UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2008
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number 001-33559
BlackRock Kelso Capital Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-2725151 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
40 East 52nd Street, New York, New York | 10022 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants Telephone Number, Including Area Code 212-810-5800
Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer x Non-Accelerated filer ¨
Smaller reporting company ¨ (Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x
The number of shares of the Registrants common stock, $.001 par value per share, outstanding at May 9, 2008, was 53,275,008.
BLACKROCK KELSO CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2008
Table of Contents
INDEX |
PAGE NO. | |||
PART I. | FINANCIAL INFORMATION | |||
Item 1. |
Financial Statements | |||
Statements of Assets and Liabilities | 4 | |||
Statements of Operations (unaudited) | 5 | |||
Statements of Changes in Net Assets (unaudited) | 6 | |||
Statements of Cash Flows (unaudited) | 7 | |||
Schedules of Investments (unaudited) | 8 | |||
Notes to Financial Statements (unaudited) | 22 | |||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 31 | ||
Item 3. |
Quantitative and Qualitative Disclosures about Market Risk | 37 | ||
Item 4. |
Controls and Procedures | 38 | ||
PART II. | OTHER INFORMATION | |||
Item 1. |
Legal Proceedings | 38 | ||
Item 1A. |
Risk Factors | 38 | ||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 38 | ||
Item 3. |
Defaults Upon Senior Securities | 39 | ||
Item 4. |
Submission of Matters to a Vote of Security Holders | 39 | ||
Item 5. |
Other Information | 39 | ||
Item 6. |
Exhibits | 40 | ||
SIGNATURES | 41 |
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In addition to factors previously identified elsewhere in the reports BlackRock Kelso Capital Corporation has filed with the Securities and Exchange Commission (the SEC), the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance:
| our future operating results; |
| our business prospects and the prospects of our portfolio companies; |
| the impact of investments that we expect to make; |
| our contractual arrangements and relationships with third parties; |
| the dependence of our future success on the general economy and its impact on the industries in which we invest; |
| the ability of our portfolio companies to achieve their objectives; |
| our expected financings and investments; |
| the adequacy of our cash resources and working capital; |
| the timing of cash flows, if any, from the operations of our portfolio companies; |
| the ability of BlackRock Kelso Capital Advisors LLC, our investment advisor (the Advisor), to locate suitable investments for us and to monitor and administer our investments; |
| the ability of the Advisor to attract and retain highly talented professionals; |
| fluctuations in foreign currency exchange rates; and |
| the impact of changes to tax legislation and, generally, our tax position. |
This report, and other statements that we may make, may contain forward-looking statements with respect to future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as trend, opportunity, pipeline, believe, comfortable, expect, anticipate, current, intention, estimate, position, assume, potential, outlook, continue, remain, maintain, sustain, seek, achieve and similar expressions, or future or conditional verbs such as will, would, should, could, may or similar expressions.
Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Forward-looking statements speak only as of the date they are made, and we assume no duty to and do not undertake to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
3
In this Quarterly Report, Company, we, us and our refer to BlackRock Kelso Capital Corporation unless the context states otherwise.
Item 1. | Financial Statements |
BlackRock Kelso Capital Corporation
Statements of Assets and Liabilities
March 31, 2008 (Unaudited) |
December 31, 2007 |
|||||||
Assets: |
||||||||
Investments at fair value: |
||||||||
Non-controlled, non-affiliated investments (amortized cost of $1,113,727,067 and $1,049,585,229) |
$ | 1,032,233,001 | $ | 1,018,013,709 | ||||
Non-controlled, affiliated investments (amortized cost of $67,028,179 and $66,907,657) |
58,797,089 | 65,412,682 | ||||||
Controlled investments (amortized cost of $41,905,183 and $38,881,854) |
12,509,254 | 14,834,395 | ||||||
Total investments at fair value |
1,103,539,344 | 1,098,260,786 | ||||||
Cash and cash equivalents |
1,941,082 | 5,077,695 | ||||||
Foreign currency at fair value (cost of $518,219 and $10,291) |
508,556 | 10,864 | ||||||
Interest receivable |
14,266,324 | 14,260,266 | ||||||
Dividends receivable |
2,566,711 | 1,796,615 | ||||||
Prepaid expenses and other assets |
2,139,261 | 2,414,954 | ||||||
Total Assets |
$ | 1,124,961,278 | $ | 1,121,821,180 | ||||
Liabilities: |
||||||||
Unrealized depreciation on forward foreign currency contracts |
$ | 1,339,002 | $ | 451,944 | ||||
Credit facility payable |
444,900,000 | 381,300,000 | ||||||
Interest payable on credit facility |
387,561 | 1,508,277 | ||||||
Dividend distributions payable |
| 3,310,606 | ||||||
Base management fees payable |
5,566,860 | 5,606,213 | ||||||
Accrued administrative services |
361,450 | 361,118 | ||||||
Other accrued expenses and payables |
1,299,642 | 1,091,153 | ||||||
Total Liabilities |
453,854,515 | 393,629,311 | ||||||
Net Assets: |
||||||||
Common stock, par value $.001 per share, 100,000,000 and 40,000,000 common shares authorized, 53,275,008 and 52,825,109 issued and outstanding |
53,275 | 52,825 | ||||||
Paid-in capital in excess of par |
795,480,856 | 790,378,102 | ||||||
Distributions in excess of net investment income |
(4,912,142 | ) | (5,411,353 | ) | ||||
Accumulated net realized gain |
935,150 | 729,635 | ||||||
Net unrealized depreciation |
(120,450,376 | ) | (57,557,340 | ) | ||||
Total Net Assets |
671,106,763 | 728,191,869 | ||||||
Total Liabilities and Net Assets |
$ | 1,124,961,278 | $ | 1,121,821,180 | ||||
Net Asset Value Per Share |
$ | 12.60 | $ | 13.78 |
The accompanying notes are an integral part of these financial statements.
4
BlackRock Kelso Capital Corporation
Statements of Operations (Unaudited)
Three months ended March 31, 2008 |
Three months ended March 31, 2007* |
|||||||
Investment Income: |
||||||||
From non-controlled, non-affiliated investments: |
||||||||
Interest |
$ | 33,088,207 | $ | 23,577,652 | ||||
Dividends |
481,114 | 37,497 | ||||||
Other income |
546 | 13,495 | ||||||
From non-controlled, affiliated investments: |
||||||||
Interest |
1,200,564 | 275,631 | ||||||
Dividends |
394,520 | | ||||||
From controlled investments: |
||||||||
Interest |
529,566 | 924,975 | ||||||
Dividends |
| 222,980 | ||||||
Total investment income |
35,694,517 | 25,052,230 | ||||||
Expenses: |
||||||||
Base management fees |
5,566,860 | 3,693,075 | ||||||
Incentive management fees |
| 3,692,649 | ||||||
Administrative services |
293,435 | 218,703 | ||||||
Professional fees |
598,330 | 146,591 | ||||||
Director fees |
94,500 | 63,505 | ||||||
Investment advisor expenses |
274,898 | 196,093 | ||||||
Insurance |
137,583 | 40,931 | ||||||
Interest and credit facility fees |
5,214,057 | 3,714,805 | ||||||
Amortization of debt issuance costs |
166,195 | 62,705 | ||||||
Other |
134,652 | 132,069 | ||||||
Expenses before management fee waiver |
12,480,510 | 11,961,126 | ||||||
Base management fee waiver |
| (923,269 | ) | |||||
Net expenses |
12,480,510 | 11,037,857 | ||||||
Net Investment Income |
23,214,007 | 14,014,373 | ||||||
Realized and Unrealized Gain (Loss): |
||||||||
Net realized gain (loss) from non-controlled, non-affiliated investments: |
||||||||
Investments |
28,363 | 22,027 | ||||||
Foreign currency |
177,152 | (214,902 | ) | |||||
Net realized gain (loss) |
205,515 | (192,875 | ) | |||||
Net change in unrealized appreciation or depreciation on: |
||||||||
Non-controlled, non-affiliated investments: |
||||||||
Investments |
(49,922,548 | ) | 3,177,312 | |||||
Foreign currency translation |
(885,903 | ) | 29,470 | |||||
Non-controlled, affiliated investments |
(6,736,115 | ) | | |||||
Controlled investments |
(5,348,470 | ) | | |||||
Net change in unrealized appreciation or depreciation |
(62,893,036 | ) | 3,206,782 | |||||
Net realized and unrealized gain (loss) |
(62,687,521 | ) | 3,013,907 | |||||
Net Increase (Decrease) in Net Assets Resulting from Operations |
$ | (39,473,514 | ) | $ | 17,028,280 | |||
Net Investment Income Per Share |
$ | 0.44 | $ | 0.36 | ||||
Earnings (Loss) Per Share |
$ | (0.75 | ) | $ | 0.44 | |||
Basic and Diluted Weighted-Average Shares Outstanding |
52,830,053 | 38,501,302 |
* | Certain amounts have been reclassified to conform to the current periods presentation. |
The accompanying notes are an integral part of these financial statements.
5
BlackRock Kelso Capital Corporation
Statements of Changes in Net Assets (Unaudited)
Three months ended March 31, 2008 |
Three months ended March 31, 2007 |
|||||||
Net Increase (Decrease) in Net Assets Resulting from Operations: |
||||||||
Net investment income |
$ | 23,214,007 | $ | 14,014,373 | ||||
Net change in unrealized appreciation or depreciation |
(62,893,036 | ) | 3,206,782 | |||||
Net realized gain (loss) |
205,515 | (192,875 | ) | |||||
Net increase (decrease) in net assets resulting from operations |
(39,473,514 | ) | 17,028,280 | |||||
Dividend Distributions to Stockholders from: |
||||||||
Net investment income |
(22,714,796 | ) | (16,356,763 | ) | ||||
Capital Share Transactions: |
||||||||
Proceeds from shares sold |
| 4,145,067 | ||||||
Reinvestment of dividends |
5,103,204 | 32,055,108 | ||||||
Net increase in net assets resulting from capital share transactions |
5,103,204 | 36,200,175 | ||||||
Total Increase (Decrease) in Net Assets |
(57,085,106 | ) | 36,871,692 | |||||
Net assets at beginning of period |
728,191,869 | 561,799,922 | ||||||
Net assets at end of period |
$ | 671,106,763 | $ | 598,671,614 | ||||
Capital Share Activity: |
||||||||
Shares issued from subscriptions |
| 273,904 | ||||||
Shares issued from reinvestment of dividends |
449,899 | 2,133,674 | ||||||
Total increase in shares |
449,899 | 2,407,578 | ||||||
Distributions in Excess: |
||||||||
Distributions in excess of net investment income, end of period |
$ | (4,912,142 | ) | $ | (5,734,939 | ) |
The accompanying notes are an integral part of these financial statements.
6
BlackRock Kelso Capital Corporation
Statements of Cash Flows (Unaudited)
Three months ended March 31, 2008 |
Three months ended March 31, 2007 |
|||||||
Operating Activities: |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | (39,473,514 | ) | $ | 17,028,280 | |||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |
||||||||
Purchases of long-term investments |
(94,558,697 | ) | (213,879,179 | ) | ||||
Purchases of foreign currencynet |
(481,879 | ) | (226,378 | ) | ||||
Proceeds from sales/repayments of long-term investments |
27,985,697 | 16,541,581 | ||||||
Net change in unrealized appreciation or depreciation on investments |
62,007,133 | (3,177,312 | ) | |||||
Net change in unrealized appreciation or depreciation on foreign currency translation |
885,903 | (29,470 | ) | |||||
Net realized gain on investments |
(28,363 | ) | (22,027 | ) | ||||
Net realized gain (loss) on foreign currency |
(177,152 | ) | 214,902 | |||||
Amortization of premium/discountnet |
(521,834 | ) | (269,543 | ) | ||||
Amortization of debt issuance costs |
166,195 | 62,705 | ||||||
Increase in receivable for investments sold |
| (287,500 | ) | |||||
Increase in interest receivable |
(6,058 | ) | (5,251,577 | ) | ||||
Increase in dividends receivable |
(770,096 | ) | (260,477 | ) | ||||
Decrease in prepaid expenses and other assets |
109,498 | 118,432 | ||||||
Increase in payable for investments purchased |
| 48,374,548 | ||||||
(Decrease) increase in base management fees payable |
(39,353 | ) | 612,724 | |||||
Decrease in incentive management fees payable |
| (116,764 | ) | |||||
Increase in accrued administrative services payable |
332 | 208,583 | ||||||
(Decrease) increase in interest payable on credit facility |
(1,120,716 | ) | 2,525,076 | |||||
Increase in other accrued expenses and payables |
208,489 | 87,659 | ||||||
Net cash used in operating activities |
(45,814,415 | ) | (137,745,737 | ) | ||||
Financing Activities: |
||||||||
Net proceeds from issuance of common stock |
| 4,145,067 | ||||||
Dividend distributions paid |
(26,025,402 | ) | (32,160,273 | ) | ||||
Dividend distributions reinvested |
5,103,204 | 32,055,108 | ||||||
Borrowings under credit facility |
87,700,000 | 428,000,000 | ||||||
Repayments under credit facility |
(24,100,000 | ) | (292,000,000 | ) | ||||
Net cash provided by financing activities |
42,677,802 | 140,039,902 | ||||||
Net (decrease) increase in cash and cash equivalents |
(3,136,613 | ) | 2,294,165 | |||||
Cash and cash equivalents, beginning of period |
5,077,695 | 3,036,413 | ||||||
Cash and cash equivalents, end of period |
$ | 1,941,082 | $ | 5,330,578 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash interest paid during period |
$ | 6,239,141 | $ | 1,194,086 |
The accompanying notes are an integral part of these financial statements.
