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 and were incorporated under the laws of theState of Delaware onFebruary 5, 2015 ("Inception"). 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. We are managed by our investment adviser,Crescent Cap Advisors, LLC (the "Adviser", and formerly,CBDC Advisors, LLC ), an investment adviser that is registered with theSEC under the 1940 Act. Our administrator,CCAP Administration LLC (the "Administrator", and formerly,CBDC Administration, LLC ) 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 six directors, four of whom are independent. Our primary 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 seek to achieve our investment objectives by investing primarily in secured debt (including senior secured first lien, unitranche and senior secured second-lien debt) and unsecured debt (including senior unsecured, 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, broadly syndicated loans and bonds are generally more liquid than and 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 the assets of the portfolio company. We obtain security interests in the assets of the portfolio company that serve as collateral in support of the repayment of such loans. This collateral serves as collateral in support of the repayment of these loans.
"Mezzanine" or "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 indebtedness.
Alcentra Acquisition
OnAugust 12, 2019 , we entered into the Merger Agreement to acquireAlcentra Capital , in a cash and stock transaction. The board of directors of both companies each unanimously approved the Alcentra Acquisition and onJanuary 29, 2020 ,Alcentra Capital's stockholders approved the merger and our stockholders approved the issuance of shares of our common stock toAlcentra Capital's stockholders. OnJanuary 31, 2020 , we completed the Alcentra Acquisition, pursuant to the terms and conditions of the Merger Agreement. To effect the acquisition, Acquisition Sub merged with and intoAlcentra Capital , withAlcentra Capital surviving the merger as our wholly owned subsidiary. Immediately thereafter and as a single integrated transaction,Alcentra Capital consummated the Second Merger, whereby it merged with and into us, withCrescent Capital BDC surviving the merger. Pursuant to the Merger Agreement,Alcentra Capital stockholders received the right to the following merger consideration in exchange for each share ofAlcentra Capital common stock outstanding immediately prior toJanuary 31, 2020 , (a)$3.1784 per share in cash consideration (less the$0.8000 final dividend declared byAlcentra Capital ) and (b) stock consideration at the fixed exchange ratio of 0.4041 shares of Common Stock. This resulted in our then-existing stockholders owning approximately 82% of us andAlcentra Capital's then-existing stockholders owning approximately 18% of us. 60
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The aggregate cash consideration was comprised of (i)$19.3 million in cash, or$1.5023 per share, from us (less$10.3 million or$0.8000 per share in final dividends paid byAlcentra Capital onJanuary 31, 2020 ) and (ii)$21.6 million in cash, or$1.6761 per share, in transaction support provided by the Adviser. KEY 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 ("CCG LP "), pursuant to whichCCG LP provides the Adviser with experienced investment professionals (including the members of the Adviser's investment committee) and access to the resources ofCCG LP 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 ofCCG LP's investment professionals.
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. 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. 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.
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 withState Street Bank and Trust Company 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;
• 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 compliance professionals, our legal counsel and other
professionals);
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Table of Contents •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. 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.
PORTFOLIO INVESTMENT ACTIVITY
We seek to create a broad and diversified portfolio that generally includes senior secured first lien, unitranche, senior secured second lien and subordinated loans and minority equity securities ofU.S. middle market companies. The size of our individual investments will vary 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.
