INVESTCORP CREDIT MANAGEMENT BDC, INC. Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to: • our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the effect of investments that we expect to make;
• the impact of global health pandemics, such as the current novel
coronavirus ("COVID-19) pandemic, on our or our portfolio companies'
business and the global economy;
• our contractual arrangements and relationships with Investcorp Credit
Management US LLC ("Investcorp") and its affiliates; • our contractual arrangements and relationships with lenders and other
third parties;
• actual and potential conflicts of interest with
LLC (the "Adviser");
• the dependence of our future success on the general economy, interest
rates and the effects of each on the industries in which we invest;
• the impact of the elimination of the London Interbank Offered Rate
("LIBOR") on our operating results;
• the impact of fluctuations in interest rates on our business;
• the ability of our portfolio companies to achieve their objectives or
service their debt obligations to us;
• the use of borrowed money to finance a portion of our investments;
• the adequacy of our financing sources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio
companies;
• the ability of the Adviser to locate suitable investments for us and
to monitor and administer our investments;
• the ability of the Adviser to attract and retain highly talented
professionals;
• our ability to qualify and maintain our qualification as a regulated
investment company ("RIC") and as a business development company
("BDC");
• our ability to obtain exemptive relief from the Securities and
Exchange Commission ("SEC");
• the effect of changes to tax legislation and our tax position and
other legislative and regulatory changes; and
• the effect of new or modified laws or regulations governing our operations,
Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "may," "might," "will," "intend," "should,"
"could," "can," "would," "expect," "believe," "estimate," "anticipate,"
"predict," "potential," "plan" or similar words.
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We have based the forward-looking statements included in this quarterly report
on Form 10-Q on information available to us on the date of this report on Form
10-Q. Actual results could differ materially from those anticipated in our
forward-looking statements, and future results could differ materially from
historical performance. We undertake no obligation to revise or update any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless required by law or SEC rule or regulation. You are
advised to consult any additional disclosures that we may make directly to you
or through reports that we in the future may file with the SEC , including annual
reports on Form 10-K,quarterly reports on Form 10-Q and current reports on Form
8-K.
Overview
Investcorp Credit Management BDC, Inc. ("ICMB," the "Company", "us", "we" or
"our"), a Maryland corporation formed in May 2013 , is a closed-end, externally
managed, non-diversified management investment company that has elected to be
regulated as a business development company ("BDC") under the Investment Company
Act of 1940, as amended (the "1940 Act"). In addition, for U.S. federal income
tax purposes, we have elected to be treated and intend to continue to qualify as
a regulated investment company ("RIC") under Subchapter M of the Internal
Revenue Code (the "Code"). On August 30, 2019 , we changed our name from CM
Finance Inc to Investcorp Credit Management BDC, Inc.
Our primary investment objective is to maximize total return to stockholders in
the form of current income and capital appreciation by investing directly in
debt and related equity of privately held middle market companies to help these
companies fund acquisitions, growth or refinancing. We invest primarily in
middle-market companies in the form of unitranche loans, standalone first and
second lien and mezzanine loans. We may also invest in unsecured debt, bonds and
in the equity of portfolio companies through warrants and other instruments.
On
CM Finance LLC , aMaryland limited liability company, commenced operations inMarch 2012 . Immediately prior to our initial public offering, the merger was consummated, wherebyCM Finance LLC merged with and into us (the "Merger"). In connection with the Merger, we issued 6,000,000 shares of common stock and$39.8 million in debt to the pre-existingCM Finance LLC investors, consisting of certain funds (the "Cyrus Funds") managed byCyrus Capital .CM Finance Inc had no assets or operations prior to completion of the Merger and, as a result, the books and records ofCM Finance LLC became our books and records, as the surviving entity. Immediately after the Merger, we issued 2,181,818 shares of our common stock toStifel Venture Corp. ("Stifel") in exchange for$32.7 million in cash. We used all of the proceeds of the sale of shares to Stifel, to repurchase 2,181,818 shares of common stock from the Cyrus Funds. Immediately after the completion of the initial public offering, we had 13,666,666 shares outstanding. We also used a portion of the net proceeds of the initial public offering to repay 100% of the debt issued to the Cyrus Funds in connection with the Merger. OnAugust 30, 2019 , Investcorp Credit Management ("Investcorp") acquired an approximate 76% ownership interest in the Adviser through the acquisition of the interests held by Stifel and certain funds managed the Cyrus Funds and through a direct purchase of equity from the Adviser (the "Investcorp Transaction"). Investcorp is a leading global credit investment platform with assets under management of$13.8 billion as ofMarch 31, 2021 . Investcorp manages funds which invest primarily in senior secured corporate debt issued by mid and large-cap corporations inWestern Europe andthe United States . 41 -------------------------------------------------------------------------------- In connection with the Investcorp Transaction, onJune 26, 2019 , our board of directors, including all of the directorswho are not "interested persons" of the Company, as defined in Section 2(a)(19) of the 1940 Act (each, an "Independent Director"), unanimously approved a new investment advisory agreement (the "Advisory Agreement") and recommended that the Advisory Agreement be submitted to our stockholders for approval, which our stockholders approved at the Special Meeting of Stockholders held onAugust 28, 2019 . The Advisory Agreement has substantially the same terms as, and replaced, the prior investment advisory agreement, datedFebruary 5, 2014 , between us and the Adviser. In addition, onJune 26, 2019 , we entered into a definitive stock purchase and transaction agreement withInvestcorp BDC Holdings Limited ("Investcorp BDC"), an affiliate of Investcorp (the "Stock Purchase Agreement"), pursuant to which, following the initial closing under the Stock Purchase Agreement onAugust 30, 2019 (the "Closing") and prior to the second anniversary of the date of the Closing (the "Closing Date"), Investcorp BDC will purchase (i) 680,985 newly issued shares of our common stock, par value$0.001 per share at the most recently determined net asset value per share of our common stock at the time of such purchase, as adjusted as necessary to comply with Section 23 of the 1940 Act, and (ii) 680,985 shares of our common stock in open-market or secondary transactions. As ofMarch 31, 2021 , Investcorp BDC had purchased 227,000 newly issued shares of our common stock pursuant to the requirement under the Stock Purchase Agreement. See "Part II. Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds" for more information. As ofMarch 31, 2021 , Investcorp BDC had purchased 281,775 shares of our common stock in open-market transactions pursuant to its obligation under the Stock Purchase Agreement. At the Closing, we entered into the Advisory Agreement with the Adviser, pursuant to which we have agreed to pay the Adviser a fee for investment advisory and management services consisting of two components - a base management fee (the "Base Management Fee") and an incentive fee (the "Incentive Fee"). The Base Management Fee is equal to 1.75% of our gross assets, payable in arrears on a quarterly basis. The Incentive Fee, which provides the Adviser with a share of the income that it generates for the Company, has two components, ordinary income (the "Income-Based Fee") and capital gains (the "Capital Gains Fee"). The Income-Based Fee is equal to 20.0% of pre-incentive fee net investment income, subject to an annualized hurdle rate of 8.0% with a "catch up" fee for returns between the 8.0% hurdle and 10.0%. The Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year endingJune 30, 2021 , and will equal to 20.0% of the Company's cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of the Company's aggregate cumulative realized capital losses and the Company's aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. At the Closing, we entered into a new administration agreement with the Adviser (the "Administration Agreement"). Under the Administration Agreement, the Adviser provides us with our chief financial officer, accounting and back-office professionals, equipment and clerical, bookkeeping, recordkeeping and other administrative services. The terms of the Administration Agreement, including the reimbursement of expenses by the Company to the Adviser, are identical to those contained in the Company's prior administration agreement with the Adviser. From time to time, we may form taxable subsidiaries (the "Taxable Subsidiaries") that are taxed as corporations for federal income tax purposes. AtMarch 31, 2021 , we had no Taxable Subsidiaries. AtJune 30, 2020 , we had no Taxable Subsidiaries. The Taxable Subsidiaries, if any, allow the Company to hold equity securities of portfolio companies organized as pass-through entities while continuing to satisfy the requirements applicable to a RIC under the Code. 42
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We are generally permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as defined in the 1940 Act, is at least equal to 150% immediately after each such issuance.
