SLR INVESTMENT CORP. The information contained in this section should be read in conjunction with the Selected Financial and Other Data and our Consolidated Financial Statements and notes thereto appearing elsewhere in this report. Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to: • our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the impact of investments that we expect to make; • our contractual arrangements and relationships with third parties;
• the dependence of our future success on the general economy and its
impact on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• our expected financings and investments;
• the adequacy of our cash resources and working capital; and
• the timing of cash flows, if any, from the operations of our portfolio
companies.
We generally use words such as "anticipates," "believes," "expects," "intends"
and similar expressions to identify forward-looking statements. Our actual
results could differ materially from those projected in the forward-looking
statements for any reason, including any factors set forth in "Risk Factors" and
elsewhere in this report.
We have based the forward-looking statements included in this report on
information available to us on the date of this report, and we assume no
obligation to update any such forward-looking statements. Although we undertake
no obligation to revise or update any forward-looking statements, whether as a
result of new information, future events or otherwise, you are advised to
consult any additional disclosures that we may make directly to you or through
reports that we in the future may file with the SEC , including any annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K.
Overview
Solar Capital Ltd. ("Solar Capital ", the "Company", "we" or "our"), aMaryland corporation formed inNovember 2007 , is a closed-end, externally managed, non-diversifiedmanagement investment company that has elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"). Furthermore, as the Company is an investment company, it continues to apply the guidance in theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 946. In addition, for tax purposes, the Company has elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). OnFebruary 9, 2010 , we priced our initial public offering, selling 5.68 million shares of our common stock. Concurrent with our initial public offering,Michael S. Gross , our Chairman, Co-ChiefExecutive Officer and 71
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President, andBruce Spohler , our Co-Chief Executive Officer and Chief Operating Officer, collectively purchased an additional 0.6 million shares of our common stock through a private placement transaction exempt from registration under the Securities Act. We invest primarily in privately heldU.S. middle-market companies, where we believe the supply of primary capital is limited and the investment opportunities are most attractive. Our investment objective is to generate both current income and capital appreciation through debt and equity investments. We invest primarily in leveraged middle-market companies in the form of senior secured loans, stretch-senior loans, financing leases and to a lesser extent, unsecured loans and equity securities. From time to time, we may also invest in public companies that are thinly traded. Our business is focused primarily on the direct origination of investments through portfolio companies or their financial sponsors. Our investments generally range between$5 million and$100 million each, although we expect that this investment size will vary proportionately with the size of our capital base and/or with strategic initiatives. Our investment activities are managed bySolar Capital Partners, LLC (the "Investment Adviser") and supervised by our board of directors, a majority of whom are non-interested, as such term is defined in the 1940 Act.Solar Capital Management, LLC (the "Administrator") provides the administrative services necessary for us to operate. In addition, we may invest a portion of our portfolio in other types of investments, which we refer to as opportunistic investments, which are not our primary focus but are intended to enhance our overall returns. These investments may include, but are not limited to, direct investments in public companies that are not thinly traded and securities of leveraged companies located in select countries outside ofthe United States . As ofDecember 31, 2019 , the Investment Adviser has directly invested approximately$9.0 billion in more than 390 different portfolio companies since 2006. Over the same period, the Investment Adviser completed transactions with approximately 200 different financial sponsors.
Recent Developments
OnFebruary 12, 2020 , a new lender to the Company executed a commitment increase to our Credit Facility providing for an additional$75.0 million of revolving credit, bringing our Credit Facility's total revolving credit capacity to$545.0 million .
On
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount of debt and equity capital available to middle market companies, the level of merger and acquisition activity for such companies, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we must not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." The definition of "eligible portfolio company" includes certain public companies that do not have any securities listed on a national securities exchange and companies whose securities are listed on a national securities exchange but whose market capitalization is less than$250 million .
Revenue
We generate revenue primarily in the form of interest and dividend income from the securities we hold and capital gains, if any, on investment securities that we may sell. Our debt investments generally have a stated term of three to seven years and typically bear interest at a floating rate usually determined on the basis of a benchmarkLondon interbank offered rate ("LIBOR"), commercial paper rate, or the prime rate. Interest on our debt investments is generally payable monthly or quarterly but may be bi-monthly or semi-annually. In addition, our investments may provide payment-in-kind ("PIK") interest. Such amounts of accrued PIK interest are added to the cost of the investment on the respective capitalization dates and generally become due at maturity of the 72
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investment or upon the investment being called by the issuer. We may also generate revenue in the form of commitment, origination, structuring fees, fees for providing managerial assistance and, if applicable, consulting fees, etc.
Expenses
All investment professionals of the investment adviser and their respective staffs, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, are provided and paid for bySolar Capital Partners . We bear all other costs and expenses of our operations and transactions, including (without limitation): • the cost of our organization and public offerings; • the cost of calculating our net asset value, including the cost of any third-party valuation services; • the cost of effecting sales and repurchases of our shares and other securities; • interest payable on debt, if any, to finance our investments; • fees payable to third parties relating to, or associated with, making
investments, including fees and expenses associated with performing due
diligence reviews of prospective investments and advisory fees;
• transfer agent and custodial fees;
• fees and expenses associated with marketing efforts;
• federal and state registration fees, any stock exchange listing fees;
• federal, state and local taxes;
• independent directors' fees and expenses;
• brokerage commissions;
• fidelity bond, directors and officers errors and omissions liability
insurance and other insurance premiums;
• direct costs and expenses of administration, including printing, mailing,
long distance telephone and staff;
• fees and expenses associated with independent audits and outside legal
costs;
• costs associated with our reporting and compliance obligations under the
1940 Act and applicable federal and state securities laws; and
• all other expenses incurred by either Solar Capital Management or us inconnection with administering our business, including payments under the
Administration Agreement that will be based upon our allocable portion of
overhead and other expenses incurred by
performing its obligations under the Administration Agreement, including
rent, the fees and expenses associated with performing compliance
functions, and our allocable portion of the costs of compensation and
related expenses of our chief compliance officer and our chief financial
officer and their respective staffs.
We expect our general and administrative operating expenses related to our
ongoing operations to increase moderately in dollar terms. During periods of
asset growth, we generally expect our general and administrative operating
expenses to decline as a percentage of our total assets and increase during
periods of asset declines. Incentive fees, interest expense and costs relating
to future offerings of securities, among others, may also increase or reduce
overall operating expenses based on portfolio performance, interest rate
benchmarks, and offerings of our securities relative to comparative periods,
among other factors.
