GLADSTONE CAPITAL CORPORATION All statements contained herein, other than historical facts, may constitute "forward-looking statements." These statements may relate to, among other things, our future operating results, our business prospects and the prospects of our portfolio companies, actual and potential conflicts of interest withGladstone Management Corporation (the "Adviser"), our adviser, and its affiliates, the use of borrowed money to finance our investments, the adequacy of our financing sources and working capital, and our ability to co-invest, among other factors. In some cases, you can identify forward-looking statements by terminology such as "estimate," "may," "might," "believe," "will," "provided," "anticipate," "future," "could," "growth," "plan," "project," "intend," "expect," "should," "would," "if," "seek," "possible," "potential," "likely" or the negative or variations of such terms or comparable terminology. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such factors include: (1) changes in the economy and the capital markets, including stock price volatility; (2) risks associated with negotiation and consummation of pending and future transactions; (3) the loss of one or more of our executive officers, in particularDavid Gladstone ,Terry Lee Brubaker orRobert L. Marcotte ; (4) changes in our investment objectives and strategy; (5) availability, terms (including the possibility of interest rate volatility) and deployment of capital; (6) changes in our industry, interest rates, exchange rates or the general economy; (7) our business prospects and the prospects of our portfolio companies; (8) the degree and nature of our competition; (9) changes in governmental regulation, tax rates and similar matters; (10) our ability to exit investments in a timely manner; (11) our ability to maintain our qualification as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and as a business development company ("BDC") under the Investment Company Act of 1940, as amended (the "1940 Act"); (12) the impact of COVID-19 on the economy, our portfolio companies and the capital markets, including the measures taken by governmental authorities to address it, which may precipitate or exacerbate other risks and/or uncertainties and (13) those factors described herein, including Item 1A. "Risk Factors," and in the "Risk Factors" section of our Annual Report on Form 10-K (our "Annual Report") for the fiscal year endedSeptember 30, 2021 , filed with theU.S. Securities and Exchange Commission ("SEC") onNovember 15, 2021 . Additionally, many of the risks and uncertainties listed above, among others, are currently elevated by and may or will continue to be elevated by the COVID-19 pandemic. We caution readers not to place undue reliance on any such forward-looking statements. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. We have based forward-looking statements on information available to us on the date of this report. Except as required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we have filed or in the future may file with theSEC from time to time, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements contained in this Quarterly Report on Form 10-Q are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended. The following analysis of our financial condition and results of operations should be read in conjunction with our accompanying Consolidated Financial Statements and the notes thereto contained elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report. Historical financial condition and results of operations and percentage relationships among any amounts in the financial statements are not necessarily indicative of financial condition or results of operations for any future periods. Except per share amounts, dollar amounts in the tables included herein are in thousands unless otherwise indicated.
OVERVIEW
General
We were incorporated under the Maryland General Corporation Law onMay 30, 2001 . We operate as an externally managed, closed-end, non-diversified management investment company, and have elected to be treated as a BDC under the 1940 Act. In addition, for federal income tax purposes we have elected to be treated as a RIC under the Code. To continue 40
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to qualify as a RIC for federal income tax purposes and obtain favorable RIC tax treatment, we must meet certain requirements, including certain minimum distribution requirements.
We were established for the purpose of investing in debt and equity securities of established private businesses operating in theU.S. Our investment objectives are to: (1) achieve and grow current income by investing in debt securities of established lower middle market businesses that we believe will provide stable earnings and cash flow to pay expenses, make principal and interest payments on our outstanding indebtedness and make distributions to stockholders that grow over time; and (2) provide our stockholders with long-term capital appreciation in the value of our assets by investing in equity securities of established businesses that we believe can grow over time to permit us to sell our equity investments for capital gains. To achieve our investment objectives, our investment strategy is to invest in several categories of debt and equity securities, with each investment generally ranging from$8 million to$30 million , although investment size may vary, depending upon our total assets or available capital at the time of investment. We expect that our investment portfolio over time will consist of approximately 90.0% debt investments and 10.0% equity investments, at cost. As ofMarch 31, 2022 , our investment portfolio was made up of approximately 90.8% debt investments and 9.2% equity investments, at cost. We focus on investing in lower middle market companies (which we generally define as companies with annual earnings before interest, taxes, depreciation and amortization of$3 million to$15 million ) in theU.S. that meet certain criteria, including the following: the sustainability of the business' free cash flow and its ability to grow it over time, adequate assets for loan collateral, experienced management teams with a significant ownership interest in the borrower, reasonable capitalization of the borrower, including an ample equity contribution or cushion based on prevailing enterprise valuation multiples and, to a lesser extent, the potential to realize appreciation and gain liquidity in our equity position, if any. We lend to borrowers that need funds for growth capital or to finance acquisitions or recapitalize or refinance their existing debt facilities. We seek to avoid investing in high-risk, early-stage enterprises. Our targeted portfolio companies are generally considered too small for the larger capital marketplace. We invest by ourselves or jointly with other funds and/or management of the portfolio company, depending on the opportunity. InJuly 2012 , theSEC granted us an exemptive order (the "Co-Investment Order") that expanded our ability to co-invest, under certain circumstances, with certain of our affiliates, including Gladstone Investment Corporation, a BDC also managed by the Adviser, and any future BDC or closed-end management investment company that is advised (or sub-advised if it controls the fund) by the Adviser, or any combination of the foregoing, subject to the conditions in the Co-Investment Order. Since 2012, we have opportunistically made several co-investments with Gladstone Investment Corporation pursuant to the Co-Investment Order. We believe the Co-Investment Order has enhanced and will continue to enhance our ability to further our investment objectives and strategies. If we are participating in an investment with one or more co-investors, our investment is likely to be smaller than if we were investing alone. We are externally managed by the Adviser, an investment adviser registered with theSEC and an affiliate of ours, pursuant to an investment advisory and management agreement. The Adviser manages our investment activities. We have also entered into an administration agreement withGladstone Administration, LLC (the "Administrator"), an affiliate of ours and the Adviser, whereby we pay separately for administrative services. Additionally,Gladstone Securities, LLC ("Gladstone Securities "), a privately-held broker-dealer registered with theFinancial Industry Regulatory Authority and insured by theSecurities Investor Protection Corporation , which is 100% indirectly owned and controlled byMr. Gladstone , our chairman and chief executive officer, has provided other services, such as investment banking and due diligence services, to certain of our portfolio companies, for whichGladstone Securities receives a fee.
Business
Portfolio and Investment Activity
In general, our investments in debt securities have a term of no more than seven years, accrue interest at variable rates (generally based on the 30-dayLondon Interbank Offered Rate ("LIBOR")) and, to a lesser extent, at fixed rates. We seek debt instruments that pay interest monthly or, at a minimum, quarterly, may have a success fee or deferred interest provision and are primarily interest only, with all principal and any accrued but unpaid interest due at maturity. Generally, success fees accrue at a set rate and are contractually due upon a change of control of a portfolio company, typically from an exit or sale. Some debt securities have deferred interest whereby some portion of the interest payment is added to the 41
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principal balance so that the interest is paid, together with the principal, at
maturity. This form of deferred interest is often called paid-in-kind ("PIK")
interest.
