UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2024
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 814-01659
Muzinich Corporate Lending Income Fund, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of Incorporation)
93-2545381
(I.R.S. Employer Identification No.)
450 Park Avenue
New York, NY 10022
(Address of principal executive offices)
(212) 888-3413
(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 |
None | | None | | None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of class)
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in 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 ☒
The issuer had 72,001.0 shares of common stock, $0.001 par value per share, outstanding as of May 14, 2024.
TABLE OF CONTENTS
Part I FINANCIAL INFORMATION
Item 1. Financial Statements
Muzinich Corporate Lending Income Fund, Inc.
Statements of Assets and Liabilities
| | As of March 31, 2024 (Unaudited) | | | As of December 31, 2023 | |
Assets: | | | | | | |
Non-controlled/non-affiliated investments, at fair value (amortized cost of $69,961,000 and $0, respectively) | | $ | 69,910,671 | | | $ | - | |
Cash and cash equivalents | | | 2,026,427 | | | | 1,000 | |
Receivables: | | | | | | | | |
Interest and other | | | 797,183 | | | | - | |
Total Assets | | $ | 72,734,281 | | | $ | 1,000 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Management fees payable | | | 177,049 | | | | - | |
Organizational and offering fees payable | | | 403,626 | | | | - | |
Professional fees payable | | | 171,750 | | | | - | |
Accrued other general and administrative expenses | | | 42,865 | | | | - | |
Total Liabilities | | $ | 795,290 | | | $ | - | |
| | | | | | | | |
Commitments and Contingencies (Note 4) | | | - | | | | - | |
| | | | | | | | |
Net Assets: | | | | | | | | |
Preferred Shares, $0.001 par value; 15,000 shares authorized, and 0 shares issued and outstanding as of March 31, 2024 and December 31, 2023 | | $ | - | | | $ | - | |
Common Shares, $0.001 par value; 1,000,000 shares authorized, 72,001.0 shares issued and outstanding as of March 31, 2024; and 1,000,000 shares authorized, 1 share issued and outstanding as of December 31, 2023 | | | 72 | | | | - | |
Additional paid-in capital | | | 71,787,502 | | | | 1,000 | |
Total distributable (accumulated) earnings (losses) | | | 151,417 | | | | - | |
Total Net Assets | | $ | 71,938,991 | | | $ | 1,000 | |
Total Liabilities and Net Assets | | $ | 72,734,281 | | | $ | 1,000 | |
Net Asset Value Per Share | | $ | 999.14 | | | $ | 1,000.00 | |
The accompanying notes are an integral part of these financial statements.
Muzinich Corporate Lending Income Fund, Inc.
Statement of Operations
| | For the three months ended March 31, 2024 (Unaudited) | |
Investment Income | | | |
Investment income from non-controlled/non-affiliated investments and cash equivalents: | | | |
Interest income | | $ | 1,741,248 | |
Total investment income from non-controlled/non-affiliated investments and cash equivalents: | | | 1,741,248 | |
Total Investment Income | | | 1,741,248 | |
| | | | |
Expenses: | | | | |
Management fees | | | 177,049 | |
Organizational fees (Note 4) | | | 190,200 | |
Professional fees | | | 266,006 | |
Directors’ fees and expenses | | | 45,000 | |
Purchased accrued interest expense | | | 836,432 | |
Other general and administrative expenses | | | 34,309 | |
Total Expenses | | | 1,548,996 | |
Net Investment Income | | | 192,252 | |
Net Realized gains/(losses) and unrealized appreciation/(depreciation) on investments | | | | |
Net realized gains (losses): | | | | |
Non-controlled/non-affiliated investments | | | 9,495 | |
Total net realized gains/(losses) | | | 9,495 | |
Net change in unrealized appreciation/(depreciation): | | | | |
Non-controlled/non-affiliated investments | | | (50,329 | ) |
Total net change in unrealized appreciation/(depreciation) | | | (50,329 | ) |
Total net realized gains/(losses) and unrealized appreciation/(depreciation) on investments | | | (40,834 | ) |
Net Increase (Decrease) in Net Assets Resulting from Operations | | $ | 151,418 | |
Basic and diluted net investment income (loss) per common share | | $ | 3.33 | |
Basic and diluted net increase (decrease) in net assets resulting from operations per common share | | $ | 2.62 | |
Weighted Average Common Shares Outstanding - Basic and Diluted (See Note 8) | | | 57,759.2 | |
The accompanying notes are an integral part of these financial statements.
Muzinich Corporate Lending Income Fund, Inc.
Statement of Changes in Net Assets
| | For the three months ended March 31, 2024 (Unaudited) | |
Increase (Decrease) in Net Assets Resulting from Operations: | | | |
Net investment income | | $ | 192,252 | |
Total net realized gains/(losses) | | | 9,495 | |
Total net change in unrealized depreciation | | | (50,329 | ) |
Net Increase in Net Assets Resulting from Operations | | | 151,418 | |
| | | | |
Decrease in Net Assets Resulting from Stockholder Distributions | | | | |
Dividends and distributions to stockholders | | | - | |
Net Decrease in Net Assets Resulting from Stockholder Distributions | | | - | |
| | | | |
Increase in Net Assets Resulting from Capital Share Transactions | | | | |
Issuance of common shares | | | 71,786,573 | |
Net Increase in Net Assets Resulting from Capital Share Transactions | | | 71,786,573 | |
Total Increase in Net Assets | | | 71,937,991 | |
Net Assets, Beginning of Period | | | 1,000 | |
Net Assets, End of Period | | $ | 71,938,991 | |
Net asset value per share | | $ | 999.14 | |
Common shares outstanding at the end of the Period | | | 72,001.0 | |
The accompanying notes are an integral part of these financial statements.
Muzinich Corporate Lending Income Fund, Inc.
Statement of Cash Flows
| | For the three months ended March 31, 2024 (Unaudited) | |
Cash Flows from Operating Activities: | | | |
Net increase (decrease) in net assets resulting from operations | | $ | 151,418 | |
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating activities: | | | | |
Net change in unrealized (appreciation)/depreciation on investments | | | 50,329 | |
Net realized (gains)/losses on investments | | | (9,495 | ) |
Net accretion of discount and amortization of premium on investments | | | (224,081 | ) |
Purchases and drawdowns of investments | | | (97,076,727 | ) |
Sales and maturities of and principal paydowns on investments | | | 27,349,303 | |
Changes in operating assets and liabilities: | | | | |
Interest and other | | | (797,183 | ) |
Management fees payable | | | 177,049 | |
Organizational and offering fees payable | | | 403,626 | |
Professional fees payable | | | 171,750 | |
Accrued other general and administrative expenses | | | 42,865 | |
Net cash provided by (used in) operating activities | | | (69,761,146 | ) |
Cash Flows from Financing Activities: | | | | |
Proceeds from issuance of common shares | | | 71,786,573 | |
Cash provided by (used in) financing activities | | | 71,786,573 | |
Net increase (decrease) in cash and cash equivalents | | | 2,025,427 | |
Cash and cash equivalents, beginning of period | | | 1,000 | |
Cash and cash equivalents, end of period | | $ | 2,026,427 | |
The accompanying notes are an integral part of these financial statements.
Muzinich Corporate Lending Income Fund, Inc.
Schedule of Investments
As of March 31, 2024
Portfolio Company | | Industry | | Spread Above Index | | Floor | | Interest Rate/Discount Rate | | | Acquisition Date | | Maturity/Expiration Date | | Principal / Units | | | Cost (1) | | | Fair Value (2) | | | Percentage of Net Assets | |
Non-Controlled/Non-Affiliated Investments | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate Bond Investments | | | | | | | | | | | | | | | | | | | | | | | | | |
American Airlines/aadvan | | Airlines | | | | | | | 5.50 | % | | 1/23/2024 | | 4/20/2026 | | $ | 1,256,250 | | | $ | 1,245,258 | | | $ | 1,247,492 | | | | 1.7 | % |
Antero Resources Corp | | Energy | | | | | | | 8.38 | % | | 1/24/2024 | | 7/15/2026 | | $ | 1,225,000 | | | $ | 1,269,587 | | | $ | 1,270,937 | | | | 1.8 | % |
Blue Racer Mid Llc/finan | | Energy | | | | | | | 7.63 | % | | 3/4/2024 | | 12/15/2025 | | $ | 1,250,000 | | | $ | 1,262,737 | | | $ | 1,256,986 | | | | 1.7 | % |
Brinker International In | | Restaurants | | | | | | | 5.00 | % | | 1/23/2024 | | 10/1/2024 | | $ | 1,250,000 | | | $ | 1,245,513 | | | $ | 1,238,141 | | | | 1.7 | % |
Buckeye Partners Lp | | Energy | | | | | | | 4.13 | % | | 1/23/2024 | | 3/1/2025 | | $ | 1,275,000 | | | $ | 1,249,830 | | | $ | 1,246,101 | | | | 1.7 | % |
Cco Hldgs Llc/cap Corp | | Cable/Satellite TV | | | | | | | 5.13 | % | | 1/30/2024 | | 5/1/2027 | | $ | 1,275,000 | | | $ | 1,231,061 | | | $ | 1,213,054 | | | | 1.7 | % |
Carnival Corp | | Leisure | | | | | | | 7.63 | % | | 2/23/2024 | | 3/1/2026 | | $ | 1,200,000 | | | $ | 1,214,878 | | | $ | 1,214,927 | | | | 1.7 | % |
Century Communities | | Homebuilders/Real Estate | | | | | | | 6.75 | % | | 2/15/2024 | | 6/1/2027 | | $ | 1,225,000 | | | $ | 1,227,828 | | | $ | 1,232,575 | | | | 1.7 | % |
