N-Q 1 pris2015q1nq.htm N-Q PRIS 2015 Q1 NQ


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22725
Priority Income Fund, Inc.
(Exact name of registrant as specified in charter)
10 East 40th Street, 42nd Floor
New York, NY 10016
(Address of principal executive offices)
M. Grier Eliasek
Chief Executive Officer
Priority Income Fund, Inc.
10 East 40th Street, 42nd Floor
New York, NY 10016
(Name and address of agent for service)
Registrant’s telephone number, including area code: (212) 448-0702
Date of fiscal year end: June 30
Date of reporting period: September 30, 2014





Item 1. Schedule of Investments.
Priority Income Fund, Inc.
Schedule of Investments
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment(1)
 
Industry
 
Investment
 
Estimated Yield(2)
 
Maturity
 
Principal Amount
 
Amortized Cost
 
Fair Value(3)
 
% of Net Assets
Collateralized Loan Obligation - Equity Class (Cayman Islands)
 
 
 
 
 
 
 
 
 
 
 
 
Adams Mill 2014-1A
 
Structured Finance
 
Subordinated notes
 
13.45
%
 
7/15/2026
 
$
500,000

 
$
493,810

 
$
485,203

 
3.3
 %
Apidos 2005-2X
 
Structured Finance
 
Subordinated notes
 
12.63
%
 
12/21/2018
 
820,000

 
11,257

 
5,141

 
0.0%(5)

Apidos 2014-18A
 
Structured Finance
 
Subordinated notes
 
13.99
%
 
7/22/2026
 
750,000

 
730,011

 
712,855

 
4.9
 %
BABSN 2014-IIA
 
Structured Finance
 
Subordinated notes
 
13.38
%
 
10/17/2026
 
1,000,000

 
919,026

 
915,199

 
6.3
 %
Blue Mountain 2014-1A
 
Structured Finance
 
Subordinated notes
 
12.60
%
 
4/30/2026
 
250,000

 
257,022

 
239,251

 
1.6
 %
Carlyle Global Market Strategies CLO 2011-1A
 
Structured Finance
 
Subordinated notes
 
9.19
%
 
8/10/2021
 
713,706

 
736,623

 
793,711

 
5.5
 %
Cent CLO 2014-21A(4)
 
Structured Finance
 
Subordinated notes
 
15.28
%
 
7/27/2026
 
500,000

 
484,982

 
476,914

 
3.3
 %
CIFC Funding 2006-II
 
Structured Finance
 
Preferred shares
 
11.68
%
 
3/1/2021
 
406,629

 
188,069

 
198,495

 
1.4
 %
CIFC Funding 2013-II
 
Structured Finance
 
Subordinated notes
 
12.56
%
 
4/21/2025
 
250,000

 
254,401

 
275,698

 
1.9
 %
CIFC Funding 2014-1A
 
Structured Finance
 
Income notes
 
12.34
%
 
4/18/2025
 
250,000

 
224,667

 
244,656

 
1.7
 %
CIFC Funding 2014-4A(4)
 
Structured Finance
 
Income notes
 
13.69
%
 
10/17/2026
 
1,000,000

 
951,929

 
945,117

 
6.5
 %
COV 2014-1A
 
Structured Finance
 
Subordinated notes
 
13.64
%
 
7/20/2026
 
274,390

 
231,898

 
235,813

 
1.6
 %
CSAM Madison Park Funding 2014-13A
 
Structured Finance
 
Subordinated notes
 
12.71
%
 
1/19/2025
 
250,000

 
225,914

 
248,748

 
1.7
 %
CSAM Madison Park Funding 2014-14X
 
Structured Finance
 
Subordinated notes
 
10.21
%
 
7/20/2026
 
750,000

 
754,045

 
743,040

 
5.1
 %
Flagship 2006-1A
 
Structured Finance
 
Subordinated securities
 
5.31
%
 
9/20/2019
 
150,000

 
44,603

 
39,790

 
0.3
 %
Galaxy 2014-17A(4)
 
Structured Finance
 
Subordinated notes
 
14.64
%
 
7/15/2026
 
250,000

 
233,055

 
228,571

 
1.6
 %
Galaxy 2014-18A
 
Structured Finance
 
Subordinated notes
 
13.07
%
 
10/15/2026
 
250,000

 
220,001

 
216,297

 
1.5
 %
Halcyon Loan Investors 2006-1A
 
Structured Finance
 
Income notes
 
7.54
%
 
11/20/2020
 
504,000

 
250,886

 
233,823

 
1.6
 %
Halcyon Loan Advisers 2014-2A(4)
 