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Portfolio and Investment Activity
During the year endedDecember 31, 2019 , we invested approximately$404 million across over 50 portfolio companies. This compares to investing approximately$586 million in 65 portfolio companies for the year endedDecember 31, 2018 . Investments sold, prepaid or repaid during the year endedDecember 31, 2019 totaled approximately$362 million versus approximately$624 million for the year endedDecember 31, 2018 . AtDecember 31, 2019 , our portfolio consisted of 108 portfolio companies and was invested 31.0% in cash flow senior secured loans, 28.2% in asset-based senior secured loans / Crystal, 21.5% in equipment senior secured financings / NEF, and 19.3% in life science senior secured loans, in each case, measured at fair value, versus 117 portfolio companies invested 33.1% in cash flow senior secured loans, 27.8% in asset-based senior secured loans / Crystal, 21.6% in equipment senior secure financings / NEF, and 17.5% in life science senior secured loans, in each case, measured at fair value, atDecember 31, 2018 . AtDecember 31, 2019 , 77.5% or$1.14 billion of our income producing investment portfolio* is floating rate and 22.5% or$331.9 million is fixed rate, measured at fair value. AtDecember 31, 2018 , 74.6% or$1.08 billion of our income producing investment portfolio* is floating rate and 25.4% or$366.1 million is fixed rate, measured at fair value. As ofDecember 31, 2019 and 2018, we had one and zero issuers on non-accrual status, respectively. Since inception throughDecember 31, 2019 ,Solar Capital and its predecessor companies have invested approximately$6.3 billion in more than 280 portfolio companies. Over the same period,Solar Capital has completed transactions with more than 150 different financial sponsors.
* We have included
producing investment portfolio.
OnDecember 28, 2012 , we completed the acquisition ofCrystal Capital Financial Holdings LLC ("Crystal Financial"), a commercial finance company focused on providing asset-based and other secured financing solutions (the "Crystal Acquisition"). We invested$275 million in cash to effect the Crystal Acquisition. Crystal Financial owned approximately 98% of the outstanding ownership interest inCrystal Financial LLC . The remaining financial interest was held by various employees ofCrystal Financial LLC , through their investment inCrystal Management LP .Crystal Financial LLC had a diversified portfolio of 23 loans having a total par value of approximately$400 million atNovember 30, 2012 and a$275 million committed revolving credit facility. OnJuly 28, 2016 , the Company purchasedCrystal Management LP's approximately 2% equity interest inCrystal Financial LLC for approximately$5.7 million . Upon the closing of this transaction, the Company holds 100% of the equity interest inCrystal Financial LLC . OnSeptember 30, 2016 ,Crystal Capital Financial Holdings LLC was dissolved. OnDecember 20, 2018 , the revolving credit facility was expanded to$330 million . As ofDecember 31, 2019 ,Crystal Financial LLC had 35 funded commitments to 28 different issuers with total funded loans of approximately$496.8 million on total assets of$518.0 million . As ofDecember 31, 2018 ,Crystal Financial LLC had 31 funded commitments to 26 different issuers with total funded loans of approximately$413.9 million on total assets of$483.8 million . As ofDecember 31, 2019 andDecember 31, 2018 , the largest loan outstanding totaled$45.0 million and$37.5 million , respectively. For the same periods, the average exposure per issuer was$17.7 million and$15.9 million , respectively.Crystal Financial LLC's credit facility, which is non-recourse toSolar Capital , had approximately$276.0 million and$206.0 million of borrowings outstanding atDecember 31, 2019 andDecember 31, 2018 , respectively. For the years endedDecember 31, 2019 and 2018,Crystal Financial LLC had net income of$8.0 million and$33.0 million , respectively, on gross income of$61.2 million and$58.8 million , respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations inCrystal Financial LLC's funded commitments, the timing of originations, and the 74
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repayments of financings, the Company cannot guarantee thatCrystal Financial LLC will be able to maintain consistent dividend payments to us.Crystal Financial LLC's consolidated financial statements for the fiscal years endedDecember 31, 2019 andDecember 31, 2018 are attached as an exhibit to this annual report on Form 10-K.
OnJuly 31, 2017 , we completed the acquisition ofNEF Holdings, LLC ("NEF"), which conducts its business through its wholly-owned subsidiaryNations Equipment Finance, LLC . NEF is an independent equipment finance company that provides senior secured loans and leases primarily toU.S. based companies. We invested$209.9 million in cash to effect the transaction, of which$145.0 million was invested in the equity of NEF through our wholly-owned consolidated taxable subsidiaryNEFCORP LLC and our wholly-owned consolidated subsidiaryNEFPASS LLC and$64.9 million was used to purchase certain leases and loans held by NEF throughNEFPASS LLC . Concurrent with the transaction, NEF refinanced its existing senior secured credit facility into a$150.0 million non-recourse facility with an accordion feature to expand up to$250.0 million . InSeptember 2019 , NEF amended the facility, increasing commitments to$214.0 million with an accordion feature to expand up to$314.0 million and extended the maturity date of the facility toJuly 31, 2023 . AtJuly 31, 2017 , NEF also had two securitizations outstanding, with an issued note balance of$94.6 million , which were later redeemed in 2018. As ofDecember 31, 2019 , NEF had 168 funded equipment-backed leases and loans to 78 different customers with a total net investment in leases and loans of approximately$245.0 million on total assets of$304.2 million . As ofDecember 31, 2018 , NEF had 207 funded equipment-backed leases and loans to 82 different customers with a total net investment in leases and loans of approximately$237.2 million on total assets of$293.2 million . As ofDecember 31, 2019 andDecember 31, 2018 , the largest position outstanding totaled$26.9 million and$28.5 million , respectively. For the same periods, the average exposure per customer was$3.1 million and$2.9 million , respectively. NEF's credit facility, which is non-recourse toSolar Capital , had approximately$128.2 million and$119.3 million of borrowings outstanding atDecember 31, 2019 andDecember 31, 2018 , respectively. For the years endedDecember 31, 2019 and 2018, NEF had net income (loss) of($6.0) million and$3.4 million , respectively, on gross income of$31.9 million and$30.0 million , respectively. Due to timing and non-cash items, there may be material differences between GAAP net income and cash available for distributions. As such, and subject to fluctuations in NEF's funded commitments, the timing of originations, and the repayments of financings, the Company cannot guarantee that NEF will be able to maintain consistent dividend payments to us. NEF's consolidated financial statements for the fiscal years endedDecember 31, 2019 andDecember 31, 2018 are attached as an exhibit to this annual report on Form 10-K. Critical Accounting Policies The preparation of consolidated financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies. Within the context of these critical accounting policies and disclosed subsequent events herein, we are not currently aware of any other reasonably likely events or circumstances that would result in materially different amounts being reported.
