CRESCENT CAPITAL BDC, INC. The information contained in this section should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This discussion also should be read in conjunction with the "Cautionary Statement Regarding Forward Looking Statements" set forth on page 1 of this Quarterly Report on Form 10-Q. In this report, "we," "us," "our" and "Company" refer toCrescent Capital BDC, Inc. and its consolidated subsidiaries.
OVERVIEW
We are a specialty finance company focused on lending to middle-market companies. We were incorporated under the laws of theState of Delaware onFebruary 5, 2015 and onJanuary 30, 2020 , we changed our state of incorporation from theState of Delaware to theState of Maryland . We have elected to be treated as a BDC under the 1940 Act. In addition, we have elected to be treated forU.S. federal income tax purposes as a RIC under Subchapter M of the Code. As such, we are required to comply with various regulatory requirements, such as the requirement to invest at least 70% of our assets in "qualifying assets," source of income limitations, asset diversification requirements, and the requirement to distribute annually at least 90% of our taxable income and tax-exempt interest.
On
We are managed byCrescent Cap Advisors, LLC (the "Adviser"), an investment adviser that is registered with theSEC under the 1940 Act.CCAP Administration, LLC (the "Administrator"), provides the administrative services necessary for us to operate. Company management consists of investment and administrative professionals from the Adviser and Administrator along with our Board. The Adviser directs and executes our investment operations and capital raising activities subject to oversight from the Board, which sets our broad policies. The Board has delegated investment management of our investment assets to the Adviser. The Board consists of five directors, four of whom are independent. Our investment objective is to maximize the total return to our stockholders in the form of current income and capital appreciation through debt and related equity investments. We invest primarily in secured debt (including first lien, unitranche first lien and second-lien debt) and unsecured debt (including mezzanine and subordinated debt), as well as related equity securities of privateU.S. middle-market companies. We may purchase interests in loans or make debt investments, either (i) directly from our target companies as primary market or private credit investments (i.e., private credit transactions), or (ii) primary or secondary market bank loan or high yield transactions in the broadly syndicated "over-the-counter" market (i.e., broadly syndicated loans and bonds). Although our focus is to invest in less liquid private credit transactions, we may from time to time invest in more liquid broadly syndicated loans to complement our private credit transactions. "First lien" investments are senior loans on a lien basis to other liabilities in the issuer's capital structure that have the benefit of a first-priority security interest in assets of the issuer. The security interest ranks above the security interest of any second-lien lenders in those assets. "Unitranche first lien" investments are loans that may extend deeper in a company's capital structure than traditional first lien debt and may provide for a waterfall of cash flow priority among different lenders in the unitranche loan. In certain instances, we may find another lender to provide the "first out" portion of such loan and retain the "last out" portion of such loan, in which case, the "first out" portion of the loan would generally receive priority with respect to payment of principal, interest and any other amounts due thereunder over the "last out" portion that we would continue to hold. In exchange for the greater risk of loss, the "last out" portion earns a higher interest rate. "Second lien" investments are loans with a second priority lien on all existing and future assets of the portfolio company. The security interest ranks below the security interests of any first lien and unitranche first lien lenders in those assets.
"Unsecured debt" investments are loans that generally rank senior to a borrower's equity securities and junior in right of payment to such borrower's other senior indebtedness.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ materially. The critical accounting policies should be read in connection with our risk factors as disclosed herein. 72
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For a description of our critical accounting policies, see Note 2 "Significant Accounting Policies" to our consolidated financial statements included in this report. We consider the most significant accounting policies to be those related to our Valuation of Portfolio Investments, Revenue Recognition, Non-Accrual Investments, Distribution Policy, and Income Taxes.
COMPONENTS OF OPERATIONS
Investments
We expect our investment activity to vary substantially from period to period depending on many factors, the general economic environment, the amount of capital we have available to us, the level of merger and acquisition activity for middle-market companies, including the amount of debt and equity capital available to such companies and the competitive environment for the type of investments we make. In addition, as part of our risk strategy on investments, we may reduce certain levels of investments through partial sales or syndication to additional investors. We may not invest in any assets other than "qualifying assets" specified in the 1940 Act, unless, at the time the investments are made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Pursuant to rules adopted by theSEC , "eligible portfolio companies" include certain companies that do not have any securities listed on a national securities exchange and public companies whose securities are listed on a national securities exchange but whose market capitalization is less than$250 million .
The Investment Adviser
Our investment activities are managed by the Adviser, which is responsible for originating prospective investments, conducting research and due diligence investigations on potential investments, analyzing investment opportunities, negotiating and structuring our investments and monitoring our investments and portfolio companies on an ongoing basis. The Adviser has entered into a resource sharing agreement withCrescent Capital Group LP ("Crescent"), pursuant to which Crescent provides the Adviser with experienced investment professionals (including the members of the Adviser's investment committee) and access to Crescent's resources so as to enable the Adviser to fulfill its obligations under the Investment Advisory Agreement. Through the resource sharing agreement, the Adviser intends to capitalize on the deal origination, credit underwriting, due diligence, investment structuring, execution, portfolio management and monitoring experience of Crescent's investment professionals. OnJanuary 5, 2021 , Sun Life Financial Inc. (together with its subsidiaries and joint ventures, "Sun Life") acquired a majority interest in Crescent (the "Sun Life Transaction"). There were no changes to our investment objective, strategies and process or to the Crescent team responsible for the investment operations as a result of the Sun Life Transaction.