Clarios Global Lp | | Technology | | | | | | | 6.75 | % | | 1/24/2024 | | 5/15/2025 | | $ | 1,225,000 | | | $ | 1,225,602 | | | $ | 1,226,249 | | | | 1.7 | % |
Cogent Communications Gr | | Telecommunications | | | | | | | 7.00 | % | | 1/30/2024 | | 6/15/2027 | | $ | 1,225,000 | | | $ | 1,230,768 | | | $ | 1,219,304 | | | | 1.7 | % |
Coty Inc | | Consumer-Products | | | | | | | 5.00 | % | | 1/23/2024 | | 4/15/2026 | | $ | 1,250,000 | | | $ | 1,232,831 | | | $ | 1,231,866 | | | | 1.7 | % |
Dave & Buster’s Inc | | Restaurants | | | | | | | 7.63 | % | | 1/24/2024 | | 11/1/2025 | | $ | 1,225,000 | | | $ | 1,238,675 | | | $ | 1,234,364 | | | | 1.7 | % |
Eqm Midstream Partners L | | Energy | | | | | | | 6.00 | % | | 1/23/2024 | | 7/1/2025 | | $ | 1,250,000 | | | $ | 1,248,655 | | | $ | 1,251,241 | | | | 1.7 | % |
Caesars Entertain Inc | | Gaming | | | | | | | 8.13 | % | | 1/23/2024 | | 7/1/2027 | | $ | 1,225,000 | | | $ | 1,251,741 | | | $ | 1,254,747 | | | | 1.7 | % |
Energizer Holdings Inc | | Consumer-Products | | | | | | | 6.50 | % | | 2/2/2024 | | 12/31/2027 | | $ | 1,250,000 | | | $ | 1,247,025 | | | $ | 1,243,280 | | | | 1.7 | % |
Ford Motor Credit Co Llc | | Automotive & Auto Parts | | | | | | | 5.13 | % | | 1/23/2024 | | 6/16/2025 | | $ | 1,250,000 | | | $ | 1,238,405 | | | $ | 1,238,986 | | | | 1.7 | % |
Fortress Trans & Infrast | | Diversified Financial Services | | | | | | | 6.50 | % | | 3/22/2024 | | 10/1/2025 | | $ | 1,250,000 | | | $ | 1,250,000 | | | $ | 1,248,049 | | | | 1.7 | % |
Encompass Health Corp | | Healthcare | | | | | | | 5.75 | % | | 1/23/2024 | | 9/15/2025 | | $ | 1,225,000 | | | $ | 1,223,730 | | | $ | 1,221,659 | | | | 1.7 | % |
Irb Holding Corp | | Restaurants | | | | | | | 7.00 | % | | 1/23/2024 | | 6/15/2025 | | $ | 1,250,000 | | | $ | 1,252,441 | | | $ | 1,250,029 | | | | 1.7 | % |
Iron Mountain Inc | | Homebuilders/Real Estate | | | | | | | 4.88 | % | | 1/23/2024 | | 9/15/2027 | | $ | 1,275,000 | | | $ | 1,229,520 | | | $ | 1,232,237 | | | | 1.7 | % |
Ladder Cap Fin Lllp/corp | | Homebuilders/Real Estate | | | | | | | 5.25 | % | | 1/23/2024 | | 10/1/2025 | | $ | 500,000 | | | $ | 491,179 | | | $ | 491,042 | | | | 0.7 | % |
Life Time Inc | | Leisure | | | | | | | 5.75 | % | | 2/12/2024 | | 1/15/2026 | | $ | 1,275,000 | | | $ | 1,264,607 | | | $ | 1,264,788 | | | | 1.8 | % |
Live Nation Entertainmen | | Entertainment/Film | | | | | | | 5.63 | % | | 1/23/2024 | | 3/15/2026 | | $ | 1,260,000 | | | $ | 1,249,994 | | | $ | 1,246,539 | | | | 1.7 | % |
Mauser Packaging Solut | | Containers | | | | | | | 7.88 | % | | 2/7/2024 | | 8/15/2026 | | $ | 1,200,000 | | | $ | 1,210,907 | | | $ | 1,222,726 | | | | 1.7 | % |
Nrg Energy Inc | | Utilities | | | | | | | 3.75 | % | | 1/24/2024 | | 6/15/2024 | | $ | 1,275,000 | | | $ | 1,268,748 | | | $ | 1,268,216 | | | | 1.8 | % |
Gen Digital Inc | | Technology | | | | | | | 6.75 | % | | 1/24/2024 | | 9/30/2027 | | $ | 1,200,000 | | | $ | 1,219,782 | | | $ | 1,217,161 | | | | 1.7 | % |
Owens-brockway | | Containers | | | | | | | 6.63 | % | | 2/7/2024 | | 5/13/2027 | | $ | 1,250,000 | | | $ | 1,248,408 | | | $ | 1,250,714 | | | | 1.7 | % |
Penn Entertainment Inc | | Gaming | | | | | | | 5.63 | % | | 2/14/2024, 2/15/2024, 2/20/2024, 2/22/2024 | | 1/15/2027 | | $ | 500,000 | | | $ | 479,981 | | | $ | 482,502 | | | | 0.7 | % |
Avient Corp | | Chemicals | | | | | | | 5.75 | % | | 1/23/2024 | | 5/15/2025 | | $ | 1,250,000 | | | $ | 1,248,714 | | | $ | 1,244,563 | | | | 1.7 | % |
Rockies Express Pipeline | | Energy | | | | | | | 3.60 | % | | 1/23/2024 | | 5/15/2025 | | $ | 1,300,000 | | | $ | 1,265,115 | | | $ | 1,268,961 | | | | 1.8 | % |
Sm Energy Co | | Energy | | | | | | | 5.63 | % | | 1/23/2024 | | 6/1/2025 | | $ | 1,250,000 | | | $ | 1,245,987 | | | $ | 1,244,116 | | | | 1.7 | % |
Service Properties Trust | | Homebuilders/Real Estate | | | | | | | 7.50 | % | | 2/1/2024 | | 9/15/2025 | | $ | 1,225,000 | | | $ | 1,241,377 | | | $ | 1,241,152 | | | | 1.7 | % |
Standard Industries Inc | | Building Materials | | | | | | | 5.00 | % | | 2/7/2024 | | 2/15/2027 | | $ | 1,275,000 | | | $ | 1,236,981 | | | $ | 1,237,810 | | | | 1.7 | % |
Sunoco Lp/finance Corp | | Energy | | | | | | | 6.00 | % | | 1/23/2024 | | 4/15/2027 | | $ | 1,225,000 | | | $ | 1,223,656 | | | $ | 1,220,071 | | | | 1.7 | % |
Transdigm Inc | | Aerospace/Defense | | | | | | | 5.50 | % | | 2/15/2024 | | 11/15/2027 | | $ | 1,275,000 | | | $ | 1,239,515 | | | $ | 1,248,477 | | | | 1.7 | % |
United Airlines Inc | | Airlines | | | | | | | 4.38 | % | | 1/23/2024 | | 4/15/2026 | | $ | 1,300,000 | | | $ | 1,255,211 | | | $ | 1,257,414 | | | | 1.7 | % |
Univision Communications | | Broadcasting | | | | | | | 6.63 | % | | 2/7/2024 | | 6/1/2027 | | $ | 1,250,000 | | | $ | 1,232,072 | | | $ | 1,223,720 | | | | 1.7 | % |
Wr Grace Holding Llc | | Chemicals | | | | | | | 4.88 | % | | 2/2/2024 | | 6/15/2027 | | $ | 1,300,000 | | | $ | 1,245,639 | | | $ | 1,235,426 | | | | 1.7 | % |
Wesco Distribution Inc | | Services | | | | | | | 7.13 | % | | 1/24/2024 | | 6/15/2025 | | $ | 1,250,000 | | | $ | 1,254,097 | | | $ | 1,251,278 | | | | 1.7 | % |
Total Corporate Bond Investments | | | | | | | | | | | | | | | | $ | 47,216,250 | | | $ | 46,938,055 | | | $ | 46,888,900 | | | | 65.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Secured Loan Debt Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PSA Worldwide T/L | | Consumer-Products | | | | | | | 12.00 | % | | 3/19/2024 | | 3/19/2029 | | $ | 4,955,696 | | | $ | 4,857,289 | | | $ | 4,856,582 | | | | 6.8 | % |
Total Senior Secured Loan Debt Investments | | | | | | | | | | | | | | | | $ | 4,955,696 | | | $ | 4,857,289 | | | $ | 4,856,582 | | | | 6.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity Investments - Preferred Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
PSA Holdings, LLC | | Consumer-Products | | | | | | | N/A | | | 3/19/2024 | | N/A | | $ | 495,570 | | | $ | 495,570 | | | $ | 495,570 | | | | 0.7 | % |
Total Preferred Stock | | | | | | | | | | | | | | | | $ | 495,570 | | | $ | 495,570 | | | $ | 495,570 | | | | 0.7 | % |
Total Equity Investments | | | | | | | | | | | | | | | | | | | | $ | 495,570 | | | $ | 495,570 | | | | 0.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-Term Investments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
United States Treasury Bill (6) | | N/A | | N/A | | N/A | | | 5.31 | % | | 1/24/2024 | | 7/11/2024 | | $ | 5,975,000 | | | $ | 5,889,531 | | | $ | 5,888,753 | | | | 8.2 | % |
United States Treasury Bill (6) | | N/A | | N/A | | N/A | | | 5.36 | % | | 1/25/2024 | | 6/6/2024 | | $ | 5,950,000 | | | $ | 5,893,024 | | | $ | 5,893,086 | | | | 8.2 | % |
United States Treasury Bill (6) | | N/A | | N/A | | N/A | | | 5.38 | % | | 1/25/2024 | | 5/14/2024 | | $ | 5,925,000 | | | $ | 5,887,531 | | | $ | 5,887,780 | | | | 8.2 | % |
Total Short-Term Investments | | | | | | | | | | | | | | | | $ | 17,850,000 | | | $ | 17,670,086 | | | $ | 17,669,619 | | | | 24.6 | % |
Total Non-Controlled/Non-Affiliated Investments | | | | | | | | | | | | | | | | | | | | $ | 69,961,000 | | | $ | 69,910,671 | | | | 97.3 | % |
Total Affiliated Investments | | | | | | | | | | | | | | | | | | | | $ | - | | | $ | - | | | | 0.0 | % |
Total Investments | | | | | | | | | | | | | | | | | | | | $ | 69,961,000 | | | $ | 69,910,671 | | | | 97.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities in Excess of Other Assets | | | | | | | | | | | | | | | | | | | | | | | | | 2,028,320 | | | | 2.7 | % |
Net assets | | | | | | | | | | | | | | | | | | | | | | | | $ | 71,938,991 | | | | 100.0 | % |
LIBOR - London Interbank Offered Rate.
SOFR - Secured Overnight Financing Rate.
(1) | The amortized cost represents the original cost adjusted for the accretion of discounts and amortization of premiums, as applicable, on debt investments using the effective interest method. |
(2) | Unless otherwise noted, significant unobservable inputs were used to determine fair value, and investments are considered Level 3 securities (Note 5). |
(3) | Variable rate security; rate shown is the rate in effect on March 31, 2024. An index may have a negative rate. Interest rate may also be subject to a ceiling or floor. |
(4) | Bank loans generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. All loans carry a variable rate of interest. These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the SOFR or (iii) the Certificate of Deposit rate. Bank loans, while exempt from registration, under the Securities Act of 1933 as amended, contain certain restrictions on resale and cannot be sold publicly. Floating rate bank loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. |
(5) | Please see Note 4 for details on unfunded commitments. |
(6) | Represents securities categorized as Level 2 assets under the definition of ASC 820 fair value hierarchy (Note 5). |
The accompanying notes are an integral part of these financial statements.