Valuation of Portfolio Investments
We conduct the valuation of our assets, pursuant to which our net asset value is
determined, at all times consistent with GAAP, and the 1940 Act. Our valuation
procedures are set forth in more detail below:
Under procedures established by our board of directors (the "Board"), we value
investments, including certain senior secured debt, subordinated debt and other
debt securities with maturities greater than 60 days, for
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which market quotations are readily available, at such market quotations (unless
they are deemed not to represent fair value). We attempt to obtain market
quotations from at least two brokers or dealers (if available, otherwise from a
principal market maker or a primary market dealer or other independent pricing
service). We utilize mid-market pricing as a practical expedient for fair value
unless a different point within the range is more representative. If and when
market quotations are deemed not to represent fair value, we may utilize
independent third-party valuation firms to assist us in determining the fair
value of material assets. Accordingly, such investments go through our
multi-step valuation process as described below. In each case, independent
valuation firms consider observable market inputs together with significant
unobservable inputs in arriving at their valuation recommendations. Debt
investments with maturities of 60 days or less shall each be valued at cost plus
accreted discount, or minus amortized premium, which is expected to approximate
fair value, unless such valuation, in the judgment of the Investment Adviser,
does not represent fair value, in which case such investments shall be valued at
fair value as determined in good faith by or under the direction of our Board.
Investments that are not publicly traded or whose market quotations are not
readily available are valued at fair value as determined in good faith by or
under the direction of our Board. Such determination of fair values involves
subjective judgments and estimates.
With respect to investments for which market quotations are not readily
available or when such market quotations are deemed not to represent fair value,
our Board has approved a multi-step valuation process each quarter, as described
below:
(1) our quarterly valuation process begins with each portfolio company or
investment being initially valued by the investment professionals of the
Investment Adviser responsible for the portfolio investment;
(2) preliminary valuation conclusions are then documented and discussed with
senior management of the Investment Adviser;
(3) independent valuation firms engaged by our Board conduct independent
appraisals and review the Investment Adviser's preliminary valuations and
make their own independent assessment for all material assets;
(4) the audit committee of the Board reviews the preliminary valuation of the
Investment Adviser and that of the independent valuation firm, if any,and responds to the valuation recommendation of the independent valuation
firm to reflect any comments; and
(5) the Board discusses valuations and determines the fair value of each
investment in our portfolio in good faith based on the input of the
Investment Adviser, the respective independent valuation firm, if any,
and the audit committee.
Investments in all asset classes are valued utilizing a market approach, an
income approach, or both approaches, as appropriate. However, in accordance with
ASC 820-10, certain investments that qualify as investment companies in
accordance with ASC 946, may be valued using net asset value as a practical
expedient for fair value. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities (including a business). The income approach uses valuation
approaches to convert future amounts (for example, cash flows or earnings) to a
single present amount (discounted). The measurement is based on the value
indicated by current market expectations about those future amounts. In
following these approaches, the types of factors that we may take into account
in fair value pricing our investments include, as relevant: available current
market data, including relevant and applicable market trading and transaction
comparables, applicable market yields and multiples, security covenants, call
protection provisions, the nature and realizable value of any collateral, the
portfolio company's ability to make payments, its earnings and discounted cash
flows, the markets in which the portfolio company does business, comparisons of
financial ratios of peer companies that are public, M&A comparables, our
principal market (as the reporting entity) and enterprise values, among other
factors. When available, broker quotations and/or quotations provided by pricing
services are considered as an input in the valuation process. For the fiscal
year ended December 31, 2019 , there has been no change to the Company's
valuation approaches or techniques and the nature of the related inputs
considered in the valuation process.
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Accounting Standards Codification ("ASC") Topic 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by the Company at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment. The exercise of judgment is based in part on our knowledge of the asset class and our prior experience.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements.
Valuation of 2022 Unsecured Notes
The Company has made an election to apply the fair value option of accounting to
the 2022 Unsecured Notes, in accordance with ASC 825-10. We believe accounting
for the 2022 Unsecured Notes at fair value better aligns the measurement
methodologies of assets and liabilities, which may mitigate certain earnings
volatility.
Revenue Recognition
The Company records dividend income and interest, adjusted for amortization of
premium and accretion of discount, on an accrual basis. Investments that are
expected to pay regularly scheduled interest and/or dividends in cash are
generally placed on non-accrual status when principal or interest/dividend cash
payments are past due 30 days or more (90 days or more for equipment financing)
and/or when it is no longer probable that principal or interest/dividend cash
payments will be collected. Such non-accrual investments are restored to accrual
status if past due principal and interest or dividends are paid in cash, and in
management's judgment, are likely to continue timely payment of their remaining
interest or dividend obligations. Interest or dividend cash payments received on
investments may be recognized as income or applied to principal depending upon
management's judgment. Some of our investments may have contractual PIK interest
or dividends. PIK interest and dividends computed at the contractual rate are
accrued into income and reflected as receivable up to the capitalization date.
PIK investments offer issuers the option at each payment date of making payments
in cash or in additional securities. When additional securities are received,
they typically have the same terms, including maturity dates and interest rates
as the original securities issued. On these payment dates, the Company
capitalizes the accrued interest or dividends receivable (reflecting such
amounts as the basis in the additional securities received). PIK generally
becomes due at the maturity of the investment or upon the investment being
called by the issuer. At the point the Company believes PIK is not expected to
be realized, the PIK investment will be placed on non-accrual status. When a PIK
investment is placed on non-accrual status, the accrued, uncapitalized interest
or dividends is reversed from the related receivable through interest or
dividend income, respectively. The Company does not reverse previously
capitalized PIK interest or dividends. Upon capitalization, PIK is subject to
the fair value estimates associated with their related investments. PIK
investments on non-accrual status are restored to accrual status if the Company
again believes that PIK is expected to be realized. Loan origination fees,
original issue discount, and market discounts are capitalized and amortized into
income using the effective interest method. Upon the prepayment of a loan, any
unamortized loan origination fees are recorded as interest income. We record
prepayment premiums on loans and other investments as interest income when we
receive such amounts. Capital structuring fees are recorded as other income when
earned.