OnMarch 19, 2019 , theSEC issued an order granting our application for exemptive relief to co-invest, subject to the satisfaction of certain conditions, in certain private placement transactions with other funds managed by the Adviser or its affiliates and any future funds that are advised by the Adviser or its affiliated investment advisers (the "Exemptive Relief"). Under the terms of the Exemptive Relief, in order for us to participate in a co-investment transaction a "required majority" (as defined in Section 57(o) of the 1940 Act) of our Independent Directors must conclude that (i) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our shareholders and do not involve overreaching in respect of us or our shareholders on the part of any person concerned, and (ii) the proposed transaction is consistent with the interests of our shareholders and is consistent with our investment objectives and strategies. We have applied for a new exemptive relief order which, if granted, would supersede the Exemptive Relief and would permit us greater flexibility to enter into co-investmenttransactions. There can be no assurance that we will obtain such new exemptive relief from theSEC .
COVID-19Developments
InMarch 2020 , the outbreak of COVID-19 was recognized as a pandemic by theWorld Health Organization . Shortly thereafter, the President ofthe United States declared a National Emergency throughoutthe United States attributable to such pandemic. Throughout much of 2020 and 2021, the COVID-19 pandemic has delivered a shock to the global economy, including the Company's primary markets of operation. As of the three and nine months endedMarch 31, 2021 , and subsequent toMarch 31, 2021 , the COVID-19 pandemic continues to have a significant impact on theU.S. and global economy. 43 -------------------------------------------------------------------------------- We have and continue to assess the impact of the COVID-19 pandemic on our portfolio companies. We cannot predict the full impact of the COVID-19 pandemic, including its duration inthe United States and worldwide, the effectiveness of governmental responses designed to mitigate strain to businesses and the economy, and the magnitude of the economic impact of the outbreak, including with respect to the travel restrictions, business closures and other quarantine measures imposed on service providers and other individuals by various local, state, and federal governmental authorities, as well as non-U.S. governmental authorities. While several countries, as well as certain states, counties and cities inthe United States , have relaxed initial public health restrictions with a view to partially or fully reopening their economies, many cities world-wide have since experienced a surge in the reported number of cases, hospitalizations and deaths related to the COVID-19 pandemic. These increases have led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities inthe United States and globally and could continue to lead to the re-introduction of such restrictions and business shutdowns elsewhere. Additionally, although theFederal Food and Drug Administration authorized vaccines beginning inDecember 2020 and a significant portion of theU.S. population has been vaccinated, it remains unclear how quickly the vaccines will continue to be distributed nationwide and globally, or when "herd immunity" will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Delays in distributing or difficulties in accessing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, theU.S. economy and most other major global economies may continue to experience a recession, and we anticipate our business and operations could be materially adversely affected by a prolonged recession inthe United States and other major markets. As such, we are unable to predict the duration of any business and supply-chain disruptions, the extent to which the COVID-19 pandemic will continue to negatively affect our portfolio companies' operating results or the impact that such disruptions may continue to have on our results of operations and financial condition. Though the magnitude of the impact remains to be seen, we expect our portfolio companies and, by extension, our operating results to continue to be adversely impacted by the COVID-19 pandemic and, depending on the duration and extent of the disruption to the operations of our portfolio companies, we expect that certain portfolio companies will experience financial distress and may possibly default on their financial obligations to us and their other capital providers. We continue to closely monitor our portfolio companies, which includes assessing each portfolio company's operational and liquidity exposure and outlook; however, any of these developments would likely result in a decrease in the value of our investment in any such portfolio company. In addition, to the extent that the impact to our portfolio companies results in reduced interest payments or permanent impairments on our investments, we could see a decrease in our net investment income, which would increase the percentage of our cash flows dedicated to our debt obligations and could impact the amount of any future distributions to our stockholders. In response to the COVID-19 pandemic, the Adviser instituted a work from home policy. Although certain employees are currently allowed to return to their offices in certain circumstances, subject to health and safety protocols, it is expected that most employees will continue to work remotely for the foreseeable future.
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"). The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Management considers the following critical accounting policies important to understanding the financial statements. In addition to the discussion below, our critical accounting policies are further described in the notes to our consolidated financial statements. 44
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Valuation of portfolio investments
We value our portfolio investments at fair value based upon the principles and
methods of valuation set forth in policies adopted by our board of directors.
Fair value is defined as the price that would be received to sell an asset in an
orderly transaction between market participants at the measurement date. Market
participants are buyers and sellers in the principal (or most advantageous)
market for the asset that (a) are independent of us, (b) are knowledgeable,
having a reasonable understanding about the asset based on all available
information (including information that might be obtained through due diligence
efforts that are usual and customary), (c) are able to transact for the asset,
and (d) are willing to transact for the asset or liability (that is, they are
motivated but not forced or otherwise compelled to do so).
Investments for which market quotations are readily available are valued at such
market quotations unless the quotations are deemed not to represent fair value.
We generally obtain market quotations from recognized exchanges, market
quotation systems, independent pricing services or one or more broker dealers or
market makers.
Debt and equity securities for which market quotations are not readily available
or for which market quotations are deemed not to represent fair value are valued
at fair value as determined in good faith by our board of directors. Because a
readily available market value for many of the investments in our portfolio is
often not available, we value many of our portfolio investments at fair value as
determined in good faith by our board of directors using a consistently applied
valuation process in accordance with a documented valuation policy that has been
reviewed and approved by our board of directors. Due to the inherent uncertainty
and subjectivity of determining the fair value of investments that do not have a
readily available market value, the fair value of our investments may differ
significantly from the values that would have been used had a readily available
market value existed for such investments and may differ materially from the
values that we may ultimately realize. In addition, changes in the market
environment and other events may have differing impacts on the market quotations
used to value some of our investments than on the fair values of our investments
for which market quotations are not readily available. Market quotations may
also be deemed not to represent fair value in certain circumstances where we
believe that facts and circumstances applicable to an issuer, a seller or
purchaser, or the market for a particular security causes current market
quotation not to reflect the fair value of the security. Examples of these
events could include cases where a security trades infrequently, causing a
quoted purchase or sale price to become stale, where there is a "forced" sale by
a distressed seller, where market quotations vary substantially among market
makers, or where there is a wide bid-ask spread or significant increase in the
bid ask spread.
