BARINGS BDC, INC. The information in this section contains forward-looking statements that involve risks and uncertainties. Please see "Risk Factors" and "Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with the combined financial statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K. The following discussion is designed to provide a better understanding of our financial statements, including a brief discussion of our business, key factors that impacted our performance and a summary of our operating results. The following discussion should be read in conjunction with the consolidated financial statements and the notes thereto included or incorporated by reference in Item 8 of this Annual Report on Form 10-K. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.
OnDecember 23, 2020 , we completed our acquisition ofMVC Capital, Inc. , aDelaware corporation ("MVC") (the "MVC Acquisition") pursuant to the terms and conditions of that certain Agreement and Plan of Merger (the "MVC Merger Agreement"), dated as ofAugust 10, 2020 , with MVC,Mustang Acquisition Sub, Inc. , aDelaware corporation and our wholly owned subsidiary ("Acquisition Sub"), andBarings LLC , our external investment adviser and our administrator ("Barings"). To effect the acquisition, Acquisition Sub merged with and into MVC, with MVC surviving the merger as our wholly owned subsidiary (the "First MVC Merger"). Immediately thereafter, MVC merged with and into us, with us as the surviving company (the "Second MVC Merger" and, together with the First MVC Merger, the "MVC Merger"). Pursuant to the MVC Merger Agreement, MVC stockholders received the right to the following merger consideration in exchange for each share of MVC common stock issued and outstanding immediately prior to the effective time of the First MVC Merger (other than shares of MVC common stock issued and outstanding immediately prior to the effective time of the First MVC Merger that were held by a subsidiary of MVC or held, directly or indirectly, by us or the Acquisition Sub), in accordance with the MVC Merger Agreement: (i) an amount in cash from Barings, without interest, equal to$0.39492 , and (ii) 0.9790836 shares of our common stock, which ratio gave effect to the Euro-dollar exchange rate adjustment mechanism in the MVC Merger Agreement, plus cash in lieu of fractional shares. We issued approximately 17,354,332 shares of our common stock to MVC's then-existing stockholders in connection with the MVC Merger, thereby resulting in our then-existing stockholders owning approximately 73.4% of the combined company and MVC's then-existing stockholders owning approximately 26.6% of the combined company. In connection with the MVC Acquisition, onDecember 23, 2020 , following the closing of the MVC Merger, we entered into (1) an amended and restated investment advisory agreement (the "Amended and Restated Advisory Agreement") with Barings, effectiveJanuary 1, 2021 , and (2) a credit support agreement (the "MVC Credit Support Agreement") with Barings, pursuant to which Barings has agreed to provide credit support to us in the amount of up to$23.0 million relating to the net cumulative realized and unrealized losses on the acquired MVC investment portfolio over a 10-year period. See "Business-MVC Capital, Inc. Acquisition" and "Business-Management Agreements - Investment Advisory Agreement" in Item 1 of Part I of this Annual Report on Form 10-K, as well as "Note 2. Agreements and Related Party Transactions" and "Note. 6 Derivative Instruments" in the Notes to our Consolidated Financial Statements included in this Annual Report on Form 10-K for more information. In addition, in connection with the closing of the MVC Merger, our board of directors (the "Board") affirmed our commitment to open-market purchases of shares of our common stock in an aggregate amount of up to$15.0 million at then-current market prices at any time shares trade below 90% of our then most recently disclosed net asset value per share. Any repurchases pursuant to the authorized program will occur during the 12-month period that commenced upon the filing of our quarterly report on Form 10-Q for the quarter endedMarch 31, 2021 , which occurred onMay 6, 2021 , and will be made in accordance with applicable legal, regulatory and contractual 76 --------------------------------------------------------------------------------
requirements, including covenants under our
Pending Sierra Income Corporation Acquisition
OnSeptember 21, 2021 , we entered into an Agreement and Plan of Merger (the "Sierra Merger Agreement") by and among us,Mercury Acquisition Sub, Inc. , aMaryland corporation and our direct wholly owned subsidiary ("Sierra Acquisition Sub"), Sierra Income Corporation, aMaryland corporation ("Sierra"), and Barings. The Sierra Merger Agreement provides that, on the terms and subject to the conditions set forth in the Sierra Merger Agreement, Sierra Acquisition Sub will merge with and into Sierra, with Sierra continuing as the surviving company and as our wholly owned subsidiary (the "FirstSierra Merger ") and, immediately thereafter, Sierra will merge with and into us, withBarings BDC, Inc. continuing as the surviving company (the "SecondSierra Merger " and, together with the FirstSierra Merger , the "Sierra Merger"). Both the Board and the board of directors of Sierra, including all of the respective independent directors, have approved the Sierra Merger Agreement and the transactions contemplated therein. The parties to the Sierra Merger Agreement intend the Sierra Merger to be treated as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). In the FirstSierra Merger , each share of Sierra common stock issued and outstanding immediately prior to the effective time of the FirstSierra Merger (excluding any shares cancelled pursuant to the Sierra Merger Agreement) will be converted into the right to receive (i)$0.9783641 per share in cash, without interest, from Barings (such amount of cash, the "Sierra Cash Consideration") and (ii) 0.44973 of a validly issued, fully paid and non-assessable share of our common stock (the "Sierra Share Consideration" and, together with the Sierra Cash Consideration, the "Sierra Merger Consideration"). The Sierra Merger Agreement contains representations, warranties and covenants, including, among others, covenants relating to the operation of each of our and Sierra's businesses during the period prior to the closing of the Sierra Merger. We and Sierra have agreed to convene and hold stockholder meetings for the purpose of obtaining the approvals required of our and Sierra's stockholders, respectively, and our Board and the board of directors of Sierra have agreed to recommend that their respective stockholders approve the applicable proposals (as described below). The Sierra Merger Agreement provides that Sierra shall not, and shall cause its subsidiaries and instruct its representatives not to, directly or indirectly, solicit proposals relating to alternative transactions, or, subject to certain exceptions, initiate or participate in discussions or negotiations regarding, or provide information with respect to, any proposal for an alternative transaction. However, the Sierra board of directors may, subject to certain conditions, change its recommendation to the Sierra stockholders or, on payment of a termination fee of$11.0 million to us and the reimbursement of up to$2.0 million in expenses incurred by us and Barings, terminate the Sierra Merger Agreement and enter into an Alternative Acquisition Agreement (as defined in the Sierra Merger Agreement) for a Superior Proposal (as defined in the Sierra Merger Agreement) if it determines in good faith, after consultation with its outside legal counsel, that failure to do so would be inconsistent with the directors' duties under applicable law. Consummation of the FirstSierra Merger , which is currently anticipated to occur during the first quarter of fiscal year 2022, is subject to certain customary closing conditions, including (1) approval of the FirstSierra Merger by the holders of at least a majority of the outstanding shares of Sierra common stock entitled to vote thereon, (2) approval of the issuance of our common stock to be issued in the FirstSierra Merger by a majority of the votes cast by our stockholders on the matter at our stockholders meeting, (3) approval of the issuance of our common stock in connection with the FirstSierra Merger at a price below the then-current net asset value per share of our common stock, if applicable, by the vote specified in Section 63(2)(A) of the Investment Company Act of 1940, as amended (the "1940 Act"), (4) the absence of certain legal impediments to the consummation of the Sierra Merger, (5) effectiveness of the registration statement for our common stock to be issued as consideration in the FirstSierra Merger , (6) approval for listing on the NYSE of our common stock to be issued as consideration in the FirstSierra Merger , (7) subject to certain materiality standards, the accuracy of the representations and warranties and compliance with the covenants of each party to the Sierra Merger Agreement, and (8) required regulatory approvals 77 --------------------------------------------------------------------------------
(including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or early termination thereof).
Barings, as party to the Sierra Merger Agreement, agreed to vote all shares of our common stock over which it has voting power (other than in its fiduciary capacity) in favor of the proposals to be submitted by us to our stockholders for approval relating to the Sierra Merger. In addition, we and Sierra will take steps necessary to provide for the repayment at closing of Sierra's existing loan agreement. The Sierra Merger Agreement also contains certain termination rights in favor of us and Sierra, including if the FirstSierra Merger is not completed on or beforeMarch 31, 2022 or if the requisite approvals of our stockholders or Sierra stockholders are not obtained. Further, we will enter into an amendment and restatement of the Amended and Restated Advisory Agreement, effective as of the closing of the Sierra Merger, to raise the annualized hurdle rate thereunder from 8.0% to 8.25%. Following the closing of the Sierra Merger, we will also enter into a credit support agreement with Barings, for the benefit of the combined company, to protect against net cumulative unrealized and realized losses of up to$100.0 million on the acquired Sierra investment portfolio over the next ten years.
