UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 814-00866
MONROE CAPITAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Maryland | 27-4895840 |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
311 South Wacker Drive, Suite 6400 Chicago, Illinois |
60606 |
(Address of Principal Executive Office) | (Zip Code) |
(312) 258-8300
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x 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 | x |
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 x
As of November 5, 2018, the registrant had 20,444,564 shares of common stock, $0.001 par value, outstanding.
TABLE OF CONTENTS
2 |
Item 1. Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except per share data)
September 30, 2018 | December 31, 2017 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Investments, at fair value: | ||||||||
Non-controlled/non-affiliate company investments | $ | 399,792 | $ | 425,747 | ||||
Non-controlled affiliate company investments | 56,183 | 58,751 | ||||||
Controlled affiliate company investments | 26,318 | 9,640 | ||||||
Total investments, at fair value (amortized cost of: $510,102 and $507,580, respectively) | 482,293 | 494,138 | ||||||
Cash | 3,969 | 4,332 | ||||||
Restricted cash | 5,938 | 2,867 | ||||||
Interest receivable | 6,382 | 5,335 | ||||||
Other assets | 492 | 760 | ||||||
Total assets | 499,074 | 507,432 | ||||||
LIABILITIES | ||||||||
Debt: | ||||||||
Revolving credit facility | 51,536 | 117,092 | ||||||
2023 Notes | 69,000 | - | ||||||
SBA debentures payable | 115,000 | 109,520 | ||||||
Total debt | 235,536 | 226,612 | ||||||
Less: Unamortized deferred financing costs | (6,721 | ) | (4,670 | ) | ||||
Total debt, less unamortized deferred financing costs | 228,815 | 221,942 | ||||||
Interest payable | 766 | 1,535 | ||||||
Unrealized loss on foreign currency forward contracts | 58 | - | ||||||
Management fees payable | 2,196 | 2,064 | ||||||
Incentive fees payable | - | 1,157 | ||||||
Accounts payable and accrued expenses | 2,450 | 2,035 | ||||||
Directors’ fees payable | 37 | - | ||||||
Total liabilities | 234,322 | 228,733 | ||||||
Net assets | $ | 264,752 | $ | 278,699 | ||||
Commitments and contingencies (See Note 11) | ||||||||
ANALYSIS OF NET ASSETS | ||||||||
Common stock, $0.001 par value, 100,000 shares authorized, 20,445 and 20,240 shares issued and outstanding, respectively | $ | 20 | $ | 20 | ||||
Capital in excess of par value | 288,844 | 286,141 | ||||||
Undistributed net investment income (accumulated distributions in excess of net investment income) | 9,477 | 6,707 | ||||||
Accumulated net realized gain (loss) | (5,980 | ) | (372 | ) | ||||
Accumulated net unrealized gain (loss) | (27,609 | ) | (13,797 | ) | ||||
Total net assets | $ | 264,752 | $ | 278,699 | ||||
Net asset value per share | $ | 12.95 | $ | 13.77 |
See Notes to Consolidated Financial Statements.
3 |
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Investment income: | ||||||||||||||||
Interest income: | ||||||||||||||||
Non-controlled/non-affiliate company investments | $ | 10,938 | $ | 10,887 | $ | 34,689 | $ | 30,995 | ||||||||
Non-controlled affiliate company investments | 1,815 | 1,470 | 5,394 | 3,777 | ||||||||||||
Controlled affiliate company investments | - | 200 | - | 594 | ||||||||||||
Total interest income | 12,753 | 12,557 | 40,083 | 35,366 | ||||||||||||
Dividend income: | ||||||||||||||||
Non-controlled/non-affiliate company investments | 288 | 251 | 813 | 751 | ||||||||||||
Controlled affiliate company investments | 550 | - | 1,075 | - | ||||||||||||
Total dividend income | 838 | 251 | 1,888 | 751 | ||||||||||||
Fee income: | ||||||||||||||||
Non-controlled/non-affiliate company investments | 188 | 661 | 1,495 | 1,626 | ||||||||||||
Non-controlled affiliate company investments | - | - | 83 | - | ||||||||||||
Total fee income | 188 | 661 | 1,578 | 1,626 | ||||||||||||
Total investment income | 13,779 | 13,469 | 43,549 | 37,743 | ||||||||||||
Operating expenses: | ||||||||||||||||
Interest and other debt financing expenses | 2,895 | 1,907 | 8,437 | 6,101 | ||||||||||||
Base management fees | 2,196 | 1,953 | 6,561 | 5,661 | ||||||||||||
Incentive fees | - | 1,721 | 1,751 | 4,471 | ||||||||||||
Professional fees | 260 | 277 | 869 | 854 | ||||||||||||
Administrative service fees | 327 | 295 | 973 | 926 | ||||||||||||
General and administrative expenses | 338 | 292 | 739 | 760 | ||||||||||||
Excise taxes | - | 100 | 11 | 100 | ||||||||||||
Directors’ fees | 37 | 37 | 111 | 111 | ||||||||||||
Expenses before incentive fee waiver | 6,053 | 6,582 | 19,452 | 18,984 | ||||||||||||
Incentive fee waiver | - | - | - | (250 | ) | |||||||||||
Total expenses, net of incentive fee waiver | 6,053 | 6,582 | 19,452 | 18,734 | ||||||||||||
Net investment income | 7,726 | 6,887 | 24,097 | 19,009 | ||||||||||||
Net gain (loss): | ||||||||||||||||
Net realized gain (loss): | ||||||||||||||||
Non-controlled/non-affiliate company investments | (1,414 | ) | (2,900 | ) | (1,414 | ) | (572 | ) | ||||||||
Non-controlled affiliate company investments | (4,186 | ) | - | (4,186 | ) | - | ||||||||||
Secured borrowings | - | - | - | 66 | ||||||||||||
Foreign currency and other transactions | (11 | ) | - | (8 | ) | - | ||||||||||
Net realized gain (loss) | (5,611 | ) | (2,900 | ) | (5,608 | ) | (506 | ) | ||||||||
Net change in unrealized gain (loss): | ||||||||||||||||
Non-controlled/non-affiliate company investments | (5,981 | ) | 3,099 | (6,661 | ) | 3,788 | ||||||||||
Non-controlled affiliate company investments | 2,396 | 454 | (8,684 | ) | (8,902 | ) | ||||||||||
Controlled affiliate company investments | 275 | (1,155 | ) | 978 | (3,389 | ) | ||||||||||
Secured borrowings | - | - | - | (6 | ) | |||||||||||
Foreign currency and other transactions | 202 | (67 | ) | 555 | (83 | ) | ||||||||||
Net change in unrealized gain (loss) | (3,108 | ) | 2,331 | (13,812 | ) | (8,592 | ) | |||||||||
Net gain (loss) | (8,719 | ) | (569 | ) | (19,420 | ) | (9,098 | ) | ||||||||
Net increase (decrease) in net assets resulting from operations | $ | (993 | ) | $ | 6,318 | $ | 4,677 | $ | 9,911 | |||||||
Per common share data: | ||||||||||||||||
Net investment income per share - basic and diluted | $ | 0.38 | $ | 0.34 | $ | 1.19 | $ | 1.05 | ||||||||
Net increase (decrease) in net assets resulting from operations per share - basic and diluted | $ | (0.05 | ) | $ | 0.31 | $ | 0.23 | $ | 0.55 | |||||||
Weighted average common shares outstanding - basic and diluted | 20,417 | 20,240 | 20,301 | 18,081 |
See Notes to Consolidated Financial Statements.
4 |
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
(in thousands)
Common Stock | Capital in | Undistributed net | Accumulated net | Accumulated net | ||||||||||||||||||||||||
Number of shares | Par
value | excess of par value | investment income | realized gain (loss) | unrealized gain (loss) | Total net assets | ||||||||||||||||||||||
Balances at June 30, 2017 | 20,240 | $ | 20 | $ | 286,269 | $ | 6,869 | $ | 2,390 | $ | (11,240 | ) | $ | 284,308 | ||||||||||||||
Net increase (decrease) in net assets resulting from operations | - | - | - | 6,887 | (2,900 | ) | 2,331 | 6,318 | ||||||||||||||||||||
Issuance of common stock, net of offering and underwriting costs | - | - | - | - | - | - | - | |||||||||||||||||||||
Distributions to stockholders | - | - | - | (7,084 | ) | - | - | (7,084 | ) | |||||||||||||||||||
Balances at September 30, 2017 | 20,240 | $ | 20 | $ | 286,269 | $ | 6,672 | $ | (510 | ) | $ | (8,909 | ) | $ | 283,542 | |||||||||||||
Balances at June 30, 2018 | 20,279 | $ | 20 | $ | 286,651 | $ | 8,907 | $ | (369 | ) | $ | (24,501 | ) | $ | 270,708 | |||||||||||||
Net increase (decrease) in net assets resulting from operations | - | - | - | 7,726 | (5,611 | ) | (3,108 | ) | (993 | ) | ||||||||||||||||||
Issuance of common stock, net of offering and underwriting costs | 166 | - | 2,193 | - | - | - | 2,193 | |||||||||||||||||||||
Distributions to stockholders | - | - | - | (7,156 | ) | - | - | (7,156 | ) | |||||||||||||||||||
Balances at September 30, 2018 | 20,445 | $ | 20 | $ | 288,844 | $ | 9,477 | $ | (5,980 | ) | $ | (27,609 | ) | $ | 264,752 |
Common Stock | Capital in | Undistributed net | Accumulated net | Accumulated net | ||||||||||||||||||||||||
Number of shares | Par value | excess of par value | investment income | realized gain (loss) | unrealized gain (loss) | Total net assets | ||||||||||||||||||||||
Balances at December 31, 2016 | 16,582 | $ | 17 | $ | 233,526 | $ | 7,037 | $ | 587 | $ | (317 | ) | $ | 240,850 | ||||||||||||||
Net increase (decrease) in net assets resulting from operations | - | - | - | 19,009 | (506 | ) | (8,592 | ) | 9,911 | |||||||||||||||||||
Issuance of common stock, net of offering and underwriting costs | 3,624 | 3 | 52,218 | - | - | - | 52,221 | |||||||||||||||||||||
Distributions to stockholders | 34 | - | 525 | (19,374 | ) | (591 | ) | - | (19,440 | ) | ||||||||||||||||||
Balances at September 30, 2017 | 20,240 | $ | 20 | $ | 286,269 | $ | 6,672 | $ | (510 | ) | $ | (8,909 | ) | $ | 283,542 | |||||||||||||
Balances at December 31, 2017 | 20,240 | $ | 20 | $ | 286,141 | $ | 6,707 | $ | (372 | ) | $ | (13,797 | ) | $ | 278,699 | |||||||||||||
Net increase (decrease) in net assets resulting from operations | - | - | - | 24,097 | (5,608 | ) | (13,812 | ) | 4,677 | |||||||||||||||||||
Issuance of common stock, net of offering and underwriting costs | 183 | - | 2,402 | - | - | - | 2,402 | |||||||||||||||||||||
Distributions to stockholders | 22 | - | 301 | (21,327 | ) | - | - | (21,026 | ) | |||||||||||||||||||
Balances at September 30, 2018 | 20,445 | $ | 20 | $ | 288,844 | $ | 9,477 | $ | (5,980 | ) | $ | (27,609 | ) | $ | 264,752 |
See Notes to Consolidated Financial Statements.
5 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net increase (decrease) in net assets resulting from operations | $ | 4,677 | $ | 9,911 | ||||
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 (gain) loss on investments | 14,367 | 8,503 | ||||||
Net change in unrealized (gain) loss on secured borrowings | - | 6 | ||||||
Net change in unrealized (gain) loss on foreign currency and other transactions | (555 | ) | 83 | |||||
Net realized (gain) loss on investments | 5,600 | 572 | ||||||
Net realized (gain) loss on secured borrowings | - | (66 | ) | |||||
Net realized (gain) loss on foreign currency and other transactions | 8 | - | ||||||
Payment-in-kind interest income | (1,389 | ) | (1,363 | ) | ||||
Payment-in-kind dividend income | (792 | ) | - | |||||
Net accretion of discounts and amortization of premiums | (1,837 | ) | (1,278 | ) | ||||
Proceeds from principal payments and sales of investments | 120,840 | 144,445 | ||||||
Purchases of investments | (124,944 | ) | (169,056 | ) | ||||
Amortization of deferred financing costs | 951 | 760 | ||||||
Changes in operating assets and liabilities: | ||||||||
Interest receivable | (1,047 | ) | (1,577 | ) | ||||
Other assets | 268 | 116 | ||||||
Payable for open trades | - | 7,425 | ||||||
Interest payable | (769 | ) | (194 | ) | ||||
Management fees payable | 132 | 204 | ||||||
Incentive fees payable | (1,157 | ) | 499 | |||||
Directors’ fees payable | 37 | 37 | ||||||
Accounts payable and accrued expenses | 415 | (265 | ) | |||||
Net cash provided by (used in) operating activities | 14,805 | (1,238 | ) | |||||
Cash flows from financing activities: | ||||||||
Borrowings on revolving credit facility | 86,107 | 93,529 | ||||||
Repayments of revolving credit facility | (151,050 | ) | (162,000 | ) | ||||
Proceeds from 2023 Notes | 69,000 | - | ||||||
SBA debentures borrowings | 5,480 | 40,600 | ||||||
Payments of deferred financing costs | (3,002 | ) | (1,339 | ) | ||||
Repayments on secured borrowings | - | (1,254 | ) | |||||
Proceeds from shares sold, net of offering and underwriting costs | 2,402 | 52,221 | ||||||
Stockholder distributions paid, net of stock issued under the dividend reinvestment plan of $301, and $525, respectively | (21,026 | ) | (19,440 | ) | ||||
Net cash provided by (used in) financing activities | (12,089 | ) | 2,317 | |||||
Net increase (decrease) in Cash and Restricted Cash | 2,716 | 1,079 | ||||||
Effect of foreign currency exchange rates | (8 | ) | - | |||||
Cash and Restricted Cash, beginning of period (1) | 7,199 | 8,331 | ||||||
Cash and Restricted Cash, end of period (2) | $ | 9,907 | $ | 9,410 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash interest paid during the period | $ | 8,197 | $ | 5,405 | ||||
Cash paid for excise taxes during the period | $ | 91 | $ | 495 |
(1) | Represents cash and restricted cash of $4,332 and $2,867, respectively, from the consolidated statement of assets and liabilities as of December 31, 2017. Represents cash and restricted cash of $5,958 and $2,373, respectively, from the consolidated statement of assets and liabilities as of December 31, 2016. |
(2) | Represents cash and restricted cash of $3,969 and $5,938, respectively, from the consolidated statement of assets and liabilities as of September 30, 2018. Represents cash and restricted cash of $3,721 and $5,689, respectively, from the consolidated statement of assets and liabilities as of September 30, 2017. |
See Notes to Consolidated Financial Statements.
6 |
CONSOLIDATED SCHEDULE OF INVESTMENTS
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Non-Controlled/Non-Affiliate Company Investments | ||||||||||||||||||||||||
Senior Secured Loans | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
Echelon Funding I, LLC (Delayed Draw) (e) (f) (g) | L+7.50% | 9.60% | 2/24/2021 | 15,750 | $ | 15,221 | $ | 15,412 | 5.8 | % | ||||||||||||||
HFZ Capital Group, LLC (e) | L+10.17% | 12.34% Cash/ 0.17% PIK | (h) | 10/21/2019 | 18,000 | 17,766 | 18,000 | 6.8 | % | |||||||||||||||
Liftforward SPV II, LLC (e) (f) | L+10.75% | 12.99% | 11/10/2020 | 10,000 | 4,210 | 4,264 | 1.6 | % | ||||||||||||||||
PKS Holdings, LLC (e) | L+9.50% | 11.60% | 11/30/2022 | 1,766 | 1,614 | 1,695 | 0.7 | % | ||||||||||||||||
PKS Holdings, LLC (Revolver) (e) (f) | L+9.50% | 11.60% | 11/30/2022 | 80 | — | — | 0.0 | % | ||||||||||||||||
45,596 | 38,811 | 39,371 | 14.9 | % | ||||||||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||||||||||
All Holding Company, LLC (i) | L+7.00% | 9.24% | 11/15/2021 | 5,225 | 5,157 | 5,081 | 1.9 | % | ||||||||||||||||
California Pizza Kitchen, Inc. | L+6.00% | 8.39% | 8/23/2022 | 6,860 | 6,806 | 6,689 | 2.5 | % | ||||||||||||||||
12,085 | 11,963 | 11,770 | 4.4 | % | ||||||||||||||||||||
Capital Equipment | ||||||||||||||||||||||||
Hastings Manufacturing Company | L+8.25% | 10.49% | 4/24/2023 | 2,963 | 2,906 | 2,970 | 1.1 | % | ||||||||||||||||
Hastings Manufacturing Company (Delayed Draw) (f) (g) | L+8.25% | 10.49% | 4/24/2023 | 899 | — | — | 0.0 | % | ||||||||||||||||
3,862 | 2,906 | 2,970 | 1.1 | % | ||||||||||||||||||||
Chemicals, Plastics & Rubber | ||||||||||||||||||||||||
Midwest Composite Technologies, LLC | L+6.75% | 8.99% | 8/31/2023 | 900 | 882 | 900 | 0.3 | % | ||||||||||||||||
Midwest Composite Technologies, LLC (Delayed Draw) (f) (g) | L+6.75% | 8.99% | 8/31/2023 | 600 | — | — | 0.0 | % | ||||||||||||||||
Midwest Composite Technologies, LLC (Revolver) (f) | L+6.75% | 8.99% | 8/31/2023 | 90 | — | — | 0.0 | % | ||||||||||||||||
Valudor Products LLC | L+7.50% | 9.74% | 6/19/2023 | 1,614 | 1,583 | 1,610 | 0.6 | % | ||||||||||||||||
Valudor Products LLC (j) | L+7.50% | 9.74% | 6/19/2023 | 211 | 205 | 222 | 0.1 | % | ||||||||||||||||
Valudor Products LLC (Revolver) (f) | L+9.50% | 11.74% | 6/19/2023 | 818 | 699 | 700 | 0.3 | % | ||||||||||||||||
4,233 | 3,369 | 3,432 | 1.3 | % | ||||||||||||||||||||
Construction & Building | ||||||||||||||||||||||||
Cali Bamboo, LLC | L+6.25% | 8.49% | 7/10/2020 | 5,278 | 5,238 | 5,278 | 2.0 | % | ||||||||||||||||
Cali Bamboo, LLC (Revolver) (f) | L+6.25% | 8.49% | 7/10/2020 | 2,165 | 1,515 | 1,515 | 0.6 | % | ||||||||||||||||
Cornerstone Detention Products, Inc. (k) | L+11.83% | 10.74% Cash/ 3.33% PIK | (l) | 4/8/2019 | 3,392 | 3,384 | 3,392 | 1.3 | % | |||||||||||||||
Cornerstone Detention Products, Inc. (Revolver) (f) | L+8.50% | 10.74% | 4/8/2019 | 1,000 | 200 | 200 | 0.1 | % | ||||||||||||||||
TRP Construction Group, LLC (i) | L+6.50% | 8.74% | 10/5/2022 | 7,960 | 7,827 | 7,964 | 3.0 | % | ||||||||||||||||
TRP Construction Group, LLC (Delayed Draw) (f) (g) | L+6.50% | 8.74% | 10/5/2022 | 7,000 | 5,684 | 5,687 | 2.1 | % | ||||||||||||||||
TRP Construction Group, LLC (Revolver) (f) | L+6.50% | 8.74% | 10/5/2022 | 2,133 | — | — | 0.0 | % | ||||||||||||||||
28,928 | 23,848 | 24,036 | 9.1 | % | ||||||||||||||||||||
Consumer Goods: Durable | ||||||||||||||||||||||||
Parterre Flooring & Surface Systems, LLC (i) | L+7.25% | 9.49% | 8/22/2022 | 11,400 | 11,214 | 11,240 | 4.2 | % | ||||||||||||||||
Parterre Flooring & Surface Systems, LLC (Revolver) (f) | L+7.25% | 9.49% | 8/22/2022 | 2,400 | — | — | 0.0 | % | ||||||||||||||||
13,800 | 11,214 | 11,240 | 4.2 | % | ||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Solaray, LLC | L+6.50% | 8.83% | 9/11/2023 | 3,239 | 3,215 | 3,239 | 1.2 | % | ||||||||||||||||
Solaray, LLC | L+6.50% | 8.89% | 9/11/2023 | 696 | 696 | 696 | 0.3 | % | ||||||||||||||||
3,935 | 3,911 | 3,935 | 1.5 | % |
7 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Energy: Oil & Gas | ||||||||||||||||||||||||
Landpoint, LLC | L+12.75% | 12.74% Cash/ 2.25% PIK | (m) | 12/20/2019 | 2,256 | $ | 2,252 | $ | 2,224 | 0.8 | % | |||||||||||||
Landpoint, LLC (Revolver) (f) | L+10.50% | 12.74% | 12/20/2019 | 312 | 283 | 280 | 0.1 | % | ||||||||||||||||
2,568 | 2,535 | 2,504 | 0.9 | % | ||||||||||||||||||||
Environmental Industries | ||||||||||||||||||||||||
Synergy Environmental Corporation (i) | L+6.50% | 8.74% | 4/29/2021 | 2,952 | 2,909 | 2,952 | 1.1 | % | ||||||||||||||||
Synergy Environmental Corporation (i) | L+6.50% | 8.74% | 4/29/2021 | 494 | 486 | 494 | 0.2 | % | ||||||||||||||||
Synergy Environmental Corporation (Delayed Draw) (f) (g) | L+6.50% | 8.74% | 4/29/2021 | 1,326 | 843 | 843 | 0.3 | % | ||||||||||||||||
Synergy Environmental Corporation (Revolver) (f) | L+6.50% | 8.74% | 4/29/2021 | 671 | 47 | 47 | 0.0 | % | ||||||||||||||||
5,443 | 4,285 | 4,336 | 1.6 | % | ||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
American Optics Holdco, Inc. (e) (n) | L+8.00% | 10.24% | 9/13/2022 | 4,102 | 4,034 | 4,168 | 1.6 | % | ||||||||||||||||
American Optics Holdco, Inc. (Revolver) (e) (f) (n) | L+8.00% | 10.24% | 9/13/2022 | 440 | 110 | 110 | 0.0 | % | ||||||||||||||||
American Optics Holdco, Inc. (e) (n) | L+8.00% | 10.24% | 9/13/2022 | 755 | 742 | 767 | 0.3 | % | ||||||||||||||||
American Optics Holdco, Inc. (Revolver) (e) (f) (n) | L+8.00% | 10.24% | 9/13/2022 | 440 | — | — | 0.0 | % | ||||||||||||||||
Familia Dental Group Holdings, LLC (i) | L+8.00% | 10.24% | 4/8/2021 | 5,087 | 5,040 | 5,138 | 1.9 | % | ||||||||||||||||
Familia Dental Group Holdings, LLC | L+8.00% | 10.24% | 4/8/2021 | 490 | 490 | 495 | 0.2 | % | ||||||||||||||||
Familia Dental Group Holdings, LLC (Revolver) (f) | L+8.00% | 10.24% | 4/8/2021 | 573 | 344 | 344 | 0.1 | % | ||||||||||||||||
Rockdale Blackhawk, LLC (DIP Facility) | n/a | 15.10% | 12/31/2018 | 155 | 155 | 155 | 0.1 | % | ||||||||||||||||
Rockdale Blackhawk, LLC (DIP Facility) (f) | n/a | 15.10% | 12/31/2018 | 7,234 | 5,750 | 5,750 | 2.2 | % | ||||||||||||||||
Rockdale Blackhawk, LLC | L+13.00% | 15.24% | (o) | 3/31/2020 | 10,923 | 10,465 | 9,297 | 3.5 | % | |||||||||||||||
Rockdale Blackhawk, LLC (Capex) | L+13.00% | 15.24% | (o) | 3/31/2020 | 549 | 549 | 467 | 0.2 | % | |||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | L+13.00% | 15.24% | (o) | 3/31/2020 | 1,849 | 1,849 | 1,574 | 0.6 | % | |||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | L+13.00% | 15.24% | (o) | 3/31/2020 | 730 | 730 | 621 | 0.2 | % | |||||||||||||||
33,327 | 30,258 | 28,886 | 10.9 | % | ||||||||||||||||||||
High Tech Industries | ||||||||||||||||||||||||
Corbett Technology Solutions, Inc. (i) | L+7.00% | 9.24% | 11/8/2021 | 4,984 | 4,930 | 5,084 | 1.9 | % | ||||||||||||||||
Corbett Technology Solutions, Inc. (Revolver) (f) | L+7.00% | 9.24% | 11/8/2021 | 867 | — | — | 0.0 | % | ||||||||||||||||
Energy Services Group, LLC | L+8.42% | 10.72% | 5/4/2022 | 4,448 | 4,400 | 4,493 | 1.7 | % | ||||||||||||||||
Energy Services Group, LLC (e) (p) | L+8.42% | 9.42% | 5/4/2022 | 5,288 | 5,313 | 5,335 | 2.0 | % | ||||||||||||||||
Energy Services Group, LLC | L+8.42% | 10.72% | 5/4/2022 | 1,266 | 1,250 | 1,279 | 0.5 | % | ||||||||||||||||
Newforma, Inc. (i) | L+5.50% | 7.89% | 6/30/2022 | 14,850 | 14,673 | 14,976 | 5.6 | % | ||||||||||||||||
Newforma, Inc. (Revolver) (f) | L+5.50% | 7.89% | 6/30/2022 | 1,250 | — | — | 0.0 | % | ||||||||||||||||
Prototek Sheetmetal Fabrication, LLC | L+7.25% | 9.49% | 12/12/2022 | 3,474 | 3,413 | 3,508 | 1.3 | % | ||||||||||||||||
Prototek Sheetmetal Fabrication, LLC (Delayed Draw) (f) (g) | L+7.25% | 9.49% | 12/12/2022 | 2,331 | 815 | 823 | 0.3 | % | ||||||||||||||||
Prototek Sheetmetal Fabrication, LLC (Revolver) (f) | L+7.25% | 9.49% | 12/12/2022 | 233 | — | — | 0.0 | % | ||||||||||||||||
RedZone Robotics, Inc. | L+6.75% | 8.99% | 6/5/2023 | 949 | 930 | 944 | 0.4 | % | ||||||||||||||||
RedZone Robotics, Inc. (Revolver) (f) | L+6.75% | 8.99% | 6/5/2023 | 158 | — | — | 0.0 | % | ||||||||||||||||
RPL Bidco Limited (e) (n) (p) | L+7.50% | 8.30% | 11/9/2023 | 14,073 | 14,116 | 14,214 | 5.4 | % | ||||||||||||||||
RPL Bidco Limited (Delayed Draw) (e) (f) (g) (n) (p) | L+7.50% | 8.30% | 11/9/2023 | 2,085 | — | — | 0.0 | % | ||||||||||||||||
RPL Bidco Limited (Revolver) (e) (f) (n) (p) | L+7.50% | 8.30% | 11/9/2023 | 521 | — | — | 0.0 | % | ||||||||||||||||
56,777 | 49,840 | 50,656 | 19.1 | % |
8 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Hotels, Gaming & Leisure | ||||||||||||||||||||||||
TRG, LLC | L+12.10% | 9.60% Cash/ 4.61% PIK | (q) | 3/31/2021 | 17,132 | $ | 17,067 | $ | 18,365 | 6.9 | % | |||||||||||||
TRG, LLC (CapEx) | L+9.50% | 9.60% Cash/ 2.00% PIK | 3/31/2021 | 1,368 | 1,364 | 1,467 | 0.6 | % | ||||||||||||||||
TRG, LLC (Revolver) (f) | L+9.50% | 11.60% | 3/31/2021 | 262 | 131 | 140 | 0.1 | % | ||||||||||||||||
18,762 | 18,562 | 19,972 | 7.6 | % | ||||||||||||||||||||
Media: Advertising, Printing & Publishing | ||||||||||||||||||||||||
AdTheorent, Inc. | L+8.50% | 10.60% | 12/22/2021 | 4,711 | 4,646 | 4,696 | 1.8 | % | ||||||||||||||||
Atlas Sign Industries of FLA, LLC (i) | L+9.50% | 11.74% | 5/15/2023 | 3,500 | 3,305 | 3,341 | 1.3 | % | ||||||||||||||||
Destination Media, Inc. (i) | L+6.50% | 8.74% | 4/7/2022 | 7,416 | 7,331 | 7,564 | 2.8 | % | ||||||||||||||||
Destination Media, Inc. (Revolver) (f) | L+6.50% | 8.74% | 4/7/2022 | 542 | — | — | 0.0 | % | ||||||||||||||||
MC Sign Lessor Corp. | L+7.00% | 9.10% | 12/22/2022 | 9,950 | 9,776 | 10,049 | 3.8 | % | ||||||||||||||||
MC Sign Lessor Corp. (Delayed Draw) (f) (g) | L+7.00% | 9.10% | 12/22/2022 | 2,083 | — | — | 0.0 | % | ||||||||||||||||
MC Sign Lessor Corp. (Revolver) (f) | L+7.00% | 9.10% | 12/22/2022 | 625 | — | — | 0.0 | % | ||||||||||||||||
28,827 | 25,058 | 25,650 | 9.7 | % | ||||||||||||||||||||
Retail | ||||||||||||||||||||||||
Bluestem Brands, Inc. | L+7.50% | 9.74% | 11/6/2020 | 2,476 | 2,464 | 1,653 | 0.6 | % | ||||||||||||||||
Forman Mills, Inc. (i) | L+7.50% | 9.74% | 10/4/2021 | 8,415 | 8,303 | 8,259 | 3.1 | % | ||||||||||||||||
LuLu’s Fashion Lounge, LLC | L+7.00% | 9.24% | 8/29/2022 | 4,625 | 4,511 | 4,718 | 1.8 | % | ||||||||||||||||
The Worth Collection, Ltd. (i) | L+8.50% | 10.74% | 9/29/2021 | 10,587 | 10,446 | 9,137 | 3.5 | % | ||||||||||||||||
Yandy Holding, LLC | L+11.00% | 13.24% | 9/30/2019 | 4,202 | 4,186 | 4,185 | 1.6 | % | ||||||||||||||||
Yandy Holding, LLC (Revolver) (f) | L+11.00% | 13.24% | 9/30/2019 | 907 | — | — | 0.0 | % | ||||||||||||||||
31,212 | 29,910 | 27,952 | 10.6 | % | ||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
APCO Worldwide, Inc. | L+8.00% | 10.24% | 6/30/2022 | 4,937 | 4,858 | 4,910 | 1.8 | % | ||||||||||||||||
Burroughs, Inc. (i) | L+7.50% | 9.60% | 12/22/2022 | 5,925 | 5,844 | 5,700 | 2.1 | % | ||||||||||||||||
Burroughs, Inc. (Revolver) | L+7.50% | 9.60% | 12/22/2022 | 750 | 750 | 721 | 0.3 | % | ||||||||||||||||
EB Employee Solutions, LLC (i) | L+8.00% | 10.24% | 2/28/2019 | 3,121 | 3,111 | 3,100 | 1.2 | % | ||||||||||||||||
First Call Resolution, LLC (i) | L+7.00% | 9.10% | 9/22/2022 | 4,110 | 4,051 | 4,132 | 1.6 | % | ||||||||||||||||
First Call Resolution, LLC | L+7.00% | 9.39% | 9/22/2022 | 10,000 | 9,826 | 10,055 | 3.8 | % | ||||||||||||||||
Madison Logic, Inc. (i) | L+8.00% | 10.24% | 11/30/2021 | 9,999 | 9,859 | 9,999 | 3.8 | % | ||||||||||||||||
Madison Logic, Inc. (Revolver) (f) | L+8.00% | 10.24% | 11/30/2021 | 988 | — | — | 0.0 | % | ||||||||||||||||
39,830 | 38,299 | 38,617 | 14.6 | % | ||||||||||||||||||||
Services: Consumer | ||||||||||||||||||||||||
PeopleConnect Intermediate, LLC | L+6.50% | 8.84% | 7/1/2020 | 4,355 | 4,317 | 4,355 | 1.6 | % | ||||||||||||||||
PeopleConnect Intermediate, LLC | L+12.50% | 14.84% | 7/1/2020 | 4,677 | 4,633 | 4,668 | 1.8 | % | ||||||||||||||||
PeopleConnect Intermediate, LLC (Revolver) (f) | L+9.50% | 11.84% | 7/1/2020 | 236 | 118 | 118 | 0.1 | % | ||||||||||||||||
9,268 | 9,068 | 9,141 | 3.5 | % |
9 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Wholesale | ||||||||||||||||||||||||
Mid-West Wholesale Hardware Co. (i) | L+8.00% | 10.24% | 2/9/2022 | 16,444 | $ | 16,198 | $ | 16,460 | 6.2 | % | ||||||||||||||
Mid-West Wholesale Hardware Co. (Revolver) (f) | L+8.00% | 10.24% | 2/9/2022 | 4,421 | 3,158 | 3,158 | 1.2 | % | ||||||||||||||||
Nearly Natural, Inc. (i) | L+7.00% | 9.39% | 12/15/2022 | 6,947 | 6,826 | 7,017 | 2.6 | % | ||||||||||||||||
Nearly Natural, Inc. (Revolver) (f) | L+7.00% | 9.39% | 12/15/2022 | 1,522 | — | — | 0.0 | % | ||||||||||||||||
29,334 | 26,182 | 26,635 | 10.0 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Senior Secured Loans | 367,787 | 330,019 | 331,103 | 125.0 | % | |||||||||||||||||||
Unitranche Secured Loans (r) | ||||||||||||||||||||||||
Chemicals, Plastics & Rubber | ||||||||||||||||||||||||
MFG Chemical, LLC (i) | L+6.00% | 8.24% | 6/23/2022 | 10,477 | 10,351 | 10,361 | 3.9 | % | ||||||||||||||||
MFG Chemical, LLC (Delayed Draw) (f) (g) | L+6.00% | 8.24% | 6/23/2022 | 1,135 | — | — | 0.0 | % | ||||||||||||||||
11,612 | 10,351 | 10,361 | 3.9 | % | ||||||||||||||||||||
Consumer Goods: Durable | ||||||||||||||||||||||||
RugsUSA, LLC | L+6.50% | 8.89% | 4/28/2023 | 4,000 | 3,963 | 4,014 | 1.5 | % | ||||||||||||||||
4,000 | 3,963 | 4,014 | 1.5 | % | ||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Collaborative Neuroscience Network, LLC | L+11.50% | 13.74% | n/a | (s) | 6,120 | 6,089 | 5,838 | 2.2 | % | |||||||||||||||
Collaborative Neuroscience Network, LLC | n/a | 12.00% Cash/ 3.00% PIK | n/a | (s) | 301 | 301 | 301 | 0.1 | % | |||||||||||||||
Collaborative Neuroscience Network, LLC (Revolver) | L+10.00% | 12.24% | n/a | (s) | 200 | 192 | 200 | 0.1 | % | |||||||||||||||
Priority Ambulance, LLC (t) | L+6.00% | 8.39% | 4/12/2022 | 9,932 | 9,932 | 9,917 | 3.8 | % | ||||||||||||||||
Priority Ambulance, LLC (i) | L+6.00% | 8.39% | 4/12/2022 | 525 | 496 | 524 | 0.2 | % | ||||||||||||||||
Priority Ambulance, LLC (Delayed Draw) (f) (g) | L+6.00% | 8.39% | 4/12/2022 | 103 | — | — | 0.0 | % | ||||||||||||||||
17,181 | 17,010 | 16,780 | 6.4 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Unitranche Secured Loans | 32,793 | 31,324 | 31,155 | 11.8 | % | |||||||||||||||||||
Junior Secured Loans | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
Confie Seguros Holdings II Co. | L+9.50% | 11.74% | 5/8/2019 | 8,594 | 8,485 | 8,379 | 3.2 | % | ||||||||||||||||
8,594 | 8,485 | 8,379 | 3.2 | % | ||||||||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||||||||||
CSM Bakery Supplies, LLC | L+7.75% | 10.09% | 7/5/2021 | 5,792 | 5,792 | 5,590 | 2.1 | % | ||||||||||||||||
5,792 | 5,792 | 5,590 | 2.1 | % | ||||||||||||||||||||
High Tech Industries | ||||||||||||||||||||||||
Answers Finance, LLC | P+7.90% | 9.00% | (u) | 9/15/2021 | 391 | 389 | 359 | 0.1 | % | |||||||||||||||
Micro Holdings Corp. | L+7.50% | 9.67% | 8/18/2025 | 3,000 | 2,972 | 3,038 | 1.2 | % | ||||||||||||||||
3,391 | 3,361 | 3,397 | 1.3 | % | ||||||||||||||||||||
Media: Broadcasting & Subscription | ||||||||||||||||||||||||
Mergermarket Bidco Limited | L+7.25% | 9.42% | 8/4/2025 | 4,500 | 4,457 | 4,511 | 1.7 | % | ||||||||||||||||
4,500 | 4,457 | 4,511 | 1.7 | % | ||||||||||||||||||||
Media: Diversified & Production | ||||||||||||||||||||||||
The Octave Music Group, Inc. | L+8.25% | 10.36% | 5/27/2022 | 5,000 | 4,954 | 5,000 | 1.9 | % | ||||||||||||||||
5,000 | 4,954 | 5,000 | 1.9 | % |
10 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Services: Consumer | ||||||||||||||||||||||||
Education Corporation of America | L+11.00% | 13.39% | 3/31/2020 | 625 | $ | 622 | $ | 625 | 0.2 | % | ||||||||||||||
625 | 622 | 625 | 0.2 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Junior Secured Loans | 27,902 | 27,671 | 27,502 | 10.4 | % | |||||||||||||||||||
Equity Securities (v) (w) | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
PKS Holdings, LLC (warrant to purchase 14,247 class A preferred units) (e) | — | — | (x) | 11/30/2027 | — | 116 | 84 | 0.0 | % | |||||||||||||||
116 | 84 | 0.0 | % | |||||||||||||||||||||
Chemicals, Plastics & Rubber | ||||||||||||||||||||||||
Valudor Products, LLC (501,014 class A-1 units) | n/a | 10.00% PIK | — | — | 501 | 473 | 0.2 | % | ||||||||||||||||
501 | 473 | 0.2 | % | |||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Collaborative Neuroscience Network, LLC (warrant to purchase up to 2 LLC units) | — | — | (x) | 12/27/2022 | — | — | 71 | 0.0 | % | |||||||||||||||
Collaborative Neuroscience Network, LLC (warrant to purchase up to 2 LLC units) | — | — | (x) | 12/31/2027 | — | — | — | 0.0 | % | |||||||||||||||
— | 71 | 0.0 | % | |||||||||||||||||||||
High Tech Industries | ||||||||||||||||||||||||
Answers Finance, LLC (76,539 shares of common stock) | — | — | (x) | — | — | 2,413 | 191 | 0.1 | % | |||||||||||||||
2,413 | 191 | 0.1 | % | |||||||||||||||||||||
Hotels, Gaming & Leisure | ||||||||||||||||||||||||
Playtime, LLC - Preferred Units (8,665 units) | — | — | (x) | — | — | 200 | 31 | 0.0 | % | |||||||||||||||
200 | 31 | 0.0 | % | |||||||||||||||||||||
Media: Advertising, Printing & Publishing | ||||||||||||||||||||||||
AdTheorent, Inc. (128,866 class A voting units) | — | — | (x) | — | — | 129 | 146 | 0.1 | % | |||||||||||||||
Atlas Sign Industries of FLA, LLC (warrant to purchase 0.8% of the equity) | — | — | (x) | 5/14/2026 | — | 125 | 107 | 0.0 | % | |||||||||||||||
InMobi Pte, Ltd. (represents the right to purchase 2.80% of the equity) (e) (n) | — | — | (x) | 9/18/2025 | — | — | 219 | 0.1 | % | |||||||||||||||
254 | 472 | 0.2 | % | |||||||||||||||||||||
Retail | ||||||||||||||||||||||||
The Tie Bar Operating Company, LLC - Class A Preferred Units (1,275 units) | — | — | — | — | 86 | 124 | 0.1 | % | ||||||||||||||||
The Tie Bar Operating Company, LLC - Class B Preferred Units (1,275 units) | — | — | — | — | 1 | — | 0.0 | % | ||||||||||||||||
87 | 124 | 0.1 | % | |||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
APCO Worldwide, Inc. (100 class A voting common stock) | — | — | (x) | — | — | 395 | 363 | 0.1 | % | |||||||||||||||
395 | 363 | 0.1 | % | |||||||||||||||||||||