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The typically higher yields and interest rates on PIK securities, to the extent we invested, reflects the payment deferral and increased credit risk associated with such instruments and that such investments may represent a significantly higher credit risk than coupon loans. PIK securities may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. PIK interest has the effect of generating investment income and increasing the incentive fees payable at a compounding rate. In addition, the deferral of PIK interest also increases the loan-to-value ratio at a compounding rate. PIK securities create the risk that incentive fees will be paid to the Investment Adviser based on non-cash accruals that ultimately may not be realized, but the Investment Adviser will be under no obligation to reimburse the Company for these fees. For the fiscal years endedDecember 31, 2019 , 2018 and 2017, capitalized PIK income totaled$1.1 million ,$0.9 million and$0.2 million , respectively.
Net Realized Gain or Loss and Net Change in Unrealized Gain or Loss
We generally measure realized gain or loss by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but considering unamortized origination or commitment fees and prepayment penalties. The net change in unrealized gain or loss reflects the change in portfolio investment values during the reporting period, including the reversal of previously recorded unrealized gain or loss, when gains or losses are realized. Gains or losses on investments are calculated by using the specific identification method.
Income Taxes
Solar Capital , aU.S. corporation, has elected to be treated, and intends to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify for taxation as a RIC, the Company is required, among other things, to timely distribute to its stockholders at least 90% of investment company taxable income, as defined by the Code, for each year. Depending on the level of taxable income earned in a given tax year, we may choose to carry forward taxable income in excess of current year distributions into the next tax year and pay a 4% excise tax on such income, as required. To the extent that the Company determines that its estimated current year annual taxable income will be in excess of estimated current year distributions, the Company accrues an estimated excise tax, if any, on estimated excess taxable income.
Recent Accounting Pronouncements
InAugust 2018 , the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this Update modify and eliminate certain disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2019 . Early adoption is permitted. The Company will adopt ASU 2018-13 effective in fiscal year 2020. InMarch 2017 , the FASB issued ASU 2017-08, Premium Amortization onPurchased Callable Debt Securities , which will amend FASB ASC 310-20. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium, generally requiring the premium to be amortized to the earliest call date. For public business entities, the amendments are effective for fiscal years, and interim periods within those fiscal years, beginning afterDecember 15, 2018 . Early adoption is permitted, including adoption in an interim period. The Company has adopted ASU 2017-08 and determined that the adoption has not had a material impact on its consolidated financial statements and disclosures. 78
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RESULTS OF OPERATIONS
Results comparisons are for the fiscal years endedDecember 31, 2019 andDecember 31, 2018 . Results for the fiscal year endedDecember 31, 2017 can be found in Item 7 of the Company's report on Form 10-K filed onFebruary 21, 2019 , which is incorporated by reference herein.
Investment Income
For the fiscal years endedDecember 31, 2019 and 2018, gross investment income totaled$154.7 million and$153.5 million , respectively. The increase in gross investment income from 2018 to 2019 was primarily due to growth of the average income producing investment portfolio.
Expenses
Expenses totaled$82.3 million and$78.6 million , respectively, for the fiscal years endedDecember 31, 2019 and 2018, of which$44.9 million and$44.5 million , respectively, were base management fees and performance-based incentive fees and$28.9 million and$24.7 million , respectively, were interest and other credit facility expenses. Administrative services and other general and administrative expenses totaled$8.5 million and$9.4 million , respectively, for the fiscal years endedDecember 31, 2019 and 2018. Expenses generally consist of management and performance-based incentive fees, interest and other credit facility expenses, administrative services fees, insurance expenses, legal fees, directors' fees, transfer agency fees, printing and proxy expenses, audit and tax services expenses, and other general and administrative expenses. Interest and other credit facility expenses generally consist of interest, unused fees, agency fees and loan origination fees, if any, among others. The increase in expenses from 2018 to 2019 was primarily due to higher interest expense resulting from generally higher average LIBOR and an increase in average borrowings to support a larger average income producing investment portfolio.
Net Investment Income
The Company's net investment income totaled$72.4 million and$74.9 million , or$1.71 and$1.77 , per average share, respectively, for the fiscal years endedDecember 31, 2019 and 2018. Net Realized Gain (Loss) The Company had investment sales and prepayments totaling approximately$362 million and$624 million , respectively, for the fiscal years endedDecember 31, 2019 and 2018. Net realized gains (losses) over the same periods were($1.8) million and$2.1 million , respectively. Net realized loss for fiscal year 2019 was primarily related to the extinguishment of debt. Net realized gains for fiscal year 2018 were related to the sale of select assets and the redemption of warrants.