Overview of Our Business
We are aMaryland corporation incorporated onOctober 10, 2006 . InAugust 2018 , in connection with the closing of an externalization transaction through which Barings agreed to become our external investment adviser, we entered into an investment advisory agreement (the "Original Advisory Agreement") and an administration agreement (the "Administration Agreement") with Barings. In connection with the completion of our MVC Acquisition, we entered into the Amended and Restated Advisory Agreement with Barings onDecember 23, 2020 , following approval of the Amended and Restated Advisory Agreement by our stockholders at ourDecember 23, 2020 special meeting of stockholders. The terms of the Amended and Restated Advisory Agreement became effective onJanuary 1, 2021 . Under the terms of the Amended and Restated Advisory Agreement and the Administration Agreement, Barings serves as our investment adviser and administrator and manages our investment portfolio and performs (or oversees, or arranges for, the performance of) the administrative services necessary for our operation. An externally-managed BDC generally does not have any employees, and its investment and management functions are provided by an outside investment adviser and administrator under an advisory agreement and administration agreement. Instead of directly compensating employees, we pay Barings for investment and management services pursuant to the terms of the Amended and Restated Advisory Agreement (and, prior toJanuary 1, 2021 , pursuant to the terms of the Original Advisory Agreement) and the Administration Agreement. Under the terms of the Amended and Restated Advisory Agreement (and, prior toJanuary 1, 2021 , under the terms of the Original Advisory Agreement), the fees paid to Barings for managing our affairs are determined based upon an objective and fixed formula, as compared with the subjective and variable nature of the costs associated with employing management and employees in an internally-managed BDC structure, which include bonuses that cannot be directly tied to Company performance because of restrictions on incentive compensation under the 1940 Act. Beginning inAugust 2018 , Barings shifted our investment focus to invest in syndicated senior secured loans, bonds and other fixed income securities. Since that time, Barings has transitioned our portfolio to primarily senior secured private debt investments in well-established middle-market businesses that operate across a wide range of industries. Barings' existingSEC co-investment exemptive relief under the 1940 Act (the "Exemptive Relief") permits us and Barings' affiliated private andSEC -registered funds to co-invest in Barings-originated loans, which allows Barings to efficiently implement its senior secured private debt investment strategy for us. Barings employs fundamental credit analysis, and targets investments in businesses with relatively low levels of cyclicality and operating risk. The holding size of each position will generally be dependent upon a number of factors including total facility size, pricing and structure, and the number of other lenders in the facility. Barings has experience managing levered vehicles, both public and private, and will seek to enhance our returns through the use of leverage with a prudent approach that prioritizes capital preservation. Barings believes this strategy and approach 78 --------------------------------------------------------------------------------
offers attractive risk/return with lower volatility given the potential for fewer defaults and greater resilience through market cycles.
We generate revenues in the form of interest income, primarily from our investments in debt securities, loan origination and other fees and dividend income. Fees generated in connection with our debt investments are recognized over the life of the loan using the effective interest method or, in some cases, recognized as earned. Our senior secured, middle-market, private debt investments generally have terms of between five and seven years. Our senior secured, middle-market, first lien private debt investments generally bear interest between LIBOR (or the applicable currency rate for investments in foreign currencies) plus 450 basis points and LIBOR plus 650 basis points per annum. Our subordinated middle-market, private debt investments generally bear interest between LIBOR (or the applicable currency rate for investments in foreign currencies) plus 700 basis points and LIBOR plus 900 basis points per annum if floating rate, and between 8% and 15% if fixed rate. From time to time, certain of our investments may have a form of interest, referred to as payment-in-kind, or PIK, interest, which is not paid currently but is instead accrued and added to the loan balance and paid at the end of the term. As ofDecember 31, 2021 andDecember 31, 2020 , the weighted average yield on the principal amount of our outstanding debt investments other than non-accrual debt investments was approximately 7.2% and 7.1%, respectively. The weighted average yield on the principal amount of all of our outstanding investments (including equity and equity-linked investments and short-term investments but excluding non-accrual debt investments) was approximately 6.1% and 6.4% as ofDecember 31, 2021 andDecember 31, 2020 , respectively. The weighted average yield on the principal amount of all of our outstanding investments (including equity and equity-linked investments, short-term investments and non-accrual debt investments) was approximately 6.4% and 6.5% as ofDecember 31, 2021 andDecember 31, 2020 , respectively.
COVID-19 Developments
The spread of the Coronavirus and the COVID-19 pandemic, and the related effect on theU.S. and global economies, has had adverse consequences for the business operations of some of our portfolio companies and has adversely affected, and threatens to continue to adversely affect, our operations and the operations of Barings, including with respect to us. Barings has taken proactive steps around COVID-19 to address the potential impacts on their people, clients, communities and everyone they come in contact with, directly or through their premises. Protecting their employees and supporting the communities in which they live and work is a priority. Barings continues to operate with the majority of employees inthe United States working remotely while maintaining service levels to our partners and clients. Inthe United States , Barings offices remained accessible throughout the fourth quarter of 2021 for employees who had a business need to work from an office location. All US-based employees have adopted a hybrid working pattern and started returning to office locations effectiveJanuary 2022 . InEurope , the majority of employees shifted to working remotely in the fourth quarter of 2021. In Asia-Pac, the majority of employees are working from office locations on average 2-3 days per week. Barings' return-to-office taskforce continues to monitor the COVID-19 situation globally and are prepared to adapt office working patterns as required to ensure the safety of their employees and clients who visit Barings office locations. Barings' cybersecurity policies are applied consistently when working remotely or in the office. While we have been carefully monitoring the COVID-19 pandemic and its impact on our business and the business of our portfolio companies, we have continued to fund our existing debt commitments. In addition, we have continued to make and originate, and expect to continue to make and originate, new loans. We cannot predict the full impact of the COVID-19 pandemic, including its duration inthe United States and worldwide and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. We are unable to predict the extent and duration of any business and supply-chain disruptions, the extent to which COVID-19 will negatively affect our portfolio companies' operating results or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the operations of our portfolio companies, certain portfolio companies could experience financial distress and possibly default on their financial obligations to us and their other capital providers. Some of our portfolio 79 -------------------------------------------------------------------------------- companies may significantly curtail business operations, furlough or lay off employees and terminate service providers, and defer capital expenditures if subjected to prolonged and severe financial distress, which would likely impair their business on a permanent basis. These developments would likely result in a decrease in the value of our investment in any such portfolio company. We will continue to monitor the situation relating to the COVID-19 pandemic and guidance fromU.S. and international authorities, including federal, state and local public health authorities and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our plan of operation. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, to the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments, our financial condition and the results of operations and financial condition of our portfolio companies. Portfolio Composition The total value of our investment portfolio was$1,800.6 million as ofDecember 31, 2021 , as compared to$1,495.8 million as ofDecember 31, 2020 . As ofDecember 31, 2021 , we had investments in 212 portfolio companies with an aggregate cost of$1,787.8 million . As ofDecember 31, 2020 , we had investments in 146 portfolio companies and two money market fund with an aggregate cost of$1,486.1 million . As of bothDecember 31, 2021 and 2020, none of our portfolio investments represented greater than 10% of the total fair value of our investment portfolio.