Typically, our equity investments consist of common stock, preferred stock, limited liability company interests, or warrants to purchase the foregoing. Often, these equity investments occur in connection with our original investment, recapitalizing a business, or refinancing existing debt.
During the six months endedMarch 31, 2022 , we invested$106.9 million in six new portfolio companies and extended$14.7 million in investments to existing portfolio companies. In addition, during the six months endedMarch 31, 2022 , we exited seven portfolio companies through early payoffs. We received a total of$147.7 million in combined net proceeds and principal repayments from the aforementioned portfolio company exits, as well as principal repayments by existing portfolio companies, during the six months endedMarch 31, 2022 . This activity resulted in a net decrease in our overall portfolio by one portfolio company (to 45) and a net decrease of$9.0 million in our portfolio at cost sinceSeptember 30, 2021 . From our initial public offering inAugust 2001 throughMarch 31, 2022 , we have made 589 different loans to, or investments in, 260 companies for a total of approximately$2.3 billion , before giving effect to principal repayments on investments and divestitures.
During the six months ended
Proprietary Investments
•In
•InNovember 2021 , our investment inLignetics, Inc. was sold, which resulted in the recognition of success fee income of$1.6 million and a realized gain of$13.4 million . In connection with the sale, we received net cash proceeds of approximately$47.2 million , including the repayment of our debt investment of$29.0 million at par. •InNovember 2021 , our investment inProphet Brand Strategy paid off at par for net cash proceeds of$13.1 million . In conjunction with the payoff, we received a prepayment fee of$0.1 million . •InNovember 2021 , our investment inEffective School Solutions LLC paid off at par for net cash proceeds of$19.5 million . In conjunction with the payoff, we received a prepayment fee of$0.5 million .
•In
•In
•In
•In
•In
•In
•In
•In
•InMarch 2022 , our investment inNetFortris Corp. was sold, which resulted in the recognition of success fee income of$3.2 million . In connection with the sale, we received net cash proceeds of$29.0 million , including the repayment of our debt investment of$28.8 million at par. We continue to retain an equity investment inNetFortris Holdings, LLC with a cost basis of$0.8 million and fair value of$0.6 million as ofMarch 31, 2022 . 42
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Syndicated Investments
•In
•In
Capital Raising
We have been able to meet our capital needs through extensions of and amendments to our line of credit withKeyBank National Association ("KeyBank"), as administrative agent, lead arranger and lender (as amended and/or restated from time to time, our "Credit Facility") and by accessing the capital markets in the form of public equity offerings of common stock and debt offerings. We have successfully extended the Credit Facility's revolving period multiple times, most recently toOctober 2023 , and currently have a total commitment amount of$175.0 million . InDecember 2020 , we completed a debt offering of$100.0 million aggregate principal amount of our 5.125% Notes due 2026 (the "2026 Notes"). InMarch 2021 , we completed a debt offering of an additional$50.0 million aggregate principal amount of the 2026 Notes. InNovember 2021 , we completed a debt offering of$50.0 million aggregate principal amount of our 3.75% Notes due 2027 (the "2027 Notes"). Refer to "Liquidity and Capital Resources - Revolving Credit Facility," "Liquidity and Capital Resources - Equity - Common Stock," and "Liquidity and Capital Resources - Notes Payable" for further discussion. Although we have been able to access the capital markets historically and in recent years, market conditions, including the impact of COVID-19, may affect the trading price of our capital stock and thus may inhibit our ability to finance new investments through the issuance of equity in the future. When our common stock trades below net asset value ("NAV") per common share, our ability to issue equity is constrained by provisions of the 1940 Act, which generally prohibits the issuance and sale of our common stock below NAV per common share without first obtaining approval from our stockholders and our independent directors, other than through sales to our then-existing stockholders pursuant to a rights offering.
On
Regulatory Compliance
Our ability to seek external debt financing, to the extent that it is available under current market conditions, is further subject to the asset coverage limitations of the 1940 Act, which require us to have an asset coverage (as defined in Sections 18 and 61 of the 1940 Act) of at least 150% on our "senior securities representing indebtedness" and our "senior securities that are stock." OnApril 10, 2018 , our Board of Directors, including a "required majority" (as such term is defined in Section 57(o) of the 1940 Act) thereof, approved the modified asset coverage requirements set forth in Section 61(a)(2) of the 1940 Act. As a result, the Company's asset coverage requirements for senior securities changed from 200% to 150%, effectiveApril 10, 2019 .
As of
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On
Record Date Payment Date Distribution per Common Share
April 22, 2022 April 29, 2022 $ 0.0675
May 20, 2022 May 31, 2022 0.0675
June 22, 2022 June 30, 2022 0.0675
Total for the Quarter: $ 0.2025
LIBOR Transition
In general, our investments in debt securities have a term of five years, accrue
interest at variable rates (based on the one-month LIBOR) and, to a lesser
extent, at fixed rates. Most U.S. dollar LIBOR are currently anticipated to be
phased out in June 2023 . LIBOR is currently expected to transition to a new
standard rate, the Secured Overnight Financing Rate ("SOFR"), which will
incorporate certain overnight repo market data collected from multiple data
sets. To attain an equivalent one-month rate, we currently intend to adjust the
SOFR to minimize the difference between the interest that a borrower would be
paying using LIBOR versus what it will be paying using SOFR. We are currently
monitoring the transition and cannot assure you whether SOFR will become a
standard rate for variable rate debt. We expect we will need to renegotiate
certain loan documents with our portfolio companies that utilize LIBOR as a
factor in determining the interest rate to include LIBOR replacement language.
Assuming that SOFR replaces LIBOR and is appropriately adjusted to equate to
one-month LIBOR, we expect that there should be minimal impact on our
operations.
COVID-19
We continue to monitor and work with the management teams and shareholders of our portfolio companies to navigate the significant market, operational and economic challenges created by the continuing COVID-19 pandemic. The Company's investment portfolio continues to be focused on a diversified mix of industries and sectors that have proven to be more durable than industries or sectors that are more prone to economic cycles including consumer or retail industries. We believe our portfolio companies effectively and efficiently responded to the challenges posed by the COVID-19 pandemic and related restrictions imposed by state and local governments, including developing liquidity plans supported by internal cash reserves, shareholder support, and, as appropriate, accessing the government Paycheck Protection Program. We believe we have sufficient levels of liquidity to support our existing portfolio companies, as necessary, and selectively deploy capital in new investment opportunities.
