SLR SENIOR INVESTMENT CORP. The information contained in this section should be read in conjunction with the Selected Financial and Other Data and our Consolidated Financial Statements and notes thereto appearing elsewhere in this report. Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to: • our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the impact of investments that we expect to make; • our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and
its
impact on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital; and
• the timing of cash flows, if any, from the operations of our portfolio
companies.
We generally use words such as "anticipates," "believes," "expects," "intends" and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including any factors set forth in "Risk Factors" and elsewhere in this report.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we
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undertake no obligation to revise or update any forward-looking statements, 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 theSEC , including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. OverviewSolar Senior Capital Ltd. ("Solar Senior", the "Company", "we" or "our"), aMaryland corporation formed inDecember 2010 , is a closed-end, externally managed, non-diversified management investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). Furthermore, as the Company is an investment company, it continues to apply the guidance in theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946. In addition, for tax purposes, the Company has elected to be treated, and intend to qualify annually, as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). OnFebruary 24, 2011 , we priced our initial public offering, selling 9.0 million shares, including the underwriters' over-allotment, raising approximately$168 million in net proceeds. Concurrent with this offering,Solar Senior Capital Investors LLC , an entity controlled byMichael S. Gross , our Chairman, Co-Chief Executive Officer and President, andBruce Spohler , our Co-Chief Executive Officer and Chief Operating Officer, purchased an additional 500,000 shares through a concurrent private placement, raising another$10 million . We invest primarily in privately heldU.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. We define "middle market" to refer to companies with annual revenues between$50 million and$1 billion . Our investment objective is to seek to maximize current income consistent with the preservation of capital. We seek to achieve our investment objective by directly and indirectly investing in senior loans, including first lien, stretch-senior, and second lien debt instruments, made to private middle-market companies whose debt is rated below investment grade, which we refer to collectively as "senior loans." We may also invest in debt of public companies that are thinly traded or in equity securities. Under normal market conditions, at least 80% of the value of our net assets (including the amount of any borrowings for investment purposes) will be invested directly and indirectly in senior loans. Senior loans typically pay interest at rates which are determined periodically on the basis of a floating base lending rate, primarily LIBOR, plus a premium. Senior loans in which we invest are typically made toU.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities which operate in various industries and geographical regions. Senior loans typically are rated below investment grade. Securities rated below investment grade are often referred to as "leveraged loans," "high yield" or "junk" securities, and may be considered "high risk" compared to debt instruments that are rated investment grade. In addition, some of our debt investments are not scheduled to fully amortize over their stated terms, which could cause us to suffer losses if the respective issuer of such debt investment is unable to refinance or repay their remaining indebtedness at maturity. While the Company does not typically seek to invest in traditional equity securities as part of its investment objective, the Company may occasionally acquire some equity securities in connection with senior loan investments and in certain other unique circumstances, such as the Company's equity investments inGemino Healthcare Finance, LLC ("Gemino") andNorth Mill Holdco LLC ("NM Holdco"). We invest in senior loans made primarily to private, leveraged middle-market companies with approximately$20 million to$100 million of earnings before income taxes, depreciation and amortization ("EBITDA"). Our business model is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our direct investments in individual securities will generally range between$5 million and$30 million each, although we expect that this investment size will vary proportionately with the size of our capital base and/or strategic initiatives. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These opportunistic investments may include, but are not limited 68
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to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside ofthe United States . We may invest up to 30% of our total assets in such opportunistic investments, including loans issued by non-U.S. issuers, subject to compliance with our regulatory obligations as a BDC under the 1940 Act. Our investment activities are managed bySolar Capital Partners, LLC ("Solar Capital Partners " or "Investment Adviser") and supervised by our board of directors, a majority of whom are non-interested, as such term is defined in the 1940 Act.Solar Capital Management, LLC ("Solar Capital Management " or "Administrator") provides the administrative services necessary for us to operate. As ofDecember 31, 2019 , the Investment Adviser has directly invested approximately$9.0 billion in more than 390 different portfolio companies since 2006. Over the same period, the Investment Adviser completed transactions with approximately 200 different financial sponsors.
Recent Developments
On
On
On
Investments Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." The definition of "eligible portfolio company" includes certain public companies that do not have any securities listed on a national securities exchange and companies whose securities are listed on a national securities exchange but whose market capitalization is less than$250 million .
Revenue
We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmarkLondon interbank offered rate ("LIBOR"), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable monthly or quarterly but may be bi-monthly or semi-annually. In addition, our investments may provide payment-in-kind ("PIK") interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.