As of
($ in millions)
September 30, 2020 December 31, 2019
Investment Type Fair Value Percentage Fair Value Percentage
Senior Secured First Lien $ 375.5 39.1% $ 351.3 48.3%
Unitranche First Lien 362.0 37.7 218.3 30.1
Unitranche First Lien - Last Out 15.0 1.5 16.2 2.2
Senior Secured Second Lien 99.3 10.3 58.9 8.1
Unsecured Debt 2.2 0.2 7.4 1.0
Equity & Other 53.6 5.6 21.4 3.0
LLC/LP Equity Interests 53.5 5.6 53.0 7.3
Total investments $ 961.1 100.0% $ 726.5 100.0%
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The following table shows our investment activity by investment type:
($ in millions)
For the Three Months Ended For the Nine Months Ended
September 30, 2020 September 30, 2019 September 30, 2020(1) September 30, 2019
New investments
committed at cost:
Senior Secured First
Lien $ 30.4 $ 30.0 $ 79.2 $ 115.6
Unitranche First
Lien 51.6 66.1 129.1 114.1
Unitranche First
Lien - Last Out - - - 16
Senior Secured
Second Lien - - 9.4 4.4
Unsecured Debt - - - -
Equity & Other 2.1 1.9 2.1 2.5
LLC/LP Equity
Interests - 14 8.5 44.9
Total $ 84.1 $ 112.3 $ 228.3 $ 297.5
Proceeds from
investments sold or
repaid:
Senior Secured First
Lien $ 26.3 $ 8.3 $ 127.2 $ 46.7
Unitranche First
Lien 3.9 16.3 27.3 17.2
Unitranche First
Lien - Last Out - 0.1 0.2 16.7
Senior Secured
Second Lien 10.1 13.5 18.8 13.5
Unsecured Debt 6.6 - 6.6 -
Equity & Other - 0.2 0.4 0.2
LLC/LP Equity
Interests 0.8 0.0 1.8 2.8
Total $ 47.7 $ 38.5 $ 182.3 $ 97.1
Net increase
(decrease) in
portfolio $ 36.4 $ 73.8 $ 46.0 $ 200.4
(1) Excludes
Alcentra Acquisition. The asset acquired, at cost, were comprised of
lien,
debt and
The following table presents certain selected information regarding our
investment portfolio as of
September 30, 2020 December 31, 2019
Weighted average yield on income
producing securities (at cost) (1) 7.9% 8.1%(2)
Percentage of debt bearing a floating
rate (at fair value) 98.0% 97.9%
Percentage of debt bearing a fixed
rate (at fair value) 2.0% 2.1%
Number of portfolio companies 128 98
(1) Yield excludes investments on non-accrual status.
(2) Prior period updated to conform to current period methodology.
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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, 2020 andDecember 31, 2019 . ($ in millions) September 30, 2020 December 31, 2019 Amortized Cost Percentage Amortized Cost Percentage Performing $ 850.6 96.2% $ 645.4 98.1% Non-accrual 33.4 3.8 12.6 1.9 Total income producing debt securities $ 884.0 100.0% $ 658.0 100.0% 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, 2020 , we had investments in four portfolio companies with seven investment positions on non-accrual status, which represented 3.8% and 2.1% of the total debt investments at cost and fair value, respectively. As ofDecember 31, 2019 , we had investments in one portfolio company with three investment positions on non-accrual status, which represented 1.9% and 1.0% of total debt investments at cost and fair value, respectively. The remaining debt investments were performing and current on their interest payments as ofSeptember 30, 2020 andDecember 31, 2019 . 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
• possible attendance at, 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 value of the loan should be reduced to
the anticipated recovery amount. Loans with an investment rating of 5 should
be placed on non-accrual status.