Services: Consumer | ||||||||||||||||||||||||
Education Corporation of America - Series G Preferred Stock (8,333 shares) | n/a | 12.00% PIK | — | — | 9,158 | 8,046 | 3.0 | % | ||||||||||||||||
9,158 | 8,046 | 3.0 | % | |||||||||||||||||||||
Wholesale | ||||||||||||||||||||||||
Nearly Natural, Inc. (152,174 class A units) | — | — | (x) | — | — | 152 | 177 | 0.1 | % | |||||||||||||||
152 | 177 | 0.1 | % | |||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Equity Securities | 13,276 | 10,032 | 3.8 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Company Investments | $ | 402,290 | $ | 399,792 | 151.0 | % |
11 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Non-Controlled Affiliate Company Investments (y) | ||||||||||||||||||||||||
Senior Secured Loans | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
American Community Homes, Inc. | L+10.00% | 10.24% Cash/ 2.00% PIK | 7/22/2019 | 7,560 | $ | 7,518 | $ | 6,743 | 2.5 | % | ||||||||||||||
American Community Homes, Inc. | L+14.50% | 10.24% Cash/ 6.50% PIK | 7/22/2019 | 4,530 | 4,508 | 4,041 | 1.5 | % | ||||||||||||||||
American Community Homes, Inc. | L+10.00% | 10.24% Cash/ 2.00% PIK | 7/22/2019 | 572 | 568 | 510 | 0.2 | % | ||||||||||||||||
American Community Homes, Inc. | L+10.00% | 10.24% Cash/ 2.00% PIK | 7/22/2019 | 458 | 453 | 409 | 0.2 | % | ||||||||||||||||
American Community Homes, Inc. | L+14.50% | 10.24% Cash/ 6.50% PIK | 7/22/2019 | 244 | 241 | 217 | 0.1 | % | ||||||||||||||||
American Community Homes, Inc. (Delayed Draw) (f) (g) | L+8.00% | 10.24% | 7/22/2019 | 1,667 | 1,577 | 1,406 | 0.5 | % | ||||||||||||||||
15,031 | 14,865 | 13,326 | 5.0 | % | ||||||||||||||||||||
Containers, Packaging & Glass | ||||||||||||||||||||||||
Summit Container Corporation (i) | L+8.00% | 10.24% | 1/6/2021 | 3,399 | 3,403 | 3,261 | 1.2 | % | ||||||||||||||||
Summit Container Corporation (Revolver) (f) (i) | L+8.00% | 10.17% | 1/6/2021 | 5,500 | 5,259 | 5,259 | 2.0 | % | ||||||||||||||||
8,899 | 8,662 | 8,520 | 3.2 | % | ||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
SHI Holdings, Inc. (i) | L+10.25% | 12.49% | 7/10/2019 | 2,605 | 2,596 | 2,605 | 1.0 | % | ||||||||||||||||
SHI Holdings, Inc. (Revolver) (f) | L+10.25% | 12.49% | 7/10/2019 | 3,136 | 2,988 | 2,993 | 1.1 | % | ||||||||||||||||
5,741 | 5,584 | 5,598 | 2.1 | % | ||||||||||||||||||||
Retail | ||||||||||||||||||||||||
Luxury Optical Holdings Co. | L+8.00% | 10.24% PIK | 9/12/2019 | 4,578 | 4,559 | 4,038 | 1.5 | % | ||||||||||||||||
Luxury Optical Holdings Co. (Delayed Draw) (f) (g) | L+11.50% | 13.74% | 9/12/2019 | 1,059 | 624 | 622 | 0.3 | % | ||||||||||||||||
Luxury Optical Holdings Co. (Revolver) | L+8.00% | 10.24% PIK | 9/12/2019 | 211 | 211 | 186 | 0.1 | % | ||||||||||||||||
TPP Operating, Inc. | n/a | n/a | (o) | n/a | 9,370 | 9,330 | — | 0.0 | % | |||||||||||||||
TPP Operating, Inc. | n/a | n/a | (o) | n/a | 7,671 | 7,629 | — | 0.0 | % | |||||||||||||||
TPP Operating, Inc. | n/a | n/a | (o) | n/a | 4,336 | 4,289 | — | 0.0 | % | |||||||||||||||
27,225 | 26,642 | 4,846 | 1.9 | % | ||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
Curion Holdings, LLC (i) | n/a | 10.00% Cash/ 4.00% PIK | 5/2/2022 | 3,855 | 3,812 | 3,668 | 1.4 | % | ||||||||||||||||
Curion Holdings, LLC (Revolver) (f) | n/a | 14.00% | 5/2/2022 | 308 | 189 | 186 | 0.1 | % | ||||||||||||||||
4,163 | 4,001 | 3,854 | 1.5 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Senior Secured Loans | 61,059 | 59,754 | 36,144 | 13.7 | % | |||||||||||||||||||
Unitranche Secured Loans (r) | ||||||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Incipio Technologies, Inc. (z) | L+9.06% | 10.74% Cash/ 0.56% PIK | (aa) | 7/1/2019 | 13,803 | 13,724 | 12,927 | 4.9 | % | |||||||||||||||
Incipio Technologies, Inc. (ab) | L+8.50% | 10.74% | 7/1/2019 | 3,613 | 3,613 | 3,613 | 1.3 | % | ||||||||||||||||
Incipio Technologies, Inc. (Delayed Draw) (f) (g) | L+8.50% | 10.74% | 7/1/2019 | 1,535 | 1,271 | 1,271 | 0.5 | % | ||||||||||||||||
18,951 | 18,608 | 17,811 | 6.7 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Unitranche Secured Loans | 18,951 | 18,608 | 17,811 | 6.7 | % |
12 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Portfolio Company (a) | Spread
Above Index (b) | Interest Rate |
Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Junior Secured Loans | ||||||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Incipio Technologies, Inc. (ac) | n/a | 10.70% PIK | (o) | 12/31/2020 | 3,766 | $ | — | $ | 1,422 | 0.5 | % | |||||||||||||
Incipio Technologies, Inc. (ad) | n/a | 10.70% PIK | (o) | 12/31/2020 | 7,194 | — | — | 0.0 | % | |||||||||||||||
10,960 | — | 1,422 | 0.5 | % | ||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
Curion Holdings, LLC (i) | n/a | 15.00% PIK | (o) | 1/2/2023 | 1,720 | 1 | — | 0.0 | % | |||||||||||||||
Curion Holdings, LLC (i) | n/a | 15.00% PIK | (o) | 1/2/2023 | 44 | — | — | 0.0 | % | |||||||||||||||
1,764 | 1 | — | 0.0 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Company Junior Secured Loans | 12,724 | 1 | 1,422 | 0.5 | % | |||||||||||||||||||
Equity Securities (w) | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
American Community Homes, Inc. (warrant to purchase up to 9.0% of the equity) | — | — | (x) | — | — | — | — | 0.0 | % | |||||||||||||||
— | — | 0.0 | % | |||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Incipio Technologies, Inc. (1,774 shares of series C common units) | — | — | (x) | — | — | — | — | 0.0 | % | |||||||||||||||
Millennial Brands LLC (10 preferred units) | n/a | 15.00% PIK | (o) | — | — | 967 | — | 0.0 | % | |||||||||||||||
Millennial Brands LLC (75,502 common units) | — | (x) | — | — | — | — | 0.0 | % | ||||||||||||||||
967 | — | 0.0 | % | |||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
SHI Holdings, Inc. (24 shares of common stock) | — | — | (x) | — | — | 27 | 806 | 0.3 | % | |||||||||||||||
27 | 806 | 0.3 | % | |||||||||||||||||||||
Retail | ||||||||||||||||||||||||
Luxury Optical Holdings Co. (86 shares of common stock) | — | — | (x) | — | — | — | — | 0.0 | % | |||||||||||||||
TPP Operating, Inc. (24 shares of common stock) | — | — | (x) | — | — | 1,953 | — | 0.0 | % | |||||||||||||||
TPP Operating, Inc. (16 shares of common stock) | — | — | (x) | — | — | 1,302 | — | 0.0 | % | |||||||||||||||
3,255 | — | 0.0 | % | |||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
Curion Holdings, LLC (58,779 shares of common stock) | — | — | (x) | — | — | — | — | 0.0 | % | |||||||||||||||
— | — | 0.0 | % | |||||||||||||||||||||
Total Non-Controlled Affiliate Equity Securities | 4,249 | 806 | 0.3 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Company Investments | $ | 82,612 | $ | 56,183 | 21.2 | % | ||||||||||||||||||
Controlled Affiliate Company Investments (ae) | ||||||||||||||||||||||||
Equity Securities | ||||||||||||||||||||||||
Investment Funds & Vehicles | ||||||||||||||||||||||||
MRCC Senior Loan Fund I, LLC (e) | — | — | — | — | 25,200 | 26,318 | 10.0 | % | ||||||||||||||||
Total Controlled Affiliate Equity Securities | 25,200 | 26,318 | 10.0 | % | ||||||||||||||||||||
Total Controlled Affiliate Company Investments | $ | 25,200 | $ | 26,318 | 10.0 | % | ||||||||||||||||||
TOTAL INVESTMENTS | $ | 510,102 | $ | 482,293 | 182.2 | % |
13 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
Derivative Instruments
Foreign currency forward contracts
Notional Amount | Notional Amount | Unrealized Gain | ||||||||||||||
Description | to be Purchased | to be Sold | Counterparty | Settlement Date | (Loss) | |||||||||||
Foreign currency forward contract | $ | 138 | £ | 108 | Bannockburn Global Forex, LLC | 10/1/2018 | $ | (3 | ) | |||||||
Foreign currency forward contract | $ | 137 | £ | 107 | Bannockburn Global Forex, LLC | 1/2/2019 | (3 | ) | ||||||||
Foreign currency forward contract | $ | 292 | £ | 228 | Bannockburn Global Forex, LLC | 2/28/2019 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 136 | £ | 106 | Bannockburn Global Forex, LLC | 4/1/2019 | (2 | ) | ||||||||
Foreign currency forward contract | $ | 293 | £ | 229 | Bannockburn Global Forex, LLC | 5/31/2019 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 136 | £ | 106 | Bannockburn Global Forex, LLC | 7/1/2019 | (2 | ) | ||||||||
Foreign currency forward contract | $ | 294 | £ | 230 | Bannockburn Global Forex, LLC | 8/30/2019 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 134 | £ | 105 | Bannockburn Global Forex, LLC | 10/1/2019 | (2 | ) | ||||||||
Foreign currency forward contract | $ | 295 | £ | 230 | Bannockburn Global Forex, LLC | 11/29/2019 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 133 | £ | 104 | Bannockburn Global Forex, LLC | 1/2/2020 | (2 | ) | ||||||||
Foreign currency forward contract | $ | 296 | £ | 231 | Bannockburn Global Forex, LLC | 2/28/2020 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 132 | £ | 103 | Bannockburn Global Forex, LLC | 4/1/2020 | (2 | ) | ||||||||
Foreign currency forward contract | $ | 130 | £ | 102 | Bannockburn Global Forex, LLC | 5/5/2020 | (2 | ) | ||||||||
Foreign currency forward contract | $ | 296 | £ | 230 | Bannockburn Global Forex, LLC | 5/29/2020 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 295 | £ | 230 | Bannockburn Global Forex, LLC | 8/28/2020 | (5 | ) | ||||||||
Foreign currency forward contract | $ | 294 | £ | 229 | Bannockburn Global Forex, LLC | 11/30/2020 | (5 | ) | ||||||||
$ | (58 | ) |
(a) | All of our investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”), unless otherwise noted. All of our investments are issued by U.S. portfolio companies unless otherwise noted. |
(b) | The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at September 30, 2018. Certain investments are subject to a LIBOR or Prime interest rate floor, or rate cap. |
(c) | Because there is no readily available market value for these investments, the fair value of these investments is determined in good faith using significant unobservable inputs by our board of directors as required by the Investment Company Act of 1940. (See Note 4 in the accompanying notes to the consolidated financial statements.) |
(d) | Percentages are based on net assets of $264,752 as of September 30, 2018. |
(e) | This investment is treated as a non-qualifying investment under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets. As of September 30, 2018, non-qualifying assets totaled 18.16% of the Company’s total assets excluding prepaid expenses. |
(f) | All or a portion of this commitment was unfunded at September 30, 2018. As such, interest is earned only on the funded portion of this commitment. |
(g) | This delayed draw loan requires that certain financial covenants be met by the portfolio company prior to any fundings. |
(h) | The PIK portion of the interest rate for HFZ Capital Group, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 0.17% per annum. |
(i) | All of this loan is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP, and is therefore not collateral to the Company’s revolving credit facility. |
(j) | This investment represents a note convertible to preferred shares of the borrower. |
(k) | A portion of this loan (principal of $2,035) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP, and is therefore not collateral to the Company’s revolving credit facility. |
(l) | A portion of the PIK interest rate for Cornerstone Detention Products, Inc. is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 2.33% per annum. |
(m) | The PIK portion of the interest rate for Landpoint, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 2.25% per annum. |
(n) | This is an international company. |
14 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands, except for shares and units)
(o) | This position was on non-accrual status as of September 30, 2018, meaning that the Company has ceased accruing interest income on the position. See Note 2 in the accompanying notes to the consolidated financial statements for additional information on the Company’s accounting policies. |
(p) | This loan is denominated in Great Britain pounds and is translated into U.S. dollars as of the valuation date. |
(q) | A portion of the PIK interest rate for TRG, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 2.61% per annum. |
(r) | The Company structures its unitranche secured loans as senior secured loans. The Company obtains security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of these loans. This collateral may take the form of first-priority liens on the assets of a portfolio company. Generally, the Company syndicates a “first out” portion of the loan to an investor and retains a “last out” portion of the loan, in which case the “first out” portion of the loan will generally receive priority with respect to payments of principal, interest and any other amounts due thereunder. Unitranche structures combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans and the Company’s unitranche secured loans will expose the Company to the risks associated with second lien and subordinated loans and may limit the Company’s recourse or ability to recover collateral upon a portfolio company’s bankruptcy. Unitranche secured loans typically provide for moderate loan amortization in the initial years of the facility, with the majority of the amortization deferred until loan maturity. Unitranche secured loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. In many cases the Company, together with its affiliates, are the sole or majority lender of these unitranche secured loans, which can afford the Company additional influence with a borrower in terms of monitoring and, if necessary, remediation in the event of underperformance. |
(s) | This is a demand note with no stated maturity. |
(t) | A portion of this loan (principal of $9,258) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP, and is therefore not collateral to the Company’s revolving credit facility. |
(u) | This loan is subject to a prime rate cap of 1.10%. |
(v) | Represents less than 5% ownership of the portfolio company’s voting securities. |
(w) | Ownership of certain equity investments may occur through a holding company or partnership. |
(x) | Represents a non-income producing security. |
(y) | As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of the portfolio company as it owns five percent or more of the portfolio company’s voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to control). |
(z) | A portion of this loan (principal of $5,061) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP, and is therefore not collateral to the Company’s revolving credit facility. |
(aa) | The PIK portion of the interest rate for Incipio Technologies, Inc. is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 0.56% per annum. |
(ab) | A portion of this loan (principal of $46) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP, and is therefore not collateral to the Company’s revolving credit facility. |
(ac) | A portion of this loan (principal of $1,015) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility. |
(ad) | A portion of this loan (principal of $1,938) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility. |
(ae) | As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and to “Control” this portfolio company as it owns more than 25% in company’s voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control. |
n/a - not applicable
See Notes to Consolidated Financial Statements.
15 |
MONROE CAPITAL
CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Non-Controlled/Non-Affiliate Company Investments | ||||||||||||||||||||||||
Senior Secured Loans | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
Echelon Funding I, LLC (Delayed Draw) (e) (f) (g) | L+10.25% | 11.61 | % | 2/24/2021 | 15,750 | $ | 15,415 | $ | 15,654 | 5.6 | % | |||||||||||||
HFZ Capital Group, LLC (e) | L+10.00% | 11.36 | % | 10/21/2019 | 18,000 | 17,613 | 17,991 | 6.5 | % | |||||||||||||||
Liftforward SPV II, LLC (e) (f) | L+10.75% | 12.32 | % | 11/10/2020 | 10,000 | 4,212 | 4,268 | 1.5 | % | |||||||||||||||
PKS Holdings, LLC (e) | L+9.50% | 10.85 | % | 11/30/2022 | 1,800 | 1,640 | 1,719 | 0.6 | % | |||||||||||||||
PKS Holdings, LLC (Revolver) (e) (f) | L+9.50% | 10.85 | % | 11/30/2022 | 80 | — | — | 0.0 | % | |||||||||||||||
45,630 | 38,880 | 39,632 | 14.2 | % | ||||||||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||||||||||
All Holding Company, LLC (h) | L+7.00% | 8.57 | % | 11/15/2021 | 5,328 | 5,246 | 5,368 | 1.9 | % | |||||||||||||||
California Pizza Kitchen, Inc. | L+6.00% | 7.57 | % | 8/23/2022 | 6,913 | 6,850 | 6,791 | 2.5 | % | |||||||||||||||
12,241 | 12,096 | 12,159 | 4.4 | % | ||||||||||||||||||||
Construction & Building | ||||||||||||||||||||||||
Cali Bamboo, LLC | L+8.00% | 9.57 | % | 7/10/2020 | 5,319 | 5,266 | 5,319 | 1.9 | % | |||||||||||||||
Cali Bamboo, LLC (Revolver) (f) | L+8.00% | 9.57 | % | 7/10/2020 | 2,165 | 1,039 | 1,039 | 0.4 | % | |||||||||||||||
Cornerstone Detention Products, Inc. (i) | L+11.83% | 10.07%
Cash/ 3.33% PIK | (j) | 4/8/2019 | 3,521 | 3,501 | 3,500 | 1.3 | % | |||||||||||||||
Cornerstone Detention Products, Inc. (Revolver) (f) | L+8.50% | 10.07 | % | 4/8/2019 | 400 | 200 | 199 | 0.1 | % | |||||||||||||||
TRP Construction Group, LLC (h) | L+6.50% | 8.07 | % | 10/5/2022 | 8,000 | 7,845 | 7,992 | 2.9 | % | |||||||||||||||
TRP Construction Group, LLC (Revolver) (f) | L+6.50% | 8.07 | % | 10/5/2022 | 2,134 | — | — | 0.0 | % | |||||||||||||||
21,539 | 17,851 | 18,049 | 6.6 | % | ||||||||||||||||||||
Consumer Goods: Durable | ||||||||||||||||||||||||
Parterre Flooring & Surface Systems, LLC (h) | L+7.25% | 8.82 | % | 8/22/2022 | 11,850 | 11,625 | 11,808 | 4.2 | % | |||||||||||||||
Parterre Flooring & Surface Systems, LLC (Revolver) (f) | L+7.25% | 8.82 | % | 8/22/2022 | 2,400 | — | — | 0.0 | % | |||||||||||||||
14,250 | 11,625 | 11,808 | 4.2 | % | ||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Gibson Brands, Inc. (k) | 8.88% | 8.88 | % | 8/1/2018 | 10,000 | 8,664 | 8,435 | 3.0 | % | |||||||||||||||
Solaray, LLC | L+6.50% | 8.02 | % | 9/11/2023 | 3,264 | 3,236 | 3,264 | 1.2 | % | |||||||||||||||
Solaray, LLC (Delayed Draw) | L+6.50% | 8.19 | % | 9/11/2023 | 699 | 699 | 699 | 0.3 | % | |||||||||||||||
13,963 | 12,599 | 12,398 | 4.5 | % | ||||||||||||||||||||
Energy: Oil & Gas | ||||||||||||||||||||||||
Landpoint, LLC | L+12.75% | 12.07%
Cash/ 2.25% PIK | (l) | 12/20/2019 | 2,386 | 2,372 | 2,352 | 0.8 | % | |||||||||||||||
Landpoint, LLC (Revolver) (f) | L+10.50% | 12.07 | % | 12/20/2019 | 313 | — | — | 0.0 | % | |||||||||||||||
2,699 | 2,372 | 2,352 | 0.8 | % | ||||||||||||||||||||
Environmental Industries | ||||||||||||||||||||||||
Synergy Environmental Corporation (h) | L+8.00% | 9.57 | % | 4/29/2021 | 3,011 | 2,958 | 3,036 | 1.1 | % | |||||||||||||||
Synergy Environmental Corporation (h) | L+8.00% | 9.57 | % | 4/29/2021 | 504 | 495 | 508 | 0.2 | % | |||||||||||||||
Synergy Environmental Corporation (Delayed Draw) (f) (g) | L+8.00% | 9.57 | % | 4/29/2018 | 1,342 | 859 | 866 | 0.3 | % | |||||||||||||||
Synergy Environmental Corporation (Revolver) (f) | L+8.00% | 9.57 | % | 4/29/2021 | 671 | 47 | 47 | 0.0 | % | |||||||||||||||
5,528 | 4,359 | 4,457 | 1.6 | % |
See Notes to Consolidated Financial Statements.
16 |
MONROE CAPITAL
CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
American Optics Holdco, Inc. (e) (m) | L+8.00% | 9.57 | % | 9/13/2022 | 4,133 | $ | 4,055 | $ | 4,136 | 1.5 | % | |||||||||||||
American Optics Holdco, Inc. (Revolver) (e) (f) (m) | L+8.00% | 9.57 | % | 9/13/2022 | 440 | — | — | 0.0 | % | |||||||||||||||
American Optics Holdco, Inc. (e) (m) | L+8.00% | 9.57 | % | 9/13/2022 | 760 | 746 | 761 | 0.3 | % | |||||||||||||||
American Optics Holdco, Inc. (Revolver) (e) (f) (m) | L+8.00% | 9.57 | % | 9/13/2022 | 440 | — | — | 0.0 | % | |||||||||||||||
Beaver-Visitec International Holdings, Inc. | L+5.00% | 6.69 | % | 8/19/2023 | 4,938 | 4,895 | 4,938 | 1.8 | % | |||||||||||||||
Edge Systems Holdings Corp. | L+7.75% | 9.32 | % | 12/1/2021 | 3,384 | 3,329 | 3,445 | 1.2 | % | |||||||||||||||
Edge Systems Holdings Corp. (Revolver) (f) | P+6.75% | 11.25 | % | 12/1/2021 | 260 | — | — | 0.0 | % | |||||||||||||||
Familia Dental Group Holdings, LLC (h) | L+8.00% | 9.57 | % | 4/8/2021 | 5,259 | 5,199 | 5,322 | 1.9 | % | |||||||||||||||
Familia Dental Group Holdings, LLC | L+8.00% | 9.57 | % | 4/8/2021 | 506 | 506 | 512 | 0.2 | % | |||||||||||||||
Familia Dental Group Holdings, LLC (Revolver) (f) | L+8.00% | 9.57 | % | 4/8/2021 | 573 | 344 | 344 | 0.1 | % | |||||||||||||||
20,693 | 19,074 | 19,458 | 7.0 | % | ||||||||||||||||||||
High Tech Industries | ||||||||||||||||||||||||
Answers Finance, LLC | L+5.00% | 6.57 | % | 4/15/2021 | 253 | 251 | 249 | 0.1 | % | |||||||||||||||
Corbett Technology Solutions, Inc. (h) | L+7.00% | 8.57 | % | 11/8/2021 | 4,275 | 4,224 | 4,318 | 1.5 | % | |||||||||||||||
Corbett Technology Solutions, Inc. (Revolver) (f) | L+7.00% | 8.57 | % | 11/8/2021 | 867 | 607 | 607 | 0.2 | % | |||||||||||||||
Energy Services Group, LLC | L+9.82% | 11.39 | % | 5/4/2022 | 4,620 | 4,568 | 4,678 | 1.7 | % | |||||||||||||||
Energy Services Group, LLC (e) (n) | L+9.82% | 10.82 | % | 5/4/2022 | 2,495 | 2,361 | 2,509 | 0.9 | % | |||||||||||||||
Energy Services Group, LLC (Delayed Draw) (f) (g) | L+9.82% | 11.39 | % | 5/4/2022 | 1,313 | 1,096 | 1,126 | 0.4 | % | |||||||||||||||
Newforma, Inc. (h) | L+7.50% | 9.19 | % | 6/30/2022 | 14,962 | 14,754 | 15,060 | 5.4 | % | |||||||||||||||
Newforma, Inc. (Revolver) (f) | L+7.50% | 9.19 | % | 6/30/2022 | 1,250 | — | — | 0.0 | % | |||||||||||||||
Prototek Sheetmetal Fabrication, LLC | L+7.50% | 9.07 | % | 12/12/2022 | 3,500 | 3,430 | 3,430 | 1.2 | % | |||||||||||||||
Prototek Sheetmetal Fabrication, LLC (Delayed Draw) (f) (g) | L+7.50% | 9.07 | % | 12/12/2022 | 2,334 | — | — | 0.0 | % | |||||||||||||||
Prototek Sheetmetal Fabrication, LLC (Revolver) (f) | L+7.50% | 9.07 | % | 12/12/2022 | 233 | — | — | 0.0 | % | |||||||||||||||
RPL Bidco Limited (e) (m) (n) | L+7.50% | 8.02 | % | 11/9/2023 | 9,459 | 9,057 | 9,516 | 3.4 | % | |||||||||||||||
RPL Bidco Limited (Revolver) (e) (f) (m) (n) | L+7.50% | 8.02 | % | 11/9/2023 | 540 | — | — | 0.0 | % | |||||||||||||||
46,101 | 40,348 | 41,493 | 14.8 | % | ||||||||||||||||||||
Hotels, Gaming & Leisure | ||||||||||||||||||||||||
BC Equity Ventures LLC | L+6.50% | 8.07 | % | 8/31/2022 | 2,586 | 2,543 | 2,624 | 0.9 | % | |||||||||||||||
Miles Partnership LLC | L+8.50% | 10.19 | % | 3/24/2021 | 5,946 | 5,910 | 6,005 | 2.2 | % | |||||||||||||||
Miles Partnership LLC (Delayed Draw) (f) (g) | L+8.50% | 10.19 | % | 3/24/2021 | 1,422 | 1,074 | 1,085 | 0.4 | % | |||||||||||||||
Miles Partnership LLC (Revolver) (f) | L+8.50% | 10.19 | % | 3/24/2021 | 320 | — | — | 0.0 | % | |||||||||||||||
TRG, LLC | L+12.42% | 8.86%
Cash/ 4.92% PIK | (o) | 3/31/2021 | 17,088 | 17,000 | 17,190 | 6.2 | % | |||||||||||||||
TRG, LLC (CapEx) (f) | L+9.50% | 8.86%
Cash/ 2.00% PIK | 3/31/2021 | 1,629 | 1,340 | 1,354 | 0.5 | % | ||||||||||||||||
TRG, LLC (Revolver) (f) | L+9.50% | 10.86 | % | 3/31/2021 | 262 | 131 | 131 | 0.0 | % | |||||||||||||||
Vacation Innovations, LLC (p) | L+9.31% | 8.57%
Cash/ 2.31% PIK | (q) | 8/20/2020 | 9,282 | 9,170 | 10,040 | 3.6 | % | |||||||||||||||
Vacation Innovations, LLC (Delayed Draw) (f) (g) | L+7.50% | 8.57%
Cash/ 0.50% PIK | 8/20/2020 | 2,037 | — | — | 0.0 | % | ||||||||||||||||
Vacation Innovations, LLC (Revolver) | L+7.50% | 8.57%
Cash/ 0.50% PIK | 8/20/2020 | 342 | 342 | 342 | 0.1 | % | ||||||||||||||||
40,914 | 37,510 | 38,771 | 13.9 | % |
See Notes to Consolidated Financial Statements.
17 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Media: Advertising, Printing & Publishing | ||||||||||||||||||||||||
AdTheorent, Inc. | L+8.50% | 9.86 | % | 12/22/2021 | 4,906 | $ | 4,824 | $ | 4,937 | 1.8 | % | |||||||||||||
Destination Media, Inc. (h) | L+6.50% | 8.07 | % | 4/7/2022 | 7,850 | 7,747 | 7,991 | 2.8 | % | |||||||||||||||
Destination Media, Inc. (Revolver) (f) | L+6.50% | 8.07 | % | 4/7/2022 | 542 | — | — | 0.0 | % | |||||||||||||||
MC Sign Lessor Corp. | L+7.00% | 8.53 | % | 12/22/2022 | 10,000 | 9,801 | 9,800 | 3.5 | % | |||||||||||||||
MC Sign Lessor Corp. (Delayed Draw) (f) (g) | L+7.00% | 8.53 | % | 12/22/2022 | 2,083 | — | — | 0.0 | % | |||||||||||||||
MC Sign Lessor Corp. (Revolver) (f) | L+7.00% | 8.53 | % | 12/22/2022 | 625 | 146 | 146 | 0.1 | % | |||||||||||||||
26,006 | 22,518 | 22,874 | 8.2 | % | ||||||||||||||||||||
Media: Broadcasting & Subscription | ||||||||||||||||||||||||
Jerry Lee Radio, LLC | L+9.50% | 11.07 | % | 12/17/2020 | 11,443 | 11,256 | 11,443 | 4.1 | % | |||||||||||||||
11,443 | 11,256 | 11,443 | 4.1 | % | ||||||||||||||||||||
Retail | ||||||||||||||||||||||||
Bluestem Brands, Inc. | L+7.50% | 9.07 | % | 11/6/2020 | 2,597 | 2,581 | 1,829 | 0.7 | % | |||||||||||||||
Forman Mills, Inc. (h) | L+7.50% | 9.07 | % | 10/4/2021 | 8,479 | 8,345 | 8,441 | 3.0 | % | |||||||||||||||
LuLu’s Fashion Lounge, LLC | L+7.00% | 8.57 | % | 8/28/2022 | 4,906 | 4,767 | 5,004 | 1.8 | % | |||||||||||||||
The Worth Collection, Ltd. (h) | L+8.50% | 10.07 | % | 9/29/2021 | 10,587 | 10,421 | 9,206 | 3.3 | % | |||||||||||||||
Yandy Holding, LLC | L+9.00% | 10.57 | % | 9/30/2019 | 4,508 | 4,480 | 4,366 | 1.6 | % | |||||||||||||||
Yandy Holding, LLC (Revolver) (f) | L+9.00% | 10.57 | % | 9/30/2019 | 907 | 106 | 102 | 0.0 | % | |||||||||||||||
31,984 | 30,700 | 28,948 | 10.4 | % | ||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
APCO Worldwide, Inc. | L+8.00% | 9.57 | % | 6/30/2022 | 5,000 | 4,908 | 5,025 | 1.8 | % | |||||||||||||||
Burroughs, Inc. (h) | L+7.50% | 9.03 | % | 12/22/2022 | 6,000 | 5,910 | 5,910 | 2.2 | % | |||||||||||||||
Burroughs, Inc. (Revolver) (f) | L+7.50% | 9.07 | % | 12/22/2022 | 750 | 75 | 75 | 0.0 | % | |||||||||||||||
Curion Holdings, LLC (h) | L+7.00% | 8.57 | % | 5/2/2022 | 3,884 | 3,832 | 3,841 | 1.4 | % | |||||||||||||||
Curion Holdings, LLC (Revolver) (f) | L+7.00% | 8.57 | % | 5/2/2022 | 308 | 77 | 76 | 0.0 | % | |||||||||||||||
EB Employee Solutions, LLC (h) | L+8.50% | 10.07 | % | 2/28/2019 | 3,195 | 3,168 | 3,115 | 1.1 | % | |||||||||||||||
First Call Resolution, LLC (h) | L+7.00% | 8.36 | % | 9/22/2022 | 5,000 | 4,916 | 5,002 | 1.8 | % | |||||||||||||||
Madison Logic, Inc. (h) | L+8.00% | 9.57 | % | 11/30/2021 | 10,237 | 10,069 | 10,289 | 3.7 | % | |||||||||||||||
Madison Logic, Inc. (Delayed Draw) (f) (g) | L+8.00% | 9.57 | % | 11/30/2021 | 4,818 | — | — | 0.0 | % | |||||||||||||||
Madison Logic, Inc. (Revolver) (f) | L+8.00% | 9.57 | % | 11/30/2021 | 988 | — | — | 0.0 | % | |||||||||||||||
40,180 | 32,955 | 33,333 | 12.0 | % | ||||||||||||||||||||
Services: Consumer | ||||||||||||||||||||||||
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.) | L+6.50% | 7.84 | % | 7/1/2020 | 4,518 | 4,462 | 4,538 | 1.7 | % | |||||||||||||||
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.) | L+12.50% | 13.84 | % | 7/1/2020 | 4,759 | 4,697 | 4,756 | 1.7 | % | |||||||||||||||
PeopleConnect Intermediate, LLC (formerly Intelius, Inc.) (Revolver) (f) | L+9.50% | 11.10 | % | 8/11/2020 | 236 | 118 | 118 | 0.0 | % | |||||||||||||||
9,513 | 9,277 | 9,412 | 3.4 | % | ||||||||||||||||||||
Telecommunications | ||||||||||||||||||||||||
Peerless Network, Inc. (h) | L+9.25% | 9.86%
Cash/ 0.75% PIK | (r) | 12/11/2020 | 3,139 | 3,089 | 3,152 | 1.1 | % | |||||||||||||||
3,139 | 3,089 | 3,152 | 1.1 | % | ||||||||||||||||||||
Utilities: Electric | ||||||||||||||||||||||||
CRCI Holdings, Inc. | L+5.50% | 7.19 | % | 8/31/2023 | 2,782 | 2,759 | 2,792 | 1.0 | % | |||||||||||||||
2,782 | 2,759 | 2,792 | 1.0 | % | ||||||||||||||||||||
Wholesale | ||||||||||||||||||||||||
Mid-West Wholesale Hardware Co. (h) | L+8.00% | 9.57 | % | 2/9/2022 | 16,568 | 16,277 | 16,544 | 5.9 | % | |||||||||||||||
Mid-West Wholesale Hardware Co. (Revolver) (f) | L+8.00% | 9.57 | % | 2/9/2022 | 4,421 | — | — | 0.0 | % |
See Notes to Consolidated Financial Statements.
18 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Nearly Natural, Inc. (h) | L+7.00% | 8.59 | % | 12/15/2022 | 7,000 | $ | 6,861 | $ | 6,860 | 2.5 | % | |||||||||||||
Nearly Natural, Inc. (Revolver) (f) | L+7.00% | 8.59 | % | 12/15/2022 | 1,522 | — | — | 0.0 | % | |||||||||||||||
29,511 | 23,138 | 23,404 | 8.4 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Senior Secured Loans | 378,116 | 332,406 | 335,935 | 120.6 | % | |||||||||||||||||||
Unitranche Secured Loans (ab) | ||||||||||||||||||||||||
Chemicals, Plastics & Rubber | ||||||||||||||||||||||||
MFG Chemical, LLC (h) | L+6.00% | 7.57 | % | 6/23/2022 | 8,856 | 8,734 | 8,860 | 3.2 | % | |||||||||||||||
8,856 | 8,734 | 8,860 | 3.2 | % | ||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Incipio Technologies, Inc. (s) | L+7.75% | 9.32 | % | 12/26/2019 | 12,209 | 12,063 | 11,769 | 4.2 | % | |||||||||||||||
12,209 | 12,063 | 11,769 | 4.2 | % | ||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Collaborative Neuroscience Network, LLC | L+11.50% | 13.07 | % | 4/27/2018 | 6,120 | 6,076 | 5,912 | 2.1 | % | |||||||||||||||
Collaborative Neuroscience Network, LLC | L+15.00% | 12.00%
Cash/ 3.00% PIK | 4/27/2018 | 295 | 295 | 295 | 0.1 | % | ||||||||||||||||
Collaborative Neuroscience Network, LLC (Revolver) | L+10.00% | 11.57 | % | 4/27/2018 | 200 | 191 | 195 | 0.1 | % | |||||||||||||||
Priority Ambulance, LLC (h) | L+6.50% | 8.19 | % | 4/12/2022 | 9,258 | 9,088 | 9,309 | 3.4 | % | |||||||||||||||
Priority Ambulance, LLC (Delayed Draw) (f) (g) | L+6.50% | 8.19 | % | 4/12/2022 | 677 | — | — | 0.0 | % | |||||||||||||||
16,550 | 15,650 | 15,711 | 5.7 | % | ||||||||||||||||||||
Hotels, Gaming & Leisure | ||||||||||||||||||||||||
Playtime, LLC | L+7.50% | 9.07 | % | 12/31/2021 | 4,214 | 4,214 | 3,955 | 1.4 | % | |||||||||||||||
4,214 | 4,214 | 3,955 | 1.4 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Unitranche Secured Loans | 41,829 | 40,661 | 40,295 | 14.5 | % | |||||||||||||||||||
Junior Secured Loans | ||||||||||||||||||||||||
Aerospace & Defense | ||||||||||||||||||||||||
AIM Aerospace, Inc. | L+9.00% | 10.38 | % | 8/2/2022 | 5,000 | 4,943 | 5,000 | 1.8 | % | |||||||||||||||
5,000 | 4,943 | 5,000 | 1.8 | % | ||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
Confie Seguros Holdings II Co. | L+9.50% | 10.98 | % | 5/8/2019 | 8,594 | 8,361 | 8,336 | 3.0 | % | |||||||||||||||
8,594 | 8,361 | 8,336 | 3.0 | % | ||||||||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||||||||||
CSM Bakery Supplies LLC | L+7.75% | 9.08 | % | 7/5/2021 | 5,792 | 5,792 | 5,611 | 2.0 | % | |||||||||||||||
5,792 | 5,792 | 5,611 | 2.0 | % | ||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Heartland Dental, LLC | L+8.50% | 9.75 | % | 7/31/2024 | 3,000 | 2,956 | 3,034 | 1.1 | % | |||||||||||||||
3,000 | 2,956 | 3,034 | 1.1 | % | ||||||||||||||||||||
High Tech Industries | ||||||||||||||||||||||||
Answers Finance, LLC | P+7.90% | 9.00 | % (ac) | 9/15/2021 | 394 | 392 | 386 | 0.1 | % | |||||||||||||||
Micro Holdings Corp. | L+7.50% | 9.09 | % | 8/18/2025 | 3,000 | 2,971 | 3,021 | 1.1 | % | |||||||||||||||
3,394 | 3,363 | 3,407 | 1.2 | % | ||||||||||||||||||||
Media: Broadcasting & Subscription | ||||||||||||||||||||||||
Mergermarket Bidco Limited | L+7.25% | 8.71 | % | 8/4/2025 | 4,500 | 4,456 | 4,522 | 1.6 | % | |||||||||||||||
4,500 | 4,456 | 4,522 | 1.6 | % |
See Notes to Consolidated Financial Statements.