7
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)
March 31, 2008
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value |
|||||||||
Senior Secured Notes7.7% |
|||||||||||||
AGY Holding Corp., Second Lien, 11.00%, 11/15/14, acquired multiple dates(b) |
Glass Yarns/Fibers | $ | 23,500,000 | $ | 23,042,060 | $ | 21,150,000 | ||||||
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13 |
Food Service Equipment |
30,277,111 | 30,277,111 | 30,277,111 | (c) | ||||||||
Total Senior Secured Notes |
53,319,171 | 51,427,111 | |||||||||||
Unsecured Debt26.7% |
|||||||||||||
AMC Entertainment Holdings, Inc., 7.80% PIK (LIBOR + 5.00%/Q), 6/13/12 |
Entertainment | 12,981,702 | 12,729,814 | 10,709,904 | |||||||||
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13 |
Marketing Services |
46,522,118 | 46,522,118 | 40,474,243 | |||||||||
BE Foods Investments, Inc., 9.70% PIK (LIBOR + 5.25%/Q), 7/11/12 |
Food | 28,258,946 | 27,190,871 | 22,889,746 | |||||||||
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15 |
Waste Management Equipment | 33,898,538 | 33,898,538 | 33,898,538 | (c) | ||||||||
Lucite International Luxembourg Finance S.àr.l., 13.41% PIK (EURIBOR + 9.00%/Q), 7/14/14(d) |
Chemicals | 11,360,630 | (e) | 14,230,835 | 13,276,180 | ||||||||
Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14 |
Transportation | 45,423,354 | 45,423,354 | 45,423,354 | (c) | ||||||||
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(b) |
Finance | 9,000,000 | 9,000,000 | 7,650,000 | |||||||||
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(b) |
Finance | 6,000,000 | 5,662,670 | 5,160,000 | |||||||||
Total Unsecured Debt |
194,658,200 | 179,481,965 | |||||||||||
Subordinated Debt19.0% |
|||||||||||||
A & A Manufacturing Co., Inc., 14.00% (12.00% cash, 2.00% PIK), 4/2/14 |
Protective Enclosures |
18,871,741 | 18,871,741 | 18,871,741 | (c) | ||||||||
Advanstar, Inc., 9.67% PIK (LIBOR + 7.00%/Q), 11/30/15 |
Printing/ Publishing |
6,634,375 | 6,634,375 | 5,148,950 | (c) | ||||||||
Al Solutions, Inc., 16.00% PIK, 12/29/13(f) |
Metals | 13,154,071 | 13,154,071 | 12,919,500 | (c) | ||||||||
Conney Safety Products, LLC, 16.00%, 10/1/14 |
Safety Products |
25,000,000 | 25,000,000 | 25,000,000 | (c) | ||||||||
Mattress Giant Corporation, 13.25% (11.00% cash, 2.25% PIK), 8/1/12 |
Bedding Retail |
14,023,148 | 13,924,404 | 12,901,296 | |||||||||
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(b) |
Information Services |
8,000,000 | 8,072,783 | 8,160,000 | |||||||||
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15 |
Financial Services |
15,063,333 | 15,063,333 | 15,063,333 | (c) |
The accompanying notes are an integral part of these financial statements.
8
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2008
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value |
|||||||||
PGA Holdings, Inc., 12.50%, 3/12/16 |
Healthcare Services |
$ | 5,000,000 | $ | 4,901,215 | $ | 4,900,000 | ||||||
Sentry Security Systems, LLC, 15.00% (12.00% cash, 3.00% PIK), 8/7/12 |
Security Services |
10,352,323 | 10,352,323 | 10,352,323 | (c) | ||||||||
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(b) |
Security Services |
7,000,000 | 7,000,000 | 6,510,000 | |||||||||
Wastequip, Inc., 12.00% (10.00% cash, 2.00% PIK), 2/5/15 |
Waste Management Equipment | 7,638,543 | 7,638,543 | 7,638,543 | (c) | ||||||||
Total Subordinated Debt |
130,612,788 | 127,465,686 | |||||||||||
Senior Secured Loans104.7%(g) |
|||||||||||||
Advanstar Communications Inc., Second Lien, 7.67% (LIBOR + 5.00%), 11/30/14 |
Printing/ Publishing |
14,000,000 | 14,000,000 | 10,865,425 | (c) | ||||||||
Alpha Media Group Inc., Second Lien, 10.20% (LIBOR + 7.50%), 2/11/15 |
Publishing | 20,000,000 | 19,263,189 | 18,000,000 | |||||||||
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15 |
HVAC/ Plumbing Services |
40,000,000 | 40,000,000 | 40,000,000 | (c) | ||||||||
American Safety Razor Company, LLC, Second Lien, 8.91% (LIBOR + 6.25%), 1/30/14 |
Consumer Products |
10,000,000 | 10,000,000 | 8,600,000 | |||||||||
American SportWorks LLC, Second Lien, 18.00% (15.00% cash, 3.00% PIK), 6/27/14(h) |
Utility Vehicles |
13,302,398 | 13,302,398 | 13,302,398 | (c) | ||||||||
AmQuip Crane Rental LLC, Second Lien, 8.48% (LIBOR + 5.75%), 6/29/14 |
Construction Equipment |
22,000,000 | 22,000,000 | 21,340,000 | |||||||||
Applied Tech Products Corp. et al., Tranche A, First Lien, 9.75% (Base Rate + 4.50%), 10/24/10 |
Plastic Packaging |
4,847,723 | 4,830,775 | 4,847,723 | (c) | ||||||||
Applied Tech Products Corp. et al., Tranche B, Second Lien, 13.75% (Base Rate + 8.50%), 4/24/11 |
Plastic Packaging |
2,308,004 | 2,296,775 | 1,474,800 | (c) | ||||||||
Applied Tech Products Corp. et al., Tranche C, Third |
Plastic Packaging |
916,240 | 855,764 | | (c) | ||||||||
Arclin US Holdings Inc., Second Lien, 9.60% (LIBOR + 6.50%), 7/10/15 |
Chemicals | 14,500,000 | 14,500,000 | 14,500,000 | (c) | ||||||||
Bankruptcy Management Solutions, Inc., Second Lien, 8.95% (LIBOR + 6.25%), 7/31/13 |
Software | 24,625,000 | 24,625,000 | 17,606,875 | |||||||||
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 11.04% (CBA + 7.00%), 7/1/12(d) |
Discount Stores |
19,609,262 | (j) | 18,303,199 | 18,920,296 | (c) | |||||||
Berlin Packaging L.L.C., Second Lien, 9.26% (LIBOR + 6.50%), 8/17/15 |
Rigid Packaging |
24,000,000 | 23,334,815 | 20,400,000 | |||||||||
Champion Energy Corporation et al., First Lien, 12.50%, 5/22/11 |
Heating and Oil Services | 34,000,000 | 34,000,000 | 34,000,000 | (c) | ||||||||
Custom Direct, Inc. et al., Second Lien, 8.70% (LIBOR + 6.00%), 12/31/14 |
Printing | 10,000,000 | 10,000,000 | 7,500,000 |
The accompanying notes are an integral part of these financial statements.
9
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2008
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value |
||||||||
Deluxe Entertainment Services Group Inc., Second Lien, 8.70% (LIBOR + 6.00%), 11/11/13 |
Entertainment | $ | 12,000,000 | $ | 12,000,000 | $ | 9,600,000 | |||||
DynaVox Systems LLC, Term Loan B, First Lien, 5.93% (LIBOR + 3.25%), 6/30/11 |
Augmentative Communication Products | 3,342,816 | 3,326,593 | 3,342,816 | (c) | |||||||
DynaVox Systems LLC, Term Loan C, First Lien, 7.43% (LIBOR + 4.75%), 12/13/11 |
Augmentative Communication Products | 1,750,000 | 1,741,174 | 1,750,000 | (c) | |||||||
Electrical Components International Holdings Company, Second Lien, 9.46% (LIBOR + 6.50%), 5/1/14 |
Electronics | 20,000,000 | 20,000,000 | 12,000,000 | ||||||||
Event Rentals, Inc., Acquisition Loan, First Lien, 7.76% (LIBOR + 4.00%), 12/19/13 |
Party Rentals |
15,000,000 | 15,000,000 | 14,925,000 | ||||||||
Facet Technologies, LLC, Second Lien, 13.88% (LIBOR + 9.00%), 1/26/12 |
Medical Devices | 27,000,000 | 27,000,000 | 27,000,000 | (c) | |||||||
Fairway Group Holdings Corp. et al., Term B Loan, First Lien, 8.09% (LIBOR + 5.00%), 1/18/13 |
Retail Grocery |
1,485,000 | 1,482,031 | 1,485,000 | (c) | |||||||
Fairway Group Holdings Corp. et al., Term C Loan, Second Lien, 13.00% (12.00% cash, 1.00% PIK), 1/18/14 |
Retail Grocery |
11,631,023 | 11,583,395 | 11,631,023 | (c) | |||||||
Fitness Together Franchise Corporation, First Lien, 11.37% (LIBOR + 6.25%), 7/14/12 |
Personal Fitness | 12,950,000 | 12,902,773 | 12,902,773 | (c) | |||||||
Heartland Automotive Services II Inc. et al., Term Loan A, First Lien, 7.75% (LIBOR + 3.75%), 2/27/12 |
Automobile Repair | 3,678,231 | 3,675,747 | 3,531,102 | (c) | |||||||
Heartland Automotive Services II Inc. et al., Acquisition Loan, First Lien, 8.00%, (LIBOR + 4.00%), 2/27/12 |
Automobile Repair | 1,799,837 | 1,799,837 | 1,781,837 | ||||||||
HIT Entertainment, Inc., Second Lien, 8.60% (LIBOR + 5.50%), 2/26/13 |
Entertainment | 1,000,000 | 1,000,000 | 750,000 | ||||||||
InterMedia Outdoor, Inc., Second Lien, 9.45% (LIBOR + 6.75%), 1/31/14 |
Printing/ Publishing |
10,000,000 | 10,000,000 | 8,400,000 | ||||||||
Isola USA Corp., First Lien, 7.45% (LIBOR + 4.75%), 12/18/12 |
Electronics | 9,875,000 | 9,758,048 | 8,591,250 | ||||||||
Isola USA Corp., Second Lien, 10.45% (LIBOR + 7.75%), 12/18/13 |
Electronics | 25,000,000 | 25,000,000 | 21,750,000 | ||||||||
Kaz, Inc. et al., M&E Loan, First Lien, 7.56% (LIBOR + 4.50%), 12/8/08 |
Consumer Products | 3,000,000 | 3,000,000 | 3,000,000 | (c) | |||||||
Kaz, Inc. et al., First Lien, 16.00% (12.00% cash, 4.00% PIK), 12/8/11 |
Consumer Products | 42,175,735 | 41,726,823 | 41,726,823 | (c) | |||||||
LJVH Holdings Inc., Second Lien, 8.20% (LIBOR + 5.50%), 1/19/15(d) |
Specialty Coffee |
25,000,000 | 25,000,000 | 21,250,000 | ||||||||
MCCI Group Holdings, LLC, Second Lien, 10.33% (LIBOR + 7.25%), 6/21/13 |
Healthcare Services | 29,000,000 | 28,941,762 | 29,000,000 | (c) |
The accompanying notes are an integral part of these financial statements.
10
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2008
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value |
||||||||
NAMIC/VA, Inc., Second Lien, 12.25%, 8/14/15 |
Healthcare Services | $ | 15,000,000 | $ | 14,741,439 | $ | 14,700,000 | |||||
New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14 |
Mining/ Construction | 35,000,000 | 34,656,886 | 34,475,000 | ||||||||
Oriental Trading Company, Inc., Second Lien, 8.71% (LIBOR + 6.00%), 1/31/14 |
Party Supplies and Novelties | 3,000,000 | 3,000,000 | 2,025,000 | ||||||||
Penton Media, Inc. et al., Second Lien, 7.70% (LIBOR + 5.00%), 2/1/14(h) |
Information Services |
26,000,000 | 25,543,162 | 18,330,000 | ||||||||
Physiotherapy Associates, Inc. et al., Second Lien, 11.41% (LIBOR + 6.50%), 12/31/13 |
Rehabilitation Centers |
17,000,000 | 17,000,000 | 15,470,000 | ||||||||
Precision Parts International Services Corp. et al., First Lien, 10.14% (LIBOR + 4.75% cash, 0.75% PIK), 9/30/11 |
Automotive Parts | 4,850,239 | 4,850,239 | 3,880,191 | ||||||||
Premier Yachts, Inc. et al., Term A, First Lien, 6.83% (LIBOR + 3.75%), 8/22/12 |
Entertainment Cruises | 7,877,183 | 7,848,784 | 7,837,797 | ||||||||
Premier Yachts, Inc. et al., Term B, First Lien, 10.08% (LIBOR + 7.00%), 8/22/13 |
Entertainment Cruises | 1,921,233 | 1,914,495 | 1,911,627 | ||||||||
Stolle Machinery Company, LLC, Second Lien, 9.18% (LIBOR + 6.50%), 9/29/13 |
Canning Machinery | 5,950,000 | 5,950,000 | 5,474,000 | ||||||||
Sunrise Medical LTC LLC et al., Second Lien, 9.20% (LIBOR + 6.50%), 12/28/13 |
Healthcare Equipment | 14,400,000 | 14,400,000 | 13,248,000 | ||||||||
Total Safety U.S. Inc., Second Lien, 11.33% (LIBOR + 6.50%), 12/8/13 |
Industrial Safety Equipment | 9,000,000 | 9,000,000 | 8,370,000 | ||||||||
United Subcontractors, Inc., Second Lien, 12.21% (LIBOR + 7.25%), 6/27/13 |
Building and Construction | 10,000,000 | 10,000,000 | 5,766,670 | ||||||||
Water Pik, Inc., Second Lien, 8.30% (LIBOR + 5.50%), 6/15/14 |
Consumer Products |
30,000,000 | 30,000,000 | 27,900,000 | (c) | |||||||
WBS Group LLC et al., Second Lien, 9.93% (LIBOR + 6.25%), 6/7/13 |
Software | 20,000,000 | 20,000,000 | 17,880,000 | (c) | |||||||
Wembley, Inc., Second Lien, 7.25% (LIBOR + 4.25%), 8/23/12 |
Gaming | 1,000,000 | 1,000,000 | 350,000 | ||||||||
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 6.70% (LIBOR + 4.00%), 3/30/11 |
Restaurants | 6,850,000 | 6,850,000 | 6,850,000 | (c) | |||||||
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 9.70% (LIBOR + 7.00%), 3/30/11(i) |
Restaurants | 8,334,656 | 8,334,656 | 8,334,656 | (c) | |||||||
York Tape & Label, Inc. et al., Second Lien, 9.94% (LIBOR + 7.25%), 9/30/13 |
Printing | 45,197,368 | 44,786,185 | 44,293,421 | ||||||||
Total Senior Secured Loans |
766,125,944 | 702,871,503 | ||||||||||
Preferred Stock1.3% |
||||||||||||
Facet Holdings Corp., Class A, 12.00% PIK |
Medical Devices |
900 | 900,000 | 204,706 | (c) | |||||||
Fitness Together Holdings, Inc., Series A, 8.00% PIK |
Personal Fitness |
187,500 | 187,500 | 187,500 | (c) | |||||||
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(h) |
Sheet Metal Fabrication |
8,337 | 8,337,000 | 8,587,110 | (c) | |||||||
Tygem Holdings, Inc., 8.00% PIK(f)(i) |
Metals | 10,789,367 | 10,826,867 | | (c) |
The accompanying notes are an integral part of these financial statements.