Revenues
We generate revenue primarily in the form of interest income on debt
investments, capital gains and distributions, if any, on equity securities that
we may acquire in portfolio companies. Certain investments may have contractual
PIK interest or dividends. PIK represents accrued interest or accumulated
dividends that are added to the loan principal of the investment on the
respective interest or dividend payment dates rather than being paid in cash and
generally becomes due at maturity or upon being called by the issuer. PIK is
recorded as interest or dividend income, as applicable. We also generate revenue
in the form of commitment or origination fees. Loan origination fees, original
issue discount and market discount or premium are capitalized, and we accrete or
amortize such amounts into income over the life of the loan using the effective
yield method.
Dividend income from common equity securities is recorded on the record date for
private portfolio companies or on the ex-dividend date for publicly-traded
portfolio companies. Dividend income from preferred equity securities is
recorded on an accrual basis to the extent that such amounts are payable by the
portfolio company and are expected to be collected.
We may receive other income, which may include income such as consent, waiver,
amendment, underwriting, and arranger fees associated with our investment
activities as well as any fees for managerial assistance services rendered to
the portfolio companies. Such fees are recognized as income when earned or the
services are rendered.
Expenses
Our primary operating expenses include the payment of management fees and
incentive fees to the Adviser under the Investment Advisory Agreement, as
amended, our allocable portion of overhead expenses under the administration
agreement with our Administrator (the "Administration Agreement"), operating
costs associated with our sub-administration agreement and other operating costs
described below. The management and incentive fees compensate the Adviser for
its work in identifying, evaluating, negotiating, closing and monitoring our
investments. We bear all other out-of-pocket costs and expenses of our
operations and transactions, including:
• the cost of calculating our net asset value, including the cost of any
third-party valuation services;
• fidelity bond, directors' and officers' liability insurance and other
insurance premiums;
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• fees and expenses associated with independent audits and outside legal
costs;
• independent directors' fees and expenses;
• administration fees and expenses, if any, payable under theAdministration Agreement (including payments based upon our allocable
portion of the Administrator's overhead in performing its obligations
under the Administration Agreement, rent and the allocable portion of the
cost of certain professional services provided to us, including but not
limited to, our accounting professionals, our legal counsel and
compliance professionals);
• U.S. federal, state and local taxes;
• the cost of effecting sales and repurchases of shares of our common stock
and other securities;
• fees payable to third parties relating to making investments, includingout-of-pocket fees and expenses associated with performing due diligence
and reviews of prospective investments;
• out-of-pocket fees and expenses associated with marketing efforts;
• federal and state registration fees and any stock exchange listing fees;
• brokerage commissions;
• costs associated with our reporting and compliance obligations under the
1940 Act and other applicable U.S. federal and state securities laws;
• debt service and other costs of borrowings or other financing
arrangements; and
• all other expenses reasonably incurred by us in connection with making
investments and administering our business.
We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.
Leverage
Our financing facilities allow us to borrow money and lever our investment portfolio, subject to the limitations of the 1940 Act, with the objective of increasing our yield. This is known as "leverage" and could increase or decrease returns to our stockholders. The use of leverage involves significant risks. Prior to the Small Business Credit Availability Act being signed into law, a BDC generally was not permitted to incur indebtedness unless immediately after such borrowing it has an asset coverage for total borrowings of at least 200%. The Small Business Credit Availability Act, signed into law onMarch 23, 2018 , contains a provision that grants a BDC the option, subject to certain conditions and disclosure obligations, to reduce the asset coverage requirement to 150%. OnMarch 3, 2020 , our Board of Directors approved, and onMay 4, 2020 , at an annual meeting of our stockholders, our stockholders approved, the application to us of the reduced asset coverage requirements in Section 61(a) of the 1940 Act. The application of the reduced asset coverage requirement, which became effective onMay 4, 2020 , permits us, provided certain requirements are satisfied, to double the maximum amount of leverage that it is permitted to incur by reducing the asset coverage requirement applicable to us from 200% to 150% (i.e., we are permitted to borrow up totwo dollars for every dollar we have in assets less all liabilities and indebtedness not represented by senior securities issued by us) in order to issue senior securities. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. The amount of leverage that we employ depends on our Adviser's and our Board's assessment of market conditions and other factors at the time of any proposed borrowing.