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
1. Organization and Basis of Presentation
Organization
Muzinich Corporate Lending Income Fund, Inc. (the “Company,” “we,” “our,” or “us”) is a Delaware corporation formed on July 5, 2023. The Company is structured as an externally managed, non-diversified, closed-end management investment company that has filed an election to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company was formed primarily to generate current income and, to a lesser extent, capital appreciation through investments in secured debt, including first lien, second lien and unitranche debt, as well as unsecured debt, including mezzanine debt and, to a lesser extent, in equity instruments of private companies.
The Company is managed by Muzinich Direct Lending Adviser, LLC (the “Adviser”), an affiliate of Muzinich & Co., Inc. (together with the Adviser and their other affiliates, collectively, “Muzinich”). No management fees will be earned by the Adviser until the commencement of investment operations. The Adviser is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring the investments and monitoring the investments and portfolio companies on an ongoing basis. Subject to the supervision of our board of directors (the “Board” or the “Board of Directors”), the Adviser manages the day-to-day operations and provides the Company with investment advisory and management services and certain administrative services.
The Company has entered into and expects to enter into separate subscription agreements with a number of investors providing for the sale of shares of common stock, par value $0.001 per share (“Common Stock”) to investors in multiple closings in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) (“Private Offerings”). The Company seeks to raise equity capital through the Private Offerings on a continuous basis through one or more closings (“Closings”). To be accepted, an investor’s subscription request including the full subscription amount must be received in accordance with the provisions of the subscription agreement at least five business days prior to its respective Closing (unless waived by the Company).
Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The accompanying financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 6 or 10 of Regulation S-X. The Company has determined it meets the definition of an investment company and follows the accounting and reporting guidance in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 — Financial Services — Investment Companies (“ASC Topic 946”).
Fiscal Year End
The Company’s fiscal year ends on December 31.
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
2. Summary of Significant Accounting Policies
The Company is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board Accounting Standard Codification Topic 946 “Financial Services-Investment Companies.”
Use of Estimates
U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reported periods.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash, money market funds, U.S. government securities and investment grade debt instruments with original maturities of three months or less when purchased by the Company. The Company deposits its cash and cash equivalents with financial institutions and, at times, may exceed the Federal Deposit Insurance Corporation insured limit.
Income Taxes
The Company has elected to be treated for U.S. federal income tax purposes as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). So long as the Company maintains its status as a RIC, it generally will not pay corporate level U.S. federal income taxes on any ordinary income or capital gains that it distributes at least annually to its stockholders as dividends. Rather, any tax liability related to income distributed by the Company represents obligations of the Company’s investors and will not be reflected in the financial statements of the Company. To qualify as a RIC under Subchapter M of the Code, the Company must, among other things, meet certain source of income and asset diversification requirements. In addition, to qualify for RIC tax treatment, the Company must distribute to its stockholders, for each taxable year, at least 90% of its “investment company taxable income” for that year, which is generally its ordinary income plus the excess of its realized net short-term capital gains over its realized net long-term capital losses.
3. Related Party Transactions
On September 14, 2023, the Company entered into an investment advisory agreement (the “Investment Advisory Agreement”) with the Adviser, pursuant to which the Adviser manages the Company’s investment program and related activities. The advisory fees consist of a management fee and an incentive fee. The cost of both the management fee and the incentive fee will ultimately be borne by the Company’s stockholders.
Management Fees
Pursuant to the Investment Advisory Agreement, the Company’s Adviser will accrue, on a quarterly basis in arrears, a management fee (the “Base Management Fee”) equal to 0.3125% (i.e., 1.25% annually) of the Company’s net assets as of the beginning of the first calendar day of the applicable quarter.
For the three months ended March 31, 2024, the Company incurred Base Management Fees of $177,049.
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
Incentive Fee
Pursuant to the Investment Advisory Agreement, the Company will pay an incentive fee (the “Incentive Fee”) to the Adviser.
The Incentive Fee consists of two components that are independent of each other, with the result that one component may be payable even if the other is not. A portion of the Incentive Fee is based on a percentage of the Company’s income and a portion is based on a percentage of the Company’s capital gains, each as described below.
Incentive Fee Based on Income
The portion based on the Company’s income is based on Pre-Incentive Fee Net Investment Income Returns. “Pre-Incentive Fee Net Investment Income Returns” means, as the context requires, either the dollar value of, or percentage rate of return on the value of the Company’s net assets at the end of the immediate preceding quarter from, interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that the Company receives from portfolio companies) accrued during the calendar quarter, minus the Company’s operating expenses accrued for the quarter (including the Base Management Fee, fees and expenses payable under the Company’s administration agreement with U.S. Bancorp Fund Services, LLC (“U.S. Bank,” and in such capacity, the “Administrator”) (the “Administration Agreement”), and any interest expense or fees on any credit facilities or outstanding debt and dividends paid on any issued and outstanding preferred shares, but excluding the Incentive Fee).
Pre-Incentive Fee Net Investment Income Returns include, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that the Company has not yet received in cash. Pre-Incentive Fee Net Investment Income Returns do not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Pre-Incentive Fee Net Investment Income Returns, expressed as a rate of return on the value of the Company’s net assets at the end of the immediately preceding quarter, is compared to a “hurdle rate” of return of 1.75% per quarter (7.00% annualized).
The Company will pay the Adviser an Incentive Fee quarterly in arrear with respect to the Company’s Pre-Incentive Fee Net Investment Income Returns in each calendar quarter as follows:
| ● | No incentive fee based on Pre-Incentive Fee Net Investment Income Returns in any calendar quarter in which the Company’s Pre-Incentive Fee Net Investment Income Returns do not exceed the hurdle rate of 1.75% per quarter (7% annualized); |
| ● | 100% of the dollar amount of Pre-Incentive Fee Net Investment Income Returns with respect to that portion of such Pre-Incentive Fee Net Investment Income Returns, if any, that exceeds the hurdle rate until the Adviser has received 12.5% of the total Pre-Incentive Fee Net Investment Income Returns for that calendar quarter (the Company refers to this portion of the Pre-Incentive Fee Net Investment Income Returns (which exceeds the hurdle rate) as the “catch-up”); and |
| ● | 12.5% of the dollar amount of all Pre-Incentive Fee Net Investment Income Returns, if any, once the Adviser has received the full catch-up. |
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
Incentive Fee Based on Capital Gains
The second component of the Incentive Fee, the Incentive Fee on based capital gains, is payable at the end of each calendar year in arrears. The amount payable equals:
| ● | 12.5% of cumulative realized capital gains from inception through the end of such calendar, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid Incentive Fee based on capital gains as calculated in accordance with U.S. GAAP. |
Each year, the fee paid for the Incentive Fee based on capital gains is net of the aggregate amount of any previously paid Incentive Fee based on capital gains for all prior periods. We will accrue, but will not pay, an Incentive Fee based on capital gains with respect to unrealized appreciation because an Incentive Fee based on capital gains would be owed to the Adviser if we were to sell the relevant investment and realize a capital gain.
If the Investment Advisory Agreement is terminated prior to the termination of the Company (other than an instance in which the Adviser voluntarily terminates the agreement), the Company will pay to the Adviser an Incentive Fee payment in connection with such termination (the “Termination Incentive Fee Payment”). The Termination Incentive Fee Payment will be calculated as of the date the Investment Advisory Agreement is terminated and will equal the amount of Incentive Fee that would be payable to the Adviser if (a) all investments were liquidated for their current value (but without taking into account any unrealized appreciation of any investment), and any unamortized deferred investment-related fees would be deemed accelerated, (b) the proceeds from such liquidation were used to pay all the Company’s outstanding liabilities, and (c) the remainder were distributed to stockholders and paid as Incentive Fee in accordance with the incentive fee calculation methodology, subject to the limitations set forth in Section 205(b)(3) of the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Company will make the Termination Incentive Fee Payment in cash on or immediately following the date the Investment Advisory Agreement is so terminated.
The Investment Advisory Agreement will remain in full force and effect for two years initially, and will continue for successive one-year periods thereafter, but only so long as such continuance is specifically approved at least annually by (a) the vote of a majority of the members of the Board who are not “interested persons,” as defined in Section 2(a)(19) of the 1940 Act, of the Company (the “Independent Directors”), and (b) by a vote of (1) a majority of the Board or (2) a majority of the Company’s outstanding voting securities, and in Independent Directors and in accordance with the requirements of the 1940 Act. The Investment Advisory Agreement may, on 60 days’ written notice to the other party, be terminated in its entirety at any time without the payment of any penalty, by the Company (following determination by the Board or by vote of a majority of the Company’s outstanding voting securities), or by the Adviser. The Investment Advisory Agreement shall automatically terminate in the event of its assignment.
For the three months ended March 31, 2024, the Company did not incur Incentive Fees.
Resource Sharing Agreement
The Adviser has entered into a resource sharing agreement (“Resource Sharing Agreement”) with Muzinich & Co., Inc., pursuant to which Muzinich & Co., Inc. makes certain personnel and resources available to the Adviser to provide certain investment advisory services to the Company under the Investment Advisory Agreement. Through the Resource Sharing Agreement, the Adviser draws on the significant deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring, and operational experience of Muzinich & Co., Inc.’s investment professionals. The Resource Sharing Agreement may be terminated by either party on 60 days’ notice, which, if terminated, may have a material adverse consequence on our operations.
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
Reimbursement of Certain Expenses
During the three months ended March 31, 2024, Muzinich paid, on behalf of the Company, certain operating costs that have been recorded by the Company. The Company will reimburse Muzinich for the costs paid on the Company’s behalf. As of March 31, 2024, the total costs reimbursable to Muzinich were $28,259, and are disclosed within Professional fees payable, and Accrued other general and administrative expenses on the Statement of Assets and Liabilities.
Shares held by Affiliated Accounts
As of March 31, 2024, certain entities affiliated with the Adviser held shares of the Company. Muzinich & Co., Inc. held 1 share of the Company, approximately 0.0% of outstanding shares of the Company.
Investments in Affiliates
Affiliated companies are those that are “affiliated persons” as defined in section 2(a)(3) of the 1940 Act. They include, among other entities, issuers of 5% or more of whose outstanding voting securities are held by the Company. For the three months ended March 31, 2024, the Company had no transactions with affiliated companies.
4. Commitments and Contingencies
The Adviser elected to incur the organizational and offering expenses associated with the Company through January 19, 2024, on which date the Company became obligated to reimburse the Adviser for such advanced expenses. As of March 31, 2024, the total organizational and offering costs incurred by the Company were $403,626.
