SIXTH STREET SPECIALTY LENDING, INC. Introduction
Management's Discussion and Analysis should be read in conjunction with ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in "ITEM 1A. RISK FACTORS." Actual results may differ materially from those contained in any forward-looking statements.
Overview
TPG Specialty Lending, Inc. is aDelaware corporation formed onJuly 21, 2010 . The Adviser is our external manager. We have three wholly owned subsidiaries,TC Lending, LLC , aDelaware limited liability company, which holds aCalifornia finance lender and broker license, TPG SL SPV, LLC, aDelaware limited liability company, in which we hold assets that were previously used to support our asset-backed credit facility, andTSL MR, LLC , aDelaware limited liability company, in which we hold certain investments.
We have elected to be regulated as a BDC under the 1940 Act and as a RIC under
the Code. We made our BDC election on
• the requirement to invest at least 70% of our assets in "qualifying assets";
• source of income limitations; • asset diversification requirements; and
• the requirement to distribute (or be treated as distributing) in each taxable
year at least 90% of our investment company taxable income and tax-exempt
interest for that taxable year.
Our shares are currently listed on the NYSE under the symbol "TSLX."
OnAugust 4, 2015 , our Board authorized us to enter into a stock repurchase plan, the Company 10b5-1 Plan, to acquire up to$50 million in the aggregate of our common stock at prices just below our net asset value per share over an initial six month period, in accordance with the guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Exchange Act, and has continued to authorize extensions of the plan termination date prior to its expiration since that time. We put the Company 10b5-1 Plan in place because we believe that, in current market conditions, if our common stock is trading below our then-current net asset value per share, it is in the best interest of our stockholders for us to reinvest in our portfolio and increase our leverage ratio through share repurchases. The Company 10b5-1 Plan is designed to allow us to repurchase our common stock at times when we otherwise might be prevented from doing so under insider trading laws. The Company 10b5-1 Plan, as currently in effect requiresGoldman Sachs & Co. LLC , as our agent, to repurchase shares of common stock on our behalf when the market price per share is just below 1.05x the most recently reported net asset value per share in our public financial statements or publicly announced by us, less the amount of any supplemental dividend that has been publicly announced by us but that has yet to be reflected in the net asset value per share most recently reported in our public financial statements (including any updates, corrections or adjustments publicly announced by us to any such net asset value per share or supplemental dividend). Under the Company 10b5-1 Plan, the agent will increase the volume of purchases made as the price of our common stock declines, subject to volume restrictions. The timing and amount of any stock repurchases depend on the terms and conditions of the Company 10b5-1 Plan, the market price of our common stock and trading volumes, and no assurance can be given that any particular amount of common stock will be repurchased. OnNovember 5, 2019 , the Board authorized the extension of the termination date of the Company 10b5-1 Plan toMay 31, 2020 . Unless extended or terminated by the Board, the Company 10b5-1 Plan will be in effect through the earlier ofMay 31, 2020 or such time as the current approved repurchase amount of up to$50 million has been fully utilized, subject to certain conditions.
Our Investment Framework
We are a specialty finance company focused on lending to middle-market companies. Since we began our investment activities inJuly 2011 , throughDecember 31, 2019 , we have originated more than$12.5 billion aggregate principal amount of investments and retained approximately$6.3 billion aggregate principal amount of these investments on our balance sheet prior to any subsequent exits and repayments. We seek to generate current income primarily inU.S. -domiciled middle-market companies through direct originations of senior secured loans and, to a lesser extent, originations of mezzanine and unsecured loans and investments in corporate bonds and equity securities. 56 -------------------------------------------------------------------------------- By "middle-market companies," we mean companies that have annual EBITDA, which we believe is a useful proxy for cash flow, of$10 million to$250 million , although we may invest in larger or smaller companies on occasion. As ofDecember 31, 2019 , our core portfolio companies, which excludes certain investments that fall outside of our typical borrower profile and represent 77.2% of our total investments based on fair value, had weighted average annual revenue of$113.9 million and weighted average annual EBITDA of$34.5 million . We invest in first-lien debt, second-lien debt, mezzanine and unsecured debt and equity and other investments. Our first-lien debt may include stand-alone first-lien loans; "last out" first-lien loans, which are loans that have a secondary priority behind super-senior "first out" first-lien loans; "unitranche" loans, which are loans that combine features of first-lien, second-lien and mezzanine debt, generally in a first-lien position; and secured corporate bonds with similar features to these categories of first-lien loans. Our second-lien debt may include secured loans, and, to a lesser extent, secured corporate bonds, with a secondary priority behind first-lien debt. The debt in which we invest typically is not rated by any rating agency, but if these instruments were rated, they would likely receive a rating of below investment grade (that is, below BBB- or Baa3 as defined byStandard & Poor's and Moody's Investors Services, respectively), which is often referred to as "junk."
The companies in which we invest use our capital to support organic growth,
acquisitions, market or product expansion and recapitalizations (including
restructurings). As of
As of
Through our Adviser, we consider potential investments utilizing a four-tiered investment framework and against our existing portfolio as a whole:
Business and sector selection. We focus on companies with enterprise value between$50 million and$1 billion . When reviewing potential investments, we seek to invest in businesses with high marginal cash flow, recurring revenue streams and where we believe credit quality will improve over time. We look for portfolio companies that we think have a sustainable competitive advantage in growing industries or distressed situations. We also seek companies where our investment will have a low loan-to-value ratio. We currently do not limit our focus to any specific industry and we may invest in larger or smaller companies on occasion. We classify the industries of our portfolio companies by end-market (such as healthcare, and business services) and not by the products or services (such as software) directed to those end-markets.
As of
Investment Structuring. We focus on investing at the top of the capital structure and protecting that position. As ofDecember 31, 2019 , approximately 97.1% of our portfolio was invested in secured debt, including 96.5% in first-lien debt investments. We carefully perform diligence and structure investments to include strong investor covenants. As a result, we structure investments with a view to creating opportunities for early intervention in the event of non-performance or stress. In addition, we seek to retain effective voting control in investments over the loans or particular class of securities in which we invest through maintaining affirmative voting positions or negotiating consent rights that allow us to retain a blocking position. We also aim for our loans to mature on a medium term, between two to six years after origination. For the year endedDecember 31, 2019 , the weighted average term on new investment commitments in new portfolio companies was 4.6 years. Deal Dynamics. We focus on, among other deal dynamics, direct origination of investments, where we identify and lead the investment transaction. A substantial majority of our portfolio investments are sourced through our direct or proprietary relationships. Risk Mitigation. We seek to mitigate non-credit-related risk on our returns in several ways, including call protection provisions to protect future interest income. As ofDecember 31, 2019 , we had call protection on 87.8% of our debt investments based on fair value, with weighted average call prices of 105.5% for the first year, 103.1% for the second year and 101.1% for the third year, in each case from the date of the initial investment. As ofDecember 31, 2019 , 99.2% of our debt investments based on fair value bore interest at floating rates (when including investment specific hedges), with 93.5% of these subject to interest rate floors, which we believe helps act as a portfolio-wide hedge against inflation. 57
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Relationship with our Adviser and TSSP
Our Adviser is aDelaware limited liability company. Our Adviser acts as our investment adviser and administrator and is a registered investment adviser with theSEC under the Advisers Act. Our Adviser sources and manages our portfolio through a dedicated team of investment professionals predominately focused on us. Our Investment Team is led by our Chairman and Chief Executive Officer and our Adviser's Co-Chief Investment OfficerJoshua Easterly and our Adviser's Co-Chief Investment OfficerAlan Waxman , both of whom have substantial experience in credit origination, underwriting and asset management. Our investment decisions are made by our Investment Review Committee, which includes senior personnel of ourAdviser and TPG Sixth Street Partners , or TSSP. TSSP is a global finance and investment business with approximately$33 billion of assets under management as ofSeptember 30, 2019 . TSSP's core platforms includeTPG Specialty Lending , TSL Europe (TSLE), which is aimed at European middle-market loan originations, TSSP Adjacent Opportunities (TAO), which has the flexibility to invest across all of TSSP's private credit market investments,TSSP Opportunities Partners (TOP), which focuses on actively managed opportunistic investments across the credit cycle,TPG Institutional Credit Partners (TICP), which is the firm's "public-side" credit investment platform focused on investment opportunities in broadly syndicated leveraged loan markets, and TSSP Capital Solutions (TCS), which provides financing solutions to growing companies. TSSP has a long-term oriented, highly flexible capital base that allows it to invest across industries, geographies, capital structures and asset classes. TSSP has extensive experience with highly complex, global public and private investments executed through primary originations, secondary market purchases and restructurings, and has a team of over 250 investment and operating professionals. As ofDecember 31, 2019 , thirty four (34) of these personnel are dedicated to our business, including twenty six (26) investment professionals. Our Adviser consults with TSSP in connection with a substantial number of our investments. The TSSP platform provides us with a breadth of large and scalable investment resources. We believe we benefit from TSSP's market expertise, insights into industry, sector and macroeconomic trends and intensive due diligence capabilities, which help us discern market conditions that vary across industries and credit cycles, identify favorable investment opportunities and manage our portfolio of investments. TSSP and its affiliates will refer all middle-market loan origination activities for companies domiciled inthe United States to us and conduct those activities through us. The Adviser will determine whether it would be permissible, advisable or otherwise appropriate for us to pursue a particular investment opportunity allocated to us. OnDecember 16, 2014 , we were granted an exemptive order from theSEC that allows us to co-invest, subject to certain conditions and to the extent the size of an investment opportunity exceeds the amount our Adviser has independently determined is appropriate to invest, with certain of our affiliates (including affiliates of TSSP) in middle-market loan origination activities for companies domiciled inthe United States and certain "follow-on" investments in companies in which we have already co-invested pursuant to the order and remain invested. OnJanuary 16, 2020 , we filed a further application for co-investment exemptive relief with theSEC to better align our existing co-investment relief with more recentSEC exemptive orders. There can be no assurance when or if theSEC will grant a further order in response to our application. Until such time a new order is granted, we will continue to operate under the terms of our current exemptive order. We believe our ability to co-invest with TSSP affiliates is particularly useful where we identify larger capital commitments than otherwise would be appropriate for us. We expect that with the ability to co-invest with TSSP affiliates we will continue to be able to provide "one-stop" financing to a potential portfolio company in these circumstances, which may allow us to capture opportunities where we alone could not commit the full amount of required capital or would have to spend additional time to locate unaffiliated co-investors. Under the terms of the Investment Advisory Agreement and Administration Agreement, the Adviser's services are not exclusive, and the Adviser is free to furnish similar or other services to others, so long as its services to us are not impaired. Under the terms of the Investment Advisory Agreement, we will pay the Adviser the base management fee, or the Management Fee, and may also pay certain incentive fees, or the Incentive Fees. Under the terms of the Administration Agreement, the Adviser also provides administrative services to us. These services include providing office space, equipment and office services, maintaining financial records, preparing reports to stockholders and reports filed with theSEC , and managing the payment of expenses and the oversight of the performance of administrative and professional services rendered by others. Certain of these services are reimbursable to the Adviser under the terms of the Administration Agreement. 58 --------------------------------------------------------------------------------
Key Components of Our Results of Operations
Investments
We focus primarily on the direct origination of loans to middle-market companies
domiciled in
Our level of investment activity (both the number of investments and the size of each investment) can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital generally 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.