Those investments for which market quotations are not readily available or for
which market quotations are deemed not to represent fair value are valued
utilizing a market approach, an income approach, or both approaches, as
appropriate. The market approach uses prices and other relevant information
generated by market transactions involving identical or comparable assets or
liabilities (including a business). The income approach uses valuation
techniques to convert future amounts (for example, cash flows or earnings) to a
single present amount (discounted). The measurement is based on the value
indicated by current market expectations about those future amounts. In
following these approaches, the types of factors that we may take into account
in determining the fair value of our investments include, as relevant and among
other factors: available current market data, including relevant and applicable
market trading and transaction comparables, applicable market yields and
multiples, security covenants, call protection provisions, information rights,
the nature and realizable value of any collateral, the portfolio company's
ability to make payments, its earnings and discounted cash flows, the markets in
which the portfolio company does business, comparisons of financial ratios of
peer companies that are public, merger and acquisition comparables, our
principal market (as the reporting entity) and enterprise values.
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With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
• our quarterly valuation process begins with each portfolio company or
investment being initially valued by the members of the Adviser's
investment team responsible for the portfolio investment;
• preliminary valuation conclusions are then documented and discussed by
our senior management and the Adviser;
• on a periodic basis, at least once annually, the valuation for each
portfolio investment is reviewed by an independent valuation firm
engaged by our board of directors;
• the valuation committee of our board of directors then reviews these
preliminary valuations and makes a recommendation to our board of
directors regarding the fair value of each investment; and
• the board of directors then reviews and discusses these preliminary
valuations and determines the fair value of each investment in our
portfolio in good faith, based on the input of the Adviser, the
independent valuation firm and the valuation committee.
When valuing all of our investments, we strive to maximize the use of observable
inputs and minimize the use of unobservable inputs. Inputs refer broadly to the
assumptions that market participants would use in pricing an asset, including
assumptions about risk. Inputs may be observable or unobservable. Observable
inputs are inputs that reflect the assumptions market participants would use in
pricing an asset or liability developed based on market data obtained from
sources independent of us. Unobservable inputs are inputs that reflect our
assumptions about the assumptions market participants would use in pricing an
asset or liability developed based on the best information available under the
circumstances.
Our investments are categorized based on the types of inputs used in their
valuation. The level in the U.S. GAAP valuation hierarchy in which an investment
falls is based on the lowest level input that is significant to the valuation of
the investment in its entirety. Investments are classified by U.S. GAAP into the
three broad levels as follows:
Level 1 - valuation is based on unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to
access at the measurement date.
Level 2 - valuation is based on inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either directly
or indirectly, such as (a) quoted prices for similar assets or
liabilities in active markets; (b) quoted prices for identical or
similar assets or liabilities in markets that are not active, that is,
markets in which there are few transactions for the asset or liability,
the prices are not current, or price quotations vary substantially
either over time or among market makers, or in which little information
is released publicly; (c) inputs other than quoted prices that are
observable for the asset or liability; or (d) inputs that are derived
principally from or corroborated by observable market data by
correlation or other means.
Level 3 - valuation is based on unobservable inputs for the asset or liability.
Unobservable inputs are used to measure fair value to the extent that
observable inputs are not available, thereby allowing for situations in
which there is little, if any, market activity for the asset or
liability at the measurement date. However, the fair value measurement
objective remains the same, that is, an exit price from the perspective
of a market participant that holds the asset or owes the liability.
Therefore, unobservable inputs reflect the Company's own assumptions
about the assumptions that market participants would use in pricing the
asset or liability, including assumptions about risk. Unobservable
inputs are developed based on the best information available under the
circumstances, which might include the Company's own data. The
Company's own data used to develop unobservable inputs is adjusted if
information is reasonably available without undue cost and effort that
indicates that market participants would use different assumptions.
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As of
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the consolidated financial statements.
Rule 2a-5 under the 1940 Act was recently adopted by theSEC and establishes requirements for determining fair value in good faith for purposes of the 1940 Act. We are evaluating the impact of adopting Rule 2a-5 on the consolidated financial statements and intend to comply with the new rule's requirements on or before the compliance date inSeptember 2022 .
Revenue recognition
Our revenue recognition policies are as follows:
Net realized gains (losses) on investments: Gains or losses on the sale of investments are calculated using the specific identification method.
Interest Income: Interest income, adjusted for amortization of premium and
accretion of discount, is recorded on an accrual basis. Origination, closing,
commitment and amendment fees, and purchase and original issue discounts
associated with loans to portfolio companies are accreted into interest income
over the respective terms of the applicable loans. Accretion of discounts or
premiums is calculated by the effective interest or straight-line method, as
applicable, as of the purchase date and adjusted only for material amendments or
prepayments. Upon the prepayment of a loan or debt security, any prepayment
penalties and unamortized fees and discounts are recorded as interest income and
are non-recurring in nature.
Structuring fees and similar fees are recognized as income as earned, usually
when received. Structuring fees, excess deal deposits, net profits interests and
overriding royalty interests are included in other fee income.
We hold debt investments in our portfolio that contain a payment-in-kind ("PIK")
interest provision. The PIK interest, which represents contractually deferred
interest added to the investment balance that is generally due at maturity, is
recorded on the accrual basis to the extent such amounts are expected to be
collected.
Non-accrual: Loans are placed on non-accrual status when principal or interest
payments are past due 90 days or more or when there is reasonable doubt that
principal or interest will be collected. Accrued and unpaid interest is
generally reversed when a loan is placed on non-accrual status. Interest
payments received on non-accrualloans may be recognized as income or applied to
principal depending upon management's judgment about ultimate collectability of
principal. Non-accrual loans are restored to accrual status when past due
principal and interest is paid and, in management's judgment, are likely to
remain current. PIK interest is not accrued if we do not expect the issuer to be
able to pay all principal and interest when due. As of March 31, 2021 , we had
four loans on non-accrual status, 1888 Industrial Services, LLC - Term B, DSG
Entertainment Services, Inc. , and the Premiere Global Services, Inc. first and
second lien loans, which represented 4.7% of our portfolio at fair value. As of
June 30, 2020 , we had no investments on non-accrual status.