PORTFOLIO INVESTMENT ACTIVITY
We seek to create a broad and diversified portfolio that generally includes senior secured first lien, unitranche, senior secured second lien, unsecured loans and minority equity securities ofU.S. middle market companies. The size of our individual investments varies proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities have speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity. 74
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As ofSeptember 30, 2021 andDecember 31, 2020 , our portfolio at fair value was comprised of the following: $ in millionsSeptember 30, 2021 December 31, 2020
Investment Type Fair Value Percentage Fair Value Percentage Senior Secured First Lien $ 349.8 30.7% $ 373.6 36.1% Unitranche First Lien 597.0 52.4 413.6 40.0 Unitranche First Lien - Last Out 13.5 1.2 14.9 1.5 Senior Secured Second Lien 56.4 5.0 104.7 10.1 Unsecured Debt 5.4 0.5 3.0 0.3 Equity & Other 57.9 5.1 69.3 6.7 LLC/LP Equity Interests 58.6 5.1 54.9 5.3 Total investments $ 1,138.6 100.0%$ 1,034.0 100.0%
The following table shows our investment activity by investment type:
$ in millions
For the three months ended For the nine months ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020(1)
New investments at cost:
Senior Secured First Lien $ 36.4 $ 30.4 $ 101.0 $ 79.2
Unitranche First Lien 114.1 51.6 252.2 129.1
Unitranche First Lien - Last Out - - - -
Senior Secured Second Lien - - - 9.4
Unsecured Debt - - 2.3 -
Equity & Other 5.3 2.1 7.3 2.1
LLC/LP Equity Interests 2.7 - 4.9 8.5
Total $ 158.5 $ 84.1 $ 367.7 $ 228.3
Proceeds from investments sold or
repaid:
Senior Secured First Lien $ 59.0 $ 26.3 $ 131.3 $ 127.2
Unitranche First Lien 14.5 3.9 77.4 27.3
Unitranche First Lien - Last Out - - - 0.2
Senior Secured Second Lien 9.1 10.1 50.6 18.8
Unsecured Debt 0.3 6.6 0.3 6.6
Equity & Other 39.8 - 47.4 0.4
LLC/LP Equity Interests 0.1 - 2.6 1.8
Total $ 122.8 $ 46.9 $ 309.6 $ 182.3
Net increase (decrease) in
portfolio $ 35.7 $ 37.2 $ 58.1 $ 46.0
(1) Excludes
Alcentra Acquisition. The assets acquired, at cost, were comprised of
lien,
debt and
The following table presents certain selected information regarding our
investment portfolio as of
September 30 ,December 31, 2021 2020
Weighted average yield on income producing securities (at cost) (1)
7.6% 8.0%
Percentage of debt bearing a floating rate (at fair value)
99.7% 98.4%
Percentage of debt bearing a fixed rate (at fair value) 0.3% 1.6% Number of portfolio companies 132 132
(1) Yield excludes investments on non-accrual status.
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The following table shows the amortized cost of our performing and non-accrual debt and income producing debt securities as ofSeptember 30, 2021 andDecember 31, 2020 . $ in millions September 30, 2021 December 31, 2020 % of Fair Cost % of Cost Fair Value Value Cost % of Cost Fair Value % of Fair Value Performing$ 1,004.0 98.5%$ 1,010.5 98.9%$ 899.2 98.3%$ 899.5 98.7% Non-Accrual 15.6 1.5% 11.7 1.1% 15.6 1.7% 12.1 1.3% Total$ 1,019.6 100.0%$ 1,022.2 100.0%$ 914.8 100.0%$ 911.6 100.0% Loans are generally placed on non-accrual status when there is reasonable doubt that principal or interest will be collected in full. Non-accrual loans are restored to accrual status when past due principal and interest is paid current and, in management's judgment, are likely to remain current. Management may determine to not place a loan on non-accrual status if the loan has sufficient collateral value and is in the process of collection. As ofSeptember 30, 2021 , we had investments in two portfolio companies with three investment positions on non-accrual status, which represented 1.5% and 1.1% of the total debt investments at cost and fair value, respectively. As ofDecember 31, 2020 , we had investments in two portfolio companies with three investment positions on non-accrual status, which represented 1.7% and 1.3% of the total debt investments at cost and fair value, respectively. The remaining debt investments were performing and current on their interest payments as ofSeptember 30, 2021 andDecember 31, 2020 . The Adviser monitors our portfolio companies on an ongoing basis. The Adviser monitors the financial trends of each portfolio company to determine if it is meeting its business plans and to assess the appropriate course of action for each company. The Adviser has a number of methods of evaluating and monitoring the performance and fair value of our investments, which may include the following:
• assessment of success of the portfolio company in adhering to its business
plan and compliance with covenants;
• review of monthly and quarterly financial statements and financial
projections for portfolio companies.
• contact with portfolio company management and, if appropriate, the financial
or strategic sponsor, to discuss financial position, requirements and
accomplishments;
• comparisons to other companies in the industry; and
• attendance and participation in board meetings.
As part of the monitoring process, the Adviser regularly assesses the risk profile of each of our investments and, on a quarterly basis, grades each investment on a risk scale of 1 to 5. Risk assessment is not standardized in our industry and our risk assessment may not be comparable to ones used by our competitors. Our assessment is based on the following categories:
1 Involves the least amount of risk in our portfolio. The investment/borrower
is performing above expectations since investment, and the trends and risk
factors are generally favorable, which may include the financial performance
of the borrower or a potential exit.
2 Involves an acceptable level of risk that is similar to the risk at the time
of investment. The investment/borrower is generally performing as expected,
and the risk factors are neutral to favorable.
3 Involves an investment/borrower performing below expectations and indicates
that the investment's risk has increased somewhat since investment. The
borrower's loan payments are generally not past due and more likely than not
the borrower will remain in compliance with debt covenants. An investment
rating of 3 requires closer monitoring.
4 Involves an investment/borrower performing materially below expectations and
indicates that the loan's risk has increased materially since investment. In
addition to the borrower being generally out of compliance with debt
covenants, loan payments may be past due (but generally not more than 180
days past due). Placing loans on non-accrual status should be considered for
investments rated 4.