In addition, as part of our risk strategy on investments, we may reduce certain levels of investments through partial sales or syndication to additional investors.
Revenues
We generate revenues primarily in the form of interest income from the investments we hold. In addition, we may generate income from dividends on direct equity investments, capital gains on the sale of investments and various loan origination and other fees. Our debt investments typically have a term of two to six years, and, as ofDecember 31, 2019 , 99.2% of these investments based on fair value bore interest at a floating rate (when including investment specific hedges), with 93.5% of these subject to interest rate floors. Interest on debt investments is generally payable quarterly or semiannually. Some of our investments provide for deferred interest payments or PIK interest. For the year endedDecember 31, 2019 , 3.0% of our total investment income was comprised of PIK interest. Changes in our net investment income are primarily driven by the spread between the payments we receive from our investments in our portfolio companies against our cost of funding, rather than by changes in interest rates. Our investment portfolio primarily consists of floating rate loans, and our credit facilities, 2022 Convertible Notes, 2023 Notes and 2024 Notes, after taking into account the effect of the interest rate swaps we have entered into in connection with these securities, all bear interest at floating rates. Macro trends in base interest rates like LIBOR or other alternate reference rates may affect our net investment income over the long term. However, because we generally originate loans to a small number of portfolio companies each quarter, and those investments also vary in size, our results in any given period-including the interest rate on investments that were sold or repaid in a period compared to the interest rate of new investments made during that period-often are idiosyncratic, and reflect the characteristics of the particular portfolio companies that we invested in or exited during the period and not necessarily any trends in our business. In addition to interest income, our net investment income is also driven by prepayment and other fees, which also can vary significantly from quarter to quarter. The level of prepayment fees is generally correlated to the movement in credit spreads and risk premiums, but also will vary based on corporate events that may take place at an individual portfolio company in a given period-e.g., merger and acquisition activity, initial public offerings and restructurings. As noted above, generally a small but varied number of portfolio companies may make prepayments in any quarter, meaning that changes in the amount of prepayment fees received can vary significantly between periods and can vary without regard to underlying credit trends. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income using the effective interest method for term instruments and the straight-line method for revolving or delayed draw instruments. Repayments of our debt investments can reduce interest income from period to period. We record prepayment premiums on loans as interest income when earned. We also may generate revenue in the form of commitment, amendment, structuring, syndication or due diligence fees, fees for providing managerial assistance and consulting fees. The frequency or volume of these repayments may fluctuate significantly.
Dividend income on common equity investments is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies.
Our portfolio activity also reflects the proceeds of sales of investments. We
recognize realized gains or losses on investments based on the difference
between the net proceeds from the disposition and the amortized cost basis of
the investment without regard to unrealized gains or losses previously
recognized. We record current period changes in fair value of investments that
are measured at fair value as a component of the net change in unrealized gains
(losses) on investments in the consolidated statements of operations.
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--------------------------------------------------------------------------------Expenses
Our primary operating expenses include the payment of fees to our Adviser under the Investment Advisory Agreement, expenses reimbursable under the Administration Agreement and other operating costs described below. Additionally, we pay interest expense on our outstanding debt. We bear all other costs and expenses of our operations, administration and transactions, including those relating to:
• calculating individual asset values and our net asset value (including the
cost and expenses of any independent valuation firms);
• expenses, including travel expenses, incurred by the Adviser, or members of
our Investment Team, or payable to third parties, in respect of due diligence
on prospective portfolio companies and, if necessary, in respect of enforcing
our rights with respect to investments in existing portfolio companies;
• the costs of any public offerings of our common stock and other securities,
including registration and listing fees;
• the Management Fee and any Incentive Fee;
• certain costs and expenses relating to distributions paid on our shares;
• administration fees payable under our Administration Agreement;
• costs of preparing financial statements and maintaining books and records and
filing reports or other documents with the
and other reporting and compliance costs, and the compensation of
professionals responsible for the preparation of the foregoing, including the
allocable portion of the compensation of our Chief Financial Officer, Chief
Compliance Officer and other professionals who spend time on those related
activities (based on the percentage of time those individuals devote, on an
estimated basis, to our business and affairs);
• debt service and other costs of borrowings or other financing arrangements;
• the Adviser's allocable share of costs incurred in providing significant
managerial assistance to those portfolio companies that request it;
• amounts payable to third parties relating to, or associated with, making or
holding investments;
• transfer agent and custodial fees;
• costs of hedging;
• commissions and other compensation payable to brokers or dealers;
• taxes;
• Independent Director fees and expenses;
• the costs of any reports, proxy statements or other notices to our
stockholders (including printing and mailing costs), the costs of anystockholders' meetings and the compensation of investor relations personnel
responsible for the preparation of the foregoing and related matters;
• our fidelity bond;
• directors and officers/errors and omissions liability insurance, and any other
insurance premiums;
• indemnification payments;
• direct costs and expenses of administration, including audit, accounting,
consulting and legal costs; and
• all other expenses reasonably incurred by us in connection with making
investments and administering our business.
We expect that during periods of asset growth, our general and administrative expenses will be relatively stable or will decline as a percentage of total assets, and will increase as a percentage of total assets during periods of asset declines.
Leverage
While as a BDC the amount of leverage that we are permitted to use is limited in
significant respects, we use leverage to increase our ability to make
investments. The amount of leverage we use in any period depends on a variety of
factors, including cash available for investing, the cost of financing and
general economic and market conditions, however, under the 1940 Act, our total
borrowings are limited so that our asset coverage ratio cannot fall below 150%
immediately after any borrowing, as defined in the 1940 Act. In any period, our
interest expense will depend largely on the extent of our borrowing and we
expect interest expense will increase as we increase leverage over time within
the limits of the 1940 Act. In addition, we may dedicate assets as collateral to
financing facilities from time to time.
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On October 8, 2018 , our stockholders approved the application of the minimum
asset coverage ratio of 150% to us, as set forth in Section 61(a)(2) of the 1940
Act, as amended by the SBCAA. As a result and subject to certain additional
disclosure requirements, as of October 9, 2018 , our minimum asset coverage ratio
was reduced from 200% to 150%. In other words, pursuant to Section 61(a) of the
1940 Act, as amended by the SBCAA, we are permitted to potentially increase our
maximum debt-to-equity ratio from an effective level of one-to-one to
two-to-one. The Adviser intends to waive a portion of the Management Fee payable
under the Investment Advisory Agreement by reducing the Management Fee on assets
financed using leverage over 200% asset coverage (in other words, over 1.0x debt
to equity). Pursuant to the waiver, the Adviser intends to waive the portion of
the Management Fee in excess of an annual rate of 1.0% (0.250% per quarter) on
the average value of our gross assets as of the end of the two most recently
completed calendar quarters that exceeds the product of (i) 200% and (ii) the
average value of our net asset value at the end of the two most recently
completed calendar quarters.
Market Trends
We believe trends in the middle-market lending environment, including the limited availability of capital, strong demand for debt capital and specialized lending requirements, are likely to continue to create favorable opportunities for us to invest at attractive risk-adjusted rates. The limited number of dedicated providers of capital to middle-market companies, combined with increases in required capital levels for regulated financial institutions, reduces the capacity of traditional lenders to serve middle-market companies. We believe that the limited availability of capital creates a significant opportunity for us to directly originate investments. We also believe that the large amount of uninvested capital held by private equity firms will continue to drive deal activity, which may in turn create additional demand for debt capital. The limited number of dedicated providers is further exacerbated by the specialized due diligence and underwriting capabilities, as well as extensive ongoing monitoring, required for middle-market lending. We believe middle-market lending is generally more labor-intensive than lending to larger companies due to smaller investment sizes and the lack of publicly available information on these companies. An imbalance between the supply of, and demand for, middle-market debt capital creates attractive pricing dynamics for investors such as BDCs. The negotiated nature of middle-market financings also generally provides for more favorable terms to the lenders, including stronger covenant and reporting packages, better call protection and lender-protective change of control provisions. We believe that BDCs have flexibility to develop loans that reflect each borrower's distinct situation, provide long-term relationships and a potential source for future capital, which renders BDCs, including us, attractive lenders.
Portfolio and Investment Activity
As ofDecember 31, 2019 , our portfolio based on fair value consisted of 96.5% first-lien debt investments, 0.6% second-lien debt investments, 0.1% mezzanine investments and 2.8% equity and other investments. As ofDecember 31, 2018 , our portfolio based on fair value consisted of 96.9% first-lien debt investments, 0.2% second-lien debt investments, 0.2% mezzanine investments, and 2.7% equity and other investments. As ofDecember 31, 2019 andDecember 31, 2018 , our weighted average total yield of debt and income producing securities at fair value (which includes interest income and amortization of fees and discounts) was 10.5% and 11.6%, respectively, and our weighted average total yield of debt and income-producing securities at amortized cost (which includes interest income and amortization of fees and discounts) was 10.7% and 11.7%, respectively.