19 |
MONROE CAPITAL
CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Media: Diversified & Production | ||||||||||||||||||||||||
The Octave Music Group, Inc. (fka SCP TPZ Acquisition, Inc.) | L+8.25% | 9.62 | % | 5/29/2022 | 5,000 | $ | 4,947 | $ | 5,006 | 1.8 | % | |||||||||||||
5,000 | 4,947 | 5,006 | 1.8 | % | ||||||||||||||||||||
Services: Consumer | ||||||||||||||||||||||||
Education Corporation of America | L+11.00% | 12.69 | % | 12/31/2018 | 625 | 620 | 625 | 0.2 | % | |||||||||||||||
Pre-Paid Legal Services, Inc. (Legal Shield) | L+9.00% | 10.57 | % | 7/1/2020 | 3,000 | 3,000 | 3,008 | 1.1 | % | |||||||||||||||
3,625 | 3,620 | 3,633 | 1.3 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Junior Secured Loans | 38,905 | 38,438 | 38,549 | 13.8 | % | |||||||||||||||||||
Equity Securities (t) (u) | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
PKS Holdings, LLC (warrant to purchase 14,247 class A preferred units) (e) | — | — | (v) | 11/30/2027 | — | 116 | 119 | 0.0 | % | |||||||||||||||
116 | 119 | 0.0 | % | |||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Collaborative Neuroscience Network, LLC (warrant to purchase up to 2 LLC units) | — | — | (v) | 12/27/2022 | — | — | — | 0.0 | % | |||||||||||||||
Collaborative Neuroscience Network, LLC (warrant to purchase up to 2 LLC units) | — | — | (v) | 12/31/2027 | — | — | — | 0.0 | % | |||||||||||||||
— | — | 0.0 | % | |||||||||||||||||||||
High Tech Industries | ||||||||||||||||||||||||
Answers Finance, LLC (76,539 shares of common stock) | — | — | (v) | — | — | 2,413 | 1,339 | 0.5 | % | |||||||||||||||
2,413 | 1,339 | 0.5 | % | |||||||||||||||||||||
Hotels, Gaming & Leisure | ||||||||||||||||||||||||
Playtime, LLC – Preferred Units (8,665 units) | — | — | (v) | — | — | 200 | 18 | 0.0 | % | |||||||||||||||
200 | 18 | 0.0 | % | |||||||||||||||||||||
Media: Advertising, Printing & Publishing | ||||||||||||||||||||||||
AdTheorent, Inc. (128,866 class A voting units) | — | — | (v) | — | — | 129 | 171 | 0.1 | % | |||||||||||||||
InMobi Pte, Ltd. (represents the right to purchase 2.80% of the equity) (e) (m) | — | — | (v) | 9/18/2025 | — | — | 219 | 0.1 | % | |||||||||||||||
129 | 390 | 0.2 | % | |||||||||||||||||||||
Retail | ||||||||||||||||||||||||
The Tie Bar Operating Company, LLC – Class A Preferred Units (1,275 units) | — | — | — | — | 86 | 122 | 0.0 | % | ||||||||||||||||
The Tie Bar Operating Company, LLC – Class B Preferred Units (1,275 units) | — | — | — | — | 1 | — | 0.0 | % | ||||||||||||||||
87 | 122 | 0.0 | % | |||||||||||||||||||||
Services: Business | ||||||||||||||||||||||||
APCO Worldwide, Inc. (100 class A voting common stock) | — | — | (v) | — | — | 395 | 399 | 0.1 | % | |||||||||||||||
395 | 399 | 0.1 | % | |||||||||||||||||||||
Services: Consumer | ||||||||||||||||||||||||
Education Corporation of America – Series G Preferred Stock (8,333 shares) | n/a | 12.00% PIK | — | — | 8,366 | 8,429 | 3.0 | % | ||||||||||||||||
8,366 | 8,429 | 3.0 | % |
See Notes to Consolidated Financial Statements.
20 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Wholesale | ||||||||||||||||||||||||
Nearly Natural, Inc. (152,174 class A units) | — | — | (v) | — | — | $ | 152 | $ | 152 | 0.1 | % | |||||||||||||
152 | 152 | 0.1 | % | |||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Equity Securities | 11,858 | 10,968 | 3.9 | % | ||||||||||||||||||||
Total Non-Controlled/Non-Affiliate Company Investments | $ | 423,363 | $ | 425,747 | 152.8 | % | ||||||||||||||||||
Non-Controlled Affiliate Company Investments (w) | ||||||||||||||||||||||||
Senior Secured Loans | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
American Community Homes, Inc. | L+8.00% | 9.57 | % | 7/22/2019 | 7,667 | 7,592 | 7,441 | 2.7 | % | |||||||||||||||
American Community Homes, Inc. | L+12.50% | 9.57%
Cash/ 4.50% PIK | 7/22/2019 | 4,413 | 4,376 | 4,329 | 1.6 | % | ||||||||||||||||
American Community Homes, Inc. | L+12.50% | 9.57%
Cash/ 4.50% PIK | n/a (x) | 542 | 536 | 542 | 0.2 | % | ||||||||||||||||
American Community Homes, Inc. | L+8.00% | 9.57 | % | 7/22/2019 | 444 | 435 | 431 | 0.2 | % | |||||||||||||||
American Community Homes, Inc. | L+12.50% | 9.57%
Cash/ 4.50% PIK | 7/22/2019 | 228 | 223 | 224 | 0.1 | % | ||||||||||||||||
American Community Homes, Inc. (Delayed Draw) (f) (g) | L+8.00% | 9.57 | % | 7/22/2019 | 444 | — | — | 0.0 | % | |||||||||||||||
American Community Homes, Inc. (Delayed Draw) (f) (g) | L+12.50% | 9.57%
Cash/ 4.50% PIK | 7/22/2019 | 222 | — | — | 0.0 | % | ||||||||||||||||
13,960 | 13,162 | 12,967 | 4.8 | % | ||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands, LLC) | n/a | 12.00% PIK | (y) | 8/29/2019 | 1,157 | 1,157 | — | 0.0 | % | |||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands, LLC) | n/a | 15.00% PIK | (y) | 8/29/2019 | 422 | 416 | — | 0.0 | % | |||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands, LLC) | n/a | 17.00% PIK | (y) | 3/30/2018 | 235 | 235 | — | 0.0 | % | |||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands, LLC) | n/a | 16.50% PIK | (y) | 8/29/2019 | 550 | 534 | 550 | 0.2 | % | |||||||||||||||
2,364 | 2,342 | 550 | 0.2 | % | ||||||||||||||||||||
Containers, Packaging & Glass | ||||||||||||||||||||||||
Summit Container Corporation (h) | L+12.00% | 12.00%
Cash/ 2.00% PIK | 1/6/2019 | 3,593 | 3,576 | 3,421 | 1.2 | % | ||||||||||||||||
Summit Container Corporation (h) | L+12.00% | 12.00%
Cash/ 2.00% PIK | 1/6/2019 | 1,508 | 1,508 | 1,507 | 0.5 | % | ||||||||||||||||
5,101 | 5,084 | 4,928 | 1.7 | % | ||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Rockdale Blackhawk, LLC | L+13.00% | 14.57 | % | 3/31/2020 | 10,922 | 10,355 | 10,594 | 3.8 | % | |||||||||||||||
Rockdale Blackhawk, LLC (Capex) | L+13.00% | 14.57 | % | 3/31/2020 | 549 | 549 | 533 | 0.2 | % | |||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | L+13.00% | 14.57 | % | 3/31/2020 | 1,849 | 1,849 | 1,797 | 0.6 | % | |||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | L+13.00% | 14.57 | % | 3/31/2020 | 3,236 | 3,236 | 3,145 | 1.1 | % | |||||||||||||||
SHI Holdings, Inc. (h) | L+10.25% | 11.82 | % | 7/10/2019 | 2,625 | 2,608 | 2,625 | 0.9 | % | |||||||||||||||
SHI Holdings, Inc. (Revolver) (f) | L+10.25% | 11.82 | % | 7/10/2019 | 2,318 | 2,216 | 2,226 | 0.8 | % | |||||||||||||||
21,499 | 20,813 | 20,920 | 7.4 | % | ||||||||||||||||||||
Retail | ||||||||||||||||||||||||
Luxury Optical Holdings Co. | L+8.00% | 9.57% PIK | 9/12/2019 | 4,249 | 4,218 | 3,697 | 1.3 | % | ||||||||||||||||
Luxury Optical Holdings Co. (Delayed Draw) (f) (g) | L+11.50% | 13.07 | % | 9/12/2019 | 1,176 | 741 | 741 | 0.3 | % | |||||||||||||||
Luxury Optical Holdings Co. (Revolver) | L+8.00% | 9.57% PIK | 9/12/2019 | 196 | 196 | 170 | 0.1 | % | ||||||||||||||||
TPP Operating, Inc. | L+6.00% | 7.57% PIK | (y) | 11/8/2018 | 9,370 | 9,330 | — | 0.0 | % |
See Notes to Consolidated Financial Statements.
21 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
TPP Operating, Inc. | L+6.00% | 7.57 | %(y) | 11/8/2018 | 6,885 | $ | 6,885 | $ | 3,373 | 1.2 | % | |||||||||||||
TPP Operating, Inc. | L+9.61% | 11.18 | %(y) | 11/8/2018 | 4,593 | 4,593 | 4,593 | 1.6 | % | |||||||||||||||
26,469 | 25,963 | 12,574 | 4.5 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Senior Secured Loans | 69,393 | 67,364 | 51,939 | 18.6 | % | |||||||||||||||||||
Junior Secured Loans | ||||||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands LLC) | n/a | 15.00% PIK | (y) | 5/1/2020 | 2,011 | 2,011 | — | 0.0 | % | |||||||||||||||
2,011 | 2,011 | — | 0.0 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Company Junior Secured Loans | 2,011 | 2,011 | — | 0.0 | % | |||||||||||||||||||
Equity Securities | ||||||||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||||||||
American Community Homes, Inc. (warrant to purchase up to 9.0% of the equity) | — | — | (v) | 10/9/2024 | — | — | 353 | 0.1 | % | |||||||||||||||
— | 353 | 0.1 | % | |||||||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands LLC) | — | — | (v) | — | — | — | — | 0.0 | % | |||||||||||||||
Millennial Brands LLC (fka Rocket Dog Brands LLC) | n/a | 15.00% PIK | (y) | — | — | 967 | — | 0.0 | % | |||||||||||||||
967 | — | 0.0 | % | |||||||||||||||||||||
Containers, Packaging & Glass | ||||||||||||||||||||||||
Summit Container Corporation (warrant to purchase up to 19.50% of the equity) | — | — | (v) | 1/6/2024 | — | — | — | 0.0 | % | |||||||||||||||
— | — | 0.0 | % | |||||||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||||||||
Rockdale Blackhawk, LLC – LLC Units (18.03% of the LLC interest) | — | — | (v) | — | — | 1,093 | 5,673 | 2.0 | % | |||||||||||||||
SHI Holdings, Inc. (24 shares of common stock) | — | — | (v) | — | — | 27 | 786 | 0.3 | % | |||||||||||||||
1,120 | 6,459 | 2.3 | % | |||||||||||||||||||||
Retail | ||||||||||||||||||||||||
Luxury Optical Holdings Co. (86 shares of common stock) | — | — | (v) | — | — | — | — | 0.0 | % | |||||||||||||||
TPP Operating, Inc. (24 shares of common stock) | — | — | (v) | — | — | 1,953 | — | 0.0 | % | |||||||||||||||
TPP Operating, Inc. (16 shares of common stock) (z) | — | — | (v) | — | — | 1,302 | — | 0.0 | % | |||||||||||||||
3,255 | — | 0.0 | % | |||||||||||||||||||||
Total Non-Controlled Affiliate Equity Securities | 5,342 | 6,812 | 2.4 | % | ||||||||||||||||||||
Total Non-Controlled Affiliate Company Investments | $ | 74,717 | $ | 58,751 | 21.0 | % |
See Notes to Consolidated Financial Statements.
22 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate | Maturity | Principal | Amortized Cost | Fair Value (c) | %
of Net Assets (d) | |||||||||||||||||
Controlled Affiliate Company Investments (aa) | ||||||||||||||||||||||||
Equity Securities | ||||||||||||||||||||||||
Investment Funds & Vehicles | ||||||||||||||||||||||||
MRCC Senior Loan Fund I, LLC (e) | — | — | — | — | $ | 9,500 | $ | 9,640 | 3.5 | % | ||||||||||||||
Total Controlled Affiliate Equity Securities | 9,500 | 9,640 | 3.5 | % | ||||||||||||||||||||
Total Controlled Affiliate Company Investments | $ | 9,500 | $ | 9,640 | 3.5 | % | ||||||||||||||||||
TOTAL INVESTMENTS | $ | 507,580 | $ | 494,138 | 177.3 | % |
(a) | All of our investments are issued by eligible portfolio companies, as defined in the Investment Company Act of 1940 (the “1940 Act”), unless otherwise noted. All of our investments are issued by U.S. portfolio companies unless otherwise noted. |
(b) | The majority of the investments bear interest at a rate that may be determined by reference to London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, monthly, quarterly, or semiannually. For each such investment, the Company has provided the spread over LIBOR or Prime and the current contractual interest rate in effect at December 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor. |
(c) | Because there is no readily available market value for these investments, the fair value of these investments is determined in good faith using significant unobservable inputs by our board of directors as required by the Investment Company Act of 1940. (See Note 4 in the accompanying notes to the consolidated financial statements.) |
(d) | Percentages are based on net assets of $278,699 as of December 31, 2017. |
(e) | This investment is treated as a non-qualifying investment under Section 55(a) of the 1940 Act. Under the 1940 Act, the Company may not acquire any non-qualifying asset unless, at the time the acquisition is made, qualifying assets represent at least 70% of the Company’s total assets. As of December 31, 2017, non-qualifying assets totaled 13.13% of the Company’s total assets excluding prepaid expenses. |
(f) | All or a portion of this commitment was unfunded at December 31, 2017. As such, interest is earned only on the funded portion of this commitment. |
(g) | This delayed draw loan requires that certain financial covenants be met by the portfolio company prior to any fundings. |
(h) | All of this loan is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility. |
(i) | A portion of this loan (principal of $2,113) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility. |
(j) | A portion of the PIK interest rate for Cornerstone Detention Products, Inc. is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 2.33% per annum. |
(k) | This investment represents a senior secured note that is traded in the secondary bond market. |
(l) | The PIK portion of the interest rate for Landpoint, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 2.25% per annum. |
(m) | This is an international company. |
(n) | This term loan is denominated in Great Britain pounds and is translated into U.S. dollars as of the valuation date. |
(o) | A portion of the PIK interest rate for TRG, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 2.92% per annum. |
(p) | A portion of this loan (principal of $4,099) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility. |
See Notes to Consolidated Financial Statements.
23 |
MONROE CAPITAL CORPORATION
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
December 31, 2017
(in thousands, except for shares and units)
(q) | A portion of the PIK interest rate for Vacation Innovations, LLC is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 1.81% per annum. |
(r) | The PIK portion of the interest rate for Peerless Network, Inc. is structured as a fee paid upon the termination of the commitment. The fee currently accrues at 0.75% per annum. |
(s) | A portion of this loan (principal of $4,477) is held in the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP and is therefore not collateral to the Company’s revolving credit facility. |
(t) | Represents less than 5% ownership of the portfolio company’s voting securities. |
(u) | Ownership of certain equity investments may occur through a holding company or partnership. |
(v) | Represents a non-income producing security. |
(w) | As defined in the 1940 Act, the Company is deemed to be an “Affiliated Person” of the portfolio company as it owns five percent or more of the portfolio company’s voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was an Affiliated Person (but not a portfolio company that the Company is deemed to control). |
(x) | This is a demand note with no stated maturity. |
(y) | This position was on non-accrual status as of December 31, 2017, meaning that the Company has ceased accruing interest income on the position. See Note 2 in the accompanying notes to the consolidated financial statements for additional information on the Company’s accounting policies. |
(z) | This investment is held in a wholly owned entity, MCC Holdco Equity Manager I, LLC (“MCC Holdco”), which has an independent manager who has full control over the operations of MCC Holdco, including the right to vote the shares of TPP Holdco LLC, the holding company which owns the Company’s equity interest in TPP. See Note 5 in the accompanying notes to the consolidated financial statements for additional information. |
(aa) | As defined in the 1940 Act, the Company is deemed to be both an “Affiliated Person” of and to “Control” this portfolio company as it owns more than 25% in company’s voting securities. See Note 5 in the accompanying notes to the consolidated financial statements for additional information on transactions in which the issuer was both an Affiliated Person and a portfolio company that the Company is deemed to Control. |
(ab) | The Company structures its unitranche secured loans as senior secured loans. The Company obtains security interests in the assets of these portfolio companies that serve as collateral in support of the repayment of these loans. This collateral may take the form of first-priority liens on the assets of a portfolio company. Generally, the Company syndicates a “first out” portion of the loan to an investor and retains a “last out” portion of the loan, in which case the “first out” portion of the loan will generally receive priority with respect to payments of principal, interest and any other amounts due thereunder. Unitranche structures combine characteristics of traditional first lien senior secured as well as second lien and subordinated loans and the Company’s unitranche secured loans will expose the Company to the risks associated with second lien and subordinated loans and may limit the Company’s recourse or ability to recover collateral upon a portfolio company’s bankruptcy. Unitranche secured loans typically provide for moderate loan amortization in the initial years of the facility, with the majority of the amortization deferred until loan maturity. Unitranche secured loans generally allow the borrower to make a large lump sum payment of principal at the end of the loan term, and there is a risk of loss if the borrower is unable to pay the lump sum or refinance the amount owed at maturity. In many cases the Company, together with its affiliates, are the sole or majority lender of these unitranche secured loans, which can afford the Company additional influence with a borrower in terms of monitoring and, if necessary, remediation in the event of underperformance. |
(ac) | This term loan is subject to a prime rate cap of 1.10%. |
n/a — not applicable
See Notes to Consolidated Financial Statements.
24 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(in thousands, except share and per share data)
Note 1. Organization and Principal Business
Monroe Capital Corporation (“Monroe Capital” and together with its subsidiaries, the “Company”) was formed in February 2011 to act as an externally managed non-diversified, closed-end management investment company and has elected to be treated as a business development company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Company had no substantive operating activities prior to October 24, 2012, the date of its initial public offering. Monroe Capital’s investment objective is to maximize the total return to its stockholders in the form of current income and capital appreciation through investment in senior secured, junior secured and unitranche secured (a combination of senior secured and junior secured debt in the same facility in which the Company syndicates a “first out” portion of the loan to an investor and retains a “last out” portion of the loan) debt and, to a lesser extent, unsecured subordinated debt and equity investments. Monroe Capital is managed by Monroe Capital BDC Advisors, LLC (“MC Advisors”), a registered investment adviser under the Investment Advisers Act of 1940, as amended. In addition, for U.S. federal income tax purposes, Monroe Capital has elected to be treated as a regulated investment company (“RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
On February 28, 2014, the Company’s wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP (“MRCC SBIC”), a Delaware limited partnership, received a license from the Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Act of 1958, as amended. MRCC SBIC commenced operations on September 16, 2013. As of September 30, 2018, MRCC SBIC had $57,624 in leverageable capital and $115,000 in SBA-guaranteed debentures outstanding. See Note 7 for additional information.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The accompanying consolidated financial statements of the Company and related financial information have been prepared pursuant to the requirements for reporting on Form 10-Q and Articles 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”). Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
As permitted under Regulation S-X and ASC Topic 946, the Company will generally not consolidate its investment in a portfolio company other than an investment company subsidiary or a controlled operating company whose business consists of providing services to the Company. Accordingly, the Company consolidated the results of the Company’s wholly-owned subsidiaries, MRCC SBIC and its wholly-owned general partner MCC SBIC GP, LLC, MRCC Holding Company I, LLC, MRCC Holding Company II, LLC, and MRCC Holding Company III, LLC, in its consolidated financial statements. All intercompany balances and transactions have been eliminated. The Company does not consolidate its non-controlling interest in MRCC Senior Loan Fund I, LLC (“SLF”). See further description of the Company’s investment in SLF in Note 3.
25 |
Fair Value of Financial Instruments
The Company applies fair value to substantially all of its financial instruments in accordance with ASC Topic 820 — Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework used to measure fair value, and requires disclosures for fair value measurements, including the categorization of financial instruments into a three-level hierarchy based on the transparency of valuation inputs. See Note 4 for further discussion regarding the fair value measurements and hierarchy.
ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments.
Revenue Recognition
The Company’s revenue recognition policies are as follows:
Investments and related investment income: Interest and dividend income are recorded on the accrual basis to the extent that the Company expects to collect such amounts. Interest income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. All other income is recorded into income when earned. The Company records fees on loans based on the determination of whether the fee is considered a yield enhancement or payment for a service. If the fee is considered a yield enhancement associated with a funding of cash on a loan, the fee is generally deferred and recognized into interest income using the effective interest method if captured in the cost basis or using the straight-line method if the loan is unfunded and therefore there is no cost basis. If the fee is not considered a yield enhancement because a service was provided, and the fee is payment for that service, the fee is deemed earned and recognized as fee income in the period earned.
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies. Each distribution received from limited liability company (“LLC”) and limited partnership (“LP”) investments is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, the Company will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. For the three and nine months ended September 30, 2018, the Company received return of capital distributions from the Company’s investment in LLC equity interest in SLF of zero and $9,500, respectively. For the three and nine months ended September 30, 2017, the Company did not receive return of capital distributions from the Company’s investment in LLC equity interest in SLF, as the Company did not make its investment in SLF until November 2017.
Loan origination fees, original issue discount and market discount or premiums are capitalized, and the Company then amortizes such amounts using the effective interest method as interest income over the life of the investment. Unamortized discounts and loan origination fees totaled $6,490 and $8,005 as of September 30, 2018 and December 31, 2017, respectively. Upfront loan origination and closing fees received for the three and nine months ended September 30, 2018 totaled $381 and $1,320, respectively. For the three and nine months ended September 30, 2017, upfront loan origination and closing fees received totaled $755 and $2,732, respectively. For the three and nine months ended September 30, 2018, interest income included $281 and $1,837 of accretion of loan origination fees, original issue discounts and market discounts or premiums, respectively. For the three and nine months ended September 30, 2017, interest income included $532 and $1,278 of accretion of loan origination fees, original issue discounts and market discounts or premiums, respectively. Upon the prepayment of a loan or debt security, any unamortized premium or discount or loan origination fees are recorded as interest income. For the three and nine months ended September 30, 2018, interest income included $450 and $895 of unamortized discount or loan origination fees recorded as interest income upon prepayment of a loan or debt security, respectively. For the three and nine months ended September 30, 2017, interest income included $514 and $1,488 of unamortized discount or loan origination fees recorded as interest income upon prepayment of a loan or debt security, respectively.
The Company has certain investments in its portfolio that contain a payment-in-kind (“PIK”) interest provision, which represents contractual interest or dividends that are added to the principal balance and recorded as income. For the three and nine months ended September 30, 2018, interest income included $733 and $1,389 of PIK interest, respectively. For the three and nine months ended September 30, 2017, interest income included $345 and $1,363 of PIK interest, respectively. For the three and nine months ended September 30, 2018, dividend income included $288 and $813 of PIK dividends, respectively. For the three and nine months ended September 30, 2017, dividend income did not include PIK dividends. The Company stops accruing PIK interest when it is determined that PIK interest is no longer collectible. To maintain RIC tax treatment, and to avoid corporate tax, substantially all of this income must be paid out to stockholders in the form of distributions, even though the Company has not yet collected the cash.
26 |
Investment transactions are recorded on a trade-date basis. Realized gains or losses on portfolio investments are calculated based upon the difference between the net proceeds from the disposition and the amortized cost basis of the investment, without regard to unrealized gains and losses previously recognized. Realized gains and losses are recorded within net realized gain (loss) on investments in the consolidated statements of operations. Changes in the fair value of investments from the prior period, as determined by the Company’s board of directors (the “Board”) through the application of the Company’s valuation policy, are included within net change in unrealized gain (loss) on investments in the consolidated statements of operations.
Non-accrual: Loans or preferred equity securities are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal, interest, or dividends are paid, and, in management’s judgment are likely to remain current. The fair value of the Company’s investments on non-accrual status totaled $13,381 and $8,516 at September 30, 2018 and December 31, 2017, respectively.
Partial loan sales: The Company follows the guidance in ASC Topic 860 — Transfers and Servicing (“ASC Topic 860”), when accounting for loan participations and other partial loan sales. Such guidance requires a participation or other partial loan sale to meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain on the Company’s consolidated statements of assets and liabilities and the proceeds are recorded as a secured borrowing until the definition is met. For these partial loan sales, the interest earned on the entire loan balance is recorded within “interest income” and the interest earned by the buyer in the partial loan sale is recorded within “interest and other debt financing expenses” in the accompanying consolidated statements of operations. Changes in the fair value of secured borrowings from the prior period, as determined by the Board through the application of the Company’s valuation policy, are included as changes in unrealized gain (loss) on secured borrowings in the consolidated statements of operations. See Note 7 for additional information.
Distributions
Distributions to common stockholders are recorded on the record date. The amount, if any, to be distributed is determined by the Board each quarter and is generally based upon the earnings estimated by management. Net realized capital gains, if any, are generally distributed at least annually, although the Company may decide to retain such capital gains for investment.
The determination of the tax attributes for the Company’s distributions is made annually, based upon its taxable income for the full year and distributions paid for the full year. Ordinary dividend distributions from a RIC do not qualify for the preferential tax rate on qualified dividend income from domestic corporations and qualified foreign corporations, except to the extent that the RIC received the income in the form of qualifying dividends from domestic corporations and qualified foreign corporations. The tax attributes for distributions will generally include both ordinary income and capital gains, but may also include qualified dividends or return of capital.
The Company has adopted a dividend reinvestment plan (“DRIP”) that provides for the reinvestment of dividends on behalf of its stockholders, unless a stockholder has elected to receive dividends in cash. As a result, if the Company declares a cash dividend, the Company’s stockholders who have not “opted out” of the DRIP at least three days prior to the dividend payment date will have their cash dividend automatically reinvested into additional shares of the Company’s common stock. The Company has the option to satisfy the share requirements of the DRIP through the issuance of new shares of common stock or through open market purchases of common stock by the DRIP plan administrator. Newly issued shares are valued based upon the final closing price of the Company’s common stock on a date determined by the Board. Shares purchased in the open market to satisfy the DRIP requirements will be valued based upon the average price of the applicable shares purchased by the DRIP plan administrator, before any associated brokerage or other costs. See Note 9 for additional information.
Earnings per Share
In accordance with the provisions of ASC Topic 260 — Earnings per Share (“ASC Topic 260”), basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. The weighted average shares outstanding utilized in the calculation of earnings per share take into account share issues on the issuance date and the Company’s repurchases of its common stock on the repurchase date. See Note 10 for additional information on the Company’s share activity. For the periods presented in these consolidated financial statements, there were no potentially dilutive common shares issued.
27 |
Segments
In accordance with ASC Topic 280 — Segment Reporting, the Company has determined that it has a single reporting segment and operating unit structure.
Cash
The Company deposits its cash in a financial institution and, at times, such balances may be in excess of the Federal Deposit Insurance Corporation insurance limits.
Restricted Cash
Restricted cash includes amounts held within MRCC SBIC. Cash held within an SBIC is generally restricted to the originations of new loans from the SBIC and the payment of SBA debentures and related interest expense.
Unamortized Deferred Financing Costs
Deferred financing costs represent fees and other direct incremental costs incurred in connection with the Company’s borrowings. As of September 30, 2018 and December 31, 2017, the Company had unamortized deferred financing costs of $6,721 and $4,670, respectively, presented as a direct reduction of the carrying amount of debt on the consolidated statements of assets and liabilities. These amounts are amortized and included in interest expense in the consolidated statements of operations over the estimated average life of the borrowings. Amortization of deferred financing costs for the three and nine months ended September 30, 2018 was $355 and $951, respectively. Amortization of deferred financing costs for the three and nine months ended September 30, 2017 was $274 and $760, respectively.
Offering Costs
Offering costs include, among other things, fees paid in relation to legal, accounting, regulatory and printing work completed in preparation of debt and equity offerings. Offering costs are charged against the proceeds from debt or equity offerings within the consolidated statements of changes in net assets. As of September 30, 2018 and December 31, 2017, other assets on the consolidated statements of assets and liabilities included $288 and $494, respectively, of deferred offering costs which will be charged against the proceeds from future debt or equity offerings when received.
Investments Denominated in Foreign Currency
As of September 30, 2018, the Company held investments in two portfolio companies that were denominated in Great Britain pounds.
At each balance sheet date, portfolio company investments denominated in foreign currencies are translated into U.S. dollars using the spot exchange rate on the last business day of the period. Purchases and sales of foreign portfolio company investments, and any income from such investments, are translated into U.S. dollars using the rates of exchange prevailing on the respective dates of such transactions.
Although the fair values of foreign portfolio company investments and the fluctuation in such fair values are translated into U.S. dollars using the applicable foreign exchange rates described above, the Company does not isolate that portion of the change in fair values resulting from foreign currency exchange rates fluctuations from the change in fair values of the underlying investment. All fluctuations in fair value are included in net change in unrealized gain (loss) of investments in the Company’s consolidated statements of operations.
Investments denominated in foreign currencies and foreign currency transactions may involve certain consideration and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. dollar.
Derivative Instruments
The Company may enter into foreign currency forward contracts to reduce the Company’s exposure to foreign currency exchange rate fluctuations. In a foreign currency forward contract, the Company agrees to receive or deliver a fixed quantity of one currency for another, at a pre-determined price at a future date. Foreign currency forward contracts are marked-to-market based on the difference between the forward rate and the exchange rate at the current period end. Unrealized gain (loss) on foreign currency forward contracts are recorded on the Company’s consolidated statements of assets and liabilities by counterparty on a net basis.
The Company does not utilize hedge accounting and as such values its derivatives at fair value with the unrealized gain or loss recorded in net change in unrealized gain (loss) from foreign currency and other transactions in the Company’s consolidated statements of operations.
28 |
Income Taxes
The Company has elected to be treated as a RIC under Subchapter M of the Code and operates in a manner so as to qualify for the tax treatment available to RICs. To maintain qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and distribute to stockholders, for each taxable year, at least 90% of the Company’s “investment company taxable income,” which is generally the Company’s net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. If the Company qualifies as a RIC and satisfies the annual distribution requirement, the Company will not have to pay corporate-level federal income taxes on any income that the Company distributes to its stockholders. The Company intends to make distributions in an amount sufficient to maintain RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal excise taxes if the Company does not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years for which it paid no federal income taxes. To the extent that the Company determines that its estimated current year annual taxable income may exceed estimated current year dividend distributions, the Company accrues excise tax, if any, calculated as 4% of the estimated excess taxable income as taxable income is earned. For the three and nine months ended September 30, 2018, zero and $11, respectively, were recorded on the consolidated statements of operations for U.S. federal excise taxes. For the three and nine months ended September 30, 2017, $100 and $100, respectively, were recorded on the consolidated statements of operations for U.S. federal excise taxes. As of September 30, 2018 and December 31, 2017, payables for excise taxes of zero and $80, respectively, were included in accounts payable and accrued expenses on the consolidated statements of assets and liabilities.
The Company accounts for income taxes in conformity with ASC Topic 740 — Income Taxes (“ASC Topic 740”). ASC Topic 740 provides guidelines for how uncertain tax positions should be recognized, measured, presented and disclosed in the consolidated financial statements. ASC Topic 740 requires the evaluation of tax positions taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” to be sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax expense in the current year. It is the Company’s policy to recognize accrued interest and penalties related to uncertain tax benefits in income tax expense. There were no material uncertain income tax positions through September 30, 2018. The 2014 through 2017 tax years remain subject to examination by U.S. federal and state tax authorities.
Subsequent Events
The Company has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued. There have been 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 consolidated financial statements as of and for the nine months ended September 30, 2018.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606) (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also specified the accounting for some costs to obtain or fulfill a contract with a customer. In addition, ASU 2014-09 requires that an entity disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The initial effective date of ASU 2014-09 was for fiscal periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (ASC Topic 606): Deferral of the Effective Date, which deferred the effective date to fiscal periods beginning after December 15, 2017. The Company has adopted ASU 2014-09, and the adoption did not have a material impact on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. The Company has adopted ASU 2016-01, and the adoption did not have a material impact on the Company’s consolidated financial statements.
29 |
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary objective of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements in the notes to the financial statements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. Management is currently evaluating the impact these changes will have on the Company’s consolidated financial statements and disclosures.
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain SEC disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, U.S. GAAP requirements, or changes in the information environment. As it pertains to the Company, the amendments include certain presentation changes to the net assets section of the consolidated statements of assets and liabilities and the consolidated statements of changes in net assets (among other changes). The amendments are effective for all filings submitted on or after November 5, 2018. The Company has adopted the final rules, and the adoption did not have a material impact on the Company’s consolidated financial statements.
Note 3. Investments
The following tables show the composition of the investment portfolio, at amortized cost and fair value (with corresponding percentage of total portfolio investments):
September 30, 2018 | December 31, 2017 | |||||||||||||||
Amortized Cost: | ||||||||||||||||
Senior secured loans | $ | 389,773 | 76.4 | % | $ | 399,770 | 78.8 | % | ||||||||
Unitranche secured loans | 49,932 | 9.8 | 40,661 | 8.0 | ||||||||||||
Junior secured loans | 27,672 | 5.4 | 40,449 | 8.0 | ||||||||||||
LLC equity interest in SLF | 25,200 | 4.9 | 9,500 | 1.8 | ||||||||||||
Equity securities | 17,525 | 3.5 | 17,200 | 3.4 | ||||||||||||
Total | $ | 510,102 | 100.0 | % | $ | 507,580 | 100.0 | % |
September 30, 2018 | December 31, 2017 | |||||||||||||||
Fair Value: | ||||||||||||||||
Senior secured loans | $ | 367,247 | 76.1 | % | $ | 387,874 | 78.5 | % | ||||||||
Unitranche secured loans | 48,966 | 10.2 | 40,295 | 8.2 | ||||||||||||
Junior secured loans | 28,924 | 6.0 | 38,549 | 7.8 | ||||||||||||
LLC equity interest in SLF | 26,318 | 5.5 | 9,640 | 1.9 | ||||||||||||
Equity securities | 10,838 | 2.2 | 17,780 | 3.6 | ||||||||||||
Total | $ | 482,293 | 100.0 | % | $ | 494,138 | 100.0 | % |
The following tables show the composition of the investment portfolio by geographic region, at amortized cost and fair value (with corresponding percentage of total portfolio investments). The geographic composition is determined by the location of the corporate headquarters of the portfolio company, which may not be indicative of the primary source of the portfolio company’s business:
September 30, 2018 | December 31, 2017 | |||||||||||||||
Amortized Cost: | ||||||||||||||||
International | $ | 19,002 | 3.7 | % | $ | 13,858 | 2.7 | % | ||||||||
Midwest | 116,699 | 22.9 | 98,907 | 19.5 | ||||||||||||
Northeast | 134,279 | 26.3 | 142,742 | 28.1 | ||||||||||||
Southeast | 73,029 | 14.3 | 84,108 | 16.6 | ||||||||||||
Southwest | 61,698 | 12.1 | 59,335 | 11.7 | ||||||||||||
West | 105,395 | 20.7 | 108,630 | 21.4 | ||||||||||||
Total | $ | 510,102 | 100.0 | % | $ | 507,580 | 100.0 | % |
30 |
September 30, 2018 | December 31, 2017 | |||||||||||||||
Fair Value: | ||||||||||||||||
International | $ | 19,478 | 4.0 | % | $ | 14,632 | 3.0 | % | ||||||||
Midwest | 115,442 | 23.9 | 98,390 | 19.9 | ||||||||||||
Northeast | 134,047 | 27.8 | 143,942 | 29.1 | ||||||||||||
Southeast | 72,297 | 15.0 | 85,293 | 17.3 | ||||||||||||
Southwest | 35,700 | 7.4 | 47,968 | 9.7 | ||||||||||||
West | 105,329 | 21.9 | 103,913 | 21.0 | ||||||||||||
Total | $ | 482,293 | 100.0 | % | $ | 494,138 | 100.0 | % |
The following tables show the composition of the investment portfolio by industry, at amortized cost and fair value (with corresponding percentage of total portfolio investments):
September 30, 2018 | December 31, 2017 | |||||||||||||||
Amortized Cost: | ||||||||||||||||
Aerospace & Defense | $ | — | — | % | $ | 4,943 | 1.0 | % | ||||||||
Banking, Finance, Insurance & Real Estate | 62,277 | 12.2 | 60,519 | 11.9 | ||||||||||||
Beverage, Food & Tobacco | 17,755 | 3.5 | 17,888 | 3.5 | ||||||||||||
Capital Equipment | 2,906 | 0.6 | — | — | ||||||||||||
Chemicals, Plastics & Rubber | 14,221 | 2.8 | 8,734 | 1.7 | ||||||||||||
Construction & Building | 23,848 | 4.6 | 17,851 | 3.5 | ||||||||||||
Consumer Goods: Durable | 15,177 | 3.0 | 11,625 | 2.3 | ||||||||||||
Consumer Goods: Non-Durable | 23,486 | 4.6 | 29,982 | 5.9 | ||||||||||||
Containers, Packaging & Glass | 8,662 | 1.7 | 5,084 | 1.0 | ||||||||||||
Energy: Oil & Gas | 2,535 | 0.5 | 2,372 | 0.5 | ||||||||||||
Environmental Industries | 4,285 | 0.8 | 4,359 | 0.9 | ||||||||||||
Healthcare & Pharmaceuticals | 52,879 | 10.3 | 59,613 | 11.7 | ||||||||||||
High Tech Industries | 55,614 | 10.9 | 46,124 | 9.1 | ||||||||||||
Hotels, Gaming & Leisure | 18,762 | 3.7 | 41,924 | 8.2 | ||||||||||||
Investment Funds & Vehicles | 25,200 | 4.9 | 9,500 | 1.9 | ||||||||||||
Media: Advertising, Printing & Publishing | 25,312 | 5.0 | 22,647 | 4.5 | ||||||||||||
Media: Broadcasting & Subscription | 4,457 | 0.9 | 15,712 | 3.1 | ||||||||||||
Media: Diversified & Production | 4,954 | 1.0 | 4,947 | 1.0 | ||||||||||||
Retail | 59,894 | 11.7 | 60,005 | 11.8 | ||||||||||||
Services: Business | 42,696 | 8.4 | 33,350 | 6.6 | ||||||||||||
Services: Consumer | 18,848 | 3.7 | 21,263 | 4.2 | ||||||||||||
Telecommunications | — | — | 3,089 | 0.6 | ||||||||||||
Utilities: Electric | — | — | 2,759 | 0.5 | ||||||||||||
Wholesale | 26,334 | 5.2 | 23,290 | 4.6 | ||||||||||||
Total | $ | 510,102 | 100.0 | % | $ | 507,580 | 100.0 | % |
31 |
September 30, 2018 | December 31, 2017 | |||||||||||||||
Fair Value: | ||||||||||||||||
Aerospace & Defense | $ | — | — | % | $ | 5,000 | 1.0 | % | ||||||||
Banking, Finance, Insurance & Real Estate | 61,160 | 12.7 | 61,407 | 12.4 | ||||||||||||
Beverage, Food & Tobacco | 17,360 | 3.6 | 17,770 | 3.6 | ||||||||||||
Capital Equipment | 2,970 | 0.6 | — | — | ||||||||||||
Chemicals, Plastics & Rubber | 14,266 | 3.0 | 8,860 | 1.8 | ||||||||||||
Construction & Building | 24,036 | 5.0 | 18,049 | 3.7 | ||||||||||||
Consumer Goods: Durable | 15,254 | 3.2 | 11,808 | 2.4 | ||||||||||||
Consumer Goods: Non-Durable | 23,168 | 4.8 | 24,717 | 5.0 | ||||||||||||
Containers, Packaging & Glass | 8,520 | 1.8 | 4,928 | 1.0 | ||||||||||||
Energy: Oil & Gas | 2,504 | 0.5 | 2,352 | 0.5 | ||||||||||||
Environmental Industries | 4,336 | 0.9 | 4,457 | 0.9 | ||||||||||||
Healthcare & Pharmaceuticals | 52,141 | 10.8 | 65,582 | 13.3 | ||||||||||||
High Tech Industries | 54,244 | 11.2 | 46,239 | 9.4 | ||||||||||||
Hotels, Gaming & Leisure | 20,003 | 4.1 | 42,744 | 8.6 | ||||||||||||
Investment Funds & Vehicles | 26,318 | 5.5 | 9,640 | 2.0 | ||||||||||||
Media: Advertising, Printing & Publishing | 26,122 | 5.4 | 23,264 | 4.7 | ||||||||||||
Media: Broadcasting & Subscription | 4,511 | 0.9 | 15,965 | 3.2 | ||||||||||||
Media: Diversified & Production | 5,000 | 1.0 | 5,006 | 1.0 | ||||||||||||
Retail | 32,922 | 6.8 | 41,644 | 8.4 | ||||||||||||
Services: Business | 42,834 | 8.9 | 33,732 | 6.8 | ||||||||||||
Services: Consumer | 17,812 | 3.7 | 21,474 | 4.3 | ||||||||||||
Telecommunications | — | — | 3,152 | 0.6 | ||||||||||||
Utilities: Electric | — | — | 2,792 | 0.6 | ||||||||||||
Wholesale | 26,812 | 5.6 | 23,556 | 4.8 | ||||||||||||
Total | $ | 482,293 | 100.0 | % | $ | 494,138 | 100.0 | % |
MRCC Senior Loan Fund I, LLC
The Company co-invests with NLV Financial Corporation (“NLV”), in senior secured loans through SLF, an unconsolidated Delaware limited liability company. SLF is capitalized as underlying investment transactions are completed, taking into account available debt and equity commitments available for funding these investments. All portfolio and investment decisions in respect to SLF must be approved by the SLF investment committee, consisting of one representative from the Company and one representative from NLV. SLF may cease making new investments upon notification of either member, but operations will continue until all investments have been sold or paid-off in the normal course of business. Investments held by SLF are measured at fair value using the same valuation methodologies as described in Note 4. The Company’s investment is illiquid in nature as SLF does not allow for withdrawal from the LLC or the sale of a member’s interest unless approved by the board of members of SLF. The full withdrawal of a member would result in an orderly wind-down of SLF.