Impact of Inflation
We believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. During the six months endedMarch 31, 2022 and 2021, general inflationary pressures and certain commodity price volatility have impacted our portfolio companies to varying degrees; however, the broad based impact of these pricing changes have largely been mitigated by price adjustments without adverse sales implications, and thus, have not materially impacted our portfolio companies' ability to service their indebtedness, including our loans. Notwithstanding the results to date, we do expect that the cumulative effect of these inflationary pressures may impact the profit margins or sales of certain portfolio companies and their ability to service their debts. We continue to monitor the current inflationary environment to anticipate any impact on our portfolio companies including their availability to pay interest on our loans. We cannot assure you that our results of operations and financial condition or that of our portfolio companies will not be materially impacted by inflation in the future. See "Risk Factors- We may experience fluctuations in our quarterly and annual results based on the impact of inflation in theU.S. " 44
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RESULTS OF OPERATIONS
Comparison of the Three Months EndedMarch 31, 2022 to the Three Months EndedMarch 31, 2021 Three Months Ended March 31, 2022 2021 $ Change % Change INVESTMENT INCOME Interest income$ 12,962 $ 11,886 $ 1,076 9.1 % Success fee, dividend, and other income 4,298 999 3,299 330.2 Total investment income 17,260 12,885 4,375 34.0 EXPENSES Base management fee 2,479 2,095 384 18.3 Loan servicing fee 1,520 1,396 124 8.9 Incentive fee 1,971 1,381 590 42.7 Administration fee 401 332 69 20.8 Interest expense on borrowings and notes payable 3,020 2,822 198 7.0 Amortization of deferred financing costs 274 338 (64) (18.9) Other expenses 522 398 124 31.2 Expenses, before credits from Adviser 10,187 8,762 1,425 16.3 Credit to base management fee - loan servicing fee (1,520) (1,396) (124) 8.9 Credits to fees from Adviser - other (102) (880) 778 (88.4) Total expenses, net of credits 8,565 6,486 2,079 32.1 NET INVESTMENT INCOME 8,695 6,399 2,296 35.9 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments - 63 (63) (100.0) Net realized gain (loss) on other 233 (1,152) 1,385 (120.2) Net unrealized appreciation (depreciation) of investments (625) 16,009 (16,634) (103.9) Net unrealized appreciation of other - (20) 20 (100.0) Net gain (loss) from investments and other (392) 14,900 (15,292) (102.6) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS$ 8,303 $ 21,299 $ (12,996) (61.0) % Investment Income Interest income increased by 9.1% for the three months endedMarch 31, 2022 , as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the three months endedMarch 31, 2022 , was$514.4 million , compared to$454.1 million for the three months endedMarch 31, 2021 , an increase of$60.3 million , or 13.3%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased to 10.2% for the three months endedMarch 31, 2022 , compared to 10.6% for the three months endedMarch 31, 2021 , inclusive of any allowances on interest receivables made during those periods. The decrease in the weighted average yield was driven mainly by competitive marketplace conditions.
As of
Other income increased by$3.3 million during the three months endedMarch 31, 2022 , as compared to the prior year period, primarily due to increases in success fees received and dividend income, partially offset by a decrease in prepayment fees received, period over period.
As of
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Expenses
Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased$2.1 million , or 32.1%, for the three months endedMarch 31, 2022 , as compared to the prior year period. This increase was primarily due to a$0.9 million increase in net base management fees and a$0.8 million increase in the net incentive fee. Total interest expense on borrowings and notes payable increased by$0.2 million , or 7.0%, during the three months endedMarch 31, 2022 , as compared to the prior year period. This increase was driven by an increase in our overall funding needs and a change in the composition of our debt financing. Interest expense on our notes payable increased by$0.4 million period over period with the issuance of the 2027 Notes inNovember 2021 and the 2026 Notes inMarch 2021 , partially offset by the redemption of our 5.375% Notes due 2024 (the "2024 Notes") inNovember 2021 . Interest expense on our Credit Facility decreased by$0.2 million , period over period, driven primarily by a decrease in the weighted average balance outstanding on our Credit Facility, partially offset by an increase in unused commitment fees. The weighted average balance outstanding on our Credit Facility was$42.5 million during the three months endedMarch 31, 2022 , as compared to$69.4 million in the prior year period, a decrease of 38.8%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 5.9% during the three months endedMarch 31, 2022 , compared to 4.6% during the prior year period. The increase in the effective interest rate was driven primarily by a$72 thousand increase in unused commitment fees during the three months endedMarch 31, 2022 as compared to the prior year period. The net base management fee earned by the Adviser increased by$0.9 million , for the three months endedMarch 31, 2022 , as compared to the prior year period, resulting from a decrease in new deal origination credits to the base management fee from the Adviser period over period and an increase in average total assets subject to the base management fee. The income-based incentive fee increased by$0.6 million for the three months endedMarch 31, 2022 , as compared to the prior year period, due to higher pre-incentive fee net investment income as compared to the prior year period. During the three months endedMarch 31, 2021 , our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of$0.2 million to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders. There was no incentive fee credit during the three months endedMarch 31, 2022 .
The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under "Transactions with the Adviser" in Note 4-Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:
Three Months Ended
March 31,
2022 2021
Average total assets subject to base management fee(A)
$ 478,857 Multiplied by prorated annual base management fee of 1.75% 0.4375 % 0.4375 % Base management fee(B)$ 2,479 $ 2,095 Portfolio company fee credit (59) (574) Syndicated loan fee credit (43) (81) Net Base Management Fee$ 2,377 $ 1,440 Loan servicing fee(B) 1,520 1,396 Credit to base management fee - loan servicing fee(B) (1,520) (1,396) Net Loan Servicing Fee $ - $ - Incentive fee(B) 1,971 1,381 Incentive fee credit - (225) Net Incentive Fee$ 1,971 $ 1,156 Portfolio company fee credit (59) (574) Syndicated loan fee credit (43) (81) Incentive fee credit - (225) Credits to Fees From Adviser - other(B)$ (102)
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(A)Average total assets subject to the base management fee is defined as total assets, including investments made with proceeds of borrowings, less any uninvested cash or cash equivalents resulting from borrowings, valued at the end of the applicable quarters within the respective periods and adjusted appropriately for any share issuances or repurchases during the periods. (B)Reflected, on a gross basis, as a line item on our Consolidated Statements of Operations.
Net Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
For the three months endedMarch 31, 2021 , we recorded a net realized gain on investments of$0.1 million , which resulted primarily from the gain recognized on our investment in Funko, LLC. No such amounts were recorded during the three months endedMarch 31, 2022 .