Net Change in Unrealized Gain (Loss)
For the fiscal years endedDecember 31, 2019 and 2018, net change in unrealized gain (loss) on the Company's assets and liabilities totaled($14.7) million and($10.1) million , respectively. Net unrealized loss for the fiscal year endedDecember 31, 2019 is primarily due to unrealized depreciation in the value of our investments inIHS Intermediate, Inc. ,SOAGG LLC andAmerican Teleconferencing Services, Ltd. , among others, partially offset by unrealized appreciation in the value of our investments inCrystal Financial LLC ,PPT Management Holdings, LLC andAlteon Health, LLC , among others. Net unrealized loss for the fiscal year endedDecember 31, 2018 is primarily due to unrealized depreciation in the value of our investments inCrystal Financial LLC ,Rug Doctor, LLC andIHS Intermediate, Inc. among others, partially offset by unrealized appreciation in the value of our investments inSOAGG LLC andPhymed Management LLC , among others. 79
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Net Increase in Net Assets From Operations
For the fiscal years endedDecember 31, 2019 and 2018, the Company had a net increase in net assets resulting from operations of$56.0 million and$66.9 million , respectively. For the fiscal years endedDecember 31, 2019 and 2018, earnings per average share were$1.33 and$1.58 , respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity and capital resources are generated and generally available through its Credit Facility, the 2022 Unsecured Notes, the 2022 Tranche C Notes, the NEFPASS Facility, the 2023 Unsecured Notes, the 2024 Unsecured Notes and the 2026 Unsecured Notes (collectively the "Credit Facilities"), through cash flows from operations, investment sales, prepayments of senior and subordinated loans, income earned on investments and cash equivalents, and periodic follow-on equity and/or debt offerings. As ofDecember 31, 2019 , we had a total of$447.1 million of unused borrowing capacity under the Credit Facilities, subject to borrowing base limits. We may from time to time issue equity and/or debt securities in either public or private offerings. The issuance of such securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful. The primary uses of existing funds and any funds raised in the future is expected to be for investments in portfolio companies, repayment of indebtedness, cash distributions to our stockholders, or for other general corporate purposes. OnFebruary 12, 2020 , a new lender to the Company executed a commitment increase to our Credit Facility providing for an additional$75.0 million of revolving credit, bringing our Credit Facility's total revolving credit capacity to$545.0 million . OnDecember 18, 2019 , the Company closed a private offering of$125 million of the 2024 Unsecured Notes with a fixed interest rate of 4.20% and a maturity date ofDecember 15, 2024 . Interest on the 2024 Unsecured Notes is due semi-annually onJune 15 andDecember 15 . The 2024 Unsecured Notes were issued in a private placement only to qualified institutional buyers. OnDecember 18, 2019 , the Company closed a private offering of$75 million of the 2026 Unsecured Notes with a fixed interest rate of 4.375% and a maturity date ofDecember 15, 2026 . Interest on the 2026 Unsecured Notes is due semi-annually onJune 15 andDecember 15 . The 2026 Unsecured Notes were issued in a private placement only to qualified institutional buyers. OnAugust 28, 2019 , the Company repaid its existing senior secured credit agreement dueSeptember 2021 and entered into the new senior secured credit agreement (the "Credit Facility"). The Credit Facility is composed of$470 million of revolving credit and$75 million of term loans. Borrowings generally bear interest at a rate per annum equal to the base rate plus a range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures inAugust 2024 and includes ratable amortization in the final year. OnDecember 28, 2017 , the Company closed a private offering of$21 million of the 2022 Tranche C Notes with a fixed interest rate of 4.50% and a maturity date ofDecember 28, 2022 . Interest on the 2022 Tranche C Notes is due semi-annually onJune 28 andDecember 28 . The 2022 Tranche C Notes were issued in a private placement only to qualified institutional buyers. OnNovember 22, 2017 , we issued$75 million in aggregate principal amount of publicly registered 2023 Unsecured Notes for net proceeds of$73.8 million . Interest on the 2023 Unsecured Notes is paid semi-annually onJanuary 20 andJuly 20 , at a fixed rate of 4.50% per year, commencing onJanuary 20, 2018 . The 2023 Unsecured Notes mature onJanuary 20, 2023 . OnFebruary 15, 2017 , the Company closed a private offering of$100 million of the 2022 Unsecured Notes with a fixed interest rate of 4.60% and a maturity date ofMay 8, 2022 . Interest on the 2022 Unsecured Notes is due semi-annually onMay 8 andNovember 8 . The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers. 80
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OnNovember 8, 2016 , the Company closed a private offering of$50 million of the 2022 Unsecured Notes with a fixed interest rate of 4.40% and a maturity date ofMay 8, 2022 . Interest on the 2022 Unsecured Notes is due semi-annually onMay 8 andNovember 8 . The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers. OnJanuary 11, 2013 , the Company closed its most recent follow-on public equity offering of 6.3 million shares of common stock raising approximately$146.9 million in net proceeds. The primary uses of the funds raised were for investments in portfolio companies, reductions in revolving debt outstanding and for other general corporate purposes.
The primary uses of existing funds and any funds raised in the future is expected to be for repayment of indebtedness, investments in portfolio companies, cash distributions to our stockholders or for other general corporate purposes.
Cash Equivalents We deem certainU.S. Treasury bills, repurchase agreements and other high-quality, short-term debt securities as cash equivalents. The Company makes purchases that are consistent with its purpose of making investments in securities described in paragraphs 1 through 3 of Section 55(a) of the 1940 Act. From time to time, including at or near the end of each fiscal quarter, we consider using various temporary investment strategies for our business. One strategy includes taking proactive steps by utilizing cash equivalents as temporary assets with the objective of enhancing our investment flexibility pursuant to Section 55 of the 1940 Act. More specifically, from time-to-time we may purchaseU.S. Treasury bills or other high-quality, short-term debt securities at or near the end of the quarter and typically close out the position on a net cash basis subsequent to quarter end. We may also utilize repurchase agreements or other balance sheet transactions, including drawing down on our credit facilities, as deemed appropriate. The amount of these transactions or such drawn cash for this purpose is excluded from total assets for purposes of computing the asset base upon which the management fee is determined. We held approximately$420 million in cash equivalents as ofDecember 31, 2019 . Debt Unsecured Notes OnDecember 18, 2019 , the Company closed a private offering of$125 million of the 2024 Unsecured Notes with a fixed interest rate of 4.20% and a maturity date ofDecember 15, 2024 . Interest on the 2024 Unsecured Notes is due semi-annually onJune 15 andDecember 15 . The 2024 Unsecured Notes were issued in a private placement only to qualified institutional buyers. OnDecember 18, 2019 , the Company closed a private offering of$75 million of the 2026 Unsecured Notes with a fixed interest rate of 4.375% and a maturity date ofDecember 15, 2026 . Interest on the 2026 Unsecured Notes is due semi-annually onJune 15 andDecember 15 . The 2026 Unsecured Notes were issued in a private placement only to qualified institutional buyers. OnDecember 28, 2017 , the Company closed a private offering of$21 million of the 2022 Tranche C Notes with a fixed interest rate of 4.50% and a maturity date ofDecember 28, 2022 . Interest on the 2022 Tranche C Notes is due semi-annually onJune 28 andDecember 28 . The 2022 Tranche C Notes were issued in a private placement only to qualified institutional buyers. OnNovember 22, 2017 , we issued$75 million in aggregate principal amount of publicly registered 2023 Unsecured Notes for net proceeds of$73.8 million . Interest on the 2023 Unsecured Notes is paid semi-annually onJanuary 20 andJuly 20 , at a fixed rate of 4.50% per year, commencing onJanuary 20, 2018 . The 2023 Unsecured Notes mature onJanuary 20, 2023 . OnFebruary 15, 2017 , the Company closed a private offering of$100 million of the 2022 Unsecured Notes with a fixed interest rate of 4.60% and a maturity date ofMay 8, 2022 . Interest on the 2022 Unsecured Notes is due semi-annually onMay 8 andNovember 8 . The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers. 81
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OnNovember 8, 2016 , the Company closed a private offering of$50 million of the 2022 Unsecured Notes with a fixed interest rate of 4.40% and a maturity date ofMay 8, 2022 . Interest on the 2022 Unsecured Notes is due semi-annually onMay 8 andNovember 8 . The 2022 Unsecured Notes were issued in a private placement only to qualified institutional buyers.