SLF’s profits and losses are allocated to the Company and NLV in accordance with their respective ownership interests. As of both September 30, 2018 and December 31, 2017, the Company and NLV each owned 50.0% of the LLC equity interests of SLF. As of September 30, 2018, SLF had $100,000 in equity commitments from its members (in the aggregate), of which $50,400 was funded. As of December 31, 2017, SLF had $100,000 in commitments from its members (in the aggregate), of which $19,000 was funded.
As of both September 30, 2018 and December 31, 2017, the Company had committed to fund $50,000 of LLC equity interest subscriptions to SLF. As of September 30, 2018 and December 31, 2017, $25,200 and $9,500 of the Company’s LLC equity interest subscriptions to SLF had been called and contributed, net of return of capital distributions subject to recall, respectively.
For the three and nine months ended September 30, 2018, the Company received $550 and $1,075 dividend income from the SLF LLC equity interests, respectively. For the three and nine months ended September 30, 2017, the Company did not receive dividend income from the SLF LLC equity interests, as the Company did not make its investment in SLF until November 2017.
SLF has entered into a senior secured revolving credit facility (as amended, the “SLF Credit Facility”) with Capital One, N.A., through its wholly-owned subsidiary MRCC Senior Loan Fund I Financing SPV, LLC (“SLF SPV”), which as of September 30, 2018 allowed SLF SPV to borrow up to $100,000 at any one time, subject to leverage and borrowing base restrictions. Borrowings under the SLF Credit Facility bear interest at an annual rate of LIBOR (three-month) plus 2.25%. The maturity date on the SLF Credit Facility is March 22, 2023.
SLF does not pay any fees to MC Advisors or its affiliates; however, SLF has entered into an administration agreement with MC Management, pursuant to which certain loan servicing and administrative functions are delegated to MC Management. SLF may reimburse MC Management for its allocable share of overhead and other expenses incurred by MC Management. For the three and nine months ended September 30, 2018, SLF incurred $29 and $29, respectively, of allocable expenses. There are no agreements or understandings by which the Company guarantees any SLF obligations.
As of September 30, 2018 and December 31, 2017, SLF had total assets at fair value of $142,112 and $41,641, respectively. As of September 30, 2018 and December 31, 2017, SLF had zero and zero portfolio company investments on non-accrual status, respectively. The portfolio companies in SLF are in industries and geographies similar to those in which the Company may invest directly. Additionally, as of September 30, 2018 and December 31, 2017, SLF had commitments to fund various undrawn revolvers and delayed draw investments to its portfolio companies totaling $5,123 and $2,083, respectively.
Below is a summary of SLF’s portfolio, followed by a listing of the individual investments in SLF’s portfolio as of September 30, 2018 and December 31, 2017:
As of | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Senior secured loans (1) | 134,629 | 29,438 | ||||||
Weighted average current interest rate on senior secured loans (2) | 7.4 | % | 7.1 | % | ||||
Number of borrowers in SLF | 39 | 8 |
(1) | Represents outstanding principal amount, excluding unfunded commitments. |
(2) | Computed as the (a) annual stated interest rate on accruing senior secured loans divided by (b) total senior secured loans at outstanding principal amount. |
32 |
MRCC SENIOR LOAN FUND I, LLC
CONSOLIDATED SCHEDULE OF INVESTMENTS
(unaudited)
September 30, 2018
Portfolio Company (a) | Spread Above | Interest Rate (b) | Maturity | Principal | Fair Value | |||||||||||
Non-Controlled/Non-Affiliate Company Investments | ||||||||||||||||
Senior Secured Loans | ||||||||||||||||
Aerospace & Defense | ||||||||||||||||
MAG Aerospace Industries, Inc. | L+4.75% | 6.99 | % | 6/6/2025 | 3,292 | $ | 3,283 | |||||||||
The KEYW Corporation | L+4.50% | 6.63 | % | 5/8/2024 | 1,525 | 1,536 | ||||||||||
Trident Maritime SH, Inc. | L+5.50% | 7.89 | % | 6/4/2024 | 4,660 | 4,658 | ||||||||||
Trident Maritime SH, Inc. (Revolver) (d) | P+4.50% | 9.50 | % | 6/4/2024 | 340 | — | ||||||||||
9,817 | 9,477 | |||||||||||||||
Automotive | ||||||||||||||||
Wheel Pros, LLC | L+4.75% | 6.99 | % | 4/4/2025 | 3,990 | 3,943 | ||||||||||
3,990 | 3,943 | |||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||
MTC Intermediate Holdco, Inc. | L+4.75% | 6.99 | % | 1/30/2023 | 4,975 | 4,975 | ||||||||||
Pivotal Payments Inc. (c) | L+4.50% | 6.89 | % | 10/1/2025 | 3,750 | 3,713 | ||||||||||
Zenith Merger Sub, Inc. | L+5.50% | 7.89 | % | 12/13/2023 | 3,722 | 3,720 | ||||||||||
12,447 | 12,408 | |||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||
Il Fornaio (America) Corporation | L+6.50% | 8.74 | % | 11/10/2022 | 4,947 | 4,947 | ||||||||||
SW Ingredients Holdings, LLC | L+4.25% | 6.64 | % | 7/3/2025 | 3,741 | 3,728 | ||||||||||
US Salt, LLC | L+4.75% | 6.99 | % | 11/30/2023 | 3,482 | 3,482 | ||||||||||
12,170 | 12,157 | |||||||||||||||
Capital Equipment | ||||||||||||||||
Analogic Corp | L+6.00% | 8.21 | % | 6/24/2024 | 5,000 | 5,012 | ||||||||||
5,000 | 5,012 | |||||||||||||||
Chemicals, Plastics & Rubber | ||||||||||||||||
Loparex International B.V. | L+4.25% | 6.64 | % | 4/11/2025 | 499 | 506 | ||||||||||
Peach State Labs, LLC | L+6.50% | 8.61 | % | 6/30/2021 | 2,862 | 2,876 | ||||||||||
3,361 | 3,382 | |||||||||||||||
Construction & Building | ||||||||||||||||
Fastener Acquisition, Inc. | L+4.25% | 6.64 | % | 3/28/2025 | 1,327 | 1,332 | ||||||||||
1,327 | 1,332 | |||||||||||||||
Consumer Goods: Durable | ||||||||||||||||
International Textile Group, Inc. | L+5.00% | 7.10 | % | 5/1/2024 | 1,863 | 1,870 | ||||||||||
SSH Group Holdings, Inc. | L+4.25% | 6.59 | % | 7/30/2025 | 2,334 | 2,357 | ||||||||||
4,197 | 4,227 | |||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||
Solaray, LLC (e) | L+6.50% | 8.83 | % | 9/11/2023 | 1,613 | 1,613 | ||||||||||
Solaray, LLC (Delayed Draw) (d) | L+6.50% | 8.82 | % | 9/11/2023 | 1,870 | 1,182 | ||||||||||
3,483 | 2,795 | |||||||||||||||
Containers, Packaging & Glass | ||||||||||||||||
Port Townsend Holdings Company, Inc. | L+4.75% | 6.87 | % | 4/3/2024 | 3,975 | 3,979 | ||||||||||
PVHC Holding Corp | L+4.75% | 7.14 | % | 8/5/2024 | 3,325 | 3,342 | ||||||||||
PVHC Holding Corp (Delayed Draw) (d) | L+4.75% | 7.14 | % | 8/5/2024 | 425 | — | ||||||||||
7,725 | 7,321 | |||||||||||||||
Energy: Oil & Gas | ||||||||||||||||
Drilling Info Holdings, Inc. | L+4.25% | 6.54 | % | 7/30/2025 | 4,027 | 4,019 | ||||||||||
Drilling Info Holdings, Inc. (Delayed Draw) (d) | L+4.25% | 6.54 | % | 7/30/2025 | 640 | — | ||||||||||
4,667 | 4,019 | |||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||
LSCS Holdings, Inc. | L+4.25% | 6.64 | % | 3/17/2025 | 2,328 | 2,328 | ||||||||||
LSCS Holdings, Inc. | L+4.25% | 6.38 | % | 3/17/2025 | 601 | 601 | ||||||||||
Radiology Partners, Inc. | L+4.25% | 6.59 | % | 7/9/2025 | 5,000 | 5,037 | ||||||||||
Solara Medical Supplies, LLC | L+6.00% | 8.39 | % | 5/31/2023 | 5,643 | 5,649 | ||||||||||
Solara Medical Supplies, LLC (Delayed Draw) (d) | L+6.00% | 8.39 | % | 5/31/2023 | 1,071 | — | ||||||||||
Solara Medical Supplies, LLC (Revolver) (d) | L+6.00% | 8.39 | % | 5/31/2023 | 714 | — | ||||||||||
15,357 | 13,615 | |||||||||||||||
High Tech Industries | ||||||||||||||||
AQA Acquisition Holding, Inc. (c) | L+4.25% | 6.64 | % | 5/24/2023 | 3,333 | 3,325 | ||||||||||
Corel Corporation | L+5.00% | 7.31 | % | 6/4/2024 | 2,500 | 2,515 | ||||||||||
Gigamon, Inc. | L+4.50% | 6.89 | % | 12/27/2024 | 2,978 | 3,000 | ||||||||||
8,811 | 8,840 | |||||||||||||||
Media: Advertising, Printing & Publishing | ||||||||||||||||
Cadent, LLC | L+5.50% | 7.65 | % | 9/11/2023 | 5,000 | 4,987 | ||||||||||
Cadent, LLC (Revolver) (d) | L+5.50% | 7.65 | % | 9/11/2023 | 167 | — | ||||||||||
5,167 | 4,987 | |||||||||||||||
Media: Diversified & Production | ||||||||||||||||
Research Now Group, Inc. and Survey Sampling International, LLC | L+5.50% | 7.74 | % | 12/20/2024 | 6,948 | 6,991 | ||||||||||
6,948 | 6,991 | |||||||||||||||
Services: Business | ||||||||||||||||
CHA Holdings, Inc. | L+4.50% | 6.89 | % | 4/10/2025 | 2,049 | 2,064 | ||||||||||
CHA Holdings, Inc. (Delayed Draw) (d) | L+4.50% | 6.89 | % | 4/10/2025 | 446 | — | ||||||||||
Engage2Excel, Inc. | L+6.50% | 8.85 | % | 3/7/2023 | 4,353 | 4,379 | ||||||||||
Engage2Excel, Inc. (Revolver) (d) | P+5.50% | 10.75 | % | 3/7/2023 | 545 | 18 | ||||||||||
GI Revelation Acquisition LLC | L+5.00% | 7.24 | % | 4/16/2025 | 1,397 | 1,402 | ||||||||||
Output Services Group, Inc. | L+4.25% | 6.49 | % | 3/27/2024 | 4,990 | 5,033 | ||||||||||
SIRVA Worldwide, Inc. | L+5.50% | 7.74 | % | 8/4/2025 | 2,000 | 2,008 | ||||||||||
15,780 | 14,904 | |||||||||||||||
Services: Consumer | ||||||||||||||||
LegalZoom.com, Inc. | L+4.25% | 6.46 | % | 11/21/2024 | 1,985 | 2,017 | ||||||||||
1,985 | 2,017 | |||||||||||||||
Telecommunications | ||||||||||||||||
Intermedia Holdings, Inc. | L+6.00% | 8.36 | % | 7/21/2025 | 1,833 | 1,842 | ||||||||||
Mavenir Systems, Inc. | L+6.00% | 8.14 | % | 5/8/2025 | 3,990 | 4,000 | ||||||||||
5,823 | 5,842 | |||||||||||||||
Utilities: Oil & Gas | ||||||||||||||||
NGS US Finco, LLC (c) | L+4.25% | 6.64 | % | 9/15/2025 | 1,750 | 1,741 | ||||||||||
1,750 | 1,741 | |||||||||||||||
Wholesale | ||||||||||||||||
BMC Acquisition, Inc. | L+5.25% | 7.84 | % | 12/30/2024 | 4,962 | 5,000 | ||||||||||
Halo Buyer, Inc. | L+4.50% | 6.74 | % | 6/27/2025 | 3,510 | 3,483 | ||||||||||
Halo Buyer, Inc. (Delayed Draw) (d) | L+4.50% | 6.72 | % | 6/27/2025 | 1,478 | 1,363 | ||||||||||
9,950 | 9,846 | |||||||||||||||
TOTAL INVESTMENTS | $ | 134,856 |
(a) | All investments are U.S. companies, except for Loparex International B.V. |
(b) | The majority of investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, quarterly or semiannually. The Company has provided the spread over LIBOR or Prime and the current contractual rate of interest in effect at September 30, 2018. Certain investments are subject to a LIBOR or Prime interest rate floor. |
(c) | Investment position or portion thereof unsettled as of September 30, 2018. |
(d) | All or a portion of this commitment was unfunded as of September 30, 2018. Principal reflects the commitment outstanding. | |
(e) | The Company also holds a portion of the term loan in this portfolio company. |
33 |
MRCC SENIOR LOAN FUND I, LLC
SCHEDULE OF INVESTMENTS
December 31, 2017
Portfolio Company (a) | Spread Above | Interest Rate (b) | Maturity | Principal | Fair Value | |||||||||||
Non-Controlled/Non-Affiliate Company Investments | ||||||||||||||||
Senior Secured Loans | ||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||
Clearent Holdings LLC and Clearent, LLC (c) | P+3.75% | 8.25 | % | 1/2/2024 | 1,056 | $ | 1,045 | |||||||||
Clearent Holdings LLC and Clearent, LLC (c) | P+3.75% | 8.25 | % | 1/2/2024 | 1,257 | 1,244 | ||||||||||
Clearent Holdings LLC and Clearent, LLC (c) (d) | P+3.75% | 8.25 | % | 1/2/2024 | 208 | — | ||||||||||
2,521 | 2,289 | |||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||
Il Fornaio (America) Corporation | L+6.50% | 8.07 | % | 11/10/2022 | 5,000 | 5,008 | ||||||||||
US Salt, LLC (c) | L+4.75% | 6.18 | % | 11/30/2023 | 3,500 | 3,500 | ||||||||||
8,500 | 8,508 | |||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||
Solaray, LLC | L+6.50% | 8.02 | % | 9/11/2023 | 1,625 | 1,625 | ||||||||||
Solaray, LLC (Delayed Draw) (d) | L+6.50% | 8.02 | % | 9/11/2023 | 1,875 | — | ||||||||||
3,500 | 1,625 | |||||||||||||||
High Tech Industries | ||||||||||||||||
Gigamon, Inc. (c) | L+4.50% | 6.03 | % | 12/27/2024 | 3,000 | 2,985 | ||||||||||
3,000 | 2,985 | |||||||||||||||
Media: Diversified & Production | ||||||||||||||||
Research Now Group, Inc. and Survey Sampling International, LLC (c) | L+5.50% | 7.13 | % | 12/20/2024 | 7,000 | 6,714 | ||||||||||
7,000 | 6,714 | |||||||||||||||
Services: Consumer | ||||||||||||||||
LegalZoom.com, Inc. (c) | L+4.50% | 5.94 | % | 11/21/2024 | 2,000 | 2,005 | ||||||||||
2,000 | 2,005 | |||||||||||||||
Wholesale | ||||||||||||||||
BMC Acquisition, Inc. (c) | L+5.25% | 6.94 | % | 12/28/2024 | 5,000 | 5,000 | ||||||||||
5,000 | 5,000 | |||||||||||||||
TOTAL INVESTMENTS | $ | 29,126 |
(a) | All investments are U.S. companies. |
(b) | The majority of investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, quarterly or semiannually. The Company has provided the spread over LIBOR or Prime and the current contractual rate of interest in effect at December 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor. |
(c) | Investment position or portion thereof unsettled as of December 31, 2017. |
(d) | All or a portion of this commitment was unfunded as of December 31, 2017. Principal reflects the commitment outstanding. |
34 |
Below is certain summarized financial information for SLF as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017:
September 30, 2018 | December 31, 2017 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Investments, at fair value | $ | 134,856 | $ | 29,126 | ||||
Cash | 491 | 12,504 | ||||||
Restricted cash | 6,362 | — | ||||||
Interest receivable | 403 | 11 | ||||||
Total assets | $ | 142,112 | $ | 41,641 | ||||
Liabilities | ||||||||
Revolving credit facility | $ | 81,432 | $ | — | ||||
Less: Unamortized deferred financing costs | (1,198 | ) | — | |||||
Total debt, less unamortized deferred financing costs | 80,234 | — | ||||||
Payable for open trades | 8,754 | 22,304 | ||||||
Interest payable | 311 | — | ||||||
Accounts payable and accrued expenses | 178 | 57 | ||||||
Total liabilities | 89,477 | 22,361 | ||||||
Members’ capital | 52,635 | 19,280 | ||||||
Total liabilities and members’ capital | $ | 142,112 | $ | 41,641 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2018 | 2017 (1) | 2018 | 2017 (1) | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Investment income: | ||||||||||||||||
Interest income | $ | 2,262 | $ | — | $ | 4,441 | $ | — | ||||||||
Total investment income | 2,262 | — | 4,441 | — | ||||||||||||
Expenses: | ||||||||||||||||
Interest and other debt financing expenses | 922 | — | 1,571 | — | ||||||||||||
Organizational costs | — | — | 11 | — | ||||||||||||
Professional fees | 139 | — | 201 | — | ||||||||||||
Total expenses | 1,061 | — | 1,783 | — | ||||||||||||
Net investment income (loss) | 1,201 | — | 2,658 | — | ||||||||||||
Net gain (loss) on investments: | ||||||||||||||||
Net change in unrealized gain (loss) on investments | 448 | — | 1,447 | — | ||||||||||||
Net gain (loss) on investments | 448 | — | 1,447 | — | ||||||||||||
Net increase (decrease) in members’ capital | $ | 1,649 | $ | — | $ | 4,105 | $ | — |
(1) | SLF commenced operations on November 14, 2017. |
Note 4. Fair Value Measurements
Investments
The Company values all investments in accordance with ASC Topic 820. ASC Topic 820 requires enhanced disclosures about assets and liabilities that are measured and reported at fair value. As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the assets or liabilities or market and the assets’ or liabilities’ complexity.
ASC Topic 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability of inputs used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment and the characteristics specific to the investment. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
35 |
Based on the observability of the inputs used in the valuation techniques, the Company is required to provide disclosures on fair value measurements according to the fair value hierarchy. The fair value hierarchy ranks the observability of the inputs used to determine fair values. Investments carried at fair value are classified and disclosed in one of the following three categories:
· | Level 1 — Valuations based on unadjusted 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, including quoted prices for similar assets or liabilities, which are either directly or indirectly observable. |
· | Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. This includes situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value are based upon the best information available and may require significant management judgment or estimation. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset’s or liability’s categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. All investments, with the exception of investments measured at fair value using net asset value (“NAV”), as of September 30, 2018 and December 31, 2017 were categorized as Level 3 investments.
With respect to investments for which market quotations are not readily available, the Company’s Board undertakes a multi-step valuation process each quarter, as described below:
· | the quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of MC Advisors responsible for the portfolio investment; |
· | preliminary valuation conclusions are then documented and discussed with the investment committee of the Company; |
· | the Board also engages one or more independent valuation firm(s) to conduct independent appraisals of a selection of investments for which market quotations are not readily available. The Company will consult with independent valuation firm(s) relative to each portfolio company at least once in every calendar year, but are generally received quarterly; |
· | the audit committee of the Board reviews the preliminary valuations of MC Advisors and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and |
· | the Board discusses these valuations and determines the fair value of each investment in the portfolio in good faith, based on the input of MC Advisors, the independent valuation firm(s) and the audit committee. |
The accompanying consolidated schedules of investments held by the Company consist primarily of private debt instruments (“Level 3 debt”). The Company generally uses the income approach to determine fair value, as long as it is appropriate. If there is deterioration in credit quality or a debt investment is in workout status, the Company may consider other factors in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company or the proceeds that would be received in a liquidation analysis. The Company generally considers its Level 3 debt to be performing loans if the borrower is not in default, the borrower is remitting payments in a timely manner; the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing Level 3 debt, the Company considers fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions and other relevant factors, both qualitative and quantitative. In the event that a Level 3 debt instrument is not performing, as defined above, the Company will evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the Level 3 debt instrument.
Under the income approach, the Company uses discounted cash flow models to determine the present value of the future cash flow streams of its debt investments, based on future interest and principal payments as set forth in the associated loan agreements. In determining fair value under the income approach, the Company also considers the following factors: applicable market yields and leverage levels, credit quality, prepayment penalties, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made.
36 |
Under the market approach, the Company typically uses the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which the Company derives a single estimate of enterprise value. In estimating the enterprise value of a portfolio company, the Company analyzes various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public. Typically, the enterprise values of private companies are based on multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value.
In addition, for certain debt investments, the Company may base its valuation on indicative bid and ask prices provided by an independent third-party pricing service. Bid prices reflect the highest price that the Company and others may be willing to pay. Ask prices represent the lowest price that the Company and others may be willing to accept. The Company generally uses the midpoint of the bid/ask range as its best estimate of fair value of such investment.
Secured Borrowings
The Company has elected the fair value option under ASC Topic 825 — Financial Instruments (“ASC Topic 825”) relating to accounting for debt obligations at their fair value for its secured borrowings which arose due to partial loan sales which did not meet the criteria for sale treatment under ASC Topic 860. The Company reports changes in the fair value of its secured borrowings within net change in unrealized gain (loss) on secured borrowings in the consolidated statements of operations. The net gain or loss reflects the difference between the fair value and the principal amount due on maturity.
Due to the absence of a liquid trading market for these secured borrowings, they are valued by calculating the net present value of the future expected cash flow streams using an appropriate risk-adjusted discount rate model. The discount rate considers projected performance of the related loan investment, applicable market yields and leverage levels, credit quality, prepayment penalties and comparable company analysis. The Company consults with an independent valuation firm relative to the fair value of its secured borrowings at least once in every calendar year.
Foreign Currency Forward Contracts
The valuation for the Company’s foreign currency forward contracts is based on the difference between the exchange rate associated with the forward contract and the exchange rate at the current period end. Foreign currency forward contracts are categorized as level 2 in the fair value hierarchy.
Fair Value Disclosures
The following table presents fair value measurements of investments and foreign currency forward contracts, by major class, as of September 30, 2018, according to the fair value hierarchy:
Fair Value Measurements | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Investments: | ||||||||||||||||
Senior secured loans | $ | — | $ | — | $ | 367,247 | $ | 367,247 | ||||||||
Unitranche secured loans | — | — | 48,966 | 48,966 | ||||||||||||
Junior secured loans | — | — | 28,924 | 28,924 | ||||||||||||
Equity securities | — | — | 10,838 | 10,838 | ||||||||||||
Investments measured at NAV (1) (2) | — | — | — | 26,318 | ||||||||||||
Total Investments | $ | — | $ | — | $ | 455,975 | $ | 482,293 | ||||||||
Foreign currency forward contracts (liability) | $ | — | $ | (58 | ) | $ | — | $ | (58 | ) |
(1) | Certain investments that are measured at fair value using the NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statements of assets and liabilities. |
(2) | Represents the Company’s investment in LLC equity interests in SLF. The fair value of this investment has been determined using the NAV of the Company’s ownership interest in members’ capital. |
37 |
The following table presents fair value measurements of investments, by major class, as of December 31, 2017, according to the fair value hierarchy:
Fair Value Measurements | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Investments: | ||||||||||||||||
Senior secured loans | $ | — | $ | — | $ | 387,874 | $ | 387,874 | ||||||||
Unitranche secured loans | — | — | 40,295 | 40,295 | ||||||||||||
Junior secured loans | — | — | 38,549 | 38,549 | ||||||||||||
Equity securities | — | — | 17,780 | 17,780 | ||||||||||||
Investments measured at NAV (1) (2) | — | — | — | 9,640 | ||||||||||||
Total Investments | $ | — | $ | — | $ | 484,498 | $ | 494,138 |
(1) | Certain investments that are measured at fair value using the NAV have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated statements of assets and liabilities. |
(2) | Represents the Company’s investment in LLC equity interests in SLF. The fair value of this investment has been determined using the NAV of the Company’s ownership interest in members’ capital. |
Senior, unitranche and junior secured loans are collateralized by tangible and intangible assets of the borrowers. These investments include loans to entities that have some level of challenge in obtaining financing from other, more conventional institutions, such as a bank. Interest rates on these loans are either fixed or floating, and are based on current market conditions and credit ratings of the borrower. Excluding loans on non-accrual, the contractual interest rates on the loans ranged between 7.89% to 16.74% at September 30, 2018 and 6.57% to 15.00% at December 31, 2017. The maturity dates on the loans outstanding at September 30, 2018 range between December 2018 and August 2025.
The following tables provide a reconciliation of the beginning and ending balances for investments and secured borrowings that use Level 3 inputs for the three and nine months ended September 30, 2018:
Investments | ||||||||||||||||||||||||
Senior secured loans | Unitranche secured loans | Junior secured loans | Equity securities | Total investments | Secured borrowings | |||||||||||||||||||
Balance as of June 30, 2018 | $ | 387,639 | $ | 51,485 | $ | 28,515 | $ | 11,903 | $ | 479,542 | $ | — | ||||||||||||
Net change in unrealized gain (loss) on investments | (5,145 | ) | (572 | ) | 2,373 | (241 | ) | (3,585 | ) | — | ||||||||||||||
Net realized gain (loss) on investments | (2,495 | ) | — | (2,011 | ) | (1,094 | ) | (5,600 | ) | — | ||||||||||||||
Purchases of investments and other adjustments to cost (1) | 43,954 | 1,818 | 48 | 270 | 46,090 | — | ||||||||||||||||||
Proceeds from principal payments and sales on investments (2) | (56,706 | ) | (3,765 | ) | (1 | ) | — | (60,472 | ) | — | ||||||||||||||
Net change in unrealized gain (loss) on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Repayments on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Net realized (gain) loss on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Balance as of September 30, 2018 | $ | 367,247 | $ | 48,966 | $ | 28,924 | $ | 10,838 | $ | 455,975 | $ | — |
Investments | ||||||||||||||||||||||||
Senior secured loans | Unitranche secured loans | Junior secured loans | Equity securities | Total investments | Secured borrowings | |||||||||||||||||||
Balance as of December 31, 2017 | $ | 387,874 | $ | 40,295 | $ | 38,549 | $ | 17,780 | $ | 484,498 | $ | — | ||||||||||||
Net change in unrealized gain (loss) on investments | (10,631 | ) | (599 | ) | 3,152 | (7,267 | ) | (15,345 | ) | — | ||||||||||||||
Net realized gain (loss) on investments | (2,495 | ) | — | (2,011 | ) | (1,094 | ) | (5,600 | ) | — | ||||||||||||||
Purchases of investments and other adjustments to cost (1) | 88,864 | 13,338 | 141 | 1,419 | 103,762 | — | ||||||||||||||||||
Proceeds from principal payments and sales on investments (2) | (96,365 | ) | (4,068 | ) | (10,907 | ) | — | (111,340 | ) | — | ||||||||||||||
Net change in unrealized gain (loss) on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Repayments on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Net realized (gain) loss on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Balance as of September 30, 2018 | $ | 367,247 | $ | 48,966 | $ | 28,924 | $ | 10,838 | $ | 455,975 | $ | — |
(1) | Includes purchases of new investments, effects of refinancing and restructurings, premium and discount accretion and amortization and PIK interest. |
(2) | Represents net proceeds from investments sold and principal paydowns received. |
38 |
The following tables provide a reconciliation of the beginning and ending balances for investments and secured borrowings that use Level 3 inputs for the three and nine months ended September 30, 2017:
Investments | ||||||||||||||||||||||||
Senior secured loans | Unitranche secured loans | Junior secured loans | Equity securities | Total investments | Secured borrowings | |||||||||||||||||||
Balance as of June 30, 2017 | $ | 351,491 | $ | 37,302 | $ | 37,709 | $ | 19,047 | $ | 445,549 | $ | — | ||||||||||||
Reclassifications (1) | (15,747 | ) | 15,747 | — | — | — | — | |||||||||||||||||
Net change in unrealized gain (loss) on investments | (3,380 | ) | 4,554 | 305 | 919 | 2,398 | — | |||||||||||||||||
Net realized gain (loss) on investments | — | (3,399 | ) | 7 | 492 | (2,900 | ) | — | ||||||||||||||||
Purchases of investments and other adjustments to cost (2) | 44,119 | 225 | 10,691 | — | 55,035 | — | ||||||||||||||||||
Proceeds from principal payments and sales on investments (3) | (48,499 | ) | (9,837 | ) | (10,157 | ) | (492 | ) | (68,985 | ) | — | |||||||||||||
Net change in unrealized gain (loss) on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Repayments on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Net realized (gain) loss on secured borrowings | — | — | — | — | — | — | ||||||||||||||||||
Balance as of September 30, 2017 | $ | 327,984 | $ | 44,592 | $ | 38,555 | $ | 19,966 | $ | 431,097 | $ | — |
Investments | ||||||||||||||||||||||||
Senior secured loans | Unitranche secured loans | Junior secured loans | Equity securities | Total investments | Secured borrowings | |||||||||||||||||||
Balance as of December 31, 2016 | $ | 275,253 | $ | 51,638 | $ | 59,366 | $ | 26,663 | $ | 412,920 | $ | 1,314 | ||||||||||||
Reclassifications (1) | (18,542 | ) | 15,747 | 382 | 2,413 | — | — | |||||||||||||||||
Net change in unrealized gain (loss) on investments | (5,237 | ) | 5,382 | 462 | (9,110 | ) | (8,503 | ) | — | |||||||||||||||
Net realized gain (loss) on investments | 41 | (3,399 | ) | 7 | 2,779 | (572 | ) | — | ||||||||||||||||
Purchases of investments and other adjustments to cost (2) | 155,915 | 4,889 | 10,893 | — | 171,697 | — | ||||||||||||||||||
Proceeds from principal payments and sales on investments (3) | (79,446 | ) | (29,665 | ) | (32,555 | ) | (2,779 | ) | (144,445 | ) | — | |||||||||||||
Net change in unrealized gain (loss) on secured borrowings | — | — | — | — | — | 6 | ||||||||||||||||||
Repayments on secured borrowings | — | — | — | — | — | (1,254 | ) | |||||||||||||||||
Net realized (gain) loss on secured borrowings | — | — | — | — | — | (66 | ) | |||||||||||||||||
Balance as of September 30, 2017 | $ | 327,984 | $ | 44,592 | $ | 38,555 | $ | 19,966 | $ | 431,097 | $ | — |
(1) | Represents non-cash reclassifications of investment type due to restructuring of the investments in portfolio companies. |
(2) | Includes purchases of new investments, effects of refinancing and restructurings, premium and discount accretion and amortization and PIK interest. |
(3) | Represent net proceeds from investments sold and principal paydowns received. |
The total change in unrealized gain (loss) included in the consolidated statements of operations within net change in unrealized gain (loss) on investments for the three and nine months ended September 30, 2018, attributable to Level 3 investments still held at September 30, 2018, was ($8,712) and ($13,198), respectively. The total change in unrealized gain (loss) included in the consolidated statements of operations within net change in unrealized gain (loss) on investments for the three and nine months ended September 30, 2017, attributable to Level 3 investments still held at September 30, 2017, was ($254) and ($11,637), respectively. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in or out of Level 3 as of the beginning of the period which the reclassifications occur. There were no transfers among Levels 1, 2 and 3 during the three and nine months ended September 30, 2018 and 2017.
Significant Unobservable Inputs
ASC Topic 820 requires disclosure of quantitative information about the significant unobservable inputs used in the valuation of assets and liabilities classified as Level 3 within the fair value hierarchy. Disclosure of this information is not required in circumstances where a valuation (unadjusted) is obtained from a third-party pricing service and the information regarding the unobservable inputs is not reasonably available to the Company and as such, the disclosures provided below exclude those investments valued in that manner. The tables below are not intended to be all-inclusive, but rather to provide information on significant unobservable inputs and valuation techniques used by the Company.
39 |
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of September 30, 2018 were as follows:
Unobservable | Weighted Average |
Range | ||||||||||||||||||
Fair Value | Valuation Technique | Input | Mean | Minimum | Maximum | |||||||||||||||
Assets: | ||||||||||||||||||||
Senior secured loans | $ | 259,999 | Discounted cash flow | EBITDA multiples | 7.1 | x | 4.0 | x | 12.5 | x | ||||||||||
Market yields | 11.7 | % | 8.2 | % | 17.0 | % | ||||||||||||||
Senior secured loans | 29,190 | Discounted cash flow | Revenue multiples | 3.5 | x | 3.3 | x | 3.8 | x | |||||||||||
Market yields | 8.7 | % | 8.6 | % | 8.8 | % | ||||||||||||||
Senior secured loans | 15,412 | Waterfall | Delinquency ratio | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||
Senior secured loans | 13,326 | Enterprise value | Tangible book value multiples | 1.5 | x | 1.5 | x | 1.5 | x | |||||||||||
Senior secured loans | 9,821 | Enterprise value | EBITDA multiples | 7.4 | x | 6.5 | x | 8.5 | x | |||||||||||
Senior secured loans | 17,864 | Liquidation | Net realizable value of assets | 41.3 | % | 41.3 | % | 41.3 | % | |||||||||||
Senior secured loans | 9,137 | Enterprise value | Revenue multiples | 0.4 | x | 0.4 | x | 0.4 | x | |||||||||||
Senior secured loans | 222 | Combination of enterprise value and discounted cash flow | EBITDA multiples | 6.8 | x | 6.8 | x | 6.8 | x | |||||||||||
Market yields | 11.0 | % | 11.0 | % | 11.0 | % | ||||||||||||||
Unitranche secured loans | 35,738 | Discounted cash flow | EBITDA multiples | 7.7 | x | 5.5 | x | 9.0 | x | |||||||||||
Market yields | 12.3 | % | 10.0 | % | 21.5 | % | ||||||||||||||
Unitranche secured loans | 13,228 | Enterprise value | EBITDA multiples | 5.6 | x | 5.5 | x | 9.0 | x | |||||||||||
Junior secured loans | 625 | Discounted cash flow | EBITDA multiples | 2.8 | x | 2.8 | x | 2.8 | x | |||||||||||
Market yields | 14.5 | % | 14.5 | % | 14.5 | % | ||||||||||||||
Junior secured loans | 1,422 | Enterprise value | EBITDA multiples | 5.5 | x | 5.5 | x | 5.5 | x | |||||||||||
Equity securities | 8,046 | Discounted cash flow | EBITDA multiples | 2.8 | x | 2.8 | x | 2.8 | x | |||||||||||
Market yields | 28.5 | % | 28.5 | % | 28.5 | % | ||||||||||||||
Equity securities | 219 | Enterprise value | Revenue multiples | 2.5 | x | 2.5 | x | 2.5 | x | |||||||||||
Equity securities | 2,382 | Enterprise value | EBITDA multiples | 7.0 | x | 4.0 | x | 10.5 | x | |||||||||||
Total Level 3 Assets | $ | 416,631 | (1) |
(1) | Excludes loans of $39,344 at fair value where valuation (unadjusted) is obtained from a third-party pricing service for which such disclosure is not required. |
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets and liabilities as of December 31, 2017 were as follows:
Unobservable | Weighted Average |
Range | ||||||||||||||||||
Fair Value | Valuation Technique | Input | Mean | Minimum | Maximum | |||||||||||||||
Assets: | ||||||||||||||||||||
Senior secured loans | $ | 300,882 | Discounted cash flow | EBITDA multiples | 6.8 | x | 3.8 | x | 14.0 | x | ||||||||||
Market yields | 11.6 | % | 8.1 | % | 23.5 | % | ||||||||||||||
Senior secured loans | 15,654 | Waterfall | Delinquency ratio | 0.0 | % | 0.0 | % | 0.0 | % | |||||||||||
Senior secured loans | 12,967 | Discounted cash flow | Tangible book value multiples | 1.3 | x | 1.2 | x | 1.3 | x | |||||||||||
Market yields | 14.5 | % | 10.3 | % | 19.9 | % | ||||||||||||||
Senior secured loans | 9,516 | Discounted cash flow | Revenue multiples | 4.0 | x | 3.8 | x | 4.3 | x | |||||||||||
Market yields | 8.8 | % | 8.4 | % | 9.2 | % | ||||||||||||||
Senior secured loans | 8,718 | Enterprise value | EBITDA multiples | 7.5 | x | 6.0 | x | 9.3 | x | |||||||||||
Senior secured loans | 8,516 | Enterprise value | Revenue multiples | 0.3 | x | 0.3 | x | 0.6 | x | |||||||||||
Unitranche secured loans | 40,000 | Discounted cash flow | EBITDA multiples | 6.2 | x | 3.8 | x | 8.5 | x | |||||||||||
Market yields | 15.0 | % | 8.8 | % | 23.0 | % | ||||||||||||||
Unitranche secured loans | 295 | Enterprise value | EBITDA multiples | 5.0 | x | 4.5 | x | 5.5 | x | |||||||||||
Junior secured loans | 5,625 | Discounted cash flow | EBITDA multiples | 9.1 | x | 3.8 | x | 10.3 | x | |||||||||||
Market yields | 11.1 | % | 10.2 | % | 14.0 | % | ||||||||||||||
Equity securities | 8,429 | Discounted cash flow | EBITDA multiples | 4.0 | x | 3.8 | x | 4.3 | x | |||||||||||
Market yields | 21.0 | % | 20.0 | % | 22.0 | % | ||||||||||||||
Equity securities | 5,892 | Enterprise value | Revenue multiples | 0.4 | x | 0.4 | x | 2.7 | x | |||||||||||
Equity securities | 1,767 | Enterprise value | EBITDA multiples | 6.8 | x | 4.5 | x | 9.0 | x | |||||||||||
Equity securities | 353 | Enterprise value | Tangible book value multiples | 1.3 | x | 1.2 | x | 1.3 | x | |||||||||||
Total Level 3 Assets | $ | 418,614 | (1) |
(1) | Excludes loans of $65,884 at fair value where valuation (unadjusted) is obtained from a third-party pricing service for which such disclosure is not required. |
40 |
The significant unobservable inputs used in the income approach of fair value measurement of the Company’s investments is the discount rate used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Increases (decreases) in the discount rate would result in a decrease (increase) in the fair value estimate of the investment. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable investments, and call provisions.