Net Unrealized Appreciation (Depreciation) of Investments
During the three months ended
Three Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net
Portfolio Company (Loss) (Depreciation) Depreciation Gain (Loss)
WB Xcel Holdings, LLC $ - $ 2,826 $ - $ 2,826
ENET Holdings, LLC - 2,250 - 2,250
Targus Cayman HoldCo, Ltd. - 1,309 - 1,309
Defiance Integrated Technologies, Inc. - 713 - 713
B+T Group Acquisition Inc. - 652 - 652
Engineering Manufacturing Technologies,
LLC - (362) - (362)
MCG Energy Solutions, LLC - (380) - (380)
Triple H Food Processors, LLC - (409) - (409)
PIC 360, LLC - (410) - (410)
R2i Holdings, LLC - (665) - (665)
Leeds Novamark Capital I, L.P. - (1,388) - (1,388)
Antenna Research Associates, Inc. - (1,624) - (1,624)
Encore Dredging Holdings, LLC - (2,715) - (2,715)
Other, net (<$500 ) - (255) (167) (422)
Total: $ - $ (458) $ (167) $ (625)
The primary driver of net unrealized depreciation of $0.6 million for the three
months ended March 31, 2022 was the decline in the financial and operational
performance of certain of our portfolio companies, partially offset by
improvement in the financial and operational performance of WB Xcel Holdings,
LLC and ENET Holdings, LLC .
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During the three months ended March 31, 2021 , we recorded net unrealized
appreciation of investments in the aggregate amount of $16.0 million . The net
realized gain (loss) and unrealized appreciation (depreciation) across our
investments for the three months ended March 31, 2021 were as follows:
Three Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net
Portfolio Company (Loss) (Depreciation) Depreciation Gain (Loss)
AG Transportation Holdings, LLC $ - $ 5,512 $ - $ 5,512
Antenna Research Associates, Inc. - 3,521 - 3,521
NetFortris Corp. - 1,076 - 1,076
American Trailer Rental Group LLC - 1,015 - 1,015
Imperative Holdings Corporation - 819 - 819
Defiance Integrated Technologies, Inc. - 659 - 659
TNCP Intermediate HoldCo, LLC - 639 - 639
Targus Cayman HoldCo, Ltd. - 636 - 636
Triple H Food Processors, LLC - 492 - 492
Lignetics, Inc. - 432 - 432
EL Academies, Inc. - 410 - 410
Sea Link International IRB, Inc. - 395 - 395
DKI Ventures, LLC - 366 - 366
PIC 360, LLC - 338 - 338
Canopy Safety Brands, LLC - 221 - 221
Leeds Novamark Capital I, L.P. - 220 - 220
ENET Holdings, LLC - (750) - (750)
Other, net (<$500 ) 63 198 (190) 71
Total: $ 63 $ 16,199 $ (190) $ 16,072
The primary driver of net unrealized appreciation of $16.0 million for the three
months ended March 31, 2021 was the improvement in the financial and operational
performance across a number of our portfolio companies and an increase in
comparable multiples used to estimate the fair value of several of our portfolio
companies, partially offset by a decrease in performance of certain of our other
portfolio companies.
Net Realized Gain (Loss) on Other
We incurred a loss on extinguishment of debt of$1.2 million during the three months endedMarch 31, 2021 , which resulted from the write-off of unamortized deferred issuance costs at the time of redemption of our$57.5 million aggregate principal amount of 6.125% Notes due 2023 (the "2023 Notes") inJanuary 2021 . During the three months endedMarch 31, 2022 , we recorded a net realized gain on other of$0.2 million associated with escrows received.
Net Unrealized (Appreciation) Depreciation of Other
During the three months ended
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Comparison of the Six Months EndedMarch 31, 2022 to the Six Months EndedMarch 31, 2021 Six Months Ended March 31, 2022 2021 $ Change % Change INVESTMENT INCOME Interest income$ 25,828 $ 23,968 $ 1,860 7.8 % Success fee, dividend, and other income 7,599 1,799 5,800 322.4 Total investment income 33,427 25,767 7,660 29.7 EXPENSES Base management fee 4,999 4,097 902 22.0 Loan servicing fee 2,982 2,744 238 8.7 Incentive fee 4,062 2,748 1,314 47.8 Administration fee 780 687 93 13.5 Interest expense on borrowings and notes payable 6,027 5,390 637 11.8 Amortization of deferred financing costs 563 756 (193) (25.5) Other expenses 1,170 940 230 24.5 Expenses, before credits from Adviser 20,583 17,362 3,221 18.6 Credit to base management fee - loan servicing fee (2,982) (2,744) (238) 8.7 Credits to fees from Adviser - other (2,029) (1,530) (499) 32.6 Total expenses, net of credits 15,572 13,088 2,484 19.0 NET INVESTMENT INCOME 17,855 12,679 5,176 40.8 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on investments 13,880 (2,081) 15,961 (767.0) Net realized gain (loss) on other (467) (1,160) 693 (59.7) Net unrealized appreciation (depreciation) of investments (10,862) 24,504 (35,366) (144.3) Net unrealized appreciation of other - (340) 340 (100.0) Net gain (loss) from investments and other 2,551 20,923 (18,372) (87.8) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS$ 20,406 $ 33,602 $ (13,196) (39.3) % Investment Income Interest income increased by 7.8% for the six months endedMarch 31, 2022 , as compared to the prior year period. Generally, the level of interest income from investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the period multiplied by the weighted-average yield. The weighted average principal balance of our interest-bearing investment portfolio for the six months endedMarch 31, 2022 , was$504.3 million , compared to$448.7 million for the six months endedMarch 31, 2021 , an increase of$55.6 million , or 12.4%. The weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments, which decreased to 10.3% for the six months endedMarch 31, 2022 , compared to 10.7% for the six months endedMarch 31, 2021 , inclusive of any allowances on interest receivables made during those periods. The decrease in the weighted average yield was driven mainly by competitive marketplace conditions.
As of
Other income increased by
As of
Expenses
Expenses, net of any non-contractual, unconditional and irrevocable credits to fees from the Adviser, increased$2.5 million , or 19.0%, for the six months endedMarch 31, 2022 , as compared to the prior year period. This increase was primarily due to a$1.8 million increase in the net incentive fee and a$0.6 million increase in interest expense on borrowings and notes payable. 49
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Total interest expense on borrowings and notes payable increased by$0.6 million , or 11.8%, during the six months endedMarch 31, 2022 , as compared to the prior year period. This increase was driven by an increase in our overall funding needs and a change in the composition of our debt financing. Interest expense on our notes payable increased by$1.1 million period over period with the issuance of the 2027 Notes inNovember 2021 and the 2026 Notes inDecember 2020 andMarch 2021 , partially offset by the redemption of the 2024 Notes inNovember 2021 . Interest expense on our Credit Facility decreased by$0.5 million , period over period, driven primarily by a decrease in the weighted average balance outstanding on our Credit Facility, partially offset by an increase in unused commitment fees. The weighted average balance outstanding on our Credit Facility was$37.7 million during the six months endedMarch 31, 2022 , as compared to$87.4 million in the prior year period, a decrease of 56.9%. The effective interest rate on our Credit Facility, including unused commitment fees incurred, but excluding the impact of deferred financing costs, was 6.6% during the six months endedMarch 31, 2022 , compared to 4.0% during the prior year period. The increase in the effective interest rate was driven primarily by a$0.3 million increase in unused commitment fees during the three months endedMarch 31, 2022 as compared to the prior year period. The net base management fee earned by the Adviser decreased by$33 thousand for the six months endedMarch 31, 2022 , as compared to the prior year period, resulting from an increase in credits to the base management fee from the Adviser period over period driven by an increase in new deal activity, partially offset by an increase in average total assets subject to the base management fee. The income-based incentive fee increased by$1.3 million for the six months endedMarch 31, 2022 , as compared to the prior year period, due to higher pre-incentive fee net investment income as compared to the prior year period. During the six months endedMarch 31, 2021 , our Board of Directors accepted non-contractual, unconditional and irrevocable credits from the Adviser of$0.4 million to reduce the income-based incentive fee to the extent net investment income did not cover 100.0% of our distributions to common stockholders. There was no incentive fee credit during the six months endedMarch 31, 2022 .
