3 | ||||||
RQM+ Corp. | 1.6 | — | ||||||
Erie Construction Mid-west, LLC | 1.6 | — | ||||||
RxSense Holdings, LLC | 1.6 | 1.5 | ||||||
TAUC Management, LLC | 1.5 | — | ||||||
World Insurance Associates, LLC | 1.3 | 1.4 | ||||||
Rezolute, Inc. | 1.2 | — | ||||||
Kid Distro Holdings, LLC | 1.1 | — | ||||||
MMIT Holdings, LLC | 1.0 | — | ||||||
Foundation Consumer Brands, LLC | 1.0 | — | ||||||
Trinity Partners, LLC | 0.9 | 0.9 | ||||||
Neuronetics, Inc. | 0.9 | 1.3 | ||||||
Ultimate Baked Goods Midco LLC | 0.8 | — | ||||||
Basic Fun, Inc. | 0.8 | 0.5 | ||||||
ENS Holdings III Corp. & ES Opco USA LLC | 0.7 | 0.7 | ||||||
All States Ag Parts, LLC | 0.6 | — | ||||||
Pinnacle Treatment Centers, Inc. | 0.6 | 0.6 | ||||||
SunMed Group Holdings, LLC | 0.3 | — | ||||||
Higginbotham Insurance Agency, Inc. | 0.3 | 1.8 | ||||||
Worldwide Facilities, LLC | — | 1.6 | ||||||
Kindred Biosciences, Inc. | — | 1.3 | ||||||
Centrexion Therapeutics, Inc. | — | 0.7 | ||||||
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Total Commitments | $ | 92.7 | $ | 34.3 |
The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company’s achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As of September 30, 2021, the Company had sufficient cash available and/or liquid securities available to fund its commitments and had reviewed them for any appropriate fair value adjustment.
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Distributions
The following table reflects the cash distributions per unit for the two most recent fiscal years:
Date Declared | Record Date | Payment Date | Amount(1) | |||||
Fiscal 2021 | ||||||||
August 23, 2021 | August 23, 2021 | August 23, 2021 | $ | 0.14 | ||||
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Total 2021 | $ | 0.14 | ||||||
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Fiscal 2020 | ||||||||
December 30, 2020 | December 30, 2020 | January 29, 2021 | $ | 0.18 | ||||
December 30, 2020 | December 30, 2020 | January 27, 2021 | 0.18 | |||||
November 18, 2020 | November 18, 2020 | November 18, 2020 | 0.15 | |||||
August 27, 2020 | August 27, 2020 | August 27, 2020 | 0.12 | |||||
June 2, 2020 | June 2, 2020 | June 2, 2020 | 0.06 | |||||
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Total 2020 | $ | 0.69 | ||||||
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Fiscal 2019 – No distributions |
(1) | Per unit amounts are rounded. |
Tax characteristics of all distributions will be reported to Unitholders on Form 1099 after the end of the calendar year. Future quarterly distributions, if any, will be determined by our Board. We expect that our distributions to Unitholders will generally be from accumulated net investment income, from net realized capital gains or non-taxable return of capital, if any, as applicable.
We have elected to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC tax treatment, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment.
We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare distributions if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual
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payment-in-kind income, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company.
With respect to the distributions to Unitholders, income from origination, structuring, closing and certain other upfront fees associated with investments in portfolio companies are treated as taxable income and accordingly, distributed to Unitholders.
Related Parties
We have entered into the Investment Management Agreement with SLR Capital Partners. Mr. Gross, our Chairman, Co-Chief Executive Officer and President and Mr. Spohler, our Co-Chief Executive Officer, Chief Operating Officer and board member, are managing members and senior investment professionals of, and have financial and controlling interests in, the Adviser. In addition, Mr. Peteka, our Chief Financial Officer, Treasurer and Secretary serves as the Chief Financial Officer for SLR Capital Partners.