11
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2008
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value |
|||||||
Tygem Holdings, Inc., Series B Convertible(f)(k) |
Metals | 54,574,501 | $ | 14,725,535 | $ | | (c) | ||||
Total Preferred Stock |
34,976,902 | 8,979,316 | |||||||||
Common Stock1.7%(k) |
|||||||||||
BKC ASW Blocker, Inc.(h)(l) |
Utility Vehicles | 1,000 | 250,000 | 450,163 | (c) | ||||||
BKC MTCH Blocker, Inc.(m) |
Transportation | 1,000 | 5,000,000 | 4,700,000 | (c) | ||||||
Facet Holdings Corp. |
Medical Devices | 10,000 | 100,000 | | (c) | ||||||
Fitness Together Holdings, Inc. |
Personal Fitness | 62,500 | 62,500 | 82,500 | (c) | ||||||
M & M Tradition Holdings Corp.(h) |
Sheet Metal Fabrication | 500,000 | 5,000,000 | 5,475,000 | (c) | ||||||
MGHC Holding Corporation |
BeddingRetail | 205,000 | 2,050,000 | 900,000 | (c) | ||||||
Tygem Holdings, Inc.(f) |
Metals | 3,596,456 | 3,608,956 | | (c) | ||||||
Total Common Stock |
16,071,456 | 11,607,663 | |||||||||
Limited Partnership/Limited Liability Company Interests3.9% |
|||||||||||
ARS Investment Holdings, LLC(k) |
HVAC/Plumbing Services | 66,902 | | 840,000 | (c) | ||||||
Big Dumpster Coinvestment, LLC(k) |
Waste Management Equipment | | 5,333,333 | 1,400,000 | (c) | ||||||
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(b) |
Finance | 1,750 | 1,650,005 | 1,557,500 | |||||||
PG Holdco, LLC, 15% PIK |
Healthcare Services | 333 | 333,333 | 333,333 | (c) | ||||||
PG Holdco, LLC, Class A(k) |
Healthcare Services | 16,667 | 166,667 | 166,667 | (c) | ||||||
Prism Business Media Holdings LLC(h)(k) |
Information Services |
68 | 14,943,200 | 13,000,000 | (c) | ||||||
Sentry Common Investors, LLC(k) |
Security Services | 147,271 | 147,271 | 74,000 | (c) | ||||||
Sentry Security Systems Holdings, LLC, 8.00% PIK |
Security Services | 602,729 | 602,729 | 602,729 | (c) | ||||||
WBS Group Holdings, LLC, Class B, 16.00% PIK |
Software | 8,000 | 8,000,000 | 8,000,000 | (c) | ||||||
Total Limited Partnership/Limited Liability Company Interests |
31,176,538 | 25,974,229 | |||||||||
Equity Warrants/Options0.2%(k) |
|||||||||||
ATEP Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | | | (c) | ||||||
ATH Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | | | (c) | ||||||
ATPP Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | 90,112 | | (c) | ||||||
ATPR Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | | | (c) | ||||||
Fitness Together Holdings, Inc., expire 7/14/16 |
Personal Fitness | 105,263 | 56,000 | 59,100 | (c) | ||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 49 | 512,000 | 293,937 | (c) | ||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 64,000 | 43,348 | (c) | ||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 24,000 | 20,813 | (c) | ||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 9,000 | 10,705 | (c) | ||||||
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(b) |
Finance | 455 | 444,450 | 784,100 | |||||||
Total Equity Warrants/Options |
1,199,562 | 1,212,003 | |||||||||
The accompanying notes are an integral part of these financial statements.
12
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2008
Portfolio Company |
Industry | Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value |
||||||||
TOTAL INVESTMENTS INCLUDING UNEARNED INCOME |
$ | 1,228,140,561 | $ | 1,109,019,476 | ||||||||
UNEARNED INCOME(0.8)% |
(5,480,132 | ) | (5,480,132 | ) | ||||||||
TOTAL INVESTMENTS164.4% |
$ | 1,222,660,429 | 1,103,539,344 | |||||||||
OTHER ASSETS & LIABILITIES (NET)(64.4)% |
(432,432,581 | ) | ||||||||||
NET ASSETS100.0% |
$ | 671,106,763 | ||||||||||
(a) | Represents amortized cost for fixed income securities and unearned income, and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options. |
(b) | These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 7.6% of net assets at March 31, 2008. |
(c) | Fair value of this investment determined by or under the direction of the Companys Board of Directors (see Note 2). The aggregate fair value of these investments (net of unearned income) is $578,789,707, or 86.2% of net assets at March 31, 2008. |
(d) | Non-U.S. company or principal place of business outside the U.S. |
(e) | Principal amount is denominated in Euros. |
(f) | Controlled investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio companys outstanding voting securities, are as follows: |
Controlled Investments |
Fair Value at December 31, 2007 |
Gross Additions (Cost)* |
Net Unrealized Gain (Loss) |
Fair Value at March 31, 2008 |
Interest Income** | |||||||||||||
Al Solutions, Inc. |
||||||||||||||||||
Subordinated Debt |
$ | 12,648,145 | $ | 505,925 | $ | (234,570 | ) | $ | 12,919,500 | $ | 529,566 | |||||||
Tygem Holdings, Inc.: |
||||||||||||||||||
Preferred Stock |
| | | | | |||||||||||||
Preferred Stock Series B Convertible |
2,613,900 | 2,500,000 | (5,113,900 | ) | | | ||||||||||||
Common Stock |
| | | | | |||||||||||||
Less: Unearned Income |
(427,650 | ) | 17,404 | | (410,246 | ) | | |||||||||||
Totals |
$ | 14,834,395 | $ | 3,023,329 | $ | (5,348,470 | ) | $ | 12,509,254 | $ | 529,566 | |||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. |
** | For the three months ended March 31, 2008. There was no dividend income from these securities during the period. |
The aggregate fair value of these investments (net of unearned income) represents 1.9% of net assets at March 31, 2008.
(g) | Approximately 73% of the senior secured loans to the Companys portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR), Canadian Bankers Acceptance Rate (CBA), or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrowers option. Additionally, the borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate as of March 31, 2008 of all contracts within the specified loan facility. Current reset frequencies for floating rate instruments other than senior secured loans are indicated by Q (quarterly) or S (semiannually). |
The accompanying notes are an integral part of these financial statements.
13
(h) | Non-controlled, affiliated investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio companys outstanding voting securities, are as follows: |
Non-controlled, Affiliated Investments |
Fair Value at December 31, 2007 |
Gross Additions (Cost)* |
Gross Reductions (Cost)** |
Net Unrealized Gain (Loss) |
Fair Value at March 31, 2008 |
Net Realized Gain (Loss)*** |
Interest Income*** |
Dividend Income*** | ||||||||||||||||||||
American SportWorks LLC: |
||||||||||||||||||||||||||||
Senior Secured Loan |
$ | 13,202,280 | $ | 100,118 | $ | | $ | | $ | 13,302,398 | $ | | $ | 614,639 | $ | | ||||||||||||
Common Stock |
406,689 | | | 43,474 | 450,163 | | | | ||||||||||||||||||||
M&M Tradition Holdings Corp.: |
||||||||||||||||||||||||||||
Preferred Stock |
9,415,180 | | (871,000 | ) | 42,930 | 8,587,110 | 23,953 | | 394,520 | |||||||||||||||||||
Common Stock |
5,000,000 | | | 475,000 | 5,475,000 | | | | ||||||||||||||||||||
Penton Media, Inc. |
||||||||||||||||||||||||||||
Senior Secured Loan |
21,250,000 | 877,519 | | (3,797,519 | ) | 18,330,000 | | 585,925 | | |||||||||||||||||||
Prism Business Media Holdings LLC |
||||||||||||||||||||||||||||
Limited Liability Co. Interest |
16,500,000 | | | (3,500,000 | ) | 13,000,000 | | | | |||||||||||||||||||
Less: Unearned Income |
(361,467 | ) | 13,885 | | | (347,582 | ) | | | | ||||||||||||||||||
Totals |
$ | 65,412,682 | $ | 991,522 | $ | (871,000 | ) | $ | (6,736,115 | ) | $ | 58,797,089 | $ | 23,953 | $ | 1,200,564 | $ | 394,520 | ||||||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. |
** | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. |
*** | For the three months ended March 31, 2008. |
The aggregate fair value of these investments (net of unearned income) represents 8.8% of net assets at March 31, 2008.
(i) | Non-accrual status (in default) at March 31, 2008 and therefore non-income producing. |
(j) | Principal amount is denominated in Canadian dollars. |
(k) | Non-income producing equity securities at March 31, 2008. |
(l) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of American SportWorks LLC. |
(m) | The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC. |
The accompanying notes are an integral part of these financial statements.
14
BlackRock Kelso Capital Corporation
Schedules of Investments
December 31, 2007
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value |
|||||||||
Senior Secured Notes6.2% |
|||||||||||||
AGY Holding Corp., Second Lien, 11.00%, 11/15/14, acquired 10/20/06(c) |
Glass Yarns/ Fibers | $ | 15,000,000 | $ | 15,000,000 | $ | 14,550,000 | ||||||
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13 |
Food Service Equipment | 30,277,111 | 30,277,111 | 30,277,111 | (d) | ||||||||
Total Senior Secured Notes |
45,277,111 | 44,827,111 | |||||||||||
Unsecured Debt24.8% |
|||||||||||||
AMC Entertainment Holdings, Inc., 9.99% PIK (LIBOR + 5.00%/Q), 6/13/12 |
Entertainment | 12,661,936 | 12,395,105 | 11,981,357 | |||||||||
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13 |
Marketing Services |
45,152,493 | 45,152,493 | 42,669,106 | |||||||||
BE Foods Investments, Inc., 10.50% PIK (LIBOR + 5.25%/Q), 7/11/12 |
Food | 25,486,292 | 24,683,196 | 23,702,251 | |||||||||
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15 |
Waste Management Equipment | 32,756,167 | 32,756,167 | 32,756,167 | (d) | ||||||||
Lucite International Luxembourg Finance S.àr.l., 13.64% PIK (EURIBOR + 9.00%/Q), 7/14/14(e) |
Chemicals | 10,978,044 | (f) | 13,666,704 | 14,987,131 | ||||||||
Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14 |
Transportation | 39,500,000 | 39,500,000 | 39,500,000 | (d) | ||||||||
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(c) |
Finance | 9,000,000 | 9,000,000 | 9,045,000 | |||||||||
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(c) |
Finance | 6,000,000 | 5,658,622 | 5,685,687 | |||||||||
Total Unsecured Debt |
182,812,287 | 180,326,699 | |||||||||||
Subordinated Debt14.9% |
|||||||||||||
A & A Manufacturing Co., Inc., 14.00% (12.00% cash, 2.00% PIK), 4/2/14 |
Protective Enclosures | 18,777,852 | 18,777,852 | 18,777,852 | (d) | ||||||||
Advanstar, Inc., 11.84% PIK (LIBOR + 7.00%/Q), 11/30/15 |
Printing/ Publishing |
6,441,546 | 6,441,546 | 6,441,546 | |||||||||
Al Solutions, Inc., 16.00% PIK, 12/29/13(g) |
Metals | 12,648,145 | 12,648,145 | 12,648,145 | (d) | ||||||||
Conney Safety Products, LLC, 16.00%, 10/01/14 |
Safety Products |
25,000,000 | 25,000,000 | 25,000,000 | (d) | ||||||||
Mattress Giant Corporation, 13.25% (11.00% cash, 2.25% PIK), 8/1/12 |
Bedding Retail |
13,944,709 | 13,840,288 | 13,247,474 | |||||||||
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple dates(c) |
Information Services | 8,000,000 | 8,074,656 | 8,220,000 | |||||||||
Sentry Security Systems, LLC, 15.00% (12.00% cash, 3.00% PIK), 8/7/12 |
Security Services |
10,274,409 | 10,274,409 | 10,274,409 | (d) |
The accompanying notes are an integral part of these financial statements.
15
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2007
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value |
|||||||||
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(c) |
Security Services |
$ | 7,000,000 | $ | 7,000,000 | $ | 6,650,000 | ||||||
Wastequip, Inc., 12.00% (10.00% cash, 2.00% PIK), 2/5/15 |
Waste Management Equipment | 7,561,250 | 7,561,250 | 7,561,250 | (d) | ||||||||
Total Subordinated Debt |
109,618,146 | 108,820,676 | |||||||||||
Senior Secured Loans97.9%(h) |
|||||||||||||
Advanstar Communications Inc., Second Lien, 9.84% (LIBOR + 5.00%), 11/30/14 |
Printing/ Publishing |
14,000,000 | 14,000,000 | 12,880,000 | |||||||||
Alpha Media Group Inc., Second Lien, 12.33% (LIBOR + 7.50%), 2/11/15 |
Publishing | 20,000,000 | 19,236,444 | 18,400,000 | |||||||||
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15 |
HVAC/Plumbing Services | 40,000,000 | 40,000,000 | 40,000,000 | (d) | ||||||||
American Safety Razor Company, LLC, Second Lien, 11.69% (LIBOR + 6.25%), 1/30/14 |
Consumer Products |
10,000,000 | 10,000,000 | 9,950,000 | |||||||||
American SportWorks LLC, Second Lien, 18.00% (15.00% cash, 3.00% PIK), 6/27/14(i) |
Utility Vehicles |
13,202,280 | 13,202,280 | 13,202,280 | (d) | ||||||||
AmQuip Crane Rental LLC, Second Lien, 10.63% (LIBOR + 5.75%), 6/29/14 |
Construction Equipment | 22,000,000 | 22,000,000 | 21,340,000 | |||||||||
Applied Tech Products Corp. et al., Tranche A, First Lien, 11.75% PIK (Base Rate + 4.50%), 10/24/10 |
Plastic Packaging |
4,847,723 | 4,829,127 | 4,847,723 | (d) | ||||||||
Applied Tech Products Corp. et al., Tranche B, Second Lien, 15.75% PIK (Base Rate + 8.50%), 4/24/11 |
Plastic Packaging |
2,308,004 | 2,295,861 | 1,568,358 | (d) | ||||||||
Applied Tech Products Corp. et al., Tranche C, Third |
Plastic Packaging |
916,240 | 851,534 | | (d) | ||||||||
Arclin US Holdings Inc., Second Lien, 11.40% (LIBOR + 6.50%), 7/10/15 |
Chemicals | 14,500,000 | 14,500,000 | 14,500,000 | (d) | ||||||||
Bankruptcy Management Solutions, Inc., Second Lien, 11.10% (LIBOR + 6.25%), 7/31/13 |
Software | 24,687,500 | 24,687,500 | 20,367,188 | |||||||||
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 11.81% (CBA + 7.00%), 7/1/12(e) |
Discount Stores |
19,739,508 | (k) | 18,414,992 | 19,800,510 | (d) | |||||||
Berlin Packaging L.L.C., Second Lien, 11.85% (LIBOR + 6.50%), 8/17/15 |
Rigid Packaging |
24,000,000 | 23,312,346 | 23,040,000 | |||||||||
Cannondale Bicycle Corporation, Second Lien, 10.85% (LIBOR + 6.00%), 6/5/10 |
Bicycles/ Apparel |
10,000,000 | 10,000,000 | 10,000,000 | (d) | ||||||||
Champion Energy Corporation et al., First Lien, 12.50%, 5/22/11 |
Heating and Oil Services | 34,000,000 | 34,000,000 | 34,000,000 | (d) |
The accompanying notes are an integral part of these financial statements.
