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, 2010
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, NY | 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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 þ Non-Accelerated filer ¨ (Do not check if a smaller reporting company)
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 þ
The number of shares of the Registrants common stock, $.001 par value per share, outstanding at May 5, 2010 was 56,742,074.
BLACKROCK KELSO CAPITAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010
Table of Contents
INDEX |
PAGE NO. | |||
PART I. |
FINANCIAL INFORMATION |
|||
Item 1. |
||||
Statements of Assets and Liabilities as of March 31, 2010 and December 31, 2009 (unaudited) |
3 | |||
Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited) |
4 | |||
Statements of Changes in Net Assets for the three months ended March 31, 2010 and 2009 (unaudited) |
5 | |||
Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited) |
6 | |||
Schedules of Investments as of March 31, 2010 and December 31, 2009 (unaudited) |
7 | |||
21 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
32 | ||
Item 3. |
40 | |||
Item 4. |
40 | |||
PART II. |
OTHER INFORMATION |
|||
Item 1. |
41 | |||
Item 1A. |
41 | |||
Item 2. |
41 | |||
Item 3. |
41 | |||
Item 4. |
41 | |||
Item 5. |
41 | |||
Item 6. |
42 | |||
43 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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.
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, including our ability to obtain continued financing on favorable terms; |
| 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. |
2
PART 1. FINANCIAL INFORMATION
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 (Unaudited)
March 31, 2010 |
December 31, 2009 |
|||||||
Assets: |
||||||||
Investments at fair value: |
||||||||
Non-controlled, non-affiliated investments (amortized cost of $866,305,972 and $963,463,604) |
$ | 732,482,462 | $ | 810,035,780 | ||||
Non-controlled, affiliated investments (amortized cost of $62,823,476 and $63,942,195) |
59,471,860 | 26,793,989 | ||||||
Controlled investments (amortized cost of $28,232,611 and $27,414,204) |
11,374,816 | 9,912,276 | ||||||
Total investments at fair value (amortized cost of $957,362,059 and $1,054,820,003) |
803,329,138 | 846,742,045 | ||||||
Cash and cash equivalents |
6,547,799 | 5,048,136 | ||||||
Cash denominated in foreign currency (cost of $675,981 and $759,760) |
703,828 | 759,765 | ||||||
Unrealized appreciation on forward foreign currency contracts |
| 203,998 | ||||||
Interest receivable |
19,118,836 | 18,441,527 | ||||||
Dividends receivable |
7,409,627 | 6,620,903 | ||||||
Prepaid expenses and other assets |
1,423,336 | 1,710,105 | ||||||
Total Assets |
$ | 838,532,564 | $ | 879,526,479 | ||||
Liabilities: |
||||||||
Payable for investments purchased |
$ | 4,667,027 | $ | 557,483 | ||||
Unrealized depreciation on forward foreign currency contracts |
1,288,817 | | ||||||
Credit facility payable |
253,500,000 | 296,000,000 | ||||||
Interest payable on credit facility |
167,028 | 959,458 | ||||||
Dividend distributions payable |
18,112,395 | 18,072,063 | ||||||
Base management fees payable |
4,322,471 | 4,547,129 | ||||||
Incentive management fees payable |
2,312,553 | 16,818,602 | ||||||
Accrued administrative services |
271,563 | 201,728 | ||||||
Other accrued expenses and payables |
937,143 | 2,807,254 | ||||||
Total Liabilities |
285,578,997 | 339,963,717 | ||||||
Net Assets: |
||||||||
Common stock, par value $.001 per share, 100,000,000 common shares authorized, 57,562,908 and 57,436,875 issued and 56,601,229 and 56,475,196 outstanding |
57,563 | 57,437 | ||||||
Paid-in capital in excess of par |
827,637,418 | 826,617,395 | ||||||
Undistributed net investment income |
21,616,819 | 19,463,949 | ||||||
Accumulated net realized loss |
(135,642,895 | ) | (93,279,572 | ) | ||||
Net unrealized depreciation |
(155,289,438 | ) | (207,870,547 | ) | ||||
Treasury stock at cost, 961,679 and 961,679 shares held |
(5,425,900 | ) | (5,425,900 | ) | ||||
Total Net Assets |
552,953,567 | 539,562,762 | ||||||
Total Liabilities and Net Assets |
$ | 838,532,564 | $ | 879,526,479 | ||||
Net Asset Value Per Share |
$ | 9.77 | $ | 9.55 |
The accompanying notes are an integral part of these financial statements.
3
BlackRock Kelso Capital Corporation
Statements of Operations (Unaudited)
Three months ended March 31, 2010 |
Three months ended March 31, 2009 |
|||||||
Investment Income: |
||||||||
From non-controlled, non-affiliated investments: |
||||||||
Interest |
$ | 25,313,012 | $ | 30,336,034 | ||||
Dividends |
503,645 | 505,209 | ||||||
From non-controlled, affiliated investments: |
||||||||
Interest |
1,460,708 | 481,385 | ||||||
Dividends |
302,163 | 273,207 | ||||||
From controlled investments: |
||||||||
Interest |
219,571 | 215,465 | ||||||
Total investment income |
27,799,099 | 31,811,300 | ||||||
Expenses: |
||||||||
Base management fees |
4,322,471 | 4,748,218 | ||||||
Incentive management fees |
493,951 | | ||||||
Interest and credit facility fees |
1,122,254 | 1,836,389 | ||||||
Investment advisor expenses |
398,664 | 346,794 | ||||||
Administrative services |
257,723 | 229,108 | ||||||
Professional fees |
203,266 | 232,050 | ||||||
Amortization of debt issuance costs |
168,292 | 168,292 | ||||||
Insurance |
152,408 | 129,361 | ||||||
Director fees |
95,837 | 95,292 | ||||||
Other |
318,968 | 274,414 | ||||||
Net expenses |
7,533,834 | 8,059,918 | ||||||
Net Investment Income |
20,265,265 | 23,751,382 | ||||||
Realized and Unrealized Gain (Loss): |
||||||||
Net realized gain (loss): |
||||||||
Non-controlled, non-affiliated investments |
(6,695,076 | ) | 4,549 | |||||
Non-controlled, affiliated investments |
(36,221,865 | ) | 12,240 | |||||
Controlled investments |
1,881 | | ||||||
Foreign currency |
551,737 | 2,111,539 | ||||||
Net realized gain (loss) |
(42,363,323 | ) | 2,128,328 | |||||
Net change in unrealized appreciation or depreciation on: |
||||||||
Non-controlled, non-affiliated investments |
15,587,411 | (23,371,679 | ) | |||||
Non-controlled, affiliated investments |
37,813,494 | (4,284,665 | ) | |||||
Controlled investments |
644,132 | (1,602,183 | ) | |||||
Foreign currency translation |
(1,463,928 | ) | (688,253 | ) | ||||
Net change in unrealized appreciation or depreciation |
52,581,109 | (29,946,780 | ) | |||||
Net realized and unrealized gain (loss) |
10,217,786 | (27,818,452 | ) | |||||
Net Increase (Decrease) in Net Assets Resulting from Operations |
$ | 30,483,051 | $ | (4,067,070 | ) | |||
Net Investment Income Per Share |
$ | 0.36 | $ | 0.43 | ||||
Earnings (Loss) Per Share |
$ | 0.54 | $ | (0.07 | ) | |||
Basic and Diluted Weighted-Average Shares Outstanding |
56,597,028 | 55,242,972 | ||||||
Dividends Declared Per Share |
$ | 0.32 | $ | 0.16 |
The accompanying notes are an integral part of these financial statements.
4
BlackRock Kelso Capital Corporation
Statements of Changes in Net Assets (Unaudited)
Three months ended March 31, 2010 |
Three
months ended March 31, 2009 |
|||||||
Net Increase (Decrease) in Net Assets Resulting from Operations: |
||||||||
Net investment income |
$ | 20,265,265 | $ | 23,751,382 | ||||
Net realized gain (loss) |
(42,363,323 | ) | 2,128,328 | |||||
Net change in unrealized appreciation or depreciation |
52,581,109 | (29,946,780 | ) | |||||
Net increase (decrease) in net assets resulting from operations |
30,483,051 | (4,067,070 | ) | |||||
Dividend Distributions to Stockholders from: |
||||||||
Net investment income |
(18,112,395 | ) | (8,831,305 | ) | ||||
Capital Share Transactions: |
||||||||
Reinvestment of dividends |
1,020,149 | | ||||||
Purchases of treasury stock |
| (1,877,658 | ) | |||||
Net increase (decrease) in net assets resulting from capital share transactions |
1,020,149 | (1,877,658 | ) | |||||
Total Increase (Decrease) in Net Assets |
13,390,805 | (14,776,033 | ) | |||||
Net assets at beginning of period |
539,562,762 | 510,295,501 | ||||||
Net assets at end of period |
$ | 552,953,567 | $ | 495,519,468 | ||||
Capital Share Activity: |
||||||||
Shares issued from reinvestment of dividends |
126,033 | | ||||||
Purchases of treasury stock |
| (501,364 | ) | |||||
Total increase (decrease) in shares |
126,033 | (501,364 | ) | |||||
Undistributed net investment income at end of period |
$ | 21,616,819 | $ | 18,775,093 |
The accompanying notes are an integral part of these financial statements.
5
BlackRock Kelso Capital Corporation
Statements of Cash Flows (Unaudited)
Three
months ended March 31, 2010 |
Three
months ended March 31, 2009 |
|||||||
Operating Activities: |
||||||||
Net increase (decrease) in net assets resulting from operations |
$ | 30,483,051 | $ | (4,067,070 | ) | |||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by operating activities: |
||||||||
Purchases of investments |
(16,441,543 | ) | (15,273,560 | ) | ||||
Sales of foreign currencynet |
543,428 | 2,153,523 | ||||||
Proceeds from sales/repayments of investments |
72,676,277 | 720,366 | ||||||
Net change in unrealized appreciation or depreciation on investments |
(54,045,037 | ) | 29,258,528 | |||||
Net change in unrealized appreciation or depreciation on foreign currency translation |
1,463,928 | 688,253 | ||||||
Net realized loss (gain) on investments |
42,915,060 | (16,789 | ) | |||||
Net realized loss (gain) on foreign currency |
(551,737 | ) | (2,111,539 | ) | ||||
Amortization of premium/discountnet |
(1,682,496 | ) | (845,709 | ) | ||||
Amortization of debt issuance costs |
168,292 | 168,292 | ||||||
Decrease (increase) in interest receivable |
(677,309 | ) | 2,306,065 | |||||
Increase in dividends receivable |
(788,724 | ) | (648,217 | ) | ||||
Decrease in prepaid expenses and other assets |
118,477 | 146,522 | ||||||
Increase in payable for investments purchased |
4,109,544 | 433,472 | ||||||
Decrease in interest payable on credit facility |
(792,430 | ) | (391,729 | ) | ||||
Decrease in base management fees payable |
(224,658 | ) | (976,811 | ) | ||||
Decrease in incentive management fees payable |
(14,506,049 | ) | | |||||
Increase in accrued administrative services payable |
69,835 | 74,825 | ||||||
Decrease in other accrued expenses and payables |
(1,870,111 | ) | (526,281 | ) | ||||
Net cash provided by operating activities |
60,967,798 | 11,092,141 | ||||||
Financing Activities: |
||||||||
Dividend distributions paid |
(17,051,914 | ) | (19,463,166 | ) | ||||
Borrowings under credit facility |
44,100,000 | 14,000,000 | ||||||
Repayments under credit facility |
(86,600,000 | ) | (18,500,000 | ) | ||||
Purchases of treasury stock |
| (1,287,672 | ) | |||||
Net cash used in financing activities |
(59,551,914 | ) | (25,250,838 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
27,842 | 3,132 | ||||||
Net increase (decrease) in cash |
1,443,726 | (14,155,565 | ) | |||||
Cash and cash equivalents, beginning of period |
5,807,901 | 15,786,271 | ||||||
Cash and cash equivalents, end of period |
$ | 7,251,627 | $ | 1,630,706 | ||||
Supplemental disclosure of cash flow information and non-cash financing activities: |
||||||||
Cash paid during period for: |
||||||||
Interest |
$ | 1,773,427 | $ | 2,164,001 | ||||
Taxes |
$ | 1,048,914 | $ | 454,007 | ||||
Dividend distributions reinvested |
$ | 1,020,149 | $ | | ||||
Unsettled treasury stock purchases |
$ | | $ | 589,986 |
The accompanying notes are an integral part of these financial statements.
6
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)
March 31, 2010
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value(b) | |||||||
Senior Secured Notes8.7% |
|||||||||||
AGY Holding Corp., Second Lien, 11.00%, 11/15/14 |
Glass Yarns/Fibers | $ | 23,500,000 | $ | 23,146,031 | $ | 19,881,000 | ||||
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13 |
Food Service Equipment |
31,503,017 | 31,503,017 | 28,384,219 | |||||||
Total Senior Secured Notes |
54,649,048 | 48,265,219 | |||||||||
Unsecured Debt13.5% |
|||||||||||
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13 |
Marketing Services |
59,123,802 | 59,123,802 | 59,123,802 | |||||||
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15 |
Waste Management Equipment | 44,417,277 | 44,417,277 | 10,349,226 | |||||||
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(c) |
Financial Services |
11,632,250 | 11,632,250 | 3,547,836 | |||||||
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(c) |
Financial Services |
8,073,638 | 7,771,035 | 1,808,495 | |||||||
Total Unsecured Debt |
122,944,364 | 74,829,359 | |||||||||
Subordinated Debt24.7% |
|||||||||||
A & A Manufacturing Co., Inc., 16.00% (14.00% cash, 2.00% PIK), 4/2/14 |
Protective Enclosures |
19,639,954 | 19,639,954 | 15,535,203 | |||||||
Conney Safety Products, LLC, 16.00%, 10/1/14(d) |
Safety Products |
30,582,734 | 29,142,598 | 29,053,597 | |||||||
DynaVox Systems LLC, 15.00%, 6/23/15 |
Augmentative Communication Products |
25,000,000 | 25,000,000 | 26,250,000 | |||||||
Mattress Giant Corporation, 11.00% PIK, 12/31/12(d) |
Bedding Retail |
5,902,111 | 2,944,066 | 2,059,837 | |||||||
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple |
Information Services |
8,000,000 | 8,055,872 | 7,336,000 | |||||||
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15 |
Financial Services |
15,366,867 | 15,366,867 | 15,628,104 | |||||||
PGA Holdings, Inc., 12.50%, 3/12/16 |
Healthcare Services |
5,000,000 | 4,926,064 | 5,100,000 | |||||||
Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12 |
Security Services |
10,888,847 | 10,888,847 | 10,671,070 | |||||||
Tri-anim Health Services, Inc. et al., 14.00% (12.00% cash, 2.00% PIK), 6/4/15 |
Healthcare Products |
15,021,667 | 15,021,667 | 15,021,667 | |||||||
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 | 7,000,000 | |||||||
Wastequip, Inc., 12.50% (10.00% cash, 2.50% PIK), 2/5/15 |
Waste Management Equipment | 7,947,596 | 7,947,596 | 3,123,405 | |||||||
Total Subordinated Debt |
145,933,531 | 136,778,883 | |||||||||
The accompanying notes are an integral part of these financial statements.