The following table shows the distribution of our investments on the 1 to 5 investment performance rating scale at fair value as ofSeptember 30, 2020 andDecember 31, 2019 . 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. 64
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($ in millions)
September 30, 2020 December 31, 2019
Investments at Percentage of Investments at Percentage of
Investment Performance Rating Fair Value Total Portfolio Fair Value Total Portfolio
1 $ 1.3 0.1% $ 19.1 2.6%
2 761.8 79.3 653.1 89.9
3 180.2 18.7 47.8 6.6
4 17.8 1.9 6.5 0.9
5 - - - -
Total $ 961.1 100.0% $ 726.5 100.0%
RESULTS OF OPERATIONS
Operating results for the three and nine months ended
($ in millions)
For the three months ended For the nine months ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Total investment income $ 18.7 $ 14.8 $ 56.8 $ 38.8
Total net expenses 6.5 5.7 20.1 15.4
Net investment income $ 12.2 $ 9.1 $ 36.7 $ 23.4
Net realized gain (loss) on
investments (1) (0.5 ) (0.0 ) (1.7 ) (0.5 )
Net unrealized appreciation
(depreciation) on
investments (1)(2) 26.8 (6.4 ) (11.1 ) (2.3 )
Net realized and unrealized
gains (losses) on
investments $ 26.3 $ (6.4 ) $ (12.8 ) $ (2.8 )
Realized loss on asset
acquisition - - (3.8 ) -
Benefit/(Provision) for
taxes on unrealized
appreciation
(depreciation) on
investments (0.2 ) (0.0 ) 0.1 (0.5 )
Net increase (decrease) in
net assets resulting from
operations $ 38.3 $ 2.7 $ 20.2 $ 20.1
(1) Includes gains and losses related to foreign currency transactions and
translation.
(2) Includes gains and losses related to foreign currency forward contracts
Investment Income
($ in millions)
For the three months ended For the nine months ended
September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019
Interest from investments $ 17.5 $ 12.8 $ 52.2 $ 34.7
Dividend Income 1.2 1.9 3.6 3.4
Other income - 0.1 1.0 0.7
Total $ 18.7 $ 14.8 $ 56.8 $ 38.8
Interest income, which includes amortization of upfront fees, increased from
$12.8 million for the three months ended September 30, 2019 to $17.5 million for
the three months ended September 30, 2020 , due to an increase in the size of our
portfolio related to the Alcentra Acquisition and organic net deployment.
Included in interest from investments for the three months ended September 30,
2020 and September 30, 2019 are $0.3 million and $0.7 million in accelerated
accretion of OID, respectively.
Dividend income decreased from $1.9 million for the three months ended
September 30, 2019 to $1.2 million for the three months ended September 30, 2020
due to lower dividends declared by the Senior Loan Fund and GACP II LP . Other
income which includes amendment fees, amortization of loan administration fees
earned as the administration agent, and other miscellaneous fee income,
decreased from $0.1 million for the three months ended September 30, 2019 to $0
for the three months ended September 30, 2020 .
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Interest income, which includes amortization of upfront fees, increased from$34.7 million for the nine months endedSeptember 30, 2019 to$52.2 million for the nine months endedSeptember 30, 2020 , due to an increase in the size of our portfolio related to the Alcentra Acquisition and organic net deployment. Included in interest from investments for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 are$1.6 million and$1.3 million in accelerated accretion of OID, respectively. Dividend income increased from$3.4 million for the nine months endedSeptember 30, 2019 to$3.6 million for the nine months endedSeptember 30, 2020 due to higher dividend payments received from our equity investments. Other income which includes amendment fees, amortization of loan administration fees earned as the administration agent, and other miscellaneous fee income, increased from$0.7 million to$1.0 million for the nine months endedSeptember 30, 2019 and 2020. Expenses ($ in millions) For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Interest and debt financing costs $ 3.5 $ 3.5 $ 11.5 $ 9.5 Management fees 2.9 2.5 8.3 6.6 Incentive fees 2.1 1.4 6.3 3.5 Professional fees 0.4 0.2 1.1 0.6 Directors' fees 0.1 0.1 0.3 0.2 Other general and administrative expenses 0.7 0.7 1.8 1.7 Total expenses $ 9.7 $ 8.4 $ 29.3 $ 22.1 Management fee waiver (1.2 ) (1.3 ) (3.4 ) (3.2 ) Incentive fee waiver (2.1 ) (1.4 ) (6.3 ) (3.5 ) Net expenses $ 6.4 $ 5.7 $ 19.6 $ 15.4 Income and excise taxes 0.1 0.0 0.5 0.0 Total $ 6.5 $ 5.7 $ 20.1 $ 15.4
Interest and Credit Facility Expenses