Expenses
All investment professionals of the Investment Adviser and their respective staffs, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead
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expenses of such personnel allocable to such services, are provided and paid for
by
• the cost of our organization and public offerings;
• the cost of calculating our net asset value, including the cost of any
third-party valuation services;
• the cost of effecting sales and repurchases of our shares and other
securities;
• interest payable on debt, if any, to finance our investments;
• fees payable to third parties relating to, or associated with, makinginvestments, including fees and expenses associated with performing due
diligence reviews of prospective investments and advisory fees;
• transfer agent and custodial fees;
• fees and expenses associated with marketing efforts;
• federal and state registration fees, any stock exchange listing fees;
• federal, state and local taxes;
• independent directors' fees and expenses;
• brokerage commissions;
• fidelity bond, directors and officers errors and omissions liability
insurance and other insurance premiums;
• direct costs and expenses of administration, including printing, mailing,
long distance telephone and staff;
• fees and expenses associated with independent audits and outside legal
costs;
• costs associated with our reporting and compliance obligations under the
1940 Act and applicable federal and state securities laws; and
• all other expenses incurred by either Solar Capital Management or us inconnection with administering our business, including payments under the
Administration Agreement that will be based upon our allocable portion of
overhead and other expenses incurred by
performing its obligations under the Administration Agreement, including
rent, the fees and expenses associated with performing compliance
functions, and our allocable portion of the costs of compensation and
related expenses of our chief compliance officer and our chief financial
officer and their respective staffs.
We expect our general and administrative operating expenses related to our ongoing operations to increase moderately in dollar terms. During periods of asset growth, we generally expect our general and administrative operating expenses to decline as a percentage of our total assets and increase during periods of asset declines. Incentive fees, interest expense and costs relating to future offerings of securities, among others, may also increase or reduce overall operating expenses based on portfolio performance, interest rate benchmarks, and offerings of our securities relative to comparative periods, among other factors.
Portfolio and Investment Activity
During our fiscal year ended
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AtDecember 31, 2019 , our portfolio consisted of 48 portfolio companies and was invested 78.5% directly in senior secured loans and 21.5% in common equity/equity interests/warrants (of which 7.8% is Gemino and 13.6% is NM Holdco, through which the Company indirectly invests in senior secured loans), in each case, measured at fair value versus 47 portfolio companies invested 77.8% directly in senior secured loans and 22.2% in common equity/equity interests/warrants (of which 7.2% is Gemino and 14.9% isNorth Mill Capital LLC ) atDecember 31, 2018 . AtDecember 31, 2019 , 98.5% or$452.9 million of our income producing investment portfolio* was floating rate and 1.5% or$7.1 million was fixed rate, measured at fair value. AtDecember 31, 2018 , 93.0% or$418.2 million of our income producing investment portfolio* was floating rate and 7.0% or$31.7 million was fixed rate, measured at fair value.
Since the initial public offering of Solar Senior on
We acquired Gemino (d/b/a Gemino Senior Secured Healthcare Finance) onSeptember 30, 2013 . Gemino is a commercial finance company that originates, underwrites, and manages primarily secured, asset-based loans for small and mid-sized companies operating in the healthcare industry. Our initial investment in Gemino was$32.8 million . The management team of Gemino co-invested in the transaction and continues to lead Gemino. As ofSeptember 30, 2019 , Gemino's management team and Solar Senior own approximately 7% and 93% of the equity in Gemino, respectively. Concurrent with the closing of the transaction, Gemino entered into a new, four-year, non-recourse,$100.0 million credit facility with non-affiliates, which was expandable to$150.0 million under its accordion feature. EffectiveMarch 31, 2014 , the credit facility was expanded to$105.0 million and again onJune 27, 2014 to$110.0 million . OnMay 27, 2016 , Gemino entered into a new$125.0 million credit facility which replaced the previously existing facility. The new facility has similar terms as compared to the previous facility and includes an accordion feature increase to$200.0 million and had a maturity date ofMay 27, 2020 . OnJune 28, 2019 , this$125.0 million facility was amended, extending the maturity date toJune 28, 2023 . Gemino currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As ofDecember 31, 2019 , the portfolio totaled approximately$203.8 million of commitments with a total net investment in loans of$111.0 million on total assets of$122.1 million . As ofDecember 31, 2018 , the portfolio totaled approximately$174.1 million of commitments with a total net investment in loans of$89.4 million on total assets of$107.9 million . AtDecember 31, 2019 , the portfolio consisted of 34 issuers with an average balance of approximately$3.3 million versus 34 issuers with an average balance of approximately$2.6 million atDecember 31, 2018 . All of the commitments in Gemino's portfolio are floating-rate, senior-secured, cash-pay loans. Gemino's credit facility, which is non-recourse to us, had approximately$89.0 million and$75.0 million of borrowings outstanding atDecember 31, 2019 andDecember 31, 2018 , respectively. For the years endedDecember 31, 2019 and 2018, Gemino had net income of$3.6 million and$3.6 million , respectively, on gross income of$12.7 million and$11.5 million , respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in Gemino's funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that Gemino will be able to maintain consistent dividend payments to us. Gemino's consolidated financial statements for the fiscal years endedDecember 31, 2019 andDecember 31, 2018 are attached as an exhibit to this annual report on Form 10-K.