16
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2007
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value |
||||||||
Custom Direct, Inc. et al., Second Lien, 10.84% (LIBOR + 6.00%), 12/31/14 |
Printing | $ | 10,000,000 | $ | 10,000,000 | $ | 8,500,000 | |||||
Deluxe Entertainment Services Group Inc., Second Lien, 10.83% (LIBOR + 6.00%), 11/11/13 |
Entertainment | 12,000,000 | 12,000,000 | 10,800,000 | ||||||||
DynaVox Systems LLC, Term Loan B, First Lien, 8.38% (LIBOR + 3.50%), 6/30/11 |
Augmentative Communication Products | 3,351,322 | 3,333,809 | 3,351,322 | (d) | |||||||
DynaVox Systems LLC, Term Loan C, First Lien, 9.88% (LIBOR + 5.00%), 12/13/11 |
Augmentative Communication Products | 1,750,000 | 1,740,579 | 1,750,000 | (d) | |||||||
Eight OClock Coffee Company et al., Second Lien, 11.38% (LIBOR + 6.50%), 7/31/13 |
Coffee Distributor | 14,000,000 | 14,000,000 | 13,440,000 | ||||||||
Electrical Components International Holdings Company, Second Lien, 11.37% (LIBOR + 6.50%), 5/1/14 |
Electronics | 20,000,000 | 20,000,000 | 16,000,000 | ||||||||
Event Rentals, Inc., Acquisition Loan, First Lien, 9.05% (LIBOR + 4.00%), 12/19/13 |
Party Rentals |
15,000,000 | 15,000,000 | 14,925,000 | ||||||||
Facet Technologies, LLC, Second Lien, 11.88% (LIBOR + 7.00%), 1/26/12 |
Medical Devices |
27,000,000 | 27,000,000 | 27,000,000 | (d) | |||||||
Fairway Group Holdings Corp. et al., Term B Loan, First Lien, 9.96% (LIBOR + 5.00%), 1/18/13 |
Retail Grocery |
1,485,000 | 1,481,877 | 1,485,000 | (d) | |||||||
Fairway Group Holdings Corp. et al., Term C Loan, Second Lien, 13.00% (12.00% cash, 1.00% PIK), 1/18/14 |
Retail Grocery |
11,601,670 | 11,551,996 | 11,601,670 | (d) | |||||||
Fitness Together Franchise Corporation, First Lien, 11.40% (LIBOR + 6.25%), 7/14/12 |
Personal Fitness |
13,150,000 | 13,099,256 | 13,099,256 | (d) | |||||||
Heartland Automotive Services II Inc. et al., Term Loan A, First Lien, 12.00% (Base Rate + 4.75%), 2/27/12(j) |
Automobile Repair |
3,558,311 | 3,555,669 | 3,415,978 | ||||||||
Heartland Automotive Services II Inc. et al., Acquisition Loan, First Lien, 12.25%, (Base Rate + 5.00%), 2/27/12(j) |
Automobile Repair |
1,740,000 | 1,740,000 | 1,722,600 | ||||||||
HIT Entertainment, Inc., Second Lien, 10.38% (LIBOR + 5.50%), 2/26/13 |
Entertainment | 1,000,000 | 1,000,000 | 950,000 | ||||||||
InterMedia Outdoor, Inc., Second Lien, 11.58% (LIBOR + 6.75%), 1/31/14 |
Printing/ Publishing |
10,000,000 | 10,000,000 | 9,600,000 | ||||||||
Isola USA Corp., First Lien, 9.58% (LIBOR + 4.75%), 12/18/12 |
Electronics | 9,900,000 | 9,776,400 | 9,306,000 | ||||||||
Isola USA Corp., Second Lien, 12.83% (LIBOR + 7.75%), 12/18/13 |
Electronics | 25,000,000 | 25,000,000 | 23,500,000 | ||||||||
Kaz, Inc. et al., M&E Loan, First Lien, 9.69% (LIBOR + 4.50%), 12/8/08 |
Consumer Products |
3,000,000 | 3,000,000 | 3,000,000 | (d) | |||||||
Kaz, Inc. et al., First Lien, 16.00% (12.00% cash, 4.00% PIK), 12/8/11 |
Consumer Products |
41,753,560 | 41,274,295 | 41,274,295 | (d) |
The accompanying notes are an integral part of these financial statements.
17
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2007
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value |
||||||||
LJVH Holdings Inc., Second Lien, 10.33% (LIBOR + 5.50%), 1/19/15(e) |
Specialty Coffee |
$ | 25,000,000 | $ | 25,000,000 | $ | 23,000,000 | |||||
MCCI Group Holdings, LLC, Second Lien, 12.71% (LIBOR + 7.25%), 6/21/13 |
Healthcare Services |
29,000,000 | 28,938,983 | 29,000,000 | (d) | |||||||
Oriental Trading Company, Inc., Second Lien, 10.85% (LIBOR + 6.00%), 1/31/14 |
Party Supplies and Novelties |
3,000,000 | 3,000,000 | 2,790,000 | ||||||||
Penton Media, Inc. et al., Second Lien, 9.98% (LIBOR + 5.00%), 2/1/14(i) |
Information Services |
25,000,000 | 24,665,642 | 21,250,000 | ||||||||
Physiotherapy Associates, Inc. et al., Second Lien, 11.41% (LIBOR + 6.50%), 12/31/13 |
Rehabilitation Centers |
17,000,000 | 17,000,000 | 15,810,000 | ||||||||
Precision Parts International Services Corp. et al., First Lien, 10.08% (LIBOR + 4.75% cash, 0.75% PIK), 9/30/11 |
Automotive Parts |
4,853,442 | 4,853,442 | 4,368,097 | ||||||||
Premier Yachts, Inc. et al., Term A, First Lien, 8.69% (LIBOR + 3.75%), 8/22/12 |
Entertainment Cruises |
7,877,183 | 7,847,172 | 7,837,797 | ||||||||
Premier Yachts, Inc. et al., Term B, First Lien, 11.94% (LIBOR + 7.00%), 8/22/13 |
Entertainment Cruises |
1,921,233 | 1,914,184 | 1,911,626 | ||||||||
Stolle Machinery Company, LLC, Second Lien, 11.38% (LIBOR + 6.50%), 9/29/13 |
Canning Machinery |
8,500,000 | 8,500,000 | 8,245,000 | ||||||||
Sunrise Medical LTC LLC et al., Second Lien, 11.35% (LIBOR + 6.50%), 12/28/13 |
Healthcare Equipment |
14,400,000 | 14,400,000 | 14,040,000 | ||||||||
Total Safety U.S. Inc., Second Lien, 11.33% (LIBOR + 6.50%), 12/8/13 |
Industrial Safety Equipment |
9,000,000 | 9,000,000 | 8,730,000 | ||||||||
United Subcontractors, Inc., Second Lien, 12.21% (LIBOR + 7.25%), 6/27/13 |
Building and Construction |
10,000,000 | 10,000,000 | 7,850,000 | ||||||||
Water Pik, Inc., Second Lien, 10.49% (LIBOR + 5.50%), 6/15/14 |
Consumer Products |
30,000,000 | 30,000,000 | 29,400,000 | (d) | |||||||
WBS Group LLC et al., Second Lien, 11.35% (LIBOR + 6.25%), 6/7/13 |
Software | 20,000,000 | 20,000,000 | 20,000,000 | (d) | |||||||
Wembley, Inc., Second Lien, 9.72% (LIBOR + 4.25%), 8/23/12 |
Gaming | 1,000,000 | 1,000,000 | 910,000 | ||||||||
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 8.83% (LIBOR + 4.00%), 3/30/11 |
Restaurants | 6,850,000 | 6,850,000 | 6,850,000 | (d) | |||||||
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 11.83% (LIBOR + 7.00%), 3/30/11 |
Restaurants | 8,334,656 | 8,334,656 | 8,334,656 | (d) | |||||||
York Tape & Label, Inc. et al., Second Lien, 12.25% (LIBOR + 7.25%), 9/30/13 |
Printing | 45,197,368 | 44,767,550 | 44,293,421 | ||||||||
Total Senior Secured Loans |
741,955,594 | 713,237,777 | ||||||||||
Preferred Stock1.7% |
||||||||||||
Facet Holdings Corp., Class A, 12.00% PIK |
Medical Devices |
900 | 900,000 | 318,420 | (d) | |||||||
Fitness Together Holdings, Inc., Series A, 8.00% PIK |
Personal Fitness |
187,500 | 187,500 | 187,500 | (d) |
The accompanying notes are an integral part of these financial statements.
18
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2007
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value |
|||||||
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(i) |
Sheet Metal Fabrication |
9,208 | $ | 9,208,000 | $ | 9,415,180 | (d) | ||||
Tygem Holdings, Inc., 8.00% PIK(g)(j) |
Metals | 10,789,367 | 10,826,867 | | (d) | ||||||
Tygem Holdings, Inc., Series B Convertible(g)(l) |
Metals | 45,567,701 | 12,225,535 | 2,613,900 | (d) | ||||||
Total Preferred Stock |
33,347,902 | 12,535,000 | |||||||||
Common Stock1.7%(l) |
|||||||||||
BKC ASW Blocker, Inc.(i)(m) |
Utility Vehicles | 1,000 | 250,000 | 406,689 | (d) | ||||||
BKC MTCH Blocker, Inc.(n) |
Transportation | 1,000 | 5,000,000 | 5,100,000 | (d) | ||||||
Facet Holdings Corp. |
Medical Devices | 10,000 | 100,000 | | (d) | ||||||
Fitness Together Holdings, Inc. |
Personal Fitness | 62,500 | 62,500 | 77,400 | (d) | ||||||
M & M Tradition Holdings Corp.(i) |
Sheet Metal Fabrication |
500,000 | 5,000,000 | 5,000,000 | (d) | ||||||
MGHC Holding Corporation |
BeddingRetail | 205,000 | 2,050,000 | 1,700,000 | (d) | ||||||
Tygem Holdings, Inc.(g) |
Metals | 3,596,456 | 3,608,956 | | (d) | ||||||
Total Common Stock |
16,071,456 | 12,284,089 | |||||||||
Limited Partnership/Limited Liability Company Interests4.2% |
|||||||||||
ARS Investment Holdings, LLC(l) |
HVAC/Plumbing Services |
66,902 | | 575,000 | (d) | ||||||
Big Dumpster Coinvestment, LLC(l) |
Waste Management Equipment | | 5,333,333 | 3,200,000 | (d) | ||||||
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(c) |
Finance | 1,750 | 1,650,005 | 1,657,860 | |||||||
Prism Business Media Holdings LLC(i)(l) |
Information Services |
68 | 14,943,201 | 16,500,000 | (d) | ||||||
Sentry Common Investors, LLC(l) |
Security Services | 147,271 | 147,271 | 147,300 | (d) | ||||||
Sentry Security Systems Holdings, LLC, 8.00% PIK |
Security Services | 602,729 | 602,729 | 602,729 | (d) | ||||||
WBS Group Holdings, LLC, Class B, 16.00% PIK |
Software | 8,000 | 8,000,000 | 8,000,000 | (d) | ||||||
Total Limited Partnership/Limited Liability Company Interests |
30,676,539 | 30,682,889 | |||||||||
Equity Warrants/Options0.2%(l) |
|||||||||||
ATEP Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | | | (d) | ||||||
ATH Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | | | (d) | ||||||
ATPP Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | 90,112 | | (d) | ||||||
ATPR Holdings, Inc., expire 10/24/15 |
Plastic Packaging | 470 | | | (d) | ||||||
Fitness Together Holdings, Inc., expire 7/14/16 |
Personal Fitness | 105,263 | 56,000 | 55,400 | (d) | ||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 49 | 512,000 | 477,065 | (d) | ||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 64,000 | 81,554 | (d) |
The accompanying notes are an integral part of these financial statements.
19
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2007
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value |
||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | $ | 24,000 | $ | 44,333 | (d) | |||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 9,000 | 25,378 | (d) | |||||||
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c) |
Finance | 455 | 444,450 | 446,672 | ||||||||
Total Equity Warrants/Options |
1,199,562 | 1,130,402 | ||||||||||
TOTAL INVESTMENTS INCLUDING UNEARNED INCOME |
1,160,958,597 | 1,103,844,643 | ||||||||||
UNEARNED INCOME(0.8)% |
(5,583,857 | ) | (5,583,857 | ) | ||||||||
TOTAL INVESTMENTS150.8% |
$ | 1,155,374,740 | 1,098,260,786 | |||||||||
OTHER ASSETS & LIABILITIES (NET)(50.8)% |
(370,068,917 | ) | ||||||||||
NET ASSETS100.0% |
$ | 728,191,869 | ||||||||||
(a) | Unaudited. |
(b) | Represents amortized cost for fixed income securities and unearned income, and cost for preferred and common stock, limited partnership/limited liability company interests and equity warrants/options. |
(c) | These securities are exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. In the aggregate, these securities represent 6.4% of net assets at December 31, 2007. |
(d) | Fair value of this investment determined by or under the direction of the Companys Board of Directors (see Note 2). The aggregate fair value of these investments (net of unearned income) is $559,803,995, or 76.9% of net assets at December 31, 2007. |
(e) | Non-U.S. company or principal place of business outside the U.S. |
(f) | Principal amount is denominated in Euros. |
(g) | Controlled investments under the Investment Company Act of 1940, whereby the Company owns more than 25% of the portfolio companys outstanding voting securities, are as follows: |
Controlled Investments |
Fair Value at December 31, 2006 |
Gross Additions (Cost)* |
Gross Reductions (Cost)** |
Net Unrealized Gain (Loss) |
Fair Value at December 31, 2007 |
Interest Income*** | ||||||||||||||||
Al Solutions, Inc. |
||||||||||||||||||||||
Subordinated Debt |
$ | 22,000,000 | $ | 3,296,290 | $ | (12,648,145 | ) | $ | | $ | 12,648,145 | $ | 3,808,869 | |||||||||
Tygem Holdings, Inc.: |
||||||||||||||||||||||
Preferred Stock |
10,826,867 | | | (10,826,867 | ) | | | |||||||||||||||
Preferred Stock Series B |
||||||||||||||||||||||
Convertible |
| 12,225,535 | | (9,611,635 | ) | 2,613,900 | | |||||||||||||||
Common Stock |
3,608,956 | | | (3,608,956 | ) | | | |||||||||||||||
Less: Unearned Income |
(998,763 | ) | 571,113 | | | (427,650 | ) | | ||||||||||||||
Totals |
$ | 35,437,060 | $ | 16,092,938 | $ | (12,648,145 | ) | $ | (24,047,458 | ) | $ | 14,834,395 | $ | 3,808,869 | ||||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. |
** | Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investment repayments or sales, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company out of this category into a different category. |
The accompanying notes are an integral part of these financial statements.