As of
Percentage of Percentage of
Cost Total Portfolio Fair Value Total Portfolio
December 31, 2021 :
Senior debt and 1st lien notes $ 1,217,899,217 68 % $ 1,221,597,953 68 %
Subordinated debt and 2nd lien
notes 253,550,848 14 240,036,808 13
Structured products 37,054,829 2 40,270,659 2
Equity shares 145,790,765 8 154,476,657 9
Equity warrants 1,111,602 - 1,107,543 -
Investments in joint
ventures/PE fund 132,416,803 8 143,104,332 8
Short-term investments - - - -
$ 1,787,824,064 100 % $ 1,800,593,952 100 %
December 31, 2020:
Senior debt and 1st lien notes $ 1,167,436,742 79 % $ 1,171,250,512 79 %
Subordinated debt and 2nd lien
notes 137,776,808 9 138,767,120 9
Structured products 30,071,808 2 32,508,845 2
Equity shares 44,693,645 3 44,651,114 3
Equity warrants 1,235,383 - 1,300,197 -
Investments in joint
ventures/PE fund 39,282,532 3 41,759,922 3
Short-term investments 65,558,227 4 65,558,227 4
$ 1,486,055,145 100 % $ 1,495,795,937 100 %
80
--------------------------------------------------------------------------------Investment Activity
During the year endedDecember 31, 2021 , we made 112 new investments totaling$1,069.4 million , made investments in existing portfolio companies totaling$234.0 million , made a new joint venture equity investment totaling$13.7 million , made additional investments in existing joint venture equity portfolio companies totaling$79.4 million and made an$89.8 million equity co-investment alongside certain affiliates in a portfolio company focused on directly originated, senior-secured asset-based loans to middle-market companies. We had 34 loans repaid at par totaling total$282.8 million and received$36.1 million of portfolio company principal payments. In addition, we sold$252.9 million of loans, recognizing a net realized gain on these transactions of$2.5 million , and sold$536.4 million of investments to our joint venture, realizing a loss on these transactions of$1.4 million . Lastly, we received proceeds related to the sale of equity investments totaling$8.6 million and recognized a net realized gain on such sales totaling$1.6 million . During the year endedDecember 31, 2020 , we made 76 new investments totaling$743.2 million , purchased$185.0 million of investments as part of the MVC Acquisition, made investments in existing portfolio companies totaling$114.6 million , made a new joint venture equity investment totaling$10.0 million and made an additional investment in one existing joint venture equity portfolio company totaling$10.0 million . We had 18 loans repaid at par totaling total$76.4 million and received$15.3 million of portfolio company principal payments. In addition, we sold$468.4 million of loans, recognizing a net realized loss on these transactions of$39.5 million , and sold$126.1 million of middle-market portfolio company debt investments to our joint venture realizing a loss on these transactions of$1.4 million . In addition, one loan investment was restructured. UnderU.S. GAAP, this restructuring was considered a material modification and as a result, we recognized a loss of approximately$0.6 million related to this restructuring. Lastly, we received$0.8 million in escrow distributions from legacy portfolio companies, which were recognized as realized gains and recognized a realized loss of$1.1 million relating to indemnification claims for a legacyTriangle Capital Corporation portfolio company. Total portfolio investment activity for the years endedDecember 31, 2021 and 2020 was as follows: Investments Senior Debt in Joint and 1st Lien Subordinated Debt Structured Equity Ventures/ Short-termDecember 31, 2021 Notes and 2nd Lien Notes Products Shares Equity WarrantsPE Fund Investments Total Fair value, beginning of period$ 1,171,250,512 $ 138,767,120 $ 32,508,845 $ 44,651,114 $ 1,300,197 $ 41,759,922 $ 65,558,227 $ 1,495,795,937 New investments 1,104,331,866 160,737,734 19,815,398 108,111,475 163,000 93,134,271 297,560,982 1,783,854,726 Proceeds from sales of investments (765,417,430) (13,683,500) (10,068,420) (8,269,168) (450,000) - (363,118,408) (1,161,006,926) Loan origination fees received (26,844,600) (3,659,741) - - - - - (30,504,341) Principal repayments received (275,645,832) (39,272,993) (4,007,677) - - - - (318,926,502) Payment in kind interest 3,112,247 8,503,991 - - - - - 11,616,238 Accretion of loan premium/discount 2,032,636 2,582,431 31,218 - - - - 4,646,285 Accretion of deferred loan origination revenue 8,841,329 602,604 - - - - - 9,443,933 Realized gain (loss) 52,258 (36,487) 1,212,504 1,254,812 163,219 - (801) 2,645,505 Unrealized appreciation (depreciation) (115,033) (14,504,351) 778,791 8,728,424 (68,873) 8,210,139 - 3,029,097
Fair value, end of period
$ 40,270,659 $ 154,476,657 $ 1,107,543 $ 143,104,332 $ -$ 1,800,593,952 81
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Senior Debt Subordinated
and 1st Lien Debt and 2nd Structured Equity Investment in Short-term
December 31, 2020 Notes Lien Notes Products Shares Equity Warrants Joint Venture Investments Total
Fair value, beginning of
period $ 1,050,863,369 $ 15,220,969 $ - $ 760,716 $ - $ 10,229,813 $ 96,568,940 $ 1,173,643,807
New investments 815,145,050 8,244,226 33,018,233 1,286,365 101,602 20,000,000 1,182,185,606 2,059,981,082
Investments acquired in MVC
merger 9,720,000 122,082,933 - 42,980,466 1,133,781 9,124,262 - 185,041,442
Proceeds from sales of
investments (588,450,883) (2,940,255) (3,000,000) 221,094 - - (1,213,197,945) (1,807,367,989)
Loan origination fees
received (19,013,021) (180,224) - - - - - (19,193,245)
Principal repayments
received (86,295,211) (5,104,857) (336,069) - - - - (91,736,137)
Payment in kind interest 453,896 41,753 - - - - - 495,649
Accretion of loan
premium/discount 1,635,917 111,923 58,132 - - - - 1,805,972
Accretion of deferred loan
origination revenue 2,672,194 44,571 - - - - - 2,716,765
Realized gain (loss) (38,462,897) 137,542 331,511 (310,105) - - 1,626 (38,302,323)
Unrealized appreciation
(depreciation) 22,982,098 1,108,539 2,437,038 (287,422) 64,814 2,405,847 - 28,710,914
Fair value, end of period $ 1,171,250,512 $ 138,767,120 $ 32,508,845 $ 44,651,114 $ 1,300,197 $ 41,759,922 $ 65,558,227 $ 1,495,795,937 Non-Accrual Assets Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. As ofDecember 31, 2021 , we had two assets on non-accrual, the fair value of which was$36.0 million , which comprised 2.0% of the total fair value of our portfolio, and the cost of which was$50.9 million , which comprised 2.9% of the total cost of our portfolio. As ofDecember 31, 2020 , we had one asset on non-accrual, the fair value of which was$3.0 million , which comprised 0.2% of the total fair value of our portfolio, and the cost of which was$3.0 million , which comprised 0.2% of the total cost of our portfolio.
A summary of our non-accrual assets as of
In connection with the MVC Acquisition, we purchased our debt investment inLegal Solutions Holdings , or Legal Solutions. During the quarter endedSeptember 30, 2021 , we placed our debt investment in Legal Solutions on non-accrual status. As a result, underU.S. GAAP, we will not recognize interest income on our debt investment in Legal Solutions for financial reporting purposes. As ofDecember 31, 2021 , the cost of our debt investment in Legal Solutions was$10.1 million and the fair value of such investment was$5.9 million . 82 --------------------------------------------------------------------------------
In connection with the MVC Acquisition, we purchased our debt investment inCustom Alloy Corporation , or Custom Alloy. During the quarter endedDecember 31, 2021 , we placed our debt investment in Custom Alloy on non-accrual status. As a result, underU.S. GAAP, we will not recognize interest income on our debt investment in Custom Alloy for financial reporting purposes. As ofDecember 31, 2021 , the cost of our debt investment in Custom Alloy was$40.8 million and the fair value of such investment was$30.0 million .
Discussion and Analysis of Financial Condition and Results of Operations
Set forth below is a comparison of the results of operations and changes in financial condition for the years endedDecember 31, 2021 and 2020. The comparison of, and changes between, the fiscal years endedDecember 31, 2020 and 2019 can be found within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Part II of our annual report on Form 10-K for the fiscal year endedDecember 31, 2020 , which is incorporated herein by reference.
Results of Operations
Comparison of years ended
Operating results for the years ended
Year Ended December 31,
2021 2020
Total investment income $ 135,335,374 $ 71,031,068
Net operating expenses 76,367,540 39,972,665
Net investment income before taxes 58,967,834 31,058,403
Income taxes, including excise tax expense 7,495
70,599
Net investment income after taxes 58,960,339 30,987,804 Net realized losses (3,379,062) (38,289,580) Net unrealized appreciation 22,104,996 18,549,588 Loss on extinguishment of debt -
(3,088,728)
Benefit from (provision) for taxes (844) 17,709 Net increase in net assets resulting from operations$ 77,685,429 $ 8,176,793
Net increases or decreases in net assets resulting from operations vary substantially from period to period due to various factors. As a result, yearly comparisons of net increases or decreases in net assets resulting from operations may not be meaningful.
Investment Income
Year Ended December 31,
2021 2020
Total interest income $ 102,439,082 $ 65,620,891
Total dividend income 8,879,156 2,603
Total fee and other income 13,020,244 4,080,636
Total payment-in-kind interest income 10,996,305 1,326,307 Interest income from cash
587 631
Total investment income $ 135,335,374 $ 71,031,068
The change in total investment income for the year ended December 31, 2021 , as
compared to the year ended December 31, 2020 , was primarily due to an increase
in the average size of our portfolio, acceleration of unamortized OID and
unamortized loan origination fee income associated with repayments of loans, an
increase in payment-in-kind ("PIK") interest income and increased dividends from
portfolio companies and joint venture investments. For the year ended
December 31, 2021 , acceleration of unamortized OID income and unamortized loan
origination fees totaled $6.2 million , as compared to $0.5 million for the year
ended December 31, 2020 . For the year ended December 31, 2021 , PIK interest
income was $11.0 million , as compared to $1.3 million for the year ended
December 31, 2020 . For the year ended December 31, 2021 , dividends from
portfolio companies and joint venture investments were $8.9 million , as compared
to $2,603 for the year ended December 31, 2020 . The amount
83
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of our outstanding debt investments was $1,554.5 million as of December 31,
2021 , as compared to $1,399.9 million as of December 31, 2020 . The weighted
average yield on the principal amount of our outstanding debt investments, other
than non-accrual debt investments was 7.2% as of December 31, 2021 , as compared
to 7.1% as of December 31, 2020 .