* We have included
within our income producing investment portfolio.
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We acquired 100% of the equity interests ofNorth Mill Capital LLC ("NMC") onOctober 20, 2017 . NMC is a leading asset-backed lending commercial finance company that provides senior secured asset-backed financings toU.S. based small-to-medium-sizedbusinesses primarily in the manufacturing, services and distribution industries. We invested approximately$51 million to effect the transaction. Subsequently, the Company contributed 1% of its equity interest in NMC toESP SSC Corporation . Immediately thereafter, the Company andESP SSC Corporation contributed their equity interests to North Mill. OnMay 1, 2018 , North Mill merged with and into NMC, with NMC being the surviving company. The Company andESP SSC Corporation own 99% and 1% of the equity interests of NMC, respectively. The management team of NMC continues to lead NMC. OnJune 28, 2019 , NM Holdco, a newly formed entity andESP SSC Corporation acquired Summit Financial Resources, aSalt Lake City -based provider of asset-backed financing to small and medium-sized businesses. As part of this transaction, the Company's 99% interest in the equity of NMC was contributed to NM Holdco. This approximately$15.5 million transaction was financed with borrowings on NMC's credit facility. NM Holdco currently manages a highly diverse portfolio of directly-originated and underwritten senior-secured commitments. As ofDecember 31, 2019 , the portfolio totaled approximately$383.1 million of commitments, of which$171.1 million were funded, on total assets of$199.4 million . As ofDecember 31, 2018 , the portfolio totaled approximately$247.3 million of commitments, of which$122.3 million were funded, on total assets of$155.6 million . AtDecember 31, 2019 , the portfolio consisted of 159 issuers with an average balance of approximately$1.1 million versus 80 issuers with an average balance of approximately$1.5 million atDecember 31, 2018 . NMC has a senior credit facility with a bank lending group for$160.0 million which expires onOctober 20, 2020 . Borrowings are secured by substantially all of NMC's assets. NMC's credit facility, which is non-recourse to us, had approximately$122.6 million and$88.9 million of borrowings outstanding atDecember 31, 2019 andDecember 31, 2018 , respectively. For the years endedDecember 31, 2019 andDecember 31, 2018 , NMC had net income (loss) of$2.2 million and($2.8) million , respectively on gross income of$20.2 million and$21.8 million , respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NMC's funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NMC will be able to maintain consistent dividend payments to us. NMC's consolidated financial statements for the fiscal years endedDecember 31, 2019 and 2018 are attached as an exhibit to this annual report on Form 10-K.
Critical Accounting Policies
The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.
Valuation of Portfolio Investments
We conduct the valuation of our assets, pursuant to which our net asset value is
determined, at all times consistent with GAAP, and the 1940 Act. Our valuation
procedures are set forth in more detail below:
The Company conducts the valuation of its assets in accordance with GAAP and the
1940 Act. The Company generally values its assets on a quarterly basis, or more
frequently if required. Investments for which market quotations are readily
available on an exchange are valued at the closing price on the date of
valuation. The Company may also obtain quotes with respect to certain of its
investments from pricing services or brokers
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or dealers in order to value assets. When doing so, management determines whether the quote obtained is sufficient according to GAAP to determine the fair value of the investment. If determined adequate, the Company uses the quote obtained. Debt investments with maturities of 60 days or less shall each be valued at cost plus accreted discount, or minus amortized premium, which is expected to approximate fair value, unless such valuation, in the judgment of the Investment Adviser, does not represent fair value, in which case such investments shall be valued at fair value as determined in good faith by or under the direction of the Company's board of directors (the "Board"). Investments for which reliable market quotations are not readily available or for which the pricing sources do not provide a valuation or methodology or provide a valuation or methodology that, in the judgment of the Investment Adviser or the Board does not represent fair value, each shall be valued as follows: (i) each portfolio company or investment is initially valued by the investment professionals responsible for the portfolio investment; (ii) preliminary valuations are discussed with senior management of the Investment Adviser; (iii) independent valuation firms engaged by, or on behalf of, the Board will conduct independent appraisals and review the Investment Adviser's preliminary valuations and make their own independent assessment for (a) each portfolio investment that, when taken together with all other investments in the same portfolio company, exceeds 10% of estimated total assets, plus available borrowings, as of the end of the most recently completed fiscal quarter, and (b) each portfolio investment that is presently in payment default and the Investment Adviser does not expect to reach an agreement with the portfolio company in the subsequent quarter; (iv) the Board will discuss the valuations and determine the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser and, where appropriate, the respective independent valuation firm. The recommendation of fair value generally considers the following factors among others, as relevant: applicable market yields; the nature and realizable value of any collateral; the portfolio company's ability to make payments; the portfolio company's earnings and discounted cash flow; the markets in which the issuer does business; and comparisons to publicly traded securities, among others. When an external event such as a purchase transaction, public offering or subsequent equity sale occurs, the Company will consider the pricing indicated by the external event to corroborate the valuation. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a readily available market value existed for such investments, and the differences could be material. Investments are valued utilizing a market approach, an income approach, or both approaches, as appropriate. However, in accordance with ASC 820-10, certain investments that qualify as investment companies in accordance with ASC 946, may be valued using net asset value as a practical expedient for fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation approaches to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, the nature and realizable value of any collateral, the portfolio company's ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, and enterprise values, among other factors. When available, broker quotations and/or quotations provided by pricing services are considered as an input in the valuation process. For the fiscal year endedDecember 31, 2019 , there has been no change to the Company's valuation approaches or techniques and the nature of the related inputs considered in the valuation process. 73
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Accounting Standards Codification ("ASC") Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.