As of March 31, 2024, the Company had no unfunded commitments to provide debt financing to its portfolio companies. As of March 31, 2024, there were no capital calls or draw requests made by the portfolio companies. Any such commitments are generally up to the Company’s discretion to approve or are subject to the satisfaction of certain financial and nonfinancial covenants and involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Company’s statements of assets and liabilities and are not reflected in the Company’s statements of assets and liabilities.
As of March 31, 2024, the Company was not subject to any legal proceedings, although the Company may, from time to time, be involved in litigation arising out of operations in the normal course of business or otherwise.
5. Investment
The following table presents the composition of the Company’s investment portfolio at amortized cost and fair value as of March 31, 2024:
| | March 31, 2024 | |
| | Amortized | | | Fair | |
| | Cost | | | Value | |
Senior Secured Loan Debt Instruments | | $ | 4,857,289 | | | $ | 4,856,582 | |
Corporate Bond Investments | | | 46,938,055 | | | | 46,888,900 | |
Equity Investments - Preferred Stock | | | 495,570 | | | | 495,570 | |
Short-Term Investments | | | 17,670,086 | | | | 17,669,619 | |
Total Investments | | $ | 69,961,000 | | | $ | 69,910,671 | |
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
100% of the investments held as of March 31, 2024 were within the United States. The industry composition of investments based on fair value, as a percentage of net assets, as of March 31, 2024 was as follows (the following table does not include short-term investments):
Industry | | March 31, 2024 | |
Energy | | | 12.2 | % |
Consumer-Products | | | 10.9 | % |
Homebuilders/Real Estate | | | 5.8 | % |
Restaurants | | | 5.2 | % |
Leisure | | | 3.4 | % |
Airlines | | | 3.5 | % |
Chemicals | | | 3.4 | % |
Containers | | | 3.4 | % |
Technology | | | 3.4 | % |
Gaming | | | 2.4 | % |
Utilities | | | 1.8 | % |
Aerospace/Defense | | | 1.7 | % |
Automotive & Auto Parts | | | 1.7 | % |
Broadcasting | | | 1.7 | % |
Building Materials | | | 1.7 | % |
Cable/Satellite TV | | | 1.7 | % |
Diversified Financial Services | | | 1.7 | % |
Entertainment/Film | | | 1.7 | % |
Healthcare | | | 1.7 | % |
Services | | | 1.7 | % |
Telecommunications | | | 1.7 | % |
Total | | | 72.4 | % |
6. Fair Value of Investments
Fair value is defined as the price that the Company would receive upon selling an investment or paying to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. Accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs.
The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the investment as of the measurement date. The three levels are defined as follows:
| Level 1 | — | Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date. |
| | | |
| Level 2 | — | Valuations based on inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities. |
| | | |
| Level 3 | — | Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. |
The inputs for the determination of fair value may require significant management judgment or estimation and are based upon the Adviser’s assessment of the assumptions that market participants would use in pricing the assets or liabilities. These investments include debt and equity investments in private companies or assets valued using the market or income approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples. The information may also include pricing information or broker quotes, which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
Pricing inputs and weightings applied to determine fair value require subjective determination. Accordingly, valuations do not necessarily represent the amounts that may eventually be realized from sales or other dispositions of investments.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following table presents the fair value hierarchy as of March 31, 2024.
| | Fair Value Hierarchy as of March 31, 2024 | |
Description | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Senior Secured Loan Debt Instruments | | $ | - | | | $ | - | | | $ | 4,856,582 | | | $ | 4,856,582 | |
Corporate Bond Investments | | | - | | | | 46,888,900 | | | | - | | | | 46,888,900 | |
Equity Investments - Preferred Stock | | | - | | | | - | | | | 495,570 | | | | 495,570 | |
Short-Term Investments | | | - | | | | 17,669,619 | | | | - | | | | 17,669,619 | |
Total | | $ | - | | | $ | 64,558,519 | | | $ | 5,352,152 | | | $ | 69,910,671 | |
The following table presents changes in the fair value of investments for which Level 3 inputs were used to determine the fair value for the three months ended March 31, 2024.
Senior Secured Loan Debt Instruments | | For the three months ended March 31, 2024 | |
Fair value, beginning of period | | $ | - | |
Purchases of investments | | | 4,856,582 | |
Proceeds from principal pre-payments and sales of investments | | | - | |
Realized gain (loss) | | | - | |
Net change in unrealized appreciation/(depreciation) | | | (706 | ) |
Net accretion of discount on investments | | | 706 | |
Transfers into (out of) Level 3 | | | - | |
Fair value, end of period | | $ | 4,856,582 | |
Equity Investments – Preferred Stock | | For the three months ended March 31, 2024 | |
Fair value, beginning of period | | $ | - | |
Purchases of investments | | | 495,570 | |
Proceeds from principal pre-payments and sales of investments | | | - | |
Realized gain (loss) | | | - | |
Net change in unrealized appreciation/(depreciation) | | | - | |
Net accretion of discount on investments | | | - | |
Transfers into (out of) Level 3 | | | - | |
Fair value, end of period | | $ | 495,570 | |
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
The following table presents the net change in unrealized appreciation (depreciation) for the period relating to these Level 3 assets that were still held by the Company at the end of March 31, 2024.
Net Change in Unrealized Appreciation/(Depreciation) | | For the three months ended March 31, 2024 | |
Senior Secured Loan Debt Instruments | | $ | (706 | ) |
Equity Investments – Preferred Stock | | | - | |
Total | | $ | (706 | ) |
The following table present quantitative information about the significant unobservable inputs of the Company’s Level 3 investments as of March 31, 2024. The table is not intended to be all-inclusive but instead capture the significant unobservable inputs relevant to the Adviser’s determination of fair value.
| | Fair Value March 31, 2024 | | | Valuation Technique | | Unobservable Input | | Range/Input | | Weighted Average Inputs |
Senior Secured Loan Debt Instruments | | | 4,856,582 | | | Recent Transaction Price | | N/A | | N/A | | N/A |
Equity Investments - Preferred Stock | | | 495,570 | | | Recent Transaction Price | | N/A | | N/A | | N/A |
| | | | | | | | | | | | |
Total | | | 5,352,152 | | | | | | | | | |
7. Net Assets
For the three months ended March 31, 2024, the Company had the following Common Stock issuances.
Date | | Shares issued and sold | | | Aggregate purchase price | |
January 19, 2024 | | | 72,000.0 | | | $ | 72,000,000 | |
Distributions
For the three months ended March 31, 2024, the Company did not declare any distributions.
8. Earnings Per Share
In accordance with the provisions of ASC Topic 260, Earnings per Share (“ASC 260”), basic and diluted net increase in net assets resulting from operations per common share is computed by dividing the net increase in net assets resulting from operations by the weighted average number of shares outstanding during the period. Other potentially dilutive common shares, and the related impact to earnings, are considered when calculating earnings per share on a diluted basis. As of March 31, 2024, there were no dilutive shares.
The following table sets forth the computation of basic and diluted earnings per common share for the three months ended March 31, 2024:
| | For the three months ended March 31, 2024 | |
Net increase (decrease) in net assets resulting from operations | | $ | 151,418 | |
Weighted average common shares of common stock outstanding – basic and diluted | | | 57,759.2 | |
Basic and diluted net increase (decrease) in net assets resulting from operations per common share | | $ | 2.62 | |
Muzinich Corporate Lending Income Fund, Inc.
Notes to Financial Statements
9. Financial Highlights
The following per common share data has been derived from information provided in the financial statements. The following is a schedule of financial highlights for the three months ended March 31, 2024:
| | For the three months ended March 31, 2024 | |
Per Common Share Operating Performance | | | |
Net Asset Value, Beginning of Period | | $ | 1,000.00 | |
| | | | |
Results of Operations: | | | | |
Net Investment Income (Loss) (1) | | | 3.33 | |
Net Realized Gains/(Losses) and Unrealized Appreciation/(Depreciation) | | | (4.19 | ) |
Net Increase (Decrease) in Net Assets Resulting from Operations | | | (0.86 | ) |
| | | | |
Capital Share Transactions | | | | |
Issuance of Common Stock | | | - | |
Net Increase (Decrease) Resulting from Capital Share Transactions | | | - | |
| | | | |
Net Asset Value, End of Period | | $ | 999.14 | |
| | | | |
Shares Outstanding, End of Period | | | 72,001.0 | |
| | | | |
Ratio/Supplemental Data | | | | |
Net assets, end of period | | $ | 71,938,991 | |
Weighted-average shares outstanding (2) | | | 57,759.2 | |
Total Return (3) | | | -0.09 | % |
Portfolio turnover (4) | | | 37.59 | % |
Ratio of total expenses to average net assets (5) | | | 17.27 | % |
Ratio of net investment income (loss) to average net assets (5) | | | 2.14 | % |
Asset coverage ratio | | | 0.00 | % |
(1) | The per common share data was derived using weighted average shares outstanding. |
(2) | Calculated for the three months ended March 31, 2024. |
(3) | Total return is based upon the change in net asset value per share between the opening and ending net asset values per share and the issuance of common stock in the period, and reflects reinvestment of any distributions to common stockholders. Total return is not annualized and does not include a sales load. |
|
(4) | Portfolio turnover is not an annualized amount. |
(5) | The ratios reflect an annualized amount. |
10. Subsequent Events
In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. The Company has determined that there were no subsequent events that occurred during such period that would require disclosure in this Form 10-Q or would be required to be recognized in the financial statements as of March 31, 2024, except as disclosed below.
On May 9, 2024, the Company declared a distribution of $8.23 per share, or $592,568, payable on May 20, 2024.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q. Unless indicated otherwise, the “Company,” “we,” “us,” and “our” refer to Muzinich Corporate Lending Income Fund, Inc., and the “Adviser” refers to Muzinich Direct Lending Adviser, LLC, an affiliate of Muzinich & Co., Inc. (together with the Adviser and their other affiliates, collectively, “Muzinich”).