Revolving & Term Loan Facilities
OnAugust 28, 2019 , the Company repaid its existing senior secured credit agreement dueSeptember 2021 and entered into the new Credit Facility. The Credit Facility is composed of$470 million of revolving credit and$75 million of term loans. Borrowings generally bear interest at a rate per annum equal to the base rate plus a range of 2.00-2.25% or the alternate base rate plus 1.00%-1.25%. The Credit Facility has no LIBOR floor requirement. The Credit Facility matures inAugust 2024 and includes ratable amortization in the final year. The Credit Facility may be increased up to$800 million with additional new lenders or an increase in commitments from current lenders. The Credit Facility contains certain customary affirmative and negative covenants and events of default. In addition, the Credit Facility contains certain financial covenants that among other things, requires the Company to maintain a minimum shareholder's equity and a minimum asset coverage ratio. AtDecember 31, 2019 , outstanding USD equivalent borrowings under the Credit Facility totaled$117.9 million , composed of$42.9 million of revolving credit and$75.0 million of term loans. OnFebruary 12, 2020 , a new lender to the Company executed a commitment increase to our Credit Facility providing for an additional$75.0 million of revolving credit, bringing our Credit Facility's total revolving credit capacity to$545.0 million . OnMay 31, 2019 , the Company as transferor and SSLP 2016-1, LLC, a wholly-owned subsidiary of the Company, as borrower entered into amendment number two to the$200 million SSLP Facility withWells Fargo Bank, NA acting as administrative agent. The Company acted as servicer under the SSLP Facility. The SSLP Facility was scheduled to mature onMay 31, 2024 . The SSLP Facility generally bore interest at a rate of LIBOR plus 2.25%. The Company and SSLP 2016-1, LLC, as applicable, had made certain customary representations and warranties, and were required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The SSLP Facility included usual and customary events of default for credit facilities of this nature. OnOctober 31, 2019 , the SSLP Facility was extinguished. OnSeptember 26, 2018 ,NEFPASS SPV LLC , a newly formed wholly-owned subsidiary ofNEFPASS LLC , as borrower entered into the NEFPASS Facility withKeybank acting as administrative agent. The Company acts as servicer under the NEFPASS Facility. The NEFPASS Facility is scheduled to mature onSeptember 26, 2023 . The NEFPASS Facility generally bears interest at a rate of LIBOR plus 2.15%.NEFPASS and NEFPASS SPV LLC , as applicable, have made certain customary representations and warranties, and are required to comply with various covenants, including leverage restrictions, reporting requirements and other customary requirements for similar credit facilities. The NEFPASS Facility also includes usual and customary events of default for credit facilities of this nature. There were$30.0 million of borrowings outstanding as ofDecember 31, 2019 . Certain covenants on our issued debt may restrict our business activities, including limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code. AtDecember 31, 2019 , the Company was in compliance with all financial and operational covenants required by our Credit Facilities. 82
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Contractual Obligations
A summary of our significant contractual payment obligations is as follows as ofDecember 31, 2019 : Payments Due by Period (in millions) Less than More Than Total 1 Year 1-3 Years 3-5 Years 5 Years Revolving credit facilities(1)$ 72.9 $ - $ -$ 72.9 $ - Unsecured senior notes 446.0 - - 371.0 75.0 Term Loans 75.0 - - 75.0 -
(1) As of
capacity under our revolving credit facilities, subject to borrowing base
limits.
Under the provisions of the 1940 Act, we are permitted, as a BDC, to issue senior securities in amounts such that our asset coverage ratio, as defined in the 1940 Act, equals at least 150% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy the asset coverage test. If that happens, we may be required to sell a portion of our investments and, depending on the nature of our leverage, repay a portion of our indebtedness at a time when such sales may be disadvantageous. Also, any amounts that we use to service our indebtedness would not be available for distributions to our common stockholders. Furthermore, as a result of issuing senior securities, we would also be exposed to typical risks associated with leverage, including an increased risk of loss. Our stockholders approved being subject to a 150% asset coverage ratio effectiveOctober 12, 2018 .
Information about our senior securities is shown in the following table (in
thousands) as of each year ended
Involuntary
Asset Liquidating Average
Total Amount Coverage Preference Market Value
Class and Year Outstanding(1) Per Unit(2) Per Unit(3) Per Unit(4)
Revolving Credit Facility
Fiscal 2019 $ 42,900 $ 182 - N/A
Fiscal 2018 96,400 593 - N/A
Fiscal 2017 245,600 1,225 - N/A
Fiscal 2016 115,200 990 - N/A
Fiscal 2015 207,900 1,459 - N/A
Fiscal 2014 - - - N/A
Fiscal 2013 - - - N/A
Fiscal 2012 264,452 1,510 - N/A
Fiscal 2011 201,355 3,757 - N/A
Fiscal 2010 400,000 2,668 - N/A
2022 Unsecured Notes
Fiscal 2019 150,000 638 - N/A
Fiscal 2018 150,000 923 - N/A
Fiscal 2017 150,000 748 - N/A
Fiscal 2016 50,000 430 - N/A
2022 Tranche C Notes
Fiscal 2019 21,000 89 - N/A
Fiscal 2018 21,000 129 - N/A
Fiscal 2017 21,000 105 - N/A
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Involuntary
Asset Liquidating Average
Total Amount Coverage Preference Market Value