Financing Facilities
We have, throughCM Finance SPV Ltd. ("CM SPV"), our wholly owned subsidiary, entered into a$102.0 million term secured financing facility (the "Term Financing"), dueDecember 5, 2021 with UBS AG, London Branch (together with its affiliates "UBS"). The Term Financing is collateralized by a portion of the debt investments in our portfolio. OnJune 21, 2019 , we amended the Term Financing and increase the Term Financing by$20.0 million from$102.0 million to$122.0 million . We subsequently repaid$20.0 million of the Term Financing onApril 15, 2020 . Borrowings under the Term Financing, as amended, bear interest with respect to the$102.0 million (i) at a rate per annum equal to one-month LIBOR plus 3.55% fromDecember 5, 2019 throughDecember 4, 2020 , and (ii) at a rate per annum equal to one-month LIBOR plus 3.15% fromDecember 5, 2020 throughDecember 4, 2021 . 47
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As of
OnNovember 20, 2017 , as subsequently amended, we entered into a$50 million revolving financing facility (the "Revolving Financing") withUBS . OnJune 21, 2019 , we amended the Revolving Financing to reduce the size of the Revolving Financing to$30.0 million and extend the maturity date (as amended, the "Revolving Financing"). OnSeptember 30, 2020 , we amended the Revolving Financing to reduce the size of the Revolving Financing to$20.0 million and extend the maturity date toDecember 5, 2021 . Borrowings under the Revolving Financing will generally bear interest at a rate per annum equal to one-month LIBOR plus 3.15%. We will pay a fee on any undrawn amounts of 0.75% per annum. Any amounts borrowed under the Revolving Financing will mature, and all accrued and unpaid interest will be due and payable, on the same day as the Term Financing, which isDecember 5, 2021 . As ofMarch 31, 2021 , there were no borrowings outstanding under the Revolving Facility. As ofJune 30, 2020 , there were$30.0 million borrowings outstanding under the Revolving Financing. We refer to the Term Financing and the Revolving Financing together as the "Financing Facilities."
Notes due 2023
OnJuly 2, 2018 , we closed the public offering of$30 million in aggregate principal amount of 6.125% notes due 2023 (the "Existing Notes"). OnJuly 12, 2018 , the underwriters exercised their over-allotment option to purchase an additional$4.5 million in aggregate principal amount of the Existing Notes. The total net proceeds to us from the Existing Notes, including the exercise of the underwriters' over-allotment option, after deducting underwriting discounts and commissions of approximately$1.0 million and estimated offering expenses of approximately$230,000 , were approximately$33.2 million . OnOctober 18, 2019 , we closed the public offering of$15 million in aggregate principal amount of additional 6.125% notes due 2023 (the "Notes," and together with the Existing Notes, the "2023 Notes"). The Notes constitute a further issuance of, rank equally in right of payment with, and form a single series with the$34.5 million in Existing Notes that we initially issued onJuly 2, 2018 andJuly 12, 2018 . OnNovember 7, 2019 , the underwriters exercised their option to purchase an additional$1.875 million in aggregate principal of the Notes. The total net proceeds received by us from the sale of the Notes, including the exercise of the underwriters' over-allotment option, was approximately$16.4 million , based on the purchase price paid by the underwriters of 96.875% of the aggregate principal amount of the Notes, after deducting estimated offering expenses of approximately$255,000 payable by us. The 2023 Notes were scheduled to mature onJuly 1, 2023 and bore interest at a rate of 6.125%. The 2023 Notes were the direct unsecured obligations and ranked pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by us. Because the 2023 Notes were not secured by any of our assets, they were effectively subordinated to all of our existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness. The 2023 Notes were structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and financing vehicles, including, without limitation, borrowings under the Term Financing and the Revolving Financing. The 2023 Notes were exclusively our obligations and not of any of our subsidiaries. None of our subsidiaries was a guarantor of the 2023 Notes and the 2023 Notes could not be required to be guaranteed by any subsidiary we may acquire or create in the future. The 2023 Notes could be redeemed in whole or in part at any time or from time to time at our option on or afterJuly 1, 2020 . Interest on the Notes was payable quarterly onJanuary 1 ,April 1 ,July 1 andOctober 1 of each year. The 2023 Notes were listed on the NASDAQ Global Select Market under the trading symbol "CMFNL." We could from time to time repurchase Notes in accordance with the 1940 Act and the rules promulgated thereunder. 48 -------------------------------------------------------------------------------- OnMarch 26, 2021 , we caused notice to be issued to the holders of the 2023 Notes regarding our exercise of the option to redeem in full all$51,375,000 in aggregate principal amount of the 2023 Notes at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon fromApril 1, 2021 , through, but excluding, the redemption date,April 25, 2021 . The 2023 Notes were redeemed onApril 25, 2021 . For more information, see "-Recent Developments." The indenture under which the Notes were issued (the "2023 Notes Indenture") contained certain covenants, including covenants (i) requiring our compliance with the asset coverage requirements set forth in Section 18(a)(1)(A) as modified by Section 61(a) of the 1940 Act, whether or not we continue to be subject to such provisions of the 1940 Act; (ii) requiring our compliance, under certain circumstances, with the requirements set forth in Section 18(a)(1)(B) as modified by Section 61(a) of the 1940 Act, whether or not we continue to be subject to such provisions of the 1940 Act, prohibiting the declaration of any cash dividend or distribution upon any class of our capital stock (except to the extent necessary for us to maintain its treatment as a RIC under Subchapter M of the Code), or purchasing any such capital stock, if our asset coverage, as defined in the 1940 Act, is below 150% at the time of the declaration of the dividend or distribution or the purchase and after deducting the amount of such dividend, distribution, or purchase; and (iii) requiring us to provide financial information to the holders of the 2023 Notes and the Trustee if we cease to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These covenants are subject to limitations and exceptions that are described in the 2023 Notes Indenture.