The significant unobservable inputs used in the market approach of fair value measurement of the Company’s investments are the market multiples of EBITDA or revenue of the comparable guideline public companies. The Company selects a population of public companies for each investment with similar operations and attributes of the portfolio company. Using these guideline public companies’ data, a range of multiples of enterprise value to EBITDA or revenue is calculated. The Company selects percentages from the range of multiples for purposes of determining the portfolio company’s estimated enterprise value based on said multiple and generally the latest twelve months EBITDA or revenue of the portfolio company (or other meaningful measure). Increases (decreases) in the multiple will result in an increase (decrease) in enterprise value, resulting in an increase (decrease) in the fair value estimate of the investment.
Other Financial Assets and Liabilities
ASC Topic 820 requires disclosure of the fair value of financial instruments for which it is practical to estimate such value. The Company believes that the carrying amounts of its other financial instruments such as cash, receivables and payables approximate the fair value of such items due to the short maturity of such instruments. Fair value of the Company’s revolving credit facility is estimated by discounting remaining payments using applicable market rates or market quotes for similar instruments at the measurement date, if applicable. The Company believes that the carrying value of its revolving credit facility approximates fair value. As of September 30, 2018, the 2023 Notes were trading on The Nasdaq Global Select Market for $24.97 per unit at par value. The par value at underwriting for the 2023 Notes was $25.00 per unit. Based on this Level 1 input, the fair value of the $69,000 in principal outstanding 2023 Notes was $68,917. SBA-guaranteed debentures are carried at cost and with their longer maturity dates, fair value is estimated by discounting remaining payments using current market rates for similar instruments and considering such factors as the legal maturity date and the ability of market participants to prepay the debentures. As of September 30, 2018 and December 31, 2017, the fair value of the Company’s SBA debentures using Level 3 inputs were estimated at $115,000 and $109,520, respectively, which is the same as the Company’s carrying value of the SBA debentures.
Note 5. Transactions with Affiliated Companies
An affiliated company is a company in which the Company has an ownership interest of 5% or more of its voting securities. A controlled affiliate company is a company in which the Company has an ownership interest of more than 25% of its voting securities. Please see the Company’s consolidated schedule of investments for the type of investment, principal amount, interest rate including the spread, and the maturity date. Transactions related to the Company’s investments with affiliates for the nine months ended September 30, 2018 and 2017 were as follows:
Portfolio Company | Fair value at December 31, 2017 | Transfers in (out) | Purchases (cost) | Sales and paydowns (cost) | PIK interest (cost) | Discount accretion | Net realized | Net unrealized | Fair value at September 30,2018 | |||||||||||||||||||||||||||
Non-controlled affiliate company investments: | ||||||||||||||||||||||||||||||||||||
American Community Homes, Inc. | $ | 7,441 | $ | — | $ | — | $ | (331 | ) | $ | 226 | $ | 31 | $ | — | $ | (624 | ) | $ | 6,743 | ||||||||||||||||
American Community Homes, Inc. | 4,329 | — | — | (165 | ) | 283 | 14 | — | (420 | ) | 4,041 | |||||||||||||||||||||||||
American Community Homes, Inc. | 542 | — | — | — | 30 | 2 | — | (64 | ) | 510 | ||||||||||||||||||||||||||
American Community Homes, Inc. | 431 | — | — | — | 14 | 4 | — | (40 | ) | 409 | ||||||||||||||||||||||||||
American Community Homes, Inc. | 224 | — | — | — | 15 | 3 | — | (25 | ) | 217 | ||||||||||||||||||||||||||
American Community Homes, Inc. (Delayed Draw) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
American Community Homes, Inc. (Delayed Draw) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
American Community Homes, Inc. (Delayed Draw) | — | — | 1,577 | — | — | — | — | (171 | ) | 1,406 | ||||||||||||||||||||||||||
American Community Homes, Inc. (warrant to purchase up to 9.0% of the equity) | 353 | — | — | — | — | — | — | (353 | ) | — | ||||||||||||||||||||||||||
13,320 | — | 1,577 | (496 | ) | 568 | 54 | — | (1,697 | ) | 13,326 | ||||||||||||||||||||||||||
Curion Holdings, LLC (1) | — | 3,775 | — | (25 | ) | 45 | 3 | — | (130 | ) | 3,668 | |||||||||||||||||||||||||
Curion Holdings, LLC (Revolver) (1) | — | 76 | 112 | — | — | — | — | (2 | ) | 186 | ||||||||||||||||||||||||||
Curion Holdings, LLC (1) | — | — | 1 | — | — | — | — | (1 | ) | — | ||||||||||||||||||||||||||
Curion Holdings, LLC (1) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Curion Holdings, LLC (58,779 shares of common stock) (1) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
— | 3,851 | 113 | (25 | ) | 45 | 3 | — | (133 | ) | 3,854 | ||||||||||||||||||||||||||
Incipio Technologies, Inc. (2) | — | 13,307 | — | — | — | 33 | — | (413 | ) | 12,927 | ||||||||||||||||||||||||||
Incipio Technologies, Inc. (2) | — | 3,613 | — | — | — | — | — | — | 3,613 | |||||||||||||||||||||||||||
Incipio Technologies, Inc. (Delayed Draw) | — | — | 1,271 | — | — | — | — | — | 1,271 | |||||||||||||||||||||||||||
Incipio Technologies, Inc. (2) | — | 1,143 | — | — | — | — | — | 279 | 1,422 | |||||||||||||||||||||||||||
Incipio Technologies, Inc. (2) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Incipio Technologies, Inc. (1,774 shares of Series C common stock) (2) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
— | 18,063 | 1,271 | — | — | 33 | — | (134 | ) | 19,233 | |||||||||||||||||||||||||||
Luxury Optical Holdings Co. | 3,697 | — | — | — | 328 | 13 | — | — | 4,038 | |||||||||||||||||||||||||||
Luxury Optical Holdings Co. (Delayed Draw) | 741 | — | — | (118 | ) | — | — | — | (1 | ) | 622 | |||||||||||||||||||||||||
Luxury Optical Holdings Co. (Revolver) | 170 | — | — | — | 15 | — | — | 1 | 186 | |||||||||||||||||||||||||||
Luxury Optical Holdings Co. (86 shares of common stock) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
4,608 | — | — | (118 | ) | 343 | 13 | — | — | 4,846 | |||||||||||||||||||||||||||
Millennial Brands LLC | — | — | — | — | — | — | (1,157 | ) | 1,157 | — | ||||||||||||||||||||||||||
Millennial Brands LLC | — | — | — | — | — | — | (416 | ) | 416 | — | ||||||||||||||||||||||||||
Millennial Brands LLC | — | — | — | — | — | — | (235 | ) | 235 | — | ||||||||||||||||||||||||||
Millennial Brands LLC | 550 | — | — | (167 | ) | — | — | (367 | ) | (16 | ) | — | ||||||||||||||||||||||||
Millennial Brands LLC | — | — | — | — | — | — | (2,011 | ) | 2,011 | — | ||||||||||||||||||||||||||
Millennial Brands LLC (10 preferred units) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Millennial Brands LLC (75,502 common units) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
550 | — | — | (167 | ) | — | — | (4,186 | ) | 3,803 | — | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (3) | 10,594 | (12,753 | ) | — | — | — | 110 | — | 2,049 | — | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Capex) (3) | 533 | (641 | ) | — | — | — | — | — | 108 | — | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) (3) | 1,797 | (2,159 | ) | — | — | — | — | — | 362 | — | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) (3) | 3,145 | (3,778 | ) | — | — | — | — | — | 633 | — | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) (3) | — | (2,672 | ) | 2,288 | — | — | — | — | 384 | — | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC – LLC Units (3) | 5,673 | — | — | — | — | — | — | (5,673 | ) | — | ||||||||||||||||||||||||||
21,742 | (22,003 | ) | 2,288 | — | — | 110 | — | (2,137 | ) | — | ||||||||||||||||||||||||||
SHI Holdings, Inc. | 2,625 | — | — | (20 | ) | — | 8 | — | (8 | ) | 2,605 | |||||||||||||||||||||||||
SHI Holdings, Inc. (Revolver) | 2,226 | — | 768 | — | — | 4 | — | (5 | ) | 2,993 | ||||||||||||||||||||||||||
SHI Holdings, Inc. (24 shares of common stock) | 786 | — | — | — | — | — | — | 20 | 806 | |||||||||||||||||||||||||||
5,637 | — | 768 | (20 | ) | — | 12 | — | 7 | 6,404 | |||||||||||||||||||||||||||
Summit Container Corporation | 3,421 | — | — | (227 | ) | 34 | 20 | — | 13 | 3,261 | ||||||||||||||||||||||||||
Summit Container Corporation | 1,507 | — | — | (1,523 | ) | 15 | — | — | 1 | — | ||||||||||||||||||||||||||
Summit Container Corporation (Revolver) | — | — | 19,329 | (14,070 | ) | — | — | — | — | 5,259 | ||||||||||||||||||||||||||
Summit Container Corporation (warrant to purchase up to 19.50% of the equity) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
4,928 | — | 19,329 | (15,820 | ) | 49 | 20 | — | 14 | 8,520 | |||||||||||||||||||||||||||
TPP Operating, Inc. (4) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
TPP Operating, Inc. (4) | 3,373 | 724 | 63 | (42 | ) | — | — | — | (4,118 | ) | — | |||||||||||||||||||||||||
TPP Operating, Inc. (4) | 4,593 | (724 | ) | 467 | (47 | ) | — | — | — | (4,289 | ) | — | ||||||||||||||||||||||||
TPP Operating, Inc. (24 shares of common stock) (4) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
TPP Operating, Inc. (16 shares of common stock) (4) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
7,966 | — | 530 | (89 | ) | — | — | — | (8,407 | ) | — | ||||||||||||||||||||||||||
Total non-controlled affiliate company investments | $ | 58,751 | $ | (89 | ) | $ | 25,876 | $ | (16,735 | ) | $ | 1,005 | $ | 245 | $ | (4,186 | ) | $ | (8,684 | ) | $ | 56,183 | ||||||||||||||
Controlled affiliate company investments: | ||||||||||||||||||||||||||||||||||||
MRCC Senior Loan Fund I, LLC | $ | 9,640 | $ | — | $ | 25,200 | $ | (9,500 | ) | $ | — | $ | — | $ | — | $ | 978 | $ | 26,318 | |||||||||||||||||
9,640 | — | 25,200 | (9,500 | ) | — | — | — | 978 | 26,318 | |||||||||||||||||||||||||||
Total controlled affiliate company investments | $ | 9,640 | $ | — | $ | 25,200 | $ | (9,500 | ) | $ | — | $ | — | $ | — | $ | 978 | $ | 26,318 |
41 |
Portfolio Company | Fair value at December 31, 2016 | Transfers in (out) | Purchases (cost) | Sales and paydowns (cost) | PIK interest (cost) | Discount accretion | Net realized | Net unrealized | Fair value at September 30, 2017 | |||||||||||||||||||||||||||
Non-controlled affiliate company investments: | ||||||||||||||||||||||||||||||||||||
American Community Homes, Inc. | $ | 7,816 | $ | — | $ | — | $ | — | $ | — | $ | 31 | $ | — | $ | (406 | ) | $ | 7,441 | |||||||||||||||||
American Community Homes, Inc. | 4,301 | — | — | — | 147 | 15 | — | (194 | ) | 4,269 | ||||||||||||||||||||||||||
American Community Homes, Inc. | 518 | — | — | — | 18 | 3 | — | (3 | ) | 536 | ||||||||||||||||||||||||||
American Community Homes, Inc. | — | — | 431 | — | — | 2 | — | (3 | ) | 430 | ||||||||||||||||||||||||||
American Community Homes, Inc. | — | — | 216 | — | 3 | 1 | — | 1 | 221 | |||||||||||||||||||||||||||
American Community Homes, Inc. (warrant to purchase up to 9.0% of the equity) | 1,315 | — | — | — | — | — | — | (705 | ) | 610 | ||||||||||||||||||||||||||
13,950 | — | 647 | — | 168 | 52 | — | (1,310 | ) | 13,507 | |||||||||||||||||||||||||||
Luxury Optical Holdings Co. (5) | — | 3,854 | — | — | 66 | 4 | — | (344 | ) | 3,580 | ||||||||||||||||||||||||||
Luxury Optical Holdings Co. (Delayed Draw) | — | — | 741 | — | — | — | — | — | 741 | |||||||||||||||||||||||||||
Luxury Optical Holdings Co. (Revolver) (5) | — | 116 | 67 | — | 2 | — | — | (20 | ) | 165 | ||||||||||||||||||||||||||
Luxury Optical Holdings Co. (86 shares of common stock) (5) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
— | 3,970 | 808 | — | 68 | 4 | — | (364 | ) | 4,486 | |||||||||||||||||||||||||||
Millennial Brands LLC | 464 | — | — | — | 33 | — | — | (497 | ) | — | ||||||||||||||||||||||||||
Millennial Brands LLC | 365 | — | — | — | 15 | (1 | ) | — | (325 | ) | 54 | |||||||||||||||||||||||||
Millennial Brands LLC | 225 | — | — | — | 10 | — | — | (33 | ) | 202 | ||||||||||||||||||||||||||
Millennial Brands LLC | — | — | — | — | 72 | — | — | (72 | ) | — | ||||||||||||||||||||||||||
Millennial Brands LLC (10 preferred units) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Millennial Brands LLC (75,502 common units) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
1,054 | — | — | — | 130 | (1 | ) | — | (927 | ) | 256 | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC | 10,933 | — | — | — | — | 147 | — | (283 | ) | 10,797 | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Capex) | 565 | — | — | (16 | ) | — | — | — | (7 | ) | 542 | |||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | 924 | — | 925 | — | — | — | — | (25 | ) | 1,824 | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | — | — | 3,236 | — | — | — | — | (44 | ) | 3,192 | ||||||||||||||||||||||||||
Rockdale Blackhawk, LLC - LLC Units (18.00% of the LLC interest) (6) | 14,655 | — | — | — | — | — | — | (6,035 | ) | 8,620 | ||||||||||||||||||||||||||
27,077 | — | 4,161 | (16 | ) | — | 147 | — | (6,394 | ) | 24,975 | ||||||||||||||||||||||||||
SHI Holdings, Inc. | 2,625 | — | — | — | — | 12 | — | (12 | ) | 2,625 | ||||||||||||||||||||||||||
SHI Holdings, Inc. (Revolver) | 1,203 | — | 833 | — | — | 3 | — | (4 | ) | 2,035 | ||||||||||||||||||||||||||
SHI Holdings, Inc. (24 shares of common stock) | 469 | — | — | — | — | — | — | 323 | 792 | |||||||||||||||||||||||||||
4,297 | — | 833 | — | — | 15 | — | 307 | 5,452 | ||||||||||||||||||||||||||||
Summit Container Corporation | 3,550 | — | — | (102 | ) | 54 | 18 | — | (99 | ) | 3,421 | |||||||||||||||||||||||||
Summit Container Corporation | — | — | 1,499 | — | 1 | — | — | (2 | ) | 1,498 | ||||||||||||||||||||||||||
Summit Container Corporation (warrant to purchase up to 19.50% of the equity) | 113 | — | — | — | — | — | — | (113 | ) | — | ||||||||||||||||||||||||||
3,663 | — | 1,499 | (102 | ) | 55 | 18 | — | (214 | ) | 4,919 | ||||||||||||||||||||||||||
Total non-controlled affiliate company investments | $ | 50,041 | $ | 3,970 | $ | 7,948 | $ | (118 | ) | $ | 421 | $ | 235 | $ | — | $ | (8,902 | ) | $ | 53,595 | ||||||||||||||||
Controlled affiliate company investments: | ||||||||||||||||||||||||||||||||||||
TPP Operating, Inc. (7) | $ | 1,799 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (1,799 | ) | $ | — | |||||||||||||||||
TPP Operating, Inc. (7) | 4,344 | 2,541 | — | — | — | — | — | (1,590 | ) | 5,295 | ||||||||||||||||||||||||||
TPP Operating, Inc. (7) | 2,756 | (2,541 | ) | 4,330 | (972 | ) | — | — | — | — | 3,573 | |||||||||||||||||||||||||
TPP Operating, Inc. (40 shares of common stock) (7) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
TPP Acquisition, Inc. (829 shares of common stock) (7) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
8,899 | — | 4,330 | (972 | ) | — | — | — | (3,389 | ) | 8,868 | ||||||||||||||||||||||||||
Total controlled affiliate company investments | $ | 8,899 | $ | — | $ | 4,330 | $ | (972 | ) | $ | — | $ | — | $ | — | $ | (3,389 | ) | $ | 8,868 |
42 |
For the nine months ended September 30, | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
Portfolio Company | Interest income | Dividend income | Fee income | Interest income | Dividend income | Fee income | ||||||||||||||||||
Non-controlled affiliate company investments: | ||||||||||||||||||||||||
American Community Homes, Inc. | $ | 806 | $ | — | $ | — | $ | 584 | $ | — | $ | — | ||||||||||||
American Community Homes, Inc. | 617 | — | — | 470 | — | — | ||||||||||||||||||
American Community Homes, Inc. | 72 | — | — | 58 | — | — | ||||||||||||||||||
American Community Homes, Inc. | 50 | — | — | 17 | — | — | ||||||||||||||||||
American Community Homes, Inc. | 34 | — | — | 13 | — | — | ||||||||||||||||||
American Community Homes, Inc. (Delayed Draw) | — | — | — | — | — | — | ||||||||||||||||||
American Community Homes, Inc. (Delayed Draw) | — | — | — | — | — | — | ||||||||||||||||||
American Community Homes, Inc. (Delayed Draw) | 23 | — | — | — | — | — | ||||||||||||||||||
American Community Homes, Inc. (Warrant) | — | — | — | — | — | — | ||||||||||||||||||
1,602 | — | — | 1,142 | — | — | |||||||||||||||||||
Curion Holdings, LLC | 115 | — | — | — | — | — | ||||||||||||||||||
Curion Holdings, LLC (Revolver) | 4 | — | — | — | — | — | ||||||||||||||||||
Curion Holdings, LLC | — | — | — | — | — | — | ||||||||||||||||||
Curion Holdings, LLC | — | — | — | — | — | — | ||||||||||||||||||
Curion Holdings, LLC (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
119 | — | — | — | — | — | |||||||||||||||||||
Incipio Technologies, Inc. | 486 | — | — | — | — | — | ||||||||||||||||||
Incipio Technologies, Inc. | 139 | — | — | — | — | — | ||||||||||||||||||
Incipio Technologies, Inc. (Delayed Draw) | 28 | — | — | — | — | — | ||||||||||||||||||
Incipio Technologies, Inc. | — | — | — | — | — | — | ||||||||||||||||||
Incipio Technologies, Inc. | — | — | — | — | — | — | ||||||||||||||||||
Incipio Technologies, Inc. (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
653 | — | — | — | — | — | |||||||||||||||||||
Luxury Optical Holdings Co. | 343 | — | — | 137 | — | — | ||||||||||||||||||
Luxury Optical Holdings Co. (Delayed Draw) | 66 | — | — | 1 | — | — | ||||||||||||||||||
Luxury Optical Holdings Co. (Revolver) | 15 | — | — | 4 | — | — | ||||||||||||||||||
Luxury Optical Holdings Co. (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
424 | — | — | 142 | — | — | |||||||||||||||||||
Millennial Brands LLC | — | — | — | 32 | — | — | ||||||||||||||||||
Millennial Brands LLC | — | — | — | 13 | — | — | ||||||||||||||||||
Millennial Brands LLC | — | — | — | 10 | — | — | ||||||||||||||||||
Millennial Brands LLC | — | — | — | 71 | — | — | ||||||||||||||||||
Millennial Brands LLC | — | — | — | — | — | — | ||||||||||||||||||
Millennial Brands LLC (Preferred units) | — | — | — | — | — | — | ||||||||||||||||||
Millennial Brands LLC (Common units) | — | — | — | — | — | — | ||||||||||||||||||
— | — | — | 126 | — | — | |||||||||||||||||||
Rockdale Blackhawk, LLC | 920 | — | — | 829 | — | — | ||||||||||||||||||
Rockdale Blackhawk, LLC (Capex) | 41 | — | — | 53 | — | — | ||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | 137 | — | — | 168 | — | — | ||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | 240 | — | — | 87 | — | — | ||||||||||||||||||
Rockdale Blackhawk, LLC (Revolver) | 104 | — | — | — | — | — | ||||||||||||||||||
Rockdale Blackhawk, LLC (LLC interest) | — | — | — | 381 | — | — | ||||||||||||||||||
1,442 | — | — | 1,518 | — | — | |||||||||||||||||||
SHI Holdings, Inc. | 249 | — | — | 225 | — | — | ||||||||||||||||||
SHI Holdings, Inc. (Revolver) | 249 | — | — | 142 | — | — | ||||||||||||||||||
SHI Holdings, Inc. (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
498 | — | — | 367 | — | — | |||||||||||||||||||
Summit Container Corporation | 399 | — | 83 | 480 | — | — | ||||||||||||||||||
Summit Container Corporation | 108 | — | — | 2 | — | — | ||||||||||||||||||
Summit Container Corporation (Revolver) | 149 | — | — | — | — | — | ||||||||||||||||||
Summit Container Corporation (Warrant) | — | — | — | — | — | — | ||||||||||||||||||
656 | — | 83 | 482 | — | — | |||||||||||||||||||
TPP Operating, Inc. | — | — | — | — | — | — | ||||||||||||||||||
TPP Operating, Inc. | — | — | — | — | — | — | ||||||||||||||||||
TPP Operating, Inc. | — | — | — | — | — | — | ||||||||||||||||||
TPP Operating, Inc. (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
TPP Operating, Inc. (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
— | — | — | — | — | — | |||||||||||||||||||
Total non-controlled affiliate company investments | $ | 5,394 | $ | — | $ | 83 | $ | 3,777 | $ | — | $ | — | ||||||||||||
Controlled affiliate company investments: | ||||||||||||||||||||||||
MRCC Senior Loan Fund I, LLC | $ | — | $ | 1,075 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
TPP Acquisition, Inc. (Common stock) | — | — | — | — | — | — | ||||||||||||||||||
TPP Operating, Inc. | — | — | — | 254 | — | — | ||||||||||||||||||
TPP Operating, Inc. | — | — | — | 340 | — | — | ||||||||||||||||||
— | 1,075 | — | 594 | — | — | |||||||||||||||||||
Total controlled affiliate company investments | $ | — | $ | 1,075 | $ | — | $ | 594 | $ | — | $ | — |
(1) | The Company provided a follow-on investment to Curion Holdings, LLC (“Curion”) as a part of a restructuring during the three months ended September 30, 2018. As part of the restructuring, the Company also received 12.1% of the equity of Curion. For the purpose of this schedule, transfers in represents the fair value at June 30, 2018. | |
(2) | The Company provided a follow-on investment to Incipio Technologies, Inc. (“Incipio”) as a part of a restructuring during the three months ended September 30, 2018. As a part of the restructuring, the Company also received 17.74% of the equity of Incipio. For the purpose of this schedule, transfers in represents the fair value at June 30, 2018. |
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(3) | On July 24, 2018, Rockdale Blackhawk, LLC (“Rockdale”) filed for bankruptcy as part of a restructuring process. During the three months ended September 30, 2018, the Company funded additional investments under the debtor in possession (“DIP”) financing facility established in conjunction with the bankruptcy and received repayments on a portion of its pre-petition debt. On July 20, 2018, the Company put back its 22.65% equity investment in Rockdale, resulting in a realized loss of $1,093, and therefore it is no longer an affiliated investment. The Company placed its investment in the pre-petition debt of Rockdale on non-accrual status in conjunction with the bankruptcy filing. For the purpose of this schedule, transfers out represents the fair value at June 30, 2018. | |
(4) | In December 2017, the Company transferred 16% of the equity interest in TPP Operating, Inc. (“TPP”) shares to a wholly-owned entity, MCC Holdco Equity Manager I, LLC (“MCC Holdco”), which has an independent manager who has full control over the operations of MCC Holdco, including the right to vote the shares of TPP Holdco LLC, the holding company which owns the Company’s equity interest in TPP. As a result, the Company then only controlled 24.0% of the voting interests in TPP and TPP Acquisition, Inc. was no longer considered a controlled affiliate company investment. As a result, TPP is presented as a non-controlled affiliate company investment for the nine months ended September 30, 2018 and a controlled affiliate company investment for the nine months ended September 30, 2017. During the nine months ended September 30, 2018, TPP ceased operations and the Company, along with the other owners, appointed an assignee and pursuant to Delaware state law completed a General Assignment for the Benefit of Creditors to the assignee. The purpose of the assignment was to wind down the TPP business and distribute the assets to its creditors. The assignee has informed the Company that it will have de minimis assets, if any, to distribute to its creditors. As a result, while the Company still has debt and equity positions in TPP, the Company has valued these positions at zero as of September 30, 2018. | |
(5) | The Company provided a follow-on investment to Luxury Optical Holdings Co. (“LOH”) as a part of a restructuring during the three months ended September 30, 2017. As part of the restructuring, the Company also received 9.6% of the equity of LOH. For the purpose of this schedule, transfers in represents the fair value at June 30, 2017. | |
(6) | The Company provided a follow-on investment to Rockdale during the three months ended September 30, 2017. In conjunction with the follow-on investment, the Company also received an additional 6.4% of the equity in Rockdale, increasing total equity ownership to 18.0%. | |
(7) | On September 2, 2016, TPP Acquisition, Inc. filed for bankruptcy as part of a restructuring process. The existing lenders, including the Company, submitted a credit bid to purchase certain assets of TPP Acquisition, Inc., which was approved by the bankruptcy court. The sale closed on November 8, 2016. A new operating company, TPP Operating, Inc., was formed to acquire certain of the assets of TPP Acquisition, Inc. and continue business operations. These new operations are no longer encumbered by significant lease liabilities. The Company initially owned 40% of the equity interests in the new operating company, TPP Operating, Inc. and owned 40.0% of the equity interests in TPP Acquisition, Inc., the former operating company, until its dissolution during the year ended December 31, 2017. |
Note 6. Transactions with Related Parties
The Company has entered into an Investment Advisory and Management Agreement with MC Advisors, under which MC Advisors, subject to the overall supervision of the Board, provides investment advisory services to the Company. The Company pays MC Advisors a fee for its services under the Investment Advisory and Management Agreement consisting of two components — a base management fee and an incentive fee. The base management fee is calculated at an annual rate equal to 1.75% of invested assets (calculated as total assets excluding cash, which includes assets financed using leverage) and is payable in arrears. Base management fees for the three and nine months ended September 30, 2018 were $2,196 and $6,561, respectively. Base management fees for the three and nine months ended September 30, 2017 were $1,953 and $5,661, respectively.
The incentive fee consists of two parts. The first part is calculated and payable quarterly in arrears and equals 20% of “pre-incentive fee net investment income” for the immediately preceding quarter, subject to a 2% (8% annualized) preferred return, or “hurdle,” and a “catch up” feature. The foregoing incentive fee is subject to a total return requirement, which provides that no incentive fee in respect of pre-incentive fee net investment income will be payable except to the extent that 20% of the cumulative net increase in net assets resulting from operations over the then current and 11 preceding calendar quarters exceeds the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters (the “Incentive Fee Limitation”). Therefore, any ordinary income incentive fee that is payable in a calendar quarter will be limited to the lesser of (1) 20% of the amount by which pre-incentive fee net investment income for such calendar quarter exceeds the 2% hurdle, subject to the “catch-up” provision, and (2) (x) 20% of the cumulative net increase in net assets resulting from operations for the then current and 11 preceding calendar quarters minus (y) the cumulative incentive fees accrued and/or paid for the 11 preceding calendar quarters. For the foregoing purpose, the “cumulative net increase in net assets resulting from operations” is the sum of pre-incentive fee net investment income, realized gains and losses and unrealized gains and losses for the then current and 11 preceding calendar quarters. The second part of the incentive fee is determined and payable in arrears as of the end of each fiscal year in an amount equal to 20% of realized capital gains, if any, on a cumulative basis from inception through the end of the year, computed net of all realized capital losses on a cumulative basis and unrealized depreciation, less the aggregate amount of any previously paid capital gain incentive fees.
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Incentive fees for the three and nine months ended September 30, 2018 were zero and $1,751, respectively. Incentive fees for the three and nine months ended September 30, 2018, consisted solely of part one incentive fees (based on net investment income) of zero and $1,751, respectively. The part one incentive fees for those periods include the effect of $1,545 and $3,419, respectively, of Incentive Fee Limitation as described above. Incentive fees for the three months ended September 30, 2017 consisted solely of part one incentive fees (based on net investment income) of $1,721. Incentive fees for the nine months ended September 30, 2017, consisted of part one incentive fees of $4,646 and part two incentive fees (based upon net realized and unrealized gains and losses, or capital gains) of ($175). Part two incentive fees reduced total incentive fees for the nine months ended September 30, 2017, primarily as a result of net unrealized losses during the period. The Company accrues, but does not pay, a capital gains incentive fee in connection with any unrealized capital appreciation, as appropriate. If, on a cumulative basis, the sum of net realized gains (losses) plus net unrealized gain (loss) decreases during a period, the Company will reverse any excess capital gains incentive fee previously accrued such that the amount of capital gains incentive fee accrued is no more than 20% of the sum of net realized gains (losses) plus net unrealized gain (loss). For the three and nine months ended September 30, 2018, no incentive fees were waived. For the three and nine months ended September 30, 2017, MC Advisors waived part one incentive fees of zero and $250, respectively.
The Company has entered into an Administration Agreement with Monroe Capital Management Advisors, LLC (“MC Management”), under which the Company reimburses MC Management (subject to the review and approval of the Board) for its allocable portion of overhead and other expenses, including the costs of furnishing the Company with office facilities and equipment and providing clerical, bookkeeping, record-keeping and other administrative services at such facilities, and the Company’s allocable portion of the cost of the chief financial officer and chief compliance officer and their respective staffs. To the extent that MC Management outsources any of its functions, the Company will pay the fees associated with such functions on a direct basis, without incremental profit to MC Management. For the three and nine months ended September 30, 2018, the Company incurred $925 and $2,581, respectively, in administrative expenses (included within Professional fees, Administrative service fees and General and administrative expenses on the consolidated statements of operations) under the Administration Agreement, of which $327 and $973, respectively, was related to MC Management overhead and salary allocation and paid directly to MC Management. For the three and nine months ended September 30, 2017, the Company incurred $864 and $2,540, respectively, in administrative expenses (included within Professional fees, Administrative service fees and General and administrative expenses on the consolidated statements of operations) under the Administration Agreement, of which $295 and $926, respectively, was related to MC Management overhead and salary allocation and paid directly to MC Management. As of September 30, 2018 and December 31, 2017, $327 and $322, respectively, of expenses were due to MC Management under this agreement and are included in accounts payable and accrued expenses on the consolidated statements of assets and liabilities.
The Company has entered into a license agreement with Monroe Capital LLC under which Monroe Capital LLC has agreed to grant the Company a non-exclusive, royalty-free license to use the name “Monroe Capital” for specified purposes in its business. Under this agreement, the Company will have a right to use the “Monroe Capital” name at no cost, subject to certain conditions, for so long as the Advisor or one of its affiliates remains its investment advisor. Other than with respect to this limited license, the Company has no legal right to the “Monroe Capital” name.
As of September 30, 2018 and December 31, 2017, the Company had accounts payable to members of the Board of $37 and zero, respectively, representing accrued and unpaid fees for their services.
Note 7. Borrowings
On June 20, 2018, the Company’s stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to the Company. As a result of this approval, the Company is now permitted to borrow amounts such that its asset coverage ratio, as defined in the Investment Company Act, is at least 150% after such borrowing (if certain requirements are met), rather than 200%, as previously required. As of September 30, 2018 and December 31, 2017, the Company’s asset coverage ratio based on aggregate borrowings outstanding was 314% and 334%, respectively.
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Revolving Credit Facility: As of September 30, 2018, the Company had U.S. dollar borrowings of $32,250 and non-U.S. dollar borrowings denominated in Great Britain pounds of £14,800 ($19,286 in U.S. dollars) under its revolving credit facility with ING Capital LLC, as agent, to finance the purchase of the Company’s assets. As of December 31, 2017, the Company had U.S. dollar borrowings of $105,200 and non-U.S. dollar borrowings denominated in Great Britain pounds of £8,800 ($11,892 in U.S. dollars) under its revolving credit facility with ING Capital LLC, as agent, to finance the purchase of the Company’s assets. The borrowings denominated in Great Britain pounds may be positively or negatively affected by movements in the rate of exchange between the U.S. dollar and the Great Britain pound. These movements are beyond the control of the Company and cannot be predicted. The borrowings denominated in Great Britain pounds are translated into U.S. dollars based on the spot rate at each balance sheet date. The impact resulting from changes in foreign currency borrowings is included in net change in unrealized gain (loss) on foreign currency and other transactions in the Company’s consolidated statements of operations and totaled $260 and $613 for the three and nine months ended September 30, 2018 and ($67) and ($83) for the three and nine months ended September 30, 2017, respectively. As of September 30, 2018, the maximum amount the Company was able to borrow was $200,000 and this borrowing can be increased to $300,000 pursuant to an accordion feature (subject to maintaining 200% asset coverage, as defined by the 1940 Act). On February 22, 2017, the Company closed a $40,000 upsize to the revolving credit facility, bringing the maximum amount the Company is able to borrow from $160,000 to the now current maximum amount of $200,000, in accordance with the facility’s accordion feature. The maturity date on the facility is December 14, 2020.
The revolving credit facility is secured by a lien on all of the Company’s assets, including cash on hand, but excluding the assets of the Company’s wholly-owned subsidiary, MRCC SBIC. The Company’s ability to borrow under the revolving credit facility is subject to availability under a defined borrowing base, which varies based on portfolio characteristics and certain eligibility criteria and concentration limits, as well as required valuation methodologies. The Company may make draws under the revolving credit facility to make or purchase additional investments through December 2019 and for general working capital purposes until the maturity date of the revolving credit facility. Borrowings under the revolving credit facility bear interest, at the Company’s election, at an annual rate of LIBOR (one-month, two-month, three-month or six-month at our discretion based on the term of the borrowing) plus 2.75% or at a daily rate equal to 1.75% per annum plus the greater of the prime interest rate, the federal funds rate plus 0.5% or LIBOR plus 1.0%. In addition to the stated interest rate on borrowings under the revolving credit facility, the Company is required to pay a fee of 0.5% per annum on any unused portion of the revolving credit facility if the unused portion of the facility is less than 65% of the then available maximum borrowing or a fee of 1.0% per annum on any unused portion of the revolving credit facility if the unused portion of the facility is greater than or equal to 65% of the then available maximum borrowing. As of September 30, 2018 and December 31, 2017, the outstanding borrowings were accruing at a weighted average interest rate of 4.4% and 4.4%, respectively. The weighted average interest rate of the revolving credit facility borrowings (excluding debt issuance costs) for the three and nine months ended September 30, 2018 was 4.7% and 4.6%, respectively. The weighted average fee rate on the unused portion of the revolving credit facility for the three and nine months ended September 30, 2018 was 0.7% and 0.6%, respectively. The weighted average interest rate of the revolving credit facility borrowings (excluding debt issuance costs) for the three and nine months ended September 30, 2017 was 4.1% and 4.1%, respectively. The weighted average fee rate on the unused portion of the revolving credit facility for the three and nine months ended September 30, 2017 was 0.5% and 0.5%, respectively.
The Company’s ability to borrow under the revolving credit facility is subject to availability under the borrowing base, which permits the Company to borrow up to 70% of the fair market value of its portfolio company investments depending on the type of the investment the Company holds and whether the investment is quoted. The Company’s ability to borrow is also subject to certain concentration limits, and continued compliance with the representations, warranties and covenants given by the Company under the facility. The revolving credit facility contains certain financial and restrictive covenants, including, but not limited to, the Company’s maintenance of: (1) a minimum consolidated total net assets at least equal to the greater of (a) 40% of the consolidated total assets on the last day of each quarter or (b) $120,000 plus 65% of the net proceeds to the Company from sales of its securities after December 14, 2015; (2) a ratio of total assets (less total liabilities other than indebtedness) to total indebtedness of not less than 2.1 times; and (3) a ratio of earnings before interest and taxes to interest expense of at least 2.5 times. The revolving credit facility also requires the Company to undertake customary indemnification obligations with respect to ING Capital LLC and other members of the lending group and to reimburse the lenders for expenses associated with entering into the credit facility. The revolving credit facility also has customary provisions regarding events of default, including events of default for nonpayment, change in control transactions at both Monroe Capital Corporation and MC Advisors, failure to comply with financial and negative covenants, and failure to maintain our relationship with MC Advisors. If the Company incurs an event of default under the revolving credit facility and fails to remedy such default under any applicable grace period, if any, then the entire revolving credit facility could become immediately due and payable, which would materially and adversely affect the Company’s liquidity, financial condition, results of operations and cash flows.