Revenue Recognition
The Company records dividend income and interest, adjusted for amortization of
premium and accretion of discount, on an accrual basis. Investments that are
expected to pay regularly scheduled interest and/or dividends in cash are
generally placed on non-accrual status when principal or interest/dividend cash
payments are past due 30 days or more and/or when it is no longer probable that
principal or interest/dividend cash payments will be collected. Such non-accrual
investments are restored to accrual status if past due principal and interest or
dividends are paid in cash, and in management's judgment, are likely to continue
timely payment of their remaining interest or dividend obligations. Interest or
dividend cash payments received on investments may be recognized as income or
applied to principal depending upon management's judgment. Some of our
investments may have contractual PIK interest or dividends. PIK interest and
dividends computed at the contractual rate are accrued into income and reflected
as receivable up to the capitalization date. PIK investments offer issuers the
option at each payment date of making payments in cash or in additional
securities. When additional securities are received, they typically have the
same terms, including maturity dates and interest rates as the original
securities issued. On these payment dates, the Company capitalizes the accrued
interest or dividends receivable (reflecting such amounts as the basis in the
additional securities received). PIK generally becomes due at the maturity of
the investment or upon the investment being called by the issuer. At the point
the Company believes PIK is not expected to be realized, the PIK investment will
be placed on non-accrual status. When a PIK investment is placed on non-accrual
status, the accrued, uncapitalized interest or dividends is reversed from the
related receivable through interest or dividend income, respectively. The
Company does not reverse previously capitalized PIK interest or dividends. Upon
capitalization, PIK is subject to the fair value estimates associated with their
related investments. PIK investments on non-accrual status are restored to
accrual status if the Company again believes that PIK is expected to be
realized. Loan origination fees, original issue discount, and market discounts
are capitalized and amortized into income using the effective interest method.
Upon the prepayment of a loan, any unamortized loan origination fees are
recorded as interest income. We record prepayment premiums on loans and other
investments as interest income when we receive such amounts. Capital structuring
fees are recorded as other income when earned.
The typically higher yields and interest rates on PIK securities, to the extent
we invested, reflects the payment deferral and increased credit risk associated
with such instruments and that such investments may represent a significantly
higher credit risk than coupon loans. PIK securities may have unreliable
valuations
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because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the deferral of PIK interest also increases the loan-to-valueratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Investment Adviser based on non-cash accruals that ultimately may not be realized, but the Investment Adviser will be under no obligation to reimburse the Company for these fees. For the fiscal years endedDecember 31, 2019 , 2018 and 2017, capitalized PIK income totaled$0.7 million ,$1.4 million and$0.5 million , respectively.
Net Realized Gain or Loss and Net Change in Unrealized Gain or Loss
We generally measure realized gain or loss by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized. Gains or losses on investments are calculated by using the specific identification method.
Income Taxes
Solar Senior Capital , aU.S. corporation, has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify for taxation as a RIC, the Company is required, among other things, to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income.
Recent Accounting Pronouncements
InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 . Early adoption is permitted. The Company will adopt ASU 2018-13 effective in fiscal year 2020. InMarch 2017 , the FASB issued ASU 2017-08, Premium Amortization onPurchased Callable Debt Securities , which will amend FASB ASC 310-20. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . Early adoption is permitted, including adoption in an interim period. The Company has adopted ASU 2017-08 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures.