20
*** | For the year ended December 31, 2007. There was no dividend income from these securities during the year. |
The aggregate fair value of these investments (net of unearned income) represents 2.0% of net assets at December 31, 2007.
(h) | Approximately 80% of the senior secured loans to the Companys portfolio companies bear interest at a floating rate that may be determined by reference to the London Interbank Offered Rate (LIBOR), Euro Interbank Offered Rate (EURIBOR), Canadian Bankers Acceptance Rate (CBA), or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrowers option. Additionally, the borrower under a senior secured loan generally has the option to select from interest reset periods of one, two, three or six months and may alter that selection at the end of any reset period. The stated interest rate represents the weighted average interest rate as of December 31, 2007 of all contracts within the specified loan facility. Current reset frequencies for floating rate instruments other than senior secured loans are indicated by Q (quarterly) or S (semiannually). |
(i) | Non-controlled, affiliated investments under the Investment Company Act of 1940, whereby the Company owns 5% or more (but not more than 25%) of the portfolio companys outstanding voting securities, are as follows: |
Non-controlled, Affiliated Investments |
Fair Value at December 31, 2006 |
Gross Additions (Cost)* |
Net Unrealized Gain (Loss) |
Fair Value at December 31, 2007 |
Interest/Other Income** |
Dividend Income** | |||||||||||||||
American SportWorks LLC: |
|||||||||||||||||||||
Senior Secured Loan |
$ | | $ | 13,202,280 | $ | | $ | 13,202,280 | $ | 1,248,969 | $ | | |||||||||
Common Stock |
| 250,000 | 156,689 | 406,689 | | | |||||||||||||||
M&M Tradition Holdings Corp.: |
|||||||||||||||||||||
Preferred Stock |
| 9,208,000 | 207,180 | 9,415,180 | 300,000 | 1,191,434 | |||||||||||||||
Common Stock |
| 5,000,000 | | 5,000,000 | | | |||||||||||||||
Penton Media, Inc. |
|||||||||||||||||||||
Senior Secured Loan |
| 24,665,642 | (3,415,642 | ) | 21,250,000 | 2,010,213 | | ||||||||||||||
Prism Business Media Holdings LLC |
|||||||||||||||||||||
Limited Liability Co. Interest |
| 14,943,201 | 1,556,799 | 16,500,000 | | | |||||||||||||||
Less: Unearned Income |
| (361,467 | ) | | (361,467 | ) | | | |||||||||||||
Totals |
$ | | $ | 66,907,656 | $ | (1,494,794 | ) | $ | 65,412,682 | $ | 3,559,182 | $ | 1,191,434 | ||||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, paid-in-kind interest or dividends, the amortization of unearned income, the exchange of one or more existing securities for one or more new securities and the movement of an existing portfolio company into this category from a different category. |
** | For the year ended December 31, 2007. |
The aggregate fair value of these investments (net of unearned income) represents 9.0% of net assets at December 31, 2007.
(j) | Non-accrual status (in default) at December 31, 2007 and therefore non-income producing. |
(k) | Principal amount is denominated in Canadian dollars. |
(l) | Non-income producing equity securities at December 31, 2007. |
(m) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of 5% or more (but not more than 25%) of the voting securities of American SportWorks LLC. |
(n) | The Company is the sole stockholder of BKC MTCH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of Marquette Transportation Company Holdings, LLC. |
The accompanying notes are an integral part of these financial statements.
21
BlackRock Kelso Capital Corporation
Notes to Financial Statements (Unaudited)
1. Organization
BlackRock Kelso Capital Corporation (the Company) was organized as a Delaware corporation on April 13, 2005 and was initially funded on July 25, 2005. The Company has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940 (the 1940 Act). In addition, for tax purposes the Company has qualified and has elected to be treated as a regulated investment company, or RIC, under the Internal Revenue Code of 1986 (the Code). The Companys investment objective is to generate both current income and capital appreciation through debt and equity investments. The Company invests primarily in middle-market companies in the form of senior and junior secured and unsecured debt securities and loans, each of which may include an equity component, and by making direct preferred, common and other equity investments in such companies.
On July 25, 2005, the Company completed a private placement of 35,366,589 shares of its common stock at a price of $15.00 per share, receiving net proceeds of $529,333,799. On July 2, 2007, the Company completed an initial public offering through which it sold an additional 10,000,000 shares of its common stock at a price of $16.00 per share and listed its shares on The NASDAQ Global Select Market (collectively, the Public Market Event). Net proceeds from the Public Market Event of $150,110,500 reflected the payment of an underwriting discount of $8,400,000 and legal fees and other offering costs of $1,489,500.
The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). In the opinion of management, all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods, have been included. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.
Certain financial information that is normally included in annual financial statements, including certain financial statement footnotes, prepared in accordance with GAAP, is not required for interim reporting purposes and has been condensed or omitted herein. These financial statements should be read in conjunction with the Companys financial statements and notes related thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the Securities and Exchange Commission (SEC) on March 17, 2008.
2. Significant accounting policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ and such differences could be material.
The significant accounting policies consistently followed by the Company are:
(a) | Investments for which market quotations are readily available are valued at such market quotations unless they are deemed not to represent fair value. The Company generally obtains market quotations from an independent pricing service or one or more broker-dealers or market makers. However, debt investments with remaining maturities within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates fair value. 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 or under the direction of the Companys Board of Directors. Because the Company expects that there will not be a readily available market value for many of the investments in its portfolio, the Company expects to value many of its portfolio investments at fair value as determined in good faith by or under the direction of the Board of Directors using a consistently applied valuation process in accordance with a documented valuation policy that has been reviewed and approved by the Board of Directors. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Companys 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 the Company 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 be deemed not to represent fair value in certain circumstances where BlackRock Kelso Capital Advisors LLC, the Companys investment advisor (the Advisor), believes that facts and circumstances applicable to an issuer, a |
22
seller or purchaser or the market for a particular security causes current market quotations to not reflect the fair value of the security. Examples of these events could include cases in which material events are announced after the close of the market on which a security is primarily traded, when a security trades infrequently causing a quoted purchase or sale price to become stale or in the event of a forced sale by a distressed seller. |
With respect to the Companys investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value, the Board of Directors undertakes a multi-step valuation process each quarter, as described below:
(i) | The quarterly valuation process begins with each portfolio company or investment being initially evaluated and rated by the investment professionals of the Advisor responsible for the portfolio investment; |
(ii) | The investment professionals provide recent portfolio company financial statements and other reporting materials to independent valuation firms engaged by the Board of Directors, such firms conduct independent appraisals each quarter and their preliminary valuation conclusions are documented and discussed with senior management of the Advisor; |
(iii) | The audit committee of the Board of Directors reviews the preliminary valuations of the independent valuation firms; and |
(iv) | The Board of Directors discusses valuations and determines the fair value of each investment in the portfolio in good faith based on the input of the Advisor, the respective independent valuation firms and the audit committee. |
With respect to the initial valuations of unquoted investments by the investment professionals of the Advisor, upon acquisition each unquoted investment generally is valued at cost until the end of the second calendar quarter following its acquisition date. As of that date, an independent valuation firm conducts the initial independent appraisal of the investment.
The types of factors that the Company may take into account in fair value pricing its investments include, as relevant, the nature and realizable value of any collateral, the portfolio companys ability to make payments and its earnings and discounted cash flow, the markets in which the portfolio company does business, comparison to publicly traded securities and other relevant factors. Determination of fair values involves subjective judgments and estimates. Accordingly, these notes to the financial statements express the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the financial statements.
(b) | Security transactions are accounted for on the trade date unless there are substantial conditions to the purchase. |
(c) | Gains or losses on the sale of investments are calculated using the specific identification method. |
(d) | Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted/amortized over the life of the respective security using the effective yield method. For loans and securities with contractual payment-in-kind (PIK) income, which represents contractual interest or dividends accrued and added to the principal balance and which generally becomes due at maturity, PIK income is not accrued if the portfolio company valuation indicates that the PIK income is not collectible. Origination, structuring, closing, commitment and other upfront fees and discounts and premiums on investments purchased are accreted/amortized over the life of the respective investment. Unamortized origination, structuring, closing, commitment and other upfront fees are recorded as unearned income. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, structuring, closing, commitment and other upfront fees are recorded as interest income. Expenses are recorded on an accrual basis. |
(e) | The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from federal income and excise taxes. Therefore, no provision has been recorded for federal income or excise taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on estimated excess taxable income as required. |
In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its income (both ordinary income and net capital gains).
23
(f) | Dividends and distributions to common stockholders are recorded on the record date. The amount to be paid out as a dividend is determined by the Board of Directors. Net realized capital gains, if any, generally are distributed at least annually, although the Company may decide to retain such capital gains for investment. |
(g) | Loans are placed on non-accrual status when principal or interest payments are past due 30 days or more or when there is reasonable doubt that principal or interest will be collected. Accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon managements judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in managements judgment, are likely to remain current. |
(h) | Recently Issued Accounting Pronouncements: |
In March 2008, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), which is effective for fiscal years beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entitys results of operations and financial position. The Company is currently evaluating the impact of adopting SFAS 161 on its financial statements. At this time, the impact on the Companys financial statements has not been determined.
3. Agreements and related party transactions
The Company has entered into an Investment Management Agreement (the Management Agreement) with the Advisor, under which the Advisor, subject to the overall supervision of the Companys Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, the Company. For providing these services, the Advisor receives a base management fee (the Management Fee) from the Company quarterly in arrears at an annual rate of 2.0% of the Companys total assets, including any assets acquired with the proceeds of leverage.
The Advisor contractually agreed to waive its rights to receive one-half of the amount of the Management Fee the Advisor would otherwise be entitled to receive from the Company until the first date on which 90% of the assets of the Company were invested in portfolio companies in accordance with the Companys investment objective or the first anniversary of the Closing, whichever was sooner (the Ramp-Up Date). The Ramp-Up Date occurred on July 25, 2006. Thereafter, the Advisor agreed to waive, until such time as the Company had completed the Public Market Event, one-quarter of the amount of the Management Fee the Advisor would otherwise be entitled to receive from the Company. All such fee waivers terminated upon completion of the Public Market Event.
For the three months ended March 31, 2008 and 2007, the Advisor earned $5,566,860 and $2,769,806, respectively, in base management fees, net of waivers, from the Company.
The Management Agreement provides that the Advisor or its affiliates may be entitled to an incentive management fee (the Incentive Fee) under certain circumstances. The determination of the Incentive Fee, as described in more detail below, will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to Company stockholders, as described in more detail below, do not meet an 8.0% annualized rate of return and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return. Annualized rate of return in this context is computed by reference to the Companys net asset value and does not take into account changes in the market price of the Companys common stock.
The Advisor will be entitled to receive the Incentive Fee if the Companys performance exceeds a hurdle rate during different measurement periods: the pre-offering period; the transition period; trailing four quarters periods (which will apply only to the portion of the Incentive Fee based on income) and annual periods (which will apply only to the portion of the Incentive Fee based on capital gains).
| The pre-offering period began on the Ramp-Up Date and ended on June 30, 2007. |
| The transition period began on July 1, 2007 and will end on June 30, 2008. |
| The trailing four quarters periods will begin on September 30, 2008. In other words, the income portion of the Incentive Fee payable for the quarterly period ending on September 30, 2008 will be determined by reference to the four quarter period ending on September 30, 2008. |
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| The term annual period means the period beginning on July 1 of each calendar year beginning in 2007 and ending on June 30 of the next calendar year. |
The hurdle rate for each quarterly portion of a measurement period is 2.0% times the net asset value of the Companys common stock at the beginning of the respective measurement period calculated after giving effect to any distributions that occurred during the measurement period times the number of calendar quarters in the measurement period. A portion of the Incentive Fee is based on the Companys income and a portion is based on capital gains. Each portion of the Incentive Fee is described below.
Quarterly Incentive Fee Based on Income. For each of the first three measurement periods referred to above (the pre-offering period, the transition period and each trailing four quarters period), the Company will pay the Advisor an Incentive Fee based on the amount by which (A) aggregate distributions and amounts distributable out of taxable net income (excluding any capital gain and loss) during the period less the amount, if any, by which net unrealized capital depreciation exceeds net realized capital gains during the period exceeds (B) the hurdle rate for the period. The amount of the excess described in this paragraph for each period is referred to as the excess income amount.
The portion of the Incentive Fee based on income for each period will equal 50% of the periods excess income amount, until the cumulative Incentive Fee payments for the period equals 20% of the periods excess income amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on income for the period will equal an amount such that the cumulative Incentive Fee payments to the Advisor during the period based on income equals 20% of the periods excess income amount.
Periodic Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated separately for each of two periods: the pre-offering period (on a quarterly basis) and after the pre-offering period (on an annual basis). For each period, the Company will pay the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed unrealized capital depreciation, if any, occurring during the period exceeds (B) the amount, if any, by which the periods hurdle rate exceeds the amount of income used in the determination of the Incentive Fee based on income for the period. The amount of the excess described in this paragraph is referred to as the excess gain amount.
The portion of the Incentive Fee based on capital gains for each period will equal 50% of the periods excess gain amount, until such payments equal 20% of the periods excess gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period will equal an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period will equal 20% of the periods excess gain amount. The result of this formula is that, if the portion of the Incentive Fee based on income for the period exceeds the periods hurdle rate, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the excess gain amount.
In calculating whether the portion of the Incentive Fee based on capital gains is payable with respect to any period, the Company accounts for its assets on a security-by-security basis. In addition, the Company uses the period-to-period method pursuant to which the portion of the Incentive Fee based on capital gains for any period is based on realized capital gains for the period reduced by realized capital losses and unrealized capital depreciation for the period. Based on current interpretations of Section 205(b)(3) of the Investment Advisers Act of 1940 by the SEC and its staff, the calculation of unrealized depreciation for each portfolio security over a period is based on the fair value of the security at the end of the period compared to the fair value at the beginning of the period. Incentive Fees earned in any of the periods described above are not subject to modification or repayment based upon performance in a subsequent period.