As of
For the year endedDecember 31, 2019 , the principal amount of new investments funded was$1,087.6 million in 32 new portfolio companies and 14 existing portfolio companies. For this period, we had$575.2 million aggregate principal amount in exits and repayments. For the year endedDecember 31, 2018 , the principal amount of new investments funded was$816.9 million in 19 new portfolio companies and 14 existing portfolio companies. For this period, we had$790.3 million aggregate principal amount in exits and repayments. 61 -------------------------------------------------------------------------------- For the year endedDecember 31, 2017 , the principal amount of new investments funded was$989.3 million in 22 new portfolio companies and 12 existing portfolio companies. For this period, we had$951.5 million aggregate principal amount in exits and repayments. Our investment activity for the years endedDecember 31, 2019 , 2018 and 2017 is presented below (information presented herein is at par value unless otherwise indicated). For the Year Ended December 31, ($ in millions) 2019 2018 2017 New investment commitments: Gross originations$ 3,007.0 $ 2,199.4 $ 2,251.5 Less: Syndications/sell downs 1,773.5 1,291.2 1,178.9 Total new investment commitments$ 1,233.5 $ 908.2 $ 1,072.6 Principal amount of investments funded: First-lien$ 1,055.7 $ 798.2 $ 958.9 Second-lien 12.4 0.8 - Mezzanine - 2.5 - Equity and other 19.5 15.4 30.4 Total$ 1,087.6 $ 816.9 $ 989.3 Principal amount of investments sold or repaid: First-lien$ 567.1 $ 702.5 $ 906.0 Second-lien 0.8 59.6 15.7 Mezzanine - - 11.5 Equity and other 7.3 28.2 18.3 Total$ 575.2 $ 790.3 $ 951.5 Number of new investment commitments in new portfolio companies 32 26 22 Average new investment commitment amount in new portfolio companies$ 28.7 $ 31.8 $ 39.2 Weighted average term for new investment commitments in new portfolio companies (in years) 4.6 5.2 4.8 Percentage of new debt investment commitments at floating rates (1) 98.7 % 99.1 % 100.0 % Percentage of new debt investment commitments at fixed rates 1.3 % 0.9 % - Weighted average interest rate of new investment commitments 10.2 % 10.5 % 9.5 % Weighted average spread over LIBOR of new floating rate investment commitments 8.0 % 8.1 % 8.3 % Weighted average interest rate on investments sold or paid down 11.8 % 10.6 % 9.5 %
(1) Includes two fixed rate investments for the years ended
2018 and 2017 for which we entered into interest rate swap agreements to swap
to floating rates.
As ofDecember 31, 2019 and 2018, our investments consisted of the following: December 31, 2019 December 31, 2018 ($ in millions) Fair Value Amortized Cost Fair Value Amortized Cost First-lien debt investments$ 2,166.2 $ 2,134.1 $ 1,653.9 $ 1,642.0 Second-lien debt investments 14.1 13.9 4.1 4.1 Mezzanine debt investments 2.5 2.5 2.5 2.5 Equity and other investments 63.1 87.5 45.5 67.8 Total$ 2,245.9 $ 2,238.0 $ 1,706.0 $ 1,716.4 62
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The following tables show the fair value and amortized cost of our performing
and non-accrual investments as of
December 31, 2019 December 31, 2018
($ in millions) Fair Value Percentage Fair Value Percentage
Performing $ 2,245.9 100.0 % $ 1,706.0 100.0 %
Non-accrual (1) - - - -
Total $ 2,245.9 100.0 % $ 1,706.0 100.0 %
December 31, 2019 December 31, 2018($ in millions) Amortized Cost Percentage Amortized Cost Percentage Performing$ 2,238.0 100.0 %$ 1,716.4 100.0 % Non-accrual (1) - - - - Total$ 2,238.0 100.0 %$ 1,716.4 100.0 %
(1) Loans are generally placed on non-accrual status when principal or interest
payments are past due 30 days or more or when management has reasonable doubt
that the borrower will pay principal or interest in full. Accrued and unpaid
interest is generally reversed when a loan is placed on non-accrual status.
Non-accrual loans are restored to accrual status when past due principal and
interest has been paid and, in management's judgment, the borrower is likely
to make principal and interest payments in the future. Management may
determine to not place a loan on non-accrual status if, notwithstanding any
failure to pay, the loan has sufficient collateral value and is in the
process of collection. See "-Critical Accounting Policies - Interest and
Dividend Income Recognition."
The weighted average yields and interest rates of our performing debt
investments at fair value as of
December 31, 2019 December 31, 2018
Weighted average total yield of debt and income
producing securities (1) 10.5 % 11.6 %
Weighted average interest rate of debt and income
producing securities 9.9 % 11.1 %
Weighted average spread over LIBOR of all floating
rate investments (2) 8.1 % 8.6 %
(1) Weighted average total portfolio yield at fair value was 10.3% at
(2) Includes fixed rate investments for which we entered into interest rate swap
agreements to swap to floating rates.
The Adviser monitors our portfolio companies on an ongoing basis. The Adviser
monitors the financial trends of each portfolio company to determine if it is
meeting its business plans and to assess the appropriate course of action for
each company. The Adviser has a number of methods of evaluating and monitoring
the performance of our investments, which may include the following:
• assessment of success of the portfolio company in adhering to its business
plan and compliance with covenants;
• periodic and regular contact with portfolio company management and, if
appropriate, the financial or strategic sponsor, to discuss financial
position, requirements and accomplishments;
• comparisons to other companies in the industry;
• attendance at, and participation in, board meetings; and
• review of monthly and quarterly financial statements and financial projections
for portfolio companies.
As part of the monitoring process, the Adviser regularly assesses the risk profile of each of our investments and, on a quarterly basis, grades each investment on a risk scale of 1 to 5. Risk assessment is not standardized in our industry and our risk assessment may not be comparable to ones used by our competitors. Our assessment is based on the following categories:
• An investment is rated 1 if, in the opinion of the Adviser, it is performing
as agreed and there are no concerns about the portfolio company's performance
or ability to meet covenant requirements. For these investments, the Adviser
generally prepares monthly reports on investment performance and intensive
quarterly asset reviews.
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• An investment is rated 2 if it is performing as agreed, but, in the opinion of
the Adviser, there may be concerns about the company's operating performance
or trends in the industry. For these investments, in addition to monthly
reports and quarterly asset reviews, the Adviser also researches any areas of
concern with the objective of early intervention with the portfolio company.
• An investment will be assigned a rating of 3 if it is paying its obligations
to us as agreed but a material covenant violation is expected. For these
investments, in addition to monthly reports and quarterly asset reviews, the
Adviser also adds the investment to its "watch list" and researches any areas
of concern with the objective of early intervention with the portfolio
company.
• An investment will be assigned a rating of 4 if a material covenant has been
violated, but the company is making its scheduled payments on its obligations
to us. For these investments, the Adviser generally prepares a bi-monthly
asset review email and generally has monthly meetings with the portfolio
company's senior management. For investments where there have been material
defaults, including bankruptcy filings, failures to achieve financial
performance requirements or failure to maintain liquidity or loan-to-value
requirements, the Adviser often will take immediate action to protect its
position. These remedies may include negotiating for additional collateral,
modifying investment terms or structure, or payment of amendment and waiver
fees.
• A rating of 5 indicates an investment is in default on its interest and/or
principal payments. For these investments, our Adviser reviews the investments
on a bi-monthly basis and, where possible, pursues workouts that achieve an
early resolution to avoid further deterioration of our investment. The Adviser
retains legal counsel and takes actions to preserve our rights, which may
include working with the portfolio company to have the default cured, to have
the investment restructured or to have the investment repaid through a
consensual workout.
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as ofDecember 31, 2019 and 2018. Investment performance ratings are accurate only as of those dates and may change due to subsequent developments relating to a portfolio company's business or financial condition, market conditions or developments, and other factors. December 31, 2019 December 31, 2018 Investment Investments at Investments at Performance Fair Value Percentage of
Fair Value Percentage of
Rating ($ in millions) Total Portfolio ($ in millions) Total Portfolio
1 $ 1,968.0 87.6 % $ 1,531.4 89.8 %
2 230.0 10.3 118.1 6.9
3 47.9 2.1 56.5 3.3
4 - - - -
5 - - - -
Total $ 2,245.9 100.0 % $ 1,706.0 100.0 %
Results of Operations
Operating results for the years ended December 31, 2019 , 2018 and 2017 were as
follows:
Year Ended December 31,
($ in millions) 2019 2018 2017
Total investment income $ 251.5 $ 261.9 $ 210.9
Less: Net expenses 119.4 114.6 87.8
Net investment income before income taxes 132.1 147.3 123.1
Less: Income taxes, including excise taxes 3.8
3.4 2.8
Net investment income 128.3
143.9 120.3
Net realized gains (losses) (1) 2.0
(10.7 ) (14.0 )
Net change in unrealized gains (losses) (1) 24.3
(14.2 ) 5.3
Net increase in net assets resulting from operations
(1) Includes foreign exchange hedging activity.
64
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Investment Income
For the Year Ended December 31,
($ in millions) 2019 2018 2017
Interest from investments $ 237.2 $ 249.9 $ 200.7
Dividend income 0.4 0.2 0.4
Other income 13.9 11.8 9.8
Total investment income $ 251.5 $ 261.9 $ 210.9
Interest from investments, which includes amortization of upfront fees and
prepayment fees, decreased from $249.9 million for the year ended December 31,
2018 to $237.2 million for the year ended December 31, 2019 , primarily due to a
decrease in accelerated amortization of upfront fees and prepayment fees due to
fewer paydowns which was partially offset by an increase in the average
portfolio size for the year ended December 31, 2019 . Accelerated amortization of
upfront fees, primarily from unscheduled paydowns, decreased from $13.4 million
for the year ended December 31, 2018 to $6.7 million for the year ended
December 31, 2019 , and prepayment fees decreased from $25.6 million for the year
ended December 31, 2018 to $12.0 million for the year ended December 31, 2019 .
The accelerated amortization and prepayment fees primarily resulted from full
paydowns on 16 portfolio investments, partial paydowns on three portfolio
investments, partial realizations on two portfolio investments and prepayment
fees on 15 portfolio investments during the year ended December 31, 2018 , and
full paydowns on 13 portfolio investments, partial paydowns on five portfolio
investments, and prepayment fees on 11 portfolio investments during the year
ended December 31, 2019 . Dividend income increased from $0.2 million for the
year ended December 31, 2018 to $0.4 million for the year ended December 31,
2019 due to increased investment in dividend yielding securities in 2019. Other
income increased from $11.8 million for the year ended December 31, 2018 to
$13.9 million for the year ended December 31, 2019 , primarily due to higher
amendment fees earned during 2019.