Notes due 2026
OnMarch 31, 2021 , we closed the public offering of$65 million in aggregate principal amount of 4.875% notes due 2026 (the "2026 Notes"). The total net proceeds to us from the 2026 Notes after deducting underwriting discounts and commissions of approximately$1.3 million and estimated offering expenses of approximately$215,000 , were approximately$63.1 million . The 2026 Notes will mature onApril 1, 2026 and bear interest at a rate of 4.875%. The 2026 Notes are direct unsecured obligations and rank pari passu, which means equal in right of payment, with all outstanding and future unsecured indebtedness issued by us. Because the 2026 Notes are not secured by any of our assets, they are effectively subordinated to all of our existing and future secured unsubordinated indebtedness (or any indebtedness that is initially unsecured as to which we subsequently grant a security interest), to the extent of the value of the assets securing such indebtedness. The 2026 Notes are structurally subordinated to all existing and future indebtedness and other obligations of any of our subsidiaries and financing vehicles, including, without limitation, borrowings under the Term Financing and the Revolving Financing. The 2026 Notes are exclusively our obligations and not of any of our subsidiaries. None of our subsidiaries is a guarantor of the 2026 Notes and the 2026 Notes will not be required to be guaranteed by any subsidiary we may acquire or create in the future. The 2026 Notes may be redeemed in whole or in part at any time or from time to time at our option, upon not less than 30 days nor more than 60 days written notice by mail prior to the date fixed for redemption thereof, at a redemption price (as determined by us) equal to the greater of the following amounts, plus, in each case, accrued and unpaid interest to, but excluding, the redemption date: (1) 100% of the principal amount of the 2026 Notes to be redeemed or (2) the sum of the present values of the remaining scheduled payments of principal and interest (exclusive of accrued and unpaid interest to the date of redemption) on the 2026 Notes to be redeemed, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) using the applicable Treasury Rate (as defined in the 2026 Notes Indenture (as defined below)) plus 50 basis points; provided, however, that if the Company redeems any 2026 Notes on or afterJanuary 1, 2026 (the date falling three months prior to the maturity date of the 2026 Notes), the redemption price for the 2026 Notes will be equal to 100% of the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption; provided, further, that no such partial redemption shall reduce the portion of the principal amount of a 2026 Note not redeemed to less than$2,000 . Interest on the 2026 Notes is payable semi-annually onApril 1 andOctober 1 of each year, commencingOctober 1, 2021 . We may from time to time repurchase 2026 Notes in accordance with the 1940 Act and the rules promulgated thereunder. As ofMarch 31, 2021 , the outstanding principal balance of the 2026 Notes was approximately$65 million . 49 -------------------------------------------------------------------------------- The indenture under which the 2026 Notes are issued (the "2026 Notes Indenture") contains certain covenants, including covenants requiring us to comply with Section 18(a)(1)(A) as modified by Section 61(a)(2) of 1940 Act, or any successor provisions, to comply with Section 18(a)(1)(B) as modified by Section 61(a)(2) of the 1940 Act, or any successor provisions but giving effect to any no-action relief granted by theSEC to another BDC and upon which we may reasonably rely (or to us if we determine to seek such similar no-action or other relief), and to provide financial information to the holders of the 2026 Notes and the Trustee if we should no longer be subject to the reporting requirements under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These covenants are subject to important limitations and exceptions that are set forth in the 2026 Notes Indenture.
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including the amount we have available to invest as well as the amount of debt and equity capital available to middle-market companies, the level of merger and acquisition activity, the general economic environment and the competitive environment for the types of investments we make. As a BDC, we are required to comply with certain regulatory requirements. For instance, as a BDC, we may not acquire any assets other than "qualifying assets" specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Qualifying assets include investments in "eligible portfolio companies." Under the relevantSEC rules, the term "eligible portfolio company" includes all private companies, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than$250 million . In each case, the company must be organized inthe United States . As ofMarch 31, 2021 andJune 30, 2020 , approximately 2.17% and 10.75% of our total assets were non-qualifying assets, respectively. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. As a RIC, we generally will not have to pay corporate-level taxes on any income we distribute to our stockholders.
Revenues
We generate revenues primarily in the form of interest on the debt we hold. We also generate revenue from royalty income, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire. Our investments in fixed income instruments generally have an expected maturity of three to five years, although we have no lower or upper constraint on maturity. Interest on our debt investments is generally payable quarterly or semi-annually. Payments of principal of our debt investments may be amortized over the stated term of the investment, deferred for several years or due entirely at maturity. In some cases, our debt investments and preferred stock investments may defer payments of cash interest or dividends or PIK interest. Any outstanding principal amount of our debt investments and any accrued but unpaid interest will generally become due at the maturity date. In addition, we may generate revenue in the form of prepayment fees, commitment, origination, structuring or due diligence fees, fees for providing significant managerial assistance, consulting fees and other investment related income.
Expenses
Our primary operating expenses include the payment of the Base Management Fee
and, depending on our operating results, the Income-Based Fee and/or Capital
Gains Fee, expenses reimbursable by us under the Advisory Agreement,
administration fees, and our allocable portion of overhead expenses under the
Administration Agreement. The Base Management Fee and incentive compensation
remunerates the Adviser for 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, without limitation,
those relating to:
• our organization and our offering;
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• valuing our assets and calculating our net asset value per share
(including the cost and expenses of any independent valuation
firm(s));
• fees and expenses payable to third parties, including agents,
consultants or other advisors, in monitoring financial and legal
affairs for us and in monitoring our investments andperforming due
diligence on our prospective portfolio companies or otherwise relating
to, or associated with, evaluating and making investments;
• valuing our assets and calculating our net asset value per share
(including the cost and expenses of any independent valuation
firm(s));
• interest payable on debt, if any, incurred to finance our investments
and expenses related to unsuccessful portfolio acquisition efforts;
• offerings of our common stock and other securities;
• administration fees and expenses, if any, payable under the
Administration Agreement (including our allocable portion of the
Adviser's overhead in performing its obligations under the
Administration Agreement, including rent, equipment and the allocable
portion of the cost of our chief compliance officer, chief financial
officer and his staffs' compensation and compensation-related
expenses);
• transfer agent and custody fees and expenses;
• federal and state registration fees;
• costs of registration and listing our shares on any securities exchange;
• federal, state and local taxes; • Independent Directors' fees and expenses;
• costs of preparing and filing reports or other documents required by
the SEC or other regulators;
• costs of any reports, proxy statements or other notices to
stockholders including printing costs;
• costs associated with individual or group stockholders;
• costs and fees associated with any fidelity bond, directors and
officers/errors and omissions liability insurance, and any other
insurance premiums;
• direct costs and expenses of administration and operation, including
printing, mailing, long distance telephone, copying, secretarial and
other staff, independent auditors and outside legal costs; and
• all other non-investment advisory expenses incurred by us or the
Adviser in connection with administering our business.