The base management, loan servicing and incentive fees, and associated non-contractual, unconditional and irrevocable credits, are computed quarterly, as described under "Transactions with the Adviser" in Note 4-Related Party Transactions of the Notes to Consolidated Financial Statements and are summarized in the following table:
Six Months Ended
March 31,
2022 2021
Average total assets subject to base management fee(A)
$ 468,229 Multiplied by prorated annual base management fee of 1.75% 0.8750 % 0.8750 % Base management fee(B)$ 4,999 $ 4,097 Portfolio company fee credit (1,928) (926) Syndicated loan fee credit (101) (168) Net Base Management Fee$ 2,970 $ 3,003 Loan servicing fee(B) 2,982 2,744 Credit to base management fee - loan servicing fee(B) (2,982) (2,744) Net Loan Servicing Fee $ - $ - Incentive fee(B) 4,062 2,748 Incentive fee credit - (436) Net Incentive Fee$ 4,062 $ 2,312 Portfolio company fee credit (1,928) (926) Syndicated loan fee credit (101) (168) Incentive fee credit - (436) Credits to Fees From Adviser - other(B)$ (2,029)
(A)Average total assets subject to the base management fee is defined as total
assets, including investments made with proceeds of borrowings, less any
uninvested cash or cash equivalents resulting from borrowings, valued at the end
of the applicable quarters within the respective periods and adjusted
appropriately for any share issuances or repurchases during the periods.
(B)Reflected, on a gross basis, as a line item on our Consolidated Statements of
Operations.
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Net Realized and Unrealized Gain (Loss)
Net Realized Gain (Loss) on Investments
For the six months ended
For the six months ended
Net Unrealized Appreciation (Depreciation) of Investments
During the six months ended
Six Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net
Portfolio Company (Loss) (Depreciation) Depreciation Gain (Loss)
NetFortris Holdings LLC $ - $ 4,127 $ (284) $ 3,843
ENET Holdings, LLC - 3,300 - 3,300
WB Xcel Holdings, LLC - 2,826 - 2,826
Targus Cayman HoldCo, Ltd. - 1,430 - 1,430
Imperative Holdings Corporation - 1,151 - 1,151
B+T Group Acquisition Inc. - 784 - 784
AG Transportation Holdings, LLC 468 - - 468
Engineering Manufacturing Technologies,
LLC - (362) - (362)
Sea Link International IRB, Inc. - (388) - (388)
Triple H Food Processors, LLC - (581) - (581)
MCG Energy Solutions, LLC - (922) - (922)
R2i Holdings, LLC - (926) - (926)
Leeds Novamark Capital I, L.P. - (1,388) - (1,388)
Antenna Research Associates, Inc. - (1,459) - (1,459)
Lignetics, Inc. 13,408 - (14,958) (1,550)
Encore Dredging Holdings, LLC - (2,776) - (2,776)
Other, net (<$500 ) 4 (303) (133) (432)
Total: $ 13,880 $ 4,513 $ (15,375) $ 3,018
The primary driver of net unrealized depreciation of $10.9 million for the six
months ended March 31, 2022 was the reversal of unrealized depreciation
associated with the exit of our investment in Lignetics, Inc. and the decline in
the financial and operational performance of certain of our other portfolio
companies, partially offset by the improvement in the financial and operational
performance of NetFortris Holdings LLC (formerly NetFortris Corp. ) and ENET
Holdings, LLC .
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During the six months ended March 31, 2021 , we recorded net unrealized
appreciation of investments in the aggregate amount of $24.5 million . The net
realized gain (loss) and unrealized appreciation (depreciation) across our
investments for the six months ended March 31, 2021 were as follows:
Six Months Ended
Reversal of
Unrealized Unrealized
Realized Gain Appreciation (Appreciation) Net
Portfolio Company (Loss) (Depreciation) Depreciation Gain (Loss)
AG Transportation Holdings, LLC $ - $ 6,788 $ - $ 6,788
Antenna Research Associates, Inc. - 4,015 - 4,015
American Trailer Rental Group LLC - 1,213 - 1,213
Triple H Food Processors, LLC - 1,094 - 1,094
Targus Cayman HoldCo, Ltd. - 1,043 - 1,043
NetFortris Corp. - 984 - 984
PIC 360, LLC - 856 - 856
TNCP Intermediate HoldCo, LLC - 831 - 831
EL Academies, Inc. - 669 - 669
DKI Ventures, LLC - 615 - 615
Defiance Integrated Technologies, Inc. - 502 - 502
Edmentum Ultimate Holdings, LLC (2,351) - 2,770 419
Café Zupas - 454 - 454
Sea Link International IRB, Inc. - 425 - 425
Lignetics, Inc. - 417 - 417
R2i Holdings, LLC - 412 - 412
Keystone Acquisition Corp. - 395 - 395
Tailwind Smith Cooper Intermediate
Corporation - 334 - 334
Vertellus Holdings LLC (41) - 313 272
Drive Chassis Holdco, LLC - 260 - 260
Medical Solutions Holdings, Inc. - 233 - 233
Leeds Novamark Capital I, L.P. - 220 - 220
Gray Matter Systems, LLC - 203 - 203
SpaceCo Holdings, LLC - 202 - 202
Belnick, Inc. - 175 - 175
Canopy Safety Brands, LLC - 163 - 163
ENET Holdings, LLC - (1,124) - (1,124)
Other, net (<$500 ) 311 232 (190) 353
Total: $ (2,081) $ 21,611 $ 2,893 $ 22,423
The primary driver of net unrealized appreciation of $24.5 million for the six
months ended March 31, 2021 was the improvement in the financial and operational
performance across a number of our portfolio companies and an increase in
comparable multiples used to estimate the fair value of several of our portfolio
companies, partially offset by the decline in the financial and operational
performance of certain of our other portfolio companies, including most notably,
ENET Holdings, LLC .
Net Realized Loss on Other
We incurred a loss on extinguishment of debt of $0.8 million during the six
months ended March 31, 2022 , which resulted from the write-off of unamortized
deferred issuance costs at the time of redemption of our 2024 Notes in November
2021 . We incurred a loss on extinguishment of debt of $1.2 million during the
six months ended March 31, 2021 , which resulted from the write-off of
unamortized deferred issuance costs at the time of redemption of our 2023 Notes
in January 2021 .