Interest from investments, which includes amortization of upfront fees and
prepayment fees, increased from $200.7 million for the year ended December 31,
2017 to $249.9 million for the year ended December 31, 2018 , primarily due to an
increase in the average size of our investment portfolio which increased from
$1.6 billion for the year ended December 31, 2017 to $1.9 billion for the year
ended December 31, 2018 . Accelerated amortization of upfront fees, primarily
from unscheduled paydowns, decreased from $21.1 million for the year ended
December 31, 2017 to $13.4 million for the year ended December 31, 2018 , and
prepayment fees increased from $12.8 million for the year ended December 31,
2017 to $25.6 million for the year ended December 31, 2018 . The accelerated
amortization and prepayment fees primarily resulted from full paydowns on 22
portfolio investments, partial paydowns on seven portfolio investments and
prepayment fees on 12 portfolio investments during the year ended December 31,
2017 , and full paydowns on 16 portfolio investments, partial paydowns on three
portfolio investments, partial realizations on two portfolio investments and
prepayment fees on 15 portfolio investments during the year ended December 31,
2018 . Dividend income decreased from $0.4 million for the year ended
December 31, 2017 to $0.2 million for the year ended December 31, 2018 due to a
partial realization of dividend yielding investments in 2018. Other income
increased from $9.8 million for the year ended December 31, 2017 to
$11.8 million for the year ended December 31, 2018 , primarily due to higher
commitment and other fees earned during 2018.
Expenses
Operating expenses for the years endedDecember 31, 2019 , 2018 and 2017 were as follows: For the Year Ended December 31, ($ in millions) 2019 2018 2017 Interest$ 49.1 $ 42.8 $ 27.4 Management fees (net of waivers) 30.1 28.5 24.3 Incentive fees related to pre-incentive fee net investment income (net of waivers) 27.2 30.5 25.5 Incentive fees related to realized/unrealized capital gains - - - Professional fees 6.5 7.2 5.4 Directors fees 0.6 0.4 0.4 Other general and administrative 5.9 5.2 4.8 Net Expenses$ 119.4 $ 114.6 $ 87.8 65
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Interest
Interest expense, including other debt financing expenses, increased from$42.8 million for the year endedDecember 31, 2018 to$49.1 million for the year endedDecember 31, 2019 . This increase was primarily due to an increase in the average debt outstanding for the year endedDecember 31, 2018 from$874.3 million to$913.4 million for the year endedDecember 31, 2019 and an increase in our average interest rate on debt outstanding due to a change in the mix of our debt financing sources. The average interest rate on our debt outstanding increased from 4.1% for the year endedDecember 31, 2018 to 4.4% for the year endedDecember 31, 2019 due to a change in the mix of our debt financing sources and a change in LIBOR. For the years endedDecember 31, 2018 and 2019, weighted average one-month LIBOR for the year was 2.0% and 2.2%, respectively. Interest expense, including other debt financing expenses, increased from$27.4 million for the year endedDecember 31, 2017 to$42.8 million for the year endedDecember 31, 2018 . This increase was primarily due to an increase in the average debt outstanding for the year endedDecember 31, 2017 from$645.1 million to$874.3 million for the year endedDecember 31, 2018 and an increase in our average interest rate on debt outstanding due to a change in the mix of our debt financing sources. The average interest rate on our debt outstanding increased from 3.3% for the year endedDecember 31, 2017 to 4.1% for the year endedDecember 31, 2018 due to the increase in LIBOR and a change in the mix of our debt financing sources. Management Fees Management Fees (net of waivers) increased from$28.5 million for the year endedDecember 31, 2018 to$30.1 million for the year endedDecember 31, 2019 . Management Fees (gross of waivers) increased from$28.5 million for the year endedDecember 31, 2018 to$30.1 million for the year endedDecember 31, 2019 due to average total assets increasing from$1.9 billion for the year endedDecember 31, 2018 to$2.1 billion for the year endedDecember 31, 2019 . Management Fees waived were less than$0.1 million for the year endedDecember 31, 2018 consisting solely of Management Fees attributable to our ownership of TCAP shares. The Adviser did not waive any Management Fees for the year endedDecember 31, 2019 . Management Fees (net of waivers) increased from$24.3 million for the year endedDecember 31, 2017 to$28.5 million for the year endedDecember 31, 2018 . Management Fees (gross of waivers) increased from$24.3 million for the year endedDecember 31, 2017 to$28.5 million for the year endedDecember 31, 2018 due to average total assets increasing from$1.6 billion for the year endedDecember 31, 2017 to$1.9 billion for the year endedDecember 31, 2018 . Management Fees waived remained flat at less than$0.1 million for the years endedDecember 31, 2017 andDecember 31, 2018 . Management Fees waived during the years endedDecember 31, 2017 andDecember 31, 2018 were solely attributable to our ownership of TCAP Shares.
Any waived Management Fees are not subject to recoupment by the Adviser.
Incentive Fees
Incentive Fees (net of waivers) related to pre-Incentive Fee net investment income decreased from$30.5 million for the year endedDecember 31, 2018 to$27.2 million for the year endedDecember 31, 2019 . This decrease resulted primarily from a decrease in interest from investments received during the year endedDecember 31, 2019 and the related decrease in net investment income. For the year endedDecember 31, 2018 , Incentive Fees related to pre-Incentive Fee net investment income of less than$0.1 million were waived, consisting solely of Incentive Fees attributable to our ownership of the TCAP Shares. There were no Incentive Fees related to pre-incentive Fee net investment income waived for the year endedDecember 31, 2019 . There were no Incentive Fees related to net capital gains and losses for the year endedDecember 31, 2018 and the year endedDecember 31, 2019 due to cumulative realized and unrealized losses on our investments. Incentive Fees (net of waivers) related to pre-Incentive Fee net investment income increased from$25.5 million for the year endedDecember 31, 2017 to$30.5 million for the year endedDecember 31, 2018 . This increase resulted primarily from an increase in interest from investments received during the year endedDecember 31, 2018 and the related increase in net investment income. Incentive Fees waived related to pre-Incentive Fee net investment income remained less than$0.1 million for the years endedDecember 31, 2017 and 2018, consisting solely of Incentive Fees attributable to our ownership of the TCAP Shares. There were no Incentive Fees related to capital gains and losses for the year endedDecember 31, 2017 and the year endedDecember 31, 2018 due to cumulative realized and unrealized losses on our investments.
Any waived Incentive Fees are not subject to recoupment by the Adviser.
Professional Fees and Other General and Administrative Expenses
Professional fees decreased from$7.2 million for the year endedDecember 31, 2018 to$6.5 million for the year endedDecember 31, 2019 due to recognition of remaining non-recurring expenses associated with the initial shelf registration statement in 2018 that were previously recorded as deferred financing cost. Other general and administrative fees increased from$5.2 million for the year endedDecember 31, 2018 to$5.9 million for the year endedDecember 31, 2019 . 66
-------------------------------------------------------------------------------- Professional fees increased from$5.4 million for the year endedDecember 31, 2017 to$7.2 million for the year endedDecember 31, 2018 due to recognition in 2018 of remaining non-recurring expenses associated with the initial shelf registration statement that were previously recorded as deferred financing costs and costs associated with shareholder meetings. Other general and administrative fees increased from$4.8 million for the year endedDecember 31, 2017 to$5.2 million for the year endedDecember 31, 2018 .
Income Taxes, Including Excise Taxes
We have elected to be treated as a RIC under Subchapter M of the Code, and we intend to operate in a manner so as to continue to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we must, among other things, distribute to our stockholders in each taxable year generally at least 90% of our investment company taxable income, as defined by the Code, and net tax-exempt income for that taxable year. To maintain our RIC status, we, among other things, have made and intend to continue to make the requisite distributions to our stockholders, which generally relieve us from corporate-levelU.S. federal income taxes. Depending on the level of taxable income earned in a tax year, we can be expected to carry forward taxable income (including net capital gains, if any) in excess of current year dividend distributions from the current tax year into the next tax year and pay a nondeductible 4%U.S. federal excise tax on such taxable income, as required. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such income, we accrue excise tax on estimated excess taxable income. For the calendar years endedDecember 31, 2019 , 2018 and 2017 we recorded a net expense of$3.8 million ,$3.4 million and$2.8 million , respectively, forU.S. federal excise tax.