RESULTS OF OPERATIONS
Results comparisons are for the fiscal years endedDecember 31, 2019 andDecember 31, 2018 . Results for the fiscal year endedDecember 31, 2017 can be found in Item 7 of the Company's report on Form 10-K filed onFebruary 21, 2019 , which is incorporated by reference herein. 75
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Investment Income
For the fiscal years endedDecember 31, 2019 and 2018, gross investment income totaled$40.1 million and$39.8 million , respectively. The increase in gross investment income from fiscal year 2018 to fiscal year 2019 was primarily due to average portfolio growth, partially offset by yield compression.
Expenses
Net expenses totaled$17.5 million and$17.2 million , respectively, for the fiscal years endedDecember 31, 2019 and 2018, of which$6.3 million and$7.5 million , respectively, were gross base management fees and gross performance-based incentive fees, and$10.7 million and$7.8 million , respectively, were interest and other credit facility expenses. Over the same periods,$1.3 million and$0.0 million of base management fees were waived and$1.5 million and$1.1 million of performance-based incentive fees were waived. Administrative services and other general and administrative expenses totaled$3.2 million and$3.0 million , respectively, for the fiscal years endedDecember 31, 2019 and 2018. Expenses generally consist of management fees, performance-based incentive fees, administrative services expenses, insurance, legal expenses, directors' expenses, audit and tax expenses, transfer agent fees and expenses, and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The slight increase in net expenses for the year endedDecember 31, 2019 was primarily due to higher interest expense, including from the increase in LIBOR, partially offset by lower incentive fee expense.
Net Investment Income
The Company's net investment income totaled$22.6 million or$1.41 per average share and$22.6 million or$1.41 per average share, for the fiscal years endedDecember 31, 2019 and 2018, respectively.
Net Realized Loss
The Company had investment sales and prepayments totaling approximately$100 million and$193 million , respectively, for the fiscal years endedDecember 31, 2019 and 2018. Net realized loss for the fiscal years endedDecember 31, 2019 and 2018 totaled$4.8 million and$8.3 million , respectively. Net realized losses for the fiscal year endedDecember 31, 2019 were primarily related to the Company's exit ofTrident USA Health Services partially offset by gains on the exit ofEngineering Solutions & Products, LLC . Net realized losses for the fiscal year endedDecember 31, 2018 were primarily related to the Company's exit from its direct and indirect investments in Metamorph US 3, LLC.
Net Change in Unrealized Gain (Loss)
For the fiscal years endedDecember 31, 2019 and 2018, the net change in unrealized gain (loss) on the Company's assets and liabilities totaled$5.1 million and($0.5) million , respectively. Net unrealized gain for the fiscal year endedDecember 31, 2019 was primarily due to appreciation on our investments inGemino Healthcare Finance, LLC andTwentyEighty, Inc. , among others, as well as the reversal of previously recorded unrealized loss onTrident USA Health Services , partially offset by depreciation in NM Holdco,American Teleconferencing Services, Ltd. andAegis Toxicology Sciences Corporation , among others. Net unrealized loss for the fiscal year endedDecember 31, 2018 was primarily due to depreciation in the value of our investments inTrident USA Health Services ,Gemino Healthcare Finance, LLC andPPT Management Holdings, LLC , among others, partially offset by the reversal of previously recorded unrealized loss on our direct and indirect investments in Metamorph US 3, LLC andHostway Corporation .
Net Increase in Net Assets From Operations
For the fiscal years endedDecember 31, 2019 and 2018, the Company had a net increase in net assets resulting from operations of$22.9 million and$13.8 million , respectively. For the fiscal years endedDecember 31, 2019 and 2018, earnings per average share were$1.43 and$0.86 , respectively. 76
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LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources are generally available through its revolving credit facilities, through periodic follow-on equity offerings, as well as from cash flows from operations, investment sales and pre-payments of investments. AtDecember 31, 2019 , the Company had$211.2 million in borrowings outstanding on its credit facilities and$88.8 million of unused capacity, subject to borrowing base limits. OnMay 31, 2019 , the Company as transferor and FLLP 2015-1, LLC, a wholly-owned subsidiary of the Company, as borrower entered into amendment number five to the$75 million credit facility withWells Fargo Bank, NA acting as administrative agent (the "FLLP Facility"). The Company acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature onMay 31, 2024 . The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.15-2.25%. OnJune 1, 2018 , the$200 million senior secured revolving credit facility with our wholly-owned subsidiarySUNS SPV LLC as borrower andCitibank, N.A . acting as administrative agent (the "Credit Facility") was refinanced by way of amendment, allowing for greater investment flexibility and the extension of the maturity date, among other changes. OnJuly 13, 2018 , commitments to the Credit Facility, as amended, were increased from$200 million to$225 million by utilizing the accordion feature. InSeptember 2016 , the Company closed a follow-on public equity offering of 4.5 million shares of common stock at$16.76 per share raising approximately$75.0 million in net proceeds. In the future, the Company may raise additional equity or debt capital, among other considerations. The primary uses of funds will be investments in portfolio companies, reductions in debt outstanding and other general corporate purposes. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.