Structured Finance
 
Subordinated notes
 
15.82
%
 
4/28/2025
 
400,000

 
380,661

 
378,001

 
2.6
 %
Halcyon Loan Advisers 2014-3A
 
Structured Finance
 
Subordinated notes
 
12.82
%
 
10/22/2025
 
500,000

 
470,000

 
470,655

 
3.2
 %
LCM XV
 
Structured Finance
 
Income notes
 
12.26
%
 
8/25/2024
 
250,000

 
218,855

 
238,487

 
1.6
 %
LCM XVI
 
Structured Finance
 
Income notes
 
13.75
%
 
7/15/2026
 
500,000

 
478,932

 
453,637

 
3.1
 %
LCM XVII
 
Structured Finance
 
Income notes
 
13.55
%
 
10/15/2026
 
500,000

 
445,000

 
445,000

 
3.1
 %
MC Funding 2006-1
 
Structured Finance
 
Preferred shares
 
4.94
%
 
12/20/2020
 
387,965

 
196,860

 
165,443

 
1.1
 %
MVW 2014-1A
 
Structured Finance
 
Income notes
 
14.47
%
 
10/15/2026
 
1,000,000

 
906,793

 
905,686

 
6.2
 %
Ocean Trails CLO II 2007-2X
 
Structured Finance
 
Subordinated notes
 
14.63
%
 
6/27/2022
 
367,064

 
202,031

 
208,684

 
1.4
 %
Octagon 2014-1A
 
Structured Finance
 
Subordinated notes
 
12.71
%
 
11/18/2026
 
2,000,000

 
1,752,901

 
1,746,305

 
12.0
 %
Octagon Loan Funding
 
Structured Finance
 
Subordinated notes
 
12.84
%
 
11/18/2026
 
500,000

 
483,261

 
475,071

 
3.3
 %

SEPTEMBER 30, 2014 N-Q                                                  2
PRIORITY INCOME FUND, INC.



OZLM 2014-8A
 
Structured Finance
 
Subordinated notes
 
11.83
%
 
5/30/2023
 
750,000

 
687,146

 
682,612

 
4.7
 %
Phoenix III (formerly, Avenue CLO 2007-6A)
 
Structured Finance
 
Subordinated notes
 
17.64
%
 
7/17/2019
 
556,629

 
221,437

 
271,018

 
1.9
 %
Regatta IV Funding
 
Structured Finance
 
Subordinated notes
 
12.59
%
 
7/25/2026
 
250,000

 
239,836

 
235,698

 
1.6
 %
Symphony 2014-14A(4)
 
Structured Finance
 
Subordinated notes
 
13.79
%
 
7/14/2026
 
750,000

 
767,494

 
726,743

 
5.0
 %
Voya CLO I (formerly, ING Investment Management CLO I)
 
Structured Finance
 
Preference shares
 
11.74
%
 
12/1/2017
 
351,000

 
31,799

 
45,968

 
0.3
 %
Voya CLO 2014-1 (formerly, ING Investment Management CLO 2014-I)(4)
 
Structured Finance
 
Subordinated notes
 
12.75
%
 
4/18/2026
 
250,000

 
255,537

 
248,980

 
1.7
 %
Washington Mill 2014-1A(4)
 
Structured Finance
 
Subordinated notes
 
17.41
%
 
4/20/2026
 
400,000

 
389,099

 
388,560

 
2.7
 %
West 2014-1A
 
Structured Finance
 
Subordinated notes
 
12.56
%
 
7/18/2026
 
375,000

 
349,259

 
341,355

 
2.4
 %
Total Collateralized Loan Obligation - Equity Class
 
 
 
 
 
 
 
15,689,100

 
15,666,225

 
107.7
 %
Total Investments
 
 
 
 
 
 
 
$
15,689,100

 
15,666,225

 
 
Liabilities in excess of other assets
 
 
 
 
 
 
 
 
 
(1,161,517
)
 
(7.7
)%
Net Assets
 
 
 
 
 
 
 
 
 
$
14,504,708

 
100.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) The Company does not "control" and is not an "affiliate" of any of the portfolio investments, each term as defined in the Investment Company Act of 1940, as amended (the "1940 Act"). In general, under the 1940 Act, the Company would be presumed to "control" a portfolio company if the Company owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if the Company owned 5% or more of its voting securities.
(2) The CLO subordinated notes/securities, income notes and preference/preferred shares are considered equity positions in the CLOs. Equity investments are entitled to distributions, which are generally equal to the remaining cash flow of the payments made by the underlying loans less contractual payments to debt holders and expenses. The estimated yield indicated is based upon the current projection (as of September 30, 2014) of the amount and timing of these distributions and the estimated amount of repayment of the investment. Such projections are periodically reviewed and adjusted, and the estimated yield may not ultimately be realized.
(3) Fair value is determined in good faith by the board of directors of the Company.
(4) Co-investment with another fund managed by an affiliate of the Adviser.
(5) Less than 0.05%.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to schedule of investments.