7
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2010
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value(b) |
|||||||||
Senior Secured Loans88.6%(e) |
|||||||||||||
Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13 |
Publishing | $ | 4,083,128 | $ | 2,878,963 | $ | 2,129,616 | ||||||
Al Solutions, Inc., First Lien, 10.00%, 6/28/13(f) |
Metals | 142,500 | 141,979 | 142,500 | |||||||||
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15 |
HVAC/ Plumbing Services |
41,421,176 | 41,421,176 | 41,835,388 | |||||||||
American Safety Razor Company, LLC, Second Lien, 6.50% (LIBOR + 6.25%), 1/30/14 |
Consumer Products |
10,000,000 | 10,000,000 | 8,180,000 | |||||||||
American SportWorks LLC, Second Lien, 20.00%, |
Utility Vehicles |
13,403,274 | 13,403,274 | 4,146,505 | |||||||||
AmQuip Crane Rental LLC, Second Lien, 6.03% (LIBOR + 5.75%), 6/29/14 |
Construction Equipment |
24,089,541 | 22,367,456 | 22,355,094 | |||||||||
Applied Tech Products Corp. et al., Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10(g) |
Plastic Packaging |
731,669 | 731,027 | 277,258 | |||||||||
Arclin US Holdings Inc., Second Lien, 7.76% (LIBOR + 6.00%), 1/15/15(h) |
Chemicals | 1,889,889 | 1,172,034 | 1,825,633 | |||||||||
Bankruptcy Management Solutions, Inc., Second Lien, 6.50% (LIBOR + 6.25%), 7/31/13 |
Financial Services |
43,328,636 | 27,444,527 | 30,806,660 | |||||||||
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK), 6/29/12(h) |
Discount Stores |
13,507,706 | (i) | 13,135,167 | 13,313,988 | ||||||||
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(h) |
Discount Stores |
18,567,294 | (i) | 17,397,877 | 18,301,014 | ||||||||
Berlin Packaging L.L.C., Second Lien, 6.76% (LIBOR + 6.50%), 8/17/15 |
Rigid Packaging |
24,000,000 | 23,515,062 | 24,000,000 | |||||||||
Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11 |
Heating and Oil Services |
30,000,000 | 30,000,000 | 30,000,000 | |||||||||
Custom Direct, Inc. et al., Second Lien, 6.31% (LIBOR + 6.00%), 12/31/14 |
Printing | 10,000,000 | 10,000,000 | 9,840,000 | |||||||||
Electrical Components International, Inc., First Lien, 9.25% (Base Rate + 6.00%), 5/1/14 |
Electronics | 2,974,210 | 2,120,372 | 2,379,368 | |||||||||
Electrical Components International, Inc., First Lien DIP Loan, 8.50% (LIBOR + 6.50%), 9/30/10 |
Electronics | 1,375,000 | 1,375,000 | 1,375,000 | |||||||||
Electrical Components International, Inc., Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14(g) |
Electronics | 26,000,000 | 23,068,081 | 5,538,000 | |||||||||
Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13 |
Party Rentals |
3,194,042 | 3,194,042 | 2,587,174 | |||||||||
Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12 |
Medical Devices |
35,823,056 | 35,823,056 | 9,651,000 | |||||||||
Facet Technologies, LLC, Guaranty(j) |
Medical Devices |
| | (442,000 | ) |
The accompanying notes are an integral part of these financial statements.
8
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2010
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value(b) | |||||||
Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(f) |
Personal Fitness |
$ | 7,057,672 | $ | 7,057,672 | $ | 5,984,906 | ||||
Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14 |
Automobile Repair |
3,325,862 | 3,324,531 | 3,116,333 | |||||||
Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14 |
Automobile Repair | 2,270,171 | 2,270,004 | 2,022,722 | |||||||
HIT Entertainment, Inc., Second Lien, 5.75% (LIBOR + 5.50%), 2/26/13(h) |
Entertainment | 1,000,000 | 1,000,000 | 612,500 | |||||||
InterMedia Outdoors, Inc., Second Lien, 7.04% (LIBOR + 6.75%), 1/31/14 |
Printing/ Publishing |
10,000,000 | 10,000,000 | 8,310,000 | |||||||
Isola USA Corp., First Lien, 13.00% (Base Rate + 9.75%), 12/18/12 |
Electronics | 10,901,316 | 10,077,074 | 10,465,263 | |||||||
Isola USA Corp., Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13 |
Electronics | 25,000,000 | 25,000,000 | 22,800,000 | |||||||
LJVH Holdings Inc., Second Lien, 5.79% (LIBOR + 5.50%), |
Specialty Coffee |
25,000,000 | 25,000,000 | 23,000,000 | |||||||
MCCI Group Holdings, LLC, Second Lien, 7.50% (LIBOR + 7.25%), 6/21/13 |
Healthcare Services | 29,000,000 | 28,964,055 | 29,000,000 | |||||||
Navilyst Medical, Inc., Second Lien, 13.00%, 8/14/15 |
Healthcare Services |
15,000,000 | 14,811,580 | 15,000,000 | |||||||
New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14 |
Mining/ Construction |
35,000,000 | 34,766,168 | 35,000,000 | |||||||
Oriental Trading Company, Inc., Second Lien, 6.26% (LIBOR + 6.00%), 1/31/14 |
Party Supplies and Novelties | 3,000,000 | 3,000,000 | 474,990 | |||||||
Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13 |
Rehabilitation Centers |
17,000,000 | 17,000,000 | 16,082,000 | |||||||
Premier Yachts, Inc. et al., Term A, First Lien, 3.99% (LIBOR + 3.75%), 8/22/12 |
Entertainment Cruises |
5,790,734 | 5,779,189 | 5,790,734 | |||||||
Premier Yachts, Inc. et al., Term B, First Lien, 7.24% (LIBOR + 7.00%), 8/22/13 |
Entertainment Cruises |
1,054,086 | 1,051,821 | 1,054,086 | |||||||
Sunrise Medical LTC LLC et al., Second Lien, 6.75% (LIBOR + 6.50%), 12/28/13 |
Healthcare Equipment |
14,400,000 | 14,400,000 | 14,400,000 | |||||||
Total Safety U.S., Inc., Second Lien, 6.79% (LIBOR + 6.50%), 12/8/13 |
Industrial Safety Equipment |
9,000,000 | 9,000,000 | 8,577,000 | |||||||
United Subcontractors, Inc., First Lien, 1.79% (LIBOR + 1.50%), 6/30/15(d) |
Building and Construction |
1,626,814 | 1,618,080 | 1,442,984 | |||||||
Water Pik, Inc., Second Lien, 5.75% (LIBOR + 5.50%), 6/15/14 |
Consumer Products |
30,000,000 | 30,000,000 | 30,000,000 | |||||||
WBS Group LLC et al., Second Lien, 6.50% (LIBOR + 6.25%), 6/7/13 |
Software | 20,000,000 | 20,000,000 | 18,000,000 |
The accompanying notes are an integral part of these financial statements.
9
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2010
Portfolio Company |
Industry |
Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value(b) | |||||||
Wembley, Inc., Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(g) |
Gaming | $ | 1,000,000 | $ | 1,000,000 | $ | 55,000 | ||||
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.29% (LIBOR + 4.00%), 3/30/11 |
Restaurants | 6,850,000 | 6,850,000 | 4,192,200 | |||||||
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.29% (LIBOR + 7.00%), 3/30/11(g) |
Restaurants | 8,334,656 | 8,334,656 | 6,136,067 | |||||||
Total Senior Secured Loans |
559,493,923 | 489,758,983 | |||||||||
Preferred Stock1.1% |
|||||||||||
Alpha Media Group Holdings Inc., Series A-2(k) |
Publishing | 5,000 | | | |||||||
Facet Holdings Corp., Class A, 12.00% PIK(g) |
Medical Devices |
900 | 900,000 | | |||||||
Fitness Together Holdings, Inc., Series A(f)(k) |
Personal Fitness |
187,500 | 173,326 | | |||||||
Fitness Together Holdings, Inc., Series A-1(f)(k) |
Personal Fitness |
49,056 | 49,056 | | |||||||
Fitness Together Holdings, Inc., Series B Convertible(f)(k) |
Personal Fitness |
12,390,924 | 7,100,000 | 1,006,000 | |||||||
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(d) |
Sheet Metal Fabrication |
4,968 | 4,968,000 | 5,117,040 | |||||||
Total Preferred Stock |
13,190,382 | 6,123,040 | |||||||||
Common Stock4.6%(k) |
|||||||||||
Alpha Media Group Holdings Inc., Class B |
Publishing | 12,500 | | | |||||||
Arclin Cayman Holdings Ltd.(h) |
Chemicals | 450,532 | 9,722,203 | 5,660,000 | |||||||
BKC ARS Blocker, Inc. (American Residential)(l) |
HVAC/ Plumbing Services |
1,000 | 192,418 | 1,111,728 | |||||||
BKC ASW Blocker, Inc. (American SportWorks)(f)(m) |
Utility Vehicles |
1,000 | 425,001 | 331,102 | |||||||
BKC CSP Blocker, Inc. (Conney Safety)(d)(n) |
Safety Products | 100 | 888,910 | 888,910 | |||||||
BKC DVSH Blocker, Inc. (DynaVox Systems and Sunrise Medical)(o) |
Augmentative Communication Products | 100 | 1,000,000 | 1,961,930 | |||||||
BKC MTCH Blocker, Inc. (Marquette Transportation)(p) |
Transportation | 1,000 | 5,000,000 | 2,676,000 | |||||||
Facet Holdings Corp. |
Medical Devices | 10,000 | 100,000 | | |||||||
Fitness Together Holdings, Inc.(f) |
Personal Fitness | 173,547 | 118,500 | | |||||||
M & M Tradition Holdings Corp.(d) |
Sheet Metal Fabrication |
500,000 | 5,000,000 | 5,000,000 | |||||||
MGHC Holding Corporation (Mattress Giant)(d) |
BeddingRetail | 2,285,815 | 2,285,815 | | |||||||
USI Senior Holdings, Inc. (United Subcontractors)(d) |
Building and Construction |
79,237 | 6,926,008 | 6,859,492 | |||||||
Total Common Stock |
31,658,855 | 24,489,162 | |||||||||
The accompanying notes are an integral part of these financial statements.
10
BlackRock Kelso Capital Corporation
Schedules of Investments (Unaudited)(Continued)
March 31, 2010
Portfolio Company |
Industry | Principal Amount or Number of Shares/Units |
Cost(a) | Fair Value(b) |
||||||||
Limited Partnership/Limited Liability Company Interests4.0% |
||||||||||||
Big Dumpster Coinvestment, LLC(k) |
Waste Management Equipment |
| $ | 5,333,333 | $ | | ||||||
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(c)(g) |
Financial Services |
1,750 | 1,650,005 | | ||||||||
Penton Business Media Holdings LLC(d)(k) |
Information Services |
| 9,050,000 | 9,050,000 | ||||||||
PG Holdco, LLC (Press Ganey), 15.00% PIK |
Healthcare Services |
333 | 333,333 | 345,832 | ||||||||
PG Holdco, LLC (Press Ganey), Class A(k) |
Healthcare Services |
16,667 | 166,667 | 233,333 | ||||||||
Sentry Security Systems Holdings, LLC(k) |
Security Services | 147,271 | 147,271 | 1,819 | ||||||||
Sentry Security Systems Holdings, LLC, 8.00% PIK |
Security Services | 602,729 | 602,729 | 602,729 | ||||||||
VSS-AHC Holdings LLC (Advanstar)(k) |
Printing/ Publishing |
352,941 | 4,199,161 | 4,198,939 | ||||||||
WBS Group Holdings, LLC, Class B, 16.00% PIK |
Software | 8,000 | 8,000,000 | 7,506,201 | ||||||||
Total Limited Partnership/Limited Liability Company Interests |
29,482,499 | 21,938,853 | ||||||||||
Equity Warrants/Options0.7%(k) |
||||||||||||
Arclin Cayman Holdings Ltd., Tranche 1, expire 1/15/14(h) |
Chemicals | 230,159 | 403,815 | 681,657 | ||||||||
Arclin Cayman Holdings Ltd., Tranche 2, expire 1/15/15(h) |
Chemicals | 230,159 | 323,052 | 806,462 | ||||||||
Arclin Cayman Holdings Ltd., Tranche 3, expire 1/15/14(h) |
Chemicals | 230,159 | 484,578 | 533,839 | ||||||||
Arclin Cayman Holdings Ltd., Tranche 4, expire 1/15/15(h) |
Chemicals | 230,159 | 403,815 | 660,681 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 49 | 512,000 | 853,043 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 64,000 | 147,564 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 24,000 | 78,470 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 9,000 | 43,176 | ||||||||
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(c) |
Financial Services |
455 | 444,450 | | ||||||||
Total Equity Warrants/Options |
2,668,710 | 3,804,892 | ||||||||||
TOTAL INVESTMENTS INCLUDING UNEARNED INCOME |
960,021,312 | 805,988,391 | ||||||||||
UNEARNED INCOME(0.5)% |
(2,659,253 | ) | (2,659,253 | ) | ||||||||
TOTAL INVESTMENTS145.5% |
$ | 957,362,059 | 803,329,138 | |||||||||
OTHER ASSETS & LIABILITIES (NET)(45.5)% |
(250,375,571 | ) | ||||||||||
NET ASSETS100.0% |
$ | 552,953,567 | ||||||||||
(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) | Fair value is determined by or under the direction of the Companys Board of Directors (see Note 2). |
The accompanying notes are an integral part of these financial statements.