We currently expect that our liquidity needs will be met with cash flows from operations, borrowings under our Credit Facility, including its accordion feature, the FLLP Facility as well as from other available financing activities.
Cash Equivalents
We deem certainU.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchaseU.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. We held approximately$100 million of cash equivalents as ofDecember 31, 2019 .
Debt
Credit Facility-OnAugust 26, 2011 , the Company established our wholly-owned subsidiary,SUNS SPV LLC (the "SUNS SPV") which entered into the Credit Facility withCitigroup Global Markets Inc. acting as administrative agent. OnJanuary 10, 2017 , commitments to the Credit Facility, as amended, were increased from$175 million to$200 million by utilizing the accordion feature. The commitments can also be expanded up to$600 million . The stated interest rate on the Credit Facility is LIBOR plus 2.00% with no LIBOR floor 77
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requirement and the current maturity date isJune 1, 2023 . The Credit Facility is secured by all of the assets held by SUNS SPV. Under the terms of the Credit Facility,Solar Senior Capital and SUNS SPV, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The Credit Facility also includes usual and customary events of default for credit facilities of this nature. The Credit Facility was amended onNovember 7, 2012 ,June 30, 2014 andMay 29, 2015 to extend maturities and add greater investment flexibility, among other changes. OnJune 1, 2018 , the Credit Facility was refinanced by way of amendment, allowing for greater investment flexibility and the extension of the maturity date, among other changes. OnJuly 13, 2018 , commitments to the Credit Facility, as amended, were increased from$200 million to$225 million by utilizing the accordion feature. There were$157.6 million of borrowings outstanding under the Credit Facility as ofDecember 31, 2019 . FLLP Facility-OnMay 31, 2019 , the Company as transferor and FLLP 2015-1, LLC, a wholly-owned subsidiary of the Company, as borrower entered into amendment number five to the$75 million FLLP Facility withWells Fargo Bank, NA acting as administrative agent. The Company acts as servicer under the FLLP Facility. The FLLP Facility is scheduled to mature onMay 31, 2024 . The FLLP Facility generally bears interest at a rate of LIBOR plus a range of 2.15-2.25%. The Company and FLLP 2015-1, LLC, as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The FLLP Facility also includes usual and customary events of default for credit facilities of this nature. There were$53.6 million of borrowings outstanding as ofDecember 31, 2019 . AtDecember 31, 2019 , the Company was in compliance with all financial and operational covenants required by the Credit Facility and FLLP Facility. Contractual Obligations Payments due by
Period as of
(dollars in millions)
Less than More than
Total 1 year 1-3 years 3-5 years 5 years
Revolving credit facilities(1) $ 211.2 $ - $ - $ 211.2 $ -
(1) At
capacity under our revolving credit facilities, subject to borrowing base
limits.
Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy the asset coverage 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. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. Our stockholders approved being subject to a 150% asset coverage ratio effectiveOctober 12, 2018 . 78
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Information about our senior securities is shown in the following table as of each year endedDecember 31 since the Company commenced operations, unless otherwise noted. The "-" indicates information which theSEC expressly does not require to be disclosed for certain types of senior securities. Involuntary Asset Liquidating Average Total Amount Coverage Preference Market Value Class and Year Outstanding(1) Per Unit(2) Per Unit(3) Per Unit(4) Credit Facility Fiscal 2019$ 157,600 $ 1,671 $ - N/A Fiscal 2018 119,200 1,770 - N/A Fiscal 2017 124,200 3,175 - N/A Fiscal 2016 98,300 3,738 - N/A Fiscal 2015 116,200 2,621 - N/A Fiscal 2014 143,200 2,421 - N/A Fiscal 2013 61,400 4,388 - N/A Fiscal 2012 39,100 5,453 - N/A Fiscal 2011 8,600 21,051 - N/A FLLP Facility Fiscal 2019 53,602 569 - N/A Fiscal 2018 51,371 762 - N/ATotal Senior Securities Fiscal 2019$ 211,202 $ 2,240 $ - N/A Fiscal 2018 170,571 2,532 - N/A Fiscal 2017 124,200 3,175 - N/A Fiscal 2016 98,300 3,738 - N/A Fiscal 2015 116,200 2,621 - N/A Fiscal 2014 143,200 2,421 - N/A Fiscal 2013 61,400 4,388 - N/A Fiscal 2012 39,100 5,453 - N/A Fiscal 2011 8,600 21,051 - N/A
(1) Total amount of each class of senior securities outstanding (in thousands) at
the end of the period presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as our consolidated total assets, less all
liabilities and indebtedness not represented by senior securities, divided by
senior securities representing indebtedness. This asset coverage ratio is
multiplied by one thousand to determine the Asset Coverage Per Unit. In order
to determine the specific Asset Coverage Per Unit for each class of debt, the
total Asset Coverage Per Unit was divided based on the amount outstanding at
the end of the period for each. As of
224.0%.