Net Realized and Unrealized Gains and Losses
The following table summarizes our net realized and unrealized gains (losses)
for the years ended
For the Year Ended December 31,
($ in millions) 2019 2018 2017
Net realized gains (losses) on investments $ 1.9 $ (11.4 ) $ (14.3 )
Net realized gains on foreign currency
transactions 0.1 0.2 0.0
Net realized losses on foreign currency
investments (0.4 ) (2.2 ) (1.4 )
Net realized gains on foreign currency
borrowings 0.4 2.7 1.7
Net realized gains on interest rate swaps 0.0 - -
Net Realized Gains (Losses) $ 2.0 $
(10.7 )
Change in unrealized gains on investments
(27.3 ) (62.8 ) (48.9 )
Net Change in Unrealized Gains (Losses) on
Investments $ 18.3 $ (17.9 ) $ 17.8
Unrealized gains (losses) on foreign currency
borrowings (3.2 ) 5.4 (11.5 )
Unrealized gains (losses) on foreign
currency cash and forward contracts 0.0 (0.0 ) 0.0
Unrealized gains (losses) on interest rate
swaps 9.2 (1.7 ) (1.0 )
Net Change in Unrealized Gains (Losses) on
Foreign
Currency Transactions and Interest Rate
Swaps $ 6.0 $
3.7
Net Change in Unrealized Gains (Losses)
For the year endedDecember 31, 2019 , we had net realized gains on investments of$1.9 million and for the years endedDecember 31, 2018 and 2017, we had net realized losses on investments,$11.4 million and$14.3 million , respectively. For the years endedDecember 31, 2019 , 2018, and 2017, we had net realized gains of$0.1 million ,$0.2 million and less than$0.1 million , respectively, on foreign currency transactions, primarily as a result of translating foreign currency related to our non-USD denominated investments. For the years endedDecember 31, 2019 , 2018 and 2017, we had net realized losses on foreign currency investments of$0.4 million ,$2.2 million and$1.4 million , respectively. For the years endedDecember 31, 2019 , 2018, and 2017 we had net realized gains on foreign currency borrowings of$0.4 million ,$2.7 million and$1.7 million , respectively. For the year endedDecember 31, 2019 we had net realized gains of less than$0.1 million on interest rate swaps. 67 -------------------------------------------------------------------------------- For the year endedDecember 31, 2019 we had$45.6 million in unrealized gains on 53 portfolio company investments, which was offset by$27.3 million in unrealized losses on 23 portfolio company investments. Unrealized gains for the year endedDecember 31, 2019 resulted from an increase in fair value, primarily due to positive valuation adjustments and changes in credit spreads. Unrealized losses for the year endedDecember 31, 2019 resulted from the reversal of prior period unrealized gains and in some instances negative credit-related adjustments. For the year endedDecember 31, 2018 we had$44.9 million in unrealized gains on 17 portfolio company investments, which was offset by$62.8 million in unrealized losses on 50 portfolio company investments. Unrealized gains for the year endedDecember 31, 2018 resulted from an increase in fair value, primarily due to reversal of prior period unrealized losses and positive valuation adjustments. Unrealized losses for the year endedDecember 31, 2018 resulted from the reversal of prior period unrealized gains on realized investments, widening credit spreads, and in some instances negative credit-related adjustments. For the year endedDecember 31, 2017 we had$66.7 million in unrealized gains on 43 portfolio company investments, which was offset by$48.9 million in unrealized losses on 32 portfolio company investments. Unrealized gains for the year endedDecember 31, 2017 resulted from an increase in fair value, primarily due to reversal of prior period unrealized losses, positive valuation adjustments and tightening credit spreads. Unrealized losses for the year endedDecember 31, 2017 resulted from the reversal of prior period unrealized gains on realized investments and in some instances negative credit-related adjustments. For the years endedDecember 31, 2019 andDecember 31, 2017 we had unrealized losses on foreign currency borrowings of$3.2 million and$11.5 million , respectively, primarily as a result of fluctuations in the AUD, CAD, GBP, and EUR exchange rates. For the year endedDecember 31, 2018 , we had unrealized gains on foreign currency borrowings of$5.4 million , primarily as a result of fluctuations in the AUD, CAD, and EUR exchange rate. For the years endedDecember 31, 2019 and 2017, we had unrealized gains on foreign currency cash and forward contracts of less than$0.1 million and less than$0.1 million , respectively, primarily as a result of settling our foreign currency forward contracts. For the year endedDecember 31, 2018 we had unrealized losses on foreign currency cash and forward contracts of less than$0.1 million , primarily as a result of settling our foreign currency forward contracts. For the year endedDecember 31, 2019 we had unrealized gains on interest rate swaps of$9.2 million and for the years endedDecember 31, 2018 and 2017, we had unrealized losses on interest rate swaps of$1.7 million , and$1.0 million , respectively, due to fluctuations in interest rates.
Realized Gross Internal Rate of Return
Since we began investing in 2011 throughDecember 31, 2019 , weighted by capital invested, our exited investments have generated an average realized gross internal rate of return to us of 18.6% (based on total capital invested of$4.0 billion and total proceeds from these exited investments of$5.0 billion ). Eighty-nine percent of these exited investments resulted in a realized gross internal rate of return to us of 10% or greater. Gross IRR, with respect to an investment, is calculated based on the dates that we invested capital and dates we received distributions, regardless of when we made distributions to our stockholders. Initial investments are assumed to occur at time zero, and all cash flows are deemed to occur on the fifteenth of each month in which they occur. Gross IRR reflects historical results relating to our past performance and is not necessarily indicative of our future results. In addition, gross IRR does not reflect the effect of Management Fees, expenses, Incentive Fees or taxes borne, or to be borne, by us or our stockholders, and would be lower if it did.
Average gross IRR is the average of the gross IRR for each of our exited investments (each calculated as described above), weighted by the total capital invested for each of those investments.
Average gross IRR on our exited investments reflects only invested and realized
cash amounts as described above, and does not reflect any unrealized gains or
losses in our portfolio.
Internal rate of return, or IRR, is a measure of our discounted cash flows
(inflows and outflows). Specifically, IRR is the discount rate at which the net
present value of all cash flows is equal to zero. That is, IRR is the discount
rate at which the present value of total capital invested in each of our
investments is equal to the present value of all realized returns from that
investment. Our IRR calculations are unaudited.
Capital invested, with respect to an investment, represents the aggregate cost
basis allocable to the realized or unrealized portion of the investment, net of
any upfront fees paid at closing for the term loan portion of the investment.
Capital invested also includes realized losses on hedging activity, with respect
to an investment, which represents any inception-to-date realized losses on
foreign currency forward contracts allocable to the investment, if any.
68
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Realized returns, with respect to an investment, represents the total cash
received with respect to each investment, including all amortization payments,
interest, dividends, prepayment fees, upfront fees, administrative fees, agent
fees, amendment fees, accrued interest, and other fees and proceeds. Realized
returns also include realized gains on hedging activity, with respect to an
investment, which represents any inception-to-date realized gains on foreign
currency forward contracts allocable to the investment, if any.
Foreign Currency Hedging
Our current approach to hedging the foreign currency exposure in our non-U.S. dollar denominated investments is primarily to borrow the par amount in local currency under our Revolving Credit Facility to fund these investments. For the years endedDecember 31, 2019 and 2017, we had$3.2 million and$11.5 million of unrealized losses, respectively, and for the year endedDecember 31, 2018 we had$5.4 million of unrealized gains on the translation of our non-U.S. dollar denominated debt intoU.S. dollars; such amounts approximate the corresponding unrealized gains and losses on the translation of our non-U.S. dollar denominated investments intoU.S. dollars for the years endedDecember 31, 2019 , 2018 and 2017. See Note 2 for additional disclosure regarding our accounting for foreign currency. See Note 7 for additional disclosure regarding the amounts of outstanding debt denominated in each foreign currency atDecember 31, 2019 . See our consolidated schedule of investments for additional disclosure regarding the foreign currency amounts (in both par and fair value) of our non-U.S. dollar denominated investments.
Financial Condition, Liquidity and Capital Resources
Our liquidity and capital resources are derived primarily from proceeds from equity issuances, advances from our credit facilities, and cash flows from operations. The primary uses of our cash and cash equivalents are:
• investments in portfolio companies and other investments and to comply with
certain portfolio diversification requirements;
• the cost of operations (including paying our Adviser);
• debt service, repayment, and other financing costs; and
• cash dividends to the holders of our shares.
We intend to continue to generate cash primarily from cash flows from
operations, future borrowings and future offerings of securities. We may from
time to time enter into additional debt facilities, increase the size of
existing facilities or issue debt securities. Any such incurrence or issuance
would be subject to prevailing market conditions, our liquidity requirements,
contractual and regulatory restrictions and other factors. In accordance with
the 1940 Act, with certain limited exceptions, we are only allowed to incur
borrowings, issue debt securities or issue preferred stock if immediately after
the borrowing or issuance our ratio of total assets (less total liabilities
other than indebtedness) to total indebtedness plus preferred stock, is at least
150%. For more information, see "Key Components of Our Results of Operations
-Leverage" above. As of December 31, 2019 , 2018 and 2017, our asset coverage
ratio was 200.4%, 270.5%, and 235.5%, respectively. We carefully consider our
unfunded commitments for the purpose of planning our capital resources and
ongoing liquidity including our financial leverage. Further, we maintain
sufficient borrowing capacity within the 150% asset coverage limitation under
the 1940 Act and the asset coverage limitation under our credit facilities to
cover any outstanding unfunded commitments we are required to fund.
Cash and cash equivalents as of
As ofDecember 31, 2019 , we had$14.1 million in cash and cash equivalents. During the year endedDecember 31, 2019 , we used$378.0 million in cash for operating activities, primarily as a result of purchases and originations of investments of$1,118.1 billion and other operating activity of$36.5 million partially offset by repayments on investments of$622.0 million and an increase in net assets resulting from operations of$154.6 million . Lastly, cash provided in financing activities was$381.6 million during the period, primarily due to borrowings of$1,742.6 million (including the issuance of$300.0 million principal amount of our 2024 Notes), which were partially offset by paydowns on our Revolving Credit Facility of$1,255.2 million , dividends paid of$98.1 million , and deferred financing costs of$7.7 million . As ofDecember 31, 2018 , we had$10.6 million in cash and cash equivalents. During the year endedDecember 31, 2018 , we provided$119.2 million in cash for operating activities, primarily as a result of proceeds from investments of$34.6 million , repayments on investments of$789.4 million , other operating activity of$14.4 million and an increase in net assets resulting from operations of$119.0 million , which was partially offset by funding portfolio investments of$838.2 million . Lastly, cash used in financing activities was$115.3 million during the period, primarily due to paydowns on our Revolving Credit Facility of$1,179.0 million , dividends paid of$95.9 million , and deferred financing costs of$7.8 million , which were partially offset by borrowings of$1,095.6 million (including the issuance of$150.0 million principal amount of our 2023 Notes and$57.5 million principal amount of our 2022 Convertible Notes in a reopening), and proceeds from issuance of common stock, net of offering and underwriting costs, of$71.8 million . 69 --------------------------------------------------------------------------------
As of
Equity OnMarch 21, 2018 , we issued 3,750,000 shares of common stock at$17.45 per share. Net of underwriting fees and offering costs, we received total cash proceeds of$63.0 million . Subsequent to the offering we issued an additional 522,224 shares inApril 2018 pursuant to the overallotment option granted to underwriters and received, net of underwriting fees, total cash proceeds of$8.8 million . During the years endedDecember 31, 2019 and 2018, we also issued 1,111,774 and 893,392 shares of our common stock, respectively, to investors who have not opted out of our dividend reinvestment plan for proceeds of$21.1 million and$16.0 million , respectively. OnJanuary 15, 2020 , we issued 194,470 shares of our common stock through our dividend reinvestment plan for proceeds of$4.0 million , which is not reflected in the number of shares issued for the year endedDecember 31, 2019 in this section or the consolidated financial statements for the year endedDecember 31, 2019 . OnAugust 4, 2015 , our Board authorized us to enter into a stock repurchase plan, the Company 10b5-1 Plan, to acquire up to$50 million in the aggregate of our common stock at prices just below our net asset value per share over an initial six month period, in accordance with the guidelines specified in Rule 10b-18 and Rule 10b5-1 of the Exchange Act, and has continued to authorize extensions of the plan termination date prior to its expiration since that time. We put the Company 10b5-1 Plan in place because we believe that, in current market conditions, if our common stock is trading below our then-current net asset value per share, it is in the best interest of our stockholders for us to reinvest in our portfolio and increase our leverage ratio through share repurchases. The Company 10b5-1 Plan is designed to allow us to repurchase our common stock at times when we otherwise might be prevented from doing so under insider trading laws. The Company 10b5-1 Plan, as currently in effect requiresGoldman Sachs & Co. LLC , as our agent, to repurchase shares of common stock on our behalf when the market price per share is just below 1.05x the most recently reported net asset value per share in our public financial statements or publicly announced by us, less the amount of any supplemental dividend that has been publicly announced by us but that has yet to be reflected in the net asset value per share most recently reported in our public financial statements (including any updates, corrections or adjustments publicly announced by us to any such net asset value per share or supplemental dividend). Under the Company 10b5-1 Plan, the agent will increase the volume of purchases made as the price of our common stock declines, subject to volume restrictions. The timing and amount of any stock repurchases depend on the terms and conditions of the Company 10b5-1 Plan, the market price of our common stock and trading volumes, and no assurance can be given that any particular amount of common stock will be repurchased. The purchase of shares pursuant to the Company 10b5-1 Plan is intended to satisfy the conditions of Rule 10b5-1 and Rule 10b-18 under the Exchange Act, and will otherwise be subject to applicable law, including Regulation M, which may prohibit purchases under certain circumstances. OnNovember 5, 2019 , the Board authorized the extension of the termination date of the Company 10b5-1 Plan toMay 31, 2020 . Unless extended or terminated by the Board, the Company 10b5-1 Plan will be in effect through the earlier ofMay 31, 2020 or such time as the current approved repurchase amount of up to$50 million has been fully utilized, subject to certain conditions.