Net Unrealized (Appreciation) Depreciation of Other
During the six months ended
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--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Our cash flows from operating activities are primarily generated from the interest payments on debt securities that we receive from our portfolio companies, as well as net proceeds received through repayments or sales of our investments. We utilize this cash primarily to fund new investments, make interest payments on our Credit Facility, make distributions to our stockholders, pay management and administrative fees to the Adviser and Administrator, and for other operating expenses.
Net cash provided by operating activities for the six months endedMarch 31, 2022 was$37.7 million , as compared to net cash used in operating activities of$4.8 million for the six months endedMarch 31, 2021 . The change was primarily due to an increase in principal repayments, partially offset by an increase in purchases of investments, period over period. Purchases of investments were$121.6 million during the six months endedMarch 31, 2022 , compared to$101.1 million during the six months endedMarch 31, 2021 . Repayments and net proceeds from sales were$147.5 million during the six months endedMarch 31, 2022 compared to$82.1 million during the six months endedMarch 31, 2021 . As ofMarch 31, 2022 , we had loans to, syndicated participations in or equity investments in 45 companies, with an aggregate cost basis of approximately$537.5 million . As ofSeptember 30, 2021 , we had loans to, syndicated participations in or equity investments in 46 companies, with an aggregate cost basis of approximately$546.5 million .
The following table summarizes our total portfolio investment activity during
the six months ended
Six
Months Ended
2022 2021
Beginning investment portfolio, at fair value $ 557,612 $ 450,400
New investments 106,918 101,000
Disbursements to existing portfolio companies 14,651 98
Scheduled principal repayments on investments (3,662) (1,563)
Unscheduled principal repayments on investments (126,938) (76,893)
Net proceeds from sale of investments (17,057) (3,598)
Net unrealized appreciation (depreciation) of investments 4,513 21,611
Reversal of prior period depreciation (appreciation) of investments on realization
(15,375) 2,893
Net realized gain (loss) on investments 13,880 (2,081)
Increase in investments due to PIK(A) or other 2,614 1,081
Net change in premiums, discounts and amortization 547 (181)
Investment Portfolio, at Fair Value $
537,703
(A)PIK interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan.
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The following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year, assuming no voluntary prepayments, as ofMarch 31, 2022 : Amount For the remaining six months ending September 30: 2022(A)$ 23,440 For the fiscal years ending September 30: 2023 27,469 2024 66,011 2025 82,477 2026 146,035 Thereafter 143,424 Total contractual repayments$ 488,856 Adjustments to cost basis of debt investments (1,039) Investments in equity securities 49,648 Investments held as of March 31, 2022 at cost:$ 537,465
(A)Includes debt investments with contractual principal amounts totaling
Financing Activities
Net cash used in financing activities for the six months endedMarch 31, 2022 was$36.9 million , which consisted primarily$38.8 million used in the redemption of our 2024 Notes and$33.1 million in net repayments on our Credit Facility, partially offset by$50.0 million in gross proceeds from the issuance of our 2027 Notes. Net cash provided by financing activities for the six months endedMarch 31, 2021 was$7.4 million , which consisted primarily of$150.0 million in gross proceeds from the issuance of long term debt, partially offset by$86.8 million in net repayments on our Credit Facility and$57.5 million used in the redemption of our 2023 Notes. Distributions to Stockholders Common Stock Distributions To qualify to be taxed as a RIC and thus avoid corporate level federal income tax on the income we distribute to our stockholders, we are required to distribute to our stockholders on an annual basis at least 90.0% of our Investment Company Taxable Income. Additionally, our Credit Facility has a covenant that generally restricts the amount of distributions to stockholders that we can pay out to be no greater than our aggregate net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. In accordance with these requirements, we paid monthly cash distributions of$0.065 per common share for each month for the six months endedMarch 31, 2022 and 2021. These distributions totaled an aggregate of$13.4 million and$12.7 million for the six months endedMarch 31, 2022 and 2021, respectively. InApril 2022 , our Board of Directors declared a monthly distribution of$0.0675 per common share for each of April, May, andJune 2022 . Our Board of Directors declared these distributions to our stockholders based on our estimates of our Investment Company Taxable Income for the fiscal year endingSeptember 30, 2022 . From inception throughMarch 31, 2022 , we have paid 230 monthly or quarterly consecutive distributions to common stockholders totaling approximately$409.7 million or$21.43 per share.
For the fiscal year ended
The characterization of the common stockholder distributions declared and paid for the fiscal year endingSeptember 30, 2022 will be determined at fiscal year end, based upon our investment company taxable income for the full fiscal year and distributions paid during the full fiscal year. Such a characterization made on a quarterly basis may not be representative of the actual full fiscal year characterization. 54
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Dividend Reinvestment Plan
Our common stockholders who hold their shares through our transfer agent,Computershare, Inc. ("Computershare"), have the option to participate in a dividend reinvestment plan offered by Computershare, as the plan agent. This is an "opt in" dividend reinvestment plan, meaning that common stockholders may elect to have their cash distributions automatically reinvested in additional shares of our common stock. Common stockholders who do make such election will receive their distributions in cash. Common stockholders who receive distributions in the form of stock will be subject to the same federal, state and local tax consequences as stockholders who elect to receive their distributions in cash. The common stockholder will have an adjusted basis in the additional common shares purchased through the plan equal to the amount of the reinvested distribution. The additional shares will have a new holding period commencing on the day following the date on which the shares are credited to the common stockholder's account. Computershare purchases shares in the open market in connection with the obligations under the plan.
Equity
Registration Statement
Our shelf registration statement permits us to issue, through one or more transactions, up to an aggregate of$300.0 million in securities, consisting of common stock, preferred stock, subscription rights, debt securities and warrants to purchase common stock, preferred stock or debt securities. As ofMarch 31, 2022 , we had the ability to issue up to$300.0 million in securities under the registration statement. Common Stock We anticipate issuing equity securities to obtain additional capital in the future. However, we cannot determine the timing or terms of any future equity issuances or whether we will be able to issue equity on terms favorable to us, or at all. To the extent that our common stock trades at a market price below our NAV per share, we will generally be precluded from raising equity capital through public offerings of our common stock, other than pursuant to stockholder and independent director approval or a rights offering to existing common stockholders.