On April 25, 2018, the Company entered into an amendment to the revolving credit facility which, among other things, removes the pricing step-down related to the Company’s net worth to fix the interest rate the revolving credit facility bears to LIBOR plus 2.75% and makes certain borrowing base changes to allow more flexibility under the revolving credit facility. The Company paid the lenders an amendment fee of $200 in conjunction with the amendment which has been capitalized within unamortized deferred financing costs and is amortized into interest expense over the estimated average life of the borrowings.
The Company’s revolving credit facility also imposes certain conditions that may limit the amount of the Company’s distributions to stockholders. Distributions payable in the Company’s common stock under the DRIP are not limited by the revolving credit facility. Distributions in cash or property other than common stock are generally limited to 115% of the amount of distributions required to maintain the Company’s status as a RIC.
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2023 Notes: On September 12, 2018, the Company closed a public offering of $69,000 in aggregate principal amount of senior unsecured notes for net proceeds of $66,394 (“2023 Notes”). The 2023 Notes will mature on October 31, 2023. Interest on the 2023 Notes is paid quarterly on January 31, April 30, July 31, and October 31, at an annual rate of 5.75%, commencing on October 31, 2018. The Company may redeem the 2023 Notes in whole or in part at any time or from time to time on or after October 31, 2020. The 2023 Notes are general, unsecured obligations and rank equal in right of payment with all of the Company’s existing and future unsecured indebtedness. The 2023 Notes are listed on The Nasdaq Global Select Market under the trading symbol MRCCL.
SBA Debentures: On February 28, 2014, the Company’s wholly-owned subsidiary, MRCC SBIC received a license from the SBA to operate as a SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended. MRCC SBIC commenced operations on September 16, 2013.
The SBIC license allows MRCC SBIC to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a leverage commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis (pooling date) at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, has a superior claim to MRCC SBIC’s assets over the Company’s stockholders in the event the Company liquidates MRCC SBIC or the SBA exercises its remedies upon an event of default.
SBA regulations currently limit the amount that an individual SBIC may borrow to a maximum of $150,000 when it has at least $75,000 in regulatory capital, receives a leverage commitment from the SBA and has been through an audit examination by the SBA subsequent to licensing. The SBA also historically limited a related group of SBICs (commonly referred to as a “family of funds”) to a maximum of $225,000 in total borrowings. On December 18, 2015, this family of funds limitation was raised to $350,000 in total borrowings. As the Company has other affiliated SBICs already in operation, MRCC SBIC was historically limited to a maximum of $40,000 in borrowings. Pursuant to the increase in the family of funds limitation, the Company submitted a commitment application to the SBA and on April 13, 2016, MRCC SBIC was approved by the SBA for an additional $75,000 in SBA-guaranteed debentures, for a total of $115,000 in available debentures.
As of September 30, 2018, MRCC SBIC had $57,624 in leverageable capital and $115,000 in SBA-guaranteed debentures outstanding. As of December 31, 2017, MRCC SBIC had $57,624 in leverageable capital and $109,520 in SBA-guaranteed debentures outstanding.
As of September 30, 2018, MRCC SBIC had the following SBA-guaranteed debentures outstanding:
Maturity Date | Interest Rate | Amount | ||||||
September 2024 | 3.4 | % | $ | 12,920 | ||||
March 2025 | 3.3 | % | 14,800 | |||||
March 2025 | 2.9 | % | 7,080 | |||||
September 2025 | 3.6 | % | 5,200 | |||||
March 2027 | 3.5 | % | 20,000 | |||||
September 2027 | 3.2 | % | 32,100 | |||||
March 2028 | 3.9 | % | 18,520 | |||||
September 2028 | 4.2 | % | 4,380 | |||||
Total | $ | 115,000 |
As of December 31, 2017, MRCC SBIC had the following SBA-guaranteed debentures outstanding:
Maturity Date | Interest Rate | Amount | ||||||
September 2024 | 3.4 | % | $ | 12,920 | ||||
March 2025 | 3.3 | % | 14,800 | |||||
March 2025 | 2.9 | % | 7,080 | |||||
September 2025 | 3.6 | % | 5,200 | |||||
March 2027 | 3.5 | % | 20,000 | |||||
September 2027 | 3.2 | % | 32,100 | |||||
March 2028 | 2.5 | %(1) | 9,160 | |||||
March 2028 | 2.6 | %(1) | 2,780 | |||||
March 2028 | 2.7 | %(1) | 5,480 | |||||
Total | $ | 109,520 |
(1) | Represents an interim rate of interest as the SBA-guaranteed debentures had not yet pooled. |
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On October 2, 2014, the Company was granted exemptive relief from the SEC for permission to exclude the debt of MRCC SBIC guaranteed by the SBA from the asset coverage test under the 1940 Act. The receipt of this exemption for this SBA-guaranteed debt increases flexibility under the asset coverage test.
Secured Borrowings: Certain partial loan sales do not qualify for sale accounting under ASC Topic 860 because these sales do not meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment on the accompanying consolidated statements of assets and liabilities and the portion sold is recorded as a secured borrowing in the liabilities section of the consolidated statements of assets and liabilities. For these partial loan sales, the interest earned on the entire loan balance is recorded within “interest income” and the interest earned by the buyer in the partial loan sale is recorded within “interest and other debt financing expenses” in the accompanying consolidated statements of operations. As of September 30, 2018 and December 31, 2017, there were no secured borrowings.
Components of interest expense: The components of the Company’s interest expense and other debt financing expenses are as follows:
Three months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest expense – revolving credit facility | $ | 1,347 | $ | 944 | ||||
Interest expense – 2023 Notes | 209 | — | ||||||
Interest expense – SBA-guaranteed debentures | 984 | 683 | ||||||
Amortization of deferred financing costs | 355 | 274 | ||||||
Interest expense – secured borrowings | — | — | ||||||
Other | — | 6 | ||||||
Total interest and other debt financing expenses | $ | 2,895 | $ | 1,907 |
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest expense – revolving credit facility | $ | 4,455 | $ | 3,674 | ||||
Interest expense – 2023 Notes | 209 | — | ||||||
Interest expense – SBA-guaranteed debentures | 2,822 | 1,607 | ||||||
Amortization of deferred financing costs | 951 | 760 | ||||||
Interest expense – secured borrowings | — | 34 | ||||||
Other | — | 26 | ||||||
Total interest and other debt financing expenses | $ | 8,437 | $ | 6,101 |
Note 8. Derivative Instruments
The Company enters into foreign currency forward contracts from time to time to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of the Company’s investments denominated in foreign currencies. As of September 30, 2018, the counterparty to these forward currency contracts was Bannockburn Global Forex, LLC. Net unrealized gain or loss on foreign currency forward contracts are included in net change in unrealized gain (loss) from foreign currency and other transactions and net realized gain or loss on forward currency forward contracts are included in net realized gain (loss) from foreign currency and other transactions in the accompanying consolidated statements of operations.
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Certain information related to the Company’s foreign currency forward contracts is presented below as of September 30, 2018. There were no derivatives outstanding as of December 31, 2017.
As of September 30, 2018 | ||||||||||||||||
Notional Amount to be Sold | Settlement Date | Gross Unrealized | Gross Amount of Unrealized Loss | Balance Sheet location of Net Amounts | ||||||||||||
Foreign currency forward contract | £ | 108 | 10/1/2018 | $ | — | $ | (3 | ) | Unrealized loss on foreign currency forward contracts | |||||||
Foreign currency forward contract | £ | 107 | 1/2/2019 | — | (3 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 228 | 2/28/2019 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 106 | 4/1/2019 | — | (2 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 229 | 5/31/2019 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 106 | 7/1/2019 | — | (2 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 230 | 8/30/2019 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 105 | 10/1/2019 | — | (2 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 230 | 11/29/2019 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 104 | 1/2/2020 | — | (2 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 231 | 2/28/2020 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 103 | 4/1/2020 | — | (2 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 102 | 5/5/2020 | — | (2 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 230 | 5/29/2020 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 230 | 8/28/2020 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Foreign currency forward contract | £ | 229 | 11/30/2020 | — | (5 | ) | Unrealized loss on foreign currency forward contracts | |||||||||
Total | £ | 2,678 | $ | — | $ | (58 | ) |
For the three and nine months ended September 30, 2018, the Company recognized net change in unrealized loss of $58 and $58, respectively, included in net change in unrealized gain (loss) from foreign currency and other transactions in the Company’s consolidated statements of operations.
Note 9. Distributions
The Company’s distributions are recorded on the record date. The following table summarizes distributions declared during the nine months ended September 30, 2018 and 2017:
Date Declared | Record Date | Payment Date | Amount Per Share | Cash Distribution | DRIP Shares Issued | DRIP Shares Value | DRIP
Shares Repurchased in the Open Market | Cost
of DRIP Shares Repurchased | ||||||||||||||||||||
Nine months ended September 30, 2018: | ||||||||||||||||||||||||||||
March 1, 2018 | March 16, 2018 | March 30, 2018 | $ | 0.35 | $ | 7,084 | — | $ | — | 23,908 | $ | 301 | ||||||||||||||||
June 1, 2018 | June 15, 2018 | June 29, 2018 | 0.35 | 6,786 | 22,308 | 301 | — | — | ||||||||||||||||||||
August 31, 2018 | September 14, 2018 | September 28, 2018 | 0.35 | 7,156 | — | — | 24,946 | 338 | ||||||||||||||||||||
Total distributions declared | $ | 1.05 | $ | 21,026 | 22,308 | $ | 301 | 48,854 | $ | 639 | ||||||||||||||||||
Nine months ended September 30, 2017: | ||||||||||||||||||||||||||||
March 7, 2017 | March 17, 2017 | March 31, 2017 | $ | 0.35 | $ | 5,549 | 16,217 | $ | 254 | — | $ | — | ||||||||||||||||
May 31, 2017 | June 15, 2017 | June 30, 2017 | 0.35 | 6,807 | 17,932 | 271 | — | — | ||||||||||||||||||||
August 31, 2017 | September 15, 2017 | September 29, 2017 | 0.35 | 7,084 | — | — | 6,508 | 93 | ||||||||||||||||||||
Total distributions declared | $ | 1.05 | $ | 19,440 | 34,149 | $ | 525 | 6,508 | $ | 93 |
Note 10. Stock Issuances and Repurchases
Stock Issuances: On July 1, 2016, the Company amended the ATM securities offering program with MLV & Co. LLC (“MLV”) and JMP Securities LLC (“JMP”) to replace MLV with FBR Capital Markets & Co. (“FBR”), an affiliate of MLV (the “Prior ATM Program”). On May 12, 2017, the Company entered into new equity distribution agreements with each FBR and JMP that reference the Company’s current registration statement (the “ATM Program”). All other material terms of the Prior ATM Program remain unchanged under the ATM Program. During the nine months ended September 30, 2017, the Company sold 173,939 shares at an average price of $15.71 per share for gross proceeds of $2,732 under the Prior ATM Program and no shares were sold under the ATM Program. Aggregate underwriters’ discounts and commissions were $41 and offering costs were $23, resulting in net proceeds of approximately $2,668. During the nine months ended September 30, 2018, the Company sold 182,299 shares at an average price of $13.82 per share for gross proceeds of $2,519 under the ATM Program. Aggregate underwriters’ discounts and commissions were $38 and offering costs were $79, resulting in net proceeds of approximately $2,402.
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On June 9, 2017, the Company closed a public offering of 3,000,000 shares of its common stock at a public offering price of $15.00 per share, raising approximately $45,000 in gross proceeds. On June 14, 2017, pursuant to the underwriters’ exercise of the over-allotment option, the Company sold an additional 450,000 shares of its common stock, at a public offering price of $15.00 per share, raising an additional $6,750 in gross proceeds for a total of $51,750. Aggregate underwriters’ discounts and commissions were $2,070 and offering costs were $127, resulting in net proceeds of approximately $49,553.
Note 11. Commitments and Contingencies
Commitments: As of September 30, 2018 and December 31, 2017, the Company had $36,328 and $41,238, respectively, in outstanding commitments to fund investments under undrawn revolvers, capital expenditure loans and delayed draw commitments. As described in Note 3, the Company had commitments up to $24,800 and $40,500, respectively, to SLF, as of September 30, 2018 and December 31, 2017 that may be contributed primarily for the purpose of funding new investments approved by the SLF investment committee.
Indemnifications: In the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties that provide general indemnifications. The Company’s maximum exposure under these agreements is unknown, as these involve future claims that may be made against the Company but that have not occurred. The Company expects the risk of any future obligations under these indemnifications to be remote.
Concentration of credit and counterparty risk: Credit risk arises primarily from the potential inability of counterparties to perform in accordance with the terms of the contract. In the event that the counterparties do not fulfill their obligations, the Company may be exposed to risk. The risk of default depends on the creditworthiness of the counterparties or issuers of the instruments. It is the Company’s policy to review, as necessary, the credit standing of each counterparty.
Market risk: The Company’s investments and borrowings are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments and borrowings are traded.
Legal proceedings: In the normal course of business, the Company may be subject to legal and regulatory proceedings that are generally incidental to its ongoing operations. While there can be no assurance of the ultimate disposition of any such proceedings, the Company is not currently aware of any such proceedings or disposition that would have a material adverse effect on the Company’s consolidated financial statements.
Note 12. Financial Highlights
The following is a schedule of financial highlights for the nine months ended September 30, 2018 and 2017:
September 30, 2018 | September 30, 2017 | |||||||
Per share data: | ||||||||
Net asset value at beginning of period | $ | 13.77 | $ | 14.52 | ||||
Net investment income (1) | 1.19 | 1.05 | ||||||
Net gain (loss) (1) | (0.96 | ) | (0.50 | ) | ||||
Net increase in net assets from operations (1) | 0.23 | 0.55 | ||||||
Stockholder distributions (2) | (1.05 | ) | (1.05 | ) | ||||
Other (3) | — | (0.01 | ) | |||||
Net asset value at end of period | $ | 12.95 | $ | 14.01 | ||||
Net assets at end of period | $ | 264,752 | $ | 283,542 | ||||
Shares outstanding at end of period | 20,444,564 | 20,239,957 | ||||||
Per share market value at end of period | $ | 13.57 | $ | 14.31 | ||||
Total return based on market value (4) | 6.75 | % | (0.29 | )% | ||||
Total return based on average net asset value (5) | 1.72 | % | 3.78 | % | ||||
Ratio/Supplemental data: | ||||||||
Ratio of net investment income to average net assets (6) | 12.07 | % | 10.24 | % | ||||
Ratio of total expenses to average net assets (6)(7) | 9.35 | % | 9.01 | % | ||||
Average debt outstanding | $ | 235,520 | $ | 177,739 | ||||
Average debt outstanding per share | $ | 11.60 | $ | 9.83 | ||||
Portfolio turnover (8) | 24.53 | % | 33.83 | % |
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(1) | Calculated using the weighted average shares outstanding during the periods presented. |
(2) | Management monitors available taxable earnings, including net investment income and realized capital gains, to determine if a tax return of capital may occur for the year. To the extent the Company’s taxable earnings fall below the total amount of the Company’s distributions for that fiscal year, a portion of those distributions may be deemed a tax return of capital to the Company’s stockholders. The tax character of distributions will be determined at the end of the fiscal year. However, if the character of such distributions were determined as of September 30, 2018 and 2017, none of the distributions would have been characterized as a tax return of capital to the Company’s stockholders; this tax return of capital may differ from the return of capital calculated with reference to net investment income for financial reporting purposes. |
(3) | Includes the effect of share issuances above (below) net asset value and the impact of different share amounts used in calculating per share data as a result of calculating certain per share data based on weighted average shares outstanding during the period and certain per share data based on shares outstanding as of a period end or transaction date. |
(4) | Total return based on market value is calculated assuming a purchase of common shares at the market value on the first day and a sale at the market value on the last day of the periods reported. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Company’s DRIP. Total return based on market value does not reflect brokerage commissions. Return calculations are not annualized. |
(5) | Total return based on average net asset value is calculated by dividing the net increase in net assets from operations by the average net asset value. Return calculations are not annualized. |
(6) | Ratios are annualized. Incentive fees included within the ratio are not annualized. |
(7) | The following is a schedule of supplemental ratios for the nine months ended September 30, 2018 and 2017. These ratios have been annualized unless otherwise noted. |
September 30, 2018 | September 30, 2017 | |||||||
Ratio of interest and other debt financing expenses to average net assets | 4.15 | % | 3.11 | % | ||||
Ratio of total expenses (without incentive fees) to average net assets | 8.71 | % | 7.40 | % | ||||
Ratio of incentive fees, net of incentive fee waiver, to average net assets (not annualized) (9) | 0.64 | % | 1.61 | % |
(8) | Ratios are not annualized. |
(9) | The ratio of waived incentive fees to average net assets was zero and 0.10% for nine months ended September 30, 2018 and 2017, respectively. |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except as otherwise specified, references to “we,” “us” and “our” refer to Monroe Capital Corporation and its consolidated subsidiaries. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing in our annual report on Form 10-K (the “Annual Report”) for the year ended December 31, 2017, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2018. The information contained in this section should also be read in conjunction with our unaudited consolidated financial statements and related notes and other financial information appearing elsewhere in this quarterly report on Form 10-Q (the “Quarterly Report”).
FORWARD-LOOKING STATEMENTS
This Quarterly Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that constitute forward-looking statements, which relate to future events or our future performance or future financial condition. These forward-looking statements are not historical facts, but rather are based on current expectations, estimates and projections about our company, our industry, our beliefs and our assumptions. The forward-looking statements contained in this Quarterly Report involve risks and uncertainties, including statements as to:
• | our future operating results; |
• | our business prospects and the prospects of our portfolio companies; |
• | the dependence of our future success on the general economy and its impact on the industries in which we invest; |
• | the impact of a protracted decline in the liquidity of credit markets on our business; |
• | the impact of increased competition; |
• | the impact of fluctuations in interest rates on our business and our portfolio companies; |
• | our contractual arrangements and relationships with third parties; |
• | the valuation of our investments in portfolio companies, particularly those having no liquid trading market; |
• | actual and potential conflicts of interest with MC Advisors and other affiliates of Monroe Capital; |
• | 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 of cash flows, if any, from the operations of our portfolio companies; |
• | the ability of MC Advisors to locate suitable investments for us and to monitor and administer our investments; |
• | the ability of MC Advisors or its affiliates to attract and retain highly talented professionals; |
• | our ability to qualify and maintain our qualification as a regulated investment company and as a business development company; and |
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• | the impact of future legislation and regulation on our business and our portfolio companies. |
We use words such as “anticipates,” “believes,” “expects,” “intends,” “seeks,” “plans,” “estimates,” “targets,” “expects” and similar expressions to identify forward-looking statements. The forward-looking statements contained in this Quarterly Report involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth in “Part I—Item 1A. Risk Factors” in our Annual Report and “Part II—Item 1A. Risk Factors” in this Quarterly Report.
Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate. Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital. In light of these and other uncertainties, the inclusion of a projection or forward-looking statement in this Quarterly Report should not be regarded as a representation by us that our plans and objectives will be achieved.
We have based the forward-looking statements included in this Quarterly Report on information available to us on the date of this Quarterly Report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements in this Quarterly Report, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and current reports on Form 8-K.
Overview
Monroe Capital Corporation is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company (“BDC”) under the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, for tax purposes, we have elected to be treated as a regulated investment company (“RIC”) under the subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”). We were incorporated under the Maryland General Corporation Law on February 9, 2011. We are a specialty finance company focused on providing financing solutions primarily to lower middle-market companies in the United States and Canada. We provide customized financing solutions focused primarily on senior secured, junior secured and unitranche secured (a combination of senior secured and junior secured debt in the same facility in which we syndicate a “first out” portion of the loan to an investor and retain a “last out” portion of the loan) debt and, to a lesser extent, unsecured subordinated debt and equity, including equity co-investments in preferred and common stock, and warrants.
Our shares are currently listed on the NASDAQ Global Select Market under the symbol “MRCC”.
Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through investment in senior, unitranche secured and junior secured debt and, to a lesser extent, subordinated debt and equity investments. We seek to use our extensive leveraged finance origination infrastructure and broad expertise in sourcing loans to invest in primarily senior, unitranche secured and junior secured debt of middle-market companies. Our investments in senior, unitranche, junior secured debt and other investments generally will range between $2.0 million and $18.0 million each, although this investment size may vary proportionately with the size of our capital base. As of September 30, 2018, our portfolio included approximately 76.1% senior secured debt, 10.2% unitranche secured debt, 6.0% junior secured debt and 7.7% equity securities, compared to December 31, 2017, when our portfolio included approximately 78.5% senior secured debt, 8.2% unitranche secured debt, 7.8% junior secured debt and 5.5% equity securities. We expect that the companies in which we invest may be leveraged, often as a result of leveraged buy-outs or other recapitalization transactions, and, in certain cases, will not be rated by national ratings agencies. If such companies were rated, we believe that they would typically receive a rating below investment grade (between BB and CCC under the Standard & Poor’s system) from the national rating agencies.
While our primary focus is to maximize current income and capital appreciation through debt investments in thinly traded or private U.S. companies, we may invest a portion of the portfolio in opportunistic investments in order to seek to enhance returns to stockholders. Such investments may include investments in high-yield bonds, distressed debt, private equity or securities of public companies that are not thinly traded and securities of middle-market companies located outside of the United States. We expect that these public companies generally will have debt securities that are non-investment grade.
On February 28, 2014, our wholly-owned subsidiary, Monroe Capital Corporation SBIC, LP (“MRCC SBIC”), a Delaware limited partnership, received a license from the Small Business Administration (“SBA”) to operate as a Small Business Investment Company (“SBIC”) under Section 301(c) of the Small Business Investment Act of 1958. MRCC SBIC commenced operations on September 16, 2013. As of September 30, 2018, MRCC SBIC had $57.6 million in leverageable capital and $115.0 million in SBA-guaranteed debentures outstanding. See “SBA Debentures” below for more information.
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Investment income
We generate interest income on the debt investments in portfolio company investments that we originate or acquire. Our debt investments, whether in the form of senior, junior or unitranche secured debt, typically have an initial term of three to seven years and bear interest at a fixed or floating rate. In some instances, we receive payments on our debt investment based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. In some cases, our investments provide for deferred interest of payment-in-kind (“PIK”) interest. In addition, we may generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums and prepayment gains (losses) on loans as interest income. As the frequency or volume of the repayments which trigger these prepayment premiums and prepayment gains (losses) may fluctuate significantly from period to period, the associated interest income recorded may also fluctuate significantly from period to period. Interest and fee income is recorded on the accrual basis to the extent we expect to collect such amounts. Interest income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. All other income is recorded into income when earned. We record fees on loans based on the determination of whether the fee is considered a yield enhancement or payment for a service. If the fee is considered a yield enhancement associated with a funding of cash on a loan, the fee is generally deferred and recognized into interest income using the effective interest method if captured in the cost basis or using the straight-line method if the loan is unfunded and therefore there is no cost basis. If the fee is not considered a yield enhancement because a service was provided, and the fee is payment for that service, the fee is deemed earned and recognized as fee income in the period earned.
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies. Each distribution received from limited liability company (“LLC”) and limited partnership (“LP”) investments is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. The frequency and volume of the distributions on common equity securities and LLC and LP investments may fluctuate significantly from period to period.
Expenses
Our primary operating expenses include the payment of fees to MC Advisors under the Investment Advisory and Management Agreement (management and incentive fees), and the payment of fees to Monroe Capital Management Advisors, LLC (“MC Management”) for our allocable portion of overhead and other expenses under the Administration Agreement and other operating costs. See Note 6 to our consolidated financial statements and “Related Party Transactions” below for additional information on our Investment Advisory and Management Agreement and Administration agreement. Our expenses also include interest expense on our revolving credit facility, our SBA-guaranteed debentures and our secured borrowings. We bear all other out-of-pocket costs and expenses of our operations and transactions.
Net gain (loss) on investments, secured borrowings, foreign currency and other transactions
We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the cost basis of the investment without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments, secured borrowings, foreign currency and other transactions within net change in unrealized gain (loss) on investments, secured borrowings, foreign currency and other transactions in the consolidated statements of operations.
Portfolio and Investment Activity
During the three months ended September 30, 2018, we invested $0.9 million in one new portfolio company and $51.2 million in 20 existing portfolio companies and had $60.4 million in aggregate amount of sales and principal repayments, resulting in net repayments of $8.3 million for the period.
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During the nine months ended September 30, 2018, we invested $19.4 million in seven new portfolio companies and $105.5 million in 27 existing portfolio companies and had $120.8 million in aggregate amount of sales and principal repayments, resulting in net investments of $4.1 million for the period.
During the three months ended September 30, 2017, we invested $29.7 million in six new portfolio companies and $24.5 million in 20 existing portfolio companies and had $69.0 million in aggregate amount of sales and principal repayments, resulting in net repayments of $14.8 million for the period.
During the nine months ended September 30, 2017, we invested $125.0 million in 16 new portfolio companies and $44.1 million in 26 existing portfolio companies and had $144.4 million in aggregate amount of sales and principal repayments, resulting in net investments of $24.7 million for the period.
The following table shows yield by debt and preferred equity security type:
September 30, 2018 | December 31, 2017 | |||||||||||||||
Weighted Average Annualized Contractual Coupon Yield (1) | Weighted Average Annualized Effective Yield (2) | Weighted Average Annualized Contractual Coupon Yield (1) | Weighted Average Annualized Effective Yield (2) | |||||||||||||
Senior secured loans | 9.5 | % | 9.5 | % | 9.6 | % | 9.6 | % | ||||||||
Unitranche secured loans | 10.1 | 10.6 | 9.3 | 11.3 | ||||||||||||
Junior secured loans | 10.6 | 10.6 | 9.4 | 9.4 | ||||||||||||
Preferred equity securities | 10.8 | 10.8 | 10.8 | 10.8 | ||||||||||||
Total | 9.7 | % | 9.7 | % | 9.8 | % | 10.0 | % |
(1) | The weighted average annualized contractual coupon yield at period end is computed by dividing (a) the interest income on debt investments and preferred equity investments (with a stated coupon rate) at the period end contractual coupon rate for each investment by (b) the par value of our debt investments (excluding debt investments on non-accrual status acquired for no cost in a restructuring) and the cost basis of our preferred equity investments. |
(2) | The weighted average annualized effective yield on portfolio investments at period end is computed by dividing (a) interest income on debt investments and preferred equity investments (with a stated coupon rate) at the period end effective rate for each investment by (b) the par value of our debt investments (excluding debt investments on non-accrual status acquired for no cost in a restructuring) and the cost basis of our preferred equity investments. The weighted average annualized effective yield on portfolio investments is a metric on the investment portfolio alone and does not represent a return to stockholders. This metric is not inclusive of our fees and expenses, the impact of leverage on the portfolio or sales load that may be paid by investors. |
The following table shows the composition of the investment portfolio (dollars in thousands):
September 30, 2018 | December 31, 2017 | |||||||||||||||
Fair Value: | ||||||||||||||||
Senior secured loans | $ | 367,247 | 76.1 | % | $ | 387,874 | 78.5 | % | ||||||||
Unitranche secured loans | 48,966 | 10.2 | 40,295 | 8.2 | ||||||||||||
Junior secured loans | 28,924 | 6.0 | 38,549 | 7.8 | ||||||||||||
LLC equity interest in SLF | 26,318 | 5.5 | 9,640 | 1.9 | ||||||||||||
Equity securities | 10,838 | 2.2 | 17,780 | 3.6 | ||||||||||||
Total | $ | 482,293 | 100.0 | % | $ | 494,138 | 100.0 | % |
Our portfolio composition remained relatively consistent with December 31, 2017, with the largest shift in portfolio composition a result of the additional investments made in SLF during the nine months ended September 30, 2018. The overall contractual and effective yield on the portfolio decreased slightly as compared to December 31, 2017. General increases in LIBOR during the nine months ended September 30, 2018 were partially offset by market spread compression as new portfolio investments during the nine months ended September 30, 2018 were at a slightly lower average spread than the average spread in the existing portfolio.
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The following table shows the portfolio composition by industry grouping at fair value (dollars in thousands):
September 30, 2018 | December 31, 2017 | |||||||||||||||
Investments at Fair Value | Percentage of Total Portfolio | Investments at Fair Value | Percentage of Total Portfolio | |||||||||||||
Aerospace & Defense | $ | — | — | % | $ | 5,000 | 1.0 | % | ||||||||
Banking, Finance, Insurance & Real Estate | 61,160 | 12.7 | 61,407 | 12.4 | ||||||||||||
Beverage, Food & Tobacco | 17,360 | 3.6 | 17,770 | 3.6 | ||||||||||||
Capital Equipment | 2,970 | 0.6 | — | — | ||||||||||||
Chemicals, Plastics & Rubber | 14,266 | 3.0 | 8,860 | 1.8 | ||||||||||||
Construction & Building | 24,036 | 5.0 | 18,049 | 3.7 | ||||||||||||
Consumer Goods: Durable | 15,254 | 3.2 | 11,808 | 2.4 | ||||||||||||
Consumer Goods: Non-Durable | 23,168 | 4.8 | 24,717 | 5.0 | ||||||||||||
Containers, Packaging & Glass | 8,520 | 1.8 | 4,928 | 1.0 | ||||||||||||
Energy: Oil & Gas | 2,504 | 0.5 | 2,352 | 0.5 | ||||||||||||
Environmental Industries | 4,336 | 0.9 | 4,457 | 0.9 | ||||||||||||
Healthcare & Pharmaceuticals | 52,141 | 10.8 | 65,582 | 13.3 | ||||||||||||
High Tech Industries | 54,244 | 11.2 | 46,239 | 9.4 | ||||||||||||
Hotels, Gaming & Leisure | 20,003 | 4.1 | 42,744 | 8.6 | ||||||||||||
Investment Funds & Vehicles | 26,318 | 5.5 | 9,640 | 2.0 | ||||||||||||
Media: Advertising, Printing & Publishing | 26,122 | 5.4 | 23,264 | 4.7 | ||||||||||||
Media: Broadcasting & Subscription | 4,511 | 0.9 | 15,965 | 3.2 | ||||||||||||
Media: Diversified & Production | 5,000 | 1.0 | 5,006 | 1.0 | ||||||||||||
Retail | 32,922 | 6.8 | 41,644 | 8.4 | ||||||||||||
Services: Business | 42,834 | 8.9 | 33,732 | 6.8 | ||||||||||||
Services: Consumer | 17,812 | 3.7 | 21,474 | 4.3 | ||||||||||||
Telecommunications | — | — | 3,152 | 0.6 | ||||||||||||
Utilities: Electric | — | — | 2,792 | 0.6 | ||||||||||||
Wholesale | 26,812 | 5.6 | 23,556 | 4.8 | ||||||||||||
Total | $ | 482,293 | 100.0 | % | $ | 494,138 | 100.0 | % |
Portfolio Asset Quality
MC Advisors’ portfolio management staff closely monitors all credits, with senior portfolio managers covering agented and more complex investments. MC Advisors segregates our capital markets investments by industry. The MC Advisors’ monitoring process and projections developed by Monroe Capital both have daily, weekly, monthly and quarterly components and related reports, each to evaluate performance against historical, budget and underwriting expectations. MC Advisors’ analysts will monitor performance using standard industry software tools to provide consistent disclosure of performance. MC Advisors also monitors our investment exposure using a proprietary trend analysis tool. When necessary, MC Advisors will update our internal risk ratings, borrowing base criteria and covenant compliance reports.
As part of the monitoring process, MC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on an internal proprietary system that uses the categories listed below, which we refer to as MC Advisors’ investment performance rating. For any investment rated in grades 3, 4 or 5, MC Advisors, through its internal Portfolio Management Group (“PMG”), will increase its monitoring intensity and prepare regular updates for the investment committee, summarizing current operating results and material impending events and suggesting recommended actions. The PMG is responsible for oversight and management of any investments rated in grades 3, 4, or 5. MC Advisors monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, MC Advisors reviews these investment ratings on a quarterly basis, and our board of directors (the “Board”) reviews and affirms such ratings. A definition of the rating system follows:
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Investment Performance Risk Rating |
Summary Description | |
Grade 1 | Includes investments exhibiting the least amount of risk in our portfolio. The issuer is performing above expectations or the issuer’s operating trends and risk factors are generally positive. | |
Grade 2 | Includes investments exhibiting an acceptable level of risk that is similar to the risk at the time of origination. The issuer is generally performing as expected or the risk factors are neutral to positive. | |
Grade 3 | Includes investments performing below expectations and indicates that the investment’s risk has increased somewhat since origination. The issuer may be out of compliance with debt covenants; however, scheduled loan payments are generally not past due. | |
Grade 4 | Includes an issuer performing materially below expectations and indicates that the issuer’s risk has increased materially since origination. In addition to the issuer being generally out of compliance with debt covenants, scheduled loan payments may be past due (but generally not more than six months past due). For grade 4 investments, we intend to increase monitoring of the issuer. | |
Grade 5 | Indicates that the issuer is performing substantially below expectations and the investment risk has substantially increased since origination. Most or all of the debt covenants are out of compliance or payments are substantially delinquent. Investments graded 5 are not anticipated to be repaid in full and we will reduce the fair market value of the loan to the amount we expect to recover. |
Our investment performance risk ratings do not constitute any rating of investments by a nationally recognized statistical rating organization or reflect or represent any third-party assessment of any of our investments.
In the event of a delinquency or a decision to rate an investment grade 4 or grade 5, the PMG, in consultation with the investment committee, will develop an action plan. Such a plan may require a meeting with the borrower’s management or the lender group to discuss reasons for the default and the steps management is undertaking to address the under-performance, as well as amendments and waivers that may be required. In the event of a dramatic deterioration of a credit, MC Advisors and the PMG forms a team or engages outside advisors to analyze, evaluate and take further steps to preserve its value in the credit. In this regard, we would expect to explore all options, including in a private equity sponsored investment, assuming certain responsibilities for the private equity sponsor or a formal sale of the business with oversight of the sale process by us. The PMG and the investment committee have extensive experience in running debt work-out transactions and bankruptcies.
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale as of September 30, 2018 (dollars in thousands):
Investment Performance Rating | Investments at Fair Value | Percentage of Total Investments | ||||||
1 | $ | — | — | % | ||||
2 | 379,010 | 78.6 | ||||||
3 | 59,528 | 12.3 | ||||||
4 | 43,755 | 9.1 | ||||||
5 | — | — | ||||||
Total | $ | 482,293 | 100.0 | % |
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale as of December 31, 2017 (dollars in thousands):
Investment Performance Rating | Investments at Fair Value | Percentage of Total Investments | ||||||
1 | $ | 3,445 | 0.7 | % | ||||
2 | 415,094 | 84.0 | ||||||
3 | 57,547 | 11.6 | ||||||
4 | 18,052 | 3.7 | ||||||
5 | — | — | ||||||
Total | $ | 494,138 | 100.0 | % |
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As of September 30, 2018, we had five borrowers with loans or preferred equity securities on non-accrual status (Curion Holdings, LLC promissory notes, Incipio Technologies, Inc. third lien tranches, Millennial Brands LLC, Rockdale Blackhawk, LLC pre-petition debt and TPP Operating, Inc.), which comprised 2.8% of our total investments at fair value. As of December 31, 2017, we had two borrowers with loans and preferred equity securities on non-accrual status (Millennial Brands LLC and TPP Operating, Inc.), which comprised 1.7% of our total investments at fair value. Loans or preferred equity securities are placed on non-accrual status when principal, interest or dividend payments become materially past due, or when there is reasonable doubt that principal, interest or dividends will be collected.
Results of Operations
Operating results were as follows (in thousands):
Three months ended September 30, | ||||||||
2018 | 2017 | |||||||
Total investment income | $ | 13,779 | $ | 13,469 | ||||
Total expenses, net of incentive fee waiver | 6,053 | 6,582 | ||||||
Net investment income | 7,726 | 6,887 | ||||||
Net realized gain (loss) on investments | (5,600 | ) | (2,900 | ) | ||||
Net realized gain (loss) on secured borrowings | — | — | ||||||
Net realized gain (loss) on foreign currency and other transactions | (11 | ) | — | |||||
Net realized gain (loss) | (5,611 | ) | (2,900 | ) | ||||
Net change in unrealized gain (loss) on investments | (3,310 | ) | 2,398 | |||||
Net change in unrealized gain (loss) on secured borrowings | — | — | ||||||
Net change in unrealized gain (loss) foreign currency and other transactions | 202 | (67 | ) | |||||
Net change in unrealized gain (loss) | (3,108 | ) | 2,331 | |||||
Net increase (decrease) in net assets resulting from operations | $ | (993 | ) | $ | 6,318 |
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Total investment income | $ | 43,549 | $ | 37,743 | ||||
Total expenses, net of incentive fee waiver | 19,452 | 18,734 | ||||||
Net investment income | 24,097 | 19,009 | ||||||
Net realized gain (loss) on investments | (5,600 | ) | (572 | ) | ||||
Net realized gain (loss) on secured borrowings | — | 66 | ||||||
Net realized gain (loss) on foreign currency and other transactions | (8 | ) | — | |||||
Net realized gain (loss) | (5,608 | ) | (506 | ) | ||||
Net change in unrealized gain (loss) on investments | (14,367 | ) | (8,503 | ) | ||||
Net change in unrealized gain (loss) on secured borrowings | — | (6 | ) | |||||
Net change in unrealized gain (loss) foreign currency and other transactions | 555 | (83 | ) | |||||
Net change in unrealized gain (loss) | (13,812 | ) | (8,592 | ) | ||||
Net increase (decrease) in net assets resulting from operations | $ | 4,677 | $ | 9,911 |
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Investment Income
The composition of our investment income was as follows (in thousands):
Three months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest income | $ | 12,022 | $ | 11,511 | ||||
Dividend income | 838 | 251 | ||||||
Fee income | 188 | 661 | ||||||
Prepayment gain (loss) | 450 | 514 | ||||||
Accretion of discounts and amortization of premium | 281 | 532 | ||||||
Total investment income | $ | 13,779 | $ | 13,469 |
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest income | $ | 37,351 | $ | 32,600 | ||||
Dividend income | 1,888 | 751 | ||||||
Fee income | 1,578 | 1,626 | ||||||
Prepayment gain (loss) | 895 | 1,488 | ||||||
Accretion of discounts and amortization of premium | 1,837 | 1,278 | ||||||
Total investment income | $ | 43,549 | $ | 37,743 |
The increase in investment income of $0.3 million during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, is primarily due to an increase in average outstanding loan balances and an increase in dividend income from our investment in SLF, partially offset by a decrease in fee income and a decline in effective rate on the portfolio as compared to the prior year period.
The increase in investment income of $5.8 million during the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, is primarily due to an increase in average outstanding loan balances and dividend income from our investment in SLF, partially offset by declines in prepayment gain (loss).