For the year ended
Debt
Debt obligations consisted of the following as ofDecember 31, 2019 and 2018: December 31, 2019 Aggregate Principal Outstanding Amount Carrying ($ in millions) Amount Committed Principal Available (1) Value (2)(3) Revolving Credit Facility $ 1,245.0$ 495.7 $ 749.3$ 485.8 2022 Convertible Notes 172.5 172.5 - 169.4 2023 Notes 150.0 150.0 - 148.0 2024 Notes 300.0 300.0 - 291.3 Total Debt $ 1,867.5 $
1,118.2 $ 749.3$ 1,094.5
(1) The amount available may be subject to limitations related to the borrowing
base under the Revolving Credit Facility and asset coverage requirements.
70
--------------------------------------------------------------------------------(2) The carrying values of the Revolving Credit Facility, 2022 Convertible Notes,
2023 Notes, and 2024 Notes are presented net of deferred financing costs and
original issue discounts of
(3) The carrying value of the 2024 Notes is presented net of
represents a change in the carrying value of the 2024 Notes resulting from a
hedge accounting relationship.
December 31, 2018
Aggregate Principal Outstanding Amount Carrying
($ in millions) Amount Committed Principal Available (1) Value (2)Revolving Credit Facility $ 940.0$ 187.5 $ 752.5$ 178.8 2019 Convertible Notes 115.0 115.0 - 113.6 2022 Convertible Notes 172.5 172.5 - 168.3 2023 Notes 150.0 150.0 - 147.3 Total Debt $ 1,377.5$ 625.0 $ 752.5$ 608.0
(1) The amount available may be subject to limitations related to the borrowing
base under the Revolving Credit Facility and asset coverage requirements.
(2) The carrying values of the Revolving Credit Facility, Convertible Notes, and
2023 Notes are presented net of deferred financing costs and original issue
discounts of
As of
Revolving Credit Facility
OnAugust 23, 2012 , we entered into a senior secured revolving credit agreement withTruist Bank (as a successor by merger toSunTrust Bank ), as administrative agent, andJ.P. Morgan Chase Bank, N.A. , as syndication agent, and certain other lenders (as amended and restated, the "Revolving Credit Facility"). As ofDecember 31 2019 , aggregate commitments under the facility were$1,245 million . Pursuant to an amendment to the Revolving Credit Facility dated as ofJanuary 31, 2020 (the "Ninth Amendment"), the aggregate commitments under the facility were increased to$1,315 million . The facility includes an uncommitted accordion feature that allows us, under certain circumstances, to increase the size of the facility to up to$1,750 million . Pursuant to the Ninth Amendment, the revolving period, during which period we, subject to certain conditions, may make borrowings under the facility, was extended fromFebruary 14, 2023 toJanuary 31, 2024 and the stated maturity date was extended fromFebruary 14, 2024 toJanuary 31, 2025 . We may borrow amounts inU.S. dollars or certain other permitted currencies. As ofDecember 31, 2019 , we had outstanding debt denominated in Australian dollars (AUD) of 52.5 million, Canadian dollars (CAD) of 131.4 million, and Euro (EUR) of 7.6 million on our Revolving Credit Facility, included in the Outstanding Principal amount in the table above. The Revolving Credit Facility also provides for the issuance of letters of credit up to an aggregate amount of$75 million . As ofDecember 31, 2019 andDecember 31, 2018 , we had no outstanding letters of credit issued through the Revolving Credit Facility. The amount available for borrowing under the Revolving Credit Facility is reduced by any letters of credit issued through the Revolving Credit Facility. Amounts drawn under the Revolving Credit Facility, including amounts drawn in respect of letters of credit, bear interest at either LIBOR plus a margin of either 1.75% or 1.875%, or the base rate plus a margin of either 0.75% or 0.875%, in each case, based on the total amount of the borrowing base relative to the sum of the total commitments (or, if greater, the total exposure) under the Revolving Credit Facility plus certain other designated secured debt. We may elect either the LIBOR or base rate at the time of drawdown, and loans may be converted from one rate to another at any time, subject to certain conditions. We also pay a fee of 0.375% on undrawn amounts and, in respect of each undrawn letter of credit, a fee and interest rate equal to the then applicable margin while the letter of credit is outstanding. The Revolving Credit Facility is guaranteed by TPG SL SPV, LLC,TC Lending, LLC andTSL MR, LLC and may be guaranteed by certain domestic subsidiaries in the future. The Revolving Credit Facility is secured by a perfected first-priority security interest in substantially all the portfolio investments held by us and each guarantor. Proceeds from borrowings may be used for general corporate purposes, including the funding of portfolio investments. 71 --------------------------------------------------------------------------------
The Revolving Credit Facility includes customary events of default, as well as customary covenants, including restrictions on certain distributions and financial covenants. The financial covenants require:
• an asset coverage ratio of no less than 1.5 to 1 on the last day of any fiscal
quarter;
• a liquidity test under which we must not maintain cash and liquid investments
of less than 10% of the covered debt amount for more than 30 consecutive
business days under circumstances where our adjusted covered debt balance is
greater than 90% of our adjusted borrowing base under the facility;
• stockholders' equity of at least
the sale of equity interests after
• a minimum asset coverage ratio of no less than 2 to 1 with respect to (i) the
consolidated assets of the Company and the subsidiary guarantors (including
certain limitations on the contribution of equity in financing subsidiaries)
to (ii) the secured debt of the Company and its subsidiary guarantors plus
unsecured senior securities of the Company and its subsidiary guarantors that
mature within 90 days of the date of determination (the "Obligor Asset
Coverage Ratio"); and
• minimum consolidated assets of the Company and the subsidiary guarantors
(including certain limitations on the contribution of equity in financing
subsidiaries), less total secured debt of the Company and the subsidiary
guarantors, of at least
The Revolving Credit Facility also contains certain additional concentration limits in connection with the calculation of the borrowing base, based on the Obligor Asset Coverage Ratio.
Net proceeds received from our common stock issuance in
2019 Convertible Notes
InJune 2014 , we issued in a private offering$115 million aggregate principal amount convertible notes dueDecember 2019 (the "2019 Convertible Notes"). The 2019 Convertible Notes were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2019 Convertible Notes were unsecured and bore interest at a rate of 4.50% per year, payable semiannually. The 2019 Convertible Notes matured onDecember 15, 2019 and were fully repaid in cash. The swap transaction associated with the issuance of the 2019 Convertible Notes also matured onDecember 15, 2019 .