Operating Expenses
Year Ended December 31,
2021 2020
Interest and other financing fees
Base management fee 19,516,741 14,317,693
Incentive management fees 14,741,949 -
Compensation expenses - 48,381
General and administrative expenses 9,095,185 5,793,880
Total operating expenses $ 76,367,540 $ 39,972,665 Interest and Other Financing Fees
Interest and other financing fees during the year endedDecember 31, 2021 were attributable to borrowings under theFebruary 2019 Credit Facility, theAugust 2025 Notes, the November Notes, the February Notes and theNovember 2026 Notes (each as defined below under "Liquidity and Capital Resources"). Interest and other financing fees during the year endedDecember 31, 2020 were attributable to borrowings underBarings BDC Senior Funding I, LLC's ("BSF") credit facility initially entered into inAugust 2018 withBank of America, N.A . (the "August 2018 Credit Facility"), theFebruary 2019 Credit Facility, ourMay 2019 $449.3 million term debt securitization (the "Debt Securitization"), theAugust 2025 Notes and the November Notes (each as defined below under "Liquidity and Capital Resources"). The increase in interest and other financing fees for the year endedDecember 31, 2021 as compared to the year endedDecember 31, 2020 , was primarily attributable to the issuance of the February Notes and theNovember 2026 Notes and increased borrowings under theFebruary 2019 Credit Facility, partially offset by the repayment of the Debt Securitization and the repayment of the borrowings under theAugust 2018 Credit Facility.
Base Management Fees
Under the terms of the Amended and Restated Advisory Agreement (and, prior toJanuary 1, 2021 , under the terms of the Original Advisory Agreement), we pay Barings a base management fee (the "Base Management Fee"), quarterly in arrears on a calendar quarter basis. The Base Management Fee is calculated based on the average value of our gross assets, excluding cash and cash equivalents, at the end of the two most recently completed calendar quarters prior to the quarter for which such fees are being calculated. Base Management Fees for any partial month or quarter are appropriately pro-rated. See Note 2 to our Consolidated Financial Statements for the year endedDecember 31, 2021 for additional information regarding the terms of the Amended and Restated Advisory Agreement (and, prior toJanuary 1, 2021 , the terms of the Original Advisory Agreement) and the fee arrangement thereunder. For the years endedDecember 31, 2021 andDecember 31, 2020 , the Base Management Fee was approximately$19.5 million and$14.3 million , respectively. The increase between periods was primarily due to the increase in our average gross assets, partially offset by a decrease in the Base Management Fee rate. The Base Management Fee rate was 1.250% for the year endedDecember 31, 2021 , as compared to 1.375% for the year endedDecember 31, 2020 . 84 --------------------------------------------------------------------------------
Incentive Fee (and, prior to
Under the Amended and Restated Advisory Agreement (and, prior toJanuary 1, 2021 , under the terms of the Original Advisory Agreement), we pay Barings an incentive fee. A portion of the incentive fee is based on our income and a portion is based on our capital gains. The income-based fee will be determined and paid quarterly in arrears based on the amount by which (x) the aggregate pre-incentive fee net investment income in respect of the current calendar quarter and the eleven preceding calendar quarters beginning with the calendar quarter that commences on or afterJanuary 1, 2021 , as the case may be (or the appropriate portion thereof in the case of any of our first eleven calendar quarters that commences on or afterJanuary 1, 2021 ) exceeds (y) the hurdle amount as calculated for the same period. See Note 2 to our Consolidated Financial Statements for additional information regarding the terms of the Amended and Restated Advisory Agreement and the fee arrangements thereunder. For the year endedDecember 31, 2021 , the amount of income-based fee incurred was$14.7 million . We did not incur any income-based fee for the year endedDecember 31, 2020 .
Compensation Expenses
Prior to the externalization transaction with Barings inAugust 2018 , compensation expenses were primarily influenced by headcount and levels of business activity. Our compensation expenses included salaries, discretionary compensation, equity-based compensation and benefits. Discretionary compensation was significantly impacted by our level of total investment income, our investment results, including investment realizations, prevailing labor markets and the external environment. In connection with the externalization transactions, all but two employees were terminated and remained employees untilFebruary 2020 .
General and Administrative Expenses
We entered into the Administration Agreement with Barings inAugust 2018 . Under the terms of the Administration Agreement, Barings performs (or oversees, or arranges for, the performance of) the administrative services necessary for our operations. We will reimburse Barings for the costs and expenses incurred by it in performing its obligations and providing personnel and facilities under the Administration Agreement in an amount to be negotiated and mutually agreed to by us and Barings quarterly in arrears; provided that the agreed-upon quarterly expense amount will not exceed the amount of expenses that would otherwise be reimbursable by us under the Administration Agreement for the applicable quarterly period, and Barings will not be entitled to the recoupment of any amounts in excess of the agreed-upon quarterly expense amount. See Note 2 to our Consolidated Financial Statements for additional information regarding the Administration Agreement. For the years endedDecember 31, 2021 and 2020, the amount of administration expense incurred and invoiced by Barings for expenses was approximately$2.5 million and$1.6 million , respectively. In addition to expenses incurred under the Administration Agreement, general and administrative expenses include Board fees, D&O insurance costs, as well as legal and accounting expenses.
Net Realized Gains (Losses)
Net realized gains (losses) during the years endedDecember 31, 2021 and 2020 were as follows: Year EndedDecember 31, 2021 2020
Non-Control / Non-Affiliate investments
Affiliate investments (100,931) -
Net realized gains (losses) on investments 2,645,505 (38,302,323)
Foreign currency transactions (6,024,567)
12,743
Net realized losses $ (3,379,062) $ (38,289,580) In the year ended
85
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For the year ended December 31, 2020 , we recognized a net realized loss totaling
$38.3 million , which consisted primarily of a net loss on our loan portfolio of
$38.0 million and a net loss of $1.1 million related to an indemnification claim
in connection with a legacy Triangle Capital Corporation portfolio company,
partially offset by $0.8 million in escrow distributions we received from
portfolio companies, which were recognized as realized gains.
Net Unrealized Appreciation and Depreciation
Net unrealized appreciation and depreciation during the years endedDecember 31, 2021 and 2020 was as follows: Year Ended December 31, 2021 2020 Non-Control / Non-Affiliate investments$ (11,086,729) $ 26,210,329 Affiliate investments 17,584,892 2,471,217 Control investments (3,469,066) 29,368
Net unrealized appreciation on investments 3,029,097 28,710,914
Credit support agreement 1,800,000 -
Foreign currency transactions 17,275,899 (10,161,326)
Net unrealized appreciation $ 22,104,996 $18,549,588
For the year endedDecember 31, 2021 , we recorded net unrealized appreciation totaling$22.1 million consisting of net unrealized appreciation on our current portfolio of$11.4 million , net unrealized appreciation related to foreign currency transactions of$17.3 million and unrealized appreciation of$1.8 million on the credit support agreement with Barings, net of unrealized depreciation reclassification adjustments of$8.4 million related to realized gains and losses recognized during the year. The net unrealized appreciation on our current portfolio of$11.4 million was driven primarily by broad market moves for investments of$31.5 million partially offset by the credit or fundamental performance of investments of$5.9 million and the impact of foreign currency exchange rates on investments of$14.2 million . For the year endedDecember 31, 2020 , we recorded net unrealized appreciation totaling$18.5 million consisting of net unrealized depreciation on our current portfolio of$27.9 million , net unrealized depreciation related to foreign currency transactions of$10.2 million and net unrealized appreciation reclassification adjustments of$56.6 million related to realized gains and losses recognized during the year. The net unrealized depreciation on our current portfolio of$27.9 million was driven primarily by the credit or fundamental performance of middle-market debt investments of$6.1 million and the broad market moves for the entire investment portfolio of$29.5 million , partially offset by the positive impact of foreign currency exchange rates on middle-market debt investments of$7.7 million .
Liquidity and Capital Resources
We believe that our current cash and foreign currencies on hand, our available borrowing capacity under theFebruary 2019 Credit Facility and our anticipated cash flows from operations will be adequate to meet our cash needs for our daily operations for at least the next twelve months. This "Liquidity and Capital Resources" section should be read in conjunction with "COVID-19 Developments" above, as well as with the notes to our Consolidated Financial Statements.
Cash Flows
For the year endedDecember 31, 2021 , we experienced a net decrease in cash in the amount of$8.2 million . During that period, our operating activities used$396.6 million in cash, consisting primarily of purchases of portfolio investments of$1,461.1 million and purchases of short-term investments of$297.6 million , partially offset by proceeds from sales or repayments of portfolio investments totaling$943.9 million and proceeds from the sales of short-term investments of$363.1 million . In addition, our financing activities provided net cash of$388.3 million , consisting of net proceeds of$343.1 million from the issuance of theNovember 2026 Notes and$149.8 million from the issuance of the February Notes (both as defined below under "Financing Transactions"), partially 86 --------------------------------------------------------------------------------
offset by net repayments under the
For the year endedDecember 31, 2020 , we experienced a net increase in cash in the amount of$70.5 million . During that period, our operating activities used$218.1 million in cash, consisting primarily of purchases of portfolio investments of$881.2 million , the acquisition of MVC (net of cash received) of$96.7 million and purchases of short-term investments of$1,182.2 million , partially offset by proceeds from sales of investments totaling$684.5 million and proceeds from the sales of short-term investments of$1,213.2 million . In addition, financing activities provided net cash of$288.6 million , consisting primarily of net borrowings under theAugust 2018 Credit Facility and theFebruary 2019 Credit Facility of$356.2 million , net proceeds from theAugust 2025 Notes and the November Notes issuances of$224.3 , net proceeds from the issuance of common stock as part of the acquisition of MVC of$160.4 million , partially offset by repayments of the Debt Securitization of$318.2 million , purchases of shares under the share repurchase plan of$7.1 million , repayment of the notes acquired as part of the acquisition of MVC of$95.5 million and dividends paid in the amount of$31.3 million . AtDecember 31, 2021 , we had$92.5 million of cash on hand.