The Adviser may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Adviser presently serves as investment adviser to SLR Investment Corp., a publicly traded BDC, which focuses on investing in senior secured loans, financing leases and to a lesser extent, unsecured loans and equity securities, SLR Senior Investment Corp., a publicly traded BDC, which focuses on investing in senior secured loans, including first lien and second lien debt instruments, as well as SLR HC BDC LLC, an unlisted BDC whose principal focus is to invest directly and indirectly in senior secured loans and other debt instruments typically to middle market companies within the healthcare industry. In addition, Michael S. Gross, our Chairman, Co-Chief Executive Officer and President, Bruce Spohler, our Co-Chief Executive Officer and Chief Operating Officer, and Richard L. Peteka, our Chief Financial Officer, serve in similar capacities for SLR Investment Corp., SLR Senior Investment Corp. and SLR HC BDC LLC. The Adviser and certain investment advisory affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Adviser or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of the SEC and its staff, and consistent with the Adviser’s allocation procedures. On June 13, 2017, the Adviser received an exemptive order that permits the Company to participate in negotiated co-investment transactions with certain affiliates, in a manner consistent with the Company’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, and pursuant to various conditions (the “Order”). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity’s investment strategy, on an alternating basis. Although the Adviser’s investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its Unitholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of the Adviser.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates. In addition, U.S. and global capital markets and credit markets have experienced a higher level of stress due to the global COVID-19 pandemic, which has resulted in an increase in the level of volatility across such markets and a general decline in value of the securities that we hold. Because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In connection with the COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced certain interest rates and LIBOR has decreased. In a prolonged low interest rate environment, including a reduction of LIBOR
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to zero, the difference between the total interest income earned on interest earning assets and the total interest expense incurred on interest bearing liabilities may be compressed, reducing our net interest income and potentially adversely affecting our operating results. During the nine months ended September 30, 2021, certain investments in our investment portfolio had floating interest rates. These floating rate investments were primarily based on floating LIBOR and typically have durations of one to three months after which they reset to current market interest rates. Additionally, some of these investments have LIBOR floors. The Company also has revolving credit facilities that are generally based on floating LIBOR. Assuming no changes to our balance sheet as of September 30, 2021 and no new defaults by portfolio companies, a hypothetical one percent decrease in LIBOR on our comprehensive floating rate assets and liabilities would increase our net investment income by approximately two cents per average share over the next twelve months. Assuming no changes to our balance sheet as of September 30, 2021 and no new defaults by portfolio companies, a hypothetical one percent increase in LIBOR on our comprehensive floating rate assets and liabilities would decrease our net investment income by approximately nine cents per average share over the next twelve months. However, we may hedge against interest rate fluctuations from time-to-time by using standard hedging instruments such as futures, options, swaps and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in any benefits of certain changes in interest rates with respect to our portfolio of investments. At September 30, 2021, we have no interest rate hedging instruments outstanding on our balance sheet.
Increase (Decrease) in LIBOR | (1.00 | %) | 1.00 | % | ||||
Increase in Net Investment Income Per Unit Per Year | $ | 0.02 | $ | (0.09 | ) |
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of September 30, 2021 (the end of the period covered by this report), our management, including our Co-Chief Executive Officers and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Co-Chief Executive Officers and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Co-Chief Executive Officers and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures.
(b) Changes in Internal Controls Over Financial Reporting
Management has not identified any change in the Company’s internal control over financial reporting that occurred during the third quarter of 2021 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
We and the Adviser are not currently subject to any material pending legal proceedings threatened against us. From time to time, we may be a party to certain legal proceedings incidental to the normal course of our business including the enforcement of our rights under contracts with our portfolio companies. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our business, financial condition or results of operations beyond what has been disclosed within these financial statements.
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In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in the February 24, 2021 filing of the Annual Report on Form 10-K, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. Other than the risk factors set forth below, there have been no material changes during the period ended September 30, 2021 to the risk factors discussed in “Risk Factors” in the February 24, 2021 filing of our Annual Report on Form 10-K.