Operating Expenses
The composition of our operating expenses was as follows (dollars in thousands):
Three months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest and other debt financing expenses | $ | 2,895 | $ | 1,907 | ||||
Base management fees | 2,196 | 1,953 | ||||||
Incentive fees, net of incentive fee waiver (1) | — | 1,721 | ||||||
Professional fees | 260 | 277 | ||||||
Administrative service fees | 327 | 295 | ||||||
General and administrative expenses | 338 | 292 | ||||||
Excise taxes | — | 100 | ||||||
Directors’ fees | 37 | 37 | ||||||
Total expenses, net of incentive fee waiver | $ | 6,053 | $ | 6,582 |
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest and other debt financing expenses | $ | 8,437 | $ | 6,101 | ||||
Base management fees | 6,561 | 5,661 | ||||||
Incentive fees, net of incentive fee waiver (1) | 1,751 | 4,221 | ||||||
Professional fees | 869 | 854 | ||||||
Administrative service fees | 973 | 926 | ||||||
General and administrative expenses | 739 | 760 | ||||||
Excise taxes | 11 | 100 | ||||||
Directors’ fees | 111 | 111 | ||||||
Total expenses, net of incentive fee waiver | $ | 19,452 | $ | 18,734 |
(1) | During the three and nine months ended September 30, 2018, no incentive fees were waived. During the three and nine months ended September 30, 2017, incentive fees of zero and $0.3 million, respectively, were waived. Incentive fees during the three and nine months ended September 30, 2018 were limited by $1.5 million and $3.4 million, respectively, due to the Incentive Fee Limitation. During the three and nine months ended September 30, 2017, incentive fees were not limited. See Note 6 in our attached consolidated financial statements for additional information on the Incentive Fee Limitation. |
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The decrease in expenses of $0.5 million during the three months ended September 30, 2018, as compared to the three months ended September 30, 2017, is primarily due to a decrease in incentive fees due to the Incentive Fee Limitation during the three months ended September 30, 2018, partially offset by an increase in interest expense primarily as a result of additional borrowings (including SBA-guaranteed debentures and the 2023 Notes) to support the larger average portfolio size.
The increase in expenses of $0.7 million during the nine months ended September 30, 2018, as compared to the nine months ended September 30, 2017, is primarily due to an increase in interest expense and management fees. The increase in management fees reflects the larger average portfolio size during the nine months ended September 30, 2018 and the increase in interest expense is primarily as a result of additional borrowings (including SBA-guaranteed debentures and the 2023 Notes) to support the larger portfolio. These increases were partially offset by a decrease in incentive fees due to the Incentive Fee Limitation during the nine months ended September 30, 2018.
The composition of our interest and other debt financing expenses was as follows (dollars in thousands):
Three months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest expense – revolving credit facility | $ | 1,347 | $ | 944 | ||||
Interest expense – 2023 Notes | 209 | — | ||||||
Interest expense – SBA-guaranteed debentures | 984 | 683 | ||||||
Amortization of deferred financing costs | 355 | 274 | ||||||
Interest expense – secured borrowings | — | — | ||||||
Other | — | 6 | ||||||
Total interest and other debt financing expenses | $ | 2,895 | $ | 1,907 |
Nine months ended September 30, | ||||||||
2018 | 2017 | |||||||
Interest expense – revolving credit facility | $ | 4,455 | $ | 3,674 | ||||
Interest expense – 2023 Notes | 209 | — | ||||||
Interest expense – SBA-guaranteed debentures | 2,822 | 1,607 | ||||||
Amortization of deferred financing costs | 951 | 760 | ||||||
Interest expense – secured borrowings | — | 34 | ||||||
Other | — | 26 | ||||||
Total interest and other debt financing expenses | $ | 8,437 | $ | 6,101 |
Net Realized Gain (Loss)
During the three months ended September 30, 2018 and 2017, we had sales of investments of $10.0 million and $12.5 million, respectively, resulting in ($5.6) million and ($2.9) million of net realized gain (loss), respectively. During the nine months ended September 30, 2018 and 2017, we had sales of investments of $10.0 million and $16.7 million resulting in ($5.6) million and ($0.6) million of net realized gain (loss), respectively. The realized losses during the three and nine months ended September 30, 2018 were primarily associated with the sale of our debt investments in Millennium Brands, LLC. These investments had been significantly marked down in previous periods and this represented a shift of these losses from unrealized to realized.
During the three months ended September 30, 2018 and 2017, we had no sales of secured borrowings. During the nine months ended September 30, 2018 and 2017, we had sales of secured borrowings of zero and $1.3 million resulting in zero and $66 thousand of net realized gain (loss), respectively.
During the three months ended September 30, 2018 and 2017, we had ($11) thousand and zero of net realized gain (loss) on foreign currency and other transactions, respectively. During the nine months ended September 30, 2018 and 2017, we had ($8) thousand and zero of net realized gain (loss) on foreign currency and other transactions, respectively.
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Net Change in Unrealized Gain (Loss)
For the three months ended September 30, 2018 and 2017, our investments had ($3.3) million and $2.4 million of net change in unrealized gain (loss), respectively. The net change in unrealized gain (loss) includes both unrealized gain on investments in our portfolio with mark-to-market gains during the period and unrealized loss on investments in our portfolio with mark-to-market losses during the period. The largest contributor to the net unrealized mark-to-market losses during the three months ended September 30, 2018 was our debt investment in Rockdale Blackhawk, LLC (“Rockdale”). On July 24, 2018, Rockdale filed for bankruptcy as part of a restructuring process. During the three months ended September 30, 2018, we funded additional investments under the debtor in possession (“DIP”) financing facility established in conjunction with the bankruptcy and received repayments on a portion of our pre-petition debt. On July 20, 2018, we put back our 22.65% equity investment in Rockdale. We placed our investment in the pre-petition debt of Rockdale on non-accrual status in conjunction with the bankruptcy filing.
For the three months ended September 30, 2018 and 2017, there were no secured borrowings outstanding. For the three months ended September 30, 2018 and 2017, our foreign currency borrowings had $260 thousand and ($67) thousand of net change in unrealized gain (loss), respectively. For the three months ended September 30, 2018 and 2017, our foreign currency forward contracts had ($58) thousand and zero of net change in unrealized gain (loss), respectively.
For the nine months ended September 30, 2018 and 2017, our investments had ($14.4) million and ($8.5) million of net unrealized gain (loss), respectively. The largest contributor to the net unrealized mark-to-market losses during the nine months ended September 30, 2018 were our investments in TPP Operating, Inc. (“TPP”) and Rockdale which contributed net mark-to-market losses of ($8.4) million and ($6.3) million, respectively. During 2018, TPP ceased operations and we, along with the other owners, appointed an assignee and pursuant to Delaware state law completed a General Assignment for the Benefit of Creditors to the assignee. The purpose of the assignment was to wind down the TPP business and distribute assets to its creditors. The assignee has informed us that it will have de minimis assets, if any, to distribute to its creditors. As a result, while we still have debt and equity positions in TPP, we have valued these positions at zero as of September 30, 2018.
For the nine months ended September 30, 2018 and 2017, our secured borrowings had zero and ($6) thousand of net unrealized gain (loss), respectively. For the nine months ended September 30, 2018 and 2017, our foreign currency borrowings had $613 thousand and ($83) thousand of net change in unrealized gain (loss), respectively. For the nine months ended September 30, 2018 and 2017, our foreign currency forward contracts had ($58) thousand and zero of net change in unrealized gain (loss), respectively.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended September 30, 2018 and 2017, the net increase (decrease) in net assets from operations was ($1.0) million and $6.3 million, respectively. Based on the weighted average shares of common stock outstanding for the three months ended September 30, 2018 and 2017, our per share net increase (decrease) in net assets resulting from operations was ($0.05) and $0.31, respectively. The $7.3 million decrease during the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, is primarily the result of an increase in net unrealized mark-to-market losses on investments in the portfolio and the realization of losses on certain portfolio investments during the three months ended September 30, 2018.
For the nine months ended September 30, 2018 and 2017, the net increase in net assets from operations was $4.7 million and $9.9 million, respectively. Based on the weighted average shares of common stock outstanding for the nine months ended September 30, 2018 and 2017, our per share net increase in net assets resulting from operations was $0.23 and $0.55, respectively. The $5.2 million decrease during the nine months ended September 30, 2018, as compared to nine months ended September 30, 2017, is primarily the result of an increase in net unrealized mark-to-market losses on investments and the realization of losses on certain portfolio investments, partially offset by an increase in net investment income.
Liquidity and Capital Resources
As of September 30, 2018, we had $4.0 million in cash, $5.9 million in cash at MRCC SBIC, $51.5 million of total debt outstanding on our revolving credit facility, $69.0 million in 2023 Notes and $115.0 million in outstanding SBA-guaranteed debentures. We had $148.5 million available for additional borrowings on our revolving credit facility. See “Borrowings” below for additional information.
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Cash Flows
For the nine months ended September 30, 2018 and 2017, we experienced a net increase in cash and restricted cash of $2.7 million and $1.1 million, respectively. For the nine months ended September 30, 2018, operating activities provided $14.8 million, primarily as a result of principal repayments on portfolio investments and net investment income, partially offset by purchases of portfolio investments. For the nine months ended September 30, 2017, operating activities used $1.2 million, primarily as a result of purchases of portfolio investments, partially offset by sales of and principal repayments on portfolio investments and net investment income. During the nine months ended September 30, 2018, we used $12.1 million in financing activities, primarily as a result of distributions to stockholders and net repayments on our revolving credit facility, partially offset by proceeds from our 2023 Notes (net of deferred financing costs payments) and SBA debenture borrowings. During the nine months ended September 30, 2017, we generated $2.3 million from financing activities primarily as a result of net proceeds from capital raises and SBA debenture borrowings during the period, partially offset by net repayments on our revolving credit facility and distributions to stockholders.
Capital Resources
As a BDC, we distribute substantially all of our net income to our stockholders and have an ongoing need to raise additional capital for investment purposes. We intend to generate additional cash primarily from future offerings of securities, future borrowings and cash flows from operations, including income earned from investments in our portfolio companies. On both a short-term and long-term basis, our primary use of funds will be to invest in portfolio companies and make cash distributions to our stockholders.
As a BDC, we are generally not permitted to issue and sell our common stock at a price below net asset value per share. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the then-current net asset value per share of our common stock if our Board, including independent directors, determines that such sale is in the best interests of us and our stockholders, and if our stockholders have approved such sales. On June 20, 2018 our stockholders voted to allow us to sell or otherwise issue common stock at a price below net asset value per share for a period of one year, subject to certain limitations. As of September 30, 2018 and December 31, 2017, we had 20,444,564 and 20,239,957 shares outstanding, respectively.
On June 24, 2015, our stockholders approved a proposal to authorize us to issue warrants, options or rights to subscribe to, convert to, or purchase our common stock in one or more offerings. This is a standing authorization and does not require annual re-approval by our stockholders.
On March 27, 2018, our Board approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. On June 20, 2018, our stockholders approved a proposal to accelerate the effective date of the modified asset coverage requirements. As a result, the asset coverage ratio test applicable to us was decreased from 200% to 150%, effective June 21, 2018.
Stock Issuances: On July 1, 2016, we amended the ATM securities offering program with MLV & Co. LLC (“MLV”) and JMP Securities LLC (“JMP”) to replace MLV with FBR Capital Markets & Co. (“FBR”), an affiliate of MLV (the “Prior ATM Program”). On May 12, 2017, we entered into new equity distribution agreements with each of FBR and JMP that reference our current registration statement (the “ATM Program”). All other material terms of the Prior ATM Program remain unchanged under the ATM Program. During the nine months ended September 30, 2017, we sold 173,939 shares at an average price of $15.71 per share for gross proceeds of $2.7 million under the Prior ATM Program and no shares were sold under the ATM Program. Aggregate underwriters’ discounts and commissions were $41 thousand and offering costs were $23 thousand, resulting in net proceeds of approximately $2.7 million. During the nine months ended September 30, 2018, we sold 182,299 shares at an average price of $13.82 per share for gross proceeds of $2.5 million under the ATM. Aggregate underwriters’ discounts and commissions were $38 thousand and offering costs were $79 thousand, resulting in net proceeds of approximately $2.4 million.
On June 9, 2017, we closed a public offering of 3,000,000 shares of our common stock at a public offering price of $15.00 per share, raising approximately $45.0 million in gross proceeds. On June 14, 2017, pursuant to the underwriters’ exercise of the over-allotment option, we sold an additional 450,000 shares of our common stock, at a public offering price of $15.00 per share, and additional $6.8 million in gross proceeds for a total of $51.8 million. Aggregate underwriters’ discounts and commissions were $2.1 million and offering costs were $0.1 million, resulting in net proceeds of approximately $49.6 million.
Borrowings
On June 20, 2018, our stockholders approved the application of the reduced asset coverage requirements in Section 61(a)(2) of the Investment Company Act to the Company. As a result of this approval, we are now permitted to borrow amounts such that our asset coverage ratio, as defined in the Investment Company Act, is at least 150% after such borrowing (if certain requirements are met), rather than 200%, as previously required. As of September 30, 2018 and December 31, 2017, our asset coverage ratio based on aggregate borrowings outstanding was 314% and 334%, respectively.
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Revolving Credit Facility: As of September 30, 2018, we had U.S. dollar borrowings of $32.2 million and non-U.S. dollar borrowings denominated in Great Britain pounds of £14.8 million ($19.3 million in U.S. dollars) under our revolving credit facility with ING Capital LLC, as agent, to finance the purchase of our assets. As of December 31, 2017, we had U.S. dollar borrowings of $105.2 million and non-U.S. dollar borrowings denominated in Great Britain pounds of £8.8 million ($11.9 million in U.S. dollars) under our revolving credit facility with ING Capital LLC, as agent, to finance the purchase of our assets. The borrowings denominated in Great Britain pounds may be positively or negatively affected by movements in the rate of exchange between the U.S. dollar and the Great Britain pound. These movements are beyond our control and cannot be predicted. The borrowings denominated in Great Britain pounds are translated into U.S. dollars based on the spot rate at each balance sheet date. The impact resulting from changes in foreign currency borrowings is included in net change in unrealized gain (loss) on foreign currency and other transactions in our consolidated statements of operations and totaled $0.3 million and $0.6 million for the three and nine months ended September 30, 2018, and ($67) thousand and ($83) thousand for the three and nine months ended September 30, 2017 respectively. As of September 30, 2018, the maximum amount we were able to borrow was $200.0 million and this borrowing can be increased to $300.0 million pursuant to an accordion feature (subject to maintaining 200% asset coverage, as defined by the 1940 Act). On February 22, 2017, we closed a $40.0 million upsize to the revolving credit facility, bringing the maximum amount we are able to borrow from $160.0 million to the now current maximum amount of $200.0 million, in accordance with the facility’s accordion feature. The maturity date on the facility is December 14, 2020.
The revolving credit facility is secured by a lien on all of our assets, including cash on hand, but excluding the assets of our wholly-owned subsidiary, MRCC SBIC. Our ability to borrow under the revolving credit facility is subject to availability under a defined borrowing base, which varies based on portfolio characteristics and certain eligibility criteria and concentration limits, as well as required valuation methodologies. We may make draws under the revolving credit facility to make or purchase additional investments through December 2019 and for general working capital purposes until the maturity date of the revolving credit facility. Borrowings under the revolving credit facility bear interest, at our election, at an annual rate of LIBOR (one-month, two-month, three-month or six-month at our discretion based on the term of the borrowing) plus 2.75% or at a daily rate equal to 1.75% per annum plus the greater of the prime interest rate, the federal funds rate plus 0.5% or LIBOR plus 1.0%. In addition to the stated interest rate on borrowings under the revolving credit facility, we are required to pay a fee of 0.5% per annum on any unused portion of the revolving credit facility if the unused portion of the facility is less than 65% of the then available maximum borrowing or a fee of 1.0% per annum on any unused portion of the revolving credit facility if the unused portion of the facility is greater than or equal to 65% of the then available maximum borrowing. As of September 30, 2018 and December 31, 2017, the outstanding borrowings were accruing at a weighted average interest rate of 4.4% and 4.4%, respectively. The weighted average interest rate of the revolving credit facility borrowings (excluding debt issuance costs) for the three and nine months ended September 30, 2018 was 4.7% and 4.6%, respectively. The weighted average fee rate on the unused portion of the revolving credit facility for the three and nine months ended September 30, 2018 was 0.7% and 0.6%, respectively. The weighted average interest rate of the revolving credit facility borrowings (excluding debt issuance costs) for the three and nine months ended September 30, 2017 was 4.1% and 4.1%, respectively. The weighted average fee rate on the unused portion of the revolving credit facility for the three and nine months ended September 30, 2017 was 0.5% and 0.5%, respectively.
Our ability to borrow under the revolving credit facility is subject to availability under the borrowing base, which permits us to borrow up to 70% of the fair market value of our portfolio company investments depending on the type of the investment we hold and whether the investment is quoted. Our ability to borrow is also subject to certain concentration limits, and our continued compliance with the representations, warranties and covenants given by us under the facility. The revolving credit facility contains certain financial and restrictive covenants, including, but not limited to, our maintenance of: (1) a minimum consolidated total net assets at least equal to the greater of (a) 40% of the consolidated total assets on the last day of each quarter or (b) $120.0 million plus 65% of the net proceeds to us from sales of our securities after December 14, 2015; (2) a ratio of total assets (less total liabilities other than indebtedness) to total indebtedness of not less than 2.1 times; and (3) a ratio of earnings before interest and taxes to interest expense of at least 2.5 times. The revolving credit facility also requires us to undertake customary indemnification obligations with respect to ING Capital LLC and other members of the lending group and to reimburse the lenders for expenses associated with entering into the credit facility. The revolving credit facility also has customary provisions regarding events of default, including events of default for nonpayment, change in control transactions at both Monroe Capital Corporation and MC Advisors, failure to comply with financial and negative covenants, and failure to maintain our relationship with MC Advisors. If we incur an event of default under the revolving credit facility and fail to remedy such default under any applicable grace period, if any, then the entire revolving credit facility could become immediately due and payable, which would materially and adversely affect our liquidity, financial condition, results of operations and cash flows.
On April 25, 2018, we entered into an amendment to the revolving credit facility which, among other things, removes the pricing step-down related to our net worth to fix the interest rate the revolving credit facility bears to LIBOR plus 2.75% and makes certain borrowing base changes to allow more flexibility under the revolving credit facility. We paid the lenders an amendment fee of $0.2 million in conjunction with the amendment which has been capitalized within unamortized deferred financing costs and is amortized into interest expense over the estimated average life of the borrowings.
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Our revolving credit facility also imposes certain conditions that may limit the amount of our distributions to stockholders. Distributions payable in our common stock under the DRIP are not limited by the revolving credit facility. Distributions in cash or property other than common stock are generally limited to 115% of the amount of distributions required to maintain our status as a RIC.
2023 Notes: On September 12, 2018, we closed a public offering of $69.0 million in aggregate principal amount of senior unsecured notes for net proceeds of $66.4 million (“2023 Notes”). The 2023 Notes will mature on October 31, 2023. Interest on the 2023 Notes is paid quarterly on January 31, April 30, July 31, and October 31, at an annual rate of 5.75%, commencing on October 31, 2018. We may redeem the 2023 Notes in whole or in part at any time or from time to time on or after October 31, 2020. The 2023 Notes are general, unsecured obligations and rank equal in right of payment with all of our existing and future unsecured indebtedness. The 2023 Notes are listed on The Nasdaq Global Select Market under the trading symbol MRCCL.
SBA Debentures: On February 28, 2014, our wholly-owned subsidiary, MRCC SBIC, received a license from the SBA to operate as a SBIC under Section 301(c) of the Small Business Investment Act of 1958, as amended. MRCC SBIC commenced operations on September 16, 2013.
The SBIC license allows MRCC SBIC to obtain leverage by issuing SBA-guaranteed debentures, subject to the issuance of a leverage commitment by the SBA and other customary procedures. SBA-guaranteed debentures are non-recourse, interest only debentures with interest payable semi-annually and have a ten year maturity. The principal amount of SBA-guaranteed debentures is not required to be paid prior to maturity but may be prepaid at any time without penalty. The interest rate of SBA-guaranteed debentures is fixed on a semi-annual basis (pooling date) at a market-driven spread over U.S. Treasury Notes with 10-year maturities. The SBA, as a creditor, has a superior claim to MRCC SBIC’s assets over our stockholders in the event we liquidate MRCC SBIC or the SBA exercises its remedies upon an event of default.
SBA regulations currently limit the amount that an individual SBIC may borrow to a maximum of $150.0 million when it has at least $75.0 million in regulatory capital, receives a leverage commitment from the SBA and has been through an audit examination by the SBA subsequent to licensing. The SBA also historically limited a related group of SBICs (commonly referred to as a “family of funds”) to a maximum of $225.0 million in total borrowings. On December 18, 2015, this family of funds limitation was raised to $350.0 million in total borrowings. As we have other affiliated SBICs already in operation, MRCC SBIC was historically limited to a maximum of $40.0 million in borrowings. Pursuant to the increase in the family of funds limitation, we submitted a commitment application to the SBA and on April 13, 2016 we were approved for $75.0 million in additional SBA-guaranteed debentures for MRCC SBIC for a total of $115.0 million in available debentures.
As of September 30, 2018, MRCC SBIC had $57.6 million in leverageable capital and $115.0 million in SBA-guaranteed debentures outstanding. As of December 31, 2017, MRCC SBIC had $57.6 million in leverageable capital and $109.5 million in SBA-guaranteed debentures outstanding.
As of September 30, 2018, MRCC SBIC had the following SBA-guaranteed debentures outstanding (dollars in thousands):
Maturity Date | Interest Rate | Amount | ||||||
September 2024 | 3.4 | % | $ | 12,920 | ||||
March 2025 | 3.3 | % | 14,800 | |||||
March 2025 | 2.9 | % | 7,080 | |||||
September 2025 | 3.6 | % | 5,200 | |||||
March 2027 | 3.5 | % | 20,000 | |||||
September 2027 | 3.2 | % | 32,100 | |||||
March 2028 | 3.9 | % | 18,520 | |||||
September 2028 | 4.2 | % | 4,380 | |||||
Total | $ | 115,000 |
As of December 31, 2017, MRCC SBIC had the following SBA-guaranteed debentures outstanding (dollars in thousands):
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Maturity Date | Interest Rate | Amount | ||||||
September 2024 | 3.4 | % | $ | 12,920 | ||||
March 2025 | 3.3 | % | 14,800 | |||||
March 2025 | 2.9 | % | 7,080 | |||||
September 2025 | 3.6 | % | 5,200 | |||||
March 2027 | 3.5 | % | 20,000 | |||||
September 2027 | 3.2 | % | 32,100 | |||||
March 2028 | 2.5 | %(1) | 9,160 | |||||
March 2028 | 2.6 | %(1) | 2,780 | |||||
March 2028 | 2.7 | %(1) | 5,480 | |||||
Total | $ | 109,520 |
(1) | Represents an interim rate of interest as the SBA-guaranteed debentures had not yet pooled. |
On October 2, 2014, the Company was granted exemptive relief from the SEC for permission to exclude the debt of MRCC SBIC guaranteed by the SBA from the asset coverage test under the 1940 Act. The receipt of this exemption for this SBA-guaranteed debt increases flexibility under the asset coverage test.
Secured Borrowings: Certain partial loan sales do not qualify for sale accounting under Accounting Standards Codification (“ASC”) Topic 860 — Transfers and Servicing (“ASC Topic 860”) because these sales do not meet the definition of a “participating interest,” as defined in the guidance, in order for sale treatment to be allowed. Participations or other partial loan sales which do not meet the definition of a participating interest remain as an investment on the accompanying consolidated statements of assets and liabilities and the portion sold is recorded as a secured borrowing in the liabilities section of the consolidated statements of assets and liabilities. For these partial loan sales, the interest earned on the entire loan balance is recorded within “interest income” and the interest earned by the buyer in the partial loan sale is recorded within “interest and other debt financing expenses” in the accompanying consolidated statements of operations. As of September 30, 2018 and December 31, 2017, there were no secured borrowings.
Distribution Policy
Our Board will determine the timing and amount, if any, of our distributions. We intend to pay distributions on a quarterly basis. In order to avoid corporate-level tax on the income we distribute as a RIC, we must distribute to our stockholders at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, on an annual basis out of the assets legally available for such distributions. In addition, we also intend to distribute any realized net capital gains (i.e., realized net long-term capital gains in excess of realized net short-term capital losses) at least annually out of the assets legally available for such distributions. Distributions to stockholders for the three and nine months ended September 30, 2018, totaled $7.2 million ($0.35 per share) and $21.3 million ($1.05 per share), respectively. Distributions to stockholders for the three and nine months ended September 30, 2017, totaled $7.1 million ($0.35 per share) and $20.0 million ($1.05 per share), respectively. The tax character of such distributions is determined at the end of the fiscal year. However, if the character of such distributions were determined as of September 30, 2018 and 2017, no portion of these distributions would have been characterized as a tax return of capital to stockholders.
We have adopted an “opt out” dividend reinvestment plan (“DRIP”) for our common stockholders. As a result, if we declare a distribution, our stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock unless a stockholder specifically “opts out” of our DRIP. If a stockholder opts out, that stockholder will receive cash distributions. Although distributions paid in the form of additional shares of our common stock will generally be subject to U.S. federal, state and local taxes in the same manner as cash distributions, stockholders participating in our DRIP will not receive any corresponding cash distributions with which to pay any such applicable taxes.
MRCC Senior Loan Fund I, LLC
We co-invest with NLV Financial Corporation (“NLV”), in senior secured loans through SLF, an unconsolidated Delaware limited liability company. SLF is capitalized as underlying investment transactions are completed, taking into account available debt and equity commitments available for funding these investments. All portfolio and investment decisions in respect to SLF must be approved by the SLF investment committee, consisting of one representative of each of us and NLV. SLF may cease making new investments upon notification of either member, but operations will continue until all investments have been sold or paid-off in the normal course of business. Investments held by SLF are measured at fair value using the same valuation methodologies as described below. Our investment is illiquid in nature as SLF does not allow for withdrawal from the LLC or the sale of a member’s interest unless approved by the board of members of SLF. The full withdrawal of a member would result in an orderly wind-down of SLF.
65 |
SLF’s profits and losses are allocated to us and NLV in accordance with the respective ownership interests. As of both September 30, 2018 and December 31, 2017, we and NLV each owned 50.0% of the LLC equity interests of SLF. As of September 30, 2018, SLF had $100.0 million in equity commitments from its members (in the aggregate), of which $50.4 million was funded. As of December 31, 2017, SLF had $100.0 million in commitments from its members (in the aggregate), of which $19.0 million was funded.
As of both September 30, 2018 and December 31, 2017, we have committed to fund $50.0 million of LLC equity interest subscriptions to SLF. As of September 30, 2018 and December 31, 2017, $25.2 million and $9.5 million of our LLC equity interest subscriptions to SLF had been called and contributed, net of return of capital distributions subject to recall, respectively.
For the three and nine months ended September 30, 2018, we received $0.6 million and $1.1 million dividend income from the SLF LLC equity interests, respectively. For the three and nine months ended September 30, 2017, we did not receive dividend income from the SLF LLC equity interests, as we did not make its investment in SLF until November 2017.
SLF has entered into a senior secured revolving credit facility (as amended, the “SLF Credit Facility”) with Capital One, N.A., through its wholly-owned subsidiary MRCC Senior Loan Fund I Financing SPV, LLC (“SLF SPV”), which as of September 30, 2018 allowed SLF SPV to borrow up to $100.0 million at any one time, subject to leverage and borrowing base restrictions. Borrowings under the SLF Credit Facility bear interest at an annual rate of LIBOR (three-month) plus 2.25%. The maturity date on the SLF Credit Facility is March 22, 2023.
SLF does not pay any fees to MC Advisors or its affiliates; however, SLF has entered into an administration agreement with MC Management, pursuant to which certain loan servicing and administrative functions are delegated to MC Management. SLF may reimburse MC Management for its allocable share of overhead and other expenses incurred by MC Management. For the three and nine months ended September 30, 2018, SLF incurred $29 thousand and $29 thousand, respectively, of allocable expenses. There are no agreements or understandings by which we guarantee any SLF obligations.
As of September 30, 2018 and December 31, 2017, SLF had total assets at fair value of $142.1 million and $41.6 million, respectively. As of September 30, 2018 and December 31, 2017, SLF had zero and zero portfolio company investments on non-accrual status, respectively. The portfolio companies in SLF are in industries and geographies similar to those in which we may invest directly. Additionally, as of September 30, 2018 and December 31, 2017, SLF had commitments to fund various undrawn revolving credit and delayed draw loans to its portfolio companies totaling $5.1 million and $2.1 million, respectively.
Below is a summary of SLF’s portfolio, followed by a listing of the individual investments in SLF’s portfolio as of September 30, 2018 and December 31, 2017 (in thousands):
As of | ||||||||
September 30, 2018 | December 31, 2017 | |||||||
Senior secured loans (1) | 134,629 | 29,438 | ||||||
Weighted average current interest rate on senior secured loans (2) | 7.4 | % | 7.1 | % | ||||
Number of borrowers in SLF | 39 | 8 |
(1) | Represents outstanding principal amount, excluding unfunded commitments. |
(2) | Computed as the (a) annual stated interest rate on accruing senior secured loans divided by (b) total senior secured loans at outstanding principal amount. |
66 |
MRCC SENIOR LOAN FUND I, LLC
CONSOLIDATED SCHEDULE OF INVESTMENTS
(unaudited)
September 30, 2018
(in thousands)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate (b) | Maturity | Principal | Fair Value | |||||||||||||
Non-Controlled/Non-Affiliate Company Investments | ||||||||||||||||||
Senior Secured Loans | ||||||||||||||||||
Aerospace & Defense | ||||||||||||||||||
MAG Aerospace Industries, Inc. | L+4.75% | 6.99 | % | 6/6/2025 | 3,292 | $ | 3,283 | |||||||||||
The KEYW Corporation | L+4.50% | 6.63 | % | 5/8/2024 | 1,525 | 1,536 | ||||||||||||
Trident Maritime SH, Inc. | L+5.50% | 7.89 | % | 6/4/2024 | 4,660 | 4,658 | ||||||||||||
Trident Maritime SH, Inc. (Revolver) (d) | P+4.50% | 9.50 | % | 6/4/2024 | 340 | — | ||||||||||||
9,817 | 9,477 | |||||||||||||||||
Automotive | ||||||||||||||||||
Wheel Pros, LLC | L+4.75% | 6.99 | % | 4/4/2025 | 3,990 | 3,943 | ||||||||||||
3,990 | 3,943 | |||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||
MTC Intermediate Holdco, Inc. | L+4.75% | 6.99 | % | 1/30/2023 | 4,975 | 4,975 | ||||||||||||
Pivotal Payments Inc. (c) | L+4.50% | 6.89 | % | 10/1/2025 | 3,750 | 3,713 | ||||||||||||
Zenith Merger Sub, Inc. | L+5.50% | 7.89 | % | 12/13/2023 | 3,722 | 3,720 | ||||||||||||
12,447 | 12,408 | |||||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||||
Il Fornaio (America) Corporation | L+6.50% | 8.74 | % | 11/10/2022 | 4,947 | 4,947 | ||||||||||||
SW Ingredients Holdings, LLC | L+4.25% | 6.64 | % | 7/3/2025 | 3,741 | 3,728 | ||||||||||||
US Salt, LLC | L+4.75% | 6.99 | % | 11/30/2023 | 3,482 | 3,482 | ||||||||||||
12,170 | 12,157 | |||||||||||||||||
Capital Equipment | ||||||||||||||||||
Analogic Corp | L+6.00% | 8.21 | % | 6/24/2024 | 5,000 | 5,012 | ||||||||||||
5,000 | 5,012 | |||||||||||||||||
Chemicals, Plastics & Rubber | ||||||||||||||||||
Loparex International B.V. | L+4.25% | 6.64 | % | 4/11/2025 | 499 | 506 | ||||||||||||
Peach State Labs, LLC | L+6.50% | 8.61 | % | 6/30/2021 | 2,862 | 2,876 | ||||||||||||
3,361 | 3,382 | |||||||||||||||||
Construction & Building | ||||||||||||||||||
Fastener Acquisition, Inc. | L+4.25% | 6.64 | % | 3/28/2025 | 1,327 | 1,332 | ||||||||||||
1,327 | 1,332 | |||||||||||||||||
Consumer Goods: Durable | ||||||||||||||||||
International Textile Group, Inc. | L+5.00% | 7.10 | % | 5/1/2024 | 1,863 | 1,870 | ||||||||||||
SSH Group Holdings, Inc. | L+4.25% | 6.59 | % | 7/30/2025 | 2,334 | 2,357 | ||||||||||||
4,197 | 4,227 | |||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||
Solaray, LLC (e) | L+6.50% | 8.83 | % | 9/11/2023 | 1,613 | 1,613 | ||||||||||||
Solaray, LLC (Delayed Draw) (d) | L+6.50% | 8.82 | % | 9/11/2023 | 1,870 | 1,182 | ||||||||||||
3,483 | 2,795 | |||||||||||||||||
Containers, Packaging & Glass | ||||||||||||||||||
Port Townsend Holdings Company, Inc. | L+4.75% | 6.87 | % | 4/3/2024 | 3,975 | 3,979 | ||||||||||||
PVHC Holding Corp | L+4.75% | 7.14 | % | 8/5/2024 | 3,325 | 3,342 | ||||||||||||
PVHC Holding Corp (Delayed Draw) (d) | L+4.75% | 7.14 | % | 8/5/2024 | 425 | — | ||||||||||||
7,725 | 7,321 | |||||||||||||||||
Energy: Oil & Gas | ||||||||||||||||||
Drilling Info Holdings, Inc. | L+4.25% | 6.54 | % | 7/30/2025 | 4,027 | 4,019 | ||||||||||||
Drilling Info Holdings, Inc. (Delayed Draw) (d) | L+4.25% | 6.54 | % | 7/30/2025 | 640 | — | ||||||||||||
4,667 | 4,019 | |||||||||||||||||
Healthcare & Pharmaceuticals | ||||||||||||||||||
LSCS Holdings, Inc. | L+4.25% | 6.64 | % | 3/17/2025 | 2,328 | 2,328 | ||||||||||||
LSCS Holdings, Inc. | L+4.25% | 6.38 | % | 3/17/2025 | 601 | 601 | ||||||||||||
Radiology Partners, Inc. | L+4.25% | 6.59 | % | 7/9/2025 | 5,000 | 5,037 | ||||||||||||
Solara Medical Supplies, LLC | L+6.00% | 8.39 | % | 5/31/2023 | 5,643 | 5,649 | ||||||||||||
Solara Medical Supplies, LLC (Delayed Draw) (d) | L+6.00% | 8.39 | % | 5/31/2023 | 1,071 | — | ||||||||||||
Solara Medical Supplies, LLC (Revolver) (d) | L+6.00% | 8.39 | % | 5/31/2023 | 714 | — | ||||||||||||
15,357 | 13,615 | |||||||||||||||||
High Tech Industries | ||||||||||||||||||
AQA Acquisition Holding, Inc. (c) | L+4.25% | 6.64 | % | 5/24/2023 | 3,333 | 3,325 | ||||||||||||
Corel Corporation | L+5.00% | 7.31 | % | 6/4/2024 | 2,500 | 2,515 | ||||||||||||
Gigamon, Inc. | L+4.50% | 6.89 | % | 12/27/2024 | 2,978 | 3,000 | ||||||||||||
8,811 | 8,840 | |||||||||||||||||
Media: Advertising, Printing & Publishing | ||||||||||||||||||
Cadent, LLC | L+5.50% | 7.65 | % | 9/11/2023 | 5,000 | 4,987 | ||||||||||||
Cadent, LLC (Revolver) (d) | L+5.50% | 7.65 | % | 9/11/2023 | 167 | — | ||||||||||||
5,167 | 4,987 |
67 |
MRCC SENIOR LOAN FUND I, LLC
CONSOLIDATED SCHEDULE OF INVESTMENTS – (continued)
(unaudited)
September 30, 2018
(in thousands)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate (b) | Maturity | Principal | Fair Value | |||||||||||||
Media: Diversified & Production | ||||||||||||||||||
Research Now Group, Inc. and Survey Sampling International, LLC | L+5.50% | 7.74 | % | 12/20/2024 | 6,948 | $ | 6,991 | |||||||||||
6,948 | 6,991 | |||||||||||||||||
Services: Business | ||||||||||||||||||
CHA Holdings, Inc. | L+4.50% | 6.89 | % | 4/10/2025 | 2,049 | 2,064 | ||||||||||||
CHA Holdings, Inc. (Delayed Draw) (d) | L+4.50% | 6.89 | % | 4/10/2025 | 446 | — | ||||||||||||
Engage2Excel, Inc. | L+6.50% | 8.85 | % | 3/7/2023 | 4,353 | 4,379 | ||||||||||||
Engage2Excel, Inc. (Revolver) (d) | P+5.50% | 10.75 | % | 3/7/2023 | 545 | 18 | ||||||||||||
GI Revelation Acquisition LLC | L+5.00% | 7.24 | % | 4/16/2025 | 1,397 | 1,402 | ||||||||||||
Output Services Group, Inc. | L+4.25% | 6.49 | % | 3/27/2024 | 4,990 | 5,033 | ||||||||||||
SIRVA Worldwide, Inc. | L+5.50% | 7.74 | % | 8/4/2025 | 2,000 | 2,008 | ||||||||||||
15,780 | 14,904 | |||||||||||||||||
Services: Consumer | ||||||||||||||||||
LegalZoom.com, Inc. | L+4.25% | 6.46 | % | 11/21/2024 | 1,985 | 2,017 | ||||||||||||
1,985 | 2,017 | |||||||||||||||||
Telecommunications | ||||||||||||||||||
Intermedia Holdings, Inc. | L+6.00% | 8.36 | % | 7/21/2025 | 1,833 | 1,842 | ||||||||||||
Mavenir Systems, Inc. | L+6.00% | 8.14 | % | 5/8/2025 | 3,990 | 4,000 | ||||||||||||
5,823 | 5,842 | |||||||||||||||||
Utilities: Oil & Gas | ||||||||||||||||||
NGS US Finco, LLC (c) | L+4.25% | 6.64 | % | 9/15/2025 | 1,750 | 1,741 | ||||||||||||
1,750 | 1,741 | |||||||||||||||||
Wholesale | ||||||||||||||||||
BMC Acquisition, Inc. | L+5.25% | 7.84 | % | 12/30/2024 | 4,962 | 5,000 | ||||||||||||
Halo Buyer, Inc. | L+4.50% | 6.74 | % | 6/27/2025 | 3,510 | 3,483 | ||||||||||||
Halo Buyer, Inc. (Delayed Draw) (d) | L+4.50% | 6.72 | % | 6/27/2025 | 1,478 | 1,363 | ||||||||||||
9,950 | 9,846 | |||||||||||||||||
TOTAL INVESTMENTS | $ | 134,856 |
(a) | All investments are U.S. companies, except Loparex International B.V. |
(b) | The majority of investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, quarterly or semiannually. We have provided the spread over LIBOR or Prime and the current contractual rate of interest in effect at September 30, 2018. Certain investments are subject to a LIBOR or Prime interest rate floor. |
(c) | Investment position or portion thereof unsettled as of September 30, 2018. |
(d) | All or a portion of this commitment was unfunded as of September 30, 2018. Principal reflects the commitment outstanding. |
(e) | We also hold a portion of the term loan in this portfolio company. |
68 |
MRCC SENIOR LOAN FUND I, LLC
SCHEDULE OF INVESTMENTS
December 31, 2017
(in thousands)
Portfolio Company (a) | Spread Above Index (b) | Interest Rate (b) | Maturity | Principal | Fair Value | |||||||||||||
Non-Controlled/Non-Affiliate Company Investments | ||||||||||||||||||
Senior Secured Loans | ||||||||||||||||||
Banking, Finance, Insurance & Real Estate | ||||||||||||||||||
Clearent Holdings LLC and Clearent, LLC (c) | P+3.75% | 8.25 | % | 1/2/2024 | 1,056 | $ | 1,045 | |||||||||||
Clearent Holdings LLC and Clearent, LLC (c) | P+3.75% | 8.25 | % | 1/2/2024 | 1,257 | 1,244 | ||||||||||||
Clearent Holdings LLC and Clearent, LLC (c) (d) | P+3.75% | 8.25 | % | 1/2/2024 | 208 | — | ||||||||||||
2,521 | 2,289 | |||||||||||||||||
Beverage, Food & Tobacco | ||||||||||||||||||
Il Fornaio (America) Corporation | L+6.50% | 8.07 | % | 11/10/2022 | 5,000 | 5,008 | ||||||||||||
US Salt, LLC (c) | L+4.75% | 6.18 | % | 11/30/2023 | 3,500 | 3,500 | ||||||||||||
8,500 | 8,508 | |||||||||||||||||
Consumer Goods: Non-Durable | ||||||||||||||||||
Solaray, LLC | L+6.50% | 8.02 | % | 9/11/2023 | 1,625 | 1,625 | ||||||||||||
Solaray, LLC (Delayed Draw) (d) | L+6.50% | 8.02 | % | 9/11/2023 | 1,875 | — | ||||||||||||
3,500 | 1,625 | |||||||||||||||||
High Tech Industries | ||||||||||||||||||
Gigamon, Inc. (c) | L+4.50% | 6.03 | % | 12/27/2024 | 3,000 | 2,985 | ||||||||||||
3,000 | 2,985 | |||||||||||||||||
Media: Diversified & Production | ||||||||||||||||||
Research Now Group, Inc. and Survey Sampling International, LLC (c) | L+5.50% | 7.13 | % | 12/20/2024 | 7,000 | 6,714 | ||||||||||||
7,000 | 6,714 | |||||||||||||||||
Services: Consumer | ||||||||||||||||||
LegalZoom.com, Inc. (c) | L+4.50% | 5.94 | % | 11/21/2024 | 2,000 | 2,005 | ||||||||||||
2,000 | 2,005 | |||||||||||||||||
Wholesale | ||||||||||||||||||
BMC Acquisition, Inc. (c) | L+5.25% | 6.94 | % | 12/28/2024 | 5,000 | 5,000 | ||||||||||||
5,000 | 5,000 | |||||||||||||||||
TOTAL INVESTMENTS | $ | 29,126 |
(a) | All investments are U.S. companies. |
(b) | The majority of investments bear interest at a rate that may be determined by reference to the London Interbank Offered Rate (“LIBOR” or “L”) or Prime Rate (“Prime” or “P”) which reset daily, quarterly or semiannually. We have provided the spread over LIBOR or Prime and the current contractual rate of interest in effect at December 31, 2017. Certain investments are subject to a LIBOR or Prime interest rate floor. |
(c) | Investment position or portion thereof unsettled as of December 31, 2017. |
(d) | All or a portion of this commitment was unfunded as of December 31, 2017. Principal reflects the commitment outstanding. |
Below is certain summarized financial information for SLF as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
September 30, 2018 | December 31, 2017 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Investments, at fair value | $ | 134,856 | $ | 29,126 | ||||
Cash | 491 | 12,504 | ||||||
Restricted cash | 6,362 | — | ||||||
Interest receivable | 403 | 11 | ||||||
Total assets | $ | 142,112 | $ | 41,641 | ||||
Liabilities | ||||||||
Revolving credit facility | $ | 81,432 | $ | — | ||||
Less: Unamortized deferred financing costs | (1,198 | ) | — | |||||
Total debt, less unamortized deferred financing costs | 80,234 | — | ||||||
Payable for open trades | 8,754 | 22,304 | ||||||
Interest payable | 311 | — | ||||||
Accounts payable and accrued expenses | 178 | 57 | ||||||
Total liabilities | 89,477 | 22,361 | ||||||
Members’ capital | 52,635 | 19,280 | ||||||
Total liabilities and members’ capital | $ | 142,112 | $ | 41,641 |
69 |
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2018 | 2017 (1) | 2018 | 2017 (1) | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Investment income: | ||||||||||||||||
Interest income | $ | 2,262 | $ | — | $ | 4,441 | $ | — | ||||||||
Total investment income | 2,262 | — | 4,441 | — | ||||||||||||
Expenses: | ||||||||||||||||
Interest and other debt financing expenses | 922 | — | 1,571 | — | ||||||||||||
Organizational costs | — | — | 11 | — | ||||||||||||
Professional fees | 139 | — | 201 | — | ||||||||||||
Total expenses | 1,061 | — | 1,783 | — | ||||||||||||
Net investment income (loss) | 1,201 | — | 2,658 | — | ||||||||||||
Net gain (loss) on investments: | ||||||||||||||||
Net change in unrealized gain (loss) on investments | 448 | — | 1,447 | — | ||||||||||||
Net gain (loss) on investments | 448 | — | 1,447 | — | ||||||||||||
Net increase (decrease) in members’ capital | $ | 1,649 | $ | — | $ | 4,105 | $ | — |
(1) | SLF commenced operations on November 14, 2017. |
Related Party Transactions
We have a number of business relationships with affiliated or related parties, including the following:
· | We have an Investment Advisory and Management Agreement with MC Advisors, an investment advisor registered with the SEC, to manage our day-to-day operating and investing activities. We pay MC Advisors a fee for its services under the Investment Advisory and Management Agreement consisting of two components — a base management fee and an incentive fee. See Note 6 to our consolidated financial statements and “Significant Accounting Estimates and Critical Accounting Policies — Capital Gains Incentive Fee” for additional information. |
· | We have an Administration Agreement with MC Management to provide us with the office facilities and administrative services necessary to conduct our day-to-day operations. See Note 6 to our consolidated financial statements for additional information. |
· | SLF has an Administration Agreement with MC Management to provide SLF with certain loan servicing and administrative functions. SLF may reimburse MC Management for its allocable share of overhead and other expenses incurred by MC Management. SLF has incurred $29 thousand of allocable expenses through September 30, 2018. |
· | Theodore L. Koenig, our Chief Executive Officer and Chairman of our Board is also a manager of MC Advisors and the President and Chief Executive Officer of MC Management. Aaron D. Peck, our Chief Financial Officer and Chief Investment Officer, serves as a director on our Board and is also a managing director of MC Management. |
· | We have a license agreement with Monroe Capital LLC, under which Monroe Capital LLC has agreed to grant us a non-exclusive, royalty-free license to use the name “Monroe Capital” for specified purposes in our business. |
In addition, we have adopted a formal code of ethics that governs the conduct of MC Advisors’ officers, directors and employees. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and Maryland General Corporation Law.