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. Such statements are not historical facts and are based on current expectations, estimates, projections, opinions and/or beliefs of the Company and/or Muzinich. You can identify these statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology. You should read statements that contain these words carefully because they discuss our plans, strategies, prospects and expectations concerning our business, operating results, financial condition and other similar matters. We believe that it is important to communicate our future expectations to our investors. These forward-looking statements include, but are not limited to, information in this Form 10-Q regarding general domestic and global economic conditions, our future financing plans, our ability to operate as a business development company (“BDC”) and the expected performance of, and the yield on, our portfolio companies. In particular, there are forward-looking statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There may be events in the future, however, that we are not able to predict accurately or control. The risk factors referenced under “Part II Item 1A. Risk Factors,” as well as any cautionary language in this Form 10-Q, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of the events described in these risk factors and elsewhere in this Form 10-Q could have a material adverse effect on our business, results of operation and financial position. Any forward-looking statement made by us in this Form 10-Q speaks only as of the date on which we make it. Factors or events that could cause actual results to differ may emerge from time to time, and it is not possible to predict all of them. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
The following factors are among those that may cause actual results to differ materially from our forward-looking statements:
| ● | our future operating results; |
| ● | our business prospects and the prospects of our portfolio companies; |
| ● | risk associated with possible disruptions in our operations or the economy generally, including the current conflicts between Russia and Ukraine and Israel and Hamas; |
| ● | changes in the general interest rate environment; |
| ● | general economic, political and industry trends and other external factors, including uncertainty surrounding the financial and political stability of the United States and other countries; |
| ● | our contractual arrangements and relationships with third parties; |
| ● | actual and potential conflicts of interest with our Adviser and its affiliates; |
| ● | the dependence of our future success on the general economy and its effect on the industries in which we invest; |
| ● | the ability of our portfolio companies to achieve their objectives; |
| ● | the use of borrowed money to finance a portion of our investments; |
| ● | the adequacy of our financing sources and working capital; |
| ● | the timing and amount of cash flows, if any, from the operations of our portfolio companies; |
| ● | the ability of our Adviser to locate suitable investments for us and to monitor and administer our investments; |
| ● | the ability of our Adviser and its affiliates to attract and retain highly talented professionals; |
| ● | our ability to qualify and maintain our qualification as a BDC and as a regulated investment company (“RIC”) under the Internal Revenue Code of 1986, as amended (the “Code”); |
| ● | the impact on our business of U.S. and international financial reform legislation, rules and regulations; |
| ● | the effect of changes in tax laws and regulations and interpretations thereof; and |
| ● | the risks, uncertainties and other factors we identify under “Item 1A. Risk Factors” and elsewhere in this Form 10-Q. |
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, some of those assumptions are based on the work of third parties and any of those assumptions could prove to be inaccurate; as a result, the forward-looking statements based on those assumptions also could prove to be inaccurate. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Form 10-Q should not be regarded as a representation by us that our plans and objectives will be achieved. These risks and uncertainties include those referenced in the section entitled “Item 1A. Risk Factors” in Part II of this Form 10-Q and elsewhere in this Form 10-Q. You should not place undue reliance on these forward-looking statements.
The safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), which preclude civil liability for certain forward-looking statements, do not apply to the forward-looking statements in this Form 10-Q because we are an investment company.
Overview
The Company was formed on July 5, 2023 under the laws of the State of Delaware. We were initially formed with the name Muzinich Direct Lending Income Fund, Inc., which we changed to Muzinich Corporate Lending Income Fund, Inc. on August 25, 2023. The Company is structured as an externally managed, non-diversified, closed-end management investment company that has filed an election to be regulated as a BDC under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company intends to elect to be treated, and intends to qualify annually thereafter, as a RIC under Subchapter M of the Code, for U.S. federal income tax purposes As such, we will be 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, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest.
As of March 31, 2024, the Company has capital commitments from investors in the amount of $72,000,000. As of March 31, 2024, the Company has additional paid in capital in the amount of $71,787,500. See “Equity Activity” under “Financial Condition, Liquidity and Capital Resources” below for further details. Management anticipates raising additional equity capital for investment purposes through drawdowns in respect of capital commitments made by investors pursuant to Private Offerings (as defined below).
Subject to the overall supervision of the Board of Directors (“Board”) and in accordance with the 1940 Act, the Adviser manages the Company’s day-to-day operations and provides investment advisory services to the Company. The Adviser is registered with the Securities and Exchange Commission (“SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended, and manages the Company’s investment activities pursuant to the Investment Advisory Agreement. The Adviser has entered into a resource sharing agreement with Muzinich & Co., Inc., pursuant to which Muzinich & Co., Inc. makes certain personnel and resources available to the Adviser to provide certain investment advisory services to the Company under the Investment Advisory Agreement. Under the Investment Advisory Agreement, the Company pays the Adviser fees for investment management services consisting of a Base Management Fee and Incentive Fees (each as defined below). The Incentive Fees consist of two components that are independent of each other, with the result that one component may be payable even if the other is not. A portion of the Incentive Fee is based on a percentage of our income and a portion is based on a percentage of our capital gains. See the notes to the financial statements in this Form 10-Q for more information.
We have also entered into (the “Administration Agreement”) with U.S. Bancorp Fund Services, LLC (“U.S. Bank,” and in such capacity, the “Administrator”), pursuant to which the Administrator provides the administrative and recordkeeping services necessary for us to operate. In addition, we have entered into a fund accounting servicing agreement with U.S. Bank (the “Fund Accounting Servicing Agreement”), pursuant to which U.S. Bank provides accounting services with respect to the Company. We will reimburse U.S. Bank for all reasonable costs and expenses incurred by U.S. Bank in providing these services, as provided by the Administration Agreement and Fund Accounting Servicing Agreement, respectively.
The Board has ultimate authority as to the Company’s investments, but it delegates authority to the Adviser to select and monitor the Company’s investments, subject to the supervision of the Board. A majority of the Board will at all times consist of members who are not “interested persons,” as defined in Section 2(a)(19) of the 1940 Act (the “Independent Directors”).
Private Offerings and Liquidity Events
The Company is a non-exchange traded, perpetual-life BDC, which is a BDC whose shares are not listed for trading on a stock exchange or other securities market. The Company uses the term “perpetual-life BDC” to describe an investment vehicle of indefinite duration, whose shares are intended to be sold by the BDC on a continuous basis at a price generally equal to the BDC’s net asset value (“NAV”) per share. The Company reserves the right to issue shares of Common Stock at a price above the then-calculated NAV per share to allocate initial organizational and offering expenses to newly admitted stockholders at any Subsequent Closing (as defined below). The Company may not sell any Common Stock below NAV per share, except pursuant to Section 23(b) or Section 63(2) of the 1940 Act. In the Company’s perpetual-life structure, it intends, subject to the Adviser’s (as defined below) commercially reasonable judgment and the Board’s sole discretion, to offer to repurchase its stockholders’ Common Stock on a quarterly basis beginning in the first full calendar quarter following the second anniversary of the Initial Closing Date (as defined herein), but it is not obligated to offer to repurchase Common Stock in any quarter in its discretion. Quarterly repurchases will be limited to 5% of the Company’s Common Stock outstanding (either by number of shares or aggregate NAV), as determined by the Board in its discretion. Any repurchase program will be subject to the Company’s available cash, compliance with the RIC qualification and diversification rules, the 1940 Act, and Rule 13e-4 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Board will have discretion to commence, amend, or suspend any share repurchase program if it deems such action to be in the best interests of stockholders. The Company believes that its perpetual nature will enable it to execute a patient and opportunistic strategy and be able to invest across different market environments. A perpetual-life structure may reduce the risk of the Company being a forced seller of assets in market downturns compared to non-perpetual funds.
We have conducted and expect to conduct private offerings (“Private Offerings”) of our Common Stock to investors in reliance on exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). Common Stock will be offered and sold during Private Offerings (i) in the United States under the exemption provided by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder, and other exemptions of similar import in the laws of the states and jurisdictions where the offering will be made, and (ii) outside of the United States in accordance with Regulation S of the Securities Act. Within the United States, shares of Common Stock are being offered solely to investors that are “accredited investors” as defined in Rule 501(a) of Regulation D.
The Company seeks to raise equity capital through private placements on a continuous basis through one or more closings (“Closings”) at which the Company will accept funds from investors in connection with such investors’ purchases of shares of Common Stock (the first such Closing the “Initial Closing” and each subsequent closing a “Subsequent Closing”). The Initial Closing occurred on January 19, 2024 (the date of the Initial Closing, the “Initial Closing Date”). Each Subsequent Closing will generally occur on a quarterly basis on the first day of each quarter (based on the NAV per share as determined as of the previous day (i.e., the last day of the preceding quarter) or on a date as determined by the Adviser in its sole discretion).
The Board may, in its sole discretion, determine to cause the Company to conduct a “Liquidity Event,” which is defined as including (1) IPO or Exchange Listing, or (2) a Sale Transaction. A “Sale Transaction” means (a) the sale of all or substantially all of the Company’s assets to, or other liquidity event with, another entity or (b) a transaction or series of transactions, including by way of merger, consolidation, recapitalization, reorganization, or sale of stock in each case for consideration of either cash and/or publicly listed securities of the acquirer. A Sale Transaction also may include a sale, merger or other transaction with one or more affiliated investment companies managed by the Adviser. The Company does not anticipate seeking stockholder approval to engage in a Liquidity Event, unless stockholder consent is required by applicable law. The decision to cause the Company to conduct a Liquidity Event will take into consideration factors such as prevailing market conditions at the time and the Company’s portfolio composition. The ability of the Company to commence and consummate a Liquidity Event is not assured, and will depend on a variety of factors, including the size and composition of the Company’s portfolio and prevailing market conditions at the time.
Should the Board determine to cause the Company to conduct a Liquidity Event, each stockholder will be required to cooperate with the Company and take all actions, execute all documents and provide all consents as may be reasonably necessary or appropriate to consummate a Liquidity Event, it being understood that the Company may, subject to applicable Delaware law and the 1940 Act and without obtaining the consent of any stockholders, make modifications to the Company’s constitutive documents, capital structure and governance arrangements so long as, in the reasonable opinion of the Board, (x) the economic interests of the stockholders are not materially diminished or materially impaired, (y) such modifications are consistent with the requirements applicable to BDCs under the 1940 Act and (z) such modifications are not inconsistent with the provisions set forth in the Company’s Private Placement Memorandum.
Upon completion of any Liquidity Event, pre-existing stockholders may also be required to enter into a lock-up agreement with the underwriters of any Liquidity Event or otherwise for a period not to exceed 180 days (or such longer period as may be required or determined to be advisable by the underwriters of the IPO or otherwise based on prevailing market conditions and practice at the time).