Risks Relating to Reference Rates. LIBOR, the London Interbank Offered Rate, is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rate on loans globally. We typically use LIBOR as a reference rate in term loans we extend to portfolio companies such that the interest due to us pursuant to a term loan extended to a partner company is calculated using LIBOR. The terms of our debt investments generally include minimum interest rate floors which are calculated based on LIBOR.
On March 5, 2021, the United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings); (ii) the overnight and 12-month US LIBOR settings would cease to exist after June 30, 2023; and (iii) the FCA would consult on whether the remaining nine LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them. Central banks and regulators in a number of major jurisdictions (for example, United States, United Kingdom, European Union, Switzerland and Japan) have convened working groups to find, and implement the transition to, suitable replacements for interbank offered rates. To identify a successor rate for U.S. dollar LIBOR, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the Federal Reserve Board and the Federal Reserve Bank of New York, was formed. The ARRC has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative rate for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. On July 29, 2021, the ARCC formally recommended SOFR as its preferred alternative replacement rate for U.S. dollar LIBOR. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere or, whether the COVID-19 pandemic will have further effect on LIBOR transition plans.
The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations. In addition, if LIBOR ceases to exist, we may need to renegotiate the credit agreements extending beyond 2021 with our portfolio companies that utilize LIBOR as a factor in determining the interest rate, in order to replace LIBOR with the new standard that is established, which may have an adverse effect on our overall financial condition or results of operations. Following the replacement of LIBOR, some or all of these credit agreements may bear interest at a lower interest rate, which could have an adverse impact on our results of operations. Moreover, if LIBOR ceases to exist, we may need to renegotiate certain terms of our credit facilities. If we are unable to do so, amounts drawn under our credit facilities may bear interest at a higher rate, which would increase the cost of our borrowings and, in turn, affect our results of operations.
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Risks Relating to Corporate Social Responsibility. Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new regulatory initiatives related to ESG could adversely affect our business.
Risks Relating to Global Climate Change. There may be evidence of global climate change. Climate change creates physical and financial risk and some of our portfolio companies may be adversely affected by climate change. For example, the needs of customers of energy companies vary with weather conditions, primarily temperature and humidity. To the extent weather conditions are affected by climate change, energy use could increase or decrease depending on the duration and magnitude of any changes. Increases in the cost of energy could adversely affect the cost of operations of our portfolio companies if the use of energy products or services is material to their business. A decrease in energy use due to weather changes may affect some of our portfolio companies’ financial condition, through decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stresses, including service interruptions. Energy companies could also be affected by the potential for lawsuits against or taxes or other regulatory costs imposed on greenhouse gas emitters, based on links drawn between greenhouse gas emissions and climate change.
In December 2015 the United Nations, of which the U.S. is a member, adopted a climate accord (the ‘‘Paris Agreement’’) with the long-term goal of limiting global warming and the short-term goal of significantly reducing greenhouse gas emissions. On November 4, 2016, the past administration announced that the U.S. would cease participation in the Paris Agreement with the withdrawal taking effect on November 4, 2020. However, on January 20, 2021, President Joseph R. Biden signed an executive order to rejoin the Paris Agreement. As a result, some of our portfolio companies may become subject to new or strengthened regulations or legislation, which could increase their operating costs and/or decrease their revenues.
Public Health Crises Risk. Periods of market volatility have occurred and could continue to occur in response to pandemics or other events outside of our control. These types of events have adversely affected and could continue to adversely affect operating results for us and for our portfolio companies. For example, the COVID-19 pandemic has delivered a shock to the global economy throughout much of 2020 and 2021. 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, including a recession and a steep increase in unemployment in the United States.