Portfolio and investment activity
Portfolio composition
We invest primarily in middle-market companies in the form of standalone first and second lien loans and unitranche loans. We may also invest in unsecured debt, bonds and in the equity of portfolio companies through warrants and other instruments. AtMarch 31, 2021 , our investment portfolio of$251.8 million (at fair value) consisted of debt and equity investments in 35 portfolio companies, of which 87.11% were first lien investments, 4.56% were second lien investments, 4.76% were unitranche first lien debt investments, and 3.57% were in equities, warrants, or other positions. AtMarch 31, 2021 , our average and largest portfolio company investment at fair value was$7.2 million and$12 million , respectively. 51
-------------------------------------------------------------------------------- AtJune 30, 2020 , our investment portfolio of$270.6 million (at fair value) consisted of debt and equity investments in 38 portfolio companies, of which 83.6% were first lien investments, 10.2% were second lien investments, 4.0% were unitranche loans and 2.2% were in equities, warrants, and other positions. AtJune 30, 2020 , our average and largest portfolio company investment at fair value was$7.1 million and$15.0 million , respectively. As ofMarch 31, 2021 andJune 30, 2020 , our weighted average total yield of debt and income producing securities at amortized cost (which includes interest income and amortization of fees and discounts) was 8.88% and 9.58%, respectively. As ofMarch 31, 2021 andJune 30, 2020 , our weighted average total yield on investments at amortized cost (which includes interest income and amortization of fees and discounts) was 8.31% and 9.01%, respectively. We use Global Industry Classification Standard ("GICS") codes to identify the industry groupings. AtMarch 31, 2021 andJune 30, 2020 , the industry composition of our portfolio in accordance with the GICS codes at fair value was as follows: Percentage of Percentage of Total Portfolio Total Portfolio at March 31, at June 30, 2021 2020 Professional Services 12.35% 11.48% Energy Equipment & Services 10.11 10.92 Trading Companies & Distributors 9.80
9.09
Containers & Packaging 7.04
5.93
Commercial Services & Supplies 6.64 4.58 Construction & Engineering 6.41 11.18 Software 5.37 - Retail 4.60 4.32 Diversified Telecommunication Services 4.58 4.64 Distributors 3.81 3.49 Airlines 3.67 3.35 Auto Components 3.43 2.31 Consumer Finance 3.15 3.37 Internet & Direct Marketing Retail 3.14
2.29
Automobiles 3.11
-
Textiles, Apparel & Luxury Goods 2.75
-
Internet Software & Services 2.69 3.41 Household Durables 1.97 1.82 Construction Materials 1.91 2.41 Road & Rail 1.74 1.43 IT Services 0.98 1.10 Technology Hardware, Storage & Peripherals 0.66 0.52 Media 0.09 7.09 Specialty Retail - 2.08 Chemicals - 1.77 Hotels, Restaurants & Leisure -
1.42
Wireless Telecommunication Services - -
100.00% 100.00%
During the three months ended
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At March 31, 2021 , 99.3% of our debt investments bore interest based on floating
rates based on indices such as LIBOR (in certain cases, subject to interest rate
floors), and 0.7% bore interest at fixed rates. At June 30, 2020 , 99.5% of our
debt investments bore interest based on floating rates based on indices such as
LIBOR (in certain cases, subject to interest rate floors), and 0.5% bore
interest at fixed rates.
Our investment portfolio may contain loans that are in the form of lines of
credit or revolving credit facilities, which require us to provide funding when
requested by portfolio companies in accordance with the terms of the underlying
loan agreements. As of March 31, 2021 , we had two investments with aggregate
unfunded commitments of $3.2 million , and as of June 30, 2020 , we had four
investments with aggregate unfunded commitments of $7.9 million . As of March 31,
2021 , we had sufficient liquidity (through cash on hand and available borrowings
under our Revolving Financing) to fund such unfunded loan commitments should the
need arise.
Asset Quality
In addition to various risk management and monitoring tools, we use the
Adviser's investment rating system to characterize and monitor the credit
profile and expected level of returns on each investment in our portfolio. This
investment rating system uses a five-level numeric rating scale. The following
is a description of the conditions associated with each investment rating:
Investment Rating 1 Investments that are performing above expectations, and whose
risks remain favorable compared to the expected risk at the time
of the original investment.
Investment Rating 2 Investments that are performing within expectations and whose
risks remain neutral compared to the expected risk at the time
of the original investment. All new loans will initially be
rated 2.
Investment Rating 3 Investments that are performing below expectations and that
require closer monitoring, but where no loss of return or
principal is expected. Portfolio companies with a rating of
3 may be out of compliance with their financial covenants.
Investment Rating 4 Investments that are performing substantially below expectations
and whose risks have increased substantially since the original
investment. These investments are often in workout. Investments
with a rating of 4 will be those for which some loss of return
but no loss of principal is expected.
Investment Rating 5 Investments that are performing substantially below expectations
and whose risks have increased substantially since the original
investment. These investments are almost always in workout.
Investments with a rating of 5 will be those for which some loss
of return and principal is expected.
If the Adviser determines that an investment is underperforming, or
circumstances suggest that the risk associated with a particular investment has
significantly increased, the Adviser will increase its monitoring intensity and
prepare regular updates for the investment committee, summarizing current
operating results and material impending events and suggesting recommended
actions. While the investment rating system identifies the relative risk for
each investment, the rating alone does not dictate the scope and/or frequency of
any monitoring that will be performed. The frequency of the Adviser's monitoring
of an investment will be determined by a number of factors, including, but not
limited to, the trends in the financial performance of the portfolio company,
the investment structure and the type of collateral securing the investment.
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The following table shows the investment rankings of the investments in our
portfolio:
As of March 31, 2021 As of June 30, 2020
% of Number of % of Number of
Fair Value Portfolio Investments Fair Value Portfolio Investments1$ 27,336,340 10.8% 4$ 25,254,600 9.3% 3 2 157,873,934 62.7 28 162,252,467 60.0 30 3 49,074,262 19.5 8 64,792,766 23.9 16 4 6,267,826 2.5 1 9,848,588 3.7 3 5 11,252,133 4.5 9 8,473,288 3.1 3 Total$ 251,804,495 100.0% 50$ 270,621,709 100.0% 55 Results of Operations
Comparison of the three months ended
Investment income
Investment income, attributable primarily to interest and fees on our debt investments, for the three months endedMarch 31, 2021 decreased to$6.0 million from$8.8 million for the three months endedMarch 31, 2020 , primarily related to a decrease in assets under management and the first and second lien investments inPremiere Global Services, Inc. being placed on non-accrual status.
Expenses
Total expenses for the three months ended
Net investment income
Net investment income decreased to$1.8 million for the three months endedMarch 31, 2021 from$3.4 million for the three months endedMarch 31, 2020 , primarily due to a decrease in assets under management compared to the prior period partially offset by a decrease in interest expense and income-based fees during the same period and the first and second lien investments inPremiere Global Services, Inc. being placed on non-accrual status.
Net realized gain or loss
Net realized loss on investments for the three months endedMarch 31, 2021 decreased to$3.6 million , compared to a realized loss on investments of$7.6 million for the three months endedMarch 31, 2020 , primarily related to the restructure ofBioPlan USA, Inc and the termination ofPR Wireless, Inc. ,$0.01 strike (Warrants).
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized appreciation of
During the three months endedMarch 31, 2020 , we recorded a net change in unrealized depreciation of$20.0 million , primarily due to the decrease in the value of 1888 Industrial Services,4L Technologies Inc ,Bioplan USA, Inc. ,DSG Entertainment Services, Inc. ,Fusion Connect Inc. , GEE Group Inc.,Premiere Global Services, Inc. andTechniplas LLC . The resulting changes in net unrealized depreciation on investments were largely due to widening credit spreads as market participants expected a higher yield on similar investments given the significant market volatility generated by the COVID-19 pandemic. 54
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Comparison of the nine months ended
Investment income
Investment income, attributable primarily to interest and fees on our debt investments, for the nine months endedMarch 31, 2021 decreased to$20.1 million from$26.8 million for the nine months endedMarch 31, 2020 , primarily due to a decrease in assets under management and the first and second lien investments inPremiere Global Services, Inc. being placed on non-accrual status.