Investment Objectives and Strategy
The Company’s investment objective is to generate current income and, to a lesser extent, capital appreciation through investments in secured debt, including first lien, second lien and unitranche debt, as well as unsecured debt, including mezzanine debt and, to a lesser extent, in equity instruments of private companies. The Company intends to invest primarily in privately owned U.S. middle-market companies that require capital for growth, acquisitions, recapitalizations, refinancings and leveraged buyouts. The Company seeks to partner with strong management teams executing long-term growth strategies that have credit worthy businesses. The Company may also from time to time invest in larger or smaller or non-U.S. companies. The Company generally uses the term “middle-market” to refer to companies with earnings before interest expense, income tax expense, depreciation and amortization, or “EBITDA,” generally between $3 million and $100 million annually, but will typically target businesses with EBITDA between $3 million and $25 million annually. The Company uses the term “unitranche” to generally refer to debt instruments that combine characteristics of first lien senior secured loans as well as second lien and subordinated loans. Unitranche loans typically include covenants prohibiting or significantly restricting the ability of an issuer to grant liens that would create a security interest senior to the lien created in connection with the unitranche loan. The Company uses the term “mezzanine” to refer to an unsecured loan that typically ranks senior only to a borrower’s equity securities and ranks junior in right of payment to all of such borrower’s other indebtedness. The Company expects to invest in primary origination investments and also expects to invest a portion of its assets in more liquid credit investments (as described below). The Company expects to source its primary origination investments through the Adviser’s and its affiliates’ network of relationships with financial intermediaries (including local and regional investment banks), private equity investment firms, lawyers, accountants, experienced senior management teams and other middle-market lenders. The Company may seek investment opportunities where it is the sole investor in an investment, and also may seek opportunities to invest alongside one or more other investors. The Company expects to invest across a number of different industries.
Under normal circumstances, the Company will invest at least 80% of its total assets in debt instruments of corporate issuers, including directly originated loans, club deals (investments generally made by a small group of lenders), broadly syndicated loans (“BSLs”) (investments generally arranged or underwritten by investment banks or other intermediaries), high yield and/or investment grade bonds, structured credit investments (including indebtedness issued by collateralized loan obligation vehicles (“CLOs”)), and other debt-related instruments. The Adviser may, without limitation, lead and structure a transaction as sole-lender, as the agent of a club credit facility (a group of similar direct lenders), or may participate as a non-agent investor in a large club or syndicated transactions. If the Company changes its 80% policy, the Company will provide stockholders with at least 60 days’ prior notice of such change.
Although the Company plans to invest primarily in debt instruments of privately owned U.S. middle-market companies, it may invest a portion of its capital opportunistically in other types of investments, such as in debt instruments of foreign companies, large U.S. companies, and publicly held U.S. middle market companies, BSLs, CLOs, securities of other RICs, bridge financings, and/or equity instruments of private companies. The proportion of these types of investments will change over time given the Company’s views on, among other things, the economic and credit environment in which it is operating, although these types of investments generally will not constitute more than 30% of the Company’s total assets. The Company intends to use open-market secondary purchases to maintain liquidity for its share repurchase program and to manage cash before investing subscription proceeds into origination investments, while also seeking attractive investment returns. Secondary purchases may consist of cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, such that 70% of the Company’s assets would be qualifying assets.
The Adviser and the Company expect to co-invest with Muzinich and its affiliates pursuant to an exemptive order from the SEC issued on March 2, 2021 the (“Order”) permitting greater flexibility to negotiate the terms of co investments. The Board has determined that it is advantageous for the Company to co-invest with other accounts managed by the Adviser or its affiliates in a manner consistent with the Company’s investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent limitations, including the terms and conditions set forth in the Order.
ESG Investment Criteria
The Company avoids investing in companies that Muzinich considers to be fundamentally unsustainable in accordance with (i) certain exclusion criteria and (ii) Muzinich’s proprietary environmental, social and governance (“ESG”) scoring systems. Exclusion criteria are assessed prior to investment, and in case of the Company’s private debt investments will be applied only at the time of investment. Information on company conduct or involvement in excluded industries is sourced either from independent ESG data providers or directly from the companies themselves. Exclusion criteria are assessed prior to investment, and in case of the Company’s private debt investments will be applied only at the time of investment. Information on company conduct or involvement in excluded industries is sourced either from independent ESG data providers or directly from the companies themselves.
Key Components of Our Results of Operations
Investments
The Company’s level of investment activity will vary substantially from period to period depending on many factors, including the amount of debt available to middle-market companies, the general economic environment and the competitive environment for the type of investments the Company makes.
Revenues
We expect to generate revenues in the form of interest income from the debt securities we hold and dividends and capital appreciation on either direct equity investments or equity interests obtained in connection with originating loans, such as options, warrants or conversion rights. We expect most of the debt securities we will hold will be floating rate in nature. The debt we invest in will typically not be rated by any rating agency, but if it were, it is likely that such debt would be below investment grade (rated lower than “Baa3” by Moody’s Investors Service, Inc. and lower than “BBB-” by Fitch Ratings, Inc. or Standard & Poor’s Rating Group, a division of The McGraw-Hill Companies, Inc.), which is an indication of having predominantly speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. We intend to structure our debt investments with interest payable quarterly, semi-annually or annually, but we may structure certain investments with terms to provide for longer interest payment periods or to allow interest to be paid by adding amounts due to the principal balance of the loan, resulting in deferred cash receipts. In addition, we may also generate revenue in the form of commitment, loan origination, structuring or diligence fees, fees for providing managerial assistance to our portfolio companies, and possibly consulting fees. Certain of these fees may be capitalized and amortized as additional interest income over the life of the related loan.
Expenses
The Company anticipates that all investment professionals and staff of the Adviser, when and to the extent engaged in providing investment advisory and management services, and the base compensation, bonus and benefits, and the routine overhead expenses, of such personnel allocable to such services, will be provided and paid for by the Adviser and its affiliates.
The Company will bear all other costs and expenses of its operations, administration and transactions, including, without limitation, those described in “Item 1. Business – Fees and Expenses” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
From time to time, our Adviser or its affiliates may pay amounts owed by us to third-party providers of goods or services. We will subsequently reimburse our Adviser for such amounts paid on our behalf. There is no contractual cap on the amount of reasonable costs and expenses for which our Adviser will be reimbursed.
We may also enter into a credit facility or other debt arrangements to partially fund our operations, and could incur costs and expenses including commitment, origination, legal and/or structuring fees and the related interest costs associated with any amounts borrowed.
We have had limited operating history, and therefore this statement concerning additional expenses is necessarily an estimate and may not match our actual results of operations in the future.
Portfolio and Investment Activity
As of March 31, 2024, the Company had 40 debt investments totaling $51,745,482, and 1 equity investment totaling $495,570 across 40 portfolio companies with an aggregate fair value of approximately $52 million. As of March 31, 2024, our debt investments consisted of senior secured loans and corporate bonds. Short-term investments as of March 31, 2024 consisted of United States Treasury bills that will expire within sixty days of purchase, with an aggregate fair value of approximately $18 million.
The Company’s investment activity for the three months ended March 31, 2024 is presented below (information presented herein is at cost unless otherwise indicated).
| | For the three months ended March 31, 2024 | |
New investments: | | | |
Gross investment purchases | | $ | 97,076,727 | |
Less: sold investments | | | (27,349,303 | ) |
Total new investments | | $ | 69,727,424 | |
| | | | |
Principal/par/units amount of investments funded: | | | | |
Term loan debt investments | | $ | 61,592,259 | |
Equity investments | | | 495,570 | |
| | | | |
Number of new investment commitments | | | 51 | |
Average new investment commitment amount | | $ | 1,231,845 | |
Weighted average maturity for new investment commitments | | | 2.3 | |
Percentage of new debt investment commitments at floating rates | | | 0 | % |
Percentage of new debt investment commitments at fixed rates | | | 100 | % |
Weighted average spread SOFR of new floating rate investment commitments | | | 0.00 | % |
As of March 31, 2024, the Company’s investments consisted of the following:
| | March 31, 2024 | |
| | | | | | | | Percentage of Total | |
| | Amortized | | | Fair | | | Investments at | |
| | Cost | | | Value | | | Fair Value | |
Senior secured loan debt instruments | | $ | 4,857,289 | | | $ | 4,856,582 | | | | 6.95 | % |
Corporate Bond Investments | | | 46,938,055 | | | | 46,888,900 | | | | 67.07 | % |
Equity investments – Preferred Stock | | | 495,570 | | | | 495,570 | | | | 0.71 | % |
Short-term investments | | | 17,670,086 | | | | 17,669,619 | | | | 25.27 | % |
Total Investments | | $ | 69,961,000 | | | $ | 69,910,671 | | | | 100.00 | % |
The Adviser believes that actively managing an investment allows it to identify problems early and work with companies to develop constructive solutions when necessary. The Adviser will monitor our portfolio with a focus toward anticipating negative credit events. In seeking to maintain portfolio company performance and to help ensure a successful exit, the Adviser will work closely with, as applicable, the lead equity sponsor, portfolio company management, consultants, advisers and other security holders to discuss financial position, compliance with covenants, financial requirements and execution of the portfolio company’s business plan. In addition, the Adviser’s personnel may occupy a seat or serve as an observer on a portfolio company’s board of directors or similar governing body.
Typically, the Company will receive financial reports detailing operating performance, sales volumes, margins, cash flows, financial position and other key operating metrics, typically on a quarterly basis from portfolio companies. The Company will use this data, combined with the knowledge gained through due diligence of the company’s customers, suppliers, competitors, market research and other methods, to conduct an ongoing assessment of the portfolio company’s operating performance and prospects.
Results of Operations
The following table represents the operating results for the three months ended March 31, 2024:
| | For the three months ending March 31, 2024 | |
Total investment income | | $ | 1,741,248 | |
Total expenses | | | 1,548,996 | |
Net investment income (loss) | | | 192,252 | |
Total net realized gains (losses) | | | 9,495 | |
Total net change in unrealized appreciation/(depreciation) | | | (50,329 | ) |
Total net realized and unrealized appreciation/(depreciation) | | | (40,834 | ) |
Net increase (decrease) in net assets resulting from operations | | $ | 151,418 | |
Investment Income
Investment income for the three months ended March 31, 2024 was as follows:
| | For the three months ending March 31, 2024 | |
Interest from term loan debt instruments, corporate bonds, and preferred stock | | $ | 1,741,248 | |
Commitment fees | | | - | |
Interest from cash and cash equivalents | | | - | |
Interest from short-term investments | | | - | |
Total investment income | | $ | 1,741,248 | |
Expenses
Operating expenses for the three months ended March 31, 2024 were as follows:
| | For the three months ending March 31, 2024 | |
Management fees | | $ | 177,049 | |
Other operating expenses | | | 1,371,947 | |
Total expenses | | $ | 1,548,996 | |
Hedging
We may, but are not required to, enter into interest rate, foreign exchange or other derivative agreements to hedge interest rate, currency, credit or other risks, but we do not generally intend to enter into any such derivative agreements for speculative purposes. Any derivative agreements entered into for speculative purposes are not expected to be material to the Company’s business or results of operations. These hedging activities, which will be in compliance with applicable legal and regulatory requirements, may include the use of futures, options and forward contracts. We will bear the costs incurred in connection with entering into, administering and settling any such derivative contracts. There can be no assurance any hedging strategy we employ will be successful.