For the three months ended March 31, 2008 and 2007, the Advisor earned $0 and $3,692,649, respectively, in Incentive Fees from the Company. Although the Company did not incur any Incentive Fees during the three months ended March 31, 2008 and during the previous two calendar quarters, it may incur such fees in the future relating to investment performance since June 30, 2007 measured on a trailing four quarters basis.
The Management Agreement provides that the Company will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the performance by the Advisor of its duties under the Management Agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to the Company. For the three months ended March 31, 2008 and 2007, the Company incurred $274,898 and $196,093, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement.
25
From time to time, the Advisor may pay amounts owed by the Company to third party providers of goods or services. The Company will subsequently reimburse the Advisor for such amounts paid on its behalf. Reimbursements to the Advisor for the three months ended March 31, 2008 and 2007 were $401,158 and $309,253, respectively.
No person who is an officer, director or employee of the Advisor and who serves as a director of the Company receives any compensation from the Company for such services. Directors who are not affiliated with the Advisor receive compensation for their services and reimbursement of expenses incurred to attend meetings.
The Company also has entered into an administration agreement with BlackRock Financial Management, Inc. (the Administrator) under which the Administrator provides administrative services to the Company. For providing these services, facilities and personnel, the Company reimburses the Administrator for the Companys allocable portion of overhead and other expenses incurred by the Administrator in performing its obligations under the administration agreement, including rent and the Companys allocable portion of the cost of certain of the Companys officers and their respective staffs. The PNC Financial Services Group, Inc. (PNC) is a significant stockholder of the ultimate parent of the Administrator. For the three months ended March 31, 2008 and 2007, the Company incurred $264,143 and $175,000, respectively, for administrative services expenses payable to the Administrator under the administration agreement.
PFPC Inc. (PFPC), a subsidiary of PNC, provides administrative and accounting services to the Company pursuant to a Sub-Administration and Accounting Services Agreement. PFPC Trust Company, another subsidiary of PNC, provides custodian services to the Company pursuant to a Custodian Services Agreement. Also, PFPC provides transfer agency and compliance support services to the Company pursuant to a Transfer Agency Agreement and a Compliance Support Services Agreement, respectively. For the services provided to the Company by PFPC and its affiliates, PFPC is entitled to an annual fee of 0.02% of the Companys average net assets plus reimbursement of reasonable expenses, and a base fee, payable monthly. PFPC Trust Company may charge the Company additional fees for cash overdraft balances or for sweeping excess cash balances.
For the three months ended March 31, 2008 and 2007, the Company incurred $49,325 and $58,703, respectively, for administrative, accounting, custodian and transfer agency services fees payable to PFPC and its affiliates under the related agreements.
In November 2007, the Companys Board of Directors authorized the purchase by the Advisor from time to time in the open market of an indeterminate number of shares of the Companys common stock, in the Advisors discretion, subject to compliance with the Companys and the Advisors applicable policies and requirements of law. Pursuant to that authorization, during the three months ended March 31, 2008, the Advisor purchased 103,735 shares of the Companys common stock in the open market for $1,228,448, excluding brokerage commissions.
In 2006, the Companys Board of Directors authorized the issuance and sale from time to time of up to $2,500,000 in aggregate net asset value of shares of the Companys common stock to certain existing and future officers and employees of the Advisor at a price equal to the greater of $15.00 per share or the Companys most recently determined net asset value per share at the time of sale. Pursuant to this authorization, during the three months ended March 31, 2007, the Company issued and sold to certain officers and employees of the Advisor in private placements a total of 89,604 shares of common stock for aggregate proceeds of approximately $1,354,000.
In 2006, the Companys Board of Directors authorized the issuance and sale from time to time of an indeterminate number of shares of the Companys common stock to the Advisor at a price per share equal to the Companys most recently determined net asset value per share at the time of sale, such shares to be used by the Advisor for employee compensation and other purposes. Pursuant to this authorization, during the three months ended March 31, 2007, the Company issued and sold to the Advisor in private placements 184,300 shares of common stock for aggregate proceeds of approximately $2,791,000.
At March 31, 2008 and December 31, 2007, the Advisor owned directly approximately 370,000 and 276,000 shares, respectively, of the Companys common stock, representing 0.7% and 0.5% of the total shares outstanding. The Advisors allocable portion of shares of the Companys common stock owned indirectly by an entity in which the Advisor holds a non-voting investment interest was approximately 1,050,000 and 854,000 shares at March 31, 2008 and December 31, 2007, respectively. The Advisor disclaims ownership of the shares held by such entity. Inclusive of its allocable portion of the shares held by such entity, the Advisor would be deemed to own approximately 2.7% and 2.1% of the Companys total shares outstanding at March 31, 2008 and December 31, 2007, respectively. At March 31, 2008 and December 31, 2007, other entities affiliated with the Administrator and PFPC beneficially owned indirectly approximately 2,947,000 and 2,843,000 shares, respectively, of the Companys common stock, representing approximately 5.5% and 5.4% of the total shares outstanding. At March 31, 2008 and December 31, 2007, an entity affiliated with the Administrator and PFPC owned 36.5% of the members interests of the Advisor.
26
In 2006, BlackRock, Inc. (BlackRock) and Merrill Lynch & Co., Inc. (Merrill Lynch) completed a merger of Merrill Lynchs investment management business, Merrill Lynch Investment Managers (MLIM), and BlackRock to create a new independent asset management company that operates under the BlackRock name. Pursuant to the underwriting agreement with respect to the Public Market Event, Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S), a subsidiary of Merrill Lynch, served as an underwriter and a senior book-running manager, committing to purchase 2,000,000 shares of the Companys common stock at a price of $16.00 per share. The terms and conditions applicable to MLPF&S under the underwriting agreement were identical to those of other entities serving in similar capacities. In accordance with such terms, MLPF&S received approximately $1,800,000 of the underwriting discount paid by the Company on July 2, 2007.
4. Earnings (loss) per share
The following information sets forth the computation of basic and diluted net increase (decrease) in net assets per share (earnings (loss) per share) resulting from operations for the three months ended March 31, 2008 and 2007.
Three months ended March 31, 2008 |
Three months ended March 31, 2007 | ||||||
Numerator for basic and diluted net increase (decrease) in net assets per share |
$ | (39,473,514 | ) | $ | 17,028,280 | ||
Denominator for basic and diluted weighted average shares |
52,830,053 | 38,501,302 | |||||
Basic/diluted net increase (decrease) in net assets per share resulting from operations |
$ | (0.75 | ) | $ | 0.44 |
Diluted net increase (decrease) in net assets per share resulting from operations equals basic net increase (decrease) in net assets per share resulting from operations for the period because there were no common stock equivalents outstanding during the above periods.
5. Investments
Purchases of long-term investments for the three months ended March 31, 2008 and 2007 totaled $94,558,697 and $213,879,179, respectively. Sales/repayments of long-term investments for the three months ended March 31, 2008 and 2007 were $27,985,697 and $16,541,581, respectively.
At March 31, 2008, investments and cash and cash equivalents consisted of the following:
Cost | Fair Value | |||||
Cash and cash equivalents |
$ | 1,941,082 | $ | 1,941,082 | ||
Senior secured notes |
53,319,171 | 51,427,111 | ||||
Unsecured debt |
194,658,200 | 179,481,965 | ||||
Subordinated debt |
130,612,788 | 127,465,686 | ||||
Senior secured loans: |
||||||
First lien |
181,345,174 | 179,618,891 | ||||
Second/other priority lien |
584,780,770 | 523,252,612 | ||||
Total senior secured loans |
766,125,944 | 702,871,503 | ||||
Preferred stock |
34,976,902 | 8,979,316 | ||||
Common stock |
16,071,456 | 11,607,663 | ||||
Limited partnership/limited liability company interests |
31,176,538 | 25,974,229 | ||||
Equity warrants/options |
1,199,562 | 1,212,003 | ||||
Total |
$ | 1,230,081,643 | $ | 1,110,960,558 | ||
At December 31, 2007, investments and cash and cash equivalents consisted of the following:
Cost | Fair Value | |||||
Cash and cash equivalents |
$ | 5,077,695 | $ | 5,077,695 | ||
Senior secured notes |
45,277,111 | 44,827,111 |
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Cost | Fair Value | |||||
Unsecured debt |
182,812,287 | 180,326,699 | ||||
Subordinated debt |
109,618,146 | 108,820,676 | ||||
Senior secured loans: |
||||||
First lien |
181,045,458 | 181,279,860 | ||||
Second/other priority lien |
560,910,136 | 531,957,917 | ||||
Total senior secured loans |
741,955,594 | 713,237,777 | ||||
Preferred stock |
33,347,902 | 12,535,000 | ||||
Common stock |
16,071,456 | 12,284,089 | ||||
Limited partnership/limited liability company interests |
30,676,539 | 30,682,889 | ||||
Equity warrants/options |
1,199,562 | 1,130,402 | ||||
Total |
$ | 1,166,036,292 | $ | 1,108,922,338 | ||
The industry composition of the portfolio at fair value at March 31, 2008 and December 31, 2007 was as follows:
Industry |
March 31, 2008 |
December 31, 2007 |
||||
Printing, Publishing and Media |
11.3 | % | 12.5 | % | ||
Other Services |
10.9 | 10.9 | ||||
Consumer Products |
10.0 | 10.4 | ||||
Business Services |
9.9 | 10.6 | ||||
Healthcare |
7.8 | 6.1 | ||||
Manufacturing |
7.7 | 8.1 | ||||
Beverage, Food and Tobacco |
5.3 | 6.8 | ||||
Retail |
4.6 | 4.8 | ||||
Transportation |
4.5 | 4.0 | ||||
Chemicals |
4.4 | 4.0 | ||||
Electronics |
4.3 | 4.9 | ||||
Metals |
4.3 | 1.4 | ||||
Entertainment and Leisure |
4.0 | 5.2 | ||||
Utilities |
3.1 | 3.1 | ||||
Finance |
2.7 | 1.5 | ||||
Containers and Packaging |
2.4 | 2.7 | ||||
Distribution |
2.3 | 2.3 | ||||
Building and Real Estate |
0.5 | 0.7 | ||||
Total |
100.0 | % | 100.0 | % | ||
6. Foreign Currency Transactions
Details of open forward foreign currency contracts at March 31, 2008 and at December 31, 2007, respectively, were as follows:
Foreign Currency |
Settlement Date | Amount and Transaction | US$ Value at Settlement Date |
US$ Value at March 31, 2008 |
Unrealized Appreciation/ (Depreciation) |
|||||||||
Euro |
April 23, 2008 | 11,400,000 Sold | $ | 16,712,400 | $ | 18,008,431 | $ | (1,296,031 | ) | |||||
Canadian dollar |
April 23, 2008 | 19,175,000 Sold | 18,622,290 | 18,665,262 | (42,972 | ) | ||||||||
Canadian dollar |
April 23, 2008 | 7,800 Sold | 7,593 | 7,592 | 1 | |||||||||
Total |
$ | 35,342,283 | $ | 36,681,285 | $ | (1,339,002 | ) | |||||||
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Foreign Currency |
Settlement Date | Amount and Transaction | US$ Value at Settlement Date |
US$ Value at December 31, 2007 |
Unrealized Appreciation/ (Depreciation) |
|||||||||
Euro |
January 23, 2008 | 11,000,000 Sold | $ | 15,485,448 | $ | 16,058,413 | $ | (572,965 | ) | |||||
Canadian dollar |
January 23, 2008 | 19,750,000 Sold | 20,045,552 | 19,924,531 | 121,021 | |||||||||
Total |
$ | 35,531,000 | $ | 35,982,944 | $ | (451,944 | ) | |||||||
7. Credit agreement and borrowings
In accordance with the 1940 Act, with certain limited exceptions, the Company is only permitted to borrow such that its asset coverage, as defined in the 1940 Act, is at least 200% after such borrowing. On December 28, 2007, the Company amended and restated its Senior Secured, Multi-Currency Credit Agreement (the Credit Agreement). Under the amended Credit Agreement, the lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $600 million outstanding, at any one time, consisting of $455 million in revolving loan commitments and $145 million in term loan commitments. Total revolving loan commitments reverted to $400 million on April 14, 2008. The Credit Agreement has a stated maturity date of December 6, 2010 and is secured by substantially all of the assets in the Companys portfolio, including cash and cash equivalents. The term loans under the facility mature on the termination date of the Credit Agreement, have been fully drawn and, once repaid, may not be reborrowed. Subject to certain exceptions, the interest rate payable under the facility is LIBOR plus 87.5 basis points with respect to revolving loans and LIBOR plus 150 basis points with respect to term loans. The Credit Agreement also includes an accordion feature that allows the Company to increase the size of the credit facility under certain circumstances to a maximum of $1 billion with respect to the revolving loans and $395 million with respect to the term loans. The Credit Agreement is used to supplement the Companys equity capital to make additional portfolio investments and for other general corporate purposes.
At March 31, 2008, the Company had $444,900,000 drawn on the credit facility, versus $381,300,000 at December 31, 2007. The weighted average annual interest cost for the three months ended March 31, 2008 and 2007 was 5.02% and 6.77%, respectively, exclusive of 0.175% in commitment fees and of other prepaid expenses related to establishing the credit facility.
The average debt outstanding on the credit facility during the three months ended March 31, 2008 and 2007 was $410,299,318 and $220,484,436, respectively. The maximum amounts borrowed during the three months ended March 31, 2008 and 2007 were $447,600,000 and $301,000,000, respectively. The remaining amount available under the facility was $155,100,000 at March 31, 2008.
At March 31, 2008, the Company was in compliance with all financial and operational covenants required by the Credit Agreement.
8. Commitments and contingencies
At December 31, 2007, the Company had a commitment outstanding to make an equity investment of up to $2,500,000 in an existing portfolio company. The Company had no such commitments outstanding at March 31, 2008.
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has had no prior claims or payments pursuant to such agreements. The Companys individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on managements experience, the Company expects the risk of loss to be remote.
9. Fair value of financial instruments
The carrying values of the Companys financial instruments approximate fair value. Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying value of the Companys credit facility payable approximates fair value because it bears interest at a variable rate, based on current market.
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For cash and cash equivalents, investments and forward foreign currency transactions, effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 defines fair value as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. SFAS 157 emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, 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 the Company. Unobservable inputs are inputs that reflect the Companys assumptions about the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances.