Class and Year Outstanding(1) Per Unit(2) Per Unit(3) Per Unit(4)2023 Unsecured Notes Fiscal 2019 75,000 319 - N/A Fiscal 2018 75,000 461 - N/A Fiscal 2017 75,000 374 - N/A 2024 Unsecured Notes Fiscal 2019 125,000 531 - N/A 2026 Unsecured Notes Fiscal 2019 75,000 319 - N/A 2042 Unsecured Notes Fiscal 2017 - - - N/A Fiscal 2016 100,000 859 -$ 1,002 Fiscal 2015 100,000 702 - 982 Fiscal 2014 100,000 2,294 - 943 Fiscal 2013 100,000 2,411 - 934 Fiscal 2012 100,000 571 - 923 Senior Secured Notes Fiscal 2017 - - - N/A Fiscal 2016 75,000 645 - N/A Fiscal 2015 75,000 527 - N/A Fiscal 2014 75,000 1,721 - N/A Fiscal 2013 75,000 1,808 - N/A Fiscal 2012 75,000 428 - N/A Term Loans Fiscal 2019 $ 75,000 319 - N/A Fiscal 2018 50,000 308 - N/A Fiscal 2017 50,000 250 - N/A Fiscal 2016 50,000 430 - N/A Fiscal 2015 50,000 351 - N/A Fiscal 2014 50,000 1,147 - N/A Fiscal 2013 50,000 1,206 - N/A Fiscal 2012 50,000 285 - N/A Fiscal 2011 35,000 653 - N/A Fiscal 2010 35,000 233 - N/A NEFPASS Facility Fiscal 2019 30,000 128 - N/A Fiscal 2018 30,000 185 - N/A SSLP Facility Fiscal 2019 - - - N/A Fiscal 2018 53,785 331 - N/ATotal Senior Securities Fiscal 2019$ 593,900 $ 2,525 - N/A Fiscal 2018 476,185 2,930 - N/A Fiscal 2017 541,600 2,702 - N/A Fiscal 2016 390,200 3,354 - N/A Fiscal 2015 432,900 3,039 - N/A Fiscal 2014 225,000 5,162 - N/A Fiscal 2013 225,000 5,425 - N/A Fiscal 2012 489,452 2,794 - N/A Fiscal 2011 236,355 4,410 - N/A Fiscal 2010 435,000 2,901 - N/A 84
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(1) Total amount of each class of senior securities outstanding (in thousands) at
the end of the period presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as our consolidated total assets, less all
liabilities and indebtedness not represented by senior securities, divided by
all senior securities representing indebtedness. This asset coverage ratio is
multiplied by one thousand to determine the Asset Coverage Per Unit. In order
to determine the specific Asset Coverage Per Unit for each class of debt, the
total Asset Coverage Per Unit is allocated based on the amount outstanding in
each class of debt at the end of the period. As of
coverage was 252.5%.
(3) The amount to which such class of senior security would be entitled upon the
involuntary liquidation of the issuer in preference to any security junior to
it.
(4) Not applicable except for the 2042 Unsecured Notes which were publicly
traded. The Average Market Value Per Unit is calculated by taking the daily
average closing price during the period and dividing it by twenty-five
dollars per share and multiplying the result by one thousand to determine a
unit price per thousand consistent with Asset Coverage Per Unit. The average
market value for the fiscal 2016, 2015, 2014, 2013 and 2012 periods was
We have also entered into two contracts under which we have future commitments: the Advisory Agreement, pursuant to whichSolar Capital Partners, LLC has agreed to serve as our investment adviser, and the Administration Agreement, pursuant to which the Administrator has agreed to furnish us with the facilities and administrative services necessary to conduct our day-to-day operations and provide on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. Payments under the Advisory Agreement are equal to (1) a percentage of the value of our average gross assets and (2) a two-part incentive fee. Payments under the Administration Agreement are equal to an amount based upon our allocable portion of the Administrator's overhead in performing its obligations under the Administration Agreement, including rent, technology systems, insurance and our allocable portion of the costs of our chief financial officer and chief compliance officer and their respective staffs. Either party may terminate each of the Advisory Agreement and administration agreement without penalty upon 60 days' written notice to the other. See note 3 to our Consolidated Financial Statements. OnJuly 31, 2017 , theCompany, NEFPASS LLC andNEFCORP LLC entered into a servicing agreement.NEFCORP LLC was engaged to provideNEFPASS LLC with administrative services related to the loans and capital leases held byNEFPASS LLC .NEFPASS LLC may terminate this agreement upon 30 days' written notice toNEFCORP LLC . 85
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Off-Balance Sheet Arrangements
From time-to-time and in the normal course of business, the Company may make unfunded capital commitments to current or prospective portfolio companies. Typically, the Company may agree to provide delayed-draw term loans or, to a lesser extent, revolving loan or equity commitments. These unfunded capital commitments always take into account the Company's liquidity and cash available for investment, portfolio and issuer diversification, and other considerations. Accordingly, the Company had the following unfunded capital commitments atDecember 31, 2019 andDecember 31, 2018 , respectively: December 31, December 31, 2019 2018 (in millions) Crystal Financial LLC*$ 44.3 $ 44.3 Kindred Biosciences, Inc. 13.8 - Rubius Therapeutics, Inc. 13.4 26.8 Cardiva Medical, Inc. 11.0 9.0 Centrexion Therapeutics, Inc. 7.6 - Cerapedics, Inc. 5.4 - PQ Bypass, Inc. 5.0 4.8 Phynet Dermatology LLC 4.7 12.4 Altern Marketing, LLC 4.2 - Varilease Finance, Inc. 3.4 - MRI Software LLC 3.3 - Enhanced Capital Group, LLC 2.5 - Solara Medical Supplies, Inc. 1.91.2 RS Energy Group U.S., Inc. 1.7 1.7 Alimera Sciences, Inc. 1.1 - iCIMS, Inc. 0.8 0.8 Atria Wealth Solutions, Inc. 0.4 1.5 BioElectron Technology Corporation - 17.5 BAM Capital, LLC - 15.0 Tetraphase Pharmaceuticals, Inc. - 13.8 Corindus Vascular Robotics, Inc. - 6.2 Kingsbridge Holdings, LLC - 4.1 Breathe Technologies, Inc. - 4.0 GenMark Diagnostics, Inc. - 3.0 Delphinus Medical Technologies, Inc. - 1.9 Datto, Inc. - 1.7 Total Commitments$ 124.5 $ 169.7
* The Company controls the funding of the
may cancel it at its discretion.