(3) The amount to which such class of senior security would be entitled upon the
involuntary liquidation of the issuer in preference to any security junior to
it.
(4) Not applicable, we do not have senior securities that are registered for
public trading.
We have also entered into two contracts under which we have future commitments: the Advisory Agreement, pursuant to whichSolar Capital Partners has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to whichSolar Capital Management has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the Advisory Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of the Administrator's overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chief compliance officer and their respective staffs. Either party may terminate 79
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each of the Advisory Agreement and Administration Agreement without penalty upon 60 days' written notice to the other. See note 3 to our Consolidated Financial Statements.
Off-Balance Sheet Arrangements
From time-to-time and in the normal course of business, the Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital commitments always take into account the Company's liquidity and cash available for investment, portfolio and issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments atDecember 31, 2019 andDecember 31, 2018 , respectively: December 31, December 31, 2019 2018 (in millions) Solara Medical Supplies, Inc. $ 3.2 $ 2.1 MSHC, Inc. 2.4 3.3 Worldwide Facilities, LLC. 2.3 - US Radiology Specialists, Inc. 2.2 - Kindred Biosciences, Inc. 2.1 - Rubius Therapeutics, Inc 2.1 4.1 WIRB-Copernicus Group, Inc. 1.7 2.7 Unified Physician Management, LLC. 1.6 - ENS Holdings III Corp. & ES Opco USA LLC 1.4 - Gemino Healthcare Finance, LLC* 1.4 1.4 Altern Marketing, LLC. 1.2 - MRI Software LLC 1.2 2.5 Composite Technology Acquisition Corp. 1.1 - Cerapedics, Inc. 0.8 - Alimera Sciences, Inc. 0.2 - AQA Acquisition Holding, Inc. 0.1 0.1 Centria Healthcare LLC. - 0.3The Hilb Group, LLC & Gencorp Insurance Group, Inc. - 3.2 DISA Holdings Acquisition Corp. - 2.6 GenMark Diagnostics, Inc. - 0.7 Engineering Solutions & Products, LLC - 0.5 TwentyEighty, Inc - 0.1 MHE Intermediate Holdings, LLC - - Total Commitments $ 25.0 $ 23.6
* The Company controls the funding of the Gemino commitment and may cancel it
at its discretion.
The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company's achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As ofDecember 31, 2019 andDecember 31, 2018 , the Company had sufficient cash available and/or liquid securities available to fund its commitments. 80
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In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Consolidated Statements of Assets and Liabilities.
Distributions
The following table reflects the cash distributions per share on our common
stock for the two most recent fiscal years and the current fiscal year to date:
Date Declared Record Date Payment Date Amount
Fiscal 2020
February 20, 2020 March 19, 2020 April 3, 2020 $ 0.1175
February 4,2020 February 20, 2020 February 28, 2020 0.1175
January 8, 2020 January 23, 2020 January 31, 2020 0.1175
Total (2020) $ 0.3525
Fiscal 2019
December 5, 2019 December 19, 2019 January 3, 2020 $ 0.1175
November 4, 2019 November 21, 2019 December 3, 2019 0.1175
October 3, 2019 October 17, 2019 November 1, 2019 0.1175
September 3, 2019 September 20, 2019 October 2, 2019 0.1175
August 5, 2019 August 22, 2019 August 30, 2019 0.1175
July 2, 2019 July 25, 2019 August 1, 2019 0.1175
June 5, 2019 June 20, 2019 July 2, 2019 0.1175
May 6, 2019 May 23, 2019 June 4, 2019 0.1175
April 4, 2019 April 18, 2019 May 1, 2019 0.1175
February 21, 2019 March 21, 2019 April 3, 2019 0.1175
February 6, 2019 February 21, 2019 March 1, 2019 0.1175
January 8, 2019 January 24, 2019 February 1, 2019 0.1175
YTD Total (2019) $ 1.41
Fiscal 2018
December 6, 2018 December 20, 2018 January 4, 2019 $ 0.1175
November 5, 2018 November 21, 2018 December 4, 2018 0.1175
October 4, 2018 October 24, 2018 November 1, 2018 0.1175
September 6, 2018 September 25, 2018 October 2, 2018 0.1175
August 2, 2018 August 23, 2018 August 31, 2018 0.1175
July 3, 2018 July 19, 2018 July 31, 2018 0.1175
June 6, 2018 June 21, 2018 July 3, 2018 0.1175
May 7, 2018 May 23, 2018 June 1, 2018 0.1175
April 3, 2018 April 19, 2018 May 2, 2018 0.1175
February 22, 2018 March 22, 2018 April 3, 2018 0.1175
February 7, 2018 February 22, 2018 March 1, 2018 0.1175
January 5, 2018 January 18, 2018 January 31, 2018 0.1175
Total (2018) $ 1.41
Tax characteristics of all distributions will be reported to stockholders on
Form 1099 after the end of the calendar year. Future distributions, if any, will
be determined by our Board. We expect that our distributions to
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stockholders will generally be from accumulated net investment income, from net realized capital gains or non-taxable return of capital, if any, as applicable.