Interest and debt financing costs include interest, amortization of deferred financing costs, upfront commitment fees and unused fees on our credit facilities. Interest and debt financing costs remained unchanged at$3.5 million for the three months endedSeptember 30, 2019 and 2020. The debt outstanding increased from$323.2 million as ofSeptember 30, 2019 to$426.9 million as ofSeptember 30, 2020 . The increase in the debt outstanding was offset by a decrease in the weighted average interest rate (including deferred upfront financing costs and unused fees) from 4.3% as ofSeptember 30, 2019 to 3.1% as ofSeptember 30, 2020 , primarily driven by a decline in benchmark rates. Interest and debt financing costs increased from$9.5 million for the nine months endedSeptember 30, 2019 to$11.5 million for the nine months endedSeptember 30, 2020 . This increase was primarily due to an increase in the debt outstanding in connection with the Alcentra Acquisition from$323.2 million as ofSeptember 30, 2019 to$426.9 million as ofSeptember 30, 2020 . The increase in the debt outstanding was partially offset by the average interest rate (including deferred upfront financing costs) decreasing from 4.3% as ofSeptember 30, 2019 to 3.1% as ofSeptember 30, 2020 , primarily driven by a decline in benchmark rates.
Investment Advisory Agreements
OnJune 2, 2015 , we entered into an investment advisory agreement with the Adviser (the "Investment Advisory Agreement"), which was subsequently replaced by the Amended and Restated Investment Advisory Agreement (together with the Investment Advisory Agreement, the "Advisory Agreements"), which was approved by our stockholders onJanuary 29, 2020 in connection with the Alcentra Acquisition. Under the terms of the Amended and Restated Investment Advisory Agreement, the Adviser provides investment advisory services to us and our portfolio investments. The Adviser's services under the Amended and Restated Investment Advisory Agreement are not exclusive, and the Adviser is free to furnish similar or other services to others so long as its services to us are not impaired. Under the terms of the Advisory Agreements, the Adviser is entitled to receive a base management fee and may also receive incentive fees, as discussed below.
Base Management Fee (prior to
Prior toFebruary 1, 2020 , pursuant to the Investment Advisory Agreement, the base management fee was calculated and payable quarterly in arrears at an annual rate of 1.50% of our gross assets, including assets acquired through the incurrence of debt but excluding any cash and cash equivalents. The base management fee was calculated based on the average value of gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for share issuances or repurchases during the current calendar quarter. Under the Investment Advisory Agreement, the Adviser agreed to waive its right to receive management fees in excess of the sum of (i) 0.25% of the aggregate committed but undrawn capital and (ii) 0.75% of the aggregate gross assets excluding cash and cash equivalents (including capital drawn to pay our expenses) during the period prior toFebruary 3, 2020 , the date of the our qualified initial public offering, as defined by the Investment Advisory Agreement ("Qualified IPO"). The listing of our Common Stock on NASDAQ onFebruary 3, 2020 qualified as a Qualified IPO. The Adviser is not permitted to recoup any waived amounts at any time. 66
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New Base Management Fee (effective
EffectiveFebruary 1, 2020 , pursuant to the Amended andRestated Investment Advisory Agreement, the base management fee is calculated and payable quarterly in arrears at an annual rate of 1.25% of our gross assets, including assets acquired through the incurrence of debt but excluding any cash and cash equivalents. The base management fee is calculated based on the average value of gross assets at the end of the two most recently completed calendar quarters, and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. In addition, under the terms of the Amended and Restated Advisory Agreement, the Adviser agreed to waive a portion of the management fee fromFebruary 1, 2020 throughJuly 31, 2021 after the closing of the Alcentra Acquisition so that only 0.75% shall be charged for such time period. The Adviser is not permitted to recoup any waived amounts at any time. For the three and nine months endedSeptember 30, 2020 , we incurred management fees of$1.7 and$4.9 million , respectively, which are net of waived amounts, of$1.2 and$3.4 million , respectively, of which$1.7 million was payable atSeptember 30, 2020 . For the three and nine months endedSeptember 30, 2019 , we incurred management fees of$1.2 and$3.4 million , respectively, which are net of waived amounts, of$1.3 and$3.2 million respectively, of which$1.2 million was payable atSeptember 30, 2019 . The Adviser has voluntarily waived its right to receive management fees on our investment inGACP II LP for any period in whichGACP II LP remains in the investment portfolio. For the three and nine months endedSeptember 30, 2020 ,$0.0 and$0.1 million , respectively, of management fees waived were attributable to our investment inGACP II LP . For the three and nine months endedSeptember 30, 2019 ,$0.0 and$0.1 million , respectively, of management fees waived were attributable to our investment inGACP II LP . These amounts are excluded from the management fee waived amounts above.