Expenses
Total expenses for the nine months ended
Net investment income
Net investment income decreased to
Net realized gain or loss Net realized losses on investments totaled$3.6 million for the nine months endedMarch 31, 2021 , primarily due to the restructure ofBioplan USA, Inc. and the termination ofPR Wireless, Inc. ,$0.01 strike (Warrants) offset by the sale ofBW Gas & Convenience . Net realized losses on investments totaled$7.6 million for the nine months endedMarch 31, 2020 , primarily due to the restructure ofFusion Connect, Inc. and4L Technologies, Inc.
Net change in unrealized (depreciation) appreciation on investments
We recorded a net change in unrealized appreciation of$5.6 million for the nine months endedMarch 31, 2021 , primarily due to the increase in the value ofBioplan USA, Inc. ,CB URS Holdings Corporation ,Pixelle Specialty Solutions LLC , and Techniplas LLC Common Stock offset by the decrease in value of 1888Industrial Services, LLC ,Premiere Global Services, Inc , andZeroChaos Parent, LLC . During the nine months endedMarch 31, 2020 , we recorded a net change in unrealized depreciation of$25.3 million , primarily due to the decrease in the value of 1888 Industrial Services,4L Technologies Inc ,Bioplan USA, Inc. ,DSG Entertainment Services, Inc. ,Fusion Connect Inc. , GEE Group Inc.,Premiere Global Services, Inc. andTechniplas LLC . The resulting changes in net unrealized depreciation on investments were largely due to widening credit spreads as market participants expected a higher yield on similar investments given the significant market volatility generated by the COVID-19 pandemic.
Liquidity and capital resources
Cash flows
For the nine months endedMarch 31, 2021 , our unrestricted cash balance increased by$65 million . During that period, cash increased by$38.6 million from operating activities, primarily due to sales of investments of$71.1 million in portfolio companies and offset by payments for the purchase of investments in portfolio companies of$45.7 million . During the same period, cash from financing activities increased by$27.6 million , consisting primarily of proceeds of$65 million from the 2026 Notes, repayments of$30 million from borrowings under the Revolving Financing and distributions of$7.5 million to our stockholders. 55
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Capital resources
As ofMarch 31, 2021 , we had$79.9 million of cash as well as$6.5 million in restricted cash and$20 million of capacity under the Revolving Financing. We intend to generate additional cash primarily from future offerings of securities, future borrowings under the Revolving Financing as well as cash flows from operations, including income earned from investments in our portfolio companies and, to a lesser extent, from the temporary investment of cash inU.S. government securities and other high-quality debt investments that mature in one year or less. Our primary liquidity needs include interest and principal repayments on our Financing Facilities, interest payments on the 2023 Notes and 2026 Notes, our unfunded loan commitments (if any), investments in portfolio companies, dividend distributions to our stockholders and operating expenses. As discussed below in further detail, we have elected to be treated as a RIC under the Code. To maintain our RIC status, we generally must distribute substantially all of our net taxable income to stockholders in the form of dividends. Our net taxable income does not necessarily equal our net income as calculated in accordance withU.S. GAAP.
Regulated Investment Company Status and Distributions
We have elected to be treated as a RIC under Subchapter M of the Code. If we
continue to qualify as a RIC, we will not be taxed on our investment company
taxable income or realized net capital gains, to the extent that such taxable
income or gains are distributed, or deemed to be distributed, to stockholders on
a timely basis.
Taxable income generally differs from net income for financial reporting
purposes due to temporary and permanent differences in the recognition of income
and expenses, and generally excludes net unrealized appreciation or depreciation
until realized. Dividends declared and paid by us in a year may differ from
taxable income for that year as such dividends may include the distribution of
current year taxable income or the distribution of prior year taxable income
carried forward into and distributed in the current year. Distributions also may
include returns of capital.
To continue to qualify for RIC tax treatment, we must, among other things,
distribute to our stockholders, with respect to each taxable year, at least 90%
of our investment company net taxable income (i.e., our net ordinary income and
our realized net short-term capital gains in excess of realized net long-term
capital losses, if any). We will also be subject to a federal excise tax, based
on distributive requirements of our taxable income on a calendar year basis.
We intend to distribute to our stockholders between 90% and 100% of our annual
taxable income (which includes our taxable interest and fee income). However,
the covenants contained in the Financing Facility may prohibit us from making
distributions to our stockholders, and, as a result, could hinder our ability to
satisfy the distribution requirement. In addition, we may retain for investment
some or all of our net taxable capital gains (i.e., realized net long-term
capital gains in excess of realized net short-term capital losses) and treat
such amounts as deemed distributions to our stockholders. If we do this, our
stockholders will be treated as if they received actual distributions of the
capital gains we retained and then reinvested the net after-tax proceeds in our
common stock. Our stockholders also may be eligible to claim tax credits (or, in
certain circumstances, tax refunds) equal to their allocable share of the tax we
paid on the capital gains deemed distributed to them. To the extent our taxable
earnings for a fiscal taxable year fall below the total amount of our dividends
for that fiscal year, a portion of those dividend distributions may be deemed a
return of capital to our stockholders.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of these
distributions from time to time. In addition, we may be limited in our ability
to make distributions due to the asset coverage test for borrowings applicable
to us as a BDC under the 1940 Act and due to provisions in Financing Facilities.
We cannot assure stockholders that they will receive any distributions or
distributions at a particular level.
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In accordance with certain applicable U.S. Department of Treasury ("Treasury")
regulations and private letter rulings issued by the Internal Revenue Service, a
RIC may treat a distribution of its own stock as fulfilling its RIC distribution
requirements if each stockholder elects to receive his or her entire
distribution in either cash or stock of the RIC, subject to a limitation that
the aggregate amount of cash to be distributed to all stockholders must be at
least 20% of the aggregate declared distribution. If too many stockholders elect
to receive cash, each stockholder electing to receive cash must receive a pro
rata amount of cash (with the balance of the distribution paid in stock). In no
event will any stockholder, electing to receive cash, receive less than 20% of
his or her entire distribution in cash. If these and certain other requirements
are met, for U.S. federal income tax purposes, the amount of the dividend paid
in stock will be equal to the amount of cash that could have been received
instead of stock. We have no current intention of paying dividends in shares of
our stock in accordance with these Treasury regulations or private letter
rulings.