FAS 157 establishes a hierarchy that classifies these inputs into the three broad levels listed below:
Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement
In addition to using the above inputs in investment valuations, the Company continues to employ the valuation policy approved by its Board of Directors that is consistent with SFAS 157 (see Note 2). Consistent with this valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value.
The following table summarizes the inputs used as of March 31, 2008 in determining the fair values of the Companys cash and cash equivalents, foreign currency, investments and forward foreign currency transactions:
Valuation Inputs |
Cash and Cash Equivalents |
Foreign Currency |
Investments | Forward Foreign Currency Contracts |
|||||||||
Level 1 - Price quotations |
$ | 1,941,082 | $ | 508,556 | $ | | $ | | |||||
Level 2 - Significant other observable inputs |
| | 524,749,637 | (1,339,002 | ) | ||||||||
Level 3 - Significant unobservable inputs |
| | 578,789,707 | | |||||||||
Total Fair Value |
$ | 1,941,082 | $ | 508,556 | $ | 1,103,539,344 | $ | (1,339,002 | ) | ||||
The following is a reconciliation of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
Investments | ||||
Fair value at December 31, 2007 |
$ | 559,803,995 | ||
Amortization of premium/discountnet |
382,594 | |||
Net realized gain (loss) |
32,362 | |||
Net change in unrealized appreciation or depreciation |
(15,955,047 | ) | ||
Net purchases, sales or redemptions |
14,980,328 | |||
Net transfers in or out of Level 3 |
19,545,475 | |||
Fair value at March 31, 2008 |
$ | 578,789,707 | ||
10. Financial highlights
The following per share data and ratios have been derived from information provided in the financial statements. The following is a schedule of financial highlights for a common share outstanding during the three months ended March 31, 2008 and 2007.
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Three months ended March 31, 2008 |
Three months ended March 31, 2007 |
|||||||
Per Share Data: |
||||||||
Net asset value, beginning of period |
$ | 13.78 | $ | 14.93 | ||||
Net investment income |
0.44 | 0.36 | ||||||
Net realized and unrealized gain (loss) |
(1.19 | ) | 0.08 | |||||
Total from investment operations |
(0.75 | ) | 0.44 | |||||
Dividend distributions to stockholders from net investment income |
(0.43 | ) | (0.42 | ) | ||||
Net increase (decrease) in net assets |
(1.18 | ) | 0.02 | |||||
Net asset value, end of period |
$ | 12.60 | $ | 14.95 | ||||
Market price, end of period(1) |
$ | 11.94 | $ | | ||||
Total return based on market value(2)(3) |
(18.90 | )% | | |||||
Total return based on net asset value(2)(3) |
(5.15 | )% | 2.97 | % | ||||
Ratios / Supplemental Data: |
||||||||
Ratio of operating expenses to average net assets(4)(5) |
4.05 | % | 5.04 | % | ||||
Ratio of credit facility related expenses to average net assets(4) |
3.07 | % | 2.63 | % | ||||
Ratio of total expenses to average net assets(4)(5) |
7.12 | % | 7.67 | % | ||||
Ratio of net investment income to average net assets(4) |
13.23 | % | 2.40 | % | ||||
Net assets, end of period |
$ | 671,106,763 | $ | 598,671,614 | ||||
Average debt outstanding |
$ | 410,299,318 | $ | 220,484,436 | ||||
Weighted average shares outstanding |
52,830,053 | 38,501,302 | ||||||
Average debt per share(6) |
$ | 7.77 | $ | 5.73 | ||||
Portfolio turnover(3) |
3 | % | 2 | % |
(1) | The Companys common stock commenced trading on The NASDAQ Global Select Market on June 27, 2007. There was no established public trading market for the stock prior to that date. |
(2) | Total return was calculated based on the change in market value per share or net asset value per common share during the period, as indicated. Total return calculations take into account dividends and distributions, if any, reinvested in accordance with the Companys dividend reinvestment plan and do not reflect brokerage commissions. |
(3) | Not annualized. |
(4) | Annualized. |
(5) | For the three months ended March 31, 2008 and 2007, the ratio of operating expenses before management fee waiver to average net assets is 4.05% and 5.68%, respectively, and the ratio of total expenses before management fee waiver to average net assets is 7.12% and 8.31%, respectively. |
(6) | Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the period. |
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The information contained in this section should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
Overview
We were incorporated in Delaware on April 13, 2005 and were initially funded on July 25, 2005 via a private placement of our common stock. Our investment objective is to provide a combination of current income and capital appreciation. We intend to invest primarily in debt and equity securities of private U.S. middle-market companies.
We are externally managed and have elected to be regulated as a BDC under the 1940 Act. As a BDC, we are required to comply with certain regulatory requirements. For instance, we generally have to invest at least 70% of our total assets in qualifying assets, including securities of private U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.
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On July 2, 2007, we completed an initial public offering through which we sold an additional 10,000,000 shares of our common stock at a price of $16.00 per share and listed our shares on The NASDAQ Global Select Market (collectively, the Public Market Event).
Investments
Our level of investment activity can and does vary substantially from period to period depending on many factors, including 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 must 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 relevant SEC rules, the term eligible portfolio company includes all private companies and companies whose securities are not listed on a national securities exchange. These rules also permit us to include as qualifying assets certain follow-on investments in companies that were eligible portfolio companies at the time of initial investment but that no longer meet the definition.
The SEC has proposed for comment a rule that would include as eligible portfolio companies certain public companies that have listed their securities on a national securities exchange, as long as their public float and/or market capitalization is below a specified level. We will continue to monitor closely any developments with respect to the definition of an eligible portfolio company and intend to adjust our investment focus as needed to comply with and/or take advantage of the new rules, as well as any other regulatory, legislative, administrative or judicial actions in this area.
Revenues
We generate revenues primarily in the form of interest on the debt we hold, dividends on our equity interests and capital gains on the sale of warrants and other debt or equity interests that we acquire in portfolio companies. Our investments in fixed income instruments generally have an expected maturity of three to ten years, although we have no lower or upper constraint on maturity, and typically bear interest at a fixed or floating rate. Interest on our debt securities 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 instruments and preferred stock investments may defer payments of cash interest or dividends or pay interest or dividends in-kind. Any outstanding principal amount of our debt securities 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 and consulting fees.
Expenses
Our primary operating expenses include the payment of a base management fee and, depending on our operating results, an incentive management fee, expenses reimbursable under the management agreement, administration fees and the allocable portion of overhead under the administration agreement. The base management fee and incentive management fee compensate the Advisor for work in identifying, evaluating, negotiating, closing and monitoring our investments. Our management agreement with the Advisor provides that we will reimburse the Advisor for costs and expenses incurred by the Advisor for office space rental, office equipment and utilities allocable to the performance by the Advisor of its duties under the management agreement, as well as any costs and expenses incurred by the Advisor relating to any non-investment advisory, administrative or operating services provided by the Advisor to us. We bear all other costs and expenses of our operations and transactions, including those relating to:
| our organization; |
| calculating our net asset value (including the cost and expenses of any independent valuation firms); |
| expenses incurred by the Advisor payable to third parties in monitoring our investments and performing due diligence on prospective portfolio companies; |
| interest payable on debt, if any, incurred to finance our investments; |
| the costs of future offerings of common shares and other securities, if any; |
| the base management fee and any incentive management fee; |
| dividends and distributions on our preferred shares, if any, and common shares; |
32
| administration fees payable under the administration agreement; |
| fees payable to third parties relating to, or associated with, making investments; |
| transfer agent and custodial fees; |
| registration fees; |
| listing fees; |
| taxes; |
| independent director fees and expenses; |
| costs of preparing and filing reports or other documents with the SEC; |
| the costs of any reports, proxy statements or other notices to our stockholders, including printing costs; |
| our fidelity bond; |
| directors and officers/errors and omissions liability insurance, and any other insurance premiums; |
| indemnification payments; |
| direct costs and expenses of administration, including audit and legal costs; and |
| all other expenses reasonably incurred by us or the Administrator in connection with administering our business, such as the allocable portion of overhead under the administration agreement, including rent and other allocable portions of the cost of certain of our officers and their respective staffs. |
During the first year of our operations (through July 2006), the Advisor agreed to waive its right to receive one-half of the base management fee the Advisor would otherwise have been entitled to receive from us. Thereafter, the Advisor waived one-quarter of the amount of the base management fee the Advisor would otherwise have been entitled to receive from us. All of the fee waivers terminated upon completion of the Public Market Event.
Additionally, the Management Agreement provides that the Advisor or its affiliates may be entitled to an Incentive Fee under certain circumstances. The determination of the Incentive Fee will result in the Advisor or its affiliates receiving no Incentive Fee payments if returns to our stockholders do not meet an 8.0% annualized rate of return and will result in the Advisor or its affiliates receiving less than the full amount of the Incentive Fee percentage until returns to stockholders exceed an approximate 13.3% annualized rate of return. Annualized rate of return in this context is computed by reference to our net asset value and does not take into account changes in the market price of our common stock. The determination of the Incentive Fee is subject to any applicable limitations under the 1940 Act and the Investment Advisers Act of 1940.
Critical accounting policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Changes in the economic environment, financial markets and any other parameters used in determining such estimates could cause actual results to differ. Our critical accounting policies are further described in the notes to the financial statements.
Recently issued accounting pronouncements
In March 2008, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161), which is effective for fiscal years beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entitys results of operations and financial position. The Company is currently evaluating the impact of adopting SFAS 161 on its financial statements. At this time, the impact on the Companys financial statements has not been determined.
Within the context of these critical accounting policies, we are not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
Portfolio and investment activity
During the quarter ended March 31, 2008, we invested approximately $94.6 million across four new and four existing portfolio companies. The new investments consisted primarily of senior loans secured by second liens ($50.4
33
million, or 53% of the total) or first liens ($0.6 million, or 1%), unsecured or subordinated debt securities ($32.5 million, or 34%), senior secured notes ($8.0 million, or 9%) and equity securities ($3.0 million, or 3%). Additionally, we received proceeds from sales/repayments of principal of approximately $28.0 million during the quarter ended March 31, 2008.
At March 31, 2008, our net portfolio of $1.1 billion (at fair value) consisted of 62 portfolio companies and was invested 63% in senior secured loans, 28% in unsecured or subordinated debt securities, 5% in senior secured notes, 4% in equity investments and less than 1% in cash, cash equivalents and foreign currency. Our average portfolio company investment by value was approximately $17.8 million. Our largest portfolio company investment by value was approximately $50.1 million and our five largest portfolio company investments by value comprised approximately 20% of our portfolio at March 31, 2008. At December 31, 2007, our net portfolio of $1.1 billion (at fair value) consisted of 60 portfolio companies and was invested 64% in senior secured loans, 26% in unsecured or subordinated debt securities, 5% in equity investments, 4% in senior secured notes and approximately 1% in cash, cash equivalents and foreign currency. Our average portfolio company investment by value was approximately $18.3 million at December 31, 2007. Our largest portfolio company investment by value was approximately $44.9 million and our five largest portfolio company investments by value comprised approximately 20% of our portfolio at December 31, 2007.
Our weighted average yield of the debt and income producing equity securities in our portfolio was 11.5% at March 31, 2008 and 12.4% at December 31, 2007. The weighted average yields on our senior secured loans and other debt securities were 10.6% and 13.2%, respectively, at March 31, 2008, versus 11.9% and 13.3%, respectively, at December 31, 2007. Yields are computed using interest rates and dividend yields as of the balance sheet date and include amortization of loan origination and commitment fees, original issue discount and market premium or discount, weighted by the amortized cost of the respective investment. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, cash and cash equivalents.
At March 31, 2008, 53% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, CBA, the Federal Funds Rate or the Prime Rate, and 47% bore interest at fixed rates. At December 31, 2007, 60% of our debt investments bore interest based on floating rates and 40% bore interest at fixed rates.
The Advisor employs a grading system for our entire portfolio. The Advisor grades all loans on a scale of 1 to 4. This system is intended to reflect the performance of the borrowers business, the collateral coverage of the loans and other factors considered relevant. Generally, the Advisor assigns only one loan grade to each portfolio company for all loan investments in that portfolio company; however, the Advisor will assign multiple ratings when appropriate for different investments in one portfolio company. The following is a description of the conditions associated with each investment rating:
Grade 1: Investments in portfolio companies whose performance is substantially within the Advisors expectations and whose risk factors are neutral to favorable to those at the time of the original investment.
Grade 2: Investments in portfolio companies whose performance is below the Advisors expectations and that require closer monitoring; however, no loss of investment return (interest and/or dividends) or principal is expected.
Grade 3: Investments in portfolio companies whose performance is below the Advisors expectations and for which risk has increased materially since origination. Some loss of investment return is expected, but no loss of principal is expected. Companies graded 3 will generally be out of compliance with debt covenants and will be unlikely to make debt repayments on their original schedule.
Grade 4: Investments in portfolio companies whose performance is materially below the Advisors expectations where business trends have deteriorated and risk factors have increased substantially since the original investment. Investments graded 4 are those for which some loss of principal is expected.
The Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with our valuation process, the Advisor and our Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.31 at March 31, 2008. The following is a distribution of the investment ratings of our portfolio companies as of March 31, 2008 and December 31, 2007:
March 31, 2008 | December 31, 2007 | |||||
Grade 1 |
$ | 834,137,114 | $ | 910,545,131 | ||
Grade 2 |
234,338,900 | 154,212,434 | ||||
Grade 3 |
16,401,326 | 17,888,578 | ||||
Grade 4 |
24,142,136 | 21,198,500 | ||||
Total |
$ | 1,109,019,476 | $ | 1,103,844,643 | ||
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Results of operations
Operating results for the three months ended March 31, 2008 as compared to March 31, 2007
Operating income
Investment income totaled $35,694,517 and $25,052,230, respectively, for the three months ended March 31, 2008 and 2007, of which $22,711,015 and $18,361,445 were attributable to interest and fees on senior secured loans, $12,098,631 and $6,254,177 to interest earned on other debt securities, $875,634 and $260,477 to dividends from preferred equity securities and closed-end funds, $8,691 and $162,636 to interest earned on short-term investments and cash equivalents, and $546 and $13,495 to other income, respectively. The increase in operating income compared to the prior period reflects the growth of our portfolio as a result of the deployment of debt capital under our Credit Facility and equity capital from our initial public offering in July 2007. Total investments and borrowings increased to $1,103,539,344 and $444,900,000, respectively, at March 31, 2008, compared to $954,974,505 and $300,000,000 at March 31, 2007.