We have elected to be taxed as a RIC under Subchapter M of the Code. To maintain our RIC status, we must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, out of the assets legally available for distribution. In addition, although we currently intend to distribute realized net capital gains (i.e., net long-term capital gains in excess of short-term capital losses), if any, at least annually, out of the assets legally available for such distributions, we may in the future decide to retain such capital gains for investment. We maintain an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution, then stockholders' cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically "opt out" of the dividend reinvestment plan so as to receive cash distributions. We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time. In addition, due to the asset coverage test applicable to us as a business development company, we may in the future be limited in our ability to make distributions. Also, our revolving credit facility may limit our ability to declare distributions if we default under certain provisions. If we do not distribute a certain percentage of our income annually, we will suffer adverse tax consequences, including possible loss of the tax benefits available to us as a regulated investment company. In addition, in accordance with GAAP and tax regulations, we include in income certain amounts that we have not yet received in cash, such as contractual payment-in-kind interest, which represents contractual interest added to the loan balance that becomes due at the end of the loan term, or the accrual of original issue or market discount. Since we may recognize income before or without receiving cash representing such income, we may have difficulty meeting the requirement to distribute at least 90% of our investment company taxable income to obtain tax benefits as a regulated investment company. With respect to the distributions to stockholders, income from origination, structuring, closing and certain other upfront fees associated with investments in portfolio companies are treated as taxable income and accordingly, distributed to stockholders. For the fiscal years endedDecember 31, 2019 andDecember 31, 2018 , 12.3% and 4.9% of distributions were funded from the waiver of management and/or incentive fees.
Related Parties
We have entered into a number of business relationships with affiliated or related parties, including the following:
• We have entered into the Advisory Agreement with
board member, are managing members and senior investment professionals
of, and have financial and controlling interests in, the Investment
Adviser. In addition,
and Secretary serves as the Chief Financial Officer for Solar Capital
Partners.
• The Administrator provides us with the office facilities andadministrative services necessary to conduct day-to-day operations
pursuant to our Administration Agreement. We reimburse the Administrator
for the allocable portion of overhead and other expenses incurred by it
in performing its obligations under the Administration Agreement,
including rent, the fees and expenses associated with performingcompliance functions, and the compensation of our chief compliance
officer, our chief financial officer and their respective staffs.
• We have entered into a license agreement with the Investment Adviser,pursuant to which the Investment Adviser has granted us a non-exclusive,
royalty-free license to use the name "Solar Capital."
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The Investment Adviser may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Investment Adviser presently serves as investment adviser to Solar Capital Ltd., a publicly traded BDC, which focuses on investing in senior secured loans, including stretch-senior loans and to a lesser extent unsecured loans and equity securities. In addition,Michael S. Gross , our Chairman, Co-Chief Executive Officer and President,Bruce Spohler , our Co-Chief Executive Officer and Chief Operating Officer, andRichard L. Peteka , our Chief Financial Officer, serve in similar capacities for Solar Capital Ltd. andSCP Private Credit Income BDC LLC . The Investment Adviser and certain investment advisory affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Adviser or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of theSEC and its staff, and consistent with the Investment Adviser's allocation procedures. OnJune 13, 2017 , the Adviser received an exemptive order that permits the Company to participate in negotiated co-investment transactions with certain affiliates, in a manner consistent with the Company's investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, and pursuant to various conditions (the "Order"). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity's investment strategy, on an alternating basis. Although the Adviser's investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its stockholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of the Adviser. Related party transactions may occur amongSolar Senior Capital Ltd. , Gemino and NM Holdco. These transactions may occur in the normal course of business. No administrative fees are paid toSolar Capital Partners by Gemino or NM Holdco. In addition, we have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and theMaryland General Corporation Law. 83
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