Financing Transactions
OnFebruary 21, 2019 , we entered into theFebruary 2019 Credit Facility (as subsequently amended inDecember 2019 ), withING Capital LLC ("ING"), as administrative agent, and the lenders party thereto. The initial commitments under theFebruary 2019 Credit Facility total$800.0 million . Effective onNovember 4, 2021 , we increased aggregate commitments under theFebruary 2019 Credit Facility to$875.0 million from$800.0 million pursuant to the accordion feature under theFebruary 2019 Credit Facility, which allows for an increase in the total commitments to an aggregate of$1.2 billion subject to certain conditions and the satisfaction of specified financial covenants. We can borrow foreign currencies directly under theFebruary 2019 Credit Facility. TheFebruary 2019 Credit Facility, which is structured as a revolving credit facility, is secured primarily by a material portion of our assets and guaranteed by certain of our subsidiaries. Following the termination of theAugust 2018 Credit Facility onJune 30, 2020 , BSF became a subsidiary guarantor and its assets will secure theFebruary 2019 Credit Facility. The revolving period of theFebruary 2019 Credit Facility ends onFebruary 21, 2023 , followed by a one-year repayment period with a final maturity date ofFebruary 21, 2024 . Borrowings under theFebruary 2019 Credit Facility bear interest, subject to our election, on a per annum basis equal to (i) the applicable base rate plus 1.00% (or 1.25% if we no longer maintain an investment grade credit rating), (ii) the applicable LIBOR rate plus 2.00% (or 2.25% if we no longer maintain an investment grade credit rating), (iii) for borrowings denominated in certain foreign currencies other than Australian dollars, the applicable currency rate for the foreign currency as defined in the credit agreement plus 2.00% (or 2.25% if we no longer maintain an investment grade credit rating), or (iv) for borrowings denominated in Australian dollars, the applicable Australian dollars Screen Rate, plus 2.20% (or 2.45% if we no longer maintain an investment grade credit rating). The applicable base rate is equal to the greatest of (i) the prime rate, (ii) the federal funds rate plus 0.5%, (iii) theOvernight Bank Funding Rate plus 0.5%, (iv) the adjusted three-month applicable currency rate plus 1.0% and (v) 1.0%. The applicable LIBOR and currency rates depend on the currency and term of the draw under theFebruary 2019 Credit Facility, and cannot be less than zero. In addition, we (i) paid a commitment fee of 0.375% per annum on undrawn amounts for the period beginning on the closing date of theFebruary 2019 Credit Facility to and including the date that was six months after the closing date of theFebruary 2019 Credit Facility, and (ii) thereafter pay a commitment fee of (x) 0.5% per annum on undrawn amounts if the unused portion of theFebruary 2019 Credit Facility is greater than two-thirds of total commitments or (y) 0.375% per annum on undrawn amounts if the unused portion of theFebruary 2019 Credit Facility is equal to or less than two-thirds of total commitments. In connection with entering into theFebruary 2019 Credit Facility, we incurred financing fees of approximately$6.4 million , which will be amortized over the life of theFebruary 2019 Credit Facility. 87 -------------------------------------------------------------------------------- As ofDecember 31, 2021 , we were in compliance with all covenants under theFebruary 2019 Credit Facility and we hadU.S. dollar borrowings of$377.0 million outstanding under theFebruary 2019 Credit Facility with a weighted average interest rate of 2.125% (weighted average one month LIBOR of 0.125%), borrowings denominated in Swedish kronas of 12.8kr million ($1.4 million U.S. dollars) with an interest rate of 2.000% (one month STIBOR of 0.000%), borrowings denominated in British pounds sterling of £68.3 million ($92.5 million U.S. dollars) with a weighted average interest rate of 2.125% (weighted average one month GBP LIBOR of 0.125%), borrowings denominated in Australian dollars ofA$36.6 million ($26.6 million U.S. dollars) with a weighted average interest rate of 2.250% (weighted average one month AUD Screen Rate of 0.250%) and borrowings denominated in Euros of €138.6 million ($157.6 million U.S. dollars) with a weighted average interest rate of 2.00% (weighted average one month EURIBOR of 0.000%). The borrowings denominated in foreign currencies were translated intoU.S. dollars based on the spot rate at the relevant balance sheet date. The impact resulting from changes in foreign exchange rates on theFebruary 2019 Credit Facility borrowings is included in "Net unrealized appreciation (depreciation) - foreign currency transactions" in our Consolidated Statements of Operations. The fair values of the borrowings outstanding under theFebruary 2019 Credit Facility are based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model. As ofDecember 31, 2021 , the total fair value of the borrowings outstanding under theFebruary 2019 Credit Facility was$655.2 million . See Note 4 to our Consolidated Financial Statements for additional information regarding theFebruary 2019 Credit Facility.
Term Debt Securitization
OnMay 9, 2019 , we completed the Debt Securitization. Term debt securitizations are also known as collateralized loan obligations and are a form of secured financing, which is consolidated for financial reporting purposes and subject to our overall asset coverage requirement. The notes offered in the Debt Securitization (collectively, the "2019 Notes"), were issued byBarings BDC Static CLO Ltd. 2019-I, ("BBDC Static CLO Ltd. ") and Barings BDC Static CLO 2019-I, LLC , our wholly-owned and consolidated subsidiaries.BBDC Static CLO Ltd. and Barings BDC Static CLO 2019-I, LLC are collectively referred to herein as the Issuers. The 2019 Notes were secured by a diversified portfolio of senior secured loans and participation interests therein. The Debt Securitization was executed through a private placement of approximately$296.8 million ofAAA (sf) Class A-1 Senior Secured Floating Rate 2019 Notes (the "Class A-1 2019 Notes"), which bore interest at the three-month LIBOR plus 1.02%;$51.5 million of AA(sf) Class A-2 Senior Secured Floating Rate 2019 Notes (the "Class A-2 2019 Notes"), which bore interest at the three-month LIBOR plus 1.65%; and$101.0 million of Subordinated 2019 Notes which did not bear interest and were not rated. We retained all of the Subordinated 2019 Notes issued in the Debt Securitization in exchange for our sale and contribution toBBDC Static CLO Ltd. of the initial closing date portfolio, which included senior secured loans and participation interests. The 2019 Notes were scheduled to mature onApril 15, 2027 ; however the 2019 Notes could be redeemed by the Issuers, at our direction as holder of the Subordinated 2019 Notes, on any business day afterMay 9, 2020 . In connection with the sale and contribution, we made customary representations, warranties and covenants to the Issuers. The Class A-1 2019 Notes and Class A-2 2019 Notes were the secured obligations of the Issuers, the Subordinated 2019 Notes were the unsecured obligations ofBBDC Static CLO Ltd. , and the indenture governing the 2019 Notes included customary covenants and events of default. The 2019 Notes were not registered under the Securities Act or any state securities or "blue sky" laws and could not be offered or sold inthe United States absent registration with theSecurities and Exchange Commission (the "SEC") or an applicable exemption from registration.
We served as collateral manager to
The Class A-1 2019 Notes and the Class A-2 2019 Notes issued in connection with
the Debt Securitization had floating rate interest provisions based on the
three-month LIBOR that reset quarterly, except that LIBOR for the first interest
accrual period was calculated by reference to an interpolation between the rate
for deposits with a term equal to the next shorter period of time for which
rates were available and the rate appearing for deposits with a term equal to
the next longer period of time for which rates were available.
88
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During the year ended December 31, 2019 , $30.0 million of Class A-1 2019 Notes
were repaid. During the year ended December 31, 2020 , the remaining 2019 Notes
were repaid in full, with the final repayment on October 15, 2020 . See Note 4 to
our Consolidated Financial Statements for additional information regarding the
Debt Securitization.
August 2025 Notes
On August 3, 2020 , we entered into a Note Purchase Agreement (the "August 2020
NPA") with Massachusetts Mutual Life Insurance Company governing the issuance of
(1) $50.0 million in aggregate principal amount of Series A senior unsecured
notes due August 2025 (the "Series A Notes due 2025") with a fixed interest rate
of 4.66% per year, and (2) up to $50.0 million in aggregate principal amount of
additional senior unsecured notes due August 2025 with a fixed interest rate per
year to be determined (the "Additional Notes" and, collectively with the Series
A Notes due 2025, the "August 2025 Notes"), in each case, to qualified
institutional investors in a private placement. An aggregate principal amount of
$25.0 million of the Series A Notes due 2025 was issued on September 24, 2020
and an aggregate principal amount of $25.0 million of the Series A Notes due
2025 was issued on September 29, 2020 , both of which will mature on August 4,
2025 unless redeemed, purchased or prepaid prior to such date by us in
accordance with their terms. Interest on the August 2025 Notes is due
semiannually in March and September, beginning in March 2021 . In addition, we
are obligated to offer to repay the August 2025 Notes at par (plus accrued and
unpaid interest to, but not including, the date of prepayment) if certain change
in control events occur. Subject to the terms of the August 2020 NPA, we may
redeem the August 2025 Notes in whole or in part at any time or from time to
time at our option at par plus accrued interest to the prepayment date and, if
redeemed on or before November 3, 2024 , a make-whole premium. The August 2025
Notes are guaranteed by certain of our subsidiaries, and are our general
unsecured obligations that rank pari passu with all outstanding and future
unsecured unsubordinated indebtedness issued by us.