SEPTEMBER 30, 2014 N-Q                                                  3
PRIORITY INCOME FUND, INC.





Notes to Schedule of Investments
September 30, 2014
(unaudited)


Note 1. Investment Valuation
Priority Income Fund, Inc. (formerly, Priority Senior Secured Income Fund, Inc.) (the "Company") follows guidance under U.S. generally accepted accounting principles, which classifies the inputs used to measure fair values into the following hierarchy:

Level 1. Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2. Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities on an inactive market, or other observable inputs other than quoted prices.

Level 3. Unobservable inputs for the asset or liability.

In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined
based on the lowest level input that is significant to the fair value measurement in its entirety. The assessment of the
significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.

Investments for which market quotations are readily available are valued at such market quotations and are classified in
level 1 of the fair value hierarchy.

U.S. government securities for which market quotations are available are valued at a price provided by an independent
pricing agent or primary dealer. The pricing agent or primary dealer provides these prices usually after evaluating inputs
including yield curves, credit rating, yield spreads, default rates, cash flows, broker quotes and reported trades. U.S.
government securities are categorized in level 2 of the fair value hierarchy.

With respect to investments for which market quotations are not readily available, or when such market quotations are
deemed not to represent fair value, the board of directors (the "Board") has approved a multi-step valuation process for each quarter, as described below, and such investments are classified in level 3 of the fair value hierarchy:

(1) the quarterly valuation process begins with the investment valuation firm engaged by the Board determining preliminary valuations for each portfolio security based on financial information received from the portfolio securities, and providing the Board with a recommended valuation or a valuation range for each portfolio security;

(2) each portfolio security report from the independent valuation firm is reviewed by investment professions of the Adviser
and the finance group from completeness and accuracy of the underlying data;

(3) the audit committee of the Board ("Audit Committee") reviews and discusses the preliminary valuations of the Adviser and that of the independent valuation firm. The independent valuation firm and the Adviser are queried, as necessary, to supplement the valuation conclusions to reflect any comments provided by the Audit Committee; and

(4) the Board discusses valuations and determines the fair value of each investment in the portfolio, in good faith, based on
the input of the Adviser, the independent valuation firm and the Audit Committee.

The types of factors that are taken into account in fair value determination include, as relevant, market changes in
expected returns for similar investments, performance improvement or deterioration, the nature and realizable value of any
collateral, the issuer's ability to make payments and its earnings and cash flows, the markets in which the issuer does business,
comparisons to traded securities, and other relevant factors.


SEPTEMBER 30, 2014 N-Q                                                  4
PRIORITY INCOME FUND, INC.





Notes to Schedule of Investments
September 30, 2014
(unaudited)

The following table summarizes the inputs used to value the Company's investments measured at fair value as of September 30, 2014.
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Collateralized Loan Obligation - Equity Class
$

 
$

 
$
15,666,225

 
$
15,666,225


The following is a reconciliation of investments for which level 3 inputs were used in determining fair value.
 
Collateralized Loan Obligation Equity Investments
Balance at June 30, 2014
$
7,921,852

Realized gain (loss)

Change in unrealized appreciation (depreciation)
3,560

Purchases of portfolio investments
8,023,550

Sales and repayments of portfolio investments
(354,920
)
Accretion of purchase discount, net
72,183

Transfers into level 3(1)

Transfers out of level 3(1)

Balance at September 30, 2014
$
15,666,225

 
 
Net change in unrealized appreciation (depreciation) attributable to level 3 investments still held at the end of the period
$
3,560

 
 
(1)Transfers are assumed to have occurred at the beginning of the period. There were no transfers between level 1 and level 2 during the period.

The following table provides quantitative information about significant unobservable inputs used in the fair value
measurement of level 3 investments as of September 30, 2014.
 