5 Involves an investment/borrower performing substantially below expectations
and indicates that the loan's risk has substantially increased since
investment. Most or all of the debt covenants are out of compliance and
payments are substantially delinquent. Loans rated 5 are not anticipated to
be repaid in full and the fair market values of the loans are generally
reduced to the anticipated recovery amounts. Loans with an investment rating
of 5 are generally placed on non-accrual status.
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The following table shows the composition of our portfolio on the 1 to 5 investment performance rating scale as ofSeptember 30, 2021 andDecember 31, 2020 . Investment performance ratings are accurate only as of those dates and may change due to subsequent developments relating to a portfolio company's business or financial condition, market conditions or developments, and other factors. $ in millions September 30, 2021 December 31, 2020 Investments at Percentage of Investments at Percentage of Investment Performance Rating Fair Value Total Portfolio Fair Value Total Portfolio 1 $ 13.4 1.2 % $ 9.8 0.9 % 2 1,003.7 88.2 895.1 86.6 3 109.8 9.6 117.0 11.3 4 11.7 1.0 12.1 1.2 5 - - - - Total $ 1,138.6 100.0 % $ 1,034.0 100.0 % RESULTS OF OPERATIONS Operating results for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: $ in millions For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020 Total investment income$ 25.5 $ 18.7 $ 69.8 $ 56.8 Total net expenses 12.8 6.5 34.7 20.1 Net investment income$ 12.7 $ 12.2 $ 35.1 $ 36.7 Net realized gain (loss) on investments 27.9 (0.5 ) 32.2 (1.7 ) Net unrealized appreciation (depreciation) on investments and forward contracts (23.5 ) 26.8 4.2 (11.1 ) Net realized and unrealized gains (losses) $ 4.4$ 26.3 $ 36.4 $ (12.8 ) Realized loss on asset acquisition - - - (3.8 ) Benefit/(Provision) for taxes on realized and unrealized appreciation (depreciation) on investments (0.4 ) (0.2 ) (0.7 ) 0.1 Net increase (decrease) in net assets resulting from operations$ 16.7 $ 38.3 $ 70.8 $ 20.2 Investment Income $ in millions For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020
Interest from investments$ 22.8 $ 17.5 $ 63.5 $ 52.1 Dividend Income 2.4 1.2 5.7 3.6 Other Income 0.3 - 0.6 1.1 Total investment income$ 25.5 $ 18.7 $ 69.8 $ 56.8 77
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Interest income, which includes amortization of upfront fees, increased from$17.5 million for the three months endedSeptember 30, 2020 to$22.8 million for the three months endedSeptember 30, 2021 , due to higher accelerated accretion of OID and organic net deployment. Included in interest from investments for the three months endedSeptember 30, 2021 and 2020 are$3.9 million and$0.3 million of accelerated accretion of OID related to paydown activity, respectively. Dividend income increased from$1.2 million for the three months endedSeptember 30, 2020 to$2.4 million for the three months endedSeptember 30, 2021 due to a one-time dividend distribution from a portfolio company. Other income which includes consent, waiver, amendment, agency, underwriting and arranger fees associated with our investment activities increased from$0 for the three months endedSeptember 30, 2020 to$0.3 million for the three months endedSeptember 30, 2021 . Interest income, which includes amortization of upfront fees, increased from$52.1 million for the nine months endedSeptember 30, 2020 to$63.5 million for the nine months endedSeptember 30, 2021 , due to organic net deployment and higher accelerated accretion of OID related to paydown activity. Included in interest from investments for the nine months endedSeptember 30, 2021 and 2020 are$7.0 million and$1.6 million of accelerated accretion of OID, respectively. Dividend income increased from$3.6 million for the nine months endedSeptember 30, 2020 to$5.7 million for the nine months endedSeptember 30, 2021 due to a one-time dividend distribution from a portfolio company. Other income which includes consent, waiver, amendment, agency, underwriting and arranger fees associated with our investment activities decreased from$1.1 million for the nine months endedSeptember 30, 2020 to$0.6 million for the nine months endedSeptember 30, 2021 . Expenses $ in millions For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020 Interest and other debt financing costs$ 5.7 $ 3.5 $ 14.5 $ 11.5 Management fees 3.5 2.9 10.1 8.3 Income based incentive fees 2.7 2.1 7.5 6.3 Capital gains based incentive fees 0.8 - 6.2 - Professional fees 0.5 0.4 1.5 1.1 Directors' fees 0.1 0.1 0.4 0.3 Other general and administrative expenses 0.7 0.7 2.0 1.8 Total expenses$ 14.0 $ 9.7 $ 42.2 $ 29.3 Management fee waiver (0.5 ) (1.2 ) (3.1 ) (3.4 ) Income based incentive fees waiver (0.9 ) (2.1 ) (5.8 ) (6.3 ) Net expenses$ 12.6 $ 6.4 $ 33.3 $ 19.6 Income and excise taxes 0.2 0.1 1.4 0.5 Total$ 12.8 $ 6.5 $ 34.7 $ 20.1
Interest and other debt financing costs
Interest and other debt financing costs include interest, amortization of deferred financing costs including upfront commitment fees and unused fees on our credit facilities. For the three months endedSeptember 30, 2021 and 2020 interest and other debt financing costs were$5.7 million and$3.5 million , respectively. For the nine months endedSeptember 30, 2021 and 2020 interest and other debt financing costs were$14.5 million and$11.5 million , respectively. The increase for both periods was due to a higher weighted average debt outstanding, higher weighted average cost of debt and acceleration of certain deferred financing costs. Base Management Fees For the three months endedSeptember 30, 2021 and 2020, we incurred management fees of$3.0 million and$1.7 million , respectively, which are net of waived amounts of$0.5 million and$1.2 million , respectively. For the nine months endedSeptember 30, 2021 and 2020, we incurred management fees of$7.0 million and$4.9 million , respectively, which are net of waived amounts of$3.1million and$3.4 million , respectively. The increase in net management fees for both three and nine month periods was driven by growing assets under management and expiration of the management fee waiver onJuly 31, 2021 . 78
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The Adviser has voluntarily waived its right to receive management fees on our investments inGACP II LP andWhiteHawk III Onshore Fund LP for any period in which these investments remain in the investment portfolio.