Commitments and Contingencies and Off-Balance Sheet Arrangements
Commitments and Contingencies
As of September 30, 2018 and December 31, 2017, we had $36.3 million and $41.2 million, respectively, in outstanding commitments to fund investments under undrawn revolvers, capital expenditure loans and delayed draw commitments. As described in Note 3 to our consolidated financial statements, we had commitments up to $24.8 million and $40.5 million, respectively, to SLF, as of September 30, 2018 and December 31, 2017 that may be contributed primarily for the purpose of funding new investments approved by the SLF investment committee. Drawdowns of the commitments to SLF require explicit authorization of our representatives on SLF’s board of managers. Additionally, we have entered into certain contracts with other parties that contain a variety of indemnifications. Our maximum exposure under these arrangements is unknown. However, we have not experienced claims or losses pursuant to these contracts and believe the risk of loss related to such indemnifications to be remote.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
70 |
Market Trends
We have identified the following trends that may affect our business:
Target Market: We believe that small and middle-market companies in the U.S. with annual revenues between $10.0 million and $2.5 billion represent a significant growth segment of the U.S. economy and often require substantial capital investments to grow. Middle-market companies have generated a significant number of investment opportunities for investment funds managed or advised by Monroe Capital, and we believe that this market segment will continue to produce significant investment opportunities for us.
Specialized Lending Requirements: We believe that several factors render many U.S. financial institutions ill-suited to lend to U.S. middle-market companies. For example, based on the experience of our management team, lending to U.S. middle-market companies (1) is generally more labor intensive than lending to larger companies due to the smaller size of each investment and the fragmented nature of information for such companies, (2) requires due diligence and underwriting practices consistent with the demands and economic limitations of the middle-market and (3) may also require more extensive ongoing monitoring by the lender.
Demand for Debt Capital: We believe there is a large pool of uninvested private equity capital for middle-market companies. We expect private equity firms will seek to leverage their investments by combining equity capital with senior secured loans and mezzanine debt from other sources, such as us.
Competition from Other Lenders: We believe that many traditional bank lenders, in recent years, de-emphasized their service and product offerings to middle-market businesses in favor of lending to large corporate clients and managing capital market transactions. In addition, many commercial banks face significant balance sheet constraints as they seek to build capital and meet future regulatory capital requirements. These factors may result in opportunities for alternative funding sources to middle-market companies and therefore drive increased new investment opportunities for us. Conversely, there is increased competitive pressure in the BDC and investment company marketplace for senior and subordinated debt which could result in lower yields for increasingly riskier assets.
Pricing and Deal Structures: We believe that the volatility in global markets over the last several years and current macroeconomic issues such as a weakened U.S. economy has reduced access to, and availability of, debt capital to middle-market companies, causing a reduction in competition and generally more favorable capital structures and deal terms. Recent capital raises in the BDC and investment company marketplace have created increased competition; however, we believe that current market conditions may continue to create favorable opportunities to invest at attractive risk-adjusted returns.
Significant Accounting Estimates and Critical Accounting Policies
Revenue Recognition
We record interest and fee income on an accrual basis to the extent that we expect to collect such amounts. For loans and debt securities with contractual PIK interest, we do not accrue PIK interest if the portfolio company valuation indicates that such PIK interest is not collectible. We do not accrue as a receivable interest on loans and debt securities if we have reason to doubt our ability to collect such interest. Loan origination fees, original issue discount and market discount or premium are capitalized, and we then amortize such amounts using the effective interest method as interest income over the life of the investment. Upon the prepayment of a loan or debt security, any unamortized premium or discount or loan origination fees are recorded as interest income. We record prepayment premiums on loans and debt securities as interest income when we receive such amounts. Interest income is accrued based upon the outstanding principal amount and contractual terms of debt and preferred equity investments. Interest is accrued on a daily basis. All other income is recorded into income when earned. We record fees on loans based on the determination of whether the fee is considered a yield enhancement or payment for a service. If the fee is considered a yield enhancement associated with a funding of cash on a loan, the fee is generally deferred and recognized into interest income using the effective interest method if captured in the cost basis or using the straight-line method if the loan is unfunded and therefore there is no cost basis. If the fee is not considered a yield enhancement because a service was provided, and the fee is payment for that service, the fee is deemed earned and recognized as fee income in the period earned.
Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies. Each distribution received from limited liability company (“LLC”) and limited partnership (“LP”) investments is evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment.
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Valuation of Portfolio Investments
As a BDC, we generally invest in illiquid securities including debt and, to a lesser extent, equity securities of middle-market companies. Under procedures established by our Board, we value investments for which market quotations are readily available and within a recent date at such market quotations. We obtain these market values from an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, otherwise by a principal market maker or a primary market dealer). When doing so, we determine whether the quote obtained is sufficient in accordance with generally accepted accounting principles in the United States of America (“GAAP”) to determine the fair value of the security. Debt and equity securities that are not publicly traded or whose market prices are not readily available or whose market prices are not regularly updated are valued at fair value as determined in good faith by our Board. Such determination of fair values may involve subjective judgments and estimates. Investments purchased within 60 days of maturity are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value.
Our Board is ultimately and solely responsible for determining the fair value of the portfolio investments that are not publicly traded, whose market prices are not readily available on a quarterly basis in good faith or any other situation where portfolio investments require a fair value determination. Because we expect that there will not be a readily available market for many of the investments in our portfolio, we expect to value many of our portfolio investments at fair value as determined in good faith by our Board using a documented valuation policy and a consistently applied valuation process. 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.
With respect to investments for which market quotations are not readily available, our Board undertakes a multi-step valuation process each quarter, as described below:
· | the quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals responsible for the credit monitoring of the portfolio investment; |
· | preliminary valuation conclusions are then documented and discussed with the investment committee; |
· | our Board engages one or more independent valuation firm(s) to conduct fair value appraisals of material investments for which market quotations are not readily available. These fair value appraisals for material investments are received at least once in every calendar year for each portfolio company investment, but are generally received quarterly; |
· | our audit committee of the Board reviews the preliminary valuations of MC Advisors and of the independent valuation firm(s) and responds and supplements the valuation recommendations to reflect any comments; and |
· | our Board discusses these valuations and determines the fair value of each investment in the portfolio in good faith, based on the input of MC Advisors, the independent valuation firm(s) and the audit committee. |
The Board, together with our independent valuation firms, generally uses the income approach to determine fair value for loans where market quotations are not readily available, as long as it is appropriate. If there is deterioration in credit quality or a debt investment is in workout status, we may consider other factors in determining the fair value, including the value attributable to the debt investment from the enterprise value of the portfolio company under the market approach or the proceeds that would be received in a liquidation analysis. We generally consider our debt to be performing if the borrower is not in default, the borrower is remitting payments in a timely manner; the loan is in covenant compliance or is otherwise not deemed to be impaired. In determining the fair value of the performing debt, we consider fluctuations in current interest rates, the trends in yields of debt instruments with similar credit ratings, financial condition of the borrower, economic conditions and other relevant factors, both qualitative and quantitative. In the event that a debt instrument is not performing, as defined above, we will evaluate the value of the collateral utilizing the same framework described above for a performing loan to determine the value of the loan.
Under the income approach, we utilize discounted cash flow models to determine the present value of the future cash flow streams of our debt investments, based on future interest and principal payments as set forth in the associated loan agreements. In determining fair value under the income approach, we also consider the following factors: applicable market yields and leverage levels, credit quality, prepayment penalties, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, and changes in the interest rate environment and the credit markets that generally may affect the price at which similar investments may be made.
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Under the market approach, we typically use the enterprise value methodology to determine the fair value of an investment. There is no one methodology to estimate enterprise value and, in fact, for any one portfolio company, enterprise value is generally best expressed as a range of values, from which we derive a single estimate of enterprise value. In estimating the enterprise value of a portfolio company, we analyze various factors consistent with industry practice, including but not limited to original transaction multiples, the portfolio company’s historical and projected financial results, applicable market trading and transaction comparables, applicable market yields and leverage levels, the nature and realizable value of any collateral, the markets in which the portfolio company does business, and comparisons of financial ratios of peer companies that are public. Typically, the enterprise values of private companies are based on multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”), cash flows, net income, revenues, or in limited cases, book value.
In addition, for certain debt investments, we may base our valuation on indicative bid and ask prices provided by an independent third-party pricing service. Bid prices reflect the highest price that we and others may be willing to pay. Ask prices represent the lowest price that we and others may be willing to accept. We generally use the midpoint of the bid/ask range as our best estimate of fair value of such investment.
Net Realized Gains or Losses and Net Change in Unrealized Gain or Loss
We measure realized gains or losses by the difference between the net proceeds from the sale and the amortized cost basis of the investment, without regard to unrealized gain or loss previously recognized. Net change in unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including any reversal of previously recorded unrealized gain or loss, when gains or losses are realized. Additionally, we do not isolate the portion of the change in fair value resulting from foreign currency exchange rate fluctuations from the changes in fair values of the underlying investment. All fluctuations in fair value are included in net change in unrealized gain (loss) on investments in fair value on our consolidated statements of operations. We report changes in the fair value of secured borrowings that are measured at fair value as a component of the net change in unrealized gain (loss) on secured borrowings in the consolidated statements of operations. The impact resulting from changes in foreign exchange rates on the revolving credit facility borrowings is included in change in unrealized gain (loss) on foreign currency and other transactions.
Capital Gains Incentive Fee
Pursuant to the terms of the Investment Advisory and Management Agreement with MC Advisors, the incentive fee on capital gains earned on liquidated investments of our portfolio is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the Investment Advisory and Management Agreement with MC Advisors neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute for Certified Public Accountants Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to MC Advisors if our entire portfolio was liquidated at its fair value as of the balance sheet date even though MC Advisors is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
During the three and nine months ended September 30, 2018, we did not accrue capital gains incentive fees. During the three months ended September 30, 2017, we did not accrue capital gains incentive fees. During the nine months ended September 30, 2017, we had a reduction in accrued capital gains incentive fees of $0.2 million, primarily as a result of net declines in portfolio valuations during the period.
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New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (ASC Topic 606) (“ASU 2014-09”). The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
ASU 2014-09 also specified the accounting for some costs to obtain or fulfill a contract with a customer. In addition, ASU 2014-09 requires that an entity disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The initial effective date of ASU 2014-09 was for fiscal periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (ASC Topic 606): Deferral of the Effective Date, which deferred the effective date to fiscal periods beginning after December 15, 2017. We have adopted ASU 2014-09, and the adoption did not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 retains many current requirements for the classification and measurement of financial instruments; however, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 also amends certain disclosure requirements associated with the fair value of financial instruments. This guidance is effective for annual and interim periods beginning after December 15, 2017, and early adoption is not permitted for public business entities. We have adopted ASU 2016-01, and the adoption did not have a material impact on our consolidated financial statements for the periods presented.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary objective of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements in the notes to the financial statements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019, although early adoption is permitted. We are currently evaluating the impact these changes will have on our consolidated financial statements and disclosures.
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends certain SEC disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other SEC disclosure requirements, U.S. GAAP requirements, or changes in the information environment. As it pertains to MRCC, the amendments include certain presentation changes to the net assets section of the consolidated statements of assets and liabilities and the consolidated statements of changes in net assets (among other changes). The amendments are effective for all filings submitted on or after November 5, 2018. We have adopted the final rules, and the adoption did not have a material impact on our consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to financial market risks, including changes in interest rates. The majority of the loans in our portfolio have floating interest rates, and we expect that our loans in the future may also have floating interest rates. These loans are usually based on a floating LIBOR and typically have interest rate re-set provisions that adjust applicable interest rates under such loans to current market rates on a monthly or quarterly basis. The majority of the loans in our current portfolio have interest rate floors which have effectively converted the loans to fixed rate loans in the current interest rate environment. In addition, our credit facility has a floating interest rate provision and we expect that other credit facilities into which we enter in the future may have floating interest rate provisions.
Assuming that the consolidated statement of financial condition as of September 30, 2018 were to remain constant and that we took no actions to alter our existing interest rate sensitivity, the following table shows the annualized impact of hypothetical base rate changes in interest rates.
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Increase (decrease) in | Increase (decrease) in | Net increase (decrease) in net | ||||||||||
Change in Interest Rates | interest income | interest expense | investment income | |||||||||
(in thousands) | ||||||||||||
Down 25 basis points | $ | (1,052 | ) | $ | (129 | ) | $ | (923 | ) | |||
Up 100 basis points | 4,273 | 516 | 3,757 | |||||||||
Up 200 basis points | 8,534 | 1,031 | 7,503 | |||||||||
Up 300 basis points | 12,795 | 1,546 | 11,249 |
Although we believe that this analysis is indicative of our existing sensitivity to interest rate changes, it does not adjust for changes in the credit market, credit quality, the size and composition of the assets in our portfolio and other business developments, including borrowing under the credit facility or other borrowings that could affect net increase in net assets resulting from operations, or net income. Accordingly, we can offer no assurances that actual results would not differ materially from the analysis above.
We may in the future hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts to the extent permitted under the 1940 Act and applicable commodities laws. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to the investments in our portfolio with fixed interest rates or interest rate floors.
We may also have exposure to foreign currencies (currently the Great Britain pound) related to certain investments. Such investments are translated into U.S. dollars based on the spot rate at each balance sheet date, exposing us to movements in the exchange rate. In order to reduce our exposure to fluctuations in exchange rates, we generally borrow in Great Britain pounds under our revolving credit facility to finance such investments. As of September 30, 2018, we have non-U.S. dollar borrowings denominated in Great Britain pounds of £14.8 million ($19.3 million U.S. dollars) outstanding under the revolving credit facility. We may also enter into foreign currency forward contracts to mitigate foreign currency exposure. As of September 30, 2018 we had foreign currency forward contracts in place for £2.7 million associated with future interest payments on certain investments.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that, at the end of the period covered by our Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
No change occurred in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
OTHER INFORMATION
Neither we nor our investment adviser are currently subject to any material legal proceedings.
In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on March 14, 2018, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results. Other than as set forth below, there have been no material changes during the nine months ended September 30, 2018 to the risk factors discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2017.
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Risks Relating to Our Business and Structure
Recent legislation allows us to incur additional leverage, which could increase the risk of investing in us.
The 1940 Act generally prohibits us from incurring indebtedness unless immediately after such borrowing we have an asset coverage for total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our total assets). However, on March 23, 2018, the Small Business Credit Availability Act (the “SBCAA”) was signed into law, which included various changes to regulations under the federal securities laws that impact BDCs. The SBCAA amended the 1940 Act to allow BDCs to decrease their asset coverage requirement from 200% to 150% (i.e. the amount of debt may not exceed 66.7% of the value of our total assets), if certain requirements are met. Under the SBCAA, we are allowed to reduce our asset coverage requirement to 150%, and thereby increase our leverage capacity, if shareholders representing at least a majority of the votes cast, when quorum is met, approve a proposal to do so. If we receive stockholder approval, we would be allowed to reduce our asset coverage requirement to 150% on the first day after such approval. Alternatively, the SBCAA allows the majority of our independent directors to approve the reduction in our asset coverage requirement to 150%, and such approval would become effective after one year. In either case, we would be required to make certain disclosures on our website and in SEC filings regarding, among other things, the receipt of approval to reduce our asset coverage requirement to 150%, our leverage capacity and usage, and risks related to leverage.
On March 27, 2018, our board of directors unanimously approved the application of the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act, as amended by the SBCAA. On March 27, 2018, our board of directors also recommended the submission of a proposal for stockholders to approve the application of the 150% minimum asset coverage requirements at our annual meeting of stockholders to be held on June 20, 2018. At the annual meeting, our stockholders approved this proposal, and we became subject to the 150% minimum asset coverage ratio, effective June 21, 2018.
Leverage is generally considered a speculative investment technique and increases the risk of investing in our securities. Leverage magnifies the potential for loss on investments in our indebtedness and on invested equity capital. As we use leverage to partially finance our investments, you will experience increased risks of investing in our securities. If the value of our assets increases, then leveraging would cause the net asset value attributable to our common stock to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged our business. Similarly, any increase in our income in excess of interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to pay distributions, scheduled debt payments or other payments related to our securities. The effects of leverage would cause any decrease in net asset value for any losses to be greater than any increase in net asset value for any corresponding gains. If we incur additional leverage, you will experience increased risks of investing in our common stock.
We maintain a revolving credit facility and use other borrowed funds to make investments or fund our business operations, which exposes us to risks typically associated with leverage and increases the risk of investing in us.
We maintain a revolving credit facility, have issued debt securities and may borrow money, including through the issuance of additional debt securities or preferred stock, to leverage our capital structure, which is generally considered a speculative investment technique. As a result:
• | our common stock is exposed to an increased risk of loss because a decrease in the value of our investments would have a greater negative impact on the value of our common stock than if we did not use leverage; |
• | if we do not appropriately match the assets and liabilities of our business, adverse changes in interest rates could reduce or eliminate the incremental income we make with the proceeds of any leverage; |
• | our ability to pay distributions on our common stock may be restricted if our asset coverage ratio, as provided in the 1940 Act, is not at least 150% and any amounts used to service indebtedness or preferred stock would not be available for such distributions; |
• | any credit facility is subject to periodic renewal by its lenders, whose continued participation cannot be guaranteed; |
• | our revolving credit facility with ING Capital LLC, as agent, is, and any other credit facility we may enter into would be, subject to various financial and operating covenants, including that our portfolio of investments satisfies certain eligibility and concentration limits as well as valuation methodologies; |
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• | such securities would be governed by an indenture or other instrument containing covenants restricting our operating flexibility; |
• | we bear the cost of issuing and paying interest or distributions on such securities, which costs are entirely borne by our common stockholders; and |
• | any convertible or exchangeable securities that we issue may have rights, preferences and privileges more favorable than those of our common stock. |
The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing in the table below.
Assumed
Return on Our Portfolio (Net of Expenses)(1) | ||||||||||||||||||||
-10% | -5% | 0% | 5% | 10% | ||||||||||||||||
Corresponding return to common stockholder(1) (2) (3) | -47.65 | % | -29.01 | % | -10.37 | % | 8.27 | % | 26.91 | % |
(1) | The assumed return on our portfolio is required by regulation of the SEC to assist investors in understanding the effects of leverage and is not a prediction of, and does not represent, our projected or actual performance. |
(2) | Assumes $507.0 million in total portfolio assets, $371.0 million in total debt outstanding, of which $261.0 million is senior securities outstanding, $136.0 million in net assets and an average cost of funds of 3.80%, which was the weighted average interest rate of borrowings on our revolving credit facility and SBA-guaranteed debentures as of December 31, 2017. The interest rate on our revolving credit facility is a variable rate. Actual interest payments may be different. |
(3) | In order for us to cover our annual interest payments on indebtedness, we must achieve annual returns on our December 31, 2017 total portfolio assets of at least 2.78%. |
The terms of our revolving credit facility may contractually limit our ability to incur additional indebtedness.
Even though our stockholders approved the proposal to apply the modified asset coverage requirements to us at our 2018 annual meeting of stockholders that was held on June 20, 2018, a covenant under our existing revolving credit facility may limit our ability to incur additional indebtedness. Currently, our revolving credit facility contains a covenant requiring that we maintain asset coverage of at least 210%. We may not be able to amend our revolving credit facility to change this covenant and if we are successful in amending our revolving credit facility, we will incur costs to do so and the other terms of such amended facility, such as interest rate, may not be as favorable to us as the current terms. An inability on our part to amend the revolving credit facility and access additional leverage could limit our ability to take advantage of the potential benefits related to our ability to incur additional leverage and could decrease our earnings, if any, which would have an adverse effect on our results of operations and the value of our shares of common stock.
Regulations governing our operation as a business development company affect our ability to and the way in which we raise additional capital.
We may issue debt securities or preferred stock and/or borrow money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted as a business development company to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% (as of June 21, 2018) of total assets (other than the SBA debentures of an SBIC subsidiary, as permitted by exemptive relief we have been granted by the SEC) less all liabilities and indebtedness not represented by senior securities, immediately after each issuance of senior securities (other than the SBA debentures of an SBIC subsidiary, as permitted by exemptive relief we have been granted by the SEC). If the value of our assets declines, we may be unable to satisfy this test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. This could have a material adverse effect on our operations and we may not be able to make distributions in an amount sufficient to be subject to taxation as a RIC, or at all. In addition, issuance of securities could dilute the percentage ownership of our current stockholders in us.
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No person or entity from which we borrow money will have a veto power or a vote in approving or changing any of our fundamental policies. If we issue preferred stock, the preferred stock would rank “senior” to common stock in our capital structure, preferred stockholders would have separate voting rights on certain matters and might have other rights, preferences or privileges more favorable than those of our common stockholders, and the issuance of preferred stock could have the effect of delaying, deferring or preventing a transaction or a change of control that might involve a premium price for holders of our common stock or otherwise be in your best interest. Holders of our common stock will directly or indirectly bear all of the costs associated with offering and servicing any preferred stock that we issue. In addition, any interests of preferred stockholders may not necessarily align with the interests of holders of our common stock and the rights of holders of shares of preferred stock to receive dividends would be senior to those of holders of shares of our common stock.
As a business development company, we generally are not able to issue our common stock at a price below net asset value per share without first obtaining the approval of our stockholders and our independent directors. If we raise additional funds by issuing more common stock or senior securities convertible into, or exchangeable for, our common stock, then percentage ownership of our stockholders at that time would decrease, and you might experience dilution. We have stockholder approval to sell our common stock below net asset value through June 20, 2019. We may seek further stockholder approval to sell shares below net asset value in the future.
Risks Related to the 2023 Notes
The 2023 Notes are unsecured and therefore are effectively subordinated to any secured indebtedness we have incurred or may incur in the future.
The 2023 Notes are not secured by any of our assets or any of the assets of any of our subsidiaries. As a result, the 2023 Notes are effectively subordinated to any secured indebtedness we or our subsidiaries have incurred or that we or our subsidiaries may incur in the future (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest) to the extent of the value of the assets securing such indebtedness. In any liquidation, dissolution, bankruptcy or other similar proceeding, the holders of any of our secured indebtedness or secured indebtedness of our subsidiaries may assert rights against the assets pledged to secure that indebtedness in order to receive full payment of their indebtedness before the assets may be used to pay other creditors, including the holders of the 2023 Notes. As of September 30, 2018, we had $51.5 million in outstanding indebtedness under the revolving credit facility. The indebtedness under the revolving credit facility is effectively senior to the 2023 Notes to the extent of the value of the assets securing such indebtedness.
The 2023 Notes are structurally subordinated to the indebtedness and other liabilities of our subsidiaries.
The 2023 Notes are obligations exclusively of the Company, and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the 2023 Notes, and the 2023 Notes are not required to be guaranteed by any subsidiary we may acquire or create in the future. Any assets of our subsidiaries are not directly available to satisfy the claims of our creditors, including holders of the 2023 Notes. Except to the extent we are a creditor with recognized claims against our subsidiaries, all claims of creditors of our subsidiaries will have priority over our equity interests in such entities (and therefore the claims of our creditors, including holders of the 2023 Notes) with respect to the assets of such entities. Even if we are recognized as a creditor of one or more of these entities, our claims would still be effectively subordinated to any security interests in the assets of any such entity and to any indebtedness or other liabilities of any such entity senior to our claims. Consequently, the 2023 Notes are structurally subordinated to all indebtedness and other liabilities, including trade payables, of any of our existing or future subsidiaries, including MRCC SBIC. As of September 30, 2018, our subsidiaries had total indebtedness outstanding of $115.0 million. In addition, in the future our subsidiaries may incur substantial additional indebtedness, all of which is and would be structurally senior to the 2023 Notes.
The indenture under which the 2023 Notes are issued contains limited protection for holders of the 2023 Notes.
The indenture under which the 2023 Notes are issued offers limited protection to holders of the 2023 Notes. The terms of the indenture and the 2023 Notes do not restrict our or any of our subsidiaries’ ability to engage in, or otherwise be a party to, a variety of corporate transactions, circumstances or events that could have a material adverse impact on your investment in the 2023 Notes. In particular, the terms of the indenture and the 2023 Notes do not place any restrictions on our or our subsidiaries’ ability to:
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• | issue securities or otherwise incur additional indebtedness or other obligations, including (1) any indebtedness or other obligations that would be equal in right of payment to the 2023 Notes, (2) any indebtedness or other obligations that would be secured and therefore rank effectively senior in right of payment to the 2023 Notes to the extent of the values of the assets securing such debt, (3) indebtedness of ours that is guaranteed by one or more of our subsidiaries and which therefore is structurally senior to the 2023 Notes and (4) securities, indebtedness or obligations issued or incurred by our subsidiaries that would be senior to our equity interests in those entities and therefore rank structurally senior to the 2023 Notes with respect to the assets of our subsidiaries, in each case other than an incurrence of indebtedness or other obligation that would cause a violation of Section 18(a)(1)(A) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, whether or not we continue to be subject to such provisions of the 1940 Act, but giving effect, in each case, to any exemptive relief granted to us by the SEC. Currently, these provisions generally prohibit us from making additional borrowings, including through the issuance of additional debt or the sale of additional debt securities, unless our asset coverage, as defined in the 1940 Act, equals at least 150% after such borrowings. See “— Recent legislation allows us to incur additional leverage, which could increase the risk of investing in us”; |
• | pay dividends on, or purchase or redeem or make any payments in respect of, capital stock or other securities ranking junior in right of payment to the 2023 Notes, including subordinated indebtedness, in each case other than dividends, purchases, redemptions or payments that would cause our asset coverage (as defined in the 1940 Act, except to the extent modified by this covenant) to fall below the threshold specified in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time or any successor provisions, giving effect to (i) any exemptive relief granted to us by the SEC and (ii) no-action relief granted by the SEC to another BDC (or to us if we determine to seek such similar no-action or other relief) permitting the BDC to declare any cash dividend or distribution notwithstanding the prohibition contained in Section 18(a)(1)(B) as modified by such provisions of Section 61(a) of the 1940 Act as may be applicable to us from time to time in order to maintain the BDC’s status as a RIC under Subchapter M of the Code. These provisions generally prohibit us from declaring any cash dividend or distribution upon any class of our capital stock, or purchasing any such capital stock if our asset coverage, as defined in the 1940 Act, is below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution or purchase. For the purposes of determining “asset coverage” as used above, any and all of our indebtedness, including any outstanding borrowings under the revolving credit facility and any successor or additional credit facility, shall be deemed a senior security of us; |
• | sell assets (other than certain limited restrictions on our ability to consolidate, merge or sell all or substantially all of our assets); |
• | enter into transactions with affiliates; |
• | create liens (including liens on the shares of our subsidiaries) or enter into sale and leaseback transactions; |
• | make investments; or |
• | create restrictions on the payment of dividends or other amounts to us from our subsidiaries. |
In addition, the indenture does not require us to offer to purchase the 2023 Notes in connection with a change of control or any other event.
Furthermore, the terms of the indenture and the 2023 Notes do not protect holders of the 2023 Notes in the event that we experience changes (including significant adverse changes) in our financial condition, results of operations or credit ratings, if any, as they do not require that we or our subsidiaries adhere to any financial tests or ratios or specified levels of net worth, revenues, income, cash flow, or liquidity.
Our ability to recapitalize, incur additional debt (including additional debt that matures prior to the maturity of the 2023 Notes), and take a number of other actions that are not limited by the terms of the 2023 Notes may have important consequences for you as a holder of the 2023 Notes, including making it more difficult for us to satisfy our obligations with respect to the 2023 Notes or negatively affecting the trading value of the 2023 Notes.
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Other debt we issue or incur in the future could contain more protections for its holders than the indenture and the 2023 Notes, including additional covenants and events of default. The issuance or incurrence of any such debt with incremental protections could affect the market for, trading levels, and prices of the 2023 Notes.
An active trading market for the 2023 Notes may not develop or be sustained, which could limit the market price of the 2023 Notes or the ability to sell them.
Although the 2023 Notes are listed on The Nasdaq Global Select Market under the symbol “MRCCL,” we cannot provide any assurances that an active trading market will develop or be maintained for the 2023 Notes or that the 2023 Notes will be able to be sold. At various times, the 2023 Notes may trade at a discount from their initial offering price depending on prevailing interest rates, the market for similar securities, our credit ratings, if any, general economic conditions, our financial condition, performance and prospects and other factors. Accordingly, we cannot provide any assurance that a liquid trading market will develop for the 2023 Notes, or that the 2023 Notes will be able to be sold at a particular time or at a favorable price. To the extent an active trading market does not develop, the liquidity and trading price for the 2023 Notes may be harmed.
If we default on our obligations to pay our other indebtedness, we may not be able to make payments on the 2023 Notes.
As of September 30, 2018, we had approximately $51.5 million of indebtedness outstanding under the revolving credit facility. Any default under the agreements governing our indebtedness, including a default under the revolving credit facility or other indebtedness to which we may be a party that is not waived by the required lenders, and the remedies sought by lenders or the holders of such indebtedness could make us unable to pay principal, premium, if any, and interest on the 2023 Notes and substantially decrease the market value of the 2023 Notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including the revolving credit facility), we could be in default under the terms of the agreements governing such indebtedness, including the 2023 Notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under the revolving credit facility or other debt we may incur in the future could elect to terminate their commitment, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation.
If our operating performance declines and we are not able to generate sufficient cash flow to service our debt obligations, we may in the future need to refinance or restructure our debt, including the 2023 Notes, sell assets, reduce or delay capital investments, seek to raise additional capital or seek to obtain waivers from the lenders under the revolving credit facility or other debt that we may incur in the future to avoid being in default. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the 2023 Notes and our other debt. If we breach our covenants under the revolving credit facility or any of our other debt and seek a waiver, we may not be able to obtain a waiver from the required lenders or holders thereof. If this occurs, we would be in default under the revolving credit facility or other debt, the lenders or holders could exercise rights as described above, and we could be forced into bankruptcy or liquidation. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing the debt, including the revolving credit facility. Because the revolving credit facility has, and any future credit facilities will likely have, customary cross-default provisions, if we have a default under the terms of the 2023 Notes, the obligations under the revolving credit facility or any future credit facility may be accelerated and we may be unable to repay or finance the amounts due.
We may choose to redeem the 2023 Notes when prevailing interest rates are relatively low.
On or after October 31, 2020, we may choose to redeem the 2023 Notes from time to time, especially if prevailing interest rates are lower than the rate borne by the 2023 Notes. If prevailing rates are lower at the time of redemption, and we redeem the 2023 Notes, you likely would not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as the interest rate on the 2023 Notes being redeemed. Our redemption right also may adversely impact your ability to sell the 2023 Notes as the optional redemption date or period approaches.
A downgrade, suspension or withdrawal of the credit rating assigned by a rating agency to us or our securities, if any, could cause the liquidity or market value of the 2023 Notes to decline significantly.
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Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of the 2023 Notes. These credit ratings may not reflect the potential impact of risks relating to the structure or marketing of the 2023 Notes. Credit ratings are not a recommendation to buy, sell or hold any security, and may be revised or withdrawn at any time by the issuing organization in its sole discretion. Neither we nor any underwriter undertakes any obligation to maintain our credit ratings or to advise holders of 2023 Notes of any changes in our credit ratings. There can be no assurance that our credit ratings will remain for any given period of time or that such credit ratings will not be lowered or withdrawn entirely by the rating agency if in their judgment future circumstances relating to the basis of the credit ratings, such as adverse changes in our company, so warrant.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
None.
Item 5. | Other Information |
None.
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Exhibit | ||
Number | Description of Document | |
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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.
Date: November 6, 2018 | By | /s/ Theodore L. Koenig |
Theodore L. Koenig | ||
Chairman, Chief Executive Officer and Director | ||
(Principal Executive Officer) | ||
Monroe Capital Corporation | ||
Date: November 6, 2018 | By | /s/ Aaron D. Peck |
Aaron D. Peck | ||
Chief Financial Officer, Chief Investment Officer and Director | ||
(Principal Financial and Accounting Officer) | ||
Monroe Capital Corporation |
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