On
Revolving Credit Facility
OnMay 13, 2021 , we, through Business Loan, amended and restated the Credit Facility to, among other things, (i) decrease the commitment amount from$205.0 million to$175.0 million , (ii) extend the revolving period end date toOctober 31, 2023 , (iii) extend the maturity date toOctober 31, 2025 (at which time all principal and interest will be due and payable if the Credit Facility is not extended by the revolving period end date), (iv) reduce the interest rate margin to 2.70% during the revolving period and 3.25% thereafter, with a LIBOR floor of 0.35%, (v) revise the unused fee to include an additional fee tier of 0.35% per annum on the daily undrawn amounts if the average unused amount is equal to or less than 35% during the applicable period, (vi) provide for certain excess concentration limits, including a reduced second lien limit and a new broadly syndicated loan limit and (vii) add customary LIBOR replacement language. We incurred fees of approximately$1.1 million in connection with this amendment and restatement, which are being amortized through our Credit Facility's revolving period end date ofOctober 31, 2023 . Interest is payable monthly during the term of our Credit Facility. Available borrowings are subject to various constraints imposed under our Credit Facility, based on the aggregate loan balance pledged by Business Loan, which varies as loans are added and repaid, regardless of whether such repayments are prepayments or made as contractually required. Our Credit Facility also requires that any interest or principal payments on pledged loans be remitted directly by the borrower into a lockbox account withKeyBank and withThe Bank of New York Mellon Trust Company, N.A. as custodian.KeyBank , which also serves as the trustee of the account, generally remits the collected funds to us once a month. Our Credit Facility contains covenants that require Business Loan to maintain its status as a separate legal entity, prohibit certain significant corporate transactions (such as mergers, consolidations, liquidations or dissolutions), and restrict material changes to our credit and collection policies without the lenders' consents. Our Credit Facility generally limits distributions to our stockholders on a fiscal year basis to the sum of our net investment income, net capital gains and amounts elected to have been paid during the prior year in accordance with Section 855(a) of the Code. Business Loan is 55
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also subject to certain limitations on the type of loan investments it can apply as collateral towards the borrowing base to receive additional borrowing availability under our Credit Facility, including restrictions on geographic concentrations, sector concentrations, loan size, payment frequency and status, average life, portfolio company leverage and lien property. Our Credit Facility further requires Business Loan to comply with other financial and operational covenants, which obligate Business Loan to, among other things, maintain certain financial ratios, including asset and interest coverage and a minimum number of 25 obligors required in the borrowing base. Additionally, we are required to maintain (i) a minimum net worth (defined in our Credit Facility to include any outstanding mandatorily redeemable preferred stock) of$325.0 million plus 50.0% of all equity and subordinated debt raised afterMay 13, 2021 less 50% of any equity and subordinated debt retired or redeemed afterMay 13, 2021 , which equates to$334.4 million as ofMarch 31, 2022 , (ii) asset coverage with respect to "senior securities representing indebtedness" of at least 150% (or such percentage as may be set forth in Section 18 of the 1940 Act, as modified by Section 61 of the 1940 Act), and (iii) our status as a BDC under the 1940 Act and as a RIC under the Code. As ofMarch 31, 2022 , and as defined in our Credit Facility, we had a net worth of$522.0 million , asset coverage on our "senior securities representing indebtedness" of 246.6%, calculated in accordance with the requirements of Section 18 and 61 of the 1940 Act, and an active status as a BDC and RIC. In addition, we had 29 obligors in our Credit Facility's borrowing base as ofMarch 31, 2022 . As ofMarch 31, 2022 , we were in compliance with all of our Credit Facility covenants. Refer to Note 5-Borrowings of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report for additional information regarding our Credit Facility.
Notes Payable
InNovember 2021 , we completed a private placement of$50.0 million aggregate principal amount of the 2027 Notes for net proceeds of approximately$48.5 million after adding discounts and deducting underwriting costs, commissions and offering expenses borne by us. The 2027 Notes will mature onMay 1, 2027 and may be redeemed in whole or in part at any time or from time to time at the Company's option prior to maturity at par plus a "make-whole" premium, if applicable. The 2027 Notes bear interest at a rate of 3.75% per year. Interest is payable semi-annually onMay 1 andNovember 1 of each year (which equates to approximately$1.9 million per year). InDecember 2020 , we completed a debt offering of$100.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately$97.7 million after deducting underwriting discounts, commissions and offering expenses borne by us. InMarch 2021 , we completed a debt offering of an additional$50.0 million aggregate principal amount of the 2026 Notes for net proceeds of approximately$50.6 million after adding premiums and deducting underwriting costs, commissions and offering expenses borne by us. The 2026 Notes will mature onJanuary 31, 2026 and may be redeemed in whole or in part at any time or from time to time at the Company's option prior to maturity at par plus a "make-whole" premium, if applicable. The 2026 Notes bear interest at a rate of 5.125% per year. Interest is payable semi-annually onJanuary 31 andJuly 31 of each year (which equates to approximately$7.7 million per year). InOctober 2019 , we completed a public debt offering of the 2024 Notes for net proceeds of approximately$37.5 million after deducting underwriting discounts, commissions and offering expenses borne by us. OnNovember 1, 2021 , we voluntarily redeemed the 2024 Notes with an aggregate principal amount outstanding of$38.8 million . In connection with the voluntary redemption of the 2024 Notes, we incurred a loss on extinguishment of debt of$0.8 million , which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The 2024 Notes would have otherwise matured onNovember 1, 2024 . InNovember 2018 , we completed a public debt offering of$57.5 million aggregate principal amount of the 2023 Notes, inclusive of the overallotment option exercised by the underwriters, for net proceeds of$55.4 million after deducting underwriting discounts, commissions and offering expenses borne by us. OnJanuary 7, 2021 , we voluntarily redeemed the 2023 Notes with an aggregate principal amount outstanding of$57.5 million . The redemption amount was$58.1 million inclusive of accrued interest through the date of redemption. In connection with the voluntary redemption of the 2023 Notes, we incurred a loss on extinguishment of debt of$1.2 million , which is primarily comprised of the unamortized deferred issuance costs at the time of redemption. The 2023 Notes would have otherwise matured onNovember 1, 2023 . The indenture relating to the 2027 Notes and the 2026 Notes contains certain covenants, including (i) an inability to incur additional debt or issue additional debt or preferred securities unless the Company's asset coverage meets the threshold specified in the 1940 Act after such borrowing, (ii) an inability to declare any dividend or distribution (except a dividend payable in our stock) on a class of our capital stock or to purchase shares of our capital stock unless the Company's asset 56
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coverage meets the threshold specified in the 1940 Act at the time of (and giving effect to) such declaration or purchase, and (iii) if, at any time, we are not subject to the reporting requirements of the Exchange Act, we will provide the holders of the 2027 Notes and the 2026 Notes, as applicable, and the trustee with audited annual consolidated financial statements and unaudited interim consolidated financial statements.
The 2027 Notes and 2026 Notes are recorded at the principal amount, plus applicable premiums, less discounts and offering costs, on our Consolidated Statements of Assets and Liabilities.
Off-Balance Sheet Arrangements
We generally recognize success fee income when the payment has been received. As ofMarch 31, 2022 andSeptember 30, 2021 , we had off-balance sheet success fee receivables on our accruing debt investments of$12.1 million and$11.7 million (or approximately$0.35 per common share and$0.34 per common share), respectively, that would be owed to us, generally upon a change of control of the portfolio companies. Consistent with GAAP, we generally have not recognized our success fee receivables and related income in our Consolidated Financial Statements until earned. Due to the contingent nature of our success fees, there are no guarantees that we will be able to collect all of these success fees or know the timing of such collections.