On
TheAugust 2020 NPA contains certain representations and warranties, and various covenants and reporting requirements customary for senior unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of our status as a BDC within the meaning of the 1940 Act, certain restrictions with respect to transactions with affiliates, fundamental changes, changes of line of business, permitted liens, investments and restricted payments, minimum shareholders' equity, maximum net debt to equity ratio and minimum asset coverage ratio. TheAugust 2020 NPA also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under our other indebtedness or that of our subsidiary guarantors, certain judgements and orders, and certain events of bankruptcy. Upon the occurrence of an event of default, the holders of at least 66-2/3% in principal amount of theAugust 2025 Notes at the time outstanding may declare allAugust 2025 Notes then outstanding to be immediately due and payable. As ofDecember 31, 2021 , we were in compliance with all covenants under theAugust 2020 NPA. TheAugust 2025 Notes were offered in reliance on Section 4(a)(2) of the Securities Act. TheAugust 2025 Notes have not and will not be registered under the Securities Act or any state securities laws and, unless so registered, may not be offered or sold inthe United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, as applicable. As ofDecember 31, 2021 , the fair value of the outstandingAugust 2025 Notes was$52.2 million . The fair value determination of theAugust 2025 Notes was based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model. November Notes OnNovember 4, 2020 , we entered into a Note Purchase Agreement (the "November 2020 NPA") governing the issuance of (1)$62.5 million in aggregate principal amount of Series B senior unsecured notes dueNovember 2025 (the "Series B Notes") with a fixed interest rate of 4.25% per year and (2)$112.5 million in aggregate principal amount of Series C senior unsecured notes dueNovember 2027 (the "Series C Notes," and, collectively with the 89 -------------------------------------------------------------------------------- Series B Notes, the "November Notes") with a fixed interest rate of 4.75% per year, in each case, to qualified institutional investors in a private placement. Each stated interest rate is subject to a step up of (x) 0.75% per year, to the extent the applicable November Notes do not satisfy certain investment grade conditions and/or (y) 1.50% per year, to the extent the ratio of our secured debt to total assets exceeds specified thresholds, measured as of each fiscal quarter end. The November Notes were delivered and paid for onNovember 5, 2020 . The Series B Notes will mature onNovember 4, 2025 , and the Series C Notes will mature onNovember 4, 2027 unless redeemed, purchased or prepaid prior to such date by us in accordance with their terms. Interest on the November Notes is due semiannually in May and November, beginning inMay 2021 . In addition, we are obligated to offer to repay the November Notes at par (plus accrued and unpaid interest to, but not including, the date of prepayment) if certain change in control events occur. Subject to the terms of theNovember 2020 NPA, we may redeem the Series B Notes and the Series C Notes in whole or in part at any time or from time to time at our option at par plus accrued interest to the prepayment date and, if redeemed on or beforeMay 4, 2025 , with respect to the Series B Notes, or on or beforeMay 4, 2027 , with respect to the Series C Notes, a make-whole premium. The November Notes are guaranteed by certain of our subsidiaries, and are our general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by us. TheNovember 2020 NPA contains certain representations and warranties, and various covenants and reporting requirements customary for senior unsecured notes issued in a private placement, including, without limitation, affirmative and negative covenants such as information reporting, maintenance of our status as a BDC within the meaning of the 1940 Act, certain restrictions with respect to transactions with affiliates, fundamental changes, changes of line of business, permitted liens, investments and restricted payments, minimum shareholders' equity, maximum net debt to equity ratio and minimum asset coverage ratio. TheNovember 2020 NPA also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under our other indebtedness or that of our subsidiary guarantors, certain judgements and orders, and certain events of bankruptcy. Upon the occurrence of an event of default, the holders of at least 66-2/3% in principal amount of the November Notes at the time outstanding may declare all November Notes then outstanding to be immediately due and payable. As ofDecember 31, 2021 , we were in compliance with all covenants under theNovember 2020 NPA. The November Notes were offered in reliance on Section 4(a)(2) of the Securities Act. The November Notes have not and will not be registered under the Securities Act or any state securities laws and, unless so registered, may not be offered or sold inthe United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, as applicable. As ofDecember 31, 2021 , the fair value of the outstanding Series B Notes and the Series C Notes was$64.1 million and$115.3 million , respectively. The fair value determinations of the Series B Notes and Series C Notes were based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model. February Notes OnFebruary 25, 2021 , we entered into a Note Purchase Agreement (the "February 2021 NPA") governing the issuance of (1)$80.0 million in aggregate principal amount of Series D senior unsecured notes dueFebruary 26, 2026 (the "Series D Notes") with a fixed interest rate of 3.41% per year and (2)$70.0 million in aggregate principal amount of Series E senior unsecured notes dueFebruary 26, 2028 (the "Series E Notes" and, collectively with the Series D Notes, the "February Notes") with a fixed interest rate of 4.06% per year, in each case, to qualified institutional investors in a private placement. Each stated interest rate is subject to a step up of (x) 0.75% per year, to the extent the applicable February Notes do not satisfy certain investment grade rating conditions and/or (y) 1.50% per year, to the extent the ratio of our secured debt to total assets exceeds specified thresholds, measured as of each fiscal quarter end. The February Notes were delivered and paid for onFebruary 26, 2021 . The Series D Notes will mature onFebruary 26, 2026 , and the Series E Notes will mature onFebruary 26, 2028 unless redeemed, purchased or prepaid prior to such date by us in accordance with the terms of theFebruary 2021 NPA. Interest on the February Notes is due semiannually in February and August of each year, beginning inAugust 2021 . In addition, we are obligated to offer to repay the February Notes at par (plus accrued and unpaid 90 -------------------------------------------------------------------------------- interest to, but not including, the date of prepayment) if certain change in control events occur. Subject to the terms of theFebruary 2021 NPA, we may redeem the Series D Notes and the Series E Notes in whole or in part at any time or from time to time at our option at par plus accrued interest to the prepayment date and, if redeemed on or beforeAugust 26, 2025 , with respect to the Series D Notes, or on or beforeAugust 26, 2027 , with respect to the Series E Notes, a make-whole premium. The February Notes are guaranteed by certain of our subsidiaries, and are our general unsecured obligations that rank pari passu with all outstanding and future unsecured unsubordinated indebtedness issued by us. TheFebruary 2021 NPA contains certain representations and warranties, and various covenants and reporting requirements customary for senior unsecured notes issued in a private placement, including, without limitation, information reporting, maintenance of our status as a BDC within the meaning of the 1940 Act, and certain restrictions with respect to transactions with affiliates, fundamental changes, changes of line of business, permitted liens, investments and restricted payments. In addition, theFebruary 2021 NPA contains the following financial covenants: (a) maintaining a minimum obligors' net worth, measured as of each fiscal quarter end; (b) not permitting our asset coverage ratio, as of the date of the incurrence of any debt for borrowed money or the making of any cash dividend to shareholders, to be less than the statutory minimum then applicable to us under the 1940 Act; and (c) not permitting our net debt to equity ratio to exceed 2.0x, measured as of each fiscal quarter end. TheFebruary 2021 NPA also contains customary events of default with customary cure and notice periods, including, without limitation, nonpayment, incorrect representation in any material respect, breach of covenant, cross-default under other indebtedness or that of our subsidiary guarantors, certain judgements and orders, and certain events of bankruptcy. Upon the occurrence of certain events of default, the holders of at least 66-2/3% in principal amount of the February Notes at the time outstanding may declare all February Notes then outstanding to be immediately due and payable. As ofDecember 31, 2021 , we were in compliance with all covenants under theFebruary 2021 NPA. The February Notes were offered in reliance on Section 4(a)(2) of the Securities Act. The February Notes have not and will not be registered under the Securities Act or any state securities laws and, unless so registered, may not be offered or sold inthe United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act, as applicable. As ofDecember 31, 2021 , the fair value of the outstanding Series D Notes and the Series E Notes was$79.2 million and$68.7 million , respectively. The fair value determinations of the Series D Notes and Series E Notes were based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model.November 2026 Notes OnNovember 23, 2021 , we entered into an Indenture (the "Base Indenture") and a Supplemental Indenture (the "First Supplemental Indenture" and, together with the Base Indenture, the "Indenture") withU.S. Bank National Association (the "Trustee"). The First Supplemental Indenture relates to our issuance of$350.0 million aggregate principal amount of its 3.300% notes due 2026 (the "November 2026 Notes"). TheNovember 2026 Notes will mature onNovember 23, 2026 and may be redeemed in whole or in part at our option at any time or from time to time at the redemption prices set forth in the Indenture. TheNovember 2026 Notes bear interest at a rate of 3.300% per year payable semi-annually onMay 23 andNovember 23 of each year, commencing onMay 23, 2022 . TheNovember 2026 Notes are our general unsecured obligations that rank senior in right of payment to all of our existing and future indebtedness that is expressly subordinated in right of payment to theNovember 2026 Notes, rank pari passu with all existing and future unsecured unsubordinated indebtedness issued by us, rank effectively junior 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 rank structurally junior to all existing and future indebtedness (including trade payables) incurred by our subsidiaries, financing vehicles or similar facilities. The Indenture contains certain covenants, including covenants requiring us to comply with the asset coverage requirements of Section 18(a)(1)(A) as modified by Section 61(a)(1) and (2) of the 1940 Act, whether or not it is subject to those requirements, and to provide financial information to the holders of theNovember 2026 Notes and 91 -------------------------------------------------------------------------------- the Trustee if we are no longer subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These covenants are subject to important limitations and exceptions that are described in the Indenture. In addition, on the occurrence of a "change of control repurchase event," as defined in the Indenture, we will generally be required to make an offer to purchase the outstandingNovember 2026 Notes at a price equal to 100% of the principal amount of suchNovember 2026 Notes plus accrued and unpaid interest to the repurchase date. TheNovember 2026 Notes were offered to persons reasonably believed to be qualified institutional buyers pursuant to Rule 144A under the Securities Act and to certain non-U.S. persons outsidethe United States pursuant to Regulation S under the Securities Act. TheNovember 2026 Notes have not been registered under the Securities Act or any state securities laws and may not be offered or sold inthe United States absent registration or an applicable exemption from such registration requirements. As ofDecember 31, 2021 , the fair value of the outstandingNovember 2026 Notes was$346.8 million . The fair value determinations of theNovember 2026 Notes were based on a market yield approach and current interest rates, which are Level 3 inputs to the market yield model.