Financial Condition, Liquidity and Capital Resources
We expect to generate cash from (1) future offerings of our Common Stock or preferred stock, (2) cash flows from operations and (3) borrowings from banks or other lenders. We will seek to enter into any bank debt, credit facility or other financing arrangements on at least customary market terms; however, we cannot assure you we will be able to do so.
Our primary use of cash will be for (1) investments in portfolio companies and other investments to comply with certain portfolio diversification requirements, (2) the cost of operations (including paying the Adviser), (3) debt service of any borrowings and (4) cash distributions to the holders of our Common Stock.
In addition to using proceeds from the Private Offerings to make investments, our expectation is to also borrow funds to make investments. This is known as “leverage” and may cause us to be more volatile than if we had not been leveraged. This is because leverage tends to exaggerate the effect of any increase or decrease in the value of our net assets. Under the provisions of the 1940 Act, following approval from our initial stockholder of the reduced asset coverage requirements under Section 61(a)(2) of the 1940 Act, which approval became effective on September 13, 2023, we are currently permitted to issue “senior securities” only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after each issuance of senior securities. For purposes of the 1940 Act, “asset coverage” means the ratio of (1) the total assets of a BDC, less all liabilities and indebtedness not represented by senior securities, to (2) the aggregate amount of senior securities representing indebtedness (plus, in the case of senior securities represented by preferred stock, the aggregate involuntary liquidation preference of such BDC’s preferred stock). Under the 1940 Act, any preferred stock we may issue will constitute a “senior security” for purposes of the 150% asset coverage test. In addition, while any senior securities remain outstanding, we will be required to make provisions to prohibit any dividend distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the dividend distribution or repurchase.
In connection with borrowings, our lenders may require us to pledge assets, investor commitments to fund capital calls and/or the proceeds of those capital calls, thereby allowing the lender to call for capital contributions upon the occurrence of an event of default under such financing arrangement. In addition, the lenders may ask us to comply with positive or negative covenants that could have an effect on our operations.
The use of leverage also involves significant risks. Certain trading practices and transactions, which may include, among others, reverse repurchase agreements and the use of when-issued, delayed delivery or forward commitment transactions, may be considered to be borrowings or involve leverage and thus are also subject to 1940 Act restrictions. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered to be borrowings for these purposes. Practices and investments that may involve leverage but are not considered to be borrowings are not subject to the asset coverage requirement. These investments may include certain investments or instruments that have embedded leverage, which may increase the risk of loss from such investments, but are not considered to be borrowings.
The amount of leverage that we employ will depend on our Adviser’s and the Board’s assessment of market conditions and other factors at the time of any proposed borrowing, and there can be no assurance that we will use leverage or that our leveraging strategy will be successful during any period in which it is employed.
Equity Activity
The Company has the authority to issue 1,000,000 shares of Common Stock at a $0.001 per share par value. Additionally, the Company has the authority to issue 15,000 shares of preferred stock at a $0.001 per share par value.
During the three months ended March 31, 2024, the Company issued 72,000 shares of common stock.
In conjunction with the Company’s formation, the Company issued and sold one share of Common Stock to Muzinich & Co., Inc., an affiliate of the Adviser, for an aggregate purchase price of $1,000. The share of Common Stock was issued and sold in reliance upon the available exemptions from registration requirements of Section 4(a)(2) of the Securities Act.
Contractual Obligations
We have entered into certain contracts under which we have material future commitments. We have entered into the Investment Advisory Agreement with the Adviser under which the Adviser determines the securities and other assets that the Company will purchase, retain or sell; determines the composition of the portfolio of the Company, the nature and timing of the changes therein and the manner of implementing such changes; identifies, evaluates and negotiates investments made by the Company and/or the structure thereof (including without limitation performing due diligence with respect to any instrument and/or company in which the Company may invest); buys, sells, exchanges, redeems holds, converts or otherwise deals with and/or executes transactions with respect to, any kind of security or other property in which the Company may invest; services and monitors the Company’s investments, including without limitation by exercising or refraining from exercising any right conveyed by a particular investment to buy, sell, subscribe for, exchange or redeem an investment; exercises or refrains from exercising any governance or ownership right conferred by a particular investment; enters into any foreign exchange and/or derivative transactions; and provides the Company with such other investment advisory, research and related services as the Company may, from time to time, reasonably require for the investment of its funds and/or which the Adviser reasonably considers to be necessary, desirable or incidental to carrying out the services under the Investment Advisory Agreement. Under the Investment Advisory Agreement, the Company pays the Adviser fees for investment management services consisting of a Base Management Fee and Incentive Fees. The Incentive Fees consist of two components that are independent of each other, with the result that one component may be payable even if the other is not. A portion of the incentive fee is based on a percentage of our income and a portion is based on a percentage of our capital gains.
Pursuant to the Administration Agreement, the Administrator will provide the administrative and recordkeeping services necessary for us to operate. In addition, we have entered into a fund accounting servicing agreement with U.S. Bank, pursuant to which U.S. Bank will provide accounting services with respect to the Company.
Off-Balance Sheet Arrangements
We may become a party to financial instruments with off-balance sheet risk in the normal course of our business to meet the financial needs of our portfolio companies. These instruments may include commitments to extend credit and involve, to varying degrees, elements of liquidity and credit risk in excess of the amount recognized in the balance sheet. As of March 31, 2024, we had no off-balance sheet arrangements.
Discretionary Repurchase Program
We do not intend to list our Common Stock on a securities exchange and we do not expect there to be a public market for our Common Stock. As a result, if you purchase our Common Stock, your ability to sell your shares of Common Stock will be limited.
Beginning in the first full calendar quarter following the second anniversary of the Initial Closing Date, and subject to market conditions and the discretion of the Board, we intend to commence a discretionary share repurchase program in which we intend to offer to repurchase, in each quarter, up to 5% of the Company’s Common Stock outstanding (either by number of shares or aggregate NAV), as determined by the Board in its discretion, as of the close of the previous calendar quarter. Our Directors may amend or suspend the share repurchase program at any time if in its reasonable judgment it deems such action to be in our best interest and/or the best interest of our stockholders. As a result, share repurchases may not be available each quarter, such as when a repurchase offer would place an undue burden on our liquidity, adversely affect our operations or risk having an adverse impact on the Company that would outweigh the benefit of the repurchase offer. We intend to conduct such repurchase offers in accordance with the requirements of Rule 13e-4 promulgated under the Exchange Act and the 1940 Act. All shares of Common Stock purchased by us pursuant to the terms of each tender offer will be retired and thereafter will be authorized and unissued shares of Common Stock. See the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for more information regarding the Company’s discretionary repurchase program.
We did not repurchase any Common Stock during the three months ended March 31, 2024.
Critical Accounting Policies
Valuation of Portfolio Securities
The NAV per share of the Company’s outstanding Common Stock is determined quarterly by dividing the fair value of total assets minus liabilities by the total number of shares of Common Stock outstanding. There is no guarantee that the NAV per share will be equal to the offering price of the Company’s Common Stock at any Closing, as the Company reserves the right to issue shares of Common Stock at a price above the then-calculated NAV per share to allocate initial organizational and offering expenses to newly admitted stockholders at any Subsequent Closing.
The Company will value its investments in accordance with the valuation policies and procedures approved by the Board (“Valuation Policy”). In accordance with Rule 2a-5 under the 1940 Act, the Board has designated the Adviser as the Company’s “Valuation Designee”. A readily available market quotation is not expected to exist for most of the investments in the Company’s portfolio, and the Company will value these portfolio investments at fair value as determined in good faith by the Valuation Designee, subject to oversight by the Board, as set forth below:
| 1. | Our valuation process begins with each portfolio company or investment being initially valued by the investment professionals of our Adviser responsible for the portfolio investment and the “Portfolio Committee” of the Adviser; |
| 2. | Preliminary valuation conclusions are then documented and discussed with the Company’s senior management and that of our Adviser; |
| 3. | At least once annually, the valuation for each portfolio investment will be reviewed by an independent valuation firm; |
| 4. | In following these approaches, the types of factors that are taken into account in fair value pricing investments include, as relevant, but are not limited to: comparison to publicly-traded securities, including such factors as yield, maturity and measures of credit quality; the enterprise value of a portfolio company; the nature and realizable value of any collateral; the portfolio company’s ability to make payments and its earning and discounted cash flow; and the markets in which the portfolio company does business; |
| 5. | The Audit Committee of our Board reviews the valuations of the Adviser on a quarterly basis; and |
| 6. | Our Board oversees the Company’s valuation process and in support of this oversight the Adviser provides periodic reports to the Board on valuation matters. |
Fair value, as defined under Topic 820 of the Financial Accounting Standards Board’s Accounting Standards Codification, as amended (“ASC 820”), is the price that we would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment or liability. ASC 820 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing an asset or liability based on market data obtained from sources independent of our Adviser. Unobservable inputs reflect the assumptions market participants would use in pricing an asset or liability based on the best information available to us at the reporting period date.
Security Transactions, Realized/Unrealized Gains or Losses and Appreciation or Depreciation, and Income Recognition
Security transactions are recorded on a trade-date basis. We will measure realized gains or losses from the repayment or sale of investments using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. We will report changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in our statements of operations.
Dividends
We intend to pay quarterly distributions to our stockholders out of assets legally available for distribution. All dividends and distributions will be subject to lawfully available funds therefor, and no assurance can be given that we will be able to declare such an initial distribution or distributions in future periods.
We intend to elect to be treated, and intend to qualify annually, to be subject to tax as a RIC under Subchapter M of the Code. To obtain and maintain our ability to be subject to tax as a RIC, we must, among other things, timely distribute to our stockholders at least 90% of our investment company taxable income for each taxable year. We intend to timely distribute to our stockholders substantially all of our annual taxable income for each taxable year, except that we may retain certain net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) for reinvestment and, depending upon the level of taxable income earned in a taxable year, we may choose to carry forward taxable income for distribution in the following taxable year and pay any applicable U.S. federal excise tax. We generally will be required to pay such U.S. federal excise tax if our distributions in respect of a calendar year do not exceed the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gains in excess of capital losses (adjusted for certain ordinary losses) for the one-year period ending on October 31 of the calendar year and (3) any net ordinary income and capital gains in excess of capital losses for preceding calendar years that were not distributed during such calendar years and on which we did not pay any U.S. federal income tax. If we retain net capital gains, we may treat such amounts as deemed distributions to our stockholders. In that case, you will be treated as if you had received an actual distribution of the capital gains we retained and then you reinvested the net after-tax proceeds in our Common Stock. In general, you also will be eligible to claim a tax credit (or, in certain circumstances, obtain a tax refund) equal to your allocable share of the tax we paid on the capital gains deemed distributed to you. The distributions we pay to our stockholders in a taxable year may exceed our taxable income for that taxable year and, accordingly, a portion of such distributions may constitute a return of capital for U.S. federal income tax purposes. The specific tax characteristics of our distributions will be reported to stockholders after the end of the calendar year. Please refer to “Certain U.S. Federal Income Tax Consequences” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for further information regarding the tax treatment of our distributions and the tax consequences of our retention of net capital gains.