With respect to the U.S. credit markets (in particular for middle market loans), this outbreak has resulted in, and until fully resolved is likely to continue to result in, the following among other things: (i) government imposition of various forms of shelter-in-place orders and the closing of “non-essential” businesses, resulting in significant disruption to the businesses of many middle-market loan borrowers including supply chains, demand and practical aspects of their operations, as well as in lay-offs of employees, and, while these effects are hoped to be temporary, some effects could be persistent or even permanent; (ii) increased draws by borrowers on revolving lines of credit; (iii) increased requests by borrowers for amendments and waivers of their credit agreements to avoid default, increased defaults by such borrowers and/or increased difficulty in obtaining refinancing at the maturity dates of their loans; (iv) volatility and disruption of these markets including greater volatility in pricing and spreads and difficulty in valuing loans during periods of increased volatility, and liquidity issues; and (v) rapidly evolving proposals and/or actions by state and federal governments to address problems being experienced by the markets and by businesses and the economy in general which will not necessarily adequately address the problems facing the loan market and middle market businesses.
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During the third quarter of 2021, the economic recovery gained significant traction in countries in which comprehensive vaccination programs have led to the lifting of health and safety restrictions, such as the U.S. and China. However, other countries encountered more challenging circumstances as a result of slower distribution of vaccines and the spread of new variants, most notably the Delta variant. The extent to which the COVID-19 pandemic will continue to affect our business, financial condition, liquidity, our portfolio companies’ results of operations and by extension our operating results will depend on future developments, such as the speed and extent of further vaccine distribution and the impact of the Delta variant or other variants that might arise, which are highly uncertain and cannot be predicted. Additionally, as of September 2021, travelers from the United States are not allowed to visit Australia or certain countries in Europe, Asia, Africa and South America. These continued travel restrictions may prolong the global economic downturn. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession in the United States and other major markets.
This outbreak is having, and any future outbreaks could have, an adverse impact on the markets and the economy in general, which could have a material adverse impact on, among other things, the ability of lenders to originate loans, the volume and type of loans originated, and the volume and type of amendments and waivers granted to borrowers and remedial actions taken in the event of a borrower default, each of which could negatively impact the amount and quality of loans available for investment by us and returns to us, among other things. As of the date of this quarterly report on Form 10-Q, 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 us and our portfolio companies. Any potential impact to our results of operations will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.
If the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, loan non-accruals, problem assets, and bankruptcies may increase. In addition, collateral for our loans may decline in value, which could cause loan losses to increase and the net worth and liquidity of loan guarantors could decline, impairing their ability to honor commitments to us. An increase in loan delinquencies and non-accruals or a decrease in loan collateral and guarantor net worth could result in increased costs and reduced income which would have a material adverse effect on our business, financial condition or results of operations. Central banks and governments have responded with liquidity injections to ease the strain on financial systems and stimulus measures to buffer the shock to businesses and consumers. These measures have helped stabilize certain portions of the financial markets over the short term, but volatility will likely remain elevated until the health crisis itself is under control (via fewer new cases, lower infection rates and/or verified treatments). There are still many unknowns and new information is incoming daily, compounding the difficulty of modeling outcomes for epidemiologists and economists alike.
We cannot be certain as to the duration or magnitude of the economic impact of the COVID-19 pandemic in the markets in which we and our portfolio companies operate, including with respect to travel restrictions, business closures, mitigation efforts (whether voluntary, suggested, or mandated by law) and corresponding declines in economic activity that may negatively impact the U.S. economy and the markets for the various types of goods and services provided by U.S. middle market companies. Depending on the duration, magnitude and severity of these conditions and their related economic and market impacts, certain portfolio companies may suffer declines in earnings and could experience financial distress, which could cause them to default on their financial obligations to us and their other lenders.
We will also be negatively affected if our operations and effectiveness or the operations and effectiveness of 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.
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Any public health emergency, including the COVID-19 pandemic or any outbreak of other existing or new epidemic diseases, or the threat thereof, and the resulting financial and economic market uncertainty could have a significant adverse impact on us and the fair value of our investments. Our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that may not show the complete impact of the COVID-19 pandemic and the resulting measures taken in response thereto. These potential impacts, while uncertain, could adversely affect our and our portfolio companies’ operating results.