Contractual Obligations
We have lines of credit, delayed draw term loans, and an uncalled capital commitment with certain of our portfolio companies that have not been fully drawn. Since these commitments have expiration dates and we expect many will never be fully drawn, the total commitment amounts do not necessarily represent future cash requirements. We estimate the fair value of the combined unused lines of credit, the unused delayed draw term loans, and the uncalled capital commitment as ofMarch 31, 2022 andSeptember 30, 2021 to be immaterial. The following table shows our contractual obligations as ofMarch 31, 2022 , at cost: Payments Due by Period Less than More than 5 Contractual Obligations(A) 1 Year 1-3 Years 3-5 Years Years Total Credit Facility(B) $ - $ -$ 17,400 $ -$ 17,400 Notes Payable - - 150,000 50,000 200,000 Interest expense on debt obligations(C) 11,729 23,457 11,420 156 46,762 Total$ 11,729 $ 23,457 $ 178,820 $ 50,156 $ 264,162 (A)Excludes our unused line of credit commitments, unused delayed draw term loans, and uncalled capital commitments to our portfolio companies in an aggregate amount of$58.8 million , at cost, as ofMarch 31, 2022 . (B)Principal balance of borrowings outstanding under our Credit Facility, based on the maturity date following the current contractual revolver period end date. (C)Includes estimated interest payments on our Credit Facility, 2027 Notes, and 2026 Notes. The amount of interest expense calculated for purposes of this table was based upon rates and balances as ofMarch 31, 2022 .
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity
with GAAP requires management to make estimates and assumptions that affect the
reported consolidated amounts of assets and liabilities, including disclosure of
contingent assets and liabilities at the date of the financial statements, and
revenues and expenses during the period reported. Actual results could differ
materially from those estimates under different assumptions or conditions. We
have identified our investment valuation policy (which has been approved by our
Board of Directors) as our most critical accounting policy, which is described
in Note 2- Summary of Significant Accounting Policies in the accompanying notes
to our Consolidated Financial Statements included elsewhere in this Quarterly
Report. Additionally, refer to Note 3-Investments in our accompanying Notes to
Consolidated Financial Statements included elsewhere in this Quarterly Report
for additional information regarding fair value measurements and our application
of Financial Accounting Standards Board Accounting Standards Codification Topic
820, "Fair Value Measurements and Disclosures." We have also identified our
revenue recognition policy as a critical accounting policy, which is described
in Note 2- Summary of Significant Accounting Policies in our accompanying Notes
to Consolidated Financial Statements included elsewhere in this Quarterly
Report.
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Investment Valuation
Credit Monitoring and Risk Rating
The Adviser monitors a wide variety of key credit statistics that provide information regarding our portfolio companies to help us assess credit quality and portfolio performance and, in some instances, used as inputs in our valuation techniques. Generally, we, through the Adviser, participate in periodic board meetings of our portfolio companies in which we hold board seats and also require them to provide annual audited and monthly unaudited financial statements. Using these statements or comparable information and board discussions, the Adviser calculates and evaluates certain credit statistics. The Adviser risk rates all of our investments in debt securities. The Adviser does not risk rate our equity securities. For syndicated loans that have been rated by anSEC registeredNationally Recognized Statistical Rating Organization ("NRSRO"), the Adviser generally uses the average of two corporate level NRSRO's risk ratings for such security. For all other debt securities, the Adviser uses a proprietary risk rating system. While the Adviser seeks to mirror the NRSRO systems, we cannot provide any assurance that the Adviser's risk rating system will provide the same risk rating as an NRSRO would for these securities. The Adviser's risk rating system is used to estimate the probability of default on debt securities and the expected loss if there is a default. The Adviser's risk rating system uses a scale of 0 to >10, with >10 being the lowest probability of default. It is the Adviser's understanding that most debt securities of medium-sized companies do not exceed the grade of BBB on an NRSRO scale, so there would be no debt securities in the middle market that would meet the definition ofAAA , AA or A. Therefore, the Adviser's scale begins with the designation >10 as the best risk rating which may be equivalent to a BBB from an NRSRO; however, no assurance can be given that a >10 on the Adviser's scale is equal to a BBB or Baa2 on an NRSRO scale. The Adviser's risk rating system covers both qualitative and quantitative aspects of the business and the securities we hold.
The following table reflects risk ratings for all proprietary loans in our
portfolio as of
As of As of
March 31, September 30,
Rating 2022 2021
Highest 10.0 10.0
Average 6.7 6.6
Weighted Average 7.4 7.0
Lowest 1.0 1.0
The following table reflects the risk ratings for all syndicated loans in our
portfolio that were rated by an NRSRO as of March 31, 2022 and September 30,
2021 , representing approximately 1.9% and 3.9%, respectively, of the principal
balance of all debt investments in our portfolio at the end of each period:
As of As of
March 31, September 30,
Rating 2022 2021
Highest 4.0 5.0
Average 4.0 4.6
Weighted Average 4.0 4.5
Lowest 4.0 4.0
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The following table reflects the risk ratings for all syndicated loans in our portfolio that were not rated by an NRSRO as ofMarch 31, 2022 andSeptember 30, 2021 , representing approximately 0.6% and 0.6%, respectively, of the principal balance of all debt investments in our portfolio at the end of each period: As of As of March 31, September 30, Rating 2022 2021 Highest 5.0 5.0 Average 5.0 5.0 Weighted Average 5.0 5.0 Lowest 5.0 5.0 Tax Status We intend to continue to maintain our qualification as a RIC under Subchapter M of the Code for federal income tax purposes. As a RIC, we generally are not subject to federal income tax on the portion of our taxable income and gains distributed to our stockholders. To maintain our qualification as a RIC, we must maintain our status as a BDC and meet certain source-of-income and asset diversification requirements. In addition, in order to qualify to be taxed as a RIC, we must distribute to stockholders at least 90% of our Investment Company Taxable Income, determined without regard to the dividends paid deduction. Our policy generally is to make distributions to our stockholders in an amount up to 100% of our Investment Company Taxable Income. We may retain some or all of our net long-term capital gains, if any, and designate them as deemed distributions, or distribute such gains to stockholders in cash. To avoid a 4% federal excise tax on undistributed amounts of income, we must distribute to stockholders, during each calendar year, an amount at least equal to the sum of: (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gain net income (both long-term and short-term) for the one-year period ending onOctober 31 of the calendar year, and (3) any income realized, but not distributed, in the preceding year (to the extent that income tax was not imposed on such amounts) less certain over-distributions in prior years. Under the RIC Modernization Act, we are permitted to carryforward any capital losses that we may incur for an unlimited period, and such capital loss carryforwards will retain their character as either short-term or long-term capital losses.
Recent Accounting Pronouncements
Refer to Note 2-Summary of Significant Accounting Policies in the notes to our accompanying Consolidated Financial Statements included elsewhere in this Quarterly Report for a description of recent accounting pronouncements.
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