Incentive Fee (prior to
Under the Investment Advisory Agreement, the Incentive Fee consisted of two parts. The first part, the income incentive fee, was calculated and payable quarterly in arrears and equaled (a) 100% of the excess of the pre-incentive fee net investment income for the immediately preceding calendar quarter, over a preferred return of 1.5% per quarter (6.0% annualized) (the "Hurdle"), and a catch-up feature until the Adviser received 15% of the pre-incentive fee net investment income for the current quarter up to 1.7647% (the "Catch-up"), and (b) 15% of all remaining pre-incentive fee net investment income above the "Catch-up." The second part, the capital gains incentive fee, was determined and payable in arrears as of the end of each fiscal year at a rate of 15.0% of our realized capital gains, if any, on a cumulative basis from Inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. At the 2018 Annual Meeting of Stockholders, in connection with the extension of the deadline to consummate a Qualified IPO, the Adviser agreed to waive its rights under the Investment Advisory Agreement to (i) the income incentive fee and (ii) the capital gain incentive fee for the period fromApril 1, 2018 throughFebruary 1, 2020 .
Incentive Fee (effective
Under the Amended and Restated Investment Advisory Agreement, the Incentive Fee consists of two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears and (a) equals 100% of the excess of the pre-incentive fee net investment income for the immediately preceding calendar quarter, over a preferred return of 1.75% per quarter (7.0% annualized) (the "Hurdle"), and a catch-up feature until the Adviser has received 17.5%, of the pre-incentive fee net investment income for the current quarter up to 2.1212% (the "Catch-up"), and (b) 17.5% of all remaining pre-incentive fee net investment income above the "Catch-up." In addition, under the terms of the Amended and Restated Investment Advisory Agreement, the Adviser agreed to waive the income based portion of the incentive fee fromFebruary 1, 2020 throughJuly 31, 2021 . Once the Adviser begins to earn income incentive fees, the Adviser will voluntarily waive the income incentive fees attributable to the investment income accrued by us as a result of our investment in GACP II. The second part, the capital gains incentive fee, is determined and payable in arrears as of the end of each fiscal year at a rate of 17.5% of our realized capital gains, if any, on a cumulative basis from Inception through the end of the fiscal year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. Since the Qualified IPO occurred on a date other than the first day of a calendar quarter, the income incentive fee shall be calculated for such calendar quarter at a weighted rate calculated based on the fee rates applicable before and after a Qualified IPO based on the number of days in such calendar quarter before and after the Qualified IPO. For the avoidance of doubt, such capital gains incentive fee shall be equal to 15.0% of our realized capital gains on a cumulative basis from Inception through the day before the Qualified IPO, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. Following the Qualified IPO, solely for the purposes of calculating the capital gains incentive fee, we will be deemed to have previously paid capital gains incentive fees prior to a Qualified IPO equal to the product obtained by multiplying (a) the actual aggregate amount of previously paid capital gains incentive fees for all periods prior to the Qualified IPO by (b) the percentage obtained by dividing (x) 17.5% by (y) 15.0%. In the event that the Amended and Restated Investment Advisory Agreement shall terminate as of a date that is not a fiscal year end, the termination date shall be treated as though it were a fiscal year end for purposes of calculating and paying a capital gains incentive fee. 67