11
(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 3.6% of net assets at March 31, 2010. |
(d) | 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, 2009 |
Gross Additions (Cost)* |
Gross Reductions (Cost)** |
Net Unrealized Gain (Loss) |
Fair Value at March 31, 2010 |
Net Realized Gain (Loss)*** |
Interest Income*** |
Dividend Income*** | ||||||||||||||||||||
BKC CSP Blocker, Inc. |
||||||||||||||||||||||||||||
Common Stock |
$ | | $ | 888,910 | $ | | $ | | $ | 888,910 | $ | | $ | | $ | | ||||||||||||
Conney Safety Products, LLC |
||||||||||||||||||||||||||||
Subordinated Debt |
| 25,125,693 | | 3,927,904 | 29,053,597 | | 1,055,311 | | ||||||||||||||||||||
M&M Tradition Holdings Corp.: |
||||||||||||||||||||||||||||
Preferred Stock |
5,117,040 | | | | 5,117,040 | | | 302,163 | ||||||||||||||||||||
Common Stock |
5,000,000 | | | | 5,000,000 | | | | ||||||||||||||||||||
Mattress Giant Corporation |
||||||||||||||||||||||||||||
Subordinated Debt |
3,521,162 | 422,864 | | (1,884,189 | ) | 2,059,837 | | 422,912 | | |||||||||||||||||||
MGHC Holding Corporation |
||||||||||||||||||||||||||||
Common Stock |
| | | | | | | | ||||||||||||||||||||
Penton Business Media Holdings LLC |
||||||||||||||||||||||||||||
Limited Liability Co. Interest |
515,870 | 9,050,000 | (14,943,201 | ) | 14,427,331 | 9,050,000 | (14,426,995 | ) | | | ||||||||||||||||||
Penton Media, Inc. |
||||||||||||||||||||||||||||
Senior Secured Loan |
4,290,000 | 14,571 | (25,694,870 | ) | 21,390,299 | | (21,794,870 | ) | (25,073 | ) | | |||||||||||||||||
United Subcontractors, Inc. |
||||||||||||||||||||||||||||
Senior Secured Loan |
1,447,864 | 410 | | (5,290 | ) | 1,442,984 | | 7,558 | | |||||||||||||||||||
USI Senior Holdings, Inc. |
||||||||||||||||||||||||||||
Common Stock |
6,902,053 | | | (42,561 | ) | 6,859,492 | | | | |||||||||||||||||||
Totals |
$ | 26,793,989 | $ | 35,502,448 | $ | (40,638,071 | ) | $ | 37,813,494 | $ | 59,471,860 | $ | (36,221,865 | ) | $ | 1,460,708 | $ | 302,163 | ||||||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-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, 2010. |
The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at March 31, 2010 represents 10.8% of net assets.
(e) | Approximately 64% 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) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrowers option. In addition, approximately 7% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. 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 at March 31, 2010 of all contracts within the specified loan facility. |
(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: |
The accompanying notes are an integral part of these financial statements.
12
Controlled Investments |
Fair Value
at December 31, 2009 |
Gross Additions (Cost)* |
Gross Reductions (Cost)** |
Net Unrealized Gain (Loss) |
Fair Value at March 31, 2010 |
Net Realized Gain (Loss)*** |
Interest Income*** | ||||||||||||||||||
Al Solutions, Inc. |
|||||||||||||||||||||||||
Senior Secured Loan |
$ | 150,000 | $ | 181 | $ | (5,619 | ) | $ | (2,062 | ) | $ | 142,500 | $ | 1,881 | $ | 3,929 | |||||||||
American SportWorks LLC |
|||||||||||||||||||||||||
Senior Secured Loan |
3,262,261 | | | 884,244 | 4,146,505 | | 13,733 | ||||||||||||||||||
BKC ASW Blocker, Inc. |
|||||||||||||||||||||||||
Common Stock |
163,289 | 175,000 | | (7,187 | ) | 331,102 | | | |||||||||||||||||
Fitness Together Franchise Corporation |
|||||||||||||||||||||||||
Senior Secured Loan |
5,807,656 | 35,113 | | 142,137 | 5,984,906 | | 201,909 | ||||||||||||||||||
Fitness Together Holdings, Inc.: |
|||||||||||||||||||||||||
Preferred Stock Series A |
| | | | | | | ||||||||||||||||||
Preferred Stock Series A-1 |
| | | | | | | ||||||||||||||||||
Preferred Stock Series B Convertible |
779,000 | 600,000 | | (373,000 | ) | 1,006,000 | | | |||||||||||||||||
Common Stock |
| | | | | | | ||||||||||||||||||
Less: Unearned Income |
(249,930 | ) | 13,733 | | | (236,197 | ) | | | ||||||||||||||||
Totals |
$ | 9,912,276 | $ | 824,027 | $ | (5,619 | ) | $ | 644,132 | $ | 11,374,816 | $ | 1,881 | $ | 219,571 | ||||||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-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, 2010. There was no dividend income from these securities during the period. |
The aggregate fair value of controlled investments (net of unearned income) at March 31, 2010 represents 2.1% of net assets.
(g) | Non-accrual status (in default) at March 31, 2010 and therefore non-income producing. At March 31, 2010, the aggregate fair value and amortized cost of debt investments on non-accrual status represents 2.1% and 5.3% of total debt investments at fair value and amortized cost, respectively. |
(h) | Non-U.S. company or principal place of business outside the U.S. |
(i) | Principal amount is denominated in Canadian dollars. |
(j) | Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. The maximum amount of potential future payments under this guaranty is $6,000,000 at March 31, 2010 with an expiration of December 2011. |
(k) | Non-income producing equity securities at March 31, 2010. |
(l) | The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C. |
(m) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC. |
(n) | The Company is the sole stockholder of BKC CSP Blocker, Inc., which is the beneficiary of more than 5% (but less than 25%) of the voting securities of Conney Prime Holdings, LLC. |
(o) | The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of each of DynaVox Systems LLC and Sunrise Medical Investors LLC. |
(p) | 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. |
PIK | Payment-in-kind. |
The accompanying notes are an integral part of these financial statements.
13
BlackRock Kelso Capital Corporation
Schedules of Investments
December 31, 2009
Portfolio Company |
Industry(a) | Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value(c) | |||||||
Senior Secured Notes9.0% |
|||||||||||
AGY Holding Corp., Second Lien, 11.00%, 11/15/14 |
Glass Yarns/ Fibers |
$ | 23,500,000 | $ | 23,131,937 | $ | 19,740,000 | ||||
TriMark Acquisition Corp., Second Lien, 11.50% (9.50% cash, 2.00% PIK), 11/30/13 |
Food Service Equipment |
31,503,017 | 31,503,017 | 28,667,746 | |||||||
Total Senior Secured Notes |
54,634,954 | 48,407,746 | |||||||||
Unsecured Debt23.5% |
|||||||||||
ASM Intermediate Holdings Corp. II, 12.00% PIK, 12/27/13 |
Marketing Services |
57,401,749 | 57,401,749 | 56,138,911 | |||||||
Big Dumpster Acquisition, Inc., 13.50% PIK, 7/5/15 |
Waste Management Equipment |
42,889,344 | 42,889,344 | 14,024,815 | |||||||
Marquette Transportation Company Holdings, LLC, 14.75% PIK, 3/21/14 |
Transportation | 52,253,576 | 52,253,576 | 51,365,265 | |||||||
Marsico Parent Holdco, LLC et al., 12.50% PIK, 7/15/16, acquired 11/28/07(d) |
Financial Services |
11,279,758 | 11,279,758 | 3,508,005 | |||||||
Marsico Parent Superholdco, LLC et al., 14.50% PIK, 1/15/18, acquired 11/28/07(d) |
Financial Services |
7,791,207 | 7,483,674 | 1,947,802 | |||||||
Total Unsecured Debt |
171,308,101 | 126,984,798 | |||||||||
Subordinated Debt24.7% |
|||||||||||
A & A Manufacturing Co., Inc., 16.00% (14.00% cash, 2.00% PIK), 4/2/14 |
Protective Enclosures |
19,542,243 | 19,542,243 | 14,871,647 | |||||||
Conney Safety Products, LLC, 18.00% (16.00% cash, 2.00% PIK), 10/1/14 |
Safety Products |
30,300,750 | 30,300,750 | 25,452,630 | |||||||
DynaVox Systems LLC, 15.00%, 6/23/15 |
Augmentative Communication Products |
25,000,000 | 25,000,000 | 25,950,000 | |||||||
Mattress Giant Corporation, 11.00% PIK, 12/31/12(e) |
Bedding Retail |
5,744,147 | 2,521,202 | 3,521,162 | |||||||
MediMedia USA, Inc., 11.38%, 11/15/14, acquired multiple |
Information Services |
8,000,000 | 8,058,173 | 6,728,000 | |||||||
The Pay-O-Matic Corp., 14.00% (12.00% cash, 2.00% PIK), 1/15/15 |
Financial Services |
15,366,867 | 15,366,867 | 15,643,470 | |||||||
PGA Holdings, Inc., 12.50%, 3/12/16 |
Healthcare Services |
5,000,000 | 4,923,000 | 5,100,000 | |||||||
Sentry Security Systems, LLC, 16.00% (14.00% cash, 2.00% PIK), 8/7/12 |
Security Services |
10,834,674 | 10,834,674 | 10,607,146 | |||||||
Tri-anim Health Services, Inc. et al., 14.00% (12.00% cash, 2.00% PIK), 6/4/15 |
Healthcare Products |
15,021,667 | 15,021,667 | 15,322,100 | |||||||
U.S. Security Holdings, Inc., 13.00% (11.00% cash, 2.00% PIK), 5/8/14, acquired 5/10/06(d) |
Security Services |
7,000,000 | 7,000,000 | 7,000,000 | |||||||
Wastequip, Inc., 12.50% (10.00% cash, 2.50% PIK), 2/5/15 |
Waste Management Equipment |
7,947,596 | 7,947,596 | 3,035,981 | |||||||
Total Subordinated Debt |
146,516,172 | 133,232,136 | |||||||||
The accompanying notes are an integral part of these financial statements.
14
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2009
Portfolio Company |
Industry(a) | Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value(c) |
|||||||||
Senior Secured Loans93.3%(f) |
|||||||||||||
Alpha Media Group Inc., First Lien, 12.00% PIK, 7/15/13 |
Publishing | $ | 3,964,202 | $ | 2,669,800 | $ | 2,055,532 | ||||||
Al Solutions, Inc., First Lien, 10.00%, 6/28/13(g) |
Metals | 150,000 | 147,418 | 150,000 | |||||||||
American Residential Services L.L.C., Second Lien, 12.00% (10.00% cash, 2.00% PIK), 4/17/15 |
HVAC/ Plumbing Services |
41,215,100 | 41,215,100 | 40,102,293 | |||||||||
American Safety Razor Company, LLC, Second Lien, 6.51% (LIBOR + 6.25%), 1/30/14 |
Consumer Products |
10,000,000 | 10,000,000 | 9,090,000 | |||||||||
American SportWorks LLC, Second Lien, 20.00%, |
Utility Vehicles |
13,403,274 | 13,403,274 | 3,262,261 | |||||||||
AmQuip Crane Rental LLC, Second Lien, 6.01% (LIBOR + 5.75%), 6/29/14 |
Construction Equipment |
24,089,541 | 22,267,464 | 22,403,273 | |||||||||
Applied Tech Products Corp. et al., Tranche A, First Lien, 7.75% (Base Rate + 4.50%), 10/24/10(h) |
Plastic Packaging |
731,669 | 730,747 | 275,359 | |||||||||
Arclin US Holdings Inc., First Lien, 7.00% (Base Rate + 3.75%), 7/10/14(h) |
Chemicals | 6,423,655 | 3,357,410 | 5,607,851 | |||||||||
Arclin US Holdings Inc., Second Lien, 10.75% (Base Rate + 7.50%), 7/10/15(h) |
Chemicals | 14,500,000 | 14,500,000 | 3,335,290 | |||||||||
Bankruptcy Management Solutions, Inc., Second Lien, 6.48% (LIBOR + 6.25%), 7/31/13 |
Financial Services |
24,187,500 | 24,187,500 | 17,802,000 | |||||||||
The Bargain! Shop Holdings Inc., Term Loan A, First Lien, 14.50% (13.50% cash, 1.00% PIK), 6/29/12(i) |
Discount Stores |
13,602,460 | (j) | 13,211,257 | 12,975,113 | ||||||||
The Bargain! Shop Holdings Inc., Term Loan B, First Lien, 14.50% (13.50% cash, 1.00% PIK), 7/1/12(i) |
Discount Stores |
18,697,540 | (j) | 17,511,078 | 17,835,208 | ||||||||
Berlin Packaging L.L.C., Second Lien, 6.76% (LIBOR + 6.50%), 8/17/15 |
Rigid Packaging |
24,000,000 | 23,492,840 | 22,680,000 | |||||||||
Champion Energy Corporation et al., First Lien, 14.50%, 5/22/11 |
Heating and Oil Services |
30,000,000 | 30,000,000 | 30,210,000 | |||||||||
Custom Direct, Inc. et al., Second Lien, 6.31% (LIBOR + 6.00%), 12/31/14 |
Printing | 10,000,000 | 10,000,000 | 7,990,000 | |||||||||
Deluxe Entertainment Services Group Inc., Second Lien, 11.00% (LIBOR + 9.00%), 11/11/13 |
Entertainment | 12,000,000 | 12,000,000 | 11,148,000 | |||||||||
Electrical Components International, Inc., First Lien, 9.25% (Base Rate + 6.00%), 5/1/14 |
Electronics | 2,974,210 | 2,052,126 | 2,562,460 | |||||||||
Electrical Components International, Inc., Second Lien, 11.50% (Base Rate + 8.25%), 5/1/14(h) |
Electronics | 26,000,000 | 22,891,103 | 8,874,840 | |||||||||
Event Rentals, Inc., Acquisition Loan, First Lien, 7.75% (LIBOR + 4.25% cash, 2.00% PIK), 12/19/13 |
Party Rentals |
3,217,840 | 3,217,840 | 2,622,540 | |||||||||
Facet Technologies, LLC, Second Lien, 17.50% PIK, 7/26/12 |
Medical Devices |
34,321,490 | 34,321,490 | 10,000,012 | |||||||||
Facet Technologies, LLC, Guaranty(k) |
Medical Devices |
| | (225,000 | ) |
The accompanying notes are an integral part of these financial statements.