Incentive Fees
For the three months endedSeptember 30, 2021 and 2020 we incurred income based incentive fees of$2.7 million and$2.1 million , of which$0.9 million and$2.1 million , respectively, were waived. For the nine months endedSeptember 30, 2021 and 2020 we incurred income based incentive fees of$7.5 million and$6.3 million , of which$5.8 million and$6.3 million , respectively, were waived. The increase in net incentive fees for both three and nine month periods was driven by expiration of the income based incentive fee waiver onJuly 31, 2021 . For the three months endedSeptember 30, 2021 and 2020 we accrued$0.8 million and$0 , respectively, of capital gains based incentive fees. For the nine months endedSeptember 30, 2021 and 2020 we accrued$6.2 million and$0 , respectively, of capital gains based incentive fees. As ofSeptember 30, 2021 andDecember 31, 2020 ,$6.2 million and$0 , respectively, was accrued and unpaid. The increase in incentive fees on cumulative unrealized capital appreciation was attributable to the inception to date performance of the investment portfolio.
Professional Fees and Other General and Administrative Expenses
Professional fees generally include expenses from independent auditors, tax advisors, legal counsel and third party valuation agents. Other general and administrative expenses generally include overhead and staffing costs allocated from the Administrator, insurance premiums, sub-administration expenses and miscellaneous administrative costs associated with our operations and investment activity.
For the three months ended
For the three months ended
The increase in professional fees and other general and administrative expenses was attributable to servicing a growing investment portfolio.
Income and Excise Taxes
For the three months endedSeptember 30, 2021 and 2020, we expensed income and excise taxes of$0.2 million and$0.1 million . For the nine months endedSeptember 30, 2021 and 2020, we expensed income and excise taxes of$1.4 million and$0.5 million . The increase in income and excise tax was attributable to taxes due on allocated taxable income from an equity investment held in a blocker. We accrued an offsetting tax distribution, which was declared by the portfolio company, under dividend income.
Net Investment Income
For the three months endedSeptember 30, 2021 and 2020, GAAP net investment income was$12.7 million or$0.45 per share and$12.2 million or$0.43 per share, respectively. The increase was due to higher accelerated amortization income. For the nine months endedSeptember 30, 2021 and 2020, GAAP net investment income was$35.1 million or$1.25 per share and$36.7 million or$1.33 per share, respectively. The decrease was due to accrued capital gains based incentive fees recorded during current year. For the three months endedSeptember 30, 2021 and 2020, net investment income excluding capital gains incentive fees ("Adjusted Net Investment Income"), was$13.5 million or$0.48 per share and$12.2 million or$0.43 per share, respectively. For the nine months endedSeptember 30, 2021 and 2020, Adjusted Net Investment Income was$41.3 million or$1.47 per share and$36.7 million or$1.33 per share, respectively. The increase was due to a higher investment income from a growing investment portfolio and higher accelerated amortization income. 79
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The following table provides a reconciliation of net investment income (the most comparableU.S. GAAP measure) to Adjusted Net Investment Income for the periods presented: For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 Amount Per Share Amount Per Share Amount Per Share Amount Per Share GAAP net investment income$ 12.7 $ 0.45 $
12.2
0.03 - - 6.2 0.22 - -
Adjusted Net Investment Income
12.2$ 0.43 $ 41.3 $ 1.47 $ 36.7 $ 1.33 On a supplemental basis, we are disclosing Adjusted Net Investment Income and per share Adjusted Net Investment Income, each of which is a financial measure that is calculated and presented on a basis of methodology other than in accordance withU.S. GAAP ("non-GAAP"). Adjusted Net Investment Income represents net investment income, excluding capital gains incentive fees. We use this non-GAAP financial measure internally to analyze and evaluate financial results and performance and believe that this non-GAAP financial measure is useful to investors as an additional tool to evaluate ongoing results and trends without giving effect to capital gains incentive fees. The Company's investment advisory agreement provides that a capital gains-based incentive fee is determined and paid annually with respect to realized capital gains (but not unrealized capital appreciation) to the extent such realized capital gains exceed realized capital losses and unrealized capital depreciation on a cumulative basis. We believe that Adjusted Net Investment Income is a useful performance measure because it reflects the net investment income produced on the Company's investments during a period without giving effect to any changes in the value of such investments and any related capital gains incentive fees between periods. The presentation of Adjusted Net Investment Income is not intended to be a substitute for financial results prepared in accordance with GAAP and should not be considered in isolation. 80