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Pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees or other fees that we receive from portfolio companies) accrued during each calendar quarter, minus operating expenses for such quarter (including the base management fee, expenses payable under the Administration Agreement and any interest expense and distributions paid on any issued and outstanding debt or preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as market discount, original issue discount, debt instruments with PIK interest, preferred stock with PIK dividends and zero coupon securities), accrued income that the we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income will be compared to a "Hurdle Amount" equal to the product of (i) the Hurdle rate of 1.50% or 1.75% per quarter, 6.00% or 7.00% annualized, prior to and effectiveFebruary 1, 2020 , respectively, and (ii) our net assets (defined as total assets less indebtedness, before taking into account any incentive fees payable during the period), at the end of the immediately preceding calendar quarter, subject to a "catch-up" provision incurred at the end of each calendar quarter. For the three months endedSeptember 30, 2020 and 2019, we incurred income incentive fees of$2.1 million and$1.4 million , of which$2.1 million and$1.4 million were waived. For the nine months endedSeptember 30, 2020 and 2019, we incurred income incentive fees of$6.3 million and$3.5 million , of which$6.3 million and$3.5 million were waived.$0 was payable atSeptember 30, 2020 and 2019, respectively.
GAAP Incentive Fee on Cumulative Unrealized Capital Appreciation
We accrue, but do not pay, a portion of the Incentive Fee based on capital gains with respect to net unrealized appreciation. Under GAAP, we are required to accrue an Incentive Fee based on capital gains that includes net realized capital gains and losses and net unrealized capital appreciation and depreciation on investments held at the end of each period. In calculating the accrual for the Incentive Fee based on capital gains, we consider the cumulative aggregate unrealized capital appreciation in the calculation, since an Incentive Fee based on capital gains would be payable if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee payable under the Amended and Restated Investment Advisory Agreement. This accrual is calculated using the aggregate cumulative realized capital gains and losses and aggregate cumulative unrealized capital appreciation or depreciation. If such amount is positive at the end of a period, then we record a capital gains incentive fee equal to 15% (preFebruary 3, 2020 ) or 17.5% (effectiveFebruary 3, 2020 ) of such amount, minus the aggregate amount of actual Incentive Fees based on capital gains paid in all prior periods. If such amount is negative, then there is no accrual for such period. There can be no assurance that such unrealized capital appreciation will be realized in the future.
For the three and nine months ended
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 expenses from the sub-administration agreement, insurance premiums, overhead and staffing costs allocated from the Administrator and other miscellaneous general and administrative costs associated with our operations and investment activity. Professional fees increased from$0.2 million for the three months endedSeptember 30, 2019 to$0.4 million for the three months endedSeptember 30, 2020 , while other general and administrative expenses remained unchanged at$0.7 for the three months endedSeptember 2019 and 2020. The net increase in expenses was due to an increase in costs associated with servicing a growing investment portfolio. Professional fees increased from$0.6 million for the nine months endedSeptember 30, 2019 to$1.1 million for the nine months endedSeptember 30, 2020 , while other general and administrative expenses increased from$1.7 million for the nine months endedSeptember 30, 2019 to$1.8 million for the nine months endedSeptember 30, 2020 . The net increase in expenses was due to an increase in costs associated with servicing a growing investment portfolio.