15
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2009
Portfolio Company |
Industry(a) | Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value(c) | |||||||
Fitness Together Franchise Corporation, First Lien, 11.50% (9.50% cash, 2.00% PIK), 11/10/13(g) |
Personal Fitness |
$ | 7,022,559 | $ | 7,022,559 | $ | 5,807,656 | ||||
Heartland Automotive Services II, Inc. et al., Term Loan A, First Lien, 7.25% (Base Rate + 4.00%), 1/30/14 |
Automobile Repair |
3,325,862 | 3,324,445 | 3,026,535 | |||||||
Heartland Automotive Services II, Inc. et al., Term Loan B, First Lien, 9.25% (Base Rate + 4.00% cash, 2.00% PIK), 1/30/14 |
Automobile Repair |
2,258,858 | 2,258,680 | 1,951,653 | |||||||
HIT Entertainment, Inc., Second Lien, 5.78% (LIBOR + 5.50%), 2/26/13 |
Entertainment | 1,000,000 | 1,000,000 | 550,000 | |||||||
InterMedia Outdoors, Inc., Second Lien, 7.00% (LIBOR + 6.75%), 1/31/14 |
Printing/ Publishing |
10,000,000 | 10,000,000 | 8,520,000 | |||||||
Isola USA Corp., First Lien, 13.00% (Base Rate + 9.75%), 12/18/12 |
Electronics | 10,901,316 | 10,002,294 | 10,138,224 | |||||||
Isola USA Corp., Second Lien, 17.75% (Base Rate + 14.50%), 12/18/13 |
Electronics | 25,000,000 | 25,000,000 | 22,050,000 | |||||||
LJVH Holdings Inc., Second Lien, 5.75% (LIBOR + 5.50%), 1/19/15(i) |
Specialty Coffee |
25,000,000 | 25,000,000 | 22,700,000 | |||||||
MCCI Group Holdings, LLC, Second Lien, 7.51% (LIBOR + 7.25%), 6/21/13 |
Healthcare Services |
29,000,000 | 28,961,307 | 28,710,000 | |||||||
Navilyst Medical, Inc., Second Lien, 12.25%, 8/14/15 |
Healthcare Services |
15,000,000 | 14,802,935 | 14,700,000 | |||||||
New Enterprise Stone & Lime Co., Inc., Second Lien, 12.50%, 7/11/14 |
Mining/ Construction |
35,000,000 | 34,752,695 | 35,000,000 | |||||||
Oriental Trading Company, Inc., Second Lien, 6.24% (LIBOR + 6.00%), 1/31/14 |
Party Supplies and Novelties |
3,000,000 | 3,000,000 | 802,500 | |||||||
Penton Media, Inc. et al., Second Lien, 5.28% (LIBOR + 5.00%), |
Information Services |
26,000,000 | 25,680,299 | 4,290,000 | |||||||
Physiotherapy Associates, Inc. et al., Second Lien, 12.00% (Base Rate + 8.75%), 12/31/13 |
Rehabilitation Centers |
17,000,000 | 17,000,000 | 15,759,000 | |||||||
PQ Corporation, Second Lien, 6.74% (LIBOR + 6.50%), 7/30/15 |
Specialty Chemicals |
10,000,000 | 8,970,517 | 8,520,000 | |||||||
Premier Yachts, Inc. et al., Term A, First Lien, 3.98% (LIBOR + 3.75%), 8/22/12 |
Entertainment Cruises |
5,973,418 | 5,960,283 | 5,973,418 | |||||||
Premier Yachts, Inc. et al., Term B, First Lien, 7.23% (LIBOR + 7.00%), 8/22/13 |
Entertainment Cruises |
1,265,983 | 1,263,002 | 1,265,983 | |||||||
Sunrise Medical LTC LLC et al., Second Lien, 6.74% (LIBOR + 6.50%), 12/28/13 |
Healthcare Equipment |
14,400,000 | 14,400,000 | 14,097,600 | |||||||
Total Safety U.S., Inc., Second Lien, 6.74% (LIBOR + 6.50%), 12/8/13 |
Industrial Safety Equipment |
9,000,000 | 9,000,000 | 8,514,000 | |||||||
United Subcontractors, Inc., First Lien, 1.76% (LIBOR + 1.50%), |
Building and Construction |
1,626,814 | 1,617,669 | 1,447,864 | |||||||
Water Pik, Inc., Second Lien, 5.73% (LIBOR + 5.50%), 6/15/14 |
Consumer Products |
30,000,000 | 30,000,000 | 30,000,000 | |||||||
WBS Group LLC et al., Second Lien, 6.54% (LIBOR + 6.25%), 6/7/13 |
Software | 20,000,000 | 20,000,000 | 17,000,000 |
The accompanying notes are an integral part of these financial statements.
16
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2009
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value(c) | |||||||
Wembley, Inc., Second Lien, 8.50% (Base Rate + 5.25%), 8/22/12(h) |
Gaming | $ | 1,000,000 | $ | 1,000,000 | $ | 67,500 | ||||
Westward Dough Operating Company, LLC, Term Loan A, First Lien, 4.25% (LIBOR + 4.00%), 3/30/11 |
Restaurants | 6,850,000 | 6,850,000 | 4,719,650 | |||||||
Westward Dough Operating Company, LLC, Term Loan B, First Lien, 7.25% (LIBOR + 7.00%), 3/30/11(h) |
Restaurants | 8,334,656 | 8,334,656 | 6,784,379 | |||||||
Total Senior Secured Loans |
616,377,788 | 503,152,994 | |||||||||
Preferred Stock1.1% |
|||||||||||
Alpha Media Group Holdings Inc., Series A-2(l) |
Publishing | 5,000 | | | |||||||
Facet Holdings Corp., Class A, 12.00% PIK(h) |
Medical Devices |
900 | 900,000 | | |||||||
Fitness Together Holdings, Inc., Series A(g)(l) |
Personal Fitness |
187,500 | 173,326 | | |||||||
Fitness Together Holdings, Inc., Series A-1(g)(l) |
Personal Fitness |
49,056 | 49,056 | | |||||||
Fitness Together Holdings, Inc., Series B Convertible(g)(l) |
Personal Fitness |
11,343,804 | 6,500,000 | 779,000 | |||||||
M & M Tradition Holdings Corp., Series A Convertible, 16.00% PIK(e) |
Sheet Metal Fabrication |
4,968 | 4,968,000 | 5,117,040 | |||||||
Total Preferred Stock |
12,590,382 | 5,896,040 | |||||||||
Common Stock3.5%(l) |
|||||||||||
Alpha Media Group Holdings Inc., Class B |
Publishing | 12,500 | | | |||||||
BKC ARS Blocker, Inc. (American Residential)(m) |
HVAC/ Plumbing Services |
1,000 | 192,418 | 1,610,000 | |||||||
BKC ASW Blocker, Inc. (American SportWorks)(g)(n) |
Utility Vehicles |
1,000 | 250,001 | 163,289 | |||||||
BKC DVSH Blocker, Inc. (DynaVox Systems)(o) |
Augmentative Communication Products | 100 | 1,000,000 | 2,560,000 | |||||||
BKC MTCH Blocker, Inc. (Marquette Transportation)(p) |
Transportation | 1,000 | 5,000,000 | 2,635,000 | |||||||
Facet Holdings Corp. |
Medical Devices | 10,000 | 100,000 | | |||||||
Fitness Together Holdings, Inc.(g) |
Personal Fitness | 173,547 | 118,500 | | |||||||
M & M Tradition Holdings Corp.(e) |
Sheet Metal Fabrication |
500,000 | 5,000,000 | 5,000,000 | |||||||
MGHC Holding Corporation (Mattress Giant)(e) |
BeddingRetail | 2,285,815 | 2,285,815 | | |||||||
USI Senior Holdings, Inc.(e) |
Building and Construction |
79,237 | 6,926,008 | 6,902,053 | |||||||
Total Common Stock |
20,872,742 | 18,870,342 | |||||||||
The accompanying notes are an integral part of these financial statements.
17
BlackRock Kelso Capital Corporation
Schedules of Investments(Continued)
December 31, 2009
Portfolio Company |
Industry(a) |
Principal Amount or Number of Shares/Units |
Cost(b) | Fair Value(c) |
||||||||
Limited Partnership/Limited Liability Company Interests2.4% |
||||||||||||
Big Dumpster Coinvestment, LLC(l) |
Waste Management Equipment | | $ | 5,333,333 | $ | | ||||||
Marsico Parent Superholdco, LLC, 16.75% PIK, acquired 11/28/07(d)(h) |
Financial Services |
1,750 | 1,650,005 | | ||||||||
PG Holdco, LLC (Press Ganey), 15.00% PIK |
Healthcare Services | 333 | 333,333 | 346,654 | ||||||||
PG Holdco, LLC (Press Ganey), Class A(l) |
Healthcare Services | 16,667 | 166,667 | 250,000 | ||||||||
Prism Business Media Holdings LLC (Penton Media)(e)(l) |
Information Services |
68 | 14,943,201 | 515,870 | ||||||||
Sentry Security Systems Holdings, LLC(l) |
Security Services | 147,271 | 147,271 | 479 | ||||||||
Sentry Security Systems Holdings, LLC, 8.00% PIK |
Security Services | 602,729 | 602,729 | 602,729 | ||||||||
VSS-AHC Holdings LLC (Advanstar)(l) |
Printing/ Publishing |
352,941 | 4,199,161 | 4,198,939 | ||||||||
WBS Group Holdings, LLC, Class B, 16.00% PIK |
Software | 8,000 | 8,000,000 | 7,167,857 | ||||||||
Total Limited Partnership/Limited Liability Company Interests |
35,375,700 | 13,082,528 | ||||||||||
Equity Warrants/Options0.2%(l) |
||||||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 49 | 512,000 | 770,160 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 64,000 | 136,373 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 24,000 | 75,141 | ||||||||
Kaz, Inc., expire 12/8/16 |
Consumer Products | 16 | 9,000 | 43,073 | ||||||||
Marsico Superholdco SPV, LLC, expire 12/14/19, acquired 11/28/07(d) |
Financial Services |
455 | 444,450 | | ||||||||
Total Equity Warrants/Options |
1,053,450 | 1,024,747 | ||||||||||
TOTAL INVESTMENTS INCLUDING UNEARNED INCOME |
1,058,729,289 | 850,651,331 | ||||||||||
UNEARNED INCOME(0.7)% |
(3,909,286 | ) | (3,909,286 | ) | ||||||||
TOTAL INVESTMENTS156.9% |
$ | 1,054,820,003 | 846,742,045 | |||||||||
OTHER ASSETS & LIABILITIES (NET)(56.9)% |
(307,179,283 | ) | ||||||||||
NET ASSETS100.0% |
$ | 539,562,762 |
(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) | Fair value is determined by or under the direction of the Companys Board of Directors (see Note 2). |
(d) | 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 3.6% of net assets at December 31, 2009. |
(e) | 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: |
The accompanying notes are an integral part of these financial statements.
18
Non-controlled, Affiliated Investments |
Fair Value
at December 31, 2008 |
Gross Additions (Cost)* |
Gross Reductions (Cost)** |
Net Unrealized Gain (Loss) |
Fair Value
at December 31, 2009 |
Net Realized Gain (Loss)*** |
Interest Income*** |
Dividend Income*** | ||||||||||||||||||||
American SportWorks LLC |
||||||||||||||||||||||||||||
Senior Secured Loan |
$ | 5,716,023 | $ | | $ | (3,572,448 | ) | $ | (2,143,575 | ) | $ | | | $ | | $ | 27,617 | $ | | |||||||||
BKC ASW Blocker, Inc. |
||||||||||||||||||||||||||||
Common Stock |
16,399 | | (5,883 | ) | (10,516 | ) | | | | | | |||||||||||||||||
M&M Tradition Holdings Corp.: |
||||||||||||||||||||||||||||
Preferred Stock |
5,537,280 | | (408,000 | ) | (12,240 | ) | 5,117,040 | 12,240 | | 1,110,885 | ||||||||||||||||||
Common Stock |
6,095,000 | | | (1,095,000 | ) | 5,000,000 | | | | |||||||||||||||||||
Mattress Giant Corporation |
||||||||||||||||||||||||||||
Subordinated Debt |
| 2,521,202 | | 999,960 | 3,521,162 | | 773,581 | | ||||||||||||||||||||
MGHC Holding Corporation |
||||||||||||||||||||||||||||
Common Stock |
| 2,285,815 | | (2,285,815 | ) | | | | | |||||||||||||||||||
Penton Media, Inc. |
||||||||||||||||||||||||||||
Senior Secured Loan |
18,226,000 | 78,211 | | (14,014,211 | ) | 4,290,000 | | 1,437,763 | | |||||||||||||||||||
Prism Business Media Holdings LLC |
||||||||||||||||||||||||||||
Limited Liability Co. Interest |
4,730,000 | | | (4,214,130 | ) | 515,870 | | | | |||||||||||||||||||
United Subcontractors, Inc. |
||||||||||||||||||||||||||||
Senior Secured Loan |
| 1,617,669 | | (169,805 | ) | 1,447,864 | | 16,210 | | |||||||||||||||||||
USI Senior Holdings, Inc. |
||||||||||||||||||||||||||||
Common Stock |
| 6,926,008 | | (23,955 | ) | 6,902,053 | | | | |||||||||||||||||||
Less: Unearned Income |
(305,622 | ) | 305,622 | | | | | | | |||||||||||||||||||
Totals |
$ | 40,015,080 | $ | 13,734,527 | $ | (3,986,331 | ) | $ | (22,969,287 | ) | $ | 26,793,989 | $ | 12,240 | $ | 2,255,171 | $ | 1,110,885 |
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-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 year ended December 31, 2009. |
| Investment moved out of the non-controlled, affiliated category into the controlled category during the year. |
The aggregate fair value of non-controlled, affiliated investments (net of unearned income) at December 31, 2009 represents 5.0% of net assets.
(f) | Approximately 66% 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) or other base rate (commonly the Federal Funds Rate or the Prime Rate), at the borrowers option. In addition, approximately 9% of such senior secured loans have floors of 1.50% to 3.25% on the LIBOR base rate. 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 at December 31, 2009 of all contracts within the specified loan facility. |
(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: |
The accompanying notes are an integral part of these financial statements.