In addition, we have adopted a distribution reinvestment plan (“DRP”), pursuant to which we will reinvest all cash dividends and other distributions declared by the Board on behalf of our stockholders who do not elect to receive their dividends or other distributions in cash as provided below. As a result, if the Board authorizes, and we declare, a cash dividend or other distribution, then our stockholders who have not opted out of our DRP will have their cash dividends or other distributions automatically reinvested in additional shares of Common Stock as described below, rather than receiving the cash dividend or other distribution.
No action is required on the part of a registered stockholder to have his, her or its cash dividend or other distribution reinvested in our shares of Common Stock. Stockholders can elect to “opt out” of the Company’s DRP in their Subscription Agreement.
If any stockholder initially elects not to participate, they may later become a participant by subsequently completing and executing an enrollment form or any distribution authorization form as may be available from the Company or any plan administrator appointed by the Company (the “Plan Administrator”). Participation in the DRP will begin with the next distribution payable after acceptance of a participant’s subscription, enrollment or authorization. Shares of Common Stock will be purchased under the DRP as of the first calendar day of the quarter following the record date of the distribution (“Purchase Date”).
If a stockholder seeks to terminate its participation in the DRP, notice of termination must be received by the Fund or the Plan Administrator five business days in advance of the first calendar day of the next quarter in order for a stockholder’s termination to be effective for such quarter. Any transfer of shares of Common Stock by a participant to a non-participant will terminate participation in the DRP with respect to the transferred shares. If a participant elects to tender its shares of Common Stock in full, any shares of Common Stock issued to the participant under the DRP subsequent to the expiration of the tender offer will be considered part of the participant’s prior tender, and participant’s participation in the DRP will be terminated as of the valuation date of the applicable tender offer. Any distributions to be paid to such stockholder on or after such date will be paid in cash on the scheduled distribution payment date.
If a stockholder elects to opt out of the DRP, it will receive any cash dividends or other distributions we declare in cash. We may pay any Plan Administrator fees under the DRP.
The purchase price for shares of Common Stock purchased under our DRP will be determined using a purchase price as determined as of the Purchase Date. Shares of Common Stock issued pursuant to our DRP will have the same voting rights as the shares of Common Stock offered pursuant to the Private Offerings.
Security Transactions, Realized/Unrealized Gains or Losses and Appreciation or Depreciation, and Income Recognition.
Security transactions are recorded on a trade-date basis. We will measure realized gains or losses from the repayment or sale of investments using the specific identification method. The amortized cost basis of investments represents the original cost adjusted for the accretion/amortization of discounts and premiums and upfront loan origination fees. We will report changes in fair value of investments that are measured at fair value as a component of net change in unrealized appreciation (depreciation) on investments in our statements of operations.
Compensation of Adviser
Under the Investment Advisory Agreement, the Company pays the Adviser fees for investment management services consisting of the Base Management Fee and the Incentive Fee. For the fiscal period ended March 31, 2024, the Company did not incur Base Management Fees or Incentive Fees. The Base Management Fee and Incentive Fee for any partial quarter will be appropriately prorated.
Base Management Fee
The Base Management Fee is payable quarterly in arrear at an annual rate of 1.25% of the value of our net assets as of the beginning of the first calendar day of the applicable quarter. For purposes of the Investment Advisory Agreement, net assets means our total assets less liabilities determined on a consolidated basis in accordance with U.S. GAAP.
Incentive Fee
The Incentive Fee consists of two components that are independent of each other, with the result that one component may be payable even if the other is not. A portion of the incentive fee is based on a percentage of our income and a portion is based on a percentage of our capital gains, each as described below.
Incentive Fee Based on Income
The portion based on our income is based on Pre-Incentive Fee Net Investment Income Returns. “Pre-Incentive Fee Net Investment Income Returns” means, as the context requires, either the dollar value of, or percentage rate of return on the value of our net assets at the end of the immediate preceding quarter from, interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses accrued for the quarter (including the Base Management Fee, fees and expenses payable under the Administration Agreement entered into between us and the Administrator, and any interest expense or fees on any credit facilities or outstanding debt and dividends paid on any issued and outstanding preferred shares, but excluding the Incentive Fee).
Pre-Incentive Fee Net Investment Income Returns include, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with PIK interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-Incentive Fee Net Investment Income Returns do not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation.
Pre-Incentive Fee Net Investment Income Returns, expressed as a rate of return on the value of our net assets at the end of the immediate preceding quarter, is compared to a “hurdle rate” of return of 1.75% per quarter (7% annualized).
We will pay the Adviser an Incentive Fee quarterly in arrear with respect to our Pre-Incentive Fee Net Investment Income Returns in each calendar quarter as follows:
| ● | No incentive fee based on Pre-Incentive Fee Net Investment Income Returns in any calendar quarter in which our Pre-Incentive Fee Net Investment Income Returns do not exceed the hurdle rate of 1.75% per quarter (7% annualized); |
| ● | 100% of the dollar amount of Pre-Incentive Fee Net Investment Income Returns with respect to that portion of such Pre-Incentive Fee Net Investment Income Returns, if any, that exceeds the hurdle rate until the Adviser has received 12.5% of the total Pre-Incentive Fee Net Investment Income Returns for that calendar quarter (the Company refers to this portion of the Pre-Incentive Fee Net Investment Income Returns (which exceeds the hurdle rate) as the “catch-up”); and |
| ● | 12.5% of the dollar amount of all Pre-Incentive Fee Net Investment Income Returns, if any, once the Adviser has received the full catch-up. |
Incentive Fee Based on Capital Gains
The second component of the Incentive Fee, the Incentive Fee on based capital gains, is payable at the end of each calendar year in arrears. The amount payable equals:
| ● | 12.5% of cumulative realized capital gains from inception through the end of such calendar, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid Incentive Fee based on capital gains as calculated in accordance with U.S. GAAP. |
Each year, the fee paid for the Incentive Fee based on capital gains is net of the aggregate amount of any previously paid Incentive Fee based on capital gains for all prior periods. We will accrue, but will not pay, an Incentive Fee based on capital gains with respect to unrealized appreciation because an Incentive Fee based on capital gains would be owed to the Adviser if we were to sell the relevant investment and realize a capital gain.
For the three months ended March 31, 2024, the Company did not incur Incentive Fees.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates. To the extent that we borrow money to make investments, our net investment income will be dependent upon the difference between the rate at which we borrow funds and the rate at which we invest these funds. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to the variable rate investments we may hold and to declines in the value of any fixed rate investments we may hold. A rise in interest rates would also be expected to lead to higher cost on any outstanding floating rate borrowings, which may reduce our net investment income.
We intend to invest primarily in illiquid debt and equity securities of private companies. Most of our investments will not have a readily available market price, and we will value these investments at fair value as determined in good faith by the Adviser, overseen by the Board, in accordance with our Valuation Policy. There is no single standard for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments we make. 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 our 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.
Because we expect that most of our investments will bear interest at floating rates, we anticipate that an increase in interest rates would have a corresponding increase in our interest income that would likely offset any increase in our cost of funds and, thus, net investment income would not be reduced. However, there can be no assurance that a significant change in market interest rates will not have an adverse effect on our net investment income.
We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations.
In addition, any investments we make that are denominated in a foreign currency will be subject to risks associated with changes in currency exchange rates. These risks include the possibility of significant fluctuations in the foreign currency markets, the imposition or modification of foreign exchange controls and potential illiquidity in the secondary market. These risks will vary depending upon the currency or currencies involved.
Interest Rate Risk
Based on our Statement of Assets and Liabilities as of March 31, 2024, the following table shows the annualized impact on net investment income of hypothetical base rate changes in interest rates (considering interest rate floors and ceilings for floating rate instruments assuming no changes in our investment and borrowing structure) in thousands.
Basis Point Change | | | Interest Income | | | | Interest Expense | | | | Net Income | |
-25 Basis Points | | $ | - | | | $ | - | | | $ | - | |
Base Interest Rate | | | - | | | | - | | | | - | |
+100 Basis Points | | | - | | | | - | | | | - | |
+200 Basis Points | | | - | | | | - | | | | - | |
+300 Basis Points | | | - | | | | - | | | | - | |
This analysis is indicative of the potential impact on our investment income as of March 31, 2024, assuming an immediate and sustained change in interest rates as noted. In addition, this analysis does not adjust for potential changes in our portfolio after March 31, 2024 nor does it take into account any changes in the credit performance of our loans that might occur should interest rates change.
For the three months ended March 31, 2024, there were no floating rate loans held.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
As of March 31, 2024 (the end of the period covered by this report), our management, including our Chief Executive Officer 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 Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act 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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
(b) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Neither we nor the Adviser are currently subject to any material legal proceedings, nor, to our knowledge, are any material legal proceedings threatened against us or the Adviser. From time to time, we or the Adviser may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. Our business is also subject to extensive regulation, which may result in regulatory proceedings against us. While the outcome of these legal or regulatory proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
Item 1A. Risk Factors
You should carefully consider the risks referenced below and all other information contained in this Quarterly Report on Form 10-Q, including our interim financial statements and the related notes thereto, before making a decision to purchase our securities. Any such risks and uncertainties are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and/or operating results, as well as the value of our securities.
In addition to the other information set forth in this report, you should carefully consider the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 (filed with the SEC on March 29, 2024), which could materially affect our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Sales of Unregistered Equity Securities
Except as previously reported by the Company on its current reports on Form 8-K, the Company did not sell any securities during the period covered by this Quarterly Report on Form 10-Q that were not registered under the Securities Act.
Issuer Purchases of Equity Securities
We did not repurchase any of our equity securities during the three months ended March 31, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosure
Not applicable.
Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended March 31, 2024, none of our directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of our securities to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC:
(1) | Previously filed as an exhibit to Amendment No. 1 to the Registrant’s Registration Statement on Form 10 (File No. 000-56572) filed with the SEC on September 15, 2023. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Muzinich Corporate Lending Income Fund, Inc. |
| | | |
Date: May 14, 2024 | By: | /s/ Jeffrey Youle |
| | Name: | Jeffrey Youle |
| | Title: | Chief Executive Officer |
Date: May 14, 2024 | By: | /s/ Paul Fehre |
| | Name: | Paul Fehre |
| | Title: | Chief Financial Officer |
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