The credit agreements of the above loan commitments contain customary lending provisions and/or are subject to the portfolio company's achievement of certain milestones that allow relief to the Company from funding obligations for previously made commitments in instances where the underlying company experiences materially adverse events that affect the financial condition or business outlook for the company. Since these commitments may expire without being drawn upon, unfunded commitments do not necessarily represent future cash requirements or future earning assets for the Company. As ofDecember 31, 2019 andDecember 31, 2018 , the Company had sufficient cash available and/or liquid securities available to fund its commitments. In the normal course of its business, we invest or trade in various financial instruments and may enter into various investment activities with off-balance sheet risk, which may include forward foreign currency contracts. Generally, these financial instruments represent future commitments to purchase or sell other financial instruments at specific terms at future dates. These financial instruments contain varying degrees of off-balance sheet risk whereby changes in the market value or our satisfaction of the obligations may exceed the amount recognized in our Consolidated Statements of Assets and Liabilities. 86
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Distributions
The following table reflects the cash distributions per share on our common
stock for the two most recent fiscal years and the current fiscal year to date:
Date Declared Record Date Payment Date Amount
Fiscal 2020
February 20, 2020 March 19, 2020 April 3, 2020 $ 0.41
Fiscal 2019
November 4, 2019 December 19, 2019 January 3, 2020 $ 0.41
August 5, 2019 September 19, 2019 October 2, 2019 0.41
May 6, 2019 June 20, 2019 July 2, 2019 0.41
February 21, 2019 March 21, 2019 April 3, 2019 0.41
Total 2019 $ 1.64
Fiscal 2018
November 5, 2018 December 20, 2018 January 4, 2019 $ 0.41
August 2, 2018 September 20, 2018 October 2, 2018 0.41
May 7, 2018 June 21, 2018 July 3, 2018 0.41
February 22, 2018 March 22, 2018 April 3, 2018 0.41
Total 2018 $ 1.60
Tax characteristics of all distributions will be reported to stockholders on
Form 1099 after the end of the calendar year. Future quarterly distributions, if
any, will be determined by our Board. We expect that our distributions to
stockholders will generally be from accumulated net investment income, from net
realized capital gains or non-taxable return of capital, if any, as applicable.
We have elected to be taxed as a RIC under Subchapter M of the Code. To maintain
our RIC tax treatment, we must distribute at least 90% of our ordinary income
and realized net short-term capital gains in excess of realized net long-term
capital losses, if any, out of the assets legally available for distribution. In
addition, although we currently intend to distribute realized net capital gains
(i.e., net long-term capital gains in excess of short-term capital losses), if
any, at least annually, out of the assets legally available for such
distributions, we may in the future decide to retain such capital gains for
investment.
We maintain an "opt out" dividend reinvestment plan for our common stockholders.
As a result, if we declare a distribution, then stockholders' cash distributions
will be automatically reinvested in additional shares of our common stock,
unless they specifically "opt out" of the dividend reinvestment plan so as to
receive cash distributions.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, due to the asset coverage test
applicable to us as a business development company, we may in the future be
limited in our ability to make distributions. Also, our revolving credit
facility may limit our ability to declare distributions if we default under
certain provisions. If we do not distribute a certain percentage of our income
annually, we will suffer adverse tax consequences, including possible loss of
the tax benefits available to us as a regulated investment company. In addition,
in accordance with GAAP and tax regulations, we include in income certain
amounts that we have not yet received in cash, such as contractual
payment-in-kind interest, which represents contractual interest added to the
loan balance that becomes due at the end of the loan term, or the accrual of
original issue or market discount. Since we may recognize income before or
without receiving cash representing such income, we may have difficulty meeting
the requirement to distribute at least 90% of our investment company taxable
income to obtain tax benefits as a regulated investment company.
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With respect to the distributions to stockholders, income from origination, structuring, closing and certain other upfront fees associated with investments in portfolio companies are treated as taxable income and accordingly, distributed to stockholders.
Related Parties
We have entered into a number of business relationships with affiliated or related parties, including the following:
• We have entered into the Advisory Agreement with
board member, are managing members and senior investment professionals
of, and have financial and controlling interests in, the Investment
Adviser. In addition,
and Secretary serves as the Chief Financial Officer for Solar Capital
Partners .
• The Administrator provides us with the office facilities andadministrative services necessary to conduct day-to-day operations
pursuant to our Administration Agreement. We reimburse the Administrator
for the allocable portion of overhead and other expenses incurred by it
in performing its obligations under the Administration Agreement,
including rent, the fees and expenses associated with performingcompliance functions, and the compensation of our chief compliance
officer, our chief financial officer and their respective staffs.
• We have entered into a license agreement with the Investment Adviser,pursuant to which the Investment Adviser has granted us a non-exclusive,
royalty-free license to use the name "
The Investment Adviser may also manage other funds in the future that may have investment mandates that are similar, in whole and in part, with ours. For example, the Investment Adviser presently serves as investment adviser to Solar Senior Capital Ltd., a publicly traded BDC, which focuses on investing in senior secured loans, including first lien and second lien debt instruments. In addition,Michael S. Gross , our Chairman, Co-Chief Executive Officer and President,Bruce Spohler , our Co-Chief Executive Officer and Chief Operating Officer, andRichard L. Peteka , our Chief Financial Officer, serve in similar capacities for Solar Senior Capital Ltd. andSCP Private Credit Income BDC LLC . The Investment Adviser and certain investment advisory affiliates may determine that an investment is appropriate for us and for one or more of those other funds. In such event, depending on the availability of such investment and other appropriate factors, the Investment Adviser or its affiliates may determine that we should invest side-by-side with one or more other funds. Any such investments will be made only to the extent permitted by applicable law and interpretive positions of theSEC and its staff, and consistent with the Investment Adviser's allocation procedures. OnJune 13, 2017 , the Adviser received an exemptive order that permits the Company to participate in negotiated co-investment transactions with certain affiliates, in a manner consistent with the Company's investment objective, positions, policies, strategies and restrictions as well as regulatory requirements and other pertinent factors, and pursuant to various conditions (the "Order"). If the Company is unable to rely on the Order for a particular opportunity, such opportunity will be allocated first to the entity whose investment strategy is the most consistent with the opportunity being allocated, and second, if the terms of the opportunity are consistent with more than one entity's investment strategy, on an alternating basis. Although the Adviser's investment professionals will endeavor to allocate investment opportunities in a fair and equitable manner, the Company and its stockholders could be adversely affected to the extent investment opportunities are allocated among us and other investment vehicles managed or sponsored by, or affiliated with, our executive officers, directors and members of the Adviser. Related party transactions may occur amongSolar Capital Ltd. ,Crystal Financial LLC ,Equipment Operating Leases LLC ,Loyer Capital LLC andNEF Holdings LLC . These transactions may occur in the normal course of business. No administrative fees are paid toSolar Capital Partners byCrystal Financial LLC ,Equipment Operating Leases LLC ,Loyer Capital LLC orNEF Holdings LLC . 88
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In addition, we have adopted a formal code of ethics that governs the conduct of our officers and directors. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and theMaryland General Corporation Law.
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