Share Repurchase Plan
OnFebruary 27, 2020 , the Board approved an open-market share repurchase program for the 2020 fiscal year (the "2020 Share Repurchase Program"). Under the 2020 Share Repurchase Program, we were authorized during fiscal year 2020 to repurchase up to a maximum of 5.0% of the amount of shares outstanding as ofFebruary 27, 2020 if shares traded below NAV per share, subject to liquidity and regulatory constraints. Purchases under the 2020 Share Repurchase Program were made in open-market transactions and included transactions being executed by a broker selected us that had been delegated the authority to repurchase shares on our behalf in the open market in accordance with applicable rules under the Exchange Act, including Rules 10b5-1 and 10b-18 thereunder, and pursuant to, and under the terms and limitations of, the 2020 Share Repurchase Program. During the year endedDecember 31, 2020 , we repurchased a total of 989,050 shares of our common stock in the open market under the 2020 Share Repurchase Program at an average price of$7.21 per share, including broker commissions. In addition, in connection with the closing of the MVC Acquisition onDecember 23, 2020 , we committed to make open-market purchases of shares of our common stock in an aggregate amount of up to$15.0 million at then-current market prices at any time shares trade below 90% of our then most recently disclosed NAV per share. Any repurchases pursuant to the authorized program will occur during the 12-month period that commenced upon the filing of our quarterly report on Form 10-Q for the quarter endedMarch 31, 2021 , which occurred onMay 6, 2021 , and will be made in accordance with applicable legal, contractual and regulatory requirements. During the year endedDecember 31, 2021 , we did not repurchase any shares under the authorized program.
Distributions to Stockholders
We intend to pay quarterly distributions to our stockholders out of assets
legally available for distribution. We have adopted a dividend reinvestment plan
("DRIP") that provides for reinvestment of dividends on behalf of our
stockholders, unless a stockholder elects to receive cash. As a result, when we
declare a dividend, stockholders who have not opted out of the DRIP will have
their dividends automatically reinvested in shares of our common stock, rather
than receiving cash dividends.
We have elected to be treated as a RIC under the Code, and intend to make the
required distributions to our stockholders as specified therein. In order to
maintain our tax treatment as a RIC and to obtain RIC tax benefits, we must meet
certain minimum distribution, source-of-income and asset diversification
requirements. If such requirements are met, then we are generally required to
pay income taxes only on the portion of our taxable income and gains we do not
distribute (actually or constructively) and certain built-in gains. We have
historically met our minimum distribution requirements and continually monitor
our distribution requirements with the goal of ensuring compliance with the
Code. We can offer no assurance that we will achieve results that will permit
the payment of any level of cash distributions and our ability to make
distributions will be limited by the asset coverage requirement
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and related provisions under the 1940 Act and contained in any applicable
indenture or financing agreement and related supplements. In addition, in order
to satisfy the annual distribution requirement applicable to RICs, we may
declare a significant portion of our dividends in shares of our common stock
instead of in cash. As long as a portion of such dividend is paid in cash (which
portion may be as low as 20% of such dividend (and 10% of the dividend declared
through June 30, 2022 ) under published guidance from the Internal Revenue
Service) and certain requirements are met, the entire distribution will be
treated as a dividend for U.S. federal income tax purposes. As a result, a
stockholder generally would be subject to tax on 100% of the fair market value
of the dividend on the date the dividend is received by the stockholder in the
same manner as a cash dividend, even though most of the dividend was paid in
shares of our common stock.
The minimum distribution requirements applicable to RICs require us to
distribute to our stockholders each year at least 90% of our investment company
taxable income, or ICTI, as defined by the Code. Depending on the level of ICTI
and net capital gain, if any, earned in a tax year, we may choose to carry
forward ICTI in excess of current year distributions into the next tax year and
pay a 4% U.S. federal excise tax on such excess. Any such carryover ICTI must be
distributed before the end of the next tax year through a dividend declared
prior to filing the final tax return related to the year which generated such
ICTI.
ICTI generally differs from net investment income for financial reporting
purposes due to temporary and permanent differences in the recognition of income
and expenses. We may be required to recognize ICTI in certain circumstances in
which we do not receive cash. For example, if we hold debt obligations that are
treated under applicable tax rules as having original issue discount (such as
debt instruments issued with warrants), we must include in ICTI each year a
portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by
us in the same taxable year. We may also have to include in ICTI other amounts
that we have not yet received in cash, such as (i) PIK interest income and (ii)
interest income from investments that have been classified as non-accrual for
financial reporting purposes. Interest income on non-accrual investments is not
recognized for financial reporting purposes, but generally is recognized in
ICTI. Because any original issue discount or other amounts accrued will be
included in our ICTI for the year of accrual, we may be required to make a
distribution to our stockholders in order to satisfy the minimum distribution
requirements, even though we will not have received and may not ever receive any
corresponding cash amount. ICTI also excludes net unrealized appreciation or
depreciation, as investment gains or losses are not included in taxable income
until they are realized.
Critical Accounting Policies and Use of Estimates
The preparation of our financial statements in accordance withU.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods covered by such financial statements. We have identified investment valuation and revenue recognition as our most critical accounting estimates. On an on-going basis, we evaluate our estimates, including those related to the matters described below. These estimates are based on the information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates under different assumptions or conditions. A discussion of our critical accounting policies follows. We describe our most significant accounting policies in Note 1 to our Consolidated Financial Statements.
Investment Valuation
The most significant estimate inherent in the preparation of our financial
statements is the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded. We have a valuation
policy, as well as established and documented processes and methodologies for
determining the fair values of portfolio company investments on a recurring (at
least quarterly) basis in accordance with the 1940 Act and
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FASB ASC Topic 820, Fair Value Measurements and Disclosures, or ASC Topic 820.
Our current valuation policy and processes were established by Barings and were
approved by the Board.
As of December 31, 2021 , our investment portfolio, valued at fair value in
accordance with the Board-approved valuation policies, represented approximately
243% of our total net assets, as compared to approximately 208% of our total net
assets as of December 31, 2020 .
Under ASC Topic 820, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between a
willing buyer and a willing seller at the measurement date. For our portfolio
securities, fair value is generally the amount that we might reasonably expect
to receive upon the current sale of the security. The fair value measurement
assumes that the sale occurs in the principal market for the security, or in the
absence of a principal market, in the most advantageous market for the security.
If no market for the security exists or if we do not have access to the
principal market, the security should be valued based on the sale occurring in a
hypothetical market.
Under ASC Topic 820, there are three levels of valuation inputs, as follows:
Level 1 Inputs - include quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 Inputs - include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 Inputs - include inputs that are unobservable and significant to the fair value measurement.
A financial instrument is categorized within the ASC Topic 820 valuation
hierarchy based upon the lowest level of input to the valuation process that is
significant to the fair value measurement. For example, a Level 3 fair value
measurement may include inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore, unrealized appreciation and depreciation
related to such investments categorized as Level 3 investments within the tables
in the notes to our consolidated financial statements may include changes in
fair value that are attributable to both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3).