19
Controlled Investments |
Fair Value
at December 31, 2008 |
Gross Additions (Cost)* |
Net Unrealized Gain (Loss) |
Fair Value
at December 31, 2009 |
Net Realized Loss** |
Interest/Other Income** | ||||||||||||||||
Al Solutions, Inc. |
||||||||||||||||||||||
Senior Secured Loan |
$ | | $ | 147,418 | $ | 2,582 | $ | 150,000 | $ | | $ | 5,821 | ||||||||||
Subordinated Debt |
| 71,373 | (71,373 | ) | | (13,395,134 | ) | 71,373 | ||||||||||||||
American SportWorks LLC |
||||||||||||||||||||||
Senior Secured Loan |
| 3,572,448 | (310,187 | ) | 3,262,261 | | 78,075 | |||||||||||||||
BKC ASW Blocker, Inc. |
||||||||||||||||||||||
Common Stock |
| 5,883 | 157,406 | 163,289 | | | ||||||||||||||||
Fitness Together Franchise Corporation |
||||||||||||||||||||||
Senior Secured Loan |
6,496,555 | 140,615 | (829,514 | ) | 5,807,656 | | 808,583 | |||||||||||||||
Fitness Together Holdings, Inc.: |
||||||||||||||||||||||
Preferred Stock Series A |
| | | | | | ||||||||||||||||
Preferred Stock Series A-1 |
| | | | | | ||||||||||||||||
Preferred Stock Series B Convertible |
4,700,000 | | (3,921,000 | ) | 779,000 | | | |||||||||||||||
Common Stock |
| | | | | | ||||||||||||||||
Tygem Holdings, Inc.: |
||||||||||||||||||||||
Preferred Stock |
| | | | (10,826,867 | ) | | |||||||||||||||
Preferred Stock Series B Convertible |
| | | | (14,725,535 | ) | | |||||||||||||||
Common Stock |
| | | | (3,608,956 | ) | | |||||||||||||||
Less: Unearned Income |
| (249,930 | ) | | (249,930 | ) | | | ||||||||||||||
Totals |
$ | 11,196,555 | $ | 3,687,807 | $ | (4,972,086 | ) | $ | 9,912,276 | $ | (42,556,492 | ) | $ | 963,852 | ||||||||
* | Gross additions include increases in the cost basis of investments resulting from new portfolio investments, payment-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, 2009. There was no dividend income from these securities during the year. |
The aggregate fair value of controlled investments (net of unearned income) at December 31, 2009 represents 1.8% of net assets.
(h) | Non-accrual status (in default) at December 31, 2009 and therefore non-income producing. At December 31, 2009, the aggregate fair value and amortized cost of debt investments on non-accrual status represents 3.5% and 6.5% of total debt investments at fair value and amortized cost, respectively. |
(i) | Non-U.S. company or principal place of business outside the U.S. |
(j) | Principal amount is denominated in Canadian dollars. |
(k) | Guaranty by the Company on behalf of portfolio company Facet Technologies, LLC. The maximum amount of potential future payments under this guaranty is $6,000,000 at December 31, 2009 with an expiration of December 2011. |
(l) | Non-income producing equity securities at December 31, 2009. |
(m) | The Company is the sole stockholder of BKC ARS Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of American Residential Services L.L.C. |
(n) | The Company is the sole stockholder of BKC ASW Blocker, Inc., which is the beneficiary of more than 25% of the voting securities of American SportWorks LLC. |
(o) | The Company is the sole stockholder of BKC DVSH Blocker, Inc., which is the beneficiary of less than 5% of the voting securities of DynaVox Systems LLC. |
(p) | 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. |
PIK | Payment-in-kind. |
The accompanying notes are an integral part of these financial statements.
20
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 (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 approximately $529 million. 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. The Company received net proceeds of approximately $150 million from this offering. Offering costs were charged against paid-in capital.
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 prior year amounts have been reclassified to conform to the current year presentation.
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, 2009, which was filed with the Securities and Exchange Commission (SEC) on March 12, 2010.
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 and utilizes the average of the range of bid and ask quotations as a practical expedient for fair value. However, debt investments with remaining maturities within 60 days are valued at amortized cost, 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 substantially all of the investments in its portfolio, the Company expects to value substantially all 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 and subjectivity 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 the Companys investments than on the fair values of the Companys 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 |
21
Companys investment advisor (the Advisor), believes that facts and circumstances applicable to an issuer, a seller or purchaser or the market for a particular security cause current market quotations to not reflect the fair value of the security. Examples of these events could include cases where a security trades infrequently causing a quoted purchase or sale price to become stale, where there is a forced sale by a distressed seller, where market quotations vary substantially among market makers, or where there is a wide bid-ask spread or significant increase in the bid-ask spread. |
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. |
Those investments for which market quotations are not readily available or for which market quotations are deemed not to represent fair value are valued utilizing a market approach, an income approach, or both approaches, as appropriate. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present amount (discounted). The measurement is based on the value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that the Company may take into account in determining the fair value of its investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio companys ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the Companys principal market (as the reporting entity) and enterprise values.
Until the end of the second calendar quarter following its acquisition, each unquoted investment in a new portfolio company generally is valued at cost, which approximates fair value. As of that date, an independent valuation firm conducts an initial independent appraisal of the investment.
Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures (ASC 820-10), issued by the Financial Accounting Standards Board (FASB), defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. ASC 820-10 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. ASC 820-10 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.
ASC 820-10 establishes a hierarchy that classifies these inputs into the three broad levels listed below:
Level 1 Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 Valuations based on unadjusted quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
22
Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The inputs into the determination of fair value may require significant management judgment or estimation. Even if observable market data is available, such information may be the result of consensus pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level 3 information, assuming no additional corroborating evidence.
Transfers between levels, if any, represent the value as of the beginning of the period of any investment where a change in the pricing level occurred from the beginning to the end of the period.
The Companys valuation policy is consistent with ASC 820-10. In accordance with this valuation policy, the Company evaluates the source of inputs, including any markets in which its investments are trading, in determining fair value.
(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, and dividend income are recorded on an accrual basis to the extent that the Company expects to collect such amounts. For loans and securities with payment-in-kind (PIK) income, which represents contractual interest or dividends accrued and added to the principal balance and generally due at maturity, PIK income is accrued only to the extent that the portfolio company valuation indicates that the PIK income is likely to be collected. 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 elected to be taxed as a RIC under Subchapter M of the Code and currently qualifies, and intends to continue to qualify each year, as a RIC under the Code. |
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 its 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). 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. If the Company chooses to do so, all other things being equal, this would increase expenses and reduce the amount available to be distributed to stockholders. The Company will accrue excise tax on estimated excess taxable income as required.
The Company holds 100% of the common stock of certain companies as indicated in the accompanying schedules of investments. These wholly owned companies are recorded at fair value in the statements of assets and liabilities, net of any applicable income tax liabilities. An income tax provision has been provided at the wholly owned company level on all income of such companies, included realized and unrealized gains. Such wholly owned companies are held in connection with the Companys election to be taxed as a RIC. In general, these wholly owned companies earn income that, if earned directly by the Company, would not be qualifying income for purposes of the Company qualifying as a RIC. Dividends from these wholly owned companies and gains from the sale of their stock are qualifying income for this purpose. The Company makes investments in securities in accordance with its investment policies through these wholly owned companies.
(f) | Dividends and distributions to common stockholders are recorded on the ex-dividend 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, as a general matter, 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 generally is 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. The Company may make exceptions to this treatment if the loan has sufficient collateral value and is in the process of collection. |
(h) | Recently Issued Accounting Pronouncements: |
In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurements and Disclosures (ASU 2010-06). ASU 2010-06 amends ASC 820-10 to require new disclosures with regard to
23
transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements within the Level 3 fair value rollforward. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption on January 1, 2010 of the applicable additional disclosure requirements of ASU 2010-06 did not materially impact the Companys financial statements.
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.
For the three months ended March 31, 2010 and 2009, the Advisor earned $4,322,471 and $4,748,218, respectively, in base management fees 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 do not meet an 8.0% annualized rate of return during the applicable fee measurement period 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 during such period. 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: trailing four quarters periods (which applies only to the portion of the Incentive Fee based on income) and annual periods (which applies only to the portion of the Incentive Fee based on capital gains). The trailing four quarters periods for purposes of determining the income portion of the Incentive Fee payable for the three months ended March 31, 2010 and 2009 was determined by reference to the four quarter periods ended on March 31, 2010 and 2009, respectively. The term annual period means the period beginning on July 1 of each calendar year and ending on June 30 of the next calendar year.
The hurdle rate for each measurement period is 2.0% multiplied by the Companys net asset values at the beginning of each calendar quarter during the measurement period, calculated after giving effect to any distributions that occurred during 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 trailing four quarters period, the Company pays 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 of (A) over (B) 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 equal 20% of the periods income amount distributed or distributable to stockholders as described in clause (A) of the preceding paragraph. Thereafter, the portion of the Incentive Fee based on income for the period will equal 20% of the periods remaining excess income amount.
Periodic Incentive Fee Based on Capital Gains. The portion of the Incentive Fee based on capital gains is calculated on an annual basis. For each annual period, the Company pays the Advisor an Incentive Fee based on the amount by which (A) net realized capital gains, if any, to the extent they exceed gross 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 of (A) over (B) described in this paragraph is referred to as the excess gain amount.
24
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 capital gain amount distributed or distributable to stockholders. Thereafter, the portion of the Incentive Fee based on capital gains for the period equals an amount such that the portion of the Incentive Fee payments to the Advisor based on capital gains for the period equals 20% of the periods remaining 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, then the portion of the Incentive Fee based on capital gains will be capped at 20% of the capital 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 gross 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, 2010 and 2009, the Advisor earned $493,951 and zero, respectively, in Incentive Fees from the Company.
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 Advisor 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, 2010 and 2009, the Company incurred $398,664 and $346,794, respectively, for costs and expenses reimbursable to the Advisor under the Management Agreement.
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, 2010 and 2009 were $1,358,769 and $340,622, 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. For the three months ended March 31, 2010 and 2009, the Company incurred $215,786 and $180,249, respectively, for administrative services expenses payable to the Administrator under the administration agreement.
The PNC Financial Services Group, Inc. (PNC) is a significant stockholder of the ultimate parent of the Administrator. PNC Global Investment Servicing Inc. (PGIS), 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, PGIS 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 PGIS and its affiliates, PGIS 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, 2010 and 2009, the Company incurred $49,171 and $54,839, respectively, for administrative, accounting, custodian and transfer agency services fees payable to PGIS 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
25
discretion, subject to compliance with the Companys and the Advisors applicable policies and requirements of law. Pursuant to this authorization, during the three months ended March 31, 2009, the Advisor purchased 65,201 shares of the Companys common stock in the open market for $242,583, including brokerage commissions. There were no such purchases during the three months ended March 31, 2010.
At March 31, 2010 and December 31, 2009, the Advisor owned directly approximately 469,000 and 555,000 shares, respectively, of the Companys common stock, representing approximately 0.8% and 1.0% of the total shares outstanding. At March 31, 2010 and December 31, 2009, other entities affiliated with the Administrator and PGIS beneficially owned indirectly approximately 2,022,000 and 2,611,000 shares, respectively, of the Companys common stock, representing approximately 3.6% and 4.6% of the total shares outstanding. An entity affiliated with the Administrator and PGIS has ownership and financial interests in the Advisor.
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, 2010 and 2009.
Three
months ended March 31, 2010 |
Three
months ended March 31, 2009 |
||||||
Numerator for basic and diluted net increase (decrease) in net assets per share |
$ | 30,483,051 | $ | (4,067,070 | ) | ||
Denominator for basic and diluted weighted average shares |
56,597,028 | 55,242,972 | |||||
Basic/diluted net increase (decrease) in net assets per share resulting from operations |
$ | 0.54 | $ | (0.07 | ) |
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 each period because there were no common stock equivalents outstanding during the above periods.
5. Investments
Purchases of investments for the three months ended March 31, 2010 and 2009 totaled $16,441,543 and $15,273,560, respectively. Sales/repayments of investments for the three months ended March 31, 2010 and 2009 totaled $72,676,277 and $720,366, respectively.
At March 31, 2010 investments consisted of the following:
Cost | Fair Value | |||||||
Senior secured notes |
$ | 54,649,048 | $ | 48,265,219 | ||||
Unsecured debt |
122,944,364 | 74,829,359 | ||||||
Subordinated debt |
145,933,531 | 136,778,883 | ||||||
Senior secured loans: |
||||||||
First lien |
117,337,454 | 110,711,213 | ||||||
Second/other priority lien |
442,156,469 | 379,047,770 | ||||||
Total senior secured loans |
559,493,923 | 489,758,983 | ||||||
Preferred stock |
13,190,382 | 6,123,040 | ||||||
Common stock |
31,658,855 | 24,489,162 | ||||||
Limited partnership/limited liability company interests |
29,482,499 | 21,938,853 | ||||||
Equity warrants/options |
2,668,710 | 3,804,892 | ||||||
Total investments including unearned income |
960,021,312 | 805,988,391 | ||||||
Unearned income |
(2,659,253 | ) | (2,659,253 | ) | ||||
Total investments |
$ | 957,362,059 | $ | 803,329,138 | ||||
26
At December 31, 2009, investments consisted of the following:
Cost | Fair Value | |||||||
Senior secured notes |
$ | 54,634,954 | $ | 48,407,746 | ||||
Unsecured debt |
171,308,101 | 126,984,798 | ||||||
Subordinated debt |
146,516,172 | 133,232,136 | ||||||
Senior secured loans: |
||||||||
First lien |
119,531,264 | 115,409,425 | ||||||
Second/other priority lien |
496,846,524 | 387,743,569 | ||||||
Total senior secured loans |
616,377,788 | 503,152,994 | ||||||
Preferred stock |
12,590,382 | 5,896,040 | ||||||
Common stock |
20,872,742 | 18,870,342 | ||||||
Limited partnership/limited liability company interests |
35,375,700 | 13,082,528 | ||||||
Equity warrants/options |
1,053,450 | 1,024,747 | ||||||
Total investments including unearned income |
1,058,729,289 | 850,651,331 | ||||||
Unearned income |
(3,909,286 | ) | (3,909,286 | ) | ||||
Total investments |
$ | 1,054,820,003 | $ | 846,742,045 | ||||
The industry composition of the portfolio at fair value at March 31, 2010 and December 31, 2009 was as follows:
Industry |
March 31, 2010 |
December 31, 2009 |
||||
Business Services |
13.8 | % | 12.6 | % | ||
Healthcare |
10.9 | 10.0 | ||||
Other Services |
10.0 | 9.4 | ||||
Electronics |
8.8 | 8.5 | ||||
Manufacturing |
7.6 | 7.6 | ||||
Financial Services |
6.4 | 4.6 | ||||
Consumer Products |
6.1 | 6.0 | ||||
Distribution |
5.6 | 4.8 | ||||
Retail |
4.8 | 4.6 | ||||
Metals |
4.4 | 4.1 | ||||
Printing, Publishing and Media |
4.2 | 3.2 | ||||
Beverage, Food and Tobacco |
4.1 | 4.0 | ||||
Chemicals |
3.7 | 4.4 | ||||
Utilities |
3.7 | 3.6 | ||||
Containers and Packaging |
3.1 | 2.7 | ||||
Entertainment and Leisure |
1.5 | 2.6 | ||||
Building and Real Estate |
1.0 | 1.0 | ||||
Transportation |
0.3 | 6.3 | ||||
Total |
100.0 | % | 100.0 | % | ||
The geographic composition of the portfolio at fair value at March 31, 2010 was United States 92.3%, Canada 7.7% and United Kingdom and other less than 0.1%, and at December 31, 2009 was United States 93.7%, Canada 6.3% and United Kingdom and other less than 0.1%. The geographic composition is determined by the location of the corporate headquarters of the portfolio company.