Expenses
Net expenses for the three months ended March 31, 2008 and 2007 were $12,480,510 and $11,037,857, respectively, which consisted of $5,566,860 and $2,769,806 in base management fees (net of base management fee waivers of $0 and $923,269, respectively), $0 and $3,692,649 in incentive management fees owed to the Advisor, $293,435 and $218,703 in administrative services expenses, $598,330 and $146,591 in professional fees, $94,500 and $63,505 in director fees, $274,898 and $196,093 in Advisor expenses, $137,583 and $40,931 in insurance expenses, $5,214,057 and $3,714,805 in interest expense and fees related to the Credit Facility, $166,195 and $62,705 in amortization of debt issuance costs, and $134,652 and $132,069 in other expenses, respectively. The increase in expenses compared to the prior period reflects the growth of our portfolio and the incurrence of borrowing costs under our Credit Facility. During the three months ended March 31, 2008, the average borrowings under our Credit Facility increased to $410,299,318 from $220,484,436 during the corresponding period in 2007. General and administrative expenses increased following the completion of the Public Market Event due to higher costs associated with being a publicly-traded company.
Net investment income
Net investment income was $23,214,007 and $14,014,373, respectively, for the three months ended March 31, 2008 and 2007 (which amounts would have been $23,214,007 and $13,091,104, respectively, without base management fee waivers). The increase was primarily due to portfolio growth and the benefits of leverage from increased borrowings under our Credit Facility.
Net realized gain or loss
Net realized gain of $205,515 for the three months ended March 31, 2008 was the result of $28,363 in net gains realized from the disposition of investments and $177,152 in net gains realized on foreign currency transactions during the period. For the three months ended March 31, 2007, net realized loss was $192,875.
Net unrealized appreciation or depreciation
For the three months ended March 31, 2008 and 2007, the change in net unrealized appreciation or depreciation was an increase in net unrealized depreciation of $(62,893,036) and an increase in net unrealized appreciation of $3,206,782, respectively. For the three months ended March 31, 2008, the increase in net unrealized depreciation was comprised of an increase in net unrealized depreciation on investments of $(62,007,133) and an increase in net unrealized depreciation on foreign currency translation of $(885,903). For the three months ended March 31, 2007, the increase in net unrealized appreciation was comprised of an increase in net unrealized appreciation on investments of $3,177,312 and an decrease in net unrealized depreciation on foreign currency translation of $29,470. The net change in unrealized appreciation or depreciation was primarily a result of declines in market quotations for the quoted investments in our portfolio, as well as reductions in the valuations of several unquoted investments, including Tygem Holdings, Inc. We believe the declines in valuations of our investments are due primarily to instability of the credit markets and changes in the current interest rate environment. The unrealized depreciation on investments does not have an impact on our current ability to pay distributions to stockholders.
Net increase (decrease) in net assets resulting from operations
The net (decrease) increase in net assets resulting from operations for the three months ended March 31, 2008 and 2007 was $(39,473,514), and $17,028,280, respectively. As compared to the prior period, the decrease primarily reflects the increase in net unrealized depreciation on investments.
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Financial condition, liquidity and capital resources
During the three months ended March 31, 2008, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities, and from sales of selected portfolio company investments or repayments of principal, as well as from dividends earned on preferred equity investments.
Our primary uses of funds from operations during the three months ended March 31, 2008 consisted of investments in portfolio companies (net of sales and repayments) of $66,573,000, payment of base management fees of $5,566,860 and payment of interest and fees incurred on Credit Facility borrowings of $5,214,057.
Our operating activities resulted in a net use of cash of $45,814,415 for the three months ended March 31, 2008.
On December 28, 2007, we amended and restated our senior secured, multi-currency Credit Facility to provide us with $600,000,000 in total availability, consisting of $455,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. Total revolving loan commitments reverted to $400,000,000 on April 14, 2008. Subject to certain conditions, we have the ability in the future to seek additional commitments from new and existing lenders up to an aggregate amount not to exceed $1,000,000,000 with respect to revolving loans and $395,000,000 with respect to term loans. The interest rate applicable to borrowings under the Credit Facility is LIBOR plus 87.5 basis points with respect to revolving loans and LIBOR plus 150 basis points with respect to term loans. The term loans mature on December 6, 2010, the termination date of the Credit Facility, and term loans, once repaid, may not be reborrowed. The Credit Facility will continue to be used to supplement our equity capital to make additional portfolio investments and for general corporate purposes. At March 31, 2008, we had approximately $445 million drawn and outstanding under the Credit Facility, with $155 million available to us.
Our financing activities resulted in a net inflow of cash of $42,677,802 for the three months ended March 31, 2008, primarily from net borrowings under our Credit Facility.
At March 31, 2008, we had $1,941,082 in cash and cash equivalents. In addition, we had $508,556 in foreign currency at that date.
On April 24, 2008, at our 2008 Annual Meeting of Stockholders, the holders of our common stock approved a proposal that would enable us, in one or more public or private offerings and with approval of our Board of Directors and subject to certain other conditions, to sell or otherwise issue shares of our common stock at a price below its then current net asset value. The authorization is effective for a period expiring on the earlier of April 24, 2009 or the date of our 2009 Annual Meeting of Stockholders, which is expected to be held in May 2009. Our Board of Directors has adopted a policy to limit our ability to sell common stock at a price below net asset value to circumstances in which the price per share of our common stock is equal to 95% or greater of its net asset value per share in effect on the date any such sale is priced.
On May 7, 2008, our Board of Directors declared a dividend of $0.43 per share, payable on June 30, 2008 to stockholders of record at the close of business on June 16, 2008.
Contractual Obligations
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under our Credit Facility at March 31, 2008 is as follows:
Payments Due By Period (dollars in millions) | |||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | |||||||||||
Credit Facility Payable(1) |
$ | 445 | $ | | $ | 445 | $ | | $ | |
(1) | At March 31, 2008, $155 million remained unused under our Credit Facility. |
Off-Balance sheet financing
At December 31, 2007, our only off-balance sheet contractual obligation or arrangement consisted of a commitment to make an equity investment of up to $2.5 million in an existing portfolio company. We had no off-balance sheet contractual obligations or arrangements at March 31, 2008.
Dividends
We intend to distribute quarterly dividends to our stockholders. Our quarterly dividends are determined by our Board of Directors. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:
Dividend Amount Per Share Outstanding |
Record Date |
Pay Date | ||
$0.20 |
December 31, 2005 | January 31, 2006 | ||
$0.20 |
March 15, 2006 | March 31, 2006 | ||
$0.23 |
June 15, 2006 | June 30, 2006 | ||
$0.30 |
September 15, 2006 | September 29, 2006 | ||
$0.42 |
December 31, 2006 | January 31, 2007 | ||
$0.42 |
March 15, 2007 | March 30, 2007 |
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Dividend Amount Per Share Outstanding |
Record Date |
Pay Date | ||
$0.42 |
May 15, 2007 | May 31, 2007 | ||
$0.42 |
September 14, 2007 | September 28, 2007 | ||
$0.43 |
December 14, 2007 | December 31, 2007 | ||
$0.43 |
March 17, 2008 | March 31, 2008 | ||
$0.43 |
June 16, 2008 | June 30, 2008 |
Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.
The Company has qualified and elected and intends to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, has made and intends to continue to make the requisite distributions to its stockholders which will relieve the Company from federal income and excise taxes. Therefore, no provision has been recorded for federal income or excise taxes. The Company, at its discretion, may carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. The Company will accrue excise tax on estimated excess taxable income as required.
In order to qualify for favorable tax treatment as a RIC, the Company is required to distribute annually to its stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, the Company must distribute annually at least 98% of its income (both ordinary income and net capital gains).
We maintain an opt out dividend reinvestment plan for our common stockholders. As a result, if we declare a dividend, stockholders cash dividends will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so as to receive cash dividends.
With respect to the dividends paid to stockholders, income from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies in which the Advisor on our behalf provides significant services to the portfolio company in connection with making the investment is treated as taxable income and accordingly, distributed to stockholders. For the three months ended March 31, 2008 and 2007, these fees totaled $837,500 and $1,293,750, respectively. We anticipate earning additional upfront fees in the future and such fees may cause our taxable income to exceed our GAAP income, although the differences are expected to be temporary in nature.
Item 3. | Quantitative and Qualitative Disclosure about Market Risk |
We are subject to financial market risks, including changes in interest rates. At March 31, 2008, 53% of our debt investments bore interest based on floating rates, such as LIBOR, EURIBOR, the Federal Funds Rate or the Prime Rate. The interest rates on such investments generally reset by reference to the current market index after one to six months.
To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our March 31, 2008 balance sheet and assuming no changes in our investment structure. Net asset value is analyzed using the assumptions that interest rates, as defined by the LIBOR and U.S. Treasury yield curves, increase or decrease and that the yield curves of the rate shocks will be parallel to each other. Under this analysis, an instantaneous 100 basis point increase in LIBOR and U.S. Treasury yields would cause a decline of approximately $12,300,000, or $0.23 per share, in the value of our net assets at March 31, 2008 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $12,300,000, or $0.23 per share, in the value of our net assets on that date.
While hedging activities may help to insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of lower interest rates with respect to our portfolio of investments. During the three months ended March 31, 2008 and 2007, we did not engage in any interest rate hedging activity.
We may enter into forward foreign currency contracts from time to time to facilitate settlement of purchases and sales of investments denominated in foreign currencies or to help mitigate the impact that an adverse change in foreign exchange rates would have on the value of our investments denominated in foreign currencies. A forward foreign currency contract is a commitment to purchase or sell a foreign currency at a future date (usually the security transaction settlement date) at a negotiated forward rate. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. Details of open forward foreign currency contracts at March 31, 2008 and at December 31, 2007, respectively, were as follows:
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Foreign Currency |
Settlement Date | Amount and Transaction | US$ Value at Settlement Date |
US$ Value at March 31, 2008 |
Unrealized Appreciation/ (Depreciation) |
|||||||||
Euro |
April 23, 2008 | 11,400,000 Sold | $ | 16,712,400 | $ | 18,008,431 | $ | (1,296,031 | ) | |||||
Canadian dollar |
April 23, 2008 | 19,175,000 Sold | 18,622,290 | 18,665,262 | (42,972 | ) | ||||||||
Canadian dollar |
April 23, 2008 | 7,800 Sold | 7,593 | 7,592 | 1 | |||||||||
Total |
$ | 35,342,283 | $ | 36,681,285 | $ | (1,339,002 | ) | |||||||
Foreign Currency |
Settlement Date | Amount and Transaction | US$ Value at Settlement Date |
US$ Value at December 31, 2007 |
Unrealized Appreciation/ (Depreciation) |
|||||||||
Euro |
January 23, 2008 | 11,000,000 Sold | $ | 15,485,448 | $ | 16,058,413 | $ | (572,965 | ) | |||||
Canadian dollar |
January 23, 2008 | 19,750,000 Sold | 20,045,552 | 19,924,531 | 121,021 | |||||||||
Total |
$ | 35,531,000 | $ | 35,982,944 | $ | (451,944 | ) | |||||||
Item 4. | Controls and Procedures |
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our current disclosure controls and procedures are effective in timely alerting them to material information relating to us that is required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. | Legal Proceedings |
We and the Advisor are not currently subject to any material legal proceedings.
Item 1A. | Risk Factors |
There have been no material changes from the risk factors previously disclosed in our most recent Form 10-K filing.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Issuer purchases of equity securities
The following table provides information regarding open-market purchases of our common stock by the Advisor for each month in the three month period ended March 31, 2008.
Period |
Average Price Paid per Share |
Total Number of Shares Purchased |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
January 2008 |
| | | | |||||
February 2008 |
| | | | |||||
March 2008 |
$ | 11.84 | 103,735 | | | ||||
Total |
$ | 11.84 | 103,735 | | | ||||
In November 2007, our Board of Directors authorized the purchase from time to time in the open market of an indeterminate number of shares of our common stock by the Advisor, in its discretion, subject to compliance with our and the Advisors applicable policies and requirements of law. The above purchases were made in accordance with such policies and Rule 10b-18 under the Securities Exchange Act of 1934.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Submission of Matters to a Vote of Security Holders |
On April 24, 2008, the Company held its 2008 Annual Meeting of Stockholders in New York, New York for the purpose of considering and voting upon the election of the Class I Director, to approve a new investment management agreement for the Company upon a proposed change of control of the Advisor, to approve a proposal to authorize flexibility for the Company, with approval of its Board of Directors, to sell shares of its common stock at a price below the Companys then current net asset value per share and to ratify the selection of an independent registered public accounting firm. Votes were cast as follows:
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Class I Director nominee | For | Withheld | ||||||
Jerrold B. Harris |
45,172,850 | 61,876 | ||||||
Proposal | For | Against | Abstain | Broker Non-Vote | ||||
To approve a new investment management agreement for the Company upon a proposed change of control of the Advisor |
41,550,419 | 155,228 | 6,945 | 3,522,134 | ||||
To approve a proposal to authorize flexibility for the Company, with approval of its Board of Directors, to sell shares of its common stock at a price below the Companys then current net asset value per share |
39,600,082 | 2,089,814 | 22,696 | 3,522,134 | ||||
Ratify the selection of Deloitte & Touche LLP |
45,200,582 | 26,636 | 7,509 | |
Item 5. | Other Information |
None.
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Item 6. | Exhibits. |
(a) | Exhibits. |
31.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32 | Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
40
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BLACKROCK KELSO CAPITAL CORPORATION | ||||
Date: May 12, 2008 | By: | /s/ James R. Maher | ||
James R. Maher | ||||
Chief Executive Officer | ||||
Date: May 12, 2008 | By: | /s/ Frank D. Gordon | ||
Frank D. Gordon | ||||
Chief Financial Officer |
41
EXHIBIT 31.1
CEO CERTIFICATION
I, James R. Maher, Chairman of the Board and Chief Executive Officer of BlackRock Kelso Capital Corporation, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of BlackRock Kelso Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 12, 2008 | By: | /s/ James R. Maher | ||
James R. Maher | ||||
Chairman of the Board and Chief Executive Officer |
EXHIBIT 31.2
CFO CERTIFICATION
I, Frank D. Gordon, Chief Financial Officer and Treasurer of BlackRock Kelso Capital Corporation, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of BlackRock Kelso Capital Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; and
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; and
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 12, 2008 | By: | /s/ Frank D. Gordon | ||
Frank D. Gordon | ||||
Chief Financial Officer and Treasurer |
EXHIBIT 32
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of BlackRock Kelso Capital Corporation (the Company) for the quarter ended March 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the Report), James R. Maher, as Chief Executive Officer of the Company, and Frank D. Gordon, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ James R. Maher | ||
Name: | James R. Maher | |
Title: | Chief Executive Officer | |
Date: | May 12, 2008 | |
/s/ Frank D. Gordon | ||
Name: | Frank D. Gordon | |
Title: | Chief Financial Officer | |
Date: | May 12, 2008 |