Organization expenses
We agreed to repay the Adviser for initial organization costs and equity offering costs incurred prior to the commencement of our operations up to a maximum of$1.5 million on a pro rata basis over the first$350.0 million of invested capital not to exceed 3 years from the initial capital commitment onJune 26, 2015 . The initial 3 year term was later extended toJune 30, 2019 , with shareholder approval. To the extent such costs related to equity offerings, these costs were charged as a reduction of capital upon the issuance of common shares. To the extent such costs related to organization costs, these costs were expensed in the Consolidated Statements of Operations upon the issuance of common shares. The Adviser was responsible for organization and private equity offerings costs in excess of$1.5 million . During the reimbursement period which began onJune 26, 2015 and expired onJune 30, 2019 , the Adviser had allocated to us$0.8 million of equity offering costs and$0.6 million of organization costs.
Income Tax Expense, Including Excise Tax
We have elected to be treated as a RIC under the Code and operate in a manner so
as to qualify for the tax treatment applicable to RICs. To qualify as a RIC, we
must generally (among other requirements) timely distribute to our stockholders
at least 90% of our investment company taxable income, as defined by the Code,
for each year. In order to maintain our RIC status, we intend to make the
requisite distributions to our stockholders which will generally relieve us from
corporate-level income taxes.
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In order to not to be subject to federal excise taxes, we must distribute annually an amount at least equal to the sum of (i) 98% of our ordinary income (taking into account certain deferrals and elections), (ii) 98.2% of our net capital gains from the current year and (iii) any undistributed ordinary income and net capital gains from preceding years. Depending on the level of taxable income earned in a tax year, we may choose to carry forward such taxable income in excess of current year dividend distributions into the next tax year and pay a 4% excise tax on such income, as required. If we determine that our estimated current year taxable income will be in excess of estimated dividend distributions for the current year from such income, we accrue excise tax on estimated excess taxable income as such taxable income is earned. For the three months endedSeptember 30, 2020 and 2019, we expensed an excise tax of$0.1 million and$0.0 million , respectively, of which$0.1 million and$0.0 million remained payable, respectively. For the nine months endedSeptember 30, 2020 and 2019, we expensed an excise tax of$0.5 million and$0.0 million , respectively, of which$0.3 million and$0.0 million remained payable, respectively.
Net Realized and Unrealized Gains and Losses
We value our portfolio investments quarterly and any changes in fair value are recorded as unrealized appreciation (depreciation) on investments. For the three and nine months endedSeptember 30, 2020 and 2019, net realized gains (losses) and net unrealized appreciation (depreciation) on our investment portfolio were comprised of the following: ($ in millions) For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Realized losses on non-controlled and non-affiliated investments $ (0.0 ) $ (0.2 ) (1.5 ) $ (0.5 ) Realized gains on non-controlled and non-affiliated investments 0.0 0.1 0.4 0.1 Realized losses on foreign currency transactions (0.0 ) (0.0 ) (0.3 ) (0.1 ) Realized gains on foreign currency transactions 0.0 0.1 0.2 - Realized losses on non-controlled and affiliated investments (1.8 ) - (1.8 ) - Realized gains on non-controlled and affiliated investments 1.3 - 1.3 - Realized losses on controlled and affiliated investments - - - - Realized gains on controlled and affiliated investments - - - - Net realized gains (losses) on investments $ (0.5 ) $ (0.0 ) $ (1.7 ) $ (0.5 ) Change in unrealized depreciation on non-controlled and non-affiliated investments $ - $ (6.2 ) $ (21.6 ) $ (7.3 ) Change in unrealized appreciation on non-controlled and non-affiliated investments 18.2 - 0.8 4.5 Change in unrealized depreciation on foreign currency translation (0.3 ) (1.4 ) (0.5 ) (1.3 ) Change in unrealized appreciation on foreign currency translation 0.6 0.0 0.5 0.4 Change in unrealized depreciation on non-controlled and affiliated investments - (0.0 ) (0.4 ) - Change in unrealized appreciation on non-controlled and affiliated investments 6.2 - 15.0 0.6 Change in unrealized depreciation on controlled and affiliated investments - - (5.5 ) (0.7 ) Change in unrealized appreciation on controlled and affiliated investments 3.4 0.0 - - Change in unrealized depreciation on foreign currency forwards (1.3 ) - (0.1 ) - Change in unrealized appreciation on foreign currency forwards - 1.2 0.7 1.5 Net unrealized appreciation (depreciation) $ 26.8 $ (6.4 ) $ (11.1 ) $ (2.3 ) Realized loss on asset acquisition - - (3.8 ) - Net realized and unrealized gains (losses) on investments and asset acquisition $ 26.3 $ (6.4 ) $ (16.6 ) $ (2.8 ) 69
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For the three and nine months endedSeptember 30, 2020 as compared to the three and nine months endedSeptember 30, 2019 , the change in unrealized depreciation on debt and equity investments was largely due to increased market volatility resulting from the COVID-19 pandemic and a subsequent recovery.