In the ordinary course of its business, the Company manages a variety of risks relating to its investments, including market risk and credit risk. Market risk is the risk of potential adverse changes to the values of investments because of changes in market conditions such as interest rate movements and volatility in investment prices. Credit risk is the risk of default or non-performance by portfolio companies equivalent to the investments carrying amount. The Company is also exposed to credit risk related to maintaining all of its cash and cash equivalents at a major financial institution.
The Company has investments in lower rated and comparable quality unrated senior and junior secured, unsecured and subordinated debt securities and loans, which are subject to a greater degree of credit risk than more highly rated investments. The risk of loss due to default by the issuer is significantly greater for holders of such securities and loans, particularly in cases where the investment is unsecured or subordinated to other creditors of the issuer.
27
6. Foreign currency transactions
The Company 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 the Companys 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. These contracts are marked-to-market by recognizing the difference between the contract exchange rate and the current market rate as unrealized appreciation or depreciation. Realized gains or losses are recognized when contracts are settled. The Companys forward foreign currency contracts generally have terms of approximately three months. The volume of open contracts at the end of each reporting period is reflective of the typical volume of transactions during the period. Risks may arise as a result of the potential inability of the counterparties to meet the terms of their contracts. The Company attempts to limit this risk by dealing with creditworthy counterparties.
At March 31, 2010, details of open forward foreign currency contracts were as follows:
Foreign Currency |
Settlement Date | Amount and Transaction |
US$ Value at Settlement Date |
US$ Value
at March 31, 2010 |
Unrealized Depreciation |
|||||||||
Canadian dollar |
April 21, 2010 | 32,075,000 Sold | $ | 30,302,887 | $ | 31,591,704 | $ | (1,288,817 | ) |
At December 31, 2009, details of open forward foreign currency contracts were as follows:
Foreign Currency |
Settlement Date | Amount and Transaction |
US$ Value at Settlement Date |
US$ Value
at December 31, 2009 |
Unrealized Appreciation | ||||||||||
Canadian dollar |
January 27, 2010 | 795,444 Purchased | $ | (759,501 | ) | $ | (760,561 | ) | $ | 1,060 | |||||
Canadian dollar |
January 27, 2010 | 31,500,000 Sold | 30,316,883 | 30,118,610 | 198,273 | ||||||||||
Canadian dollar |
January 27, 2010 | 800,000 Sold | 769,582 | 764,917 | 4,665 | ||||||||||
Total |
$ | 30,326,964 | $ | 30,122,966 | $ | 203,998 | |||||||||
All realized and unrealized gains and losses on forward foreign currency contracts are included in earnings (changes in net assets) and are reported as separate line items within the Companys statements of operations. Unrealized gains and losses on forward foreign currency contracts are also reported as separate line items within the Companys statements of assets and liabilities.
7. Credit facility 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. At March 31, 2010, the Companys asset coverage for borrowed amounts was 311%. On December 28, 2007, the Company amended and restated its Senior Secured, Multi-Currency Credit Agreement (the Credit Facility). Under the amended Credit Facility, the lenders agreed to extend credit to the Company in an aggregate principal amount not to exceed $545,000,000 outstanding, at any one time, consisting of $400,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. The Credit Facility 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 Facility, 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 Facility also includes an accordion feature that allows the Company to increase the size of the credit facility under certain circumstances to a maximum of $1,000,000,000 with respect to the revolving loans and $395,000,000 with respect to the term loans. The Credit Facility is used to supplement the Companys equity capital to make additional portfolio investments and for other general corporate purposes. See Note 12.
At March 31, 2010, the Company had $253,500,000 drawn on the credit facility versus $296,000,000 at December 31, 2009. The weighted average annual interest cost for the three months ended March 31, 2010 and 2009 was 1.53% and 1.66%, 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, 2010 and 2009 was $260,746,667 and $432,311,196, respectively. The maximum amounts borrowed during the three months ended March 31, 2010 and 2009 were $314,000,000 and $433,680,000, respectively. The remaining amount available under the facility was $291,500,000 at March 31, 2010.
28
At March 31, 2010, the Company was in compliance with all financial and operational covenants required by the Credit Facility.
8. Capital stock
As a closed-end investment company regulated as a BDC under the 1940 Act, the Company is prohibited from selling shares of its common stock at a price below the current net asset value of the stock, or NAV, unless the Companys stockholders approve such a sale and its Board of Directors makes certain determinations. On February 8, 2010, subject to certain Board of Director determinations, the Companys stockholders approved the ability to sell or otherwise issue shares of the Companys common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which the Companys common stock would be issued and sold may not be less than a price that, in the determination of the Companys Board of Directors, closely approximates the market value of such common stock. Any sale of the Companys common stock at a price below NAV would have a dilutive effect on NAV.
In August 2008, the Companys Board of Directors approved a share repurchase plan under which the Company may repurchase up to 2.5 percent of its outstanding shares of common stock from time to time in open market or privately negotiated transactions. In May 2009, the Board of Directors approved an extension and increase to the plan which authorized the Company to repurchase up to an additional 2.5 percent of its outstanding shares of common stock. The repurchase plan is expected to be in effect through the earlier of June 30, 2010 or until the approved number of shares has been repurchased. During the three months ended March 31, 2009, the Company purchased a total of 501,364 shares of its common stock on the open market for $1,877,658, including brokerage commissions. There were no such purchases during the three months ended March 31, 2010. Since inception of the repurchase plan through March 31, 2010, the Company has purchased 961,679 shares of its common stock on the open market for $5,425,900, including brokerage commissions. At March 31, 2010, the total number of remaining shares authorized for repurchase was 1,794,971. The Company currently holds the shares it repurchased in treasury. See Note 12.
9. Guarantees and commitments
In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. At March 31, 2010 and December 31, 2009, the maximum amount of potential future payments under such guarantees was $6,000,000, with an expiration of December 2011. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Companys investments. The potential liability under such guarantees is reflected at fair value in the Companys schedules of investments.
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.
From time to time, the Company may be a party to certain legal proceedings incidental to the normal course of its business, including the enforcement of the Companys rights under contracts with its portfolio companies. While the Company cannot predict the outcome of these legal proceedings with certainty, it does not expect that these proceedings will have a material effect on its financial statements.
10. Fair value of financial instruments
The carrying values of the Companys financial instruments approximate fair value. The carrying values of receivables, other assets, accounts payable and accrued expenses approximate fair value due to their short maturities. The carrying and fair values of the Companys credit facility payable were $253,500,000 and $247,796,000 at March 31, 2010 and $296,000,000 and $287,120,000 at December 31, 2009, respectively.
29
The following tables summarize the fair values of the Companys cash and cash equivalents, investments and forward foreign currency contracts based on the inputs used at March 31, 2010 and December 31, 2009 in determining such fair values:
Valuation Inputs, March 31, 2010 |
Cash
and Cash Equivalents |
Senior Secured Notes |
Unsecured Debt |
Subordi- nated Debt |
Senior Secured Loans |
Preferred Stock |
Common Stock |
Limited Partnership/ Limited Liability Company Interests |
Equity Warrants/ Options |
Forward Foreign Currency Contracts |
Total | ||||||||||||||||||||||||
Level 1 - Price quotations |
$ | 7,251,627 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 7,251,627 | |||||||||||||
Level 2 - Significant other observable inputs |
| | | | | | | | | (1,288,817 | ) | (1,288,817 | ) | ||||||||||||||||||||||
Level 3 - Significant unobservable inputs |
| 48,265,219 | 74,641,210 | 135,569,589 | 488,497,173 | 6,123,040 | 24,489,162 | 21,938,853 | 3,804,892 | | 803,329,138 | ||||||||||||||||||||||||
Fair value at March 31, 2010 |
$ | 7,251,627 | $ | 48,265,219 | $ | 74,641,210 | $ | 135,569,589 | $ | 488,497,173 | $ | 6,123,040 | $ | 24,489,162 | $ | 21,938,853 | $ | 3,804,892 | $ | (1,288,817 | ) | $ | 809,291,948 | ||||||||||||
Valuation Inputs, December 31, 2009 |
Cash
and Cash Equivalents |
Senior Secured Notes |
Unsecured Debt |
Subordi- nated Debt |
Senior Secured Loans |
Preferred Stock |
Common Stock |
Limited Partnership/ Limited Liability Company Interests |
Equity Warrants/ Options |
Forward Foreign Currency Contracts |
Total | ||||||||||||||||||||||||
Level 1 - Price quotations |
$ | 5,807,901 | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | | $ | 5,807,901 | |||||||||||||
Level 2 - Significant other observable inputs |
| | | | | | | | | 203,998 | 203,998 | ||||||||||||||||||||||||
Level 3 - Significant unobservable inputs |
| 48,407,746 | 126,312,042 | 131,337,094 | 501,811,506 | 5,896,040 | 18,870,342 | 13,082,528 | 1,024,747 | | 846,742,045 | ||||||||||||||||||||||||
Fair value at December 31, 2009 |
$ | 5,807,901 | $ | 48,407,746 | $ | 126,312,042 | $ | 131,337,094 | $ | 501,811,506 | $ | 5,896,040 | $ | 18,870,342 | $ | 13,082,528 | $ | 1,024,747 | $ | 203,998 | $ | 852,753,944 | |||||||||||||
In determining the fair values of the Companys forward foreign currency contracts at March 31, 2010 and December 31, 2009, the Company used unadjusted indicative price quotations for similar assets (Level 2). The following tables summarize the valuation techniques used at March 31, 2010 and December 31, 2009 in determining the fair values of the Companys investments for which significant unobservable inputs (Level 3) were used in determining fair value:
Valuation Techniques, March 31, 2010 |
Senior Secured Notes |
Unsecured Debt |
Subordi- nated Debt |
Senior Secured Loans |
Preferred Stock |
Common Stock |
Limited Partnership/ Limited Liability Company Interests |
Equity Warrants/ Options |
Total | ||||||||||||||||||
Market approach, income approach or both, utilizing one or more third-party valuation firms |
$ | 48,265,219 | $ | 74,641,210 | $ | 135,569,589 | $ | 484,767,509 | $ | 6,123,040 | $ | 24,489,162 | $ | 21,938,853 | $ | 3,804,892 | $ | 799,599,474 | |||||||||
Broker quote(s) for identical assets |
| | | 3,729,664 | | | | | 3,729,664 | ||||||||||||||||||
Fair value at March 31, 2010 |
$ | 48,265,219 | $ | 74,641,210 | $ | 135,569,589 | $ | 488,497,173 | $ | 6,123,040 | $ | 24,489,162 | $ | 21,938,853 | $ | 3,804,892 | $ | 803,329,138 | |||||||||
Valuation Techniques, December 31, 2009 |
Senior Secured Notes |
Unsecured Debt |
Subordi- nated Debt |
Senior Secured Loans |
Preferred Stock |
Common Stock |
Limited Partnership/ Limited Liability Company Interests |
Equity Warrants/ Options |
Total | ||||||||||||||||||
Market approach, income approach or both, utilizing one or more third-party valuation firms |
$ | 48,407,746 | $ | 126,312,042 | $ | 131,337,094 | $ | 497,768,966 | $ | 5,896,040 | $ | 18,870,342 | $ | 13,082,528 | $ | 1,024,747 | $ | 842,699,505 | |||||||||
Broker quote(s) for identical assets |
| | | 4,042,540 | | | | | 4,042,540 | ||||||||||||||||||
Fair value at December 31, 2009 |
$ | 48,407,746 | $ | 126,312,042 | $ | 131,337,094 | $ | 501,811,506 | $ | 5,896,040 | $ | 18,870,342 | $ | 13,082,528 | $ | 1,024,747 | $ | 846,742,045 | |||||||||
The following are reconciliations for the three months ended March 31, 2010 of investments for which Level 3 inputs were used in determining fair value:
Senior Secured Notes |
Unsecured Debt |
Subordi- nated Debt |
Senior Secured Loans |
Preferred Stock |
Common Stock |
Limited Partnership/ Limited Liability Company Interests |
Equity Warrants/ Options |
Total | |||||||||||||||||||||||||||
Fair value at December 31, 2009 |
$ | 48,407,746 | $ | 126,312,042 | $ | 131,337,094 | $ | 501,811,506 | $ | 5,896,040 | $ | 18,870,342 | $ | 13,082,528 | $ | 1,024,747 | $ | 846,742,045 | |||||||||||||||||
Amortization of premium/discount - net |
14,094 | 489,537 | 681,810 | 497,055 | | | | | 1,682,496 | ||||||||||||||||||||||||||
Net realized gain (loss) |
| | 358 | (28,488,423 | ) | | | (14,426,995 | ) | | (42,915,060 | ) | |||||||||||||||||||||||
Net change in unrealized appreciation or depreciation |
(156,621 | ) | (3,791,702 | ) | 4,129,389 | 43,489,853 | (373,000 | ) | (5,167,293 | ) | 14,749,526 | 1,164,885 | 54,045,037 | ||||||||||||||||||||||
Net purchases, sales or redemptions |
| (48,368,667 | ) | (579,062 | ) | (28,812,818 | ) | 600,000 | 10,786,113 | 8,533,794 | 1,615,260 | (56,225,380 | ) | ||||||||||||||||||||||
Net transfers in or out of Level 3 |
| | | | | | | | | ||||||||||||||||||||||||||
Fair value at March 31, 2010 |
$ | 48,265,219 | $ | 74,641,210 | $ | 135,569,589 | $ | 488,497,173 | $ | 6,123,040 | $ | 24,489,162 | $ | 21,938,853 | $ | 3,804,892 | $ | 803,329,138 | |||||||||||||||||
30
All realized and unrealized gains and losses are included in earnings (changes in net assets) and are reported as separate line items within the Companys statements of operations.
The following table contains information with respect to net unrealized appreciation or depreciation on investments for which Level 3 inputs were used in determining fair value that are still held by the Company at March 31, 2010.