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Net Realized and Unrealized Gains and Losses
We value our portfolio investments quarterly and any changes in fair value are recorded as unrealized appreciation (depreciation) on investments. For the three and nine months endedSeptember 30, 2021 and 2020, net realized gains (losses) and net unrealized appreciation (depreciation) on our investment portfolio were comprised of the following: $ in millions For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020 Realized losses on non-controlled and non-affiliated investments$ (0.1 ) $ -$ (0.2 ) $ (1.5 ) Realized gains on non-controlled and non-affiliated investments 0.5 - 5.1 0.4 Realized losses on non-controlled and affiliated investments - (1.8 ) - (1.8 ) Realized gains on non-controlled and affiliated investments 27.5 1.3 27.5 1.3 Realized losses on foreign currency forwards (0.1 ) - (0.1 ) (0.3 ) Realized gains on foreign currency forwards - - - 0.2 Realized losses on foreign currency transactions - - (0.2 ) (0.3 ) Realized gains on foreign currency transactions 0.1 - 0.1 0.2
Net realized gains (losses) on investments
Change in unrealized depreciation on non-controlled and non-affiliated investments (9.3 ) - (15.0 ) (21.0 ) Change in unrealized appreciation on non-controlled and non-affiliated investments 12.2 18.7 28.2 0.8 Change in unrealized depreciation on foreign currency translation - (0.3 ) - (0.5 ) Change in unrealized appreciation on foreign currency translation - 0.6 - 0.5 Change in unrealized depreciation on non-controlled and affiliated investments (28.8 ) (0.5 ) (14.2 ) (1.0 ) Change in unrealized appreciation on non-controlled and affiliated investments 0.6 6.2 1.7 15.0 Change in unrealized depreciation on controlled and affiliated investments - - - (5.5 ) Change in unrealized appreciation on controlled and affiliated investments 0.3 3.4 1.5 - Change in unrealized depreciation on foreign currency forwards - (1.3 ) - (0.1 ) Change in unrealized appreciation on foreign currency forwards 1.5 - 2.0 0.7 Net unrealized appreciation (depreciation) on investments (23.5 ) 26.8 4.2 (11.1 ) Realized loss on asset acquisition - - - (3.8 )
Net realized and unrealized gains (losses)
on investments and asset acquisition $ 4.4
Hedging We may, but are not required to, enter into interest rate, foreign exchange or other derivative agreements to hedge interest rate, currency, credit or other risks. Generally, we do not intend to enter into any such derivative agreements for speculative purposes. Any derivative agreements entered into for speculative purposes are not expected to be material to our business or results of operations. These hedging activities, which are in compliance with applicable legal and regulatory requirements, may include the use of various instruments, including futures, options and forward contracts. We bear the costs incurred in connection with entering into, administering and settling any such derivative contracts. There can be no assurance any hedging strategy we employ will be successful.
During the nine months ended
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FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The primary uses of our cash and cash equivalents are for (1) investments in portfolio companies and other investments; (2) the cost of operations (including paying the Adviser); (3) debt service, repayment, and other financing costs; and (4) cash distributions to the holders of our common stock. We expect to generate additional liquidity from (1) future offerings of securities, (2) future borrowings and (3) cash flows from operations. As ofSeptember 30, 2021 , we had$19.5 million in cash and cash equivalents and restricted cash and cash equivalents and$173.1 million of undrawn capacity on our senior revolving credit and special purpose vehicle asset facilities, subject to borrowing base and other limitations. As ofSeptember 30, 2021 , the undrawn capacity under our facilities is in excess of our unfunded commitments. As ofSeptember 30, 2021 , we were in compliance with our asset coverage requirements under the 1940 Act. In addition, we were in compliance with all the financial covenant requirements of our credit facilities as ofSeptember 30, 2021 . However, any increase in realized losses or unrealized depreciation of our investment portfolio or significant reductions in our net asset value as a result of the effects of the COVID-19 pandemic, increase the risk of breaching the relevant covenants requirements. Any breach of these requirements may adversely affect the access to sufficient debt and equity capital.