Our investment portfolio includes certain debt and equity instruments of
privately held companies for which quoted prices or other observable inputs
falling within the categories of Level 1 and Level 2 are generally not
available. In such cases, we determine the fair value of our investments in good
faith primarily using Level 3 inputs. In certain cases, quoted prices or other
observable inputs exist, and if so, we assess the appropriateness of the use of
these third-party quotes in determining fair value based on (i) our
understanding of the level of actual transactions used by the broker to develop
the quote and whether the quote was an indicative price or binding offer and
(ii) the depth and consistency of broker quotes and the correlation of changes
in broker quotes with underlying performance of the portfolio company.
There is no single standard for determining fair value in good faith, as fair
value depends upon the specific circumstances of each individual investment. The
recorded fair values of our Level 3 investments may differ significantly from
fair values that would have been used had an active market for the securities
existed. In addition, changes in the market environment and other events that
may occur over the life of the investments may cause the gains or losses
ultimately realized on these investments to be different than the valuations
currently assigned.
Investment Valuation Process
Barings has established a pricing committee that is, subject to the oversight of
the Board, responsible for the approval, implementation and oversight of the
processes and methodologies that relate to the pricing and valuation of assets
we hold. Barings uses independent third-party providers to price the portfolio,
but in the event an acceptable price cannot be obtained from an approved
external source, Barings will utilize alternative methods in accordance with
internal pricing procedures established by Barings' pricing committee.
At least annually, Barings conducts reviews of the primary pricing vendors to
validate that the inputs used in the vendors' pricing process are deemed to be
market observable. While Barings is not provided access to
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proprietary models of the vendors, the reviews have included on-site
walkthroughs of the pricing process, methodologies and control procedures for
each asset class and level for which prices are provided. The review also
includes an examination of the underlying inputs and assumptions for a sample of
individual securities across asset classes, credit rating levels and various
durations, a process Barings continues to perform annually. In addition, the
pricing vendors have an established challenge process in place for all security
valuations, which facilitates identification and resolution of prices that fall
outside expected ranges. Barings believes that the prices received from the
pricing vendors are representative of prices that would be received to sell the
assets at the measurement date (i.e. exit prices).
Our money market fund investments are generally valued using Level 1 inputs and
our equity investments listed on an exchange or on the NASDAQ National Market
System are valued using Level 1 inputs, using the last quoted sale price of that
day. Our syndicated senior secured loans and structured products are generally
valued using Level 2 inputs, which are generally valued at the bid quotation
obtained from dealers in loans by an independent pricing service. Our
middle-market, private debt and equity investments and are generally valued
using Level 3 inputs.
Independent Valuation
The fair value of loans and equity investments that are not syndicated or for which market quotations are not readily available, including middle-market loans, are generally submitted to independent providers to perform an independent valuation on those loans and equity investments as of the end of each quarter. Such loans and equity investments are initially held at cost, as that is a reasonable approximation of fair value on the acquisition date, and monitored for material changes that could affect the valuation (for example, changes in interest rates or the credit quality of the borrower). At the quarter end following the initial acquisition, such loans and equity investments are generally sent to a valuation provider which will determine the fair value of each investment. The independent valuation providers apply various methods (synthetic rating analysis, discounting cash flows, and re-underwriting analysis) to establish the rate of return a market participant would require (the "discount rate") as of the valuation date, given market conditions, prevailing lending standards and the perceived credit quality of the issuer. Future expected cash flows for each investment are discounted back to present value using these discount rates in the discounted cash flow analysis. A range of values will be provided by the valuation provider and Barings will determine the point within that range that it will use in making valuation recommendations to the Board, and will report to the Board on its rationale for each such determination. Barings uses its internal valuation model as a comparison point to validate the price range provided by the valuation provider and, where applicable, in determining the point within that range that it will use in making valuation recommendations to the Board. If Barings' pricing committee disagrees with the price range provided, it may make a fair value recommendation to the Board that is outside of the range provided by the independent valuation provider, and will notify the Board of any such override and the reasons therefore. In certain instances, we may determine that it is not cost-effective, and as a result is not in the stockholders' best interests, to request an independent valuation firm to perform an independent valuation on certain investments. Such instances include, but are not limited to, situations where the fair value of the investment in the portfolio company is determined to be insignificant relative to the total investment portfolio. Pursuant to these procedures, the Board determines in good faith whether our investments were valued at fair value in accordance with our valuation policies and procedures and the 1940 Act based on, among other things, the input of Barings, our Audit Committee and the independent valuation firm. TheSEC has adopted new Rule 2a-5 under the 1940 Act. This rule establishes requirements for determining fair value in good faith for purposes of the 1940 Act. We will comply with the new rule's valuation requirements on or before theSEC's compliance date in 2022.
Valuation Techniques
Our valuation techniques are based upon both observable and unobservable pricing
inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our market assumptions. Our assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the financial instrument. An
independent pricing service provider is the preferred source of pricing a loan,
however, to the extent the independent pricing service provider price is
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unavailable or not relevant and reliable, we will utilize alternative approaches
such as broker quotes or manual prices. We attempt to maximize the use of
observable inputs and minimize the use of unobservable inputs. The availability
of observable inputs can vary from investment to investment and is affected by a
wide variety of factors, including the type of security, whether the security is
new and not yet established in the marketplace, the liquidity of markets and
other characteristics particular to the security.
Valuation of Investments in Jocassee,
As Jocassee,Thompson Rivers ,Waccamaw River andMVC Private Equity Fund LP are investment companies with no readily determinable fair values, we estimate the fair value of our investments in these entities using net asset value of each company and our ownership percentage as a practical expedient. The net asset value is determined in accordance with the specialized accounting guidance for investment companies. Revenue Recognition Interest and Dividend Income Interest income, including amortization of premium and accretion of discount, is recorded on the accrual basis to the extent that such amounts are expected to be collected. Generally, when interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. The cessation of recognition of such interest will negatively impact the reported fair value of the investment. We write off any previously accrued and uncollected interest when it is determined that interest is no longer considered collectible. Dividend income is recorded on the ex-dividend date. We may have to include interest income in our ICTI, including original issue discount income, from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. As a result, we may be required to make a distribution to our stockholders in order to satisfy the minimum distribution requirements to maintain our RIC tax treatment, even though we will not have received and may not ever receive any corresponding cash amount. Additionally, any loss recognized by us forU.S. federal income tax purposes on previously accrued interest income will be treated as a capital loss.
Fee Income
Origination, facility, commitment, consent and other advance fees received in
connection with the origination of a loan, or Loan Origination Fees, are
recorded as deferred income and recognized as investment income over the term of
the loan. Upon prepayment of a loan, any unamortized Loan Origination Fees are
recorded as investment income. In the general course of our business, we receive
certain fees from portfolio companies, which are non-recurring in nature. Such
fees include loan prepayment penalties, advisory, loan amendment and other fees,
and are recorded as investment income when earned.
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Fee income for the years ended December 31, 2021 , 2020 and 2019 was as follows:
Year Ended December 31,
2021 2020 2019
Recurring Fee Income:
Amortization of loan origination fees $ 4,620,259 $ 2,179,859 $ 914,197
Management, valuation and other fees 2,185,600 867,465 275,510
Total Recurring Fee Income 6,805,859 3,047,324 1,189,707
Non-Recurring Fee Income:
Prepayment fees 474,499 84,151 59,617
Acceleration of unamortized loan origination fees 4,823,674
536,906 694,971
Advisory, loan amendment and other fees 916,212 412,255 172,525
Total Non-Recurring Fee Income 6,214,385 1,033,312 927,113
Total Fee Income $ 13,020,244 $ 4,080,636 $ 2,116,820 Payment-in-Kind (PIK) Interest Income
We currently hold, and expect to hold in the future, some loans in our portfolio that contain PIK interest provisions. PIK interest, computed at the contractual rate specified in each loan agreement, is periodically added to the principal balance of the loan, rather than being paid to us in cash, and is recorded as interest income. Thus, the actual collection of PIK interest may be deferred until the time of debt principal repayment. PIK interest, which is a non-cash source of income at the time of recognition, is included in our taxable income and therefore affects the amount we are required to distribute to our stockholders to maintain our tax treatment as a RIC forU.S. federal income tax purposes, even though we have not yet collected the cash. Generally, when current cash interest and/or principal payments on a loan become past due, or if we otherwise do not expect the borrower to be able to service its debt and other obligations, we will place the loan on non-accrual status and will generally cease recognizing PIK interest income on that loan for financial reporting purposes until all principal and interest have been brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. We write off any previously accrued and uncollected PIK interest when it is determined that the PIK interest is no longer collectible. We may have to include in our ICTI, PIK interest income from investments that have been classified as non-accrual for financial reporting purposes. Interest income on non-accrual investments is not recognized for financial reporting purposes, but generally is recognized in ICTI. As a result, we may be required to make a distribution to our stockholders in order to satisfy the minimum distribution requirements, even though we will not have received and may not ever receive any corresponding cash amount.
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