 
 
 
 
 
Unobservable Input
Asset Category
 
Fair Value
 
Primary Valuation Technique
 
Input
 
Range
 
Weighted Average
Collateral Loan Obligation - Equity Class
 
$
15,666,225

 
Discounted Cash Flow
 
Discount Rate
 
6.02% - 16.56%
 
12.32%

In determining the range of fair value for investments in CLOs, management and the independent valuation firm used a discounted cash flow model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each CLO security, the most appropriate valuation approach was chosen from alternative approaches to ensure the most accurate valuation for such security. A waterfall engine is used to store the collateral data, generate collateral cash flows from the assets based on various assumptions for the risk factors, and distribute the cash flows to the liability structure based on the payment priorities, and discount them back using proper discount rates.

The discounted cash flow model considers the CLO structure as well as current asset and liability characteristics based upon information derived from data sources such as the CLOs' trustee reports and indentures. Key model inputs include reinvestment asset spread, expected prepayment rate, default rate and recovery rate for the underlying collateral held in the CLOs. These inputs are derived by reference to a variety of market sources and historical performance metrics. A discount rate is applied to the expected future cash flows from the CLOs derived from the third-party cash flow model, which reflects the

SEPTEMBER 30, 2014 N-Q                                                  5
PRIORITY INCOME FUND, INC.





Notes to Schedule of Investments
September 30, 2014
(unaudited)

perceived level of risk that would be used by another market participant in determining fair value. An analysis of the observable risk premium data as well as the structural strength and credit quality of the CLOs is undertaken in determining the discount rate.

The fair value calculations for the CLOs are sensitive to the key model inputs, including amongst other things, default and
recovery rates. The default rate, recovery rate and other assumptions are determined by reference to a variety of observable
market sources and applied according to the quality and asset class mix of the underlying collateral and the historical track
record of each particular collateral manager. The model assumptions are reviewed on a regular basis and adjusted as appropriate
to factor in historic, current and potential market developments.

The significant unobservable input used to value the CLOs is the discount rate applied to the estimated future cash flows
expected to be received from the underlying investment, which includes both future principal and interest payments. Included in the consideration and selection of the discount rate are the following factors: risk of default, comparable investments, and call provisions. An increase or decrease in the discount rate applied to projected cash flows, where all other inputs remain constant, would result in a decrease or increase, respectively, in the fair value measurement.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market
value, the fair value of the Company's investments may fluctuate from period to period. Additionally, the fair value of the
Company's investments may differ significantly from the values that would have been used had a ready market existed for such
investments and may differ materially from the values that the Company may ultimately realize. Further, such investments are
generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If the
Company were required to liquidate a portfolio investment in a forced or liquidation sale, the Company could realize
significantly less than the value at which the Company has recorded it. In addition, changes in the market environment and
other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these
investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.

SEPTEMBER 30, 2014 N-Q                                                  6
PRIORITY INCOME FUND, INC.





Notes to Schedule of Investments
September 30, 2014
(unaudited)

The tax cost of the Company's portfolio investments as of September 30, 2014 was as follows:
Tax Cost
Unrealized Appreciation
Unrealized (Depreciation)
Net Unrealized Appreciation/ (Depreciation)
$
15,780,669

$
207,659

$
(322,103
)
$
(114,444
)

The differences between book-basis and tax-basis unrealized appreciation/(depreciation) relate primarily to the realization for tax purposes of unrealized gains on investments in passive foreign investment companies.

Item 2. Controls and Procedures.
(a)
Based on an evaluation of the Disclosure Controls and Procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, the "Disclosure Controls") as of a date within 90 days prior to the filing date (the "Filing Date") of this Form N-Q (the "Report"), the Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer) have concluded that the Disclosure Controls are reasonably designed to ensure that information required to be disclosed by the registrant in the Report is recorded, processed, summarized and reported by the Filing Date, including ensuring that information required to be disclosed in the Report is accumulated and communicated to the registrant's management, including the registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the registrant's last fiscal quarter that have materially affected or are reasonably likely to materially affect the registrant's internal control over financial reporting.

Item 3. Exhibits.
(a)(1)
Not applicable.
(a)(2)
Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.
(b)
Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940.

SEPTEMBER 30, 2014 N-Q                                                  7
PRIORITY INCOME FUND, INC.





SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PRIORITY INCOME FUND, INC.
By: /s/ M. Grier Eliasek
M. Grier Eliasek
Chief Executive Officer
Date: November 7, 2014

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

By: /s/ M. Grier Eliasek
M. Grier Eliasek
Chief Executive Officer
Date: November 7, 2014

By: /s/ Frank V. Saracino
Frank V. Saracino
Chief Financial Officer, Chief Compliance Officer
Treasurer and Secretary
Date: November 7, 2014