Capital Share Activity
BetweenJune 26, 2015 , commencement of operations, andJanuary 31, 2020 , the date of Alcentra Acquisition, we entered into subscription agreements (collectively, the "Subscription Agreements") with several investors, including Crescent, providing for the private placement of our common shares. Pursuant to the Subscription Agreements, betweenJune 26, 2015 andJanuary 31, 2020 , we issued 23,127,335 common shares for aggregate proceeds of$456.3 million , of which$10.0 million was from Crescent. Proceeds from the issuances were used to fund our investing activities and for other general corporate purposes. Subsequently, onJanuary 31, 2020 , we issued 5,203,016 shares in connection with the Alcentra Acquisition. Upon closing of the Alcentra Acquisition, all unfunded commitments of stockholders subscribing in the private offering were terminated. During the nine months endedSeptember 30, 2021 we issued no common stock. During the nine months endedSeptember 30, 2020 , we issued 30,128 shares of our common stock to investors who have opted into our dividend reinvestment plan for proceeds of$0.6 million . Debt Debt consisted of the following as ofSeptember 30, 2021 andDecember 31, 2020 : $ in millions September 30, 2021 Weighted Weighted Average Average Aggregate Principal Drawn Amount Carrying Debt Interest Amount Committed Amount Available (1) Value (2) Outstanding Rate SPV Asset Facility $ 350.0$ 276.7 $ 73.3$ 276.7 $ 263.6 2.42 % Corporate Revolving Facility 200.0 100.2 99.8 100.2 101.6 3.00 % 2023 Unsecured Notes 50.0 50.0 - 50.0 50.0 6.50 % 2026 Unsecured Notes 135.0 135.0 - 135.0 87.8 4.21 % InterNotes® - - - - 4.0 - % Total Debt $ 735.0$ 561.9 $ 173.1$ 561.9 $ 507.0 3.32 % December 31, 2020 Weighted Weighted Average Average Aggregate Principal Drawn Amount Carrying Debt Interest Amount Committed Amount Available (1) Value (2) Outstanding Rate SPV Asset Facility $ 350.0$ 260.2 $ 89.8$ 260.2 $ 235.3 2.63 % Corporate Revolving Facility 200.0 149.9 50.1 149.9 150.4 2.93 % 2023 Unsecured Notes 50.0 50.0 - 50.0 15.0 6.49 % InterNotes® 16.4 16.4 - 16.4 20.4 6.40 % Total Debt $ 616.4$ 476.5 $ 139.9$ 476.5 $ 421.1 3.26 %
(1) The amount available is subject to any limitations related to the respective
debt facilities' borrowing bases and foreign currency translation
adjustments.
(2) Amount presented excludes netting of deferred financing costs.
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SPV Asset Facility
OnMarch 28, 2016 ,Crescent Capital BDC Funding, LLC ("CCAP SPV"), a wholly owned subsidiary of CCAP, entered into a loan and security agreement, as amended from time to time (the "SPV Asset Facility") with us as the collateral manager, seller and equity holder, CCAP SPV as the borrower, the banks and other financial institutions from time to time party thereto as lenders, andWells Fargo Bank, National Association ("Wells Fargo"), as administrative agent, collateral agent, and lender. We consolidate CCAP SPV in our consolidated financial statements and no gain or loss is recognized from the transfer of assets to and from CCAP SPV. The maximum commitment amount under the SPV Asset Facility is$350 million , and may be increased with the consent of Wells Fargo or reduced upon our request. Proceeds of the advances under the SPV Asset Facility may be used to acquire portfolio investments, to make distributions to us in accordance with the SPV Asset Facility, and to pay related expenses. The maturity date is the earlier of (a) the date the borrower voluntarily reduces the commitments to zero, (b)June 22, 2026 and (c) the date upon which Wells Fargo declares the obligations due and payable after the occurrence of an Event of Default. Borrowings under the SPV Asset Facility bear interest at LIBOR plus a margin with no LIBOR floor. The margin is between 1.65% and 2.10% as determined by the proportion of liquid and illiquid loans pledged to the SPV Asset Facility. We pay unused facility fees of 0.50% per annum on committed but undrawn amounts under the SPV Asset Facility. The unused facility fee rate may vary based on the utilization. The SPV Asset Facility includes customary covenants, including certain limitations on the incurrence of additional indebtedness and liens, as well as usual and customary events of default for revolving credit facilities of this nature. The facility size is subject to availability under the borrowing base, which is based on the amount of CCAP SPV's assets from time to time, and satisfaction of certain conditions, including an asset coverage test and certain concentration limits.
Corporate Revolving Facility
OnAugust 20, 2019 , we entered into the "Corporate Revolving Facility" withAlly Bank , as Administrative Agent and Arranger. Proceeds of the advances under the Revolving Credit Agreement may be used to acquire portfolio investments, to make distributions to us in accordance with the Revolving Credit Agreement and to pay related expenses. The maximum principal amount of the Corporate Revolving Facility is$200 million , subject to availability under the borrowing base. Borrowings under the Corporate Revolving Facility bear interest at LIBOR plus a 2.35% margin with no LIBOR floor. We pay unused facility fees of 0.50% per annum on committed but undrawn amounts under the Corporate Revolving Facility. The unused facility fee rate may vary based on the utilization. Interest is payable quarterly in arrears. Any amounts borrowed under the Corporate Revolving Facility, and all accrued and unpaid interest, will be due and payable, onAugust 20, 2024 .
2023 Unsecured Notes
OnJuly 30, 2020 , we completed a private offering of$50.0 million aggregate principal amount of 5.95% senior unsecured notes dueJuly 30, 2023 (the "2023 Unsecured Notes"). The 2023 Unsecured Notes were issued in two$25.0 million issuances onJuly 30, 2020 andOctober 28, 2020 . The 2023 Unsecured Notes will mature onJuly 30, 2023 and may be redeemed in whole or in part, at our option, at any time or from time to time at par plus a "make-whole" premium, if applicable. Interest on the 2023 Unsecured Notes is due and payable semiannually in arrears onJanuary 30th andJuly 30th of each year. As ofSeptember 30, 2021 , we were in compliance with the terms of the note purchase agreement governing the 2023 Unsecured Notes. 83
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2026 Unsecured Notes
On
The 2026 Unsecured Notes will mature onFebruary 17, 2026 and may be redeemed in whole or in part, at our option, at any time or from time to time at par plus a "make-whole" premium, if applicable. Interest on the 2026 Unsecured Notes is due and payable semiannually in arrears onFebruary 17th andAugust 17th of each year. As ofSeptember 30, 2021 , we were in compliance with the terms of the note purchase agreement governing the 2026 Unsecured Notes.