Senior Secured Notes |
Unsecured Debt |
Subordi- nated Debt |
Senior Secured Loans |
Preferred Stock |
Common Stock |
Limited Partnership/ Limited Liability Company Interests |
Equity Warrants/ Options |
Total | |||||||||||||||||||||||||||
Net change in unrealized appreciation or depreciation for the three months ended March 31, 2010 on investments held at March 31, 2010 |
$ | (156,621 | ) | $ | (4,680,013 | ) | $ | (718,731 | ) | $ | 21,162,640 | $ | (373,000 | ) | $ | (5,167,293 | ) | $ | 322,531 | $ | 1,164,885 | $ | 11,554,398 | ||||||||||||
Net unrealized depreciation on investments held at March 31, 2010 |
(6,383,830 | ) | (48,115,005 | ) | (9,154,646 | ) | (69,734,941 | ) | (7,067,342 | ) | (7,169,693 | ) | (7,543,646 | ) | 1,136,182 | (154,032,921 | ) |
11. 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, 2010 and 2009.
Three
months ended March 31, 2010 |
Three
months ended March 31, 2009 |
|||||||
Per Share Data: |
||||||||
Net asset value, beginning of period |
$ | 9.55 | $ | 9.23 | ||||
Net investment income |
0.36 | 0.43 | ||||||
Net realized and unrealized gain (loss) |
0.18 | (0.50 | ) | |||||
Total from investment operations |
0.54 | (0.07 | ) | |||||
Dividend distributions to stockholders from net investment income |
(0.32 | ) | (0.16 | ) | ||||
Purchases of treasury stock at prices below net asset value |
| 0.04 | ||||||
Net increase (decrease) in net assets |
0.22 | (0.19 | ) | |||||
Net asset value, end of period |
$ | 9.77 | $ | 9.04 | ||||
Market price, end of period |
$ | 9.96 | $ | 4.19 | ||||
Total return(1)(2) |
27.01 | % | (54.77 | )% | ||||
Ratios / Supplemental Data: |
||||||||
Ratio of operating expenses to average net assets(3) |
4.62 | % | 4.79 | % | ||||
Ratio of credit facility related expenses to average net assets(3) |
0.95 | % | 1.59 | % | ||||
Ratio of total expenses to average net assets(3) |
5.57 | % | 6.38 | % | ||||
Ratio of net investment income to average net assets(3) |
14.98 | % | 18.80 | % | ||||
Net assets, end of period |
$ | 552,953,567 | $ | 495,519,468 | ||||
Average debt outstanding |
$ | 260,746,667 | $ | 432,311,196 | ||||
Weighted average shares outstanding |
56,597,028 | 55,242,972 | ||||||
Average debt per share(4) |
$ | 4.61 | $ | 7.83 | ||||
Portfolio turnover(2) |
9 | % | * |
* | Less than 1%. |
(1) | Total return is based on the change in market price per share during the respective periods. 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. |
(2) | Not annualized. |
(3) | Annualized. |
(4) | Average debt per share is calculated as average debt outstanding divided by the weighted average shares outstanding during the applicable period. |
31
12. Subsequent events
The Company has reviewed subsequent events occurring through the date that these financial statements were issued, and determined that no subsequent events occurred requiring accrual or disclosure, except as disclosed below and elsewhere in these notes to financial statements.
On April 20, 2010, the Company entered into an agreement to amend its Credit Facility. The amendment extends through December 6, 2013 certain existing lenders commitments totaling $300 million, consisting of $200 million of revolving loan commitments and $100 million of term loan commitments. Subsequent to the amendment becoming effective, the Company received a binding commitment from a new lender of $50 million, subject to definitive documentation. The addition of this revolving loan commitment would bring the total commitments that extend through December 2013 to $350 million. Non-extending lender commitments of $245 million, consisting of $200 million of revolving loan commitments and $45 million of term loan commitments, mature on December 6, 2010 unless they are extended prior to that date. Pricing for outstanding borrowings made by non-extending lenders will remain at LIBOR plus 0.875% with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The pricing for outstanding borrowings made by extending lenders and the new lender is reset to LIBOR plus an applicable spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on the Companys credit rating, and LIBOR plus 3.00% for term loans. The Credit Facility does not contain a LIBOR floor requirement. On May 5, 2010, the effective LIBOR spread under the Credit Facility was 2.34%. Additionally, the Company is required to pay a commitment fee of 0.50% on any unused portion of the commitments of the extending lenders and the new lender. The Credit Facility is secured by substantially all of the assets in the Companys portfolio, including cash and cash equivalents. In connection with the amendment of the Credit Facility, the Company paid structuring and arrangement fees of approximately $6.5 million. The Credit Facility includes an accordion feature that allows the Company, under certain circumstances, to increase the size of the facility from its current level by up to an additional $300 million of revolving loan commitments and $250 million of term loan commitments. The Company expects to approach new lenders to solicit additional commitments to its Credit Facility.
On May 5, 2010, the Companys Board of Directors declared a dividend of $0.32 per share, payable on July 2, 2010 to stockholders of record at the close of business on May 17, 2010.
On May 5, 2010, the Companys Board of Directors approved an extension of the Companys share repurchase plan to June 30, 2011, with 1,794,971 shares remaining authorized for repurchase.
From April 1 to May 5, 2010, the Companys purchases of investments totaled approximately $58 million and sales and repayments of investments totaled approximately $144 million. At May 5, 2010, borrowings under the Credit Facility were $245 million.
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. 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 or thinly traded public U.S. companies, cash, cash equivalents, U.S. Government securities and high-quality debt investments that mature in one year or less.
On July 25, 2005, we completed a private placement of 35,366,589 shares of our common stock at a price of $15.00 per share that raised approximately $529 million in net proceeds. On July 2, 2007, we completed an initial public offering of 10,000,000 shares of our common stock at a price of $16.00 per share that raised approximately $150 million in net proceeds.
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.
32
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, companies whose securities are not listed on a national securities exchange, and certain public companies that have listed their securities on a national securities exchange and have a market capitalization of less than $250 million. 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.
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 Advisor 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.
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 and in Note 2 to the financial statements in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. See Note 2 to the financial statements in this Quarterly Report for a description of recently issued accounting pronouncements.
Financial and operating highlights
At March 31, 2010:
Investment Portfolio: $810.6 million
Net Assets: $553.0 million
Net Indebtedness (borrowings less cash and cash equivalents): $246.2 million
Net Asset Value per share: $9.77
Portfolio Activity for the Three Months Ended March 31, 2010:
Cost of investments during period: $16.4 million
Sales, repayments and other exits during period: $72.7 million
33
Number of portfolio companies at end of period: 55
Operating Results for the Three Months Ended March 31, 2010:
Net investment income before Incentive Fees per share: $0.37
Net investment income per share: $0.36
Net investment income per share, as adjusted1: $0.30
Dividends declared per share: $0.32
Net increase in net assets from operations per share: $0.54
Net investment income before Incentive Fees: $20.8 million
Net investment income: $20.3 million
Net investment income, as adjusted1: $16.8 million
Net realized and unrealized gains: $10.2 million
Net increase in net assets from operations: $30.5 million
As adjusted amounts are non-GAAP basis financial measures that refer to GAAP basis amounts adjusted for incremental incentive management fee expense that reflects the difference between the estimated amount of incentive management fees that we expect to incur at the end of the year with respect to the reported periods operating results versus the actual amount that we are legally obligated to pay at the end of the reported period. Management believes that reflecting estimated incentive fees throughout the year, as the related investment income is earned, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. The presentation of this additional information is not meant to be considered in isolation or as a substitute for financial results prepared in accordance with GAAP. Reconciliations of as adjusted amounts to the most directly comparable GAAP financial measures are set forth in Results of operationsSupplemental information below.
Portfolio and investment activity
During the three months ended March 31, 2010, we invested approximately $16.4 million across five existing portfolio companies. The new investments consisted primarily of senior loans secured by first liens ($1.5 million, or 9% of the total) or second liens ($5.0 million, or 31%), unsecured or subordinated debt securities ($4.5 million, or 27%) and equity securities ($5.4 million, or 33%). Additionally, we received proceeds from sales/repayments of investment principal of approximately $72.7 million during the three months ended March 31, 2010.
At March 31, 2010, our net portfolio of $811 million (at fair value) consisted of 55 portfolio companies and was invested 60% in senior secured loans, 26% in unsecured or subordinated debt securities, 7% in equity investments, 6% in senior secured notes and 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $17.4 million. Our largest portfolio company investment by value was approximately $59.1 million and our five largest portfolio company investments by value comprised approximately 25% of our portfolio at March 31, 2010. At December 31, 2009, our net portfolio of $853 million (at fair value) consisted of 57 portfolio companies and was invested 59% in senior secured loans, 30% in unsecured or subordinated debt securities, 6% in senior secured notes, 5% in equity investments and less than 1% in cash and cash equivalents. Our average portfolio company investment at amortized cost was approximately $18.5 million at December 31, 2009. Our largest portfolio company investment by value was approximately $56.1 million and our five largest portfolio company investments by value comprised approximately 26% of our portfolio at December 31, 2009.
The weighted average yield of the debt and income producing equity securities in our portfolio at their current cost basis was 11.6% at March 31, 2010 and 11.2% at December 31, 2009. The weighted average yields on our senior secured loans and other debt securities at their current cost basis were 10.3% and 13.9%, respectively, at March 31, 2010, versus 9.4% and 14.2% at December 31, 2009. 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. Yields exclude common equity investments, preferred equity investments with no stated dividend rate, short-term investments, cash and cash equivalents.
At March 31, 2010, 42% of our debt investments bore interest based on floating rates, such as LIBOR, the Federal Funds Rate or the Prime Rate, and 58% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 5% at March 31, 2010. At December 31, 2009, 41% of our debt investments bore interest based on floating rates and 59% bore interest at fixed rates. The percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 5% at December 31, 2009.
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
1 | Non-GAAP basis financial measure. See Results of operationsSupplemental information below. |
34
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 generally will 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 Board of Directors review these investment ratings on a quarterly basis. Our average investment rating was 1.45 at March 31, 2010 versus 1.46 at December 31, 2010. The following is a distribution of the investment ratings of our portfolio companies at March 31, 2010 and December 31, 2009:
March 31, 2010 | December 31, 2009 | |||||||
Grade 1 |
$ | 524,460,771 | $ | 553,361,682 | ||||
Grade 2 |
222,313,206 | 224,552,728 | ||||||
Grade 3 |
39,118,057 | 51,207,962 | ||||||
Grade 4 |
20,096,357 | 21,528,959 | ||||||
Total investments including unearned income |
805,988,391 | 850,651,331 | ||||||
Unearned income |
(2,659,253 | ) | (3,909,286 | ) | ||||
Total investments |
$ | 803,329,138 | $ | 846,742,045 | ||||
Results of operations
Results comparisons for the three months ended March 31, 2010 and 2009.
Investment income
Investment income totaled $27,799,099 and $31,811,300, respectively, for the three months ended March 31, 2010 and 2009, of which $14,994,235 and $17,841,510 were attributable to interest and fees on senior secured loans, $11,998,827 and $13,185,401 to interest earned on other debt securities, $805,808 and $778,416 to dividends from preferred equity securities, and $229 and $5,973 to interest earned on cash equivalents, respectively. The decrease in investment income for the three months ended March 31, 2010 primarily reflects a reduction in the size of our portfolio due to sales and repayments, as well as the impact of lower levels of LIBOR on interest income from our floating rate debt investments, which generally bear interest based on LIBOR. Total investments at their current cost basis were $957,362,059 at March 31, 2010, compared to $1,251,186,989 at March 31, 2009. Three-month LIBOR averaged 0.26% during the three months ended March 31, 2010, compared to 1.24% during the three months ended March 31, 2009.
Expenses
Expenses for the three months ended March 31, 2010 and 2009 were $7,533,834 and $8,059,918, respectively, which consisted of $4,322,471 and $4,748,218 in base management fees, $493,951 and zero in incentive management fees, $1,122,254 and $1,836,389 in interest expense and fees related to the Credit Facility, $398,664 and $346,794 in Advisor expenses, $257,723 and $229,108 in administrative services, $203,266 and $232,050 in professional fees, $168,292 and $168,292 in amortization of debt issuance costs, $152,408 and $129,361 in insurance expenses, $95,837 and $95,292 in director fees and $318,968 and $274,414 in other expenses, respectively. The decrease in base management fees reflects a decline in the quarterly portfolio values on which the fees are paid (in arrears). The
35
increase in incentive management fees is due to continued strong investment earnings, without the substantial net capital depreciation (including net realized and unrealized gains and losses) that had occurred in the prior period. The decrease in interest expense and fees related to the Credit Facility is mainly a result of reduced borrowing levels and lower prevailing levels of LIBOR. Total borrowings were $253,500,000 at March 31, 2010, compared to $421,500,000 at March 31, 2009.
Net investment income
Net investment income was $20,265,265 and $23,751,382 for the three months ended March 31, 2010 and 2009, respectively. Net investment income, as adjusted,2 totaled $16,764,179 and $19,134,617, or $0.30 per share and $0.35 per share, respectively, for the three months ended March 31, 2010 and 2009. The decrease is primarily a result of a decline in interest income, which was partially offset by a decrease in interest and other expenses.
Net realized gain or loss
Net realized loss of $(42,363,323) for the three months ended March 31, 2010 was the result of $(42,915,060) in net losses realized from the disposition or restructuring of our investments and $551,737 in net gains realized on foreign currency transactions. Net realized loss on investments for the three months ended March 31, 2010 resulted primarily from the restructuring of our investments in Penton Media Inc. and Arclin US Holdings Inc. Nearly the entire net realized loss on investments represents amounts that had been reflected in unrealized depreciation on investments in prior periods. Foreign currency gains mainly represent gains on forward currency contracts used to hedge our investments denominated in foreign currencies. For the three months ended March 31, 2009, net realized gain was $2,128,328.
Net unrealized appreciation or depreciation
For the three months ended March 31, 2010 and 2009, the change in net unrealized depreciation was a decrease (increase) in net unrealized depreciation of $52,581,109 and $(29,946,780), respectively. The decrease in net unrealized depreciation for the three months ended March 31, 2010 was comprised of a decrease (increase) in net unrealized depreciation on investments of $54,045,037 and on foreign currency translation of $(1,463,928). The decrease in net unrealized depreciation on investments for the three months ended March 31, 2010 includes $42,490,639 relating to reversals of prior periods net unrealized depreciation as a result of investment restructurings and dispositions. The decrease in net unrealized depreciation during the first quarter of 2010 was primarily a result of the reversals described above and improved capital market conditions. The valuations of our investments were favorably impacted by market-wide decreases in interest yields, as well as increases in multiples used to estimate the fair value of some of our investments. Market-wide movements and trading multiples are not necessarily indicative of any fundamental change in the condition or prospects of our portfolio companies. The increase in net unrealized depreciation for the three months ended March 31, 2009 was comprised of increases in net unrealized depreciation on investments of $(29,258,527) and on foreign currency translation of $(688,253).