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
The Senior Loan Fund , an unconsolidated limited liability company, was formed onSeptember 26, 2018 and commenced operations inFebruary 2019 . We invest together with Masterland through theSenior Loan Fund . Masterland is a wholly owned subsidiary ofChina Orient Asset Management (International) Holding Limited (HK).The Senior Loan Fund's principal purpose is to make investments in broadly syndicated bank loans, either directly or indirectly through its wholly owned subsidiary,CBDC Senior Loan Sub LLC . We along with Masterland, have each subscribed to fund$40.0 million . Except under certain circumstances, contributions to theSenior Loan Fund cannot be redeemed.The Senior Loan Fund is managed by a four member board of managers, on which we and Masterland have equal representation. Investment decisions generally must be unanimously approved by a quorum of the board of managers. Since we do not have a controlling financial interest in theSenior Loan Fund , it is not consolidated.The Senior Loan Fund is an investment company and measured using the net asset value per share as a practical expedient for fair value. We along with Masterland had subscribed to fund and contributed the following to theSenior Loan Fund : ($ in millions) September 30, 2020 December 31, 2019 Subscribed Unfunded Subscribed Unfunded
Member to fund Contributed Commitment to fund
Contributed Commitment Company$ 40.0 $ 39.0 $ 1.0 $ 40.0 $ 34.0 $ 6.0 Masterland 40.0 39.0 1.0 40.0 34.0 6.0 Total$ 80.0 $ 78.0 $ 2.0 $ 80.0 $ 68.0 $ 12.0 The Senior Loan Fund is capitalized pro rata with LLC equity interest as transactions are completed.The Senior Loan Fund has a revolving credit facility with Royal Bank of Canada (the "RBC Facility"), as amended, which permitted up to$300.0 million of borrowings as ofSeptember 30, 2020 . Borrowings under the RBC Facility are secured by all assets ofCBDC Senior Loan Sub LLC . The interest rate on the credit facility is London Interbank Offered Rate ("LIBOR"), with no LIBOR floor, plus margin, which ranges between 1.25% and 1.45% based on pricing of the pledged collateral. 70
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Below is a summary of theSenior Loan Fund's portfolio as ofSeptember 30, 2020 andDecember 31, 2019 : ($ in millions) As of As of
$ 291.6 $ 275.6
Total senior secured debt, at fair value $ 278.7 $ 275.1
Weighted average current interest rate on senior secured debt(1) 3.4 % 4.9 %
Number of borrowers in the Senior Loan Fund's portfolio 191 169
Largest loan to a single borrower $ 3.5 $ 3.5
Senior Secured First Lien investments as a % of total investments, at fair value
100 % 100.0 %
90.7 % 89.7 %
Non-accrual investments as % of total investment, at cost 0.0 % 0.0 %
(1) Computed as (a) the annual stated interest rate on accruing senior secured
debt, divided by (b) total senior secured debt at par amount, excluding
fully unfunded commitments.
Below is selected balance sheet information for the
($ in millions)
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