2022 Convertible Notes
InFebruary 2017 , we issued in a private offering$115 million aggregate principal amount convertible notes dueAugust 2022 (the "2022 Convertible Notes" and, together with the 2019 Convertible Notes, the "Convertible Notes"). The 2022 Convertible Notes were issued in a private placement only to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2022 Convertible Notes are unsecured, and bear interest at a rate of 4.50% per year, payable semiannually. The 2022 Convertible Notes will mature onAugust 1, 2022 . In certain circumstances, the 2022 Convertible Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election, at an initial conversion rate of 46.8516 shares of common stock per$1,000 principal amount of 2022 Convertible Notes, which is equivalent to an initial conversion price of approximately$21.34 per share of our common stock, subject to customary anti-dilution adjustments. As ofDecember 31, 2019 , the estimated adjusted conversion price was approximately$20.66 per share of common stock. The sale of the 2022 Convertible Notes generated net proceeds of approximately$111.2 million . We used the net proceeds of the offering to pay down debt under the Revolving Credit Facility. In connection with the offering of 2022 Convertible Notes, we have entered into an interest rate swap to continue to align the interest rates of our liabilities with our investment portfolio, which consists of predominately floating rate loans. As a result of the swaps, our effective interest rate on the original issuance of 2022 Convertible Notes is three-month LIBOR plus 2.37%. InJune 2018 , we issued an additional$57.5 million aggregate principal amount of 2022 Convertible Notes. The additional 2022 Convertible Notes were issued with identical terms, and are fungible with and are part of a single series with the previously outstanding$115 million aggregate principal amount of our 2022 Convertible Notes issued inFebruary 2017 . In connection with the reopening of the 2022 Convertible Notes, we entered into interest rate swaps to continue to align the interest rates of its liabilities with its investment portfolio, which consists of predominantly floating rate loans. As a result of the additional swaps, our effective interest rate on the additional 2022 Convertible Notes is approximately three-month LIBOR plus 1.60%. See Note 5 for further information related to our interest rate swaps. Holders may convert their 2022 Convertible Notes at their option at any time prior toFebruary 1, 2022 only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending onJune 30, 2017 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a 72 -------------------------------------------------------------------------------- period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the "measurement period") in which the trading price (as defined in the indenture governing the 2022 Convertible Notes) per$1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or afterFebruary 1, 2022 until the close of business on the scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the occurrence or nonoccurrence of any of the foregoing circumstances. The 2022 Convertible Notes are our unsecured obligations and rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the 2022 Convertible Notes; equal in right of payment to our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness (including unsecured indebtedness that we later secure) to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities. As ofDecember 31, 2019 , the principal amount of the 2022 Convertible Notes was exceeded by the value of the underlying shares multiplied by the per share closing price of our common stock. However, the conditions required for conversion prior to maturity had not been satisfied. As ofDecember 31, 2018 , the principal amount of the 2022 Convertible Notes exceeded the value of the underlying shares multiplied by the per share closing price of our common stock. The indenture governing the 2022 Convertible Notes contains certain covenants, including covenants requiring us to comply with the applicable asset coverage ratio requirement under the 1940 Act and to provide financial information to the holders of the 2022 Convertible Notes under certain circumstances. These covenants are subject to important limitations and exceptions that are described in the indenture governing the 2022 Convertible Notes. As ofDecember 31, 2019 and 2018, we were in compliance with the terms of the indenture governing the 2022 Convertible Notes. The 2022 Convertible Notes are accounted for in accordance with Accounting Standards Codification ("ASC") 470-20. Upon conversion of any of the 2022 Convertible Notes, we intend to pay the outstanding principal amount in cash and, to the extent that the conversion value exceeds the principal amount, we have the option to pay in cash or shares of our common stock (or a combination of cash and shares) in respect of the excess amount, subject to the requirements of the indenture governing the 2022 Convertible Notes. We have determined that the embedded conversion options in the 2022 Convertible Notes are not required to be separately accounted for as a derivative underU.S. GAAP. In accounting for the 2022 Convertible Notes, we estimated at the time of issuance separate debt and equity components of the 2022 Convertible Notes. An original issue discount equal to the equity components of the 2022 Convertible Notes was recorded in "additional paid-in capital" in the accompanying consolidated balance sheet. Additionally, the issuance costs associated with the 2022 Convertible Notes were allocated to the debt and equity components in proportion to the allocation of the proceeds and accounted for as deferred financing costs and equity issuance costs, respectively.
2023 Notes
InJanuary 2018 , we issued$150.0 million aggregate principal amount of unsecured notes that mature onJanuary 22, 2023 (the "2023 Notes"). The principal amount of the 2023 Notes is payable at maturity. The 2023 Notes bear interest at a rate of 4.50% per year, payable semi-annually commencing onJuly 22, 2018 , and may be redeemed in whole or in part at our option at any time at par plus a "make whole" premium. Total proceeds from the issuance of the 2023 Notes, net of underwriting discounts and offering costs, were$146.9 million . We used the net proceeds of the 2023 Notes to repay outstanding indebtedness under the Revolving Credit Facility. In connection with the 2023 Notes offering, we entered into an interest rate swap to continue to align the interest rates of our liabilities with our investment portfolio, which consists of predominately floating rate loans. As a result of the swap, our effective interest rate on the 2023 Notes is three-month LIBOR plus 1.99%. 2024 Notes InNovember 2019 , we issued$300.0 million aggregate principal amount of unsecured notes that mature onNovember 1, 2024 (the "2024 Notes"). The principal amount of the 2024 Notes is payable at maturity. The 2024 Notes bear interest at a rate of 3.875% per year, payable semi-annually commencing onMay 1, 2020 , and may be redeemed in whole or in part at our option at any time at par plus a "make whole" premium. Total proceeds from the issuance of the 2024 Notes, net of underwriting discounts and offering costs, were$293.1 million . We used the net proceeds of the 2024 Notes to repay outstanding indebtedness under the Revolving Credit Facility. 73 -------------------------------------------------------------------------------- In connection with the 2024 Notes offering, we entered into an interest rate swap to continue to align the interest rates of our liabilities with our investment portfolio, which consists of predominately floating rate loans. As a result of the swap, our effective interest rate on the 2024 Notes is three-month LIBOR plus 2.25%. OnFebruary 5, 2020 , we issued$50.0 million aggregate principal amount of unsecured notes that mature onNovember 1, 2024 (the "Reopened 2024 Notes"). The Reopened 2024 Notes are a further issuance of, fungible with, rank equally in right of payment with and have the same terms (other than the issue date and the public offering price) as the initial issuance of 2024 Notes. Total proceeds from the issuance of the Reopened 2024 Notes, net of underwriting discounts and estimated offering costs, were approximately$50.1 million . We used the net proceeds of the 2024 Notes to repay outstanding indebtedness under the Revolving Credit Facility. In connection with the issuance of the Reopened 2024 Notes, we entered into an interest rate swap to continue to align the interest rates of our liabilities with our investment portfolio, which consists of predominantly floating rate loans. As a result of the swap, our effective interest rate on the Reopened 2024 Notes is three-month LIBOR plus 2.46%. 74 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
Portfolio Company Commitments
From time to time, we may enter into commitments to fund investments. We incorporate these commitments into our assessment of our liquidity position. Our senior secured revolving loan commitments are generally available on a borrower's demand and may remain outstanding until the maturity date of the applicable loan. Our senior secured term loan commitments are generally available on a borrower's demand and, once drawn, generally have the same remaining term as the associated loan agreement. Undrawn senior secured term loan commitments generally have a shorter availability period than the term of the associated loan agreement. As ofDecember 31, 2019 and 2018, we had the following commitments to fund investments in current portfolio companies: ($ in millions) December 31, 2019 December 31, 2018 Alpha Midco, Inc. - Delayed Draw $ 19.6 $ - AppStar Financial, LLC - Revolver 2.0 2.0 AvidXchange, Inc. - Delayed Draw 5.1 - BlueSnap, Inc. - Revolver 2.5 - Caris Life Sciences, Ltd. - Delayed Draw - 2.5 ClearCompany, LLC - Delayed Draw 1.4 3.0 Clinicient, Inc. - Revolver 4.0 - DaySmart Holdings, LLC - Revolver 5.0 - DaySmart Holdings, LLC - Delayed Draw 17.5 - Dye & Durham Corp. - Revolver 1.3 - Energy Alloys, LLC - Delayed Draw 15.0 - Ferrellgas, L.P. - Revolver 30.0 30.0 Frontline Technologies Group, LLC - Delayed Draw - 9.4 G Treasury SS, LLC - Delayed Draw 3.8 5.0 G Treasury SS, LLC - Revolver - 2.0 Gainsight, Inc. - Delayed Draw 1.8 - Government Brands, LLC - Revolver - 5.0 Integration Appliance, Inc. - Revolver 2.6 2.6 IntelePeer Holdings, Inc. - Delayed Draw 3.5 - IRGSE Holding Corp. - Revolver 2.1 3.0 Kyriba Corp. - Delayed Draw 8.3 - Kyriba Corp. - Revolver 1.2 - Lithium Technologies, LLC - Revolver 3.9 3.9 Lucidworks, Inc. - Revolver 3.3 - MD America Energy, LLC - Delayed Draw - 15.0 Motus, LLC - Revolver - 5.6 PageUp People, Ltd. - Revolver 2.8 2.1 PayLease, LLC - Revolver 3.3 3.3 PayScale Holdings, Inc. - Delayed Draw 7.7 - PrimeRevenue, Inc. - Revolver 6.3 6.3 ResMan, LLC - Delayed Draw 3.6 - ResMan, LLC - Revolver 2.0 - ScentAir Technologies, Inc. - Revolver - 0.8 Sovos Compliance, LLC - Delayed Draw - 0.5 Sovos Compliance, LLC - Revolver - 1.7 TherapeuticsMD, Inc. - Delayed Draw A1 7.5 - TherapeuticsMD, Inc. - Delayed Draw A2 7.5 - Valant Medical Solutions, Inc. - Delayed Draw 2.6 - Valant Medical Solutions, Inc. - Revolver 2.0 -Verdad Resources Intermediate Holdings, LLC - Delayed Draw 7.8 - Total Portfolio Company Commitments $ 187.0 $ 103.7 75
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Other Commitments and Contingencies
As of
From time to time, we may become a party to certain legal proceedings incidental to the normal course of our business. As ofDecember 31, 2019 , management is not aware of any material pending or threatened litigation that would require accounting recognition or financial statement disclosure. We have certain contracts under which we have material future commitments. Under the Investment Advisory Agreement, our Adviser provides us with investment advisory and management services. For these services, we pay the Management Fee and the Incentive Fee. Under the Administration Agreement, our Adviser furnishes us with office facilities and equipment, provides us clerical, bookkeeping and record keeping services at such facilities and provides us with other administrative services necessary to conduct our day-to-day operations. We reimburse our Adviser for the allocable portion (subject to the review and approval of our Board) of expenses incurred by it in performing its obligations under the Administration Agreement, the fees and expenses associated with performing compliance functions and our allocable portion of the compensation of our Chief Compliance Officer, Chief Financial Officer and other professionals who spend time on those related activities (based on a percentage of time those individuals devote, on an estimated basis, to our business and affairs). Our Adviser also offers on our behalf significant managerial assistance to those portfolio companies to which we are required to offer to provide such assistance.
Contractual Obligations
A summary of our contractual payment obligations as ofDecember 31, 2019 is as follows: Payments Due by Period Less than ($ in millions) Total 1 year 1-3 years 3-5 years After 5 years Revolving Credit Facility$ 495.7 $ - $ -$ 495.7 $ - 2022 Convertible Notes 172.5 - 172.5 - - 2023 Notes 150.0 - - 150.0 - 2024 Notes 300.0 - - 300.0 -
Total Contractual Obligations
-
In addition to the contractual payment obligations in the tables above, we also
have commitments to fund investments and to pledge assets as collateral under
the terms of our derivatives agreements.
Distributions
We have elected and qualified to be treated forU.S. federal income tax purposes as a RIC under subchapter M of the Code. To maintain our RIC status, we must distribute (or be treated as distributing) in each taxable year dividends for tax purposes equal to at least 90 percent of the sum of our:
• investment company taxable income (which is generally our ordinary income plus
the excess of realized net short-term capital gains over realized net
long-term capital losses), determined without regard to the deduction for
dividends paid, for such taxable year; and
• net tax-exempt interest income (which is the excess of our gross tax exempt
interest income over certain disallowed deductions) for such taxable year.