Net increase or decrease in net assets resulting from operations
The net increase or decrease in net assets resulting from operations for the three months ended March 31, 2010 and 2009 was an increase of $30,483,051 and a decrease of $(4,067,070), respectively. The net increase or decrease in net assets resulting from operations, as adjusted,2 for the three months ended March 31, 2010 and 2009 was an increase of $26,981,965 and a decrease of $(8,683,835), respectively. As compared to the prior period, the increase primarily reflects the decrease in net unrealized depreciation on investments, net of realized gains and losses, for the three months ended March 31, 2010.
Supplemental information
We report our financial results on a GAAP basis; however, management believes that evaluating our ongoing operating results may be enhanced if investors have additional non-GAAP basis financial measures. Management reviews non-GAAP financial measures to assess ongoing operations and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time. Management does not advocate that investors consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP.
We record our liability for Incentive Fees as we become legally obligated to pay them, based on a hypothetical liquidation at the end of each reporting period. Our obligation to pay Incentive Fees with respect to any fiscal quarter is based on a formula that reflects our results over a trailing four-fiscal quarter period ending with the current fiscal quarter. We are legally obligated to pay the amount resulting from the formula less any cash payments of Incentive Fees during the prior three quarters. The formulas requirement to
2 | Non-GAAP basis financial measure. See Results of operationsSupplemental information below. |
36
reduce the Incentive Fees by amounts paid with respect to Incentive Fees in the prior three quarters has caused our Incentive Fees expense to become, and currently is expected to be, concentrated in the fourth quarter of each year. Management believes that reflecting Incentive Fees throughout the year, as the related investment income is earned, is an effective measure of our profitability and financial performance that facilitates comparison of current results with historical results and with those of our peers. Our as adjusted results reflect Incentive Fees based on the formula we utilize for each trailing four-fiscal quarter period, with the formula applied to the current quarters incremental earnings and without any reduction for Incentive Fees paid during the prior three quarters. The resulting amount represents an estimate of each quarters incremental Incentive Fee that we expect we will become legally obligated to pay at the end of the year. Prior year amounts are estimated in the same manner. Changes in the economic environment, financial markets and other parameters used in determining such estimates could cause actual results to differ and such differences could be material. See Note 3 to the financial statements in this Quarterly Report for a more detailed description of the Companys incentive management fee.
Computations for all periods are derived from our financial statements as follows:
Three months ended March 31, 2010 |
Three
months ended March 31, 2009 |
|||||||
GAAP Basis: |
||||||||
Net Investment Income |
$ | 20,265,265 | $ | 23,751,382 | ||||
Net Increase (Decrease) in Net Assets from Operations |
30,483,051 | (4,067,070 | ) | |||||
Net Asset Value at end of period |
552,953,567 | 495,519,468 | ||||||
Less: Incremental Incentive Fee expense using existing formula as applied to current period operating results |
(3,501,086 | ) | (4,616,765 | ) | ||||
As Adjusted: |
||||||||
Net Investment Income |
$ | 16,764,179 | $ | 19,134,617 | ||||
Net Increase (Decrease) in Net Assets from Operations |
26,981,965 | (8,683,835 | ) | |||||
Net Asset Value at end of period |
549,452,481 | 490,902,703 | ||||||
Per Share Amounts, GAAP Basis: |
||||||||
Net Investment Income |
$ | 0.36 | $ | 0.43 | ||||
Net Increase (Decrease) in Net Assets from Operations |
0.54 | (0.07 | ) | |||||
Net Asset Value at end of period |
9.77 | 9.04 | ||||||
Per Share Amounts, As Adjusted: |
||||||||
Net Investment Income |
$ | 0.30 | $ | 0.35 | ||||
Net Increase (Decrease) in Net Assets from Operations |
0.48 | (0.16 | ) | |||||
Net Asset Value at end of period |
9.71 | 8.96 |
Financial condition, liquidity and capital resources
During the three months ended March 31, 2010, we generated operating cash flows primarily from interest earned and fees received on senior secured loans and other debt securities, as well as from sales of selected portfolio company investments or repayments of principal.
Net cash provided by operating activities during the three months ended March 31, 2010 was $60,967,798. Our primary sources of cash from operating activities during the period consisted of a net increase in net assets from operations of $30,483,051 and sales/repayments of investments (net of purchases) of $56,234,734.
We used $59,551,914 for financing activities during the three months ended March 31, 2010, consisting of $17,051,914 of dividend distributions and $42,500,000 of net repayments under our Credit Facility.
Our senior secured, multi-currency Credit Facility provides us with $545,000,000 in total availability, consisting of $400,000,000 in revolving loan commitments and $145,000,000 in term loan commitments. 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 generally 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 have been fully drawn and mature on December 6, 2010, the termination date of the Credit Facility, and term loans, once repaid, may not be reborrowed. The Credit Facility is secured by substantially all of the assets in our portfolio,
37
including cash and cash equivalents. At March 31, 2010, we had $253,500,000 drawn and outstanding under the Credit Facility, with $291,500,000 available to us, subject to compliance with customary affirmative and negative covenants, including the maintenance of a minimum stockholders equity, the maintenance of a ratio of not less than 200% of total assets (less total liabilities other than indebtedness) to total indebtedness, and restrictions on certain payments and issuance of debt. See Recent developments below.
At March 31, 2010, we had $7,251,627 in cash and cash equivalents.
The primary use of existing funds is expected to be purchases of investments in portfolio companies, cash distributions to our stockholders, repayment of indebtedness and other general corporate purposes.
Our shelf registration permits us to offer, from time to time, up to $1 billion of our common stock, preferred stock, debt securities, warrants representing rights to purchase shares of our common stock, preferred stock or debt securities and subscription rights. As a closed-end investment company regulated as a BDC under the 1940 Act, we are prohibited from selling shares of our common stock at a price below the current net asset value of the stock, or NAV, unless our stockholders approve such a sale and our Board of Directors makes certain determinations. On February 8, 2010, subject to certain Board of Director determinations, our stockholders approved our ability to sell or otherwise issue shares of our common stock at a price below its then current net asset value per share for a twelve month period expiring on the anniversary of the date of stockholder approval. In any such case, the price at which our common stock would be issued and sold may not be less than a price that, in the determination of our Board of Directors, closely approximates the market value of such common stock. Any sale of the Companys common stock at a price below NAV would have a dilutive effect on our NAV.
Contractual obligations
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under our Credit Facility at March 31, 2010 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) |
$ | 253.5 | $ | 253.5 | $ | | $ | | $ | | |||||
Interest Payable on Credit Facility |
0.2 | 0.2 | | | |
(1) | At March 31, 2010, $291.5 million remained unused under our Credit Facility. |
Off-balance sheet arrangements
In the normal course of business, the Company may enter into guarantees on behalf of portfolio companies. Under these arrangements, the Company would be required to make payments to third parties if the portfolio companies were to default on their related payment obligations. At March 31, 2010 and December 31, 2009, the maximum amount of potential future payments under such guarantees was $6,000,000, with an expiration of December 2011. Guarantees made on behalf of portfolio companies are considered in determining the fair value of the Companys investments.
Dividends
Our quarterly dividends, if any, are determined by our Board of Directors. Dividends are declared considering our estimate of annual taxable income available for distribution to stockholders and the amount of taxable income carried over from the prior year for distribution in the current year. We cannot assure stockholders that they will receive any dividends and distributions or dividends and distributions at a particular level. Dividends declared by the Company since July 25, 2005 (inception of operations) have been as follows:
Dividend Amount |
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 |
38
Dividend Amount |
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 | ||
$0.43 | September 15, 2008 | September 30, 2008 | ||
$0.43 | December 15, 2008 | December 31, 2008 | ||
$0.16 | March 20, 2009 | April 3, 2009 | ||
$0.16 | June 19, 2009 | July 2, 2009 | ||
$0.16 | September 18, 2009 | October 2, 2009 | ||
$0.32 | December 21, 2009 | January 4, 2010 | ||
$0.32 | March 22, 2010 | April 5, 2010 | ||
$0.32 | May 17, 2010 | July 2, 2010 |
Tax characteristics of all dividends are reported to stockholders on Form 1099 after the end of the calendar year.
We have qualified and elected and intend to continue to qualify for the tax treatment applicable to regulated investment companies under Subchapter M of the Code, and, among other things, have made and intend to continue to make the requisite distributions to its stockholders which will relieve us from federal income taxes. Therefore, no provision has been recorded for federal income taxes. We may, at our discretion, carry forward taxable income in excess of calendar year distributions and pay a 4% excise tax on this income. We will accrue excise tax on estimated undistributed taxable income as required.
In order to qualify for favorable tax treatment as a RIC, we are required to distribute annually to our stockholders at least 90% of investment company taxable income, as defined by the Code. To avoid federal excise taxes, we must distribute annually at least 98% of our income (both ordinary income and net capital gains).
We maintain an opt out dividend reinvestment plan for our common stockholders. As a result, except as discussed below, 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 our dividends and distributions paid to stockholders during the three months ended March 31, 2010 and 2009, dividends reinvested pursuant to our dividend reinvestment plan totaled $1,020,149 and zero, respectively.
Under the terms of our amended and restated dividend reinvestment plan adopted on March 4, 2009, dividends may be paid in newly issued or treasury shares of our common stock at a price equal to 95% of the market price on the dividend payment date. This feature of the plan means that, under certain circumstances, we may issue shares of our common stock at a price below net asset value per share, which could cause our stockholders to experience dilution.
Income we receive from origination, structuring, closing, commitment and other upfront fees associated with investments in portfolio companies is treated as taxable income when received and accordingly, distributed to stockholders. For financial reporting purposes, such fees are recorded as unearned income and accreted/amortized over the life of the respective investment. For the three months ended March 31, 2010 and 2009, these fees totaled $27,500 and zero, 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.
In order to satisfy the annual distribution requirement applicable to RICs, we have the ability to declare a large portion of a dividend in shares of our common stock instead of in cash. As long as a portion of such dividend is paid in cash (which portion can be as low as 10% for our taxable years ending on or before December 31, 2011) and certain requirements are met, the entire distribution would be treated as a dividend for U.S. federal income tax purposes.
Recent developments
On April 20, 2010, we entered into an agreement to amend our Credit Facility. The amendment extends through December 6, 2013 certain existing lenders commitments totaling $300 million, consisting of $200 million of revolving loan commitments and $100 million of term loan commitments. Subsequent to the amendment becoming effective, we received a binding commitment from a new lender of $50 million, subject to definitive documentation. The addition of this revolving loan commitment would bring the total commitments that extend through December 2013 to $350 million. Non-extending lender commitments of $245 million, consisting of $200 million of revolving
39
loan commitments and $45 million of term loan commitments, mature on December 6, 2010 unless they are extended prior to that date. Pricing for outstanding borrowings made by non-extending lenders will remain at LIBOR plus 0.875% with respect to revolving loans and LIBOR plus 1.50% with respect to term loans. The pricing for outstanding borrowings made by extending lenders and the new lender is reset to LIBOR plus an applicable spread of either 3.00% or 3.25% for revolving loans, based on a pricing grid depending on the Companys credit rating, and LIBOR plus 3.00% for term loans. The Credit Facility does not contain a LIBOR floor requirement. On May 5, 2010, the effective LIBOR spread under the Credit Facility was 2.34%. Additionally, we are required to pay a commitment fee of 0.50% on any unused portion of the commitments of the extending lenders and the new lender. The Credit Facility is secured by substantially all of the assets in our portfolio, including cash and cash equivalents. In connection with the amendment of the Credit Facility, we paid structuring and arrangement fees of approximately $6.5 million. The Credit Facility includes an accordion feature that allows us, under certain circumstances, to increase the size of the facility from its current level by up to an additional $300 million of revolving loan commitments and $250 million of term loan commitments. We expect to approach new lenders to solicit additional commitments to our Credit Facility
On May 5, 2010, our Board of Directors declared a dividend of $0.32 per share, payable on July 2, 2010 to stockholders of record at the close of business on May 17, 2010.
On May 5, 2010, our Board of Directors approved an extension of our share repurchase plan to June 30, 2011, with 1,794,971 shares remaining authorized for repurchase.
From April 1 to May 5, 2010, our purchases of investments totaled approximately $58 million and sales and repayments of investments totaled approximately $144 million. At May 5, 2010, borrowings under our Credit Facility were $245 million.
Notice is hereby given in accordance with Section 23 of the 1940 Act that from time to time we may purchase shares of our common stock in the open market at prevailing market prices.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are subject to financial market risks, including changes in interest rates. At March 31, 2010, 42% of our debt investments bore interest based on floating rates, such as LIBOR, 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. At March 31, 2010, the percentage of our total debt investments that bore floating rate interest based on an interest rate floor was 5%. Floating rate investments subject to a floor generally reset by reference to the current market index after one to six months only if the index exceeds the floor.
To illustrate the potential impact of changes in interest rates, we have performed the following analysis based on our March 31, 2010 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 $8,100,000, or $0.14 per share, in the value of our net assets at March 31, 2010 and a corresponding 100 basis point decrease in LIBOR and U.S. Treasury yields would cause an increase of approximately $7,900,000, or $0.14 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 also may 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, 2010 and 2009, we did not engage in any interest rate hedging activity.
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.
40
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.
PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
From time to time, we and the Advisor may be a party to certain legal proceedings incidental to the normal course of our business, including the enforcement of our rights under contracts with our portfolio companies. While we cannot predict the outcome of these legal proceedings with certainty, we do not expect that these proceedings will have a material effect on our financial statements.
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 |
Sales of unregistered securities
None.
Issuer purchases of equity securities
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | [Reserved] |
Item 5. | Other Information |
None.
41
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. |
42
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 6, 2010 | By: | /s/ James R. Maher | ||
James R. Maher | ||||
Chief Executive Officer | ||||
Date: May 6, 2010 | By: | /s/ Frank D. Gordon | ||
Frank D. Gordon | ||||
Chief Financial Officer |
43
EXHIBIT 31.1
CEO CERTIFICATION
I, James R. Maher, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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;
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;
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 6, 2010 | 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, 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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;
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;
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 6, 2010 | 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, 2010 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 6, 2010 | |
/s/ Frank D. Gordon | ||
Name: | Frank D. Gordon | |
Title: | Chief Financial Officer | |
Date: | May 6, 2010 |