Advisory Agreement
EffectiveAugust 30, 2019 (the "Commencement Date"), we entered into the Advisory Agreement with the Adviser. Under the Advisory Agreement, the Base Management Fee is calculated at an annual rate of 1.75% of our gross assets, including assets purchased with borrowed funds or other forms of leverage and excluding cash and cash equivalents (such amount, "Gross Assets"). The Base Management Fee is payable quarterly in arrears and the Base Management Fees for any partial month or quarter will be appropriately pro-rated. Under the Advisory Agreement, for the period from the Commencement Date through the end of the first and second fiscal quarters after the Commencement Date, the Base Management Fee was calculated based on the value of our Gross Assets as of the end of such quarter. Subsequently, the Base Management Fee is calculated based on the average value of our Gross Assets at the end of the two most recently completed fiscal quarters. Base Management Fees for any partial month or quarter will be appropriately pro-rated. For the three and nine months endedMarch 31, 2021 under the Advisory Agreement,$1,160,047 and$3,570,259 , respectively, in Base Management Fees were earned by the Adviser, of which$84,227 and$291,557 , respectively, was waived and$1,075,820 was payable atMarch 31, 2021 . For the three and nine months endedMarch 31, 2020 under the Advisory Agreement,$1,359,833 and$4,084,894 , respectively, in Base Management Fees were earned by the Adviser, of which$63,797 and$165,832 , respectively, was waived and$1,296,037 was payable atMarch 31, 2020 . Under the Advisory Agreement, the Income-Based Fee is calculated and payable quarterly in arrears based on our Pre-Incentive Fee Net Investment Income (as defined below) for the immediately preceding fiscal quarter, subject to a total return requirement (the "Total Return Requirement") and deferral of non-cash amounts, and is 20.0% of the amount, if any, by which our Pre-Incentive Fee Net Investment Income, expressed as a rate of return on the value of our net assets attributable to its common stock, for the immediately preceding fiscal quarter, exceeds a 2.0% (which is 8.0% annualized) hurdle rate and a "catch-up" provision measured as of the end of each fiscal quarter. Under this provision, in any fiscal quarter, the Adviser receives no Incentive Fee until our Pre-Incentive Fee Net Investment Income equals the hurdle rate of 2.0%, but then receives, as a "catch-up," 100% of our Pre-Incentive Fee Net Investment Income with respect to that portion of such Pre-Incentive Fee Net Investment Income, if any, that exceeds the hurdle rate but is less than 2.5% (which is 10.0% annualized). The effect of the "catch-up" provision is that, subject to the Total Return Requirement and deferral provisions discussed below, if Pre-Incentive Fee Net Investment Income exceeds 2.5% in any fiscal quarter, the Adviser receives 20.0% of our Pre-Incentive Fee Net Investment Income as if a hurdle rate did not apply. 57
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"Pre-Incentive Fee Net Investment Income" means interest income, dividend income
and any other income (including any other fees, such as commitment, origination,
structuring, diligence, managerial assistance and consulting fees or other fees
that we receive from portfolio companies) accrued during the fiscal quarter,
minus our operating expenses for the quarter (including the Base Management Fee,
expenses payable under the Administration Agreement and any interest expense and
any distributions paid on any issued and outstanding 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 original
issue discount ("OID"), debt instruments with payment-in-kind ("PIK") interest
and zero coupon securities), accrued income that 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.
No Income-Based Fee is payable under the Advisory Agreement except to the extent 20.0% of the cumulative net increase in net assets resulting from operations over the fiscal quarter for which fees are being calculated and the Lookback Period exceeds the cumulative Incentive Fees accrued and/or paid for the Lookback Period. For the foregoing purpose, the "cumulative net increase in net assets resulting from operations" is the amount, if positive, of the sum of Pre-Incentive Fee Net Investment Income, realized gains and losses and unrealized appreciation and depreciation of the Company for the then current fiscal quarter and the Lookback Period. The "Lookback Period" means (1) throughJune 30, 2022 , the period that on the last day of the fiscal quarter in which the Commencement Date occurs and ends on the last day of the fiscal quarter immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated, and (2) afterJune 30, 2022 , the eleven fiscal quarters immediately preceding the fiscal quarter for which the Income-Based Fee is being calculated. For the three and nine months endedMarch 31, 2021 , we incurred no Income-Based Fees. As ofMarch 31, 2021 ,$20,160 of such Income-Based Fees are currently payable to the Adviser and$628,962 of Income-Based Fees incurred by us were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash. For the three and nine months endedMarch 31, 2020 , we incurred$0 and$832,472 , respectively, of Income-Based Fees, of which$336,971 was waived for the nine months endedMarch 31, 2020 . As ofMarch 31, 2020 ,$737,659 of such Income-Based Fees were payable to the Adviser and$737,660 of Income-Based Fees incurred by us were generated from deferred interest (i.e., PIK and certain discount accretion) and are not payable until such amounts are received in cash. Under the Advisory Agreement, the Capital Gains Fee is determined and payable in arrears as of the end of each fiscal year (or upon termination of the Advisory Agreement, as of the termination date), commencing with the fiscal year endingJune 30, 2021 , and will equal to 20.0% of our cumulative aggregate realized capital gains from the Commencement Date through the end of that fiscal year, computed net of our aggregate cumulative realized capital losses and our aggregate cumulative unrealized capital depreciation through the end of such year, less the aggregate amount of any previously paid Capital Gains Fees. If such amount is negative, then no Capital Gains Fee will be payable for such year. Additionally, if the Advisory Agreement is terminated as of a date that is not a fiscal year end, the termination date will be treated as though it were a fiscal year end for purposes of calculating and paying the Capital Gains Fee. For the avoidance of doubt, realized capital gains, realized capital losses, unrealized capital appreciation and unrealized capital depreciation with respect to our portfolio as of the end of the fiscal year endedJune 30, 2020 are excluded from the calculations of the Capital Gains Fee. UnderU.S. GAAP, we calculate the Capital Gains Fee as if we had realized all assets at their fair values as of the reporting date. Accordingly, we accrue a provisional Capital Gains Fee taking into account any unrealized gains or losses. As the provisional Capital Gains Fee is subject to the performance of investments until there is a realization event, the amount of the provisional Capital Gains Fee accrued at a reporting date may vary from the Capital Gains Fee that is ultimately realized and the differences could be material. 58
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As of
The Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations under the Advisory Agreement, the Adviser and its officers, managers, partners, agents, employees, controlling persons and members, and any other person or entity affiliated with it, are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) arising from the rendering of the Adviser's services under the Advisory Agreement or otherwise as the Adviser.
Off-Balance Sheet Arrangements
We may be a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of our portfolio companies. As ofMarch 31, 2021 , our off-balance sheet arrangements consisted of$3.2 million in unfunded commitments to two of our portfolio companies. As ofMarch 31, 2021 , we had sufficient liquidity (through cash on hand and available borrowings under our Revolving Financing) to fund such unfunded loan commitments should the need arise. As ofJune 30, 2020 , our off-balance arrangements consisted of$7.9 million in unfunded commitments to three of our portfolio companies.
Recent Developments
We have evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the consolidated financial statements were issued.
Subsequent to
OnMay 6, 2021 , our board of directors declared a distribution for the quarter endedJune 30, 2021 of$0.15 per share, payable onJuly 9, 2021 to stockholders of record as ofJune 18, 2021 . OnApril 25, 2021 , we redeemed in full all$51,375,000 in aggregate principal amount of the 2023 Notes at 100% of their principal amount ($25 per Note), plus the accrued and unpaid interest thereon fromApril 1, 2021 , through, but excluding,April 25, 2021 .
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