As a RIC, we (but not our stockholders) generally will not be subject toU.S. federal income tax on investment company taxable income and net capital gains that we distribute to our stockholders. We intend to distribute annually all or substantially all of such income. To the extent that we retain our net capital gains or any investment company taxable income, we generally will be subject to corporate-levelU.S. federal income tax. We may choose to retain our net capital gains or any investment company taxable income, and pay theU.S. federal excise tax described below. 76 -------------------------------------------------------------------------------- Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4%U.S. federal excise tax payable by us. To avoid this tax, we must distribute (or be treated as distributing) during each calendar year an amount at least equal to the sum of:
• 98% of our net ordinary income excluding certain ordinary gains or losses for
that calendar year;
• 98.2% of our capital gain net income, adjusted for certain ordinary gains and
losses, recognized for the twelve-month period ending on
calendar year; and
• 100% of any income or gains recognized, but not distributed, in preceding
years.
While we intend to distribute any income and capital gains in the manner necessary to minimize imposition of the 4%U.S. federal excise tax, sufficient amounts of our taxable income and capital gains may not be distributed to avoid entirely the imposition of this tax. In that event, we will be liable for this tax only on the amount by which we do not meet the foregoing distribution requirement. We intend to pay quarterly dividends to our stockholders out of assets legally available for distribution. All dividends will be paid at the discretion of our Board and will depend on our earnings, financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as our Board may deem relevant from time to time. To the extent our current taxable earnings for a year fall below the total amount of our distributions for that year, a portion of those distributions may be deemed a return of capital to our stockholders forU.S. federal income tax purposes. Thus, the source of a distribution to our stockholders may be the original capital invested by the stockholder rather than our income or gains. Stockholders should read any written disclosure carefully and should not assume that the source of any distribution is our ordinary income or gains. We have adopted an "opt out" dividend reinvestment plan for our common stockholders. As a result, if we declare a cash dividend or other distribution, each stockholder that has not "opted out" of our dividend reinvestment plan will have their dividends or distributions automatically reinvested in additional shares of our common stock rather than receiving cash dividends. Stockholders who receive distributions in the form of shares of common stock will be subject to the sameU.S. federal, state and local tax consequences as if they received cash distributions. Related-Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
• the Investment Advisory Agreement; • the Administration Agreement; and
• a license agreement with an affiliate of TPG under which the affiliate granted
us a non-exclusive license to use the "TPG" name and logo, for a nominal fee,
for so long as the Adviser or one of its affiliates remains our investment
adviser. Other than with respect to this limited license, we have no legal
right to the "TPG" name or logo.
Critical Accounting Policies
The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies, including those relating to the valuation of our investment portfolio, are described below. The critical accounting policies should be read in connection with our risk factors as disclosed in "ITEM 1A. RISK FACTORS."
Investments at Fair Value
Loan originations are recorded on the date of the binding commitment, which is
generally the funding date. Investment transactions purchased through the
secondary markets are recorded on the trade date. Realized gains or losses are
measured by the difference between the net proceeds received (excluding
prepayment fees, if any) and the amortized cost basis of the investment without
regard to unrealized gains or losses previously recognized, and include
investments charged off during the period, net of recoveries. The net change in
unrealized gains or losses primarily reflects the change in investment values
and also includes the reversal of previously recorded unrealized gains or losses
with respect to investments realized during the period.
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Investments for which market quotations are readily available are typically
valued at those market quotations. To validate market quotations, we utilize a
number of factors to determine if the quotations are representative of fair
value, including the source and number of the quotations. Debt and equity
securities that are not publicly traded or whose market prices are not readily
available, as is the case for substantially all of our investments, are valued
at fair value as determined in good faith by our Board, based on, among other
things, the input of the Adviser, our Audit Committee and independent
third-party valuation firms engaged at the direction of the Board.
As part of the valuation process, the Board takes into account relevant factors
in determining the fair value of our investments, including and in combination
of:
• the estimated enterprise value of a portfolio company (that is, the total
value of the portfolio company's net debt and equity);
• the nature and realizable value of any collateral;
• the portfolio company's ability to make payments based on its earnings and
cash flow;
• the markets in which the portfolio company does business;
• a comparison of the portfolio company's securities to any similar publicly
traded securities; and
• overall changes in the interest rate environment and the credit markets that
may affect the price at which similar investments may be made in the future.
When an external event, such as a purchase transaction, public offering or subsequent equity sale occurs, the Board considers whether the pricing indicated by the external event corroborates our valuation.
The Board undertakes a multi-step valuation process, which includes, among other procedures, the following:
• The valuation process begins with each investment being initially valued by
the investment professionals responsible for the portfolio investment in
conjunction with the portfolio management team.
• The Adviser's management reviews the preliminary valuations with theinvestment professionals. Agreed-upon valuation recommendations are presented
to the Audit Committee.
• The Audit Committee reviews the valuations presented and recommends values for
each investment to the Board.
• The Board reviews the recommended valuations and determines the fair value of
each investment; valuations that are not based on readily available market
quotations are valued in good faith based on, among other things, the input of
the Adviser, Audit Committee and, where applicable, other third parties,
including independent third party valuation firms engaged at the direction of
the Board.
We conduct this valuation process on a quarterly basis.
The Board has engaged independent third-party valuation firms to perform certain limited procedures that the Board has identified and requested them to perform in connection with the valuation process. AtDecember 31, 2019 , the independent third-party valuation firms performed their procedures over substantially all of our investments. Upon completion of such limited procedures, the third-party valuation firms determined that the fair value, as determined by the Board, of those investments subjected to their limited procedures, appeared reasonable. We apply Financial Accounting Standards Board Accounting Standards Codification 820, Fair Value Measurement ("ASC 820"), as amended, which establishes a framework for measuring fair value in accordance withU.S. GAAP and required disclosures of fair value measurements. ASC 820 determines fair value to be the price that would be received for an investment in a current sale, which assumes an orderly transaction between market participants on the measurement date. Market participants are defined as buyers and sellers in the principal or most advantageous market (which may be a hypothetical market) that are independent, knowledgeable, and willing and able to transact. In accordance with ASC 820, we consider our principal market to be the market that has the greatest volume and level of activity. ASC 820 specifies a fair value hierarchy that prioritizes and ranks the level of observability of inputs used in determination of fair value. In accordance with ASC 820, these levels are summarized below:
• Level 1-Valuations based on quoted prices in active markets for identical
assets or liabilities that we have the ability to access.
• Level 2-Valuations based on quoted prices in markets that are not active or
for which all significant inputs are observable, either directly or
indirectly.
• Level 3-Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
78
-------------------------------------------------------------------------------- Transfers between levels, if any, are recognized at the beginning of the quarter in which the transfers occur. In addition to using the above inputs in investment valuations, we apply the valuation policy approved by our Board that is consistent with ASC 820. Consistent with the valuation policy, we evaluate the source of inputs, including any markets in which our investments are trading (or any markets in which securities with similar attributes are trading), in determining fair value. When a security is valued based on prices provided by reputable dealers or pricing services (that is, broker quotes), we subject those prices to various additional criteria in making the determination as to whether a particular investment would qualify for treatment as a Level 2 or Level 3 investment. For example, we review pricing and methodologies provided by dealers or pricing services in order to determine if observable market information is being used, versus unobservable inputs. Some additional factors considered include the number of prices obtained, as well as an assessment as to their quality, such as the depth of the relevant market relative to the size of the Company's position. Our accounting policy on the fair value of our investments is critical because the 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 these valuations, and any change in these valuations, on the consolidated financial statements.
See Note 6 to our consolidated financial statements included in this Form 10-K for more information on the fair value of our investments.
Interest and Dividend Income Recognition
Interest income is recorded on an accrual basis and includes the amortization of discounts and premiums. Discounts and premiums to par value on securities purchased or originated are amortized into interest income over the contractual life of the respective security using the effective interest method. The amortized cost of investments represents the original cost adjusted for the amortization of discounts and premiums, if any. Unless providing services in connection with an investment, such as syndication, structuring or diligence, all or a portion of any loan fees received by us will be deferred and amortized over the investment's life using the effective interest method. Loans are generally placed on non-accrual status when principal or interest payments are past due 30 days or more or when management has reasonable doubt that the borrower will pay principal or interest in full. Accrued and unpaid interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment regarding collectability. Non-accrual loans are restored to accrual status when past due principal and interest has been paid and, in management's judgment, the borrower is likely to make principal and interest payments in the future. Management may determine to not place a loan on non-accrual status if, notwithstanding any failure to pay, the loan has sufficient collateral value and is in the process of collection. Dividend income on preferred equity securities is recorded 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 or on the ex-dividend date for publicly traded portfolio companies. Our accounting policy on interest and dividend income recognition is critical because it involves the primary source of our revenue and accordingly is significant to the financial results as disclosed in our consolidated financial statements.U.S. Federal Income Taxes We have elected to be treated as a BDC under the 1940 Act. We also have elected to be treated as a RIC under the Code. So long as we maintain our status as a RIC, we will generally not pay corporate-levelU.S. federal income or excise taxes on any ordinary income or capital gains that we distribute at least annually to our stockholders as dividends. As a result, any tax liability related to income earned and distributed by us represents obligations of our stockholders and will not be reflected in our consolidated financial statements. We evaluate tax positions taken or expected to be taken in the course of preparing our financial statements to determine whether the tax positions are "more-likely-than-not" to be sustained by the applicable tax authority. Tax positions not deemed to meet the "more-likely-than-not" threshold are reversed and recorded as a tax benefit or expense in the current year. All penalties and interest associated with income taxes are included in income tax expense. Conclusions regarding tax positions are subject to review and may be adjusted at a later date based on factors including, but not limited to, on-going analyses of tax laws, regulations and interpretations thereof. As ofDecember 31, 2019 , the Company did not have any uncertain tax positions that met the recognition or measurement criteria, nor did the Company have any unrecognized tax benefits. Our 2018, 2017 and 2016 tax year returns remain subject to examination by the relevant federal, state, and local tax authorities. Our accounting policy on income taxes is critical because if we are unable to maintain our status as a RIC, we would be required to record a provision for corporate-levelU.S. federal income taxes which may be significant to our financial results. 79
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