Risks Relating to Waivers or Deferrals of Covenants and Covenant-Lite Loans. We structure the debt investments in our portfolio companies to include business and financial covenants placing affirmative and negative obligations on the operation of the company’s business and its financial condition. However, from time to time we may elect to waive breaches of these covenants, including our right to payment, or waive or defer enforcement of remedies, such as acceleration of obligations or foreclosure on collateral, depending upon the financial condition and prospects of the particular portfolio company. These actions may reduce the likelihood of our receiving the full amount of future payments of interest or principal and be accompanied by a deterioration in the value of the underlying collateral as many of these companies may have limited financial resources, may be unable to meet future obligations and may go bankrupt. This could negatively impact our ability to pay distributions, could adversely affect our results of operation and financial condition and cause the loss of all or part of your investment.
In addition, some of the loans in which we may invest may be “covenant-lite” loans. We use the term “covenant-lite” loans to refer generally to loans that do not have a complete set of financial maintenance covenants. Generally, “covenant-lite” loans provide borrower companies more freedom to negatively impact lenders because their covenants are incurrence-based, which means they are only tested and can only be breached following an affirmative action of the borrower, rather than by a deterioration in the borrower’s financial condition. Accordingly, to the extent we invest in “covenant-lite” loans, we may have fewer rights against a borrower and may have a greater risk of loss on such investments as compared to investments in or exposure to loans with financial maintenance covenants.
Risks related to New Tax Legislation. Legislative or other actions relating to taxes could have a negative effect on us. The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. The Biden Administration has proposed significant changes to the existing U.S. tax rules, and there are a number of proposals in Congress that would similarly modify the existing U.S. tax rules. The likelihood of any such legislation being enacted is uncertain, but new legislation and any U.S. Treasury regulations, administrative interpretations or court decisions interpreting such legislation could significantly and negatively affect our ability to qualify for tax treatment as a RIC or the U.S. federal income tax consequences to us and our investors of such qualification, or could have other adverse consequences. Investors are urged to consult with their tax advisor regarding tax legislative, regulatory, or administrative developments and proposals and their potential effect on an investment in our units.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 19, 2021, the Company issued and sold approximately 1,908,397 Units to its investors for an aggregate offering price of $20,000,000, in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the 1933 Act. On August 17, 2021, the Company issued and sold approximately 1,890,359 Units to its investors for an aggregate offering price of $20,000,000, in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the 1933 Act.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not applicable.
On October 21, 2021, the Company delivered a capital drawdown notice to its investor, an investment fund created by a financial institution unaffiliated with the Company (the “Access Fund”), relating to the sale of approximately 3.8 million of the Company’s units (the “Units”), for an aggregate offering price of $40 million. The sale is expected to close on or about November 4, 2021.
The sale of Units is being made pursuant to a subscription agreement (the “Subscription Agreement”) and the second amended and restated limited liability company agreement (the “LLC Agreement”) entered into by the Company and the Access Fund. Under the terms of the Subscription Agreement and the LLC Agreement, the Access Fund is required to fund drawdowns to purchase Units up to the amount of its capital commitment on an as-needed basis with a minimum of 10 business days’ prior notice to the Access Fund.
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The issuance and sale of the Units are exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof and Regulation D thereunder.
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
* Filed herewith.
(1) | Previously filed as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form 10 (File No. 000-55955) filed with the SEC on August 24, 2018. |
(2) | Previously filed in connection with the Registrant’s report on Form 10-K filed on February 20, 2020. |
(3) | Previously filed in connection with the Registrant’s report on Form 8-K filed on June 28, 2021. |
(4) | Previously filed in connection with the Registrant’s report on Form 8-K filed on October 8, 2021. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 3, 2021.
SCP PRIVATE CREDIT INCOME BDC LLC | ||
By: | /s/ MICHAEL S. GROSS | |
Michael S. Gross Co-Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ BRUCE J. SPOHLER | |
Bruce J. Spohler Co-Chief Executive Officer (Principal Executive Officer) | ||
By: | /s/ RICHARD L. PETEKA | |
Richard L. Peteka Chief Financial Officer (Principal Financial and Accounting Officer) |
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