InterNotes®
OnJanuary 31, 2020 , in connection with the Alcentra Acquisition, we assumed direct unsecured fixed interest rate obligations or "InterNotes®". The InterNotes® bore interest at fixed interest rates ranging between 6.25% and 6.75% and offered a variety of maturities ranging betweenFebruary 15, 2021 andApril 15, 2022 . We redeemed or paid down the remaining$16.4 million of InterNotes® during the first quarter of 2021. The summary of costs incurred in connection with the SPV Asset Facility, Corporate Revolving Facility, 2023 Unsecured Notes, 2026 Unsecured Notes and InterNotes® for the three and nine months endedSeptember 30, 2021 and 2020, is presented below: $ in millions For the three months ended For the nine months ended September 30, September 30, 2021 2020 2021 2020 Borrowing interest expense $ 4.2 $ 2.9$ 11.7 $ 9.9 Unused facility fees 0.3 0.2 0.8 0.6 Amortization of financing costs 1.2 0.4 2.0 1.0 Total interest and other debt financing costs $ 5.7 $ 3.5$ 14.5 $ 11.5 Weighted average outstanding balance$ 507.1 $ 410.9 $ 529.8 $ 405.9 To the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for debt financing presents attractively priced opportunities, or if our Board otherwise determines that leveraging our portfolio would be in our best interest and the best interests of our stockholders, we may enter into new debt financing opportunities in addition to our existing debt. The pricing and other terms of any such opportunities would depend upon market conditions and the performance of our business, among other factors. In accordance with applicableSEC staff guidance and interpretations, effectiveMay 5, 2020 with shareholder approval, we, as a BDC, are permitted to borrow amounts such that our asset coverage ratio is at least 150% after such borrowing (if certain requirements are met), rather than 200%, as previously required. Short-term credits necessary for the settlement of securities transactions and arrangements with respect to securities lending will not be considered borrowings for these purposes. The amount of leverage that we employ depends on our Adviser's and our Board's assessment of market conditions and other factors at the time of any proposed borrowing. As ofSeptember 30, 2021 andDecember 31, 2020 , our asset coverage ratio was 205% and 217%, respectively. We may also refinance or repay any of our indebtedness at any time based on our financial condition and market conditions. See Note 6. Debt to our consolidated financial statements for more detail on the debt facilities. STOCK REPURCHASE PROGRAM OnJanuary 31, 2020 , we entered into a$20.0 million repurchase plan which allowed us to purchase shares in the open market any time our common stock traded below 90% of the most recently disclosed net asset value per share. The plan was subject to compliance with our liquidity, covenant, leverage and regulatory requirements. Pursuant to the terms of the repurchase plan, repurchases began onMarch 2, 2020 . OnApril 9, 2020 , our Board of Directors unanimously approved the termination of the stock repurchase program. 84
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There was no stock repurchased for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2020 , we repurchased 192,415 shares at an average price per share, including commissions, of$11.48 .
OFF BALANCE SHEET ARRANGEMENTS
Our investment portfolio may contain investments that are in the form of lines of credit or unfunded commitments which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. Unfunded commitments to provide funds to portfolio companies are not reflected on our Consolidated Statements of Assets and Liabilities. These commitments are subject to the same underwriting and ongoing portfolio maintenance as are the on-balance sheet financial instruments that we hold. Since these commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements. As ofSeptember 30, 2021 andDecember 31, 2020 , we had aggregate unfunded commitments totaling$166.3 million and$80.8 million , respectively.
RECENT DEVELOPMENTS
OnOctober 27, 2021 , we entered into a senior secured revolving credit agreement (the "SMBC Corporate Revolving Facility") withSumitomo Mitsui Banking Corporation , as Administrative Agent, Collateral Agent and Lender and concurrently terminated our$200.0 million Corporate Revolving Facility withAlly Bank . The maximum principal amount of the SMBC Corporate Revolving Facility is$300.0 million , subject to availability under the borrowing base. Borrowings under the SMBC Corporate Revolving Facility bear interest at LIBOR plus 1.875% or 2.000%, subject to certain provisions in the SMBC Corporate Revolving Facility agreement, with no LIBOR floor. Any amounts borrowed under the SMBC Corporate Revolving Facility, and all accrued and unpaid interest, will be due and payable, onOctober 27, 2026 . OnNovember 5, 2021 , our Board of Directors declared the following cash dividends: Cash Dividend Type Record Date Payment Date Amount Per Share Regular December 31, 2021 January 17, 2022 $ 0.41 Special December 3, 2021 December 15, 2021 $ 0.05 Special March 4, 2022 March 15, 2022 $ 0.05 Special June 3, 2022 June 15, 2022 $ 0.05 Special September 2, 2022 September 15, 2022 $ 0.05 85
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